-----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, Kb/syMxRXu3bT4AC/wlv9AmqSjg1DiSYgUkNIVW6d2dGyZhVgPJ8LDj6KfmO70w1 cQ2nS2j1U8rown9Cv7ZhhA== 0000042293-99-000028.txt : 19991115 0000042293-99-000028.hdr.sgml : 19991115 ACCESSION NUMBER: 0000042293-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749267 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 September 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 October 31, 1999, was 53,869,754 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 nine months ended September 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 nine month periods have been included. The operating results for the three and nine months ended September 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)
September 30 September 30 December 31 1999 1998 1998 ------------ ------------- ------------- (Unaudited) --------------------------- Assets: Cash $ 237,614 $ 199,747 $ 250,875 Securities available for sale at fair value 346,255 310,296 377,005 Other investments at cost 678,332 890,379 422,385 Purchased mortgage-backed securities available for sale at fair value 84,540 125,107 113,585 Purchased mortgage-backed securities held to maturity at cost 449,477 629,036 572,376 Mortgage-backed securities held to maturity with recourse at cost 3,036,257 4,201,842 3,884,347 Mortgage-backed securities-REMICs held to maturity at cost 7,684,755 3,440,637 5,461,657 Loans receivable 25,856,148 27,940,415 25,721,288 Interest earned but uncollected 165,882 200,036 209,328 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 533,623 768,601 780,303 Real estate held for sale or investment 17,232 45,659 45,696 Prepaid expenses and other assets 601,352 365,451 357,363 Premises and equipment--at cost less accumulated depreciation 274,010 265,800 272,521 ------------ ------------- ------------- $39,965,477 $39,383,006 $38,468,729 ============ ============= ============= Liabilities and Stockholders' Equity: Deposits $26,549,828 $25,477,429 $26,219,095 Advances from Federal Home Loan Banks 8,109,333 6,866,847 6,163,472 Securities sold under agreements to repurchase 772,940 2,310,198 1,252,469 Accounts payable and accrued expenses 312,484 523,230 468,213 Taxes on income 286,193 307,969 329,409 Subordinated notes--net of discount 812,694 911,467 911,753 Stockholders' equity 3,122,005 2,985,866 3,124,318 ------------ ------------- ------------- $39,965,477 $39,383,006 $38,468,729 ============ ============= =============
Golden West Financial Corporation Consolidated Statement of Net Earnings (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------- Interest Income: Interest on loans $ 445,576 $ 529,135 $ 1,367,178 $ 1,745,201 Interest on mortgage-backed securities 204,444 156,234 562,558 333,965 Interest and dividends on investments 52,233 59,088 152,776 161,063 ------------- ------------ ------------ ------------- 702,253 744,457 2,082,512 2,240,229 Interest Expense: Interest on deposits 309,640 327,589 923,274 963,878 Interest on advances 93,533 112,394 262,713 341,160 Interest on repurchase agreements 13,742 27,750 46,032 93,783 Interest on other borrowings 33,374 38,582 99,322 120,355 ------------- ------------ ------------ ------------- 450,289 506,315 1,331,341 1,519,176 ------------- ------------ ------------ ------------- Net Interest Income 251,964 238,142 751,171 721,053 Provision for (recovery of) loan losses (1,253) 3,130 (1,406) 8,777 ------------- ------------ ------------ ------------- Net Interest Income after Provision for (Recovery of) Loan Losses 253,217 235,012 752,577 712,276 Non-Interest Income: Fees 16,180 16,224 49,101 44,887 Gain on the sale of securities, MBS, and loans 3,001 6,417 21,313 28,001 Other 12,257 8,182 38,871 27,035 ------------- ------------ ------------ ------------- 31,438 30,823 109,285 99,923 Non-Interest Expense: General and administrative: Personnel 54,766 49,632 158,982 144,212 Occupancy 16,861 15,636 49,565 44,754 Deposit insurance 1,310 1,444 4,048 4,572 Advertising 3,378 2,189 8,586 7,653 Other 19,732 18,604 63,938 57,024 ------------- ------------ ------------ ------------- 96,047 87,505 285,119 258,215 Earnings before Taxes on Income and Extraordinary Item 188,608 178,330 576,743 553,984 Taxes on Income 70,537 70,309 215,917 218,932 ------------- ------------ ------------ ------------- Earnings before Extraordinary Item 118,071 108,021 360,826 335,052 Extraordinary Item: Federal Home Loan Bank advance prepayment penalty, net of tax benefit -0- (4,801) -0- (12,511) ------------- ------------ ------------ ------------- Net Earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541 ============= ============ ============ ============= Basic earnings per share before extraordinary item $ 2.16 $ 1.87 $ 6.48 $ 5.84 Basic earnings per share on extraordinary item, net of tax benefit 0.00 (.08) 0.00 (.22) ------------- ------------ ------------ ------------- Basic earnings per share $ 2.16 $ 1.79 $ 6.48 $ 5.62 ============= ============ ============ ============= Diluted earnings per share before extraordinary item $ 2.14 $ 1.85 $ 6.42 $ 5.78 Diluted earnings per share on extraordinary item, net of tax benefit 0.00 (.08) 0.00 (.22) ------------- ------------ ------------ ------------- Diluted earnings per share $ 2.14 $ 1.77 $ 6.42 $ 5.56 ============= ============ ============ =============
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Cash Flows from Operating Activities: Net earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Extraordinary item -0- 8,117 -0- 21,152 Provision for (recovery of) loan losses (1,253) 3,130 (1,406) 8,777 Amortization of loan fees and discounts (1,962) (5,474) (12,481) (16,568) Depreciation and amortization 6,926 6,369 20,892 18,060 Loans originated for sale (113,497) (291,424) (717,442) (625,382) Sales of loans 168,310 375,872 1,129,073 776,038 Decrease in interest earned but uncollected 9,924 9,651 43,446 16,887 Federal Home Loan Bank stock dividends (8,038) (12,559) (28,993) (40,274) Increase in prepaid expenses and other assets (10,318) (452) (245,678) (107,284) Increase (decrease) in accounts payable and accrued (269,785) 2,433 (167,651) 76,905 expenses Increase (decrease) in taxes on income (33,547) (11,412) (9,120) 31,819 Other, net (4,145) 785 (6,724) (5,087) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (139,314) 188,256 364,742 477,584 Cash Flows from Investing Activities: New loan activity: New real estate loans originated for portfolio (3,482,228) (1,886,820) (7,826,284) (5,091,687) Real estate loans purchased (205) (648) (1,140) (2,337) Other, net (21,560) (65,120) (58,694) (85,491) ------------ ------------ ------------ ------------ (3,503,993) (1,952,588) (7,886,118) (5,179,515) Real estate loan principal payments: Monthly payments 145,593 158,922 440,805 493,429 Payoffs, net of foreclosures 1,002,369 1,340,611 3,430,193 4,073,503 ------------ ------------ ------------ ------------ 1,147,962 1,499,533 3,870,998 4,566,932 Repayments of mortgage-backed securities 663,936 723,795 2,209,804 1,239,664 Proceeds from sales of real estate 25,438 31,484 93,241 118,020 Purchases of securities available for sale (2,740,856) (183,116) (4,205,922) (310,597) Sales of securities available for sale -0- -0- 19 81,373 Matured securities available for sale 2,746,870 304,096 4,172,283 557,767 Increase in other investments (361,452) (746,379) (255,947) (637,731) Purchases of Federal Home Loan Bank stock -0- (49,253) -0- (149,247) Redemption of Federal Home Loan Bank stock 8,858 -0- 275,673 -0- Additions to premises and equipment (8,707) (13,495) (26,151) (48,792) ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities (2,021,944) (385,923) (1,752,120) 237,874
