-----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, P9v9pNbUE33U/kDw1GuSHsAZI44iZ+N1g1kz0N5pj7fGNYQFSBEjQL7vv6ipF4KR zMe83ch8Rzr5AwSvq1StSQ== 0000950149-97-001554.txt : 19970814 0000950149-97-001554.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950149-97-001554 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 97659544 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 FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For Quarter Ended June 30, 1997 Commission File Number 1-4629 GOLDEN WEST FINANCIAL CORPORATION - -------------------------------------------------------------------------------- Delaware 95-2080059 - ------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1901 Harrison Street, Oakland, California 94612 - ------------------------------------------------ -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the registrant's common stock on July 31, 1997, was 56,725,109 shares. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (the Company) for the three and six months ended June 30, 1997 and 1996 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three and six month periods have been included. The operating results for the three and six months ended June 30, 1997, are not necessarily indicative of the results for the full year. Golden West Financial Corporation Consolidated Statement of Financial Condition (Unaudited) (Dollars in thousands)
June 30 June 30 December 31 1997 1996 1996 ---------- ---------- ---------- Assets: Cash $ 130,667 $ 189,724 $ 218,719 Securities available for sale at fair value 601,278 495,607 781,325 Other investments at cost 1,044,756 1,210,140 1,078,832 Mortgage-backed securities available for sale without 206,722 252,712 227,466 recourse at fair value Mortgage-backed securities available for sale with -0- 224,466 -0- recourse at fair value Mortgage-backed securities held to maturity without 768,468 832,021 800,692 recourse at cost Mortgage-backed securities held to maturity with 3,077,534 2,103,642 3,265,424 recourse at cost Loans receivable 31,821,887 29,059,953 30,113,421 Interest earned but uncollected 217,309 224,564 221,604 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 572,157 397,463 500,105 Real estate held for sale or investment 73,436 73,221 83,052 Prepaid expenses and other assets 356,021 304,782 226,054 Premises and equipment--at cost less accumulated 224,847 208,000 213,904 depreciation ----------- ----------- ----------- $39,095,082 $35,576,295 $37,730,598 =========== =========== =========== Liabilities and Stockholders' Equity: Deposits $24,036,660 $21,040,598 $22,099,934 Advances from Federal Home Loan Banks 7,359,039 7,175,549 8,798,433 Securities sold under agreements to repurchase 2,954,221 2,317,258 1,908,126 Medium-term notes 309,936 689,662 589,845 Accounts payable and accrued expenses 485,805 513,018 452,182 Taxes on income 248,759 353,855 207,605 Subordinated notes--net of discount 1,209,772 1,323,189 1,323,996 Stockholders' equity 2,490,890 2,163,166 2,350,477 ----------- ----------- ----------- $39,095,082 $35,576,295 $37,730,598 =========== =========== ===========
2 3 Golden West Financial Corporation Consolidated Statement of Net Earnings (Loss) (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- ----------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Interest Income: Interest on loans $ 583,659 $ 542,280 $ 1,148,722 $ 1,083,488 Interest on mortgage-backed 72,369 59,861 147,302 121,534 securities Interest and dividends on 34,211 28,037 68,494 64,263 investments ----------- ----------- ----------- ----------- 690,239 630,178 1,364,518 1,269,285 Interest Expense: Interest on deposits 294,122 257,912 574,442 523,282 Interest on advances 107,781 91,692 220,389 181,673 Interest on repurchase agreements 40,470 33,966 68,368 62,354 Interest on other borrowings 31,286 38,105 66,047 85,814 ----------- ----------- ----------- ----------- 473,659 421,675 929,246 853,123 ----------- ----------- ----------- ----------- Net Interest Income 216,580 208,503 435,272 416,162 Provision for loan losses 13,111 17,236 33,806 35,758 ----------- ----------- ----------- ----------- Net Interest Income after Provision for Loan Losses 203,469 191,267 401,466 380,404 Non-Interest Income: Fees 11,298 9,485 22,035 18,368 Gain on the sale of securities, MBS, and loans 3,061 3,147 4,284 7,831 Other 5,451 6,194 12,723 12,151 ----------- ----------- ----------- ----------- 19,810 18,826 39,042 38,350 Non-Interest Expense: General and administrative: Personnel 43,892 39,742 87,992 79,127 Occupancy 13,408 12,349 26,796 24,565 Deposit insurance 1,937 10,017 3,983 21,349 Advertising 2,342 2,509 4,760 4,757 Other 17,048 15,852 34,266 31,462 ----------- ----------- ----------- ----------- 78,627 80,469 157,797 161,260 Earnings Before Taxes on Income and Cumulative Effect of Change in Accounting 144,652 129,624 282,711 257,494 Taxes on Income 57,375 50,039 112,060 99,316 ----------- ----------- ----------- ----------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill 87,277 79,585 170,651 158,178 Cumulative Effect of Change in Accounting for Goodwill -0- -0- -0- (205,242) ----------- ----------- ----------- ----------- Net Earnings (Loss) $ 87,277 $ 79,585 $ 170,651 $ (47,064) =========== =========== =========== =========== Earnings (Loss) Per Share: Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 1.54 $ 1.35 $ 2.99 $ 2.69 Cumulative Effect of Change in Accounting for Goodwill 0.00 0.00 0.00 (3.49) ----------- ----------- ----------- ----------- Net Earnings (Loss) Per Share $ 1.54 $ 1.35 $ 2.99 $ (.80) =========== =========== =========== ===========
3 4 Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Cash Flows From Operating Activities: Net earnings (loss) $ 87,277 $ 79,585 $ 170,651 $ (47,064) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Provision for loan losses 13,111 17,236 33,806 35,758 Cumulative effect of the change in -0- -0- -0- 205,242 accounting for goodwill Amortization of loan fees and discounts (4,810) (6,155) (9,251) (12,681) Depreciation and amortization 5,164 4,835 10,307 9,628 Loans originated for sale (45,191) (140,893) (98,751) (335,252) Sales of loans originated for sale 48,796 149,216 98,304 334,879 Decrease (increase) in interest earned but (5,029) (6,217) 4,295 831 uncollected Federal Home Loan Bank stock dividends (8,596) (5,233) (24,318) (14,484) (Increase) in prepaid expenses and other (62,881) (72,916) (121,462) (144,372) assets Increase in accounts payable and accrued 3,470 25,121 33,623 62,204 expenses Increase (decrease) in taxes on income (29,799) (36,558) 24,869 (986) Other, net (3,244) (1,578) (7,870) (7,315) ---------- ---------- ---------- ---------- Net cash provided by (used in) operating (1,732) 6,443 114,203 86,388 activities Cash Flows From Investing Activities: New loan activity: New real estate loans originated for (2,109,072) (1,773,730) (3,450,976) (2,757,814) portfolio Real estate loans purchased (608) (1,875) (1,260) (2,075) Other, net (14,849) (5,039) (23,119) (5,515) ---------- ---------- ---------- ---------- (2,124,529) (1,780,644) (3,475,355) (2,765,404) Real estate loan principal payments: Monthly payments 170,310 148,314 334,559 289,862 Payoffs, net of foreclosures 699,963 601,219 1,187,683 1,122,430 Refinances 70,223 73,409 127,606 140,297 ---------- ---------- ---------- ---------- 940,496 822,942 1,649,848 1,552,589 Purchases of mortgage-backed securities held -0- (1,456) -0- (1,518) to maturity Repayments of mortgage-backed securities 132,561 115,379 238,586 219,938 Proceeds from sales of real estate 60,636 46,675 113,316 97,978 Purchases of securities available for sale (1,177) (7,010) (1,187) (330,245) Sales of securities available for sale 961 6,182 961 81,133 Matured securities available for sale 48,452 210,674 224,053 654,871 Decrease (increase) in other investments 493,795 (123,885) 34,076 (19,980) Purchases of Federal Home Loan Bank stock -0- -0- (56,239) (37,099) Additions to premises and equipment (8,785) (7,567) (23,132) (14,506) ---------- ---------- ---------- ---------- Net cash used in investing activities (457,590) (718,710) (1,295,073) (562,243)
