SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the Quarter Ended September 30, 1999 Commission File Number 1-4629
GOLDEN WEST FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Delaware 95-2080059
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1901 Harrison Street, Oakland, California 94612
- ----------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 446-3420
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
The number of shares outstanding of the registrant's common stock on
October 31, 1999, was 53,869,754 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Golden West Financial
Corporation and subsidiaries (Golden West or Company) for the three and nine
months ended September 30, 1999 and 1998 are unaudited. In the opinion of the
Company, all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair statement of the results for such three and nine month
periods have been included. The operating results for the three and nine months
ended September 30, 1999, are not necessarily indicative of the results for the
full year.
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 September 30 December 31
1999 1998 1998
------------ ------------- -------------
(Unaudited)
---------------------------
Assets:
<S> <C> <C> <C>
Cash $ 237,614 $ 199,747 $ 250,875
Securities available for sale at fair value 346,255 310,296 377,005
Other investments at cost 678,332 890,379 422,385
Purchased mortgage-backed securities available for sale
at fair value 84,540 125,107 113,585
Purchased mortgage-backed securities held to maturity
at cost 449,477 629,036 572,376
Mortgage-backed securities held to maturity with recourse at cost 3,036,257 4,201,842 3,884,347
Mortgage-backed securities-REMICs held to maturity at cost 7,684,755 3,440,637 5,461,657
Loans receivable 25,856,148 27,940,415 25,721,288
Interest earned but uncollected 165,882 200,036 209,328
Investment in capital stock of Federal Home Loan Banks--at cost
which approximates fair value 533,623 768,601 780,303
Real estate held for sale or investment 17,232 45,659 45,696
Prepaid expenses and other assets 601,352 365,451 357,363
Premises and equipment--at cost less accumulated depreciation 274,010 265,800 272,521
------------ ------------- -------------
$39,965,477 $39,383,006 $38,468,729
============ ============= =============
Liabilities and Stockholders' Equity:
Deposits $26,549,828 $25,477,429 $26,219,095
Advances from Federal Home Loan Banks 8,109,333 6,866,847 6,163,472
Securities sold under agreements to repurchase 772,940 2,310,198 1,252,469
Accounts payable and accrued expenses 312,484 523,230 468,213
Taxes on income 286,193 307,969 329,409
Subordinated notes--net of discount 812,694 911,467 911,753
Stockholders' equity 3,122,005 2,985,866 3,124,318
------------ ------------- -------------
$39,965,477 $39,383,006 $38,468,729
============ ============= =============
</TABLE>
<PAGE>
Golden West Financial Corporation
Consolidated Statement of Net Earnings
(Unaudited)
(Dollars in thousands except per share figures)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
Interest Income:
<S> <C> <C> <C> <C>
Interest on loans $ 445,576 $ 529,135 $ 1,367,178 $ 1,745,201
Interest on mortgage-backed securities 204,444 156,234 562,558 333,965
Interest and dividends on investments 52,233 59,088 152,776 161,063
------------- ------------ ------------ -------------
702,253 744,457 2,082,512 2,240,229
Interest Expense:
Interest on deposits 309,640 327,589 923,274 963,878
Interest on advances 93,533 112,394 262,713 341,160
Interest on repurchase agreements 13,742 27,750 46,032 93,783
Interest on other borrowings 33,374 38,582 99,322 120,355
------------- ------------ ------------ -------------
450,289 506,315 1,331,341 1,519,176
------------- ------------ ------------ -------------
Net Interest Income 251,964 238,142 751,171 721,053
Provision for (recovery of) loan losses (1,253) 3,130 (1,406) 8,777
------------- ------------ ------------ -------------
Net Interest Income after Provision
for (Recovery of) Loan Losses 253,217 235,012 752,577 712,276
Non-Interest Income:
Fees 16,180 16,224 49,101 44,887
Gain on the sale of securities, MBS, and loans 3,001 6,417 21,313 28,001
Other 12,257 8,182 38,871 27,035
------------- ------------ ------------ -------------
31,438 30,823 109,285 99,923
Non-Interest Expense:
General and administrative:
Personnel 54,766 49,632 158,982 144,212
Occupancy 16,861 15,636 49,565 44,754
Deposit insurance 1,310 1,444 4,048 4,572
Advertising 3,378 2,189 8,586 7,653
Other 19,732 18,604 63,938 57,024
------------- ------------ ------------ -------------
96,047 87,505 285,119 258,215
Earnings before Taxes on Income and
Extraordinary Item 188,608 178,330 576,743 553,984
Taxes on Income 70,537 70,309 215,917 218,932
------------- ------------ ------------ -------------
Earnings before Extraordinary Item 118,071 108,021 360,826 335,052
Extraordinary Item:
Federal Home Loan Bank advance prepayment
penalty, net of tax benefit -0- (4,801) -0- (12,511)
------------- ------------ ------------ -------------
Net Earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541
============= ============ ============ =============
Basic earnings per share before extraordinary item $ 2.16 $ 1.87 $ 6.48 $ 5.84
Basic earnings per share on extraordinary
item, net of tax benefit 0.00 (.08) 0.00 (.22)
------------- ------------ ------------ -------------
Basic earnings per share $ 2.16 $ 1.79 $ 6.48 $ 5.62
============= ============ ============ =============
Diluted earnings per share before extraordinary item $ 2.14 $ 1.85 $ 6.42 $ 5.78
Diluted earnings per share on extraordinary item,
net of tax benefit 0.00 (.08) 0.00 (.22)
------------- ------------ ------------ -------------
Diluted earnings per share $ 2.14 $ 1.77 $ 6.42 $ 5.56
============= ============ ============ =============
</TABLE>
<PAGE>
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C>
Net earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary item -0- 8,117 -0- 21,152
Provision for (recovery of) loan losses (1,253) 3,130 (1,406) 8,777
Amortization of loan fees and discounts (1,962) (5,474) (12,481) (16,568)
Depreciation and amortization 6,926 6,369 20,892 18,060
Loans originated for sale (113,497) (291,424) (717,442) (625,382)
Sales of loans 168,310 375,872 1,129,073 776,038
Decrease in interest earned but uncollected 9,924 9,651 43,446 16,887
Federal Home Loan Bank stock dividends (8,038) (12,559) (28,993) (40,274)
Increase in prepaid expenses and other assets (10,318) (452) (245,678) (107,284)
Increase (decrease) in accounts payable and accrued (269,785) 2,433 (167,651) 76,905
expenses
Increase (decrease) in taxes on income (33,547) (11,412) (9,120) 31,819
Other, net (4,145) 785 (6,724) (5,087)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (139,314) 188,256 364,742 477,584
Cash Flows from Investing Activities:
New loan activity:
New real estate loans originated for portfolio (3,482,228) (1,886,820) (7,826,284) (5,091,687)
Real estate loans purchased (205) (648) (1,140) (2,337)
Other, net (21,560) (65,120) (58,694) (85,491)
------------ ------------ ------------ ------------
(3,503,993) (1,952,588) (7,886,118) (5,179,515)
Real estate loan principal payments:
Monthly payments 145,593 158,922 440,805 493,429
Payoffs, net of foreclosures 1,002,369 1,340,611 3,430,193 4,073,503
------------ ------------ ------------ ------------
1,147,962 1,499,533 3,870,998 4,566,932
Repayments of mortgage-backed securities 663,936 723,795 2,209,804 1,239,664
Proceeds from sales of real estate 25,438 31,484 93,241 118,020
Purchases of securities available for sale (2,740,856) (183,116) (4,205,922) (310,597)
Sales of securities available for sale -0- -0- 19 81,373
Matured securities available for sale 2,746,870 304,096 4,172,283 557,767
Increase in other investments (361,452) (746,379) (255,947) (637,731)
Purchases of Federal Home Loan Bank stock -0- (49,253) -0- (149,247)
Redemption of Federal Home Loan Bank stock 8,858 -0- 275,673 -0-
Additions to premises and equipment (8,707) (13,495) (26,151) (48,792)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (2,021,944) (385,923) (1,752,120) 237,874
</TABLE>
<PAGE>
Golden West Financial Corporation
Consolidated Statement of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------
------------- ------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
Cash Flows from Financing Activities:
Deposit activity:
<S> <C> <C> <C> <C>
Increase (decrease) in deposits, net $ (47,781) $ 213,571 $ (441,298) $ 589,384
Interest credited 261,903 270,150 772,031 778,328
------------- ------------ ------------ ------------
214,122 483,721 330,733 1,367,712
Additions to Federal Home Loan Bank advances 2,005,500 2,712,440 3,518,580 5,976,940
Repayments of Federal Home Loan Bank advances (7,565) (3,341,798) (1,572,717) (7,648,071)
Proceeds from agreements to repurchase securities 1,548,894 3,490,320 5,549,145 6,554,310
Repayments of agreements to repurchase securities (1,460,892) (2,996,555) (6,028,674) (6,578,160)
Repayments of medium-term notes -0- -0- -0- (110,000)
Repayment of subordinated debt -0- (100,000) (100,000) (200,000)
Dividends on common stock (7,663) (7,214) (23,417) (21,517)
Exercise of stock options 4,075 2,286 8,629 15,133
Purchase and retirement of Company stock (138,510) (44,299) (308,162) (44,299)
------------- ------------ ------------ ------------
Net cash provided by (used in) financing activities 2,157,961 198,901 1,374,117 (687,952)
------------- ------------ ------------ ------------
Net Increase (Decrease) in Cash (3,297) 1,234 (13,261) 27,506
Cash at beginning of period 240,911 198,513 250,875 172,241
------------- ------------ ------------ ------------
Cash at end of period $ 237,614 $ 199,747 $ 237,614 $ 199,747
============= ============ ============ ============
Supplemental cash flow information:
Cash paid for:
Interest $ 439,930 $ 510,620 $ 1,318,456 $ 1,525,208
Income taxes 104,090 77,500 225,194 181,582
Cash received for interest and dividends 712,177 754,108 2,125,958 2,257,116
Noncash investing activities:
Loans converted from adjustable rate to
fixed-rate 32,424 70,607 503,750 113,996
Loans transferred to foreclosed real estate 16,180 29,614 54,748 88,667
Loans securitized into MBS and MBS-REMICs -0- -0- 3,700,579 5,698,458
</TABLE>
<PAGE>
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
------------------------------------------------------------------------------------
Accumulated
Comprehensive
Income From
Additional Unrealized Total
Common Paid-in Retained Gains On Stockholders' Comprehensive
Stock Capital Earnings Securities Equity Income
---------- ----------- ---------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 5,686 $ 122,159 $2,781,925 $ 214,548 $ 3,124,318
Comprehensive income:
Net earnings -0- -0- 360,826 -0- 360,826 $ 360,826
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- (39,439) (39,439) (39,439)
Reclassification adjustment
for gains included in income -0- -0- -0- (750) (750) (750)
--------------
Comprehensive Income $ 320,637
==============
Cash dividends on common
stock ($.42 per share) -0- -0- (23,417) -0- (23,417)
Common stock issued upon
exercise of stock options,
including tax benefits 35 8,594 -0- -0- 8,629
Purchase and retirement of
Company stock (322) -0- (307,840) -0- (308,162)
---------- ----------- ---------- -------------- -------------
Balance at September 30, 1999 $ 5,399 $ 130,753 $2,811,494 $ 174,359 $ 3,122,005
========== =========== ========== ============== =============
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
------------------------------------------------------------------------------------
Accumulated
Comprehensive
Income From
Additional Unrealized Total
Common Paid-in Retained Gains On Stockholders' Comprehensive
Stock Capital Earnings Securities Equity Income
---------- ----------- ---------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 5,707 $ 85,532 $2,457,055 $ 149,737 $ 2,698,031
Comprehensive income:
Net earnings -0- -0- 322,541 -0- 322,541 $ 322,541
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- 23,998 23,998 23,998
Reclassification adjustment
for gains included in income -0- -0- -0- (8,022) (8,022) (8,022)
--------------
Comprehensive Income $ 338,517
==============
Cash dividends on common
stock ($.375 per share) -0- -0- (21,517) -0- (21,517)
Common stock issued upon
exercise of stock options,
including tax benefits 66 15,068 -0- -0- 15,134
Purchase and retirement of
Company stock (56) -0- (44,243) -0- (44,299)
----------- ----------- ---------- ------------- -------------
Balance at September 30, 1998 $ 5,717 $ 100,600 $2,713,836 $ 165,713 $ 2,985,866
========== =========== ========== ============== =============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis included herein covers those material
changes in liquidity and capital resources that have occurred since December
31, 1998, as well as certain material changes in results of operations during
the three and nine month periods ended September 30, 1999, and 1998,
respectively.
