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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-4629
GOLDEN WEST FINANCIAL CORPORATION
Incorporated pursuant to the Laws of Delaware State
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I.R.S. - Employer Identification No. 95-2080059
1901 Harrison Street, Oakland, California 94612
(510) 446-3420
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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, Pacific Exchange
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [ X ] No [ ]
The approximate aggregate market value of the registrant's
common stock held by nonaffiliates of the registrant on June 30, 2002,
was $10,657,969,078. The number of shares outstanding of the
registrant's common stock on February 28, 2003, was 153,329,403
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 14, 2003, furnished to stockholders
in connection with the registrant's 2003 Annual Meeting of
Stockholders, is incorporated by reference into Part III.
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GOLDEN WEST FINANCIAL CORPORATION
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I.........................................................................1
Item 1. Business............................................................1
Registrant..................................................................1
Forward Looking Statements..................................................2
Regulatory Framework........................................................2
Office Structure............................................................2
Operations..................................................................3
Deposit Activities..........................................................3
Borrowings..................................................................5
Mortgage-Backed Securities and Loans Receivable.............................7
Mortgage Servicing Rights..................................................19
Asset Quality..............................................................19
Investment Activities......................................................25
Stockholders' Equity.......................................................26
New Accounting Pronouncements..............................................26
Earnings Per Share.........................................................28
Yield on Interest-Earning Assets/Cost of Funds.............................28
Competition and Other Matters..............................................30
Thrift Industry............................................................31
Regulation.................................................................31
Employee Relations.........................................................38
Executive Officers of the Company..........................................39
Item 2. Description of Property............................................40
Item 3. Legal Proceedings..................................................40
Item 4. Submission of Matters to a Vote of Security Holders................40
PART II.......................................................................41
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...............................................41
Market Prices of Stock.....................................................41
Per Share Cash Dividends Data..............................................41
Stockholders...............................................................42
Equity Compensation Plan Information.......................................42
Item 6. Selected Financial Data............................................42
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................46
Financial Condition........................................................47
Results of Operations......................................................64
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........69
Item 8. Financial Statements and Supplementary Data........................69
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................69
PART III......................................................................70
Item 10. Directors and Executive Officers of the Registrant.................70
Item 11. Executive Compensation.............................................70
Item 12. Security Ownership of Certain Beneficial Owners and Management.....70
Item 13. Certain Relationships and Related Transactions.....................70
Item 14. Controls and Procedures............................................70
PART IV.......................................................................71
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....71
42
PART I
ITEM 1. BUSINESS
Registrant
Golden West Financial Corporation (Golden West or Company) is a savings and loan
holding company, the principal business of which is the operation of a savings
bank business through its wholly owned federally chartered savings bank
subsidiary, World Savings Bank, FSB (WSB). WSB has a wholly owned subsidiary,
World Savings Bank, FSB (Texas) (WTX), that is also a federally chartered
savings bank. Atlas Advisers, Inc. and Atlas Securities, Inc. also are
subsidiaries of Golden West. These two companies were formed to provide services
to Atlas Assets, Inc., an open-ended registered investment company sponsored by
the Company. Atlas Advisers, Inc., is a registered investment adviser and the
investment manager of Atlas Assets, Inc.'s fifteen portfolios (the Atlas Funds).
Atlas Securities, Inc., is a registered broker-dealer and the sole distributor
of Atlas Fund shares. The Company was incorporated in 1959 and has its
headquarters in Oakland, California. References herein to the Company or Golden
West mean Golden West and its subsidiaries on a consolidated basis, unless the
context requires otherwise.
WSB's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). The FDIC administers two separate deposit insurance funds,
the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF).
The BIF is a deposit insurance fund for commercial banks and certain savings
banks. The SAIF is a deposit insurance fund for most savings associations. WSB
is a member of the BIF, but a portion of WSB's deposits are insured through the
SAIF. WTX's deposits are also insured by the FDIC and WTX is a member of the
BIF.
WSB's home office is in Oakland, California. As of December 31, 2002
and 2001, WSB had assets of $68.0 billion and $58.4 billion, respectively. For
the years ended December 31, 2002, 2001, and 2000, WSB had net income of $978
million, $827 million, and $540 million, respectively.
The Company's Internet address is www.gdw.com. Copies of the
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to such reports are available, free of
charge, through www.gdw.com as soon as reasonably practicable after their filing
with the Securities and Exchange Commission.
Forward Looking Statements
This report may contain various forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include projections, statements of the plans and objectives of
management for future operations, statements of future economic performance,
assumptions underlying these statements and other statements that are not
statements of historical facts. Forward-looking statements are subject to
significant business, economic and competitive risks, uncertainties and
contingencies, many of which are beyond Golden West's control. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated. Among the key risk factors that may have a direct bearing on Golden
West's results of operations and financial condition are:
o competitive practices in the financial services industries;
o operational and systems risks;
o general economic and capital market conditions, including fluctuations in
interest rates;
o economic conditions in certain geographic areas, particularly in
California; and
o the impact of current and future laws and governmental regulations
affecting the financial services industry in general and Golden West's
operations in particular.
In addition, actual results may differ materially from the results
discussed in any forward-looking statements for the reasons, among others,
discussed under the heading "Asset/Liability Management" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, herein
under Item 7.
Regulatory Framework
The Company is a savings and loan holding company within the meaning of the
Home Owners' Loan Act (HOLA) and is subject to the regulation, examination,
supervision, and reporting requirements of HOLA. WSB is a member of the Federal
Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WTX is
a member of the FHLB system and owns stock in the FHLB of Dallas. WSB's and
WTX's savings accounts are insured by the FDIC up to the maximum amounts
provided by law. The Company, WSB, and WTX are subject to extensive examination,
supervision, and regulation by the Office of Thrift Supervision (OTS).
Applicable regulations govern, among other things, lending and investment
powers, the types of savings accounts that can be offered, the types of
businesses that can be engaged in, capital requirements, and the payment of
dividends. WSB and WTX are also subject to regulations of the FDIC and the Board
of Governors of the Federal Reserve System (Federal Reserve Board) with respect
to deposit accounts, reserve requirements, and certain other matters (see
Regulation), and regulations of other federal and state agencies concerning
consumers, lending, and securities activities.
Office Structure
As of December 31, 2002, the Company operated 121 savings branch
offices in California, 46 in Florida, 36 in Colorado, 23 in Texas, 15 in
Arizona, 11 in New Jersey, eight in Kansas, six in Illinois, and two in Nevada.
The Company also operated 311 loan origination offices of which 110 were located
in the states listed above. The remaining 201 loan origination offices were
located in Connecticut, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New
Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington,
Wisconsin, and Wyoming. Of the 311 loan offices, 21 were fully-staffed offices
that were located in the same premises as savings branch offices, and 110 others
were savings branch offices that have a single loan officer on site. The
remaining loan origination offices were located in facilities that were separate
from savings branch offices.
Operations
The principal business of the Company, through WSB and WTX, is
attracting funds from the investing public and the capital markets and investing
those funds principally in loans secured by deeds of trust or mortgages on
residential real estate, and mortgage-backed securities (MBS). WSB's principal
sources of funds are cash flows generated from earnings; deposits; loan
repayments; sales of loans; wholesale certificates of deposit; bank notes;
borrowings from the Federal Home Loan Bank of San Francisco; borrowings from its
parent; borrowings from its WTX subsidiary; and debt collateralized by
mortgages, MBS, or securities. In addition, WSB has other alternatives available
to provide liquidity or finance operations including federal funds purchased,
the issuance of medium-term notes, borrowings from public offerings of debt,
issuance of commercial paper, and borrowings from commercial banks. Furthermore,
under certain limited conditions, WSB 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. WTX's principal source of funds are
cash flows generated from borrowings from the FHLB of Dallas; earnings;
deposits; loan repayments; debt collateralized by mortgages or securities; and
borrowings from WSB and WSB's parent.
The principal sources of funds for the holding company, Golden West,
are dividends from subsidiaries, interest on investments, and the proceeds from
the issuance of debt and equity securities. Various statutory and regulatory
restrictions and tax considerations limit the amount of dividends WSB can pay.
The principal liquidity needs of Golden West are for payment of interest and
principal on debt securities, capital contributions to WSB, dividends to
stockholders, the repurchase of Company stock, and general and administrative
expenses.
Deposit Activities
Deposit flows are affected by changes in general economic conditions,
changes in prevailing interest rates, and competition among depository
institutions and other investment alternatives. The Company currently offers a
number of alternatives for depositors, including passbook, checking, and money
market deposit accounts from which funds may be withdrawn at any time without
penalty, and certificate accounts with varying maturities ranging up to five
years. All types of accounts presently offered by the Company have rates that
are set by the Company, consistent with prevailing interest rates. The Company's
certificate accounts are issued in non-negotiable form through its branch
offices. From time to time, the Company uses securities dealers to sell
certificates of deposit (CDs) to institutional investors. These are referred to
in this document as "wholesale CDs." All other deposits offered by the Company
are considered "retail deposits." There were no outstanding wholesale CDs at
December 31, 2002 and 2001. The Company's deposit balance at December 31, 2000
included $185 million of these wholesale CDs.
Retail deposits increased $6.6 billion during 2002, including
interest credited of $1.0 billion, compared to an increase of $4.6 billion
during 2001, including interest credited of $1.3 billion, and an increase of
$2.7 billion, including interest credited of $1.3 billion during 2000. Retail
deposits increased in 2002, 2001, and 2000 primarily due to the implementation
of marketing campaigns that took advantage of the favorable savings environment
in which the public found money market deposit accounts to be a more favorable
investment compared with other alternatives. At December 31, 2002, 2001, and
2000, transaction accounts (which include checking, passbook, and money market
deposit accounts) represented 66%, 40%, and 24%, respectively, of the total
balance of deposits.
The following table summarizes the Company's deposits by original
term to maturity at December 31.
TABLE 1
Deposits
by Original Term to Maturity
(Dollars in Thousands)
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
Interest-bearing checking accounts......$ 165,320 $ 155,799 $ 74,598 $ 128,677 $ 102,874
Interest-bearing checking accounts
swept into money market deposit
accounts............................... 4,407,650 4,613,087 3,059,928 3,206,240 2,706,811
Passbook accounts........................ 456,158 459,953 451,228 484,132 514,265
Money market deposit accounts............ 22,060,104 8,569,759 3,534,786 5,869,963 5,825,450
Time certificates of deposit with
original maturities of:
4 weeks to 1 year.................. 4,714,712 10,852,181 12,325,768 8,554,573 5,893,772
1 to 2 years........................ 4,197,261 6,415,700 7,275,219 5,947,712 7,717,692
2 to 3 years........................ 1,857,234 1,619,868 1,367,147 1,349,180 1,417,606
3 to 4 years........................ 1,286,011 737,981 453,974 368,540 368,615
4 years and over.................... 1,794,051 799,025 675,120 582,275 1,150,056
Retail jumbo CDs (a).................... 100,173 249,088 644,962 623,286 521,478
Wholesale CDs........................... -0- -0- 185,000 600,000 -0-
All other............................... 123 144 189 332 476
-------------- -------------- -------------- -------------- --------------
Total deposits...........................$ 41,038,797 $ 34,472,585 $ 30,047,919 $ 27,714,910 $ 26,219,095
============== ============== ============== ============== ==============
(a) Retail jumbo CDs are certificates of deposit with a minimum balance of $100,000.
The table below sets forth the Company's deposits by interest rate at
December 31.
TABLE 2
Deposits by Interest Rate
(Dollars in Thousands)
2002 2001
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0.00% -- 2.00% . . . . . . . . . . $ 5,433,756 $ 685,916
2.01% -- 4.00% . . . . . . . . . . 32,219,197 24,445,143
4.01% -- 6.00% . . . . . . . . . . 2,846,962 7,572,962
6.01% -- 8.00% . . . . . . . . . . 529,715 1,759,311
8.01% -- 10.00% . . . . . . . . . . -0- -0-
10.01% -- 12.00% . . . . . . . . . . 9,167 9,253
----------------- -----------------
$ 41,038,797 $ 34,472,585
================= =================
At December 31, the weighted average cost of deposits was 2.56% (2002) and 3.39% (2001).
The table below shows the maturities of deposits at December 31, 2002
by interest rate.
