SEC Info  
    Home      Search      My Interests      Help      Sign In      Please Sign In

Golden West Financial Corp/DE – ‘10-K405’ for 12/31/98

As of:  Tuesday, 3/30/99   ·   For:  12/31/98   ·   Accession #:  42293-99-5   ·   File #:  1-04629

Previous ‘10-K405’:  ‘10-K405/A’ on 8/12/98 for 12/31/96   ·   Next:  ‘10-K405’ on 3/30/00 for 12/31/99   ·   Latest:  ‘10-K405/A’ on 3/30/00 for 12/31/99

Find Words in Filings emoji
 
  in    Show  and   Hints

  As Of                Filer                Filing    For·On·As Docs:Size

 3/30/99  Golden West Financial Corp/DE     10-K405    12/31/98    4:307K

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Golden West 10-K, Live Filing                        117    596K 
 2: EX-21       Exhibit 21(A)                                          1      6K 
 3: EX-23       Exhibit 23 (A)                                         1      5K 
 4: EX-27       Financial Data Schedule (Pre-XBRL)                     2±     7K 


10-K405   —   Golden West 10-K, Live Filing
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Business
3Item 1. BUSINESS (Continued)
20Asset Quality
26Mortgage-Backed Securities
29Extraordinary Item
41Capital Distributions by Savings Associations
42Depositor Priorities
44Item 2. Properties
45Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
46Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
47Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (Continued)
"Item 6. Selected Financial Data
48Item 6. SELECTED FINANCIAL DATA (Continued)
51Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
53Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
62Change in Accounting for Goodwill
71Non-Interest Income
72Deposit Insurance
"Taxes on Income
74Year 2000
75Item 7A. Quantitative and Qualitative Disclosures About Market Risk
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
76Item 10. Directors and Executive Officers of the Registrant
77Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
"Item 11. Executive Compensation
78Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
79Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)
10-K4051st Page of 117TOCTopPreviousNextBottomJust 1st
 

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1998 Commission File No. 1-4629 GOLDEN WEST FINANCIAL CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2080059 --------------------------------------------- ----------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1901 Harrison Street, Oakland, California 94612 --------------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ----------------------------- ----------------------------------------- Common Stock, $.10 par value New York Stock Exchange, Inc., Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant on February 28, 1999, was $5,308,537,195. The number of shares outstanding of the Registrant's common stock on February 28, 1999, was 56,511,374 shares. DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K ------------------------------------ ---------------------------- Proxy Statement Dated March 15, 1999, Part III Furnished to Stockholders in Connection with Registrant's Annual Meeting of Stockholders.
10-K4052nd Page of 117TOC1stPreviousNextBottomJust 2nd
PART I ITEM 1. BUSINESS REGISTRANT Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly-owned savings bank subsidiaries, World Savings Bank, FSB (WFSB), and World Savings Bank, SSB, (WSSB) and a savings and loan business through its wholly-owned subsidiary, World Savings and Loan Association, a Federal Savings and Loan Association (WSL). WFSB, WSL and WSSB are referred to collectively as the "Insured Institutions" or "Insured Subsidiaries." Golden West also has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s fourteen portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise. During 1995, Golden West acquired Watchung Hills Bank for Savings of New Jersey and renamed it World Savings Bank, FSB. WFSB is a federally chartered savings bank, with deposits insured by the Federal Deposit Insurance Corporation (FDIC) Bank Insurance Fund (BIF) and its home office is in Oakland, California. As of December 31, 1998 and 1997, WFSB had assets of $31.9 billion and $24.6 billion, respectively. For the years ended December 31, 1998, 1997 and 1996, WFSB had net income of $242 million, $185 million and $69 million, respectively. WSL, whose deposits are insured by the FDIC Savings Association Insurance Fund (SAIF), was incorporated in 1912 as a capital stock savings and loan association and has its home office in Oakland, California. WSL became a federally chartered savings and loan association in September 1981. For the years ended December 31, 1998, 1997 and 1996, WSL's net income was $223 million, $161 million and $108 million, respectively. WSL's assets totaled $6.8 billion and $15.4 billion at yearends 1998 and 1997, respectively. WSSB had assets of $3.5 billion and $123 million for the years ended December 31, 1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and 1996, WSSB had net income of $8.0 million, $901 thousand and $511 thousand, respectively.
10-K4053rd Page of 117TOC1stPreviousNextBottomJust 3rd
ITEM 1. BUSINESS (Continued) REGISTRANT (continued) Golden West is operating its insured subsidiaries in a manner that enhances customer service. In this regard, all of WFSB's and WSL's products are made available in the savings branches of these two subsidiaries. In addition, customers of each of Golden West's insured subsidiaries can transact most business on their accounts at any of the Company's branch offices. Each insured subsidiary reimburses the other for services provided in these arrangements. Interest rates set on deposit accounts offered by the Company's Insured Subsidiaries are based on market conditions, cost and funding needs. REGULATORY FRAMEWORK The Company is a savings and loan holding company within the meaning of the Home Owners Loan Act (HOLA), and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. WFSB is a member of the Federal Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WSSB is a member of the FHLB system and owns stock in the FHLB of Dallas. WFSB's and WSSB's savings accounts are insured by the FDIC BIF, up to the maximum amounts provided by law. WSL is a member of the FHLB system and owns stock in the FHLB of San Francisco. WSL's savings accounts are insured by the FDIC SAIF, also up to the maximum amounts provided by law. The Company, WFSB, and WSL are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of businesses that can be engaged in, capital requirements, and the payment of dividends. WSSB also is subject to extensive examination, supervision, and regulation by the FDIC, as well as the Texas Savings and Loan Department. WFSB, WSL, and WSSB are also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation). OFFICE STRUCTURE As of December 31, 1998, the Company operated 118 savings branch offices in California, 44 in Colorado, 32 in Florida, 19 in Texas, 13 in Arizona, 11 in New Jersey, ten in Kansas, and one in Illinois. The Company also operates 249 loan origination offices of which 217 are located in the states listed above. The remaining 32 loan origination offices are located in Connecticut, Delaware, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin. Of the 249 loan offices, 18 are fully-staffed offices that are located in the same premises as savings branch offices and 111 others are savings branch offices that have a single loan officer on site. The remaining loan origination offices are located in facilities that are separate from savings branch offices.
10-K4054th Page of 117TOC1stPreviousNextBottomJust 4th
ITEM 1. BUSINESS (Continued) ACQUISITIONS/DIVESTITURES On March 19, 1998, one savings branch in Colorado with $36 million in deposits was sold to Commercial Bank of Leadville. The foregoing divestiture is not material to the financial position or net earnings of Golden West and pro forma information is not deemed necessary. OPERATIONS The principal business of the Company, through the Insured Subsidiaries, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS) -- securities backed by pools of residential loans that have many of the characteristics of mortgages including the monthly payment of principal and interest. Funds for the Insured Subsidiaries' operations are also provided through earnings; loan repayments; sales of loans; borrowings from the Federal Home Loan Bank system; debt collateralized by mortgages, MBS, or other securities; and the issuance of medium-term notes. In addition, the Insured Subsidiaries had a number of other alternatives available to provide liquidity or finance operations. These include public offerings of debt or equity, issuance of negotiable certificates of deposit, issuance of commercial paper, and borrowings from commercial banks. Furthermore, under certain limited conditions, WFSB and WSL may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending on policies of the FHLB of San Francisco, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for the holding company, Golden West, are dividends from its Insured Subsidiaries, interest on investments, and the proceeds from the issuance of debt and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends the Insured Subsidiaries can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities, capital contributions to its Insured Subsidiaries, dividends to stockholders, the purchase of Company stock, and general and administrative expenses.
10-K4055th Page of 117TOC1stPreviousNextBottomJust 5th
ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES Deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to seven years. All types of accounts presently offered by the Company have rates that are set by the Company, consistent with prevailing interest rates. The Company's certificate accounts are issued in non-negotiable form through its branch offices. In addition, beginning in January 1997, the Company began a program to use broker/dealers to sell certificates of deposit (CDs) to institutional investors. These are referred to in this document as "wholesale CDs". Retail deposits increased $2.6 billion during 1998, including interest credited of $1.1 billion, compared to an increase of $1.5 billion during 1997, including interest credited of $960 million, and an increase of $1.3 billion, including interest credited of $869 million during 1996. Total deposits increased during 1998, 1997, and 1996 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts in 1997 and 1998. The increase in deposits in 1998, 1997 and 1996 reflected growth in deposits at WFSB. The mix of deposits changed during 1998, 1997 and 1996 as compared to 1995. During 1998 and 1997, the Company actively promoted money market deposit accounts which accounted for part of the change in mix during those years. In addition, the change was also due to a new program begun in the fourth quarter of 1996. Specifically, the 1998, 1997, and 1996 reported balances of interest-bearing checking accounts decreased as compared to 1995 and the 1998, 1997, and 1996 reported balances of money market accounts increased compared to balances reported in 1995. The new program calculates the minimum amount of funds needed to cover disbursements for each customer's checking account and transfers the remaining funds to a money market account, reducing the Company's required reserves at the Federal Reserve Bank. The table on the following page summarizes the Company's deposits by original term to maturity at December 31.
10-K4056th Page of 117TOC1stPreviousNextBottomJust 6th
ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued) [Enlarge/Download Table] TABLE 1 Deposits by Original Term to Maturity (Dollars in thousands) 1998 1997 1996 1995 1994 ----------- ----------- ------------ ------------ ------------ Interest-bearing checking ................ $ 102,874 $ 85,343 $ 318,422 $ 750,160 $ 730,290 Passbook .................................. 514,265 528,727 550,075 567,890 638,905 Money market deposit accounts ............ 8,532,261 4,160,734 1,565,682 1,291,501 1,818,426 Term certificate accounts with original maturities of: 4 weeks to 1 year 5,893,772 8,996,965 10,144,102 9,358,705 5,159,037 1 to 2 years ......................... 7,717,692 5,750,387 5,012,735 3,599,540 5,636,301 2 to 3 years ......................... 1,417,606 1,478,756 1,587,068 2,128,392 1,997,826 3 to 4 years ......................... 368,615 431,400 565,997 651,787 817,631 4 years and over....................... 1,150,056 1,440,434 1,993,983 2,065,785 2,098,984 Retail jumbo CDs ....................... 521,478 711,010 360,441 430,647 312,413 Wholesale CDs ........................... -0- 525,305 -0- -0- -0- All other ................................ 476 656 1,429 3,503 9,576 ----------- ----------- ----------- ----------- ----------- Total deposits............................ $26,219,095 $24,109,717 $22,099,934 $20,847,910 $19,219,389 =========== =========== =========== =========== =========== The table below sets forth the Company's deposits by interest rate at December 31. [Download Table] TABLE 2 Deposits by Interest Rate (Dollars in thousands) 1998 1997 -------------- -------------- 0.00% -- 4.00% . . . . . . . . $ 4,282,680 $ 3,109,497 4.01% -- 6.00% . . . . . . . . 21,060,706 19,813,017 6.01% -- 8.00% . . . . . . . . 865,533 1,170,164 8.01% -- 10.00% . . . . . . . . 716 2,395 10.01% -- 12.00% . . . . . . . . 9,460 14,644 -------------- -------------- $26,219,095 $24,109,717 ============== ============== At December 31, the weighted average cost of deposits was 4.67% (1998) and 5.04% (1997).
10-K4057th Page of 117TOC1stPreviousNextBottomJust 7th
ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued) The table below shows the maturities of deposits at December 31, 1998 by interest rate. [Enlarge/Download Table] TABLE 3 Deposit Maturities by Interest Rate (Dollars in thousands) 2003 and 1999(a) 2000 2001 2002 thereafter Total -------------- ------------ ------------ ------------- ------------ -------------- 0.00% -- 4.00% $ 4,263,768 $ 18,912 $ -0- $ -0- $ -0- $ 4,282,680 4.01% -- 6.00% 19,503,571 1,136,844 224,715 105,619 89,957 21,060,706 6.01% -- 8.00% 680,363 115,069 38,095 31,447 559 865,533 8.01% -- 10.00% 716 -0- -0- -0- -0- 716 10.01% -- 12.00% 61 59 61 58 9,221 9,460 -------------- ------------ ------------ ------------- ------------ -------------- $24,448,479 $1,270,884 $ 262,871 $ 137,124 $ 99,737 $26,219,095 ============== ============ ============ ============= ============ ============== (a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity. As of December 31, 1998 the aggregate amount outstanding of time certificates of deposit in amounts of $100,000 or more was $2.5 billion, of which, $521 million were retail jumbo CDs. The following table presents the maturity of these time certificates of deposit at December 31, 1998. TABLE 4 Maturities of Time Certificates of Deposit Equal to or Greater than $100,000 (Dollars in thousands) [Download Table] 3 months or less $ 770,049 Over 3 months through 6 months 594,930 Over 6 months through 12 months 942,362 Over 12 months 234,376 ------------- $2,541,717 ============= During 1996 and years prior, the Company did not use brokers to acquire certificates of deposit. Beginning in January 1997, the Company began a program to use broker/dealers to acquire wholesale certificates of deposit. As of December 31, 1997, there were $525 million of wholesale CDs outstanding. There were no wholesale CDs outstanding at December 31, 1998. More information regarding deposits is included in Note J to the Financial Statements included in Item 14.
10-K4058th Page of 117TOC1stPreviousNextBottomJust 8th
ITEM 1. BUSINESS (Continued) BORROWINGS The Company generally may borrow from the FHLB upon the security of a) the capital stock of the FHLB owned by the Company, b) certain of its residential mortgage loans and MBS or c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances" to supplement cash flow and to provide funds for loan origination activities. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable, as negotiated with the FHLB. At December 31, 1998, the Company had $6.2 billion in FHLB advances outstanding, compared to $8.5 billion at yearend 1997. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 29. From time to time, the Company enters into reverse repurchase agreements with selected major government securities dealers, selected large banks, or the FHLB of San Francisco and the FHLB of Dallas. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company. The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company. The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses with dealers, banks, and the FHLB of San Francisco amounted to $1.3 billion at December 31, 1998, compared to $2.3 billion at yearend 1997.
10-K4059th Page of 117TOC1stPreviousNextBottomJust 9th
ITEM 1. BUSINESS (Continued) BORROWINGS (continued) The Company accounts for transfers and servicing of financial assets in accordance with SFAS 125 and SFAS 127. At December 31, 1998, Golden West, at the parent level, had principal amounts outstanding of $812 million of subordinated debt. As of December 31, 1998, Golden West's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At December 31, 1998, Golden West had on file a registration statement with the Securities and Exchange Commission for the sale of up to $300 million of subordinated notes, all of which was available for issuance at year end 1998. As of December 31, 1998, WSL had a total of $100 million of subordinated notes issued and outstanding which were rated A2 and A from Moody's and S&P, respectively. These subordinated notes have a scheduled maturity of July 1, 2000; however, WSL intends to exercise its right to call the notes at par on April 1, 1999. The subordinated notes are included in WSL's risk-based regulatory capital as Supplementary Capital. WSL had no medium-term notes outstanding at December 31, 1998, compared to $110 million at yearend 1997 and $590 million at December 31, 1996. During November 1996, WFSB received permission from the OTS to issue non-convertible medium-term notes to institutional investors under rules similar to Office of the Comptroller of the Currency rules applicable to similarly situated national banks. As of December 31, 1998, WFSB had not issued any notes under this authority.
10-K40510th Page of 117TOC1stPreviousNextBottomJust 10th
ITEM 1. BUSINESS (Continued) BORROWINGS (continued) The table below sets forth the composition of the Company's borrowings at December 31. [Enlarge/Download Table] TABLE 5 Composition of Borrowings (Dollars in thousands) 1998 1997 1996 1995 1994 ------------ ------------ ------------- ------------- ------------ FHLB advances. . . . . . . . . . . $ 6,163,472 $ 8,516,605 $ 8,798,433 $ 6,447,201 $ 6,488,418 Reverse repurchase agreements. . . 1,223,668 2,334,048 1,614,763 1,752,171 316,865 Dollar reverse repurchase agreements 28,801 -0- 293,363 65,772 284,956 Medium-term notes . . . . . . . . . -0- 109,992 589,845 1,597,507 1,164,079 Federal funds purchased . . . . . . -0- -0- -0- -0- 250,000 Subordinated debt . . . . . . . . . 911,753 1,110,488 1,323,996 1,322,392 1,221,559 ------------ ------------ ------------- -------------- ------------ Total borrowings. . . . . . . . $ 8,327,694 $12,071,133 $12,620,400 $ 11,185,043 $ 9,725,877 ============ ============ ============= ============= ============ Weighed average interest rate of total borrowings . . . . . . 5.87% 5.99% 5.80% 6.15% 5.85% ============ ============ ============= ============= ============ More information concerning the borrowings of the Company is included in Notes K, L, M, and N to the Financial Statements which are included in Item 14. LENDING ACTIVITIES Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens primarily on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the authority to originate loans in any part of the United States. At December 31, 1998, the Company was originating loans in Arizona, California, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, South Dakota, Texas, Utah, Virginia, Washington, and Wisconsin. The Company also makes loans to customers on the security of their deposit accounts. Deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 1998, and 1997. The Company retains most of its real estate loan originations in portfolio. From time to time, the Company securitizes loans from its portfolio into MBS that are available to be used as collateral for borrowings. As of December 31, 1998, the balance outstanding of loans securitized into MBS with recourse was $3.9 billion and the balance of loans securitized into Real Estate Mortgage Conduits (MBS-REMIC) was $5.5 billion. The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 1998, and 1997.
10-K40511th Page of 117TOC1stPreviousNextBottomJust 11th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) [Enlarge/Download Table] TABLE 6 Loan Portfolio by State December 31, 1998 (Dollars in thousands) Residential Real Estate Commercial Loans -------------------------- Real Total as a% of State 1 - 4 5+ Land Estate Loans (a) Portfolio ------------------ ------------ ----------- --------- ------------ ------------- ------------ California $19,786,322 $3,332,721 $ 212 $ 39,820 $ 23,159,075 65.61% Florida 1,462,265 17,826 2 687 1,480,780 4.19 Texas 1,400,077 67,615 519 1,342 1,469,553 4.16 Illinois 1,147,766 146,418 -0- -0- 1,294,184 3.67 New Jersey 1,210,384 -0- -0- 4,593 1,214,977 3.44 Colorado 959,218 194,823 -0- 5,482 1,159,523 3.28 Washington 545,150 427,989 -0- 686 973,825 2.76 Arizona 738,654 22,631 -0- -0- 761,285 2.16 Pennsylvania 640,131 4,163 -0- 2,888 647,182 1.83 Virginia 492,515 8,411 -0- 1,172 502,098 1.42 Connecticut 489,636 -0- -0- 15 489,651 1.39 Maryland 343,956 2,112 -0- 432 346,500 0.98 Oregon 248,883 12,076 -0- 242 261,201 0.74 Minnesota 224,284 7,801 -0- -0- 232,085 0.66 Utah 209,798 48 -0- 1,340 211,186 0.60 Wisconsin 183,152 3,797 -0- -0- 186,949 0.53 Kansas 168,999 4,614 -0- 63 173,676 0.49 Nevada 163,539 879 -0- -0- 164,418 0.47 Massachusetts 146,418 -0- -0- -0- 146,418 0.41 Missouri 87,967 5,498 -0- -0- 93,465 0.26 Washington DC 52,739 -0- -0- -0- 52,739 0.15 New Mexico 47,504 -0- -0- -0- 47,504 0.13 Michigan 46,554 -0- -0- -0- 46,554 0.13 New York 36,340 -0- -0- -0- 36,340 0.10 North Carolina 35,771 -0- -0- -0- 35,771 0.10 Idaho 32,604 -0- -0- -0- 32,604 0.09 Delaware 32,040 -0- -0- -0- 32,040 0.09 Georgia 23,258 -0- -0- 1,357 24,615 0.07 South Dakota 11,567 -0- -0- -0- 11,567 0.03 Ohio 6,189 1,190 65 2,875 10,319 0.03 Other 6,365 -0- -0- 2,739 9,104 0.03 ------------ ----------- --------- ------------ ------------- --------- Totals $30,980,045 $4,260,612 $ 798 $ 65,733 35,307,188 100.00% ============ =========== ========= ============ ========= SFAS 91 deferred loan fees (12,265) Loan discount on purchased loans (3,008) Undisbursed loan funds (3,080) Allowance for loan losses (244,466) Loans to facilitate (LTF) interest reserve (484) Troubled debt restructured (TDR) interest reserve (1,872) Loans on deposits 25,279 ------------- Total loan portfolio and loans securitized with FNMA MBS with recourse and MBS-REMIC 35,067,292 Loans securitized with FNMA MBS and MBS-REMIC (9,346,004)(b) ------------- Total loan portfolio $ 25,721,288 ============= (a) The Company has no commercial loans other than commercial real estate loans. (b) The above schedule includes the December 31, 1998 balances of adjustable rate loans that were securitized and retained as Federal National Mortgage Association (FNMA) mortgage-backed securities and MBS-REMIC
10-K40512th Page of 117TOC1stPreviousNextBottomJust 12th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) [Enlarge/Download Table] TABLE 7 Loan Portfolio by State December 31, 1997 (Dollars in thousands) Residential Real Estate Commercial Loans -------------------------- Real Total as a% of State 1 - 4 5+ Land Estate Loans(a) Portfolio ------------------ ------------ ----------- --------- ------------ ------------- ------------- California $20,722,679 $3,448,720 $ 234 $ 48,800 $ 24,220,433 66.27% Texas 1,390,668 93,860 559 1,464 1,486,551 4.06 Illinois 1,224,009 170,971 -0- 1,623 1,396,603 3.82 Florida 1,344,412 20,051 9 835 1,365,307 3.73 Colorado 1,098,665 230,203 -0- 7,039 1,335,907 3.65 New Jersey 1,241,358 401 -0- 5,356 1,247,115 3.41 Washington 530,281 408,258 -0- 721 939,260 2.57 Arizona 765,941 37,323 -0- 550 803,814 2.20 Pennsylvania 617,348 4,217 -0- 3,184 624,749 1.71 Virginia 535,615 8,505 -0- 1,325 545,445 1.49 Connecticut 491,275 -0- -0- 19 491,294 1.34 Maryland 369,326 2,158 -0- 493 371,977 1.02 Oregon 256,178 12,803 -0- 245 269,226 0.74 Minnesota 202,274 8,122 -0- -0- 210,396 0.58 Utah 200,516 54 -0- 1,575 202,145 0.55 Nevada 188,756 1,006 -0- -0- 189,762 0.52 Kansas 166,476 4,769 -0- 172 171,417 0.47 Wisconsin 153,005 3,853 -0- -0- 156,858 0.43 Massachusetts 126,343 -0- -0- 20 126,363 0.35 Missouri 84,247 5,833 -0- -0- 90,080 0.25 Washington DC 52,178 -0- -0- -0- 52,178 0.14 New Mexico 49,341 -0- -0- -0- 49,341 0.14 New York 43,499 -0- -0- -0- 43,499 0.12 Delaware 32,950 -0- -0- -0- 32,950 0.09 Georgia 30,633 -0- -0- 1,411 32,044 0.09 Idaho 31,340 -0- -0- -0- 31,340 0.09 Ohio 11,768 1,748 175 3,337 17,028 0.05 North Carolina 12,420 -0- -0- 452 12,872 0.04 South Dakota 10,397 -0- -0- -0- 10,397 0.03 Other 15,109 1 -0- 4,010 19,120 0.05 ------------ ----------- --------- ------------ ------------- ---------- Totals $31,999,007 $4,462,856 $ 977 $ 82,631 36,545,471 100.00% ============ =========== ========= ============ ========== SFAS 91 deferred loan fees (37,632) Loan discount on purchased loans (3,838) Undisbursed loan funds (3,306) Allowance for loan losses (233,280) Loans to facilitate (LTF) interest reserve (589) Troubled debt restructured (TDR) interest reserve (3,894) Loans on deposits 28,167 ------------- Total oan portfolio and loans securitized into FNMA MBS with recourse 36,291,099 Loans securitized into FNMA MBS with recourse (3,030,390)(b) ------------- Total loan portfolio $ 33,260,709 ============= (a) The Company has no commercial loans other than commercial real estate loans. (b) The above schedule includes the December 31, 1997 balances of adjustable rate loans that were securitized and retained as Federal National Mortgage Association (FNMA) mortgage-backed securities.
10-K40513th Page of 117TOC1stPreviousNextBottomJust 13th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The table below sets forth the composition of the Company's loan portfolio (excluding mortgage-backed securities) by type of collateral at December 31. [Enlarge/Download Table] TABLE 8 Loan Portfolio by Type of Security (Dollars in thousands) 1998 1997 1996 1995 1994 ------------ ------------ ------------- ------------- ------------- Loans collateralized primarily by first deeds of trust: One-to four-family units . $21,639,015 $28,978,476 $ 25,862,898 $ 24,071,421 $ 23,217,564 Over four-family units. . . 4,260,631 4,462,990 4,403,389 4,205,050 3,946,446 Commercial real estate. . . 65,865 82,888 97,852 122,396 134,189 Construction loans. . . . . -0- -0- -0- 1,471 -0- Land. . . . . . . . . . . . 798 977 1,147 1,511 1,851 Loans on deposits . . . . 25,279 28,167 31,936 33,279 30,460 Less: Undisbursed loan funds. . . 3,080 3,306 3,920 3,568 2,781 Unearned fees and discounts 17,629 45,953 69,938 88,194 105,314 Unamortized discount arising from acquisitions . . . 5,125 10,250 14,241 20,025 27,146 Allowance for loan losses. . 244,466 233,280 195,702 141,988 124,003 ------------ ------------ ------------- ------------- ------------- $25,721,288 $33,260,709 $ 30,113,421 $ 28,181,353 $ 27,071,266 ============ ============ ============= ============ ============= At December 31, 1998, 98% of the loans in the portfolio had remaining terms to maturity in excess of 10 years. The table below sets forth the amount of loans due after one year that have predetermined interest rates and the amount that have floating interest rates at December 31, 1998. [Download Table] TABLE 9 Loans Due After One Year (Dollars in thousands) Adjustable Rate $23,321,212 Fixed Rate 2,352,754 -------------- $25,673,966 ============== The table on the following page sets forth information concerning new loans made by the Company during 1998, 1997, and 1996 by type and purpose of loan.
