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PAGE 1
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, 1993
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. [X]
The approximate aggregate market value of the Registrant's common
stock held by nonaffiliates of the Registrant on February 28, 1994, was
$2,648,346,929. The number of shares outstanding of the Registrant's
common stock on February 28, 1994, was 64,008,385 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference Applicable Part of Form 10-K
Proxy Statement Dated March 14, 1994, Part III
Furnished to Stockholders in Connection
with Registrant's Annual Meeting of
Stockholders.
PAGE 2
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 and loan business through its wholly owned
subsidiary, World Savings and Loan Association, a Federal Savings and Loan
Association (World or Association). Golden West also has two other
subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These
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 twelve 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.
THE ASSOCIATION
World was incorporated in 1912 as a capital stock savings and loan
association and has its home office in Oakland, California. World became a
federally chartered savings and loan association in September 1981. See
Note T to the Financial Statements included in Item 14 for the contribution
of the Association to the earnings of the Company.
REGULATORY FRAMEWORK
The Company is a savings and loan holding company within the meaning
of the National Housing Act, as amended, (the Holding Company Act), and is
subject to the regulation, examination, supervision, and reporting
requirements of the Holding Company Act. The Association is a member of
the Federal Home Loan Bank System and owns stock in the Federal Home Loan
Bank (FHLB) of San Francisco, Topeka, and New York. The Association's
savings accounts are insured by the Federal Deposit Insurance Corporation
(FDIC) Savings Association Insurance Fund (SAIF), up to the maximum amounts
provided by law.
The Company and the Association are subject to extensive examination,
supervision, and regulation by the Office of Thrift Supervision (OTS) and
the FDIC. Applicable regulations govern, among other things, the Associa-
tion's lending and investment powers, the types of accounts it is permitted
to offer, the types of business in which it may engage, and capital
requirements. The Association is 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).
PAGE 3
ITEM 1. BUSINESS (Continued)
OFFICE STRUCTURE
As of December 31, 1993, the Company operated 112 savings branch
offices in California, 59 in Colorado, 19 in Florida, 11 in Texas, ten in
Kansas, nine in Arizona, and seven in New Jersey. The Company also
operates 175 loan origination offices of which 154 are located in the same
states as savings branch offices. The remaining 21 loan origination
offices are located in Connecticut, Delaware, Idaho, Illinois, Maryland,
Missouri, Nevada, New Mexico, Oregon, Pennsylvania, Utah, Virginia,
Washington, and Wisconsin. Of the 154 offices mentioned earlier, 15 are
fully-staffed offices that are located in the same premises as savings
branch offices and 75 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.
ACQUISITIONS/DIVESTITURES
On August 13, 1993, the Company acquired $320 million in deposits and
seven branches in Arizona from PriMerit Bank. On September 17, 1993, the
Company sold $133 million of savings in two Ohio branches to Trumbull
Savings and Loan. On October 15, 1993, the Company sold its remaining five
Ohio branches with $131 million in deposits to Fifth Third Bancorp.
During 1992, the Company sold one branch in California containing
$40 million in deposits to American Savings Bank and two branches in the
state of Washington containing $37 million in deposits to Washington Mutual
Savings Bank.
On July 15, 1991, the Company took title to the common stock of Beach
Federal Savings and Loan Association (Beach) of Boynton Beach, Florida, and
its $1.5 billion in assets. The transaction has been accounted for as a
purchase, and the subsidiary's results of operations have been included
with those of the Company's since July 15, 1991. As a result of the Beach
acquisition, the Company recognized, for tax purposes, certain Beach net
operating losses that resulted in a $25 million benefit in 1992 and a
$103 million benefit in 1991. For financial statement reporting, this
benefit has been recorded as negative goodwill and is being amortized into
income over ten years. In 1993, 1992, and 1991, $13 million, $12 million,
and $5 million, respectively, of the negative goodwill was amortized.
On March 31, 1991, World Savings and Loan Association of Ohio (World
of Ohio), a wholly owned subsidiary of Golden West, was merged into World.
In conjunction with Golden West's acquisition of World of Ohio in 1988, the
benefits of net operating loss carryforwards resulted in recording
$18 million of negative goodwill in 1991. This benefit was amortized into
income over the period 1989 to 1993. In 1993, 1992, and 1991, $3 million,
$4 million, and $11 million, respectively, of the negative goodwill was
amortized.
PAGE 4
ITEM 1. BUSINESS (Continued)
ACQUISITIONS (continued):
During 1991, World acquired from the Resolution Trust Corporation a
total of $355 million of deposits and 11 branches from four separate
acquisitions.
The foregoing acquisitions are 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 Association, 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 Association's
operations are also provided through earnings, loan repayments, borrowings
from the Federal Home Loan Banks, and debt collateralized by mortgages,
MBS, or other securities. In addition, the Association has a number of
other alternatives available to provide liquidity or finance operations.
These include borrowings from public offerings of debt or equity, sales of
loans and MBS, negotiable certificates of deposit, issuance of commercial
paper, and borrowings from commercial banks. Furthermore, under certain
conditions, World may borrow from the Federal Reserve Bank of San Francisco
to meet short-term cash needs. The availability of these funds will vary
depending on policies of the FHLB, 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 World and the proceeds from the issuance of debt and
equity securities.
CUSTOMER DEPOSIT ACTIVITIES
Customer 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. The Company's certificate
accounts are issued in non-negotiable form through its branch offices. All
types of accounts presently offered by the Company have rates that are set
by the Company consistent with prevailing interest rates.
PAGE 5
ITEM 1. BUSINESS (Continued)
CUSTOMER DEPOSIT ACTIVITIES (continued)
During 1993, customer deposits increased $880 million, including
interest credited of $567 million and excluding $320 million from
acquisitions and $264 million from divestitures compared to a decrease of
$255 million, including interest credited of $676 million and excluding
divestitures of $77 million during 1992. Customer deposits increased
$640 million in 1991, including $903 million of interest credited and
excluding $1.8 billion from acquisitions. The Company does not solicit
brokered deposit accounts. Rates paid on new and repricing accounts
dropped steadily in 1993 and 1992, reaching the lowest level in 20 years
for most products. Although rates paid on new accounts were lower than
they had been in previous years, consumer funds were attracted during 1993
as a result of special promotions in the Company's savings markets. The
Company experienced a net outflow of deposits during 1992 because the
Company elected to emphasize other, more cost-effective sources of funds,
primarily Federal Home Loan Bank advances.
The table below summarizes the Company's customer deposits by original
term to maturity at December 31.
TABLE 1
Customer Deposits
by Original Term to Maturity
($000s Omitted)
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
Interest-bearing
checking . . . . $ 736,767 $ 710,851 $ 574,068 $ 457,532 $ 409,842
Passbook . . . . . 611,606 541,701 391,205 332,421 301,034
Money market
deposit accounts 2,378,087 2,731,338 2,310,518 1,749,417 1,231,560
Term certificate
accounts with
original matur-
ities of:
4 weeks to 1 year 4,334,208 4,762,359 6,148,044 4,512,000 4,137,130
1 to 2 years . . 4,614,059 3,494,606 4,415,462 4,622,991 2,319,364
2 to 3 years . . 1,448,779 1,246,978 907,858 994,267 1,351,433
3 to 4 years . . 1,149,108 1,267,707 1,232,213 890,346 1,338,469
4 years and over 2,021,350 1,612,784 730,057 595,936 512,378
Retail jumbo CDs 109,250 94,651 82,331 189,397 155,061
All other. . . . . 19,270 23,271 26,754 28,177 31,113
----------- ----------- ----------- ----------- -----------
Total customer
deposits. . . . $17,422,484 $16,486,246 $16,818,510 $14,372,484 $11,787,384
=========== =========== =========== =========== ===========
PAGE 6
ITEM 1. BUSINESS (Continued)
CUSTOMER DEPOSIT ACTIVITIES (continued)
The table below sets forth the Company's customer deposits by interest
rate at December 31.
TABLE 2
Customer Deposits by Interest Rate
($000s Omitted)
1993 1992
----------- -----------
0.00% - 4.00% . . . . . . . . . . $ 9,344,231 $ 6,625,378
4.01% - 6.00% . . . . . . . . . . 5,807,364 6,838,163
6.01% - 8.00% . . . . . . . . . . 1,935,573 2,219,414
8.01% - 10.00% . . . . . . . . . . 296,998 761,973
10.01% - 12.00% . . . . . . . . . . 38,018 40,717
12.01% - 14.00% . . . . . . . . . . 300 601
----------- -----------
$17,422,484 $16,486,246
=========== ===========
The table below shows the maturities of customer deposits at
December 31, 1993, by interest rate.
TABLE 3
Customer Deposit Maturities
by Interest Rate
($000s Omitted)
1998 and
1994(a) 1995 1996 1997 thereafter Total
----------- ---------- -------- -------- ---------- -----------
0.00% - 4.00% . $ 8,839,663 $ 492,442 $ 4,834 $ 2 $ 7,290 $ 9,344,231
4.01% - 6.00% . 3,817,998 1,249,786 308,013 113,795 317,772 5,807,364
6.01% - 8.00% . 662,797 67,077 146,009 534,665 525,025 1,935,573
8.01% - 10.00% . 236,798 54,735 1,475 1,769 2,221 296,998
10.01% - 12.00% . 29,482 1,949 141 912 5,534 38,018
12.01% - 14.00% . 200 -0- -0- 100 -0- 300
----------- ---------- -------- -------- -------- -----------
$13,586,938 $1,865,989 $460,472 $651,243 $857,842 $17,422,484
=========== ========== ======== ======== ======== ===========
(a) Includes passbook, checking, and money market deposit accounts, which
have no stated maturity.
PAGE 7
ITEM 1. BUSINESS (Continued)
CUSTOMER DEPOSIT ACTIVITIES (continued)
As of December 31, 1993, the aggregate amount outstanding of time
certificates of deposits in amounts of $100,000 or more was $1.5 billion of
which $109 million were retail jumbo CDs. The following table presents the
maturity of these time certificates of deposit at December 31, 1993.
TABLE 4
Time Certificate of Deposit Maturities
($000s Omitted)
3 months or less $ 426,370
Over 3 months through 6 months 288,931
Over 6 months through 12 months 318,100
Over 12 months 419,546
----------
$1,452,947
==========
More information regarding customer deposits is included in Note J to
the Financial Statements, in Item 14.
BORROWINGS
The Company generally may borrow from the FHLB of San Francisco upon
the security of a) the capital stock of the FHLB owned by the Company,
b) certain of its residential mortgage loans 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 determined by the
FHLB. At December 31, 1993, the Company had $6.3 billion in FHLB advances
outstanding, compared to $5.5 billion at yearend 1992.
From time to time, the Company enters into reverse repurchase
agreements with selected major government securities dealers, as well as
large banks. 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 brokers and dealers a variable or fixed
rate of interest for the use of the funds for the period involved, usually
less than one year. At maturity, the borrowings are repaid (by repurchase
PAGE 8
ITEM 1. BUSINESS (Continued)
BORROWINGS (continued)
of the same securities) and the same securities are returned to the
Company. These transactions are used to take advantage of arbitrage
investment opportunities and to supplement cash flow.
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. These transactions are
used to take advantage of arbitrage investment opportunities and to
supplement cash flow.
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 and banks amounted to $377 mil-
lion at December 31, 1993, compared to $486 million at yearend 1992.
Golden West currently has on file a registration statement with the
Securities and Exchange Commission for the sale of up to $100 million of
subordinated debt securities. The Company issued subordinated debt
securities of $100 million in January 1993 and $200 million in October
1993, bringing the total amount issued to $1.0 billion at
December 31, 1993. As of December 31, 1993, Golden West's subordinated
debt securities had ratings of A3 and A- from Moody's Investors Service
(Moody's) and Standard & Poor's Corporation (S&P), respectively.
World currently has on file a shelf registration with the OTS for the
issuance of $2.0 billion of unsecured medium-term notes. At
December 31, 1993, $1.2 billion was available for issuance. In total, at
December 31, 1993, the Association had $677 million of medium-term notes
outstanding under the current and prior registrations compared to
$81 million at yearend 1992. As of December 31, 1993, the Association's
medium-term notes had ratings of A1 and A+ from Moody's and S&P,
respectively.
World also has on file a registration statement with the OTS for the
sale of up to $250 million of subordinated notes. Under a prior filing
with the OTS, $50 million of subordinated notes remain unissued. As of
December 31, 1993, the Association had issued a total of $200 million of
PAGE 9
ITEM 1. BUSINESS (Continued)
BORROWINGS (continued)
subordinated notes. As of December 31, 1993, World's subordinated notes
had ratings of A2 and A from Moody's and S&P, respectively. The
subordinated notes are included in the Association's risk-based regulatory
capital as Supplementary Capital.
The table below sets forth the composition of the Company's borrowings
at December 31.
TABLE 5
Composition of Borrowings
($000s Omitted)
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
FHLB advances. . . . . . . . . $6,281,691 $5,499,363 $4,159,796 $3,834,755 $4,506,263
Reverse repurchase agreements. 205,821 372,409 302,400 648,841 177,799
Dollar reverse repurchase
agreements . . . . . . . . . 237,053 184,301 349,813 691,926 223,495
Medium-term notes. . . . . . . 676,540 81,267 166,750 960,869 1,256,235
Other borrowings . . . . . . . -0- -0- 21,395 12,415 12,495
Subordinated debt. . . . . . . 1,220,061 921,701 625,105 426,200 113,668
---------- ---------- ---------- ---------- ----------
Total borrowings . . . . . . $8,621,166 $7,059,041 $5,625,259 $6,575,006 $6,289,955
========== ========== ========== ========== ==========
Weighted average interest rate
of total borrowings. . . . 4.69% 5.58% 7.48% 8.73% 9.13%
===== ===== ===== ===== =====
More information concerning the borrowings of the Company is included
in Notes K, L, M, and N to the Financial Statements, 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 power to originate loans in any part of the United States. The Company
is currently originating loans primarily in California, as well as in
Arizona, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Kansas,
Maryland, Missouri, Nevada, New Mexico, New Jersey, Oregon, Pennsylvania,
Texas, Utah, Virginia, Washington, and Wisconsin. The Company also makes
loans to customers on the security of their deposit accounts. Customer
deposit loans constituted less than one percent of the Company's total
loans outstanding as of December 31, 1993, and 1992.