4 5 Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 ----------------------------- ----------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Cash Flows From Financing Activities: Deposit activity: Increase (decrease) in deposits, net $ 854,966 $ (160,817) $ 1,473,148 $ (231,656) Interest credited 237,770 210,634 463,578 424,344 ----------- ----------- ----------- ----------- 1,092,736 49,817 1,936,726 192,688 Additions to Federal Home Loan Bank advances 22,600 737,500 44,200 763,450 Repayments of Federal Home Loan Bank advances (797,490) (21,807) (1,483,689) (35,277) Proceeds from agreements to repurchase 1,011,791 1,619,309 2,436,493 2,015,671 securities Repayments of agreements to repurchase (719,749) (1,441,422) (1,390,398) (1,516,356) securities Repayments of medium-term notes -0- (200,000) (280,000) (908,135) Proceeds from federal funds purchased -0- 675,000 -0- 1,250,000 Repayments of federal funds purchased -0- (675,000) -0- (1,250,000) Repayment of subordinated debt (115,000) -0- (115,000) -0- Dividends on common stock (6,253) (5,514) (12,554) (11,095) Sale of stock 320 2,183 2,329 4,445 Purchase and retirement of Company stock (31,938) (41,494) (45,289) (58,507) ----------- ----------- ----------- ----------- Net cash provided by financing activities 457,017 698,572 1,092,818 446,884 ----------- ----------- ----------- ----------- Net Decrease in Cash (2,305) (13,695) (88,052) (28,971) Cash at beginning of period 132,972 203,419 218,719 218,695 ----------- ----------- ----------- ----------- Cash at end of period $ 130,667 $ 189,724 $ 130,667 $ 189,724 =========== =========== =========== =========== Supplemental cash flow information: Cash paid for: Interest $ 476,118 $ 412,194 $ 928,642 $ 865,824 Income taxes 87,903 85,707 88,514 105,578 Cash received for interest and dividends 685,210 623,961 1,368,813 1,270,116 Noncash investing activities: Loans transferred to foreclosed real estate 54,069 46,815 104,726 98,989 Loans securitized into MBS with recourse -0- 226,210 -0- 226,210
5 6 Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
Six Months Ended June 30 ------------------------------ 1997 1996 ----------- ----------- Common Stock: Balance at January 1 $ 5,734 $ 5,887 Common stock issued upon exercise of stock options 9 16 Common stock retired upon purchase of stock (69) (111) ----------- ----------- Balance at June 30 5,674 5,792 ----------- ----------- Paid-in Capital: Balance at January 1 67,953 55,353 Common stock issued upon exercise of stock options 2,320 4,429 ----------- ----------- Balance at June 30 70,273 59,782 ----------- ----------- Retained Earnings: Balance at January 1 2,177,098 2,140,883 Net earnings (loss) 170,651 (47,064) Cash dividends on common stock (12,554) (11,095) Retirement of stock (45,220) (58,396) ----------- ----------- Balance at June 30 2,289,975 2,024,328 ----------- ----------- Unrealized Gains on Securities Available for Sale: Balance at January 1 99,692 76,230 Change during period 25,276 (2,966) ----------- ----------- Balance at June 30 124,968 73,264 ----------- ----------- Total Stockholders' Equity at June 30 $ 2,490,890 $ 2,163,166 =========== ===========
6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis included herein covers those material changes in liquidity and capital resources that have occurred since December 31, 1996, as well as certain material changes in results of operations during the three and six month periods ended June 30, 1997, and 1996, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1996 Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 1996, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The Company operates as a single segment and, therefore, SFAS 131 is expected to have no effect on the Company's financial statements. Both statements are effective for fiscal years beginning after December 31, 1997, with earlier application permitted. CHANGE IN ACCOUNTING FOR GOODWILL Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," (SFAS 72) for goodwill related to acquisitions made prior to September 30, 1982. Up until 1996, the Company had applied SFAS 72 only to acquisitions made after September 30, 1982. The adoption of SFAS 72 for goodwill relating to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. SFAS 72 requires, among other things, that goodwill be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. As a result, the Company wrote off goodwill totaling $205 million during 1996 as the cumulative effect of the change in accounting for goodwill. The remaining goodwill from acquisitions subsequent to 1982 amounting to less than .2% of total assets is not material and has been reclassified to other assets. The minor amount of continuing goodwill amortization no longer warrants a separate line item on the Company's Consolidated Statement of Net Earnings and, therefore, for 1997 and 1996, has been included in other income. 7 8 The adoption of SFAS 72 noted above resulted in the restatement of earnings previously reported of $77 million, or $1.32 per share and $152 million, or $2.60 per share for the second quarter and first half of 1996, respectively, to earnings of $80 million, or $1.35 per share for the second quarter of 1996 and a loss of $47 million, or $.80 per share for the first half of 1996. The restatement included a first quarter charge of $3.49 per share for the cumulative effect of change in accounting for goodwill and a credit of $.05 per share and $.11 per share of goodwill amortization for the second quarter and first half of 1996, respectively. For the three and six months ended June 30, 1996, earnings before the cumulative effect of the change in accounting for goodwill were $1.35 per share and $2.69 per share, respectively. Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
June 30 June 30 December 31 1997 1996 1996 ----------- ----------- ----------- Assets $39,095,082 $35,576,295 $37,730,598 Loans receivable 31,821,887 29,059,953 30,113,421 Mortgage-backed securities 4,052,724 3,412,841 4,293,582 Deposits 24,036,660 21,040,598 22,099,934 Stockholders' equity 2,490,890 2,163,166 2,350,477 Stockholders' equity/total assets 6.37% 6.08% 6.23% Book value per common share $ 43.90 $ 37.35 $ 40.99 Common shares outstanding 56,738,514 57,923,709 57,342,389 Yield on loan portfolio 7.42% 7.46% 7.43% Yield on mortgage-backed securities 7.10% 7.21% 7.13% Yield on investments 6.51% 5.82% 6.88% Yield on earning assets 7.35% 7.36% 7.37% Cost of deposits 5.10% 4.92% 4.98% Cost of borrowings 5.97% 5.93% 5.80% Cost of funds 5.38% 5.28% 5.28% Yield on earning assets less cost of funds 1.97% 2.08% 2.09% Ratio of nonperforming assets to total 1.11% 1.24% 1.21% assets Ratio of troubled debt restructured to .19% .16% .22% total assets World Savings and Loan Association: Total assets $18,767,337 $25,150,776 $21,040,890 Net worth 1,260,995 1,743,351 1,427,914 \ Net worth/total assets 6.72% 6.93% 6.79% Regulatory capital ratios: Tangible capital 6.13% 6.65% 6.37% Core capital 6.13% 6.65% 6.37% Risk-based capital 13.30% 14.37% 13.91% World Savings Bank, a Federal Savings Bank: Total assets $20,240,335 $10,281,997 $16,929,859 Net worth 1,341,396 764,471 1,136,717 Net worth/total assets 6.63% 7.44% 6.71% Regulatory capital ratios: Tangible capital 6.61% 7.40% 6.69% Core capital 6.61% 7.40% 6.69% Risk-based capital 13.22% 13.46% 13.14%
8 9 Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 ------------------------------------- ------------------------------------ 1997 1996 1997 1996 -------------- --------------- -------------- -------------- New real estate loans originated $ 2,154,263 $ 1,914,623 $ 3,549,727 $ 3,093,066 Average yield on new real estate loans 7.51% 7.62% 7.52% 7.65% Increase in deposits (a) $ 1,092,736 $ 49,817 $ 1,936,726 $ 192,688 Earnings before cumulative effect of change in accounting for goodwill 87,277 79,585 170,651 158,178 Net earnings (loss) 87,277 79,585 170,651 (47,064) Earnings per share before cumulative effect of change in accounting for goodwill 1.54 1.35 2.99 2.69 Net earnings (loss) per share 1.54 1.35 2.99 (.80) Cash dividends on common stock .11 .095 .22 .19 Average common shares outstanding 56,892,526 58,283,423 57,102,416 58,536,031 Ratios:(b) Net earnings (loss)/average net worth 14.24% 14.82% 14.09% (4.37%) (ROE)(c) Net earnings (loss)/average assets .90% .91% .89% (.27%) (ROA)(c) Net interest income/average assets 2.24% 2.38% 2.27% 2.38% General and administrative .81% .92% .82% .92% expense/average assets
(a) Includes an increase of $674 million and $1.1 billion of wholesale deposits for the quarter and six months ended June 30, 1997, respectively. (b) Ratios are annualized by multiplying the quarterly computation by four and the semi-annual computation by two. Averages are computed by adding the beginning balance and each monthend balance during the quarter and six-month period and dividing by four and seven, respectively. (c) The year-to-date ratios as of June 30, 1996 include the $205 million cumulative effect of the change in accounting for goodwill, which was effective January 1, 1996. The year-to-date ratios as of June 30, 1996, excluding the change in accounting for goodwill are: ROE 14.68% and ROA .90% 9 10 FINANCIAL CONDITION The consolidated condensed balance sheet shown in the table below presents the Company's assets and liabilities in percentage terms at June 30, 1997 and 1996, and December 31, 1996. The reader is referred to page 51 of the Company's 1996 Form 10-K for similar information for the years 1993 through 1996 and a discussion of the changes in the composition of the Company's assets and liabilities in those years. TABLE 1 Consolidated Condensed Balance Sheet In Percentage Terms
