SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
for the fiscal year ended December 31, 1998
Commission File No. 1-4629
GOLDEN WEST FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2080059
- --------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1901 Harrison Street, Oakland, California 94612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 446-3420
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
- ----------------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange, Inc., Pacific
Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Registrant's common stock
held by nonaffiliates of the Registrant on February 28, 1999, was
$5,308,537,195. The number of shares outstanding of the Registrant's common
stock on February 28, 1999, was 56,511,374 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference Applicable Part of Form 10-K
- ------------------------------------ ----------------------------
Proxy Statement Dated March 15, 1999, Part III
Furnished to Stockholders in Connection
with Registrant's Annual Meeting of
Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
REGISTRANT
Golden West Financial Corporation (Golden West or Company) is a savings
and loan holding company, the principal business of which is the operation of a
savings bank business through its wholly-owned savings bank subsidiaries, World
Savings Bank, FSB (WFSB), and World Savings Bank, SSB, (WSSB) and a savings and
loan business through its wholly-owned subsidiary, World Savings and Loan
Association, a Federal Savings and Loan Association (WSL). WFSB, WSL and WSSB
are referred to collectively as the "Insured Institutions" or "Insured
Subsidiaries." Golden West also has two other subsidiaries, Atlas Advisers,
Inc., and Atlas Securities, Inc. These two companies were formed to provide
services to Atlas Assets, Inc., a series open-end registered investment company
sponsored by the Company. Atlas Advisers, Inc., is a registered investment
adviser and the investment manager of Atlas Assets, Inc.'s fourteen portfolios
(the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the
sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and
has its headquarters in Oakland, California. References herein to the Company or
Golden West mean Golden West and its subsidiaries on a consolidated basis,
unless the context requires otherwise.
During 1995, Golden West acquired Watchung Hills Bank for Savings of
New Jersey and renamed it World Savings Bank, FSB. WFSB is a federally chartered
savings bank, with deposits insured by the Federal Deposit Insurance Corporation
(FDIC) Bank Insurance Fund (BIF) and its home office is in Oakland, California.
As of December 31, 1998 and 1997, WFSB had assets of $31.9 billion and $24.6
billion, respectively. For the years ended December 31, 1998, 1997 and 1996,
WFSB had net income of $242 million, $185 million and $69 million, respectively.
WSL, whose deposits are insured by the FDIC Savings Association
Insurance Fund (SAIF), was incorporated in 1912 as a capital stock savings and
loan association and has its home office in Oakland, California. WSL became a
federally chartered savings and loan association in September 1981. For the
years ended December 31, 1998, 1997 and 1996, WSL's net income was $223 million,
$161 million and $108 million, respectively. WSL's assets totaled $6.8 billion
and $15.4 billion at yearends 1998 and 1997, respectively.
WSSB had assets of $3.5 billion and $123 million for the years ended
December 31, 1998 and 1997, respectively. For the years ended December 31, 1998,
1997 and 1996, WSSB had net income of $8.0 million, $901 thousand and $511
thousand, respectively.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGISTRANT (continued)
Golden West is operating its insured subsidiaries in a manner that
enhances customer service. In this regard, all of WFSB's and WSL's products are
made available in the savings branches of these two subsidiaries. In addition,
customers of each of Golden West's insured subsidiaries can transact most
business on their accounts at any of the Company's branch offices. Each insured
subsidiary reimburses the other for services provided in these arrangements.
Interest rates set on deposit accounts offered by the Company's Insured
Subsidiaries are based on market conditions, cost and funding needs.
REGULATORY FRAMEWORK
The Company is a savings and loan holding company within the meaning of
the Home Owners Loan Act (HOLA), and is subject to the regulation, examination,
supervision, and reporting requirements of HOLA. WFSB is a member of the Federal
Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WSSB
is a member of the FHLB system and owns stock in the FHLB of Dallas. WFSB's and
WSSB's savings accounts are insured by the FDIC BIF, up to the maximum amounts
provided by law. WSL is a member of the FHLB system and owns stock in the FHLB
of San Francisco. WSL's savings accounts are insured by the FDIC SAIF, also up
to the maximum amounts provided by law. The Company, WFSB, and WSL are subject
to extensive examination, supervision, and regulation by the Office of Thrift
Supervision (OTS) and the FDIC. Applicable regulations govern, among other
things, lending and investment powers, the types of savings accounts that can be
offered, the types of businesses that can be engaged in, capital requirements,
and the payment of dividends. WSSB also is subject to extensive examination,
supervision, and regulation by the FDIC, as well as the Texas Savings and Loan
Department. WFSB, WSL, and WSSB are also subject to regulations of the Board of
Governors of the Federal Reserve System (Federal Reserve Board) with respect to
reserve requirements and certain other matters (see Regulation).
OFFICE STRUCTURE
As of December 31, 1998, the Company operated 118 savings branch
offices in California, 44 in Colorado, 32 in Florida, 19 in Texas, 13 in
Arizona, 11 in New Jersey, ten in Kansas, and one in Illinois. The Company also
operates 249 loan origination offices of which 217 are located in the states
listed above. The remaining 32 loan origination offices are located in
Connecticut, Delaware, Idaho, Maryland, Massachusetts, Michigan, Minnesota,
Missouri, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South
Dakota, Utah, Virginia, Washington, and Wisconsin. Of the 249 loan offices, 18
are fully-staffed offices that are located in the same premises as savings
branch offices and 111 others are savings branch offices that have a single loan
officer on site. The remaining loan origination offices are located in
facilities that are separate from savings branch offices.
<PAGE>
ITEM 1. BUSINESS (Continued)
ACQUISITIONS/DIVESTITURES
On March 19, 1998, one savings branch in Colorado with $36 million in
deposits was sold to Commercial Bank of Leadville.
The foregoing divestiture is not material to the financial position or net
earnings of Golden West and pro forma information is not deemed necessary.
OPERATIONS
The principal business of the Company, through the Insured Subsidiaries, is
attracting funds, primarily in the form of savings deposits acquired from the
general public, and investing those funds principally in loans secured by deeds
of trust or mortgages on residential and other real estate, and mortgage-backed
securities (MBS) -- securities backed by pools of residential loans that have
many of the characteristics of mortgages including the monthly payment of
principal and interest. Funds for the Insured Subsidiaries' operations are also
provided through earnings; loan repayments; sales of loans; borrowings from the
Federal Home Loan Bank system; debt collateralized by mortgages, MBS, or other
securities; and the issuance of medium-term notes. In addition, the Insured
Subsidiaries had a number of other alternatives available to provide liquidity
or finance operations. These include public offerings of debt or equity,
issuance of negotiable certificates of deposit, issuance of commercial paper,
and borrowings from commercial banks. Furthermore, under certain limited
conditions, WFSB and WSL may borrow from the Federal Reserve Bank of San
Francisco to meet short-term cash needs. The availability of these funds will
vary depending on policies of the FHLB of San Francisco, the Federal Reserve
Bank of San Francisco, and the Federal Reserve Board.
The principal sources of funds for the holding company, Golden West, are
dividends from its Insured Subsidiaries, interest on investments, and the
proceeds from the issuance of debt and equity securities. Various statutory and
regulatory restrictions and tax considerations limit the amount of dividends the
Insured Subsidiaries 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 Company stock, and general and administrative expenses.
<PAGE>
ITEM 1. BUSINESS (Continued)
DEPOSIT ACTIVITIES
Deposit flows are affected by changes in general economic conditions,
changes in prevailing interest rates, and competition among depository
institutions and other investment alternatives. The Company currently offers a
number of alternatives for depositors, including passbook, checking, and money
market deposit accounts from which funds may be withdrawn at any time without
penalty, and certificate accounts with varying maturities ranging up to seven
years. All types of accounts presently offered by the Company have rates that
are set by the Company, consistent with prevailing interest rates. The Company's
certificate accounts are issued in non-negotiable form through its branch
offices. In addition, beginning in January 1997, the Company began a program to
use broker/dealers to sell certificates of deposit (CDs) to institutional
investors. These are referred to in this document as "wholesale CDs".
Retail deposits increased $2.6 billion during 1998, including interest
credited of $1.1 billion, compared to an increase of $1.5 billion during 1997,
including interest credited of $960 million, and an increase of $1.3 billion,
including interest credited of $869 million during 1996. Total deposits
increased during 1998, 1997, and 1996 primarily due to ongoing marketing efforts
as well as active promotions of market rate transaction accounts in 1997 and
1998. The increase in deposits in 1998, 1997 and 1996 reflected growth in
deposits at WFSB.
The mix of deposits changed during 1998, 1997 and 1996 as compared to
1995. During 1998 and 1997, the Company actively promoted money market deposit
accounts which accounted for part of the change in mix during those years. In
addition, the change was also due to a new program begun in the fourth quarter
of 1996. Specifically, the 1998, 1997, and 1996 reported balances of
interest-bearing checking accounts decreased as compared to 1995 and the 1998,
1997, and 1996 reported balances of money market accounts increased compared to
balances reported in 1995. The new program 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.
The table on the following page summarizes the Company's deposits by
original term to maturity at December 31.
<PAGE>
ITEM 1. BUSINESS (Continued)
DEPOSIT ACTIVITIES (continued)
<TABLE>
<CAPTION>
TABLE 1
Deposits
by Original Term to Maturity
(Dollars in thousands)
1998 1997 1996 1995 1994
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest-bearing checking ................ $ 102,874 $ 85,343 $ 318,422 $ 750,160 $ 730,290
Passbook .................................. 514,265 528,727 550,075 567,890 638,905
Money market deposit accounts ............ 8,532,261 4,160,734 1,565,682 1,291,501 1,818,426
Term certificate accounts with
original maturities of:
4 weeks to 1 year 5,893,772 8,996,965 10,144,102 9,358,705 5,159,037
1 to 2 years ......................... 7,717,692 5,750,387 5,012,735 3,599,540 5,636,301
2 to 3 years ......................... 1,417,606 1,478,756 1,587,068 2,128,392 1,997,826
3 to 4 years ......................... 368,615 431,400 565,997 651,787 817,631
4 years and over....................... 1,150,056 1,440,434 1,993,983 2,065,785 2,098,984
Retail jumbo CDs ....................... 521,478 711,010 360,441 430,647 312,413
Wholesale CDs ........................... -0- 525,305 -0- -0- -0-
All other ................................ 476 656 1,429 3,503 9,576
----------- ----------- ----------- ----------- -----------
Total deposits............................ $26,219,095 $24,109,717 $22,099,934 $20,847,910 $19,219,389
=========== =========== =========== =========== ===========
</TABLE>
The table below sets forth the Company's deposits by interest rate at
December 31.
<TABLE>
TABLE 2
Deposits by Interest Rate
(Dollars in thousands)
1998 1997
-------------- --------------
<S> <C> <C> <C> <C>
0.00% -- 4.00% . . . . . . . . $ 4,282,680 $ 3,109,497
4.01% -- 6.00% . . . . . . . . 21,060,706 19,813,017
6.01% -- 8.00% . . . . . . . . 865,533 1,170,164
8.01% -- 10.00% . . . . . . . . 716 2,395
10.01% -- 12.00% . . . . . . . . 9,460 14,644
-------------- --------------
$26,219,095 $24,109,717
============== ==============
</TABLE>
At December 31, the weighted average cost of deposits was 4.67% (1998)
and 5.04% (1997).
<PAGE>
ITEM 1. BUSINESS (Continued)
DEPOSIT ACTIVITIES (continued)
The table below shows the maturities of deposits at December 31, 1998 by
interest rate.
<TABLE>
<CAPTION>
TABLE 3
Deposit Maturities
by Interest Rate
(Dollars in thousands)
2003 and
1999(a) 2000 2001 2002 thereafter Total
-------------- ------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.00% -- 4.00% $ 4,263,768 $ 18,912 $ -0- $ -0- $ -0- $ 4,282,680
4.01% -- 6.00% 19,503,571 1,136,844 224,715 105,619 89,957 21,060,706
6.01% -- 8.00% 680,363 115,069 38,095 31,447 559 865,533
8.01% -- 10.00% 716 -0- -0- -0- -0- 716
10.01% -- 12.00% 61 59 61 58 9,221 9,460
-------------- ------------ ------------ ------------- ------------ --------------
$24,448,479 $1,270,884 $ 262,871 $ 137,124 $ 99,737 $26,219,095
============== ============ ============ ============= ============ ==============
</TABLE>
(a) Includes passbook, checking, and money market deposit accounts, which have
no stated maturity.
As of December 31, 1998 the aggregate amount outstanding of time
certificates of deposit in amounts of $100,000 or more was $2.5 billion, of
which, $521 million were retail jumbo CDs. The following table presents the
maturity of these time certificates of deposit at December 31, 1998.
TABLE 4
Maturities of Time Certificates of Deposit Equal to or Greater than $100,000
(Dollars in thousands)
<TABLE>
<S> <C> <C>
3 months or less $ 770,049
Over 3 months through 6 months 594,930
Over 6 months through 12 months 942,362
Over 12 months 234,376
-------------
$2,541,717
=============
</TABLE>
During 1996 and years prior, the Company did not use brokers to acquire
certificates of deposit. Beginning in January 1997, the Company began a program
to use broker/dealers to acquire wholesale certificates of deposit. As of
December 31, 1997, there were $525 million of wholesale CDs outstanding. There
were no wholesale CDs outstanding at December 31, 1998.
More information regarding deposits is included in Note J to the
Financial Statements included in Item 14.
<PAGE>
ITEM 1. BUSINESS (Continued)
BORROWINGS
The Company generally may borrow from the FHLB upon the security of a)
the capital stock of the FHLB owned by the Company, b) certain of its
residential mortgage loans and MBS or c) certain other assets (principally
obligations of, or guaranteed by, the United States Government or a federal
agency). The Company uses FHLB borrowings, also known as "advances" to
supplement cash flow and to provide funds for loan origination activities.
Advances offer strategic advantages for asset-liability management, including
long-term maturities and, in certain cases, prepayment at the Company's option.
Each advance has a specified maturity and interest rate, which may be fixed or
variable, as negotiated with the FHLB. At December 31, 1998, the Company had
$6.2 billion in FHLB advances outstanding, compared to $8.5 billion at yearend
1997. During 1998, the Company paid off, before maturity, $4.4 billion of
high-cost FHLB of San Francisco advances and, as a result, incurred a $21
million pre-tax charge for the penalties associated with these prepayments. See
"Extraordinary Item" discussion on page 29.
From time to time, the Company enters into reverse repurchase
agreements with selected major government securities dealers, selected large
banks, or the FHLB of San Francisco and the FHLB of Dallas. A reverse repurchase
agreement involves the sale and delivery of U.S. Government securities or
mortgage-backed securities by the Company to a broker or dealer coupled with an
agreement to buy the securities back at a later date. Under generally accepted
accounting principles, these transactions are properly accounted for as
borrowings secured by securities. The Company pays the counterparty a variable
or fixed rate of interest for the use of the funds for the period involved. At
maturity, the borrowings are repaid (by repurchase of the same securities) and
the same securities are returned to the Company.
The Company also enters into dollar reverse repurchase agreements
(dollar reverses) with selected major government securities dealers, as well as
large banks. A dollar reverse involves the sale and delivery of mortgage-backed
securities by the Company to a broker or dealer, coupled with an agreement to
purchase securities of the same type and interest coupon at a fixed price for
settlement at a later date. Under generally accepted accounting principles,
these transactions are properly accounted for as borrowings secured by
mortgage-backed securities. The Company pays the brokers and dealers a fixed
rate of interest for the use of the funds for the period involved, which is
generally short-term. At maturity, the secured borrowings are repaid (by
purchase of similar securities) and similar securities are delivered to the
Company.
The Company monitors the level of activity with any one party in
connection with reverse repurchase agreements and dollar reverses in order to
minimize its risk exposure in these transactions. Reverse repurchase agreements
and dollar reverses with dealers, banks, and the FHLB of San Francisco amounted
to $1.3 billion at December 31, 1998, compared to $2.3 billion at yearend 1997.
<PAGE>
ITEM 1. BUSINESS (Continued)
BORROWINGS (continued)
The Company accounts for transfers and servicing of financial assets in
accordance with SFAS 125 and SFAS 127.
At December 31, 1998, Golden West, at the parent level, had principal
amounts outstanding of $812 million of subordinated debt. As of December 31,
1998, Golden West'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 December 31, 1998, Golden West had on file a registration
statement with the Securities and Exchange Commission for the sale of up to $300
million of subordinated notes, all of which was available for issuance at year
end 1998.
As of December 31, 1998, WSL had a total of $100 million of subordinated
notes issued and outstanding which were rated A2 and A from Moody's and S&P,
respectively. These subordinated notes have a scheduled maturity of July 1,
2000; however, WSL intends to exercise its right to call the notes at par on
April 1, 1999. The subordinated notes are included in WSL's risk-based
regulatory capital as Supplementary Capital.
WSL had no medium-term notes outstanding at December 31, 1998, compared to
$110 million at yearend 1997 and $590 million at December 31, 1996.
During November 1996, WFSB received permission from the OTS to issue
non-convertible medium-term notes to institutional investors under rules similar
to Office of the Comptroller of the Currency rules applicable to similarly
situated national banks. As of December 31, 1998, WFSB had not issued any notes
under this authority.
<PAGE>
ITEM 1. BUSINESS (Continued)
BORROWINGS (continued)
The table below sets forth the composition of the Company's borrowings at
December 31.
<TABLE>
<CAPTION>
TABLE 5
Composition of Borrowings
(Dollars in thousands)
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
FHLB advances. . . . . . . . . . . $ 6,163,472 $ 8,516,605 $ 8,798,433 $ 6,447,201 $ 6,488,418
Reverse repurchase agreements. . . 1,223,668 2,334,048 1,614,763 1,752,171 316,865
Dollar reverse repurchase agreements 28,801 -0- 293,363 65,772 284,956
Medium-term notes . . . . . . . . . -0- 109,992 589,845 1,597,507 1,164,079
Federal funds purchased . . . . . . -0- -0- -0- -0- 250,000
Subordinated debt . . . . . . . . . 911,753 1,110,488 1,323,996 1,322,392 1,221,559
------------ ------------ ------------- -------------- ------------
Total borrowings. . . . . . . . $ 8,327,694 $12,071,133 $12,620,400 $ 11,185,043 $ 9,725,877
============ ============ ============= ============= ============
Weighed average interest rate
of total borrowings . . . . . . 5.87% 5.99% 5.80% 6.15% 5.85%
============ ============ ============= ============= ============
</TABLE>
More information concerning the borrowings of the Company is included
in Notes K, L, M, and N to the Financial Statements which are included in Item
14.
LENDING ACTIVITIES
Income from real estate loans provides the principal source of revenue
to the Company in the form of interest, loan origination fees, and other fees.
Loans made by the Company are generally secured by first liens primarily on
residential properties. Although the Company has from time to time made
commercial real estate and construction loans, the Company is not currently
active in these segments of the lending market. The Company has the authority to
originate loans in any part of the United States. At December 31, 1998, the
Company was originating loans in Arizona, California, Colorado, Connecticut,
Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Oregon,
Pennsylvania, South Dakota, Texas, Utah, Virginia, Washington, and Wisconsin.
The Company also makes loans to customers on the security of their deposit
accounts. Deposit loans constituted less than one percent of the Company's total
loans outstanding as of December 31, 1998, and 1997.
The Company retains most of its real estate loan originations in
portfolio. From time to time, the Company securitizes loans from its portfolio
into MBS that are available to be used as collateral for borrowings. As of
December 31, 1998, the balance outstanding of loans securitized into MBS with
recourse was $3.9 billion and the balance of loans securitized into Real Estate
Mortgage Conduits (MBS-REMIC) was $5.5 billion.
The tables on the following two pages set forth the Company's loan
portfolio by state as of December 31, 1998, and 1997.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
<TABLE>
<CAPTION>
TABLE 6
Loan Portfolio by State
December 31, 1998
(Dollars in thousands)
Residential
Real Estate Commercial Loans
-------------------------- Real Total as a% of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ------------------ ------------ ----------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
California $19,786,322 $3,332,721 $ 212 $ 39,820 $ 23,159,075 65.61%
Florida 1,462,265 17,826 2 687 1,480,780 4.19
Texas 1,400,077 67,615 519 1,342 1,469,553 4.16
Illinois 1,147,766 146,418 -0- -0- 1,294,184 3.67
New Jersey 1,210,384 -0- -0- 4,593 1,214,977 3.44
Colorado 959,218 194,823 -0- 5,482 1,159,523 3.28
Washington 545,150 427,989 -0- 686 973,825 2.76
Arizona 738,654 22,631 -0- -0- 761,285 2.16
Pennsylvania 640,131 4,163 -0- 2,888 647,182 1.83
Virginia 492,515 8,411 -0- 1,172 502,098 1.42
Connecticut 489,636 -0- -0- 15 489,651 1.39
Maryland 343,956 2,112 -0- 432 346,500 0.98
Oregon 248,883 12,076 -0- 242 261,201 0.74
Minnesota 224,284 7,801 -0- -0- 232,085 0.66
Utah 209,798 48 -0- 1,340 211,186 0.60
Wisconsin 183,152 3,797 -0- -0- 186,949 0.53
Kansas 168,999 4,614 -0- 63 173,676 0.49
Nevada 163,539 879 -0- -0- 164,418 0.47
Massachusetts 146,418 -0- -0- -0- 146,418 0.41
Missouri 87,967 5,498 -0- -0- 93,465 0.26
Washington DC 52,739 -0- -0- -0- 52,739 0.15
New Mexico 47,504 -0- -0- -0- 47,504 0.13
Michigan 46,554 -0- -0- -0- 46,554 0.13
New York 36,340 -0- -0- -0- 36,340 0.10
North Carolina 35,771 -0- -0- -0- 35,771 0.10
Idaho 32,604 -0- -0- -0- 32,604 0.09
Delaware 32,040 -0- -0- -0- 32,040 0.09
Georgia 23,258 -0- -0- 1,357 24,615 0.07
South Dakota 11,567 -0- -0- -0- 11,567 0.03
Ohio 6,189 1,190 65 2,875 10,319 0.03
Other 6,365 -0- -0- 2,739 9,104 0.03
------------ ----------- --------- ------------ ------------- ---------
Totals $30,980,045 $4,260,612 $ 798 $ 65,733 35,307,188 100.00%
============ =========== ========= ============ =========
SFAS 91 deferred loan fees (12,265)
Loan discount on purchased loans (3,008)
Undisbursed loan funds (3,080)
Allowance for loan losses (244,466)
Loans to facilitate (LTF) interest reserve (484)
Troubled debt restructured (TDR) interest reserve (1,872)
Loans on deposits 25,279
-------------
Total loan portfolio and loans securitized with FNMA MBS with recourse
and MBS-REMIC 35,067,292
Loans securitized with FNMA MBS and MBS-REMIC (9,346,004)(b)
-------------
Total loan portfolio $ 25,721,288
=============
</TABLE>
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) The above schedule includes the December 31, 1998 balances of adjustable
rate loans that were securitized and retained as Federal National Mortgage
Association (FNMA) mortgage-backed securities and MBS-REMIC
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
<TABLE>
<CAPTION>
TABLE 7
Loan Portfolio by State
December 31, 1997
(Dollars in thousands)
Residential
Real Estate Commercial Loans
-------------------------- Real Total as a% of
State 1 - 4 5+ Land Estate Loans(a) Portfolio
- ------------------ ------------ ----------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
California $20,722,679 $3,448,720 $ 234 $ 48,800 $ 24,220,433 66.27%
Texas 1,390,668 93,860 559 1,464 1,486,551 4.06
Illinois 1,224,009 170,971 -0- 1,623 1,396,603 3.82
Florida 1,344,412 20,051 9 835 1,365,307 3.73
Colorado 1,098,665 230,203 -0- 7,039 1,335,907 3.65
New Jersey 1,241,358 401 -0- 5,356 1,247,115 3.41
Washington 530,281 408,258 -0- 721 939,260 2.57
Arizona 765,941 37,323 -0- 550 803,814 2.20
Pennsylvania 617,348 4,217 -0- 3,184 624,749 1.71
Virginia 535,615 8,505 -0- 1,325 545,445 1.49
Connecticut 491,275 -0- -0- 19 491,294 1.34
Maryland 369,326 2,158 -0- 493 371,977 1.02
Oregon 256,178 12,803 -0- 245 269,226 0.74
Minnesota 202,274 8,122 -0- -0- 210,396 0.58
Utah 200,516 54 -0- 1,575 202,145 0.55
Nevada 188,756 1,006 -0- -0- 189,762 0.52
Kansas 166,476 4,769 -0- 172 171,417 0.47
Wisconsin 153,005 3,853 -0- -0- 156,858 0.43
Massachusetts 126,343 -0- -0- 20 126,363 0.35
Missouri 84,247 5,833 -0- -0- 90,080 0.25
Washington DC 52,178 -0- -0- -0- 52,178 0.14
New Mexico 49,341 -0- -0- -0- 49,341 0.14
New York 43,499 -0- -0- -0- 43,499 0.12
Delaware 32,950 -0- -0- -0- 32,950 0.09
Georgia 30,633 -0- -0- 1,411 32,044 0.09
Idaho 31,340 -0- -0- -0- 31,340 0.09
Ohio 11,768 1,748 175 3,337 17,028 0.05
North Carolina 12,420 -0- -0- 452 12,872 0.04
South Dakota 10,397 -0- -0- -0- 10,397 0.03
Other 15,109 1 -0- 4,010 19,120 0.05
------------ ----------- --------- ------------ ------------- ----------
Totals $31,999,007 $4,462,856 $ 977 $ 82,631 36,545,471 100.00%
============ =========== ========= ============ ==========
SFAS 91 deferred loan fees (37,632)
Loan discount on purchased loans (3,838)
Undisbursed loan funds (3,306)
Allowance for loan losses (233,280)
Loans to facilitate (LTF) interest reserve (589)
Troubled debt restructured (TDR) interest reserve (3,894)
Loans on deposits 28,167
-------------
Total oan portfolio and loans securitized into FNMA MBS with recourse 36,291,099
Loans securitized into FNMA MBS with recourse (3,030,390)(b)
-------------
Total loan portfolio $ 33,260,709
=============
</TABLE>
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) The above schedule includes the December 31, 1997 balances of adjustable
rate loans that were securitized and retained as Federal National Mortgage
Association (FNMA) mortgage-backed securities.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The table below sets forth the composition of the Company's loan
portfolio (excluding mortgage-backed securities) by type of collateral at
December 31.
<TABLE>
<CAPTION>
TABLE 8
Loan Portfolio by Type of Security
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------- -------------
Loans collateralized primarily
by first deeds of trust:
One-to four-family units . $21,639,015 $28,978,476 $ 25,862,898 $ 24,071,421 $ 23,217,564
Over four-family units. . . 4,260,631 4,462,990 4,403,389 4,205,050 3,946,446
Commercial real estate. . . 65,865 82,888 97,852 122,396 134,189
Construction loans. . . . . -0- -0- -0- 1,471 -0-
Land. . . . . . . . . . . . 798 977 1,147 1,511 1,851
Loans on deposits . . . . 25,279 28,167 31,936 33,279 30,460
Less:
Undisbursed loan funds. . . 3,080 3,306 3,920 3,568 2,781
Unearned fees and discounts 17,629 45,953 69,938 88,194 105,314
Unamortized discount arising
from acquisitions . . . 5,125 10,250 14,241 20,025 27,146
Allowance for loan losses. . 244,466 233,280 195,702 141,988 124,003
------------ ------------ ------------- ------------- -------------
$25,721,288 $33,260,709 $ 30,113,421 $ 28,181,353 $ 27,071,266
============ ============ ============= ============ =============
</TABLE>
At December 31, 1998, 98% of the loans in the portfolio had remaining
terms to maturity in excess of 10 years.
The table below sets forth the amount of loans due after one year that
have predetermined interest rates and the amount that have floating interest
rates at December 31, 1998.
<TABLE>
<CAPTION>
TABLE 9
Loans Due After One Year
(Dollars in thousands)
<S> <C>
Adjustable Rate $23,321,212
Fixed Rate 2,352,754
--------------
$25,673,966
==============
</TABLE>
The table on the following page sets forth information concerning new loans
made by the Company during 1998, 1997, and 1996 by type and purpose of loan.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
<TABLE>
<CAPTION>
TABLE 10
New Loan Originations By Type and Purpose
(Dollars in thousands)
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
No.of % of No.of % of No.of % of
Type Loans Amount Total Loans Amount Total Loans Amount Total
---------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(one unit) 51,881 $7,585,610 92.7% 47,508 $6,847,344 91.5% 46,225 $6,268,160 89.4%
Residential
(2 to 4 units) 1,382 214,618 2.6 1,625 231,682 3.1 1,821 236,304 3.4
Residential
(5 or more units) 733 387,706 4.7 726 403,947 5.4 978 507,977 7.2
Commercial -0- -0- 0.0 -0- -0- 0.0 1 121 0.0
------- ----------- ------ ------- ---------- ------ ------- ----------- ------
Totals 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% 49,025 $7,012,562 100.0%
======= =========== ====== ======= ========== ====== ======= =========== ======
</TABLE>
<TABLE>
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
No.of % of No.of % of No.of % of
Purpose Loans Amount Total Loans Amount Total Loans Amount Total
---------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase 30,902 $4,548,415 55.6% 33,663 $5,018,687 67.1% 32,553 $4,607,852 65.7%
Refinance 23,094 3,639,519 44.4 16,196 2,464,286 32.9 16,472 2,404,710 34.3
------- ----------- ------ ------- ---------- ------- ------- ----------- ------
Totals 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% 49,025 $7,012,562 100.0%
======= =========== ====== ======= ========== ====== ======= =========== ======
</TABLE>
Note:During 1998, 1997, and 1996, the Company also purchased $3 million, $2
million, and $5 million, respectively, of residential loans (not included
above) of which none were on one-unit residential properties for the years
ended December 31, 1998 and 1997. $3 million were on one-unit residential
properties for the year ended December 31, 1996.