The tables on the following two pages set forth the Company's loan
portfolio by state as of December 31, 1993, and 1992.
PAGE 10
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
TABLE 6
Loan Portfolio by State
December 31, 1993
($000s Omitted)
Residential
Real Estate Commercial Loans as
------------------------ Real Total a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ------------ ----------- ---------- ------ ---------- ----------- ---------
California $16,349,385 $3,277,630 $ 308 $ 89,076 $19,716,399 81.80%
Colorado 585,359 116,491 -0- 9,763 711,613 2.95
Illinois 421,926 132,602 -0- 5,311 559,839 2.32
New Jersey 536,330 41 -0- 169 536,540 2.23
Washington 215,185 215,668 -0- 843 431,696 1.79
Florida 313,146 -0- 408 2,463 316,017 1.31
Texas 244,334 2,795 615 1,855 249,599 1.04
Virginia 238,655 934 -0- 1,845 241,434 1.00
Connecticut 179,831 -0- -0- -0- 179,831 0.75
Arizona 171,201 4,323 -0- 1,885 177,409 0.74
Pennsylvania 140,034 -0- -0- 9,405 149,439 0.62
Kansas 126,134 5,464 -0- 238 131,836 0.55
Oregon 117,800 8,245 -0- 4,089 130,134 0.54
Maryland 123,447 -0- -0- 685 124,132 0.51
Nevada 90,295 1,407 -0- -0- 91,702 0.38
Missouri 62,012 9,059 -0- 80 71,151 0.29
New York 66,714 174 -0- 656 67,544 0.28
Georgia 58,607 -0- -0- 2,747 61,354 0.25
Ohio 42,550 6,153 1,076 7,557 57,336 0.24
Utah 37,399 141 -0- 2,338 39,878 0.17
Other 40,963 4,342 -0- 11,703 57,008 0.24
----------- ---------- ------ -------- ----------- ------
Totals $20,161,307 $3,785,469 $2,407 $152,708 24,101,891 100.00%
=========== ========== ====== ======== ======
FAS 91 deferred loan fees (102,184)
Loan discount on purchased loans (8,340)
Undisbursed loan funds (1,882)
Allowance for loan losses (106,698)
LTF interest reserve (914)
TDR interest reserve (1,314)
Loans on customer deposits 32,012
-----------
Total loan portfolio $23,912,571
===========
(a) The Company has no commercial loans.
PAGE 11
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
TABLE 7
Loan Portfolio by State
December 31, 1992
($000s Omitted)
Residential
Real Estate Commercial Loans as
------------------------ Real Total a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ------------ ----------- ---------- ------ ---------- ----------- ---------
California $15,265,464 $3,130,935 $ 330 $ 95,007 $18,491,736 83.60%
Colorado 592,569 78,934 -0- 7,602 679,105 3.07
New Jersey 534,854 41 -0- 419 535,314 2.42
Illinois 295,951 92,863 -0- 5,843 394,657 1.78
Washington 134,225 159,996 -0- 1,344 295,565 1.34
Florida 269,359 118 36 7,120 276,633 1.25
Virginia 177,725 -0- -0- 3,022 180,747 0.82
Connecticut 157,719 -0- -0- -0- 157,719 0.71
Kansas 129,941 5,552 -0- 358 135,851 0.61
Arizona 124,563 4,420 -0- 1,954 130,937 0.59
Texas 94,629 5,023 -0- 5,053 104,705 0.47
Oregon 84,544 7,930 -0- 4,239 96,713 0.44
Pennsylvania 82,430 115 -0- 11,330 93,875 0.43
Maryland 81,146 -0- -0- 3,121 84,267 0.38
New York 78,288 178 -0- 688 79,154 0.36
Georgia 73,990 -0- -0- 3,025 77,015 0.35
Missouri 65,432 8,313 -0- 82 73,827 0.33
Ohio 61,834 6,511 1,397 3,856 73,598 0.33
Nevada 68,361 1,486 -0- -0- 69,847 0.32
Utah 18,860 148 -0- 2,491 21,499 0.10
Other 42,032 5,765 -0- 17,942 65,739 0.30
----------- ---------- ------ -------- ----------- ------
Totals $18,433,916 $3,508,328 $1,763 $174,496 22,118,503 100.00%
=========== ========== ====== ======== ======
FAS 91 deferred loan fees (95,611)
Loan discount on purchased loans (12,175)
Undisbursed loan funds (2,687)
Allowance for loan losses (70,924)
LTF interest reserve (1,066)
TDR interest reserve (594)
Loans on customer deposits 33,230
-----------
Total loan portfolio $21,968,676
===========
(a) The Company has no commercial loans.
PAGE 12
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 security at
December 31.
TABLE 8
Loan Portfolio by Type of Security
($000s Omitted)
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
Loans collateralized primarily
by first deeds of trust:
One-to four-family units. . . $20,197,613 $18,487,247 $17,065,371 $15,060,960 $12,482,114
Over four-family units. . . . 3,785,673 3,509,105 2,989,908 2,606,502 2,455,302
Commercial real estate. . . . 153,396 176,900 214,706 233,720 265,344
Construction loans. . . . . . 580 580 580 -0- 686
Land. . . . . . . . . . . . . 2,407 1,763 1,989 1,212 1,602
Loans on customer deposits. . . 32,012 33,230 36,607 34,428 31,437
Less:
Undisbursed loan funds. . . . 1,882 2,687 1,924 598 835
Unearned fees and discounts . 112,751 109,446 92,472 81,593 84,421
Unamortized discount arising
from acquisitions . . . . . 37,779 57,092 79,297 97,385 119,270
Allowance for loan losses 106,698 70,924 48,036 26,799 20,963
----------- ----------- ----------- ----------- -----------
$23,912,571 $21,968,676 $20,087,432 $17,730,447 $15,010,996
=========== =========== =========== =========== ===========
At December 31, 1993, 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, 1993.
TABLE 9
Loans Due After One Year
($000s Omitted)
Adjustable Rate $20,469,876
Fixed Rate 3,375,700
-----------
$23,845,576
===========
The table on the following page sets forth information concerning new
loans made by the Company during 1993, 1992, and 1991 by type and purpose
of loan.
PAGE 13
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
TABLE 10
New Loan Originations By Type and Purpose
($000s Omitted)
1993 1992 1991
---------------------------- ---------------------------- ----------------------------
No. of % of No. of % of No. of % of
Type Loans Amount Total Loans Amount Total Loans Amount Total
- ---------------------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Residential
(one unit) 41,999 $5,459,456 85.2% 36,756 $5,264,481 81.6% 26,341 $4,123,609 84.5%
Residential
(2 to 4 units) 2,380 351,349 5.5 2,191 382,901 5.9 1,739 320,807 6.6
Residential
(5 or more units) 1,209 598,972 9.3 1,323 807,652 12.5 737 432,484 8.9
Commercial real estate 1 2,100 0.0 1 56 0.0 1 257 0.0
------ ---------- ----- ------ ---------- ----- ------ ---------- -----
Totals 45,589 $6,411,877 100.0% 40,271 $6,455,090 100.0% 28,818 $4,877,157 100.0%
====== ========== ===== ====== ========== ===== ====== ========== =====
1993 1992 1991
---------------------------- ---------------------------- ----------------------------
No. of % of No. of % of No. of % of
Purpose Loans Amount Total Loans Amount Total Loans Amount Total
- ---------------------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Purchase 18,236 $2,654,769 41.4% 18,188 $2,819,943 43.7% 15,862 $2,627,124 53.9%
Refinance 27,353 3,757,108 58.6 22,083 3,635,147 56.3 12,955 2,249,453 46.1
Construction -0- -0- 0.0 -0- -0- 0.0 1 580 0.0
------ ---------- ----- ------ ---------- ----- ------ ---------- -----
Totals 45,589 $6,411,877 100.0% 40,271 $6,455,090 100.0% 28,818 $4,877,157 100.0%
====== ========== ===== ====== ========== ===== ====== ========== =====
Note: During 1993, 1992, and 1991, the Company also purchased $14 million,
$5 million, and $302 million, respectively, of loans (not included above)
of which $304 thousand, $1 million, and $178 million, respectively, were
one-unit residential loans.
PAGE 14
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
Although the Company has lending operations in 21 states, the primary
mortgage origination focus continues to be on residential properties in
California. In 1993, 73% of total loan originations were on residential
properties in California, compared to 83% and 88% in 1992 and 1991,
respectively. Although California originations continue to be a large
portion of total originations, the decrease in 1993 as compared to 1992 and
1991 was due to increased penetration by the Company in markets outside
California and the slight decrease of originations in California. The
percentage of the total loan portfolio (excluding mortgage-backed
securities) that is comprised of residential loans in California was 81% at
December 31, 1993, compared to 83% at yearend 1992.
New loan originations in 1993, 1992, and 1991 amounted to
$6.4 billion, $6.5 billion, and $4.9 billion, respectively. Refinanced
loans constituted 59% of new loan originations in 1993 compared to 56% in
1992 and 46% in 1991. The new loan origination levels achieved in 1993 and
1992 were due, in large part, to strong demand in the marketplace for
refinancing of existing loans due to the low interest rate environment. In
addition, in 1992 and 1991, capital deficiencies and loan portfolio
problems inhibited many of Golden West's competitors from making loans.
The total portfolio growth for each of the years ended December 31, 1993,
and 1992, was $1.9 billion or 9%.
Federal regulations permit federally chartered savings and loan
associations 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 but which must be beyond the control of the association
and readily 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 terms,
except that the original loan term may not be increased to more than 40
years.
Pursuant to these powers, the Company began offering adjustable rate
mortgages (ARMs) in the early 1980s and this type of mortgage continues to
be the Company's primary real estate loan. The portion of the mortgage
portfolio (excluding mortgage-backed securities) composed of rate-sensitive
loans was 87% at yearends 1993, 1992, and 1991. Despite stiff competition
from mortgage bankers who aggressively marketed fixed-rate mortgages at the
lowest rates seen in the past 20 years, Golden West's ARM originations
constituted approximately 75% of new mortgage loans made by the Company in
1993, compared with 80% in 1992 and 89% in 1991.
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
PAGE 15
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
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.
On certain other ARMs, the payment and interest rate change every six
months, with the maximum rate change capped at one percent. These ARMs do
not allow negative amortization and, consequently, do not have the 7-1/2%
payment increase 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 three to 36 months. (However, the borrower
must generally qualify at the initial fully-indexed contract rate.)
The weighted average maximum lifetime cap rate on the Company's ARM
and modified ARM loan portfolio was 13.82%, or 7.39% above the actual
weighted average rate at December 31, 1993, versus 14.18%, or 6.99% above
the weighted average rate at yearend 1992.
Approximately $4.5 billion of the Company's loans have terms that
state that the interest rate may not fall below a lifetime floor, set at
the time of origination or assumption. Due to the decline in interest
rates, as of December 31, 1993, $1.5 billion of these loans had reached
their rate floors. The weighted average floor rate on these loans was
7.4% at yearend 1993.
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
salaried personnel who contact local real estate brokers regarding possible
lending opportunities. All loan applications are completed, reviewed, and
approved in the loan origination offices and forwarded to the Company's
central offices in Oakland, California; Costa Mesa, California; or Denver,
Colorado, for processing.
PAGE 16
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The Company also utilizes the services of selected mortgage brokers to
obtain completed loan applications. In such cases, the Company, in
addition to the review by the mortgage broker, performs its own quality
review, including a physical inspection of the property, before processing
the application and funding the loan.
The Company's loan approval process is intended to assess both the
borrower's ability to repay the loan and the adequacy of the pro-posed
security. Documentation for all loans is maintained in the Company's loan
servicing offices in San Leandro, California.
The Company generally lends up to 80% of the appraised value of
residential real property and, under certain circumstances, up to 90% of
the appraised value of single-family residences. Commencing in 1992, it is
the Company's policy that all loans originated in excess of 80% of the
appraised value of the property are required to have mortgage insurance ex-
cept on loans to facilitate the sale of REO. During 1993, 1992, and 1991,
less than 3% of loans originated were in excess of 80% of the appraised
value of the residence. 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, par-
ticipations in loans and, in limited instances, whole loans, to the Federal
Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Asso-
ciation (FNMA), and to institutional purchasers. Under loan participation
sale agreements, the Company usually 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.
At December 31, 1993, the Company was engaged in servicing approximately
$807 million of loan participations and whole loans for others. For the
year ended December 31, 1993, fees received for such servicing activities
totalled $3 million, or approximately one-tenth of one percent of total
revenues.
The Company sold $432 million of loans during 1993 compared to
$281 million and $67 million in 1992 and 1991, respectively. The Company
recognized pre-tax gains of $5.7 million compared to $1.7 million in 1992
and $381 thousand in 1991. The Company originated $443 million of loans
held for sale during 1993 compared to $278 million in 1992 and $77 million
in 1991. The loan held for sale portfolio had a balance of $56 million at
December 31, 1993, and is carried at the lower of cost or market.
PAGE 17
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The Company also purchases, on a selective basis and only after a
strict underwriting review, residential mortgage whole loans in the
secondary market. Loan purchases in 1993, 1992, and 1991 amounted to
$14 million, $5 million, and $302 million, respectively.