June 30 ------------------ December 31 1997 1996 1996 ----- ----- ----- Assets: Cash and investments 4.5% 5.3% 5.5% Mortgage-backed securities 10.4 9.6 11.4 Loans receivable 81.4 81.7 79.8 Other assets 3.7 3.4 3.3 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== Liabilities and Stockholders' Equity: Deposits 61.5% 59.1% 58.6% Federal Home Loan Bank advances 18.8 20.2 23.3 Securities sold under agreements to 7.6 6.5 5.1 repurchase Medium-term notes 0.8 1.9 1.6 Other liabilities 1.8 2.5 1.7 Subordinated debt 3.1 3.7 3.5 Stockholders' equity 6.4 6.1 6.2 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
As the above table shows, deposits represent the majority of the Company's liabilities. The largest asset component is the loan portfolio, which consists primarily of long-term mortgages. The disparity between the repricing (maturity or interest rate change) of deposits and borrowings and the repricing of mortgage loans and investments can have a material impact on the Company's results of operations. The difference between the repricing characteristics of assets and liabilities is commonly referred to as "the gap." The gap table on the following page shows that, as of June 30, 1997, the Company's assets mature or reprice sooner than its liabilities. Consequently, one would expect falling interest rates to lower the Company's earnings and rising interest rates to increase the Company's earnings. However, the Company's earnings are also affected by the built-in lags inherent in the Eleventh District Cost of Funds Index (COFI), which is the benchmark the Company uses to determine the rate on the great majority of its adjustable rate mortgages. Specifically, there is a two-month delay in reporting the COFI because of the time required to gather the data needed to compute the index. As a result, the current COFI actually reflects the Eleventh District's cost of funds at the level it was two months prior. In addition, because COFI is based on a portfolio of accounts, not all of which mature or reprice immediately, COFI does not initially reflect a change in market interest rates. Consequently, when the interest rate environment changes, the COFI lags cause assets to initially reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down income when 10 11 rates rise. In addition to the COFI lags, other elements of ARM loans also have an impact on earnings. These elements are the interest rate adjustment frequency of ARM loans, interest rate limits on individual rate changes, interest rate floors, and introductory rates on new ARM loans. TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of June 30, 1997 (Dollars in millions)
Projected Repricing(a) --------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------- ------- ------- ------- ------- Interest-Earning Assets: Investments $ 1,358 $ 119 $ 167 $ 2 $ 1,646 Mortgage-backed securities 3,166 91 345 451 4,053 Loans receivable: Rate-sensitive 27,314 1,526 126 -0- 28,966 Fixed-rate 79 236 994 1,282 2,591 Other(b) 670 -0- -0- -0- 670 Impact of interest rate swaps 317 430 (296) (451) -0- ------- ------- ------- ------- ------- Total $32,904 $ 2,402 $ 1,336 $ 1,284 $37,926 ======= ======= ======= ======= ======= Interest-Bearing Liabilities(c): Deposits $10,350 $10,807 $ 2,854 $ 25 $24,036 FHLB advances 5,933 800 345 281 7,359 Other borrowings 3,258 199 619 398 4,474 Impact of interest rate swaps 1,274 (709) (552) (13) -0- ------- ------- ------- ------- ------- Total $20,815 $11,097 $ 3,266 $ 691 $35,869 ======= ======= ======= ======= ======= Repricing gap $12,089 $(8,695) $(1,930) $ 593 ======= ======= ======= ======= Cumulative gap $12,089 $ 3,394 $ 1,464 $ 2,057 ======= ======= ======= ======= Cumulative gap as a percentage of total assets 30.9% 8.7% 3.7% ======= ======= =======
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and Federal Home Loan Bank (FHLB)stock. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months. 11 12 CASH AND INVESTMENTS The Office of Thrift Supervision (OTS) requires insured institutions, such as World Savings and Loan Association (World or Association) and World Savings Bank, FSB (WFSB), to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. The current minimum requirement is equal to a monthly average of 5% of deposits and short-term borrowings. For the months ended June 30, 1997 and 1996, and December 31, 1996, World's average regulatory liquidity ratios were 7%, 7%, and 8%, respectively. For the months ended June 30, 1997 and 1996, and December 31, 1996, WFSB's average regulatory liquidity ratios were 5.5%, 5.4%, and 6%, respectively. World and WFSB exceeded the monthly 5% requirements for each of the six months ended June 30, 1997 and all months during 1996. The level of the Company's investments position in excess of its liquidity requirements at any time depends on liquidity needs and available arbitrage opportunities. At June 30, 1997 and 1996, and December 31, 1996, the Company had securities available for sale in the amount of $601 million, $496 million, and $781 million, respectively, including unrealized gains on securities available for sale of $203 million, $114 million, and $159 million, respectively. At June 30, 1997 and 1996, and December 31, 1996, the Company had no securities held to maturity or for trading. Included in the securities available for sale at June 30, 1997 and 1996, and December 31, 1996, were collateralized mortgage obligations (CMOs) in the amount of $96 million, $279 million, and $170 million, respectively. The Company holds CMOs on which both principal and interest are received. It does not hold any interest-only or principal-only CMOs. At June 30, 1997, the majority of the Company's CMOs had remaining terms to maturity of five years or less, and qualified for inclusion in the regulatory liquidity measurement. MORTGAGE-BACKED SECURITIES At June 30, 1997 and 1996, and December 31, 1996, the Company had mortgage-backed securities (MBS) held to maturity in the amount of $3.8 billion, $2.9 billion, and $4.1 billion, respectively, including $3.1 billion of Federal National Mortgage Association (FNMA) MBS subject to full credit recourse to the Company at June 30, 1997, $2.1 billion at June 30, 1996, and $3.3 billion at December 31, 1996. At June 30, 1997 and 1996, and December 31, 1996, the Company had mortgage-backed securities available for sale in the amount of $207 million, $477 million, and $227 million, respectively, including unrealized gains on MBS available for sale of $8 million, $12 million, and $11 million, respectively, and including $224 million of FNMA MBS subject to full credit recourse at June 30, 1996. At June 30, 1997 and 1996 and December 31, 1996, the Company had no trading MBS. During 1995 and 1996, the Company securitized $2.3 billion and $1.3 billion, respectively, of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS, to be used as collateral for borrowings. Included in the $1.3 billion securitized during 1996, was $226 million of loans securitized into MBS available for sale with recourse, which were subsequently transferred from the MBS available for sale portfolio to the MBS held to maturity portfolio during the fourth quarter of 1996. These securities are subject to full credit recourse to the Company. The Company has the ability and intent to hold these MBS until maturity. Accordingly, these MBS are classified as held to maturity. 12 13 Repayments of MBS during the second quarter and first six months of 1997 were $133 million and $239 million, respectively, compared to $115 million and $220 million in the same periods of 1996. Although the balance of the MBS portfolio is higher than it was a year ago, repayments on MBS during the first six months of 1997 as compared to the first six months of 1996 were flat primarily due to a decrease in prepayments on the underlying loans. LOAN PORTFOLIO LOAN VOLUME New loan originations for the three and six months ended June 30, 1997, amounted to $2.2 billion and $3.5 billion, respectively, compared to $1.9 billion and $3.1 billion for the same periods in 1996. The increase in loan volume in 1997 over the first half of 1996 occurred because of a strong home sales market and strong demand for ARMs, our primary product. For most of the second quarter, rates on new fixed-rate mortgages remained near the 8% level. In contrast, the starting rates on ARMs, the Company's principal product, remained low and affordable. The Company continues to sell most of its fixed-rate originations. Loans originated for sale for the three and six months ended June 30, 1997 were $45 million and $99 million, respectively, compared to $141 million and $335 million for the same periods in 1996. Refinanced loans constituted 31% and 33% of new loan originations for the three and six months ended June 30, 1997, compared to 36% and 38% for the three and six months ended June 30, 1996. The Company has lending operations in 23 states. The primary source of mortgage origination is loans secured by residential properties in California. For the three and six months ended June 30, 1997, 53% and 52%, respectively, of total loan originations were on residential properties in California compared to 51% and 52% for the same periods in 1996. The five largest states, other than California, for originations for the three and six months ended June 30, 1997, were Florida, Texas, Illinois, Colorado, and New Jersey with a combined total of 26% of total originations for both periods. The percentage of the total loan portfolio (excluding mortgage-backed securities with recourse) that is comprised of residential loans in California was 67% at June 30, 1997 compared to 71% at June 30, 1996, and 69% at December 31, 1996. The tables on the following two pages show the Company's loan portfolio by state at June 30, 1997 and 1996. 13 14 TABLE 3 Loan Portfolio by State June 30, 1997 (Dollars in thousands)
