SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For Quarter Ended September 30, 1996 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, 1996, was 57,337,009 shares.
<PAGE>
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 nine months ended September 30,
1996 and 1995 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, 1996, are not necessarily indicative of the results for the full year.
<TABLE>
<CAPTION>
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Unaudited)
(Dollars in thousands)
September 30 September 30 December 31
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Assets:
Cash $ 130,467 $ 173,994 $ 218,695
Securities available for sale at fair value 650,927 1,249,736 901,856
Other investments at cost 1,350,002 818,730 1,190,160
Mortgage-backed securities available for sale without recourse at
fair value 237,176 298,221 282,881
Mortgage-backed securities available for sale with recourse at
fair value 220,612 -0- -0-
Mortgage-backed securities held to maturity without recourse at
cost 814,619 917,005 893,774
Mortgage-backed securities held to maturity with recourse at cost 2,039,227 1,969,697 2,232,686
Loans receivable 30,278,267 27,951,161 28,181,353
Interest earned but uncollected 218,366 234,442 225,395
Investment in capital stock of Federal Home Loan Banks--at cost
which approximates fair value 480,468 346,356 350,955
Real estate held for sale or investment 83,074 71,426 76,187
Prepaid expenses and other assets 297,917 225,899 222,015
Premises and equipment--at cost less accumulated depreciation 210,301 202,674 203,637
Goodwill arising from acquisitions -0- 138,931 138,562
------------ ----------- -----------
$ 37,011,423 $34,598,272 $35,118,156
============ =========== ===========
Liabilities and Stockholders' Equity:
Customer deposits $ 21,584,365 $20,559,933 $20,847,910
Advances from Federal Home Loan Banks 8,159,240 5,976,515 6,447,201
Securities sold under agreements to repurchase 2,227,481 1,865,172 1,817,943
Medium-term notes 689,755 1,864,229 1,597,507
Accounts payable and accrued expenses 593,594 462,041 450,814
Taxes on income 163,252 352,232 356,036
Subordinated notes--net of discount 1,323,592 1,321,989 1,322,392
Stockholders' equity 2,270,144 2,196,161 2,278,353
------------ ----------- -----------
$ 37,011,423 $34,598,272 $35,118,156
============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
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
------------------------------ -----------------------------
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans $ 554,245 $ 540,154 $ 1,637,733 $ 1,557,366
Interest on mortgage-backed securities 59,882 54,007 181,416 117,511
Interest and dividends on investments 32,460 37,611 96,723 112,935
----------- ------------ ----------- ------------
646,587 631,772 1,915,872 1,787,812
Interest Expense:
Interest on customer deposits 264,445 274,000 787,727 779,795
Interest on advances 107,803 87,681 289,476 280,087
Interest on repurchase agreements 31,054 25,565 93,408 41,169
Interest on other borrowings 38,338 57,093 124,152 160,596
----------- ------------ ----------- ------------
441,640 444,339 1,294,763 1,261,647
----------- ------------ ----------- -------------
Net Interest Income 204,947 187,433 621,109 526,165
Provision for loan losses 23,498 14,622 59,256 44,052
----------- ------------ ----------- ------------
Net Interest Income after Provision
for Loan Losses 181,449 172,811 561,853 482,113
Non-Interest Income:
Fees 9,504 7,690 27,872 20,399
Gain (loss) on the sale of securities,
MBS and loans 1,952 (366) 9,783 (344)
Other 6,220 3,152 18,371 10,660
----------- ------------ ----------- ------------
17,676 10,476 56,026 30,715
Non-Interest Expense:
General and administrative:
Personnel 40,146 37,692 119,273 111,909
Occupancy 12,702 12,431 37,267 36,406
Deposit insurance 140,949 11,602 162,298 33,162
Advertising 1,954 2,166 6,711 7,620
Other 15,531 14,596 46,993 45,918
----------- ------------ ----------- ------------
211,282 78,487 372,542 235,015
Amortization of goodwill arising
from acquisitions -0- 527 -0- 2,393
----------- ------------ ----------- ------------
211,282 79,014 372,542 237,408
----------- ------------ ----------- ------------
Earnings (Loss) Before Taxes on Income and
Cumulative Effect of Change in Accounting (12,157) 104,273 245,337 275,420
Taxes on Income (147,942) 40,892 (48,626) 107,545
----------- ------------ ----------- ------------
Income Before Cumulative Effect of Change in
Accounting for Goodwill 135,785 63,381 293,963 167,875
Cumulative Effect of Change in Accounting
for Goodwill -0- -0- (205,242) -0-
----------- ------------ ----------- ------------
Net Earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875
=========== ============ =========== ============
Earnings Per Share:
Earnings Per Share Before Cumulative Effect of
Change in Accounting for Goodwill $ 2.32 $ 1.08 $ 5.01 $ 2.86
Cumulative Effect of Change in Accounting
for Goodwill 0.00 0.00 (3.49) 0.00
------------ ------------ ----------- ------------
Net Earnings Per Share $ 2.32 $ 1.08 $ 1.52 $ 2.86
============ ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 23,498 14,622 59,256 44,052
Cumulative effect of the change in accounting for goodwill -0- -0- 205,242 -0-
Amortization of loan fees and discounts (5,412) (5,493) (18,093) (15,052)
Depreciation and amortization 4,884 5,214 14,512 16,402
Loans originated for sale (72,354) (33,002) (407,606) (43,488)
Sales of loans originated for sale 73,715 14,435 408,594 23,982
Decrease (increase) in interest earned but uncollected 6,198 13,894 7,029 (31,986)
Federal Home Loan Bank stock dividends (6,217) (4,659) (20,701) (16,779)
Decrease (increase) in prepaid expenses and other assets 7,684 13,174 (136,688) (15,222)
Increase in accounts payable and accrued expenses 80,576 26,653 142,780 18,348
Increase (decrease) in taxes on income (197,773) (4,203) (198,759) 27,772
Other, net (4,672) (8,405) (11,987) (24,852)
----------- ----------- ----------- ------------
Net cash provided by operating activities 45,912 95,611 132,300 151,052
Cash Flows From Investing Activities:
New loan activity:
New real estate loans originated for portfolio (2,034,022) (1,342,404) (4,791,836) (4,535,012)
Real estate loans purchased (1,934) (478) (4,009) (29,923)
Other, net (9,559) (4,117) (15,074) (60,925)
----------- ----------- ---------- ------------
(2,045,515) (1,346,999) (4,810,919) (4,625,860)
Real estate loan principal payments:
Monthly payments 161,679 121,752 451,541 384,311
Payoffs, net of foreclosures 528,889 491,202 1,651,319 1,085,577
Refinances 62,114 50,693 202,411 126,532
----------- ----------- ----------- ------------
752,682 663,647 2,305,271 1,596,420
Purchases of mortgage-backed securities available for sale -0- -0- -0- (6,254)
Purchases of mortgage-backed securities held to maturity (4) (97,840) (1,522) (99,020)
Sales of mortgage-backed securities available for sale -0- -0- -0- 6,396
Repayments of mortgage-backed securities 100,527 63,708 320,465 121,298
Proceeds from sales of real estate 50,371 49,743 148,349 151,002
Purchases of securities available for sale (344,476) (1,155,102) (674,721) (2,627,287)
Sales of securities available for sale -0- 80,015 81,133 190,625
Maturities of securities available for sale 207,393 1,271,065 862,264 2,750,529
Decrease (increase) in other investments (139,862) 166,440 (159,842) (284,130)
Purchases of Federal Home Loan Bank stock (115,256) -0- (152,355) (13,486)
Redemptions of Federal Home Loan Bank stock 37,649 -0- 37,649 12,650
Additions to premises and equipment (7,216) (6,358) (21,722) (18,232)
----------- ----------- ----------- ------------
Net cash used in investing activities (1,503,707) (311,681) (2,065,950) (2,845,349)
</TABLE>
<PAGE>
<TABLE>
Golden West Financial Corporation
Consolidated Statement of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Customer deposit activity:
Increase (decrease) in deposits, net $ 324,260 $ (399,563) $ 92,604 $ 713,689
Interest credited 219,507 221,341 643,851 626,855
----------- ----------- ----------- ------------
543,767 (178,222) 736,455 1,340,544
Additions to Federal Home Loan Bank advances 1,117,600 25,800 1,881,050 575,890