The following narrative is written with the presumption that the users
have read or have access to the Company's 1998 Annual Report on Form 10-K,
which contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 1998, and for the year then ended.
Therefore, only material changes in financial condition and results of
operations are discussed herein.
This report contains certain forward-looking statements, which are not
historical facts and pertain to future operating results of the Company. Such
statements are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
inherently subject to significant business, economic, and competitive
uncertainties and contingencies, many of which are beyond the Company's
control. In addition, these forward-looking statements are subject to change.
Actual results may differ materially from the results discussed in these
forward-looking statements for the reasons, among others, discussed under the
heading "Asset/Liability Management" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's
1998 Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, Golden West adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company
operates as a single segment and, therefore, SFAS 131 had no effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133"
(SFAS 137) which delayed the effective date of SFAS 133 until fiscal years
beginning after June 15, 2000. The Company is in the process of assessing the
impact of this statement on its financial statements and results of operations.
<PAGE>
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
<TABLE>
<CAPTION>
September 30 September 30 December 31
1999 1998 1998
------------- ------------ --------------
<S> <C> <C> <C>
Assets $ 39,965,477 $ 39,383,006 $ 38,468,729
Loans receivable including mortgage-backed securities 37,111,177 36,337,037 35,753,253
Deposits 26,549,828 25,477,429 26,219,095
Stockholders' equity 3,122,005 2,985,866 3,124,318
Stockholders' equity/total assets 7.81% 7.58% 8.12%
Book value per common share $ 57.83 $ 52.23 $ 54.95
Common shares outstanding 53,990,504 57,172,249 56,861,124
Diluted common shares outstanding 54,471,358 57,743,225 57,429,914
Yield on loan portfolio 7.02% 7.49% 7.36%
Yield on mortgage-backed securities 7.07% 7.23% 7.20%
Yield on investments 6.10% 6.20% 5.53%
Yield on earning assets 7.02% 7.40% 7.30%
Cost of deposits 4.50% 4.91% 4.67%
Cost of borrowings 5.53% 5.92% 5.87%
Cost of funds 4.78% 5.20% 4.96%
Yield on earning assets less cost of funds 2.24% 2.20% 2.34%
Ratio of nonperforming assets to total assets .61% .78% .79%
Ratio of troubled debt restructured to total assets .04% .06% .06%
World Savings Bank, FSB:
Total assets $ 35,186,048 $ 31,854,886 $ 31,912,264
Net worth 2,425,617 2,095,404 2,164,854
Net worth/total assets 6.89% 6.58% 6.78%
Regulatory capital ratios:
Core capital 6.89% 6.57% 6.77%
Risk-based capital 12.81% 12.76% 12.93%
World Savings and Loan Association:
Total assets $ 5,468,506 $ 8,288,587 $ 6,810,266
Net worth 649,136 804,414 687,778
Net worth/total assets 11.87% 9.71% 10.10%
Regulatory capital ratios:
Core capital 9.03% 7.91% 7.25%
Risk-based capital 17.64% 16.72% 16.24%
World Savings Bank, SSB:
Total assets $ 3,501,022 $ 3,426,447 $ 3,519,046
Net worth 198,539 182,914 186,411
Net worth/total assets 5.67% 5.34% 5.30%
Regulatory capital ratios:
Tier 1 leverage capital 5.51% 5.67% 5.26%
Total risk-based capital 26.52% 25.20% 25.15%
</TABLE>
<PAGE>
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
New real estate loans originated $3,595,725 $2,178,244 $8,543,726 $ 5,717,069
Fully indexed rate on new real estate loans 7.56% 7.76% 7.57% 7.76%
Current average rate on new real estate loans (a) 5.91% 6.13% 6.02% 6.20%
New adjustable rate mortgages as a percentage of
new real estate loans originated 94.53% 83.91% 88.82% 85.80%
Increase in deposits (b)(c) $ 214,122 $ 483,721 $ 330,733 $ 1,367,712
Earnings before extraordinary item 118,071 108,021 360,826 335,052
Net earnings 118,071 103,220 360,826 322,541
Basic earnings per share before extraordinary item 2.16 1.87 6.48 5.84
Diluted earnings per share before extraordinary item 2.14 1.85 6.42 5.78
Basic earnings per share 2.16 1.79 6.48 5.62
Diluted earnings per share 2.14 1.77 6.42 5.56
Cash dividends on common stock .14 .125 .42 .375
Average common shares outstanding 54,698,032 57,562,090 55,715,591 57,343,932
Average diluted common shares outstanding 55,163,060 58,182,842 56,176,340 57,997,076
Ratios:(d)
Net earnings/average net worth (ROE)(e) 15.01% 13.97% 15.25% 15.04%
Net earnings/average assets (ROA)(e) 1.21% 1.05% 1.24% 1.09%
Net interest income/average assets 2.58% 2.43% 2.59% 2.44%
General and administrative expense/average assets .98% .89% .98% .87%
Efficiency ratio (f) 33.89% 32.53% 33.14% 31.45%
</TABLE>
(a) The current rate reflects the actual rate being paid by the borrower at
time of origination.
(b) Includes a decrease of $525 million of wholesale deposits for the nine
months ended September 30, 1998.
(c) Includes the effect of the sale of three branches with a total of $119
million in deposits during the second quarter of 1999, the sale of one
branch with $29 million in deposits during the third quarter of 1999, and
the sale of one branch with $36 million in deposits in March of 1998.
(d) Ratios are annualized by multiplying the quarterly computation by four and
the nine-month computation by one and one-third. Averages are computed by
adding the beginning balance and each monthend balance during the quarter
and nine-month period and dividing by four and ten, respectively.
(e) The ratios for the three and nine months ended September 30, 1998 include
the extraordinary item. The ratios for the quarter ended September 30, 1998
excluding the extraordinary item are: ROE 14.62% and ROA 1.10%. The
year-to-date ratios as of September 30, 1998 excluding the extraordinary
item are: ROE 15.62% and ROA 1.24%.
(f) The efficiency ratio is calculated by dividing general and administrative
expense by net interest income plus other income.
<PAGE>
FINANCIAL CONDITION
The consolidated condensed balance sheet shown in the table below
presents the Company's assets and liabilities in percentage terms at September
30, 1999 and 1998, and December 31, 1998. The reader is referred to page 53 of
the Company's 1998 Annual Report on Form 10-K for similar information for the
years 1995 through 1998 and a discussion of the changes in the composition of
the Company's assets and liabilities in those years.
<TABLE>
<CAPTION>
TABLE 1
Consolidated Condensed Balance Sheet
In Percentage Terms
September 30
-------------------- December 31
1999 1998 1998
------- ------- -------------
Assets:
<S> <C> <C> <C>
Cash and investments 3.2% 3.6% 2.7%
Mortgage-backed securities 28.2 21.3 26.1
Loans receivable 64.7 70.9 66.9
Other assets 3.9 4.2 4.3
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
Liabilities and Stockholders' Equity:
Deposits 66.4% 64.7% 68.1%
Federal Home Loan Bank advances 20.3 17.4 16.0
Securities sold under agreements to repurchase 1.9 5.9 3.3
Other liabilities 1.6 2.1 2.1
Subordinated debt 2.0 2.3 2.4
Stockholders' equity 7.8 7.6 8.1
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
</TABLE>
For the first nine months of 1999 and 1998, the Company securitized
$3.7 billion and $5.7 billion, respectively, of loans into mortgage-backed
securities which caused the percentage of mortgage-backed securities to total
assets to increase from September 30, 1998 to September 30, 1999 and the
percentage of loans receivable to total assets to decrease from September 30,
1998 to September 30, 1999. For further discussion, see pages 12 and 13.
As the above table shows, the largest asset components are loans
receivable and mortgage-backed securities, which consist primarily of long-term
mortgages. Deposits represent the majority of the Company's liabilities. The
disparity between the repricing (maturity, prepayment, or interest rate change)
of deposits and borrowings and the repricing of mortgage loans and investments
can have a material impact on the Company's results of operations. The
difference between the repricing characteristics of assets and liabilities is
commonly referred to as "the gap."
<PAGE>
The following gap table shows that, as of September 30, 1999, the
Company's assets reprice sooner than its liabilities. If all repricing assets
and liabilities responded equally to changes in the interest rate environment,
then the gap analysis would suggest that the Company's earnings would rise when
interest rates increase and would fall when interest rates decrease. However,
the Company's earnings are also affected by the built-in reporting and repricing
lags inherent in the Eleventh District Cost of Funds Index (COFI), which is the
benchmark Golden West uses to determine the rate on the majority of its
adjustable rate mortgages (ARMs). The reporting lag occurs because of the time
it takes to gather the data needed to compute the index. As a result, the COFI
in effect in any month actually reflects the Eleventh District's cost of funds
at the level it was two months prior. The repricing lag occurs because COFI is
based on a portfolio of accounts, not all of which reprice immediately.