Loan repayments consist of monthly loan amortization, loan payoffs,
and loan refinances. During 1993, 1992, and 1991, repayments amounted to
$3.8 billion, $4.1 billion, and $2.8 billion, respectively. The decrease
in repayments in 1993 over 1992 was due to lower mortgage payoffs within
our loan portfolio. The increase in repayments in 1992 over 1991 was
primarily due to an increase in refinance activity as many borrowers took
advantage of lower interest rates by replacing older, high-cost debt with
new, more attractively priced instruments.
The Company adopted Statement of Financial Accounting Standards
No. 114 (FAS 114), "Accounting by Creditors for Impairment of a Loan," in
the fourth quarter of 1993, retroactive to January 1, 1993. FAS 114
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate. As a practical expedient, impairment may be measured based on the
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. When the measure 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 present value of impaired
loans for which impairment is measured based on the present value of
expected future cash flows. The Company had previously measured loan
impairment in accordance with the methods prescribed in FAS 114. As a
result, no additional loss provisions were required by early adoption of
the pronouncement.
FAS 114 requires that impaired loans for which foreclosure is probable
should be accounted for as loans. As a result, $16 million of in-substance
foreclosed loans, with a valuation allowance of $7 million, were
reclassified from real estate held for sale to loans receivable. Prior
year amounts have not been restated.
It is too early to predict with any precision potential losses to the
Company resulting from the Northridge (southern California) earthquake in
January 1994; however, based on early assessments of severity of damage,
borrower equity, and levels of insurance coverage, the Company believes
that any potential loss to the Company will not be material to the
financial condition and results of operations of the Company.
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. The Company
also charges fees for loan prepayments, loan assumptions and modifications,
late payments and other miscellaneous services.
PAGE 18
ITEM 1. BUSINESS (Continued)
LENDING ACTIVITIES (continued)
The table below sets forth information relat-ing to interest rates and
loan fees charged for the years indicated.
TABLE 11
Weighted Average Interest Rates and Fees on New Loan Originations
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
Weighted average interest
rate on new real estate
loans originated(a) . . . . 6.86% 8.06% 9.83% 10.64% 10.86%
Weighted average loan fees
received on new real estate
loans originated(a) . . . . .59% .81% .85% .71% .90%
(a) excludes loans purchased
NONPERFORMING ASSETS
If a borrower fails to make required payments on a loan, the Company
usually takes the 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" involving 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 real-
ized from the sale of such property and the amount owed by the borrower.
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 that are 90 days or more past due) and
real estate acquired through foreclosure. Loans in-substance foreclosed
were no longer classified as part of the real estate held for sale
portfolio upon adoption of FAS 114 during December 1993 and are now
included in the Company's total loan portfolio as previously discussed. No
interest is recognized on non-accrual loans.
PAGE 19
ITEM 1. BUSINESS (Continued)
NONPERFORMING ASSETS (continued)
The table below sets forth the components of the Company's
nonperforming assets and the ratio of nonperforming assets to total assets
at December 31.
TABLE 12
Nonperforming Assets
($000s Omitted)
1993 1992 1991 1990 1989
-------- -------- -------- -------- -------
Non-accrual loans $330,062 $263,065 $232,803 $148,884 $71,228
Real estate acquired
through foreclosure 62,724 56,642 38,163 13,001 13,694
Loans in-substance
foreclosed -0- 9,351 6,908 7,427 -0-
Real estate in judgement 1,366 1,030 4,049 4,571 -0-
-------- -------- -------- -------- -------
Total nonperforming assets $394,152 $330,088 $281,923 $173,883 $84,922
======== ======== ======== ======== =======
Ratio of nonperforming
assets to total assets 1.37% 1.27% 1.16% .77% .44%
===== ===== ===== ===== =====
The increase in NPAs in 1993 and 1992 was primarily in single-family
loans and foreclosed real estate in California. The continued weak
California economy and high unemployment led to a slowdown in the real
estate market, resulting in an increase in loan delinquencies and, in cer-
tain areas, decreases in real estate prices. The growth in NPAs was also
impacted by an increase in bankruptcy filings in 1992 and a continued high
level of bankruptcy filings in 1993, which often delay the collection
process and extend the length of time a loan remains delinquent. The
Company continues to closely monitor all delinquencies and takes
appropriate steps to protect its interests. Interest foregone on non-
accrual loans amounted to $20 million in 1993, $17 million in 1992, and
$17 million in 1991.
The tables on the following two pages show the Company's
nonperforming assets by state at December 31, 1993, and 1992.
PAGE 20
ITEM 1. BUSINESS (Continued)
NONPERFORMING ASSETS (continued)
TABLE 13
Nonperforming Assets By State
December 31, 1993
($000s Omitted)
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 Loans
- ------------ -------- ------- ----------- ------- ------ ----------- -------- -------
California $270,325 $18,922 $532 $47,133 $7,169 $4,622 $348,703 1.77%
Colorado 1,560 83 -0- 346 842 261 3,092 0.43%
Illinois 2,141 340 -0- 64 -0- -0- 2,545 0.45%
New Jersey 12,491 -0- -0- 1,085 -0- -0- 13,576 2.53%
Washington 351 -0- -0- -0- -0- -0- 351 0.08%
Florida 4,463 -0- 316 1,156 -0- -0- 5,935 1.88%
Texas 1,400 -0- -0- 95 -0- -0- 1,495 0.60%
Virginia 1,437 -0- -0- 373 -0- -0- 1,810 0.75%
Connecticut 3,578 -0- -0- 566 -0- -0- 4,144 2.30%
Arizona 1,342 -0- -0- 333 -0- -0- 1,675 0.94%
Pennsylvania 1,302 -0- -0- 114 -0- -0- 1,416 0.95%
Kansas 815 40 -0- 375 -0- -0- 1,230 0.93%
Oregon 354 -0- -0- -0- -0- -0- 354 0.27%
Maryland 1,525 -0- -0- 149 -0- -0- 1,674 1.35%
Nevada 606 -0- -0- 77 -0- -0- 683 0.74%
Missouri 253 377 -0- 14 -0- -0- 644 0.91%
New York 3,738 -0- -0- 750 -0- -0- 4,488 6.64%
Georgia 1,395 -0- -0- 174 -0- -0- 1,569 2.56%
Ohio 15 -0- 55 41 -0- 80 191 0.33%
Utah 156 -0- -0- -0- -0- -0- 156 0.39%
Other 150 -0- -0- 74 -0- -0- 224 0.43%
-------- ------- ---- ------- ------ ------ -------- -----
Totals $309,397 $19,762 $903 $52,919 $8,011 $4,963 $395,955 1.64%
======== ======= ==== ======= ====== ======
REO general valuation allowance (1,803) 0.00%
-------- ------
$394,152 1.64%
======== ======
(a) Non-accrual loans are 90 days or more past due and have no unpaid
interest accrued.
PAGE 21
ITEM 1. BUSINESS (Continued)
NONPERFORMING ASSETS (continued)
TABLE 14
Nonperforming Assets by State
December 31, 1992
($000s Omitted)
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 Loans
- ------------ -------- ------- ----------- ------- ------- ----------- -------- -------
California $197,907 $13,457 $ 978 $43,761 $ 2,206 $5,350 $263,659 1.43%
Colorado 1,896 979 -0- 2,284 6,275 2,641 14,075 2.07%
New Jersey 15,907 -0- -0- 1,116 -0- 88 17,111 3.20%
Illinois 1,602 -0- -0- 186 -0- -0- 1,788 0.45%
Washington 677 -0- -0- 198 -0- -0- 875 0.30%
Florida 5,060 -0- 89 610 -0- -0- 5,759 2.08%
Virginia 1,732 -0- -0- 785 -0- -0- 2,517 1.39%
Connecticut 3,752 -0- -0- 601 -0- -0- 4,353 2.76%
Kansas 963 -0- 113 307 -0- -0- 1,383 1.02%
Arizona 1,917 -0- -0- 350 -0- -0- 2,267 1.73%
Texas 1,486 -0- -0- 181 977 -0- 2,644 2.53%
Oregon 106 -0- -0- -0- -0- -0- 106 0.11%
Pennsylvania 684 -0- -0- -0- -0- -0- 684 0.73%
Maryland 1,566 -0- -0- 180 -0- -0- 1,746 2.07%
New York 5,363 -0- -0- 129 -0- -0- 5,492 6.94%
Georgia 2,417 -0- -0- 1,053 -0- -0- 3,470 4.51%
Missouri 685 -0- -0- 146 -0- -0- 831 1.13%
Ohio 68 -0- -0- 30 -0- 145 243 0.33%
Nevada 452 -0- -0- -0- -0- -0- 452 0.65%
Utah 184 -0- -0- -0- -0- -0- 184 0.86%
Other 532 -0- 2,493 -0- -0- -0- 3,025 4.60%
-------- ------- ------ ------- ------- ------ -------- ------
Totals $244,956 $14,436 $3,673 $51,917 $ 9,458 $8,224 $332,664 1.50%
======== ======= ====== ======= ======= ======
REO general valuation allowance (2,576) (0.01)
-------- ------
$330,088 1.49%
======== ======
(a) Non-accrual loans are 90 days or more past due and have no unpaid
interest accrued.
The Company's troubled debt restructured (TDRs), which are loans that
have been modified due to a weakness in the collateral and/or borrower,
were $37 million, or 0.13% of assets, at December 31, 1993, compared to
$13 million, or 0.06% of assets, at yearend 1992. The increase is due in
part to the FAS 114 reclassification previously discussed, which included
loans that had been modified. The great majority of the Company's TDRs
have temporary interest rate reductions and have been made primarily to
customers negatively impacted by adverse economic conditions. Interest
foregone on TDRs amounted to $275 thousand in 1993 compared to
$217 thousand in 1992 and $328 thousand in 1991.
At December 31, 1993, approximately $310 million of the Company's
loans were 30 to 89 days past due and an additional $85 million of loans
PAGE 22
ITEM 1. BUSINESS (Continued)
NONPERFORMING ASSETS (continued)
were performing under bankruptcy protection. Management has included its
estimate of potential losses on these loans in the allowance for possible
loan losses.
The Company provides allowances for losses on loans when impaired and
real estate owned when any significant and permanent decline in value is
identified and based upon trends in the basic portfolio. Additions to and
reductions from the allowances are reflected in current earnings. 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.
The table below summarizes the changes in the allowance for loan
losses for the years indicated:
TABLE 15
Changes in the Allowance for Loan Losses
($000s Omitted)
1993 1992 1991 1990 1989
-------- -------- -------- -------- -------
Beginning allowance for loan losses $ 70,924 $ 48,036 $ 26,799 $ 20,963 $16,252
Provision charged to expense 65,837 43,218 34,984 18,701 10,927
Less loans charged off (38,475) (21,227) (15,274) (13,165) (7,229)
Add recoveries 1,145 897 1,527 300 1,013
Reclassification of in-substance foreclosure
allowances 7,267 -0- -0- -0- -0-
-------- -------- -------- -------- -------
Ending allowance for loan losses $106,698 $ 70,924 $ 48,036 $ 26,799 $20,963
======== ======== ======== ======== =======
Ratio of net chargeoffs to average loans
outstanding (excluding MBS) .16% .10% .07% .08% .05%
======== ======== ======== ======== =======
Ratio of allowance for loan losses to
nonperforming assets 27.1% 21.5% 17.0% 15.4% 24.7%
======== ======== ======== ======== =======
The Company continues to use a methodology for monitoring and
estimating loan losses that is based on both historical experience in the
loan portfolio and factors reflecting current economic conditions. This
approach utilizes a data base that identifies losses on loans and fore-
closed 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 loss allowances to cover future losses in the port-
folio. The increase in the allowance and the provision in 1993 over 1992
was considered prudent given the slowdown in the California housing market,
the increase in the size of the loan portfolio, and the increase in nonper-
forming assets and loan losses experienced by the Association in 1993.
Chargeoffs increased as a result of the increase in nonperforming
loans, the increase in the percentage of nonperforming loans that became
real estate owned, and the increased losses on real estate owned primarily
due to the weakening of the California housing market.
PAGE 23
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, and short-term money market instruments. In
determining the amounts of assets to invest in each class of securities,
the Company considers relative rates, liquidity, and credit quality. When
opportunities arise, the Company enters into arbitrage transactions with
secured borrowings and short-term investments to profit from the rate
differential. The level of the Company's investments position in excess of
its liquidity requirements at any time depends on liquidity needs and
available arbitrage opportunities.
Effective December 31, 1993, the Company adopted Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 establishes
classifications of investments into three categories: held to maturity,
trading, and available for sale. In accordance with FAS 115, the Company
modified its accounting policies as of December 31, 1993, to identify
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. 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. At December 31, 1993, the Company had no securities
held 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 as a separate component of
stockholders' equity until realized. At December 31, 1993, the Company had
securities available for sale in the amount of $1.6 billion and unrealized
gains on securities available for sale included in stockholders' equity of
$41 million. 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 adoption of FAS 115 resulted in the reclassification of
certain securities from the investment securities portfolio to the
securities available for sale portfolio. The Company has other investments
that are not required to be classified under one of the categories of
FAS 115 and that are recorded at cost with any discount or premium
amortized using a method that is not materially different from the interest
method.
Prior to December 31, 1993, securities were classified as either
securities held for sale or investment securities. Securities held for
sale were recorded at the aggregate portfolio's lower of amortized cost or
market, with the unrealized gains and losses included in earnings.
Investment securities were recorded at amortized cost.
PAGE 24
ITEM 1. BUSINESS (Continued)
INVESTMENT ACTIVITIES (continued)
The table below sets forth the composition of the Company's securities
available for sale at December 31.
TABLE 16
Composition of Securities Available For Sale
($000s Omitted)
1993
----------
Certificates of deposit and short-term bank notes $ 482,100
U.S. Treasury and Government agency obligations 419,815
Collateralized mortgage obligations 275,408
Commercial paper 230,389
Bankers acceptances 58,395
Equity securities 170,479
----------
$1,636,586
==========
The table below sets forth the composition of the Company's other
investments at December 31. The reduction in 1993 versus 1992 resulted
from the classification required under FAS 115.