Repayments of Federal Home Loan Bank advances (134,025) (307,551) (169,302) (1,088,118)
Proceeds from agreements to repurchase securities 1,974,262 1,429,200 3,989,933 2,894,195
Repayments of agreements to repurchase securities (2,064,039) (735,714) (3,580,395) (1,630,844)
Proceeds from medium-term notes -0- -0- -0- 699,360
Repayments of medium-term notes -0- -0- (908,135) -0-
Proceeds from federal funds purchased -0- -0- 1,250,000 -0-
Repayments of federal funds purchased -0- -0- (1,250,000) (250,000)
Proceeds from subordinated debt -0- -0- -0- 99,283
Dividends on common stock (5,496) (4,990) (16,591) (14,955)
Sale of stock 1,665 382 6,110 3,365
Purchase and retirement of Company stock (35,196) (2,224) (93,703) (2,870)
----------- ----------- ------------ ------------
Net cash provided by financing activities 1,398,538 226,681 1,845,422 2,625,850
----------- ----------- ------------ ------------
Net Increase (Decrease) in Cash (59,257) 10,611 (88,228) (68,447)
Cash at beginning of period 189,724 163,383 218,695 242,441
----------- ------------ ----------- - ------------
Cash at end of period $ 130,467 $ 173,994 $ 130,467 $ 173,994
=========== ============ ============ ============
Supplemental cash flow information:
Cash paid for:
Interest $ 476,400 $ 431,106 $ 1,342,224 $ 1,234,984
Income taxes 49,832 45,716 155,410 81,768
Cash received for interest and dividends 652,785 645,666 1,922,901 1,755,826
Noncash investing activities:
Loans transferred to foreclosed real estate 64,061 56,287 163,050 162,507
Loans securitized into MBS with recourse -0- 637,122 226,210 2,010,272
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Common Stock:
Balance at January 1 $ 5,887 $ 5,859
Common stock issued upon exercise of stock options 25 14
Common stock retired upon purchase of stock (174) (7)
----------- ----------
Balance at September 30 5,738 5,866
----------- ----------
Paid-in Capital:
Balance at January 1 55,353 45,689
Common stock issued upon exercise of stock options 6,085 3,351
------------ ----------
Balance at September 30 61,438 49,040
------------ ----------
Retained Earnings:
Balance at January 1 2,140,883 1,929,740
Net earnings 88,721 167,875
Cash dividends on common stock (16,591) (14,955)
Retirement of stock (93,529) (2,863)
----------- ----------
Balance at September 30 2,119,484 2,079,797
----------- ----------
Unrealized Gains on Securities Available for Sale:
Balance at January 1 76,230 18,986
Change during period 7,254 42,472
----------- ----------
Balance at September 30 83,484 61,458
----------- ----------
Total Stockholders' Equity at September 30 $2,270,144 $2,196,161
=========== ==========
</TABLE>
<PAGE>
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, 1995,
as well as certain material changes in results of operations during the three
and nine month periods ended September 30, 1996, and 1995, respectively.
The following narrative is written with the presumption that the users have
read or have access to the Company's 1995 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, 1995, and for the year then ended. Therefore, only material changes
in financial condition and results of operations are discussed herein.
ACCOUNTING CHANGE
In the third quarter and 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. SFAS 72 requires, among other
things, that goodwill resulting from the acquisition of banking or thrift
institutions initiated after September 30, 1982, be amortized over a period no
longer than the estimated remaining life of the acquired long-term
interest-earning assets. 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. As a result, the Company wrote-off goodwill totaling
$205.2 million as the cumulative effect of the change in accounting for
goodwill.
The adoption resulted in the restatement of earnings previously reported of
$75.5 million, or $1.28 per share, in the first quarter of 1996 to a loss of
$126.6 million, or $2.15 per share. Earnings for the second quarter of 1996 have
been restated from $76.5 million, or $1.32 per share to $79.6 million, or $1.35
per share. The Company has been accounting for acquisitions initiated subsequent
to September 30, 1982, in accordance with SFAS 72. Prior to the adoption of SFAS
72, the goodwill amortization expense for goodwill relating to acquisitions
prior to September 30, 1982 was $3.1 million per quarter.
<PAGE>
<TABLE>
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
<CAPTION>
September 30 September 30 December 31
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Assets $ 37,011,423 $ 34,598,272 $ 35,118,156
Loans receivable 30,278,267 27,951,161 28,181,353
Mortgage-backed securities 3,311,634 3,184,923 3,409,341
Customer deposits 21,584,365 20,559,933 20,847,910
Stockholders' equity 2,270,144 2,196,161 2,278,353
Stockholders' equity/total assets 6.13% 6.35% 6.49%
Book value per common share $ 39.57 $ 37.44 $ 38.70
Common shares outstanding 57,375,909 58,663,619 58,871,409
Yield on loan portfolio 7.42% 7.70% 7.69%
Yield on mortgage-backed securities 7.18% 7.49% 7.41%
Yield on investments 6.06% 6.05% 5.96%
Yield on earning assets 7.32% 7.58% 7.56%
Cost of deposits 4.95% 5.22% 5.15%
Cost of borrowings 5.85% 6.22% 6.15%
Cost of funds 5.28% 5.57% 5.50%
Yield on earning assets less cost of funds 2.04% 2.01% 2.06%
Ratio of nonperforming assets to total assets 1.20% 1.08% 1.11%
Ratio of troubled debt restructured to total assets .16% .16% .13%
World Savings and Loan Association:
Total assets $ 23,883,202 $32,668,619 $ 30,354,740
Net worth 1,623,564 2,314,532 2,128,329
Net worth/total assets 6.80% 7.08% 7.01%
Regulatory capital ratios:
Tangible capital 6.47% 6.54% 6.38%
Core capital 6.47% 6.54% 6.38%
Risk-based capital 14.19% 13.61% 13.40%
World Savings Bank, a Federal Savings Bank:
Total assets $ 12,830,891 $ 1,090,619 $ 4,017,491
Net worth 880,253 215,614 566,851
Net worth/total assets 6.86% 19.77% 14.11%
Regulatory capital ratios:
Tangible capital 6.83% 19.44% 14.01%
Core capital 6.83% 19.44% 14.01%
Risk-based capital 12.68% 35.14% 26.55%
</TABLE>
<PAGE>
<TABLE>
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
New real estate loans originated $2,106,376 $ 1,375,406 $ 5,199,442 $4,578,500
Average yield on new real estate loans 7.54% 7.84% 7.61% 7.49%
Increase (decrease) in customer deposits $ 543,767 $ (178,222) $ 736,455 $1,340,544
Earnings excluding 1996 nonrecurring items (a) 71,125 63,381 223,141 167,875
Earnings before cumulative effect of change in
accounting for goodwill 135,785 63,381 293,963 167,875
Net earnings 135,785 63,381 88,721 167,875
Earnings per share excluding 1996 nonrecurring items (a) 1.23 1.08 3.83 2.86
Earnings per share before cumulative effect
of change in accounting for goodwill 2.32 1.08 5.01 2.86
Net earnings per share 2.32 1.08 1.52 2.86
Cash dividends on common stock .095 .085 .285 .255
Average common shares outstanding 57,584,306 58,681,021 58,216,474 58,637,427
Ratios:(b)
Net earnings/average net worth (ROE)(c) 24.71% 11.71% 5.45% 10.65%
Net earnings/average assets (ROA)(c) 1.50% .74% .33% .67%
Net interest income/average assets 2.27% 2.18% 2.34% 2.09%
General and administrative expense/average assets
(G&A to Average Assets)(c) 2.34% .91% 1.40% .93%
</TABLE>
(a) Excludes the third quarter 1996 SAIF assessment of $132.6 million (pre-tax)
and the special tax credit of $139.5 million. Also excluded is the $205.2
million cumulative effect of the change in accounting for goodwill, which
was effective January 1, 1996.
(b) 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 the nine month period and dividing by four and ten,
respectively.
(c) The ratios for the quarter ended September 30, 1996, excluding the three
1996 nonrecurring items in footnote (a) above are: ROE 11.95%, ROA .78%
and G&A to Average Assets .87%. The same ratios for the nine months ended
September 30, 1996, are: ROE 12.69%, ROA .84% and G&A to Average Assets
.90%.
<PAGE>
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, 1996
and 1995, and December 31, 1995. The reader is referred to page 48 of the
Company's 1995 Form 10-K for similar information for the years 1992 through 1995
and a discussion of the changes in the composition of the Company's assets and
liabilities in those years.