TABLE 3
Deposit Maturities
by Interest Rate
(Dollars in Thousands)
2007 and
2003(a) 2004 2005 2006 thereafter Total
----------------- ---------------- -------------- -------------- ---------------- ------------
0.00% -- 2.00% $ 5,320,343 $ 113,130 $ 283 $ -0- $ -0- $5,433,756
2.01% -- 4.00% 30,765,063 1,022,885 328,775 9,467 93,007 32,219,197
4.01% -- 6.00% 843,534 345,302 391,365 245,013 1,021,748 2,846,962
6.01% -- 8.00% 233,908 13,999 271,928 1,166 8,714 529,715
8.01% -- 10.00% -0- -0- -0- -0- -0- -0-
10.01% -- 12.00% 9,167 -0- -0- -0- -0- 9,167
----------------- ---------------- -------------- -------------- ------------ --------------
$37,172,015 $1,495,316 $992,351 $255,646 $1,123,469 $41,038,797
================= ================ ============== ============== ============ ==============
(a) Includes passbook, checking, and money market deposit accounts, which have
no stated maturity.
As of December 31, 2002, the aggregate amount outstanding of time
certificates of deposit in amounts of $100,000 or more was $2.7 billion, of
which $100 million were retail jumbo CDs with a minimum balance of $100,000.
There were no wholesale CDs. The following table presents the maturity of these
time certificates of deposit at December 31, 2002.
TABLE 4
Maturities of Time Certificates of Deposit Equal to or Greater than $100,000
(Dollars in Thousands)
3 months or less $ 774,496
Over 3 months through 6 months 495,459
Over 6 months through 12 months 575,276
Over 12 months 842,690
-----------------
$2,687,921
=================
More information regarding deposits is included in Note I to the
Financial Statements included in Item 15.
Borrowings
The Company generally may borrow from the FHLB upon the security of
(a) the capital stock of the FHLB owned by the Company, (b) certain of its
residential mortgage loans and MBS, or (c) certain other assets (principally
obligations of, or guaranteed by, the United States Government or a federal
agency). The Company uses FHLB borrowings, also known as "advances," to 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. At December 31, 2002, the
Company had $18.6 billion in FHLB advances outstanding, compared to $18.0
billion at yearend 2001.
The Company enters into reverse repurchase agreements with selected
major government securities dealers, large banks, or the FHLB of San Francisco
and the FHLB of Dallas. A reverse repurchase agreement involves the sale and
delivery of U.S. Government securities or mortgage-backed securities by the
Company to a counterparty coupled with an agreement to buy the securities back
at a later date. Under generally accepted accounting principles, these
transactions are accounted for as borrowings secured by securities. The Company
pays the counterparty a variable or fixed rate of interest for the use of the
funds for the period involved. At maturity, the borrowings are repaid (by
repurchase of the same securities) and the same securities are returned to the
Company.
The Company also enters into dollar reverse repurchase agreements
(dollar reverses) with selected major government securities dealers, as well as
large banks. A dollar reverse involves the sale and delivery of mortgage-backed
securities by the Company to a broker or dealer, coupled with an agreement to
purchase securities of the same type and interest coupon at a fixed price for
settlement at a later date. Under generally accepted accounting principles,
these transactions are accounted for as borrowings secured by mortgage-backed
securities. The Company pays the brokers and dealers a fixed rate of interest
for the use of the funds for the period involved, which is generally short-term.
At maturity, the secured borrowings are repaid (by purchase of similar
securities) and similar securities are delivered to the Company.
The Company monitors the level of activity with any one party in
connection with reverse repurchase agreements and dollar reverses in order to
minimize its risk exposure in these transactions. Reverse repurchase agreements
and dollar reverses amounted to $522 million at December 31, 2002, compared to
$224 million at yearend 2001.
At December 31, 2002, Golden West, at the holding company level, had
a total of $200 million of subordinated debt outstanding compared with $600
million at December 31, 2001. As of December 31, 2002, Golden West's
subordinated debt securities were rated A2 and A by Moody's Investors Service
(Moody's) and Standard & Poor's (S&P), respectively.
At December 31, 2002, the Company had outstanding $1.0 billion of
senior debt compared to $200 million at December 31, 2001. As of December 31,
2002, the Company's senior debt was rated A1 and A+ by Moody's and S&P,
respectively.
WSB has a bank note program under which up to $5 billion of
borrowings can be outstanding at any point in time. At December 31, 2002, WSB
had $1.2 billion of bank notes outstanding. There were no bank notes outstanding
at December 31, 2001 or 2000. As of December 31, 2002, WSB's bank notes were
rated P-1 and A-1+ by Moody's and S&P, respectively.
The table below sets forth the composition of the Company's
borrowings at December 31.
TABLE 5
Composition of Borrowings
(Dollars in Thousands)
2002 2001 2000 1999 1998
-------------- --------------- ---------------- --------------- -------------
FHLB advances...................................$ 18,635,099 $ 18,037,509 $ 19,731,797 $ 8,915,218 $6,163,472
Reverse repurchase agreements................... 522,299 223,523 857,274 970,129 1,252,469
Dollar reverse repurchase agreements............ -0- -0- -0- 75,047 -0-
Bank notes...................................... 1,209,925 -0- -0- -0- -0-
Senior debt..................................... 989,690 198,215 -0- -0- -0-
Subordinated debt............................... 199,867 599,511 598,791 812,950 911,753
-------------- --------------- ---------------- --------------- -------------
Total borrowings............................$ 21,556,880 $19,058,758 $ 21,187,862 $10,773,344 $8,327,694
============== =============== ================ =============== =============
Weighted average interest rate
of total borrowings......................... 1.85% 2.72% 6.66% 5.77% 5.87%
============== =============== ================ =============== =============
More information concerning the borrowings of the Company is included in Notes J, K, L and M to the Financial Statements, which
are included in Item 15.
Mortgage-Backed Securities and Loans Receivable
The Company invests primarily in whole loans. From time to time, the
Company securitizes loans from its portfolio into mortgage-backed securities
(MBS) and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs). Under
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 140), if the Company retains 100% of the beneficial interests in its MBS
securitizations, it will not have any effective "retained interests" requiring
disclosures under SFAS 140. To date the Company has not sold any interests
requiring disclosures under SFAS 140. Because the Company currently retains all
of the beneficial interest in these MBS , the securitizations formed after March
31, 2001 are securities classified as securitized loans and included in loans
receivable in accordance with SFAS 140 (see pages 26 and 27 for further
discussion). Additionally, from time to time, the Company purchases MBS. Loans,
securitized loans, and MBS are available to be used as collateral for
borrowings.
During the first half of 2002, the Company desecuritized $4.1 billion
of Federal National Mortgage Association (FNMA) MBS that were classified as MBS
held to maturity with recourse, and the underlying loans were reclassified to
loans receivable. This desecuritization led to a significant decrease in the
outstanding balance of MBS, which in turn contributed to lower MBS repayments
and lower interest on mortgage-backed securities. The desecuritization also
contributed to an increase in the outstanding balance of loans receivable and an
increase in interest income on loans.
The following table shows the components of the Company's loans
receivable portfolio, including MBS, at December 31, 2002, 2001, and 2000.
TABLE 6
Balance of Loans Receivable, Including MBS, by Component
(Dollars in Thousands)
December 31 December 31 December 31
2002 2001 2000
-------------------- -------------------- --------------------
Loans $ 39,159,502 $ 35,952,918 $ 33,860,345
Securitized loans (a) (b) 19,066,063 5,186,717 -0-
-------------------- -------------------- --------------------
Total loans, excluding MBS 58,225,565 41,139,635 33,860,345
-------------------- -------------------- --------------------
FNMA MBS -0- 4,732,779 7,758,409
MBS-REMICs 5,871,069 8,836,840 10,366,578
Purchased MBS 196,389 508,553 455,503
-------------------- -------------------- --------------------
Total MBS 6,067,458 14,078,172 18,580,490
-------------------- -------------------- --------------------
Other (c) 43,334 (74,260) (97,702)
-------------------- -------------------- --------------------
Total loans receivable, including MBS $ 64,336,357 $ 55,143,547 $ 52,343,133
==================== ==================== ====================
(a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on pages 26 and 27).
(b) Includes $10.9 billion at December 31, 2002 of loans securitized with FNMA where the securitized loans are subject to full
credit recourse to the Company.
(c) Includes deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
Repayments from the loan portfolio, including MBS, were $15.6
billion, $15.6 billion, and $6.9 billion for the years ended December 31, 2002,
2001, and 2000, respectively. In 2002, there was a small decrease in the
prepayment rate offset by the growth in the loan portfolio. Loans receivable
repayments were higher in 2001 as compared to 2000 due to an increase in the
prepayment rate as well as an increase in the balance of the total loan
portfolio outstanding.
Mortgage-Backed Securities
The Company classifies its MBS as either held to maturity or
available for sale. The Company has no trading MBS. MBS held to maturity are
recorded at cost because the Company has the ability and intent to hold these
MBS to maturity. Premiums and discounts on MBS are amortized or accreted using
the interest method over the estimated life of the security. At December 31,
2002, 2001, and 2000, the Company had MBS held to maturity in the amount of $6.0
billion, $13.8 billion, and $18.5 billion, respectively. The sizable decrease in
2002 was due primarily to prepayments and to the desecuritization of $4.1
billion of FNMA MBS in 2002. During 2001, the Company securitized $3.0 billion
of ARMs into MBS-REMICs during the first three months. Loans securitized after
March 31, 2001 were classified as securitized loans in accordance with SFAS 140.
During 2000, the Company securitized $4.8 billion of ARMs into FNMA MBS and
securitized $4.6 billion of ARMs into MBS-REMICs. The Company has the ability
and intent to hold these MBS until maturity and, accordingly, these MBS are
classified as held to maturity.
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, 2002, 2001, and 2000, the Company had MBS available for sale in the
amount of $35 million, $233 million, and $70 million, respectively, including
net unrealized gains on MBS available for sale of $139 thousand, $2 million, and
$1 million, respectively. Realized gains or losses on sales of MBS are 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 adjusted for any unamortized premium
or discount. During the first quarter of 2002, the Company sold $176 million of
purchased MBS available for sale, which resulted in a gain of $3 million.
Repayments of MBS during the years 2002, 2001, and 2000 amounted to
$3.2 billion, $6.4 billion, and $2.5 billion, respectively. MBS repayments were
lower in 2002 due primarily to a decrease in the balance of MBS outstanding. MBS
repayments were higher in 2001 due to an increase in the prepayment rate.
For more information on MBS, see Notes C and D to the Financial
Statements included in Item 15.
Loans
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 on
residential properties. Although the Company has from time to time made
commercial real estate and construction loans, the Company is not currently
active in these segments of the lending market. The Company has the authority to
originate loans in any part of the United States. At December 31, 2002, the
Company was originating loans in Arizona, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee,
Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. The Company also
makes loans to customers on the security of their deposit accounts. Deposit
loans constituted less than one percent of the Company's total loans outstanding
as of December 31, 2002 and 2001.
Interest rates set at the time of origination by the Company on real
estate loans are affected principally by competition, the supply of money
available for lending, loan demand, and other factors that are affected by
general economic conditions, regulatory and monetary policies of the federal
government, and legislation and other governmental action dealing with budgetary
and tax matters.
The Company originates loans through offices that are staffed by
employees who primarily contact local real estate brokers, mortgage brokers, and
consumers regarding possible lending opportunities. Customers also may apply for
home loans over the telephone and on line at www.worldsavings.com. The Company's
loan approval process is intended to assess both the borrower's ability to repay
the loan and the adequacy of the proposed security. Documentation for all loans
is maintained in the Company's loan servicing offices in San Antonio, Texas.
The following tables set forth the Company's loan portfolio by state
as of December 31, 2002 and 2001.
TABLE 7
Loan Portfolio by State
December 31, 2002
(Dollars in Thousands)
Residential
Real Estate Commercial Loans
------------------------------- Real Total as a % of
State 1 - 4 5+ Land Estate Loans Portfolio
- ------------------------ -------------- -------------- ---------- -------------- ---------------- ---------------
Northern California $ 20,874,426 $ 1,783,379 $ -0- $ 10,000 $ 22,667,805 35.37%
Southern California 16,696,057 1,567,389 -0- 1,449 18,264,895 28.50
Florida 3,405,781 44,041 -0- 78 3,449,900 5.38
Texas 2,554,814 115,511 112 804 2,671,241 4.17
New Jersey 2,389,661 -0- -0- 945 2,390,606 3.73
Washington 1,273,255 700,172 -0- -0- 1,973,427 3.08
Illinois 1,545,752 131,149 -0- -0- 1,676,901 2.62
Colorado 1,375,382 187,861 -0- 4,341 1,567,584 2.45
Other(a) 9,277,811 140,374 2 2,848 9,421,035 14.70
-------------- -------------- ---------- -------------- ---------------- -----------
Totals $ 59,392,939 $ 4,669,876 $ 114 $ 20,465 64,083,394 100.00%
============== ============== ========== ============== ===========
Net deferred loan costs 331,985
Allowance for loan losses (281,097)
Undisbursed loan funds (7,554)
Loans on deposits 13,240
----------------
Total loan portfolio and loans securitized into MBS-REMICs 64,139,968
Loans securitized into MBS-REMICs (5,871,069)(b)(c)
----------------
Total loans receivable $ 58,268,899
================
(a) All states included in Other have total loan balances less than 2% of
total loans.