TABLE 17
Composition of Other Investments
($000s Omitted)
1993 1992 1991
-------- -------- ----------
Interest-bearing deposits $ 25,000 $245,021 $ 399,247
U.S. Treasury and Government agencies -0- 43,434 6,328
Short-term repurchase agreements collater-
alized by mortgage-backed securities 513,100 273,991 344,366
Corporate notes and bonds -0- 10,001 118,569
Bankers acceptances -0- 17,962 35,532
Collateralized mortgage obligations -0- 94,237 20,044
Other securities -0- 105,543 119,307
-------- -------- ----------
$538,100 $790,189 $1,043,393
======== ======== ==========
The weighted average yield on the other investments portfolio was
3.42% at December 31, 1993. As of December 31, 1993, the entire other
investments portfolio matures in 1994.
MORTGAGE-BACKED SECURITIES
FAS 115 also requires the same three classifications for mortgage-
backed securities (MBS): held to maturity, trading, and available for
sale. In accordance with FAS 115, the Company modified its accounting
policies as of December 31, 1993, to identify MBS as either held to
maturity or available for sale. The Company has no trading MBS. 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
PAGE 25
ITEM 1. BUSINESS (Continued)
MORTGAGE-BACKED SECURITIES (continued)
MBS are amortized or accreted using the interest method, also known as the
level yield method, over the life of the security. At December 31, 1993,
the Company had mortgage-backed securities held to maturity in the amount
of $408 million. 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, 1993, the Company had mortgage-backed
securities available for sale in the amount of $1.1 billion and unrealized
gains on mortgage-backed securities included in stockholders' equity of
$44 million. 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. Prior to
December 31, 1993, all MBS were recorded at amortized cost.
Repayments of MBS during the years 1993, 1992, and 1991 amounted to
$646 million, $552 million, and $200 million, respectively. The increase
in repayments in 1993 over 1992 and in 1992 over 1991 was primarily due to
an increase in refinance activity as many borrowers took advantage of lower
interest rates. The portion of the Company's loans receivable represented
by MBS was 6%, 8%, and 9% at yearends 1993, 1992, and 1991, respectively.
STOCKHOLDERS' EQUITY
The Company has increased its total stockholders' equity in each of
the years 1993, 1992, and 1991 through the retention of a high percentage
of net earnings. In addition, stockholders' equity increased in 1993 by
$85 million due to the adoption of FAS 115 as of December 31, 1993.
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 sold from time to time in one
or more transactions for total proceeds of up to $200 million. 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.
On October 28, 1993, the Company's Board of Directors' authorized the
purchase by the Company of up to 3.2 million shares of Golden West's common
stock. As of December 31, 1993, 204,000 shares had been repurchased and
retired.
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, 1993, 1992, and 1991 is contained in
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and is incorporated herein by reference.
PAGE 26
ITEM 1. BUSINESS (Continued)
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued)
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, 1993, and is incorporated herein by reference.
The dollar amounts of the Company's interest income and interest
expense fluctuate depending both on changes in the respective interest
rates and on changes in the respective amounts (volume) of interest-earning
assets and interest-bearing liabilities. The following table sets forth
certain information with respect to the yields earned and rates paid on the
Company's interest-earning assets and interest-bearing liabilities.
TABLE 18
Average Interest-Earning Assets and Interest-Bearing Liabilities
At or for the Years Ended December 31
($000s Omitted)
1993 1992 1991
---------------------------- ---------------------------- ----------------------------
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 $ 2,178,164 3.67% 3.80% $ 1,365,679 4.41% 4.17% $ 1,644,586 6.64% 5.41%
Mortgage-backed securities 1,595,255 8.71% 8.67% 1,909,819 9.32% 9.30% 2,182,918 9.66% 9.74%
Loans receivable(a) 23,101,066 7.09% 6.73% 20,906,573 8.33% 7.52% 18,813,190 9.98% 9.30%
Invest. in capital stock of
FHLB 342,586 3.99% 3.49% 289,529 1.87% 0.43% 276,611 6.00% 4.94%
----------- ---- ----------- ---- ----------- ----
Interest-earning assets $27,217,071 6.87% $24,471,600 8.11% $22,917,305 9.66%
=========== ==== =========== ==== =========== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Customer deposits:
Checking accounts $ 706,245 1.62% 1.35% $ 630,541 1.96% 1.91% $ 504,862 2.97% 3.49%
Savings accounts 3,069,143 2.23% 3.11% 3,081,417 3.20% 3.80% 2,376,504 4.74% 5.68%
Term accounts 13,239,960 4.73% 4.24% 12,763,873 5.75% 4.69% 12,838,752 7.53% 6.28%
----------- ---- ---- ----------- ---- ---- ----------- ---- ----
Total customer deposits 17,015,348 4.15% 3.92% 16,475,831 5.13% 4.40% 15,720,118 6.96% 6.09%
Advances from FHLB 6,416,250 4.27% 3.87% 4,852,544 5.53% 4.62% 4,185,930 7.72% 6.92%
Reverse repurchases 464,091 7.76% 6.06% 905,145 7.27% 8.09% 1,077,110 7.07% 8.47%
Other borrowings 1,611,046 7.56% 7.07% 949,587 9.31% 9.41% 1,027,343 8.69% 9.56%
----------- ---- ----------- ---- ----------- ----
Interest-bearing liabilities $25,506,735 4.46% $23,183,107 5.47% $22,010,501 7.19%
=========== ==== =========== ==== =========== ====
Net yield on interest-earning
assets 2.41% 2.64% 2.47%
==== ==== ====
(a) Includes non-accrual loans (90 days or more past due).
The table on the following page presents the changes for 1993 and 1992
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.
PAGE 27
ITEM 1. BUSINESS (Continued)
YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued)
TABLE 19
Volume and Rate Analysis of Interest Income and Interest Expense
Years Ended December 31
($000s Omitted)
Increase/Decrease in Income/Expense Due to Changes in
Due to Changes in Volume and Rate(a)
---------------------------------------------------------------
1993 1992 1991 1993 versus 1992 1992 versus 1991
---------- ---------- ---------- ------------------------------ -------------------------------
Income/ Income/ Income/
Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total
---------- ---------- ---------- -------- --------- --------- --------- --------- ---------
Interest Income:
Investments $ 79,874 $ 60,231 $ 109,193 $ 27,407 $ (7,764) $ 19,643 $ (16,432) $ (32,530) $ (48,962)
Mortgage-backed securities 138,874 178,010 210,834 (27,938) (11,198) (39,136) (25,656) (7,168) (32,824)
Loans receivable(c) 1,637,764 1,740,845 1,877,955 248,072 (351,153) (103,081) 279,640 (416,750) (137,110)
Invest. in capital stock of
Federal Home Loan Banks 13,660 5,424 16,608 1,151 7,085 8,236 815 (11,999) (11,184)
---------- ---------- ----------
Total interest income 1,870,172 1,984,510 2,214,590
Interest Expense:
Customer deposits
Checking accounts $ 11,426 $ 12,376 $ 15,017 $ 2,049 $ (2,999) $ (950) $ 7,206 $ (9,847) $ (2,641)
Savings accounts 68,382 98,538 112,747 (390) (29,766) (30,156) 143,649 (157,858) (14,209)
Term accounts 625,892 733,796 966,619 28,662 (136,566) (107,904) (5,606) (227,217) (232,823)
---------- ---------- ---------- -------- --------- --------- --------- --------- ---------
Total customer deposits 705,700 844,710 1,094,383 30,321 (169,331) (139,010) 145,249 (394,922) (249,673)
Advances from Federal Home
Loan Banks 273,816 268,320 323,034 18,836 (13,340) 5,496 70,140 (124,854) (54,714)
Securities sold under
agreements to repurchase 36,023 65,779 76,154 (34,590) 4,834 (29,756) (12,569) 2,194 (10,375)
Other borrowings 121,875 88,371 89,243 45,809 (12,305) 33,504 (15,101) 14,229 (872)
---------- ---------- ---------- -------- --------- --------- --------- --------- ---------
Total interest expense 1,137,414 1,267,180 1,582,814
---------- ---------- ----------
Net interest income $ 732,758 $ 717,330 $ 631,776 $188,316 $(172,888) $ 15,428 $ 50,648 $ 34,906 $ 85,554
========== ========== ========== ======== ========= ========= ========= ========= =========
Net interest income increase
(decrease) as a percentage
of average earning assets 0.77% (0.71)% 0.06% 0.22% 0.15% 0.37%
==== ===== ==== ==== ==== ====
(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 hedging activity have been allocated to income and expense
of the related assets and liabilities.
(c) Includes non-accrual loans (90 days or more past due).
PAGE 28
ITEM 1. BUSINESS (Continued)
COMPETITION AND OTHER MATTERS
The Company experiences strong competition in both attracting customer
deposits and making real estate loans. Competition for savings deposits has
historically come from money market mutual funds, other savings associa-
tions, commercial banks, credit unions, and government and corporate debt
securities. In addition, traditional financial institutions have found
themselves in competition with new entrants into the financial services
field, such as securities dealers, insurance companies, and others. The
principal methods used by the Company to attract customer 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. A
weak commercial real estate sector and a reduced volume of speculative
transactions, such as leveraged buy-outs, have provided added incentive for
banks to deploy their resources in new areas, and, as a result, they are
increasing their investments in residential real estate mortgages. In
addition, the volume of real estate lending by mortgage banking companies
that originate and sell loans immediately has increased significantly.
Traditionally privately owned, many mortgage banking companies have gone
public and participated heavily in the refinance-driven loan market in
recent years. 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.
SAVINGS AND LOAN INDUSTRY
The operations of savings associations 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. Customer 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,
commercial banks and credit unions. As a member, World is required to own
capital stock of an FHLB in an amount that depends generally upon its
outstanding home mortgage loans or advances from such FHLB and is
authorized to borrow funds from such FHLB (see Borrowings).
PAGE 29
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
LIQUIDITY. The OTS requires insured institutions, such as World, to
maintain a minimum amount of cash and certain qualifying investments for
liquidity purposes. The current minimum requirement is equal to a monthly
average of 5% of customer deposits and short-term borrowings. For the
months ended December 31, 1993, and 1992, World's regulatory average
liquidity ratio was 8% and 7%, respectively, consistently exceeding the
requirement.
FEDERAL DEPOSIT INSURANCE CORPORATION. The customer deposit accounts
of World are insured by the FDIC as part of the Savings Association
Insurance Fund up to the maximum amount permitted by law, currently
$100,000 per insured depositor. As a result, the Association is subject to
supervision by regulation and examination by the FDIC.
FDIC insurance is required for all federally chartered associations.
Such insurance may be terminated by the FDIC under certain circumstances
involving violations of regulations or unsound practices. The annual
premium charged for FDIC-SAIF insurance is determined by the FDIC using a
risk-based system beginning in 1993. Under the system, associations are
charged a variable rate ranging from a low of $.23 to a high of $.31 per
$100 of deposits. The amount of capital an institution maintains and its
examination scores are the most important factors determining the
assessment. World qualifies for the lowest premium assessment of $.23 per
$100 of deposits under the system.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) generally imposes a moratorium until 1994 on conversions from
SAIF membership to Bank Insurance Fund (BIF) membership. However, a savings
institution may convert to a bank charter if the resulting bank remains a
member of SAIF. After expiration of the moratorium, such conversion
requires 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.
OFFICE OF THRIFT SUPERVISION. As a federally chartered savings and
loan association, the principal regulator of World is the OTS. Under
various regulations of the OTS, savings and loan 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.
World is subject to examination by the OTS and is in compliance with its
current requirements.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require
savings institutions to maintain noninterest-earning reserves against their
PAGE 30
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
checking accounts. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements. World is currently in compliance with all
applicable Federal Reserve Board reserve requirements.
Savings and loan associations have authority to borrow from the
Federal Reserve Bank "Discount Window," but the Federal Reserve Board
requires savings and loan associations to exhaust all FHLB sources before
borrowing from the Federal Reserve Bank.
REGULATORY CAPITAL. The OTS requires federally insured institutions
such as World to meet certain minimum capital requirements.
The table below summarizes World's regulatory capital ratios and
compares them to the OTS minimum requirements at December 31.
TABLE 20
World Savings and Loan Association
Regulatory Capital Ratios
Under Current Requirements
($000s Omitted)
1993 1992
----------------------------------------- -----------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
------------------- ------------------ ------------------- ------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- ------ ---------- ----- ---------- ------ ---------- -----
Tangible $2,030,992 7.27% $ 419,052 1.50% $1,677,449 6.54% $ 384,484 1.50%
Core 2,240,518 8.02 838,103 3.00 1,933,772 7.54 768,968 3.00
Risk-based 2,533,738 17.42 1,163,650 8.00 2,196,576 16.28 1,079,538 8.00
The table below summarizes World's regulatory capital ratios and
compares them to the fully phased-in OTS minimum requirements at
December 31.
TABLE 21
World Savings and Loan Association
Regulatory Capital Ratios
Under Fully Phased-In Requirements
($000s Omitted)
1993 1992
----------------------------------------- -----------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
------------------- ------------------ ------------------- ------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- ------ ---------- ----- ---------- ------ ---------- -----
Tangible $2,030,992 7.27% $ 419,052 1.50% $1,677,449 6.54% $ 384,484 1.50%
Core 2,030,992 7.27 838,103 3.00 1,677,449 6.54 768,968 3.00
Risk-based 2,323,040 16.21 1,146,794 8.00 1,936,555 14.63 1,058,736 8.00
PAGE 31
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required each federal banking agency to implement prompt
corrective actions for institutions that it regulates to resolve the
problems of insured depository institutions at the least possible long-term
loss to the deposit insurance fund. In response to this requirement, the
OTS adopted final rules as to capital adequacy, effective
December 19, 1992, based upon FDICIA's five capital tiers. 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. A savings association
is "adequately capitalized" if its total risk-based capital ratio is 8% or
greater, its Tier 1 risk-based capital ratio is 4% or greater, and its
leverage ratio is 4% or greater (3% or greater for one-rated institutions).