<TABLE>
<CAPTION>
TABLE 1
Consolidated Condensed Balance Sheet
In Percentage Terms
September 30
------------------ December 31
1996 1995 1995
------- ------ -------------
<S> <C> <C> <C>
Assets:
Cash and investments 5.8% 6.5% 6.6%
Mortgage-backed securities 8.9 9.2 9.7
Loans receivable 81.8 80.8 80.2
Other assets 3.5 3.5 3.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Liabilities and Stockholders' Equity:
Customer deposits 58.3% 59.4% 59.4%
Federal Home Loan Bank advances 22.0 17.3 18.4
Securities sold under agreements to repurchase 6.0 5.4 5.2
Medium-term notes 1.9 5.4 4.5
Other liabilities 2.1 2.4 2.2
Subordinated debt 3.6 3.8 3.8
Stockholders' equity 6.1 6.3 6.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As the above table shows, customer 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 September 30, 1996,
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 lag 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. Consequently, when the interest rate
environment changes, the COFI reporting lag causes assets to initially reprice
more slowly than liabilities, enhancing earnings when rates are falling and
holding down income when rates rise. In addition to the COFI reporting lag,
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.
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of September 30, 1996
(Dollars in millions)
Projected Repricing(a)
-------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investments $ 1,656 $ 10 $ 333 $ 2 $ 2,001
Mortgage-backed securities 2,354 93 358 507 3,312
Loans receivable:
Rate-sensitive 25,280 1,815 113 -0- 27,208
Fixed-rate 75 236 985 1,499 2,795
Other(b) 573 -0- -0- -0- 573
Impact of interest rate swaps 629 8 24 (661) -0-
--------- -------- ------- -------- --------
Total $ 30,567 $ 2,162 $ 1,813 $ 1,347 $ 35,889
========= ======== ======= ======== ========
Interest-Bearing Liabilities(c):
Customer deposits $ 8,095 $ 10,552 $ 2,880 $ 57 $ 21,584
FHLB advances 7,158 440 340 221 8,159
Other borrowings 2,711 315 619 596 4,241
Impact of interest rate swaps 2,219 (1,065) (1,141) (13) -0-
--------- -------- ------- -------- --------
Total $ 20,183 $ 10,242 $ 2,698 $ 861 $ 33,984
========= ======== ======= ======== ========
Repricing gap $ 10,384 $ (8,080) $ (885) $ 486
========= ======== ======= ========
Cumulative gap $ 10,384 $ 2,304 $ 1,419 1,905
========= ======== ======= =========
Cumulative gap as a percentage of
total assets 28.1% 6.2% 3.8%
========= ======== =======
</TABLE>
(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.
<PAGE>
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, a Federal Savings Bank (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 customer deposits and
short-term borrowings. For the months ended September 30, 1996 and 1995, and
December 31, 1995, World's average regulatory liquidity ratios were 7%, 6%, and
8%, respectively, consistently exceeding the requirement. For the months ended
September 30, 1996, and December 31, 1995, WFSB's average regulatory liquidity
ratios were 6% and 6%, respectively, consistently exceeding the requirement. The
level of the Company's investments position in excess of its liquidity
requirements at any time depends on liquidity needs.
At September 30, 1996 and 1995, and December 31, 1995, the Company had
securities available for sale in the amount of $651 million, $1.2 billion, and
$902 million, respectively, including net unrealized gains on securities
available for sale of $132 million, $89 million, and $117 million, respectively.
At September 30, 1996 and 1995, and December 31, 1995, the Company had no
securities held to maturity or for trading.
Included in the securities available for sale at September 30, 1996 and
1995, and December 31, 1995, were collateralized mortgage obligations (CMOs) in
the amount of $216 million, $484 million, and $408 million, respectively. The
Company holds CMOs on which both principal and interest are received. It does
not hold any interest-only or principal-only CMOs. At September 30, 1996, the
majority of the Company's CMOs were fixed-rate instruments with remaining terms
to maturity of five years or less, and qualified for inclusion in the regulatory
liquidity measurement.
MORTGAGE-BACKED SECURITIES
At September 30, 1996 and 1995, and December 31, 1995, the Company had
mortgage-backed securities (MBS) held to maturity in the amount of $2.9 billion,
$2.9 billion, and $3.1 billion, respectively, including $2.0 billion of Federal
National Mortgage Association (FNMA) MBS subject to full credit recourse at
September 30, 1996. At September 30, 1996 and 1995, and December 31, 1995, the
Company had mortgage-backed securities available for sale in the amount of $458
million, $298 million, and $283 million, respectively, including net unrealized
gains on MBS available for sale of $11 million, $16 million, and $14 million,
respectively, and including $221 million of FNMA MBS subject to full credit
recourse at September 30, 1996. At September 30, 1996 and 1995, and December 31,
1995, the Company had no trading MBS.
In June 1996, the Company securitized $226 million of adjustable rate
mortgages (ARMs) into FNMA COFI-indexed MBS. These MBS are classified as
available for sale. During 1995, the Company securitized $2.3 billion of ARMs
into FNMA COFI-indexed MBS. The Company has the ability and intent to hold these
MBS until maturity. Accordingly, these MBS are classified as held to maturity.
Both the FNMA COFI-indexed MBS available for sale and the FNMA COFI-indexed MBS
held to maturity are available to be used as collateral for borrowings and are
subject to full credit recourse to the Company.
<PAGE>
Repayments of MBS during the third quarter and first nine months of 1996
were $101 million and $320 million, respectively, compared to $64 million and
$121 million in the same periods of 1995. The increase in repayments on MBS
during the first nine months of 1996 as compared to the first nine months of
1995 was primarily due to the increase in MBS that resulted from the
securitization of ARM loans into FNMA MBS and an increase in prepayments on the
underlying mortgages.
LOAN PORTFOLIO
LOAN VOLUME
New loan originations for the three months ended September 30, 1996,
amounted to $2.1 billion, the largest single quarter in the Company's history,
compared to $1.4 billion for the same period in 1995. New loan originations for
the nine months ended September 30, 1996, amounted to $5.2 billion, compared to
$4.6 billion for the same period in 1995. The increase in loan volume in 1996
occurred because rates on new fixed-rate mortgages have generally remained above
the 8% level during 1996, while the starting rates on ARMs, the Company's
principal product, remained low and more affordable. The Company continues to
sell most of its fixed-rate originations. Loans originated for sale for the
three and nine months ended September 30, 1996 were $72 million and $408
million, respectively, compared to $33 million and $43 million for the same
periods in 1995. Although interest rates increased during the second quarter of
1996, interest rates on fixed-rate loans in the first nine months of 1996 have
generally been at levels below the same periods of 1995, helping to cause an
increase in activity in fixed-rate loans during 1996. Refinanced loans
constituted 29% and 35% of new loan originations for the three and nine months
ended September 30, 1996, compared to 31% and 30% for the three and nine months
ended September 30, 1995.
The Company has lending operations in 24 states. The primary source of
mortgage origination is loans secured by residential properties in California.
For the three and nine months ended September 30, 1996, 49% and 51%,
respectively, of total loan originations were on residential properties in
California compared to 53% for the same periods in 1995. The five largest
states, other than California, for originations for the three and nine months
ended September 30, 1996, were Texas, Florida, Illinois, Colorado, and New
Jersey with a combined total of 29% and 28%, respectively, of total
originations. The percentage of the total loan portfolio (including
mortgage-backed securities with recourse) that is comprised of residential loans
in California was 70% at September 30, 1996 compared to 74% at September 30,
1995, and 73% at December 31, 1995.
The tables on the following two pages show the Company's loan portfolio by
state at September 30, 1996 and 1995.