10-K40514th Page of 117TOC1stPreviousNextBottomJust 14th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) [Enlarge/Download Table] TABLE 10 New Loan Originations By Type and Purpose (Dollars in thousands) 1998 1997 1996 ------------------------------ ----------------------------- ------------------------------ No.of % of No.of % of No.of % of Type Loans Amount Total Loans Amount Total Loans Amount Total ---------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Residential (one unit) 51,881 $7,585,610 92.7% 47,508 $6,847,344 91.5% 46,225 $6,268,160 89.4% Residential (2 to 4 units) 1,382 214,618 2.6 1,625 231,682 3.1 1,821 236,304 3.4 Residential (5 or more units) 733 387,706 4.7 726 403,947 5.4 978 507,977 7.2 Commercial -0- -0- 0.0 -0- -0- 0.0 1 121 0.0 ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Totals 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% 49,025 $7,012,562 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ====== [Enlarge/Download Table] 1998 1997 1996 ------------------------------ ----------------------------- ------------------------------ No.of % of No.of % of No.of % of Purpose Loans Amount Total Loans Amount Total Loans Amount Total ---------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Purchase 30,902 $4,548,415 55.6% 33,663 $5,018,687 67.1% 32,553 $4,607,852 65.7% Refinance 23,094 3,639,519 44.4 16,196 2,464,286 32.9 16,472 2,404,710 34.3 ------- ----------- ------ ------- ---------- ------- ------- ----------- ------ Totals 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% 49,025 $7,012,562 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ====== Note:During 1998, 1997, and 1996, the Company also purchased $3 million, $2 million, and $5 million, respectively, of residential loans (not included above) of which none were on one-unit residential properties for the years ended December 31, 1998 and 1997. $3 million were on one-unit residential properties for the year ended December 31, 1996. New loan originations in 1998, 1997, and 1996 amounted to $8.2 billion, $7.5 billion, and $7.0 billion, respectively. The increase in 1998 occurred because more consumers sought to refinance their existing home loans as well as a result of a record housing market. The increase in loan volume in 1997 occurred because of a continued strong housing market, primarily in California, and solid demand for ARMs, the Company's principal product. Refinanced loans constituted 44% of new loan originations in 1998 compared to 33% in 1997 and 34% in 1996.
10-K40515th Page of 117TOC1stPreviousNextBottomJust 15th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The primary source of mortgage originations is loans secured by residential properties in California. Loans originated in California were $5.1 billion in 1998 compared to $4.0 billion in 1997 and $3.5 billion in 1996. In 1998, 62% of total originations were on California residential property compared to 54% in 1997 and 50% in 1996. The five largest states, other than California, for originations for the year ended December 31, 1998 were Florida, Texas, Colorado, Illinois, and Washington with a combined total of 21% of total originations. The percentage of loans originated in California increased in 1998 as compared to 1997 and in 1997 as compared to 1996 due to the strong California real estate market. Federal regulations permit federally chartered savings and loan associations and savings banks to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the association or savings bank but which must be readily available to, and independently verifiable by, the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or term. Pursuant to the aforementioned powers, the Company offers adjustable rate mortgages and this type of mortgage is the Company's primary real estate loan. The portion of the mortgage portfolio (excluding mortgage-backed securities) composed of rate-sensitive loans was 92% at yearend 1998 compared to 93% at yearend 1997 and 91% at yearend 1996. Golden West's ARM originations constituted over 82% of new mortgage loans made by the Company in 1998, compared with 95% in 1997 and 90% in 1996. Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain interest rate or cost of funds indices. During the life of the loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. Lifetime caps on the Company's ARMs are typically between 350 and 625 basis points (a basis point is one one-hundredth of one percent) higher than the loan's initial fully-indexed contract rate. On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase or decrease of 7-1/2% of the prior year's payment. At five year intervals, the payment may be adjusted without limit, to amortize the loan fully within the then remaining term. Within these five year periods, negative amortization (deferred interest) may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount.
10-K40516th Page of 117TOC1stPreviousNextBottomJust 16th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) On certain other ARMs, the payment and interest rate change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation. The Company also offers a "modified" ARM, a loan that usually offers a low fixed rate from 1% to 3% below the initial fully indexed contract rate for an initial period, normally one to 36 months. (However, the borrower must qualify at the initial fully-indexed contract rate.) The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio was 12.59%, or 5.36% above the actual weighted average rate at December 31, 1998, versus 12.74%, or 5.34% above the weighted average rate at yearend 1997. Approximately $4.6 billion of the Company's ARMs (including MBS with recourse and MBS-REMICS) have terms that state that the interest rate may not fall below a lifetime floor, set at the time of origination or assumption. As of December 31, 1998, $495 million ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.72% at yearend 1998 compared to 7.76% at yearend 1997. Without the floor, the average yield on these loans would have been 7.15% at December 31, 1998 and 7.21% at December 31, 1997. Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers and mortgage brokers regarding possible lending opportunities. All loan applications are completed, reviewed, and approved in the loan field offices and forwarded to the Company's central offices in San Antonio, Texas, for processing. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas.
10-K40517th Page of 117TOC1stPreviousNextBottomJust 17th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The Company generally lends up to 80% of the appraised value of residential real property and, under certain circumstances, up to 97% of the appraised value of single-family residences. During 1998, 5% of loans originated were in excess of 80% of the appraised value of the residence compared to 5% and 6% in 1997 and 1996, respectively. The Company requires title insurance for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are security for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most having original terms of 30 years. However, the majority of such loans remain outstanding for a shorter period of time. To generate income and to provide additional funds for lending and liquidity, the Company has from time to time sold, without recourse, whole loans and participations in pools of loans to the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association, and to institutional investors. Beginning in 1995, the Company began sales to FNMA of whole loans with recourse, for which a valuation liability has been provided. The Company continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on the participant's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income. Loans originated for sale were $1.2 billion, $217 million, and $477 million for the years ended December 31, 1998, 1997, and 1996, respectively. In addition, during 1998, $229 million of loans were converted from adjustable rate to fixed-rate held for sale. The Company continues to sell most of its fixed-rate originations. The Company sold $1.4 billion, $209 million, and $485 million of these loans during 1998, 1997, and 1996, respectively. The Company recognized pre-tax gains of $25 million in 1998 compared to $5 million in 1997 and $11 million in 1996. Included in the $25 million gain in 1998 is $23 million due to the capitalization of mortgage servicing rights (see page 19 for further information). The loans held for sale portfolio had a balance of $135 million at December 31, 1998, all of which are carried at the lower of cost or market. At December 31, 1998, the balance of loans sold with recourse was $1.4 billion and had a valuation liability of $2.3 million. At December 31, 1998, the Company was engaged in servicing approximately $6.2 billion of loan participations and whole loans for others including $5.2 billion of loans serviced for FNMA with recourse. In addition, at December 31, 1998, the Company serviced $5.5 billion of loans securitized into MBS-REMIC. For the year ended December 31, 1998, fees received for such servicing activities totaled $21 million, or approximately two-thirds of one percent of total revenues compared to $16 million or approximately three-fifths of one percent of total revenues for the year ended December 31, 1997.
10-K40518th Page of 117TOC1stPreviousNextBottomJust 18th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The Company also purchases, on a selective basis and only after strict underwriting review, residential mortgage whole loans in the secondary market. Loan purchases in 1998, 1997, and 1996 amounted to $3 million, $2 million, and $5 million, respectively. Loan repayments consist of monthly loan amortization and loan payoffs. During 1998, 1997, and 1996, repayments amounted to $6.2 billion, $3.8 billion, and $3.1 billion, respectively. The increase in repayments in 1998 was due to an increase in refinance and home sale activity. The increase in repayments in 1997 as compared to 1996 was due to an increase in the portfolio balance as well as increased prepayment rates. The 1998 increase in loan repayments would have been even higher if the Company had not securitized $8.2 billion of loans into MBS and MBS-REMIC during 1998. The balance of the loan portfolio declined for the year ended December 31, 1998, due to a high level of prepayments, an increase in loans sold, and the securitization of loans into MBS. The decrease in the balance of the loan portfolio for the year ended December 31, 1998 was $7.5 billion or 23%. Had there not been $8.2 billion of loans securitized into MBS with recourse and MBS-REMIC, the balance of the loan portfolio would have decreased modestly for the year ended December 31, 1998. The total growth in the portfolio for the year ended December 31, 1997, was $3.1 billion or 10%. In addition to interest earned on loans, the Company receives fees for originating loans and for making loan commitments. The income represented by such fees varies with the volume and types of loans made. In 1998 and 1997, the Company responded to increased competition from fixed-rate lenders by offering more low and zero point adjustable rate mortgage options to its customers. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments and other miscellaneous services.
10-K40519th Page of 117TOC1stPreviousNextBottomJust 19th
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The table below sets forth information relating to interest rates and loan fees charged for the years indicated. [Enlarge/Download Table] TABLE 11 Weighted Average Interest Rates and Fees on New Loan Originations 1998 1997 1996 1995 1994 --------- -------- --------- -------- --------- Fully-indexed weighted average interest rate on new real estate loans originated (a) 7.72% 7.59% 7.59% 7.56% 6.44% Current weighted average interest rate on new real estate loans originated (b) 6.20% 6.42% 6.56% 6.58% n/a Weighted average loan fees received on new real estate loans originated (a) .26% .18% .25% .25% .29% (a) Excludes loans purchased. (b) The current rate reflects the actual rate being paid by the borrower. n/a Not available. The Company accounts for mortgage servicing rights in accordance with SFAS 125. For the years ended December 31, 1998, 1997, and 1996, Golden West recognized gains of $23 million, $5 million, and $11 million, respectively, on the sale of loans due to the capitalization of servicing rights. After amortization, the balance of the capitalized servicing rights at December 31, 1998, 1997, and 1996, was $29 million, $11 million, and $9 million, respectively. The book value of Golden West's servicing rights did not exceed the fair value at December 31, 1998 or 1997 and, therefore, no write-down of the servicing rights to their fair value was necessary. If a borrower fails to make required payments on a loan, the Company usually takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted. Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of such property and the amount owed by the borrower.
10-K40520th Page of 117TOC1stPreviousNextBottomJust 20th
ITEM 1. BUSINESS (Continued) ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include nonaccrual loans (loans, including loans swapped into MBS with recourse and loans securitized into MBS-REMIC, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on nonaccrual loans. The Company's troubled debt restructured (TDRs) are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The table below sets forth the components of the Company's NPAs and TDRs and the various ratios to total assets at December 31. [Enlarge/Download Table] TABLE 12 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) 1998 1997 1996 1995 1994 ----------- ---------- ---------- ----------- ----------- Non-accrual loans $ 262,332 $ 317,550 $ 373,157 $ 314,086 $ 284,103 Real estate acquired through foreclosure 42,572 61,517 82,075 75,158 70,981 Real estate in judgment 74 67 416 443 390 ----------- ---------- ---------- ----------- ----------- Total nonperforming assets $ 304,978 $ 379,134 $ 455,648 $ 389,687 $ 355,474 =========== ========== ========== =========== =========== TDRs $ 22,774 $ 43,795 $ 84,082 $ 45,222 $ 72,827 =========== ========== ========== =========== =========== Ratio of nonperforming assets to total assets .79% .96% 1.21% 1.11% 1.12% =========== ========== ========== =========== =========== Ratio of TDRs to total assets .06% .11% .22% .13% .23% =========== ========== ========== =========== =========== Ratio of NPAs and TDRs to total assets .85% 1.07% 1.43% 1.24% 1.35% =========== ========== ========== =========== =========== The decrease in NPAs during 1998 and 1997 reflected the strong California economy and housing market in those years. The increase in NPAs during 1996 reflected the continued weakness in the California housing market during 1996 and increased bankruptcies nationwide. The level of NPAs during 1994 through 1995 remained relatively flat even though the loan portfolio continued to grow. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans (loans greater than 90 days past due) amounted to $8 million in 1998, $14 million in 1997, and $20 million in 1996. The Company's troubled debt restructured was $23 million, or .06% of assets, at December 31, 1998, compared to $44 million, or .11% of assets, at yearend 1997 and $84 million, or .22% of assets, at yearend 1996. Interest foregone on TDRs amounted to $899 thousand in 1998 compared to $1.9 million in 1997 and $1.7 million in 1996. The tables on the following two pages show the Company's nonperforming assets by state at December 31, 1998, and 1997.
10-K40521st Page of 117TOC1stPreviousNextBottomJust 21st
ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) [Enlarge/Download Table] TABLE 13 Nonperforming Assets by State December 31, 1998 (Dollars in thousands) Non-Accrual Loans (a) ----------------------------------- Real Estate Owned Residential -------------------- NPAs as Real Estate Commercial Residential Total a% of State 1 - 4 5+ Real Estate 1 - 4 5+ NPAs(b) Loans --------------------- ---------- --------- ----------- --------- --------- ---------- ----------- California $171,362 $ 3,334 $ 944 $36,213 $ 703 $212,556 0.92% Florida 17,117 -0- 79 1,025 -0- 18,221 1.23 Texas 8,590 -0- -0- 1,300 -0- 9,890 0.67 Illinois 11,526 219 -0- 906 -0- 12,651 0.98 New Jersey 17,495 -0- 374 946 -0- 18,815 1.55 Colorado 1,140 -0- 3 -0- -0- 1,143 0.10 Washington 2,442 -0- -0- -0- -0- 2,442 0.25 Arizona 1,732 -0- -0- 78 -0- 1,810 0.24 Pennsylvania 7,976 -0- -0- 818 -0- 8,794 1.36 Virginia 2,384 -0- -0- 143 -0- 2,527 0.50 Connecticut 2,344 -0- -0- 148 -0- 2,492 0.51 Maryland 1,617 -0- -0- 313 -0- 1,930 0.56 Oregon 1,213 -0- -0- -0- -0- 1,213 0.46 Minnesota 1,396 -0- -0- 66 -0- 1,462 0.63 Utah 1,897 -0- -0- -0- -0- 1,897 0.90 Wisconsin 348 -0- -0- -0- -0- 348 0.19 Kansas 686 -0- -0- -0- -0- 686 0.39 Nevada 1,489 -0- -0- 331 -0- 1,820 1.11 Massachusetts 297 -0- -0- -0- -0- 297 0.20 Missouri 195 -0- -0- 109 -0- 304 0.33 Washington DC 135 -0- -0- -0- -0- 135 0.26 New Mexico 824 -0- -0- -0- -0- 824 1.73 Michigan 15 -0- -0- -0- -0- 15 0.03 New York 2,214 -0- -0- 235 -0- 2,449 6.74 North Carolina -0- -0- -0- -0- -0- -0- 0.00 Idaho 105 -0- -0- 211 -0- 316 0.97 Delaware -0- -0- -0- -0- -0- -0- 0.00 Georgia 628 -0- -0- -0- -0- 628 2.55 South Dakota 135 -0- -0- -0- -0- 135 1.17 Ohio 51 -0- -0- -0- -0- 51 0.49 Other 26 -0- -0- -0- -0- 26 0.29 ---------- --------- ----------- --------- --------- ---------- -------- Totals $257,379 $ 3,553 $ 1,400 $42,842 $ 703 305,877 0.87 ========== ========= =========== ========= ========= REO general valuation allowance (899) (0.00) ---------- -------- $304,978 0.87% ========== ======== (a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) During the past four years, the Company has securitized adjustable rate loans into FNMA mortgage-backed securities with full credit recourse. In addition, during 1998, the Company securitized mortgage loans into MBS-REMIC. The December 31, 1998, balances of the related nonperforming assets are reflected in the amounts above.
10-K40522nd Page of 117TOC1stPreviousNextBottomJust 22nd
ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) [Enlarge/Download Table] TABLE 14 Nonperforming Assets by State December 31, 1997 (Dollars in thousands) Non-Accrual Loans (a) ----------------------------------- Real Estate Owned Residential ----------------------------------- NPAs as Real Estate Commercial Residential Commercial Total a% of State 1 - 4 5+ Real Estate 1 - 4 5+ Real Estate NPAs(b) Loans ----------------- ---------- --------- ----------- --------- --------- ------------ ----------- ----------- California $228,859 $ 8,528 $ 1,579 $ 53,834 $ 1,913 $ 2,167 $296,880 1.23% Texas 8,142 -0- -0- 994 -0- -0- 9,136 0.61 Illinois 9,656 221 -0- 818 -0- -0- 10,695 0.77 Florida 11,211 -0- 191 567 -0- -0- 11,969 0.88 Colorado 1,317 -0- 16 75 -0- -0- 1,408 0.11 New Jersey 17,299 -0- 769 530 -0- -0- 18,598 1.49 Washington 1,930 -0- -0- 110 -0- -0- 2,040 0.22 Arizona 1,412 -0- -0- -0- -0- -0- 1,412 0.18 Pennsylvania 6,412 -0- -0- 246 -0- -0- 6,658 1.07 Virginia 1,726 -0- -0- 528 -0- -0- 2,254 0.41 Connecticut 3,345 -0- -0- 274 -0- -0- 3,619 0.74 Maryland 1,900 -0- -0- 106 -0- -0- 2,006 0.54 Oregon 1,000 -0- -0- -0- -0- -0- 1,000 0.37 Minnesota 798 -0- -0- -0- -0- -0- 798 0.38 Utah 1,503 -0- -0- -0- -0- -0- 1,503 0.74 Nevada 2,129 -0- -0- 133 -0- -0- 2,262 1.19 Kansas 657 40 -0- -0- -0- -0- 697 0.41 Wisconsin 807 -0- -0- -0- -0- -0- 807 0.51 Massachusetts 96 -0- 20 -0- -0- -0- 116 0.09 Missouri 469 39 -0- 126 163 -0- 797 0.88 Washington DC 97 -0- -0- -0- -0- -0- 97 0.19 New Mexico 217 -0- -0- -0- -0- -0- 217 0.44 New York 2,976 -0- -0- 183 -0- 30 3,189 7.33 Delaware 269 -0- -0- -0- -0- -0- 269 0.82 Georgia 1,635 -0- -0- 181 -0- -0- 1,816 5.67 Idaho 235 -0- -0- -0- -0- -0- 235 0.75 Ohio -0- -0- 2 -0- -0- -0- 2 0.01 North Carolina 5 -0- -0- -0- -0- -0- 5 0.04 South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00 Other 43 -0- -0- -0- -0- -0- 43 0.22 ---------- --------- ----------- --------- --------- ------------ -------- Totals $306,145 $ 8,828 $ 2,577 $ 58,705 $2,076 $ 2,197 380,528 1.04 ========== ========= =========== ========= ========= ============ REO general valuation allowance (1,394) (0.00) ----------- -------- $379,134 1.04% =========== ======== (a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995, 1996, and 1997, the Company securitized adjustable rate mortgages into FNMA mortgage-backed securities with full credit recourse. The December 31, 1997 balances of the related nonperforming assets are reflected in the amounts above.
10-K40523rd Page of 117TOC1stPreviousNextBottomJust 23rd
ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) At December 31, 1998, approximately $310 million of the Company's loans were 30 to 89 days past due. An additional $171 million of loans were performing under bankruptcy protection. Management has included its estimate of potential losses on these loans in the allowance for loan losses. The Company provides specific valuation allowances for losses on loans when impaired, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating loan losses and recourse obligations that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a data base that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to, and reductions from the allowances are reflected in current earnings. The table below shows the changes in the allowance for loan losses for the years indicated: [Enlarge/Download Table] TABLE 15 Changes in Allowance for Loan Losses (Dollars in thousands) 1998 1997 1996 1995 1994 ----------- ----------- ---------- ----------- ---------- Beginning allowance for loan losses $233,280 $195,702 $141,988 $ 124,003 $106,698 Provision charged to expense 11,260 57,609 84,256 61,190 62,966 Less loans charged off (1,387) (20,818) (31,239) (44,656) (46,556) Add recoveries 1,313 787 697 1,451 895 ----------- ----------- ---------- ----------- ---------- Ending allowance for loan losses $244,466 $233,280 $195,702 $ 141,988 $124,003 =========== =========== ========== =========== ========== Ratio of net chargeoffs to average loans outstanding(including MBS with recourse) .00% .06% .10% .15% .18% =========== =========== ========== =========== ========== Ratio of allowance for loan losses to nonperforming assets 80.2% 61.5% 43.0% 36.4% 34.9% =========== =========== ========== =========== ========== Chargeoffs decreased in 1998 as compared to 1997 and in 1997 as compared to 1996 primarily due to the strong California economy and housing market.
10-K40524th Page of 117TOC1stPreviousNextBottomJust 24th
ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES Golden West's investment securities portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, collateralized mortgage obligations, and corporate notes. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in comprehensive income and as a separate component of stockholders' equity until realized. Gains or losses on sales of investment securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, consisting of overnight investments such as Eurodollar time deposits, federal funds, and short-term repurchase agreements, and longer-term investments such as bank notes, medium-term notes, and collateralized mortgage obligations. These other investments are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. At December 31, 1998, 1997, and 1996, the Company had securities available for sale in the amount of $377 million, $609 million, and $781 million, respectively, including net unrealized gains on investment securities available for sale of $358 million, $245 million, and $159 million, respectively. Included in the Company's investment portfolio at December 31, 1998, 1997, and 1996, were collateralized mortgage obligations (CMOs) in the amount of $196 million, $71 million and $170 million, respectively. The Company holds CMOs on which both principal and interest are received. It does not hold any interest-only or principal-only CMOs. At December 31, 1998, all of the Company's CMOs qualified for inclusion in the regulatory liquidity measurement.
10-K40525th Page of 117TOC1stPreviousNextBottomJust 25th
ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) The table below sets forth the composition of the Company's securities available for sale at December 31. [Enlarge/Download Table] TABLE 16 Composition of Securities Available for Sale (Dollars in thousands) 1998 1997 1996 ------------ ------------ ------------ Equity securities $ 363,427 $ 335,267 $ 260,672 U.S Treasury and Government agency obligations 5,814 201,845 200,844 Collateralized mortgage obligations 7,764 71,432 169,812 Certificates of deposit and short-term bank notes -0- -0- 149,997 ------------ ------------ ------------ $ 377,005 $ 608,544 $ 781,325 ============ ============ ============ The weighted average yields on the securities available for sale portfolio were 19.21%, 6.88%, and 6.64% at December 31, 1998, 1997, and 1996, respectively. The higher yield in 1998 reflects the effect of the high yield on the Federal Home Loan Mortgage Corporation stock on a smaller available for sale portfolio. The table below sets forth the composition of the Company's other investments at December 31. [Enlarge/Download Table] TABLE 17 Composition of Other Investments (Dollars in thousands) 1998 1997 1996 ------------ ------------ ----------- Overnight Investments: Federal funds, at cost $ 166,896 $ 72,648 $ 324,432 Eurodollar time deposits, at cost -0- 180,000 102,400 Short-term repurchase agreements collateralized by mortgage-back securities, at cost -0- -0- 652,000 Longer-Term Investments: Bank notes 25,000 -0- -0- Collateralized mortgage obligations 188,304 -0- -0- Medium-term notes 42,185 -0- -0- ------------ ------------ ----------- $ 422,385 $ 252,648 $1,078,832 ============ ============ =========== The weighted average yields on the other investments portfolio were 4.92%, 5.91%, and 7.01% at December 31, 1998, 1997, and 1996, respectively. There were no sales of other investments during 1998, 1997, or 1996.
10-K40526th Page of 117TOC1stPreviousNextBottomJust 26th
ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) As of December 31, 1998, the other investments portfolio had maturities as follows: [Download Table] TABLE 18 Maturities of Other Investments (Dollars in thousands) Amortized Maturity Cost --------------------------------- -------------- 1999 $166,896 2000 through 2003 67,185 2004 through 2008 51,569 2009 and thereafter 136,735 --------------- $422,385 ============== MORTGAGE-BACKED SECURITIES The Company classifies its MBS as either held to maturity or available for sale. The Company has no trading MBS. MBS held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. The Company has securitized certain loans from its loan portfolio into MBS with recourse and into Real Estate Investment Conduits (MBS-REMICs), both of which are held to maturity and available to be used as collateral for borrowings. At December 31, 1998, the Company had MBS held to maturity in the amount of $9.9 billion, including $3.9 billion of FNMA MBS subject to full credit recourse to the Company and including $5.5 billion of securities issued in the form of REMICs. At December 31, 1997, the Company had MBS held to maturity in the amount of $3.8 billion, including $3.0 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company. At December 31, 1996, the Company had MBS held to maturity in the amount of $4.1 billion, including $3.3 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 1998, 1997, and 1996, the Company had mortgage-backed securities available for sale in the amount of $114 million, $157 million, and $227 million, respectively, including unrealized gains on mortgage-backed securities available for sale of $5 million, $8 million, and $11 million, respectively. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS, using specific identification, adjusted for any unamortized premium or discount.