New loan originations in 1998, 1997, and 1996 amounted to $8.2 billion,
$7.5 billion, and $7.0 billion, respectively. The increase in 1998 occurred
because more consumers sought to refinance their existing home loans as well as
a result of a record housing market. The increase in loan volume in 1997
occurred because of a continued strong housing market, primarily in California,
and solid demand for ARMs, the Company's principal product. Refinanced loans
constituted 44% of new loan originations in 1998 compared to 33% in 1997 and 34%
in 1996.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The primary source of mortgage originations is loans secured by
residential properties in California. Loans originated in California were $5.1
billion in 1998 compared to $4.0 billion in 1997 and $3.5 billion in 1996. In
1998, 62% of total originations were on California residential property compared
to 54% in 1997 and 50% in 1996. The five largest states, other than California,
for originations for the year ended December 31, 1998 were Florida, Texas,
Colorado, Illinois, and Washington with a combined total of 21% of total
originations. The percentage of loans originated in California increased in 1998
as compared to 1997 and in 1997 as compared to 1996 due to the strong California
real estate market.
Federal regulations permit federally chartered savings and loan
associations and savings banks to make or purchase both fixed-rate loans and
loans with periodic adjustments to the interest rate. These latter types of
loans are subject to the following primary limitations: (i) the adjustments must
be based on changes in a specified interest rate index, which may be selected by
the association or savings bank but which must be readily available to, and
independently verifiable by, the borrower; and (ii) adjustments to the interest
rate may be implemented through changes in the monthly payment amount and/or
adjustment to the outstanding principal balance or term.
Pursuant to the aforementioned powers, the Company offers adjustable
rate mortgages and this type of mortgage is the Company's primary real estate
loan. The portion of the mortgage portfolio (excluding mortgage-backed
securities) composed of rate-sensitive loans was 92% at yearend 1998 compared to
93% at yearend 1997 and 91% at yearend 1996. Golden West's ARM originations
constituted over 82% of new mortgage loans made by the Company in 1998, compared
with 95% in 1997 and 90% in 1996.
Most of the Company's ARMs carry an interest rate that changes monthly
based on movements in certain interest rate or cost of funds indices. During the
life of the loan, the interest rate may not be raised above a lifetime cap, set
at the time of origination or assumption. Lifetime caps on the Company's ARMs
are typically between 350 and 625 basis points (a basis point is one
one-hundredth of one percent) higher than the loan's initial fully-indexed
contract rate. On most of the Company's ARMs, monthly payments of principal and
interest are adjusted annually with a maximum increase or decrease of 7-1/2% of
the prior year's payment. At five year intervals, the payment may be adjusted
without limit, to amortize the loan fully within the then remaining term. Within
these five year periods, negative amortization (deferred interest) may occur to
the extent that the loan balance remains below 125% of the original mortgage
amount, unless the original loan to value ratio exceeded 85%, in which case the
loan balance cannot exceed 110% of the original mortgage amount.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
On certain other ARMs, the payment and interest rate change every six
months, with the maximum rate per change capped at one percent. These ARMs do
not allow negative amortization and, consequently, do not have the 7-1/2%
payment change limitation.
The Company also offers a "modified" ARM, a loan that usually offers a low
fixed rate from 1% to 3% below the initial fully indexed contract rate for an
initial period, normally one to 36 months. (However, the borrower must qualify
at the initial fully-indexed contract rate.)
The weighted average maximum lifetime cap rate on the Company's ARM loan
portfolio was 12.59%, or 5.36% above the actual weighted average rate at
December 31, 1998, versus 12.74%, or 5.34% above the weighted average rate at
yearend 1997.
Approximately $4.6 billion of the Company's ARMs (including MBS with
recourse and MBS-REMICS) have terms that state that the interest rate may not
fall below a lifetime floor, set at the time of origination or assumption. As of
December 31, 1998, $495 million ARMs had reached their rate floors. The weighted
average floor rate on the loans that had reached their floor was 7.72% at
yearend 1998 compared to 7.76% at yearend 1997. Without the floor, the average
yield on these loans would have been 7.15% at December 31, 1998 and 7.21% at
December 31, 1997.
Interest rates charged by the Company on real estate loans are affected
principally by competition, and also by the supply of money available for
lending, loan demand, and factors that are, in turn, affected by general
economic conditions, regulatory and monetary policies of the federal government,
the OTS and the Federal Reserve Board, and legislation and other governmental
action dealing with budgetary and tax matters.
The Company originates loans through offices that are staffed by employees
who primarily contact local real estate brokers and mortgage brokers regarding
possible lending opportunities. All loan applications are completed, reviewed,
and approved in the loan field offices and forwarded to the Company's central
offices in San Antonio, Texas, for processing.
The Company's loan approval process is intended to assess both the
borrower's ability to repay the loan and the adequacy of the proposed security.
Documentation for all loans is maintained in the Company's loan servicing
offices in San Antonio, Texas.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The Company generally lends up to 80% of the appraised value of
residential real property and, under certain circumstances, up to 97% of the
appraised value of single-family residences. During 1998, 5% of loans originated
were in excess of 80% of the appraised value of the residence compared to 5% and
6% in 1997 and 1996, respectively.
The Company requires title insurance for all mortgage loans and
requires that fire and casualty insurance be maintained on all improved
properties that are security for its loans. The original contractual loan
payment period for residential loans normally ranges from 15 to 40 years with
most having original terms of 30 years. However, the majority of such loans
remain outstanding for a shorter period of time.
To generate income and to provide additional funds for lending and
liquidity, the Company has from time to time sold, without recourse, whole loans
and participations in pools of loans to the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association, and to
institutional investors. Beginning in 1995, the Company began sales to FNMA of
whole loans with recourse, for which a valuation liability has been provided.
The Company continues to collect payments on the loans as they become due, and
otherwise to service the loans. The Company pays an agreed-upon yield on the
participant's portion of the loans. This yield is usually less than the interest
agreed to be paid by the borrower, with the difference being retained by the
Company as servicing fee income.
Loans originated for sale were $1.2 billion, $217 million, and $477
million for the years ended December 31, 1998, 1997, and 1996, respectively. In
addition, during 1998, $229 million of loans were converted from adjustable rate
to fixed-rate held for sale. The Company continues to sell most of its
fixed-rate originations. The Company sold $1.4 billion, $209 million, and $485
million of these loans during 1998, 1997, and 1996, respectively. The Company
recognized pre-tax gains of $25 million in 1998 compared to $5 million in 1997
and $11 million in 1996. Included in the $25 million gain in 1998 is $23 million
due to the capitalization of mortgage servicing rights (see page 19 for further
information). The loans held for sale portfolio had a balance of $135 million at
December 31, 1998, all of which are carried at the lower of cost or market. At
December 31, 1998, the balance of loans sold with recourse was $1.4 billion and
had a valuation liability of $2.3 million.
At December 31, 1998, the Company was engaged in servicing
approximately $6.2 billion of loan participations and whole loans for others
including $5.2 billion of loans serviced for FNMA with recourse. In addition, at
December 31, 1998, the Company serviced $5.5 billion of loans securitized into
MBS-REMIC. For the year ended December 31, 1998, fees received for such
servicing activities totaled $21 million, or approximately two-thirds of one
percent of total revenues compared to $16 million or approximately three-fifths
of one percent of total revenues for the year ended December 31, 1997.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The Company also purchases, on a selective basis and only after strict
underwriting review, residential mortgage whole loans in the secondary market.
Loan purchases in 1998, 1997, and 1996 amounted to $3 million, $2 million, and
$5 million, respectively.
Loan repayments consist of monthly loan amortization and loan payoffs.
During 1998, 1997, and 1996, repayments amounted to $6.2 billion, $3.8 billion,
and $3.1 billion, respectively. The increase in repayments in 1998 was due to an
increase in refinance and home sale activity. The increase in repayments in 1997
as compared to 1996 was due to an increase in the portfolio balance as well as
increased prepayment rates. The 1998 increase in loan repayments would have been
even higher if the Company had not securitized $8.2 billion of loans into MBS
and MBS-REMIC during 1998.
The balance of the loan portfolio declined for the year ended December
31, 1998, due to a high level of prepayments, an increase in loans sold, and the
securitization of loans into MBS. The decrease in the balance of the loan
portfolio for the year ended December 31, 1998 was $7.5 billion or 23%. Had
there not been $8.2 billion of loans securitized into MBS with recourse and
MBS-REMIC, the balance of the loan portfolio would have decreased modestly for
the year ended December 31, 1998. The total growth in the portfolio for the year
ended December 31, 1997, was $3.1 billion or 10%.
In addition to interest earned on loans, the Company receives fees for
originating loans and for making loan commitments. The income represented by
such fees varies with the volume and types of loans made. In 1998 and 1997, the
Company responded to increased competition from fixed-rate lenders by offering
more low and zero point adjustable rate mortgage options to its customers. The
Company also charges fees for loan prepayments, loan assumptions and
modifications, late payments and other miscellaneous services.
<PAGE>
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The table below sets forth information relating to interest rates and loan
fees charged for the years indicated.
<TABLE>
<CAPTION>
TABLE 11
Weighted Average Interest Rates and Fees on New Loan Originations
1998 1997 1996 1995 1994
--------- -------- --------- -------- ---------
Fully-indexed weighted average interest rate on
<S> <C> <C> <C> <C> <C>
new real estate loans originated (a) 7.72% 7.59% 7.59% 7.56% 6.44%
Current weighted average interest rate on new
real estate loans originated (b) 6.20% 6.42% 6.56% 6.58% n/a
Weighted average loan fees received on new real
estate loans originated (a) .26% .18% .25% .25% .29%
</TABLE>
(a) Excludes loans purchased.
(b) The current rate reflects the actual rate being paid by the borrower.
n/a Not available.
The Company accounts for mortgage servicing rights in accordance with
SFAS 125. For the years ended December 31, 1998, 1997, and 1996, Golden West
recognized gains of $23 million, $5 million, and $11 million, respectively, on
the sale of loans due to the capitalization of servicing rights. After
amortization, the balance of the capitalized servicing rights at December 31,
1998, 1997, and 1996, was $29 million, $11 million, and $9 million,
respectively. The book value of Golden West's servicing rights did not exceed
the fair value at December 31, 1998 or 1997 and, therefore, no write-down of the
servicing rights to their fair value was necessary.
If a borrower fails to make required payments on a loan, the Company
usually takes steps required under applicable law to foreclose upon the security
for the loan. If a delinquency is not cured, the property is generally acquired
by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure.
If the applicable period of redemption by the borrower (which varies from state
to state and by method of foreclosure pursued) has expired, the Company is free
to sell the property. The property may then be sold generally with a loan
conforming to normal loan requirements, or with a "loan to facilitate sale"
which is so designated if the loan involves terms more favorable to the borrower
than those normally permitted.
Various antideficiency and homeowner protective provisions of state law
may limit the remedies available to lenders when a residential mortgage borrower
is in default. The effect of these provisions, in most cases, is to limit the
Company to foreclosing upon, or otherwise obtaining ownership of, the property
securing the loan after default and to prevent the Company from recovering from
the borrower any deficiency between the amount realized from the sale of such
property and the amount owed by the borrower.
<PAGE>
ITEM 1. BUSINESS (Continued)
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
nonaccrual loans (loans, including loans swapped into MBS with recourse and
loans securitized into MBS-REMIC, that are 90 days or more past due) and real
estate acquired through foreclosure. No interest is recognized on nonaccrual
loans. The Company's troubled debt restructured (TDRs) are made up of loans on
which delinquent payments have been capitalized or on which temporary interest
rate reductions have been made, primarily to customers negatively impacted by
adverse economic conditions.
The table below sets forth the components of the Company's NPAs and
TDRs and the various ratios to total assets at December 31.
<TABLE>
<CAPTION>
TABLE 12
Nonperforming Assets and Troubled Debt Restructured
(Dollars in thousands)
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 262,332 $ 317,550 $ 373,157 $ 314,086 $ 284,103
Real estate acquired through foreclosure 42,572 61,517 82,075 75,158 70,981
Real estate in judgment 74 67 416 443 390
----------- ---------- ---------- ----------- -----------
Total nonperforming assets $ 304,978 $ 379,134 $ 455,648 $ 389,687 $ 355,474
=========== ========== ========== =========== ===========
TDRs $ 22,774 $ 43,795 $ 84,082 $ 45,222 $ 72,827
=========== ========== ========== =========== ===========
Ratio of nonperforming assets to total assets .79% .96% 1.21% 1.11% 1.12%
=========== ========== ========== =========== ===========
Ratio of TDRs to total assets .06% .11% .22% .13% .23%
=========== ========== ========== =========== ===========
Ratio of NPAs and TDRs to total assets .85% 1.07% 1.43% 1.24% 1.35%
=========== ========== ========== =========== ===========
</TABLE>
The decrease in NPAs during 1998 and 1997 reflected the strong
California economy and housing market in those years. The increase in NPAs
during 1996 reflected the continued weakness in the California housing market
during 1996 and increased bankruptcies nationwide. The level of NPAs during 1994
through 1995 remained relatively flat even though the loan portfolio continued
to grow. The Company continues to closely monitor all delinquencies and takes
appropriate steps to protect its interests. Interest foregone on non-accrual
loans (loans greater than 90 days past due) amounted to $8 million in 1998, $14
million in 1997, and $20 million in 1996.
The Company's troubled debt restructured was $23 million, or .06% of
assets, at December 31, 1998, compared to $44 million, or .11% of assets, at
yearend 1997 and $84 million, or .22% of assets, at yearend 1996. Interest
foregone on TDRs amounted to $899 thousand in 1998 compared to $1.9 million in
1997 and $1.7 million in 1996.
The tables on the following two pages show the Company's nonperforming
assets by state at December 31, 1998, and 1997.
<PAGE>
ITEM 1. BUSINESS (Continued)
ASSET QUALITY (continued)
<TABLE>
<CAPTION>
TABLE 13
Nonperforming Assets by State
December 31, 1998
(Dollars in thousands)
Non-Accrual Loans (a)
-----------------------------------
Real Estate Owned
Residential -------------------- NPAs as
Real Estate Commercial Residential Total a% of
State 1 - 4 5+ Real Estate 1 - 4 5+ NPAs(b) Loans
- --------------------- ---------- --------- ----------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
California $171,362 $ 3,334 $ 944 $36,213 $ 703 $212,556 0.92%
Florida 17,117 -0- 79 1,025 -0- 18,221 1.23
Texas 8,590 -0- -0- 1,300 -0- 9,890 0.67
Illinois 11,526 219 -0- 906 -0- 12,651 0.98
New Jersey 17,495 -0- 374 946 -0- 18,815 1.55
Colorado 1,140 -0- 3 -0- -0- 1,143 0.10
Washington 2,442 -0- -0- -0- -0- 2,442 0.25
Arizona 1,732 -0- -0- 78 -0- 1,810 0.24
Pennsylvania 7,976 -0- -0- 818 -0- 8,794 1.36
Virginia 2,384 -0- -0- 143 -0- 2,527 0.50
Connecticut 2,344 -0- -0- 148 -0- 2,492 0.51
Maryland 1,617 -0- -0- 313 -0- 1,930 0.56
Oregon 1,213 -0- -0- -0- -0- 1,213 0.46
Minnesota 1,396 -0- -0- 66 -0- 1,462 0.63
Utah 1,897 -0- -0- -0- -0- 1,897 0.90
Wisconsin 348 -0- -0- -0- -0- 348 0.19
Kansas 686 -0- -0- -0- -0- 686 0.39
Nevada 1,489 -0- -0- 331 -0- 1,820 1.11
Massachusetts 297 -0- -0- -0- -0- 297 0.20
Missouri 195 -0- -0- 109 -0- 304 0.33
Washington DC 135 -0- -0- -0- -0- 135 0.26
New Mexico 824 -0- -0- -0- -0- 824 1.73
Michigan 15 -0- -0- -0- -0- 15 0.03
New York 2,214 -0- -0- 235 -0- 2,449 6.74
North Carolina -0- -0- -0- -0- -0- -0- 0.00
Idaho 105 -0- -0- 211 -0- 316 0.97
Delaware -0- -0- -0- -0- -0- -0- 0.00
Georgia 628 -0- -0- -0- -0- 628 2.55
South Dakota 135 -0- -0- -0- -0- 135 1.17
Ohio 51 -0- -0- -0- -0- 51 0.49
Other 26 -0- -0- -0- -0- 26 0.29
---------- --------- ----------- --------- --------- ---------- --------
Totals $257,379 $ 3,553 $ 1,400 $42,842 $ 703 305,877 0.87
========== ========= =========== ========= =========
REO general valuation allowance (899) (0.00)
---------- --------
$304,978 0.87%
========== ========
</TABLE>
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest
accrued.
(b) During the past four years, the Company has securitized adjustable rate
loans into FNMA mortgage-backed securities with full credit recourse. In
addition, during 1998, the Company securitized mortgage loans into
MBS-REMIC. The December 31, 1998, balances of the related nonperforming
assets are reflected in the amounts above.
<PAGE>
ITEM 1. BUSINESS (Continued)
ASSET QUALITY (continued)
<TABLE>
<CAPTION>
TABLE 14
Nonperforming Assets by State
December 31, 1997
(Dollars in thousands)
Non-Accrual Loans (a)
----------------------------------- Real Estate Owned
Residential ----------------------------------- NPAs as
Real Estate Commercial Residential Commercial Total a% of
State 1 - 4 5+ Real Estate 1 - 4 5+ Real Estate NPAs(b) Loans
- ----------------- ---------- --------- ----------- --------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $228,859 $ 8,528 $ 1,579 $ 53,834 $ 1,913 $ 2,167 $296,880 1.23%
Texas 8,142 -0- -0- 994 -0- -0- 9,136 0.61
Illinois 9,656 221 -0- 818 -0- -0- 10,695 0.77
Florida 11,211 -0- 191 567 -0- -0- 11,969 0.88
Colorado 1,317 -0- 16 75 -0- -0- 1,408 0.11
New Jersey 17,299 -0- 769 530 -0- -0- 18,598 1.49
Washington 1,930 -0- -0- 110 -0- -0- 2,040 0.22
Arizona 1,412 -0- -0- -0- -0- -0- 1,412 0.18
Pennsylvania 6,412 -0- -0- 246 -0- -0- 6,658 1.07
Virginia 1,726 -0- -0- 528 -0- -0- 2,254 0.41
Connecticut 3,345 -0- -0- 274 -0- -0- 3,619 0.74
Maryland 1,900 -0- -0- 106 -0- -0- 2,006 0.54
Oregon 1,000 -0- -0- -0- -0- -0- 1,000 0.37
Minnesota 798 -0- -0- -0- -0- -0- 798 0.38
Utah 1,503 -0- -0- -0- -0- -0- 1,503 0.74
Nevada 2,129 -0- -0- 133 -0- -0- 2,262 1.19
Kansas 657 40 -0- -0- -0- -0- 697 0.41
Wisconsin 807 -0- -0- -0- -0- -0- 807 0.51
Massachusetts 96 -0- 20 -0- -0- -0- 116 0.09
Missouri 469 39 -0- 126 163 -0- 797 0.88
Washington DC 97 -0- -0- -0- -0- -0- 97 0.19
New Mexico 217 -0- -0- -0- -0- -0- 217 0.44
New York 2,976 -0- -0- 183 -0- 30 3,189 7.33
Delaware 269 -0- -0- -0- -0- -0- 269 0.82
Georgia 1,635 -0- -0- 181 -0- -0- 1,816 5.67
Idaho 235 -0- -0- -0- -0- -0- 235 0.75
Ohio -0- -0- 2 -0- -0- -0- 2 0.01
North Carolina 5 -0- -0- -0- -0- -0- 5 0.04
South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00
Other 43 -0- -0- -0- -0- -0- 43 0.22
---------- --------- ----------- --------- --------- ------------ --------
Totals $306,145 $ 8,828 $ 2,577 $ 58,705 $2,076 $ 2,197 380,528 1.04
========== ========= =========== ========= ========= ============
REO general valuation allowance (1,394) (0.00)
----------- --------
$379,134 1.04%
=========== ========
</TABLE>
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest
accrued.
(b) During 1995, 1996, and 1997, the Company securitized adjustable rate
mortgages into FNMA mortgage-backed securities with full credit recourse.
The December 31, 1997 balances of the related nonperforming assets are
reflected in the amounts above.
<PAGE>
ITEM 1. BUSINESS (Continued)
ASSET QUALITY (continued)
At December 31, 1998, approximately $310 million of the Company's
loans were 30 to 89 days past due. An additional $171 million of loans were
performing under bankruptcy protection. Management has included its estimate of
potential losses on these loans in the allowance for loan losses.
The Company provides specific valuation allowances for losses on
loans when impaired, and on real estate owned when any significant and permanent
decline in value is identified. The Company also utilizes a methodology for
monitoring and estimating loan losses and recourse obligations that is based on
both historical experience in the loan portfolio and factors reflecting current
economic conditions. This approach uses a data base 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 years indicated:
<TABLE>
<CAPTION>
TABLE 15
Changes in Allowance for Loan Losses
(Dollars in thousands)
1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Beginning allowance for loan losses $233,280 $195,702 $141,988 $ 124,003 $106,698
Provision charged to expense 11,260 57,609 84,256 61,190 62,966
Less loans charged off (1,387) (20,818) (31,239) (44,656) (46,556)
Add recoveries 1,313 787 697 1,451 895
----------- ----------- ---------- ----------- ----------
Ending allowance for loan losses $244,466 $233,280 $195,702 $ 141,988 $124,003
=========== =========== ========== =========== ==========
Ratio of net chargeoffs to average loans
outstanding(including MBS with recourse) .00% .06% .10% .15% .18%
=========== =========== ========== =========== ==========
Ratio of allowance for loan losses to
nonperforming assets 80.2% 61.5% 43.0% 36.4% 34.9%
=========== =========== ========== =========== ==========
</TABLE>
Chargeoffs decreased in 1998 as compared to 1997 and in 1997 as compared to
1996 primarily due to the strong California economy and housing market.
<PAGE>
ITEM 1. BUSINESS (Continued)
INVESTMENT ACTIVITIES
Golden West's investment securities portfolio is composed primarily of
federal funds, short-term repurchase agreements collateralized by
mortgage-backed securities, short-term money market securities, United States
government obligations, collateralized mortgage obligations, and corporate
notes. In determining the amounts of assets to invest in each class of
investments, the Company considers relative rates, liquidity, and credit
quality.
The Company classifies its investment securities as either held to
maturity or available for sale. The Company has no trading securities. Held to
maturity securities are recorded at cost with any discount or premium amortized
using a method that is not materially different from the interest method, which
is also known as the level yield method. Securities held to maturity are
recorded at cost because the Company has the ability to hold these securities to
maturity and because it is Management's intention to hold them to maturity.
Securities available for sale increase the Company's portfolio management
flexibility for investments and are reported at fair value. Net unrealized gains
and losses are excluded from earnings and reported net of applicable income
taxes in comprehensive income and as a separate component of stockholders'
equity until realized. Gains or losses on sales of investment securities are
realized and recorded in earnings at the time of sale and are determined by the
difference between the net sales proceeds and the cost of the security, using
specific identification, adjusted for any unamortized premium or discount. The
Company has other investments, consisting of overnight investments such as
Eurodollar time deposits, federal funds, and short-term repurchase agreements,
and longer-term investments such as bank notes, medium-term notes, and
collateralized mortgage obligations. These other investments are recorded at
cost with any discount or premium amortized using a method that is not
materially different from the interest method.
At December 31, 1998, 1997, and 1996, the Company had securities
available for sale in the amount of $377 million, $609 million, and $781
million, respectively, including net unrealized gains on investment securities
available for sale of $358 million, $245 million, and $159 million,
respectively.
Included in the Company's investment portfolio at December 31, 1998,
1997, and 1996, were collateralized mortgage obligations (CMOs) in the amount of
$196 million, $71 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 December 31, 1998, all of the Company's
CMOs qualified for inclusion in the regulatory liquidity measurement.
<PAGE>
ITEM 1. BUSINESS (Continued)
INVESTMENT ACTIVITIES (continued)
The table below sets forth the composition of the Company's securities
available for sale at December 31.
<TABLE>
<CAPTION>
TABLE 16
Composition of Securities Available for Sale
(Dollars in thousands)
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Equity securities $ 363,427 $ 335,267 $ 260,672
U.S Treasury and Government agency obligations 5,814 201,845 200,844
Collateralized mortgage obligations 7,764 71,432 169,812
Certificates of deposit and short-term bank notes -0- -0- 149,997
------------ ------------ ------------
$ 377,005 $ 608,544 $ 781,325
============ ============ ============
</TABLE>
The weighted average yields on the securities available for sale portfolio
were 19.21%, 6.88%, and 6.64% at December 31, 1998, 1997, and 1996,
respectively. The higher yield in 1998 reflects the effect of the high yield on
the Federal Home Loan Mortgage Corporation stock on a smaller available for sale
portfolio.
The table below sets forth the composition of the Company's other
investments at December 31.
<TABLE>
<CAPTION>
TABLE 17
Composition of Other Investments
(Dollars in thousands)
1998 1997 1996
------------ ------------ -----------
Overnight Investments:
<S> <C> <C> <C>
Federal funds, at cost $ 166,896 $ 72,648 $ 324,432
Eurodollar time deposits, at cost -0- 180,000 102,400
Short-term repurchase agreements collateralized
by mortgage-back securities, at cost -0- -0- 652,000
Longer-Term Investments:
Bank notes 25,000 -0- -0-
Collateralized mortgage obligations 188,304 -0- -0-
Medium-term notes 42,185 -0- -0-
------------ ------------ -----------
$ 422,385 $ 252,648 $1,078,832
============ ============ ===========
</TABLE>
The weighted average yields on the other investments portfolio were 4.92%,
5.91%, and 7.01% at December 31, 1998, 1997, and 1996, respectively. There were
no sales of other investments during 1998, 1997, or 1996.
<PAGE>
ITEM 1. BUSINESS (Continued)
INVESTMENT ACTIVITIES (continued)
As of December 31, 1998, the other investments portfolio had maturities as
follows:
<TABLE>
TABLE 18
Maturities of Other Investments
(Dollars in thousands)
Amortized
Maturity Cost
- --------------------------------- --------------
<S> <C>
1999 $166,896
2000 through 2003 67,185
2004 through 2008 51,569
2009 and thereafter 136,735
---------------
$422,385
==============
</TABLE>
MORTGAGE-BACKED SECURITIES
The Company classifies its MBS as either held to maturity or available
for sale. The Company has no trading MBS. MBS held to maturity are recorded at
cost because the Company has the ability to hold these MBS to maturity and
because Management intends to hold these securities to maturity. Premiums and
discounts on MBS are amortized or accreted using the interest method over the
estimated life of the security. The Company has securitized certain loans from
its loan portfolio into MBS with recourse and into Real Estate Investment
Conduits (MBS-REMICs), both of which are held to maturity and available to be
used as collateral for borrowings. At December 31, 1998, the Company had MBS
held to maturity in the amount of $9.9 billion, including $3.9 billion of FNMA
MBS subject to full credit recourse to the Company and including $5.5 billion of
securities issued in the form of REMICs. At December 31, 1997, the Company had
MBS held to maturity in the amount of $3.8 billion, including $3.0 billion of
FNMA MBS with the underlying loans subject to full credit recourse to the
Company. At December 31, 1996, the Company had MBS held to maturity in the
amount of $4.1 billion, including $3.3 billion of FNMA MBS with the underlying
loans subject to full credit recourse to the Company.
MBS available for sale are reported at fair value, with unrealized
gains and losses excluded from earnings and reported net of applicable income
taxes as a separate component of stockholders' equity until realized. At
December 31, 1998, 1997, and 1996, the Company had mortgage-backed securities
available for sale in the amount of $114 million, $157 million, and $227
million, respectively, including unrealized gains on mortgage-backed securities
available for sale of $5 million, $8 million, and $11 million, respectively.
Gains or losses on sales of MBS are realized and recorded in earnings at the
time of sale and are determined by the difference between the net sales proceeds
and the cost of the MBS, using specific identification, adjusted for any
unamortized premium or discount.
<PAGE>
ITEM 1. BUSINESS (Continued)
MORTGAGE-BACKED SECURITIES (continued)
During 1998, the Company securitized $6.4 billion of mortgage loans
into Real Estate Mortgage Investment Conduits formed by WFSB. Securities issued
by the REMICs are being used as collateral for borrowings. The securities issued
by the REMIC are classified as MBS held to maturity.
During 1998, the Company securitized $1.8 billion of ARMs into FNMA
Eleventh District Cost of Funds Index (COFI)-indexed MBS. During 1997, 1996, and
1995, the Company securitized $1.0 billion, $1.3 billion, and $2.3 billion,
respectively, of ARMs into FNMA COFI-indexed MBS. In addition, during 1997, the
Company desecuritized $856 million of FNMA COFI-indexed MBS. The Company has the
ability and intent to hold these MBS until maturity and, accordingly, these MBS
are classified as held to maturity. The FNMA MBS held to maturity are available
to be used as collateral for borrowings and are subject to full credit recourse
to the Company.