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
Loan Portfolio by State
September 30, 1996
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
------------------------- Real Total a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- --------------- ------------ ----------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
California $19,615,787 $3,369,019 $ 259 $ 65,584 $23,050,649 $ 70.35%
Colorado 931,879 233,318 -0- 7,404 1,172,601 3.58
Illinois 985,939 182,522 -0- 1,857 1,170,318 3.57
Texas 1,052,319 106,486 579 1,602 1,160,986 3.54
New Jersey 992,647 409 -0- 7,155 1,000,211 3.05
Florida 917,033 17,829 143 976 935,981 2.86
Washington 397,289 341,335 -0- 765 739,389 2.26
Arizona 569,451 51,943 -0- 1,689 623,083 1.90
Virginia 474,620 7,884 -0- 1,498 484,002 1.48
Pennsylvania 452,421 4,273 -0- 3,780 460,474 1.41
Connecticut 379,277 -0- -0- 24 379,301 1.16
Maryland 310,800 1,396 -0- 561 312,757 0.95
Oregon 199,410 11,031 -0- 2,778 213,219 0.65
Nevada 173,693 1,148 -0- -0- 174,841 0.53
Kansas 140,487 4,951 -0- 198 145,636 0.44
Utah 134,296 61 -0- 1,841 136,198 0.42
Minnesota 118,120 5,135 -0- -0- 123,255 0.38
Wisconsin 87,158 4,183 -0- -0- 91,341 0.28
Missouri 68,924 6,697 -0- -0- 75,621 0.23
Massachusetts 52,479 -0- -0- 20 52,499 0.16
New York 50,257 -0- -0- 18 50,275 0.15
Washington, DC 39,633 -0- -0- -0- 39,633 0.12
Georgia 37,223 -0- -0- 1,864 39,087 0.12
New Mexico 31,705 -0- -0- -0- 31,705 0.10
Ohio 18,743 2,322 283 4,477 25,825 0.08
Idaho 23,298 -0- -0- -0- 23,298 0.07
Delaware 20,944 -0- -0- -0- 20,944 0.06
North Carolina 8,067 254 -0- 511 8,832 0.03
South Dakota 4,838 -0- -0- -0- 4,838 0.01
Other 12,874 18 -0- 4,698 17,590 0.06
----------- ---------- --------- ----------- ----------- --------
Totals $28,301,611 $4,352,214 $ 1,264 $ 109,300 32,764,389 100.00%
=========== ========== ========= =========== ========
SFAS 91 deferred loan fees (63,634)
Loan discount on purchased loans (5,436)
Undisbursed loan funds (4,913)
Allowance for loan losses (178,354)
Loans to facilitate (LTF) interest reserve (532)
Troubled debt restructured (TDR) interest reserve (5,237)
Loans on customer deposits 31,823
-----------
Total loan portfolio and loans securitized into FNMA MBS with recourse 32,538,106
Loans securitized into FNMA MBS with recourse (2,259,839)(b)
-----------
Total loan portfolio $30,278,267
===========
</TABLE>
(a) The Company has no commercial loans.
(b) Loans amounting to $2.6 billion were securitized with full recourse into
Federal National Mortgage Association mortgage-backed securities during
1995 and 1996. The September 30, 1996 balances of these FNMA
mortgage-backed securities are reflected in the amounts above.
<PAGE>
<TABLE>
<CAPTION>
TABLE 4
Loan Portfolio by State
September 30, 1995
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
-------------------------- Real Total a % of
State 1 - 4 5+ Land Estate Construction Loans (a) Portfolio
- --------------- ------------ ----------- ------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
California $18,869,206 $3,337,180 $ 277 $ 74,020 $ -0- $22,280,683 73.98%
Colorado 818,258 207,409 -0- 7,841 -0- 1,033,508 3.43
Illinois 800,456 177,024 -0- 2,586 -0- 980,066 3.25
Texas 780,265 68,344 593 1,702 -0- 850,904 2.83
New Jersey 836,725 -0- -0- 8,440 2,214 847,379 2.81
Florida 654,941 -0- 247 1,424 -0- 656,612 2.18
Washington 347,367 299,209 -0- 796 -0- 647,372 2.15
Virginia 406,260 604 -0- 1,623 -0- 408,487 1.36
Arizona 353,127 40,271 -0- 1,745 -0- 395,143 1.31
Pennsylvania 369,861 -0- -0- 4,347 -0- 374,208 1.24
Connecticut 302,964 -0- -0- -0- -0- 302,964 1.01
Maryland 267,044 -0- -0- 610 -0- 267,654 0.89
Oregon 173,120 10,618 -0- 3,789 -0- 187,527 0.62
Nevada 155,791 1,250 -0- -0- -0- 157,041 0.52
Kansas 128,558 5,193 -0- 215 -0- 133,966 0.44
Utah 86,049 66 -0- 2,035 -0- 88,150 0.29
Missouri 65,305 7,138 -0- 77 -0- 72,520 0.24
Minnesota 70,001 -0- -0- -0- -0- 70,001 0.23
Wisconsin 50,876 4,218 -0- -0- -0- 55,094 0.18
New York 54,494 -0- -0- -0- -0- 54,494 0.18
Georgia 44,914 -0- -0- 1,974 -0- 46,888 0.16
Washington, DC 34,591 -0- -0- -0- -0- 34,591 0.11
Ohio 25,677 2,839 438 5,383 -0- 34,337 0.11
New Mexico 23,325 -0- -0- -0- -0- 23,325 0.08
Delaware 17,862 -0- -0- -0- -0- 17,862 0.06
Idaho 13,626 -0- -0- -0- -0- 13,626 0.05
North Carolina 9,060 351 -0- 3,026 -0- 12,437 0.04
Other 57,270 10,893 -0- 4,974 -0- 73,137 0.25
----------- ---------- ------ -------- ------- ---------- ------
Totals $25,816,993 $4,172,607 $1,555 $126,607 $ 2,214 30,119,976 100.00%
=========== ========== ====== ======== ======= ======
SFAS 91 deferred loan fees (80,366)
Loan discount on purchased loans (6,770)
Undisbursed loan funds (3,623)
Allowance for loan losses (137,377)
LTF interest reserve (512)
TDR interest reserve (5,244)
Loans on customer deposits 34,774
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse 29,920,858
Loans securitized into FNMA MBS with recourse (1,969,697)(b)
-----------
Total loan portfolio $27,951,161
===========
</TABLE>
(a) The Company has no commercial loans.
(b) Loans amounting to $2.0 billion were securitized with full recourse into
FNMA mortgage-backed securities during the first nine months of 1995. The
September 30, 1995 balances of these mortgage-backed securities are
reflected in the amounts above.
<PAGE>
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 91% at September 30, 1996 compared to 90% at September 30, 1995, and
December 31, 1995. The Company's ARM originations for the third quarter and
first nine months of 1996 constituted approximately 95% and 89%, respectively,
of new mortgage loans made in 1996 compared to 88% and 94% in the same periods
of 1995.
The weighted average maximum lifetime cap rate on the Company's ARM loan
portfolio (including MBS with recourse) was 12.95%, or 5.72% above the actual
weighted average rate at September 30, 1996, versus 13.16%, or 5.67% above the
weighted average rate at September 30, 1995.
Approximately $5.4 billion of the Company's 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. As of September 30, 1996, $665
million of these ARM loans had reached their rate floors. The weighted average
floor rate on these loans was 7.75% at September 30, 1996 and 7.85% at September
30, 1995. Without the floor, the average yield on these loans would have been
7.08% at September 30, 1996 and 7.54% at September 30, 1995.
Loan repayments consist of monthly loan amortization, loan payoffs, and
refinances. For the three and nine months ended September 30, 1996, loan
repayments were $753 million and $2.3 billion, respectively, compared to $664
million and $1.6 billion in the same periods of 1995. The increase in loan
repayments was primarily due to higher mortgage payoffs and higher refinances
within the portfolio as well as an increase in the portfolio balance.
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 impairment of capitalized mortgage servicing rights based on the fair
value of those rights on a disaggregated basis. For the third quarter and first
nine months of 1996, the Company recognized gains of $1.8 million and $8.8
million, respectively, on the sale of loans due to the capitalization of
servicing rights under SFAS 122. After amortization, the balance at September
30, 1996 of the capitalized servicing rights was $7.9 million.
ASSET QUALITY
One measure of the soundness of the Company's portfolio is its ratio of
nonperforming assets (NPAs) to total assets. Nonperforming assets includes
non-accrual loans (loans 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 loan payments have been capitalized or on which temporary interest
rate reductions have been made, primarily to customers negatively impacted by
adverse economic conditions.
<PAGE>
The following table shows the components of the Company's nonperforming
assets and TDRs, and the ratios to total assets.
<TABLE>
<CAPTION>
TABLE 5
Nonperforming Assets and Troubled Debt Restructured
(Dollars in thousands)
September 30
-------------------------- December 31
1996 1995 1995
----------- ------------ ------------
<S> <C> <C> <C>
Non-accrual loans $ 362,817 $ 301,586 $ 314,086
Real estate acquired through foreclosure 81,563 70,727 75,158
Real estate in judgment 944 107 443
---------- ----------- -----------
Total nonperforming assets $ 445,324 $ 372,420 $ 389,687
========== =========== ===========
TDRs $ 60,732 $ 56,493 $ 45,222
========== =========== ===========
Ratio of NPAs to total assets 1.20% 1.08% 1.11%
========== =========== ===========
Ratio of TDRs to total assets .16% .16% .13%
========== =========== ===========
Ratio of NPAs and TDRs to total assets 1.36% 1.24% 1.24%
========== =========== ===========
</TABLE>
The increase in NPAs during 1996 reflects the continued weakness in the
California housing market and increased bankruptcies nationwide. 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 $5 million and $15 million in the third quarter and first nine
months of 1996 compared to $5 million and $14 million for the same periods of
1995. Interest foregone on TDRs amounted to $432 thousand and $1.2 million for
the three and nine months ended September 30, 1996, compared to $482 thousand
and $1.5 million for the three and nine months ended September 30, 1995.