Residential Real Estate Commercial Loans as -------------------- Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - -------------- ---------- ---------- ----- ---------- ---------- ------ California $20,327,373 $3,397,605 $ 244 $53,442 $23,778,664 67.65% Texas 1,268,634 105,901 567 1,521 1,376,623 3.92 Illinois 1,142,439 178,242 -0- 1,712 1,322,393 3.76 Colorado 1,043,506 233,298 -0- 7,059 1,283,863 3.65 Florida 1,187,442 20,192 59 932 1,208,625 3.44 New Jersey 1,132,637 404 -0- 5,594 1,138,635 3.24 Washington 478,018 382,828 -0- 746 861,592 2.45 Arizona 700,736 45,145 -0- 568 746,449 2.12 Pennsylvania 538,703 4,240 -0- 3,414 546,357 1.55 Virginia 516,245 8,550 -0- 1,397 526,192 1.50 Connecticut 451,883 -0- -0- 21 451,904 1.29 Maryland 351,507 2,178 -0- 521 354,206 1.01 Oregon 240,586 11,539 -0- 246 252,371 0.72 Nevada 190,579 1,064 -0- -0- 191,643 0.55 Utah 182,707 57 -0- 1,685 184,449 0.52 Minnesota 163,919 8,171 -0- -0- 172,090 0.49 Kansas 155,432 4,823 -0- 183 160,438 0.46 Wisconsin 123,442 3,879 -0- -0- 127,321 0.36 Massachusetts 101,971 -0- -0- 20 101,991 0.29 Missouri 77,011 6,276 -0- -0- 83,287 0.24 Washington DC 47,912 -0- -0- -0- 47,912 0.14 New York 46,359 -0- -0- -0- 46,359 0.13 New Mexico 41,547 -0- -0- -0- 41,547 0.12 Georgia 33,270 -0- -0- 1,637 34,907 0.10 Idaho 28,494 -0- -0- -0- 28,494 0.08 Delaware 26,548 -0- -0- -0- 26,548 0.08 Ohio 14,676 1,832 189 3,822 20,519 0.06 South Dakota 8,714 -0- -0- -0- 8,714 0.02 North Carolina 7,488 -0- -0- 476 7,964 0.02 Other 10,429 5 -0- 4,491 14,925 0.04 ----------- ----------- ------ ---------- ----------- ------ Totals $30,640,207 $ 4,416,229 $1,059 $ 89,487 35,146,982 100.00% =========== =========== ====== ========== ====== SFAS 91 deferred loan fees (48,304) Loan discount on purchased loans (3,755) Undisbursed loan funds (4,069) Allowance for loan losses (216,651) Loans to facilitate (LTF) interest reserve (668) Troubled debt restructured (TDR) interest reserve (6,098) Loans on deposits 31,984 ----------- Total loan portfolio and loans securitized into FNMA MBS with recourse 34,899,421 Loans securitized into FNMA MBS with recourse (3,077,534)(b) ----------- Total loan portfolio $31,821,887 ===========
(a) The Company has no commercial loans. (b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion, respectively, were securitized with full recourse into Federal National Mortgage Association mortgage-backed securities. The June 30, 1997 balances of these FNMA mortgage-backed securities are reflected in the amounts above. 14 15 TABLE 4 Loan Portfolio by State June 30, 1996 (Dollars in thousands)
Residential Real Estate Commercial Loans as -------------------- Real Total a % of State 1 - 4 5+ Land Estate Construction Loans(a) Portfolio - ------------ ---------- ----------- --------- ----------- ------------ ---------- --------- California $19,232,989 $3,362,817 $ 264 $ 67,333 $ -0- $22,663,403 71.70% Colorado 879,922 229,322 -0- 7,448 -0- 1,116,692 3.53 Illinois 906,070 180,441 -0- 1,951 -0- 1,088,462 3.44 Texas 943,562 94,956 583 1,628 -0- 1,040,729 3.29 New Jersey 920,148 411 -0- 7,397 139 928,095 2.94 Florida 822,356 11,428 169 984 -0- 834,937 2.64 Washington 370,901 322,017 -0- 773 -0- 693,691 2.20 Arizona 510,195 52,225 -0- 1,697 -0- 564,117 1.79 Virginia 450,726 4,393 -0- 1,530 -0- 456,649 1.45 Pennsylvania 419,594 278 -0- 3,889 -0- 423,761 1.34 Connecticut 343,346 -0- -0- 14 -0- 343,360 1.09 Maryland 289,560 1,075 -0- 574 -0- 291,209 0.92 Oregon 186,326 11,067 -0- 2,820 -0- 200,213 0.63 Nevada 163,022 1,174 -0- -0- -0- 164,196 0.52 Kansas 131,706 4,977 -0- 203 -0- 136,886 0.43 Utah 116,001 63 -0- 1,891 -0- 117,955 0.37 Minnesota 99,144 2,351 -0- -0- -0- 101,495 0.32 Wisconsin 74,466 4,195 -0- -0- -0- 78,661 0.25 Missouri 65,726 6,763 -0- -0- -0- 72,489 0.23 New York 51,168 -0- -0- 20 -0- 51,188 0.16 Georgia 39,087 -0- -0- 1,941 -0- 41,028 0.13 Washington, DC 37,510 -0- -0- -0- -0- 37,510 0.12 Massachusetts 31,476 -0- -0- 20 -0- 31,496 0.10 Ohio 20,558 2,486 298 4,593 -0- 27,935 0.09 New Mexico 27,880 -0- -0- -0- -0- 27,880 0.09 Idaho 20,828 -0- -0- -0- -0- 20,828 0.07 Delaware 20,065 -0- -0- -0- -0- 20,065 0.06 North Carolina 8,334 279 -0- 522 -0- 9,135 0.03 Other 17,551 22 -0- 4,765 -0- 22,338 0.07 ----------- ---------- -------- ---------- ---------- ----------- ------ Totals $27,200,217 $4,292,740 $1,314 $111,993 $ 139 31,606,403 100.00% =========== ========== ======== ========== ========== ====== SFAS 91 deferred loan fees (68,840) Loan discount on purchased loans (5,582) Undisbursed loan funds (5,443) Allowance for loan losses (163,846) Loans to facilitate (LTF) interest reserve (486) Troubled debt restructured (TDR) interest reserve (5,110) Loans on deposits 30,965 ----------- Total loan portfolio and loans securitized into FNMA 31,388,061 MBS with recourse Loans securitized into FNMA MBS with recourse (2,328,108)(b) ----------- Total loan portfolio $29,059,953 ===========
(a) The Company has no commercial loans. (b) During 1995 and 1996, loans amounting to $2.3 billion and $226 million, respectively, were securitized with full recourse into Federal National Mortgage Association (FNMA) mortgage-backed securities. The June 30, 1996 balances of these FNMA mortgage-backed securities are reflected in the amounts above. 15 16 The Company continues to emphasize ARM loans with interest rates that change periodically in accordance with movements in specified indexes. The portion of the mortgage portfolio (excluding MBS) composed of rate-sensitive loans was 92% at June 30, 1997 compared to 91% at June 30, 1996 and December 31, 1996. The Company's ARM originations for the first half of 1997 constituted over 95% of new mortgage loans made in 1997 compared to 85% in the first half of 1996. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including MBS with recourse) was 12.81%, or 5.55% above the actual weighted average rate at June 30, 1997, versus 13.02%, or 5.76% above the weighted average rate at June 30, 1996. Approximately $5.5 billion of the Company's ARM loans (including MBS with recourse) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of June 30, 1997, $615 million of ARM loans had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.73% at June 30, 1997 compared to 7.75% at June 30, 1996. Without the floor, the average yield on these loans would have been 7.09% at June 30, 1997 and 7.37% at June 30, 1996. Loan repayments consist of monthly loan amortization, loan payoffs, and refinances. For the three and six months ended June 30, 1997, loan repayments were $940 million and $1.6 billion, respectively, compared to $823 million and $1.6 billion in the same periods of 1996. Although the balance of the loan portfolio is higher than it was a year ago, loan repayments during the first six months of 1997 as compared to the first six months of 1996 were flat primarily due to a decrease in refinances on the underlying loans. MORTGAGE SERVICING RIGHTS On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities," to require that any financial institution participating in the secondary mortgage market recognize, as separate assets, rights to service mortgage loans for others when those rights are acquired through either the purchase or origination of mortgage loans which are subsequently sold or securitized. SFAS 122 also requires that financial institutions participating in the secondary mortgage market should evaluate and measure for impairment of capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. If the book value exceeds the fair value of the capitalized mortgage servicing rights, financial institutions are required to write-down the servicing rights to their fair value. The book value of Golden West's servicing rights did not exceed the fair value at June 30, 1997 or 1996 and, therefore, no adjustment was necessary. On January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). The accounting for mortgage servicing assets under SFAS 125 is substantially the same as the accounting for mortgage servicing assets under SFAS 122. See page 22 for further discussion on SFAS 125. For the second quarter and first half of 1997, the Company recognized gains of $1.1 million and $2.1 million, respectively, on the sale of loans due to the capitalization of servicing rights. For the same periods in 1996, the Company recognized gains of $2.3 million and $7.0 million, respectively. After amortization, the balance at June 30, 1997 and 1996 of the capitalized servicing rights was $10.0 million and $6.6 million, respectively. 16 17 ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include non-accrual loans (loans, including loans swapped into MBS with recourse, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's troubled debt restructured (TDRs) is made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers adversely impacted by economic conditions. The following table shows the components of the Company's nonperforming assets and troubled debt restructured and the various ratios to total assets. TABLE 5 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands)