(b) The above schedule includes the December 31, 2002 balances of loans that were securitized and retained as MBS-REMICs.
(c) The significantly lower balance compared with December 31, 2001 (see
Table 8) is due to the repayment of MBS-REMICs over the past year and the
desecuritization of FNMA MBS with recourse in the first half of 2002.
Since March 31, 2001, all new FNMA MBS with recourse and MBS-REMICs have
been classified as securitized loans per SFAS 140 (see discussion on
pages 26 and 27).
TABLE 8
Loan Portfolio by State
December 31, 2001
(Dollars in Thousands)
Residential
Real Estate Commercial Loans
------------------------------- Real Total as a % of
State 1 - 4 5+ Land Estate Loans Portfolio
----------------------- -------------- -------------- ---------- --------------- --------------- ---------------
Northern California $ 16,668,387 $ 1,773,468 $ 19 $ 15,156 $ 18,457,030 33.75%
Southern California 15,136,951 1,579,418 -0- 2,871 16,719,240 30.57
Florida 2,767,388 23,931 -0- 194 2,791,513 5.10
Texas 2,159,023 82,468 169 899 2,242,559 4.10
New Jersey 1,987,905 -0- -0- 1,817 1,989,722 3.64
Washington 1,094,565 650,818 -0- -0- 1,745,383 3.19
Illinois 1,407,339 119,020 -0- -0- 1,526,359 2.79
Colorado 1,222,142 186,155 -0- 4,548 1,412,845 2.58
Other(a) 7,704,927 99,361 11 3,632 7,807,931 14.28
-------------- -------------- ---------- --------------- --------------- -----------
Totals $ 50,148,627 $ 4,514,639 $ 199 $ 29,117 54,692,582 100.00%
============== ============== ========== =============== ===========
Net deferred loan costs 193,924
Allowance for loan losses (261,013)
Undisbursed loan funds (7,171)
Loans on deposits 16,672
---------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMICs 54,634,994
Loans securitized into FNMA MBS with recourse and MBS-REMICs (13,569,619)(b)
----------------
Total loans receivable $ 41,065,375
===============
(a) All states included in Other have total loan balances less than 2% of total loans.
(b) The above schedule includes the December 31, 2001 balances of loans that were securitized and retained as FNMA MBS with recourse
and MBS-REMICs.
The table below sets forth the composition of the Company's loan
portfolio by type of collateral at December 31.
TABLE 9
Loan Portfolio by Type of Security
(Dollars in Thousands)
2002 2001 2000 1999 1998
------------- -------------- --------------- -------------- -----------------
Loans collateralized
first deeds of trust:
One-to four-family units.............$ 54,934,357 $ 38,326,759 $ 31,353,927 $ 26,041,066 $ 21,639,015
Over four-family units............... 3,257,389 2,766,888 2,444,832 1,979,199 4,260,631
Commercial real estate............... 20,465 29,117 39,810 49,149 65,865
Land................................. 114 199 347 612 798
Loans on deposits....................... 13,240 16,672 21,429 20,107 25,279
Net deferred costs (fees)............... 331,985 193,924 145,709 66,840 (22,754)
Allowance for loan losses............... (281,097) (261,013) (236,708) (232,134) (244,466)
Undisbursed loan funds.................. (7,554) (7,171) (6,703) (5,022) (3,080)
------------- -------------- --------------- -------------- -----------------
Total loans receivable.............. 58,268,899 41,065,375 33,762,643 27,919,817 25,721,288
Loans securitized into MBS
collateralized by:
One-to four-family units............. 4,458,582 11,821,868 16,102,358 8,853,027 9,346,004
Over four-family units............... 1,412,487 1,747,751 2,022,629 2,294,874 -0-
------------- -------------- --------------- -------------- -----------------
Total loans securitized into MBS........ 5,871,069 13,569,619 18,124,987 11,147,901 9,346,004
------------- -------------- --------------- -------------- -----------------
Loan portfolio including MBS $ 64,139,968 $ 54,634,994 $ 51,887,630 $ 39,067,718 $ 35,067,292
============= ============== =============== ============== =================
At December 31, 2002, 99.6% of the loans in the portfolio (including loans
securitized into MBS) had remaining terms to maturity in excess of 10 years.
The following table sets forth the amount of loans due after one year
that have fixed interest rates and the amount that have adjustable interest
rates at December 31, 2002.
TABLE 10
Loans Due After One Year
(Dollars in Thousands)
Loans
Securitized Loans
into MBS Receivable Total
----------------- ---------------- -----------------
Adjustable Rate $5,515,045 $56,270,782 $61,785,827
Fixed Rate 355,154 1,977,766 2,332,920
----------------- ---------------- -----------------
$5,870,199 $58,248,548 $64,118,747
================= ================ =================
The following table sets forth information concerning new loans made
by the Company during 2002, 2001, and 2000 by type and purpose of loan.
TABLE 11
New Mortgage Loan Originations by Type and by Purpose
(Dollars in Thousands)
2002 2001 2000
----------------------------------- ----------------------------------- --------------------------------
No. of % of No. of % of No. of % of
By Type Loans Amount Total Loans Amount Total Loans Amount Total
- -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Residential
(one unit) 117,664 $24,946,030 93.4% 97,224 $19,501,525 93.9% 108,539 $18,627,153 94.2%
Residential
(2 to 4 units) 3,456 817,466 3.1 2,495 575,585 2.8 2,238 478,297 2.4
Residential
(5 or more units) 1,265 919,394 3.5 1,105 686,127 3.3 941 677,237 3.4
--------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Totals 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0% 111,718 $19,782,687 100.0%
========= ============ ======= ========= ============ ======= ======== ============ =======
2002 2001 2000
----------------------------------- ----------------------------------- --------------------------------
No. of % of No. of % of No. of % of
By Purpose Loans Amount Total Loans Amount Total Loans Amount Total
- -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Purchase 48,292 $10,188,265 38.2% 45,989 $ 8,604,296 41.4% 79,038 $13,045,821 65.9%
Refinance 74,093 16,494,625 61.8 54,835 12,158,941 58.6 32,680 6,736,866 34.1
--------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Totals 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0% 111,718 $19,782,687 100.0%
========= ============ ======= ========= ============ ======= ======== ============ =======
New mortgage loan originations in 2002, 2001, and 2000 amounted to
$26.7 billion, $20.8 billion, and $19.8 billion, respectively. The volume of
originations increased during 2002 due to the continued strong demand for
mortgage loans and an increase in the popularity of adjustable rate mortgages,
the Company's principal product. The volume of originations during 2001
increased due to an increase in the market demand for loans.
The Company sells most of its new fixed-rate loans. First mortgages
originated for sale were $1.7 billion, $2.2 billion, and $114 million for the
years ended December 31, 2002, 2001, and 2000, respectively. The volume of loans
originated for sale was high in 2002 and in 2001 as compared to 2000 due to an
increase in fixed-rate mortgage originations caused by consumer preference for
these loans in the prevailing low interest rate environment. During 2002, 2001,
and 2000, $596 million, $794 million, and $29 million, respectively, of loans,
including MBS, were converted at the customer's request from adjustable rate to
fixed-rate. The Company also sells most of its converted fixed-rate loans. The
Company sold $2.3 billion, $2.7 billion, and $152 million of fixed-rate first
mortgage loans during 2002, 2001, and 2000, respectively. The Company recognized
pre-tax gains on the sale of loans of $42 million in 2002 compared to $43
million in 2001 and $10 million in 2000. Included in the gains in 2002, 2001,
and 2000 were $34 million, $42 million, and $3 million, respectively, due to the
capitalization of mortgage servicing rights (see page 19 for further
information). At December 31, 2002, the loans held for sale portfolio had a
balance of $381 million, all of which were carried at the lower of cost or
market.
The largest source of mortgage originations is loans secured by
residential properties in California. Loans originated in California were $17.9
billion in 2002 compared to $14.4 billion in 2001 and $12.4 billion in 2000. In
2002, 67% of total origination volume was secured by California residential
property compared to 70% in 2001 and 63% in 2000. The five largest states, other
than California, for originations for the year ended December 31, 2002, were
Florida, Texas, New Jersey, Washington, and Colorado with a combined total of
17% of total originations. The percentage of loans originated in California has
remained consistently high during the three years under discussion due to the
strong California real estate market. The percentage of the total loan portfolio
(including MBS, except purchased MBS) that was comprised of residential loans in
California was 64% in 2002 compared to 64% in 2001 and 63% in 2000.
Federal regulations permit federally chartered savings banks to make
or purchase both fixed-rate loans and loans with periodic adjustments to the
interest rate. These latter types of loans are subject to the following primary
limitations: (i) the adjustments must be based on changes in a specified
interest rate index, which may be selected by the savings bank but which must be
readily available to, and independently verifiable by, the borrower; and (ii)
adjustments to the interest rate may be implemented through changes in the
monthly payment amount and/or adjustment to the outstanding principal balance or
term.
Pursuant to the aforementioned powers, the Company offers adjustable
rate mortgages, and this type of mortgage is the Company's primary real estate
loan. The portion of the mortgage portfolio (including securitized loans and
MBS) composed of adjustable rate loans was 96% at yearend 2002 compared to 94%
at yearend 2001 and 95% at yearend 2000. The Company's ARM originations
constituted approximately 92% of new mortgage loans made by the Company in 2002,
compared with 84% in 2001 and 96% in 2000.
Golden West originates ARMs tied primarily to the Certificate of
Deposit Index (CODI), the Eleventh District Cost of Funds Index (COFI), and
Golden West Cost of Savings Index (COSI). Prior to 2001, the Company also
originated ARMS tied to the twelve-month rolling average of One-Year Treasury
Constant Maturity (TCM). For a description of these indexes, see page 47 in Item
7. The following table shows the distribution of ARM originations by index for
the years ended December 31, 2002, 2001, and 2000.
TABLE 12
Adjustable Rate Mortgage Originations by Index
(Dollars in Thousands)
ARM Index 2002 2001 2000
- ----------------------------- ----------------- ----------------- ------------------
CODI $13,173,161 $ 554,390 $ -0-
COFI 3,370,412 9,813,174 5,701,413
COSI 7,899,702 7,064,962 12,872,834
TCM -0- -0- 470,171
----------------- ----------------- ------------------
$24,443,275 $17,432,526 $19,044,418
================= ================= ==================
The following table shows the distribution by index of the Company's
outstanding balance of adjustable rate mortgages (including ARM MBS) at December
31, 2002, 2001, and 2000.
TABLE 13
Adjustable Rate Mortgage Portfolio by Index
(Including ARM MBS)
(Dollars in Thousands)
ARM Index 2002 2001 2000
- ---------------------------- ----------------- ----------------- -----------------
CODI $13,286,566 $ 552,746 $ -0-
COFI 24,755,498 29,010,008 27,405,401
COSI 22,070,692 20,943,596 20,460,242
Other (a) 1,657,386 1,288,050 1,640,010
----------------- ----------------- -----------------
$61,770,142 $51,794,400 $49,505,653
================= ================= =================
(a) Includes equity lines of credit tied to the prime rate and ARMs tied to the TCM.
Most of the Company's ARMs carry an interest rate that changes
monthly based on movements in certain indexes. The Company also offers a
"modified" ARM, a loan that offers an introductory rate generally below the
initial fully indexed contract rate for a specified period, normally one to 12
months. However, the borrower must qualify at the initial fully indexed contract
rate.
During the life of a typical ARM loan, the interest rate may not be
raised above a lifetime cap, set at the time of origination or assumption. The
weighted average maximum lifetime cap rate on the Company's ARM loan portfolio
(including securitized ARM loans, FNMA MBS, and MBS-REMICs before any reduction
for loan servicing fees) was 12.13%, or 6.74% above the actual weighted average
rate at December 31, 2002, versus 12.21%, or 5.77% above the weighted average
rate at yearend 2001 and 12.28% or 4.17% above the weighted average rate at
yearend 2000.