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands)
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------- ------------- ------------ 1999 1998 1999 1998 ------------- ------------ ------------ ------------ Cash Flows from Financing Activities: Deposit activity: Increase (decrease) in deposits, net $ (47,781) $ 213,571 $ (441,298) $ 589,384 Interest credited 261,903 270,150 772,031 778,328 ------------- ------------ ------------ ------------ 214,122 483,721 330,733 1,367,712 Additions to Federal Home Loan Bank advances 2,005,500 2,712,440 3,518,580 5,976,940 Repayments of Federal Home Loan Bank advances (7,565) (3,341,798) (1,572,717) (7,648,071) Proceeds from agreements to repurchase securities 1,548,894 3,490,320 5,549,145 6,554,310 Repayments of agreements to repurchase securities (1,460,892) (2,996,555) (6,028,674) (6,578,160) Repayments of medium-term notes -0- -0- -0- (110,000) Repayment of subordinated debt -0- (100,000) (100,000) (200,000) Dividends on common stock (7,663) (7,214) (23,417) (21,517) Exercise of stock options 4,075 2,286 8,629 15,133 Purchase and retirement of Company stock (138,510) (44,299) (308,162) (44,299) ------------- ------------ ------------ ------------ Net cash provided by (used in) financing activities 2,157,961 198,901 1,374,117 (687,952) ------------- ------------ ------------ ------------ Net Increase (Decrease) in Cash (3,297) 1,234 (13,261) 27,506 Cash at beginning of period 240,911 198,513 250,875 172,241 ------------- ------------ ------------ ------------ Cash at end of period $ 237,614 $ 199,747 $ 237,614 $ 199,747 ============= ============ ============ ============ Supplemental cash flow information: Cash paid for: Interest $ 439,930 $ 510,620 $ 1,318,456 $ 1,525,208 Income taxes 104,090 77,500 225,194 181,582 Cash received for interest and dividends 712,177 754,108 2,125,958 2,257,116 Noncash investing activities: Loans converted from adjustable rate to fixed-rate 32,424 70,607 503,750 113,996 Loans transferred to foreclosed real estate 16,180 29,614 54,748 88,667 Loans securitized into MBS and MBS-REMICs -0- -0- 3,700,579 5,698,458
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
For the Nine Months Ended September 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- 360,826 -0- 360,826 $ 360,826 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- (39,439) (39,439) (39,439) Reclassification adjustment for gains included in income -0- -0- -0- (750) (750) (750) -------------- Comprehensive Income $ 320,637 ============== Cash dividends on common stock ($.42 per share) -0- -0- (23,417) -0- (23,417) Common stock issued upon exercise of stock options, including tax benefits 35 8,594 -0- -0- 8,629 Purchase and retirement of Company stock (322) -0- (307,840) -0- (308,162) ---------- ----------- ---------- -------------- ------------- Balance at September 30, 1999 $ 5,399 $ 130,753 $2,811,494 $ 174,359 $ 3,122,005 ========== =========== ========== ============== =============
For the Nine Months Ended September 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- 322,541 -0- 322,541 $ 322,541 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- 23,998 23,998 23,998 Reclassification adjustment for gains included in income -0- -0- -0- (8,022) (8,022) (8,022) -------------- Comprehensive Income $ 338,517 ============== Cash dividends on common stock ($.375 per share) -0- -0- (21,517) -0- (21,517) Common stock issued upon exercise of stock options, including tax benefits 66 15,068 -0- -0- 15,134 Purchase and retirement of Company stock (56) -0- (44,243) -0- (44,299) ----------- ----------- ---------- ------------- ------------- Balance at September 30, 1998 $ 5,717 $ 100,600 $2,713,836 $ 165,713 $ 2,985,866 ========== =========== ========== ============== =============
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 nine month periods ended September 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)
September 30 September 30 December 31 1999 1998 1998 ------------- ------------ -------------- Assets $ 39,965,477 $ 39,383,006 $ 38,468,729 Loans receivable including mortgage-backed securities 37,111,177 36,337,037 35,753,253 Deposits 26,549,828 25,477,429 26,219,095 Stockholders' equity 3,122,005 2,985,866 3,124,318 Stockholders' equity/total assets 7.81% 7.58% 8.12% Book value per common share $ 57.83 $ 52.23 $ 54.95 Common shares outstanding 53,990,504 57,172,249 56,861,124 Diluted common shares outstanding 54,471,358 57,743,225 57,429,914 Yield on loan portfolio 7.02% 7.49% 7.36% Yield on mortgage-backed securities 7.07% 7.23% 7.20% Yield on investments 6.10% 6.20% 5.53% Yield on earning assets 7.02% 7.40% 7.30% Cost of deposits 4.50% 4.91% 4.67% Cost of borrowings 5.53% 5.92% 5.87% Cost of funds 4.78% 5.20% 4.96% Yield on earning assets less cost of funds 2.24% 2.20% 2.34% Ratio of nonperforming assets to total assets .61% .78% .79% Ratio of troubled debt restructured to total assets .04% .06% .06% World Savings Bank, FSB: Total assets $ 35,186,048 $ 31,854,886 $ 31,912,264 Net worth 2,425,617 2,095,404 2,164,854 Net worth/total assets 6.89% 6.58% 6.78% Regulatory capital ratios: Core capital 6.89% 6.57% 6.77% Risk-based capital 12.81% 12.76% 12.93% World Savings and Loan Association: Total assets $ 5,468,506 $ 8,288,587 $ 6,810,266 Net worth 649,136 804,414 687,778 Net worth/total assets 11.87% 9.71% 10.10% Regulatory capital ratios: Core capital 9.03% 7.91% 7.25% Risk-based capital 17.64% 16.72% 16.24% World Savings Bank, SSB: Total assets $ 3,501,022 $ 3,426,447 $ 3,519,046 Net worth 198,539 182,914 186,411 Net worth/total assets 5.67% 5.34% 5.30% Regulatory capital ratios: Tier 1 leverage capital 5.51% 5.67% 5.26% Total risk-based capital 26.52% 25.20% 25.15%
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ------------ ------------- New real estate loans originated $3,595,725 $2,178,244 $8,543,726 $ 5,717,069 Fully indexed rate on new real estate loans 7.56% 7.76% 7.57% 7.76% Current average rate on new real estate loans (a) 5.91% 6.13% 6.02% 6.20% New adjustable rate mortgages as a percentage of new real estate loans originated 94.53% 83.91% 88.82% 85.80% Increase in deposits (b)(c) $ 214,122 $ 483,721 $ 330,733 $ 1,367,712 Earnings before extraordinary item 118,071 108,021 360,826 335,052 Net earnings 118,071 103,220 360,826 322,541 Basic earnings per share before extraordinary item 2.16 1.87 6.48 5.84 Diluted earnings per share before extraordinary item 2.14 1.85 6.42 5.78 Basic earnings per share 2.16 1.79 6.48 5.62 Diluted earnings per share 2.14 1.77 6.42 5.56 Cash dividends on common stock .14 .125 .42 .375 Average common shares outstanding 54,698,032 57,562,090 55,715,591 57,343,932 Average diluted common shares outstanding 55,163,060 58,182,842 56,176,340 57,997,076 Ratios:(d) Net earnings/average net worth (ROE)(e) 15.01% 13.97% 15.25% 15.04% Net earnings/average assets (ROA)(e) 1.21% 1.05% 1.24% 1.09% Net interest income/average assets 2.58% 2.43% 2.59% 2.44% General and administrative expense/average assets .98% .89% .98% .87% Efficiency ratio (f) 33.89% 32.53% 33.14% 31.45%