June 30 ---------------------- December 31 1997 1996 1996 ------- -------- ------------ Non-accrual loans $361,860 $370,081 $373,157 Real estate acquired through 72,697 71,910 82,075 foreclosure Real estate in judgment 191 738 416 -------- -------- -------- Total nonperforming assets $434,748 $ 442,729 $455,648 ======== ========= ======== TDRs $ 75,834 $ 56,992 $ 84,082 ======== ========= ======== Ratio of NPAs to total assets 1.11% 1.24% 1.21% ======== ========= ======== Ratio of TDRs to total assets .19% .16% .22% ======== ========= ======== Ratio of NPAs and TDRs to total assets 1.30% 1.40% 1.43% ======== ========= ========
The decrease in NPAs during 1997 reflects the improving California economy. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans is fully-reserved and amounted to $4 million and $9 million in the second quarter and first six months of 1997 compared to $4 million and $11 million for the same periods of 1996. Interest foregone on TDRs amounted to $555 thousand and $1.1 million for the three and six months ended June 30, 1997, compared to $411 thousand and $778 thousand for the three and six months ended June 30, 1996. The tables on the following two pages show the Company's nonperforming assets by state at June 30, 1997 and 1996. 17 18 TABLE 6 Nonperforming Assets by State June 30, 1997 (Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned ------------------------------------- --------------------------------- Residential Commercial Commercial NPAs as Real Estate Real Residential Real Total a % of State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans - ---------------------- -------- ------- ------ ------ ------ ------ ------- ---- California $280,013 $12,211 $1,123 $59,394 $8,886 $2,167 $363,794 1.53% Texas 7,454 -0- -0- 711 -0- -0- 8,165 0.59 Illinois 8,148 223 -0- 367 -0- -0- 8,738 0.66 Colorado 1,814 -0- 3,088 -0- -0- -0- 4,902 0.38 Florida 7,008 -0- 195 515 -0- -0- 7,718 0.64 New Jersey 15,213 -0- 826 365 -0- -0- 16,404 1.44 Washington 2,525 -0- -0- -0- -0- -0- 2,525 0.29 Arizona 1,158 -0- -0- 210 -0- -0- 1,368 0.18 Pennsylvania 4,988 -0- 4 152 -0- -0- 5,144 0.94 Virginia 1,543 -0- -0- 524 -0- -0- 2,067 0.39 Connecticut 2,620 -0- -0- 590 -0- -0- 3,210 0.71 Maryland 1,627 -0- -0- 289 -0- -0- 1,916 0.54 Oregon 804 -0- -0- -0- -0- -0- 804 0.32 Nevada 1,252 -0- -0- 227 -0- -0- 1,479 0.77 Utah 375 -0- -0- -0- -0- -0- 375 0.20 Minnesota 506 -0- -0- -0- -0- -0- 506 0.29 Kansas 426 40 -0- -0- -0- -0- 466 0.29 Wisconsin 591 -0- -0- -0- -0- -0- 591 0.46 Massachusetts 160 -0- 20 -0- -0- -0- 180 0.18 Missouri 423 42 -0- 32 -0- -0- 497 0.60 Washington,DC 74 -0- -0- -0- -0- -0- 74 0.15 New York 3,412 -0- -0- 302 -0- -0- 3,714 8.01 New Mexico -0- -0- -0- -0- -0- -0- -0- 0.00 Georgia 1,784 -0- -0- -0- -0- -0- 1,784 5.11 Idaho -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware 118 -0- -0- -0- -0- -0- 118 0.44 Ohio 7 -0- 2 -0- -0- -0- 9 0.04 South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00 Other 43 -0- -0- -0- -0- -0- 43 0.29 -------- ------- ------ ------- ------ ------ -------- ---- Totals $344,086 $12,516 $5,258 $63,678 $8,886 $2,167 436,591 1.24% ======== ======= ====== ======= ====== ====== REO general valuation allowance (1,843) (0.00) -------- ---- Total nonperforming assets $434,748 1.24% ======== ====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion, respectively, were securitized with full recourse into FNMA mortgage-backed securities. The June 30, 1997 balances of the related nonperforming assets are reflected in the amounts above. 18 19 TABLE 7 Nonperforming Assets by State June 30, 1996 (Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned ---------------------------- ------------------------------------- Residential Commercial Commercial NPAs Real Estate Real Residential Real Total a % of State 1 -4 5+ Estate 1 - 4 5+ Land Estate NPAs(b) Loans - ---------------- -------- ------- ------- ------- ------- ------- ------- ------- ---- California $292,980 $25,045 $1,229 $54,780 $13,638 $ 400 $ 2,167 $390,239 1.72% Colorado 1,952 -0- 3,090 148 -0- -0- -0- 5,190 0.46 Illinois 4,470 191 -0- 395 541 -0- -0- 5,597 0.51 Texas 3,274 -0- -0- 164 -0- -0- -0- 3,438 0.33 New Jersey 12,267 -0- 679 424 -0- -0- -0- 13,370 1.44 Florida 4,021 -0- 150 292 -0- -0- -0- 4,463 0.53 Washington 663 -0- -0- -0- -0- -0- -0- 663 0.10 Arizona 1,229 -0- 837 -0- -0- -0- -0- 2,066 0.37 Virginia 1,528 -0- -0- 818 -0- -0- -0- 2,346 0.51 Pennsylvania 2,633 -0- -0- 225 -0- -0- -0- 2,858 0.67 Connecticut 3,370 -0- -0- 325 -0- -0- -0- 3,695 1.08 Maryland 1,486 -0- -0- -0- -0- -0- -0- 1,486 0.51 Oregon 489 -0- -0- -0- -0- -0- -0- 489 0.24 Nevada 1,001 -0- -0- 114 -0- -0- -0- 1,115 0.68 Kansas 895 40 -0- -0- -0- -0- -0- 935 0.68 Utah 121 -0- -0- -0- -0- -0- -0- 121 0.10 Minnesota 291 -0- -0- -0- -0- -0- -0- 291 0.29 Wisconsin -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Missouri 618 43 -0- -0- -0- -0- -0- 661 0.91 New York 3,787 -0- -0- 55 -0- -0- -0- 3,842 7.51 Georgia 1,352 -0- -0- 72 -0- -0- -0- 1,424 3.47 Washington,DC 6 -0- -0- -0- -0- -0- -0- 6 0.02 Massachusetts -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Ohio 61 -0- 58 5 -0- -0- 144 268 0.96 New Mexico -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Idaho -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware -0- -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina 80 -0- -0- -0- -0- -0- -0- 80 0.88 Other 145 -0- -0- -0- -0- -0- -0- 145 0.65 Totals -------- ------- ------- ------- ------- ------- ------- -------- ---- $338,719 $25,319 $ 6,043 $57,817 $14,179 $ 400 $ 2,311 444,788 1.41% ======== ======= ======= ======= ======= ======= ======= REO general valuation allowance (2,059) (0.01) -------- ---- Total nonperforming assets $442,729 1.40% ======== ====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995 and 1996, loans amounting to $2.3 billion and $226 million, respectively, were securitized with full recourse into FNMA mortgage-backed securities. The June 30, 1996 balance of the related nonperforming assets are reflected in the amounts above. 19 20 The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse or loans sold with recourse, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings. Loans securitized into FNMA MBS with full credit recourse are included with the Company's loan portfolio when determining the allowance for loan losses. For loans sold to FNMA with full credit recourse, the Company records a separate recourse liability for any potential losses. The table below shows the changes in the allowance for loan losses for the three and six months ended June 30, 1997 and 1996. TABLE 8 Changes in Allowance for Loan Losses (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 --------------------- ---------------------- 1997 1996 1997 1996 --------- --------- ---------- ---------- Beginning allowance for loan losses $209,077 $152,360 $ 195,702 $ 141,988 Provision charged to expense 13,111 17,236 33,806 35,758 Less loans charged off (5,747) (5,871) (13,305) (14,231) Add recoveries 210 121 448 331 --------- --------- ---------- ---------- Ending allowance for loan losses $216,651 $163,846 $216,651 $ 163,846 ========= ========= ========== ========== Ratio of net charge-offs to average loans outstanding (including MBS with recourse) .06% .07% .08% .09% ========= ========= ========== ========== Ratio of allowance for loan losses to 49.8% 37.0% nonperforming assets ========== ========== Ratio of allowance for loan losses to total loans (including MBS with recourse) .62% .52% ========== ==========