Repayments of MBS during the years 1998, 1997, and 1996 amounted to
$2.1 billion, $518 million, and $413 million, respectively. MBS repayments were
higher in 1998 due to the increase in total MBS outstanding and an increase in
prepayments on underlying mortgages. MBS repayments were higher in 1997 due to
the increase in prepayments on underlying mortgages.
For information on MBS see Notes D and E to the Financial Statements
included in Item 14.
GOODWILL
During 1996, the Company adopted SFAS 72, effective January 1, 1996,
for goodwill related to the Company's acquisitions made prior to September 30,
1982. 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.
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. As a result, the Company wrote-off goodwill totaling
$205 million as the cumulative effect of the change in accounting for goodwill.
The Company had been accounting for acquisitions initiated subsequent to
September 30, 1982 in accordance with SFAS 72. The remaining goodwill from
acquisitions subsequent to 1982 amounting to less than .2% of total assets was
not material and was reclassified to other assets. Amortization of goodwill is
recorded on the Company's Consolidated Statement of Net Earnings under the
section titled "Non-Interest Income - Other".
<PAGE>
ITEM 1. BUSINESS (Continued)
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased during 1998, 1997, and
1996 as a result of earnings and increased market values of securities available
for sale. These increases were partially offset by the repurchase of Company
stock and the payment of quarterly dividends to stockholders. The cost of the
stock repurchase program for the years ended December 31, 1998, 1997, and 1996
was $80 million, $48 million, and $106 million, respectively.
Since 1993, through three separate actions, Golden West's Board of
Directors' authorized the purchase by the Company of up to 12.2 million shares
of Golden West's common stock. As of December 31, 1998, 9.5 million shares had
been repurchased and retired at a cost of $461 million since October 28, 1993,
of which 1.0 million shares were purchased and retired at a cost of $80 million
during 1998. Dividends from subsidiaries are expected to continue to be the
major source of funding for the stock repurchase program. The purchase of Golden
West stock is not intended to have a material impact on the normal liquidity of
the Company.
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 such registration statement. The Company's
preferred stock has been preliminarily rated a2 by Moody's.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company
operates as a single segment and, therefore, SFAS 131 had no effect on the
Company's financial statements.
<PAGE>
ITEM 1. BUSINESS (Continued)
NEW ACCOUNTING PRONOUNCEMENTS (continued)
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not yet
completed a full assessment of the impact of this statement on its financial
statements and results of operations.
EARNINGS PER SHARE
Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS
in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, but uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted average
number of shares outstanding. The Company's Basic EPS before the extraordinary
item was $7.81 for the year ended December 31, 1998, compared to $6.22 and $5.31
(before the three nonrecurring items) for the years ended December 31, 1997 and
1996, respectively. The Company reported Diluted EPS, before the extraordinary
item, of $7.74 for the year ended December 31, 1998 as compared to $6.13 and
$5.24 (before the three nonrecurring items), for the years ended December 31,
1997 and 1996, respectively.
EXTRAORDINARY ITEM
During 1998, the Company paid off, before maturity, $4.4 billion of
high-cost FHLB of San Francisco advances and, as a result, incurred a $21
million pre-tax charge for the penalties associated with these prepayments which
was recorded as an extraordinary item.
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS
Information regarding the Company's yield on interest-earning assets
and cost of funds at December 31, 1998, 1997, and 1996 is contained in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and is incorporated herein by reference.
The gap table and related discussion included in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, gives
information on the repricing characteristics of the Company's interest-earning
assets and interest-bearing liabilities at December 31, 1998, and is
incorporated herein by reference.
<PAGE>
ITEM 1. BUSINESS (Continued)
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (Continued)
The dollar amounts of the Company's income and interest expense
fluctuate depending both on changes in the respective interest rates and on
changes in the respective amounts (volume) of interest-earning assets and
interest-bearing liabilities. The following table sets forth certain information
with respect to the yields earned and rates paid on the Company's
interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
TABLE 19
Average Interest-Earning Assets and Interest-Bearing Liabilities
At and for the Years Ended December 31
(Dollars in thousands)
1998 1997 1996
---------------------------- ---------------------------- -----------------------------
End of End of End of
Average Average Period Average Average Period Average Average Period
Balances Yield Yield Balances Yield Yield Balances Yield Yield
---------- ------- ------- ---------- ------- ------- ----------- ------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities $ 2,956,971 5.72% 5.53% $ 2,025,096 6.06% 6.48% $ 1,690,498 6.18% 6.88%
Mortgage-backed securities 6,891,798 7.23% 7.20% 3,985,408 7.09% 7.23% 3,392,220 7.26% 7.13%
Loans receivable (a) 29,982,931 7.52% 7.36% 32,037,925 7.47% 7.53% 29,493,151 7.47% 7.43%
Invest. in capital stock 692,345 5.87% 5.50% 566,678 6.19% 5.86% 433,819 6.23% 6.34%
of FHLB
---------- ------- ----------- ------- ----------- -------
Interest-earning assets $40,524,045 7.31% $38,615,107 7.34% $35,009,688 7.37%
========== ======= =========== ======= =========== =======
LIABILITIES
Deposits:
Checking accounts $ 79,172 1.50% 2.06% $ 93,472 1.18% 1.75% $ 622,011 1.21% 1.17%
Savings accounts 6,805,841 3.98% 3.97% 3,112,833 2.79% 3.75% 1,880,457 2.30% 2.38%
Term accounts 19,028,844 5.32% 5.07% 20,700,959 5.42% 5.37% 18,756,033 5.39% 5.32%
---------- ------- ------- ---------- ------- ------- ----------- ------- -------
Total deposits 25,913,857 4.96% 4.67% 23,907,264 5.06% 5.04% 21,258,501 4.99% 4.98%
Advances from FHLB 7,389,038 5.94% 5.67% 7,813,493 5.59% 5.78% 7,343,334 5.57% 5.47%
Reverse repurchases 2,004,388 5.64% 5.39% 2,630,958 5.72% 5.73% 2,013,427 5.86% 5.45%
Other borrowings 2,408,791 6.57% 7.90% 2,000,791 7.24% 7.94% 2,202,477 7.36% 7.65%
---------- ------- ----------- ------- ------------ -------
Interest-bearing liabilities 37,716,074 5.29% $36,352,506 5.34% $32,817,739 5.33%
========== ======= =========== ======= ============ =======
Net interest spread 2.02% 2.00% 2.04%
======= ======= =======
Net interest income $ 967,322 $ 890,495 $ 830,960
========== ========== ===========
Net yield on average
interest-earning assets 2.39% 2.31% 2.37%
======= ======= =======
</TABLE>
(a) Includes nonaccrual loans (90 days or more past due).
<PAGE>
ITEM 1. BUSINESS (Continued)
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued)
The table below presents the changes for 1998 and 1997 from the
respective preceding year of the interest income and expense associated with
each category of interest-bearing asset and liability as allocated to changes in
volume and changes in rates.
<TABLE>
<CAPTION>
TABLE 20
Volume and Rate Analysis of Interest Income and Interest Expense
Years Ended December 31
(Dollars in thousands)
Increase/Decrease in Income/Expense
Due to Changes in Volume and Rate(a)
-------------------------------------------------------------
1998 1997 1996 1998 versus 1997 1997 versus 1996
---------- ---------- ----------- ------------------------------ -----------------------------
Income/ Income/ Income/
Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total
---------- ---------- ----------- -------- --------- --------- --------- --------- -------
Interest Income
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ 169,194 $ 122,765 $ 104,510 $52,880 $ (6,451) $ 46,429 $ 20,240 $ (1,985) $ 18,255
Mortgage-backed 498,319 282,499 246,293 210,039 5,781 215,820 41,887 (5,681) 36,206
securities
Loans receivable 2,254,427 2,392,175 2,203,752 (154,648) 16,900 (137,748) 190,010 (1,587) 188,423
Invest. in capital
stock of Federal Home 40,613 35,058 27,006 7,249 (1,694) 5,555 8,219 (167) 8,052
Loan Banks ---------- ---------- -----------
Total interest income 2,962,553 2,832,497 2,581,561
Interest Expense
Deposits
Checking accounts 1,184 1,100 7,536 (109) 193 84 (6,226) (210) (6,436)
Savings accounts 271,172 86,799 43,261 135,416 48,957 184,373 32,894 10,644 43,538
Term accounts 1,012,987 1,121,747 1,010,617 (89,299) (19,461) (108,760) 105,361 5,769 111,130
---------- ---------- ----------- -------- --------- --------- --------- --------- --------
Total deposits 1,285,343 1,209,646 1,061,414 46,008 29,689 75,697 132,029 16,203 148,232
Advances from Federal
Home Loan Banks 438,660 437,028 409,040 (12,543) 14,175 1,632 26,290 1,698 27,988
Securities sold under
agreements to repurchase 112,942 150,557 117,960 (35,339) (2,276) (37,615) 35,269 (2,672) 32,597
Other borrowings 158,286 144,771 162,187 24,589 (11,074) 13,515 (14,634) (2,782) (17,416)
---------- ---------- ----------- -------- --------- --------- --------- --------- --------
Total interest expense 1,995,231 1,942,002 1,750,601
----------- ---------- -----------
Net interest income $ 967,322 $ 890,495 $ 830,960 $92,805 $15,978) $76,827 $ 81,402 $(21,867) $59,535
========== ========== =========== ======== ========= ========= ========= ========= ========
Net interest income increase
(decrease)as a percentage
of average earning assets(c) .23% (.04)% 0.19% .21% (.06)% 0.15%
======== ========= ========= ========= ========= =======
</TABLE>
(a) The change in volume is calculated by multiplying the difference between
the average balance of the current year and the prior year by the prior
year's average yield. The change in rate is calculated by multiplying the
difference between the average yield of the current year and the prior year
by the prior year's average balance. The mixed changes in rate/volume is
calculated by multiplying the difference between the average balance of the
current year and the prior year by the difference between the average yield
of the current year and the prior year. This amount is then allocated
proportionately to the volume and rate changes calculated previously.
(b) The effects of interest rate swap and cap activity have been included in
income and expense of the related assets and liabilities.
(c) Includes nonaccrual loans (90 days or more past due).
<PAGE>
ITEM 1. BUSINESS (Continued)
COMPETITION AND OTHER MATTERS
The Company experiences strong competition in both attracting deposits
and making real estate loans. Competition for savings deposits has historically
come from money market mutual funds, other savings associations, commercial
banks, and government and corporate debt securities. In addition, traditional
financial institutions have found themselves in competition with other financial
services entities, such as securities dealers, insurance companies, credit
unions, and others. The principal methods used by the Company to attract
deposits, in addition to the interest rates and terms offered, include the
offering of a variety of services and the convenience of office locations and
hours of public operation.
Competition in making real estate loans comes principally from other
savings associations, mortgage banking companies, and commercial banks. Many of
the nation's largest savings associations, mortgage banking companies, and
commercial banks are headquartered or have a significant number of branch
offices in the areas in which the Company competes. Changes in the government's
monetary, tax, or housing financing policies can also affect the ability of
lenders to compete profitably. The primary factors in competing for real estate
loans are interest rates, loan fee charges, underwriting standards, and the
quality of service to borrowers and their real estate brokers. In addition, the
Company competes indirectly with enormous government-sponsored enterprises,
notably the Federal National Mortgage Association (FNMA), the Federal Home Loan
Mortgage Corporation (FHLMC), and the Federal Home Loan Banks.
THRIFT INDUSTRY
The operations of the thrift industry are significantly influenced by
general economic conditions, by the related monetary and fiscal policies of the
federal government, and by the policies of financial institution regulatory
authorities. Deposit flows and costs of funds are impacted by interest rates on
competing investments and general market rates of interest. Lending and other
investment activities are affected by the demand for mortgage financing and for
consumer and other types of loans, which in turn are affected by the interest
rates at which such financing may be offered and other factors affecting the
supply of housing and the availability of funds.
REGULATION
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve
credit capacity for its members, which may include savings associations, savings
banks, commercial banks and credit unions. As members, the Insured Institutions
are required to own capital stock of a FHLB in an amount that depends generally
upon their outstanding home mortgage loans or advances from such FHLB, and are
authorized to borrow funds from such FHLB (see Borrowings).
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
LIQUIDITY. The Office of Thrift Supervision (OTS) requires insured
institutions, such as WFSB and WSL, to maintain a minimum amount of cash and
certain qualifying investments for liquidity purposes. As of December 1, 1997,
the current minimum requirement was changed to equal 4% of the quarterly average
of daily balances of short-term deposits and borrowings or 4% of the prior
quarter's ending balance of short-term deposits and borrowings. For all other
months during 1997, the minimum liquidity requirement was equal to 5% of the
monthly average of customer deposits and short-term borrowings. At December 31,
1998, 1997, and 1996, the Company's insured subsidiaries had liquidity in excess
of the regulatory requirements.
FEDERAL DEPOSIT INSURANCE CORPORATION. The deposit accounts of WFSB and
WSSB are insured by the FDIC as part of the BIF, up to the maximum amount
permitted by law, currently $100,000 per insured depositor. The deposit accounts
of WSL are insured by the FDIC as part of the SAIF, also up to the maximum
amount permitted by law. As a result, WFSB, WSL, and WSSB are subject to
supervision, regulation and examination by the FDIC. FDIC insurance is required
for all federally chartered financial institutions such as WFSB and WSL, and for
state chartered entities such as WSSB. Such insurance may be terminated by the
FDIC under certain circumstances involving violations of regulations or unsound
practices.
During 1996, federal legislation was enacted 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. The new banking law required
members to pay a levy of $4.7 billion to bring the SAIF up to the required
reserve level of 1.25% of insured deposits, but lowered savings and loan deposit
insurance premiums starting in 1997. As a result of this legislation, Golden
West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996.
Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced
from $2.30 per $1,000 in savings balances to $.648 per $1,000. Also, beginning
on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB
and WSSB, was increased from $0.00 per $1,000 in savings balances to $.1296 per
$1,000.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The deposits of savings institutions insured by the SAIF may be
converted to BIF insurance. Further, deposits insured by the BIF may be
converted to SAIF insurance. Such conversions require payment of an exit fee to
the insurance fund that the institution leaves and an entrance fee to the
insurance fund the institution enters. In addition, bank holding companies,
which were previously authorized to acquire savings institutions only in
connection with supervisory transactions, may now acquire savings institutions
generally.
In addition, the same 1996 federal legislation which recapitalized the
SAIF, also included a provision which directs federal banking regulators to take
appropriate actions to prevent insured depositories from encouraging and
facilitating the shifting of deposits from SAIF to BIF. The provision was the
subject of a notice of proposed rulemaking issued by the FDIC, but the FDIC
withdrew the proposed rule.
OFFICE OF THRIFT SUPERVISION (OTS). Because they are federally
chartered savings institutions, the principal regulator of both WFSB and WSL is
the OTS. Under various regulations of the OTS, savings associations are
required, among other things, to pay assessments to the OTS, maintain required
regulatory capital, maintain liquid assets at levels fixed from time to time,
and to comply with various limitations on loans to one borrower and limitations
on equity investments, investments in real estate, and investments in corporate
debt securities that are not investment grade.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require
savings institutions to maintain noninterest-earning reserves against their
checking accounts. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements. WFSB, WSL and WSSB are currently in compliance with all applicable
Federal Reserve Board reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank but the Federal Reserve Board requires savings associations to exhaust all
FHLB sources before borrowing from the Federal Reserve Bank.
REGULATORY CAPITAL. The OTS requires federally insured institutions
such as WFSB and WSL to meet certain minimum capital requirements. Effective
March 31, 1998, FIRREA's old 3% minimum requirement for Core (or Leverage)
Capital was superseded by a 4% minimum requirement under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA).
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The following table summarizes WFSB's regulatory capital ratio and
compares them to the OTS minimum requirements at December 31.
<TABLE>
<CAPTION>
TABLE 21
World Savings Bank, a Federal Savings Bank
Regulatory Capital Ratios
(Dollars in thousands)
1998 1997
------------------------------------------------- --------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ---------------------- ----------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- -------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $2,163,838 6.77% $ 479,370 1.50% $1,603,530 6.51% $ 369,694 1.50%
Core 2,163,838 6.77 1,278,319 4.00 1,603,530 6.51 739,388 3.00
Risk-based 2,311,286 12.93 1,430,371 8.00 1,695,565 12.80 1,060,024 8.00
</TABLE>
The following table summarizes WSL's regulatory capital ratio and
compares them to the OTS minimum requirements at December 31.
<TABLE>
<CAPTION>
TABLE 22
World Savings and Loan Association
Regulatory Capital Ratios
(Dollars in thousands)
1998 1997
------------------------------------------------- --------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ---------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- -------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $ 473,523 7.25% $ 97,909 1.50% $ 980,483 6.42% $ 228,950 1.50%
Core 473,523 7.25 261,091 4.00 980,483 6.42 457,901 3.00
Risk-based 617,654 16.24 304,286 8.00 1,186,445 13.64 695,611 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 WFSB and WSL do not
have above-normal exposure to interest-rate risk.
The OTS has adopted rules based upon five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The determination of whether
an association falls into a certain classification depends primarily on its
capital ratios. As of December 31, 1998, the most recent notification from the
OTS categorized both WFSB and WSL as "well-capitalized" under the current
requirements. There are no conditions or events that have occurred since that
notification that the Company believes would have an impact on the
categorization of either WFSB or WSL.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table below shows a reconciliation of WFSB's equity capital to
regulatory capital at December 31, 1998.
<TABLE>
<CAPTION>
TABLE 23
World Savings Bank, a Federal Savings Bank
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------- ------------ ------------- ------------ ------------
<S> <C>
Common stock $ 150
Paid-in surplus 1,672,138
Retained earnings 492,566
------------
Equity capital $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854
============
Positive goodwill (1,016) (1,016) (1,016) (1,016) (1,016)
General valuation allowance 147,448
------------- ------------ ------------- ------------ ------------
Regulatory capital $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,311,286
============= ============ ============= ============ ============
Total assets $31,912,264
============
Adjusted total assets $31,957,968 $31,957,968 $31,957,968
============= ============ =============
Risk-weighted assets $17,879,637 $17,879,637
============ ============
CAPITAL RATIO - ACTUAL 6.78% 6.77% 6.77% 6.77% 12.10% 12.93%
============ ============= ============ ============= ============ ============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============= ============ ============
Adequately capitalized,
equal to or greater than 1.50% 4.00% 4.00% 8.00%
============ ============= ============ ============
Undercapitalized, less than 1.50% 4.00% 4.00% 8.00%
============ ============= ============ ============
Significantly undercapitalized,
less than 3.00% 3.00% 6.00%
============= ============ ============
Critically undercapitalized,
equal to or less than 2.00%
============
</TABLE>
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table below shows a reconciliation of WFSB's equity capital to
regulatory capital at December 31, 1997.
<TABLE>
<CAPTION>
TABLE 24
World Savings Bank, a Federal Savings Bank
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------- ------------ ------------- ------------ ------------
<S> <C>
Common stock $ 150
Paid-in surplus 1,354,612
Retained earnings 250,799
------------
Equity capital $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561
============
Positive goodwill (2,031) (2,031) (2,031) (2,031) (2,031)
General valuation allowance 92,035
------------- ------------ ------------- ------------ ------------
Regulatory capital $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,695,565
============= ============ ============= ============ ============
Total assets $24,608,701
============
Adjusted total assets $ 24,646,251 $24,646,251 $24,646,251
============= ============ =============
Risk-weighted assets $13,250,306 $13,250,306
============ ============
CAPITAL RATIO - ACTUAL 6.52% 6.51% 6.51% 6.51% 12.10% 12.80%
============ ============= ============ ============= ============ ============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============= ============ =============
Adequately capitalized,
equal to or greater than 1.50% 4.00% 4.00% 8.00%
============ ============= ============ =============
Undercapitalized, less than 1.50% 4.00% 4.00% 8.00%
============ ============= ============ =============
Significantly undercapitalized,
less than 3.00% 3.00% 6.00%
============= ============ =============
Critically undercapitalized,
equal to or less than 2.00%
============
</TABLE>
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table below shows a reconciliation of WSL's equity capital to
regulatory capital at December 31, 1998.
<TABLE>
<CAPTION>
TABLE 25
World Savings and Loan Association
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------- ------------- ------------ ------------
<S> <C>
Common stock $ 150
Paid-in surplus 233,441
Retained earnings 239,932
Unrealized gains on securities
available for sale 214,255
------------
Equity capital $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778
============
Unrealized gains on securities
available for sale (214,255) (214,255) (214,255) (214,255) (214,255)
Equity/other investments (3,108)
Subordinated debt 99,818
General valuation allowance 47,421
------------ ------------- ------------- ------------ ------------
Regulatory capital $ 473,523 $ 473,523 $ 473,523 $ 473,523 $ 617,654
============ ============= ============= ============ ============
Total assets $ 6,810,266
============
Adjusted total assets $ 6,527,285 $ 6,527,285 $ 6,527,285
============ ============= =============
Risk-weighted assets $ 3,803,573 $ 3,803,573
============ ============
CAPITAL RATIO - ACTUAL 10.10% 7.25% 7.25% 7.25% 12.45% 16.24%
============ ============ ============= ============= ============ ============
Regulatory Capital Ratio
Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============ ============= ============
Adequately capitalized,
equal to or greater than 1.50% 4.00% 4.00% 8.00%
============ ============ ============= ============
Undercapitalized, less than 1.50% 4.00% 4.00% 8.00%
============ ============ ============= ============
Significantly undercapitalized,
less than 3.00% 3.00% 6.00%
============ ============= ============
Critically undercapitalized,
equal to or less than 2.00%
============
</TABLE>
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table below shows a reconciliation of WSL's equity capital to
regulatory capital at December 31, 1997.
<TABLE>
<CAPTION>
TABLE 26
World Savings and Loan Association
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------- ------------- ------------ ------------
<S> <C>
Common stock $ 150
Paid-in surplus 233,441
Retained earnings 746,892
Unrealized gains on securities
available for sale 141,478
------------
Equity capital $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961
============
Unrealized gains on securities
available for sale (141,478) (141,478) (141,478) (141,478) (141,478)
Equity/other investments (2,452)
Subordinated debt 99,697
General valuation allowance 108,717
------------ ------------- ------------- ------------ ------------
Regulatory capital $ 980,483 $ 980,483 $ 980,483 $ 980,483 $ 1,186,445
============ ============= ============= ============ ============
Total assets $15,446,575
============
Adjusted total assets $15,263,364 $15,263,364 $15,263,364
============ ============= =============
Risk-weighted assets $ 8,695,143 $ 8,695,143
============ ============
CAPITAL RATIO - ACTUAL 7.26% 6.42% 6.42% 6.42% 11.28% 13.64%
============ ============ ============= ============= ============ ============
Regulatory Capital Ratio
Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============ ============= ============
Adequately capitalized,
equal to or greater than 1.50% 4.00% 4.00% 8.00%
============ ============ ============= ============
Undercapitalized, less than 1.50% 4.00% 4.00% 8.00%
============ ============ ============= ============
Significantly undercapitalized,
less than 3.00% 3.00% 6.00%
============ ============= ============
Critically undercapitalized,
equal to or less than 2.00%
============
</TABLE>
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table shows that WFSB's regulatory capital exceeds the requirements
of the well-capitalized classification at December 31.
<TABLE>
<CAPTION>
TABLE 27
World Savings Bank, a Federal Savings Bank
Regulatory Capital Compared to Well-Capitalized Classification Requirement
(Dollars in thousands)
1998 1997
---------------------------------------------- ----------------------------------------------
ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED
--------------------- ---------------------- --------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- -------- ----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage $2,163,838 6.77% $1,597,898 5.00% $1,603,530 6.51% $1,232,313 5.00%
Tier 1 riskbased 2,163,838 12.10 1,072,778 6.00 1,603,530 12.10 795,018 6.00
Total risk-based 2,311,286 12.93 1,787,964 10.00 1,695,565 12.80 1,325,031 10.00
</TABLE>
The table below shows that WSL's regulatory capital exceeds the
requirements of the well-capitalized classification at December 31.
<TABLE>
<CAPTION>
TABLE 28
World Savings and Loan Association
Regulatory Capital Compared to Well-Capitalized Classification Requirement
(Dollars in thousands)
1998 1997
---------------------------------------------- ----------------------------------------------
ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED
--------------------- ---------------------- --------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- -------- ----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage $ 473,523 7.25% $ 326,364 5.00% $ 980,483 6.42% $ 763,168 5.00%
Tier 1 risk based 473,523 12.45 228,214 6.00 980,483 11.28 521,709 6.00
Total risk-based 617,654 16.24 380,357 10.00 1,186,445 13.64 869,514 10.00
</TABLE>
WSSB is a state chartered savings bank regulated by the FDIC. At
December 31, WSSB had the following regulatory capital calculated in accordance
with FDIC's capital standards:
<TABLE>
<CAPTION>
TABLE 29
World Savings Bank, a State Chartered Savings Bank
Regulatory Capital Ratios
(Dollars in thousands)
1998 1997
--------------------------------------------- ---------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
--------------------- --------------------- --------------------- ---------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier-1 Leverage $ 186,411 5.26% $ 106,220 3.00% $ 11,878 9.88% $ 3,607 3.00%
Tier 1 risk based 186,411 25.12 29,686 4.00 11,878 17.80 2,670 4.00
Total risk-based 186,647 25.15 59,372 8.00 12,026 18.02 5,340 8.00
</TABLE>
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS limits capital
distributions, including distributions of cash or other property to owners of
savings associations on account of their ownership, payments to repurchase,
redeem or retire shares of the savings association, and any direct or indirect
payment of cash to owners of a savings association or affiliates in connection
with a corporate restructuring. During the first quarter of 1999, the OTS
changed its regulations governing capital distributions. Those changes become
effective April 1, 1999. Under the new regulations, savings associations not
controlled by a savings and loan holding company may pay capital distributions
during a calendar year, without notice or application to the OTS, equal to net
income for the applicable calendar year plus retained net income for the two
prior calendar years. Such savings associations must file applications for
approval of a proposed distribution, if (i) they are not eligible for expedited
application processing, (ii) they would not be at least adequately capitalized
following the capital distribution, or (iii) they would violate a prohibition
contained in any applicable statute, regulation, or agreement with the OTS or
the FDIC, or would violate a condition of OTS approval by making the proposed
distribution. In addition, the new regulations require 30-days advance notice to
be filed for proposed capital distributions that would result in the savings
association being less than well-capitalized or that involve the reduction or
retirement of the savings association's stock.
All savings associations controlled by savings and loan holding
companies are required to file 30-days advance notice of proposed capital
distributions. Under the new regulations, the OTS may disapprove a notice if it
finds that (a) the savings association will be undercapitalized, significantly
undercapitalized or critically undercapitalized following the distribution, (b)
the proposed capital distribution raises safety and soundness concerns, or (c)
the proposed distribution violates a prohibition contained in a statute,
regulation or agreement between the savings association and the OTS (or FDIC),
or a condition imposed by an OTS condition of approval. During 1998, WSL paid a
total of $730 million in upstream dividends to Golden West.
LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings
associations to the same loans-to-one borrower restrictions that are applicable
to national banks with limited provisions for exceptions. In general, the
national bank standard restricts loans to a single borrower to no more than 15%
of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if
the loan is collateralized by certain readily marketable collateral. (Real
estate is not included in the definition of "readily marketable collateral".) At
December 31, 1998, the maximum that WFSB could have loaned to one borrower was
$347 million while the largest amount of loans it had to one borrower was $33
million. At December 31, 1998, the maximum amount that WSL could have loaned to
one borrower (and related entities) was $93 million. At such date, the largest
amount of loans that WSL had outstanding to any one borrower was $7 million.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of
a federally chartered savings association or a savings bank, such as WFSB or
WSL, or state-chartered savings banks such as WSSB based upon the failure of the
savings associations or savings banks meet certain minimum capital requirements
or the existence of certain other conditions, the Federal Deposit Insurance Act
recognizes a priority in favor of holders of withdrawable deposits (including
the FDIC subrogee or transferee) over general creditors (including holders of
debt of the Insured Institutions). Thus, in the event of a liquidation of the
Insured Institutions or a similar event, claims for deposits would have a
priority over claims of holders of debt. As of December 31, 1998, the Insured
Institutions had approximately $26.2 billion of deposits outstanding.
POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED
DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an
insured depository institution, such as WFSB, WSL, or WSSB, the FDIC may
disaffirm or repudiate any contract or lease to which such institution is a
party, the performance of which is determined to be burdensome, and the
disaffirmance or repudiation of which is determined to promote the orderly
administration of the institution's affairs. The FDIC may contend that its power
to repudiate "contracts" extends to obligations such as the debt of the
depository institution and at least one court has held that the FDIC can
repudiate publicly-traded debt obligations. The effect of any such repudiation
should be to accelerate the maturity of debt. Such repudiation would result in a
claim by each holder of debt against the receivership. The claim may be for
principal and interest accrued through the date of the date of the appointment
of the conservator or receiver. Alternatively, at least one court has held that
the claim would be in the amount of the fair market value of the debt as of the
date of the repudiation, which amount could be more or less than accrued
principal and interest. The amount paid on the claims of the holders of the debt
would depend, among other factors, upon the amount of receivership assets
available for the payment of unsecured claims and the priority of the claim
relative to the claims of other unsecured creditors and depositors, and may be
less than the amount owed to the holders of the debt. See "Depositor Priorities"
above. If the maturity of the debt were so accelerated, and a claim relating to
the debt paid by the receivership, the holders of the debt might not be able,
depending upon economic conditions, to reinvest any amounts paid on the debt at
a rate of interest comparable to that paid on the debt. In addition, although
the holders of the debt may have the right to accelerate the debt in the event
of the appointment of a conservator or receiver of the depository institution,
the FDIC as conservator or receiver may enforce most types of contracts,
including the debt pursuant to their terms, notwithstanding any such
acceleration provision. The FDIC as conservator or receiver may also transfer to
a new obligor any of the depository institution's assets and liabilities,
without the approval or consent of its creditors.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
In its resolutions of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally obligated to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to deposit insurance fund by protecting
depositors for more than the insured portion of deposits (generally $100,000) or
by protecting creditors other than depositors. Existing law authorizes the FDIC
to settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final payment after the declaration of insolvency. Such
a payment would constitute full payment and disposition of the FDIC's
obligations to claimants. Existing law provides that the rate of such final
payment is to be a percentage reflecting the FDIC's receivership recovery
experience.
SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and loan
holding company" under the HomeOwners Loan Act (HOLA). As such, it has
registered with the OTS and is subject to OTS regulation and OTS and FDIC
examination, supervision, and reporting requirements. Among other things, the
OTS has authority to determine that an activity of a savings and loan holding
company constitutes a serious risk to the financial safety, soundness, or
stability of its subsidiary savings institutions and thereupon may impose, among
other things, restrictions on the payment of dividends by the subsidiary
institutions and on transactions between the subsidiary institutions, the
holding company and subsidiaries or affiliates of either.
As WFSB's, WSL's and WSSB's parent company, Golden West is considered an
"affiliate" of WFSB, WSL and WSSB for regulatory purposes. In addition, WFSB,
WSL, and WSSB are considered to be affiliates of each other. Savings
associations and savings banks are subject to the rules relating to transactions
with affiliates and loans to insiders generally applicable to commercial banks
that are members of the Federal Reserve System set forth in Sections 23A, 23B,
and 22(h)of the Federal Reserve Act, and with respect to savings associations,
as well as additional limitations set forth in current law and as adopted by the
OTS. In addition, current law generally prohibits a savings association from
lending or otherwise extending credit to an affiliate, other than the
association's subsidiaries, unless the affiliate is engaged only in activities
that the Federal Reserve Board has determined to be permissible for bank holding
companies and that the OTS has not disapproved. OTS regulations provide guidance
in determining an affiliate of a savings association and in calculating
compliance with the quantitative limitations on transactions with affiliates.
QTL TEST. The HOLA requires savings institutions to meet a qualified thrift
lender (QTL) test. Under the QTL test, a savings institution is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed and related securities) in at least nine months out of
each 12 month period. A savings institution that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. At December 31,
1998, WFSB and WSL were in compliance with the QTL test.
<PAGE>
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
TAXATION. The Company files consolidated federal income tax returns
with its subsidiaries. The provision for federal and state taxes on income is
based on taxes currently payable and taxes expected to be payable in the future
as a result of events that have been recognized in the financial statements or
tax returns.
Golden West 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.
EMPLOYEE RELATIONS
The Company had a total of 4,379 full-time and 910 permanent part-time
employees at December 31, 1998. None of the employees of the Company are
represented by any collective bargaining group. The management of the Company
considers employee relations to be good.
ITEM 2. PROPERTIES
Properties owned by the Company are located in Arizona, California,
Colorado, Florida, Illinois, Kansas, New Jersey, and Texas. The executive
offices of the Company are located at 1901 Harrison Street, Oakland, California,
in leased facilities.
The Company owns a 300,000 square-foot office complex on an 111-acre
site in San Antonio, Texas. This complex houses its Loan Service, Savings
Operations, and Information Systems Departments.
The Company owns 206 of its branches, some of which are located on
leased land. For further information regarding the Company's investment in
premises and equipment and expiration dates of long-term leases, see Note I to
the Financial Statements included in Item 14.
The Company continuously evaluates the suitability and adequacy of the
offices of the Company and has a program of relocating or remodeling them as
necessary to maintain efficient and attractive facilities.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to actions arising in the
ordinary course of business, none of which, in the opinion of management, is
material to the Company's consolidated financial condition or results of
operations, or is otherwise required to be discussed pursuant to Item 103 of
Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET PRICES OF STOCK
Golden West's stock is listed on the New York Stock Exchange and
Pacific Exchange and traded on the Boston and Midwest Stock Exchanges under the
ticker symbol GDW. The quarterly price ranges for the Company's common stock
during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
TABLE 30
Common Stock Price Range
1998 1997
---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $81 - $99 9/16 $61 3/4 - $74 1/4
Second Quarter $95 1/16 - $114 1/4 $59 7/8 - $73 1/4
Third Quarter $75 13/16 - $110 1/8 $70 13/16 - $90 15/16
Fourth Quarter $72 3/8 - $97 5/8 $84 1/16 - $97 13/16
</TABLE>
PER SHARE CASH DIVIDENDS DATA
Golden West's cash dividends paid per share for 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
TABLE 31
Cash Dividends Per Share
1998 1997
--------- ---------
<S> <C> <C>
First Quarter $ .125 $ .110
Second Quarter $ .125 $ .110
Third Quarter $ .125 $ .110
Fourth Quarter $ .140 $ .125
</TABLE>
The principal sources of funds for the payment by Golden West of
cash dividends are cash dividends paid to it by WSL, investment income, and
short-term borrowings.
Under OTS regulations, the OTS must be given at least 30 days'
advance notice by WFSB or WSL of any proposed dividend to be paid to the parent.
Under existing OTS regulations, WFSB and WSL are classified as Tier 1
associations and are, therefore, allowed to distribute dividends up to 100% of
their net income in any year plus one-half of capital in excess of the OTS fully
phased-in capital requirement as of the end of the prior year. Distributions
beyond these amounts are allowed only with the specific, prior approval of the
OTS. New regulations go into effect on April 1, 1999. (See "CAPITAL
DISTRIBUTIONS BY SAVINGS ASSOCIATIONS" on page 41.)
<PAGE>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS (Continued)
At December 31, 1998, $775 million of the Insured Institutions'
retained earnings were available for the payment of cash dividends without the
imposition of additional federal income taxes.
STOCKHOLDERS
At the close of business on March 24, 1999, 56,372,799 shares of
Golden West's Common Stock were outstanding and were held by 1,439 stockholders
of record. At the close of business on March 24, 1999, the Company's common
stock price was 95 3/8.
The transfer agent and registrar for the Golden West Common Stock
is Chase Mellon Shareholder Services, L.L.C., San Francisco, California 94101.
The Securities and Exchange Commission (Commission) maintains a
web site which contains reports, proxy and information statements and other
information pertaining to registrants that file electronically with the
Commission including Golden West. The address is: http://www.sec.gov.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
other data for Golden West for the years indicated. Such information is
qualified in its entirety by the more detailed financial information set forth
in the financial statements and notes thereto appearing in documents
incorporated herein by reference.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
TABLE 32
Five Year Consolidated Summary of Operations
(Dollars in thousands except per share figures)
Year Ended December 31
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ ----------- ----------- ------------
Interest Income:
<S> <C> <C> <C> <C> <C>
Interest on loans $2,254,427 $2,392,175 $2,203,752 $2,097,664 $1,649,413
Interest on mortgage-backed securities 498,319 282,499 246,293 181,355 103,927
Interest on dividends and investments 209,807 157,823 131,516 148,422 123,137
----------- ------------ ----------- ----------- ------------
2,962,553 2,832,497 2,581,561 2,427,441 1,876,477
Interest Expense:
Interest on deposits 1,285,343 1,209,646 1,061,414 1,048,390 714,353
Interest on advances and other borrowings 709,888 732,356 689,187 656,215 440,754
----------- ------------ ----------- ----------- ------------
1,995,231 1,942,002 1,750,601 1,704,605 1,155,107
----------- ------------ ----------- ----------- ------------
Net interest income 967,322 890,495 830,960 722,836 721,370
Provision for loan losses 11,260 57,609 84,256 61,190 62,966
----------- ------------ ----------- ----------- ------------
Net interest income after provision for loan 956,062 832,886 746,704 661,646 658,404
losses
Non-Interest Income:
Fees 62,820 45,910 38,558 29,200 28,816
Gain (loss) on the sale of securities,
mortgage-backed securities, and loans 38,784 8,197 11,954 (493) (120)
Other 36,009 27,161 24,387 11,071 6,201
----------- ------------ ----------- ----------- ------------
137,613 81,268 74,899 39,778 34,897
Non-Interest Expense
General and administrative expenses
Personnel 196,153 180,917 163,243 151,352 150,220
Occupancy 62,549 55,508 50,171 48,737 44,472
Deposit insurance 5,925 7,454 167,528 44,993 40,220
Advertising 10,412 11,525 9,277 9,850 10,761
Other 79,468 71,555 63,203 61,260 57,246
----------- ------------ ----------- ----------- ------------
354,507 326,959 453,422 316,192 302,919
----------- ------------ ----------- ----------- ------------
Earnings before taxes on income 739,168 587,195 368,181 385,232 390,382
Taxes on income 292,077 233,057 (1,732) 150,693 159,933
----------- ------------ ----------- ----------- ------------
Earnings before cumulative effect of change in
accounting for goodwill and extraordinary item 447,091 354,138 369,913 234,539 230,449
Cumulative effect of change in accounting
for goodwill -0- -0- (205,242) -0- -0-
Extraordinary item (12,511) -0- -0- -0- -0-
----------- ------------ ----------- ----------- ------------
Net earnings $ 434,580 $ 354,138 $ 164,671 $ 234,539 $ 230,449
=========== ============ =========== =========== ============
Basic earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item $ 7.81 $ 6.22 $ 6.38 $ 4.00 $ 3.71
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.54) 0.00 0.00
Extraordinary item (.22) 0.00 0.00 0.00 0.00
----------- ------------ ----------- ----------- ------------
Basic earnings per share $ 7.59 $ 6.22 $ 2.84 $ 4.00 $ 3.71
=========== ============ =========== =========== ============
Diluted earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item $ 7.74 $ 6.13 $ 6.29 $ 3.94 $ 3.66
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.49) 0.00 0.00
Extraordinary item (.22) 0.00 0.00 0.00 0.00
----------- ------------ ----------- ----------- ------------
Diluted earnings per share $ 7.52 $ 6.13 $ 2.80 $ 3.94 $ 3.66
=========== ============ =========== =========== ============
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
TABLE 33
Five Year Summary of Financial Condition
(Dollars in thousands)
At December 31
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Assets $38,468,729 $39,590,271 $37,730,598 $35,118,156 $31,683,741
Cash, securities available for sale,
and other investments 1,050,265 1,033,433 2,078,876 2,310,711 2,265,886
Mortgage-backed securities 10,031,965 3,939,746 4,293,582 3,409,341 1,194,378
Loans receivable 25,721,288 33,260,709 30,113,421 28,181,353 27,071,266
Deposits 26,219,095 24,109,717 22,099,934 20,847,910 19,219,389
Advances from FHLBs 6,163,472 8,516,605 8,798,433 6,447,201 6,488,418
Securities sold under agreements to
repurchase and other borrowings 1,252,469 2,334,048 1,908,126 1,817,943 601,821
Medium-term notes -0- 109,992 589,845 1,597,507 1,164,079
Subordinated debt 911,753 1,110,488 1,323,996 1,322,392 1,221,559
Stockholders' equity 3,124,318 2,698,031 2,350,477 2,278,353 2,000,274
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
TABLE 34
Five Year Selected Other Data
(Dollars in thousands except per share figures)
Year Ended December 31
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
New real estate loans originated $ 8,187,934 $ 7,482,973 $ 7,012,562 $ 5,949,064 $ 6,637,653
Average yield on new real estate loans 7.72% 7.59% 7.59% 7.56% 6.44%
Current average yield on new real estate loans(a) 6.20% 6.42% 6.56% 6.58% n/a
Deposits increase ($) $ 2,109,378 $ 2,009,783 $ 1,252,024 $ 1,628,521 $ 1,796,905
Deposits increase (%) 8.7% 9.1% 6.0% 8.5% 10.3%
Net earnings/average net worth (ROE) 14.94% (b) 14.14% 7.46% (c) 10.98% 11.11%
Net earnings/average assets (ROA) 1.11% (b) .91% .46% (c) .69% .78%
General and administrative expense (G&A) to:
Total revenues 11.44% (b) 11.22% 17.07% (c) 12.80% 15.83%
Average assets .90% .84% 1.26% (c) .93% 1.02%
Ratio of earnings to fixed charges: (d)
Including interest on deposits 1.37x 1.30x 1.21x 1.23x 1.34x
Excluding interest on deposits 2.03x 1.79x 1.53x 1.58x 1.87x
Yield on loan portfolio 7.36% 7.53% 7.43% 7.69% 6.85%
Yield on MBS 7.20% 7.23% 7.13% 7.41% 8.37%
Yield on investments 5.53% 6.48% 6.88% 5.96% 5.42%
Yield on earning assets 7.30% 7.48% 7.37% 7.56% 6.81%
Cost of deposits 4.67% 5.04% 4.98% 5.15% 4.57%
Cost of borrowings 5.87% 5.99% 5.80% 6.15% 5.85%
Cost of funds 4.96% 5.36% 5.28% 5.50% 5.00%
Spread 2.34% 2.12% 2.09% 2.06% 1.81%
Nonperforming asset/total assets (e) .79% .96% 1.21% 1.11% 1.12%
Stockholders' equity/total assets 8.12% 6.81% 6.23% 6.49% 6.31%
Average stockholders' equity/average assets 7.41% 6.45% 6.15% 6.30% 6.98%
World Savings Bank, FSB (WFSB)
regulatory capital ratios: (f)
Tangible capital 6.77% 6.51% 6.69% 14.01% ---
Core capital 6.77% 6.51% 6.69% 14.01% ---
Risk-based capital 12.93% 12.80% 13.14% 26.55% ---
World Savings and Loan Association (WSL)
regulatory capital ratios: (f)
Tangible capital 7.25% 6.42% 6.37% 6.38% 6.26%
Core capital 7.25% 6.42% 6.37% 6.38% 6.64%
Risk-based capital 16.24% 13.64% 13.91% 13.40% 13.54%
Number of savings branch offices 248 250 244 233 237
Cash dividends per share $ .515 $ .455 $ .395 $ .35 $ .31
Dividend payout ratio 6.79% (b) 7.32% 13.91% 8.75% 8.34%
</TABLE>
(a) The current rate reflects the actual rate being paid by the borrower at
time of origination.
(b) The ratios for the year ended December 31, 1998 include an extraordinary
charge of $21 million before tax, or $.22 per basic and diluted earnings
per share, net of tax benefit, associated with the prepayment of FHLB
advances and include a nonrecurring gain of $13 million before tax, of
$.13 per basic and diluted earnings per share, after tax, realized when
preferred stock purchased as a discount was redeemed by the issuer at par.
Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%, and the
dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to
total revenues was 11.48%.
(c) The numbers for the year ended December 31, 1996 include the 1996 SAIF
assessment of $133 million, the special tax credit of $139 million, and
the $205 million cumulative effect of the change in accounting for
goodwill. The ratios for the year ended December 31, 1996, excluding the
three 1996 nonrecurring items are: ROE 13.97%, ROA .86%, G&A to total
revenues 12.08%, and G&A to average assets .89%.
(d) Earnings represent income from continuing operations before income taxes,
cumulative effect of change in accounting, extraordinary item, and fixed
charges. Fixed charges include interest expense and amortization of debt
expense.
(e) The definition of nonperforming assets includes nonaccrual loans (loans
that are 90 days or more past due) and real state owned acquired through
foreclosure.
(f) For regulatory purposes, the requirements to be considered "well
capitalized" 5.0% and 10.0% for core and risk-based capital, respectively.
n/a Not available.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The table below sets forth Golden West Financial Corporation's (Golden
West or Company) net earnings for the three years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
TABLE 35
Golden West Net Earnings, Basic Earnings Per Share
and Diluted Earnings Per Share
(Dollars in thousands except per share figures)
Year Ended December 31
-------------------------------------------
1998 1997 1996
------------ ------------- ------------
Earnings before cumulative effect of change in
<S> <C> <C> <C>
accounting for goodwill and extraordinary item (a)(b) $447,091 $354,138 $369,913
Cumulative effect of change in accounting
for goodwill (c) -0- -0- (205,242)
Extraordinary item (d) (12,511) -0- -0-
------------ ------------- ------------
Net Earnings $434,580 $354,138 $164,671
============ ============= ============
Basic earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item (a)(b) $ 7.81 $ 6.22 $ 6.38
Cumulative effect of change in accounting for goodwill(c)
0.00 0.00 (3.54)
Extraordinary item (d) (.22) 0.00 0.00
------------ ------------- ------------
Basic earnings per share $ 7.59 $ 6.22 $ 2.84
============ ============= ============
Diluted earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item (a)(b) $ 7.74 $ 6.13 $ 6.29
Cumulative effect of change in accounting for goodwill(c) 0.00 0.00 (3.49)
Extraordinary item (d) (.22) 0.00 0.00
------------ ------------- ------------
Diluted earnings per share $ 7.52 $ 6.13 $ 2.80
============ ============= ============
</TABLE>
(a) 1998 includes a nonrecurring gain of $13 million or $.13 per basic and
diluted earnings per share, after tax, realized when preferred stock
purchased at a discount was redeemed by the issuer at par.
(b) 1996 includes the one-time assessment of $133 million to recapitalize the
Savings Association Insurance Fund (SAIF) and a tax benefit of $139 million
arising from an earlier acquisition. See "Deposit Insurance" and "Taxes on
Income" sections on page 72.
(c) During 1996, the Company adopted Statement of Financial Accounting
Standards No. 72 (SFAS 72), "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," which resulted in the write-off of $205 million of
goodwill. See "Change in Accounting for Goodwill" section on page 62.
(b) Penalties resulting from the prepayment of Federal Home Loan Bank of San
Francisco advances during 1998. See "Extraordinary Item" section on page
73.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Golden West's principal subsidiaries are World Savings Bank, FSB
(WFSB), World Savings and Loan Association (WSL) and World Savings Bank, SSB
(WSSB). WFSB, WSL, and WSSB are referred to collectively as the "Insured
Institutions." WFSB and WSL are headquartered in Oakland, California. WSSB is
headquartered in Austin, Texas. At December 31, 1998, WFSB, WSL, and WSSB had
$32 billion, $7 billion, and $4 billion, respectively, in assets. At December
31, 1998, Golden West had a savings network of 118 branches in California, 44 in
Colorado, 32 in Florida, 19 in Texas, 13 in Arizona, 11 in New Jersey, ten in
Kansas and one in Illinois. By virtue of being federally-chartered, WFSB and WSL
can originate mortgages anywhere in the nation, even though they may not be
authorized to conduct deposit gathering business in those jurisdictions. In
addition to the states with savings operations referenced above, the Company had
lending operations in Connecticut, Delaware, Idaho, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Oregon,
Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin.
The savings accounts offered by WFSB and WSSB are insured by the Bank
Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). WSL's
accounts are insured by the Savings Association Insurance Fund (SAIF) of the
FDIC. WFSB and WSL share savings branches in which all products of each
institution are made available. In addition, customers of each of the Company's
Insured Institutions can transact business on their accounts at any of the
Company's branch offices. Interest rates set on deposit accounts offered by the
Company's Insured Subsidiaries are based on market conditions, cost, and funding
needs.
The following narrative focuses on the significant financial statement
changes that have taken place at Golden West over the past three years and
includes a discussion of the Company's financial condition, results of
operations, and liquidity and capital resources.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION
The accompanying table summarizes the Company's major asset, liability,
and equity components in percentage terms at yearends 1998, 1997, 1996, and
1995. As the table shows, the largest asset component is the loan portfolio
(including mortgage-backed securities), which consists primarily of long-term
mortgages. Deposits represent the majority of the Company's liabilities.
<TABLE>
<CAPTION>
TABLE 36
Asset, Liability, and Equity Components as
Percentages of the Total Balance Sheet
December 31
----------------------------------------------------
1998 1997 1996 1995
----------- ---------- ---------- -----------
Assets:
<S> <C> <C> <C> <C>
Cash and investments 2.7% 2.6% 5.5% 6.6%
Mortgage-backed securities (a) 26.1 10.0 11.4 9.7
Loans receivable 66.9 84.0 79.8 80.2
Other assets 4.3 3.4 3.3 3.5
----------- ---------- ---------- -----------
100.0% 100.0% 100.0% 100.0%
=========== ========== ========== ===========
Liabilities and Stockholders' Equity:
Deposits 68.1% 60.9% 58.6% 59.4%
FHLB advances 16.0 21.5 23.3 18.4
Securities sold under
agreements to repurchase 3.3 5.9 5.1 5.2
Medium-term notes 0.0 .3 1.6 4.5
Other liabilities 2.1 1.8 1.7 2.2
Subordinated debt 2.4 2.8 3.5 3.8
Stockholders' equity 8.1 6.8 6.2 6.5
----------- ---------- ---------- -----------
100.0% 100.0% 100.0% 100.0%
=========== ========== ========== ===========
</TABLE>
(a) The increase in 1998 resulted from the securitization of
loans into mortgage-backed securities. See "Mortgage-Backed
Securities" section on page 58.
ASSET/LIABILITY MANAGEMENT
The Company's earnings depend primarily on its net interest income,
which is the difference between the amounts it receives from interest earned on
loans, MBS and investments and the amounts it pays in interest on deposits and
borrowings. Therefore, the Company's profitability is largely dependent upon its
ability to manage interest rate risk and credit risk (see "Asset Quality"
section on page 60). The Company mitigates its credit risk through strict
underwriting standards and loan reviews. The Company manages interest rate risk
by managing the repricing of interest-rate sensitive assets and liabilities.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
The Company enters into interest rate swaps as part of its interest
rate risk management strategy. Such instruments are entered into solely to alter
the repricing characteristics of designated assets and liabilities.
One measure of exposure to interest rate risk is the gap, the
difference between the repricing of assets and liabilities. The Company is
subject to interest rate risk to the extent its assets and liabilities reprice
at different times. The disparity between the repricing (maturity, prepayment,
or interest rate change) of deposits and borrowings and the repricing of
mortgage loans and investments can have a material impact on the Company's
results of operations. The following is the Company's gap table at December 31,
1998:
<TABLE>
<CAPTION>
TABLE 37
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of December 31, 1998
(Dollars in Millions)
Projected Repricing(a)
-----------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
------------ ------------ ------------ ------------ -----------
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C>
Investments $ 333 $ 1 $ 122 $ 343 $ 799
Mortgage-backed securities 9,434 101 313 184 10,032
Loans receivable:
Rate-sensitive 21,360 1,872 161 -0- 23,393
Fixed-rate 145 376 1,072 593 2,186
Other(b) 978 -0- -0- -0- 978
Impact of swaps 412 273 (581) (104) -0-
------------ ------------ ------------ ------------ -----------
Total $ 32,662 $ 2,623 $ 1,087 $ 1,016 $ 37,388
============ ============ ============ ============ ===========
Interest-Bearing Liabilities(c):
Deposits $ 12,487 $ 11,156 $ 2,568 $ 8 $ 26,219
FHLB advances 5,700 50 122 292 6,164
Other borrowings 1,246 7 911 -0- 2,164
Impact of swaps 291 (150) (141) -0- -0-
------------ ------------ ------------ ------------ ============
Total $ 19,724 $ 11,063 $ 3,460 $ 300 $ 34,547
============ ============ ============ ============ ============
Repricing gap $ 12,938 $ (8,440) $ (2,373) $ 716
============ ============ ============ ============
Cumulative gap $ 12,938 $ 4,498 $ 2,125 $ 2,841
============ ============ ============ ============
Cumulative gap as a percentage of
total assets 33.6% 11.7% 5.5%
============ ============ ============
</TABLE>
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect
scheduled repayments and projected prepayments of principal.
(b) Includes cash in banks and FHLB stock.
(c) Liabilities with no maturity date, such as passbook and money market
deposit accounts, are assigned zero months.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
The gap table shows that, as of December 31, 1998, the Company's assets
reprice sooner than its liabilities. If all repricing assets and liabilities
responded equally to changes in the interest rate environment, then the gap
analysis would suggest that Golden West's earnings would rise when interest
rates increase and would fall when interest rates decrease. However, Golden
West's earnings are also affected by the built-in reporting and repricing lags
inherent in the Eleventh District Cost of Funds Index (COFI), which is the
benchmark the Company uses to determine the rate on the majority of its
adjustable rate mortgages (ARMs). The reporting lag occurs because of the time
it takes to gather the data needed to compute the index. As a result, the COFI
in effect in any month actually reflects the Eleventh District's cost of funds
at the level it was two months prior. The repricing lag occurs because COFI is
based on a portfolio of accounts, not all of which reprice immediately.
Therefore, COFI does not initially fully reflect a change in market interest
rates. Consequently, when the interest rate environment changes, the COFI lags
cause assets to initially reprice more slowly than liabilities, enhancing
earnings when rates are falling and holding down income when rates rise.
In addition to the COFI lags, other elements of ARM loans also have an
impact on earnings. These elements are introductory rates on new ARM loans, the
interest rate adjustment frequency of ARM loans, interest rate caps or limits on
individual rate changes, and interest rate floors. Partially offsetting the
impact of the COFI lags are similar lags on a portion of the Company's
liabilities. On balance, the COFI lags and ARM structural features cause the
Company's assets initially to reprice more slowly than its liabilities,
resulting in a temporary reduction in net interest income when rates increase
and a temporary increase in net interest income when rates fall.
The table below reflects the Company's expected cash flows and
applicable yields on the balances of its interest sensitive assets and
liabilities as of December 31, 1998, and takes into consideration expected
prepayments of the Company's long-term assets (primarily mortgage-backed
securities and loans receivable) and the estimated current fair value.
Golden West estimates the sensitivity of the Company's net interest
income, net earnings, and capital ratios to interest rate changes based on
simulations using an asset/liability model which takes into account the lags
described above. The simulation model projects net interest income, net
earnings, and capital ratios based on an immediate interest rate increase that
is sustained for a thirty-six month period. The model is based on the actual
maturity and repricing characteristics of interest-rate sensitive assets and
liabilities. For certain assets, the model incorporates assumptions regarding
the impact of changing interest rates on prepayment rates which are based on the
Company's historical prepayment information. The model factors in projections
for anticipated activity levels by product lines offered by the Company. Based
on the information and assumptions in effect at December 31, 1998, Management
believes that a 200 basis point rate increase sustained over a thirty-six month
period would not affect the Company's long-term profitability and financial
strength.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
<TABLE>
<CAPTION>
TABLE 38
Summary of Market Risk on Financial Instruments
As of December 31, 1998
(Dollars in Millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date as of December 31, 1998
-------------------------------------------------------------------------------------------
2004 & Total Fair
1999 2000 2001 2002 2003 thereafter Balance Value
---------- --------- ---------- ---------- --------- ----------- ---------- ---------
Interest-Sensitive Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ 797 $ -0- $ 1 $ -0- $ -0- $ 1 $ 799 $ 800
Weighted average interest rate 5.52% 0.00% 6.56% 0.00% 0.00% 9.87% 5.53%
MBS
Fixed Rate $ 200 $ 132 $ 90 $ 62 $ 43 $ 111 $ 638 654
Weighted average interest rate 8.21% 8.10% 7.98% 7.87% 7.75% 7.39% 7.95%
Variable Rate $ 2,597 $ 1,740 $ 1,109 $ 810 $ 612 $ 2,526 $ 9,394 9,492
Weighted average interest rate 7.17% 7.17% 7.17% 7.16% 7.14% 7.14% 7.16%
Loans Receivable
Fixed Rate $ 647 $ 363 $ 259 $ 191 $ 145 $ 784 $ 2,389 2,452
Weighted average interest rate 8.44% 8.61% 8.50% 8.39% 8.29% 7.92% 8.29%
Variable Rate $ 5,842 $ 4,194 $ 2,981 $ 2,219 $ 1,533 $ 6,563 $ 23,332 23,252
Weighted average interest rate (a) 7.38% 7.39% 7.41% 7.41% 7.38% 7.38% 7.23%
---------- --------- ---------- ---------- --------- ----------- ---------- ---------
Total $ 10,083 $ 6,429 $ 4,440 $ 3,282 $ 2,333 $ 9,985 $ 36,552 $ 36,650
========== ========= ========== ========== ========= =========== ========== =========
Interest-Sensitive Liabilities:
Deposits (b) $ 24,448 $ 1,271 $ 263 $ 137 $ 97 $ 3 $ 26,219 $ 26,290
Weighted average interest rate 4.63% 5.23% 5.46% 5.65% 5.76% 5.21% 4.68%
FHLB Advances
Fixed Rate $ 29 $ 41 $ 23 $ 38 $ 109 $ 173 $ 413 443
Weighted average interest rate 6.76% 6.97% 6.76% 7.04% 6.43% 6.72% 6.70%
Variable Rate $ -0- $ 1,550 $ 1,000 $ 200 $ 2,000 $ 1,000 $ 5,750 5,745
Weighted average interest rate 0.00% 5.71% 5.72% 5.32% 5.54% 5.55% 5.61%
Reverse Repurchase Agreements
Fixed Rate $ 35 $ -0- $ -0- $ -0- $ -0- $ -0- $ 35 35
Weighted average interest rate 2.58% 0.00% 0.00% 0.00% 0.00% 0.00% 2.58%
Variable Rate $ 550 $ 600 $ 67 $ -0- $ -0- $ -0- $ 1,217 1,219
Weighted average interest rate 5.25% 5.72% 5.48% 0.00% 0.00% 0.00% 5.49%
Subordinated Notes $ 100 $ 215 $ -0- $ 398 $ 199 $ -0- $ 912 955
Weighted average interest rate 10.04% 8.89% 0.00% 7.72% 6.12% 0.00% 7.90%
---------- --------- ---------- ---------- --------- ----------- ---------- ---------
Total $ 25,162 $ 3,677 $ 1,353 $ 773 $ 2,405 $ 1,176 $ 34,546 $ 34,687
========== ========= ========== ========== ========= =========== ========== =========
Off-Balance Sheet Items:
Interest Rate Swaps
Receive Fixed Swaps $ 329 $ 46 $ 35 $ 12 $ 91 $ -0- $ 513 $ 9
Weighted average receive rate 6.71% 6.73% 6.61% 6.52% 6.39% 0.00% 6.64%
Weighted average pay rate 5.39% 5.37% 5.32% 5.31% 5.28% 0.00% 5.36%
Pay Fixed Swaps $ 172 $ 10 $ 96 $ 305 $ 212 $ 104 $ 899 (46)
Weighted average receive rate 5.64% 5.61% 5.47% 5.43% 5.47% 5.40% 5.48%
Weighted average pay rate 8.26% 6.08% 8.13% 7.54% 6.26% 6.65% 7.32%
---------- --------- ---------- ---------- --------- ----------- ---------- ---------
Total $ 501 $ 56 $ 131 $ 317 $ 303 $ 104 $ 1,412 $ (37)
========== ========= ========== ========== ========= =========== ========== =========
</TABLE>
(a) The total weighted average interest rate for variable loans receivable
reflects loans with teaser (start) rates in effect at December 31, 1998.