(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 nine months ended September 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, the sale of one branch with $29 million in deposits during the third 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 nine-month computation by one and one-third. Averages are computed by adding the beginning balance and each monthend balance during the quarter and nine-month period and dividing by four and ten, respectively. (e) The ratios for the three and nine months ended September 30, 1998 include the extraordinary item. The ratios for the quarter ended September 30, 1998 excluding the extraordinary item are: ROE 14.62% and ROA 1.10%. The year-to-date ratios as of September 30, 1998 excluding the extraordinary item are: ROE 15.62% and ROA 1.24%. (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 September 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 September 30 -------------------- December 31 1999 1998 1998 ------- ------- ------------- Assets: Cash and investments 3.2% 3.6% 2.7% Mortgage-backed securities 28.2 21.3 26.1 Loans receivable 64.7 70.9 66.9 Other assets 3.9 4.2 4.3 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= ======= Liabilities and Stockholders' Equity: Deposits 66.4% 64.7% 68.1% Federal Home Loan Bank advances 20.3 17.4 16.0 Securities sold under agreements to repurchase 1.9 5.9 3.3 Other liabilities 1.6 2.1 2.1 Subordinated debt 2.0 2.3 2.4 Stockholders' equity 7.8 7.6 8.1 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= =======
For the first nine months of 1999 and 1998, the Company securitized $3.7 billion and $5.7 billion, respectively, of loans into mortgage-backed securities which caused the percentage of mortgage-backed securities to total assets to increase from September 30, 1998 to September 30, 1999 and the percentage of loans receivable to total assets to decrease from September 30, 1998 to September 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 September 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 September 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 $ 670 $ 160 $ 17 $ 178 $ 1,025 Mortgage-backed securities 9,722 208 739 586 11,255 Loans receivable: Rate-sensitive 22,049 2,402 220 -0- 24,671 Fixed-rate 49 135 426 471 1,081 Other(b) 710 -0- -0- -0- 710 Impact of interest rate swaps 540 140 (680) -0- -0- ----------- ----------- ----------- ------------ ----------- Total $ 33,740 $ 3,045 $ 722 $ 1,235 $ 38,742 =========== =========== =========== ============ =========== Interest-Bearing Liabilities(c): Deposits $ 16,108 $ 8,378 $ 2,037 $ 27 $ 26,550 FHLB advances 7,500 215 106 288 8,109 Other borrowings 773 100 713 -0- 1,586 Impact of interest rate swaps 248 (70) (178) -0- -0- ----------- ----------- ----------- ------------ =========== Total $ 24,629 $ 8,623 $ 2,678 $ 315 $ 36,245 =========== =========== =========== =========== =========== Repricing gap $ 9,111 $ (5,578) $ (1,956) $ 920 $ 2,497 =========== =========== =========== ============ =========== Cumulative gap $ 9,111 $ 3,533 $ 1,577 $ 2,497 =========== =========== =========== ============ Cumulative gap as a percentage of total assets 22.8% 8.8% 3.9% =========== =========== ===========
(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 September 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 had liquidity in excess of the requirement during the periods under discussion. At September 30, 1999 and 1998, and December 31, 1998, the Company had securities available for sale in the amount of $346 million, $310 million, and $377 million, respectively, including unrealized gains on securities available for sale of $287 million, $274 million, and $358 million, respectively. At September 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 September 30, 1999 and 1998, and December 31, 1998, were collateralized mortgage obligations (CMOs) in the amount of $140 million, $98 million, and $196 million, respectively. The Company holds CMOs on which both principal and interest are received. At September 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 September 30, 1999 and 1998, and December 31, 1998, the balance of loans receivable including mortgage-backed securities was $37.1 billion, $36.3 billion, and $35.8 billion, respectively. Included in the $37.1 billion at September 30, 1999, was $3.0 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities with the underlying loans subject to full credit recourse to the Company and $7.7 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 $36.3 billion at September 30, 1998, was $4.2 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company and $3.4 billion of MBS-REMICs. At September 30, 1999 and 1998, and December 31, 1998, the Company had MBS held to maturity in the amount of $11.2 billion, $8.3 billion, and $9.9 billion, respectively. At September 30, 1999 and 1998, and December 31, 1998, the Company had MBS available for sale in the amount of $85 million, $125 million, and $114 million, respectively, including unrealized gains on MBS available for sale of $2 million, $6 million, and $5 million, respectively. At September 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 nine 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. Repayments of MBS during the third quarter and first nine months of 1999 were $664 million and $2.2 billion, respectively, compared to $724 million and $1.2 billion during the same periods of 1998. MBS repayments were lower during the third quarter of 1999 as compared to the third quarter of 1998 due to a decline in the repayment rates of the underlying mortgages. MBS repayments were higher during the first nine months of 1999 as compared to the first nine 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 nine months ended September 30, 1999, amounted to $3.6 billion and $8.5 billion, respectively, compared to $2.2 billion and $5.7 billion for the same periods in 1998. The high volume of originations during 1999 was due to the renewed demand for adjustable rate loans, the Company's primary product, as interest rates moved up and the cost of fixed-rate loans increased. In addition, the Company increased the size of its loan origination staff to take advantage of the favorable market conditions. Refinanced loans constituted 35% and 41% of new loan originations for the three and nine months ended September 30, 1999, compared to 42% and 43% for the three and nine months ended September 30, 1998. Loans originated for sale amounted to $113 million and $717 million for the three and nine months ended September 30, 1999, compared to $291 million and $625 million for the same periods in 1998. The reduction in loans originated for sale during the third quarter of 1999 as compared to the third quarter of 1998 was attributable to the decrease in fixed-rate originations due to higher rates being offered on fixed-rate loans. In addition, during the third quarter and first nine months of 1999, $32 million and $504 million of loans were converted at the customer's request from adjustable rate to fixed rate compared to $71 million and $114 million for the same periods in 1998. The Company sold $168 million and $1.1 billion of fixed-rate loans for the three and nine months ended September 30, 1999, respectively, compared to $376 million and $776 million for the same periods of 1998. At September 30, 1999, the Company had lending operations in 29 states. The largest source of mortgage origination is loans secured by residential properties in California. For the three and nine months ended September 30, 1999, 62% and 64% of total loan originations were on residential properties in California compared to 63% and 62% for the same periods in 1998. The five largest states, other than California, for originations for the nine months ended September 30, 1999, were Florida, Texas, Washington, Illinois, and Arizona with a combined total of 19% of total originations, respectively. 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 September 30, 1999 compared to 66% at September 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 third quarter and first nine months of 1999 and 1998.