20 21 DEPOSITS Retail deposits increased during the second quarter of 1997 by $419 million, including interest credited of $238 million, compared to an increase of $50 million, including interest credited of $211 million, in the second quarter of 1996. Retail deposit balances in the first half of 1997 increased by $866 million, including interest credited of $464 million, compared to an increase of $193 million, including interest credited of $424 million, in the first half of 1996. Retail deposits increased during 1997 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. Beginning in January 1997, the Company began a program to use government securities dealers to sell large certificates of deposit (CDs) to institutional investors. The Company's deposit balance at June 30, 1997 includes $1.1 billion of these wholesale CDs. The mix of reported deposits changed during 1997 as compared to 1996, in part due to a new program begun in the fourth quarter of 1996. Specifically, the reported balance of interest-bearing checking accounts has decreased as compared to 1996 and the reported balance of money market accounts has increased compared to balances reported in 1996 as a result of this new program which calculates the minimum amount of funds needed to cover disbursements for each customer's checking account and transfers the remaining funds to a money market account, reducing the Company's required reserves at the Federal Reserve Bank. In addition, during 1997 the Company has been actively promoting money market deposit accounts. 21 22 The table below shows the Company's deposits by interest rate and by remaining maturity at June 30, 1997 and 1996. TABLE 9 Deposits (Dollars in millions)
June 30 ------------------------------------------ 1997 1996 ------------------ ------------------- Rate* Amount Rate* Amount ------- ------- ------- -------- Deposits by interest rate: Interest-bearing checking accounts 1.17% $ 276 1.21% $ 756 Passbook accounts 2.22 545 2.22 560 Money market deposit accounts 3.02 1,940 3.25 1,188 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.32 12,543 4.97 8,422 1 to 2 years 5.37 3,687 5.25 5,138 2 to 3 years 5.44 1,322 5.95 1,810 3 to 4 years 5.79 489 5.46 616 4 years and over 5.87 1,648 5.82 2,062 Retail jumbo CDs 5.51 515 5.31 487 Wholesale CDs 5.64 1,071 0.00 -0- All other 7.67 1 7.69 2 -------- -------- $ 24,037 $ 21,041 ======== ======== Deposits by remaining maturity: No contractual maturity $ 2,761 $ 2,504 Maturity within one year: 3rd quarter 7,289 4,560 4th quarter 7,237 4,835 1st quarter 2,499 3,696 2nd quarter 1,371 2,434 ------- -------- 18,396 15,525 1 to 2 years 1,929 1,826 2 to 3 years 679 496 3 to 4 years 110 520 4 years and over 162 170 -------- -------- $ 24,037 $ 21,041 ======== ========
* Weighted average interest rate, including the impact of interest rate swaps. ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses borrowings from the FHLB, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances are secured by pledges of certain loans, capital stock of the FHLB, and MBS. FHLB advances amounted to $7.4 billion at June 30, 1997, compared to $7.2 billion and $8.8 billion at June 30, 1996 and December 31, 1996, respectively. 22 23 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 $3.0 billion, $2.3 billion, and $1.9 billion at June 30, 1997 and 1996, and December 31, 1996, respectively. The $3.0 billion balance at June 30, 1997, included $750 million in Federal Home Loan Bank of San Francisco MBS Reverse Repos with maturities ranging from 1997 to 1998. In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (SFAS 127), which delayed the effective date for portions of SFAS 125 for one year. The impact of the SFAS 125 and SFAS 127 on the Company's financial condition and results of operations is not expected to be material. OTHER BORROWINGS At June 30, 1997, Golden West, at the holding company level, had a total of $1.0 billion of subordinated debt issued and outstanding. As of June 30, 1997, the Company's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At June 30, 1997, Golden West had on file a registration statement with the Securities and Exchange Commission for the sale of up to $300 million of subordinated notes. World currently has on file a shelf registration with the OTS for the issuance of $2.0 billion of unsecured medium-term notes, all of which was available for issuance at June 30, 1997. World had medium-term notes outstanding under prior registrations with principal amounts of $310 million at June 30, 1997, compared to $690 million at June 30, 1996, and $590 million at December 31, 1996. As of June 30, 1997, World's medium-term notes were rated A1 and A+ by Moody's and S&P, respectively. World also has on file a registration statement with the OTS for the sale of up to $300 million of subordinated notes and, at June 30, 1997, the full amount was available for issuance. As of June 30, 1997, World had issued under prior registrations a total of $200 million of subordinated notes, which were rated A2 and A by Moody's and S&P, respectively. The subordinated notes are included in World's risk-based regulatory capital as Supplementary Capital. 23 24 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. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased by $140 million during the first six months of 1997. The increase in stockholders' equity was primarily a result of net earnings for the first six months of 1997 and a $25 million increase in market values of securities available for sale since December 31, 1996, which were partially offset by the $45 million cost of the purchase of Company stock and the payment of $13 million in quarterly dividends to stockholders. The Company's stockholders' equity decreased during the first six months of 1996 as a result of a $47 million loss incurred during the first half of 1996 (see Change in Accounting for Goodwill on page 7), the $59 million cost of the purchase of Company stock during the first two quarters of 1996, and a $3 million decline in market values of securities available for sale since December 1995. Unrealized gains net of taxes on securities and MBS available for sale included in stockholders' equity at June 30, 1997 and 1996, and December 31, 1996, were $125 million, $73 million, and $100 million, respectively. During periods of low asset growth, the Company's capital ratios may build to levels well in excess of the amounts necessary to meet regulatory capital requirements. Golden West's Board of Directors periodically reviews alternative uses of excess capital, including faster growth and acquisitions. At times, the Board has determined that the purchase of common stock is a wise use of excess capital. Since October 1993, through three separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of June 30, 1997, 8.5 million shares had been purchased and retired at a cost of $377 million since October 1993, of which 689,100 were purchased and retired at a cost of $45 million during the first half of 1997. Dividends from World Savings are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. World paid a $135 million and a $140 million dividend to Golden West in March and June 1997, respectively. Also, during the first quarter and second quarter of 1997, Golden West purchased from World, and subsequently contributed as capital to WFSB, $30 million and $18 million in loans, respectively. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. 24 25 REGULATORY CAPITAL The OTS requires federally insured institutions, such as World and WFSB, to meet certain minimum capital requirements. Both World's and WFSB's regulatory capital ratios continue to exceed regulatory requirements for well-capitalized institutions, the highest regulatory standard. The following table shows World's regulatory capital ratios and compares them to the OTS minimum requirements at June 30, 1997 and 1996. TABLE 10 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands)
June 30, 1997 June 30, 1996 --------------------------------------- --------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------ ------------------- ------------------ ------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio --------- ------- --------- ------- --------- ------- --------- ------- Tangible $1,142,979 6.13% $279,515 1.50% $1,668,903 6.65% $376,445 1.50% Core 1,142,979 6.13 559,030 3.00 1,668,903 6.65 752,890 3.00 Risk-based 1,458,621 13.30 877,655 8.00 1,989,286 14.37 1,107,514 8.00
World's regulatory capital ratios as of June 30, 1996 have been restated due to the adoption of SFAS 72 as discussed on page 7. The adoption of SFAS 72 had no effect on WFSB's June 30, 1996 regulatory capital ratios. The following table shows WFSB's current regulatory capital ratios and compares them to the current OTS minimum requirements at June 30, 1997 and 1996. TABLE 11 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands)
June 30, 1997 June 30, 1996 -------------------------------------- -------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------ ------------------ ------------------ ------------------ Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ----- --------- ------- -------- -------- --------- ------- Tangible $1,338,857 6.61% $304,005 1.50% $760,916 7.40% $154,184 1.50% Core 1,338,857 6.61 608,010 3.00 760,916 7.40 308,368 3.00 Risk-based 1,406,712 13.22 851,290 8.00 778,530 13.46 462,892 8.00
In addition, institutions whose exposure to interest rate risk as determined by the OTS is deemed to be above normal may be required to hold additional risk-based capital. The OTS has determined that neither the Association nor WFSB has above-normal exposure to interest rate risk. The OTS has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. 25 26 The table below shows that World's regulatory capital exceeds the requirements of the well capitalized classification at June 30, 1997. TABLE 12 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands)