Those loans are assumed to mature outside the teaser period at
fully-indexed rates (the fully-indexed rate is equal to the effective index
plus the loan margin). Consequently, the weighted average rate of all
maturing variable rate loans will not equal the weighted average rate of
total variable rate loans at December 31, 1998 as indicated in the total
balance column.
(b) Deposits with no maturity are included in the 1999 column.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
CASH AND INVESTMENTS
Golden West's investment portfolio is composed primarily of federal
funds, short-term repurchase agreements collateralized by mortgage-backed
securities, short-term money market securities, United States government
obligations, collateralized mortgage obligations and corporate bonds. In
determining the amounts of assets to invest in each class of investments, the
Company considers relative rates, liquidity, and credit quality.
The Office of Thrift Supervision (OTS) requires insured institutions,
such as WFSB and WSL, to maintain a minimum amount of cash and certain
qualifying investments for liquidity purposes. As of December 1, 1997, the
current minimum requirement was changed from a monthly to a quarterly
calculation and is equal to either 4% of the quarterly average of daily balances
of short-term deposits and borrowings or 4% of the prior quarter's ending
balance of short-term deposits and borrowings. For all other months during 1997
and for all months during 1996, the minimum liquidity requirement was equal to
5% of the monthly average of deposits and short-term borrowings. At December 31,
1998, 1997, and 1996, the Company's insured subsidiaries had liquidity in excess
of the regulatory requirements.
At December 31, 1998, and 1997, the Company had securities available
for sale in the amount of $377 million and $609 million, respectively, including
net unrealized gains on securities available for sale of $358 million and $245
million, respectively. At December 31, 1998 and 1997, the Company had no
securities for trading in its investment securities portfolio.
Included in the Company's investment portfolio at December 31, 1998,
and 1997, were collateralized mortgage obligations (CMOs) in the amount of $196
million and $71 million, respectively. The Company holds CMOs on which both
principal and interest are received. It does not hold any interest-only or
principal-only CMO's. At December 31, 1998, all of these CMOs qualified for
inclusion in the regulatory liquidity measurement.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
MORTGAGE-BACKED SECURITIES
At December 31, 1998, the Company had mortgage-backed securities held
to maturity in the amount of $9.9 billion, including $3.9 billion of Federal
National Mortgage Association (FNMA) mortgage-backed securities (MBS) with the
underlying loans subject to full credit recourse to the Company and including
$5.5 billion of securities issued by a Real Estate Mortgage Investment Conduit
(REMIC). At December 31, 1997, the Company had mortgage-backed securities held
to maturity in the amount of $3.8 billion, including $3.0 billion of Federal
National Mortgage Association mortgage-backed securities with the underlying
loans subject to full credit recourse to the Company.
At December 31, 1998, and 1997, the Company had mortgage-backed
securities available for sale in the amount of $114 million and $157 million,
respectively, including net unrealized gains on mortgage-backed securities
available for sale of $5 million and $8 million at December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, the Company had no trading MBS.
During 1998, the Company securitized $6.4 billion of mortgage loans
into Real Estate Mortgage Investment Conduits (MBS-REMIC). Securities issued by
the REMICs are being used as collateral for borrowings. The securities issued by
the REMIC are classified as MBS held to maturity.
During 1998, the Company securitized $1.8 billion of adjustable rate
mortgages (ARMs) into FNMA COFI-indexed MBS. During 1997, 1996 and 1995, the
Company securitized $1.0 billion, $1.3 billion and $2.3 billion, respectively,
of ARMs into FNMA COFI-indexed MBS. In addition, during 1997, the Company
desecuritized $856 million of FNMA COFI-indexed MBS. The Company has the ability
and intent to hold these MBS until maturity and, accordingly, these MBS are
classified as held to maturity. The FNMA MBS held to maturity are available to
be used as collateral for borrowings and the underlying loans are subject to
full credit recourse to the Company.
At December 31, 1998, $9.4 billion of the Company's total MBS portfolio
were backed by ARMs. The percentage of MBS backed by ARMs was 94% at yearend
1998 compared to 78% at yearend 1997 and 77% at yearend 1996. The large amount
of adjustable rate MBS is mainly due to the large amount of ARM loans
securitized in the last four years. At December 31, 1998, fixed-rate
mortgage-backed securities comprise the other 6% of the total MBS portfolio.
Repayments of MBS during the years 1998, 1997, and 1996 amounted to
$2.1 billion, $518 million, and $413 million, respectively. MBS repayments were
higher in 1998 due to the increase in total MBS outstanding and an increase in
prepayments on the underlying mortgages. MBS repayments were higher in 1997 due
to an increase in prepayments on the underlying mortgages.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
LOAN PORTFOLIO
New loan originations in 1998, 1997, and 1996 amounted to $8.2 billion,
$7.5 billion, and $7.0 billion, respectively. The increase in 1998 occurred
because more consumers sought to refinance their existing home loans as well as
a result of a record housing market. The increase in loan volume in 1997
occurred because of a strong housing market and solid demand for ARMs, the
Company's principal product. Refinanced loans constituted 44% of new loan
originations in 1998 compared to 33% in 1997 and 34% in 1996.
Loans originated for sale were $1.2 billion, $217 million, and $477
million for the years ended December 31, 1998, 1997, and 1996. In addition,
during 1998, $229 million of loans were converted from adjustable rate to
fixed-rate held for sale. The Company continues to sell most of its fixed-rate
loans. The Company sold $1.4 billion, $209 million, and $485 million of loans
during 1998, 1997, and 1996, respectively. At December 31, 1998, the balance
outstanding of loans sold with recourse was $1.4 billion and had a valuation
liability of $2.3 million.
Golden West continues to emphasize adjustable rate mortgages--loans
with interest rates that change periodically in accordance with movements in
specified indexes. The portion of the mortgage portfolio (including MBS)
composed of ARMs was 92% at yearend 1998 compared to 91% at yearend 1997 and 90%
at yearend 1996. Golden West's ARM originations constituted approximately 82% of
new mortgage loans made by the Company in 1998, compared with 95% in 1997 and
90% in 1996.
Approximately $4.6 billion of the Company's ARMs (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 December 31,
1998, $495 million ARMs had reached their rate floors. The weighted average
floor rate on the loans that had reached their floor was 7.72% at December 31,
1998, compared to 7.76% at December 31, 1997. Without the floor, the average
yield on these loans would have been 7.15% at December 31, 1998, and 7.21% at
December 31, 1997.
The Company has lending operations in 26 states. The largest source of
mortgage origination is loans secured by residential properties in California.
In 1998, 62% of total loan originations were on residential properties in
California, compared to 54% and 50% in 1997 and 1996, respectively. The five
largest states, other than California, for originations for the year ended
December 31, 1998, were Florida, Texas, Colorado, Illinois, and Washington with
a combined total of 21% 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 66% at December 31, 1998 and December 31,
1997, and 69% at December 31, 1996.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
Loan repayments consisting of monthly loan amortization and loan
payoffs during the years 1998, 1997, and 1996 amounted to $6.2 billion, $3.8
billion, and $3.1 billion, respectively. The increase in repayments in 1998 was
due to an increase in refinance and home sale activity. The increase in
repayments in 1997 was due to an increase in the loan portfolio as well as
increased prepayment rates.
The balance of the loan portfolio declined for the year ended December
31, 1998, due to a high level of prepayments, an increase in loans sold, and the
securitization of loans into MBS. The decrease in the balance of the loan
portfolio for the year ended December 31, 1998, was $7.5 billion or 23%. Had
there not been $8.2 billion of loans securitized into MBS with recourse and
MBS-REMIC, the balance of the loan portfolio would have decreased modestly for
the year ended December 31, 1998. The total growth in the portfolio for the year
ended December 31, 1997, was $3.1 billion or 10%.
MORTGAGE SERVICING RIGHTS
The Company accounts for mortgage servicing rights in accordance with
SFAS 125. For the years ended December 31, 1998 and 1997, Golden West recognized
gains of $23 million and $5 million, respectively, on the sale of loans due to
the capitalization of servicing rights. After amortization, the balance at
December 31, 1998 and 1997 of the capitalized servicing rights was $29 million
and $11 million, respectively. The book value of Golden West's servicing rights
did not exceed the fair value at December 31, 1998 or 1997 and, therefore, no
write-down of the servicing rights to their fair value was necessary.
ASSET QUALITY
One measure of the soundness of the Company's portfolio is its ratio of
nonperforming assets (NPAs) to total assets. Nonperforming assets include
non-accrual loans (loans, including loans swapped into MBS with recourse and
loans securitized into MBS-REMIC, that are 90 days or more past due) and real
estate acquired through foreclosure. No interest is recognized on loans 90 days
or more past due. NPAs amounted to $305 million, $379 million, and $456 million
at yearends 1998, 1997, and 1996, respectively.
The decrease in NPAs during 1998 and 1997 reflected the strong
California economy and housing market. The Company continues to closely monitor
all delinquencies and takes appropriate steps to protect its interests.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
The Company's troubled debt restructured (TDRs) were $23 million, or
.06% of assets, at December 31, 1998, compared to $44 million, or .11% of
assets, at December 31, 1997, and $84 million, or .22% of assets, at December
31, 1996.
The Company's TDRs are 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.
The Company's ratio of NPAs and TDRs to total assets decreased to .85%
at December 31, 1998 compared to 1.07% and 1.43% at yearends 1997 and 1996,
respectively.
The Company has other impaired loans on which specific loss reserves
have been provided and that were not included in nonperforming loans or troubled
debt restructured because the loans were performing in full accordance with the
loan terms. Other impaired loans amounted to $71 million at yearends 1998 and
1997 and $56 million at yearend 1996.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses was $244 million at December
31, 1998, compared to $233 million and $196 million at yearends 1997 and 1996,
respectively. The provision for loan losses was $11 million, $58 million, and
$84 million in 1998, 1997, and 1996, respectively. The provision for loan losses
as a percentage of the loan portfolio (including MBS with recourse and
MBS-REMIC) was .03% for the year ended December 31, 1998 as compared to .16% and
.25% for the years ended December 31, 1997 and 1996. The allowance for loan
losses as a percentage of the loan portfolio (including MBS with recourse and
MBS-REMIC) was .70% for the year ended December 31, 1998 as compared to .64% and
.59% for the years ended December 31, 1997 and 1996. Net chargeoffs for the
years ended December 31, 1998, 1997, and 1996 were $74 thousand, $20 million and
$31 million, respectively. The ratio of net chargeoffs to average loans
outstanding (including MBS with recourse and MBS-REMIC) was .00% for the year
ended December 31, 1998, as compared to .06% and .10% for the years ended 1997
and 1996, respectively. The improvements in these ratios reflect the strong
California economy and housing market as previously discussed in "Asset
Quality."
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
The Company provides specific valuation allowances for losses on loans
when impaired and on real estate owned when any significant and permanent
decline in value is identified. The Company also utilizes a methodology, based
on trends in the basic portfolio, for monitoring and estimating loan losses and
recourse obligations that is based on both historical experience in the loan
portfolio and factors reflecting current economic conditions. This approach uses
a data base 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 sales 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.
REAL ESTATE HELD FOR SALE
At December 31, 1998, the Company had real estate held for sale in the
amount of $43 million, compared to $62 million a year earlier. The largest
balance of real estate held for sale continues to be in one- to four-family
properties in California.
CHANGE IN ACCOUNTING FOR GOODWILL
During 1996, the Company adopted SFAS 72, effective January 1, 1996,
for goodwill related to the Company's acquisitions made prior to September 30,
1982. 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.
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 that the estimated remaining life of the acquired long-term
interest-earning assets. As a result, the Company wrote-off goodwill totaling
$205 million as the cumulative effect of the change in accounting for goodwill.
The Company has been accounting for acquisitions initiated subsequent to
September 30, 1982 in accordance with SFAS 72. 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. Amortization of goodwill
is recorded on the Company's Consolidated Statement of Net Earnings under the
section titled "Non-Interest Income - Other."
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
DEPOSITS
Retail deposits increased by $2.6 billion in 1998 compared to increases
of $1.5 billion and $1.3 billion in 1997 and 1996, respectively. Retail deposits
increased during 1998, 1997, and 1996 primarily due to ongoing marketing efforts
as well as active promotions of market rate transaction accounts in 1997 and
1998.
Beginning in January 1997, the Company began a program to use
government securities dealers to sell certificates of deposit (CDs) to
institutional investors. There were no outstanding wholesale CDs at December 31,
1998. The Company's deposit balance at December 31, 1997 included $525 million
of these wholesale CDs.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Company uses borrowings from the Federal Home Loan Banks (FHLBs),
also known as "advances," to supplement cash flow and to provide funds for loan
origination activities. Advances are secured by pledges of certain loans,
MBS-REMIC, other MBS, and capital stock of the Federal Home Loan Banks. FHLB
advances amounted to $6.2 billion at December 31, 1998, compared to $8.5 billion
and $8.8 billion at December 31, 1997, and 1996, respectively. During 1998, the
Company paid off, before maturity, $4.4 billion of high-cost FHLB of San
Francisco advances and, as a result, incurred a $21 million pre-tax charge for
the penalties associated with these prepayments. See "Extraordinary Item"
discussion on page 73.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company borrows funds through transactions in which securities are
sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered
into with selected major government securities dealers, large banks, and the
Federal Home Loan Bank of San Francisco, typically using MBS from the Company's
portfolio. Reverse Repos with dealers, banks, and the Federal Home Loan Bank of
San Francisco amounted to $1.3 billion, $2.3 billion, and $1.9 billion at
yearend's 1998, 1997, and 1996, respectively.
The Company uses accounting and reporting standards for transfers and
servicing of assets in accordance with SFAS 125 and SFAS 127. The Company
adopted SFAS 127 on January 1, 1998 and the adoption of SFAS 127 had no effect
on the Company's financial condition and results of operations.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
OTHER BORROWINGS
As of December 31, 1998, Golden West, at the holding company level, had
a total of $812 million of subordinated debt issued and outstanding. At yearend
1998, the Company's subordinated debt was rated A3 and A- by Moody's Investors
Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At
December 31, 1998, Golden West had on file a registration statement with the
Securities and Exchange Commission for the sale of up to $300 million of
subordinated notes.
As of December 31, 1998, WSL had a total of $100 million of
subordinated notes issued and outstanding which were rated A2 and A by Moody's
and S&P, respectively. These subordinated notes have a scheduled maturity of
July 1, 2000; however, WSL intends to exercise its right to call the notes on
April 1, 1999. The subordinated notes are included in WSL's risk-based
regulatory capital as Supplementary Capital.
WSL had no medium-term notes outstanding at December 31, 1998, compared
to $110 million at December 31, 1997, and $590 million at December 31, 1996.
During 1996, WFSB received permission from the OTS to issue
non-convertible medium-term notes to institutional investors under rules similar
to Office of the Comptroller of the Currency rules applicable to similarly
situated national banks. As of December 31, 1998, WFSB had not issued any notes
under this authority.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased during 1998 as a result of
earnings and increased market values of securities available for sale. These
increases were partially offset by the $80 million cost of the repurchase of
Company stock and the payment of quarterly dividends to stockholders. The
Company's stockholders' equity increased during 1997 as a result of earnings and
increased market values of securities available for sale. These increases in
1997 were partially offset by the $48 million cost of the repurchase of Company
stock and the payment of quarterly dividends to stockholders. The Company's
stockholders' equity increased during 1996 as a result of earnings and increased
market values of securities available for sale. These increases in 1996 were
partially offset by the $106 million cost of the repurchase of Company stock and
the payment of quarterly dividends to stockholders.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
Since 1993, through three separate actions, Golden West's Board of
Directors has authorized the purchase by the Company of up to a total of 12.2
million shares of Golden West's common stock. As of December 31, 1998, 9.5
million shares had been repurchased and retired at a cost of $461 million since
October 28, 1993, of which 1.0 million shares were purchased and retired at a
cost of $80 million during 1998. Dividends from subsidiaries are expected to
continue to be the major source of funding for the stock repurchase program. The
purchase of Golden West stock is not intended to have a material impact on the
normal liquidity of the Company.
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.
The OTS requires federally insured institutions, such as WFSB and WSL,
to meet minimum capital requirements. Under these regulations, a savings
institution is required to meet three separate capital requirements. The first
requirement is to have tangible capital of 1.5% of adjusted total assets. At
December 31, 1998, WFSB had tangible capital of $2.2 billion, or 6.77% of
adjusted total assets, $1.7 billion in excess of the regulatory requirement. At
December 31, 1998, WSL had tangible capital of $474 million, or 7.25% of
adjusted total assets, $376 million in excess of the regulatory requirement.
The second requirement is to have core capital of 4% of adjusted total
assets. At December 31, 1998, WFSB had core capital of $2.2 billion, or 6.77% of
adjusted total assets, $886 million in excess of the regulatory requirement. At
December 31, 1998, WSL had core capital of $474 million, or 7.25% of adjusted
total assets, $212 million in excess of the regulatory requirement.
The third capital requirement is to have risk-based capital equal to 8%
of risk-weighted assets. At December 31, 1998, WFSB had risk-based capital in
the amount of $2.3 billion or 12.93% of risk-weighted assets, exceeding the
current requirement by $881 million. At December 31, 1998, WSL had risk-based
capital in the amount of $618 million or 16.24% of risk-weighted assets,
exceeding the current requirement by $313 million.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
Under OTS regulations which implement the prompt corrective action
system mandated by the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), an institution is well capitalized if its ratio of total capital
to risk-weighted assets is 10% or more, its ratio of core capital to
risk-weighted assets is 6% or more, its ratio of core capital to total assets is
5% or more and it is not subject to any written agreement, order or directive to
meet a specified capital level. WFSB and WSL qualify as well-capitalized
institutions under the rules applicable to them.
The OTS limits capital distributions by savings associations. For
purposes of capital distributions, the OTS has classified WFSB and WSL as Tier 1
associations; thus, WFSB and WSL may pay dividends during a calendar year of up
to 100% of net earnings to date during the calendar year plus up to one-half of
capital in excess of the risk-based capital requirement at the end of the prior
year subject to thirty days' advance notice to the OTS. Distributions beyond
these amounts are allowed only with the specific, prior approval of the OTS.
During 1998, WSL obtained such approval and paid a total of $730 million in
dividends to Golden West during 1998.
WSSB is a state chartered savings bank regulated by the FDIC. Under
these regulations, a savings bank is required to meet three capital
requirements. The first capital requirement is to have tier 1 leverage capital
of 3% of adjusted average regulatory assets. The second requirement is to have
tier 1 risk-based capital of 4% of risk-weighted assets. The third requirement
is to have total risk-based capital of 8% of risk-weighted assets. At December
31, 1998, WSSB had tier 1 leverage capital of $186 million or 5.26% of adjusted
average regulatory assets, tier 1 risk-based capital of $186 million or 25.12%
of risk-weighted assets, and total risk-based capital of $187 million or 25.15%
of risk-weighted assets.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company
operates as a single segment and, therefore, SFAS 131 had no effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not yet
completed a full assessment of the impact of this statement on its financial
statements and results of operations.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Net earnings before the extraordinary item increased in 1998 as
compared to 1997 primarily due to an increase in net interest income, a decrease
in the provision for loan losses made possible by the Company's declining
chargeoffs and nonperforming assets, and an increase in non-interest income.
These increases to net earnings were partially offset by an increase in general
and administrative expenses. In addition, net earnings for 1998 included a gain
of $13 million before tax from the redemption of preferred stock which was
called by the issuer. Net earnings increased in 1997 as compared to 1996 without
the three nonrecurring items: the federally mandated recapitalization of the
SAIF, the recognition of a tax benefit arising from an earlier acquisition, and
the adoption of SFAS 72 for goodwill related to the Company's acquisitions prior
to September 30, 1982. The increase was primarily due to an increase in net
interest income as a result of increases in interest earning assets; a decrease
in the provision for loan losses made possible by the Company's declining
chargeoffs and nonperforming assets; and a decrease in deposit insurance
premiums partially offset by increases in other operating expenses.
EARNINGS PER SHARE
Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS
in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted-average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, but uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted average
number of shares outstanding. The Company's Basic EPS before the extraordinary
item was $7.81 for the year ended December 31, 1998, compared to $6.22 and $5.31
(before the three nonrecurring items) for the years ended December 31, 1997 and
1996, respectively. The Company reported Diluted EPS before the extraordinary
item of $7.74 for the year ended December 31, 1998 as compared to $6.13 and
$5.24 (before the three nonrecurring items) for the years ended December 31,
1997 and 1996, respectively.
PROFIT MARGINS/SPREADS
An important determinant of Golden West's earnings is its primary
spread--the difference between its yield on earning assets and its cost of
funds.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
The following table shows the components of the Company's primary
spread at the end of the years 1996 through 1998.
<TABLE>
<CAPTION>
TABLE 39
Yield on Earning Assets, Cost of Funds, And Primary Spread
December 31
--------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Yield on loan portfolio 7.32% 7.50% 7.39%
Yield on investments 5.53 6.48 6.88
-------- --------- ---------
Yield on earning assets 7.30 7.48 7.37
-------- --------- ---------
Cost of deposits 4.67 5.04 4.98
Cost of borrowings 5.87 5.99 5.80
-------- --------- ---------
Cost of funds 4.96 5.36 5.28
-------- --------- ---------
Primary spread 2.34% 2.12% 2.09%
======== ========= =========
</TABLE>
YIELD ON EARNING ASSETS
Golden West originates ARMs to manage the rate sensitivity of the asset
side of the balance sheet. Most of the Company's ARMs have interest rates that
change in accordance with an index based on the cost of deposits and borrowings
of savings institutions that are members of the FHLB of San Francisco (the
COFI). Nevertheless, the yield on the Company's ARM portfolio tends to lag
changes in market interest rates because of lags related to the index and
because of certain loan features (see Asset/Liability Management section for
further discussion.)
COST OF FUNDS
Approximately 89% of Golden West's liabilities are subject to repricing
in less than one year. Lower rates on deposit accounts as well as lower rates on
borrowings led to a decrease in the Company's cost of funds during 1998. Higher
rates on deposit accounts as well as higher rates on borrowings led to an
increase in the Company's cost of funds during 1997.
INTEREST RATE SWAPS AND CAPS
The Company enters into interest rate swaps and caps as a part of its
interest rate risk management strategy. The Company had no caps outstanding
during 1998 or 1997. 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.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
Interest rate swap and cap activity decreased net interest income by $9
million, $5 million, and $10 million for the years ended December 31, 1998,
1997, and 1996, respectively.
The table below summarizes the unrealized gains and losses for interest
rate swaps at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
TABLE 40
Unrealized Gains and Losses on Interest Rate Swaps
(Thousands)
December 31, 1998
---------------------------------------------
Net
Unrealized Unrealized Unrealized
Gains Losses (Loss)
------------- ------------ ------------
<S> <C> <C> <C>
Interest rate swaps $ 8,924 $ 45,923 $ (36,999)
============= ============ ============
December 31, 1997
---------------------------------------------
Net
Unrealized Unrealized Unrealized
Gains Losses (Loss)
------------- ------------ ------------
Interest rate swaps $ 11,043 $ 36,897 $ (25,854)
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
TABLE 41
Interest Rate Swap Activity
(Notional Amounts in Millions)
Receive Pay Forward
Fixed Fixed Starting
Swaps Swaps Swaps
----------- ---------- -----------
<S> <C> <C> <C>
Balance at January 1, 1997 $ 2,581 $ 1,340 $ 10
Additions 100 -0- -0-
Maturities (1,002) (232) -0-
Forward starting,
becoming effective -0- -0- (10)
----------- ---------- -----------
Balance at December 31, 1997
1,679 1,108 -0-
Additions -0- -0- -0-
Maturities (1,167) (209) -0-
----------- ---------- -----------
Balance at December 31, 1998 $ 512 $ 899 $ -0-
=========== ========== ===========
</TABLE>
INTEREST ON LOANS
In 1998, interest on loans decreased due to a decrease in the average
portfolio balance which was partially offset by an increase in the average
portfolio yield. The decrease in the average loan portfolio balance was
primarily due to the securitization of adjustable-rate loans into MBS as
discussed in "Mortgage-Backed Securities" on page 58. In 1997, interest on loans
increased due to an increase in the average portfolio balance.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
INTEREST ON MBS
In 1998, interest on MBS increased due to an increase in the average
portfolio balance, as previously discussed, and an increase in the average
portfolio yield. In 1997, interest on MBS increased due to an increase in the
average portfolio balance which was partially offset by a decrease in the
average portfolio yield.
INTEREST AND DIVIDENDS ON INVESTMENTS
The income earned on the investment portfolio fluctuates, depending
upon the volume outstanding and the yields available on short-term investments.
Interest and dividends on investments was higher in 1998 than in 1997 due to an
increase in the average portfolio balance which was partially offset by a
decrease in the average portfolio yield. Interest and dividends on investments
was higher in 1997 than in 1996 due to an increase in the average portfolio
balance and an increase in the average portfolio yield.
INTEREST ON DEPOSITS
The major portion of the Company's deposit base consists of savings
accounts with remaining maturities of one year or less and market rate
transaction accounts. Thus, the amount of interest paid on these funds depends
upon the level of short-term interest rates and the savings and the market rate
transaction account balances outstanding. The increase in interest expense in
1998 was due to the increase in the average balance of deposits partially offset
by a decrease in the average cost of deposits. The increase in interest expense
on deposits in 1997 was due to an increase in the average cost of deposits and
an increase in the average balance of deposits.
INTEREST ON ADVANCES
Interest paid on FHLB advances was higher in 1998 as compared to 1997
due to an increase in the average cost of these borrowings partially offset by a
decrease in the average outstanding balance. Interest paid on FHLB advances was
higher in 1997 as compared to 1996 due to an increase in the average balance of
these borrowings and an increase in the average cost of these borrowings.
INTEREST ON OTHER BORROWINGS
Interest expense on other borrowings, including interest on reverse
repurchase agreements, amounted to $271 million, $295 million, and $280 million
for the years ended 1998, 1997, and 1996, respectively. The decrease in the
expense in 1998 compared with 1997 was due to a decrease in the average balance
of these liabilities and a decrease in the average cost. The increase in the
expense in 1997 over 1996 was due to an increase in the average balance of these
liabilities partially offset by a decrease in the average cost.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
PROVISION FOR LOAN LOSSES
The provision for loan losses was $11 million, $58 million, and $84
million for the years ended 1998, 1997, and 1996, respectively. The lower
provision in 1998 and 1997 reflected the decrease in net chargeoffs, the
decrease in nonperforming assets, and the strong California economy and housing
market.
NON-INTEREST INCOME
Non-interest income was $138 million, $81 million, and $75 million for
the years ended December 31, 1998, 1997, and 1996, respectively. The increase in
non-interest income in 1998 as compared to 1997 was mainly due to greater
revenues from mortgage prepayment fees and loan servicing fees, and gains on the
sale of more fixed-rate loans in the secondary market. In addition, 1998
non-interest income included a gain of $13 million from the redemption of
preferred stock which was called by the issuer. The increase in non-interest
income in 1997 as compared to 1996 was mainly due to an increase in loan fee
income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased during the three years
under discussion. The 1998 increase was due to the increase in mortgage
activity, the ongoing expansion of the Company's branch system, and the
implementation of a variety of technology initiatives including addressing the
"Year 2000" computer issue. The 1997 increase was due to the ongoing expansion
of the savings and loan business, as well as the implementation of several major
technology initiatives. The 1996 increase was due to the one-time SAIF
assessment of $133 million. Without the one-time SAIF assessment, 1996 general
and administrative expenses increased slightly from 1995 due to modest inflation
during 1996.
General and administrative expenses as a percentage of average assets
was .90% for the year ended December 31, 1998 compared with .84% and .89%
(without the one-time 1996 SAIF assessment) for the years ended December 31,
1997, and 1996, respectively.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
DEPOSIT INSURANCE
During 1996, federal legislation was enacted 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
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 savings and loan deposit
insurance premiums starting in 1997. As a result of this legislation, Golden
West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996.
Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced
from $2.30 per $1,000 in savings balances to $.648 per $1,000. Also, beginning
on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB
and WSSB, were increased from $0.00 per $1,000 in savings balances to $.1296 per
$1,000.