TABLE 3 Adjustable Rate Mortgage Originations by Index (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ---------------------------- ---------------------------- ARM Index 1999 1998 1999 1998 - -------------------------- ------------ ------------- ------------ ------------ COFI $ 945,825 $ 973,983 $ 2,256,015 $ 2,991,734 COSI 2,382,470 344,777 5,190,298 940,035 TCM 70,830 509,109 142,571 973,742 ------------ ------------- ------------ ------------ $ 3,399,125 $ 1,827,869 $ 7,588,884 $ 4,905,511 ============ ============= ============ ============
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 September 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) September 30 December 31 -------------------------------- ARM Index 1999 1998 1998 - -------------------------- -------------- --------------- --------------- COFI $ 26,451,321 $ 31,256,900 $ 29,761,484 COSI 6,580,191 932,147 1,703,283 TCM 1,209,742 1,018,831 1,256,775 Other 154,620 221,999 201,756 -------------- --------------- --------------- $ 34,395,874 $ 33,429,877 $ 32,923,298 ============== =============== ===============
The tables on the following two pages show the Company's loan portfolio by state at September 30, 1999 and 1998.
TABLE 5 Loan Portfolio by State September 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 $20,482,201 $3,341,495 $ 193 $ 30,322 $ 23,854,211 64.91% Florida 1,622,784 16,234 -0- 504 1,639,522 4.46 Texas 1,486,019 60,920 434 1,248 1,548,621 4.21 Illinois 1,153,525 124,934 -0- -0- 1,278,459 3.48 New Jersey 1,236,155 -0- -0- 3,883 1,240,038 3.37 Colorado 926,423 173,075 -0- 5,218 1,104,716 3.01 Washington 633,838 463,754 -0- 656 1,098,248 2.99 Arizona 791,442 18,890 -0- -0- 810,332 2.20 Other (b) 4,124,093 44,805 55 10,679 4,179,632 11.37 ------------ ----------- ---------- ------------- ------------ --------- Totals $32,456,480 $4,244,107 $ 682 $ 52,510 36,753,779 100.00% ============ =========== ========== ============= ========= SFAS 91 net deferred loan costs 44,875 Loan discount on purchased loans (2,090) Undisbursed loan funds (5,201) Allowance for loan losses (233,277) Loans to facilitate (LTF) interest reserve (353) Troubled debt restructured (TDR) interest reserve (1,259) Loans on deposits 20,686 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 36,577,160 Loans securitized into FNMA MBS with recourse and MBS-REMICs (10,721,012)(c) ------------ Total loans receivable $25,856,148 ============
(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 September 30, 1999 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
TABLE 6 Loan Portfolio by State September 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 $20,097,429 $3,381,050 $ 216 $ 42,197 $ 23,520,892 65.65% Florida 1,438,608 19,052 4 703 1,458,367 4.07 Texas 1,410,729 70,144 524 1,374 1,482,771 4.14 Illinois 1,186,384 152,000 -0- 1,481 1,339,865 3.74 New Jersey 1,227,348 -0- -0- 4,633 1,231,981 3.44 Colorado 1,022,793 206,054 -0- 5,975 1,234,822 3.45 Washington 542,281 416,926 -0- 693 959,900 2.68 Arizona 757,130 24,201 -0- -0- 781,331 2.18 Other (b) 3,751,002 53,569 68 13,579 3,818,218 10.65 ------------ ----------- ---------- ------------- ------------ --------- Totals $31,433,704 $4,322,996 $ 812 $ 70,635 35,828,147 100.00% ============ =========== ========== ============= ========= SFAS 91 net deferred loan fees (20,134) Loan discount on purchased loans (3,309) Undisbursed loan funds (3,321) Allowance for loan losses (242,415) Loans to facilitate interest reserve (514) Troubled debt restructured interest reserve (2,214) Loans on deposits 26,654 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMIC 35,582,894 Loans securitized into FNMA MBS with recourse and MBS-REMIC (7,642,479)(c) ------------ Total loans receivable $27,940,415 ============
(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 September 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 93% at September 30, 1999, 92% at September 30, 1998 and December 31, 1998. The Company's ARM originations for the first nine months of 1999 constituted 89% of new mortgage loans made in 1999 compared to 86% for the first nine months 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 12.49%, or 5.51% above the actual weighted average rate at September 30, 1999, versus 12.64%, or 5.27% above the weighted average rate at September 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 September 30, 1999, $486 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 September 30, 1999 compared to 7.74% at September 30, 1998. Without the floor, the average rate on these loans would have been 6.76% at September 30, 1999 and 7.17% at September 30, 1998. Loan repayments consist of monthly loan amortization and loan payoffs. For the three and nine months ended September 30, 1999, loan repayments were $1.1 billion and $3.9 billion, respectively, compared to $1.5 billion and $4.6 billion in the same periods of 1998. The decrease in loan repayments was primarily due to a decrease in loan prepayments during the third quarter of 1999. 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 nine months ended September 30, 1999 and 1998.