The following table shows the Company's ARM loans by lifetime cap
bands as of December 31, 2002.
TABLE 14
Adjustable Rate Mortgage Portfolio by Lifetime Cap Bands
December 31, 2002
(Dollars in Thousands)
ARM Number % of Total
Cap Bands Balance of Loans Balance
--------------------------------- --------------- ---------------- ---------------
Less than 9.00% $ 4,507 22 .0%
9.00% - 9.49% 107 1 .0%
9.50% - 9.99% 542 5 .0%
10.00% - 10.49% 8,556 22 .0%
10.50% - 10.99% 6,437 31 .0%
11.00% - 11.49% 80,362 605 .1%
11.50% - 11.99% 48,731,800 242,488 78.9%
12.00% - 12.49% 5,235,229 36,444 8.5%
12.50% - 12.99% 4,203,137 20,031 6.8%
13.00% - 13.49% 245,298 1,335 .4%
13.50% - 13.99% 749,410 6,012 1.2%
14.00% or greater 2,469,418 38,956 4.0%
No Cap 35,339 355 .1%
---------------- ---------------- ----------------
Total $61,770,142 346,307 100.0%
================ ================ ================
Approximately $5.2 billion of the Company's ARMs (including MBS with
recourse held to maturity) have terms that state that the interest rate may not
fall below a lifetime floor set at the time of origination or assumption. As of
December 31, 2002, $2.0 billion of ARM loans had reached their rate floors
compared with $560 million at December 31, 2001 and $144 million at December 31,
2000. The weighted average floor rate on the loans that had reached their floor
was 5.87% at yearend 2002 compared to 7.15% at yearend 2001 and 8.01% at yearend
2000. Without the floor, the average rate on these loans would have been 5.19%
at December 31, 2002, 5.91% at December 31, 2001, and 7.80% at December 31,
2000.
On most of the Company's ARMs, monthly payments of principal and
interest are adjusted annually with a maximum increase of 7-1/2% of the prior
year's payment. If the contractual payment is not large enough to cover the
interest due on the loan, the customer has the option of paying the portion of
interest not covered by the payment or adding such interest to the balance of
the loan. The portion of interest not covered by the payment that is added to
the balance of the loan is referred to as deferred interest. At five-year
intervals beginning in the sixth or eleventh year, the payment may be adjusted
without limit to amortize the loan fully within the then-remaining term. Within
these five-year periods, 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. If deferred interest reaches these limits,
the Company may increase the loan payment to amortize the loan over its
then-remaining term.
On certain other ARMs, the payment and interest rate may change every
six months, with the maximum rate per change capped at one percent. These ARMs
do not allow negative amortization and, consequently, do not have the 7-1/2%
payment change limitation.
Most of the Company's loans are collateralized by first deeds of
trust on one-to four- family homes. The Company also originates second deeds of
trust in the form of fixed-rate loans. The Company's fixed-rate second mortgage
originations amounted to $160 million, $279 million, and $547 million for the
years ended December 31, 2002, 2001, and 2000, respectively. The outstanding
balance of fixed-rate seconds amounted to $215 million, $362 million, and $491
million at December 31, 2002, 2001 and 2000, respectively.
The Company also establishes equity lines of credit (ELOCs) indexed
to the prime rate which are collateralized by first or second deeds of trust.
The Company established new ELOCs totaling $1.2 billion, $422 million, and $66
million for the years ended December 31, 2002, 2001, and 2000, respectively. The
outstanding balance of ELOCs amounted to $999 million, $303 million, and $40
million at December 31, 2002, 2001, and 2000, respectively. The maximum total
line of credit available on the Company's ELOCs amounted to $1.5 billion, $458
million, and $67 million at December 31, 2002, 2001, and 2000, respectively.
The Company generally lends up to 80% of the appraised value of
residential real property. In some cases, a higher amount is possible through a
first mortgage loan or a combination of a first and a second mortgage loan on
the same property. The second loan may be a fixed-rate loan or an adjustable
rate equity line of credit. For the year ended December 31, 2002, 13% of loans
originated exceeded 80% of the appraised value of the property compared to 13%
for the year ended December 31, 2001 and 19% for the year ended December 31,
2000.
The Company takes steps to reduce the potential credit risk with
respect to loans with a loan to value (LTV) or a combined LTV (the sum of the
first and second loan balances as a percentage of total value) over 80%. Among
other things, the loan amount may not exceed 95% of the appraised value of a
single-family residence at the time of origination. Also, most first mortgage
loans with an LTV over 80% carry mortgage insurance, which reimburses the
Company for losses up to a specified percentage per loan, thereby reducing the
effective LTV to below 80%. Furthermore, the Company sells without recourse a
significant portion of its second mortgage originations. Sales of second
mortgages amounted to $139 million, $184 million, and $198 million in 2002,
2001, and 2000, respectively. In addition, the Company carries pool mortgage
insurance on ELOCs and most fixed-rate seconds not sold. The cumulative losses
covered by this pool mortgage insurance are limited to 10% or 20% of the
original balance of each insured pool.
The following table shows mortgage originations with LTV ratios or
combined LTV ratios greater than 80% for the years ended December 31, 2002,
2001, and 2000.
TABLE 15
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater than 80%
(Dollars in Thousands)
For the Year Ended
December 31
------------------------------------------------------
2002 2001 2000
---------------- --------------- ---------------
First mortgages with loan to value ratios greater than 80%:
With mortgage insurance $ 292,210 $ 225,464 $ 124,066
With no mortgage insurance 70,478 123,387 229,397
---------------- --------------- ---------------
362,688 348,851 353,463
---------------- --------------- ---------------
First and second mortgages with combined loan to value ratios
greater than 80%:
With pool insurance on second mortgages 2,412,821 1,354,754 2,549,049
With no pool insurance 611,044 911,214 924,538
---------------- --------------- ---------------
3,023,865 2,265,968 3,473,587
---------------- --------------- ---------------
Total $3,386,553 $ 2,614,819 $ 3,827,050
================ =============== ===============
The following table shows the outstanding balance of mortgages with
original LTV or combined LTV ratios greater than 80% at December 31, 2002, 2001,
and 2000.
TABLE 16
Balance of Mortgages With Loan to Value and
Combined Loan to Value Ratios Greater than 80%
(Dollars in Thousands)
As of December 31
------------------------------------------------------
2002 2001 2000
---------------- --------------- ---------------
First mortgages with loan to value ratios greater than 80%:
With mortgage insurance $ 553,747 $ 431,498 $ 388,625
With no mortgage insurance 293,851 548,507 823,864
---------------- --------------- --------------
847,598 980,005 1,212,489
---------------- --------------- --------------
First and second mortgages with combined loan to value ratios
greater than 80%:
With pool insurance on second mortgages 3,699,519 2,396,954 2,193,990
With no pool insurance 292,104 454,289 722,703
---------------- --------------- --------------
3,991,623 2,851,243 2,916,693
---------------- --------------- --------------
Total $4,839,221 $ 3,831,248 $ 4,129,182
================ =============== ==============
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 loans having original terms of 30 years. However, the majority of these
loans remain outstanding for a shorter period of time.
To generate income and to provide additional funds for lending and
liquidity, the Company sells first mortgages to FNMA without recourse. The
Company also sells first mortgages to FNMA with recourse, for which a recourse
liability is provided. The Company continues to collect payments on the loans
sold to FNMA as they become due, and otherwise to service the loans. The Company
pays an agreed-upon yield on FNMA'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. The Company also sells
second mortgages without recourse privately on a servicing released basis and to
FNMA on a servicing retained basis. At December 31, 2002, the balance of loans
sold with recourse was $2.9 billion.
In addition to the loan portfolio (including MBS with recourse and
MBS-REMICs), the Company was engaged in servicing approximately $5.4 billion of
loan participations and whole loans for others at December 31, 2002. For each of
the years ended December 31, 2002, 2001, and 2000, fees received for such
servicing activities totaled $16 million, $35 million, and $28 million,
respectively.
Loan repayments consist of monthly loan amortization and loan
payoffs. For the years ended 2002, 2001, and 2000, loan repayments amounted to
$12.3 billion, $9.2 billion, and $4.5 billion, respectively. The increase in
repayments in 2002 was due primarily to an increase in the balance of loans
receivable. The increase in repayments in 2001 was due to an increase in
loanpayoffs.
In addition to interest earned on loans, the Company receives points
and fees for originating loans. The Company also charges fees for loan
prepayments, loan assumptions and modifications, late payments, and other
miscellaneous services.
The following table sets forth information relating to interest rates
and loan points charged for the years indicated.
TABLE 17
Weighted Average Interest Rates and Points on New Loan Originations(a)
2002 2001 2000 1999 1998
---------- ---------- ---------- ----------- ----------
Fully-indexed weighted average interest rate on new real
estate loans originated 5.86% 7.72% 8.24% 7.60% 7.72%
Current weighted average interest rate on new real estate
loans originated(b) 4.32% 5.59% 6.18% 5.97% 6.20%
Weighted average points received on new real estate loans
originated .14% .20% .10% .16% .26%
(a) Excludes loans purchased.
(b) The current rate reflects the introductory rate on new loans being paid by the borrower.
If a borrower fails to make required payments on a loan, the Company
takes steps required under applicable law to foreclose upon the security for the
loan. If a delinquency is not cured, the property is generally acquired by the
Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the
applicable period of redemption by the borrower (which varies from state to
state and by method of foreclosure pursued) has expired, the Company is free to
sell the property. The property may then be sold generally with a loan
conforming to normal loan requirements, or with a "loan to facilitate sale"
which is so designated if the loan involves terms more favorable to the borrower
than those normally permitted.
Various antideficiency and homeowner protective provisions of state
law may limit the remedies available to lenders when a purchase money
residential mortgage borrower is in default. The effect of these provisions, in
most cases, is to limit the Company to foreclosing upon, or otherwise obtaining
ownership of, the property securing the loan after default and to prevent the
Company from recovering from the borrower any deficiency between the amount
realized from the sale of the property and the amount owed by the borrower.
Securitized Loans
Subsequent to March 31, 2001, the effective date of SFAS 140, the
Company securitized $6.0 billion of loans in 2001 and $18.9 billion of loans in
2002. These securities are classified as loans receivable on the Statement of
Financial Position per SFAS 140 and are available to be used as collateral for
borrowings.
Mortgage Servicing Rights
Capitalized mortgage servicing rights (CMSRs) are included in "Other
assets" on the Consolidated Statement of Financial Condition. The following
table shows the changes in capitalized mortgage servicing rights for the years
ended 2002, 2001, and 2000.
TABLE 18
Capitalized Mortgage Servicing Rights
(Dollars in Thousands)
2002 2001 2000
------------ ------------- -------------
Beginning balance of CMSRs $56,056 $28,355 $37,295
New CMSRs from loan sales 34,044 41,587 3,404
Amortization of CMSRs (20,652) (13,886) (12,344)
------------ ------------- -------------
Ending balance of CMSRs $69,448 $56,056 $28,355
============ ============= =============
The estimated amortization of the December 31, 2002 balance for the
five years ending 2007 is $29.4 million (2003), $19.0 million (2004), $12.1
million (2005), $6.9 million (2006), and $2.0 million (2007). Actual results may
vary depending upon the level of the payoffs of the loans currently serviced.
The book value of the Company's CMSRs did not exceed the fair value
at December 31, 2002, 2001, or 2000 and, therefore, no reserve was required to
adjust the servicing rights to their fair value.
Asset Quality
An important measure of the soundness of the Company's loan and MBS
portfolio is its ratio of nonperforming assets (NPAs) and troubled debt
restructured (TDRs) to total assets. Nonperforming assets include nonaccrual
loans (that is, loans, including loans securitized into MBS with recourse and
loans securitized into MBS-REMICs, that are 90 days or more past due) and real
estate acquired through foreclosure. No interest is recognized on non-accrual
loans. The Company's TDRs are made up of loans on which delinquent payments have
been capitalized or on which temporary interest rate reductions have been made,
primarily to customers negatively impacted by adverse economic conditions.
The following table sets forth the components of the Company's NPAs
and TDRs and the various ratios to total assets at December 31.