ACTUAL WELL CAPITALIZED ------------------ ----------------------- Capital Ratio Capital Ratio --------- ------- ----------- --------- Leverage $1,142,979 6.13% $ 931,717 5.00 % Tier 1 risk-based 1,142,979 10.42 658,241 6.00 Total risk-based 1,458,621 13.30 1,097,068 10.00
The table below shows that WFSB's regulatory capital exceeds the requirements of the well capitalized classification at June 30, 1997. TABLE 13 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands)
ACTUAL WELL CAPITALIZED --------------------- ---------------------- Capital Ratio Capital Ratio ----------- ------ ---------- -------- Leverage $ 1,338,857 6.61% $1,013,351 5.00% Tier 1 risk-based 1,338,857 12.58 638,468 6.00 Total risk-based 1,406,712 13.22 1,064,113 10.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings for the six months ended June 30, 1997 were $171 million or $2.99 per share compared to a loss of $47 million or $.80 per share for the first six months ended June 30, 1996. Without the one-time goodwill write-off (See Accounting Change section on page 7), Golden West's earnings for the first half of 1996 would have been $158 million or $2.69 per share. Net earnings increased in 1997 as a result of increased net interest income, a lower provision for loan losses, and a 2% decrease in general and administrative expenses due to lower deposit insurance premiums. 26 27 SFAS 128 - EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Measurement of Earnings Per Share" (SFAS 128). SFAS 128 replaces Primary and Fully-Diluted Earnings Per Share (EPS) with "Basic EPS" and "Diluted EPS" for fiscal years ending after December 15, 1997. Basic EPS will be calculated by dividing net earnings for the period by the weighted-average common shares outstanding for that period. There will be no adjustment to the number of outstanding shares for stock options or other dilutive items as is currently done in the calculation of Primary EPS. Diluted EPS will take into account the effect of dilutive instruments, such as stock options, but will use the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. In contrast, the current, Fully-diluted EPS uses the period-ending share price, if it exceeds the average price, in the calculation to determine the number of incremental shares that are to be added. If SFAS 128 had been applied for the quarter and the six months ended June 30, 1997, the Basic EPS reported would have been $1.53 and $2.99, respectively, and the Diluted EPS would have been $1.51 and $2.94, respectively. For the quarter and six months ended June 30, 1996, before the cumulative effect of the change in accounting for goodwill, Basic EPS would have been $1.37 and $2.71, respectively, and Diluted EPS would have been $1.34 and $2.66, respectively. SPREADS An important determinant of the Company's earnings is its primary spread - -- the difference between its yield on earning assets and its cost of funds. The table below shows the components of the Company's spread at June 30, 1997 and 1996, and December 31, 1996. TABLE 14
Yield on Earning Assets, Cost of Funds, and Primary Spread June 30 ---------------- December 31 1997 1996 1996 ---- ---- ---- Yield on loan portfolio 7.42% 7.46% 7.43% Yield on MBS 7.10 7.21 7.13 Yield on investments 6.51 5.82 6.88 ---- ---- ---- Yield on earning assets 7.35 7.36 7.37 ---- ---- ---- Cost of deposits 5.10 4.92 4.98 Cost of borrowings 5.97 5.93 5.80 ---- ---- ---- Cost of funds 5.38 5.28 5.28 ---- ---- ---- Primary spread 1.97% 2.08% 2.09% ==== ==== ====
27 28 The Company's primary spread is, to some degree, dependent on changes in interest rates because the Company's liabilities tend to respond somewhat more rapidly to rate movements than its assets, which are primarily adjustable rate mortgages. Most of the Company's ARMs have interest rates that change in accordance with an index based on the cost of deposits and borrowings of savings institutions that are members of the FHLB of San Francisco (the COFI). In general, the repricing of COFI ARM portfolios tends to lag liability interest rate changes because of certain loan features which restrain monthly adjustments and because the COFI tends to trail changes in liability costs due to the existence of a two-month reporting lag. In addition, because COFI is based on a portfolio of accounts, not all of which mature or reprice immediately, COFI does not initially reflect a change in market interest rates. Yields on short term and long-term interest rates increased in the middle of the first quarter of 1997 and drifted back downward during the second quarter of 1997. The effects of this interest rate environment led to a ten basis point increase in the Company's cost of funds because our liability costs responded somewhat faster to the first quarter increase in interest rates than our earning assets. The yield on earning assets decreased two basis points during the first half of 1997, due mainly to the lags in the COFI index. These changes resulted in a 12 basis point decrease in the Company's spread since yearend 1996. The following table shows the Company's revenues and expenses as a percentage of total revenues for the three and six months ended June 30, 1997 and 1996, in order to focus on the changes in interest income between years as well as changes in other revenue and expense amounts. TABLE 15 Selected Revenue and Expense Items as Percentages of Total Revenues
Three Months Ended Six Months Ended June 30 June 30 ----------------- ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Interest on loans 82.2% 83.6% 81.8% 82.9% Interest on mortgage-backed securities 10.2 9.2 10.5 9.3 Interest and dividends on investments 4.8 4.3 4.9 4.9 ---- ---- ---- ---- 97.2 97.1 97.2 97.1 Less: Interest on deposits 41.4 39.8 40.9 40.0 Interest on advances and other borrowings 25.3 25.2 25.3 25.3 ---- ---- ---- ---- 66.7 65.0 66.2 65.3 Net interest income 30.5 32.1 31.0 31.8 Provision for loan losses 1.8 2.6 2.4 2.7 ---- ---- ---- ---- Net interest income after provision for loan 28.7 29.5 28.6 29.1 losses Add: Fees 1.6 1.5 1.6 1.4 Gain on the sale of securities, MBS, and 0.4 0.5 0.3 0.6 loans Other non-interest income 0.8 0.9 0.9 0.9 ---- ---- ---- ---- 2.8 2.9 2.8 2.9 Less: General and administrative expenses 11.1 12.4 11.2 12.3 Taxes on income 8.1 7.7 8.0 7.6 ---- ---- ---- ---- Earnings before cumulative effect of change in accounting for goodwill 12.3 12.3 12.2 12.1 Cumulative effect of change in accounting for 0.0 0.0 0.0 (15.7) goodwill ---- ---- ---- ---- Net earnings (loss) 12.3% 12.3% 12.2% (3.6)% ==== ==== ==== ====
28 29 INTEREST RATE SWAPS The Company enters into interest rate swaps as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. Interest rate swap activity decreased net interest income by $1.2 million and $1.5 million for the three and six months ended June 30, 1997, as compared to a decrease of $3 million and $7 million for the same periods in 1996. The following table summarizes the unrealized gains and losses for interest rate swaps at June 30, 1997 and 1996. TABLE 16 Schedule of Unrealized Gains and Losses on Interest Rate Swaps (Dollars in thousands)
June 30, 1997 June 30, 1996 --------------------------------- --------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain(Loss) Gains Losses Gain(Loss) ---------- ---------- ---------- ---------- --------- ---------- Interest rate swaps $ 17,881 $ (31,179) $ (13,298) $ 29,908 $ (43,730) $ (13,822) ========== ========== ========== ========== ========= ==========
TABLE 17 Schedule of Interest Rate Swaps Activity (Notional amounts in millions)
Six Months Ended June 30, 1997 ---------------------------------- Receive Pay Forward Fixed Fixed Starting Swaps Swaps Swaps --------- -------- ------- Balance at December 31, 1996 $ 2,581 $ 1,340 $ 10 Additions -0- -0- -0- Maturities (844) (197) -0- Forward starting becoming effective 10 -0- (10) -------- -------- ------- Balance at June 30, 1997 $ 1,747 $ 1,143 $-0- ======== ======== =======