TABLE 7 Capitalized Mortgage Servicing Rights (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ------------ Beginning balance of capitalized mortgage servicing rights $ 39,860 $ 15,749 $ 28,635 $ 11,116 New capitalized mortgage servicing rights from loan sales 2,785 5,822 19,244 12,410 Amortization of capitalized mortgage servicing rights (3,269) (1,381) (8,503) (3,336) ----------- ----------- ----------- ------------ Ending balance of capitalized mortgage servicing rights $ 39,376 $ 20,190 $ 39,376 $ 20,190 =========== =========== =========== ============
The book value of Golden West's servicing rights did not exceed the fair value at September 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) September 30 -------------------------- December 31 1999 1998 1998 ----------- ----------- -------------- Non-accrual loans $ 230,777 $ 264,198 $ 262,332 Real estate acquired through foreclosure 14,256 44,537 42,572 Real estate in judgment 174 -0- 74 ----------- ----------- ------------ Total nonperforming assets $ 245,207 $ 308,735 $ 304,978 =========== =========== ============ TDRs $ 15,281 $ 24,118 $ 22,774 =========== =========== ============ Ratio of NPAs to total assets .61% .78% .79% =========== =========== ============ Ratio of TDRs to total assets .04% .06% .06% =========== =========== ============ Ratio of NPAs and TDRs to total assets .65% .84% .85% =========== =========== ============
The lower NPAs at September 30, 1999 as compared to September 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 $790 thousand and $4 million in the third quarter and first nine months of 1999 compared to $738 thousand and $6 million for the same periods in 1998. Interest foregone on TDRs amounted to $107 thousand and $350 thousand for the three and nine months ended September 30, 1999, compared to $203 thousand and $729 thousand for the three and nine months ended September 30, 1998. The tables on the following page show the Company's nonperforming assets by state as of September 30, 1999 and 1998.
TABLE 9 Nonperforming Assets by State September 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(b) - ------------------ --------- --------- ----------- -------- --------- --------- ---------- -------- California $134,026 $ 3,287 $ 1,661 $10,808 $ 440 $ -0- $ 150,222 .63% Florida 16,500 -0- 179 349 -0- -0- 17,028 1.04 Texas 9,112 -0- -0- 603 -0- -0- 9,715 .63 Illinois 9,866 216 -0- 699 -0- -0- 10,781 .84 New Jersey 16,463 -0- 45 131 -0- -0- 16,639 1.34 Colorado 1,209 1,032 -0- 77 -0- -0- 2,318 .21 Washington 2,344 -0- -0- -0- -0- -0- 2,344 .21 Arizona 4,074 124 -0- -0- -0- -0- 4,198 .52 Other (c) 27,801 103 2,735 1,647 -0- -0- 32,286 .77 --------- --------- ----------- -------- --------- --------- ---------- ----- Totals $221,395 $ 4,762 $ 4,620 $14,314 $ 440 $ -0- 245,531 .67% ========= ========= =========== ======== ========= ========= REO general valuation allowance (324) (.00) ---------- ------ Total nonperforming assets $245,207 .67% ========== ======
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) The September 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 September 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(b) - ------------------ --------- --------- --------- -------- --------- --------- --------- --------- California $178,080 $5,835 $ 462 $39,236 $ 1,027 $ -0- $ 224,640 .96% Florida 13,506 -0- 80 926 -0- -0- 14,512 1.00 Texas 7,434 -0- -0- 755 -0- -0- 8,189 .55 Illinois 10,487 220 -0- 1,242 -0- -0- 11,949 .89 New Jersey 14,805 -0- 57 875 -0- -0- 15,737 1.28 Colorado 1,141 -0- 3 -0- -0- -0- 1,144 .09 Washington 1,620 -0- -0- -0- -0- -0- 1,620 .17 Arizona 2,618 -0- -0- 112 -0- -0- 2,730 .35 Other (c) 27,810 40 -0- 1,294 -0- 11 29,155 .76 --------- --------- --------- -------- --------- --------- --------- ----- Totals $257,501 $6,095 $ 602 $44,440 $ 1,027 $ 11 309,676 .86% ========= ========= ========= ======== ========= ========= REO general valuation allowance (941) (.00) --------- ----- Total nonperforming assets $308,735 .86% ========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) The September 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 nine months ended September 30, 1999 and 1998.
TABLE 11 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ---------- Beginning allowance for loan losses $ 233,471 $ 239,537 $ 244,466 $ 233,280 Provision (recovery) charged (credited) to expense (1,253) 3,130 (1,406) 8,777 Transfer of allowance from (to) reserve for losses on loans sold or securitized and retained 213 -0- (11,922) -0- Less loans charged off, net -0- (370) -0- -0- Add recoveries 846 118 2,139 358 ----------- ----------- ----------- ---------- Ending allowance for loan losses $ 233,277 $ 242,415 $ 233,277 $ 242,415 =========== =========== =========== ========== Ratio of chargeoffs net of recoveries to average loans outstanding (including MBS with recourse and MBS-REMICs) (.01%) .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 with recourse 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 with recourse or securitized and retained for the three and nine months ended September 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 Nine Months Ended September 30 September 30 ------------------------ ----------------------- 1999 1998 1999 1998 ----------- ---------- ---------- ---------- Beginning balance of reserve for losses on loans sold with recourse or securitized and retained $ 15,397 $ 1,363 $ 2,256 $ 886 Initial recourse at time of sale charged to expense 183 381 1,189 858 Transfer from (to) allowance for loan losses (213) -0- 11,922 -0- ----------- ---------- ---------- ---------- Ending balance of reserve for losses on loans sold with recourse or securitized and retained $ 15,367 $ 1,744 $ 15,367 $ 1,744 =========== ========== ========== ==========
The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was 101.4% and 79.1% at September 30, 1999 and 1998, respectively. At September 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 with recourse or securitized and retained was .68% and .69%, respectively. DEPOSITS Retail deposits increased during the third quarter of 1999 by $214 million, including interest credited of $262 million, compared to an increase of $484 million, including interest credited of $270 million, in the third quarter of 1998. Retail deposits increased during the first nine months of 1999 by $331 million, including interest credited of $772 million, compared to an increase of $1.9 billion, including interest credited of $778 million, in the first nine months of 1998. During the third quarter of 1999, the Company sold one branch with a total of $29 million in deposits and in 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 nine months of 1998 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts. At September 30, 1999 and 1998, transaction accounts (which includes checking, passbook, and money market accounts) represented 38% and 31%, 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 September 30, 1999 or at September 30, 1998. The table below shows the Company's deposits by interest rate and by remaining maturity at September 30, 1999 and 1998.