10-K40527th Page of 117TOC1stPreviousNextBottomJust 27th
ITEM 1. BUSINESS (Continued) MORTGAGE-BACKED SECURITIES (continued) During 1998, the Company securitized $6.4 billion of mortgage loans into Real Estate Mortgage Investment Conduits formed by WFSB. Securities issued by the REMICs are being used as collateral for borrowings. The securities issued by the REMIC are classified as MBS held to maturity. During 1998, the Company securitized $1.8 billion of ARMs into FNMA Eleventh District Cost of Funds Index (COFI)-indexed MBS. During 1997, 1996, and 1995, the Company securitized $1.0 billion, $1.3 billion, and $2.3 billion, respectively, of ARMs into FNMA COFI-indexed MBS. In addition, during 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS. The Company has the ability and intent to hold these MBS until maturity and, accordingly, these MBS are classified as held to maturity. The FNMA MBS held to maturity are available to be used as collateral for borrowings and are subject to full credit recourse to the Company. Repayments of MBS during the years 1998, 1997, and 1996 amounted to $2.1 billion, $518 million, and $413 million, respectively. MBS repayments were higher in 1998 due to the increase in total MBS outstanding and an increase in prepayments on underlying mortgages. MBS repayments were higher in 1997 due to the increase in prepayments on underlying mortgages. For information on MBS see Notes D and E to the Financial Statements included in Item 14. GOODWILL During 1996, the Company adopted SFAS 72, effective January 1, 1996, for goodwill related to the Company's acquisitions made prior to September 30, 1982. The adoption of SFAS 72 for goodwill related to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. SFAS 72 requires, among other things, that to the extent the fair value of liabilities assumed exceeds the fair value of assets resulting from the acquisition of banking or thrift institutions initiated after September 30, 1982, the resulting goodwill recognized shall be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. As a result, the Company wrote-off goodwill totaling $205 million as the cumulative effect of the change in accounting for goodwill. The Company had been accounting for acquisitions initiated subsequent to September 30, 1982 in accordance with SFAS 72. The remaining goodwill from acquisitions subsequent to 1982 amounting to less than .2% of total assets was not material and was reclassified to other assets. Amortization of goodwill is recorded on the Company's Consolidated Statement of Net Earnings under the section titled "Non-Interest Income - Other".
10-K40528th Page of 117TOC1stPreviousNextBottomJust 28th
ITEM 1. BUSINESS (Continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1998, 1997, and 1996 as a result of earnings and increased market values of securities available for sale. These increases were partially offset by the repurchase of Company stock and the payment of quarterly dividends to stockholders. The cost of the stock repurchase program for the years ended December 31, 1998, 1997, and 1996 was $80 million, $48 million, and $106 million, respectively. Since 1993, through three separate actions, Golden West's Board of Directors' authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of December 31, 1998, 9.5 million shares had been repurchased and retired at a cost of $461 million since October 28, 1993, of which 1.0 million shares were purchased and retired at a cost of $80 million during 1998. Dividends from subsidiaries are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under such registration statement. The Company's preferred stock has been preliminarily rated a2 by Moody's. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company operates as a single segment and, therefore, SFAS 131 had no effect on the Company's financial statements.
10-K40529th Page of 117TOC1stPreviousNextBottomJust 29th
ITEM 1. BUSINESS (Continued) NEW ACCOUNTING PRONOUNCEMENTS (continued) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet completed a full assessment of the impact of this statement on its financial statements and results of operations. EARNINGS PER SHARE Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The Company's Basic EPS before the extraordinary item was $7.81 for the year ended December 31, 1998, compared to $6.22 and $5.31 (before the three nonrecurring items) for the years ended December 31, 1997 and 1996, respectively. The Company reported Diluted EPS, before the extraordinary item, of $7.74 for the year ended December 31, 1998 as compared to $6.13 and $5.24 (before the three nonrecurring items), for the years ended December 31, 1997 and 1996, respectively. EXTRAORDINARY ITEM During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments which was recorded as an extraordinary item. YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 1998, 1997, and 1996 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference. The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1998, and is incorporated herein by reference.
10-K40530th Page of 117TOC1stPreviousNextBottomJust 30th
ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (Continued) The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities. [Enlarge/Download Table] TABLE 19 Average Interest-Earning Assets and Interest-Bearing Liabilities At and for the Years Ended December 31 (Dollars in thousands) 1998 1997 1996 ---------------------------- ---------------------------- ----------------------------- End of End of End of Average Average Period Average Average Period Average Average Period Balances Yield Yield Balances Yield Yield Balances Yield Yield ---------- ------- ------- ---------- ------- ------- ----------- ------- ------- ASSETS Investment Securities $ 2,956,971 5.72% 5.53% $ 2,025,096 6.06% 6.48% $ 1,690,498 6.18% 6.88% Mortgage-backed securities 6,891,798 7.23% 7.20% 3,985,408 7.09% 7.23% 3,392,220 7.26% 7.13% Loans receivable (a) 29,982,931 7.52% 7.36% 32,037,925 7.47% 7.53% 29,493,151 7.47% 7.43% Invest. in capital stock 692,345 5.87% 5.50% 566,678 6.19% 5.86% 433,819 6.23% 6.34% of FHLB ---------- ------- ----------- ------- ----------- ------- Interest-earning assets $40,524,045 7.31% $38,615,107 7.34% $35,009,688 7.37% ========== ======= =========== ======= =========== ======= LIABILITIES Deposits: Checking accounts $ 79,172 1.50% 2.06% $ 93,472 1.18% 1.75% $ 622,011 1.21% 1.17% Savings accounts 6,805,841 3.98% 3.97% 3,112,833 2.79% 3.75% 1,880,457 2.30% 2.38% Term accounts 19,028,844 5.32% 5.07% 20,700,959 5.42% 5.37% 18,756,033 5.39% 5.32% ---------- ------- ------- ---------- ------- ------- ----------- ------- ------- Total deposits 25,913,857 4.96% 4.67% 23,907,264 5.06% 5.04% 21,258,501 4.99% 4.98% Advances from FHLB 7,389,038 5.94% 5.67% 7,813,493 5.59% 5.78% 7,343,334 5.57% 5.47% Reverse repurchases 2,004,388 5.64% 5.39% 2,630,958 5.72% 5.73% 2,013,427 5.86% 5.45% Other borrowings 2,408,791 6.57% 7.90% 2,000,791 7.24% 7.94% 2,202,477 7.36% 7.65% ---------- ------- ----------- ------- ------------ ------- Interest-bearing liabilities 37,716,074 5.29% $36,352,506 5.34% $32,817,739 5.33% ========== ======= =========== ======= ============ ======= Net interest spread 2.02% 2.00% 2.04% ======= ======= ======= Net interest income $ 967,322 $ 890,495 $ 830,960 ========== ========== =========== Net yield on average interest-earning assets 2.39% 2.31% 2.37% ======= ======= ======= (a) Includes nonaccrual loans (90 days or more past due).
10-K40531st Page of 117TOC1stPreviousNextBottomJust 31st
ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued) The table below presents the changes for 1998 and 1997 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates. [Enlarge/Download Table] TABLE 20 Volume and Rate Analysis of Interest Income and Interest Expense Years Ended December 31 (Dollars in thousands) Increase/Decrease in Income/Expense Due to Changes in Volume and Rate(a) ------------------------------------------------------------- 1998 1997 1996 1998 versus 1997 1997 versus 1996 ---------- ---------- ----------- ------------------------------ ----------------------------- Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ---------- ----------- -------- --------- --------- --------- --------- ------- Interest Income Investments $ 169,194 $ 122,765 $ 104,510 $52,880 $ (6,451) $ 46,429 $ 20,240 $ (1,985) $ 18,255 Mortgage-backed 498,319 282,499 246,293 210,039 5,781 215,820 41,887 (5,681) 36,206 securities Loans receivable 2,254,427 2,392,175 2,203,752 (154,648) 16,900 (137,748) 190,010 (1,587) 188,423 Invest. in capital stock of Federal Home 40,613 35,058 27,006 7,249 (1,694) 5,555 8,219 (167) 8,052 Loan Banks ---------- ---------- ----------- Total interest income 2,962,553 2,832,497 2,581,561 Interest Expense Deposits Checking accounts 1,184 1,100 7,536 (109) 193 84 (6,226) (210) (6,436) Savings accounts 271,172 86,799 43,261 135,416 48,957 184,373 32,894 10,644 43,538 Term accounts 1,012,987 1,121,747 1,010,617 (89,299) (19,461) (108,760) 105,361 5,769 111,130 ---------- ---------- ----------- -------- --------- --------- --------- --------- -------- Total deposits 1,285,343 1,209,646 1,061,414 46,008 29,689 75,697 132,029 16,203 148,232 Advances from Federal Home Loan Banks 438,660 437,028 409,040 (12,543) 14,175 1,632 26,290 1,698 27,988 Securities sold under agreements to repurchase 112,942 150,557 117,960 (35,339) (2,276) (37,615) 35,269 (2,672) 32,597 Other borrowings 158,286 144,771 162,187 24,589 (11,074) 13,515 (14,634) (2,782) (17,416) ---------- ---------- ----------- -------- --------- --------- --------- --------- -------- Total interest expense 1,995,231 1,942,002 1,750,601 ----------- ---------- ----------- Net interest income $ 967,322 $ 890,495 $ 830,960 $92,805 $15,978) $76,827 $ 81,402 $(21,867) $59,535 ========== ========== =========== ======== ========= ========= ========= ========= ======== Net interest income increase (decrease)as a percentage of average earning assets(c) .23% (.04)% 0.19% .21% (.06)% 0.15% ======== ========= ========= ========= ========= ======= (a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of interest rate swap and cap activity have been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due).
10-K40532nd Page of 117TOC1stPreviousNextBottomJust 32nd
ITEM 1. BUSINESS (Continued) COMPETITION AND OTHER MATTERS The Company experiences strong competition in both attracting deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings associations, commercial banks, and government and corporate debt securities. In addition, traditional financial institutions have found themselves in competition with other financial services entities, such as securities dealers, insurance companies, credit unions, and others. The principal methods used by the Company to attract deposits, in addition to the interest rates and terms offered, include the offering of a variety of services and the convenience of office locations and hours of public operation. Competition in making real estate loans comes principally from other savings associations, mortgage banking companies, and commercial banks. Many of the nation's largest savings associations, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their real estate brokers. In addition, the Company competes indirectly with enormous government-sponsored enterprises, notably the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal Home Loan Banks. THRIFT INDUSTRY The operations of the thrift industry are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. REGULATION FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve credit capacity for its members, which may include savings associations, savings banks, commercial banks and credit unions. As members, the Insured Institutions are required to own capital stock of a FHLB in an amount that depends generally upon their outstanding home mortgage loans or advances from such FHLB, and are authorized to borrow funds from such FHLB (see Borrowings).
10-K40533rd Page of 117TOC1stPreviousNextBottomJust 33rd
ITEM 1. BUSINESS (Continued) REGULATION (continued) LIQUIDITY. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and WSL, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. As of December 1, 1997, the current minimum requirement was changed to equal 4% of the quarterly average of daily balances of short-term deposits and borrowings or 4% of the prior quarter's ending balance of short-term deposits and borrowings. For all other months during 1997, the minimum liquidity requirement was equal to 5% of the monthly average of customer deposits and short-term borrowings. At December 31, 1998, 1997, and 1996, the Company's insured subsidiaries had liquidity in excess of the regulatory requirements. FEDERAL DEPOSIT INSURANCE CORPORATION. The deposit accounts of WFSB and WSSB are insured by the FDIC as part of the BIF, up to the maximum amount permitted by law, currently $100,000 per insured depositor. The deposit accounts of WSL are insured by the FDIC as part of the SAIF, also up to the maximum amount permitted by law. As a result, WFSB, WSL, and WSSB are subject to supervision, regulation and examination by the FDIC. FDIC insurance is required for all federally chartered financial institutions such as WFSB and WSL, and for state chartered entities such as WSSB. Such insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. During 1996, federal legislation was enacted to capitalize the Savings Association Insurance Fund in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund. The new banking law required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.648 per $1,000. Also, beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB and WSSB, was increased from $0.00 per $1,000 in savings balances to $.1296 per $1,000.
10-K40534th Page of 117TOC1stPreviousNextBottomJust 34th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The deposits of savings institutions insured by the SAIF may be converted to BIF insurance. Further, deposits insured by the BIF may be converted to SAIF insurance. Such conversions require payment of an exit fee to the insurance fund that the institution leaves and an entrance fee to the insurance fund the institution enters. In addition, bank holding companies, which were previously authorized to acquire savings institutions only in connection with supervisory transactions, may now acquire savings institutions generally. In addition, the same 1996 federal legislation which recapitalized the SAIF, also included a provision which directs federal banking regulators to take appropriate actions to prevent insured depositories from encouraging and facilitating the shifting of deposits from SAIF to BIF. The provision was the subject of a notice of proposed rulemaking issued by the FDIC, but the FDIC withdrew the proposed rule. OFFICE OF THRIFT SUPERVISION (OTS). Because they are federally chartered savings institutions, the principal regulator of both WFSB and WSL is the OTS. Under various regulations of the OTS, savings associations are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets at levels fixed from time to time, and to comply with various limitations on loans to one borrower and limitations on equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade. FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. WFSB, WSL and WSSB are currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings associations have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings associations to exhaust all FHLB sources before borrowing from the Federal Reserve Bank. REGULATORY CAPITAL. The OTS requires federally insured institutions such as WFSB and WSL to meet certain minimum capital requirements. Effective March 31, 1998, FIRREA's old 3% minimum requirement for Core (or Leverage) Capital was superseded by a 4% minimum requirement under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
10-K40535th Page of 117TOC1stPreviousNextBottomJust 35th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The following table summarizes WFSB's regulatory capital ratio and compares them to the OTS minimum requirements at December 31. [Enlarge/Download Table] TABLE 21 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) 1998 1997 ------------------------------------------------- -------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- -------- ------------ -------- ------------ --------- Tangible $2,163,838 6.77% $ 479,370 1.50% $1,603,530 6.51% $ 369,694 1.50% Core 2,163,838 6.77 1,278,319 4.00 1,603,530 6.51 739,388 3.00 Risk-based 2,311,286 12.93 1,430,371 8.00 1,695,565 12.80 1,060,024 8.00 The following table summarizes WSL's regulatory capital ratio and compares them to the OTS minimum requirements at December 31. [Enlarge/Download Table] TABLE 22 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) 1998 1997 ------------------------------------------------- -------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- -------- ------------ -------- ------------ --------- Tangible $ 473,523 7.25% $ 97,909 1.50% $ 980,483 6.42% $ 228,950 1.50% Core 473,523 7.25 261,091 4.00 980,483 6.42 457,901 3.00 Risk-based 617,654 16.24 304,286 8.00 1,186,445 13.64 695,611 8.00 In addition, institutions whose exposure to interest-rate risk as determined by the OTS is deemed to be above normal may be required to hold additional risk-based capital. The OTS has determined that WFSB and WSL do not have above-normal exposure to interest-rate risk. The OTS has adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. As of December 31, 1998, the most recent notification from the OTS categorized both WFSB and WSL as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of either WFSB or WSL.
10-K40536th Page of 117TOC1stPreviousNextBottomJust 36th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1998. [Enlarge/Download Table] TABLE 23 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------- ------------ ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 1,672,138 Retained earnings 492,566 ------------ Equity capital $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 ============ Positive goodwill (1,016) (1,016) (1,016) (1,016) (1,016) General valuation allowance 147,448 ------------- ------------ ------------- ------------ ------------ Regulatory capital $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,311,286 ============= ============ ============= ============ ============ Total assets $31,912,264 ============ Adjusted total assets $31,957,968 $31,957,968 $31,957,968 ============= ============ ============= Risk-weighted assets $17,879,637 $17,879,637 ============ ============ CAPITAL RATIO - ACTUAL 6.78% 6.77% 6.77% 6.77% 12.10% 12.93% ============ ============= ============ ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============= ============ ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============= ============ ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============= ============ ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============= ============ ============ Critically undercapitalized, equal to or less than 2.00% ============
10-K40537th Page of 117TOC1stPreviousNextBottomJust 37th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1997. [Enlarge/Download Table] TABLE 24 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------- ------------ ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 1,354,612 Retained earnings 250,799 ------------ Equity capital $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 ============ Positive goodwill (2,031) (2,031) (2,031) (2,031) (2,031) General valuation allowance 92,035 ------------- ------------ ------------- ------------ ------------ Regulatory capital $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,695,565 ============= ============ ============= ============ ============ Total assets $24,608,701 ============ Adjusted total assets $ 24,646,251 $24,646,251 $24,646,251 ============= ============ ============= Risk-weighted assets $13,250,306 $13,250,306 ============ ============ CAPITAL RATIO - ACTUAL 6.52% 6.51% 6.51% 6.51% 12.10% 12.80% ============ ============= ============ ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============= ============ ============= Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============= ============ ============= Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============= ============ ============= Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============= ============ ============= Critically undercapitalized, equal to or less than 2.00% ============
10-K40538th Page of 117TOC1stPreviousNextBottomJust 38th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1998. [Enlarge/Download Table] TABLE 25 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 239,932 Unrealized gains on securities available for sale 214,255 ------------ Equity capital $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778 ============ Unrealized gains on securities available for sale (214,255) (214,255) (214,255) (214,255) (214,255) Equity/other investments (3,108) Subordinated debt 99,818 General valuation allowance 47,421 ------------ ------------- ------------- ------------ ------------ Regulatory capital $ 473,523 $ 473,523 $ 473,523 $ 473,523 $ 617,654 ============ ============= ============= ============ ============ Total assets $ 6,810,266 ============ Adjusted total assets $ 6,527,285 $ 6,527,285 $ 6,527,285 ============ ============= ============= Risk-weighted assets $ 3,803,573 $ 3,803,573 ============ ============ CAPITAL RATIO - ACTUAL 10.10% 7.25% 7.25% 7.25% 12.45% 16.24% ============ ============ ============= ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============= ============ Critically undercapitalized, equal to or less than 2.00% ============
10-K40539th Page of 117TOC1stPreviousNextBottomJust 39th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1997. [Enlarge/Download Table] TABLE 26 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 746,892 Unrealized gains on securities available for sale 141,478 ------------ Equity capital $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 ============ Unrealized gains on securities available for sale (141,478) (141,478) (141,478) (141,478) (141,478) Equity/other investments (2,452) Subordinated debt 99,697 General valuation allowance 108,717 ------------ ------------- ------------- ------------ ------------ Regulatory capital $ 980,483 $ 980,483 $ 980,483 $ 980,483 $ 1,186,445 ============ ============= ============= ============ ============ Total assets $15,446,575 ============ Adjusted total assets $15,263,364 $15,263,364 $15,263,364 ============ ============= ============= Risk-weighted assets $ 8,695,143 $ 8,695,143 ============ ============ CAPITAL RATIO - ACTUAL 7.26% 6.42% 6.42% 6.42% 11.28% 13.64% ============ ============ ============= ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============= ============ Critically undercapitalized, equal to or less than 2.00% ============
10-K40540th Page of 117TOC1stPreviousNextBottomJust 40th
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table shows that WFSB's regulatory capital exceeds the requirements of the well-capitalized classification at December 31. [Enlarge/Download Table] TABLE 27 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well-Capitalized Classification Requirement (Dollars in thousands) 1998 1997 ---------------------------------------------- ---------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED --------------------- ---------------------- --------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ----------- --------- ---------- -------- ---------- --------- Leverage $2,163,838 6.77% $1,597,898 5.00% $1,603,530 6.51% $1,232,313 5.00% Tier 1 riskbased 2,163,838 12.10 1,072,778 6.00 1,603,530 12.10 795,018 6.00 Total risk-based 2,311,286 12.93 1,787,964 10.00 1,695,565 12.80 1,325,031 10.00 The table below shows that WSL's regulatory capital exceeds the requirements of the well-capitalized classification at December 31. [Enlarge/Download Table] TABLE 28 World Savings and Loan Association Regulatory Capital Compared to Well-Capitalized Classification Requirement (Dollars in thousands) 1998 1997 ---------------------------------------------- ---------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED --------------------- ---------------------- --------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ----------- --------- ---------- -------- ---------- --------- Leverage $ 473,523 7.25% $ 326,364 5.00% $ 980,483 6.42% $ 763,168 5.00% Tier 1 risk based 473,523 12.45 228,214 6.00 980,483 11.28 521,709 6.00 Total risk-based 617,654 16.24 380,357 10.00 1,186,445 13.64 869,514 10.00 WSSB is a state chartered savings bank regulated by the FDIC. At December 31, WSSB had the following regulatory capital calculated in accordance with FDIC's capital standards: [Enlarge/Download Table] TABLE 29 World Savings Bank, a State Chartered Savings Bank Regulatory Capital Ratios (Dollars in thousands) 1998 1997 --------------------------------------------- --------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED --------------------- --------------------- --------------------- --------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ---------- -------- ---------- -------- ---------- -------- Tier-1 Leverage $ 186,411 5.26% $ 106,220 3.00% $ 11,878 9.88% $ 3,607 3.00% Tier 1 risk based 186,411 25.12 29,686 4.00 11,878 17.80 2,670 4.00 Total risk-based 186,647 25.15 59,372 8.00 12,026 18.02 5,340 8.00
10-K40541st Page of 117TOC1stPreviousNextBottomJust 41st
ITEM 1. BUSINESS (Continued) REGULATION (continued) CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS limits capital distributions, including distributions of cash or other property to owners of savings associations on account of their ownership, payments to repurchase, redeem or retire shares of the savings association, and any direct or indirect payment of cash to owners of a savings association or affiliates in connection with a corporate restructuring. During the first quarter of 1999, the OTS changed its regulations governing capital distributions. Those changes become effective April 1, 1999. Under the new regulations, savings associations not controlled by a savings and loan holding company may pay capital distributions during a calendar year, without notice or application to the OTS, equal to net income for the applicable calendar year plus retained net income for the two prior calendar years. Such savings associations must file applications for approval of a proposed distribution, if (i) they are not eligible for expedited application processing, (ii) they would not be at least adequately capitalized following the capital distribution, or (iii) they would violate a prohibition contained in any applicable statute, regulation, or agreement with the OTS or the FDIC, or would violate a condition of OTS approval by making the proposed distribution. In addition, the new regulations require 30-days advance notice to be filed for proposed capital distributions that would result in the savings association being less than well-capitalized or that involve the reduction or retirement of the savings association's stock. All savings associations controlled by savings and loan holding companies are required to file 30-days advance notice of proposed capital distributions. Under the new regulations, the OTS may disapprove a notice if it finds that (a) the savings association will be undercapitalized, significantly undercapitalized or critically undercapitalized following the distribution, (b) the proposed capital distribution raises safety and soundness concerns, or (c) the proposed distribution violates a prohibition contained in a statute, regulation or agreement between the savings association and the OTS (or FDIC), or a condition imposed by an OTS condition of approval. During 1998, WSL paid a total of $730 million in upstream dividends to Golden West. LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings associations to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral".) At December 31, 1998, the maximum that WFSB could have loaned to one borrower was $347 million while the largest amount of loans it had to one borrower was $33 million. At December 31, 1998, the maximum amount that WSL could have loaned to one borrower (and related entities) was $93 million. At such date, the largest amount of loans that WSL had outstanding to any one borrower was $7 million.
10-K40542nd Page of 117TOC1stPreviousNextBottomJust 42nd
ITEM 1. BUSINESS (Continued) REGULATION (continued) DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings association or a savings bank, such as WFSB or WSL, or state-chartered savings banks such as WSSB based upon the failure of the savings associations or savings banks meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of debt of the Insured Institutions). Thus, in the event of a liquidation of the Insured Institutions or a similar event, claims for deposits would have a priority over claims of holders of debt. As of December 31, 1998, the Insured Institutions had approximately $26.2 billion of deposits outstanding. POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as WFSB, WSL, or WSSB, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate "contracts" extends to obligations such as the debt of the depository institution and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation should be to accelerate the maturity of debt. Such repudiation would result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" above. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including the debt pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of its creditors.
10-K40543rd Page of 117TOC1stPreviousNextBottomJust 43rd
ITEM 1. BUSINESS (Continued) REGULATION (continued) In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience. SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and loan holding company" under the HomeOwners Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company and subsidiaries or affiliates of either. As WFSB's, WSL's and WSSB's parent company, Golden West is considered an "affiliate" of WFSB, WSL and WSSB for regulatory purposes. In addition, WFSB, WSL, and WSSB are considered to be affiliates of each other. Savings associations and savings banks are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h)of the Federal Reserve Act, and with respect to savings associations, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings association from lending or otherwise extending credit to an affiliate, other than the association's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining an affiliate of a savings association and in calculating compliance with the quantitative limitations on transactions with affiliates. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 1998, WFSB and WSL were in compliance with the QTL test.
10-K40544th Page of 117TOC1stPreviousNextBottomJust 44th
ITEM 1. BUSINESS (Continued) REGULATION (continued) TAXATION. The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. EMPLOYEE RELATIONS The Company had a total of 4,379 full-time and 910 permanent part-time employees at December 31, 1998. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good. ITEM 2. PROPERTIES Properties owned by the Company are located in Arizona, California, Colorado, Florida, Illinois, Kansas, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities. The Company owns a 300,000 square-foot office complex on an 111-acre site in San Antonio, Texas. This complex houses its Loan Service, Savings Operations, and Information Systems Departments. The Company owns 206 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note I to the Financial Statements included in Item 14. The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities.
10-K40545th Page of 117TOC1stPreviousNextBottomJust 45th
ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations, or is otherwise required to be discussed pursuant to Item 103 of Regulation S-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable.