Therefore, COFI does not initially fully reflect a change in market interest
rates. Consequently, when the interest rate environment changes, the COFI lags
cause assets to initially reprice more slowly than liabilities, enhancing
earnings when rates are falling and holding down income when rates rise.
<TABLE>
<CAPTION>
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of September 30, 1999
(Dollars in millions)
Projected Repricing(a)
-------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
----------- ----------- ----------- ------------ -----------
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C>
Investments $ 670 $ 160 $ 17 $ 178 $ 1,025
Mortgage-backed securities 9,722 208 739 586 11,255
Loans receivable:
Rate-sensitive 22,049 2,402 220 -0- 24,671
Fixed-rate 49 135 426 471 1,081
Other(b) 710 -0- -0- -0- 710
Impact of interest rate swaps 540 140 (680) -0- -0-
----------- ----------- ----------- ------------ -----------
Total $ 33,740 $ 3,045 $ 722 $ 1,235 $ 38,742
=========== =========== =========== ============ ===========
Interest-Bearing Liabilities(c):
Deposits $ 16,108 $ 8,378 $ 2,037 $ 27 $ 26,550
FHLB advances 7,500 215 106 288 8,109
Other borrowings 773 100 713 -0- 1,586
Impact of interest rate swaps 248 (70) (178) -0- -0-
----------- ----------- ----------- ------------ ===========
Total $ 24,629 $ 8,623 $ 2,678 $ 315 $ 36,245
=========== =========== =========== =========== ===========
Repricing gap $ 9,111 $ (5,578) $ (1,956) $ 920 $ 2,497
=========== =========== =========== ============ ===========
Cumulative gap $ 9,111 $ 3,533 $ 1,577 $ 2,497
=========== =========== =========== ============
Cumulative gap as a percentage of
total assets 22.8% 8.8% 3.9%
=========== =========== ===========
</TABLE>
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect
scheduled repayments and projected prepayments of principal based on
current rates of prepayment.
(b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock.
(c) Liabilities with no maturity date, such as checking, passbook and money
market deposit accounts, are assigned zero months.
<PAGE>
CASH AND INVESTMENTS
The Office of Thrift Supervision (OTS) requires insured institutions,
such as World Savings Bank, FSB (WFSB), and World Savings and Loan Association
(WSL), to maintain a minimum amount of cash and certain qualifying investments
for liquidity purposes. At September 30, 1999 and 1998 and at December 31, 1998,
WFSB and WSL had liquidity in excess of the regulatory requirements. The state
of Texas requires insured institutions, such as World Savings Bank, SSB (WSSB),
to maintain a daily minimum amount of cash and certain qualifying investments
for liquidity purposes. WSSB had liquidity in excess of the requirement during
the periods under discussion.
At September 30, 1999 and 1998, and December 31, 1998, the Company had
securities available for sale in the amount of $346 million, $310 million, and
$377 million, respectively, including unrealized gains on securities available
for sale of $287 million, $274 million, and $358 million, respectively. At
September 30, 1999 and 1998, and December 31, 1998, the Company had no
securities held for trading in its investment securities portfolio.
Included in the Company's investment portfolio at September 30, 1999
and 1998, and December 31, 1998, were collateralized mortgage obligations (CMOs)
in the amount of $140 million, $98 million, and $196 million, respectively. The
Company holds CMOs on which both principal and interest are received. At
September 30, 1999, all of these CMOs qualified for inclusion in the regulatory
liquidity measurement. The Company does not hold any interest-only or
principal-only CMOs.
LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES
The Company invests in whole loans and mortgage-backed securities (MBS)
and, from time to time, the Company securitizes loans from its portfolio into
MBS and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs) that are
available to be used as collateral for borrowings. At September 30, 1999 and
1998, and December 31, 1998, the balance of loans receivable including
mortgage-backed securities was $37.1 billion, $36.3 billion, and $35.8 billion,
respectively. Included in the $37.1 billion at September 30, 1999, was $3.0
billion of Federal National Mortgage Association (FNMA) mortgage-backed
securities with the underlying loans subject to full credit recourse to the
Company and $7.7 billion of MBS-REMICs. Included in the $35.8 billion at
December 31, 1998, was $3.9 billion of FNMA MBS with the underlying loans
subject to full credit recourse to the Company and $5.5 billion of MBS-REMICs.
Included in the $36.3 billion at September 30, 1998, was $4.2 billion of FNMA
MBS with the underlying loans subject to full credit recourse to the Company and
$3.4 billion of MBS-REMICs.
At September 30, 1999 and 1998, and December 31, 1998, the Company had
MBS held to maturity in the amount of $11.2 billion, $8.3 billion, and $9.9
billion, respectively. At September 30, 1999 and 1998, and December 31, 1998,
the Company had MBS available for sale in the amount of $85 million, $125
million, and $114 million, respectively, including unrealized gains on MBS
available for sale of $2 million, $6 million, and $5 million, respectively. At
September 30, 1999 and 1998 and December 31, 1998, the Company had no trading
MBS.
<PAGE>
The Company securitized $3.7 billion and $6.4 billion of mortgage loans
into MBS-REMICs in the first nine months of 1999 and for the year ended December
31, 1998, respectively. MBS-REMICs are being used as collateral for borrowings.
The Company has the ability and intent to hold these MBS until maturity and,
accordingly, MBS-REMICs are classified as MBS held to maturity.
During 1998, the Company securitized $1.8 billion of adjustable rate
mortgages (ARMs) into FNMA COFI-indexed MBS. The Company has the ability and
intent to hold these MBS until maturity and, accordingly, these MBS are
classified as held to maturity.The FNMA MBS held to maturity are being used as
collateral for borrowings.
Repayments of MBS during the third quarter and first nine months of 1999
were $664 million and $2.2 billion, respectively, compared to $724 million and
$1.2 billion during the same periods of 1998. MBS repayments were lower during
the third quarter of 1999 as compared to the third quarter of 1998 due to a
decline in the repayment rates of the underlying mortgages. MBS repayments were
higher during the first nine months of 1999 as compared to the first nine months
of 1998 due to an increase in total MBS outstanding and an increase in the
prepayment rate of the underlying mortgages.
LOAN VOLUME
New loan originations for the three and nine months ended September 30,
1999, amounted to $3.6 billion and $8.5 billion, respectively, compared to $2.2
billion and $5.7 billion for the same periods in 1998. The high volume of
originations during 1999 was due to the renewed demand for adjustable rate
loans, the Company's primary product, as interest rates moved up and the cost of
fixed-rate loans increased. In addition, the Company increased the size of its
loan origination staff to take advantage of the favorable market conditions.
Refinanced loans constituted 35% and 41% of new loan originations for the three
and nine months ended September 30, 1999, compared to 42% and 43% for the three
and nine months ended September 30, 1998.
Loans originated for sale amounted to $113 million and $717 million for
the three and nine months ended September 30, 1999, compared to $291 million and
$625 million for the same periods in 1998. The reduction in loans originated for
sale during the third quarter of 1999 as compared to the third quarter of 1998
was attributable to the decrease in fixed-rate originations due to higher rates
being offered on fixed-rate loans. In addition, during the third quarter and
first nine months of 1999, $32 million and $504 million of loans were converted
at the customer's request from adjustable rate to fixed rate compared to $71
million and $114 million for the same periods in 1998. The Company sold $168
million and $1.1 billion of fixed-rate loans for the three and nine months ended
September 30, 1999, respectively, compared to $376 million and $776 million for
the same periods of 1998.
At September 30, 1999, the Company had lending operations in 29 states.
The largest source of mortgage origination is loans secured by residential
properties in California. For the three and nine months ended September 30,
1999, 62% and 64% of total loan originations were on residential properties in
California compared to 63% and 62% for the same periods in 1998. The five
largest states, other than California, for originations for the nine months
ended September 30, 1999, were Florida, Texas, Washington, Illinois, and Arizona
with a combined total of 19% of total originations, respectively. The percentage
of the total loan portfolio (including mortgage-backed securities with recourse
and MBS-REMICs) that is comprised of residential loans in California was 65% at
September 30, 1999 compared to 66% at September 30, 1998 and December 31, 1998.
<PAGE>
The Company originates adjustable rate mortgages tied to various indexes,
including the Eleventh District Cost of Funds Index (COFI), the Golden West Cost
of Savings Index (COSI), and the twelve-month rolling average of the One-Year
Treasury Constant Maturity (TCM).
The following table shows the distribution of ARM originations by index for
the third quarter and first nine months of 1999
and 1998.
<TABLE>
<CAPTION>
TABLE 3
Adjustable Rate Mortgage Originations by Index
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
ARM Index 1999 1998 1999 1998
- -------------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
COFI $ 945,825 $ 973,983 $ 2,256,015 $ 2,991,734
COSI 2,382,470 344,777 5,190,298 940,035
TCM 70,830 509,109 142,571 973,742
------------ ------------- ------------ ------------
$ 3,399,125 $ 1,827,869 $ 7,588,884 $ 4,905,511
============ ============= ============ ============
</TABLE>
The following table shows the distribution by index of the Company's
outstanding balance of adjustable rate mortgages (including ARM MBS with
recourse and ARM MBS-REMICs) at September 30, 1999 and 1998 and December 31,
1998.
<TABLE>
<CAPTION>
TABLE 4
Adjustable Rate Mortgage Portfolio by
Index (Including ARM MBS with recourse and
ARM MBS-REMICs)
(Dollars in thousands)
September 30 December 31
--------------------------------
ARM Index 1999 1998 1998
- -------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
COFI $ 26,451,321 $ 31,256,900 $ 29,761,484
COSI 6,580,191 932,147 1,703,283
TCM 1,209,742 1,018,831 1,256,775
Other 154,620 221,999 201,756
-------------- --------------- ---------------
$ 34,395,874 $ 33,429,877 $ 32,923,298
============== =============== ===============
</TABLE>
The tables on the following two pages show the Company's loan portfolio
by state at September 30, 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE 5
Loan Portfolio by State
September 30, 1999
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
------------------------- Real Total a% of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ---------------- ------------ ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
California $20,482,201 $3,341,495 $ 193 $ 30,322 $ 23,854,211 64.91%
Florida 1,622,784 16,234 -0- 504 1,639,522 4.46
Texas 1,486,019 60,920 434 1,248 1,548,621 4.21
Illinois 1,153,525 124,934 -0- -0- 1,278,459 3.48
New Jersey 1,236,155 -0- -0- 3,883 1,240,038 3.37
Colorado 926,423 173,075 -0- 5,218 1,104,716 3.01
Washington 633,838 463,754 -0- 656 1,098,248 2.99
Arizona 791,442 18,890 -0- -0- 810,332 2.20
Other (b) 4,124,093 44,805 55 10,679 4,179,632 11.37
------------ ----------- ---------- ------------- ------------ ---------
Totals $32,456,480 $4,244,107 $ 682 $ 52,510 36,753,779 100.00%
============ =========== ========== ============= =========
SFAS 91 net deferred loan costs 44,875
Loan discount on purchased loans (2,090)
Undisbursed loan funds (5,201)
Allowance for loan losses (233,277)
Loans to facilitate (LTF) interest reserve (353)
Troubled debt restructured (TDR) interest reserve (1,259)
Loans on deposits 20,686
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMICs 36,577,160
Loans securitized into FNMA MBS with recourse and MBS-REMICs (10,721,012)(c)
------------
Total loans receivable $25,856,148
============
</TABLE>
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) Includes states with loans less than 2% of total loans.