TABLE 13 Deposits (Dollars in millions) September 30 --------------------------------------------------- 1999 1998 ------------------------ ------------------------ Rate* Amount Rate* Amount --------- ----------- ------------------------ Deposits by rate: Interest-bearing checking accounts (a) 3.06% $ 119 2.24% $ 87 Passbook accounts 1.80 504 2.73 666 Money market deposit accounts (a) 4.07 9,558 4.37 7,168 Term certificate accounts with original maturities of: 4 weeks to 1 year 4.62 6,279 4.95 6,741 1 to 2 years 4.88 6,998 5.36 7,331 2 to 3 years 5.26 1,439 5.43 1,376 3 to 4 years 5.24 350 5.32 371 4 years and over 5.45 655 5.80 1,178 Retail jumbo CDs 4.79 648 5.20 558 Wholesale CDs 0.00 -0- 0.00 -0- All other 0.00 -0- 7.60 1 ----------- ------------ $ 26,550 $ 25,477 =========== ============ 1999 1998 ----------- ------------ Deposits by remaining maturity: No contractual maturity $ 10,181 $ 7,921 Maturity within one year 14,305 15,242 1 to 5 years 2,037 2,307 Over 5 years 27 7 ----------- ------------ $ 26,550 $ 25,477 =========== ============
* Weighted average interest rate, including the impact of interest rate swaps. (a) At September 30, 1999 and 1998, $3.2 billion and $2.5 billion, respectively, of interest-bearing checking accounts were swept into money market deposit accounts. At September 30, the weighted average cost of deposits was 4.50% (1999) and 4.91% (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 $8.1 billion at September 30, 1999, compared to $6.9 billion and $6.2 billion at September 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 34. 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 $773 million, $2.3 billion, and $1.3 billion at September 30, 1999 and 1998, and December 31, 1998, respectively. OTHER BORROWINGS At September 30, 1999, Golden West, at the holding company level, had a total of $813 million of subordinated debt issued and outstanding. As of September 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 September 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 September 30, 1999, WFSB had not issued any notes under this authority. STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased by $2.3 million during the first nine months of 1999 as a result of the $308 million cost of the repurchase of Company stock, the decrease in market values of securities available for sale, and the payment of quarterly dividends to stockholders. These decreases were partially offset by net earnings of $361 million. The Company's stockholders' equity increased during the first nine 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, and the $44 million cost of the repurchase of Company stock. Unrealized gains, net of taxes, on securities and MBS available for sale included in stockholders' equity at September 30, 1999 and 1998, and December 31, 1998, were $174 million, $166 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. In November 1999, the Company acted to effect a three-for-one split of its outstanding Common Stock in the form of a 200% stock dividend. This dividend is payable December 10, 1999, to holders of record at the close of business on November 15, 1999. Per share amounts, in this 10-Q filing, have not been restated to reflect this stock dividend. Since 1993, through four separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to 14.9 million shares of Golden West's common stock. As of September 30, 1999, 12.7 million shares had been repurchased and retired at a cost of $769 million since October 1993, of which 3.2 million shares were purchased and retired at a cost of $308 million during the first nine months of 1999. 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 September 30, 1999 and 1998.
TABLE 14 World Savings Bank, FSB Regulatory Capital Ratios (Dollars in thousands) September 30, 1999 September 30, 1998 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ---------- --------- ---------- -------- Tangible $2,425,414 6.89% $ 528,211 1.50% $2,094,134 6.57% $ 478,353 1.50% Core 2,425,414 6.89 1,408,563 4.00 2,094,134 6.57 1,275,607 4.00 Risk-based 2,576,183 12.81 1,608,362 8.00 2,197,128 12.76 1,377,966 8.00
The following table shows WSL's current regulatory capital ratios and compares them to the OTS minimum requirements at September 30, 1999 and 1998.
TABLE 15 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) September 30, 1999 September 30, 1998 ------------------------------------------------ ------------------------------------------------ ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ----------- -------- Tangible $ 474,911 9.03% $ 78,866 1.50% $ 638,887 7.91% $ 121,168 1.50% Core 474,911 9.03 210,310 4.00 638,887 7.91 323,115 4.00 Risk-based 508,128 17.64 230,434 8.00 797,702 16.72 381,666 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 September 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 September 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 $ 2,425,414 6.89% $ 1,760,703 5.00% Tier 1 risk-based 2,425,414 12.06 1,206,271 6.00 Total risk-based 2,576,183 12.81 2,010,452 10.00
The table below shows that WSL's regulatory capital exceeds the requirements of the well-capitalized classification at September 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 $ 474,911 9.03% $ 262,888 5.00% Tier 1 risk-based 474,911 16.49 172,826 6.00 Total risk-based 508,128 17.64 288,043 10.00
World Savings Bank, SSB is regulated by the FDIC and the state of Texas. At September 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) September 30, 1999 September 30, 1998 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- -------- ----------- --------- ---------- --------- ----------- --------- Tier 1 leverage $198,539 5.51% $ 108,148 3.00% $ 182,914 5.67% $ 96,719 3.00% Tier 1 risk-based 198,539 26.49 29,977 4.00 182,914 25.17 29,071 4.00 Tota risk-based 198,781 26.52 59,953 8.00 183,147 25.20 58,141 8.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings for the three months ended September 30, 1999 were $118 million compared to net earnings of $108 million, before extraordinary item (see extraordinary item discussion on page 33), for the three months ended September 30, 1998. Net earnings for the nine months ended September 30, 1999 were $361 million compared to net earnings of $335 million, before an extraordinary item, for the nine months ended September 30, 1998. Net earnings increased for the first nine 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 32), and a lower effective tax rate. These increases to net earnings were partially offset by an increase in general and administrative expenses. YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS An important determinant of the Company's earnings is its primary spread -- the difference between its yield on earning assets and its cost of funds. The table below shows the components of the Company's spread at September 30, 1999 and 1998, and December 31, 1998.
TABLE 19 Yield on Earning Assets, Cost of Funds, and Primary Spread September 30 ---------------------------- December 31 1999 1998 1998 ------------ ------------ ------------- Yield on loan portfolio 7.02% 7.49% 7.36% Yield on MBS 7.07 7.23 7.20 Yield on investments 6.10 6.20 5.53 --------- --------- --------- Yield on earning assets 7.02 7.40 7.30 --------- --------- --------- Cost of deposits 4.50 4.91 4.67 Cost of borrowings 5.53 5.92 5.87 --------- --------- --------- Cost of funds 4.78 5.20 4.96 --------- --------- --------- Primary spread 2.24% 2.20% 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.