The range of floating interest rates received on swap contracts in the first six months of 1997 was 5.47% to 6.08%, and the range of floating interest rates paid on swap contracts was 4.76% to 6.00%. The range of fixed interest rates received on swap contracts in the first six months of 1997 was 4.62% to 8.68% and the range of fixed interest rates paid on swap contracts was 5.38% to 9.14%. 29 30 INTEREST ON LOANS In the second quarter of 1997, interest on loans was higher than in the comparable 1996 period by $41 million or 7.6%. The increase in the second quarter of 1997 was due to a $2.6 billion increase in the average portfolio balance which was partially offset by an 8 basis point decrease in the average portfolio yield. For the first half of 1997, interest on loans was higher than the comparable 1996 period by $65 million or 6.0%. The increase was due to a $2.3 billion increase in the average portfolio balance which was partially offset by a 14 basis point decrease in the average portfolio yield. INTEREST ON MORTGAGE-BACKED SECURITIES In the second quarter of 1997, interest on mortgage-backed securities was higher than in the comparable 1996 period by $13 million or 20.9%. The 1997 increase was due primarily to a $802 million increase in the average portfolio balance which was partially offset by a 21 basis point decrease in the average portfolio yield. For the first half of 1997, interest on mortgage-backed securities was higher than in the comparable 1996 period by $26 million or 21.2% due to a $843 million increase in the average portfolio balance which was partially offset by a 26 basis point decrease in the average portfolio yield. The increase in the mortgage-backed securities portfolio, and the lower average portfolio yield were primarily the result of the securitization of adjustable-rate loans with full credit recourse that began in 1995, as discussed on page 12. INTEREST AND DIVIDENDS ON INVESTMENTS The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. For the second quarter of 1997, interest and dividends on investments were higher than in the comparable 1996 period by $6 million or 22.0%. The increase was primarily due to a $147 million increase in the average portfolio balance and a 35 basis point increase in the average portfolio yield. For the first half of 1997, interest and dividends on investments was $4 million or 6.6% higher than for the same period in 1996. The increase was primarily due to a $50 million increase in the average portfolio balance and a 25 basis point increase in the average portfolio yield. INTEREST ON DEPOSITS In the second quarter of 1997, interest on deposits increased by $36 million or 14.0% from the comparable period in 1996. In the first half of 1997, interest on deposits increased by $51 million or 9.8% from the comparable period in 1996. The second quarter increase was due to a $2.4 billion increase in the average balance of deposits and an 11 basis point increase in the average cost of deposits. The six month increase was primarily due to a $2.1 billion increase in the average balance of deposits and a one basis point increase in the average cost of deposits. 30 31 INTEREST ON ADVANCES AND OTHER BORROWINGS For the second quarter and first half of 1997, interest on advances and other borrowings increased by $16 million or 9.6% and $25 million or 7.6%, respectively, from the comparable periods of 1996. The second quarter increase was primarily due to a $1.1 billion increase in the average balance, which was partially offset by a two basis point decrease in the average cost of these borrowings. The six month increase was primarily due to a $1.2 billion increase in the average balance which was offset by a 13 basis point decrease in the average cost of these borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses was $13 million and $34 million, respectively, for the three and six months ended June 30, 1997, compared to $17 million and $36 million for the same periods in 1996. The lower provision in 1997 reflects the decrease in non-accrual loans and the improving California economy. GENERAL AND ADMINISTRATIVE EXPENSES For the second quarter and first half of 1997, general and administrative expenses (G&A) were $79 million and $158 million, respectively, compared to $80 million and $161 million for the comparable periods in 1996. The primary reason for the decrease in 1997 was the benefit received from reduced deposit insurance premiums paid by the Association in 1997 (See Deposit Insurance section below). Excluding the effect of the lower deposit insurance premiums, total G&A increased due to the expansion of savings branches, higher loan volume, and the installation of enhancements to data processing systems. G&A as a percentage of average assets on an annualized basis was .81% and .82%, respectively, for the second quarter and first half of 1997 compared to .92% for the same periods in 1996. DEPOSIT INSURANCE During 1996, legislation was enacted to recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The new banking law required members to pay a levy of $4.7 billion to bring SAIF up to the required reserve level of 1.25% of insured deposits, but lowered the premiums paid by SAIF-insured institutions, starting in the fourth quarter of 1996. As a result of this legislation, Golden West's subsidiary, World Savings and Loan Association, incurred a one-time charge of $133 million at the end of the third quarter of 1996. Beginning on January 1, 1997, the premium paid by the Association to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.65 per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB, was increased from $0.00 per $1,000 in savings balances to $.13 per $1,000. 31 32 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 cumulative effect of the change in accounting for goodwill were 39.7% and 39.6%, respectively, for the second quarter and first half of 1997 compared to 38.6% for the same periods a year ago. LIQUIDITY AND CAPITAL RESOURCES World's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB; issuance of medium-term notes; and debt collateralized by mortgages, MBS, or securities. In addition, World has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from its parent, borrowings from public offerings of debt, sales of loans, sales of negotiable certificates of deposit, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, World may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of World's liquidity positions at June 30, 1997, and 1996, and December 31, 1996, see the cash and investments section on page 12. WFSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; negotiable certificates of deposit, borrowings from the FHLB; issuance of medium-term notes; investments and borrowings from its affiliates; and debt collateralized by mortgages, MBS, or securities. In addition, WFSB has other alternatives available to provide liquidity or finance operations including borrowings from public offerings of debt, sales of loans, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WFSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of WFSB's liquidity positions at June 30, 1997, and 1996, and December 31, 1996, see the cash and investments section on page 12. The principal sources of funds for Golden West (the Parent) are interest on investments, dividends from World, and the proceeds from the issuance of debt and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends World and WFSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities (of which $200 million matures in 1998), capital contributions to its insured subsidiaries (including $125 million for the six months ended June 30, 1997 and $500 million for the year ended December 31, 1996 to WFSB), dividends to stockholders, the purchase of Golden West stock (see stockholders' equity section on page 23), and general and administrative expenses. At June 30, 1997 and 1996, and December 31, 1996, Golden West's total cash and investments amounted to $900 million (including a $600 million long-term loan to WFSB), $799 million (including a $600 million short-term loan to World), and $913 million (including a $600 million long-term loan to WFSB), respectively. 32 33 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Statement of Computation of Earnings Per Share 27 - Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION Dated: August 13, 1997 /s/ J. L. Helvey ---------------------------------------------- J. L. Helvey Executive Vice President (duly authorized and principal financial officer) 33 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Earnings (Loss) Per Share (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 1997 1996 1997 1996 ----------- ---------- ----------- ----------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill $ 87,277 $ 79,585 $ 170,651 $ 158,178 Cumulative Effect of Change in Accounting for Goodwill -0- -0- -0- (205,242) ----------- ---------- ---------- ----------- Net Earnings (Loss) $ 87,277 $ 79,585 $ 170,651 $ (47,064) =========== ========== ========== =========== Average Number of Common Shares Outstanding 56,892,526 58,283,423 57,102,416 58,536,031 =========== ========== ========== =========== Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 1.54 $ 1.35 $ 2.99 $ 2.69 Cumulative Effect of Change in Accounting for Goodwill 0.00 0.00 0.00 (3.49) ----------- ---------- ---------- ----------- Earnings (Loss) Per Common Share $ 1.54 $ 1.35 $ 2.99 $ (.80) =========== ========== =========== ===========
34 EX-27 3 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1997 JUN-30-1997 130,667 0 856,456 0 808,000 3,846,002 3,846,110 31,821,887 216,651 39,095,082 24,036,660 4,431,565 734,564 7,401,403 0 0 5,674 2,485,216 39,095,082 1,148,722 68,494 147,302 1,364,518 574,442 929,246 435,272 33,806 0 157,797 282,711 282,711 0 0 170,651 2.99 2.99 7.35 361,860 0 75,834 0 195,702 13,305 448 216,651 216,651 0 0
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