TABLE 19
Nonperforming Assets and Troubled Debt Restructured
(Dollars in Thousands)
2002 2001 2000 1999 1998
------------- ------------- ------------ ------------- -------------
Non-accrual loans $ 413,123 $382,510 $231,155 $225,409 $262,332
Real estate acquired through foreclosure 11,244 11,101 8,261 10,909 42,646
------------- ------------- ------------ ------------- -------------
Total nonperforming assets $ 424,367 $393,611 $239,416 $236,318 $304,978
============= ============= ============ ============= =============
TDRs, net of interest reserve $ 233 $ 1,505 $ 1,933 $ 10,542 $ 22,774
============= ============= ============ ============= =============
Ratio of NPAs to total assets .62% .67% .43% .56% .79%
============= ============= ============ ============= =============
Ratio of TDRs to total assets .00% .00% .00% .03% .06%
============= ============= ============ ============= =============
Ratio of NPAs and TDRs to total assets .62% .67% .43% .59% .85%
============= ============= ============ ============= =============
NPAs at yearend 2002 and 2001 reflected the normal increase in
delinquencies associated with the aging of the large volume of mortgages
originated during the past two years together with the uncertain U.S. economy.
The lower level of NPAs during 2000 and 1999 reflected the strong economy and
housing market in those years. The Company closely monitors all delinquencies
and takes appropriate steps to protect its interests. The Company mitigates its
credit risk through strict underwriting standards and loan reviews. Interest
foregone on non-accrual loans (loans 90 days or more past due) amounted to $3
million in 2002, $10 million in 2001, and $4 million in 2000. Interest foregone
on TDRs amounted to $6 thousand in 2002 compared to $46 thousand in 2001 and
$181 thousand in 2000.
The tables on the following page show the Company's nonperforming
assets by state at December 31, 2002 and 2001.
TABLE 20
Nonperforming Assets by State
December 31, 2002
(Dollars in Thousands)
Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE)
-------------------------------------------- -----------------------------------
Residential Commercial Residential Commercial NPAs as
Real Estate Real Real Estate Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans
- --------------------- ------------- --------- ---------------- ---------- -------- ----------- --------- ----------
Northern California $ 96,805 $ -0- $ 221 $ 1,300 $ -0- $ -0- $ 98,326 .43%
Southern California 104,059 -0- 309 2,031 -0- -0- 106,399 .58
Florida 35,055 -0- 15 410 -0- -0- 35,480 1.03
Texas 29,143 -0- 442 808 -0- -0- 30,393 1.14
New Jersey 18,256 -0- 622 -0- -0- -0- 18,878 .79
Washington 16,257 433 -0- 1,499 -0- -0- 18,189 .92
Illinois 13,656 1,507 -0- 862 -0- -0- 16,025 .96
Colorado 5,331 64 -0- -0- -0- -0- 5,395 .34
Other(c) 90,948 -0- -0- 4,604 -0- -0- 95,552 1.01
------------- --------- ---------------- ---------- -------- ----------- --------- -----------
Totals $409,510 $2,004 $ 1,609 $11,514 $ -0- $ -0- 424,637 .66
- --------------------- ============= ========= ================ ========== ======== ===========
FRE general valuation allowance (270) (.00)
--------- ----------
Total nonperforming assets $424,367 .66%
========= ===========
(a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans.
(b) The December 31, 2002 balances include loans that were securitized into MBS.
(c) All states included in Other have total loans balances with less than 2% of total loans.
TABLE 21
Nonperforming Assets by State
December 31, 2001
(Dollars in Thousands)
Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE)
-------------------------------------------- ----------------------------------
Residential Commercial Residential Commercial NPAs as
Real Estate Real Real Estate Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans
- --------------------- ------------- --------- ---------------- ---------- -------- ----------- --------- ----------
Northern California $ 71,038 $ 496 $ 103 $ 55 $ -0- $ -0- $ 71,692 .39%
Southern California 131,975 707 611 2,399 -0- -0- 135,692 .81
Florida 32,674 -0- 23 590 -0- -0- 33,287 1.19
Texas 17,713 -0- -0- 1,795 -0- -0- 19,508 .87
New Jersey 16,663 -0- -0- 484 -0- -0- 17,147 .86
Washington 10,427 421 -0- 317 -0- -0- 11,165 .64
Illinois 16,507 -0- -0- 512 215 -0- 17,234 1.13
Colorado 3,445 -0- -0- -0- -0- -0- 3,445 .24
Other(c) 79,396 298 13 5,051 -0- -0- 84,758 1.09
------------- ---------- ---------------- --------- -------- ----------- --------- -----------
Totals $379,838 $1,922 $ 750 $11,203 $ 215 $ -0- 393,928 .72
- --------------------- ============ ========== ================ ========= ======== ===========
FRE general valuation allowance (317) (.00)
--------- -------
Total nonperforming assets $393,611 .72%
========= =======
(a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans.
(b) The December 31, 2001 balances include loans that were securitized into MBS.
(c) All states included in Other have total loan balances with less than 2% of total loans.
A risk profile of loans, including securitized loans, is displayed by
components in the following table as of December 31, 2002:
TABLE 22
Risk Profile of Loans and Securitized Loans
December 31, 2002
(Dollars in Thousands)
Residential
Real Estate Commercial
1 - 4 5+ Real Estate Total
---------------- -------------- ---------------- ---------------
Nonaccural loans $ 409,510 $ 2,004 $ 1,609 $ 413,123
Loans 30 to 89 days past due 752,203 2,398 18 754,619
Loans performing under
bankruptcy protection 172,874 -0- -0- 172,874
Troubled debt restructured 314 -0- -0- 314
Other impaired loans 24 291 3,574 3,889
Performing loans (including MBS)
not otherwise classified 58,058,014 4,665,183 15,378 62,738,575
---------------- -------------- ---------------- ---------------
Total gross loans $ 59,392,939 $ 4,669,876 $ 20,579 64,083,394
================ ============== ================
Net deferred costs 331,985
Allowance for loan losses (281,097)
Undisbursed loan funds (7,554)
Loans on deposits 13,240
---------------
Total loan portfolio and loans securitized into
MBS-REMICs $64,139,968
===============
TABLE 23
Risk Profile of Loans and Securitized Loans
December 31, 2001
(Dollars in Thousands)
Residential
Real Estate Commercial
1 - 4 5+ Real Estate Total
---------------- -------------- ---------------- ---------------
Nonaccural loans $ 379,838 $ 1,922 $ 750 $ 382,510
Loans 30 to 89 days past due 757,252 2,771 -0- 760,023
Loans performing under
bankruptcy protection 167,836 726 132 168,694
Troubled debt restructured -0- 1,582 -0- 1,582
Other impaired loans 371 7,525 3,329 11,225
Performing loans (including MBS)
not otherwise classified 48,843,330 4,500,113 25,105 53,368,548
---------------- -------------- ---------------- ---------------
Total gross loans $ 50,148,627 $ 4,514,639 $ 29,316 54,692,582
================ ============== ================
Net deferred costs 193,924
Allowance for loan losses (261,013)
Undisbursed loan funds (7,171)
Loans on deposits 16,672
---------------
Total loan portfolio and loans securitized into FNMA MBS
and MBS-REMICs $54,634,994
===============
The Company provides specific valuation allowances for losses on
major loans when impaired and a write-down on foreclosed real estate when any
significant and permanent decline in value is identified. The Company also
utilizes a methodology for monitoring and estimating probable loan losses that
is based on both the Company's historical loss experience in the loan portfolio
and factors reflecting current economic conditions. This approach uses a
database that identifies losses on loans and foreclosed real estate from past
years to the present, broken down by year of origination, type of loan, and
geographical area. This process also takes into consideration current trends in
economic growth, unemployment, housing market activity, and home prices for the
nation and individual geographic regions. This approach further considers the
impact of other events such as natural disasters. Based on the analysis of
historical performance, current conditions, and other risks, management
estimates a range of loss allowances by type of loan and risk category to cover
probable losses in the portfolio. One-to-four single-family real estate loans
are evaluated as a group. In addition, periodic reviews are made of major
multi-family and commercial real estate loans and foreclosed real estate. Where
indicated, valuation allowances are established or adjusted. In estimating
probable losses, consideration is given to the estimated sale price, cost of
refurbishing the security property, payment of delinquent taxes, cost of
disposal, and cost of holding the property. Additions to and reductions from the
allowances are reflected in current earnings based upon quarterly reviews of the
portfolio and the review methodology and historical analyses are reconsidered
quarterly.
The table below shows the changes in the allowance for loan losses
for the years indicated.
TABLE 24
Changes in Allowance for Loan Losses
(Dollars in Thousands)
2002 2001 2000 1999 1998
------------ ------------- ------------ ------------ ------------
Beginning allowance for loan losses $ 261,013 $ 236,708 $ 232,134 $ 244,466 $ 233,280
Provision for (recovery of) loan losses
charged to expense 21,170 22,265 9,195 (2,089) 11,260
Loans charged off (1,943) (2,425) (623) -0- (1,387)
Recoveries 857 351 472 1,800 1,313
Net transfer of allowance (to) from recourse
liability -0- 4,114 (4,470) (12,043) -0-
------------ ------------- ------------ ------------ ------------
Ending allowance for loan losses $ 281,097 $ 261,013 $ 236,708 $ 232,134 $ 244,466
============ ============= ============ ============ ============
Ratio of net chargeoffs (recoveries) to average
loans outstanding (including MBS with
recourse and MBS-REMICs) .00% .00% .00% (.01)% .00%
============ ============= ============ ============ ============
Ratio of allowance for loan losses to NPAs 66.2% 66.3% 98.9% 98.2% 80.2%
============ ============= ============ ============ ============
The table below shows the composition of the allowance for loan
losses at December 31.
TABLE 25
Composition of Allowance for Loan Losses
(Dollars in Thousands)
2002 2001 2000 1999 1998
------------ ------------- ------------- ------------ -------------
Real Estate
1 to 4 units
General $263,004 $240,135 $213,507 $200,499 $184,357
Specific -0- -0- -0- 369 363
------------ ------------- ------------- ------------ -------------
263,004 240,135 213,507 200,868 184,720
------------ ------------- ------------- ------------ -------------
5+ units and commercial
General 16,521 18,166 19,165 22,192 41,700
Specific 1,572 2,712 4,036 9,074 18,046
------------ ------------- ------------- ------------ -------------
18,093 20,878 23,201 31,266 59,746
------------ ------------- ------------- ------------ -------------
Total $281,097 $261,013 $236,708 $232,134 $244,466
============ ============= ============= ============ =============
Ratio of allowance for loan losses
to total loans (including MBS with
recourse and MBS-REMICs) .44% .48% .46% .59% .70%
============ ============= ============= ============ =============
The increase in the allowance account during 2002 reflected the
uncertain U.S. economy. The increase in the allowance account during 2001
reflected the increase in NPAs and the recessionary economy. The impact of the
favorable economy and housing environment during 2000 and 1999 is reflected in
the components of the allowance account.
Investment Activities
The Company classifies its investment securities as available for
sale. The Company has no trading securities. Securities available for sale are
reported at fair value. Net unrealized gains and losses are excluded from
earnings and reported net of applicable income taxes in other comprehensive
income and as a separate component of stockholders' equity until realized.
Realized gains or losses on sales of securities are 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. In 2000, the Company had Other Investments,
which were recorded at cost with any discount or premium amortized using a
method that is not materially different from the interest method. The Company
had no Other Investments outstanding at December 31, 2001 or 2002.
The table below sets forth the composition of the Company's
securities available for sale at December 31.
TABLE 26
Composition of Securities Available for Sale
(Dollars in Thousands)
2002 2001 2000
--------------- -------------- --------------
Eurodollar time deposits $ 225,000 $ 200,000 $ -0-
Commercial paper 199,986 -0- -0-
Federal funds 153,838 49,397 -0-
Equity securities 331,861 367,548 387,077
Other 11,492 5,725 5,764
--------------- -------------- --------------
$ 922,177 $ 622,670 $ 392,841
=============== ============== ==============
Included in the balances above are net unrealized gains on investment
securities available for sale of $326 million, $362 million, and $382 million at
December 31, 2002, 2001, and 2000, respectively. The cost basis of the
securities available for sale portfolio at December 31, 2002, 2001, and 2000 was
$596 million, $260 million, and $11 million, respectively, and had weighted
average yields (based on cost) of 1.94%, 2.86%, and 38.31% at December 31, 2002,
2001, and 2000, respectively. The yield in 2000 primarily reflects the effect of
the high yield on the Federal Home Loan Mortgage Corporation stock because of
its low cost basis.
The table below sets forth the composition of the Company's Other
Investments at December 31.