The tables on the following two pages show the Company's nonperforming
assets by state at September 30, 1996 and 1995.
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
Nonperforming Assets by State
September 30, 1996
(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+ Land Estate NPAs(b) Loans
- ----------- --------- ---------- --------- -------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $291,880 $ 18,711 $ 530 $63,792 $ 14,649 $ 475 $ 2,167 $392,204 1.70%
Colorado 1,220 119 3,092 165 -0- -0- -0- 4,596 0.39
Illinois 4,726 191 -0- 227 281 -0- -0- 5,425 0.46
Texas 3,881 -0- -0- 102 -0- -0- -0- 3,983 0.34
New Jersey 11,955 -0- 791 1,393 -0- -0- -0- 14,139 1.41
Florida 3,903 -0- 269 430 -0- -0- -0- 4,602 0.49
Washington 1,470 -0- -0- -0- -0- -0- -0- 1,470 0.20
Arizona 776 -0- 1,096 -0- -0- -0- -0- 1,872 0.30
Virginia 1,224 -0- -0- 733 -0- -0- -0- 1,957 0.40
Pennsylvania 2,696 -0- -0- 48 -0- -0- -0- 2,744 0.60
Connecticut 2,936 -0- -0- 279 -0- -0- -0- 3,215 0.85
Maryland 1,596 -0- -0- -0- -0- -0- -0- 1,596 0.51
Oregon 850 -0- -0- -0- -0- -0- -0- 850 0.40
Nevada 1,000 -0- -0- -0- -0- -0- -0- 1,000 0.57
Kansas 720 40 -0- -0- -0- -0- -0- 760 0.52
Utah 294 -0- -0- -0- -0- -0- -0- 294 0.22
Minnesota 323 -0- -0- -0- -0- -0- -0- 323 0.26
Wisconsin -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Missouri 849 106 -0- -0- -0- -0- -0- 955 1.26
Massachusetts -0- -0- -0- -0- -0- -0- -0- -0- 0.00
New York 3,926 -0- -0- -0- -0- -0- -0- 3,926 7.81
Washington, DC -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Georgia 1,443 -0- -0- 73 -0- -0- -0- 1,516 3.88
New Mexico -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Ohio 70 -0- 58 -0- -0- -0- -0- 128 0.50
Idaho -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Delaware -0- -0- -0- -0- -0- -0- -0- -0- 0.00
North Carolina -0- -0- -0- -0- -0- -0- -0- -0- 0.00
South Dakota -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Other 76 -0- -0- -0- -0- -0- -0- 76 0.43
--------- ---------- --------- -------- --------- --------- --------- --------- -----
Totals $337,814 $ 19,167 $ 5,836 $67,242 $14,930 $ 475 $2,167 447,631 1.37
========= ========== ========= ======== ========= ========= =========
REO general valuation allowance (2,307) (0.01)
-------- -----
Total nonperforming assets $445,324 1.36%
========= =====
</TABLE>
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) Loans amounting to $2.6 billion were securitized with full recourse into
FNMA mortgage-backed securities during 1995 and 1996. The September 30,
1996 balances of the related nonperforming assets are reflected in the
amounts above.
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
Nonperforming Assets by State
September 30, 1995
(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
- ----------- --------- ---------- --------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $251,455 $ 12,691 $ 413 $52,335 $12,650 $3,716 $333,260 1.50%
Colorado 1,658 64 -0- 49 -0- -0- 1,771 0.17
Illinois 2,531 1,078 -0- 859 400 -0- 4,868 0.50
Texas 2,301 -0- -0- 307 -0- -0- 2,608 0.31
New Jersey 10,218 -0- 2 412 -0- -0- 10,632 1.25
Florida 2,678 -0- 84 234 -0- -0- 2,996 0.46
Washington 783 -0- -0- 335 -0- -0- 1,118 0.17
Virginia 2,044 -0- -0- 326 -0- -0- 2,370 0.58
Arizona 1,138 -0- -0- -0- -0- -0- 1,138 0.29
Pennsylvania 2,222 -0- -0- -0- -0- -0- 2,222 0.59
Connecticut 3,307 -0- -0- (90) -0- -0- 3,217 1.06
Maryland 405 -0- -0- 213 -0- -0- 618 0.23
Oregon 608 -0- -0- -0- -0- -0- 608 0.32
Nevada 557 -0- -0- 113 -0- -0- 670 0.43
Kansas 561 40 -0- 21 -0- -0- 622 0.46
Utah 122 -0- -0- -0- -0- -0- 122 0.14
Missouri 407 -0- -0- 32 -0- -0- 439 0.61
Minnesota -0- -0- -0- -0- -0- -0- -0- 0.00
Wisconsin -0- -0- -0- -0- -0- -0- -0- 0.00
New York 2,929 -0- -0- 724 -0- -0- 3,653 6.70
Georgia 1,046 -0- -0- -0- -0- -0- 1,046 2.23
Washington, DC -0- -0- -0- -0- -0- -0- -0- 0.00
Ohio -0- -0- 58 17 154 -0- 229 0.67
New Mexico 1 -0- -0- -0- -0- -0- 1 0.00
Delaware -0- -0- -0- -0- -0- -0- -0- 0.00
Idaho -0- -0- -0- -0- -0- -0- -0- 0.00
North Carolina 80 -0- -0- -0- -0- -0- 80 0.64
Other 105 -0- -0- -0- -0- -0- 105 0.14
-------- --------- -------- ------- -------- -------- -------- ----
Totals $287,156 $ 13,873 $ 557 $55,887 $ 13,204 $ 3,716 374,393 1.24
======== ========= ======== ======= ======== ========
REO general valuation allowance (1,973) (0.00)
-------- -----
Total nonperforming assets $372,420 1.24%
======== =====
</TABLE>
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) Loans amounting to $2.0 billion were securitized with full recourse into
FNMA mortgage-backed securities during the first nine months of 1995. The
September 30, 1995 balance of the related nonperforming assets are
reflected in the amounts above.
<PAGE>
The Company provides specific valuation allowances for losses on loans when
impaired, including loans securitized into MBS with recourse or loans sold with
recourse, and on real estate owned when any significant and permanent decline in
value is identified. The Company also utilizes a methodology, based on trends in
the basic portfolio, for monitoring and estimating loan losses that is based on
both historical experience in the loan portfolio and factors reflecting current
economic conditions. This approach uses a database that identifies losses on
loans and foreclosed real estate from past years to the present, broken down by
year of origination, type of loan, and geographical area. Management is then
able to estimate a range of general loss allowances to cover losses in the
portfolio. In addition, periodic reviews are made of major loans and real estate
owned, and major lending areas are regularly reviewed to determine potential
problems. Where indicated, valuation allowances are established or adjusted. In
estimating possible losses, consideration is given to the estimated sale price,
cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of
holding the property. Additions to and reductions from the allowances are
reflected in current earnings.
The table below shows the changes in the allowance for loan losses for
the three and nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
TABLE 8
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- -------------------------
1996 1995 1996 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $ 163,846 $ 133,682 $ 141,988 $ 124,003
Provision charged to expense 23,498 14,622 59,256 44,052
Less loans charged off (9,167) (11,087) (23,398) (31,997)
Add recoveries 177 160 508 1,319
---------- ----------- ---------- ---------
Ending allowance for loan losses $ 178,354 $ 137,377 $ 178,354 $ 137,377
========== =========== ========== =========
Ratio of net charge-offs to average loans
outstanding (including MBS with recourse) .11% .15% .10% .14%
========== =========== ========== =========
Ratio of allowance for loan losses
to nonperforming assets 40.1% 36.9%
========== =========
</TABLE>
CUSTOMER DEPOSITS
Driven by effective, directed marketing efforts, customer deposits
increased during the third quarter of 1996 by $544 million, including interest
credited of $220 million, compared to a decrease of $178 million, including
interest credited of $221 million, in the third quarter of 1995. Customer
deposit balances in the first nine months of 1996 increased by $736 million,
including interest credited of $644 million, compared to an increase of $1.3
billion, including interest credited of $627 million, during the first nine
months of 1995. All of the 1995 growth occurred in the first half of the year
and was attributed to increasing interest rates offered on savings accounts
during those six months.