TAXES ON INCOME
Golden West 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 1996, the Company recognized $139 million of tax benefits
associated with the Company's purchase 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 million of tax benefits was confirmed during the third
quarter of 1996.
Taxes as a percentage of earnings before the extraordinary item
decreased slightly in 1998 over 1997. 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 million in tax benefits,
increased slightly in 1997 over 1996.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
EXTRAORDINARY ITEM
During 1998, the Company paid off, before maturity, $4.4 billion of
high-cost FHLB of San Francisco advances and, as a result, incurred a $21
million pre-tax charge for the penalties associated with these prepayments.
LIQUIDITY AND CAPITAL RESOURCES
WFSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; sales of loans; negotiable certificates of
deposit; borrowings from the FHLB; investments and borrowings from its
affiliates; debt collateralized by mortgages, MBS, or securities; and the
issuance of medium-term notes. In addition, WFSB has other alternatives
available to provide liquidity or finance operations including borrowings from
public offerings of debt, issuances of commercial paper, and borrowings from
commercial banks. Furthermore, under certain conditions, WFSB may borrow from
the Federal Reserve Bank of San Francisco to meet short-term cash needs. The
availability of these funds will vary depending upon policies of the FHLB, the
Federal Reserve Bank of San Francisco, and the Federal Reserve Board.
WSL's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; sales of loans; borrowings from the FHLB;
debt collateralized by mortgages, MBS, or securities, and the issuance of
medium-term notes. In addition, WSL has a number of other alternatives available
to provide liquidity or finance operations. These include borrowings from its
affiliates, borrowings from public offerings of debt, negotiable certificates of
deposit, issuances of commercial paper, and borrowings from commercial banks.
Furthermore, under certain conditions, WSL may borrow from the Federal Reserve
Bank of San Francisco to meet short-term cash needs. The availability of these
funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of
San Francisco, and the Federal Reserve Board.
WSSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; borrowings from the FHLB; debt
collateralized by mortgages or securities, and borrowings from its affiliates.
The principal sources of funds for WFSB's, WSL's, and WSSB's parent,
Golden West, are dividends from subsidiaries, interest on investments, and the
proceeds from the issuance of debt and equity securities. Various statutory and
regulatory restrictions and tax considerations limit the amount of dividends
WFSB and WSL can pay. The principal liquidity needs of Golden West are for
payment of interest and principal on subordinated debt securities, capital
contributions to its insured subsidiaries ($489 million in 1998 and $284 million
in 1997), dividends to stockholders, the purchase of Golden West stock, and
general and administrative expenses.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
YEAR 2000
The Company is aware of the system challenges that the Year 2000 has
created and currently has a plan in place (Year 2000 Project) to insure that all
of the Company's mission critical systems will be Year 2000 compliant by
mid-1999. The plan has been developed in accordance with guidance set forth by
federal banking regulators in a series of jointly-issued policy statements.
Federal banking regulators regularly monitor the Company's progress in meeting
the requirements of such policy statements. The Company has completed an
inventory and assessment of its systems. The Company is currently in the process
of testing and modifying or replacing systems that may be affected by these Year
2000 compliance issues. Included in this process are both information technology
systems and other systems (e.g. elevators, doorlocks) that could be affected by
Year 2000 issues. The Company has placed priority on information technology
systems affecting its core business of deposit-taking and lending. Testing of
these systems for the ability to function during the Year 2000 was substantially
completed by December 31, 1998. During the first quarter of 1999, the Company
commenced integrated testing to ascertain that all systems function together.
All systems affecting the Company's core business are scheduled to be Year 2000
compliant by mid-1999.
While the Company believes it is doing everything technologically
possible to assure Year 2000 compliance, the success of the Year 2000 Project is
to some extent dependent upon vendor cooperation. The Company is requiring its
computer systems and software vendors to represent that the products provided
are or will be Year 2000 compliant and has planned a program of testing for
compliance. Such testing is included in the testing previously described in this
section. To date, the Company has no indication that its principal vendors or
their systems will adversely affect the Company's Year 2000 compliance efforts.
The Company currently estimates that it will cost approximately $20
million to make all of its computer systems Year 2000 compliant. The Company
will expense all costs associated with the Year 2000 Project and expects to fund
such costs through operating cash flows. The Year 2000 Project expense incurred
during 1998 was $8 million. Included in the $20 million are estimates for
compensation of employees dedicated to the Year 2000 Project, consultants,
hardware and software expense and depreciation of the equipment purchased as
part of this process. However, the Company's Year 2000 expenses are not expected
to result in a dollar for dollar increase in the Company's overall information
systems expenditures because the Company has dedicated a number of its existing
resources solely to the Year 2000 Project.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
The Company believes that its Year 2000 Project will result in the
Company's systems functioning normally, without adverse consequences. While the
systems of others, with whom and through which the Company conducts business,
are not within the Company's control, the Year 2000 Project is intended to
provide the Company with sufficient advance warning that such systems will not
perform. In the unlikely event of a problem with the Company's systems or the
systems of others which relate to the Company's core business, the Company has
developed contingency plans to address the potential that one or more systems
might fail, despite efforts to the contrary. Although the Company has no reason
to believe that such contingency plans will not effectively avoid or mitigate
any adverse consequences of such system failures, no assurances are given that
such plans will be effective.
COMMON STOCK
The quarterly price ranges for the Company's common stock during 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
TABLE 42
Common Stock Price Range
1998 1997
---------------------------- -----------------------------
<S> <C> <C>
First Quarter $81 - $99 9/16 $61 3/4 - $74 1/4
Second Quarter $95 1/16 - $114 1/4 $59 7/8 - $73 1/4
Third Quarter $75 13/16 - $110 1/8 $70 13/16 - $90 15/16
Fourth Quarter $72 3/8 - $97 5/8 $84 1/16 - $97 13/16
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 53 through 56 in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index included on page 78 and the financial statements, which begin
on page F-1, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows (see
footnote explanations on the following page):
Name and Age Position
---------------------- -----------------------
Herbert M. Sandler, 67 Chairman of the Board
and Chief Executive Officer
Marion O. Sandler, 68 Chairman of the Board
and Chief Executive Officer
James T. Judd, 60 Senior Executive Vice
President
Russell W. Kettell, 55 President and Treasurer(a)
J. L. Helvey, 67 Executive Vice President(b)
Dirk S. Adams, 47 Executive Vice President(c)
Robert C. Rowe, 43 Senior Vice President and
Secretary(d)
Carl M. Andersen, 38 Senior Vice President(e)
William C. Nunan, 47 Senior Vice President(f)
Maryellen B. Cattani, 55 Director
Louis J. Galen, 73 Director
Antonia Hernandez, 51 Director
Patricia A. King, 56 Director
Bernard A. Osher, 71 Director
Kenneth T. Rosen, 50 Director
Leslie Tang Schilling, 44 Director
Each of the above persons holds the same position with WFSB and WSL
with the exception of James T. Judd who is President, Chief Operating Officer,
and Director of WFSB and WSL and Russell W. Kettell who is a Senior Executive
Vice President and Director of WFSB and WSL. Each executive officer has had
the principal occupations shown for the prior five years except as follows:
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Continued)
(a) Russell W. Kettell was elected Treasurer of the Company in
January 1995 and has held the position of President of the
Company since February 1993. Prior thereto, Mr. Kettell served as
Senior Executive Vice President since 1989, Executive Vice
President since 1984, Senior Vice President since 1980, and
Treasurer from 1976 until 1984.
(b) J. L. Helvey was elected Executive Vice President of the Company
in 1996. Prior thereto, Mr. Helvey served as Group Senior Vice
President since 1988 and Senior Vice President since 1973.
(c) Dirk S. Adams was elected Executive Vice President of the Company
in 1998. Prior thereto, Mr. Adams served as Group Senior Vice
President since 1990.
(d) Robert C. Rowe was elected Senior Vice President in 1995. Prior
thereto, he served as Vice President and Secretary of the Company
since February 1991. Prior thereto, Mr. Rowe served as Assistant
Vice President and Secretary since 1989 and as General Counsel
since 1988. Prior to that, Mr. Rowe was a legal counsel to the
Federal Home Loan Bank of San Francisco since 1984.
(e) Carl M. Andersen was elected Senior Vice President of the Company
in 1997 and has held the same position with WFSB, WSL and WSSB
since 1996. Prior thereto, he served as Vice President of WFSB
and WSL since 1990.
(f) William C. Nunan was elected Senior Vice President of the Company
in 1997 and has held the same position with WFSB, WSL and WSSB
since 1995. Prior thereto, he served as Vice President of WFSB
and WSL since 1985.
For further information concerning the directors and executive officers of
the Registrant, see pages 2 and 3 of the Registrant's Proxy Statement dated
March 15, 1999, which are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in Registrant's
Proxy Statement dated March 15, 1999, on pages 3 through 5 and 7 through 8 and
is incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth on pages 2, 3, 5
and 6 of Registrant's Proxy Statement dated March 15, 1999, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Indebtedness of Management" on page 8 of the Registrant's Proxy
Statement dated March 15, 1999, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
See Index included on page 83 and the financial statements,
which begin on page F-1.
(2) Index to Financial Statement Schedules
Financial statement schedules are omitted because they are
not required or because the required information is included
in the financial statements or the notes thereto.
(3) Index To Exhibits
Exhibit No. Description
----------- -----------
3(a) Certificate of Incorporation, as amended, and
amendments thereto, are incorporated by reference to
Exhibit 3(a) to the Company's Annual Report on Form
10-K (File No. 1-4269) for the year ended December 31,
1990.
3(b) By-Laws, as amended in 1997.
4(a) The Registrant agrees to furnish to the Commission,
upon request, a copy of each instrument with respect to
issues of long-term debt, the authorized principal
amount of which does not exceed 10% of the total assets
of the Company.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(a) (3) Index To Exhibits (continued)
Exhibit No. Description
---------- -----------
10(a) 1996 Stock Option Plan, as amended, is incorporated by
reference to Exhibit A of the Company's Definitive
Proxy Statement on Schedule 14A, filed on March 15,
1996, for the Company's 1996 Annual Meeting of
Stockholders.
10(b) Annual Incentive Bonus Plan is incorporated by
reference to Exhibit A of the Company's Definitive
Proxy Statement on Schedule 14A, filed on March 16,
1998, for the Company's 1998 Annual Meeting of
Stockholders.
10(c) Deferred Compensation Agreement between the Company and
James T.Judd is incorporated by reference to Exhibit
10(b) of the Company's Annual Report on Form 10-K (File
No. 1-4629) for the year ended December 31, 1986.
10(d) Deferred Compensation Agreement between the Company
and Russell W. Kettell is incorporated by reference to
Exhibit 10(c) of the Company's Annual Report on Form
10-K (File No. 1-4629) for the year ended December 31,
1986.
10(e) Deferred Compensation Agreement between the Company
and J. L. Helvey is incorporated by reference to
Exhibit 10(d) of the Company's Annual Report on Form
10-K (File No. 1-4629) for the year ended December 31,
1986.
10(f) Deferred Compensation Agreement between the Company and
David C. Welch is incorporated by reference to Exhibit
10(f) of the Company's Annual Report on Form 10-K (File
No. 1-4629) for the year ended December 31, 1987.
10(g) Operating lease on Company headquarters building, 1901
Harrison Street, Oakland, California 94612, is
incorporated by reference to Exhibit 10(h) of the
Company's Quarterly Report on Form 10-Q (File No.
1-4629) for the quarter ended September 30, 1998.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(a) (3) Index To Exhibits (continued)
Exhibit No. Description
----------- -----------
10(h) Form of Supplemental Retirement Agreement between the
Company and certain executive officers is incorporated
by reference to Exhibit 10(j) to the Company's Annual
Report on Form 10-K (File No. 1-4629) for the year
ended December 31, 1990.
21(a) Subsidiaries of the Registrant.
23(a) Independent Auditors' Consent.
27 Financial Data Schedule
(b) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
part of section (a), Exhibits.
(c) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K
with the Commission in the fourth quarter.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned Registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into Registrant's Registration Statement on Form
S-8 No. 33-14833 (filed June 5, 1987):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
By: /s/ Herbert M. Sandler 3/29/99
------------------------------------------
Herbert M. Sandler,
Chairman of the Board and
Chief Executive Officer
By: /s/ Marion O. Sandler 3/29/99
------------------------------------------
Marion O. Sandler,
Chairman of the Board and
Chief Executive Officer
By: /s/ J. L. Helvey 3/29/99
------------------------------------------
J. L. Helvey,
Executive Vice President and
Chief Financial and
Accounting Officer
Dated: March 29, 1999
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Maryellen B. Cattani 3/29/99 /s/ Bernard A. Osher 3/29/99
- ----------------------------------- -----------------------------------
Maryellen B. Cattani Bernard A. Osher
Director Director
/s/ Louis J. Galen 3/29/99
- ----------------------------------- -----------------------------------
Louis J. Galen Kenneth T. Rosen
Director Director
/s/ Antonia Hernandez 3/29/99 /s/ Herbert M. Sandler 3/29/99
- ----------------------------------- -----------------------------------
Antonia Hernandez Herbert M. Sandler
Director Director
/s/ Patricia A. King 3/29/99 /s/ Marion O. Sandler 3/29/99
- ----------------------------------- -----------------------------------
Patricia A. King Marion O. Sandler
Director Director
/s/ Leslie Tang Schilling 3/29/99
-----------------------------------
Leslie Tang Schilling
Director
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Golden West Financial Corporation and Subsidiaries:
Consolidated Statement of Financial Condition as of
December 31, 1998, and 1997 F-2
Consolidated Statement of Net Earnings for the years
ended December 31, 1998, 1997, and 1996 F-3
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996 F-4
Consolidated Statement of Cash Flows for the years
ended December 31, 1998, 1997, and 1996 F-5, F-6
Notes to Consolidated Financial Statements F-7
All supplemental schedules are omitted as inapplicable or because the required
information is included in the financial statements or notes thereto.
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Golden West Financial Corporation
Oakland, California
We have audited the accompanying consolidated statement of financial
condition of Golden West Financial Corporation and subsidiaries (the "Company")
as of December 31, 1998 and 1997, and the related consolidated statements of net
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Golden West Financial
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for goodwill related to acquisitions
made prior to September 30, 1982, effective January 1, 1996, to conform with
Statement of Financial Accounting Standards No. 72.
Oakland, California
January 20, 1999
F-1
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
---------------------------------------------
(Dollars in thousands except per share figures)
ASSETS
------
December 31
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash $ 250,875 $ 172,241
Securities available for sale at fair value
(cost of $18,788 and $363,911) (Note B) 377,005 608,544
Other investments at cost (fair value of $422,508 and
$252,648) (Note C) 422,385 252,648
Mortgage-backed securities available for sale at fair value
(cost of $109,083 and $148,864) (Notes D and L) 113,585 157,327
Mortgage-backed securities held to maturity at cost
(fair value of $10,032,527 and $3,833,527) (Notes E, K and L) 9,918,380 3,782,419
Loans receivable less allowance for loan losses of
$244,466 and $233,280 (Notes F and K) 25,721,288 33,260,709
Interest earned but uncollected (Note G) 209,328 216,923
Investment in capital stock of Federal Home Loan Banks,
at cost which approximates fair value (Note K) 780,303 590,244
Real estate held for sale or investment (Note H) 45,696 62,006
Prepaid expenses and other assets 357,363 247,003
Premises and equipment, net (Note I) 272,521 240,207
-------------- --------------
$38,468,729 $39,590,271
============== ==============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Deposits (Note J) $26,219,095 $24,109,717
Advances from Federal Home Loan Banks (Note K) 6,163,472 8,516,605
Securities sold under agreements to repurchase (Note L) 1,252,469 2,334,048
Medium-term notes (Note M) -0- 109,992
Accounts payable and accrued expenses 468,213 446,325
Taxes on income (Note O) 329,409 265,065
-------------- --------------
34,432,658 35,781,752
Subordinated notes (Note N) 911,753 1,110,488
Stockholders' equity (Notes P and R): Preferred stock, par value $1.00:
Authorized 20,000,000 shares
Issued and outstanding, none
Common stock, par value $.10:
Authorized 200,000,000 shares
Issued and outstanding, 56,861,124 and 57,068,504 shares 5,686 5,707
Additional paid-in capital 122,159 85,532
Retained earnings 2,781,925 2,457,055
-------------- --------------
2,909,770 2,548,294
Accumulated comprehensive income from unrealized gains
on securities, net of tax $148,171 and $103,359 214,548 149,737
-------------- --------------
Total Stockholders' Equity 3,124,318 2,698,031
-------------- --------------
$38,468,729 $39,590,271
============== ==============
See notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET EARNINGS
--------------------------------------
(Dollars in thousands except per share figures)
Year Ended December 31
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Interest Income:
<S> <C> <C> <C>
Interest on loans $ 2,254,427 $ 2,392,175 $ 2,203,752
Interest on mortgage-backed securities 498,319 282,499 246,293
Interest and dividends on investments 209,807 157,823 131,516
-------------- -------------- --------------
2,962,553 2,832,497 2,581,561
Interest Expense:
Interest on deposits (Note J) 1,285,343 1,209,646 1,061,414
Interest on advances 438,660 437,028 409,040
Interest on repurchase agreements 112,942 150,557 117,960
Interest on other borrowings 158,286 144,771 162,187
-------------- -------------- --------------
1,995,231 1,942,002 1,750,601
-------------- -------------- --------------
Net Interest Income 967,322 890,495 830,960
Provision for loan losses 11,260 57,609 84,256
-------------- -------------- --------------
Net Interest Income after Provision for
Loan Losses 956,062 832,886 746,704
Non-Interest Income:
Fees 62,820 45,910 38,558
Gain on the sale of securities,
mortgage-backed securities, and loans 38,784 8,197 11,954
Other 36,009 27,161 24,387
-------------- -------------- --------------
137,613 81,268 74,899
Non-Interest Expense:
General and administrative:
Personnel 196,153 180,917 163,243
Occupancy 62,549 55,508 50,171
Deposit insurance (Note A) 5,925 7,454 167,528
Advertising 10,412 11,525 9,277
Other 79,468 71,555 63,203
-------------- -------------- --------------
354,507 326,959 453,422
Earnings Before Taxes on Income 739,168 587,195 368,181
Taxes on income (Note O) 292,077 233,057 (1,732)
-------------- -------------- --------------
Earnings Before Cumulative Effect of Change in
Accounting for Goodwill and Extraordinary Item 447,091 354,138 369,913
Cumulative effect of change in accounting
for goodwill (Note A) -0- -0- (205,242)
Extraordinary item (Note A) (12,511) -0- -0-
-------------- -------------- --------------
Net Earnings $ 434,580 $ 354,138 $ 164,671
============== ============== ==============
Basic earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item $ 7.81 $ 6.22 $ 6.38
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.54)
Extraordinary item (.22) 0.00 0.00
-------------- -------------- --------------
Basic earnings per share (Note Q) $ 7.59 $ 6.22 $ 2.84
============== ============== ==============
Diluted earnings per share before cumulative
effect of change in accounting for goodwill
and extraordinary item $ 7.74 $ 6.13 $ 6.29
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.49)
Extraordinary item (.22) 0.00 0.00
-------------- -------------- --------------
Diluted earnings per share (Note Q) $ 7.52 $ 6.13 $ 2.80
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
(Dollars in thousands except per share figures)
Accumulated
Comprehensive
Income From
Additional Unrealized Total
Common Paid-in Retained Gains On Stockholders' Comprehensive
Stock Capital Earnings Securities Equity Income
---------- ----------- ------------ ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 5,887 $ 55,353 $2,140,883 $ 76,230 $ 2,278,353
Net earnings -0- -0- 164,671 -0- 164,671 $ 164,671
Change in unrealized gains on
securities available for sale -0- -0- -0- 23,869 23,869 23,869
Reclassification adjustment for
gains included in income -0- -0- -0- (407) (407) (407)
----------------
Comprehensive Income $ 188,133
================
Cash dividends on common
stock ($.395 per share) -0- -0- (22,893) -0- (22,893)
Common stock issued upon
exercise of stock options,
including tax benefits -
401,780 shares 40 12,600 -0- -0- 12,640
Purchase and retirement of
1,930,800 shares of Company
stock (Note P) (193) -0- (105,563) -0- (105,756)
---------- ----------- ------------ ---------------- --------------
Balance at December 31, 1996 5,734 67,953 2,177,098 99,692 2,350,477
Net earnings -0- -0- 354,138 -0- 354,138 $ 354,138
Change in unrealized gains on
securities available for sale -0- -0- -0- 51,993 51,993 51,993
Reclassification adjustment for
gains included in income -0- -0- -0- (1,948) (1,948) (1,948)
----------------
Comprehensive Income $ 404,183
================
Cash dividends on common
stock ($.455 per share) -0- -0- (25,903) -0- (25,903)
Common stock issued upon
exercise of stock options,
including tax benefits -
457,215 shares 46 17,579 -0- -0- 17,625
Purchase and retirement of
731,100 shares of Company
stock (Note P) (73) -0- (48,278) -0- (48,351)
---------- ----------- ------------ ---------------- --------------
Balance at December 31, 1997 5,707 85,532 2,457,055 149,737 2,698,031
Net earnings -0- -0- 434,580 -0- 434,580 $ 434,580
Change in unrealized gains on
securities available for sale -0- -0- -0- 72,833 72,833 72,833
Reclassification adjustment for
gains included in income -0- -0- -0- (8,022) (8,022) (8,022)
----------------
Comprehensive Income $ 499,391
================
Cash dividends on common
stock ($.515 per share) -0- -0- (29,488) -0- (29,488)
Common stock issued upon
exercise of stock options,
including tax benefits -
794,320 shares 80 36,627 -0- -0- 36,707
Purchase and retirement of
1,001,700 shares of Company
stock (Note P) (101) -0- (80,222) -0- (80,323)
---------- ----------- ------------ ---------------- --------------
Balance at December 31, 1998 $ 5,686 $ 122,159 $2,781,925 $ 214,548 $ 3,124,318
========== =========== ============ ================ ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Dollars in thousands)
Year Ended December 31
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net earnings $ 434,580 $ 354,138 $ 164,671
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Cumulative effect of change in accounting for goodwill -0- -0- 205,242
Extraordinary item 21,152 -0- -0-
Provision for loan losses 11,260 57,609 84,256
Amortization of loan fees and discounts (22,410) (17,958) (23,038)
Depreciation and amortization 25,913 21,270 19,592
Loans originated for sale (1,155,912) (217,264) (476,589)
Sales of loans 1,423,084 208,826 484,601
Decrease in interest earned but uncollected 7,595 4,681 3,791
Federal Home Loan Bank stock dividends (51,156) (42,590) (29,813)
(Increase) in prepaid expenses and other assets (99,601) (12,259) (62,811)
Increase (decrease) in accounts payable and accrued expenses 21,888 (5,857) 1,368
Increase (decrease) in taxes on income 19,532 24,069 (164,902)
Other, net 12,782 (4,504) (14,032)
------------- ------------- -------------
Net cash provided by operating activities 648,707 370,161 192,336
Cash Flows From Investing Activities:
New loan activity:
Real estate loans originated for portfolio (7,032,022) (7,265,709) (6,535,973)
Real estate loans purchased (2,683) (2,480) (5,070)
Other, net (188,393) (46,781) (26,906)
------------- ------------- -----------
(7,223,098) (7,314,970) (6,567,949)
Real estate loan principal payments:
Monthly payments 648,331 693,134 624,896
Payoffs, net of foreclosures 5,552,187 3,093,780 2,452,299
------------- ------------- -------------
6,200,518 3,786,914 3,077,195
Purchases of mortgage-backed securities held to maturity -0- -0- (1,522)
Repayments of mortgage-backed securities 2,093,124 518,224 412,576
Proceeds from sales of real estate 146,202 226,135 203,936
Purchases of securities available for sale (368,151) (2,916) (824,734)
Sales of securities available for sale 81,373 11,944 81,133
Matured securities available for sale 632,284 249,029 908,436
Decrease (increase) in other investments (169,737) 826,184 111,328
Purchases of Federal Home Loan Bank stock (149,662) (56,239) (164,894)
Redemptions of Federal Home Loan Bank stock -0- -0- 37,649
Additions to premises and equipment (64,143) (53,834) (30,465)
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,178,710 (1,809,529) (2,757,311)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Cash Flows From Financing Activities:
Deposit activity:
<S> <C> <C> <C>
Increase in deposits, net $ 1,045,459 $ 1,041,843 $ 382,732
Interest credited 1,063,919 967,940 869,292
-------------- -------------- --------------
2,109,378 2,009,783 1,252,024
Additions to Federal Home Loan Bank advances 8,363,135 2,571,200 3,695,322
Repayments of Federal Home Loan Bank advances (10,737,644) (2,853,217) (1,344,429)
Proceeds from agreements to repurchase securities 6,555,115 6,385,060 4,566,506
Repayments of agreements to repurchase securities (7,636,694) (5,959,138) (4,476,323)
Repayments of medium-term notes (110,000) (480,000) (1,008,135)
Repayments of subordinated notes (200,000) (215,000) -0-
Dividends on common stock (29,488) (25,903) (22,893)
Exercise of stock options 17,738 8,456 8,683
Purchase and retirement of Company stock (80,323) (48,351) (105,756)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (1,748,783) 1,392,890 2,564,999
-------------- -------------- --------------
Net Increase (Decrease) in Cash 78,634 (46,478) 24
Cash at beginning of period 172,241 218,719 218,695
-------------- -------------- --------------
Cash at end of period $ 250,875 $ 172,241 $ 218,719
============== ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest $ 2,018,128 $ 1,948,021 $ 1,789,487
Income taxes 248,086 201,306 165,560
Cash received for interest and dividends 2,970,148 2,837,178 2,585,352
Noncash investing activities:
Loans converted from adjustable rate to fixed-rate held for sale 228,529 -0- -0-
Loans transferred to foreclosed real estate 112,406 201,304 220,642
Mortgage-backed securities transferred from available for
sale to held to maturity (at fair value) -0- 30,003 217,719
Adjustable rate mortgages securitized into mortgage-backed
securities and mortgage-backed securities-REMIC 8,189,190 1,022,455 1,297,669
Mortgage-backed securities with recourse desecuritized
into adjustable rate mortgages -0- 856,038 -0-
</TABLE>
F-6
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Golden
West Financial Corporation, a Delaware corporation, and its wholly owned
subsidiaries (the Company or Golden West). Intercompany accounts and
transactions have been eliminated. The Company's principal operating
subsidiaries are World Savings Bank, a federally chartered savings bank (WFSB),
World Savings and Loan Association, a federally chartered association (WSL), and
World Savings Bank, a state chartered savings bank (WSSB), (collectively, the
Insured Subsidiaries). At December 31, 1998, the assets of these subsidiaries
were $31.9 billion, $6.8 billion and $3.5 billion, respectively.
Nature of Operations
- --------------------
Golden West Financial Corporation, through its financial institution
subsidiaries, operates 248 savings branches in eight states and 249 loan offices
in 26 states. The Company's primary source of revenue is interest from loans on
residential real estate and mortgage-backed securities.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash
- ----
For the purpose of presentation in the Consolidated Statement of Cash
Flows, cash is defined as cash held in office and amounts due from banks.
Securities Available for Sale and Other Investments
- ---------------------------------------------------
Effective December 1, 1997, the Office of Thrift Supervision required
insured institutions to maintain a minimum amount of liquid assets in the form
of cash and securities approved by federal regulations at either a) 4% of the
quarterly average of daily balances of short-term deposits and borrowings for
the prior quarter or b) 4% of the prior quarter's ending balance of short-term
deposits and borrowings. Prior to December 1, 1997, insured institutions were
required by regulation to maintain liquid assets in the form of cash and
securities approved by federal regulations at a monthly average of daily
balances of not less than 5% of deposits and short-term borrowings.
The Company classifies its investment securities as either held to
maturity or available for sale. The Company has no trading securities. Held to
maturity securities are recorded at cost with any discount or premium amortized
using a method that is not materially different from the interest method, which
is also known as the level yield method. Securities held to maturity are
recorded at cost because the Company has the ability to hold these securities to
maturity and because it is Management's intention to hold them to maturity.
Securities available for sale increase the Company's portfolio management
flexibility for investments and are reported at fair value. Net unrealized gains
and losses are excluded from earnings and reported net of applicable income
taxes in comprehensive income and as a separate component of stockholders'
equity until realized. Gains or losses on sales of securities are realized and
recorded in earnings at the time of sale and are determined by the difference
between the net sales proceeds and the cost of the security, using specific
identification, adjusted for any unamortized premium or discount. The Company
has other investments, consisting of overnight investments such as Eurodollar
time deposits, federal funds and short-term repurchase agreements, and
longer-term investments such as Bank notes, medium-term notes and collateralized
mortgage obligations. These other investments are recorded at cost with any
discount or premium amortized using a method that is not materially different
from the interest method.
F-7
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share)
Mortgage-Backed Securities
- --------------------------
The Company has no mortgage-backed securities (MBS) classified as
trading. Mortgage-backed securities held to maturity are recorded at cost
because the Company has the ability to hold these MBS to maturity and because
Management intends to hold these securities to maturity. Premiums and discounts
on MBS are amortized or accreted using the interest method over the estimated
life of the security. MBS available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported net of
applicable income taxes as a separate component of stockholders' equity until
realized. Gains or losses on sales of MBS are realized and recorded in earnings
at the time of sale and are determined by the difference between the net sales
proceeds and the cost of MBS, using specific identification, adjusted for any
unamortized premium or discount. The Company has securitized certain loans from
its investment portfolio into MBS with recourse and into Real Estate Mortgage
Investment Conduits (REMIC) which are held to maturity and available to be used
as collateral for borrowings.