TABLE 27
Composition of Other Investments
(Dollars in Thousands)
2000
--------------
Overnight Investments:
Federal funds $ 318,736
Eurodollar time deposits 40,000
Longer-Term Investments:
Collateralized mortgage obligations 9,819
--------------
$ 368,555
==============
At December 31, 2002 and 2001, the Company had no Other Investments
outstanding. The weighted average yield on the Other Investments portfolio was
6.21% at December 31, 2000. There were no sales of other investments during
2000.
Stockholders' Equity
The Company's stockholders' equity increased by $741 million during
2002 as a result of earnings partially offset by the $173 million cost of the
repurchase of Company stock, decreased market values of equity securities
available for sale, and the payment of quarterly dividends to stockholders. The
Company's stockholders' equity increased by $597 million during 2001 as a result
of net earnings partially offset by the $186 million cost of the repurchase of
Company stock, decreased market values of securities available for sale, and the
payment of quarterly dividends to stockholders. The Company's stockholders'
equity increased by $492 million during 2000 as a result of net earnings and
increased market values of securities available for sale partially offset by the
$109 million cost of the repurchase of Company stock and the payment of
quarterly dividends to stockholders.
Since 1993, through five separate actions, the Company's Board of
Directors has authorized the purchase by the Company of up to 60.6 million
shares of Golden West's common stock. As of December 31, 2002, 49.3 million
shares had been repurchased and retired at a cost of $1.3 billion since October
28, 1993, including 2.7 million shares purchased and retired at a cost of $173
million during 2002. Earnings from WSB are expected to continue to be the major
source of funding for the stock repurchase program. The purchase of Golden West
stock is not intended to have a material impact on the normal liquidity of the
Company.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the Statement of Financial Condition and measure
those instruments at fair value. The Company adopted SFAS 133 as of January 1,
2001 and recorded a loss of $10 million before tax, or $6 million after tax.
Because the Company has decided not to use permitted hedge accounting for the
derivative financial instruments in portfolio on December 31, 2002 and 2001, the
changes in fair value of these instruments are reported in Noninterest Income as
the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net
Earnings.
In September 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 140). This statement replaces previously issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS 125's provisions without reconsideration. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. From time to time, the Company
securitizes loans from its portfolio into MBS, including MBS-REMICs. Under SFAS
140, if the Company retains 100% of the beneficial interests in its MBS
securitizations, it will not have any effective "retained interests" requiring
disclosures under SFAS 140. To date, the Company has not sold any interests
requiring disclosure under SFAS 140. In accordance with SFAS 140, the Company's
securitizations after March 31, 2001 resulted in securities classified as
securitized loans and recorded as loans receivable.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. The adoption of SFAS 142 on January
1, 2002 had no impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and the normal operation
of a long-lived asset, except for certain obligations of lessees. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not expect the adoption of this statement to have a material
impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144) which requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
In addition, this statement resolves implementation issues of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost should be recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized. The Company believes that SFAS 146 will not have a
significant impact on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" (SFAS 147), which provides guidance on the
accounting for the acquisition of a financial institution. This statement was
effective on October 1, 2002. The adoption of SFAS 147 had no impact on the
Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation" (SFAS 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. This statement is effective for interim
periods beginning after December 15, 2002. The Company is still considering the
impact of the adoption of this statement.
Earnings Per Share (EPS)
The Company reported Basic EPS of $6.20 for the year ended December
31, 2002, compared to $5.18 (before the cumulative effect of accounting change)
and $3.44 for the years ended December 31, 2001 and 2000, respectively. The
Company reported Diluted EPS of $6.12 for the year ended December 31, 2002 as
compared to $5.11 (before the cumulative effect of accounting change) and $3.41
for the years ended December 31, 2001 and 2000, respectively.
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, 2002, 2001, and 2000 is contained in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and is incorporated herein by reference.
The gap table and related discussion included in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, gives
information on the repricing characteristics of the Company's interest-earning
assets and interest-bearing liabilities at December 31, 2002, and is
incorporated herein by reference.
The dollar amounts of the Company's income and interest expense
fluctuate depending both on changes in the respective interest rates and on
changes in the respective amounts (volume) of interest-earning assets and
interest-bearing liabilities. The following table sets forth certain information
with respect to the yields earned and rates paid on the Company's
interest-earning assets and interest-bearing liabilities.
TABLE 28
Average Interest-Earning Assets and Interest-Bearing Liabilities
At and for the Years Ended December 31
(Dollars in Thousands)
2002 2001 2000
--------------------------------- ------------------------------- -----------------------------
End of End of End of
Average Average Period Average Average Period Average Average Period
Balances (a) Yield Yield Balances Yield Yield Balances Yield Yield
------------- --------- --------- ------------ -------- --------- ----------- --------- -------
ASSETS
Investment securities $ 3,119,920 1.98% 1.94% $ 3,200,407 4.30% 2.86% $ 2,966,636 6.61% 7.12%
Mortgage-backed securities 8,343,896 5.88 5.64 17,264,807 7.39 6.35 14,040,134 7.64 7.98
Loans receivable(b) 50,840,594 5.69 5.25 36,566,720 7.49 6.39 31,970,102 7.73 8.05
Invest. in capital stock of FHLBs 1,055,015 4.88 3.91 1,084,383 5.10 3.51 788,306 7.40 6.53
----------- --------- ------------ -------- ----------- ---------
Interest-earning assets $63,359,425 5.52% $ 58,116,317 7.24% $49,765,178 7.63%
=========== ========= ============ ======== =========== =========
LIABILITIES
Deposits:
Checking accounts $ 144,490 1.55% 1.23% $ 122,451 2.56% 1.33% $ 134,424 2.19% 2.91%
Savings accounts 19,886,169 2.52 2.35 9,317,765 3.28 2.50 8,376,899 3.82 3.66
Term accounts 17,203,402 3.35 2.99 23,220,480 5.23 3.99 20,622,941 5.68 6.10
------------- --------- --------- ------------ -------- --------- ----------- --------- -------
Total deposits 37,234,061 2.90 2.56 32,660,696 4.66 3.39 29,134,264 5.13 5.52
Advances from FHLBs 18,468,723 2.06 1.68 18,738,987 4.70 2.55 15,087,379 6.37 6.65
Reverse repurchases 122,389 1.49 1.31 917,287 4.59 1.96 1,399,580 6.18 6.56
Other borrowings 4,195,270 2.51 3.26 2,949,185 4.54 6.81 1,462,410 7.08 7.17
------------- --------- ------------ -------- ----------- ---------
Interest-bearing liabilities $60,020,443 2.61% $ 55,266,155 4.67% $47,083,633 5.62%
============= ========= ============ ======== =========== =========
Average net interest spread 2.91% 2.57% 2.01%
========= ======== =========
Net interest income $ 1,930,294 $ 1,631,332 $ 1,151,168
============= ============ ===========
Net yield on average
interest-earning assets 3.05% 2.81% 2.31%
========= ======== =========
(a) Averages are computed using daily balances.
(b) Includes nonaccrual loans (90 days or more past due).
The table below presents the changes for 2002 and 2001 from the
respective preceding year of the interest income and expense associated with
each category of interest-bearing asset and liability as allocated to changes in
volume and changes in rates.
TABLE 29
Volume and Rate Analysis of Interest Income and Interest Expense
Years Ended December 31
(Dollars in Thousands)
Increase/(Decrease) in Income/Expense
Due to Changes in Volume and Rate(a)
--------------------------------------------------------------------
2002 2001 2000 2002 versus 2001 2001 versus 2000
---------- ---------- ---------- --------------------------------- --------------------------------
Income/ Income/ Income/
Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total
---------- ---------- ---------- --------- ---------- ---------- ---------- ----------- ---------
Interest Income
Investments $ 61,750 $ 137,562 $ 196,092 $ (3,377) $(72,435) $ (75,812) $ 17,024 $ (75,554) $(58,530)
Mortgage-backed securities 490,523 1,276,648 1,072,559 (562,848) (223,277) (786,125) 237,170 (33,081) 204,089
Loans receivable 2,893,299 2,740,101 2,469,556 399,189 (245,991) 153,198 341,651 (71,106) 270,545
Invest. in capital stock of
Federal Home Loan Banks 51,462 55,301 58,333 (1,473) (2,366) (3,839) (17,583) 14,551 (3,032)
---------- ---------- ----------
Total interest income 3,497,034 4,209,612 3,796,540
Interest Expense
Deposits
Checking accounts 2,233 3,132 2,946 750 (1,649) (899) (212) 398 186
Savings accounts 501,681 305,532 319,594 246,215 (50,066) 196,149 55,980 (70,042) (14,062)
Term accounts 576,023 1,213,664 1,171,907 (267,142) (370,499) (637,641) 114,997 (73,240) 41,757
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------- ---------
Total deposits 1,079,937 1,522,328 1,494,447 (20,177) (422,214) (442,391) 170,765 (142,884) 27,881
Advances from Federal Home
Loan Banks 379,613 879,842 960,824 (12,512) (487,717) (500,229) 947,060 (1,028,042) (80,982)
Securities sold under
agreements to repurchase 1,826 42,113 86,549 (22,647) (17,640) (40,287) (25,428) (19,008) (44,436)
Other borrowings 105,364 133,997 103,552 489,458 (518,091) (28,633) 47,017 (16,572) 30,445
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------
Total interest expense 1,566,740 2,578,280 2,645,372
---------- ---------- ----------
Net interest income $1,930,294 $1,631,332 $1,151,168 $(602,631) $901,593 $ 298,962 $(561,152) $1,041,316 $480,164
========== ========== ========== ========== ========== ========== ========== =========== =========
Net interest income increase
(decrease) as a percentage
of average earning assets(c) (.95%) 1.42% .47% (.96%) 1.79% .83%
========== ========== ========== ========== =========== =========
(a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior
year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield
of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by
multiplying the difference between the average balance of the current year and the prior year by the difference between the
average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate
changes calculated previously.
(b) The effects of interest rate swap activity have been included in income and expense of the related assets and liabilities.
(c) Includes nonaccrual loans (90 days or more past due).
Competition and Other Matters
The Company experiences strong competition in both attracting
deposits and making real estate loans. Competition for savings deposits has
historically come from other savings institutions, commercial banks, credit
unions, the equities market, mutual funds, issuers of government and corporate
debt securities, securities dealers, insurance companies, and other financial
services providers. The principal methods used by the Company to attract
deposits, in addition to the interest rates and terms offered, include the
offering of a variety of free financial services, the convenience of over 260
office locations, and easy access to WSB's products and services over the
Internet at www.worldsavings.com.
Competition in making real estate loans comes principally from other
savings institutions, mortgage banking companies, and commercial banks. Many of
the nation's largest savings institutions, mortgage banking companies, and
commercial banks are headquartered or have a significant number of branch
offices in the areas in which the Company competes. 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
representatives. In addition, the Company competes indirectly with
government-sponsored enterprises, notably the FNMA and the Federal Home Loan
Mortgage Corporation. Changes in the government's monetary, tax, or housing
financing policies can also affect the ability of lenders to compete profitably.
Thrift Industry
The operations of the thrift industry are significantly influenced by
general economic conditions, by the related monetary and fiscal policies of the
federal government, and by the policies of financial institution regulatory
authorities. Deposit flows and costs of funds are impacted by interest rates on
competing investments and general market rates of interest. Lending and other
investment activities are affected by the demand for mortgage financing and for
consumer and other types of loans, which in turn are affected by the interest
rates at which such financing may be offered and other factors affecting the
supply of housing and the availability of funds.
Regulation
OFFICE OF THRIFT SUPERVISION. Because they are federally chartered
savings institutions, both WSB and WTX are regulated principally by the OTS.
Under various regulations of the OTS, savings institutions are required, among
other things, to pay assessments to the OTS, maintain required regulatory
capital, maintain a satisfactory level of liquid assets, and to comply with
various limitations on loans to one borrower, equity investments, investments in
real estate, and investments in corporate debt securities that are not
investment grade and comply with regulations governing deposits and mortgage
loans.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC administers two
separate deposit insurance funds, the Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF). Each fund insures deposit accounts up
to the maximum amount permitted by law, currently $100,000 per insured
depositor. Initially, the BIF was a deposit insurance fund for commercial banks,
federally chartered savings banks, and some state chartered savings banks and
the SAIF was a deposit insurance fund for most other savings associations.
Through the years, there has developed considerable overlap between the funds.