<PAGE>
The table below shows the Company's customer deposits by interest rate
and by remaining maturity at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
TABLE 9
Customer Deposits
(Dollars in millions)
September 30
---------------------------------------------------
1996 1995
---------------------- -----------------------
Rate* Amount Rate* Amount
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Customer deposits by interest rate:
Interest-bearing checking accounts 1.22 % $ 747 1.25% $ 733
Passbook accounts 2.22 549 2.23 583
Money market deposit accounts 3.06 1,095 3.14 1,379
Term certificate accounts with original maturities
of:
4 weeks to 1 year 5.05 9,104 5.52 8,538
1 to 2 years 5.21 5,259 5.59 3,950
2 to 3 years 5.96 1,750 5.48 2,179
3 to 4 years 5.58 591 5.31 698
4 years and over 5.78 2,034 6.43 2,076
Retail jumbo CDs 5.31 453 5.76 420
All other 7.71 2 7.72 4
---------- ----------
$ 21,584 $ 20,560
========== ==========
Customer deposits by remaining maturity:
No contractual maturity $ 2,391 $ 2,695
Maturity within one year:
4th quarter 5,704 4,584
1st quarter 6,568 4,628
2nd quarter 2,857 3,689
3rd quarter 1,127 1,217
---------- ----------
16,256 14,118
1 to 2 years 1,763 2,095
2 to 3 years 772 752
3 to 4 years 232 601
4 years and over 170 299
---------- ----------
$ 21,584 $ 20,560
========== ==========
</TABLE>
* Weighted average interest rate, including the impact of interest rate swaps.
<PAGE>
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. FHLB
advances amounted to $8.2 billion at September 30, 1996, compared to $6.0
billion and $6.4 billion at September 30, 1995, and December 31, 1995,
respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company borrows funds through transactions in which securities are sold
under agreements to repurchase (Reverse Repos). Reverse Repos are entered into
with selected major government securities dealers, 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 $2.2 billion, $1.9 billion, and $1.8 billion at
September 30, 1996 and 1995, and December 31, 1995, respectively. The $2.2
billion balance at September 30, 1996, 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
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
125). SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
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 November 1996, the FASB issued an exposure draft which would
delay the effective date for portions of SFAS 125 for one year. The impact of
the exposure draft and SFAS 125 on the Company's financial condition and results
of operations is not expected to be material.
OTHER BORROWINGS
At September 30, 1996, Golden West, at the holding company level, had a
total of $1.1 billion of subordinated debt issued and outstanding. As of
September 30, 1996, 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 September 30, 1996, 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 September 30, 1996. World had medium-term notes
outstanding under prior registrations with principal amounts of $690 million at
September 30, 1996, compared to $1.9 billion at September 30, 1995, and $1.6
billion at December 31, 1995. As of September 30, 1996, World's medium-term
notes were rated A1 and A+ by Moody's and S&P, respectively.
<PAGE>
World also has on file a registration statement with the OTS for the
sale of up to $300 million of subordinated notes and, at September 30, 1996, the
full amount was available for issuance. As of September 30, 1996, World had
issued 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.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity decreased during the first nine months
of 1996 as a result of the $94 million cost of the purchase of Company stock and
the payment of $17 million in quarterly dividends to stockholders. The decrease
was offset by net earnings for the first nine months of 1996 and a $7 million
increase in market values of securities available for sale since December 31,
1995. The Company's stockholders' equity increased during the first nine months
of 1995 as a result of retained earnings. Unrealized gains on securities and MBS
available for sale included in stockholders' equity at September 30, 1996 and
1995, and December 31, 1995, were $83 million, $61 million, and $76 million,
respectively.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) on January 1, 1996. SFAS
123 establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
123, the Company can either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma disclosures of
net income and earnings per share as if the accounting provisions of SFAS 123
had been adopted. The Company adopted only the disclosure requirements of SFAS
123; therefore such adoption has no effect on the Company's September 30, 1996
consolidated financial statements.
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 September 30, 1996, 7.6 million
shares had been purchased and retired at a cost of $320 million since October
1993, of which 1.7 million were purchased and retired at a cost of $94 million
during the first nine months of 1996. 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 $165 million dividend to Golden West in March 1996, a $165
million dividend in June 1996 and a $245 million dividend in September 1996 for
a total of $575 million for the first nine months of 1996. In addition, World
has received approval from the OTS to pay up to $255 million more in upstream
dividends to Golden West. Also, during 1996, Golden West invested $175 million
and $95 million in WFSB in June and in September, respectively.
<PAGE>
The Company has on file a shelf registration statement with the Securities
and Exchange Commission to issue up to two million shares of its preferred
stock. The preferred stock may be issued in one or more series, may have varying
provisions and designations, and may be represented by depository shares. The
preferred stock is not convertible into common stock. No preferred stock has yet
been issued under the registration. The Company's preferred stock has been
preliminarily rated a2 by Moody's.
REGULATORY CAPITAL
The OTS requires federally insured institutions, such as World and WFSB, to
meet certain minimum capital requirements. The adoption of SFAS 72 had no effect
on World's or WFSB's regulatory capital ratios because goodwill is required to
be deducted from regulatory capital. 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
current regulatory capital ratios and compares them to the current OTS minimum
requirements at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
TABLE 10
World Savings and Loan Association
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1996 September 30, 1995
------------------------------------------------ ------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ----------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $1,541,519 6.47% $ 357,644 1.50% $2,123,471 6.54% $ 487,097 1.50%
Core 1,541,519 6.47 715,288 3.00 2,123,471 6.54 974,194 3.00
Risk-based 1,866,220 14.19 1,052,051 8.00 2,441,239 13.61 1,434,813 8.00
</TABLE>
The following table shows WFSB's current regulatory capital ratios and
compares them to the current OTS minimum requirements at September 30, 1996 and
1995.
<TABLE>
<CAPTION>
TABLE 11
World Savings Bank, a Federal Savings Bank
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1996 September 30, 1995
----------------------------------------------- ----------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
---------------------- ---------------------- ---------------------- ---------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $ 876,490 6.83% $ 192,563 1.50% $ 211,297 19.44% $16,301 1.50%
Core 876,490 6.83 385,125 3.00 211,297 19.44 32,603 3.00
Risk-based 901,307 12.68 568,592 8.00 212,965 35.14 48,479 8.00
</TABLE>
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.
<PAGE>
The OTS has adopted rules based upon five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The determination of whether an association falls
into a certain classification depends primarily on its capital ratios.
The table below shows that World's regulatory capital exceeds the
requirements of the well capitalized classification at September 30, 1996.
<TABLE>
<CAPTION>
TABLE 12
World Savings and Loan Association
Regulatory Capital Compared to Well Capitalized Classification
(Dollars in thousands)
ACTUAL WELL CAPITALIZED
----------------------- --------------------------
Capital Ratio Capital Ratio
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Leverage $1,541,519 6.47% $1,192,146 5.00%
Tier 1 risk-based 1,541,519 11.72 789,038 6.00
Total risk-based 1,866,220 14.19 1,315,063 10.00
</TABLE>
The table below shows that WFSB's regulatory capital exceeds the
requirements of the well capitalized classification at September 30, 1996.
<TABLE>
<CAPTION>
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
----------- -------- -- ----------- -----------
<S> <C> <C> <C> <C>
Leverage $ 876,490 6.83% $ 641,876 5.00%
Tier 1 risk-based 876,490 12.33 426,444 6.00
Total risk-based 901,307 12.68 710,740 10.00
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the quarter and nine months ended September 30, 1996, were
significantly influenced by three nonrecurring items: the federally mandated
recapitalization of the Savings Association Insurance Fund (SAIF) which resulted
in a one-time charge of $132.6 million, or $1.34 per share on an after-tax basis
at the end of the third quarter (See Deposit Insurance Section on page 31); the
recognition during the third quarter of $139.5 million, or $2.40 per share of
tax benefits arising from a prior year acquisition (see Taxes on Income section
on page 32); and the third quarter adoption, retroactive to January 1, 1996, of
SFAS 72 which resulted in the write-off of $205.2 million or $3.49 per share of
goodwill during the first quarter of 1996. Reported net earnings for the third
quarter and nine months ended September 30, 1996 were $135.8 million or $2.32
per share and $88.7 million or $1.52 per share, respectively. Without the effect
of the three items, net earnings for the third quarter and nine months ended
September 30, 1996 would have been $71.1 million or $1.23 per share and $223.1
million or $3.83 per share, respectively, compared to $63.4 million or $1.08 per
share and $167.9 million or $2.86 per share for same periods in 1995.