(c) The above schedule includes the September 30, 1999 balances of loans that
were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
Loan Portfolio by State
September 30, 1998
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
------------------------- Real Total a% of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ---------------- ------------ ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
California $20,097,429 $3,381,050 $ 216 $ 42,197 $ 23,520,892 65.65%
Florida 1,438,608 19,052 4 703 1,458,367 4.07
Texas 1,410,729 70,144 524 1,374 1,482,771 4.14
Illinois 1,186,384 152,000 -0- 1,481 1,339,865 3.74
New Jersey 1,227,348 -0- -0- 4,633 1,231,981 3.44
Colorado 1,022,793 206,054 -0- 5,975 1,234,822 3.45
Washington 542,281 416,926 -0- 693 959,900 2.68
Arizona 757,130 24,201 -0- -0- 781,331 2.18
Other (b) 3,751,002 53,569 68 13,579 3,818,218 10.65
------------ ----------- ---------- ------------- ------------ ---------
Totals $31,433,704 $4,322,996 $ 812 $ 70,635 35,828,147 100.00%
============ =========== ========== ============= =========
SFAS 91 net deferred loan fees (20,134)
Loan discount on purchased loans (3,309)
Undisbursed loan funds (3,321)
Allowance for loan losses (242,415)
Loans to facilitate interest reserve (514)
Troubled debt restructured interest reserve (2,214)
Loans on deposits 26,654
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMIC 35,582,894
Loans securitized into FNMA MBS with recourse and MBS-REMIC (7,642,479)(c)
------------
Total loans receivable $27,940,415
============
</TABLE>
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) Includes states with loans less than 2% of total loans.
(c) The above schedule includes the September 30, 1998 balances of loans that
were securitized and retained as FNMA MBS with recourse and MBS-REMIC.
<PAGE>
The Company continues to emphasize ARM loans with interest rates that
change periodically in accordance with movements in specified indexes. The
portion of the mortgage portfolio (including MBS and MBS-REMICs) composed of
rate-sensitive loans was 93% at September 30, 1999, 92% at September 30, 1998
and December 31, 1998. The Company's ARM originations for the first nine months
of 1999 constituted 89% of new mortgage loans made in 1999 compared to 86% for
the first nine months of 1998.
The weighted average maximum lifetime cap rate on the Company's ARM
loan portfolio (including ARMs swapped into MBS with recourse and MBS-REMICs)
was 12.49%, or 5.51% above the actual weighted average rate at September 30,
1999, versus 12.64%, or 5.27% above the weighted average rate at September 30,
1998.
Approximately $4.8 billion of the Company's ARM loans (including MBS
with recourse and MBS-REMICs) have terms that state that the interest rate may
not fall below a lifetime floor set at the time of origination or assumption. As
of September 30, 1999, $486 million of ARM loans had reached their rate floors.
The weighted average floor rate on the loans that had reached their floor was
7.62% at September 30, 1999 compared to 7.74% at September 30, 1998. Without the
floor, the average rate on these loans would have been 6.76% at September 30,
1999 and 7.17% at September 30, 1998.
Loan repayments consist of monthly loan amortization and loan payoffs.
For the three and nine months ended September 30, 1999, loan repayments were
$1.1 billion and $3.9 billion, respectively, compared to $1.5 billion and $4.6
billion in the same periods of 1998. The decrease in loan repayments was
primarily due to a decrease in loan prepayments during the third quarter of
1999.
MORTGAGE SERVICING RIGHTS
The Company accounts for mortgage servicing rights in accordance with
SFAS 125. Capitalized mortgage servicing rights are included in "Prepaid
expenses and other assets" on the Consolidated Statement of Financial Condition.
The following table shows the changes in capitalized mortgage servicing rights
for the three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 7
Capitalized Mortgage Servicing Rights
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Beginning balance of capitalized mortgage servicing rights $ 39,860 $ 15,749 $ 28,635 $ 11,116
New capitalized mortgage servicing rights from loan sales 2,785 5,822 19,244 12,410
Amortization of capitalized mortgage servicing rights (3,269) (1,381) (8,503) (3,336)
----------- ----------- ----------- ------------
Ending balance of capitalized mortgage servicing rights $ 39,376 $ 20,190 $ 39,376 $ 20,190
=========== =========== =========== ============
</TABLE>
The book value of Golden West's servicing rights did not exceed the fair
value at September 30, 1999 or 1998 and, therefore, no write-down of the
servicing rights to their fair value was necessary.
<PAGE>
ASSET QUALITY
One measure of the soundness of the Company's loan and MBS portfolio is
its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets
include non-accrual loans (loans, including loans swapped into MBS with recourse
and loans securitized into MBS-REMICs, that are 90 days or more past due) and
real estate acquired through foreclosure. No interest is recognized on
non-accrual loans. The Company's troubled debt restructured (TDRs) are made up
of loans on which delinquent payments have been capitalized or on which
temporary interest rate reductions have been made, primarily to customers
adversely impacted by economic conditions.
The following table shows the components of the Company's NPAs and TDRs
and the various ratios to total assets.
<TABLE>
<CAPTION>
TABLE 8
Nonperforming Assets and Troubled Debt Restructured
(Dollars in thousands)
September 30
-------------------------- December 31
1999 1998 1998
----------- ----------- --------------
<S> <C> <C> <C>
Non-accrual loans $ 230,777 $ 264,198 $ 262,332
Real estate acquired through foreclosure 14,256 44,537 42,572
Real estate in judgment 174 -0- 74
----------- ----------- ------------
Total nonperforming assets $ 245,207 $ 308,735 $ 304,978
=========== =========== ============
TDRs $ 15,281 $ 24,118 $ 22,774
=========== =========== ============
Ratio of NPAs to total assets .61% .78% .79%
=========== =========== ============
Ratio of TDRs to total assets .04% .06% .06%
=========== =========== ============
Ratio of NPAs and TDRs to total assets .65% .84% .85%
=========== =========== ============
</TABLE>
The lower NPAs at September 30, 1999 as compared to September 30, 1998
reflect primarily the strong economy and housing market, especially in
California. The Company continues to closely monitor all delinquencies and takes
appropriate steps to protect its interests. Interest foregone on non-accrual
loans amounted to $790 thousand and $4 million in the third quarter and first
nine months of 1999 compared to $738 thousand and $6 million for the same
periods in 1998. Interest foregone on TDRs amounted to $107 thousand and $350
thousand for the three and nine months ended September 30, 1999, compared to
$203 thousand and $729 thousand for the three and nine months ended September
30, 1998.
The tables on the following page show the Company's nonperforming
assets by state as of September 30, 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE 9
Nonperforming Assets by State
September 30, 1999
(Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned
------------------------------------ --------------------------------
Residential Commercial Commercial NPAs as
Real Estate Real Residential Real Total a% of
State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans(b)
- ------------------ --------- --------- ----------- -------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $134,026 $ 3,287 $ 1,661 $10,808 $ 440 $ -0- $ 150,222 .63%
Florida 16,500 -0- 179 349 -0- -0- 17,028 1.04
Texas 9,112 -0- -0- 603 -0- -0- 9,715 .63
Illinois 9,866 216 -0- 699 -0- -0- 10,781 .84
New Jersey 16,463 -0- 45 131 -0- -0- 16,639 1.34
Colorado 1,209 1,032 -0- 77 -0- -0- 2,318 .21
Washington 2,344 -0- -0- -0- -0- -0- 2,344 .21
Arizona 4,074 124 -0- -0- -0- -0- 4,198 .52
Other (c) 27,801 103 2,735 1,647 -0- -0- 32,286 .77
--------- --------- ----------- -------- --------- --------- ---------- -----
Totals $221,395 $ 4,762 $ 4,620 $14,314 $ 440 $ -0- 245,531 .67%
========= ========= =========== ======== ========= =========
REO general valuation allowance (324) (.00)
---------- ------
Total nonperforming assets $245,207 .67%
========== ======
</TABLE>
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) The September 30, 1999 balances include loans that were securitized into
FNMA MBS and MBS-REMICs.
(c) Includes states with loans less than 2% of total loans.
<TABLE>
<CAPTION>
TABLE 10
Nonperforming Assets by State
September 30, 1998
(Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned
---------------------------------- ---------------------------------
Residential Commercial Commercial NPAs as
Real Estate Real Residential Real Total a% of
State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans(b)
- ------------------ --------- --------- --------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California $178,080 $5,835 $ 462 $39,236 $ 1,027 $ -0- $ 224,640 .96%
Florida 13,506 -0- 80 926 -0- -0- 14,512 1.00
Texas 7,434 -0- -0- 755 -0- -0- 8,189 .55
Illinois 10,487 220 -0- 1,242 -0- -0- 11,949 .89
New Jersey 14,805 -0- 57 875 -0- -0- 15,737 1.28
Colorado 1,141 -0- 3 -0- -0- -0- 1,144 .09
Washington 1,620 -0- -0- -0- -0- -0- 1,620 .17
Arizona 2,618 -0- -0- 112 -0- -0- 2,730 .35
Other (c) 27,810 40 -0- 1,294 -0- 11 29,155 .76
--------- --------- --------- -------- --------- --------- --------- -----
Totals $257,501 $6,095 $ 602 $44,440 $ 1,027 $ 11 309,676 .86%
========= ========= ========= ======== ========= =========
REO general valuation allowance (941) (.00)
--------- -----
Total nonperforming assets $308,735 .86%
========= =====
</TABLE>
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) The September 30, 1998 balances include loans that were securitized into
FNMA MBS and MBS-REMIC.
(c) Includes states with loans less than 2% of total loans.
<PAGE>
The Company provides specific valuation allowances for losses on loans
when impaired, and on real estate owned when any significant and permanent
decline in value is identified. The Company also utilizes a methodology for
monitoring and estimating loan losses that is based on both historical
experience in the loan portfolio and factors reflecting current economic
conditions. This approach uses a database that identifies losses on loans and
foreclosed real estate from past years to the present, broken down by year of
origination, type of loan, and geographical area. Management is then able to
estimate a range of general loss allowances to cover losses in the portfolio.