10-K40546th Page of 117TOC1stPreviousNextBottomJust 46th
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS MARKET PRICES OF STOCK Golden West's stock is listed on the New York Stock Exchange and Pacific Exchange and traded on the Boston and Midwest Stock Exchanges under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 1998 and 1997 were as follows: [Enlarge/Download Table] TABLE 30 Common Stock Price Range 1998 1997 ---------------------------- ----------------------------- First Quarter $81 - $99 9/16 $61 3/4 - $74 1/4 Second Quarter $95 1/16 - $114 1/4 $59 7/8 - $73 1/4 Third Quarter $75 13/16 - $110 1/8 $70 13/16 - $90 15/16 Fourth Quarter $72 3/8 - $97 5/8 $84 1/16 - $97 13/16 PER SHARE CASH DIVIDENDS DATA Golden West's cash dividends paid per share for 1998 and 1997 were as follows: [Download Table] TABLE 31 Cash Dividends Per Share 1998 1997 --------- --------- First Quarter $ .125 $ .110 Second Quarter $ .125 $ .110 Third Quarter $ .125 $ .110 Fourth Quarter $ .140 $ .125 The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by WSL, investment income, and short-term borrowings. Under OTS regulations, the OTS must be given at least 30 days' advance notice by WFSB or WSL of any proposed dividend to be paid to the parent. Under existing OTS regulations, WFSB and WSL are classified as Tier 1 associations and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. New regulations go into effect on April 1, 1999. (See "CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS" on page 41.)
10-K40547th Page of 117TOC1stPreviousNextBottomJust 47th
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (Continued) At December 31, 1998, $775 million of the Insured Institutions' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. STOCKHOLDERS At the close of business on March 24, 1999, 56,372,799 shares of Golden West's Common Stock were outstanding and were held by 1,439 stockholders of record. At the close of business on March 24, 1999, the Company's common stock price was 95 3/8. The transfer agent and registrar for the Golden West Common Stock is Chase Mellon Shareholder Services, L.L.C., San Francisco, California 94101. The Securities and Exchange Commission (Commission) maintains a web site which contains reports, proxy and information statements and other information pertaining to registrants that file electronically with the Commission including Golden West. The address is: http://www.sec.gov. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. Such information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference.
10-K40548th Page of 117TOC1stPreviousNextBottomJust 48th
ITEM 6. SELECTED FINANCIAL DATA (Continued) [Enlarge/Download Table] TABLE 32 Five Year Consolidated Summary of Operations (Dollars in thousands except per share figures) Year Ended December 31 --------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ------------ ----------- ----------- ------------ Interest Income: Interest on loans $2,254,427 $2,392,175 $2,203,752 $2,097,664 $1,649,413 Interest on mortgage-backed securities 498,319 282,499 246,293 181,355 103,927 Interest on dividends and investments 209,807 157,823 131,516 148,422 123,137 ----------- ------------ ----------- ----------- ------------ 2,962,553 2,832,497 2,581,561 2,427,441 1,876,477 Interest Expense: Interest on deposits 1,285,343 1,209,646 1,061,414 1,048,390 714,353 Interest on advances and other borrowings 709,888 732,356 689,187 656,215 440,754 ----------- ------------ ----------- ----------- ------------ 1,995,231 1,942,002 1,750,601 1,704,605 1,155,107 ----------- ------------ ----------- ----------- ------------ Net interest income 967,322 890,495 830,960 722,836 721,370 Provision for loan losses 11,260 57,609 84,256 61,190 62,966 ----------- ------------ ----------- ----------- ------------ Net interest income after provision for loan 956,062 832,886 746,704 661,646 658,404 losses Non-Interest Income: Fees 62,820 45,910 38,558 29,200 28,816 Gain (loss) on the sale of securities, mortgage-backed securities, and loans 38,784 8,197 11,954 (493) (120) Other 36,009 27,161 24,387 11,071 6,201 ----------- ------------ ----------- ----------- ------------ 137,613 81,268 74,899 39,778 34,897 Non-Interest Expense General and administrative expenses Personnel 196,153 180,917 163,243 151,352 150,220 Occupancy 62,549 55,508 50,171 48,737 44,472 Deposit insurance 5,925 7,454 167,528 44,993 40,220 Advertising 10,412 11,525 9,277 9,850 10,761 Other 79,468 71,555 63,203 61,260 57,246 ----------- ------------ ----------- ----------- ------------ 354,507 326,959 453,422 316,192 302,919 ----------- ------------ ----------- ----------- ------------ Earnings before taxes on income 739,168 587,195 368,181 385,232 390,382 Taxes on income 292,077 233,057 (1,732) 150,693 159,933 ----------- ------------ ----------- ----------- ------------ Earnings before cumulative effect of change in accounting for goodwill and extraordinary item 447,091 354,138 369,913 234,539 230,449 Cumulative effect of change in accounting for goodwill -0- -0- (205,242) -0- -0- Extraordinary item (12,511) -0- -0- -0- -0- ----------- ------------ ----------- ----------- ------------ Net earnings $ 434,580 $ 354,138 $ 164,671 $ 234,539 $ 230,449 =========== ============ =========== =========== ============ Basic earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.81 $ 6.22 $ 6.38 $ 4.00 $ 3.71 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.54) 0.00 0.00 Extraordinary item (.22) 0.00 0.00 0.00 0.00 ----------- ------------ ----------- ----------- ------------ Basic earnings per share $ 7.59 $ 6.22 $ 2.84 $ 4.00 $ 3.71 =========== ============ =========== =========== ============ Diluted earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.74 $ 6.13 $ 6.29 $ 3.94 $ 3.66 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.49) 0.00 0.00 Extraordinary item (.22) 0.00 0.00 0.00 0.00 ----------- ------------ ----------- ----------- ------------ Diluted earnings per share $ 7.52 $ 6.13 $ 2.80 $ 3.94 $ 3.66 =========== ============ =========== =========== ============
10-K40549th Page of 117TOC1stPreviousNextBottomJust 49th
ITEM 6. SELECTED FINANCIAL DATA (Continued) [Enlarge/Download Table] TABLE 33 Five Year Summary of Financial Condition (Dollars in thousands) At December 31 -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------- --------------- --------------- ---------------- --------------- Assets $38,468,729 $39,590,271 $37,730,598 $35,118,156 $31,683,741 Cash, securities available for sale, and other investments 1,050,265 1,033,433 2,078,876 2,310,711 2,265,886 Mortgage-backed securities 10,031,965 3,939,746 4,293,582 3,409,341 1,194,378 Loans receivable 25,721,288 33,260,709 30,113,421 28,181,353 27,071,266 Deposits 26,219,095 24,109,717 22,099,934 20,847,910 19,219,389 Advances from FHLBs 6,163,472 8,516,605 8,798,433 6,447,201 6,488,418 Securities sold under agreements to repurchase and other borrowings 1,252,469 2,334,048 1,908,126 1,817,943 601,821 Medium-term notes -0- 109,992 589,845 1,597,507 1,164,079 Subordinated debt 911,753 1,110,488 1,323,996 1,322,392 1,221,559 Stockholders' equity 3,124,318 2,698,031 2,350,477 2,278,353 2,000,274
10-K40550th Page of 117TOC1stPreviousNextBottomJust 50th
ITEM 6. SELECTED FINANCIAL DATA (Continued) [Enlarge/Download Table] TABLE 34 Five Year Selected Other Data (Dollars in thousands except per share figures) Year Ended December 31 ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------ ------------ ------------- ------------ New real estate loans originated $ 8,187,934 $ 7,482,973 $ 7,012,562 $ 5,949,064 $ 6,637,653 Average yield on new real estate loans 7.72% 7.59% 7.59% 7.56% 6.44% Current average yield on new real estate loans(a) 6.20% 6.42% 6.56% 6.58% n/a Deposits increase ($) $ 2,109,378 $ 2,009,783 $ 1,252,024 $ 1,628,521 $ 1,796,905 Deposits increase (%) 8.7% 9.1% 6.0% 8.5% 10.3% Net earnings/average net worth (ROE) 14.94% (b) 14.14% 7.46% (c) 10.98% 11.11% Net earnings/average assets (ROA) 1.11% (b) .91% .46% (c) .69% .78% General and administrative expense (G&A) to: Total revenues 11.44% (b) 11.22% 17.07% (c) 12.80% 15.83% Average assets .90% .84% 1.26% (c) .93% 1.02% Ratio of earnings to fixed charges: (d) Including interest on deposits 1.37x 1.30x 1.21x 1.23x 1.34x Excluding interest on deposits 2.03x 1.79x 1.53x 1.58x 1.87x Yield on loan portfolio 7.36% 7.53% 7.43% 7.69% 6.85% Yield on MBS 7.20% 7.23% 7.13% 7.41% 8.37% Yield on investments 5.53% 6.48% 6.88% 5.96% 5.42% Yield on earning assets 7.30% 7.48% 7.37% 7.56% 6.81% Cost of deposits 4.67% 5.04% 4.98% 5.15% 4.57% Cost of borrowings 5.87% 5.99% 5.80% 6.15% 5.85% Cost of funds 4.96% 5.36% 5.28% 5.50% 5.00% Spread 2.34% 2.12% 2.09% 2.06% 1.81% Nonperforming asset/total assets (e) .79% .96% 1.21% 1.11% 1.12% Stockholders' equity/total assets 8.12% 6.81% 6.23% 6.49% 6.31% Average stockholders' equity/average assets 7.41% 6.45% 6.15% 6.30% 6.98% World Savings Bank, FSB (WFSB) regulatory capital ratios: (f) Tangible capital 6.77% 6.51% 6.69% 14.01% --- Core capital 6.77% 6.51% 6.69% 14.01% --- Risk-based capital 12.93% 12.80% 13.14% 26.55% --- World Savings and Loan Association (WSL) regulatory capital ratios: (f) Tangible capital 7.25% 6.42% 6.37% 6.38% 6.26% Core capital 7.25% 6.42% 6.37% 6.38% 6.64% Risk-based capital 16.24% 13.64% 13.91% 13.40% 13.54% Number of savings branch offices 248 250 244 233 237 Cash dividends per share $ .515 $ .455 $ .395 $ .35 $ .31 Dividend payout ratio 6.79% (b) 7.32% 13.91% 8.75% 8.34% (a) The current rate reflects the actual rate being paid by the borrower at time of origination. (b) The ratios for the year ended December 31, 1998 include an extraordinary charge of $21 million before tax, or $.22 per basic and diluted earnings per share, net of tax benefit, associated with the prepayment of FHLB advances and include a nonrecurring gain of $13 million before tax, of $.13 per basic and diluted earnings per share, after tax, realized when preferred stock purchased as a discount was redeemed by the issuer at par. Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%, and the dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to total revenues was 11.48%. (c) The numbers for the year ended December 31, 1996 include the 1996 SAIF assessment of $133 million, the special tax credit of $139 million, and the $205 million cumulative effect of the change in accounting for goodwill. The ratios for the year ended December 31, 1996, excluding the three 1996 nonrecurring items are: ROE 13.97%, ROA .86%, G&A to total revenues 12.08%, and G&A to average assets .89%. (d) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, extraordinary item, and fixed charges. Fixed charges include interest expense and amortization of debt expense. (e) The definition of nonperforming assets includes nonaccrual loans (loans that are 90 days or more past due) and real state owned acquired through foreclosure. (f) For regulatory purposes, the requirements to be considered "well capitalized" 5.0% and 10.0% for core and risk-based capital, respectively. n/a Not available.
10-K40551st Page of 117TOC1stPreviousNextBottomJust 51st
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The table below sets forth Golden West Financial Corporation's (Golden West or Company) net earnings for the three years ended December 31, 1998, 1997 and 1996. [Enlarge/Download Table] TABLE 35 Golden West Net Earnings, Basic Earnings Per Share and Diluted Earnings Per Share (Dollars in thousands except per share figures) Year Ended December 31 ------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ Earnings before cumulative effect of change in accounting for goodwill and extraordinary item (a)(b) $447,091 $354,138 $369,913 Cumulative effect of change in accounting for goodwill (c) -0- -0- (205,242) Extraordinary item (d) (12,511) -0- -0- ------------ ------------- ------------ Net Earnings $434,580 $354,138 $164,671 ============ ============= ============ Basic earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item (a)(b) $ 7.81 $ 6.22 $ 6.38 Cumulative effect of change in accounting for goodwill(c) 0.00 0.00 (3.54) Extraordinary item (d) (.22) 0.00 0.00 ------------ ------------- ------------ Basic earnings per share $ 7.59 $ 6.22 $ 2.84 ============ ============= ============ Diluted earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item (a)(b) $ 7.74 $ 6.13 $ 6.29 Cumulative effect of change in accounting for goodwill(c) 0.00 0.00 (3.49) Extraordinary item (d) (.22) 0.00 0.00 ------------ ------------- ------------ Diluted earnings per share $ 7.52 $ 6.13 $ 2.80 ============ ============= ============ (a) 1998 includes a nonrecurring gain of $13 million or $.13 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. (b) 1996 includes the one-time assessment of $133 million to recapitalize the Savings Association Insurance Fund (SAIF) and a tax benefit of $139 million arising from an earlier acquisition. See "Deposit Insurance" and "Taxes on Income" sections on page 72. (c) During 1996, the Company adopted Statement of Financial Accounting Standards No. 72 (SFAS 72), "Accounting for Certain Acquisitions of Banking or Thrift Institutions," which resulted in the write-off of $205 million of goodwill. See "Change in Accounting for Goodwill" section on page 62. (b) Penalties resulting from the prepayment of Federal Home Loan Bank of San Francisco advances during 1998. See "Extraordinary Item" section on page 73.
10-K40552nd Page of 117TOC1stPreviousNextBottomJust 52nd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Golden West's principal subsidiaries are World Savings Bank, FSB (WFSB), World Savings and Loan Association (WSL) and World Savings Bank, SSB (WSSB). WFSB, WSL, and WSSB are referred to collectively as the "Insured Institutions." WFSB and WSL are headquartered in Oakland, California. WSSB is headquartered in Austin, Texas. At December 31, 1998, WFSB, WSL, and WSSB had $32 billion, $7 billion, and $4 billion, respectively, in assets. At December 31, 1998, Golden West had a savings network of 118 branches in California, 44 in Colorado, 32 in Florida, 19 in Texas, 13 in Arizona, 11 in New Jersey, ten in Kansas and one in Illinois. By virtue of being federally-chartered, WFSB and WSL can originate mortgages anywhere in the nation, even though they may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, the Company had lending operations in Connecticut, Delaware, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin. The savings accounts offered by WFSB and WSSB are insured by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). WSL's accounts are insured by the Savings Association Insurance Fund (SAIF) of the FDIC. WFSB and WSL share savings branches in which all products of each institution are made available. In addition, customers of each of the Company's Insured Institutions can transact business on their accounts at any of the Company's branch offices. Interest rates set on deposit accounts offered by the Company's Insured Subsidiaries are based on market conditions, cost, and funding needs. The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources.
10-K40553rd Page of 117TOC1stPreviousNextBottomJust 53rd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION The accompanying table summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 1998, 1997, 1996, and 1995. As the table shows, the largest asset component is the loan portfolio (including mortgage-backed securities), which consists primarily of long-term mortgages. Deposits represent the majority of the Company's liabilities. [Enlarge/Download Table] TABLE 36 Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet December 31 ---------------------------------------------------- 1998 1997 1996 1995 ----------- ---------- ---------- ----------- Assets: Cash and investments 2.7% 2.6% 5.5% 6.6% Mortgage-backed securities (a) 26.1 10.0 11.4 9.7 Loans receivable 66.9 84.0 79.8 80.2 Other assets 4.3 3.4 3.3 3.5 ----------- ---------- ---------- ----------- 100.0% 100.0% 100.0% 100.0% =========== ========== ========== =========== Liabilities and Stockholders' Equity: Deposits 68.1% 60.9% 58.6% 59.4% FHLB advances 16.0 21.5 23.3 18.4 Securities sold under agreements to repurchase 3.3 5.9 5.1 5.2 Medium-term notes 0.0 .3 1.6 4.5 Other liabilities 2.1 1.8 1.7 2.2 Subordinated debt 2.4 2.8 3.5 3.8 Stockholders' equity 8.1 6.8 6.2 6.5 ----------- ---------- ---------- ----------- 100.0% 100.0% 100.0% 100.0% =========== ========== ========== =========== (a) The increase in 1998 resulted from the securitization of loans into mortgage-backed securities. See "Mortgage-Backed Securities" section on page 58. ASSET/LIABILITY MANAGEMENT The Company's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on loans, MBS and investments and the amounts it pays in interest on deposits and borrowings. Therefore, the Company's profitability is largely dependent upon its ability to manage interest rate risk and credit risk (see "Asset Quality" section on page 60). The Company mitigates its credit risk through strict underwriting standards and loan reviews. The Company manages interest rate risk by managing the repricing of interest-rate sensitive assets and liabilities.
10-K40554th Page of 117TOC1stPreviousNextBottomJust 54th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company enters into interest rate swaps as part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. One measure of exposure to interest rate risk is the gap, the difference between the repricing of assets and liabilities. The Company is subject to interest rate risk to the extent its assets and liabilities reprice at different times. The disparity between the repricing (maturity, prepayment, or interest rate change) of deposits and borrowings and the repricing of mortgage loans and investments can have a material impact on the Company's results of operations. The following is the Company's gap table at December 31, 1998: [Enlarge/Download Table] TABLE 37 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of December 31, 1998 (Dollars in Millions) Projected Repricing(a) ----------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------------ ------------ ------------ ------------ ----------- Interest-Earning Assets: Investments $ 333 $ 1 $ 122 $ 343 $ 799 Mortgage-backed securities 9,434 101 313 184 10,032 Loans receivable: Rate-sensitive 21,360 1,872 161 -0- 23,393 Fixed-rate 145 376 1,072 593 2,186 Other(b) 978 -0- -0- -0- 978 Impact of swaps 412 273 (581) (104) -0- ------------ ------------ ------------ ------------ ----------- Total $ 32,662 $ 2,623 $ 1,087 $ 1,016 $ 37,388 ============ ============ ============ ============ =========== Interest-Bearing Liabilities(c): Deposits $ 12,487 $ 11,156 $ 2,568 $ 8 $ 26,219 FHLB advances 5,700 50 122 292 6,164 Other borrowings 1,246 7 911 -0- 2,164 Impact of swaps 291 (150) (141) -0- -0- ------------ ------------ ------------ ------------ ============ Total $ 19,724 $ 11,063 $ 3,460 $ 300 $ 34,547 ============ ============ ============ ============ ============ Repricing gap $ 12,938 $ (8,440) $ (2,373) $ 716 ============ ============ ============ ============ Cumulative gap $ 12,938 $ 4,498 $ 2,125 $ 2,841 ============ ============ ============ ============ Cumulative gap as a percentage of total assets 33.6% 11.7% 5.5% ============ ============ ============ (a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and FHLB stock. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months.
10-K40555th Page of 117TOC1stPreviousNextBottomJust 55th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The gap table shows that, as of December 31, 1998, the Company's assets reprice sooner than its liabilities. If all repricing assets and liabilities responded equally to changes in the interest rate environment, then the gap analysis would suggest that Golden West's earnings would rise when interest rates increase and would fall when interest rates decrease. However, Golden West's earnings are also affected by the built-in reporting and repricing lags inherent in the Eleventh District Cost of Funds Index (COFI), which is the benchmark the Company uses to determine the rate on the majority of its adjustable rate mortgages (ARMs). The reporting lag occurs because of the time it takes to gather the data needed to compute the index. As a result, the COFI in effect in any month actually reflects the Eleventh District's cost of funds at the level it was two months prior. The repricing lag occurs because COFI is based on a portfolio of accounts, not all of which reprice immediately. Therefore, COFI does not initially fully reflect a change in market interest rates. Consequently, when the interest rate environment changes, the COFI lags cause assets to initially reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down income when rates rise. In addition to the COFI lags, other elements of ARM loans also have an impact on earnings. These elements are introductory rates on new ARM loans, the interest rate adjustment frequency of ARM loans, interest rate caps or limits on individual rate changes, and interest rate floors. Partially offsetting the impact of the COFI lags are similar lags on a portion of the Company's liabilities. On balance, the COFI lags and ARM structural features cause the Company's assets initially to reprice more slowly than its liabilities, resulting in a temporary reduction in net interest income when rates increase and a temporary increase in net interest income when rates fall. The table below reflects the Company's expected cash flows and applicable yields on the balances of its interest sensitive assets and liabilities as of December 31, 1998, and takes into consideration expected prepayments of the Company's long-term assets (primarily mortgage-backed securities and loans receivable) and the estimated current fair value. Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes based on simulations using an asset/liability model which takes into account the lags described above. The simulation model projects net interest income, net earnings, and capital ratios based on an immediate interest rate increase that is sustained for a thirty-six month period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. For certain assets, the model incorporates assumptions regarding the impact of changing interest rates on prepayment rates which are based on the Company's historical prepayment information. The model factors in projections for anticipated activity levels by product lines offered by the Company. Based on the information and assumptions in effect at December 31, 1998, Management believes that a 200 basis point rate increase sustained over a thirty-six month period would not affect the Company's long-term profitability and financial strength.
10-K40556th Page of 117TOC1stPreviousNextBottomJust 56th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) [Enlarge/Download Table] TABLE 38 Summary of Market Risk on Financial Instruments As of December 31, 1998 (Dollars in Millions) ----------------------------------------------------------------------------------------------------------------------------------- Expected Maturity Date as of December 31, 1998 ------------------------------------------------------------------------------------------- 2004 & Total Fair 1999 2000 2001 2002 2003 thereafter Balance Value ---------- --------- ---------- ---------- --------- ----------- ---------- --------- Interest-Sensitive Assets: Investments $ 797 $ -0- $ 1 $ -0- $ -0- $ 1 $ 799 $ 800 Weighted average interest rate 5.52% 0.00% 6.56% 0.00% 0.00% 9.87% 5.53% MBS Fixed Rate $ 200 $ 132 $ 90 $ 62 $ 43 $ 111 $ 638 654 Weighted average interest rate 8.21% 8.10% 7.98% 7.87% 7.75% 7.39% 7.95% Variable Rate $ 2,597 $ 1,740 $ 1,109 $ 810 $ 612 $ 2,526 $ 9,394 9,492 Weighted average interest rate 7.17% 7.17% 7.17% 7.16% 7.14% 7.14% 7.16% Loans Receivable Fixed Rate $ 647 $ 363 $ 259 $ 191 $ 145 $ 784 $ 2,389 2,452 Weighted average interest rate 8.44% 8.61% 8.50% 8.39% 8.29% 7.92% 8.29% Variable Rate $ 5,842 $ 4,194 $ 2,981 $ 2,219 $ 1,533 $ 6,563 $ 23,332 23,252 Weighted average interest rate (a) 7.38% 7.39% 7.41% 7.41% 7.38% 7.38% 7.23% ---------- --------- ---------- ---------- --------- ----------- ---------- --------- Total $ 10,083 $ 6,429 $ 4,440 $ 3,282 $ 2,333 $ 9,985 $ 36,552 $ 36,650 ========== ========= ========== ========== ========= =========== ========== ========= Interest-Sensitive Liabilities: Deposits (b) $ 24,448 $ 1,271 $ 263 $ 137 $ 97 $ 3 $ 26,219 $ 26,290 Weighted average interest rate 4.63% 5.23% 5.46% 5.65% 5.76% 5.21% 4.68% FHLB Advances Fixed Rate $ 29 $ 41 $ 23 $ 38 $ 109 $ 173 $ 413 443 Weighted average interest rate 6.76% 6.97% 6.76% 7.04% 6.43% 6.72% 6.70% Variable Rate $ -0- $ 1,550 $ 1,000 $ 200 $ 2,000 $ 1,000 $ 5,750 5,745 Weighted average interest rate 0.00% 5.71% 5.72% 5.32% 5.54% 5.55% 5.61% Reverse Repurchase Agreements Fixed Rate $ 35 $ -0- $ -0- $ -0- $ -0- $ -0- $ 35 35 Weighted average interest rate 2.58% 0.00% 0.00% 0.00% 0.00% 0.00% 2.58% Variable Rate $ 550 $ 600 $ 67 $ -0- $ -0- $ -0- $ 1,217 1,219 Weighted average interest rate 5.25% 5.72% 5.48% 0.00% 0.00% 0.00% 5.49% Subordinated Notes $ 100 $ 215 $ -0- $ 398 $ 199 $ -0- $ 912 955 Weighted average interest rate 10.04% 8.89% 0.00% 7.72% 6.12% 0.00% 7.90% ---------- --------- ---------- ---------- --------- ----------- ---------- --------- Total $ 25,162 $ 3,677 $ 1,353 $ 773 $ 2,405 $ 1,176 $ 34,546 $ 34,687 ========== ========= ========== ========== ========= =========== ========== ========= Off-Balance Sheet Items: Interest Rate Swaps Receive Fixed Swaps $ 329 $ 46 $ 35 $ 12 $ 91 $ -0- $ 513 $ 9 Weighted average receive rate 6.71% 6.73% 6.61% 6.52% 6.39% 0.00% 6.64% Weighted average pay rate 5.39% 5.37% 5.32% 5.31% 5.28% 0.00% 5.36% Pay Fixed Swaps $ 172 $ 10 $ 96 $ 305 $ 212 $ 104 $ 899 (46) Weighted average receive rate 5.64% 5.61% 5.47% 5.43% 5.47% 5.40% 5.48% Weighted average pay rate 8.26% 6.08% 8.13% 7.54% 6.26% 6.65% 7.32% ---------- --------- ---------- ---------- --------- ----------- ---------- --------- Total $ 501 $ 56 $ 131 $ 317 $ 303 $ 104 $ 1,412 $ (37) ========== ========= ========== ========== ========= =========== ========== ========= (a) The total weighted average interest rate for variable loans receivable reflects loans with teaser (start) rates in effect at December 31, 1998. Those loans are assumed to mature outside the teaser period at fully-indexed rates (the fully-indexed rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable rate loans will not equal the weighted average rate of total variable rate loans at December 31, 1998 as indicated in the total balance column. (b) Deposits with no maturity are included in the 1999 column.