An institution is considered "undercapitalized" if its total risk-based
capital ratio is less than 8%, its Tier 1 risk-based capital ratio is less
than 4%, or its leverage ratio is less than 4% (less than 3% for one-rated
institutions). An institution is "significantly undercapitalized" if its
total risk-based capital ratio is less than 6%, its Tier 1 risk-based
capital ratio is less than 3%, or its leverage ratio is less than 3%. A
savings association is deemed to be "critically undercapitalized" if its
ratio of tangible equity to total assets is equal to, or less than, 2%. At
its discretion, the OTS may determine that an institution is in a
capitalization category that is lower than is indicated by its actual
capital position. As used herein, total risk-based capital ratio means 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 leverage
ratio means the ratio of core capital to adjusted total assets, in each
case as calculated in accordance with current OTS capital regulations.
World met the "well capitalized" standard as of December 31, 1993.
PAGE 32
The table below shows a reconciliation of World's equity capital to
regulatory capital under FIRREA and FDICIA at December 31, 1993.
TABLE 22
Reconciliation of Equity Capital to Regulatory Capital
Under FIRREA and FDICIA
($000s Omitted)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
----------- ----------- ----------- ----------- ----------- -----------
Common stock $ 150
Paid-in capital 233,441
Retained earnings 1,848,761
Unrealized gains on securities
available for sale 82,299
-----------
Equity capital $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651
===========
Positive goodwill (1) (2) (232,758) (232,758) (232,758) (232,758) (232,758)
Negative goodwill (1) (3) 99,099 99,099 99,099 99,099 99,099
Qualifying supervisory
positive goodwill (1) (2) 209,526 209,526 209,526 209,526
Equity/other investments (4) (1,757)
Subordinated debt 198,879
General valuation allowances 96,098
----------- ----------- ----------- ----------- -----------
Regulatory capital $ 2,030,992 $ 2,240,518 $ 2,240,518 $ 2,240,518 $ 2,533,738
=========== =========== =========== =========== ===========
Total assets $28,028,596
===========
Adjusted total assets $27,936,774 $27,936,774 $27,936,774
=========== =========== ===========
Risk-weighted assets $14,545,620 $14,545,620
=========== ===========
CAPITAL RATIO - ACTUAL 7.72% 7.27% 8.02% 8.02% 15.40% 17.42%
=========== =========== =========== =========== =========== ===========
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 undercapital-
ized, less than 3.00% 3.00% 6.00%
=========== =========== ===========
Critically undercapitalized,
equal to or less than 2.00%
===========
(1) All goodwill is required to be deducted from tangible capital. Goodwill
arising prior to April 12, 1989, in excess of a sliding scale limit (.75%
of assets at December 31, 1993), is required to be deducted from all other
capital computations on a phased-in basis through December 1994. Goodwill
arising after April 12, 1989, must be deducted from all capital
computations.
(2) All but $2,443 of the Association's positive goodwill arose prior to
April 12, 1989.
(3) The Association's negative goodwill arose after April 12, 1989.
(4) Equity and certain other investments are required to be deducted from total
risk-based capital on a phased-in basis (60% at December 31, 1993) through
June 1994.
PAGE 33
The table below shows a reconciliation of World's equity capital to
regulatory capital under FIRREA and FDICIA at December 31, 1992.
TABLE 23
Reconciliation of Equity Capital to Regulatory Capital
Under FIRREA and FDICIA
($000s Omitted)
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 1,596,572
-----------
Equity capital $ 1,830,163 $ 1,830,163 $ 1,830,163 $ 1,830,163 $ 1,830,163 $ 1,830,163
===========
Positive goodwill (1) (2) (268,233) (268,233) (268,233) (268,233) (268,233)
Negative goodwill (1) (3) 115,519 115,519 115,519 115,519 115,519
Qualifying supervisory
positive goodwill (1) (2) 256,323 256,323 256,323 256,323
Equity/other investments (4) (2,465)
Subordinated debt 198,668
General valuation allowances 66,601
----------- ----------- ----------- ----------- -----------
Regulatory capital $ 1,677,449 $ 1,933,772 $ 1,933,772 $ 1,933,772 $ 2,196,576
=========== =========== =========== =========== ===========
Total assets $25,771,831
===========
Adjusted total assets $25,632,252 $25,632,252 $25,632,252
=========== =========== ===========
Risk-weighted assets $13,494,220 $13,494,220
=========== ===========
Capital ratio - actual 7.10% 6.54% 7.54% 7.54% 14.33% 16.28%
=========== =========== =========== =========== =========== ===========
Capital ratio - category:
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 undercapital-
ized, less than 3.00% 3.00% 6.00%
=========== =========== ===========
Critically undercapitalized,
equal to or less than 2.00%
===========
(1) All goodwill is required to be deducted from tangible capital. Goodwill
arising prior to April 12, 1989, in excess of a sliding scale limit (1% of
assets at December 31, 1992), is required to be deducted from all other
capital computations on a phased-in basis through December 1994. Goodwill
arising after April 12, 1989, must be deducted from all capital
computations.
(2) All but $193 of the Association's positive goodwill arose prior to
April 12, 1989.
(3) The Association's negative goodwill arose after April 12, 1989.
(4) Equity and certain other investments are required to be deducted from
total risk-based capital on a phased-in basis (40% at December 31, 1992)
through June 1994.
PAGE 34
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
The table below compares World's regulatory capital to the well
capitalized classification of FDICIA's capital standards at December 31.
TABLE 24
World Savings and Loan Association
Regulatory Capital Compared to Well Capitalized Classification
($000s Omitted)
1993 1992
---------------------------------------- ----------------------------------------
ACTUAL WELL CAPITALIZED ACTUAL WELL-CAPITALIZED
------------------- ------------------- ------------------- -------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
---------- ------ ---------- ------ ---------- ------ ---------- ------
Leverage $2,240,518 8.02% $1,396,839 5.00% $1,933,772 7.54% $1,281,613 5.00%
Tier 1 risk-based 2,240,518 15.40 872,737 6.00 1,933,772 14.33 809,653 6.00
Total risk-based 2,533,738 17.42 1,454,562 10.00 2,196,576 16.28 1,349,422 10.00
World's leverage, Tier 1 risk-based, and total risk-based capital
ratios under the fully phased-in 1995 OTS minimum requirements at
December 31, 1993, were 7.27%, 14.17%, and 16.21%, respectively. World's
leverage, Tier 1 risk-based, and total risk-based capital ratios under the
fully phased-in 1995 OTS minimum requirements at December 31, 1992, were
6.54%, 12.68%, and 14.63%, respectively.
CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS adopted
regulations in 1990 with respect to capital distributions by savings
associations such as World. Under these regulations, a savings association
is classified as either Tier 1, if it meets each of its fully phased-in
capital requirements immediately prior to and after giving effect to the
proposed capital distribution; Tier 2, if it meets each of its current
capital requirements but does not meet one or more of its fully phased-in
capital requirements immediately prior to or after giving effect to the
proposed capital distribution; or Tier 3, if it does not meet its current
capital requirements immediately prior to or after giving effect to the
proposed capital distribution. A savings association that would otherwise
be classified as Tier 1 is treated as Tier 2 or Tier 3 if the OTS so
notifies the association based on OTS' conclusion that the association is
in need of more than normal supervision.
Under the regulations, a Tier 1 association may make capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus up to one-half of its capital in excess of
the fully phased-in requirement at the end of the prior year. A Tier 2
association may make capital distributions from 25% to 75% of its net
PAGE 35
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
income over the most recent four quarter period, with the percentage
varying based on its level of risk-based capital. Any capital
distributions by a Tier 3 association or in excess of the foregoing amounts
by a Tier 1 or Tier 2 association are subject to either prior OTS approval
or notice must be given to the OTS, which may disapprove the distribution.
However, FDICIA legislation prohibits capital distributions by an
institution that does not meet its capital requirements. Savings
associations are required to give the OTS 30-day advance written notice of
all proposed capital distributions. For purposes of capital distributions,
the OTS has classified World as a Tier 1 association.
LIMITATION ON LOANS TO ONE BORROWER. FIRREA 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, 1993, the maximum amount
that World could have loaned to one borrower (and related entities) was
$325 million. At such date, the largest amount of loans that World had
outstanding to any one borrower was $39 million.
SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and
loan holding company" under the National Housing Act of 1934. 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 World's parent company, Golden West is considered an "affiliate" of
the Association for regulatory purposes. Savings associations 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, as well as additional limitations set forth in FIRREA and as
adopted by the OTS. In addition, FIRREA 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
PAGE 36
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
disapproved. In 1991, the OTS adopted regulations to implement the
affiliate transactions limitations contained in FIRREA. Among other
things, the regulations provide guidance in determining an affiliate of a
savings association and in calculating compliance with the quantitative
limitations on transactions with affiliates.
TAXATION. Savings and loan associations that meet certain
definitional tests and other conditions prescribed by the Internal Revenue
Code are allowed a bad debt reserve deduction computed as a percentage of
taxable income before such deduction. Accordingly, qualifying savings and
loan associations are subject to a lower effective federal income tax rate
than that applicable to corporations generally. The effective federal
income tax rate applicable to qualifying savings and loan associations is
approximately 32.2%, depending on the extent of "tax preference" items in
addition to the bad debt reserve deduction.
The bad debt reserve deduction computed as a percentage of taxable
income is available only to the extent that amounts accumulated in the bad
debt reserve for certain real estate loans defined as "qualifying real
estate loans" do not exceed 6% of such loans at yearend. In addition, the
deduction is further limited to the amount by which 12% of customer
deposits at yearend exceeds the sum of surplus, undivided profits and
reserves at the beginning of the year. At December 31, 1993, the 6% and
12% limitations did not restrict the bad debt reserve deduction of World,
and it is expected that such limitations will not be restricting factors in
the future. Qualifying savings and loan associations that file income tax
returns as members of a consolidated group are required to reduce their bad
debt reserve deduction for tax losses attributable to non-savings and loan
association members of the group whose activities are functionally related
to the activities of the savings and loan association member.
If the accumulated bad debt reserves are used for any purpose other
than to absorb bad debt losses, federal income taxes may be imposed at the
then applicable rates. In addition, if such reserves are used to pay
dividends or to make other distributions with respect to a savings and loan
association stock (such as redemption or liquidation), special additional
taxes would be imposed.
Although generally similar, differences exist, with respect to the
determination of taxable income, among the Internal Revenue Code and the
tax codes of the states in which the Company operates. These states do not
allow the special percentage of taxable income method of computing the bad
debt reserve, discussed above, which can cause the Company's taxable
income, at the state level, to be significantly different from its taxable
income at the federal level.
PAGE 37
ITEM 1. BUSINESS (Continued)
REGULATION (continued)
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.
In the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes." FAS 109 required a change from the deferred to the liability
method of computing deferred income taxes. The Company has applied FAS 109
prospectively. The cumulative effect of this change in accounting for
income taxes for the periods ending prior to January 1, 1993, is not
material. FAS 109 required the Company to adjust its purchase accounting
for prior business combinations by increasing deferred tax assets and
reducing goodwill by $23 million to reflect the non-taxability of purchase
accounting income. This deferred tax asset is being amortized over the
remaining lives of the related purchased assets.
EMPLOYEE RELATIONS
The Company had a total of 3,635 full-time and 741 permanent part-time
employees at December 31, 1993. 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, Kansas, New Jersey, and Texas. The executive offices of
the Company are located at 1901 Harrison Street, Oakland, California, in
leased facilities.
The Company continuously evaluates the suitability and adequacy of the
offices of the Company and has a program of relocating or remodel-ing them
as necessary to maintain efficient and attractive facilities.
The Company is currently building a 300,000 square-foot office complex
on an 111-acre site in San Antonio, Texas, which will house its Loan
Service, Savings Operations, and Information Systems Departments. The
expected completion date is September 1994.
The Company owns 175 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, in Item 14.
PAGE 38
ITEM 3. LEGAL PROCEEDINGS
Savings and loan associations and other financial institutions that
take consumer deposits in California have been named from time to time in
class action proceedings that question the legality of certain terms of
deposit agreements and the implementation of such agreements. World is
named as a defendant in one action that purports to be a class action of
this type. This action was dismissed at the trial court level, and, upon
appeal, the dismissal was affirmed in part and reversed in part. The
action was subsequently remanded to the trial court level, where a class
has been certified. However, in the opinion of management, the result of
this action will not have a material effect on the Company's consolidated
financial condition or results of operations. The Company and its subsid-
iaries are parties to other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
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 Stock 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 1993 and 1992 were as follows:
TABLE 25
Common Stock Price Range
1993 1992
--------------- ---------------
First Quarter 41 - 50 3/8 37 - 43 5/8
Second Quarter 39 1/2 - 48 7/8 36 1/8 - 45 7/8
Third Quarter 38 3/8 - 44 37 1/4 - 46 1/4
Fourth Quarter 37 1/8 - 44 3/4 35 1/2 - 43 7/8
PAGE 39
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS (Continued)
PER SHARE CASH DIVIDENDS DATA
Golden West's cash dividends paid per share for 1993 and 1992 were as
follows:
TABLE 26
Cash Dividends Per Share
1993 1992
----- -----
First Quarter $.065 $.055
Second Quarter $.065 $.055
Third Quarter $.065 $.055
Fourth Quarter $.075 $.065
The principal sources of funds for the payment by Golden West of cash
dividends are cash dividends paid to it by World Savings, investment
income, and short-term borrowings.