In addition, periodic reviews are made of major loans and real estate owned,
and major lending areas are regularly reviewed to determine potential
problems. Where indicated, valuation allowances are established or adjusted.
In estimating possible losses, consideration is given to the estimated sale
price, cost of refurbishing, payment of delinquent taxes, cost of disposal,
and cost of holding the property. Additions to and reductions from the
allowances are reflected in current earnings.
The table below shows the changes in the allowance for loan losses for the
three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 11
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $ 233,471 $ 239,537 $ 244,466 $ 233,280
Provision (recovery) charged (credited) to expense (1,253) 3,130 (1,406) 8,777
Transfer of allowance from (to) reserve for losses
on loans sold or securitized and retained 213 -0- (11,922) -0-
Less loans charged off, net -0- (370) -0- -0-
Add recoveries 846 118 2,139 358
----------- ----------- ----------- ----------
Ending allowance for loan losses $ 233,277 $ 242,415 $ 233,277 $ 242,415
=========== =========== =========== ==========
Ratio of chargeoffs net of recoveries to average loans
outstanding (including MBS with recourse and MBS-REMICs) (.01%) .00% (.01%) .00%
=========== =========== =========== ==========
</TABLE>
As previously mentioned, the Company has securitized loans from its
portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to
hold these MBS and MBS-REMICs to maturity. Because these loans underlying the
MBS and MBS-REMICs are similar in all respects to the loans in its loan
portfolio, the Company estimates its reserve on these securities in a manner
similar to the method it uses for the allowance for loan losses. The Company
also sells loans with full credit recourse and has established a reserve for
potential losses on these loans. The liability for this reserve for losses on
loans sold with recourse or securitized and retained is included in accounts
payable and accrued expenses.
<PAGE>
The table below shows the changes in the reserve for losses on loans
sold with recourse or securitized and retained for the three and nine months
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 12
Changes in Reserve for Losses on Loans Sold with Recourse or Securitized and Retained
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
Beginning balance of reserve for losses on loans
<S> <C> <C> <C> <C>
sold with recourse or securitized and retained $ 15,397 $ 1,363 $ 2,256 $ 886
Initial recourse at time of sale charged to expense 183 381 1,189 858
Transfer from (to) allowance for loan losses (213) -0- 11,922 -0-
----------- ---------- ---------- ----------
Ending balance of reserve for losses on loans
sold with recourse or securitized and retained $ 15,367 $ 1,744 $ 15,367 $ 1,744
=========== ========== ========== ==========
</TABLE>
The ratio to nonperforming assets of the allowance for loan losses and
the reserve for losses on loans sold with recourse or securitized and retained
was 101.4% and 79.1% at September 30, 1999 and 1998, respectively. At September
30, 1999 and 1998, the ratio to total loans (including MBS with recourse and
MBS-REMICs) of the allowance for loan losses and the reserve for losses on loans
sold with recourse or securitized and retained was .68% and .69%, respectively.
DEPOSITS
Retail deposits increased during the third quarter of 1999 by $214
million, including interest credited of $262 million, compared to an increase of
$484 million, including interest credited of $270 million, in the third quarter
of 1998. Retail deposits increased during the first nine months of 1999 by $331
million, including interest credited of $772 million, compared to an increase of
$1.9 billion, including interest credited of $778 million, in the first nine
months of 1998. During the third quarter of 1999, the Company sold one branch
with a total of $29 million in deposits and in the second quarter of 1999, the
Company sold three branches with a total of $119 million in deposits. During the
first quarter of 1998, the Company sold one branch with $36 million in deposits.
Retail deposit balances were essentially unchanged during 1999 as the Company
concentrated marketing efforts on building the loyalty of existing depositors.
Retail deposits increased during the first nine months of 1998 primarily due to
ongoing marketing efforts as well as active promotions of market rate
transaction accounts. At September 30, 1999 and 1998, transaction accounts
(which includes checking, passbook, and money market accounts) represented 38%
and 31%, respectively, of the total balance of deposits.
Beginning in January 1997, the Company began a program to use
government securities dealers to sell certificates of deposit (CDs) to
institutional investors (wholesale CDs). There were no outstanding wholesale CDs
at September 30, 1999 or at September 30, 1998.
<PAGE>
The table below shows the Company's deposits by interest rate and by
remaining maturity at September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 13
Deposits
(Dollars in millions)
September 30
---------------------------------------------------
1999 1998
------------------------ ------------------------
Rate* Amount Rate* Amount
--------- ----------- ------------------------
Deposits by rate:
<S> <C> <C> <C> <C>
Interest-bearing checking accounts (a) 3.06% $ 119 2.24% $ 87
Passbook accounts 1.80 504 2.73 666
Money market deposit accounts (a) 4.07 9,558 4.37 7,168
Term certificate accounts with original maturities of:
4 weeks to 1 year 4.62 6,279 4.95 6,741
1 to 2 years 4.88 6,998 5.36 7,331
2 to 3 years 5.26 1,439 5.43 1,376
3 to 4 years 5.24 350 5.32 371
4 years and over 5.45 655 5.80 1,178
Retail jumbo CDs 4.79 648 5.20 558
Wholesale CDs 0.00 -0- 0.00 -0-
All other 0.00 -0- 7.60 1
----------- ------------
$ 26,550 $ 25,477
=========== ============
1999 1998
----------- ------------
Deposits by remaining maturity:
No contractual maturity $ 10,181 $ 7,921
Maturity within one year 14,305 15,242
1 to 5 years 2,037 2,307
Over 5 years 27 7
----------- ------------
$ 26,550 $ 25,477
=========== ============
</TABLE>
* Weighted average interest rate, including the impact of interest rate swaps.
(a) At September 30, 1999 and 1998, $3.2 billion and $2.5 billion,
respectively, of interest-bearing checking accounts were swept into money
market deposit accounts.
At September 30, the weighted average cost of deposits was 4.50% (1999) and
4.91% (1998).
ADVANCES FROM FEDERAL HOME LOAN BANKS
The Company uses borrowings from FHLBs, also known as "advances," to
supplement cash flow and to provide funds for loan origination activities.
Advances are secured by pledges of certain loans, MBS-REMICs, other MBS, and
capital stock of FHLBs. FHLB advances amounted to $8.1 billion at September 30,
1999, compared to $6.9 billion and $6.2 billion at September 30, 1998, and
December 31, 1998, respectively. During 1998, the Company paid off, before
maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a
result, incurred a $21 million pre-tax charge for the penalties associated with
these prepayments. See Extraordinary Item discussion on page 34.
<PAGE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company borrows funds through transactions in which securities are
sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered
into with selected major government securities dealers, large banks, and the
Federal Home Loan Bank of San Francisco, typically using MBS from the Company's
portfolio. Reverse Repos with dealers, banks and the Federal Home Loan Bank of
San Francisco amounted to $773 million, $2.3 billion, and $1.3 billion at
September 30, 1999 and 1998, and December 31, 1998, respectively.
OTHER BORROWINGS
At September 30, 1999, Golden West, at the holding company level, had a
total of $813 million of subordinated debt issued and outstanding. As of
September 30, 1999, the Company's subordinated debt securities were rated A3 and
A- by Moody's Investors Service (Moody's) and Standard & Poor's (S&P),
respectively. At September 30, 1999, Golden West had on file a registration
statement with the Securities and Exchange Commission for the sale of up to $300
million of subordinated notes.
During November 1996, WFSB received permission from the OTS to issue
non-convertible medium-term notes to institutional investors under rules similar
to Office of the Comptroller of the Currency rules applicable to similarly
situated national banks. As of September 30, 1999, WFSB had not issued any notes
under this authority.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity decreased by $2.3 million during the
first nine months of 1999 as a result of the $308 million cost of the repurchase
of Company stock, the decrease in market values of securities available for
sale, and the payment of quarterly dividends to stockholders. These decreases
were partially offset by net earnings of $361 million. The Company's
stockholders' equity increased during the first nine months of 1998 as a result
of net earnings and increased market values of securities available for sale
partially offset by the payment of quarterly dividends to stockholders, and the
$44 million cost of the repurchase of Company stock. Unrealized gains, net of
taxes, on securities and MBS available for sale included in stockholders' equity
at September 30, 1999 and 1998, and December 31, 1998, were $174 million, $166
million, and $215 million, respectively.
From time to time, the Company's capital ratios may build to levels
well in excess of the amounts necessary to meet regulatory capital requirements.
Golden West's Board of Directors periodically reviews alternative uses of excess
capital, including faster growth and acquisitions. At times, the Board has
determined that the purchase of the Company's common stock is a wise use of
excess capital.
In November 1999, the Company acted to effect a three-for-one split of
its outstanding Common Stock in the form of a 200% stock dividend. This dividend
is payable December 10, 1999, to holders of record at the close of business on
November 15, 1999. Per share amounts, in this 10-Q filing, have not been
restated to reflect this stock dividend.
<PAGE>
Since 1993, through four separate actions, Golden West's Board of
Directors has authorized the purchase by the Company of up to 14.9 million
shares of Golden West's common stock. As of September 30, 1999, 12.7 million
shares had been repurchased and retired at a cost of $769 million since October
1993, of which 3.2 million shares were purchased and retired at a cost of $308
million during the first nine months of 1999. Dividends from subsidiaries are
expected to continue to be the major source of funding for the stock repurchase
program. The purchase of Golden West stock is not intended to have a material
impact on the normal liquidity of the Company.
The Company has on file a shelf registration statement with the
Securities and Exchange Commission to issue up to two million shares of its
preferred stock. The preferred stock may be issued in one or more series, may
have varying provisions and designations, and may be represented by depository
shares. The preferred stock is not convertible into common stock. No preferred
stock has been issued under the registration. The Company's preferred stock has
been preliminarily rated a2 by Moody's.