10-K40557th Page of 117TOC1stPreviousNextBottomJust 57th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) CASH AND INVESTMENTS Golden West's investment portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, collateralized mortgage obligations and corporate bonds. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and WSL, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. As of December 1, 1997, the current minimum requirement was changed from a monthly to a quarterly calculation and is equal to either 4% of the quarterly average of daily balances of short-term deposits and borrowings or 4% of the prior quarter's ending balance of short-term deposits and borrowings. For all other months during 1997 and for all months during 1996, the minimum liquidity requirement was equal to 5% of the monthly average of deposits and short-term borrowings. At December 31, 1998, 1997, and 1996, the Company's insured subsidiaries had liquidity in excess of the regulatory requirements. At December 31, 1998, and 1997, the Company had securities available for sale in the amount of $377 million and $609 million, respectively, including net unrealized gains on securities available for sale of $358 million and $245 million, respectively. At December 31, 1998 and 1997, the Company had no securities for trading in its investment securities portfolio. Included in the Company's investment portfolio at December 31, 1998, and 1997, were collateralized mortgage obligations (CMOs) in the amount of $196 million and $71 million, respectively. The Company holds CMOs on which both principal and interest are received. It does not hold any interest-only or principal-only CMO's. At December 31, 1998, all of these CMOs qualified for inclusion in the regulatory liquidity measurement.
10-K40558th Page of 117TOC1stPreviousNextBottomJust 58th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) MORTGAGE-BACKED SECURITIES At December 31, 1998, the Company had mortgage-backed securities held to maturity in the amount of $9.9 billion, including $3.9 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities (MBS) with the underlying loans subject to full credit recourse to the Company and including $5.5 billion of securities issued by a Real Estate Mortgage Investment Conduit (REMIC). At December 31, 1997, the Company had mortgage-backed securities held to maturity in the amount of $3.8 billion, including $3.0 billion of Federal National Mortgage Association mortgage-backed securities with the underlying loans subject to full credit recourse to the Company. At December 31, 1998, and 1997, the Company had mortgage-backed securities available for sale in the amount of $114 million and $157 million, respectively, including net unrealized gains on mortgage-backed securities available for sale of $5 million and $8 million at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the Company had no trading MBS. During 1998, the Company securitized $6.4 billion of mortgage loans into Real Estate Mortgage Investment Conduits (MBS-REMIC). Securities issued by the REMICs are being used as collateral for borrowings. The securities issued by the REMIC are classified as MBS held to maturity. During 1998, the Company securitized $1.8 billion of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS. During 1997, 1996 and 1995, the Company securitized $1.0 billion, $1.3 billion and $2.3 billion, respectively, of ARMs into FNMA COFI-indexed MBS. In addition, during 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS. The Company has the ability and intent to hold these MBS until maturity and, accordingly, these MBS are classified as held to maturity. The FNMA MBS held to maturity are available to be used as collateral for borrowings and the underlying loans are subject to full credit recourse to the Company. At December 31, 1998, $9.4 billion of the Company's total MBS portfolio were backed by ARMs. The percentage of MBS backed by ARMs was 94% at yearend 1998 compared to 78% at yearend 1997 and 77% at yearend 1996. The large amount of adjustable rate MBS is mainly due to the large amount of ARM loans securitized in the last four years. At December 31, 1998, fixed-rate mortgage-backed securities comprise the other 6% of the total MBS portfolio. Repayments of MBS during the years 1998, 1997, and 1996 amounted to $2.1 billion, $518 million, and $413 million, respectively. MBS repayments were higher in 1998 due to the increase in total MBS outstanding and an increase in prepayments on the underlying mortgages. MBS repayments were higher in 1997 due to an increase in prepayments on the underlying mortgages.
10-K40559th Page of 117TOC1stPreviousNextBottomJust 59th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) LOAN PORTFOLIO New loan originations in 1998, 1997, and 1996 amounted to $8.2 billion, $7.5 billion, and $7.0 billion, respectively. The increase in 1998 occurred because more consumers sought to refinance their existing home loans as well as a result of a record housing market. The increase in loan volume in 1997 occurred because of a strong housing market and solid demand for ARMs, the Company's principal product. Refinanced loans constituted 44% of new loan originations in 1998 compared to 33% in 1997 and 34% in 1996. Loans originated for sale were $1.2 billion, $217 million, and $477 million for the years ended December 31, 1998, 1997, and 1996. In addition, during 1998, $229 million of loans were converted from adjustable rate to fixed-rate held for sale. The Company continues to sell most of its fixed-rate loans. The Company sold $1.4 billion, $209 million, and $485 million of loans during 1998, 1997, and 1996, respectively. At December 31, 1998, the balance outstanding of loans sold with recourse was $1.4 billion and had a valuation liability of $2.3 million. Golden West continues to emphasize adjustable rate mortgages--loans with interest rates that change periodically in accordance with movements in specified indexes. The portion of the mortgage portfolio (including MBS) composed of ARMs was 92% at yearend 1998 compared to 91% at yearend 1997 and 90% at yearend 1996. Golden West's ARM originations constituted approximately 82% of new mortgage loans made by the Company in 1998, compared with 95% in 1997 and 90% in 1996. Approximately $4.6 billion of the Company's ARMs (including MBS with recourse) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of December 31, 1998, $495 million ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.72% at December 31, 1998, compared to 7.76% at December 31, 1997. Without the floor, the average yield on these loans would have been 7.15% at December 31, 1998, and 7.21% at December 31, 1997. The Company has lending operations in 26 states. The largest source of mortgage origination is loans secured by residential properties in California. In 1998, 62% of total loan originations were on residential properties in California, compared to 54% and 50% in 1997 and 1996, respectively. The five largest states, other than California, for originations for the year ended December 31, 1998, were Florida, Texas, Colorado, Illinois, and Washington with a combined total of 21% of total originations. The percentage of the total loan portfolio (including mortgage-backed securities with recourse) that is comprised of residential loans in California was 66% at December 31, 1998 and December 31, 1997, and 69% at December 31, 1996.
10-K40560th Page of 117TOC1stPreviousNextBottomJust 60th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Loan repayments consisting of monthly loan amortization and loan payoffs during the years 1998, 1997, and 1996 amounted to $6.2 billion, $3.8 billion, and $3.1 billion, respectively. The increase in repayments in 1998 was due to an increase in refinance and home sale activity. The increase in repayments in 1997 was due to an increase in the loan portfolio as well as increased prepayment rates. The balance of the loan portfolio declined for the year ended December 31, 1998, due to a high level of prepayments, an increase in loans sold, and the securitization of loans into MBS. The decrease in the balance of the loan portfolio for the year ended December 31, 1998, was $7.5 billion or 23%. Had there not been $8.2 billion of loans securitized into MBS with recourse and MBS-REMIC, the balance of the loan portfolio would have decreased modestly for the year ended December 31, 1998. The total growth in the portfolio for the year ended December 31, 1997, was $3.1 billion or 10%. MORTGAGE SERVICING RIGHTS The Company accounts for mortgage servicing rights in accordance with SFAS 125. For the years ended December 31, 1998 and 1997, Golden West recognized gains of $23 million and $5 million, respectively, on the sale of loans due to the capitalization of servicing rights. After amortization, the balance at December 31, 1998 and 1997 of the capitalized servicing rights was $29 million and $11 million, respectively. The book value of Golden West's servicing rights did not exceed the fair value at December 31, 1998 or 1997 and, therefore, no write-down of the servicing rights to their fair value was necessary. ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include non-accrual loans (loans, including loans swapped into MBS with recourse and loans securitized into MBS-REMIC, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on loans 90 days or more past due. NPAs amounted to $305 million, $379 million, and $456 million at yearends 1998, 1997, and 1996, respectively. The decrease in NPAs during 1998 and 1997 reflected the strong California economy and housing market. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests.
10-K40561st Page of 117TOC1stPreviousNextBottomJust 61st
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company's troubled debt restructured (TDRs) were $23 million, or .06% of assets, at December 31, 1998, compared to $44 million, or .11% of assets, at December 31, 1997, and $84 million, or .22% of assets, at December 31, 1996. The Company's TDRs are made up of loans on which delinquent loan payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The Company's ratio of NPAs and TDRs to total assets decreased to .85% at December 31, 1998 compared to 1.07% and 1.43% at yearends 1997 and 1996, respectively. The Company has other impaired loans on which specific loss reserves have been provided and that were not included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $71 million at yearends 1998 and 1997 and $56 million at yearend 1996. ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was $244 million at December 31, 1998, compared to $233 million and $196 million at yearends 1997 and 1996, respectively. The provision for loan losses was $11 million, $58 million, and $84 million in 1998, 1997, and 1996, respectively. The provision for loan losses as a percentage of the loan portfolio (including MBS with recourse and MBS-REMIC) was .03% for the year ended December 31, 1998 as compared to .16% and .25% for the years ended December 31, 1997 and 1996. The allowance for loan losses as a percentage of the loan portfolio (including MBS with recourse and MBS-REMIC) was .70% for the year ended December 31, 1998 as compared to .64% and .59% for the years ended December 31, 1997 and 1996. Net chargeoffs for the years ended December 31, 1998, 1997, and 1996 were $74 thousand, $20 million and $31 million, respectively. The ratio of net chargeoffs to average loans outstanding (including MBS with recourse and MBS-REMIC) was .00% for the year ended December 31, 1998, as compared to .06% and .10% for the years ended 1997 and 1996, respectively. The improvements in these ratios reflect the strong California economy and housing market as previously discussed in "Asset Quality."
10-K40562nd Page of 117TOC1stPreviousNextBottomJust 62nd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company provides specific valuation allowances for losses on loans when impaired and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses and recourse obligations that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a data base that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings. REAL ESTATE HELD FOR SALE At December 31, 1998, the Company had real estate held for sale in the amount of $43 million, compared to $62 million a year earlier. The largest balance of real estate held for sale continues to be in one- to four-family properties in California. CHANGE IN ACCOUNTING FOR GOODWILL During 1996, the Company adopted SFAS 72, effective January 1, 1996, for goodwill related to the Company's acquisitions made prior to September 30, 1982. The adoption of SFAS 72 for goodwill related to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. SFAS 72 requires, among other things, that to the extent the fair value of liabilities assumed exceeds the fair value of assets resulting from the acquisition of banking or thrift institutions initiated after September 30, 1982, the resulting goodwill recognized shall be amortized over a period no longer that the estimated remaining life of the acquired long-term interest-earning assets. As a result, the Company wrote-off goodwill totaling $205 million as the cumulative effect of the change in accounting for goodwill. The Company has been accounting for acquisitions initiated subsequent to September 30, 1982 in accordance with SFAS 72. The remaining goodwill from acquisitions subsequent to 1982 amounting to less than .2% of total assets is not material and has been reclassified to other assets. Amortization of goodwill is recorded on the Company's Consolidated Statement of Net Earnings under the section titled "Non-Interest Income - Other."
10-K40563rd Page of 117TOC1stPreviousNextBottomJust 63rd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) DEPOSITS Retail deposits increased by $2.6 billion in 1998 compared to increases of $1.5 billion and $1.3 billion in 1997 and 1996, respectively. Retail deposits increased during 1998, 1997, and 1996 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts in 1997 and 1998. Beginning in January 1997, the Company began a program to use government securities dealers to sell certificates of deposit (CDs) to institutional investors. There were no outstanding wholesale CDs at December 31, 1998. The Company's deposit balance at December 31, 1997 included $525 million of these wholesale CDs. ADVANCES FROM THE FEDERAL HOME LOAN BANK The Company uses borrowings from the Federal Home Loan Banks (FHLBs), also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances are secured by pledges of certain loans, MBS-REMIC, other MBS, and capital stock of the Federal Home Loan Banks. FHLB advances amounted to $6.2 billion at December 31, 1998, compared to $8.5 billion and $8.8 billion at December 31, 1997, and 1996, respectively. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 73. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered into with selected major government securities dealers, large banks, and the Federal Home Loan Bank of San Francisco, typically using MBS from the Company's portfolio. Reverse Repos with dealers, banks, and the Federal Home Loan Bank of San Francisco amounted to $1.3 billion, $2.3 billion, and $1.9 billion at yearend's 1998, 1997, and 1996, respectively. The Company uses accounting and reporting standards for transfers and servicing of assets in accordance with SFAS 125 and SFAS 127. The Company adopted SFAS 127 on January 1, 1998 and the adoption of SFAS 127 had no effect on the Company's financial condition and results of operations.
10-K40564th Page of 117TOC1stPreviousNextBottomJust 64th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) OTHER BORROWINGS As of December 31, 1998, Golden West, at the holding company level, had a total of $812 million of subordinated debt issued and outstanding. At yearend 1998, the Company's subordinated debt was rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At December 31, 1998, Golden West had on file a registration statement with the Securities and Exchange Commission for the sale of up to $300 million of subordinated notes. As of December 31, 1998, WSL had a total of $100 million of subordinated notes issued and outstanding which were rated A2 and A by Moody's and S&P, respectively. These subordinated notes have a scheduled maturity of July 1, 2000; however, WSL intends to exercise its right to call the notes on April 1, 1999. The subordinated notes are included in WSL's risk-based regulatory capital as Supplementary Capital. WSL had no medium-term notes outstanding at December 31, 1998, compared to $110 million at December 31, 1997, and $590 million at December 31, 1996. During 1996, WFSB received permission from the OTS to issue non-convertible medium-term notes to institutional investors under rules similar to Office of the Comptroller of the Currency rules applicable to similarly situated national banks. As of December 31, 1998, WFSB had not issued any notes under this authority. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1998 as a result of earnings and increased market values of securities available for sale. These increases were partially offset by the $80 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased during 1997 as a result of earnings and increased market values of securities available for sale. These increases in 1997 were partially offset by the $48 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased during 1996 as a result of earnings and increased market values of securities available for sale. These increases in 1996 were partially offset by the $106 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders.
10-K40565th Page of 117TOC1stPreviousNextBottomJust 65th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Since 1993, through three separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to a total of 12.2 million shares of Golden West's common stock. As of December 31, 1998, 9.5 million shares had been repurchased and retired at a cost of $461 million since October 28, 1993, of which 1.0 million shares were purchased and retired at a cost of $80 million during 1998. Dividends from subsidiaries are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. The OTS requires federally insured institutions, such as WFSB and WSL, to meet minimum capital requirements. Under these regulations, a savings institution is required to meet three separate capital requirements. The first requirement is to have tangible capital of 1.5% of adjusted total assets. At December 31, 1998, WFSB had tangible capital of $2.2 billion, or 6.77% of adjusted total assets, $1.7 billion in excess of the regulatory requirement. At December 31, 1998, WSL had tangible capital of $474 million, or 7.25% of adjusted total assets, $376 million in excess of the regulatory requirement. The second requirement is to have core capital of 4% of adjusted total assets. At December 31, 1998, WFSB had core capital of $2.2 billion, or 6.77% of adjusted total assets, $886 million in excess of the regulatory requirement. At December 31, 1998, WSL had core capital of $474 million, or 7.25% of adjusted total assets, $212 million in excess of the regulatory requirement. The third capital requirement is to have risk-based capital equal to 8% of risk-weighted assets. At December 31, 1998, WFSB had risk-based capital in the amount of $2.3 billion or 12.93% of risk-weighted assets, exceeding the current requirement by $881 million. At December 31, 1998, WSL had risk-based capital in the amount of $618 million or 16.24% of risk-weighted assets, exceeding the current requirement by $313 million.
10-K40566th Page of 117TOC1stPreviousNextBottomJust 66th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Under OTS regulations which implement the prompt corrective action system mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), an institution is well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to total assets is 5% or more and it is not subject to any written agreement, order or directive to meet a specified capital level. WFSB and WSL qualify as well-capitalized institutions under the rules applicable to them. The OTS limits capital distributions by savings associations. For purposes of capital distributions, the OTS has classified WFSB and WSL as Tier 1 associations; thus, WFSB and WSL may pay dividends during a calendar year of up to 100% of net earnings to date during the calendar year plus up to one-half of capital in excess of the risk-based capital requirement at the end of the prior year subject to thirty days' advance notice to the OTS. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. During 1998, WSL obtained such approval and paid a total of $730 million in dividends to Golden West during 1998. WSSB is a state chartered savings bank regulated by the FDIC. Under these regulations, a savings bank is required to meet three capital requirements. The first capital requirement is to have tier 1 leverage capital of 3% of adjusted average regulatory assets. The second requirement is to have tier 1 risk-based capital of 4% of risk-weighted assets. The third requirement is to have total risk-based capital of 8% of risk-weighted assets. At December 31, 1998, WSSB had tier 1 leverage capital of $186 million or 5.26% of adjusted average regulatory assets, tier 1 risk-based capital of $186 million or 25.12% of risk-weighted assets, and total risk-based capital of $187 million or 25.15% of risk-weighted assets. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company operates as a single segment and, therefore, SFAS 131 had no effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet completed a full assessment of the impact of this statement on its financial statements and results of operations.
10-K40567th Page of 117TOC1stPreviousNextBottomJust 67th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Net earnings before the extraordinary item increased in 1998 as compared to 1997 primarily due to an increase in net interest income, a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets, and an increase in non-interest income. These increases to net earnings were partially offset by an increase in general and administrative expenses. In addition, net earnings for 1998 included a gain of $13 million before tax from the redemption of preferred stock which was called by the issuer. Net earnings increased in 1997 as compared to 1996 without the three nonrecurring items: the federally mandated recapitalization of the SAIF, the recognition of a tax benefit arising from an earlier acquisition, and the adoption of SFAS 72 for goodwill related to the Company's acquisitions prior to September 30, 1982. The increase was primarily due to an increase in net interest income as a result of increases in interest earning assets; a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets; and a decrease in deposit insurance premiums partially offset by increases in other operating expenses. EARNINGS PER SHARE Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted-average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The Company's Basic EPS before the extraordinary item was $7.81 for the year ended December 31, 1998, compared to $6.22 and $5.31 (before the three nonrecurring items) for the years ended December 31, 1997 and 1996, respectively. The Company reported Diluted EPS before the extraordinary item of $7.74 for the year ended December 31, 1998 as compared to $6.13 and $5.24 (before the three nonrecurring items) for the years ended December 31, 1997 and 1996, respectively. PROFIT MARGINS/SPREADS An important determinant of Golden West's earnings is its primary spread--the difference between its yield on earning assets and its cost of funds.
10-K40568th Page of 117TOC1stPreviousNextBottomJust 68th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The following table shows the components of the Company's primary spread at the end of the years 1996 through 1998. [Download Table] TABLE 39 Yield on Earning Assets, Cost of Funds, And Primary Spread December 31 -------------------------------- 1998 1997 1996 -------- --------- --------- Yield on loan portfolio 7.32% 7.50% 7.39% Yield on investments 5.53 6.48 6.88 -------- --------- --------- Yield on earning assets 7.30 7.48 7.37 -------- --------- --------- Cost of deposits 4.67 5.04 4.98 Cost of borrowings 5.87 5.99 5.80 -------- --------- --------- Cost of funds 4.96 5.36 5.28 -------- --------- --------- Primary spread 2.34% 2.12% 2.09% ======== ========= ========= YIELD ON EARNING ASSETS Golden West originates ARMs to manage the rate sensitivity of the asset side of the balance sheet. Most of the Company's ARMs have interest rates that change in accordance with an index based on the cost of deposits and borrowings of savings institutions that are members of the FHLB of San Francisco (the COFI). Nevertheless, the yield on the Company's ARM portfolio tends to lag changes in market interest rates because of lags related to the index and because of certain loan features (see Asset/Liability Management section for further discussion.) COST OF FUNDS Approximately 89% of Golden West's liabilities are subject to repricing in less than one year. Lower rates on deposit accounts as well as lower rates on borrowings led to a decrease in the Company's cost of funds during 1998. Higher rates on deposit accounts as well as higher rates on borrowings led to an increase in the Company's cost of funds during 1997. INTEREST RATE SWAPS AND CAPS The Company enters into interest rate swaps and caps as a part of its interest rate risk management strategy. The Company had no caps outstanding during 1998 or 1997. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes.
10-K40569th Page of 117TOC1stPreviousNextBottomJust 69th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) Interest rate swap and cap activity decreased net interest income by $9 million, $5 million, and $10 million for the years ended December 31, 1998, 1997, and 1996, respectively. The table below summarizes the unrealized gains and losses for interest rate swaps at December 31, 1998 and 1997. [Download Table] TABLE 40 Unrealized Gains and Losses on Interest Rate Swaps (Thousands) December 31, 1998 --------------------------------------------- Net Unrealized Unrealized Unrealized Gains Losses (Loss) ------------- ------------ ------------ Interest rate swaps $ 8,924 $ 45,923 $ (36,999) ============= ============ ============ December 31, 1997 --------------------------------------------- Net Unrealized Unrealized Unrealized Gains Losses (Loss) ------------- ------------ ------------ Interest rate swaps $ 11,043 $ 36,897 $ (25,854) ============= ============ ============ [Download Table] TABLE 41 Interest Rate Swap Activity (Notional Amounts in Millions) Receive Pay Forward Fixed Fixed Starting Swaps Swaps Swaps ----------- ---------- ----------- Balance at January 1, 1997 $ 2,581 $ 1,340 $ 10 Additions 100 -0- -0- Maturities (1,002) (232) -0- Forward starting, becoming effective -0- -0- (10) ----------- ---------- ----------- Balance at December 31, 1997 1,679 1,108 -0- Additions -0- -0- -0- Maturities (1,167) (209) -0- ----------- ---------- ----------- Balance at December 31, 1998 $ 512 $ 899 $ -0- =========== ========== =========== INTEREST ON LOANS In 1998, interest on loans decreased due to a decrease in the average portfolio balance which was partially offset by an increase in the average portfolio yield. The decrease in the average loan portfolio balance was primarily due to the securitization of adjustable-rate loans into MBS as discussed in "Mortgage-Backed Securities" on page 58. In 1997, interest on loans increased due to an increase in the average portfolio balance.
10-K40570th Page of 117TOC1stPreviousNextBottomJust 70th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) INTEREST ON MBS In 1998, interest on MBS increased due to an increase in the average portfolio balance, as previously discussed, and an increase in the average portfolio yield. In 1997, interest on MBS increased due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. INTEREST AND DIVIDENDS ON INVESTMENTS The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. Interest and dividends on investments was higher in 1998 than in 1997 due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. Interest and dividends on investments was higher in 1997 than in 1996 due to an increase in the average portfolio balance and an increase in the average portfolio yield. INTEREST ON DEPOSITS The major portion of the Company's deposit base consists of savings accounts with remaining maturities of one year or less and market rate transaction accounts. Thus, the amount of interest paid on these funds depends upon the level of short-term interest rates and the savings and the market rate transaction account balances outstanding. The increase in interest expense in 1998 was due to the increase in the average balance of deposits partially offset by a decrease in the average cost of deposits. The increase in interest expense on deposits in 1997 was due to an increase in the average cost of deposits and an increase in the average balance of deposits. INTEREST ON ADVANCES Interest paid on FHLB advances was higher in 1998 as compared to 1997 due to an increase in the average cost of these borrowings partially offset by a decrease in the average outstanding balance. Interest paid on FHLB advances was higher in 1997 as compared to 1996 due to an increase in the average balance of these borrowings and an increase in the average cost of these borrowings. INTEREST ON OTHER BORROWINGS Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $271 million, $295 million, and $280 million for the years ended 1998, 1997, and 1996, respectively. The decrease in the expense in 1998 compared with 1997 was due to a decrease in the average balance of these liabilities and a decrease in the average cost. The increase in the expense in 1997 over 1996 was due to an increase in the average balance of these liabilities partially offset by a decrease in the average cost.
10-K40571st Page of 117TOC1stPreviousNextBottomJust 71st
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) PROVISION FOR LOAN LOSSES The provision for loan losses was $11 million, $58 million, and $84 million for the years ended 1998, 1997, and 1996, respectively. The lower provision in 1998 and 1997 reflected the decrease in net chargeoffs, the decrease in nonperforming assets, and the strong California economy and housing market. NON-INTEREST INCOME Non-interest income was $138 million, $81 million, and $75 million for the years ended December 31, 1998, 1997, and 1996, respectively. The increase in non-interest income in 1998 as compared to 1997 was mainly due to greater revenues from mortgage prepayment fees and loan servicing fees, and gains on the sale of more fixed-rate loans in the secondary market. In addition, 1998 non-interest income included a gain of $13 million from the redemption of preferred stock which was called by the issuer. The increase in non-interest income in 1997 as compared to 1996 was mainly due to an increase in loan fee income. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased during the three years under discussion. The 1998 increase was due to the increase in mortgage activity, the ongoing expansion of the Company's branch system, and the implementation of a variety of technology initiatives including addressing the "Year 2000" computer issue. The 1997 increase was due to the ongoing expansion of the savings and loan business, as well as the implementation of several major technology initiatives. The 1996 increase was due to the one-time SAIF assessment of $133 million. Without the one-time SAIF assessment, 1996 general and administrative expenses increased slightly from 1995 due to modest inflation during 1996. General and administrative expenses as a percentage of average assets was .90% for the year ended December 31, 1998 compared with .84% and .89% (without the one-time 1996 SAIF assessment) for the years ended December 31, 1997, and 1996, respectively.
10-K40572nd Page of 117TOC1stPreviousNextBottomJust 72nd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) DEPOSIT INSURANCE During 1996, federal legislation was enacted to capitalize the Savings Association Insurance Fund in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The new banking law required members to pay a levy of $4.7 billion to bring SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.648 per $1,000. Also, beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB and WSSB, were increased from $0.00 per $1,000 in savings balances to $.1296 per $1,000. TAXES ON INCOME Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. During 1996, the Company recognized $139 million of tax benefits associated with the Company's purchase of Beach Federal Savings and Loan Association (Beach). Specifically, in December 1988, Golden West entered into a government approved transaction with Beach to provide management services to that institution. As part of the agreement, Golden West obtained an option to take title to the stock of Beach and subsequently exercised this right in July 1991. When Golden West took title to the stock, the Company disclosed that tax benefits were anticipated from operating losses which had been accumulated at Beach's predecessor institution up to the time of the 1988 agreement, although the availability and the amount of these benefits were uncertain. The availability of the $139 million of tax benefits was confirmed during the third quarter of 1996. Taxes as a percentage of earnings before the extraordinary item decreased slightly in 1998 over 1997. Taxes as a percentage of earnings before the cumulative effect of the change in accounting for goodwill, the one-time SAIF assessment and excluding the aforementioned $139 million in tax benefits, increased slightly in 1997 over 1996.