Under OTS regulations, the OTS must be given at least 30 days' advance
notice by the Association of any proposed dividend to be paid to the
parent. Under OTS regulations, World Savings is classified as a Tier 1
association and is, therefore, allowed to distribute dividends up to 100%
of its net income in any year plus one-half of its capital in excess of the
OTS fully phased-in capital requirement as of the end of the prior year.
At December 31, 1993, $354 million of the Association's retained
earnings had not been subjected to federal income taxes due to the
application of the bad debt deduction, and $1.8 billion of the
Association's 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 18, 1994, 63,994,385 shares of
Golden West's Common Stock were outstanding and were held by 1,911
stockholders of record.
The transfer agent and registrar for the Golden West Common Stock is
First Interstate Bank, San Francisco, California 94104.
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 the
documents incorporated herein by reference.
PAGE 40
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 27
Five Year Consolidated Summary of Operations
($000s Omitted, Except Per Share Amounts)
Year Ended December 31
---------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
Interest Income:
Interest on loans $1,637,764 $1,740,845 $1,877,955 $1,730,408 $1,491,352
Interest on MBS 138,874 178,010 210,834 209,846 208,882
Interest and dividends on investments 93,534 65,655 125,801 158,068 206,063
---------- ---------- ---------- ---------- ----------
1,870,172 1,984,510 2,214,590 2,098,322 1,906,297
Interest Expense:
Interest on customer deposits 705,700 844,710 1,094,383 1,022,706 886,052
Interest on advances and other
borrowings 431,714 422,470 488,431 578,771 599,258
---------- ---------- ---------- ---------- ----------
1,137,414 1,267,180 1,582,814 1,601,477 1,485,310
---------- ---------- ---------- ---------- ----------
Net interest income 732,758 717,330 631,776 496,845 420,987
Provision for loan losses 65,837 43,218 34,984 18,701 10,927
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 666,921 674,112 596,792 478,144 410,060
Non-Interest Income:
Fees 31,061 24,458 20,889 17,069 15,978
Gain (loss) on the sale of securities
and mortgage-backed securities 22,541 4,058 (1,021) 3,127 7,795
Other 8,440 12,601 7,008 8,698 10,835
---------- ---------- ---------- ---------- ----------
62,042 41,117 26,876 28,894 34,608
Non-Interest Expense:
General and administrative:
Personnel 132,472 118,553 107,759 95,476 83,404
Occupancy 40,443 38,521 35,619 31,750 29,445
Advertising 10,782 8,968 10,486 11,017 8,344
Other 89,470 84,833 81,557 69,450 60,656
---------- ---------- ---------- ---------- ----------
273,167 250,875 235,421 207,693 181,849
Amortization of goodwill arising from
acquisitions (1,586) 661 1,532 16,657 16,611
---------- ---------- ---------- ---------- ----------
271,581 251,536 236,953 224,350 198,460
---------- ---------- ---------- ---------- ----------
Earnings before taxes on income 457,382 463,693 386,715 282,688 246,208
Taxes on income 183,528 180,155 148,116 101,231 88,270
---------- ---------- ---------- ---------- ----------
Net earnings $ 273,854 $ 283,538 $ 238,599 $ 181,457 $ 157,938
========== ========== ========== ========== ==========
Net earnings per share $ 4.28 $ 4.46 $ 3.76 $ 2.87 $ 2.51
========== ========== ========== ========== ==========
PAGE 41
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 28
Five Year Summary of Financial Condition
($000s Omitted)
At December 31
-------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
Assets $28,829,288 $25,890,921 $24,297,784 $22,562,101 $19,520,569
Cash, securities available for sale,
and other investments 2,417,871 1,179,868 1,289,327 1,343,464 1,562,016
Mortgage-backed securities 1,522,536 1,791,615 2,000,167 2,485,695 1,979,324
Loans receivable 23,912,571 21,968,676 20,087,432 17,730,447 15,010,996
Goodwill arising from acquisitions 136,754 155,873 181,733 304,266 320,523
Customer deposits 17,422,484 16,486,246 16,818,510 14,372,484 11,787,384
Advances from Federal Home Loan Banks 6,281,691 5,499,363 4,159,796 3,834,755 4,506,263
Securities sold under agreements to
repurchase and other borrowings 1,119,414 637,977 840,358 2,314,051 1,670,024
Subordinated debt 1,220,061 921,701 625,105 426,200 113,668
Stockholders' equity 2,065,604 1,727,398 1,449,135 1,220,403 1,046,284
PAGE 42
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 29
Five Year Selected Other Data
($000s Omitted)
Year Ended December 31
---------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
New real estate loans originated $6,411,877 $6,455,090 $4,877,157 $4,309,494 $4,696,543
Average yield on new real estate loans 6.86% 8.06% 9.83% 10.64% 10.86%
Customer deposits increase (decrease) ($) $ 936,238 $ (332,264) $2,446,026 $2,585,100 $1,291,166
Customer deposits increase (decrease) (%) 5.7% (2.0)% 17.0% 21.9% 12.3%
Net earnings/average net worth 14.68% 17.86% 17.92% 15.98% 16.30%
Net earnings/average assets 0.98% 1.12% 1.00% 0.86% 0.85%
General and administrative expense to:
Total revenues 14.14% 12.39% 10.50% 9.76% 9.37%
Average assets 0.97% 0.99% 0.99% 0.99% 0.97%
Ratio of earnings to fixed charges:(a)
Including interest on customer deposits 1.40x 1.36x 1.24x 1.18x 1.17x
Excluding interest on customer deposits 2.05x 2.08x 1.78x 1.48x 1.41x
Yield on loan portfolio 6.84% 7.66% 9.34% 10.42% 10.85%
Yield on investments 3.80% 4.17% 5.41% 8.11% 8.69%
Yield on earning assets 6.61% 7.52% 9.16% 10.29% 10.69%
Cost of deposits 3.92% 4.40% 6.09% 7.76% 8.07%
Cost of borrowings 4.69% 5.58% 7.48% 8.73% 9.13%
Cost of funds 4.18% 4.75% 6.44% 8.06% 8.44%
Spread 2.43% 2.77% 2.72% 2.23% 2.25%
Nonperforming asset/total assets(b) 1.37% 1.27% 1.16% 0.77% 0.44%
Stockholders' equity/total assets 7.16% 6.67% 5.96% 5.41% 5.36%
Average stockholders' equity/average assets 6.65% 6.27% 5.60% 5.40% 5.19%
World Savings and Loan Association regulatory
capital ratios:(c)
Tangible capital 7.27% 6.54% 5.79% 4.61% 4.11%
Core capital 8.02% 7.54% 6.96% 6.00% 5.81%
Risk-based capital 17.42% 16.28% 14.98% 13.52% 11.62%
Number of savings branch offices 227 227 231 211 200
Cash dividends per share $0.27 $0.23 $0.19 $0.165 $0.15
Dividend payout ratio 6.31% 5.16% 5.05% 5.75% 5.98%
(a) Earnings represent income from continuing operations before income taxes
and fixed charges. Fixed charges include interest expense and amortization
of debt expense.
(b) The definition of nonperforming assets includes non-accrual loans (loans
that are 90 days or more past due) and real estate owned acquired through
foreclosure.
(c) The requirements were 1.5%, 3.0%, and 8.0% (7.2% prior to December 31,
1992) for tangible, core, and risk-based capital, respectively, at
December 31, 1992, and 1993. World Savings and Loan Association currently
meets its fully phased-in capital requirement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and results of
operations during that period.
PAGE 43
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 1993,
1992, 1991, and 1990. As the table shows, customer deposits represent the
majority of the Company's liabilities. On the other side of the balance
sheet, the loan portfolio, which consists primarily of long-term mortgages,
is the largest asset component.
TABLE 30
Asset, Liability, and Equity Components as
Percentages of the Total Balance Sheet
December 31
----------------------------
1993 1992 1991 1990
------ ------ ------ ------
Assets:
Cash and Investments 8.4% 4.6% 5.3% 6.0%
Mortgage-backed securities 5.3 6.9 8.2 11.0
Loans Receivable 82.9 84.9 82.7 78.6
Other Assets 3.4 3.6 3.8 4.4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Liabilities and
Stockholders' Equity:
Customer Deposits 60.4% 63.7% 69.2% 63.7%
FHLB Advances 21.8 21.2 17.1 17.0
Securities Sold Under
Agreements to Repurchase 1.5 2.2 2.7 5.9
Medium-Term Notes 2.4 0.3 0.7 4.3
Other Liabilities 2.5 2.3 1.7 1.8
Subordinated Debt 4.2 3.6 2.6 1.9
Stockholders' Equity 7.2 6.7 6.0 5.4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
The disparity between the repricing (maturity or interest rate change)
of deposits and other liabilities and the repricing of mortgage loans can
affect the Company's liquidity and can have a material impact on the
Company's results of operations. The difference between the repricing of
assets and liabilities is commonly referred to as the gap. The gap table
on the following page shows that, as of December 31, 1993, the Company's
assets reprice sooner than its liabilities. Consequently, one would expect
falling interest rates to lower Golden West's earnings and rising rates to
increase the Company's earnings. However, Golden West's earnings are also
affected by the built-in lag inherent in the Eleventh District Cost of
Funds Index (COFI), which is the benchmark the Company uses to determine
the rate on the great majority of its adjustable rate mortgages.
Specifically, there is a two-month delay in reporting the COFI because of
the time required to gather the data needed to compute the index. As a
result, the current COFI actually reflects the Eleventh District's cost of
PAGE 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
funds at the level it was two months prior. Consequently, when the
interest rate environment changes, the COFI reporting lag causes assets to
initially reprice more slowly than liabilities, enhancing earnings when
rates are falling and holding down income when rates rise.
TABLE 31
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of December 31, 1993
(Dollars in Millions)
Projected Repricing(a)
-------------------------------------------
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------- ------- ------- ------ -------
Interest-Earning Assets
Investments $ 1,530 $ 232 $ 396 $ 17 $ 2,175
Loans Receivable:
Rate-Sensitive 16,695 2,876 851 -0- 20,422
Fixed-Rate 699 1,246 415 825 3,185
Mortgage-backed securities 201 192 517 613 1,523
Other(b) 450 -0- -0- -0- 450
------- ------- ------- ------ -------
Total $19,575 $ 4,546 $ 2,179 $1,455 $27,755
------- ------- ------- ------ -------
Interest-Bearing Liabilities(c)
Customer deposits $ 8,664 $ 5,602 $ 2,588 $ 568 $17,422
FHLB advances 5,757 424 41 60 6,282
Other borrowings 843 (262) 952 808 2,341
------- ------- ------- ------ -------
Total $15,264 $ 5,764 $ 3,581 $1,436 $26,045
------- ------- ------- ------ -------
Repricing gap $ 4,311 $(1,218) $(1,402) $ 19
======= ======= ======= ======
Cumulative gap $ 4,311 $ 3,093 $ 1,691 $1,710
======= ======= ======= ======
Cumulative gap as a
percentage of total assets 15.0% 10.7% 5.9%
======= ======= =======
(a) Based on scheduled maturity or scheduled repricing, loans reflect scheduled
repayments and projected prepayments of principal.
(b) Includes cash in banks, FHLB stock, and loans collateralized by customer
deposits.
(c) Liabilities with no maturity date, such as passbook and money market
deposit accounts, are assigned zero months.
CASH AND INVESTMENTS
Golden West's investment portfolio is composed primarily of federal
funds, short-term repurchase agreements collateralized by mortgage-backed
securities, and short-term money market securities. In determining the
amounts of assets to invest in each class of investments, the Company
considers relative rates, liquidity, and credit quality. When
opportunities arise, the Company enters into arbitrage transactions with
PAGE 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
secured borrowings and short-term investments to profit from the rate
differential. The level of the Company's investments position in excess of
its liquidity requirements at any time depends on liquidity needs and
available arbitrage opportunities.
The Office of Thrift Supervision requires insured institutions, such
as World Savings, to maintain a minimum amount of cash and certain
qualifying investments for liquidity purposes. The current minimum
requirement is equal to a monthly average of 5% of customer deposits and
short-term borrowings. For the months ended December 31, 1993, 1992, and
1991, World's regulatory average liquidity ratio was 8%, 7%, and 8%,
respectively, consistently exceeding the requirement.
Effective December 31, 1993, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." FAS 115 establishes three investment
classifications: held to maturity, trading, and available for sale. In
accordance with FAS 115, the Company modified its accounting policies as of
December 31, 1993, to identify 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. 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. At
December 31, 1993, the Company had no securities held 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 as a separate component of stockholders' equity until
realized. At December 31, 1993, the Company had no securities held to
maturity or for trading. At December 31, 1993, the Company had securities
available for sale in the amount of $1.6 billion and unrealized gains on
securities available for sale recorded to stockholders' equity of
$41 million. 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 which are recorded at cost
with any discount or premium amortized using a method that is not
materially different from the interest method. The adoption of FAS 115
resulted in the reclassification of certain securities from the investment
securities portfolio to the securities available for sale portfolio.
PAGE 46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
Prior to December 31, 1993, securities were classified as either
securities held for sale or investment securities. Securities held for
sale were recorded at the aggregate portfolio's lower of amortized cost or
market, with the unrealized gains and losses included in earnings.
Investment securities were recorded at amortized cost.
MORTGAGE-BACKED SECURITIES
FAS 115 also requires the same three classifications for
mortgage-backed securities: held to maturity, trading, and available for
sale. In accordance with FAS 115, the Company modified its accounting
policies as of December 31, 1993, to identify MBS as either held to
maturity or available for sale. The Company has no trading MBS.