Loans Receivable
- ----------------
The Company's real estate loan portfolio consists primarily of
long-term loans collateralized by first trust deeds on single-family residences
and multi-family residential property. In addition to real estate loans, the
Company makes loans on the security of savings accounts.
The adjustable rate mortgage (ARM) is the Company's primary real estate
loan. The ARM carries an interest rate that may change as often as monthly,
based on movements in certain cost of funds or other indexes. Interest rate
changes and monthly payments of principal and interest may be subject to maximum
increases or decreases. Negative amortization may occur during periods when
payments are limited. The Company also offers "modified" ARMs, loans that offer
a low, fixed rate generally from 1% to 3% below the contract rate for an initial
period, primarily one to 12 months.
The Company originates loans that are held for sale, primarily
fixed-rate loans. These loans are recorded at the lower of cost or market. Some
of these loans are sold with recourse and a recourse liability reserve is
provided on the sale of these loans.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company's policy is to measure
impairment based on the fair value of the collateral. When the value of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance. The valuation allowance and provision
for loan losses are adjusted for changes in the fair value of the collateral.
Loan origination fees, net of certain direct loan origination costs,
are deferred and amortized as an interest income yield adjustment over the
actual life of the related loans using the interest method. Loan origination
fees, net of certain direct loan origination costs, on loans originated for sale
are deferred until the loans are sold and recognized at the time of sale.
"Fees," which include fees for prepayment of loans, income for
servicing loans, late charges for delinquent payments, fees from deposit
accounts, and miscellaneous fees, are recorded when collected.
Premiums and discounts on purchased loans, including premiums and
discounts arising from acquisitions of other associations, are generally
amortized using the interest method over the actual life of the loans.
Nonperforming assets consist of loans 90 days or more delinquent, with
balances not reduced for loan loss reserves, and real estate owned through
foreclosure. For loans past due 90 days or more, all interest earned but
uncollected is fully reserved.
Troubled debt restructured consists of loans that have been modified by
the lender to grant a concession to the borrower because of a perceived
temporary weakness in the collateral and/or borrower.
F-8
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
Real Estate Held for Sale or Investment
- ---------------------------------------
Real estate held for sale or investment is comprised primarily of
improved property acquired through foreclosure. All real estate owned is
recorded at the lower of cost or fair value. Included in the fair value is the
estimated selling price in the ordinary course of business less estimated costs
to repair, hold, and dispose of the property. Costs relating to holding
property, net of rental and option income, are expensed in the current period.
Gains on the sale of real estate are recognized at the time of sale. Losses
realized and expenses incurred in connection with the disposition of foreclosed
real estate are charged to current earnings.
Allowance for Loan Losses
- -------------------------
The Company provides specific valuation allowances for losses on loans when
impaired and on real estate owned when any significant and permanent decline in
value is identified. The Company also utilizes a methodology, based on trends in
the basic portfolio, for monitoring and estimating loan losses and recourse
obligations 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 loan losses, consideration is given
to the estimated sales 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.
Mortgage Servicing Rights
- -------------------------
The Company follows 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 (CMSRs) 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 any financial
institution participating in the secondary mortgage market should evaluate and
measure impairment of CMSRs based on the fair value of those rights on a
disaggregated basis. CMSRs are periodically reviewed for impairment based on
fair value. The fair value of the CMSRs, for the purposes of impairment, is
measured using a discounted cash flow analysis based on the Company's estimated
annual cost of servicing, market prepayment rates, and market discount rates. At
December 31, 1998 and 1997, there was no impairment. 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), which amends SFAS 122. The accounting for mortgage
servicing assets under SFAS 125 is substantially the same as the accounting for
mortgage servicing assets under SFAS 122. The balance of CMSRs is included in
"Prepaid expenses and other assets" in the Consolidated Statement of Financial
Condition and is being amortized over the projected servicing period. The
amortization of the CMSRs is included in "Fee income" in the Consolidated
Statement of Net Earnings.
F-9
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
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 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. Amortization of goodwill is recorded on the
Consolidated Statement of Net Earnings under the section titled "Non-Interest
Income - Other."
Securities Sold Under Agreements to Repurchase
- ----------------------------------------------
The Company enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) only with selected dealers and banks.
Reverse repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the Consolidated
Statement of Financial Condition. The securities underlying the agreements
remain in the asset accounts.
As previously stated, the Company adopted SFAS 125. 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). The impact of the implementation of the delayed portions of
SFAS 125 on the Company's financial condition and results of operations in 1998
was not material.
Interest Rate Swaps and Caps
- ----------------------------
The Company utilizes certain derivative financial instruments,
primarily various types of interest rate swaps and 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.
An interest rate swap is an agreement between two parties in which one
party exchanges cash payments based on a fixed or floating rate of interest for
a counterparty's cash payment based on a floating rate of interest. The amounts
to be paid are defined by agreement and determined by applying the specified
interest rates to a notional principal amount. Interest rate swap agreements are
entered into to limit the impact of changes in interest rates on mortgage loans,
or other designated assets, deposits or borrowings. The interest rate
differential paid or received on interest rate swap agreements is recognized
over the life of the agreements, with income and expense recorded in the same
category as the designated balance sheet item. The designated balance sheet item
is generally a pool of assets or liabilities with similar interest rate
characteristics. Some interest rate swaps are entered into with starting dates
in the future in anticipation of future prepayments on fixed-rate assets.
F-10
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
An interest rate cap is an agreement between two parties in which one
party pays a fee for the right to receive a payment from a counterparty based on
the excess, if any, of an open market floating rate over a base rate applied to
a notional principal amount. The excess that may be received on interest rate
cap agreements limits the impact of changes in interest rates on mortgage loans
or other designated assets. Amounts that may be received on interest rate cap
agreements and fees paid to purchase the agreements are recognized over the life
of the agreements, with income and expense recorded in the same category as the
designated balance sheet item.
Taxes on Income
- ---------------
The Company files consolidated federal income tax returns with its
subsidiaries. The provision for federal and state taxes on income is based on
taxes currently payable and taxes expected to be payable in the future as a
result of events that have been recognized in the financial statements or tax
returns.
Regulatory Capital Requirements
- -------------------------------
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) established capital standards for OTS regulated institutions, such
as WFSB and WSL. Under FIRREA, thrifts and savings banks must have tangible
capital equal to 1.5% of adjusted total assets, have core capital equal to 4% of
adjusted total assets, and have risk-based capital equal to 8% of risk-weighted
assets.
At December 31, WFSB had the following regulatory capital calculated in
accordance with FIRREA's capital standards:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------- ---------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
------------------------- ------------------------- ------------------------- -------------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------- ---------- -------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $ 2,163,838 6.77% $ 479,370 1.50% $ 1,603,530 6.51% $ 369,694 1.50%
Core 2,163,838 6.77 1,278,319 4.00 1,603,530 6.51 739,388 3.00
Risk-based 2,311,286 12.93 1,430,371 8.00 1,695,565 12.80 1,060,024 8.00
</TABLE>
<TABLE>
<CAPTION>
At December 31, WSL had the following regulatory capital calculated in
accordance with FIRREA's capital standards:
1998 1997
--------------------------------------------------- ---------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
------------------------- ------------------------- ------------------------- -------------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------- ---------- -------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $ 473,523 7.25% $ 97,909 1.50% $ 980,483 6.42% $ 228,950 1.50%
Core 473,523 7.25 261,091 4.00 980,483 6.42 457,901 3.00
Risk-based 617,654 16.24 304,286 8.00 1,186,445 13.64 695,611 8.00
</TABLE>
The Office of Thrift Supervision (OTS) has adopted rules based upon
five capital tiers: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. The rules
provide that a savings association is "well-capitalized" if its total risk-based
capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its leverage ratio is 5% or greater, and the institution is not subject
to a capital directive.
F-11
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
As used herein, the total risk-based capital ratio is the ratio of
total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the
ratio of core capital to risk-weighted assets, and the leverage ratio is the
ratio of core capital to adjusted total assets, in each case as calculated in
accordance with current OTS capital regulations. WFSB and WSL, are both
regulated by the OTS. As of December 31, 1998, the most recent notification from
the OTS categorized both WFSB and WSL, as "well-capitalized" under the current
requirements. There are no conditions or events that have occurred since that
notification that the Company believes would have an impact on the
categorization of either WFSB or WSL.
The table below shows that WFSB's regulatory capital exceeds the
well-capitalized classification at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- -------------------------------------------------
ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED
----------------------- ---------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------ --------- ------------ -------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage $2,163,838 6.77% $1,597,898 5.00% $1,603,530 6.51% $1,232,313 5.00%
Tier 1 risk-based 2,163,838 12.10 1,072,778 6.00 1,603,530 12.10 795,018 6.00
Total risk-based 2,311,286 12.93 1,787,964 10.00 1,695,565 12.80 1,325,031 10.00
</TABLE>
<TABLE>
<CAPTION>
The table below shows that WSL's regulatory capital exceeds the
well-capitalized classification at December 31, 1998 and 1997.
1998 1997
----------------------------------------------- -------------------------------------------------
ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED
----------------------- ---------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------ --------- ------------ -------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage $ 473,523 7.25% $ 326,364 5.00% $ 980,483 6.42% $ 763,168 5.00%
Tier 1 risk-based 473,523 12.45 228,214 6.00 980,483 11.28 521,709 6.00
Total risk-based 617,654 16.24 380,357 10.00 1,186,445 13.64 869,514 10.00
</TABLE>
WSSB is a state chartered savings bank regulated by the FDIC. At
December 31, WSSB had the following regulatory capital calculated in accordance
with FDIC's capital standards:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- -------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ---------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------ --------- ------------ -------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $ 186,411 5.26% $ 106,220 3.00% $ 11,878 9.88% $ 3,607 3.00%
Tier 1 risk-based 186,411 25.12 29,686 4.00 11,878 17.80 2,670 4.00
Total risk-based 186,647 25.15 59,372 8.00 12,026 18.02 5,340 8.00
</TABLE>
Retained Earnings
- -----------------
Under OTS regulations, the OTS must be given at least 30 days' advance
notice by WFSB or WSL of any proposed dividend to be paid to the Company. Under
OTS regulations, WFSB and WSL are classified as Tier 1 institutions and are,
therefore, allowed to distribute dividends up to 100% of their net income in any
year plus one-half of their capital in excess of the OTS capital requirement as
of the end of the prior year. Distributions beyond these amounts are allowed
only with the specific, prior approval of the OTS.
At December 31, 1998, $775 million of the Insured Subsidiaries'
retained earnings were available for the payment of cash dividends without the
imposition of additional federal income taxes. The Company is not subject to the
same tax and reporting restrictions as are WFSB and WSL.
F-12
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
Earnings Per Share
- ------------------
Basic EPS and Diluted EPS are calculated in accordance with the
guidelines established in Statement of Financial Accounting Standards No. 128,
"Measurement of Earnings Per Share" (SFAS 128). (See footnote Q for further
details.)
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 deposits, but lowered savings and loan deposit
insurance premiums starting in the fourth quarter of 1996. As a result of this
legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133
million during 1996. Beginning on January 1, 1997, the premium paid by WSL 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 and WSSB, were increased from $0.00 per $1,000 in
savings balances to $.13 per $1,000.
Extraordinary Item
- ------------------
During 1998, the Company paid off, before maturity, $4.4 billion of
high-cost FHLB of San Francisco advances and, as a result, incurred a $21
million pre-tax charge for the penalties associated with these prepayments.
These penalties are reflected as an extraordinary charge on the Consolidated
Statement of Net Earnings.
New Accounting Pronouncements
- -----------------------------
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company
operates as a single segment and, therefore, SFAS 131 had no effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This Statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company has not yet completed
a full assessment of the impact of this Statement on its financial condition or
results of operations.
F-13
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-----------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE B - Securities Available for Sale
<TABLE>
<CAPTION>
The following is a summary of securities available for sale:
December 31, 1998
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency obligations $ 5,291 $ 523 $ -0- $ 5,814
Collateralized mortgage obligations 7,948 6 190 7,764
Equity securities 5,549 357,878 -0- 363,427
------------ ------------ ------------ -------------
$ 18,788 $ 358,407 $ 190 $ 377,005
============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency obligations $ 200,989 $ 856 $ -0- $ 201,845
Collateralized mortgage obligations 72,545 7 1,120 71,432
Equity securities 90,377 244,897 7 335,267
------------- ------------- ------------ ------------
$ 363,911 $ 245,760 $ 1,127 $ 608,544
============= ============= ============ ============
</TABLE>
The weighted average portfolio yields on securities available for sale
were 19.21% and 6.88% at December 31, 1998, and 1997, respectively. Principal
proceeds from the sales of securities from the securities available for sale
portfolio were $94,846 (1998), $14,937 (1997) and $81,974 (1996) and resulted in
realized gains of $13,480 (1998), $3,039 (1997), and $841 (1996) and realized
losses of $7 (1998), $46 (1997), and $-0- (1996).
At December 31, 1998, the securities available for sale had maturities
as follows:
<TABLE>
<CAPTION>
Amortized Fair
Maturity Cost Value
------------------------------------ -------------- --------------
<S> <C> <C>
No maturity $ 9,824 $ 368,199
1999 6,469 6,314
2000 through 2003 42 42
2004 through 2008 2,116 2,134
2009 and thereafter 337 316
-------------- --------------
$ 18,788 $ 377,005
============== ==============
</TABLE>
NOTE C - Other Investments
The following is a summary of other investments:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -------------
Overnight Investments:
<S> <C> <C> <C> <C>
Federal funds $ 166,896 $ -0- $ -0- $ 166,896
Longer-term Investments:
Bank notes 25,000 94 -0- 25,094
Collateralized mortgage obligations 188,304 108 187 188,225
Medium-term notes 42,185 108 -0- 42,293
------------ ------------ ------------ -------------
$ 422,385 $ 310 $ 187 $ 422,508
============ ============ ============ =============
</TABLE>
F-14
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ -------------
Overnight Investments:
<S> <C> <C> <C> <C>
Federal funds $ 72,648 $ -0- $ -0- $ 72,648
Eurodollar time deposits 180,000 -0- -0- 180,000
------------ ------------ ------------ -------------
$ 252,648 $ -0- $ -0- $ 252,648
============ ============ ============ =============
</TABLE>
The weighted average portfolio yields on other investments were 4.92%
and 5.91% at December 31, 1998, and 1997, respectively. There were no sales of
other investments during 1998, 1997, or 1996.
At December 31, 1998, the other investments portfolio had maturities as
follows:
<TABLE>
<CAPTION>
Amortized Fair
Maturity Cost Value
------------------------------------ -------------- --------------
<S> <C> <C> <C>
1999 $ 166,896 $ 166,896
2000 through 2003 67,185 67,387
2004 through 2008 51,569 51,530
2009 and thereafter 136,735 136,695
-------------- --------------
$ 422,385 $ 422,508
============== ==============
</TABLE>
NOTE D - Mortgage-Backed Securities Available for Sale
Mortgage-backed securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FNMA $ 42,958 $ 1,168 $ 23 $ 44,103
FHLMC 39,234 1,536 47 40,723
GNMA 26,833 1,882 11 28,704
Other 58 -0- 3 55
-------------- ------------- ------------- --------------
$ 109,083 $ 4,586 $ 84 $ 113,585
============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FNMA $ 53,855 $ 2,365 $ 62 $ 56,158
FHLMC 56,822 3,147 72 59,897
GNMA 38,110 3,097 8 41,199
Other 77 -0- 4 73
------------- ------------- ------------- --------------
$ 148,864 $ 8,609 $ 146 $ 157,327
============= ============= ============= ==============
</TABLE>
The weighted average portfolio yields on mortgage-backed securities
available for sale were 9.15% and 9.18% at December 31, 1998, and 1997,
respectively. There were no sales of securities from the mortgage-backed
securities available for sale portfolio in 1998, 1997, or 1996.
At December 31, 1998, mortgage-backed securities available for sale had
contractual maturities as follows:
<TABLE>
<CAPTION>
Amortized Fair
Maturity Cost Value
------------------------------------- -------------- --------------
<S> <C> <C> <C>
1999 through 2003 $ 320 $ 322
2004 through 2008 2,259 2,297
2009 and thereafter 106,504 110,966
-------------- --------------
$ 109,083 $ 113,585
============== ==============
</TABLE>
F-15
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE E - Mortgage-Backed Securities Held to Maturity
Mortgage-backed securities held to maturity are summarized as follows:
<TABLE>
December 31, 1998
-------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FNMA $ 493,466 $ 10,761 $ -0- $ 504,227
FHLMC 41,107 3,218 -0- 44,325
GNMA 37,803 2,595 -0- 40,398
FNMA (with recourse) 3,884,347 70,997 -0- 3,955,344
REMIC 5,461,657 26,576 -0- 5,488,233
------------- ------------- ------------- --------------
$ 9,918,380 $ 114,147 $ -0- $ 10,032,527
============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
FNMA $ 639,902 $ 13,569 $ 1,973 $ 651,498
FHLMC 58,071 5,195 -0- 63,266
GNMA 54,056 4,916 -0- 58,972
FNMA (with recourse) 3,030,390 29,401 -0- 3,059,791
------------- ------------- ------------- --------------
$ 3,782,419 $ 53,081 $ 1,973 $ 3,833,527
============= ============= ============= ==============
</TABLE>
The weighted average portfolio yields on mortgage-backed securities
held to maturity were 7.18% and 7.15% at December 31, 1998, and 1997,
respectively. There were no sales of securities from the mortgage-backed
securities held to maturity portfolio during 1998, 1997, or 1996.
At December 31, 1998, mortgage-backed securities held to maturity had
contractual maturities as follows:
<TABLE>
<CAPTION>
Amortized Fair
Maturity Cost Value
------------------------------------- -------------- --------------
<S> <C> <C> <C>
2004 through 2008 $ 372 $ 382
2009 and thereafter 9,918,008 10,032,145
--------------- --------------
$ 9,918,380 $10,032,527
============== ==============
</TABLE>
F-16
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE F - Loans Receivable
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
-------------- --------------
Loans collateralized primarily by first deeds of trust:
<S> <C> <C>
One- to four-family dwelling units $21,639,015 $28,978,476
Over four-family dwelling units 4,260,631 4,462,990
Commercial property 65,865 82,888
Land 798 977
-------------- --------------
25,966,309 33,525,331
Loans on savings accounts 25,279 28,167
-------------- --------------
25,991,588 33,553,498
Less:
Undisbursed loan funds 3,080 3,306
Unearned fees and discounts 17,629 45,953
Unamortized discount arising from acquisitions 5,125 10,250
Allowance for loan losses 244,466 233,280
-------------- --------------
$25,721,288 $33,260,709
============== ==============
</TABLE>
In addition to loans receivable, WSL services loans for others. At
December 31, 1998, and 1997, the amount of loans serviced for others
(non-affiliated) was $6,234,537 and $4,403,254, respectively, including $1.8
billion in 1998 and $1.0 billion in 1997 of loans that were securitized into
FNMA MBS with recourse.
During 1997, the Company desecuritized $856 million of MBS with
recourse into adjustable rate mortgages which had a balance of $634 million at
December 31, 1998. These adjustable rate mortgages have been separately
identified as "held to maturity" and it is the Company's intention to hold them
to maturity.
At December 31, 1998, and 1997, the Company had $135 million and $23
million, respectively, in loans held for sale, all of which are carried at the
lower of cost or market. At December 31, 1998 and 1997, the balance outstanding
of loans sold with recourse amounted to $1.4 billion and $653 million,
respectively, and had a valuation liability of $2.3 million and $886 thousand as
of December 31, 1998 and 1997, respectively.
Capitalized mortgage servicing rights are included in "Prepaid expenses
and other assets" on the Consolidated Statement of Financial Condition. The
following is a summary of capitalized mortgage servicing rights:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance at January 1 $ 11,116 $ 9,325
New capitalized mortgage servicing rights from loan sales 22,680 4,914
Amortization of capitalized mortgage servicing rights (5,161) (3,123)
----------- -----------
Balance at December 31 $ 28,635 $ 11,116
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
A summary of the changes in the allowance for loan losses is as
follows:
Year Ended December 31
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Balance at January 1 $ 233,280 $ 195,702 $ 141,988
Provision for loan losses charged to expense 11,260 57,609 84,256
Less loans charged off (1,387) (20,818) (31,239)
Recoveries 1,313 787 697
------------ ------------- ------------
Balance at December 31 $ 244,466 $ 233,280 $ 195,702
============ ============= ============
</TABLE>
F-17
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
The following is a summary of impaired loans:
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Nonperforming loans $ 262,332 $ 317,550
Troubled debt restructured 22,774 43,795
Other impaired loans 70,621 71,022
------------ ------------
$ 355,727 $ 432,367
============ ============
</TABLE>
The portion of the allowance for loan losses that was specifically
provided for impaired loans was $18,409 and $19,848 at December 31, 1998 and
1997, respectively. The average recorded investment in total impaired loans was
$394,938 and $495,592 during 1998 and 1997, respectively. All amounts involving
impaired loans have been measured based upon the fair value of the related
collateral. The amount of interest income recognized during the years ended
December 31, 1998, 1997, and 1996 on the total of impaired loans at each yearend
was $17,265 (1998), $20,064 (1997), and $25,140 (1996).
NOTE G - Interest Earned But Uncollected
<TABLE>
<CAPTION>
December 31
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Loans receivable $ 96,065 $ 135,262
Mortgage-backed securities 81,051 27,947
Interest rate swaps 20,398 41,990
Other 11,814 11,724
-------------- --------------
$ 209,328 $ 216,923
============== ==============
</TABLE>
<TABLE>
<CAPTION>
NOTE H - Real Estate Held for Sale or Investment
December 31
---------------------------------
1998 1997
-------------- --------------
Real estate acquired through foreclosure of loans, net of
<S> <C> <C>
allowance for losses $ 42,572 $ 61,517
Real estate in judgement, net of allowance for losses 74 67
Real estate held for investment, net of allowance for losses 3,050 422
-------------- --------------
$ 45,696 $ 62,006
============== ==============
</TABLE>
<TABLE>
<CAPTION>
NOTE I - Premises and Equipment
December 31
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Land $ 69,319 $ 61,178
Building and leasehold improvements 187,216 175,834
Furniture, fixtures, and equipment 185,827 158,162
-------------- --------------
442,362 395,174
Accumulated depreciation and amortization 169,841 154,967
-------------- --------------
$ 272,521 $ 240,207
============== ==============
</TABLE>
Depreciation and amortization, computed by the straight-line method for
financial statement purposes, are provided over the useful lives of the various
classes of premises and equipment.
The aggregate future rentals under long-term operating leases on land
or premises in effect on December 31, 1998, and which expire between 1999 and
2064, amounted to approximately $191,651. The approximate minimum payments
during the five years ending 2003 are $18,600 (1999), $16,741 (2000), $15,171
(2001), $14,089 (2002), and $12,575 (2003). Certain of the leases provide for
options to renew and for the payment of taxes, insurance, and maintenance costs.
The rental expense for the year amounted to $20,350 (1998), $19,531 (1997), and
$18,289 (1996).
F-18
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE J - Deposits
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
Rate* Amount Rate* Amount
-------- -------------- --------------------------
Deposits by rate:
<S> <C> <C> <C> <C>
Interest-bearing checking accounts 2.06% $ 102,874 1.75% $ 85,343
Passbook accounts 1.85 514,265 2.14 528,727
Money market deposit accounts 4.10 8,532,261 3.95 4,160,734
Term certificate accounts with original
maturities of:
4 weeks to 1 year 4.70 5,893,772 5.15 8,996,965
1 to 2 years 5.19 7,717,692 5.47 5,750,387
2 to 3 years 5.39 1,417,606 5.45 1,478,756
3 to 4 years 5.29 368,615 5.67 431,400
4 years and over 5.67 1,150,056 5.87 1,440,434
Retail jumbo CDs 4.96 521,478 5.54 711,010
Wholesale CDs 0.00 -0- 5.86 525,305
All other 7.14 476 7.62 656
-------------- --------------
$26,219,095 $24,109,717
============== ==============
</TABLE>
<TABLE>
<CAPTION>
*Weighted average interest rate including the impact of interest rate swaps.
December 31
------------------------------------
1998 1997
-------------- --------------
Deposits by remaining maturity at yearend:
<S> <C> <C>
No contractual maturity $ 9,149,400 $ 4,774,804
Maturity within one year 15,299,079 16,569,780
1 to 5 years 1,767,564 2,752,586
Over 5 years 3,052 12,547
-------------- --------------
$26,219,095 $24,109,717
============== ==============
</TABLE>
At December 31, the weighted average cost of deposits was 4.67% (1998)
and 5.04% (1997).
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Interest-bearing checking accounts $ 1,184 $ 1,100 $ 7,536
Passbook accounts 14,027 15,989 17,967
Money market deposit accounts 257,145 70,810 25,294
Term certificate accounts 1,012,987 1,121,747 1,010,617
-------------- --------------- --------------
$ 1,285,343 $ 1,209,646 $ 1,061,414
============== =============== ==============
</TABLE>
F-19
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE K - Advances from Federal Home Loan Banks
Advances are secured by pledges of $8,882,065 of certain loans and
MBS-REMIC principal, capital stock of the Federal Home Loan Banks, and other MBS
with a market value of $470,183, and these borrowings have maturities and
interest rates as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------
Receive
Stated Fixed Adjusted
Maturity Amount Rate Swaps Rate*
-------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
1999 $ 29,039 6.76% 6.76%
2000 1,591,070 5.74 5.74
2001 1,023,403 5.74 5.74
2002 237,707 5.60 5.60
2003 2,108,855 5.59 (.05)% 5.54
2004 and thereafter 1,173,398 5.72 5.72
--------------
$ 6,163,472
==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------------
Receive
Stated Fixed Adjusted
Maturity Amount Rate Swaps Rate*
----------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998 $ 1,478,629 5.89% 5.89%
1999 576,471 6.04 6.04
2000 2,188,592 5.82 (.01)% 5.81
2001 1,171,304 5.85 5.85
2002 1,235,305 5.96 5.96
2003 and thereafter 1,866,304 5.47 (.06) 5.41
-------------
$ 8,516,605
=============
</TABLE>
*Weighted average interest rate adjusted for impact of interest rate swaps.
At December 31, the weighted average adjusted interest rate was 5.67%
(1998) and 5.78% (1997). These borrowings averaged $7,389,038 (1998) and
$7,813,493 (1997) and the maximum outstanding at any monthend was $8,625,262
(1998) and $8,516,605 (1997).
F-20
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE L - Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by
mortgage-backed securities with a market value of $1,257,627 and $2,398,471 at
December 31, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------
Receive
Stated Fixed Adjusted
Maturity Amount Rate Swaps Rate*
------------------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1999 $ 585,401 5.09% (.03)% 5.06%
2000 600,000 5.72 5.72
2001 67,068 5.48 5.48
-------------
$ 1,252,469
=============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------------
Pay Receive
Stated Fixed Fixed Adjusted
Maturity Amount Rate Swaps Swaps Rate*
------------------------ ------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998 $ 1,084,586 5.69% (.03)% 5.66%
1999 556,600 5.86 (.03)% 5.83
2000 600,000 5.75 5.75
2001 92,862 5.84 5.84
-------------
$ 2,334,048
=============
</TABLE>
*Weighted average interest rate adjusted for impact of interest rate swaps.
At December 31, these liabilities had a weighted average adjusted
interest rate of 5.39% (1998) and 5.73% (1997). These borrowings averaged
$1,877,396 (1998) and $2,563,891 (1997) and the weighted average interest rate
on these averages was 5.67% for 1998 and 5.61% for 1997. The maximum outstanding
at any monthend was $2,447,124 (1998) and $2,955,649 (1997). At the end of 1998
and 1997, all of the agreements to repurchase with brokers/dealers and with the
Federal Home Loan Bank of San Francisco were to reacquire the same securities.
NOTE M - Medium-Term Notes
Medium-term notes are unsecured obligations of WSL. There were no
medium-term notes outstanding at December 31, 1998. The balance of medium-term
notes outstanding at December 31, 1997 was $109,992 with a weighted average
interest rate of 6.19%. The entire amount matured in 1998.
F-21
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE N - Subordinated Notes
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
-------------- --------------
Parent:
Subordinated notes, unsecured, due from
2000 to 2003, at coupon rates of 6.00%
to 10.25%, net of unamortized discount
<S> <C> <C>
of $3,065 (1998) and $4,209 (1997) $ 811,935 $ 1,010,791
WSL:
Subordinated note, unsecured, due July 1,
2000, callable on April 1, 1999,
at a coupon rate of 9.90%,
net of unamortized discount
of $182 (1998) and $303 (1997) 99,818 99,697
-------------- --------------
$ 911,753 $ 1,110,488
============== ==============
</TABLE>
At December 31, subordinated notes had a weighted average interest rate
of 7.90% (1998) and 8.11% (1997). WSL intends in 1999 to exercise its right to
call the subordinated note, due July 1, 2000. At December 31, 1998, subordinated
notes had maturities and interest rates as follows:
<TABLE>
<CAPTION>
Maturity Rate* Amount
------------------------------------ ---------- --------------
<S> <C> <C> <C>
1999 10.04% $ 99,818
2000 8.89 214,586
2002 7.72 398,196
2003 6.12 199,153
--------------
$ 911,753
==============
</TABLE>
*Weighted average interest rate.