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 September
30, 1996 and 1995, and December 31, 1995.
<TABLE>
<CAPTION>
TABLE 14
Yield on Earning Assets,
Cost of Funds, and Primary Spread,
Including Effect of Purchase Accounting
September 30
--------------------------- December 31
1996 1995 1995
--------- ----------- -----------
<S> <C> <C> <C>
Yield on loan portfolio 7.42% 7.70% 7.69%
Yield on MBS 7.18 7.49 7.41
Yield on investments 6.06 6.05 5.96
-------- ------ --------
Yield on earning assets 7.32 7.58 7.56
-------- ------ --------
Cost of customer deposits 4.95 5.22 5.15
Cost of borrowings 5.85 6.22 6.15
-------- ------ --------
Cost of funds 5.28 5.57 5.50
--------- ------ --------
Primary spread 2.04% 2.01% 2.06%
========= ====== ========
</TABLE>
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. Short term interest rates were generally
declining during the second half of 1995 and early 1996 before stabilizing and
remaining relatively flat through September. The effects of this interest rate
environment led to a 22 basis point reduction in the Company's cost of funds and
a 24 basis point reduction in the yield on earning assets during the first nine
months of 1996, resulting in a 2 basis point decrease in the Company's spread
since yearend 1995.
<PAGE>
The table below shows the Company's revenues and expenses as a percentage
of total revenues for the three and nine months ended September 30, 1996 and
1995, in order to focus on the changes in interest income between years as well
as changes in other revenue and expense amounts.
<TABLE>
<CAPTION>
TABLE 15
Selected Revenue and Expense Items
as Percentages of Total Revenues
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Interest on loans 83.4% 84.1 % 83.1 % 85.6%
Interest on mortgage-backed securities 9.0 8.4 9.2 6.5
Interest and dividends on investments 4.9 5.9 4.9 6.2
--------- --------- -------- ---------
97.3 98.4 97.2 98.3
Less:
Interest on customer deposits 39.8 42.7 40.0 42.9
Interest on advances and other borrowings 26.7 26.5 25.7 26.5
--------- --------- -------- ---------
66.5 69.2 65.7 69.4
Net interest income 30.8 29.2 31.5 28.9
Provision for loan losses 3.5 2.3 3.0 2.4
-------- -------- -------- --------
Net interest income after provision for loan 27.3 26.9 28.5 26.5
losses
Add:
Fees 1.4 1.2 1.4 1.1
Gain (loss) on the sale of securities,
MBS, and loans 0.3 (0.1) 0.5 0.0
Other non-interest income 1.0 0.5 0.9 0.6
-------- -------- -------- --------
2.7 1.6 2.8 1.7
Less:
General and administrative expenses 31.8(a) 12.2 18.9 (a) 13.0
Amortization of goodwill 0.0 0.1 0.0 0.1
Taxes on income (22.2)(b) 6.3 (2.5)(b) 5.9
-------- -------- ------- --------
Earnings before cumulative effect of change in
accounting for goodwill 20.4 9.9 14.9 9.2
Cumulative effect of change in accounting
for goodwill 0.0 0.0 (10.4) 0.0
-------- -------- ------- --------
Net earnings 20.4% 9.9% 4.5% 9.2%
======== ======== ======= ========
</TABLE>
(a) Without the effect of the one-time SAIF assessment (see Deposit
Insurance section on page 31), general and administrative expenses as a
percentage of total revenues would have been 11.8% and 12.2% for the
three and nine months ended September 30, 1996, respectively.
(b) Without the effect of the one-time SAIF assessment and the special tax
credit (see Taxes on Income section on page 32), taxes on income as a
percentage of total revenues would have been 7.0% and 7.4% for the
three and nine months ended September 30, 1996, respectively.
<PAGE>
INTEREST RATE SWAPS AND CAPS
The Company enters into interest rate swaps and, from time to time, caps as
a part of its interest rate risk management strategy. Such instruments are
entered into solely to alter the repricing characteristics of designated assets
and liabilities. The Company does not hold any derivative financial instruments
for trading purposes.
Interest rate swap and cap activity decreased net interest income by $2
million and $9 million for the three and nine months ended September 30, 1996,
as compared to a decrease of $6 million and $24 million for the same periods in
1995.
The following table summarizes the unrealized gains and losses for interest
rate swaps and caps at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
TABLE 16
Schedule of Unrealized Gains and Losses on Interest Rate Swaps and Caps
(Dollars in thousands)
September 30, 1996 September 30, 1995
---------------------------------------- ----------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain (Loss) Gains Losses Gain (Loss)
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate caps $ -0- $ -0- $ -0- $ 84 $ -0- $ 84
Interest rate swaps 25,763 (42,980) (17,217) 27,998 (62,254) (34,256)
----------- ----------- ------------ ---------- ----------- ----------
Total $ 25,763 $ (42,980) $ (17,217) $ 28,082 $ (62,254) $ (34,172)
=========== =========== ============ ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
TABLE 17
Schedule of Interest Rate Swaps and Caps Activity
(Notional amounts in millions)
Nine Months Ended
September 30, 1996
-----------------------------------------------------------------------
Receive Pay Forward Interest
Fixed Fixed Basis Starting Rate
Swaps Swaps Swaps(a) Swaps Caps
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 3,221 $ 1,775 $ 43 $ 10 $ 225
Additions 905 -0- -0- -0- -0-
Maturities (1,545) (270) (43) -0- (225)
Terminations -0- -0- -0- -0- -0-
Forward starting becoming effective -0- -0- -0- -0- -0-
Other -0- -0- -0- -0- -0-
----------- --------- ---------- ---------- ---------
Balance at September 30, 1996 $ 2,581 $ 1,505 $ -0- $ 10 $ -0-
=========== ========= ========== ========== =========
</TABLE>
(a) Receives based upon one index, pays based upon another index.
The range of floating interest rates received on swap contracts in the
first nine months of 1996 was 5.14% to 6.02%, and the range of floating interest
rates paid on swap contracts was 4.81% to 6.06%. The range of fixed interest
rates received on swap contracts in the first nine months of 1996 was 4.61% to
9.68% and the range of fixed interest rates paid on swap contracts was 5.38% to
9.14%.
<PAGE>
INTEREST ON LOANS
In the third quarter of 1996, interest on loans was higher than in the
comparable 1995 period by $14 million or 2.6%. The increase in the third quarter
of 1996 was due to a $1.8 billion increase in the average portfolio balance
which was partially offset by a 27 basis point decrease in the average portfolio
yield. For the first nine months of 1996, interest on loans was higher than the
comparable 1995 period by $80 million or 5.2%. The increase was due to a $1.1
billion increase in the average portfolio balance and a ten basis point increase
in the average portfolio yield.
INTEREST ON MORTGAGE-BACKED SECURITIES
In the third quarter of 1996, interest on mortgage-backed securities was
higher than in the comparable 1995 period by $6 million or 10.9%. The third
quarter increase was due primarily to a $477 million increase in the average
portfolio balance, which was partially offset by a 37 basis point decrease in
the average portfolio yield. For the first nine months of 1996, interest on
mortgage-backed securities was higher than in the comparable 1995 period by $64
million or 54.4% due to a $1.3 billion increase in the average portfolio which
was partially offset by a 41 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 third quarter of 1996, interest and dividends on investments were $5 million
or 13.7% lower than for the same period in 1995. The decrease was primarily due
to a 15 basis point decrease in the average portfolio yield and a $447 million
decrease in the average portfolio balance. For the first nine months of 1996,
interest and dividends on investments was $16 million or 14.4% lower than for
the same period in 1995. The decrease was primarily due to a $511 million
decrease in the average portfolio balance and a 19 basis point decrease in the
average portfolio yield.
INTEREST ON CUSTOMER DEPOSITS
In the third quarter of 1996, interest on customer deposits decreased by
$10 million or 3.5% from the comparable period in 1995. In the first nine months
of 1996, interest on customer deposits increased by $8 million or 1.0% from the
comparable period of 1995. The third quarter decrease was due to a 35 basis
point decrease in the average cost of deposits which was offset by a $705
million increase in the average deposit balance. The nine month increase was
primarily due to a $765 million increase in the average balance of deposits
which was offset by a 16 basis point decrease in the average cost of deposits.