WSB is a member of the BIF, but a portion of WSB's deposits are insured through
the SAIF. At December 31, 2002, 10% of WSB's deposits were SAIF insured. WTX's
deposits are also insured by the FDIC and WTX is a member of the BIF. FDIC
insurance is required for all federally chartered financial institutions such as
WSB and WTX. FDIC insurance may be terminated by the FDIC under certain
circumstances involving violations of regulations or unsound practices.
During 1996, federal legislation was enacted to capitalize the SAIF
in order to bring it into parity with the BIF. The new law required members to
pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of
1.25% of insured deposits, but lowered thrift deposit insurance premiums for
SAIF members starting in 1997. As a result of this legislation, the Company
incurred a one-time charge of $133 million during 1996. The premiums paid for
the years 1997 through 1999 were adjusted quarterly and premiums paid starting
2000 were adjusted semi-annually. As of December 31, 2002, the premium paid by
WSB and WTX to the FDIC was an annual rate of $.17 per $1,000 of deposits.
FEDERAL RESERVE BOARD. Federal Reserve Board regulations require
financial institutions to maintain noninterest-earning reserves against their
checking accounts. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements. WSB and WTX are currently in compliance with all applicable
Federal Reserve Board reserve requirements.
Savings institutions have authority to borrow from the Federal
Reserve Bank but the Federal Reserve Board requires savings institutions to
exhaust all FHLB sources before borrowing from the relevant Federal Reserve
Bank.
REGULATORY CAPITAL. The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) established capital standards for federally
insured financial institutions, such as WSB and WTX. Under FIRREA, savings
institutions must have tangible capital equal to at least 1.5% of adjusted total
assets, have core capital equal to at least 4% of adjusted total assets, and
have risk-based capital equal to at least 8% of risk-weighted assets.
The OTS and other bank regulatory agencies have established five
capital tiers: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. The rules
provide that a savings association is "well-capitalized" if its leverage ratio
is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its
total risk-based capital ratio is 10% or greater and the institution is not
subject to a capital directive.
As used herein, the total risk-based capital ratio is the ratio of
total capital to risk-weighted assets, the Tier 1 risk-based capital ratio is
the ratio of core capital to risk-weighted assets, and the Tier 1 or leverage
ratio is the ratio of core capital to adjusted total assets, in each case as
calculated in accordance with current OTS capital regulations. As of December
31, 2002, the most recent notification from the OTS categorized WSB and WTX as
"well-capitalized" under the current requirements. There are no conditions or
events that have occurred since that notification that the Company believes
would have an impact on the categorization of WSB or WTX.
At December 31, 2002 and 2001, WSB and WTX had the following
regulatory capital calculated in accordance with FIRREA's capital standards:
TABLE 30
Regulatory Capital Ratios, Minimum Capital Requirements,
and Well-Capitalized Capital Requirements
As of December 31, 2002
(Dollars in Thousands)
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------- -------------------------- ---------------------------
Capital Ratio Capital Ratio Capital Ratio
-------------- ------- ---------------- ------- ---------------- -------
WSB and Subsidiaries
- --------------------
Tangible $5,152,335 7.61% $ 1,015,695 1.50% --- ---
Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00 $ 3,385,650 5.00%
Tier 1 risk-based 5,152,335 13.52 --- --- 2,286,060 6.00
Total risk-based 5,431,860 14.26 3,048,080 8.00 3,810,101 10.00
WTX
Tangible $ 413,885 5.23% $ 118,752 1.50% --- ---
Tier 1 (core or leverage) 413,885 5.23 316,673 4.00 $ 395,841 5.00%
Tier 1 risk-based 413,885 24.05 --- --- 103,277 6.00
Total risk-based 414,277 24.07 137,702 8.00 172,128 10.00
TABLE 31
Regulatory Capital Ratios, Minimum Capital Requirements,
and Well-Capitalized Capital Requirements
As of December 31, 2001
(Dollars in Thousands)
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------- -------------------------- ---------------------------
Capital Ratio Capital Ratio Capital Ratio
-------------- ------- ---------------- ------- ---------------- -------
WSB and Subsidiaries
Tangible $4,480,834 7.71% $ 871,198 1.50% --- ---
Tier 1 (core or leverage) 4,480,834 7.71 2,323,194 4.00 $ 2,903,992 5.00%
Tier 1 risk-based 4,480,834 13.20 --- --- 2,037,158 6.00
Total risk-based 4,836,208 14.24 2,716,210 8.00 3,395,263 10.00
Tangible $ 401,886 5.23% $ 115,211 1.50% --- ---
Tier 1 (core or leverage) 401,886 5.23 307,229 4.00 $ 384,036 5.00%
Tier 1 risk-based 401,886 25.04 --- --- 96,289 6.00
Total risk-based 402,025 25.05 128,385 8.00 160,481 10.00
The table below shows a reconciliation of WSB's equity capital to
regulatory capital at December 31, 2002.
TABLE 32
World Savings Bank, FSB and Subsidiaries
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in Thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------ ------------ ------------ ------------
Common stock $ 300
Paid-in surplus 2,145,764
Retained earnings 3,012,916
Unrealized gain on securities after tax 199,460
------------
Equity capital $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440
============
Non-includable Subsidiary (2,971) (2,971) (2,971) (2,971) (2,971)
Unrealized gain on securities after tax (199,460) (199,460) (199,460) (199,460) (199,460)
Non-qualifying mortgage servicing
rights (3,674) (3,674) (3,674) (3,674) (3,674)
General valuation allowance 279,525
------------ ------------ ------------ ------------ ------------
Regulatory capital $ 5,152,335 $ 5,152,335 $ 5,152,335 $ 5,152,335 $ 5,431,860
============ ============ ============ ============ ============
Total assets $67,967,975
============
Adjusted total assets $67,713,007 $67,713,007 $67,713,007
============ ============ ============
Risk-weighted assets $38,101,006 $38,101,006
============ ============
CAPITAL RATIO - ACTUAL 7.88% 7.61% 7.61% 7.61% 13.52% 14.26%
============ ============ ============ ============ ============ ============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============ ============ ============
The table below shows a reconciliation of WSB's equity capital to
regulatory capital at December 31, 2001.
TABLE 33
World Savings Bank, FSB and Subsidiaries
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in Thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------ ------------ ------------ -------------
Common stock $ 300
Paid-in surplus 2,145,764
Retained earnings 2,334,770
Unrealized gain on securities after tax 221,088
------------
Equity capital $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922
============
Direct investments (2,927)
Unrealized gain on securities after tax (221,088) (221,088) (221,088) (221,088) (221,088)
General valuation allowance 258,301
Qualifying subordinated debt 100,000
------------ ------------ ------------ ------------ -------------
Regulatory capital $ 4,480,834 $ 4,480,834 $ 4,480,834 $ 4,480,834 $ 4,836,208
============ ============ ============ ============ =============
Total assets $58,377,834
============
Adjusted total assets $58,079,843 $58,079,843 $58,079,843
============ ============ ============
Risk-weighted assets $33,952,627 $ 33,952,627
============ =============
CAPITAL RATIO - ACTUAL 8.05% 7.71% 7.71% 7.71% 13.20% 14.24%
============ ============ ============ ============ ============ =============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============ ============ =============
The table below shows a reconciliation of WTX's equity capital to
regulatory capital at December 31, 2002.
TABLE 34
World Savings Bank, FSB (Texas)
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in Thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------ ------------ ------------ ------------
Common stock $ 150
Paid-in surplus 346,575
Retained earnings 67,160
------------
Equity capital $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 413,885
============
General valuation allowance 392
------------ ------------ ------------ ------------ -------------
Regulatory capital $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 414,277
============ ============ ============ ============ =============
Total assets $ 7,916,763
============
Adjusted total assets $ 7,916,829 $ 7,916,829 $ 7,916,829
============ ============ ============
Risk-weighted assets $ 1,721,275 $ 1,721,275
============ =============
CAPITAL RATIO - ACTUAL 5.23% 5.23% 5.23% 5.23% 24.05% 24.07%
============ ============ ============ ============ ============ =============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============= ============ =============
The table below shows a reconciliation of WTX's equity capital to
regulatory capital at December 31, 2001.
TABLE 35
World Savings Bank, FSB (Texas)
Reconciliation of Equity Capital to Regulatory Capital
(Dollars in Thousands)
Core/ Tier 1 Total
Equity Tangible Tangible Leverage Risk-Based Risk-Based
Capital Capital Equity Capital Capital Capital
------------ ------------ ------------ ------------ ------------ ------------
Common stock $ 150
Paid-in surplus 346,575
Retained earnings 55,161
------------
Equity capital $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 401,886
============
General valuation allowance 139
------------ ------------ ------------ ------------ ------------
Regulatory capital $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 402,025
============ ============ ============ ============ ============
Total assets $ 7,680,360
============
Adjusted total assets $ 7,680,727 $ 7,680,727 $ 7,680,727
============ ============ ============
Risk-weighted assets $ 1,604,811 $ 1,604,811
============ ============
CAPITAL RATIO - ACTUAL 5.23% 5.23% 5.23% 5.23% 25.04% 25.05%
============ ============ ============ ============ ============ ============
Regulatory Capital Ratio Requirements:
Well-capitalized, equal to
or greater than 5.00% 6.00% 10.00%
============ ============ ============
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides credit to its
members, which include savings institutions, commercial banks, insurance
companies, credit unions, and certain other entities. Each FHLB has joint and
several liability for the obligations of the eleven other FHLBs in the system.
WSB is a member of the FHLB of San Francisco and WTX is a member of the FHLB of
Dallas. As members, WSB and WTX may obtain advances (borrowings) from, and must
own capital stock of, their respective FHLB. Advances are secured by collateral
pledges and a blanket lien on the assets of the institution. In the event a
member bank, such as WSB or WTX, defaults on an advance, the Federal Home Loan
Bank Act establishes priority of the FHLB's claim over various other claims. WSB
and WTX must own an amount of capital stock that depends generally upon their
outstanding FHLB advances. In the event a FHLB falls below its minimum capital
requirements, the FHLB may require its members to purchase additional capital
stock of the FHLB.
CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS. See Item 5, "MARKET
FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS" on page 41, for a
discussion on certain limitations imposed by the OTS on dividends paid by
savings institutions. During 2002, WSB paid $300 million in upstream dividends
to Golden West.
LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings
institutions 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, 2002, the maximum that WSB could have loaned to one borrower (and
related entities) was $815 million, while the largest amount of loans it had to
one borrower was $81 million. At December 31, 2002, the maximum amount that WTX
could have loaned to one borrower (and related entities) was $62 million, while
the largest amount of loans WTX had outstanding to any one borrower was $4
million.
DEPOSITOR PRIORITIES. In the event of the appointment of a receiver
of a federally chartered savings bank, such as WSB, based upon the failure of
the savings bank to meet certain minimum capital requirements or the existence
of certain other conditions, the Federal Deposit Insurance Act recognizes a
priority in favor of holders of insured withdrawable deposits (including the
FDIC subrogee or transferee) over general creditors (including holders of
certain debt of WSB). Thus, in the event of a liquidation of WSB or a similar
event, claims for insured deposits would have a priority over claims of holders
of certain debt. As of December 31, 2002, WSB had approximately $41 billion of
deposits outstanding.
POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED
DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an
insured depository institution, such as WSB or WTX, the FDIC may disaffirm or
repudiate any contract or lease to which such institution is a party, the
performance of which is determined to be burdensome, and the disaffirmance or
repudiation of which is determined to promote the orderly administration of the
institution's affairs. The FDIC may contend that its power to repudiate
contracts extends to obligations such as the debt of the depository institution,
and at least one court has held that the FDIC can repudiate publicly-traded debt
obligations. The effect of any such repudiation could be to accelerate the
maturity of debt. Such repudiation would likely result in a claim by each holder
of debt against the receivership. The claim may be for principal and interest
accrued through the date of the appointment of the conservator or receiver.
Alternatively, at least one court has held that the claim would be in the amount
of the fair market value of the debt as of the date of the repudiation, which
amount could be more or less than accrued principal and interest. The amount
paid on the claims of the holders of the debt would depend, among other factors,
upon the amount of receivership assets available for the payment of unsecured
claims and the priority of the claim relative to the claims of other unsecured
creditors and depositors, and may be less than the amount owed to the holders of
the debt. See "Depositor Priorities" above. If the maturity of the debt were so
accelerated, and a claim relating to the debt paid by the receivership, the
holders of the debt might not be able, depending upon economic conditions, to
reinvest any amounts paid on the debt at a rate of interest comparable to that
paid on the debt. In addition, although the holders of the debt may have the
right to accelerate the debt in the event of the appointment of a conservator or
receiver of the depository institution, the FDIC as conservator or receiver may
enforce most types of contracts, including debt contracts pursuant to their
terms, notwithstanding any such acceleration provision. The FDIC as conservator
or receiver may also transfer to a new obligor any of the depository
institution's assets and liabilities, without the approval or consent of the
institution's creditors.