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, also
known as the level yield method, over the life of the security. At
December 31, 1993, the Company had mortgage-backed securities held to
maturity in the amount of $408 million. 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, 1993,
the Company had mortgage-backed securities available for sale in the amount
of $1.1 billion and unrealized gains on mortgage-backed securities recorded
to stockholders' equity of $44 million. 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. Prior to December 31, 1993, all MBS were recorded at
amortized cost.
Repayments of MBS during the years 1993, 1992, and 1991 amounted to
$646 million, $552 million, and $200 million, respectively. The increase
in repayments in 1993 over 1992 and in 1992 over 1991 was primarily due to
an increase in refinance activity as many borrowers took advantage of lower
interest rates. The portion of the Company's loans receivable represented
by MBS was 6%, 8%, and 9% at yearends 1993, 1992, and 1991, respectively.
LOAN PORTFOLIO
New loan originations in 1993, 1992, and 1991 amounted to
$6.4 billion, $6.5 billion, and $4.9 billion, respectively. Refinanced
loans constituted 59% of new loan originations in 1993 compared to 56% in
1992 and 46% in 1991. The 1993 origination volume remained high due to the
continued demand in the marketplace for refinancing of existing loans, plus
expansion of the Company's loan origination capacity. Although the Company
PAGE 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
has lending operations in 21 states, the primary mortgage origination focus
continues to be on residential property in California. In 1993, 73% of
total loan originations were on residential properties in California,
compared to 83% and 88% in 1992 and 1991, respectively. Although
California originations continue to be a large portion of total
originations, the decrease in 1993 as compared to 1992 and 1991 was due to
increased penetration by the Company in markets outside California and the
slight decrease of originations in California. The percentage of the total
loan portfolio (excluding mortgage-backed securities) that is comprised of
residential loans in California was 81% at December 31, 1993, and 83% at
December 31, 1992, and 1991. The total growth in the portfolio for each of
the years ended December 31, 1993, and 1992, was $1.9 billion or 9%.
Golden West continues to emphasize adjustable rate mortgages
(ARMs)--loans with interest rates that change periodically in accordance
with movements in specified indexes. The portion of the mortgage portfolio
(excluding MBS) composed of rate-sensitive loans was 87% at yearends 1993,
1992, and 1991. Despite stiff competition from mortgage bankers who
aggressively marketed fixed-rate mortgages at the lowest rates seen in the
past 20 years, Golden West's ARM originations constituted approximately 75%
of new mortgage loans made by the Company in 1993, compared with 80% in
1992 and 89% in 1991.
Repayments of loans during the years 1993, 1992, and 1991 amounted to
$3.8 billion, $4.1 billion, and $2.8 billion, respectively. The decrease
in repayments in 1993 over 1992 was due to lower mortgage payoffs within
our loan portfolio. The increase in repayments in 1992 over 1991 was
primarily due to an increase in refinance activity as many borrowers took
advantage of lower interest rates by replacing older, high-cost debt with
new, more attractively priced instruments.
The Company adopted Statement of Financial Accounting Standards No.
114 (FAS 114), "Accounting by Creditors for Impairment of a Loan," in the
fourth quarter of 1993, retroactive to January 1, 1993. FAS 114 requires
that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure 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 present value of impaired loans for which
impairment is measured based on the present value of expected future cash
flows. The Company had previously measured loan impairment in accordance
with the methods prescribed in FAS 114. As a result, no additional loss
provisions were required by early adoption of the pronouncement. FAS 114
PAGE 48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
requires that impaired loans for which foreclosure is probable should be
accounted for as loans. As a result, $16 million of in-substance
foreclosed loans, with a valuation allowance of $7 million, were
reclassified from real estate held for sale to loans receivable. Prior
year amounts have not been restated.
One measure of the soundness of the Company's portfolio is its ratio
of nonperforming assets to total assets. Nonperforming assets include
non-accrual loans (loans that are 90 days or more past due) and real estate
acquired through foreclosure. In prior years, loans considered
in-substance foreclosed were included in real estate held for sale, but
upon adoption of FAS 114, impaired loans are now classified with loans
receivable. NPAs amounted to $394 million, $330 million, and $282 million
at yearends 1993, 1992, and 1991, respectively.
The increase in NPAs in 1993 and 1992 was primarily in single-family
loans and foreclosed real estate in California. The continued weak
California economy and high unemployment rate resulted in an increase in
loan delinquencies and, in certain areas, decreases in real estate prices.
The growth in NPAs has also been impacted by high levels of bankruptcy
filings, which often delay the collection process and extend the length of
time a loan remains delinquent. The Company continues to closely monitor
all delinquencies and takes appropriate steps to protect its interests.
The Company's troubled debt restructured, which are loans that have
been modified due to a weakness in the collateral and/or borrower, were
$37 million, or 0.13% of assets, at December 31, 1993, compared to
$13 million, or 0.06% of assets, at December 31, 1992, and $18 million, or
0.08% of assets, at December 31, 1991. The increase is due in part to the
FAS 114 reclassification which included loans that had been modified. A
majority of the Company's TDRs have temporary interest rate reductions and
have been made primarily to customers negatively impacted by adverse
economic conditions.
The Company's ratio of NPAs and TDRs to total assets increased to
1.50% at December 31, 1993, from 1.33% and 1.24% at yearends 1992 and 1991,
respectively.
REAL ESTATE HELD FOR SALE
Real estate acquired through foreclosure increased to $63 million at
December 31, 1993, from $57 million a year earlier. The increase occurred
primarily in one- to four-family properties in California. The Company's
total Real Estate Held for Sale portfolio decreased to $64 million at
December 31, 1993, from $67 million a year earlier due to the
reclassification of loans in-substance foreclosed upon adoption of FAS 114
PAGE 49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
during December 1993. The components of the real estate held for sale
portfolio at December 31, 1993, 1992, and 1991, are shown below:
TABLE 32
Real Estate Held for Sale(a)
(In Thousands)
December 31
---------------------------
1993 1992 1991
------- ------- -------
Real Estate Acquired
Through Foreclosure $62,724 $56,642 $38,163
Real Estate in Judgement 1,366 1,030 4,049
Loans In-Substance
Foreclosed -0- 9,351 6,908
------- ------- -------
$64,090 $67,023 $49,120
======= ======= =======
(a) All amounts are net of general valuation allowances.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses was $107 million at
December 31, 1993, compared to $71 million and $48 million at yearends 1992
and 1991, respectively. The provision for loan losses was $66 million,
$43 million, and $35 million in 1993, 1992, and 1991, respectively. The
1993 increase in the allowance and the provision over 1992 was considered
prudent given the continued difficulties in the California economy, which
led to an increase in nonperforming assets and chargeoffs.
CUSTOMER DEPOSITS
Customer deposits increased by $880 million, excluding those arising
from acquisition and sales activity, compared to a decrease of $255 million
in 1992, excluding branch sales, and an increase of $640 million in 1991.
Rates paid on deposit accounts dropped steadily in 1993 and 1992, reaching
the lowest level in 20 years for most products. Although rates paid on new
accounts were lower than they had been in previous years, consumer funds
were attracted during 1993 as a result of special promotions in the
Company's savings markets. The Company experienced a net outflow of
deposits during 1992 because the Company emphasized other, more
cost-effective sources of funds, primarily Federal Home Loan Bank advances.
In 1993, the Company acquired seven branches in Arizona containing
$320 million in deposits and sold all seven of the Ohio branches with
$264 million in deposits. The Company has no brokered deposits.
PAGE 50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
ADVANCES FROM FEDERAL HOME LOAN BANKS
The Company uses Federal Home Loan Bank 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. FHLB advances increased by
$782 million in 1993 compared to increases of $1.3 billion and $325 million
in 1992 and 1991, respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company borrows funds through transactions in which securities are
sold under agreements to repurchase. These funds are used to take
advantage of arbitrage investment opportunities and to supplement cash
flow. Reverse Repos are entered into with selected major government
securities dealers, as well as large banks, typically using MBS from the
Company's portfolio. Reverse Repos with dealers and banks amounted to
$377 million, $486 million, and $579 million at yearends 1993, 1992, and
1991, respectively.
OTHER BORROWINGS
At December 31, 1993, Golden West had on file registration statements
with the Securities and Exchange Commission for the sale of up to
$100 million of subordinated notes.
Golden West issued subordinated debt securities of $100 million in
January 1993, and $200 million in October 1993, bringing the balance to
$1.0 billion at December 31, 1993. As of December 31, 1993, 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.
World Savings currently has on file a shelf registration with the OTS
for the issuance of $2.0 billion of unsecured medium-term notes. As of
December 31, 1993, $1.2 billion was available for issuance. The
Association had medium-term notes outstanding under the current and prior
registrations with principal amounts of $677 million at December 31, 1993,
compared to $81 million at December 31, 1992, and $167 million at
December 31, 1991. As of December 31, 1993, the Association's medium-term
notes were rated A1 and A+ by Moody's and S&P, respectively.
World Savings also has on file a registration statement with the OTS
for the sale of up to $250 million of subordinated notes. Under a prior
filing with the OTS, $50 million of subordinated notes remain unissued. As
of December 31, 1993, World Savings had issued $200 million of subordinated
securities. As of December 31, 1993, World Savings' subordinated notes
were rated A2 and A by Moody's and S&P, respectively. The subordinated
PAGE 51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
notes are included in World Savings' risk-based regulatory capital as
Supplementary Capital.
STOCKHOLDERS' EQUITY
The Company has increased its total stockholders' equity in each of
the years 1993, 1992, and 1991 through the retention of a high percentage
of net earnings. In addition, stockholders' equity increased in 1993 by
$85 million due to the adoption of FAS 115 as of December 31, 1993.
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 sold from time to time in one
or more transactions for total proceeds of up to $200 million. 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.
On October 28, 1993, the Company's Board of Directors' authorized the
purchase by the Company of up to 3.2 million shares of Golden West's common
stock. As of December 31, 1993, 204,000 shares had been repurchased and
retired.
The OTS requires federally insured institutions, such as World, 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, 1993, World Savings had tangible capital of
$2.0 billion, or 7.27% of adjusted total assets, $1.6 billion in excess of
the regulatory requirement.
The second requirement is to have core capital of 3% of adjusted total
assets. Core capital is defined as tangible capital plus certain allowable
amounts of supervisory goodwill and direct investments. However, the
amount of supervisory goodwill and direct investments that can be counted
as core capital will be phased-down to zero by January 1, 1995. At
December 31, 1993, World Savings had core capital of $2.2 billion, or 8.02%
of adjusted total assets, $1.4 billion in excess of the regulatory
requirement.
The third capital requirement is to have risk-based capital equal to
8.0% of risk-weighted assets. At December 31, 1993, World Savings had
risk-based capital in the amount of $2.5 billion, or 17.42% of
risk-weighted assets, exceeding the current requirement by $1.4 billion.
It should be noted that World Savings also continues to exceed all
three capital requirements on a fully phased-in basis.
PAGE 52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
The Federal Deposit Insurance Corporation Improvement Act of 1991
required each federal banking agency to implement prompt corrective actions
for capital deficient institutions that it regulates. In response to this
requirement, the OTS adopted final rules, effective December 19, 1992,
based upon FDICIA's five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The determination of whether an association
falls into a certain classification depends primarily on its capital
ratios. The following table summarizes the capital ratios for each of the
five classifications and shows that World Savings met the "well
capitalized" standard as of December 31, 1993.
TABLE 33
Relationship of Capital Ratios to
FDIC Capital Adequacy Classifications
- ---------------------------------------------------------------------------------
Ratio of
Leverage Ratio of Tier 1 Total Capital to
Capital Capital to Risk- Risk-Weighted
Category Ratio(a) Weighted Assets(b) Assets(c)
- ---------------------------------------------------------------------------------
Well capitalized 5.0% or 6.0% or greater 10.0% or greater
greater
Adequately 4.0% or 4.0% or greater 8.0% or greater
capitalized greater
Undercapitalized 3.0% or 3.0% or greater 6.0% or greater
greater
Significantly less than
undercapitalized 3.0% less than 3.0% less than 6.0%
Critically less than 2.0%
undercapitalized on a fully
phased-in basis
- ---------------------------------------------------------------------------------
World Savings' ratios
at December 31, 1993 8.02% 15.40% 17.42%
- ---------------------------------------------------------------------------------
(a) Core capital divided by adjusted total assets.
(b) Core capital divided by risk-weighted assets.
(c) Total capital is the same as risk-based capital and consists of such items
as qualifying subordinated debt, cumulative perpetual and intermediate-term
preferred stock, certain convertible debt securities, and general
allowances for loan losses.
The OTS limits capital distributions by savings and loan associations.
For purposes of capital distributions, the OTS has classified World Savings
as a Tier 1 association; thus, the Association may pay dividends during a
calendar year of up to 100% of net income to date during the calendar year
plus up to one-half of capital in excess of the fully phased-in requirement
PAGE 53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (continued)
at the end of the prior year subject to thirty days' advance notice to the
OTS.
RESULTS OF OPERATIONS
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. The Company's primary spread is somewhat dependent on changes in
interest rates because Golden West's liabilities tend to respond more
rapidly to rate movements than do its assets. Because of the relatively
stable interest rate environment during 1993, the benefit from the COFI
timing lag was significantly smaller, resulting in a lower spread than a
year ago. The primary spread was unusually high during 1992 because,
during that year's falling interest rate environment, the cost of deposits
and borrowings declined much faster than the yield on the Company's major
earning asset, the loan portfolio, in large part due to the two month
reporting lag of the Eleventh District Cost of Funds Index to which
$19.5 billion of Golden West's assets are tied.
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 monthly 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). Consequently, when interest rates de-
creased in 1991 and 1992, the yield on the Company's loan portfolio also
decreased. During 1993, although interest rates were more stable, the
index continued to decline somewhat. In addition, during 1992 and 1993,
the Company experienced large payoffs of high-rate fixed loans and MBS,
which also contributed to the decrease in the yield on loans. The yield on
earning assets showed a decline throughout 1991, 1992, and 1993 from a high
of 10.22% in January 1991 to 6.61% at December 31, 1993, due in large part
to decreases in the COFI during the period.