INTEREST ON ADVANCES AND OTHER BORROWINGS
For the third quarter and first nine months of 1996, interest on advances
and other borrowings increased by $7 million or 4.0% and $25 million or 5.2%,
respectively, from the comparable periods of 1995. The third quarter increase
was primarily due to a $1.1 billion increase in the average balance, which was
partially offset by a 36 basis point decrease in the average cost of these
borrowings. The nine month increase was primarily due to a $948 million increase
in the average balance which was offset by a 28 basis point decrease in the
average cost of these borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $23 million and $59 million,
respectively, for the three and nine months ended September 30, 1996, compared
to $14.6 million and $44.1 million for the same periods in 1995. The higher
provision in 1996 reflects the increase in non-accrual loans.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarter and first nine months of 1996, general and
administrative expenses (G&A) increased by $133 million or 169.2% and $138
million or 58.5%, respectively, from the comparable periods in 1995. The primary
reason for the increase in 1996 was the $132.6 million Savings Association
Insurance Fund (SAIF) assessment accrued in September 1996 (See Deposit
Insurance section below). Without the effect of the one-time SAIF assessment,
G&A as a percentage of average assets on an annualized basis was .87% and .90%
for the third quarter and first nine months of 1996, respectively, compared to
.91% and .93% for the same periods in 1995. Including the effect of the one-time
SAIF assessment, G&A as a percentage of average assets on an annualized basis
was 2.34% and 1.40% for the third quarter and first nine months of 1996,
respectively.
DEPOSIT INSURANCE
On September 30, 1996, Congress passed and President Clinton signed
legislation to capitalize the Savings Association Insurance Fund in order to
bring it into parity with the FDIC's other insurance fund, the Bank Insurance
Fund (BIF). The new banking law requires 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
lowers savings and loan deposit insurance premiums starting in 1997. As a result
of this legislation, Golden West's subsidiary, World Savings and Loan
Association, incurred a one-time charge of $132.6 million at the end of the
third quarter. Beginning on January 1, 1997, the premium paid by the Association
to the FDIC will be reduced from $2.30 per $1,000 in savings balances to $.64
per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured
institutions, such as WFSB, will be increased from $0.00 per $1,000 in savings
balances to $.13 per $1,000.
<PAGE>
CHANGE IN ACCOUNTING FOR GOODWILL
During the third quarter of 1996, the Company adopted SFAS 72, effective
January 1, 1996, for goodwill related to acquisitions made prior to September
30, 1982. SFAS 72 requires, among other things, that to the extent the fair
value of liabilities assumed exceeds the fair value of assets resulting from the
acquisition of banking or thrift institutions initiated after September 30,
1982, the resulting goodwill recognized shall be amortized over a period no
longer than the estimated remaining life of the acquired long-term
interest-earning assets. The adoption of SFAS 72 for goodwill related to
acquisitions of banking or thrift institutions prior to September 30, 1982, is
permitted but not required. As a result, the Company wrote-off goodwill totaling
$205.2 million as the cumulative effect of the change in accounting for goodwill
and restated its financial statements for the first and second quarters of 1996.
Results from periods prior to 1996 have not been restated. The Company has been
accounting for acquisitions initiated subsequent to September 30, 1982 in
accordance with SFAS 72.
With the adoption of SFAS 72 and the resulting reduction in the balance of
goodwill, there was no amortization of goodwill for the third quarter and first
nine months of 1996. 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. Goodwill amortization for the third quarter and
first nine months of 1995 was $527 thousand and $2.4 million, respectively.
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.
During the third quarter of 1996, the Company recognized $139.5 million of
tax benefits associated with the Company's acquisition of Beach Federal Savings
and Loan Association (Beach). Specifically, in December 1988, Golden West
entered into a government approved transaction with Beach to provide management
services to that institution. As part of the agreement, Golden West obtained an
option to take title to the stock of Beach and subsequently exercised this right
in July 1991. When Golden West took title to the stock, the Company disclosed
that tax benefits were anticipated from operating losses which had been
accumulated at Beach's predecessor institution up to the time of the 1988
agreement, although the availability and the amount of these benefits were
uncertain. The availability of the $139.5 million of tax benefits was confirmed
in the third quarter of 1996.
Taxes as a percentage of earnings before the cumulative effect of the
change in accounting for goodwill, the one-time SAIF assessment and excluding
the aforementioned $139.5 million in tax benefits, were 39.4% and 39.5% for the
third quarter and first nine months of 1996, respectively, compared to 39.2% and
39.0% for the same periods a year ago.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
World's principal sources of funds are cash flows generated from earnings;
customer 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, 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 September 30, 1996, and 1995, and
December 31, 1995, see the cash and investments section on page 12.
WFSB's principal sources of funds are cash flows generated from earnings;
customer deposits; loan repayments; borrowings from the FHLB; investments and
borrowings from its parent; and debt collateralized by mortgages or securities.
In addition, WFSB has other alternatives available to provide liquidity or
finance operations including sales of loans. For a discussion of WFSB's
liquidity positions at September 30, 1996, and 1995, and December 31, 1995, 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 can pay. The principal
liquidity needs of Golden West are for payment of interest and principal on
subordinated debt securities, capital contributions to its insured subsidiaries,
dividends to stockholders, the purchase of Golden West stock (see stockholders'
equity section on page 23), and general and administrative expenses. At
September 30, 1996 and 1995, and December 31, 1995, Golden West's total cash and
investments amounted to $910 million (including a $600 million short-term loan
to World and a $1.5 million short-term loan to World Savings Bank, a State
Savings Bank), $802 million, and $719 million, respectively.
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
<PAGE>
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 13, 1996 /s/ J. L. Helvey
------------------------------------
J. L. Helvey
Executive Vice President
(duly authorized and principal
financial officer)
<PAGE>
<TABLE>
EXHIBIT 11
Golden West Financial Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands except per share figures)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Earnings Before Cumulative Effect of
Change in Accounting for Goodwill $ 135,785 $ 63,381 $ 293,963 $ 167,875
Cumulative Effect of Change in
Accounting for Goodwill -0- -0- (205,242) -0-
----------- ---------- ---------- -----------
Net Earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875
=========== ========== ========== ===========
Average Number of Common
Shares Outstanding 57,584,306 58,681,021 58,216,474 58,637,427
============ ========== ========== ===========
Earnings Per Share Before Cumulative Effect
of Change in Accounting for Goodwill $ 2.32 $ 1.08 $ 5.01 $ 2.86
Cumulative Effect of Change in Accounting
for Goodwill 0.00 0.00 (3.49) 0.00
------------ ------------ ------------ -----------
Earnings Per Common Share $ 2.32 $ 1.08 $ 1.52 $ 2.86
============ ============ ============ ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 130,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 581,002
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,108,715
<INVESTMENTS-CARRYING> 2,853,846
<INVESTMENTS-MARKET> 2,850,722
<LOANS> 30,278,267
<ALLOWANCE> 178,354
<TOTAL-ASSETS> 37,011,423
<DEPOSITS> 21,584,365
<SHORT-TERM> 3,664,269
<LIABILITIES-OTHER> 756,846
<LONG-TERM> 8,735,799
0
0
<COMMON> 5,738
<OTHER-SE> 2,264,406
<TOTAL-LIABILITIES-AND-EQUITY> 37,011,423
<INTEREST-LOAN> 1,637,733
<INTEREST-INVEST> 96,723
<INTEREST-OTHER> 181,416
<INTEREST-TOTAL> 1,915,872
<INTEREST-DEPOSIT> 787,727
<INTEREST-EXPENSE> 1,294,763
<INTEREST-INCOME-NET> 621,109
<LOAN-LOSSES> 59,256
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 372,542
<INCOME-PRETAX> 245,337
<INCOME-PRE-EXTRAORDINARY> 245,337
<EXTRAORDINARY> 0
<CHANGES> (205,242)
<NET-INCOME> 88,721
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 7.32
<LOANS-NON> 362,817
<LOANS-PAST> 0
<LOANS-TROUBLED> 60,732
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 141,988
<CHARGE-OFFS> 23,398
<RECOVERIES> 508
<ALLOWANCE-CLOSE> 178,354
<ALLOWANCE-DOMESTIC> 178,354
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