TABLE 20 Average Interest-Earning Assets and Interest-Bearing Liabilities (Dollars in thousands) Three Months Ended Three Months Ended September 30, 1999 September 30, 1998 ------------------------------- ------------------------------- Annualized End of Annualized End of Average Average Period Average Average Period Balances(a) Yield Yield Balances(a) Yield Yield ---------- ---------- ------- ----------- --------- ------- ASSETS Investment Securities $ 3,271,302 5.51% 6.10% $ 3,320,093 5.76% 6.20% Mortgage-backed securities 11,585,161 7.06% 7.07% 8,661,540 7.22% 7.23% Loans receivable (b) 24,857,797 7.17% 7.02% 28,104,328 7.53% . 7.49% Invest.in capital stock 530,442 5.42% 5.37% 753,214 6.01% 5.89% of FHLBs ---------- ---------- ----------- --------- Interest-earning assets $40,244,702 6.98% $40,839,175 7.29% ========== ========== =========== ========= LIABILITIES Deposits: Checking accounts $ 110,918 2.27% 3.06% $ 81,889 2.13% 2.24% Savings accounts 10,405,105 3.95% 3.96% 7,383,928 4.14% 4.23% Term accounts 16,944,575 4.87% 4.84% 18,743,957 5.35% 5.23% ---------- ---------- ------- ----------- --------- ------- Total deposits 27,460,598 4.51% 4.50% 26,209,774 5.00% 4.91% Advances from FHLBs 6,970,600 5.37% 5.36% 7,648,969 5.88% 5.77% Reverse repurchases 1,067,588 5.15% 5.08% 1,955,234 5.68% 5.59% Other borrowings 2,165,713 6.16% 7.63% 2,317,764 6.66% 7.90% ---------- ---------- ----------- --------- Interest-bearing liabilities $37,664,499 4.78% $38,131,741 5.31% ========== ========== =========== ========= Annualized net interest spread 2.20% 1.98% ========== ========= Net interest income $ 251,964 $ 238,142 ========== =========== Annualized net yield on average interest-earning assets 2.50% 2.33% ========== =========
(a) Averages are computed using daily balances. (b) Includes nonaccrual loans (90 days or more past due).
TABLE 21 Average Interest-Earning Assets and Interest-Bearing Liabilities (Dollars in thousands) Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 ------------------------------- ------------------------------- Annualized End of Annualized End of Average Average Period Average Average Period Balances(a) Yield Yield Balances(a) Yield Yield ---------- ---------- ------- ----------- --------- ------- ASSETS Investment Securities $ 3,229,203 5.25% 6.10% $ 2,989,002 5.86% 6.20% Mortgage-backed securities 10,655,509 7.04% 7.07% 6,211,961 7.17% 7.23% Loans receivable(b) 25,242,449 7.22% 7.02% 30,939,057 7.52% 7.49% Invest. in capital stock 643,782 5.32% 5.37% 669,244 5.93% 5.89% of FHLB ---------- ---------- ----------- --------- Interest-earning assets $39,770,943 6.98% $40,809,264 7.32% ========== ========== =========== ========= LIABILITIES Deposits: Checking accounts $ 107,116 2.18% 3.06% $ 75,196 1.31% 2.24% Savings accounts 9,964,785 3.91% 3.96% 6,216,625 3.97% 4.23% Term accounts 17,170,638 4.89% 4.84% 19,428,999 5.34% 5.23% ---------- ---------- ------- ----------- --------- ------- Total deposits 27,242,539 4.52% 4.50% 25,720,820 5.00% 4.91% Advances from FHLB 6,477,019 5.41% 5.36% 7,813,013 5.82% 5.77% Reverse repurchases 1,197,857 5.12% 5.08% 2,212,798 5.65% 5.59% Other borrowings 2,191,376 6.04% 7.63% 2,394,947 6.70% 7.90% ---------- ---------- ----------- --------- Interest-bearing liabilities$37,108,791 4.78% $38,141,578 5.31% ========== ========== =========== ========= Annualized net interest spread 2.20% 2.01% ========== ========= Net interest income $ 751,171 $ 721,053 ========== =========== Annualized net yield on average interest-earning assets 2.52% 2.36% ========== =========
(a) Averages are computed using daily balances. (b) Includes nonaccrual loans (90 days or more past due). The following table shows the Company's revenues and expenses as a percentage of total revenues for the three and nine months ended September 30, 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 22 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ----------------------- 1999 1998 1999 1998 --------- --------- ---------- ---------- Interest on loans (a) 60.7% 68.2% 62.3% 74.6% Interest on mortgage-backed securities (a) 27.9 20.2 25.7 14.2 Interest and dividends on investments 7.1 7.6 7.0 6.9 --------- --------- ---------- ---------- 95.7 96.0 95.0 95.7 Less: Interest on deposits 42.2 42.3 42.1 41.2 Interest on advances and other borrowings 19.2 23.0 18.6 23.7 --------- --------- ---------- ---------- 61.4 65.3 60.7 64.9 Net interest income 34.3 30.7 34.3 30.8 Provision for (recovery of) loan losses (.2) .4 (.1) .4 --------- --------- ---------- ---------- Net interest income after provision for loan 34.5 30.3 34.4 30.4 losses Add: Fees 2.2 2.1 2.2 1.9 Gain on the sale of securities, MBS, and loans .4 .8 1.0 1.2 Other non-interest income 1.7 1.1 1.8 1.2 --------- --------- ---------- ---------- 4.3 4.0 5.0 4.3 Less: General and administrative expenses 13.1 11.3 13.0 11.0 Taxes on income 9.6 9.1 9.9 9.4 --------- --------- ---------- ---------- Earnings before extraordinary item 16.1 13.9 16.5 14.3 Extraordinary item 0.0 (.6) 0.0 (.5) --------- --------- ---------- ---------- Net earnings 16.1% 13.3% 16.5% 13.8% ========= ========= ========== ==========
(a) During the nine months ended September 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 September 30, 1998 to September 30, 1999 and the percentage of interest on loans to total revenues to decrease from September 30, 1998 to September 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 increased net interest income by $511 thousand and decreased net interest income by $3.2 million for the three and nine months ended September 30, 1999, as compared to decreases of $2 million and $7 million for the same periods in 1998. The following table summarizes the unrealized gains and losses for interest rate swaps at September 30, 1999 and 1998.