10-K40573rd Page of 117TOC1stPreviousNextBottomJust 73rd
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) EXTRAORDINARY ITEM During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. LIQUIDITY AND CAPITAL RESOURCES WFSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; negotiable certificates of deposit; borrowings from the FHLB; investments and borrowings from its affiliates; debt collateralized by mortgages, MBS, or securities; and the issuance of medium-term notes. In addition, WFSB has other alternatives available to provide liquidity or finance operations including borrowings from public offerings of debt, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WFSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. WSL's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; borrowings from the FHLB; debt collateralized by mortgages, MBS, or securities, and the issuance of medium-term notes. In addition, WSL has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from its affiliates, borrowings from public offerings of debt, negotiable certificates of deposit, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WSL may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. WSSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB; debt collateralized by mortgages or securities, and borrowings from its affiliates. The principal sources of funds for WFSB's, WSL's, and WSSB's parent, Golden West, are dividends from subsidiaries, interest on investments, and the proceeds from the issuance of debt and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WFSB and WSL can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities, capital contributions to its insured subsidiaries ($489 million in 1998 and $284 million in 1997), dividends to stockholders, the purchase of Golden West stock, and general and administrative expenses.
10-K40574th Page of 117TOC1stPreviousNextBottomJust 74th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) YEAR 2000 The Company is aware of the system challenges that the Year 2000 has created and currently has a plan in place (Year 2000 Project) to insure that all of the Company's mission critical systems will be Year 2000 compliant by mid-1999. The plan has been developed in accordance with guidance set forth by federal banking regulators in a series of jointly-issued policy statements. Federal banking regulators regularly monitor the Company's progress in meeting the requirements of such policy statements. The Company has completed an inventory and assessment of its systems. The Company is currently in the process of testing and modifying or replacing systems that may be affected by these Year 2000 compliance issues. Included in this process are both information technology systems and other systems (e.g. elevators, doorlocks) that could be affected by Year 2000 issues. The Company has placed priority on information technology systems affecting its core business of deposit-taking and lending. Testing of these systems for the ability to function during the Year 2000 was substantially completed by December 31, 1998. During the first quarter of 1999, the Company commenced integrated testing to ascertain that all systems function together. All systems affecting the Company's core business are scheduled to be Year 2000 compliant by mid-1999. While the Company believes it is doing everything technologically possible to assure Year 2000 compliance, the success of the Year 2000 Project is to some extent dependent upon vendor cooperation. The Company is requiring its computer systems and software vendors to represent that the products provided are or will be Year 2000 compliant and has planned a program of testing for compliance. Such testing is included in the testing previously described in this section. To date, the Company has no indication that its principal vendors or their systems will adversely affect the Company's Year 2000 compliance efforts. The Company currently estimates that it will cost approximately $20 million to make all of its computer systems Year 2000 compliant. The Company will expense all costs associated with the Year 2000 Project and expects to fund such costs through operating cash flows. The Year 2000 Project expense incurred during 1998 was $8 million. Included in the $20 million are estimates for compensation of employees dedicated to the Year 2000 Project, consultants, hardware and software expense and depreciation of the equipment purchased as part of this process. However, the Company's Year 2000 expenses are not expected to result in a dollar for dollar increase in the Company's overall information systems expenditures because the Company has dedicated a number of its existing resources solely to the Year 2000 Project.
10-K40575th Page of 117TOC1stPreviousNextBottomJust 75th
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The Company believes that its Year 2000 Project will result in the Company's systems functioning normally, without adverse consequences. While the systems of others, with whom and through which the Company conducts business, are not within the Company's control, the Year 2000 Project is intended to provide the Company with sufficient advance warning that such systems will not perform. In the unlikely event of a problem with the Company's systems or the systems of others which relate to the Company's core business, the Company has developed contingency plans to address the potential that one or more systems might fail, despite efforts to the contrary. Although the Company has no reason to believe that such contingency plans will not effectively avoid or mitigate any adverse consequences of such system failures, no assurances are given that such plans will be effective. COMMON STOCK The quarterly price ranges for the Company's common stock during 1998 and 1997 were as follows: [Download Table] TABLE 42 Common Stock Price Range 1998 1997 ---------------------------- ----------------------------- First Quarter $81 - $99 9/16 $61 3/4 - $74 1/4 Second Quarter $95 1/16 - $114 1/4 $59 7/8 - $73 1/4 Third Quarter $75 13/16 - $110 1/8 $70 13/16 - $90 15/16 Fourth Quarter $72 3/8 - $97 5/8 $84 1/16 - $97 13/16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See pages 53 through 56 in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 78 and the financial statements, which begin on page F-1, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable.
10-K40576th Page of 117TOC1stPreviousNextBottomJust 76th
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows (see footnote explanations on the following page): Name and Age Position ---------------------- ----------------------- Herbert M. Sandler, 67 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 68 Chairman of the Board and Chief Executive Officer James T. Judd, 60 Senior Executive Vice President Russell W. Kettell, 55 President and Treasurer(a) J. L. Helvey, 67 Executive Vice President(b) Dirk S. Adams, 47 Executive Vice President(c) Robert C. Rowe, 43 Senior Vice President and Secretary(d) Carl M. Andersen, 38 Senior Vice President(e) William C. Nunan, 47 Senior Vice President(f) Maryellen B. Cattani, 55 Director Louis J. Galen, 73 Director Antonia Hernandez, 51 Director Patricia A. King, 56 Director Bernard A. Osher, 71 Director Kenneth T. Rosen, 50 Director Leslie Tang Schilling, 44 Director Each of the above persons holds the same position with WFSB and WSL with the exception of James T. Judd who is President, Chief Operating Officer, and Director of WFSB and WSL and Russell W. Kettell who is a Senior Executive Vice President and Director of WFSB and WSL. Each executive officer has had the principal occupations shown for the prior five years except as follows:
10-K40577th Page of 117TOC1stPreviousNextBottomJust 77th
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) (a) Russell W. Kettell was elected Treasurer of the Company in January 1995 and has held the position of President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984. (b) J. L. Helvey was elected Executive Vice President of the Company in 1996. Prior thereto, Mr. Helvey served as Group Senior Vice President since 1988 and Senior Vice President since 1973. (c) Dirk S. Adams was elected Executive Vice President of the Company in 1998. Prior thereto, Mr. Adams served as Group Senior Vice President since 1990. (d) Robert C. Rowe was elected Senior Vice President in 1995. Prior thereto, he served as Vice President and Secretary of the Company since February 1991. Prior thereto, Mr. Rowe served as Assistant Vice President and Secretary since 1989 and as General Counsel since 1988. Prior to that, Mr. Rowe was a legal counsel to the Federal Home Loan Bank of San Francisco since 1984. (e) Carl M. Andersen was elected Senior Vice President of the Company in 1997 and has held the same position with WFSB, WSL and WSSB since 1996. Prior thereto, he served as Vice President of WFSB and WSL since 1990. (f) William C. Nunan was elected Senior Vice President of the Company in 1997 and has held the same position with WFSB, WSL and WSSB since 1995. Prior thereto, he served as Vice President of WFSB and WSL since 1985. For further information concerning the directors and executive officers of the Registrant, see pages 2 and 3 of the Registrant's Proxy Statement dated March 15, 1999, which are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 15, 1999, on pages 3 through 5 and 7 through 8 and is incorporated herein by reference.
10-K40578th Page of 117TOC1stPreviousNextBottomJust 78th
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth on pages 2, 3, 5 and 6 of Registrant's Proxy Statement dated March 15, 1999, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Indebtedness of Management" on page 8 of the Registrant's Proxy Statement dated March 15, 1999, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements See Index included on page 83 and the financial statements, which begin on page F-1. (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index To Exhibits Exhibit No. Description ----------- ----------- 3(a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1990. 3(b) By-Laws, as amended in 1997. 4(a) The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed 10% of the total assets of the Company.
10-K40579th Page of 117TOC1stPreviousNextBottomJust 79th
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ---------- ----------- 10(a) 1996 Stock Option Plan, as amended, is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 15, 1996, for the Company's 1996 Annual Meeting of Stockholders. 10(b) Annual Incentive Bonus Plan is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 16, 1998, for the Company's 1998 Annual Meeting of Stockholders. 10(c) Deferred Compensation Agreement between the Company and James T.Judd is incorporated by reference to Exhibit 10(b) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(d) Deferred Compensation Agreement between the Company and Russell W. Kettell is incorporated by reference to Exhibit 10(c) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(e) Deferred Compensation Agreement between the Company and J. L. Helvey is incorporated by reference to Exhibit 10(d) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(f) Deferred Compensation Agreement between the Company and David C. Welch is incorporated by reference to Exhibit 10(f) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1987. 10(g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the quarter ended September 30, 1998.
10-K40580th Page of 117TOC1stPreviousNextBottomJust 80th
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 10(h) Form of Supplemental Retirement Agreement between the Company and certain executive officers is incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1990. 21(a) Subsidiaries of the Registrant. 23(a) Independent Auditors' Consent. 27 Financial Data Schedule (b) Financial Statement Schedules The response to this portion of Item 14 is submitted as a part of section (a), Exhibits. (c) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the Commission in the fourth quarter. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statement on Form S-8 No. 33-14833 (filed June 5, 1987): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
10-K40581st Page of 117TOC1stPreviousNextBottomJust 81st
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION By: /s/ Herbert M. Sandler 3/29/99 ------------------------------------------ Herbert M. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler 3/29/99 ------------------------------------------ Marion O. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ J. L. Helvey 3/29/99 ------------------------------------------ J. L. Helvey, Executive Vice President and Chief Financial and Accounting Officer Dated: March 29, 1999
10-K40582nd Page of 117TOC1stPreviousNextBottomJust 82nd
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Maryellen B. Cattani 3/29/99 /s/ Bernard A. Osher 3/29/99 ----------------------------------- ----------------------------------- Maryellen B. Cattani Bernard A. Osher Director Director /s/ Louis J. Galen 3/29/99 ----------------------------------- ----------------------------------- Louis J. Galen Kenneth T. Rosen Director Director /s/ Antonia Hernandez 3/29/99 /s/ Herbert M. Sandler 3/29/99 ----------------------------------- ----------------------------------- Antonia Hernandez Herbert M. Sandler Director Director /s/ Patricia A. King 3/29/99 /s/ Marion O. Sandler 3/29/99 ----------------------------------- ----------------------------------- Patricia A. King Marion O. Sandler Director Director /s/ Leslie Tang Schilling 3/29/99 ----------------------------------- Leslie Tang Schilling Director
10-K40583rd Page of 117TOC1stPreviousNextBottomJust 83rd
INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 1998, and 1997 F-2 Consolidated Statement of Net Earnings for the years ended December 31, 1998, 1997, and 1996 F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996 F-5, F-6 Notes to Consolidated Financial Statements F-7 All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto.
10-K40584th Page of 117TOC1stPreviousNextBottomJust 84th
Independent Auditors' Report Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for goodwill related to acquisitions made prior to September 30, 1982, effective January 1, 1996, to conform with Statement of Financial Accounting Standards No. 72. Oakland, California January 20, 1999 F-1
10-K40585th Page of 117TOC1stPreviousNextBottomJust 85th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES [Enlarge/Download Table] CONSOLIDATED STATEMENT OF FINANCIAL CONDITION --------------------------------------------- (Dollars in thousands except per share figures) ASSETS ------ December 31 -------------------------------- 1998 1997 -------------- -------------- Cash $ 250,875 $ 172,241 Securities available for sale at fair value (cost of $18,788 and $363,911) (Note B) 377,005 608,544 Other investments at cost (fair value of $422,508 and $252,648) (Note C) 422,385 252,648 Mortgage-backed securities available for sale at fair value (cost of $109,083 and $148,864) (Notes D and L) 113,585 157,327 Mortgage-backed securities held to maturity at cost (fair value of $10,032,527 and $3,833,527) (Notes E, K and L) 9,918,380 3,782,419 Loans receivable less allowance for loan losses of $244,466 and $233,280 (Notes F and K) 25,721,288 33,260,709 Interest earned but uncollected (Note G) 209,328 216,923 Investment in capital stock of Federal Home Loan Banks, at cost which approximates fair value (Note K) 780,303 590,244 Real estate held for sale or investment (Note H) 45,696 62,006 Prepaid expenses and other assets 357,363 247,003 Premises and equipment, net (Note I) 272,521 240,207 -------------- -------------- $38,468,729 $39,590,271 ============== ============== [Enlarge/Download Table] LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ December 31 -------------------------------- 1998 1997 -------------- -------------- Deposits (Note J) $26,219,095 $24,109,717 Advances from Federal Home Loan Banks (Note K) 6,163,472 8,516,605 Securities sold under agreements to repurchase (Note L) 1,252,469 2,334,048 Medium-term notes (Note M) -0- 109,992 Accounts payable and accrued expenses 468,213 446,325 Taxes on income (Note O) 329,409 265,065 -------------- -------------- 34,432,658 35,781,752 Subordinated notes (Note N) 911,753 1,110,488 Stockholders' equity (Notes P and R): Preferred stock, par value $1.00: Authorized 20,000,000 shares Issued and outstanding, none Common stock, par value $.10: Authorized 200,000,000 shares Issued and outstanding, 56,861,124 and 57,068,504 shares 5,686 5,707 Additional paid-in capital 122,159 85,532 Retained earnings 2,781,925 2,457,055 -------------- -------------- 2,909,770 2,548,294 Accumulated comprehensive income from unrealized gains on securities, net of tax $148,171 and $103,359 214,548 149,737 -------------- -------------- Total Stockholders' Equity 3,124,318 2,698,031 -------------- -------------- $38,468,729 $39,590,271 ============== ============== See notes to consolidated financial statements. F-2
10-K40586th Page of 117TOC1stPreviousNextBottomJust 86th
[Enlarge/Download Table] GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS -------------------------------------- (Dollars in thousands except per share figures) Year Ended December 31 ------------------------------------------------ 1998 1997 1996 -------------- -------------- -------------- Interest Income: Interest on loans $ 2,254,427 $ 2,392,175 $ 2,203,752 Interest on mortgage-backed securities 498,319 282,499 246,293 Interest and dividends on investments 209,807 157,823 131,516 -------------- -------------- -------------- 2,962,553 2,832,497 2,581,561 Interest Expense: Interest on deposits (Note J) 1,285,343 1,209,646 1,061,414 Interest on advances 438,660 437,028 409,040 Interest on repurchase agreements 112,942 150,557 117,960 Interest on other borrowings 158,286 144,771 162,187 -------------- -------------- -------------- 1,995,231 1,942,002 1,750,601 -------------- -------------- -------------- Net Interest Income 967,322 890,495 830,960 Provision for loan losses 11,260 57,609 84,256 -------------- -------------- -------------- Net Interest Income after Provision for Loan Losses 956,062 832,886 746,704 Non-Interest Income: Fees 62,820 45,910 38,558 Gain on the sale of securities, mortgage-backed securities, and loans 38,784 8,197 11,954 Other 36,009 27,161 24,387 -------------- -------------- -------------- 137,613 81,268 74,899 Non-Interest Expense: General and administrative: Personnel 196,153 180,917 163,243 Occupancy 62,549 55,508 50,171 Deposit insurance (Note A) 5,925 7,454 167,528 Advertising 10,412 11,525 9,277 Other 79,468 71,555 63,203 -------------- -------------- -------------- 354,507 326,959 453,422 Earnings Before Taxes on Income 739,168 587,195 368,181 Taxes on income (Note O) 292,077 233,057 (1,732) -------------- -------------- -------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill and Extraordinary Item 447,091 354,138 369,913 Cumulative effect of change in accounting for goodwill (Note A) -0- -0- (205,242) Extraordinary item (Note A) (12,511) -0- -0- -------------- -------------- -------------- Net Earnings $ 434,580 $ 354,138 $ 164,671 ============== ============== ============== Basic earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.81 $ 6.22 $ 6.38 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.54) Extraordinary item (.22) 0.00 0.00 -------------- -------------- -------------- Basic earnings per share (Note Q) $ 7.59 $ 6.22 $ 2.84 ============== ============== ============== Diluted earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.74 $ 6.13 $ 6.29 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.49) Extraordinary item (.22) 0.00 0.00 -------------- -------------- -------------- Diluted earnings per share (Note Q) $ 7.52 $ 6.13 $ 2.80 ============== ============== ============== See notes to consolidated financial statements. F-3
10-K40587th Page of 117TOC1stPreviousNextBottomJust 87th
[Enlarge/Download Table] GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------------------- (Dollars in thousands except per share figures) Accumulated Comprehensive Income From Additional Unrealized Total Common Paid-in Retained Gains On Stockholders' Comprehensive Stock Capital Earnings Securities Equity Income ---------- ----------- ------------ ---------------- -------------- ---------------- Balance at January 1, 1996 $ 5,887 $ 55,353 $2,140,883 $ 76,230 $ 2,278,353 Net earnings -0- -0- 164,671 -0- 164,671 $ 164,671 Change in unrealized gains on securities available for sale -0- -0- -0- 23,869 23,869 23,869 Reclassification adjustment for gains included in income -0- -0- -0- (407) (407) (407) ---------------- Comprehensive Income $ 188,133 ================ Cash dividends on common stock ($.395 per share) -0- -0- (22,893) -0- (22,893) Common stock issued upon exercise of stock options, including tax benefits - 401,780 shares 40 12,600 -0- -0- 12,640 Purchase and retirement of 1,930,800 shares of Company stock (Note P) (193) -0- (105,563) -0- (105,756) ---------- ----------- ------------ ---------------- -------------- Balance at December 31, 1996 5,734 67,953 2,177,098 99,692 2,350,477 Net earnings -0- -0- 354,138 -0- 354,138 $ 354,138 Change in unrealized gains on securities available for sale -0- -0- -0- 51,993 51,993 51,993 Reclassification adjustment for gains included in income -0- -0- -0- (1,948) (1,948) (1,948) ---------------- Comprehensive Income $ 404,183 ================ Cash dividends on common stock ($.455 per share) -0- -0- (25,903) -0- (25,903) Common stock issued upon exercise of stock options, including tax benefits - 457,215 shares 46 17,579 -0- -0- 17,625 Purchase and retirement of 731,100 shares of Company stock (Note P) (73) -0- (48,278) -0- (48,351) ---------- ----------- ------------ ---------------- -------------- Balance at December 31, 1997 5,707 85,532 2,457,055 149,737 2,698,031 Net earnings -0- -0- 434,580 -0- 434,580 $ 434,580 Change in unrealized gains on securities available for sale -0- -0- -0- 72,833 72,833 72,833 Reclassification adjustment for gains included in income -0- -0- -0- (8,022) (8,022) (8,022) ---------------- Comprehensive Income $ 499,391 ================ Cash dividends on common stock ($.515 per share) -0- -0- (29,488) -0- (29,488) Common stock issued upon exercise of stock options, including tax benefits - 794,320 shares 80 36,627 -0- -0- 36,707 Purchase and retirement of 1,001,700 shares of Company stock (Note P) (101) -0- (80,222) -0- (80,323) ---------- ----------- ------------ ---------------- -------------- Balance at December 31, 1998 $ 5,686 $ 122,159 $2,781,925 $ 214,548 $ 3,124,318 ========== =========== ============ ================ ============== See notes to consolidated financial statements. F-4
10-K40588th Page of 117TOC1stPreviousNextBottomJust 88th
[Enlarge/Download Table] GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Dollars in thousands) Year Ended December 31 ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash Flows From Operating Activities: Net earnings $ 434,580 $ 354,138 $ 164,671 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting for goodwill -0- -0- 205,242 Extraordinary item 21,152 -0- -0- Provision for loan losses 11,260 57,609 84,256 Amortization of loan fees and discounts (22,410) (17,958) (23,038) Depreciation and amortization 25,913 21,270 19,592 Loans originated for sale (1,155,912) (217,264) (476,589) Sales of loans 1,423,084 208,826 484,601 Decrease in interest earned but uncollected 7,595 4,681 3,791 Federal Home Loan Bank stock dividends (51,156) (42,590) (29,813) (Increase) in prepaid expenses and other assets (99,601) (12,259) (62,811) Increase (decrease) in accounts payable and accrued expenses 21,888 (5,857) 1,368 Increase (decrease) in taxes on income 19,532 24,069 (164,902) Other, net 12,782 (4,504) (14,032) ------------- ------------- ------------- Net cash provided by operating activities 648,707 370,161 192,336 Cash Flows From Investing Activities: New loan activity: Real estate loans originated for portfolio (7,032,022) (7,265,709) (6,535,973) Real estate loans purchased (2,683) (2,480) (5,070) Other, net (188,393) (46,781) (26,906) ------------- ------------- ----------- (7,223,098) (7,314,970) (6,567,949) Real estate loan principal payments: Monthly payments 648,331 693,134 624,896 Payoffs, net of foreclosures 5,552,187 3,093,780 2,452,299 ------------- ------------- ------------- 6,200,518 3,786,914 3,077,195 Purchases of mortgage-backed securities held to maturity -0- -0- (1,522) Repayments of mortgage-backed securities 2,093,124 518,224 412,576 Proceeds from sales of real estate 146,202 226,135 203,936 Purchases of securities available for sale (368,151) (2,916) (824,734) Sales of securities available for sale 81,373 11,944 81,133 Matured securities available for sale 632,284 249,029 908,436 Decrease (increase) in other investments (169,737) 826,184 111,328 Purchases of Federal Home Loan Bank stock (149,662) (56,239) (164,894) Redemptions of Federal Home Loan Bank stock -0- -0- 37,649 Additions to premises and equipment (64,143) (53,834) (30,465) ------------- ------------- ------------- Net cash provided by (used in) investing activities 1,178,710 (1,809,529) (2,757,311) See notes to consolidated financial statements. F-5
10-K40589th Page of 117TOC1stPreviousNextBottomJust 89th
[Enlarge/Download Table] Year Ended December 31 ----------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- Cash Flows From Financing Activities: Deposit activity: Increase in deposits, net $ 1,045,459 $ 1,041,843 $ 382,732 Interest credited 1,063,919 967,940 869,292 -------------- -------------- -------------- 2,109,378 2,009,783 1,252,024 Additions to Federal Home Loan Bank advances 8,363,135 2,571,200 3,695,322 Repayments of Federal Home Loan Bank advances (10,737,644) (2,853,217) (1,344,429) Proceeds from agreements to repurchase securities 6,555,115 6,385,060 4,566,506 Repayments of agreements to repurchase securities (7,636,694) (5,959,138) (4,476,323) Repayments of medium-term notes (110,000) (480,000) (1,008,135) Repayments of subordinated notes (200,000) (215,000) -0- Dividends on common stock (29,488) (25,903) (22,893) Exercise of stock options 17,738 8,456 8,683 Purchase and retirement of Company stock (80,323) (48,351) (105,756) -------------- -------------- -------------- Net cash provided by (used in) financing activities (1,748,783) 1,392,890 2,564,999 -------------- -------------- -------------- Net Increase (Decrease) in Cash 78,634 (46,478) 24 Cash at beginning of period 172,241 218,719 218,695 -------------- -------------- -------------- Cash at end of period $ 250,875 $ 172,241 $ 218,719 ============== ============== ============== Supplemental cash flow information: Cash paid for: Interest $ 2,018,128 $ 1,948,021 $ 1,789,487 Income taxes 248,086 201,306 165,560 Cash received for interest and dividends 2,970,148 2,837,178 2,585,352 Noncash investing activities: Loans converted from adjustable rate to fixed-rate held for sale 228,529 -0- -0- Loans transferred to foreclosed real estate 112,406 201,304 220,642 Mortgage-backed securities transferred from available for sale to held to maturity (at fair value) -0- 30,003 217,719 Adjustable rate mortgages securitized into mortgage-backed securities and mortgage-backed securities-REMIC 8,189,190 1,022,455 1,297,669 Mortgage-backed securities with recourse desecuritized into adjustable rate mortgages -0- 856,038 -0- F-6
10-K40590th Page of 117TOC1stPreviousNextBottomJust 90th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE A - Summary of Significant Accounting Policies Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). Intercompany accounts and transactions have been eliminated. The Company's principal operating subsidiaries are World Savings Bank, a federally chartered savings bank (WFSB), World Savings and Loan Association, a federally chartered association (WSL), and World Savings Bank, a state chartered savings bank (WSSB), (collectively, the Insured Subsidiaries). At December 31, 1998, the assets of these subsidiaries were $31.9 billion, $6.8 billion and $3.5 billion, respectively. Nature of Operations -------------------- Golden West Financial Corporation, through its financial institution subsidiaries, operates 248 savings branches in eight states and 249 loan offices in 26 states. The Company's primary source of revenue is interest from loans on residential real estate and mortgage-backed securities. Use of Estimates in the Preparation of Financial Statements ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash ---- For the purpose of presentation in the Consolidated Statement of Cash Flows, cash is defined as cash held in office and amounts due from banks. Securities Available for Sale and Other Investments --------------------------------------------------- Effective December 1, 1997, the Office of Thrift Supervision required insured institutions to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or b) 4% of the prior quarter's ending balance of short-term deposits and borrowings. Prior to December 1, 1997, insured institutions were required by regulation to maintain liquid assets in the form of cash and securities approved by federal regulations at a monthly average of daily balances of not less than 5% of deposits and short-term borrowings. The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in comprehensive income and as a separate component of stockholders' equity until realized. Gains or losses on sales of securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, consisting of overnight investments such as Eurodollar time deposits, federal funds and short-term repurchase agreements, and longer-term investments such as Bank notes, medium-term notes and collateralized mortgage obligations. These other investments are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. F-7