COST OF FUNDS
Approximately 81% of Golden West's liabilities are subject to
repricing in less than one year. Because the cost of these liabilities is
affected by short-term interest rates, a fall in the general level of
interest rates led to a decrease in the Company's cost of funds during
1993, 1992, and 1991.
The effect of these changes on asset yields and liability costs may be
seen in the following table, which shows the components of the Company's
primary spread at the end of the years 1991 through 1993.
PAGE 54
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
TABLE 34
Yield on Earning Assets, Cost of Funds, and Primary
Spread Including Effect of Purchase Accounting
December 31
--------------------------
1993 1992 1991
----- ----- -----
Yield on Loan Portfolio 6.84% 7.66% 9.34%
Yield on Investments 3.80 4.17 5.41
---- ---- ----
Yield on Earning Assets 6.61 7.52 9.16
---- ---- ----
Cost of Customer Deposits 3.92 4.40 6.09
Cost of Borrowings 4.69 5.58 7.48
---- ---- ----
Cost of Funds 4.18 4.75 6.44
---- ---- ----
Primary Spread 2.43% 2.77% 2.72%
==== ==== ====
INTEREST ON LOANS
In 1993 and 1992, interest on loans decreased due to a decline in the
average portfolio yield partially offset by an increase in the average
portfolio balance.
INTEREST ON MBS
In 1993 and 1992, interest on MBS decreased due to a decline in the
average portfolio yield and a decrease in the average portfolio balance.
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. Income from the Company's investments was higher in 1993 than
in 1992 due to a higher average portfolio balance and increased FHLB
dividends. Interest and dividends on investments was lower in 1992 than in
1991 due to a lower portfolio yield.
INTEREST ON CUSTOMER DEPOSITS
The major portion of the Company's customer deposit base consists of
savings accounts with remaining maturities of less than one year. Thus,
the amount of interest paid on these funds depends upon the level of
short-term interest rates and the savings balances outstanding. The
decrease in interest on customer deposits in 1993 and 1992 was due to a
decrease in the average cost of deposits.
INTEREST ON ADVANCES
Interest paid on FHLB advances was higher in 1993 than in 1992 due to
an increase in the average balance of these liabilities partially offset by
a decrease in the average cost. Interest paid on FHLB advances was lower
in 1992 than in 1991 due to a decrease in the average cost of these
liabilities partially offset by an increase in the average balance of these
liabilities.
PAGE 55
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
OTHER BORROWINGS
Interest expense on other borrowings amounted to $158 million,
$154 million, and $165 million for the years ended 1993, 1992, and 1991,
respectively. The increase in the expense from 1993 over 1992 was due to
an increase in the average balance of these liabilities partially offset by
a decrease in the average cost. The decrease in the expense from 1992 over
1991 was due to a decrease in the average cost of other borrowings and a
decrease in the average balance.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $66 million, $43 million, and
$35 million for the years ended 1993, 1992, and 1991, respectively. The
increase in the provision from 1993 over 1992 and 1992 over 1991 reflected
increased chargeoffs, increased nonperforming assets, and the continued
weak California economy.
GAIN (LOSS) ON THE SALE OF SECURITIES AND MORTGAGE-BACKED
SECURITIES
The gain (loss) on the sale of securities and mortgage-backed
securities was a gain of $23 million and $4 million for the years ended
1993 and 1992, respectively, compared to a loss of $1 million for the year
ended 1991. The 1993 gain included a $24 million reduction of a valuation
allowance on investments charged to income in a previous year compared to a
$4 million reduction in 1992.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased during the three years
under discussion. The primary reasons for the increases for all three
years were general inflation, growth of mortgage and deposit balances, the
expansion of loan origination capacity, the installation of enhancements to
data processing systems, and the expansion at Atlas Mutual Funds. The
increase in 1993 was also due to the expansion of savings and loan activity
outside of California and the relocation of some of our administrative
operations to San Antonio, Texas. General and administrative expense as a
percentage of average assets was 0.97%, 0.99%, and 0.99% at
December 31, 1993, 1992, and 1991, respectively.
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.
In the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
PAGE 56
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
FAS 109 requires a change from the deferred method to the liability method
of computing deferred income taxes. The Company has applied FAS 109
prospectively. The cumulative effect of this change in accounting for
income taxes for the periods ending prior to January 1, 1993, is not
material. FAS 109 required the Company to adjust its purchase accounting
for prior business combinations by increasing deferred tax assets and
reducing goodwill by $23 million to reflect the non-taxability of purchase
accounting income. This deferred tax asset is being amortized over the
remaining lives of the related purchased assets.
The consolidated financial statements presented for the years prior to
1993 reflect income taxes under the deferred method required by previous
accounting standards.
Taxes as a percentage of earnings increased in 1993 over 1992 due to
the effect of the amortization of the deferred tax asset related to the
$23 million adjustment arising from the adoption of FAS 109, as well as the
effect of the federal legislation enacted during 1993 that increased the
federal corporate income tax rate from 34% to 35%.
ACQUISITIONS
During 1993, the Company acquired $320 million in deposits and seven
branches in Arizona from PriMerit Bank.
On July 15, 1991, the Company took title to the common stock of Beach
Federal Savings and Loan Association of Boynton Beach, Florida, and its
$1.5 billion in assets. The transaction has been accounted for as a
purchase, and the results of operations have been included with the
Company's results of operations since July 15, 1991. As a result of the
Beach acquisition, Golden West recognized, for tax purposes, certain Beach
net operating losses that resulted in a $25 million benefit in 1992 and a
$103 million benefit in 1991. For financial statement reporting, this
benefit has been recorded as negative goodwill and is being amortized into
income over ten years. In 1993, 1992, and 1991, $13 million, $12 million,
and $5 million, respectively, of the negative goodwill was amortized.
On March 31, 1991, World Savings and Loan Association of Ohio, a
wholly owned subsidiary of Golden West, was merged into World Savings. In
conjunction with Golden West's acquisition of World of Ohio in 1988, the
benefits of net operating loss carryforwards resulted in recording
$18 million of negative goodwill in 1991. This benefit has been amortized
into income over the period 1989 to 1993. In 1993, 1992, and 1991,
$3 million, $4 million, and $11 million, respectively, of the negative
goodwill was amortized.
PAGE 57
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (continued)
During 1991, World Savings acquired from the Resolution Trust
Corporation (RTC) $355 million of deposits and 11 branches from four
separate acquisitions.
The acquisitions are not material to the financial position or net
earnings of Golden West and pro forma information is not deemed necessary.
DIVESTITURES
During 1993, the Company sold $133 million of savings in two Ohio
branches to Trumbull Savings and Loan and its remaining five Ohio branches
with $131 million deposits to Fifth Third Bancorp. During 1992, the Company
sold one branch in California containing $40 million in deposits and two
branches in the state of Washington containing $37 million in deposits.
LIQUIDITY AND CAPITAL RESOURCES
The Association's principal sources of funds are cash flows generated
from earnings; customer deposits; loan repayments; borrowings from the
FHLB; issuance of medium-term notes; and debt collateralized by mortgages,
MBS, or securities. In addition, the Association has a number of other
alternatives available to provide liquidity or finance operations. These
include borrowings from public offerings of debt or equity, sales of loans,
negotiable certificates of deposit, issuance of commercial paper, and
borrowings from commercial banks. Furthermore, under certain conditions,
World Savings 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.
The principal sources of funds for the Association's parent, Golden
West, are dividends from World Savings and the proceeds from the issuance
of debt and equity securities.
PAGE 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index included on page 66 and the financial statements, which
begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
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, 62 Chairman of the Board and
Chief Executive Officer
Marion O. Sandler, 63 Chairman of the Board and
Chief Executive Officer (a)
James T. Judd, 55 Senior Executive Vice
President (b)
Russell W. Kettell, 50 President (c)
J. L. Helvey, 62 Group Senior Vice
President (d)
David C. Welch, 51 Group Senior Vice President
and Treasurer (e)
Dirk S. Adams, 42 Group Senior Vice
President (f)
Robert C. Rowe, 38 Vice President and
Secretary (g)
Louis J. Galen, 68 Director
William P. Kruer, 49 Director
William D. McKee, 67 Director
Bernard A. Osher, 66 Director
Kenneth T. Rosen, 45 Director
Paul Sack, 66 Director
PAGE 59
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Each of the above persons holds the same position with World with the
exception of James T. Judd who is President, Chief Operating Officer, and
Director of World and Russell W. Kettell who is a Senior Executive Vice
President and Director of World. Each executive officer has had the
principal occupations shown for the prior five years except as follows:
(a) Marion O. Sandler was elected Chairman of the Board of the
Company in February 1993. Prior thereto, Mrs. Sandler served as
President and Chief Executive Officer since 1980.
(b) James T. Judd was elected Senior Executive Vice President of the
Company in July 1989. Prior thereto, Mr. Judd served as
Executive Vice President since 1984 and Senior Vice President
since 1975.
(c) Russell W. Kettell was elected President of the Company in
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.
(d) J. L. Helvey was elected Group Senior Vice President of the
Company in November 1988. Prior thereto, Mr. Helvey served as
Senior Vice President since 1973.
(e) David C. Welch was elected Group Senior Vice President and
Treasurer of the Company in November 1988. Prior thereto,
Mr. Welch served as Senior Vice President and Treasurer since
1985, Vice President and Treasurer since 1984, and Vice President
and Assistant Treasurer since 1980.
(f) Dirk S. Adams was elected Group Senior Vice President of the
Company in November 1990. Prior thereto, Mr. Adams served as
Senior Vice President since 1987. Prior to that, Mr. Adams
served as Senior Vice President and General Counsel to the
Federal Home Loan Bank of San Francisco since 1983.
(g) Robert C. Rowe was elected Vice President and Secretary of the
Company in 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.
For further information concerning the directors and executive
officers of the Registrant, see pages 2 through 10 of the Registrant's
Proxy Statement dated March 14, 1994, which is incorporated herein by
reference.
PAGE 60
ITEM 11. MANAGEMENT REMUNERATION
The information required by this Item 11 is set forth in Registrant's
Proxy Statement dated March 14, 1994, on pages 8 through 10 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth on pages 2
through 10 of Registrant's Proxy Statement dated March 14, 1994, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
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 66 and the financial statements,
which begin on page F-1.
PAGE 61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(a) (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 amend-
ed, and amendments thereto, are incorpo-
rated by reference from Exhibit 3(a) to
the Company's Annual Report on Form 10-K
(file No. 1-4629) for the year ended
December 31, 1990.
3 (b) By-Laws, as amended, are incorporated by
reference from Exhibit 3(b) to the
Company's Annual Report on Form 10-K
(file No. 1-4629) for the year ended
December 31, 1987.
4 (a) The Registrant agrees to furnish to the
Commission, upon request, a copy of each
instrument with respect to issues of
long-term debt, the authorized principal
amount of which does not exceed 10% of
the total assets of the Company.
10 (a) 1978 Stock Option Plan, as amended,
is incorporated by reference from
Exhibit 10(a) to the Company's Annual
Report on Form 10-K (file No. 1-4629)
for the year ended December 31, 1987.
10 (b) 1987 Stock Option Plan, as amended,
is incorporated by reference from
Exhibit 10(b) to the Company's Annual
Report on Form 10-K (file No. 1-4629)
for the year ended December 31, 1991.
PAGE 62
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(a) (3) Index To Exhibits (continued)
Exhibit No. Description
----------- -----------
10 (c) Deferred Compensation Agreement between
the Company and James T. Judd is
incorporated by reference from 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 from 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 incorpo-
rated by reference from 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 from 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 from Exhibit 10(e) of the
Company's Annual Report on Form 10-K
(file No. 1-4629) for the year ended
December 31, 1986.
10 (h) Form of Supplemental Retirement
Agreement between the Company and cer-
tain executive officers is incorporated
by reference from 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 is
incorporated by reference from Exhibit
22(a) of the Company's Annual Report on
Form 10-K (file No. 1-4629) for the year
ended December 31, 1987.
23 (a) Independent Auditors' Consent.
PAGE 63
ITEM l4. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(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 Statements on Form S-8 Nos. 2-66913 (filed January 19, 1982)
and 33-14833 (filed June 5, 1987):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
PAGE 64
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
-------------------------------
Herbert M. Sandler,
Chairman of the Board and
Chief Executive Officer
By: /s/ Marion O. Sandler
-------------------------------
Marion O. Sandler,
Chairman of the Board and
Chief Executive Officer
By: /s/ J. L. Helvey
-------------------------------
J. L. Helvey,
Group Senior Vice President and
Chief Financial and
Accounting Officer
Dated: March 23, 1994
PAGE 65
Pursuant to the requirements of the Securities Exchange Act of l934,
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/ Louis J. Galen 3/23/94 /s/ Kenneth T. Rosen 3/23/94
- ---------------------------------- ----------------------------------
Louis J. Galen, Kenneth T. Rosen,
Director Director
- ---------------------------------- ----------------------------------
William P. Kruer, Paul Sack,
Director Director
/s/ William D. McKee 3/23/94 /s/ Herbert M. Sandler 3/23/94
- ---------------------------------- ----------------------------------
William D. McKee, Herbert M. Sandler,
Director Director
/s/ Bernard A. Osher 3/23/94 /s/ Marion O. Sandler 3/23/94
- ---------------------------------- ----------------------------------
Bernard A. Osher, Marion O. Sandler,
Director Director
PAGE 66
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, 1993, and 1992 F-2, F-3
Consolidated Statement of Net Earnings for the years
ended December 31, 1993, 1992, and 1991 F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1993, 1992, and 1991 F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1993, 1992, and 1991 F-6, F-7
Notes to Consolidated Financial Statements F-8
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes
thereto.