REGULATORY CAPITAL
The OTS requires federally insured institutions, such as WFSB and WSL,
to meet certain minimum capital requirements. The following table shows WFSB's
regulatory capital ratios and compares them to the OTS minimum requirements at
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 14
World Savings Bank, FSB
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1999 September 30, 1998
----------------------------------------------- ----------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
---------------------- ---------------------- ---------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $2,425,414 6.89% $ 528,211 1.50% $2,094,134 6.57% $ 478,353 1.50%
Core 2,425,414 6.89 1,408,563 4.00 2,094,134 6.57 1,275,607 4.00
Risk-based 2,576,183 12.81 1,608,362 8.00 2,197,128 12.76 1,377,966 8.00
</TABLE>
The following table shows WSL's current regulatory capital ratios and
compares them to the OTS minimum requirements at September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 15
World Savings and Loan Association
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1999 September 30, 1998
------------------------------------------------ ------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ----------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible $ 474,911 9.03% $ 78,866 1.50% $ 638,887 7.91% $ 121,168 1.50%
Core 474,911 9.03 210,310 4.00 638,887 7.91 323,115 4.00
Risk-based 508,128 17.64 230,434 8.00 797,702 16.72 381,666 8.00
</TABLE>
<PAGE>
In addition, institutions whose exposure to interest rate risk, as
determined by the OTS, is deemed to be above normal may be required to hold
additional risk-based capital. The OTS has determined that neither WFSB nor WSL
has above-normal exposure to interest rate risk.
The OTS has adopted rules based upon five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The determination of whether
an association falls into a certain classification depends primarily on its
capital ratios. As of September 30, 1999, the most recent notification from the
OTS categorized both WFSB and WSL as "well-capitalized" under the current
requirements. There are no conditions or events that have occurred since that
notification that the Company believes would have an impact on the
categorization of either WFSB or WSL.
The table below shows that WFSB's regulatory capital exceeds the
requirements of the well-capitalized classification at September 30, 1999.
<TABLE>
<CAPTION>
TABLE 16
World Savings Bank, FSB
Regulatory Capital Compared to Well-Capitalized Classification
(Dollars in thousands)
ACTUAL WELL-CAPITALIZED
------------------------ --------------------------
Capital Ratio Capital Ratio
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Leverage $ 2,425,414 6.89% $ 1,760,703 5.00%
Tier 1 risk-based 2,425,414 12.06 1,206,271 6.00
Total risk-based 2,576,183 12.81 2,010,452 10.00
</TABLE>
The table below shows that WSL's regulatory capital exceeds the
requirements of the well-capitalized classification at September 30, 1999.
<TABLE>
<CAPTION>
TABLE 17
World Savings and Loan Association
Regulatory Capital Compared to Well-Capitalized Classification
(Dollars in thousands)
ACTUAL WELL-CAPITALIZED
------------------------ --------------------------
Capital Ratio Capital Ratio
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Leverage $ 474,911 9.03% $ 262,888 5.00%
Tier 1 risk-based 474,911 16.49 172,826 6.00
Total risk-based 508,128 17.64 288,043 10.00
</TABLE>
<PAGE>
World Savings Bank, SSB is regulated by the FDIC and the state of
Texas. At September 30, WSSB had the following regulatory capital calculated in
accordance with the FDIC's capital standards:
<TABLE>
<CAPTION>
TABLE 18
World Savings Bank, SSB
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1999 September 30, 1998
----------------------------------------------- ----------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
---------------------- ---------------------- ---------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- -------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 leverage $198,539 5.51% $ 108,148 3.00% $ 182,914 5.67% $ 96,719 3.00%
Tier 1 risk-based 198,539 26.49 29,977 4.00 182,914 25.17 29,071 4.00
Tota risk-based 198,781 26.52 59,953 8.00 183,147 25.20 58,141 8.00
</TABLE>
RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the three months ended September 30, 1999 were $118
million compared to net earnings of $108 million, before extraordinary item (see
extraordinary item discussion on page 33), for the three months ended September
30, 1998. Net earnings for the nine months ended September 30, 1999 were $361
million compared to net earnings of $335 million, before an extraordinary item,
for the nine months ended September 30, 1998. Net earnings increased for the
first nine months of 1999 as compared to the same period in 1998 as a result of
increased net interest income, a decrease in the provision for loan losses,
increased non-interest income before the one-time gains (see non-interest income
discussion on page 32), and a lower effective tax rate. These increases to net
earnings were partially offset by an increase in general and administrative
expenses.
<PAGE>
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS
An important determinant of the Company's earnings is its primary
spread -- the difference between its yield on earning assets and its cost of
funds. The table below shows the components of the Company's spread at September
30, 1999 and 1998, and December 31, 1998.
<TABLE>
<CAPTION>
TABLE 19
Yield on Earning Assets,
Cost of Funds, and Primary Spread
September 30
---------------------------- December 31
1999 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
Yield on loan portfolio 7.02% 7.49% 7.36%
Yield on MBS 7.07 7.23 7.20
Yield on investments 6.10 6.20 5.53
--------- --------- ---------
Yield on earning assets 7.02 7.40 7.30
--------- --------- ---------
Cost of deposits 4.50 4.91 4.67
Cost of borrowings 5.53 5.92 5.87
--------- --------- ---------
Cost of funds 4.78 5.20 4.96
--------- --------- ---------
Primary spread 2.24% 2.20% 2.34%
========= ========= =========
</TABLE>
The Company holds ARMs to manage the rate sensitivity of the asset side
of the balance sheet. The yield on the Company's ARM portfolio tends to lag
changes in market interest rates because of lags related to the index and
because of certain loan features. These features include introductory rates on
new ARM loans, the interest rate adjustment frequency of ARM loans, interest
rate caps or limits on individual rate changes and interest rate floors. Most of
the Company's ARMs have interest rates that change in accordance with an index
based on the cost of deposits and borrowings of savings institutions that are
members of the FHLB of San Francisco (the COFI). On balance, COFI lags and ARM
structural features cause the Company's assets initially to reprice more slowly
than its liabilities, resulting in a temporary reduction in net interest income
when rates increase and a temporary increase in net interest income when rates
fall.
<PAGE>
<TABLE>
<CAPTION>
TABLE 20
Average Interest-Earning Assets and Interest-Bearing Liabilities
(Dollars in thousands)
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------------------- -------------------------------
Annualized End of Annualized End of
Average Average Period Average Average Period
Balances(a) Yield Yield Balances(a) Yield Yield
---------- ---------- ------- ----------- --------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Investment Securities $ 3,271,302 5.51% 6.10% $ 3,320,093 5.76% 6.20%
Mortgage-backed securities 11,585,161 7.06% 7.07% 8,661,540 7.22% 7.23%
Loans receivable (b) 24,857,797 7.17% 7.02% 28,104,328 7.53% . 7.49%
Invest.in capital stock 530,442 5.42% 5.37% 753,214 6.01% 5.89%
of FHLBs ---------- ---------- ----------- ---------
Interest-earning assets $40,244,702 6.98% $40,839,175 7.29%
========== ========== =========== =========
LIABILITIES
Deposits:
Checking accounts $ 110,918 2.27% 3.06% $ 81,889 2.13% 2.24%
Savings accounts 10,405,105 3.95% 3.96% 7,383,928 4.14% 4.23%
Term accounts 16,944,575 4.87% 4.84% 18,743,957 5.35% 5.23%
---------- ---------- ------- ----------- --------- -------
Total deposits 27,460,598 4.51% 4.50% 26,209,774 5.00% 4.91%
Advances from FHLBs 6,970,600 5.37% 5.36% 7,648,969 5.88% 5.77%
Reverse repurchases 1,067,588 5.15% 5.08% 1,955,234 5.68% 5.59%
Other borrowings 2,165,713 6.16% 7.63% 2,317,764 6.66% 7.90%
---------- ---------- ----------- ---------
Interest-bearing liabilities $37,664,499 4.78% $38,131,741 5.31%
========== ========== =========== =========
Annualized net interest spread 2.20% 1.98%
========== =========
Net interest income $ 251,964 $ 238,142
========== ===========
Annualized net yield on average
interest-earning assets 2.50% 2.33%
========== =========
</TABLE>
(a) Averages are computed using daily balances.
(b) Includes nonaccrual loans (90 days or more past due).
<TABLE>
<CAPTION>
TABLE 21
Average Interest-Earning Assets and Interest-Bearing Liabilities
(Dollars in thousands)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------------- -------------------------------
Annualized End of Annualized End of
Average Average Period Average Average Period
Balances(a) Yield Yield Balances(a) Yield Yield
---------- ---------- ------- ----------- --------- -------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Investment Securities $ 3,229,203 5.25% 6.10% $ 2,989,002 5.86% 6.20%
Mortgage-backed securities 10,655,509 7.04% 7.07% 6,211,961 7.17% 7.23%
Loans receivable(b) 25,242,449 7.22% 7.02% 30,939,057 7.52% 7.49%
Invest. in capital stock 643,782 5.32% 5.37% 669,244 5.93% 5.89%
of FHLB ---------- ---------- ----------- ---------
Interest-earning assets $39,770,943 6.98% $40,809,264 7.32%
========== ========== =========== =========
LIABILITIES
Deposits:
Checking accounts $ 107,116 2.18% 3.06% $ 75,196 1.31% 2.24%
Savings accounts 9,964,785 3.91% 3.96% 6,216,625 3.97% 4.23%
Term accounts 17,170,638 4.89% 4.84% 19,428,999 5.34% 5.23%
---------- ---------- ------- ----------- --------- -------
Total deposits 27,242,539 4.52% 4.50% 25,720,820 5.00% 4.91%
Advances from FHLB 6,477,019 5.41% 5.36% 7,813,013 5.82% 5.77%
Reverse repurchases 1,197,857 5.12% 5.08% 2,212,798 5.65% 5.59%
Other borrowings 2,191,376 6.04% 7.63% 2,394,947 6.70% 7.90%
---------- ---------- ----------- ---------
Interest-bearing liabilities$37,108,791 4.78% $38,141,578 5.31%
========== ========== =========== =========
Annualized net interest spread 2.20% 2.01%
========== =========
Net interest income $ 751,171 $ 721,053
========== ===========
Annualized net yield on
average interest-earning assets 2.52% 2.36%
========== =========
</TABLE>
(a) Averages are computed using daily balances.
(b) Includes nonaccrual loans (90 days or more past due).
<PAGE>
The following table shows the Company's revenues and expenses as a
percentage of total revenues for the three and nine months ended September 30,
1999 and 1998, in order to focus on the changes in interest income between years
as well as changes in other revenue and expense amounts.