10-K40591st Page of 117TOC1stPreviousNextBottomJust 91st
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share) Mortgage-Backed Securities -------------------------- The Company has no mortgage-backed securities (MBS) classified as trading. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. The Company has securitized certain loans from its investment portfolio into MBS with recourse and into Real Estate Mortgage Investment Conduits (REMIC) which are held to maturity and available to be used as collateral for borrowings. Loans Receivable ---------------- The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first trust deeds on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. The Company also offers "modified" ARMs, loans that offer a low, fixed rate generally from 1% to 3% below the contract rate for an initial period, primarily one to 12 months. The Company originates loans that are held for sale, primarily fixed-rate loans. These loans are recorded at the lower of cost or market. Some of these loans are sold with recourse and a recourse liability reserve is provided on the sale of these loans. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's policy is to measure impairment based on the fair value of the collateral. When the value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the fair value of the collateral. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the actual life of the related loans using the interest method. Loan origination fees, net of certain direct loan origination costs, on loans originated for sale are deferred until the loans are sold and recognized at the time of sale. "Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from deposit accounts, and miscellaneous fees, are recorded when collected. Premiums and discounts on purchased loans, including premiums and discounts arising from acquisitions of other associations, are generally amortized using the interest method over the actual life of the loans. Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and real estate owned through foreclosure. For loans past due 90 days or more, all interest earned but uncollected is fully reserved. Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or borrower. F-8
10-K40592nd Page of 117TOC1stPreviousNextBottomJust 92nd
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) Real Estate Held for Sale or Investment --------------------------------------- Real estate held for sale or investment is comprised primarily of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. Allowance for Loan Losses ------------------------- The Company provides specific valuation allowances for losses on loans when impaired and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses and recourse obligations that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating loan losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal and cost of holding the property. Additions to, and reductions from the allowances are reflected in current earnings. Mortgage Servicing Rights ------------------------- The Company follows Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities," to require that any financial institution participating in the secondary mortgage market recognize, as separate assets, rights to service mortgage loans for others (CMSRs) when those rights are acquired through either the purchase or origination of mortgage loans which are subsequently sold or securitized. SFAS 122 also requires that any financial institution participating in the secondary mortgage market should evaluate and measure impairment of CMSRs based on the fair value of those rights on a disaggregated basis. CMSRs are periodically reviewed for impairment based on fair value. The fair value of the CMSRs, for the purposes of impairment, is measured using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. At December 31, 1998 and 1997, there was no impairment. On January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125), which amends SFAS 122. The accounting for mortgage servicing assets under SFAS 125 is substantially the same as the accounting for mortgage servicing assets under SFAS 122. The balance of CMSRs is included in "Prepaid expenses and other assets" in the Consolidated Statement of Financial Condition and is being amortized over the projected servicing period. The amortization of the CMSRs is included in "Fee income" in the Consolidated Statement of Net Earnings. F-9
10-K40593rd Page of 117TOC1stPreviousNextBottomJust 93rd
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) Goodwill -------- Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," (SFAS 72) for goodwill related to acquisitions made prior to September 30, 1982. Up until 1996, the Company had applied SFAS 72 only to acquisitions made after September 30, 1982. The adoption of SFAS 72 for goodwill relating to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. SFAS 72 requires, among other things, that goodwill be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. As a result, the Company wrote off goodwill totaling $205 million as the cumulative effect of the change in accounting for goodwill. The remaining goodwill from acquisitions subsequent to 1982, amounting to less than .2% of total assets, is not material and has been reclassified to other assets. Amortization of goodwill is recorded on the Consolidated Statement of Net Earnings under the section titled "Non-Interest Income - Other." Securities Sold Under Agreements to Repurchase ---------------------------------------------- The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. As previously stated, the Company adopted SFAS 125. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (SFAS 127). The impact of the implementation of the delayed portions of SFAS 125 on the Company's financial condition and results of operations in 1998 was not material. Interest Rate Swaps and Caps ---------------------------- The Company utilizes certain derivative financial instruments, primarily various types of interest rate swaps and caps, as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. Some interest rate swaps are entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets. F-10
10-K40594th Page of 117TOC1stPreviousNextBottomJust 94th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) An interest rate cap is an agreement between two parties in which one party pays a fee for the right to receive a payment from a counterparty based on the excess, if any, of an open market floating rate over a base rate applied to a notional principal amount. The excess that may be received on interest rate cap agreements limits the impact of changes in interest rates on mortgage loans or other designated assets. Amounts that may be received on interest rate cap agreements and fees paid to purchase the agreements are recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. Taxes on Income --------------- The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. Regulatory Capital Requirements ------------------------------- The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for OTS regulated institutions, such as WFSB and WSL. Under FIRREA, thrifts and savings banks must have tangible capital equal to 1.5% of adjusted total assets, have core capital equal to 4% of adjusted total assets, and have risk-based capital equal to 8% of risk-weighted assets. At December 31, WFSB had the following regulatory capital calculated in accordance with FIRREA's capital standards: [Enlarge/Download Table] 1998 1997 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- ---------- -------------- ---------- ------------- ---------- ------------- ---------- Tangible $ 2,163,838 6.77% $ 479,370 1.50% $ 1,603,530 6.51% $ 369,694 1.50% Core 2,163,838 6.77 1,278,319 4.00 1,603,530 6.51 739,388 3.00 Risk-based 2,311,286 12.93 1,430,371 8.00 1,695,565 12.80 1,060,024 8.00 [Enlarge/Download Table] At December 31, WSL had the following regulatory capital calculated in accordance with FIRREA's capital standards: 1998 1997 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- ---------- -------------- ---------- ------------- ---------- ------------- ---------- Tangible $ 473,523 7.25% $ 97,909 1.50% $ 980,483 6.42% $ 228,950 1.50% Core 473,523 7.25 261,091 4.00 980,483 6.42 457,901 3.00 Risk-based 617,654 16.24 304,286 8.00 1,186,445 13.64 695,611 8.00 The Office of Thrift Supervision (OTS) has adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well-capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive. F-11
10-K40595th Page of 117TOC1stPreviousNextBottomJust 95th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and the leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. WFSB and WSL, are both regulated by the OTS. As of December 31, 1998, the most recent notification from the OTS categorized both WFSB and WSL, as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of either WFSB or WSL. The table below shows that WFSB's regulatory capital exceeds the well-capitalized classification at December 31, 1998 and 1997. [Enlarge/Download Table] 1998 1997 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Leverage $2,163,838 6.77% $1,597,898 5.00% $1,603,530 6.51% $1,232,313 5.00% Tier 1 risk-based 2,163,838 12.10 1,072,778 6.00 1,603,530 12.10 795,018 6.00 Total risk-based 2,311,286 12.93 1,787,964 10.00 1,695,565 12.80 1,325,031 10.00 [Enlarge/Download Table] The table below shows that WSL's regulatory capital exceeds the well-capitalized classification at December 31, 1998 and 1997. 1998 1997 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Leverage $ 473,523 7.25% $ 326,364 5.00% $ 980,483 6.42% $ 763,168 5.00% Tier 1 risk-based 473,523 12.45 228,214 6.00 980,483 11.28 521,709 6.00 Total risk-based 617,654 16.24 380,357 10.00 1,186,445 13.64 869,514 10.00 WSSB is a state chartered savings bank regulated by the FDIC. At December 31, WSSB had the following regulatory capital calculated in accordance with FDIC's capital standards: [Enlarge/Download Table] 1998 1997 ----------------------------------------------- ------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Tier 1 Leverage $ 186,411 5.26% $ 106,220 3.00% $ 11,878 9.88% $ 3,607 3.00% Tier 1 risk-based 186,411 25.12 29,686 4.00 11,878 17.80 2,670 4.00 Total risk-based 186,647 25.15 59,372 8.00 12,026 18.02 5,340 8.00 Retained Earnings ----------------- Under OTS regulations, the OTS must be given at least 30 days' advance notice by WFSB or WSL of any proposed dividend to be paid to the Company. Under OTS regulations, WFSB and WSL are classified as Tier 1 institutions and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of their capital in excess of the OTS capital requirement as of the end of the prior year. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. At December 31, 1998, $775 million of the Insured Subsidiaries' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as are WFSB and WSL. F-12
10-K40596th Page of 117TOC1stPreviousNextBottomJust 96th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) Earnings Per Share ------------------ Basic EPS and Diluted EPS are calculated in accordance with the guidelines established in Statement of Financial Accounting Standards No. 128, "Measurement of Earnings Per Share" (SFAS 128). (See footnote Q for further details.) Deposit Insurance ----------------- During 1996, legislation was enacted to recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The new banking law required members to pay a levy of $4.7 billion to bring SAIF up to the required reserve level of 1.25% of deposits, but lowered savings and loan deposit insurance premiums starting in the fourth quarter of 1996. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.65 per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB and WSSB, were increased from $0.00 per $1,000 in savings balances to $.13 per $1,000. Extraordinary Item ------------------ During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. These penalties are reflected as an extraordinary charge on the Consolidated Statement of Net Earnings. New Accounting Pronouncements ----------------------------- In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company operates as a single segment and, therefore, SFAS 131 had no effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet completed a full assessment of the impact of this Statement on its financial condition or results of operations. F-13
10-K40597th Page of 117TOC1stPreviousNextBottomJust 97th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ----------------------------------------------------- Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE B - Securities Available for Sale [Enlarge/Download Table] The following is a summary of securities available for sale: December 31, 1998 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- U.S. Treasury and government agency obligations $ 5,291 $ 523 $ -0- $ 5,814 Collateralized mortgage obligations 7,948 6 190 7,764 Equity securities 5,549 357,878 -0- 363,427 ------------ ------------ ------------ ------------- $ 18,788 $ 358,407 $ 190 $ 377,005 ============ ============ ============ ============= [Enlarge/Download Table] December 31, 1997 ---------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------ ------------ U.S. Treasury and government agency obligations $ 200,989 $ 856 $ -0- $ 201,845 Collateralized mortgage obligations 72,545 7 1,120 71,432 Equity securities 90,377 244,897 7 335,267 ------------- ------------- ------------ ------------ $ 363,911 $ 245,760 $ 1,127 $ 608,544 ============= ============= ============ ============ The weighted average portfolio yields on securities available for sale were 19.21% and 6.88% at December 31, 1998, and 1997, respectively. Principal proceeds from the sales of securities from the securities available for sale portfolio were $94,846 (1998), $14,937 (1997) and $81,974 (1996) and resulted in realized gains of $13,480 (1998), $3,039 (1997), and $841 (1996) and realized losses of $7 (1998), $46 (1997), and $-0- (1996). At December 31, 1998, the securities available for sale had maturities as follows: [Download Table] Amortized Fair Maturity Cost Value ------------------------------------ -------------- -------------- No maturity $ 9,824 $ 368,199 1999 6,469 6,314 2000 through 2003 42 42 2004 through 2008 2,116 2,134 2009 and thereafter 337 316 -------------- -------------- $ 18,788 $ 377,005 ============== ============== NOTE C - Other Investments The following is a summary of other investments: [Enlarge/Download Table] December 31, 1998 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- Overnight Investments: Federal funds $ 166,896 $ -0- $ -0- $ 166,896 Longer-term Investments: Bank notes 25,000 94 -0- 25,094 Collateralized mortgage obligations 188,304 108 187 188,225 Medium-term notes 42,185 108 -0- 42,293 ------------ ------------ ------------ ------------- $ 422,385 $ 310 $ 187 $ 422,508 ============ ============ ============ ============= F-14
10-K40598th Page of 117TOC1stPreviousNextBottomJust 98th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) [Enlarge/Download Table] December 31, 1997 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- Overnight Investments: Federal funds $ 72,648 $ -0- $ -0- $ 72,648 Eurodollar time deposits 180,000 -0- -0- 180,000 ------------ ------------ ------------ ------------- $ 252,648 $ -0- $ -0- $ 252,648 ============ ============ ============ ============= The weighted average portfolio yields on other investments were 4.92% and 5.91% at December 31, 1998, and 1997, respectively. There were no sales of other investments during 1998, 1997, or 1996. At December 31, 1998, the other investments portfolio had maturities as follows: [Download Table] Amortized Fair Maturity Cost Value ------------------------------------ -------------- -------------- 1999 $ 166,896 $ 166,896 2000 through 2003 67,185 67,387 2004 through 2008 51,569 51,530 2009 and thereafter 136,735 136,695 -------------- -------------- $ 422,385 $ 422,508 ============== ============== NOTE D - Mortgage-Backed Securities Available for Sale Mortgage-backed securities available for sale are summarized as follows: [Download Table] December 31, 1998 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 42,958 $ 1,168 $ 23 $ 44,103 FHLMC 39,234 1,536 47 40,723 GNMA 26,833 1,882 11 28,704 Other 58 -0- 3 55 -------------- ------------- ------------- -------------- $ 109,083 $ 4,586 $ 84 $ 113,585 ============= ============= ============= ============== [Download Table] December 31, 1997 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 53,855 $ 2,365 $ 62 $ 56,158 FHLMC 56,822 3,147 72 59,897 GNMA 38,110 3,097 8 41,199 Other 77 -0- 4 73 ------------- ------------- ------------- -------------- $ 148,864 $ 8,609 $ 146 $ 157,327 ============= ============= ============= ============== The weighted average portfolio yields on mortgage-backed securities available for sale were 9.15% and 9.18% at December 31, 1998, and 1997, respectively. There were no sales of securities from the mortgage-backed securities available for sale portfolio in 1998, 1997, or 1996. At December 31, 1998, mortgage-backed securities available for sale had contractual maturities as follows: [Download Table] Amortized Fair Maturity Cost Value ------------------------------------- -------------- -------------- 1999 through 2003 $ 320 $ 322 2004 through 2008 2,259 2,297 2009 and thereafter 106,504 110,966 -------------- -------------- $ 109,083 $ 113,585 ============== ============== F-15
10-K40599th Page of 117TOC1stPreviousNextBottomJust 99th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE E - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows: [Download Table] December 31, 1998 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 493,466 $ 10,761 $ -0- $ 504,227 FHLMC 41,107 3,218 -0- 44,325 GNMA 37,803 2,595 -0- 40,398 FNMA (with recourse) 3,884,347 70,997 -0- 3,955,344 REMIC 5,461,657 26,576 -0- 5,488,233 ------------- ------------- ------------- -------------- $ 9,918,380 $ 114,147 $ -0- $ 10,032,527 ============= ============= ============= ============== [Download Table] December 31, 1997 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 639,902 $ 13,569 $ 1,973 $ 651,498 FHLMC 58,071 5,195 -0- 63,266 GNMA 54,056 4,916 -0- 58,972 FNMA (with recourse) 3,030,390 29,401 -0- 3,059,791 ------------- ------------- ------------- -------------- $ 3,782,419 $ 53,081 $ 1,973 $ 3,833,527 ============= ============= ============= ============== The weighted average portfolio yields on mortgage-backed securities held to maturity were 7.18% and 7.15% at December 31, 1998, and 1997, respectively. There were no sales of securities from the mortgage-backed securities held to maturity portfolio during 1998, 1997, or 1996. At December 31, 1998, mortgage-backed securities held to maturity had contractual maturities as follows: [Download Table] Amortized Fair Maturity Cost Value ------------------------------------- -------------- -------------- 2004 through 2008 $ 372 $ 382 2009 and thereafter 9,918,008 10,032,145 --------------- -------------- $ 9,918,380 $10,032,527 ============== ============== F-16
10-K405100th Page of 117TOC1stPreviousNextBottomJust 100th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE F - Loans Receivable [Enlarge/Download Table] December 31 -------------------------------- 1998 1997 -------------- -------------- Loans collateralized primarily by first deeds of trust: One- to four-family dwelling units $21,639,015 $28,978,476 Over four-family dwelling units 4,260,631 4,462,990 Commercial property 65,865 82,888 Land 798 977 -------------- -------------- 25,966,309 33,525,331 Loans on savings accounts 25,279 28,167 -------------- -------------- 25,991,588 33,553,498 Less: Undisbursed loan funds 3,080 3,306 Unearned fees and discounts 17,629 45,953 Unamortized discount arising from acquisitions 5,125 10,250 Allowance for loan losses 244,466 233,280 -------------- -------------- $25,721,288 $33,260,709 ============== ============== In addition to loans receivable, WSL services loans for others. At December 31, 1998, and 1997, the amount of loans serviced for others (non-affiliated) was $6,234,537 and $4,403,254, respectively, including $1.8 billion in 1998 and $1.0 billion in 1997 of loans that were securitized into FNMA MBS with recourse. During 1997, the Company desecuritized $856 million of MBS with recourse into adjustable rate mortgages which had a balance of $634 million at December 31, 1998. These adjustable rate mortgages have been separately identified as "held to maturity" and it is the Company's intention to hold them to maturity. At December 31, 1998, and 1997, the Company had $135 million and $23 million, respectively, in loans held for sale, all of which are carried at the lower of cost or market. At December 31, 1998 and 1997, the balance outstanding of loans sold with recourse amounted to $1.4 billion and $653 million, respectively, and had a valuation liability of $2.3 million and $886 thousand as of December 31, 1998 and 1997, respectively. Capitalized mortgage servicing rights are included in "Prepaid expenses and other assets" on the Consolidated Statement of Financial Condition. The following is a summary of capitalized mortgage servicing rights: [Enlarge/Download Table] Year Ended December 31 --------------------------- 1998 1997 ----------- ----------- Balance at January 1 $ 11,116 $ 9,325 New capitalized mortgage servicing rights from loan sales 22,680 4,914 Amortization of capitalized mortgage servicing rights (5,161) (3,123) ----------- ----------- Balance at December 31 $ 28,635 $ 11,116 =========== =========== [Enlarge/Download Table] A summary of the changes in the allowance for loan losses is as follows: Year Ended December 31 --------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ Balance at January 1 $ 233,280 $ 195,702 $ 141,988 Provision for loan losses charged to expense 11,260 57,609 84,256 Less loans charged off (1,387) (20,818) (31,239) Recoveries 1,313 787 697 ------------ ------------- ------------ Balance at December 31 $ 244,466 $ 233,280 $ 195,702 ============ ============= ============ F-17
10-K405101st Page of 117TOC1stPreviousNextBottomJust 101st
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) The following is a summary of impaired loans: [Download Table] December 31 ----------------------------- 1998 1997 ------------ ------------ Nonperforming loans $ 262,332 $ 317,550 Troubled debt restructured 22,774 43,795 Other impaired loans 70,621 71,022 ------------ ------------ $ 355,727 $ 432,367 ============ ============ The portion of the allowance for loan losses that was specifically provided for impaired loans was $18,409 and $19,848 at December 31, 1998 and 1997, respectively. The average recorded investment in total impaired loans was $394,938 and $495,592 during 1998 and 1997, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized during the years ended December 31, 1998, 1997, and 1996 on the total of impaired loans at each yearend was $17,265 (1998), $20,064 (1997), and $25,140 (1996). NOTE G - Interest Earned But Uncollected [Download Table] December 31 --------------------------------- 1998 1997 -------------- -------------- Loans receivable $ 96,065 $ 135,262 Mortgage-backed securities 81,051 27,947 Interest rate swaps 20,398 41,990 Other 11,814 11,724 -------------- -------------- $ 209,328 $ 216,923 ============== ============== [Enlarge/Download Table] NOTE H - Real Estate Held for Sale or Investment December 31 --------------------------------- 1998 1997 -------------- -------------- Real estate acquired through foreclosure of loans, net of allowance for losses $ 42,572 $ 61,517 Real estate in judgement, net of allowance for losses 74 67 Real estate held for investment, net of allowance for losses 3,050 422 -------------- -------------- $ 45,696 $ 62,006 ============== ============== [Download Table] NOTE I - Premises and Equipment December 31 ------------------------------- 1998 1997 -------------- -------------- Land $ 69,319 $ 61,178 Building and leasehold improvements 187,216 175,834 Furniture, fixtures, and equipment 185,827 158,162 -------------- -------------- 442,362 395,174 Accumulated depreciation and amortization 169,841 154,967 -------------- -------------- $ 272,521 $ 240,207 ============== ============== Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment. The aggregate future rentals under long-term operating leases on land or premises in effect on December 31, 1998, and which expire between 1999 and 2064, amounted to approximately $191,651. The approximate minimum payments during the five years ending 2003 are $18,600 (1999), $16,741 (2000), $15,171 (2001), $14,089 (2002), and $12,575 (2003). Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $20,350 (1998), $19,531 (1997), and $18,289 (1996). F-18
10-K405102nd Page of 117TOC1stPreviousNextBottomJust 102nd
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE J - Deposits [Enlarge/Download Table] December 31 -------------------------------------------------------- 1998 1997 --------------------------- --------------------------- Rate* Amount Rate* Amount -------- -------------- -------------------------- Deposits by rate: Interest-bearing checking accounts 2.06% $ 102,874 1.75% $ 85,343 Passbook accounts 1.85 514,265 2.14 528,727 Money market deposit accounts 4.10 8,532,261 3.95 4,160,734 Term certificate accounts with original maturities of: 4 weeks to 1 year 4.70 5,893,772 5.15 8,996,965 1 to 2 years 5.19 7,717,692 5.47 5,750,387 2 to 3 years 5.39 1,417,606 5.45 1,478,756 3 to 4 years 5.29 368,615 5.67 431,400 4 years and over 5.67 1,150,056 5.87 1,440,434 Retail jumbo CDs 4.96 521,478 5.54 711,010 Wholesale CDs 0.00 -0- 5.86 525,305 All other 7.14 476 7.62 656 -------------- -------------- $26,219,095 $24,109,717 ============== ============== [Enlarge/Download Table] *Weighted average interest rate including the impact of interest rate swaps. December 31 ------------------------------------ 1998 1997 -------------- -------------- Deposits by remaining maturity at yearend: No contractual maturity $ 9,149,400 $ 4,774,804 Maturity within one year 15,299,079 16,569,780 1 to 5 years 1,767,564 2,752,586 Over 5 years 3,052 12,547 -------------- -------------- $26,219,095 $24,109,717 ============== ============== At December 31, the weighted average cost of deposits was 4.67% (1998) and 5.04% (1997). Interest expense on deposits is summarized as follows: [Enlarge/Download Table] Year Ended December 31 ------------------------------------------------- 1998 1997 1996 -------------- --------------- -------------- Interest-bearing checking accounts $ 1,184 $ 1,100 $ 7,536 Passbook accounts 14,027 15,989 17,967 Money market deposit accounts 257,145 70,810 25,294 Term certificate accounts 1,012,987 1,121,747 1,010,617 -------------- --------------- -------------- $ 1,285,343 $ 1,209,646 $ 1,061,414 ============== =============== ============== F-19
10-K405103rd Page of 117TOC1stPreviousNextBottomJust 103rd
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE K - Advances from Federal Home Loan Banks Advances are secured by pledges of $8,882,065 of certain loans and MBS-REMIC principal, capital stock of the Federal Home Loan Banks, and other MBS with a market value of $470,183, and these borrowings have maturities and interest rates as follows: [Enlarge/Download Table] December 31, 1998 ------------------------------------------------------------------------------------- Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* -------------- ---------- ------------ ----------- 1999 $ 29,039 6.76% 6.76% 2000 1,591,070 5.74 5.74 2001 1,023,403 5.74 5.74 2002 237,707 5.60 5.60 2003 2,108,855 5.59 (.05)% 5.54 2004 and thereafter 1,173,398 5.72 5.72 -------------- $ 6,163,472 ============== [Enlarge/Download Table] December 31, 1997 ------------------------------------------------------------------------------------- Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ----------------------- ------------- ----------- ----------- ----------- 1998 $ 1,478,629 5.89% 5.89% 1999 576,471 6.04 6.04 2000 2,188,592 5.82 (.01)% 5.81 2001 1,171,304 5.85 5.85 2002 1,235,305 5.96 5.96 2003 and thereafter 1,866,304 5.47 (.06) 5.41 ------------- $ 8,516,605 ============= *Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, the weighted average adjusted interest rate was 5.67% (1998) and 5.78% (1997). These borrowings averaged $7,389,038 (1998) and $7,813,493 (1997) and the maximum outstanding at any monthend was $8,625,262 (1998) and $8,516,605 (1997). F-20
10-K405104th Page of 117TOC1stPreviousNextBottomJust 104th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE L - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by mortgage-backed securities with a market value of $1,257,627 and $2,398,471 at December 31, 1998, and 1997, respectively. [Download Table] December 31, 1998 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ------------------------ ------------- --------- ----------- ------------ 1999 $ 585,401 5.09% (.03)% 5.06% 2000 600,000 5.72 5.72 2001 67,068 5.48 5.48 ------------- $ 1,252,469 ============= [Enlarge/Download Table] December 31, 1997 -------------------------------------------------------------------------------------------------- Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* ------------------------ ------------- --------- ----------- ----------- ----------- 1998 $ 1,084,586 5.69% (.03)% 5.66% 1999 556,600 5.86 (.03)% 5.83 2000 600,000 5.75 5.75 2001 92,862 5.84 5.84 ------------- $ 2,334,048 ============= *Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, these liabilities had a weighted average adjusted interest rate of 5.39% (1998) and 5.73% (1997). These borrowings averaged $1,877,396 (1998) and $2,563,891 (1997) and the weighted average interest rate on these averages was 5.67% for 1998 and 5.61% for 1997. The maximum outstanding at any monthend was $2,447,124 (1998) and $2,955,649 (1997). At the end of 1998 and 1997, all of the agreements to repurchase with brokers/dealers and with the Federal Home Loan Bank of San Francisco were to reacquire the same securities. NOTE M - Medium-Term Notes Medium-term notes are unsecured obligations of WSL. There were no medium-term notes outstanding at December 31, 1998. The balance of medium-term notes outstanding at December 31, 1997 was $109,992 with a weighted average interest rate of 6.19%. The entire amount matured in 1998. F-21