F-22
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE O - Taxes on Income
The following is a comparative analysis of the provision for federal
and state taxes on income.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Federal income tax:
<S> <C> <C> <C>
Current $ 225,271 $ 181,304 $ (35,754)
Deferred 6,052 3,193 1,863
State tax:
Current 55,627 46,678 33,742
Deferred 5,127 1,882 (1,583)
-------------- -------------- --------------
$ 292,077 $ 233,057 $ (1,732)
============== ============== ==============
</TABLE>
The amounts of net deferred liability included in taxes on income in
the Consolidated Statement of Financial Condition are:
<TABLE>
<CAPTION>
December 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Federal income tax $ 197,659 $ 156,332
State tax 74,454 58,352
</TABLE>
The deferred tax liability results from changes in the amounts of
temporary differences during the year. The components of the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1997
--------------- ---------------
Deferred tax liabilities:
<S> <C> <C>
Unrealized gains on debt and equity securities $ 148,171 $ 103,390
FHLB stock dividends 108,212 91,710
Loan fees and interest income 92,874 90,276
Bad debt reserve 25,957 27,651
Depreciation 16,162 15,443
Other deferred tax liabilities 5,691 5,376
--------------- ---------------
Gross deferred tax liabilities 397,067 333,846
Deferred tax assets:
Provision for losses on loans 93,737 89,678
State taxes 21,092 17,414
Loan discount primarily related to acquisitions 2,426 4,561
Other deferred tax assets 7,699 7,509
--------------- ---------------
Gross deferred tax assets 124,954 119,162
--------------- ---------------
Net deferred tax liability $ 272,113 $ 214,684
=============== ===============
</TABLE>
F-23
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
A reconciliation of income taxes at the federal statutory corporate
rate to the effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------- ----------- ----------- ----------- ----------- -----------
Computed standard
<S> <C> <C> <C> <C> <C> <C>
corporate tax expense $ 258,709 35.0% $ 205,518 35.0% $128,864 35.0%
Increases (reductions) in
taxes resulting from:
Net financial income, not
subject to income tax,
primarily related to
acquisitions (7,754) (1.0) (4,163) (.7) (150,963) (41.0)
State tax, net of federal
income tax benefit 42,504 5.7 33,564 5.7 22,133 6.0
Other (1,382) (.2) (1,862) (.3) (1,766) (.5)
----------- ------------ ----------- ----------- ----------- -----------
$ 292,077 39.5% $ 233,057 39.7% $ (1,732) (0.5)%
=========== =========== =========== =========== =========== ===========
</TABLE>
"Net financial income, not subject to income tax, primarily related to
acquisitions," includes $139 million of tax benefits realized in 1996 from
operating losses which had been accumulated at the predecessor institution of
Beach Federal Savings and Loan Association (Beach) up to the time of the
government approved transaction with Beach in 1988.
In accordance with Financial Accounting Standards Board Pronouncement
109, "Accounting for Income Taxes," a deferred tax liability has not been
recognized for the tax bad debt reserve of WSL that arose in tax years that
began prior to December 31, 1987. At December 31, 1998 and 1997, the portion of
the tax bad debt reserve attributable to pre-1988 tax years was approximately
$252 million. The amount of unrecognized deferred tax liability at December 31,
1998 and 1997, was approximately $88 million. This deferred tax liability could
be recognized if certain distributions are made with respect to the stock of
WSL, or the bad debt reserve is used for any purpose other than absorbing bad
debt losses.
NOTE P - Stockholders' Equity
The Company's Board of Directors, through three separate actions,
authorized the purchase by the Company of up to 12.2 million shares of Golden
West's common stock. As of December 31, 1998, 9,496,616 of such shares had been
repurchased and retired at a cost of $461 million since October 28, 1993. During
1998, 1,001,700 of the shares were purchased and retired at a cost of $80
million.
F-24
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE Q - Earnings Per Share
Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS
in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, but uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted average
number of shares outstanding.
The following is a summary of the calculation of basic and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Earnings before cumulative effect of change in
<S> <C> <C> <C>
accounting for goodwill and extraordinary item $ 447,091 $ 354,138 $ 369,913
Cumulative effect of change in accounting
for goodwill -0- -0- (205,242)
Extraordinary item (12,511) -0- -0-
-------------- -------------- --------------
Net earnings $ 434,580 $ 354,138 $ 164,671
============== ============== ==============
Weighted average shares 57,243,756 56,940,494 57,989,327
Add: Options outstanding at yearend 1,695,630 2,209,750 2,674,215
Less: Shares assumed purchased back with
proceeds from the exercise of options 1,118,741 1,377,479 1,807,422
-------------- -------------- --------------
Diluted average shares outstanding 57,820,645 57,772,765 58,856,120
============== ============== ==============
Basic Earnings Per Share Calculation:
Basic earnings per share before cumulative effect
of change in accounting for goodwill and
extraordinary item $ 7.81 $ 6.22 $ 6.38
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.54)
Extraordinary item (.22) 0.00 0.00
-------------- -------------- --------------
Basic earnings per share $ 7.59 $ 6.22 $ 2.84
============== ============== ==============
Diluted Earnings Per Share Calculation:
Diluted earnings per share before cumulative effect
of change in accounting for goodwill and
extraordinary item $ 7.74 $ 6.13 $ 6.29
Cumulative effect of change in accounting
for goodwill 0.00 0.00 (3.49)
Extraordinary item (.22) 0.00 0.00
-------------- -------------- --------------
Diluted earnings per share $ 7.52 $ 6.13 $ 2.80
============== ============== ==============
</TABLE>
F-25
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE R - Stock Options
The Company's 1996 stock option plan authorizes the granting of options to
key employees to purchase up to 7 million shares of the Company's common stock.
The plan permits the issuance of either non-qualified stock options or
incentive stock options. Under terms of the plan, incentive stock options have
been granted at fair market value as of the date of grant and are exercisable
any time after two to six years and prior to ten years from the grant date.
Non-qualified options have been granted at fair market value as of the date of
grant and are exercisable after two to six years and prior to ten years and one
month from the grant date. At December 31, shares available for option amounted
to 2,473,550 (1998), 2,753,750 (1997), and 2,746,500 (1996). Outstanding options
at December 31, 1998, were held by 376 employees and had expiration dates
ranging from July 3, 1999, to July 27, 2008.
The following table sets forth the range of exercise prices on outstanding
options at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Range of Number of Exercise Remaining
Exercise Price Options Price Contractual Life
- ------------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
$18.50 - $22.81 497,850 $21.81 1 year
$34.50 - $65.00 914,580 42.37 5.5 years
$82.81 - $97.00 283,200 82.95 9 years
--------------
1,695,630
</TABLE>
All of the options in the range from $18.50 to $65.00 are exercisable. None
of the options in the range from $82.81 to $97.00 is exercisable.
A summary of the transactions of the stock option plan follows:
<TABLE>
<CAPTION>
Average
Exercise
Price per
Shares Share
------------- ------------
<S> <C> <C>
Outstanding, January 1, 1996 2,978,295 $ 26.70
Granted 116,000 $ 53.42
Exercised (401,780) $ 21.61
Canceled (18,300) $ 42.07
------------- ------------
Outstanding, December 31, 1996 2,674,215 $ 28.51
Granted 3,000 $ 92.00
Exercised (457,215) $ 18.50
Canceled (10,250) $ 43.63
------------- ------------
Outstanding, December 31, 1997 2,209,750 $ 30.60
Granted 287,850 $ 82.85
Exercised (794,320) $ 22.33
Canceled (7,650) $ 82.81
------------- ------------
Outstanding, December 31, 1998 1,695,630 $ 43.11
============= ============
</TABLE>
At December 31, options exercisable amounted to 1,412,430 (1998), 2,032,750
(1997), and 1,976,965 (1996).
F-26
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
The weighted-average fair value per share of options granted during
1998 was $23.30 per share, $27.08 per share for those granted during 1997, and
$15.21 per share for those granted during 1996. For these disclosure purposes,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively; dividend yield
of 0.9% (1998), 0.7% (1997) and 1.1% (1996); expected volatility of 24% (1998),
21% (1997) and 20% (1996); expected lives of 5.3 years for all years; and
risk-free interest rates of 4.54% (1998), 5.71% (1997) and 6.21% (1996). During
the initial phase-in period, the effects of applying SFAS 123 may not be
representative of the effects on reported net income for future years because
options vest over several years and additional awards can be made each year.
The Company applies APB 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method
prescribed by SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net income
<S> <C> <C> <C>
As reported $ 434,580 $354,138 $164,671
Pro forma 432,661 352,773 163,307
Basic earnings per share
As reported $ 7.59 $ 6.22 $ 2.84
Pro forma 7.56 6.20
2.82
Diluted earning per share
As reported $ 7.52 $ 6.13 $ 2.80
Pro forma 7.48 6.10 2.77
</TABLE>
NOTE S - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk
As of December 31, 1998, the balance of the Company's loans receivable,
MBS held to maturity with recourse and MBS-REMIC was $35 billion. Of that $35
billion balance, 33% were Northern California loans, 33% were Southern
California loans, 4% were Florida loans, 4% were Texas loans, 4% were Illinois
loans, 3% were New Jersey loans, 3% were Colorado loans, 3% were Washington
loans, and 2% were Arizona loans. No other single state made up more than 2% of
the total loan portfolio. The majority of these loans are secured by first deeds
of trust on one- to four-family residential property. Economic conditions and
real estate values in the states in which the Company lends are the key factors
that affect the credit risk of the Company's loan portfolio.
In order to reduce its exposure to fluctuations in interest rates, the
Company is a party to financial instruments with off-balance-sheet risk entered
into in the normal course of business. These financial instruments include
commitments to fund loans; commitments to purchase or sell securities,
mortgage-backed securities, and loans; and interest rate swaps and caps. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statement of
financial condition. The contract or notional amounts of these instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments. To limit credit exposure, among other things, the Company
enters into financial instrument contracts only with the Federal Home Loan Bank
of San Francisco and with major banks and securities dealers selected by the
Company upon the basis of their creditworthiness and other matters. The Company
initially has not required collateral or other security to support these
financial instruments because of the creditworthiness of the counterparties.
Commitments to originate mortgage loans are agreements to lend to a
customer providing that the customer satisfies the terms of the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Prior to entering each commitment, the Company
evaluates the customer's creditworthiness. The amount of outstanding loan
commitments at December 31, 1998, and 1997, was $408 million and $312 million,
respectively. Most of these commitments were for adjustable rate mortgages.
F-27
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
The Company enters into commitments to purchase or sell mortgage-backed
securities and other mortgage derivative products. The commitments generally
have a fixed delivery or receipt settlement date. The Company controls the
credit risk of such commitments through credit evaluations, limits, and
monitoring procedures. The interest rate risk of the commitment is considered by
the Company and may be matched with the appropriate funding sources. The Company
had no outstanding commitments to purchase or sell mortgage-backed securities as
of December 31, 1998, and 1997.
Interest rate swaps and caps are utilized to limit the Company's
sensitivity to interest rate changes. The Company is exposed to credit risk in
the event of nonperformance by the other parties to the interest rate swap and
cap agreements. However, the Company does not anticipate nonperformance by the
other parties.
NOTE T - Interest Rate Swaps and Caps
The Company has entered into interest rate swap and cap agreements with
selected banks and government security dealers to reduce its exposure to
fluctuations in interest rates. The Company had no caps outstanding during 1998
and 1997. The possible inability of counterparties to satisfy the terms of these
contracts exposes the Company to credit risk to the extent of the net difference
between the calculated pay and receive amounts on each transaction. Net
differences of that amount are generally settled quarterly. The Company has not
experienced any credit losses from interest rate swaps or caps.
The information presented below is based on interest rates at December
31, 1998. To the extent that rates change, variable interest rate information
will change. The basis swaps were contracts in which the Company received an
amount based on one interest rate index and paid an amount based on a different
interest rate index. The forward starting swaps were entered into to convert
floating rate assets to fixed-rate in the future in anticipation of future
prepayments of matched fixed-rate assets.
The following table illustrates the maturities and weighted average rates
as of December 31, 1998 for interest rate swaps held by the Company by product
type.
<TABLE>
<CAPTION>
Maturities of December 31, 1998 Interest Rate Swaps
- ----------------------------------------------------------------------------------------------------------------------
Maturity
--------------------------------------------------------------- Balance at
1999 2000 2001 2002 2003+ December 31, 1998
---------- ----------- ----------- ----------- ---------- -----------------
Receive fixed generic swaps:
<S> <C> <C> <C> <C> <C> <C>
Notional amount $ 329,373 $ 45,901 $ 34,401 $ 11,500 $ 91,300 $ 512,475
Weighted average receive rate 6.71% 6.73% 6.61% 6.52% 6.39% 6.64%
Weighted average pay rate 5.39% 5.37% 5.32% 5.31% 5.28% 5.36%
Pay fixed generic swaps:
Notional amount $ 172,000 $ 10,000 $ 96,495 $ 305,000 $ 315,600 $ 899,095
Weighted average receive rate 5.64% 5.61% 5.47% 5.43% 5.45% 5.48%
Weighted average pay rate 8.26% 6.08% 8.13% 7.54% 6.37% 7.32%
---------- ----------- ----------- ----------- ---------- ============
Total notional value $ 501,373 $ 55,901 $ 130,896 $ 316,500 $ 406,900 $1,411,570
========== =========== =========== =========== ========== ============
Total weighted average rate on swaps:
Receive rate 6.34% 6.53% 5.77% 5.47% 5.66% 5.90%
========== =========== =========== =========== ========== ============
Pay rate 6.37% 5.50% 7.39% 7.46% 6.14% 6.61%
========== =========== =========== =========== ========== ============
</TABLE>
During 1998, the range of floating interest rates received on swap
contracts was 4.94% to 6.19% and the range of floating interest rates paid on
swap contracts was 4.95% to 6.08%. The range of fixed interest rates received on
swap contracts was 4.86% to 8.68% and the range of fixed interest rates paid on
swap contracts was 5.38% to 9.14%.
F-28
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
Activity in interest rate swaps and caps is summarized as follows:
Interest Rate Swap and Cap Activity
For the Years Ended December 31, 1998, 1997, and 1996
(Notional amounts in millions)
<TABLE>
<CAPTION>
Receive Pay Forward Interest
Fixed Fixed Basis Starting Rate
Swaps Swaps Swaps Swaps Caps
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 3,221 $ 1,775 $ 43 $ 10 $ 225
Additions 905 -0- -0- -0- -0-
Maturities (1,545) (435) (43) -0- (225)
Forward starting, becoming effective -0- -0- -0- -0- -0-
----------- ----------- ----------- ------------ -----------
Balance, December 31, 1996 2,581 1,340 -0- 10 -0-
Additions 100 -0- -0- -0- -0-
Maturities (1,002) (232) -0- -0- -0-
Forward starting, becoming effective -0- -0- -0- (10) -0-
----------- ----------- ----------- ------------ -----------
Balance, December 31, 1997 1,679 1,108 -0- -0- -0-
Additions -0- -0- -0- -0- -0-
Maturities (1,167) (209) -0- -0- -0-
----------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 $ 512 $ 899 $ -0- $ -0- $ -0-
=========== =========== =========== ============ ===========
</TABLE>
Interest rate swaps and caps activity decreased net interest income by $9
million, $5 million, and $10 million for the years ended December 31, 1998,
1997, and 1996, respectively.
F-29
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE U - Disclosure About Fair Value of Financial Instruments
The Financial Accounting Standards Board Pronouncement No. 107,
"Disclosures About Fair Value of Financial Instruments," requires disclosure of
the fair value of financial instruments for which it is practicable to estimate
that value. The statement provides for a variety of different valuation methods,
levels of aggregation, and assessments of practicability of estimating fair
value.
Fair value estimates are not necessarily more relevant than historical
cost values. Fair values may have limited usefulness in evaluating portfolios of
long-term financial instrument assets and liabilities held by going concerns.
Moreover, there are significant inherent weaknesses in any estimating techniques
employed. Differences in the alternative methods and assumptions selected by
various companies as well as differences in the methodology utilized between
years may, and probably will, significantly limit comparability and usefulness
of the data displayed. For these reasons, as well as others, management believes
that the disclosure presented herein has limited relevance to the Company and
its operations.
The values presented are based upon information as of December 31,
1998, and 1997, and do not reflect any subsequent changes in fair value. Fair
values may have changed significantly following the balance sheet dates. The
estimates presented herein are not necessarily indicative of amounts that could
be realized in a current transaction.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
The historical cost amounts approximate the fair value of the following
financial instruments: cash, interest earned but uncollected,
investment in capital stock of Federal Home Loan Banks, other overnight
investments, demand deposits, and securities sold under agreements to
repurchase with brokers/dealers due within 90 days.
Fair values are based on quoted market prices for securities available
for sale, other long-term investments, mortgage-backed securities
available for sale, mortgage-backed securities held to maturity,
securities sold under agreements to repurchase with the Federal Home
Loan Bank of San Francisco and brokers/dealers with terms greater than
90 days, and subordinated notes.
Fair values are estimated using projected cash flows present valued at
replacement rates currently offered for instruments of similar
remaining maturities for: term deposits, advances from Federal Home
Loan Banks, consumer repurchase agreements, and medium-term notes.
For loans receivable and loan commitments, the fair value is estimated
by present valuing projected future cash flows, using current rates at
which similar loans would be made to borrowers and with assumed rates
of prepayment. Adjustment for credit risk is estimated based upon the
classification status of the loans.
For mortgage servicing rights, the fair value is estimated using a
discounted cash flow analysis based on the Company's estimated annual
cost of servicing, market prepayment rates, and market discount rates.
The fair value of interest rate swap agreements is the estimated amount
the Company would receive or pay to terminate the swap agreements on
the reporting date, considering current interest rates.
F-30
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash $ 250,875 $ 250,875 $ 172,241 $ 172,241
Securities available for sale 377,005 377,005 608,544 608,544
Other investments 422,385 422,508 252,648 252,648
Mortgage-backed securities available for sale 113,585 113,585 157,327 157,327
Mortgage-backed securities held to maturity 9,918,380 10,032,527 3,782,419 3,833,527
Loans receivable 25,721,288 25,703,930 33,260,709 33,223,479
Interest earned but uncollected 209,328 209,328 216,923 216,923
Investment in capital stock of Federal Home
Loan Bank 780,303 780,303 590,244 590,244
Capitalized mortgage servicing rights 28,635 42,470 11,116 16,900
Financial Liabilities:
Deposits 26,219,095 26,289,577 24,109,717 24,166,679
Advances from Federal Home Loan Banks 6,163,472 6,188,212 8,516,605 8,553,213
Securities sold under agreements to
repurchase 1,252,469 1,253,982 2,334,048 2,334,967
Medium-term notes -0- -0- 109,992 110,015
Subordinated notes 911,753 954,772 1,110,488 1,153,634
</TABLE>
<TABLE>
<CAPTION>
Off-Balance Sheet Instruments (based on estimated fair value at December 31):
-----------------------------------------------------------------------------------------
December 31
-----------------------------------------------------------------------------------------
1998 1997
------------------------------------------- -------------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain (Loss) Gains Losses Gain (Loss)
------------ ------------ ------------- ------------ ------------ -------------
Interest rate swaps:
<S> <C> <C> <C> <C> <C> <C>
Receive fixed $ 8,924 $ -0- $ 8,924 $ 9,646 $ 1,022 $ 8,624
Pay fixed -0- 45,923 (45,923) 1,397 35,875 (34,478)
Loan commitments 4,118 -0- 4,118 1,494 -0- 1,494
------------ ------------ ------------- ------------ ------------ -------------
Total $ 13,042 $ 45,923 $ (32,881) $ 12,537 $ 36,897 $ (24,360)
============ ============ ============= ============ ============ =============
</TABLE>
F-31
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued
-----------------------------------------------------
Years ended December 31, 1998 1997 and 1996
(Dollars in thousands except per share figures)
NOTE V - Parent Company Financial Information
Statement of Net Earnings
- -------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1998 1997 1996
------------ ------------ -------------
Revenues:
<S> <C> <C> <C>
Investment income $ 71,480 $ 57,020 $ 48,356
Insurance commissions 1,298 1,392 1,381
Other 5 20 19
------------ ------------ -------------
72,783 58,432 49,756
Expenses:
Interest 69,549 83,687 91,943
General and administrative 3,826 3,470 3,166
------------ ------------ -------------
73,375 87,157 95,109
------------ ------------ -------------
Loss before earnings of subsidiaries
and income tax credit (592) (28,725) (45,353)
Income tax credit 1,122 13,296 20,306
Earnings of subsidiaries before cumulative
effect of change in accounting for goodwill
and extraordinary item 446,561 369,567 394,960
------------ ------------ -------------
Earnings Before Cumulative Effect of Change
in Accounting for Goodwill and Extraordinary
Item 447,091 354,138 369,913
Cumulative effect of change in accounting
for goodwill -0- -0- (205,242)
Extraordinary item (12,511) -0- -0-
------------ ------------ -------------
Net Earnings $ 434,580 $ 354,138 $ 164,671
============ ============ =============
</TABLE>
Statement of Financial Condition
- --------------------------------
Assets
------
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash $ 21,937 $ 10,826
Securities available for sale 3,163 97,935
Overnight note receivable from subsidiary 72,977 76,146
Other investments 90 180,087
Notes receivable from subsidiary 800,000 600,000
Prepaid expenses and other assets 21,783 9,343
Investment in subsidiaries 3,035,222 2,766,544
-------------- --------------
$ 3,955,172 $ 3,740,881
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses $ 18,919 $ 32,059
Subordinated notes, net 811,935 1,010,791
Stockholders' equity 3,124,318 2,698,031
-------------- --------------
$ 3,955,172 $ 3,740,881
============== ==============
</TABLE>
F-32
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued
-----------------------------------------------------
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands except per share figures)
NOTE V- Parent Company Financial Information (Continued)
Statement of Cash Flows
- -----------------------
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1998 1997 1996
------------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 434,580 $ 354,138 $ 164,671
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiaries before cumulative
effect of change in accounting for goodwill and
extraordinary item (446,561) (369,567) (394,960)
Cumulative effect of change in accounting for goodwill -0- -0- 205,242
Extraordinary item 21,152 -0- -0-
Amortization of intangibles and discount on
subordinated notes 1,144 1,305 1,393
Other, net (6,618) 12,543 4,072
------------- ------------ ------------
Net cash provided by (used in)operating activities) 3,697 (1,581) (19,582)
Cash flows from investing activities:
Loans purchased from subsidiary (317,520) (80,661) -0-
Capital contributed to subsidiaries (171,007) (203,769) (500,225)
Dividends received from subsidiary 731,215 515,225 830,000
Purchases of securities available for sale (15) (2,878) (306,590)
Sales of securities available for sale 73,648 11,944 6,182
Matured securities available for sale -0- 50,000 350,000
Decrease (increase) in overnight notes receivable
from subsidiary 3,169 (76,146) -0-
Decrease (increase) in other investments 179,997 (27,602) 364,717
Issuances of notes receivable from subsidiaries (200,000) (600,000) (2,501,500)
Repayments of notes receivable from subsidiaries -0- 600,000 1,901,500
------------- ------------ ------------
Net cash provided by investing activities 299,487 186,113 144,084
Cash flows from financing activities:
Repayment of subordinated notes (200,000) (115,000) -0-
Dividends on common stock (29,488) (25,903) (22,893)
Exercise of stock options 17,738 8,456 8,683
Purchase and retirement of Company stock (80,323) (48,351) (105,756)
------------- ------------ ------------
Net cash used in financing activities (292,073) (180,798) (119,966)
Net increase in cash 11,111 3,734 4,536
Cash at beginning of period 10,826 7,092 2,556
------------- ------------ ------------
Cash at end of period $ 21,937 $ 10,826 $ 7,092
============= ============ ============
Supplemental cash flow information:
Loans contributed to subsidiary $ 317,520 $ 80,661 $ -0-
</TABLE>
F-33
<PAGE>
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued
-----------------------------------------------------
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands except per share figures)
NOTE W - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income $ 755,203 $ 740,569 $ 744,457 $ 722,324
Interest expense 511,489 501,372 506,315 476,055
-------------- -------------- -------------- --------------
Net interest income 243,714 239,197 238,142 246,269
Provision for loan losses 2,965 2,682 3,130 2,483
Non-interest income 26,003 43,097 30,823 37,690
Non-interest expense 83,674 87,036 87,505 96,292
-------------- -------------- -------------- --------------
Earnings before taxes on income and
extraordinary item 183,078 192,576 178,330 185,184
Taxes on income 72,997 75,626 70,309 73,145
-------------- -------------- -------------- --------------
Earnings before extraordinary item 110,081 116,950 108,021 112,039
Extraordinary item (7,710) -0- (4,801) -0-
-------------- -------------- -------------- --------------
Net earnings $ 102,371 $ 116,950 $ 103,220 $ 112,039
============== ============== ============== ==============
Basic earnings per share before
extraordinary item $ 1.92 $ 2.04 $ 1.87 $ 1.97
Extraordinary item (.13) 0.00 (.08) 0.00
-------------- -------------- -------------- --------------
Basic earnings per share $ 1.79 $ 2.04 $ 1.79 $ 1.97
============== ============== ============== ==============
Diluted earnings per share before
extraordinary item $ 1.89 $ 2.01 $ 1.85 $ 1.95
Extraordinary item (.13) 0.00 (.08) 0.00
-------------- -------------- -------------- --------------
Diluted earnings per share $ 1.76 $ 2.01 $ 1.77 $ 1.95
============== ============== ============== ==============
Cash dividends per share $ .125 $ .125 $ .125 $ .14
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income $ 674,279 $ 690,239 $ 718,202 $ 749,777
Interest expense 455,587 473,659 496,057 516,699
-------------- -------------- -------------- --------------
Net interest income 218,692 216,580 222,145 233,078
Provision for loan losses 20,695 13,111 9,980 13,823
Non-interest income 19,232 19,810 20,420 21,806
Non-interest expense 79,170 78,627 83,234 85,928
-------------- -------------- -------------- --------------
Earnings before taxes on income 138,059 144,652 149,351 155,133
Taxes on income 54,685 57,375 59,344 61,653
-------------- -------------- -------------- --------------
Net earnings $ 83,374 $ 87,277 $ 90,007 $ 93,480
============== ============== ============== ==============
Basic earnings per share $ 1.45 $ 1.53 $ 1.59 $ 1.65
============== ============== ============== ==============
Diluted earnings per share $ 1.43 $ 1.51 $ 1.56 $ 1.62
============== ============== ============== ==============
Cash dividends per share $ .11 $ .11 $ .11 $ .125
============== ============== ============== ==============
</TABLE>
F-34
EXHIBIT 21(a)
SUBSIDIARIES OF REGISTRANT:
---------------------------
WORLD SAVINGS AND LOAN ASSOCIATION
California Corp. Inc. October 26, 1912
Federally Chartered September 24, 1981
WORLD SAVINGS BANK, FSB
Federal Savings Bank, Inc. July 31, 1987
Federally Chartered January 20, 1995
WORLD SAVINGS BANK, SSB
Texas State Savings Bank, Inc. January 12, 1995
THE 1901 CORPORATION
California Corp. Inc. March 29, 1984
ATLAS ADVISORS, INC.
California Corp. Inc. May 6, 1987
ATLAS SECURITIES, INC.
California Corp. Inc. May 6, 1987
WORLD MORTGAGE INVESTORS, INC.
Maryland Corp. Inc. March 13, 1998
WORLD REAL ESTATE INVESTORS, INC.
Maryland Corp. Inc. March 13, 1998
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post Effective Amendment No. 2
to Registration Statement No. 2-66913 on Form S-8, Registration Statement No.
33-14833 on Form S-8, Registration Statement No. 33-29286 on Form S-3,
Registration Statement No. 33-40572 on Form S-8, Registration Statement No.
33-48976 on Form S-3, Registration Statement No. 33-57882 on Form S-3 and
Amendment No. 1 to Registration Statement No. 33-61293 on Form S-3 of our report
dated January 20, 1999 appearing in this Annual Report on Form 10-K of Golden
West Financial Corporation for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Oakland, CA
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 250,875
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 166,896
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 490,590
<INVESTMENTS-CARRYING> 9,918,380
<INVESTMENTS-MARKET> 10,032,527
<LOANS> 25,721,288
<ALLOWANCE> 244,466
<TOTAL-ASSETS> 38,468,729
<DEPOSITS> 26,219,095
<SHORT-TERM> 714,257
<LIABILITIES-OTHER> 797,622
<LONG-TERM> 7,613,437
0
0
<COMMON> 5,686
<OTHER-SE> 3,118,632
<TOTAL-LIABILITIES-AND-EQUITY> 38,468,729
<INTEREST-LOAN> 2,254,427
<INTEREST-INVEST> 209,807
<INTEREST-OTHER> 498,319
<INTEREST-TOTAL> 2,962,553
<INTEREST-DEPOSIT> 1,285,343
<INTEREST-EXPENSE> 1,995,231
<INTEREST-INCOME-NET> 967,322
<LOAN-LOSSES> 11,260
<SECURITIES-GAINS> 13,480
<EXPENSE-OTHER> 354,507
<INCOME-PRETAX> 739,168
<INCOME-PRE-EXTRAORDINARY> 739,168
<EXTRAORDINARY> (12,511)
<CHANGES> 0
<NET-INCOME> 434,580
<EPS-PRIMARY> 7.59
<EPS-DILUTED> 7.52
<YIELD-ACTUAL> 7.30
<LOANS-NON> 262,332
<LOANS-PAST> 0
<LOANS-TROUBLED> 22,774
<LOANS-PROBLEM> 70,621
<ALLOWANCE-OPEN> 233,280
<CHARGE-OFFS> 1,387
<RECOVERIES> 1,313
<ALLOWANCE-CLOSE> 244,466
<ALLOWANCE-DOMESTIC> 244,466
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