TABLE 23 Schedule of Unrealized Gains and Losses on Interest Rate Swaps (Dollars in thousands) September 30, 1999 September 30, 1998 ---------------------------------------- ---------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Gain Unrealized Unrealized Gain Gains Losses (Loss) Gains Losses (Loss) ------------ ------------ ------------ ------------ ------------ ------------ Interest rate swaps: Receive fixed $ 647 $ 67 $ 580 $ 12,416 $ 9 $ 12,407 Pay fixed 3,312 13,862 (10,550) -0- 59,066 (59,066) ------------ ------------ ------------ ------------ ------------ ------------- $ 3,959 $ 13,929 $ (9,970) $ 12,416 $ 59,075 $ (46,659) ============ ============ ============ ============ ============ =============
TABLE 24 Schedule of Interest Rate Swaps Activity (Notional amounts in millions) Nine Months Ended September 30, 1999 ---------------------------- Receive Pay Fixed Fixed Swaps Swaps ------------ ------------ Balance at December 31, 1998 $ 512 $ 899 Additions 80 -0- Maturities (317) (147) ------------ ------------ Balance at September 30, 1999 $ 275 $ 752 ============ ============
The range of floating interest rates received on swap contracts in the first nine months of 1999 was 5.06% to 5.97%, and the range of floating interest rates paid on swap contracts was 5.29% to 5.52%. The range of fixed interest rates received on swap contracts in the first nine months of 1999 was 5.50% to 8.18% and the range of fixed interest rates paid on swap contracts was 5.58% to 8.85%. INTEREST ON LOANS In the third quarter of 1999, interest on loans was lower than in the comparable 1998 period by $84 million or 15.8%. The decrease in the third quarter of 1999 was due to a $3.2 billion decrease in the average portfolio balance and a 36 basis point decrease in the average portfolio yield. For the first nine months of 1999, interest on loans was lower than in the comparable 1998 period by $378 million or 21.7%. The decrease was due to a $5.7 billion decrease in the average portfolio balance and a 30 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 third quarter of 1999, interest on mortgage-backed securities was higher than in the comparable 1998 period by $48 million or 30.9%. The 1999 increase was due primarily to a $2.9 billion increase in the average portfolio balance, which was partially offset by a 16 basis point decrease in the average portfolio yield. For the first nine months of 1999, interest on mortgage-backed securities was higher than in the comparable 1998 period by $229 million or 68.4% due primarily to a $4.4 billion increase in the average portfolio balance, which was partially offset by a 13 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 third quarter of 1999, interest and dividends on investments was lower than in the comparable 1998 period by $6.9 million or 11.6%. The decrease was primarily due to a $49 million decrease in the average portfolio balance and a 36 basis point decrease in the average portfolio yield. For the first nine months of 1999, interest and dividends on investments was lower than in the comparable 1998 period by $8.3 million or 5.1%. The decrease was primarily due to a 59 basis point decrease in the average portfolio yield which was partially offset by a $240 million increase in the average portfolio balance. INTEREST ON DEPOSITS In the third quarter of 1999, interest on deposits decreased by $18 million or 5.5% from the comparable period in 1998. The third quarter decrease was due to a 49 basis point decrease in the average cost of deposits, which was partially offset by a $1.3 billion increase in the average balance of deposits. In the first nine months of 1999, interest on deposits decreased by $41 million or 4.2% from the comparable period in 1998. The nine month decrease was primarily due to a 47 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. INTEREST ON ADVANCES AND OTHER BORROWINGS For the third quarter and first nine months of 1999, interest on advances and other borrowings decreased by $38 million or 21.3% and $147 million or 26.5%, respectively, from the comparable periods of 1998. The third quarter decrease was primarily due to a $1.7 billion decrease in the average balance and a 52 basis point decrease in the average cost of these borrowings. The nine month decrease was primarily due to a $2.6 billion decrease in the average balance and a 45 basis point decrease in the average cost of these borrowings. PROVISION FOR (RECOVERY OF) LOAN LOSSES The recovery of loan losses was $1.3 million and $1.4 million, respectively, for the three and nine months ended September 30, 1999, compared to a provision for loan losses of $3 million and $9 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 $31 million and $109 million, respectively, for the three and nine months ended September 30, 1999, compared to $31 million and $100 million for the same periods in 1998. Non-interest income for the three months ended September 30, 1999 included a gain of $628 thousand from the sale of one savings offices located in a market with limited growth potential. For the nine months ended September 30, 1999, non-interest income included gains of $8 million from the sale of four savings offices located in markets with limited growth potential. Non-interest income for the nine months ended September 30, 1998, included a gain of $13 million before tax from the redemption of preferred stock which was called by the issuer and 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 nine months ended September 30, 1999, was $31 million and $101 million, respectively, as compared to $31 million and $84 million for the same periods in 1998. The increases in 1999 as compared to 1998 resulted from a higher amount of loan prepayment fees and increased gains on the sale of fixed-rate mortgages. GENERAL AND ADMINISTRATIVE EXPENSES For the third quarter and first nine months of 1999, general and administrative expenses (G&A) were $96 million and $285 million, respectively, compared to $88 million and $258 million for the comparable periods in 1998. G&A as a percentage of average assets on an annualized basis was .98%, for the third quarter and first nine months of 1999 compared to .89% and .87%, 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 37.4%, for the third quarter and first nine months of 1999 compared to 39.4% and 39.5%, 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; and the issuance of medium-term notes. 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 September 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 September 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 $466 million for the nine months ended September 30, 1998), dividends to stockholders, the purchase of Golden West stock (see stockholders' equity section on page 23), and general and administrative expenses. At September 30, 1999 and 1998, and December 31, 1998, Golden West's total cash and investments amounted to $680 million, $728 million, and $898 million, respectively. Included in the September 30, 1999 and 1998, and December 31, 1998 amounts are loans to WFSB. 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 has completed the testing and modification or replacement of substantially all of those systems that may be affected by Year 2000 compliance issues. 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 $18 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 $8 million was incurred for the nine months ended September 30, 1999. Included in the $18 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 September 30, 1999, Management believes that a 200 basis point rate increase sustained over a thirty-six month period would not adversely 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 nine 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: November 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 Nine Months Ended September 30 September 30 --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Earnings Before Extraordinary Item $ 118,071 $ 108,021 $ 360,826 $ 335,052 Extraordinary Item, Net of Tax -0- (4,801) -0- (12,511) ------------ ------------ ------------ ------------ Net Earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541 ============ ============ ============ ============ Weighted Average Shares 54,698,032 57,562,090 55,715,591 57,343,932 Add: Options outstanding at period end 2,075,650 1,836,505 2,075,650 1,836,505 Less: Shares assumed purchased back with proceeds of options exercised 1,610,622 1,215,753 1,614,901 1,183,361 ------------ ------------ ------------ ------------ Diluted Average Shares Outstanding 55,163,060 58,182,842 56,176,340 57,997,076 ============ ============ ============ ============ Basic Earnings Per Share Calculation: Basic Earnings Per Share Before Extraordinary Item $ 2.16 $ 1.87 $ 6.48 $ 5.84 Extraordinary Item, Net of Tax 0.00 (.08) 0.00 (.22) ------------ ------------ ------------ ------------ Basic Earnings Per Share $ 2.16 $ 1.79 $ 6.48 $ 5.62 ============ ============ ============ ============ Diluted Earnings Per Share Calculation: Diluted Earnings Per Share Before Extraordinary Item $ 2.14 $ 1.85 $ 6.42 $ 5.78 Extraordinary Item, Net of Tax 0.00 (.08) 0.00 (.22) ------------ ------------ ------------ ------------ Diluted Earnings Per Share $ 2.14 $ 1.77 $ 6.42 $ 5.56 ============ ============ ============ ============
EX-27 3
9 9-MOS DEC-31-1998 SEP-30-1999 237,614 4,984 320,013 0 430,795 11,170,489 10,995,251 25,856,148 233,277 39,965,477 26,549,828 267,786 598,677 9,427,181 0 0 5,399 3,116,606 39,965,477 1,367,178 152,776 562,558 2,082,512 923,274 1,331,341 751,171 (1,406) 0 285,119 576,743 360,826 0 0 360,826 6.48 6.42 7.02 230,777 0 15,281 65,911 244,466 0 2,139 233,277 233,277 0 0
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