10-K405105th Page of 117TOC1stPreviousNextBottomJust 105th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE N - Subordinated Notes [Download Table] December 31 ------------------------------- 1998 1997 -------------- -------------- Parent: Subordinated notes, unsecured, due from 2000 to 2003, at coupon rates of 6.00% to 10.25%, net of unamortized discount of $3,065 (1998) and $4,209 (1997) $ 811,935 $ 1,010,791 WSL: Subordinated note, unsecured, due July 1, 2000, callable on April 1, 1999, at a coupon rate of 9.90%, net of unamortized discount of $182 (1998) and $303 (1997) 99,818 99,697 -------------- -------------- $ 911,753 $ 1,110,488 ============== ============== At December 31, subordinated notes had a weighted average interest rate of 7.90% (1998) and 8.11% (1997). WSL intends in 1999 to exercise its right to call the subordinated note, due July 1, 2000. At December 31, 1998, subordinated notes had maturities and interest rates as follows: [Download Table] Maturity Rate* Amount ------------------------------------ ---------- -------------- 1999 10.04% $ 99,818 2000 8.89 214,586 2002 7.72 398,196 2003 6.12 199,153 -------------- $ 911,753 ============== *Weighted average interest rate. F-22
10-K405106th Page of 117TOC1stPreviousNextBottomJust 106th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE O - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income. [Download Table] Year Ended December 31 ----------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- Federal income tax: Current $ 225,271 $ 181,304 $ (35,754) Deferred 6,052 3,193 1,863 State tax: Current 55,627 46,678 33,742 Deferred 5,127 1,882 (1,583) -------------- -------------- -------------- $ 292,077 $ 233,057 $ (1,732) ============== ============== ============== The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are: [Download Table] December 31 ------------------------------ 1998 1997 -------------- -------------- Federal income tax $ 197,659 $ 156,332 State tax 74,454 58,352 The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows: [Enlarge/Download Table] December 31 ----------------------------------- 1998 1997 --------------- --------------- Deferred tax liabilities: Unrealized gains on debt and equity securities $ 148,171 $ 103,390 FHLB stock dividends 108,212 91,710 Loan fees and interest income 92,874 90,276 Bad debt reserve 25,957 27,651 Depreciation 16,162 15,443 Other deferred tax liabilities 5,691 5,376 --------------- --------------- Gross deferred tax liabilities 397,067 333,846 Deferred tax assets: Provision for losses on loans 93,737 89,678 State taxes 21,092 17,414 Loan discount primarily related to acquisitions 2,426 4,561 Other deferred tax assets 7,699 7,509 --------------- --------------- Gross deferred tax assets 124,954 119,162 --------------- --------------- Net deferred tax liability $ 272,113 $ 214,684 =============== =============== F-23
10-K405107th Page of 117TOC1stPreviousNextBottomJust 107th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate follows: [Enlarge/Download Table] Year Ended December 31 ------------------------------------------------------------------------------------ 1998 1997 1996 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income ----------- ----------- ----------- ----------- ----------- ----------- Computed standard corporate tax expense $ 258,709 35.0% $ 205,518 35.0% $128,864 35.0% Increases (reductions) in taxes resulting from: Net financial income, not subject to income tax, primarily related to acquisitions (7,754) (1.0) (4,163) (.7) (150,963) (41.0) State tax, net of federal income tax benefit 42,504 5.7 33,564 5.7 22,133 6.0 Other (1,382) (.2) (1,862) (.3) (1,766) (.5) ----------- ------------ ----------- ----------- ----------- ----------- $ 292,077 39.5% $ 233,057 39.7% $ (1,732) (0.5)% =========== =========== =========== =========== =========== =========== "Net financial income, not subject to income tax, primarily related to acquisitions," includes $139 million of tax benefits realized in 1996 from operating losses which had been accumulated at the predecessor institution of Beach Federal Savings and Loan Association (Beach) up to the time of the government approved transaction with Beach in 1988. In accordance with Financial Accounting Standards Board Pronouncement 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of WSL that arose in tax years that began prior to December 31, 1987. At December 31, 1998 and 1997, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 1998 and 1997, was approximately $88 million. This deferred tax liability could be recognized if certain distributions are made with respect to the stock of WSL, or the bad debt reserve is used for any purpose other than absorbing bad debt losses. NOTE P - Stockholders' Equity The Company's Board of Directors, through three separate actions, authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of December 31, 1998, 9,496,616 of such shares had been repurchased and retired at a cost of $461 million since October 28, 1993. During 1998, 1,001,700 of the shares were purchased and retired at a cost of $80 million. F-24
10-K405108th Page of 117TOC1stPreviousNextBottomJust 108th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE Q - Earnings Per Share Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following is a summary of the calculation of basic and diluted EPS: [Enlarge/Download Table] Year Ended December 31 ------------------------------------------------ 1998 1997 1996 -------------- -------------- -------------- Earnings before cumulative effect of change in accounting for goodwill and extraordinary item $ 447,091 $ 354,138 $ 369,913 Cumulative effect of change in accounting for goodwill -0- -0- (205,242) Extraordinary item (12,511) -0- -0- -------------- -------------- -------------- Net earnings $ 434,580 $ 354,138 $ 164,671 ============== ============== ============== Weighted average shares 57,243,756 56,940,494 57,989,327 Add: Options outstanding at yearend 1,695,630 2,209,750 2,674,215 Less: Shares assumed purchased back with proceeds from the exercise of options 1,118,741 1,377,479 1,807,422 -------------- -------------- -------------- Diluted average shares outstanding 57,820,645 57,772,765 58,856,120 ============== ============== ============== Basic Earnings Per Share Calculation: Basic earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.81 $ 6.22 $ 6.38 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.54) Extraordinary item (.22) 0.00 0.00 -------------- -------------- -------------- Basic earnings per share $ 7.59 $ 6.22 $ 2.84 ============== ============== ============== Diluted Earnings Per Share Calculation: Diluted earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 7.74 $ 6.13 $ 6.29 Cumulative effect of change in accounting for goodwill 0.00 0.00 (3.49) Extraordinary item (.22) 0.00 0.00 -------------- -------------- -------------- Diluted earnings per share $ 7.52 $ 6.13 $ 2.80 ============== ============== ============== F-25
10-K405109th Page of 117TOC1stPreviousNextBottomJust 109th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE R - Stock Options The Company's 1996 stock option plan authorizes the granting of options to key employees to purchase up to 7 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to six years and prior to ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to six years and prior to ten years and one month from the grant date. At December 31, shares available for option amounted to 2,473,550 (1998), 2,753,750 (1997), and 2,746,500 (1996). Outstanding options at December 31, 1998, were held by 376 employees and had expiration dates ranging from July 3, 1999, to July 27, 2008. The following table sets forth the range of exercise prices on outstanding options at December 31, 1998: [Download Table] Weighted Weighted Average Average Range of Number of Exercise Remaining Exercise Price Options Price Contractual Life ------------------- -------------- ------------------ ------------------ $18.50 - $22.81 497,850 $21.81 1 year $34.50 - $65.00 914,580 42.37 5.5 years $82.81 - $97.00 283,200 82.95 9 years -------------- 1,695,630 All of the options in the range from $18.50 to $65.00 are exercisable. None of the options in the range from $82.81 to $97.00 is exercisable. A summary of the transactions of the stock option plan follows: [Download Table] Average Exercise Price per Shares Share ------------- ------------ Outstanding, January 1, 1996 2,978,295 $ 26.70 Granted 116,000 $ 53.42 Exercised (401,780) $ 21.61 Canceled (18,300) $ 42.07 ------------- ------------ Outstanding, December 31, 1996 2,674,215 $ 28.51 Granted 3,000 $ 92.00 Exercised (457,215) $ 18.50 Canceled (10,250) $ 43.63 ------------- ------------ Outstanding, December 31, 1997 2,209,750 $ 30.60 Granted 287,850 $ 82.85 Exercised (794,320) $ 22.33 Canceled (7,650) $ 82.81 ------------- ------------ Outstanding, December 31, 1998 1,695,630 $ 43.11 ============= ============ At December 31, options exercisable amounted to 1,412,430 (1998), 2,032,750 (1997), and 1,976,965 (1996). F-26
10-K405110th Page of 117TOC1stPreviousNextBottomJust 110th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) The weighted-average fair value per share of options granted during 1998 was $23.30 per share, $27.08 per share for those granted during 1997, and $15.21 per share for those granted during 1996. For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively; dividend yield of 0.9% (1998), 0.7% (1997) and 1.1% (1996); expected volatility of 24% (1998), 21% (1997) and 20% (1996); expected lives of 5.3 years for all years; and risk-free interest rates of 4.54% (1998), 5.71% (1997) and 6.21% (1996). During the initial phase-in period, the effects of applying SFAS 123 may not be representative of the effects on reported net income for future years because options vest over several years and additional awards can be made each year. The Company applies APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: [Download Table] Year Ended December 31 ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income As reported $ 434,580 $354,138 $164,671 Pro forma 432,661 352,773 163,307 Basic earnings per share As reported $ 7.59 $ 6.22 $ 2.84 Pro forma 7.56 6.20 2.82 Diluted earning per share As reported $ 7.52 $ 6.13 $ 2.80 Pro forma 7.48 6.10 2.77 NOTE S - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk As of December 31, 1998, the balance of the Company's loans receivable, MBS held to maturity with recourse and MBS-REMIC was $35 billion. Of that $35 billion balance, 33% were Northern California loans, 33% were Southern California loans, 4% were Florida loans, 4% were Texas loans, 4% were Illinois loans, 3% were New Jersey loans, 3% were Colorado loans, 3% were Washington loans, and 2% were Arizona loans. No other single state made up more than 2% of the total loan portfolio. The majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio. In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage-backed securities, and loans; and interest rate swaps and caps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank of San Francisco and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company initially has not required collateral or other security to support these financial instruments because of the creditworthiness of the counterparties. Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 1998, and 1997, was $408 million and $312 million, respectively. Most of these commitments were for adjustable rate mortgages. F-27
10-K405111th Page of 117TOC1stPreviousNextBottomJust 111th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) The Company enters into commitments to purchase or sell mortgage-backed securities and other mortgage derivative products. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. The Company had no outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 1998, and 1997. Interest rate swaps and caps are utilized to limit the Company's sensitivity to interest rate changes. The Company is exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap and cap agreements. However, the Company does not anticipate nonperformance by the other parties. NOTE T - Interest Rate Swaps and Caps The Company has entered into interest rate swap and cap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The Company had no caps outstanding during 1998 and 1997. The possible inability of counterparties to satisfy the terms of these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps or caps. The information presented below is based on interest rates at December 31, 1998. To the extent that rates change, variable interest rate information will change. The basis swaps were contracts in which the Company received an amount based on one interest rate index and paid an amount based on a different interest rate index. The forward starting swaps were entered into to convert floating rate assets to fixed-rate in the future in anticipation of future prepayments of matched fixed-rate assets. The following table illustrates the maturities and weighted average rates as of December 31, 1998 for interest rate swaps held by the Company by product type. [Enlarge/Download Table] Maturities of December 31, 1998 Interest Rate Swaps ---------------------------------------------------------------------------------------------------------------------- Maturity --------------------------------------------------------------- Balance at 1999 2000 2001 2002 2003+ December 31, 1998 ---------- ----------- ----------- ----------- ---------- ----------------- Receive fixed generic swaps: Notional amount $ 329,373 $ 45,901 $ 34,401 $ 11,500 $ 91,300 $ 512,475 Weighted average receive rate 6.71% 6.73% 6.61% 6.52% 6.39% 6.64% Weighted average pay rate 5.39% 5.37% 5.32% 5.31% 5.28% 5.36% Pay fixed generic swaps: Notional amount $ 172,000 $ 10,000 $ 96,495 $ 305,000 $ 315,600 $ 899,095 Weighted average receive rate 5.64% 5.61% 5.47% 5.43% 5.45% 5.48% Weighted average pay rate 8.26% 6.08% 8.13% 7.54% 6.37% 7.32% ---------- ----------- ----------- ----------- ---------- ============ Total notional value $ 501,373 $ 55,901 $ 130,896 $ 316,500 $ 406,900 $1,411,570 ========== =========== =========== =========== ========== ============ Total weighted average rate on swaps: Receive rate 6.34% 6.53% 5.77% 5.47% 5.66% 5.90% ========== =========== =========== =========== ========== ============ Pay rate 6.37% 5.50% 7.39% 7.46% 6.14% 6.61% ========== =========== =========== =========== ========== ============ During 1998, the range of floating interest rates received on swap contracts was 4.94% to 6.19% and the range of floating interest rates paid on swap contracts was 4.95% to 6.08%. The range of fixed interest rates received on swap contracts was 4.86% to 8.68% and the range of fixed interest rates paid on swap contracts was 5.38% to 9.14%. F-28
10-K405112th Page of 117TOC1stPreviousNextBottomJust 112th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) Activity in interest rate swaps and caps is summarized as follows: Interest Rate Swap and Cap Activity For the Years Ended December 31, 1998, 1997, and 1996 (Notional amounts in millions) [Enlarge/Download Table] Receive Pay Forward Interest Fixed Fixed Basis Starting Rate Swaps Swaps Swaps Swaps Caps ----------- ----------- ----------- ------------ ----------- Balance, January 1, 1996 $ 3,221 $ 1,775 $ 43 $ 10 $ 225 Additions 905 -0- -0- -0- -0- Maturities (1,545) (435) (43) -0- (225) Forward starting, becoming effective -0- -0- -0- -0- -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1996 2,581 1,340 -0- 10 -0- Additions 100 -0- -0- -0- -0- Maturities (1,002) (232) -0- -0- -0- Forward starting, becoming effective -0- -0- -0- (10) -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1997 1,679 1,108 -0- -0- -0- Additions -0- -0- -0- -0- -0- Maturities (1,167) (209) -0- -0- -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1998 $ 512 $ 899 $ -0- $ -0- $ -0- =========== =========== =========== ============ =========== Interest rate swaps and caps activity decreased net interest income by $9 million, $5 million, and $10 million for the years ended December 31, 1998, 1997, and 1996, respectively. F-29
10-K405113th Page of 117TOC1stPreviousNextBottomJust 113th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE U - Disclosure About Fair Value of Financial Instruments The Financial Accounting Standards Board Pronouncement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. Fair value estimates are not necessarily more relevant than historical cost values. Fair values may have limited usefulness in evaluating portfolios of long-term financial instrument assets and liabilities held by going concerns. Moreover, there are significant inherent weaknesses in any estimating techniques employed. Differences in the alternative methods and assumptions selected by various companies as well as differences in the methodology utilized between years may, and probably will, significantly limit comparability and usefulness of the data displayed. For these reasons, as well as others, management believes that the disclosure presented herein has limited relevance to the Company and its operations. The values presented are based upon information as of December 31, 1998, and 1997, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Banks, other overnight investments, demand deposits, and securities sold under agreements to repurchase with brokers/dealers due within 90 days. Fair values are based on quoted market prices for securities available for sale, other long-term investments, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, securities sold under agreements to repurchase with the Federal Home Loan Bank of San Francisco and brokers/dealers with terms greater than 90 days, and subordinated notes. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: term deposits, advances from Federal Home Loan Banks, consumer repurchase agreements, and medium-term notes. For loans receivable and loan commitments, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans. For mortgage servicing rights, the fair value is estimated using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreements on the reporting date, considering current interest rates. F-30
10-K405114th Page of 117TOC1stPreviousNextBottomJust 114th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) [Enlarge/Download Table] December 31 ---------------------------------------------------------------- 1998 1997 ------------------------------- ------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- -------------- -------------- -------------- Financial Assets: Cash $ 250,875 $ 250,875 $ 172,241 $ 172,241 Securities available for sale 377,005 377,005 608,544 608,544 Other investments 422,385 422,508 252,648 252,648 Mortgage-backed securities available for sale 113,585 113,585 157,327 157,327 Mortgage-backed securities held to maturity 9,918,380 10,032,527 3,782,419 3,833,527 Loans receivable 25,721,288 25,703,930 33,260,709 33,223,479 Interest earned but uncollected 209,328 209,328 216,923 216,923 Investment in capital stock of Federal Home Loan Bank 780,303 780,303 590,244 590,244 Capitalized mortgage servicing rights 28,635 42,470 11,116 16,900 Financial Liabilities: Deposits 26,219,095 26,289,577 24,109,717 24,166,679 Advances from Federal Home Loan Banks 6,163,472 6,188,212 8,516,605 8,553,213 Securities sold under agreements to repurchase 1,252,469 1,253,982 2,334,048 2,334,967 Medium-term notes -0- -0- 109,992 110,015 Subordinated notes 911,753 954,772 1,110,488 1,153,634 [Enlarge/Download Table] Off-Balance Sheet Instruments (based on estimated fair value at December 31): ----------------------------------------------------------------------------------------- December 31 ----------------------------------------------------------------------------------------- 1998 1997 ------------------------------------------- ------------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------- Interest rate swaps: Receive fixed $ 8,924 $ -0- $ 8,924 $ 9,646 $ 1,022 $ 8,624 Pay fixed -0- 45,923 (45,923) 1,397 35,875 (34,478) Loan commitments 4,118 -0- 4,118 1,494 -0- 1,494 ------------ ------------ ------------- ------------ ------------ ------------- Total $ 13,042 $ 45,923 $ (32,881) $ 12,537 $ 36,897 $ (24,360) ============ ============ ============= ============ ============ ============= F-31
10-K405115th Page of 117TOC1stPreviousNextBottomJust 115th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued ----------------------------------------------------- Years ended December 31, 1998 1997 and 1996 (Dollars in thousands except per share figures) NOTE V - Parent Company Financial Information Statement of Net Earnings ------------------------- [Enlarge/Download Table] Year Ended December 31 -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------- Revenues: Investment income $ 71,480 $ 57,020 $ 48,356 Insurance commissions 1,298 1,392 1,381 Other 5 20 19 ------------ ------------ ------------- 72,783 58,432 49,756 Expenses: Interest 69,549 83,687 91,943 General and administrative 3,826 3,470 3,166 ------------ ------------ ------------- 73,375 87,157 95,109 ------------ ------------ ------------- Loss before earnings of subsidiaries and income tax credit (592) (28,725) (45,353) Income tax credit 1,122 13,296 20,306 Earnings of subsidiaries before cumulative effect of change in accounting for goodwill and extraordinary item 446,561 369,567 394,960 ------------ ------------ ------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill and Extraordinary Item 447,091 354,138 369,913 Cumulative effect of change in accounting for goodwill -0- -0- (205,242) Extraordinary item (12,511) -0- -0- ------------ ------------ ------------- Net Earnings $ 434,580 $ 354,138 $ 164,671 ============ ============ ============= Statement of Financial Condition -------------------------------- Assets ------ [Download Table] December 31 -------------------------------- 1998 1997 -------------- -------------- Cash $ 21,937 $ 10,826 Securities available for sale 3,163 97,935 Overnight note receivable from subsidiary 72,977 76,146 Other investments 90 180,087 Notes receivable from subsidiary 800,000 600,000 Prepaid expenses and other assets 21,783 9,343 Investment in subsidiaries 3,035,222 2,766,544 -------------- -------------- $ 3,955,172 $ 3,740,881 ============== ============== [Enlarge/Download Table] Liabilities and Stockholders' Equity ------------------------------------ Accounts payable and accrued expenses $ 18,919 $ 32,059 Subordinated notes, net 811,935 1,010,791 Stockholders' equity 3,124,318 2,698,031 -------------- -------------- $ 3,955,172 $ 3,740,881 ============== ============== F-32
10-K405116th Page of 117TOC1stPreviousNextBottomJust 116th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued ----------------------------------------------------- Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands except per share figures) NOTE V- Parent Company Financial Information (Continued) Statement of Cash Flows ----------------------- [Enlarge/Download Table] Year Ended December 31 ------------------------------------------ 1998 1997 1996 ------------- ------------ ------------ Cash flows from operating activities: Net earnings $ 434,580 $ 354,138 $ 164,671 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Equity in earnings of subsidiaries before cumulative effect of change in accounting for goodwill and extraordinary item (446,561) (369,567) (394,960) Cumulative effect of change in accounting for goodwill -0- -0- 205,242 Extraordinary item 21,152 -0- -0- Amortization of intangibles and discount on subordinated notes 1,144 1,305 1,393 Other, net (6,618) 12,543 4,072 ------------- ------------ ------------ Net cash provided by (used in)operating activities) 3,697 (1,581) (19,582) Cash flows from investing activities: Loans purchased from subsidiary (317,520) (80,661) -0- Capital contributed to subsidiaries (171,007) (203,769) (500,225) Dividends received from subsidiary 731,215 515,225 830,000 Purchases of securities available for sale (15) (2,878) (306,590) Sales of securities available for sale 73,648 11,944 6,182 Matured securities available for sale -0- 50,000 350,000 Decrease (increase) in overnight notes receivable from subsidiary 3,169 (76,146) -0- Decrease (increase) in other investments 179,997 (27,602) 364,717 Issuances of notes receivable from subsidiaries (200,000) (600,000) (2,501,500) Repayments of notes receivable from subsidiaries -0- 600,000 1,901,500 ------------- ------------ ------------ Net cash provided by investing activities 299,487 186,113 144,084 Cash flows from financing activities: Repayment of subordinated notes (200,000) (115,000) -0- Dividends on common stock (29,488) (25,903) (22,893) Exercise of stock options 17,738 8,456 8,683 Purchase and retirement of Company stock (80,323) (48,351) (105,756) ------------- ------------ ------------ Net cash used in financing activities (292,073) (180,798) (119,966) Net increase in cash 11,111 3,734 4,536 Cash at beginning of period 10,826 7,092 2,556 ------------- ------------ ------------ Cash at end of period $ 21,937 $ 10,826 $ 7,092 ============= ============ ============ Supplemental cash flow information: Loans contributed to subsidiary $ 317,520 $ 80,661 $ -0- F-33
10-K405Last Page of 117TOC1stPreviousNextBottomJust 117th
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued ----------------------------------------------------- Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE W - Selected Quarterly Financial Data (Unaudited) [Enlarge/Download Table] 1998 ---------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- -------------- -------------- Interest income $ 755,203 $ 740,569 $ 744,457 $ 722,324 Interest expense 511,489 501,372 506,315 476,055 -------------- -------------- -------------- -------------- Net interest income 243,714 239,197 238,142 246,269 Provision for loan losses 2,965 2,682 3,130 2,483 Non-interest income 26,003 43,097 30,823 37,690 Non-interest expense 83,674 87,036 87,505 96,292 -------------- -------------- -------------- -------------- Earnings before taxes on income and extraordinary item 183,078 192,576 178,330 185,184 Taxes on income 72,997 75,626 70,309 73,145 -------------- -------------- -------------- -------------- Earnings before extraordinary item 110,081 116,950 108,021 112,039 Extraordinary item (7,710) -0- (4,801) -0- -------------- -------------- -------------- -------------- Net earnings $ 102,371 $ 116,950 $ 103,220 $ 112,039 ============== ============== ============== ============== Basic earnings per share before extraordinary item $ 1.92 $ 2.04 $ 1.87 $ 1.97 Extraordinary item (.13) 0.00 (.08) 0.00 -------------- -------------- -------------- -------------- Basic earnings per share $ 1.79 $ 2.04 $ 1.79 $ 1.97 ============== ============== ============== ============== Diluted earnings per share before extraordinary item $ 1.89 $ 2.01 $ 1.85 $ 1.95 Extraordinary item (.13) 0.00 (.08) 0.00 -------------- -------------- -------------- -------------- Diluted earnings per share $ 1.76 $ 2.01 $ 1.77 $ 1.95 ============== ============== ============== ============== Cash dividends per share $ .125 $ .125 $ .125 $ .14 ============== ============== ============== ============== [Enlarge/Download Table] 1997 ---------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- -------------- -------------- Interest income $ 674,279 $ 690,239 $ 718,202 $ 749,777 Interest expense 455,587 473,659 496,057 516,699 -------------- -------------- -------------- -------------- Net interest income 218,692 216,580 222,145 233,078 Provision for loan losses 20,695 13,111 9,980 13,823 Non-interest income 19,232 19,810 20,420 21,806 Non-interest expense 79,170 78,627 83,234 85,928 -------------- -------------- -------------- -------------- Earnings before taxes on income 138,059 144,652 149,351 155,133 Taxes on income 54,685 57,375 59,344 61,653 -------------- -------------- -------------- -------------- Net earnings $ 83,374 $ 87,277 $ 90,007 $ 93,480 ============== ============== ============== ============== Basic earnings per share $ 1.45 $ 1.53 $ 1.59 $ 1.65 ============== ============== ============== ============== Diluted earnings per share $ 1.43 $ 1.51 $ 1.56 $ 1.62 ============== ============== ============== ============== Cash dividends per share $ .11 $ .11 $ .11 $ .125 ============== ============== ============== ============== F-34

Dates Referenced Herein   and   Documents Incorporated by Reference

Referenced-On Page
This ‘10-K405’ Filing    Date First  Last      Other Filings
7/27/08109
7/1/009105
7/3/99109
6/15/992996
4/1/999105
Filed on:3/30/99
3/29/9981
3/24/9947
3/15/99178DEF 14A
2/28/9914
1/20/9984
For Period End:12/31/9811175
9/30/987910-Q
3/31/983410-Q
3/19/984
3/16/9879DEF 14A
1/1/9863
12/31/97211710-K405
12/1/973390
1/1/973396
12/31/96211710-K405,  10-K405/A
3/15/9679DEF 14A
1/1/9627112
10/28/9328107
 List all Filings 
Top
Filing Submission 0000042293-99-000005   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
AboutPrivacyRedactionsHelp — Fri., Mar. 29, 8:35:19.2am ET