<TABLE>
<CAPTION>
TABLE 22
Selected Revenue and Expense Items
as Percentages of Total Revenues
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Interest on loans (a) 60.7% 68.2% 62.3% 74.6%
Interest on mortgage-backed securities (a) 27.9 20.2 25.7 14.2
Interest and dividends on investments 7.1 7.6 7.0 6.9
--------- --------- ---------- ----------
95.7 96.0 95.0 95.7
Less:
Interest on deposits 42.2 42.3 42.1 41.2
Interest on advances and other borrowings 19.2 23.0 18.6 23.7
--------- --------- ---------- ----------
61.4 65.3 60.7 64.9
Net interest income 34.3 30.7 34.3 30.8
Provision for (recovery of) loan losses (.2) .4 (.1) .4
--------- --------- ---------- ----------
Net interest income after provision for loan 34.5 30.3 34.4 30.4
losses
Add:
Fees 2.2 2.1 2.2 1.9
Gain on the sale of securities, MBS, and loans .4 .8 1.0 1.2
Other non-interest income 1.7 1.1 1.8 1.2
--------- --------- ---------- ----------
4.3 4.0 5.0 4.3
Less:
General and administrative expenses 13.1 11.3 13.0 11.0
Taxes on income 9.6 9.1 9.9 9.4
--------- --------- ---------- ----------
Earnings before extraordinary item 16.1 13.9 16.5 14.3
Extraordinary item 0.0 (.6) 0.0 (.5)
--------- --------- ---------- ----------
Net earnings 16.1% 13.3% 16.5% 13.8%
========= ========= ========== ==========
</TABLE>
(a) During the nine months ended September 30, 1999 and the year ended
December 31, 1998, the Company securitized $3.7 billion and $8.2
billion, respectively, of loans into MBS which caused the percentage of
interest on mortgage-backed securities to total revenues to increase
from September 30, 1998 to September 30, 1999 and the percentage of
interest on loans to total revenues to decrease from September 30, 1998
to September 30, 1999. For further discussion, see pages 12 and 13.
<PAGE>
INTEREST RATE SWAPS
The Company enters into interest rate swaps as a part of its interest
rate risk management strategy. Such instruments are entered into solely to alter
the repricing characteristics of designated assets and liabilities. The Company
does not hold any derivative financial instruments for trading purposes.
Interest rate swap activity increased net interest income by $511
thousand and decreased net interest income by $3.2 million for the three and
nine months ended September 30, 1999, as compared to decreases of $2 million and
$7 million for the same periods in 1998.
The following table summarizes the unrealized gains and losses for
interest rate swaps at September 30, 1999 and 1998.
<TABLE>
<CAPTION>
TABLE 23
Schedule of Unrealized Gains and Losses on Interest Rate Swaps
(Dollars in thousands)
September 30, 1999 September 30, 1998
---------------------------------------- ----------------------------------------
Net Net
Unrealized Unrealized
Unrealized Unrealized Gain Unrealized Unrealized Gain
Gains Losses (Loss) Gains Losses (Loss)
------------ ------------ ------------ ------------ ------------ ------------
Interest rate swaps:
<S> <C> <C> <C> <C> <C> <C>
Receive fixed $ 647 $ 67 $ 580 $ 12,416 $ 9 $ 12,407
Pay fixed 3,312 13,862 (10,550) -0- 59,066 (59,066)
------------ ------------ ------------ ------------ ------------ -------------
$ 3,959 $ 13,929 $ (9,970) $ 12,416 $ 59,075 $ (46,659)
============ ============ ============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
TABLE 24
Schedule of Interest Rate Swaps Activity
(Notional amounts in millions)
Nine Months Ended
September 30, 1999
----------------------------
Receive Pay
Fixed Fixed
Swaps Swaps
------------ ------------
<S> <C> <C>
Balance at December 31, 1998 $ 512 $ 899
Additions 80 -0-
Maturities (317) (147)
------------ ------------
Balance at September 30, 1999 $ 275 $ 752
============ ============
</TABLE>
The range of floating interest rates received on swap contracts in the
first nine months of 1999 was 5.06% to 5.97%, and the range of floating interest
rates paid on swap contracts was 5.29% to 5.52%. The range of fixed interest
rates received on swap contracts in the first nine months of 1999 was 5.50% to
8.18% and the range of fixed interest rates paid on swap contracts was 5.58% to
8.85%.
<PAGE>
INTEREST ON LOANS
In the third quarter of 1999, interest on loans was lower than in the
comparable 1998 period by $84 million or 15.8%. The decrease in the third
quarter of 1999 was due to a $3.2 billion decrease in the average portfolio
balance and a 36 basis point decrease in the average portfolio yield. For the
first nine months of 1999, interest on loans was lower than in the comparable
1998 period by $378 million or 21.7%. The decrease was due to a $5.7 billion
decrease in the average portfolio balance and a 30 basis point decrease in the
average portfolio yield. The decrease in the average loan portfolio balance was
primarily due to the securitization of loans into FNMA MBS and MBS-REMICs (see
pages 12 and 13).
INTEREST ON MORTGAGE-BACKED SECURITIES
In the third quarter of 1999, interest on mortgage-backed securities
was higher than in the comparable 1998 period by $48 million or 30.9%. The 1999
increase was due primarily to a $2.9 billion increase in the average portfolio
balance, which was partially offset by a 16 basis point decrease in the average
portfolio yield. For the first nine months of 1999, interest on mortgage-backed
securities was higher than in the comparable 1998 period by $229 million or
68.4% due primarily to a $4.4 billion increase in the average portfolio balance,
which was partially offset by a 13 basis point decrease in the average portfolio
yield. The increase in the mortgage-backed securities portfolio is primarily due
to the securitization of loans into FNMA MBS and MBS-REMICs, as discussed on
pages 12 and 13.
INTEREST AND DIVIDENDS ON INVESTMENTS
The income earned on the investment portfolio fluctuates, depending
upon the volume outstanding and the yields available on short-term investments.
For the third quarter of 1999, interest and dividends on investments was lower
than in the comparable 1998 period by $6.9 million or 11.6%. The decrease was
primarily due to a $49 million decrease in the average portfolio balance and a
36 basis point decrease in the average portfolio yield. For the first nine
months of 1999, interest and dividends on investments was lower than in the
comparable 1998 period by $8.3 million or 5.1%. The decrease was primarily due
to a 59 basis point decrease in the average portfolio yield which was partially
offset by a $240 million increase in the average portfolio balance.
INTEREST ON DEPOSITS
In the third quarter of 1999, interest on deposits decreased by $18
million or 5.5% from the comparable period in 1998. The third quarter decrease
was due to a 49 basis point decrease in the average cost of deposits, which was
partially offset by a $1.3 billion increase in the average balance of deposits.
In the first nine months of 1999, interest on deposits decreased by $41 million
or 4.2% from the comparable period in 1998. The nine month decrease was
primarily due to a 47 basis point decrease in the average cost of deposits,
which was partially offset by a $1.5 billion increase in the average balance of
deposits.
<PAGE>
INTEREST ON ADVANCES AND OTHER BORROWINGS
For the third quarter and first nine months of 1999, interest on
advances and other borrowings decreased by $38 million or 21.3% and $147 million
or 26.5%, respectively, from the comparable periods of 1998. The third quarter
decrease was primarily due to a $1.7 billion decrease in the average balance and
a 52 basis point decrease in the average cost of these borrowings. The nine
month decrease was primarily due to a $2.6 billion decrease in the average
balance and a 45 basis point decrease in the average cost of these borrowings.
PROVISION FOR (RECOVERY OF) LOAN LOSSES
The recovery of loan losses was $1.3 million and $1.4 million,
respectively, for the three and nine months ended September 30, 1999, compared
to a provision for loan losses of $3 million and $9 million for the same periods
in 1998. The decrease in the provision in 1999 was due to declining
nonperforming assets and lower loan losses as a result of the strong California
housing market and economy.
NON-INTEREST INCOME
Non-interest income was $31 million and $109 million, respectively, for
the three and nine months ended September 30, 1999, compared to $31 million and
$100 million for the same periods in 1998. Non-interest income for the three
months ended September 30, 1999 included a gain of $628 thousand from the sale
of one savings offices located in a market with limited growth potential. For
the nine months ended September 30, 1999, non-interest income included gains of
$8 million from the sale of four savings offices located in markets with limited
growth potential. Non-interest income for the nine months ended September 30,
1998, included a gain of $13 million before tax from the redemption of preferred
stock which was called by the issuer and a gain of $3 million from the sale of
one savings branch. Without the effects of these one-time gains, non-interest
income for the three and nine months ended September 30, 1999, was $31 million
and $101 million, respectively, as compared to $31 million and $84 million for
the same periods in 1998. The increases in 1999 as compared to 1998 resulted
from a higher amount of loan prepayment fees and increased gains on the sale of
fixed-rate mortgages.
GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarter and first nine months of 1999, general and
administrative expenses (G&A) were $96 million and $285 million, respectively,
compared to $88 million and $258 million for the comparable periods in 1998. G&A
as a percentage of average assets on an annualized basis was .98%, for the third
quarter and first nine months of 1999 compared to .89% and .87%, respectively,
for the same periods in 1998. G&A expenses increased in 1999 because of normal
increases in employee compensation, the expansion of the loan origination
organization to take advantage of opportunities to increase mortgage volume, and
investments in new computers and automated teller machines to enhance customer
service in our branches.
<PAGE>
EXTRAORDINARY ITEM
During the first quarter of 1998, the Company paid off, before
maturity, $2.9 billion of high-cost FHLB of San Francisco advances. As a result,
the Company incurred a $13 million pretax charge in the first quarter of 1998
for the penalties associated with the prepayments. In addition, in the third
quarter of 1998, the Company paid off, before maturity, an additional $1.5
billion of high-cost FHLB advances. As a result, the Company incurred an $8
million pretax charge in the third quarter of 1998 for the penalties associated
with the prepayments.
TAXES ON INCOME
The Company utilizes the accrual method of accounting for income tax
purposes and for preparing its published financial statements. For financial
reporting purposes only, the Company uses purchase accounting in connection with
certain assets acquired through mergers. The purchase accounting portion of
income is not subject to tax.
Taxes as a percentage of earnings before the extraordinary item were
37.4%, for the third quarter and first nine months of 1999 compared to 39.4% and
39.5%, respectively, for the same periods a year ago. The decrease in the tax
rate in 1999 as compared to 1998 was due to a lower overall state tax rate due
to the expansion of business in lower taxing states.
LIQUIDITY AND CAPITAL RESOURCES
WFSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; sales of loans; negotiable certificates of
deposit; borrowings from the FHLB; investments and borrowings from its
affiliates; debt collateralized by mortgages, MBS, or securities; and the
issuance of medium-term notes. In addition, WFSB has other alternatives
available to provide liquidity or finance operations including federal funds
purchased, borrowings from public offerings of debt, issuances of commercial
paper, and borrowings from commercial banks. Furthermore, under certain
conditions, WFSB may borrow from the Federal Reserve Bank of San Francisco to
meet short-term cash needs. The availability of these funds will vary depending
upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the
Federal Reserve Board. For a discussion of WFSB's liquidity positions at
September 30, 1999, and 1998, and December 31, 1998, see the Cash and
Investments section on page 12.
WSL's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; borrowings from the FHLB; and debt
collateralized by mortgages, MBS, or securities. In addition, WSL has a number
of other alternatives available to provide liquidity or finance operations.
These include federal funds purchased, borrowings from its affiliates,
borrowings from public offerings of debt, sales of loans, negotiable
certificates of deposit, issuances of commercial paper, and borrowings from
commercial banks. Furthermore, under certain conditions, WSL may borrow from the
Federal Reserve Bank of San Francisco to meet short-term cash needs. The
availability of these funds will vary depending upon policies of the FHLB, the
Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a
discussion of WSL's liquidity positions at September 30, 1999, and 1998, and
December 31, 1998, see the Cash and Investments section on page 12.
<PAGE>
WSSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; borrowings from the FHLB Dallas; debt
collateralized by mortgages or securities; and borrowings from its affiliates.
The principal sources of funds for WFSB's, WSL's, and WSSB's parent,
Golden West, are dividends from subsidiaries, interest on investments, and the
proceeds from the issuance of debt and equity securities. Various statutory and
regulatory restrictions and tax considerations limit the amount of dividends
WFSB and WSL can pay. The principal liquidity needs of Golden West are for
payment of interest and principal on subordinated debt securities, capital
contributions to its insured subsidiaries (including $489 million for the year
ended December 31, 1998 and $466 million for the nine months ended September 30,
1998), dividends to stockholders, the purchase of Golden West stock (see
stockholders' equity section on page 23), and general and administrative
expenses. At September 30, 1999 and 1998, and December 31, 1998, Golden West's
total cash and investments amounted to $680 million, $728 million, and $898
million, respectively. Included in the September 30, 1999 and 1998, and December
31, 1998 amounts are loans to WFSB.
YEAR 2000
The Company is aware of the system challenges that the Year 2000 has
created and has implemented a plan (Year 2000 Project) to insure that all of the
Company's mission critical systems are Year 2000 compliant by the end of the
second quarter of 1999, and to evaluate, test, and modify other systems that
might also be affected. The evaluation, correction and testing of the
mission-critical systems was completed during the first quarter of 1999, and
during the second quarter of 1999, the Company successfully completed
integration testing to confirm that all such systems function together. All
mission critical systems have now been upgraded and placed into production. The
Company has completed an inventory and assessment of all other non-mission
systems and has completed the testing and modification or replacement of
substantially all of those systems that may be affected by Year 2000 compliance
issues. The Year 2000 project was developed in accordance with guidance set
forth by federal banking regulators in a series of jointly-issued policy
statements. Federal banking regulators regularly monitor the Company's progress
in meeting the requirements of such policy statements.
While the Company believes it is doing everything technologically
possible to assure Year 2000 compliance, the success of the Year 2000 Project is
to some extent dependent upon vendor cooperation. The Company is requiring its
computer systems and software vendors to represent that the products provided
are or will be Year 2000 compliant and has planned a program of testing for
compliance. Such testing is included in the testing previously described in this
section. To date, the Company has no indication that its principal vendors or
their systems will adversely affect the Company's Year 2000 compliance efforts.
<PAGE>
The Company currently estimates that it will cost approximately $18
million to make all of its computer systems Year 2000 compliant. The Company
will expense all costs associated with the Year 2000 Project and expects to fund
such costs through operating cash flows. The Year 2000 Project expense incurred
during 1998 was $8 million and $8 million was incurred for the nine months ended
September 30, 1999. Included in the $18 million are estimates for compensation
of employees dedicated to the Year 2000 Project, consultants, hardware and
software expense and depreciation of the equipment purchased as part of this
process. However, the Company's Year 2000 expenses are not expected to result in
a dollar for dollar increase in the Company's overall information systems
expenditures because the Company has dedicated a number of its existing
resources solely to the Year 2000 Project.
The Company believes that its Year 2000 Project will result in the
Company's systems functioning normally at the beginning of the year 2000,
without adverse consequences. While the systems of others, with whom and through
which the Company conducts business, are not within the Company's control, the
Year 2000 Project is intended to provide the Company with sufficient advance
warning should such systems not perform. In the unlikely event of a problem with
the Company's systems or the systems of others which relate to the Company's
core business, the Company has developed contingency plans to address the
potential that one or more systems might fail, despite efforts to the contrary.
Although the Company has no reason to believe that such contingency plans will
not effectively avoid or mitigate any adverse consequences of such system
failures, no assurances can be given that such plans will be effective.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Golden West estimates the sensitivity of the Company's net interest
income, net earnings, and capital ratios to interest rate changes and
anticipated growth based on simulations using an asset/liability model which
takes into account the lags described on pages 11 and 27. The simulation model
projects net interest income, net earnings, and capital ratios based on an
immediate interest rate increase that is sustained for a thirty-six month
period. The model is based on the actual maturity and repricing characteristics
of interest-rate sensitive assets and liabilities. For certain assets, the model
incorporates assumptions regarding the impact of changing interest rates on
prepayment rates which are based on the Company's historical prepayment
information. The model factors in projections for anticipated activity levels by
product lines offered by the Company. Based on the information and assumptions
in effect at September 30, 1999, Management believes that a 200 basis point rate
increase sustained over a thirty-six month period would not adversely affect the
Company's long-term profitability and financial strength.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit No. Description
3(a) Certificate of Incorporation, as amended, and amendments
thereto, are incorporated by reference to Exhibit 3(a) to
the Company's Annual Report on Form 10-K (File No. 1-4269)
for the year ended December 31, 1990.
3(b) By-Laws of the Company, as amended in 1997,. are
incorporated by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K (File No. 1-4269) for the year
ended December 31, 1997.
4(a) The Registrant agrees to furnish to the Commission, upon
request, a copy of each instrument with respect to issues of
long-term debt, the authorized principal amount of which
does not exceed 10% of the total assets of the Company.
10(a) 1996 Stock Option Plan, as amended, is incorporated by
reference to Exhibit A of the Company's Definitive Proxy
Statement on Schedule 14A, filed on March 15, 1996, for the
Company's 1996 Annual Meeting of Stockholders.
10(b) Annual Incentive Bonus Plan is incorporated by reference to
Exhibit A of the Company's Definitive Proxy Statement on
Schedule 14A, filed on March 14, 1998, for the Company's
1998 Annual Meeting of Stockholders.
10(c) Deferred Compensation Agreement between the Company and
James T. Judd is incorporated by reference to Exhibit 10(b)
of the Company's Annual Report on Form 10-K (File No.
1-4629) for the year ended December 31, 1986.
10(d) Deferred Compensation Agreement between the Company and
Russell W. Kettell is incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K (File No.
1-4629) for the year ended December 31, 1986.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(a) Index to Exhibits (continued)
Exhibit No. Description
10(e) Deferred Compensation Agreement between the Company and J.
L. Helvey is incorporated by reference to Exhibit 10(d) of
the Company's Annual Report on Form 10-K (File No. 1-4629)
for the year ended December 31, 1986.
10(f Form of Supplemental Retirement Agreement between the
Company and certain executive officers is incorporated by
reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K (File No. 1-4629) for the year ended December 31,
1990.
10(g) Operating lease on Company headquarters building, 1901
Harrison Street, Oakland, California 94612, is incorporated
by reference to Exhibit 10(h) of the Company's Quarterly
Report on Form 10-Q (File No. 1-4629) for the quarter ended
September 30, 1998.
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K with the
Commission during the first nine months of 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
Dated: November 12, 1999 /s/ J. L. Helvey
-----------------------------
J. L. Helvey
Executive Vice President
(duly authorized and principal financial
officer)
<TABLE>
<CAPTION>
EXHIBIT 11
Golden West Financial Corporation
Statement of Computation of Basic and Diluted Earnings Per Share
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings Before Extraordinary Item $ 118,071 $ 108,021 $ 360,826 $ 335,052
Extraordinary Item, Net of Tax -0- (4,801) -0- (12,511)
------------ ------------ ------------ ------------
Net Earnings $ 118,071 $ 103,220 $ 360,826 $ 322,541
============ ============ ============ ============
Weighted Average Shares 54,698,032 57,562,090 55,715,591 57,343,932
Add: Options outstanding at period end 2,075,650 1,836,505 2,075,650 1,836,505
Less: Shares assumed purchased back with
proceeds of options exercised 1,610,622 1,215,753 1,614,901 1,183,361
------------ ------------ ------------ ------------
Diluted Average Shares Outstanding 55,163,060 58,182,842 56,176,340 57,997,076
============ ============ ============ ============
Basic Earnings Per Share Calculation:
Basic Earnings Per Share Before Extraordinary Item $ 2.16 $ 1.87 $ 6.48 $ 5.84
Extraordinary Item, Net of Tax 0.00 (.08) 0.00 (.22)
------------ ------------ ------------ ------------
Basic Earnings Per Share $ 2.16 $ 1.79 $ 6.48 $ 5.62
============ ============ ============ ============
Diluted Earnings Per Share Calculation:
Diluted Earnings Per Share Before Extraordinary Item $ 2.14 $ 1.85 $ 6.42 $ 5.78
Extraordinary Item, Net of Tax 0.00 (.08) 0.00 (.22)
------------ ------------ ------------ ------------
Diluted Earnings Per Share $ 2.14 $ 1.77 $ 6.42 $ 5.56
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 237,614
<INT-BEARING-DEPOSITS> 4,984
<FED-FUNDS-SOLD> 320,013
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 430,795
<INVESTMENTS-CARRYING> 11,170,489
<INVESTMENTS-MARKET> 10,995,251
<LOANS> 25,856,148
<ALLOWANCE> 233,277
<TOTAL-ASSETS> 39,965,477
<DEPOSITS> 26,549,828
<SHORT-TERM> 267,786
<LIABILITIES-OTHER> 598,677
<LONG-TERM> 9,427,181
0
0
<COMMON> 5,399
<OTHER-SE> 3,116,606
<TOTAL-LIABILITIES-AND-EQUITY> 39,965,477
<INTEREST-LOAN> 1,367,178
<INTEREST-INVEST> 152,776
<INTEREST-OTHER> 562,558
<INTEREST-TOTAL> 2,082,512
<INTEREST-DEPOSIT> 923,274
<INTEREST-EXPENSE> 1,331,341
<INTEREST-INCOME-NET> 751,171
<LOAN-LOSSES> (1,406)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 285,119
<INCOME-PRETAX> 576,743
<INCOME-PRE-EXTRAORDINARY> 360,826
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360,826
<EPS-BASIC> 6.48
<EPS-DILUTED> 6.42
<YIELD-ACTUAL> 7.02
<LOANS-NON> 230,777
<LOANS-PAST> 0
<LOANS-TROUBLED> 15,281
<LOANS-PROBLEM> 65,911
<ALLOWANCE-OPEN> 244,466
<CHARGE-OFFS> 0
<RECOVERIES> 2,139
<ALLOWANCE-CLOSE> 233,277
<ALLOWANCE-DOMESTIC> 233,277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