In its resolutions of the problems of an insured depository
institution in default or in danger of default, the FDIC is generally obligated
to satisfy its obligations to insured depositors at the least possible cost to
the deposit insurance fund. In addition, the FDIC may not take any action that
would have the effect of increasing the losses to the relevant deposit insurance
fund by protecting depositors for more than the insured portion of deposits
(generally $100,000) or by protecting creditors other than depositors. Existing
law authorizes the FDIC to settle all uninsured and unsecured claims in the
insolvency of an insured institution by making a final payment after the
declaration of insolvency. Such a payment would constitute full payment and
disposition of the FDIC's obligations to claimants. Existing law provides that
the rate of such final payment is to be a percentage reflecting the FDIC's
receivership recovery experience.
SAVINGS AND LOAN HOLDING COMPANY LAW. Golden West is a "savings and
loan holding company" under the Home Owners' Loan Act (HOLA). As such, it
has registered with the OTS and is subject to OTS regulation, and OTS
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 WSB's parent company, Golden West is considered an "affiliate" of
WSB for regulatory purposes. Savings banks are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System set forth in
Sections 23A, 23B, and 22(h) of the Federal Reserve Act, and with respect to
savings banks, as well as additional limitations set forth in current law and as
adopted by the OTS. In addition, current law generally prohibits a savings
institution from lending or otherwise extending credit to an affiliate, other
than the institution's subsidiaries, unless the affiliate is engaged only in
activities that the Federal Reserve Board has determined to be permissible for
bank or financial services holding companies and that the OTS has not
disapproved. OTS regulations provide guidance in determining affiliates of a
savings institution and in calculating compliance with the quantitative
limitations on transactions with affiliates.
QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender (QTL) test. Under the QTL test, a savings institution is required
to maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed and related securities) in at least nine months out of
each 12 month period. A savings institution that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. At December 31,
2002, WSB and WTX were in compliance with the QTL test.
TAXATION. The Company files consolidated federal income tax returns
with its subsidiaries. The provision for federal and state taxes on income is
based on taxes currently payable and taxes expected to be payable in the future
as a result of events that have been recognized in the financial statements or
tax returns.
The Company utilizes the accrual method of accounting for income tax
purposes and for preparing its published financial statements. Taxes as a
percentage of earnings were 38.4% and 38.5% for the years ended 2002 and 2001,
respectively. Included in taxes on income for 2002 was a non-recurring after-tax
benefit of $2.7 million due to a change in the California tax law regarding
reserves for loan losses.
Employee Relations
The Company had a total of 6,839 full-time and 1,002 permanent
part-time employees at December 31, 2002. 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.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name and Age Position
- ------------ --------
Herbert M. Sandler, 71 Chairman of the Board and Chief Executive Officer
Marion O. Sandler, 72 Chairman of the Board and Chief Executive Officer
James T. Judd, 64 Senior Executive Vice President
Russell W. Kettell, 59 President and Chief Financial Officer(a)
Georganne C. Proctor, 46 Executive Vice President(b)
Michael Roster, 57 Executive Vice President, General Counsel, and
Secretary(c)
Carl M. Andersen, 42 Group Senior Vice President and Tax Director(d)
Roberta A. Conger, 55 Group Senior Vice President and Treasurer(e)
William C. Nunan, 51 Group Senior Vice President and Chief Accounting Officer(f)
Each of the above persons holds the same position with WSB with the
exceptions of James T. Judd who is President, Chief Operating Officer, and
Director of WSB, and Russell W. Kettell who is a Senior Executive Vice
President, Chief Financial Officer, and Director of WSB. Each executive officer
has had the principal occupations shown for the prior five years except as
follows:
(a) Russell W. Kettell was elected Chief Financial Officer in December 1999
and has served as President of the Company since February 1993. Prior
thereto, Mr. Kettell served as Senior Executive Vice President since
1989, Executive Vice President since 1984, Senior Vice President since
1980, and Treasurer from 1976 until 1984 and from 1995 until 2002.
(b) Georganne C. Proctor was elected Executive Vice President in February
2003. Prior thereto, Ms. Proctor was Chief Financial Officer for the
Bechtel Group in San Francisco which provides engineering and
construction services.
(c) Michael Roster was elected Executive Vice President, General Counsel and
Secretary in February 2000. Prior thereto, Mr. Roster was General Counsel
at Stanford University.
(d) Carl M. Andersen was elected Tax Director in 2002, Group Senior Vice
President in 1999, and Senior Vice President of the Company in 1997. He
served as Senior Vice President with WSB since 1996. Prior thereto, he
served as Vice President of WSB since 1990.
(e) Roberta A. Conger was elected Treasurer in July 2002 and Group Senior
Vice President in February 2003. She served as Group Senior Vice
President with WSB since 1996 and has served as Treasurer of WSB since
1994.
(f) William C. Nunan was elected Chief Accounting Officer of the Company in
December 1999, was elected Group Senior Vice President in 1999, and was
elected Senior Vice President of the Company in 1997. He served as Senior
Vice President with WSB and WTX since 1995. Prior thereto, he served as
Vice President of WSB since 1985.
ITEM 2. DESCRIPTION OF PROPERTY
Properties owned by the Company for the operation of its business are
located in Arizona, California, Colorado, Florida, Illinois, Kansas, Nevada, New
Jersey, and Texas. The executive offices of the Company are located at 1901
Harrison Street, Oakland, California, in leased facilities.
The Company owns a 545,000 square-foot office complex on a 111-acre
site in San Antonio, Texas. This complex houses the loan service, savings
operations, and information systems departments, and various other back-office
functions.
The Company owns 233 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 H to
the Financial Statements included in Item 14.
The Company continuously evaluates the suitability and adequacy of
the Company's offices and has a program of relocating or remodeling them as
necessary to maintain efficient and attractive facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to actions arising in
the ordinary course of business, none of which, in the opinion of management, is
material to the Company's consolidated financial condition or results of
operations, or is otherwise required to be discussed pursuant to Item 103 of
Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the quarter ended December 31, 2002
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Prices of Stock
Golden West's stock is listed on the New York Stock Exchange and the
Pacific Exchange and options on Golden West are traded on the Chicago Board
Options Exchange as well as the Pacific Exchange under the ticker symbol GDW.
The quarterly price ranges for the Company's common stock during 2002 and 2001
were as follows:
TABLE 36
Common Stock Price Range
2002 2001
------------------------- --------------------------
First Quarter $58.04 - $65.80 $51.00 - $65.94
Second Quarter $63.17 - $70.25 $57.96 - $68.95
Third Quarter $58.15 - $68.95 $52.81 - $70.00
Fourth Quarter $57.91 - $72.98 $47.15 - $58.85
Per Share Cash Dividends Data
Golden West's cash dividends paid per share for 2002 and 2001 were as
follows:
TABLE 37
Cash Dividends Per Share
2002 2001
------------ -----------
First Quarter $ .0725 $ .0625
Second Quarter $ .0725 $ .0625
Third Quarter $ .0725 $ .0625
Fourth Quarter $ .0850 $ .0725
The principal sources of funds for the payment by Golden West of cash
dividends are cash dividends paid to it by subsidiaries.
As a federal savings bank, WSB must file a notice with the OTS prior to
making capital distributions and, in some cases, may need to file applications.
The OTS may disapprove a notice or deny an application, in whole or in part, if
the OTS finds that: (a) the insured subsidiary would be undercapitalized or
worse following the proposed capital distribution; (b) the proposed capital
distribution raises safety and soundness concerns; or (c) the proposed capital
distribution violates a prohibition contained in any statute, regulation, or
agreement with the OTS or a condition imposed upon the insured subsidiary in an
OTS approved application or notice. In general, WSB may, with prior notice to
the OTS, make capital distributions during a calendar year in an amount equal to
that year's net income plus retained net income for the preceding two years, as
long as immediately after the distributions it remains at least adequately
capitalized. Capital distributions in excess of such amount, or which would
cause WSB no longer to be adequately capitalized, require specific OTS approval.
(See "CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS" on page 36.)
At December 31, 2002, $3.0 billion of the WSB'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 20, 2003, 152,934,708 shares of
Golden West's Common Stock were outstanding and were held by 1,172 stockholders
of record. At the close of business on March 20, 2003, the Company's common
stock price was $73.00.
The transfer agent and registrar for the Golden West common stock is
Mellon Investor Services, L.L.C., San Francisco, California 94101.
Equity Compensation Plan Information
The Company's 1996 Stock Option Plan authorizes the granting of
options to key employees for the purchase of up to 21 million shares of the
Company's common stock. The plan permits the issuance of either non-qualified
stock options or incentive stock options. Under the terms of the plan, incentive
stock options are granted at fair market value as of the date of grant and are
exercisable any time after two to five years and prior to ten years from the
grant date. Non-qualified options are granted at fair market value as of the
date of grant and are exercisable after two to five years and prior to ten years
and one month from the grant date.
The following table sets forth information about the Company's stock
option plan at December 31, 2002:
TABLE 38
Golden West Financial Corporation
1996 Stock Option Plan
As of December 31, 2002
Number of Number of
Securities to be Weighted Securities Remaining
Issued Upon Average Available for
Exercise of Exercise Price Future Issuance
Outstanding of Outstanding Under Stock
Options Options Option Plan
---------------------- -------------------- -----------------------------
Equity Compensation Plan Approved by
Stockholders:
1996 Stock Option Plan 5,598,799 $29.84 3,147,200
====================== ==================== =============================
The Company does not have any equity compensation plans that have not
been approved by stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
other data for Golden West for the years indicated. This information is
qualified in its entirety by the more detailed financial information set forth
in the financial statements and notes thereto appearing in documents
incorporated herein by reference.
TABLE 39
Five Year Consolidated Summary of Operations
(Dollars in Thousands Except Per Share Figures)
Year Ended December 31
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- -------------- -------------- -------------
Interest Income:
Interest on loans $2,893,299 $2,740,101 $2,469,556 $1,851,790 $2,254,427
Interest on mortgage-backed securities 490,523 1,276,648 1,072,559 769,314 498,319
Interest on dividends and investments 113,212 192,863 254,425 204,741 209,807
------------- ------------- -------------- -------------- -------------
3,497,034 4,209,612 3,796,540 2,825,845 2,962,553
Interest Expense:
Interest on deposits 1,079,937 1,522,328 1,494,447 1,250,364 1,285,343
Interest on advances and other borrowings 486,803 1,055,952 1,150,925 571,996 709,888
------------- ------------- -------------- -------------- -------------
1,566,740 2,578,280 2,645,372 1,822,360 1,995,231
------------- ------------- -------------- -------------- -------------
Net interest income 1,930,294 1,631,332 1,151,168 1,003,485 967,322
Provision for (recovery of) loan losses 21,170 22,265 9,195 (2,089) 11,260
------------- ------------- -------------- -------------- -------------
Net interest income after provision for
(recovery of) loan losses 1,909,124 1,609,067 1,141,973 1,005,574 956,062
Noninterest Income:
Fees 139,416 150,675 78,016 65,456 62,820
Gain on the sale of securities,
MBS and loans 45,143 42,513 10,515 22,764 38,784
Change in fair value of derivatives 7,610 (9,738) -0- -0- -0-
Other 54,831 53,289 72,289 55,082 36,009
------------- ------------- -------------- -------------- -------------
247,000 236,739 160,820 143,302 137,613
Noninterest Expense
General and administrative expenses
Personnel 355,543 298,435 243,787 215,483 196,153
Occupancy 88,387 80,908 72,355 67,015 62,549
Deposit insurance 6,062 5,712 5,699 5,358 5,925
Advertising 16,656 15,114 8,450 11,928 10,412
Other 134,846 113,633 94,556 86,363 79,468
------------- ------------- -------------- -------------- -------------
601,494 513,802 424,847 386,147 354,507
------------- ------------- -------------- -------------- -------------
Earnings before taxes on income 1,554,630 1,332,004 877,946 762,729 739,168
Taxes on income 596,351 513,181 332,155 282,750 292,077
------------- ------------- -------------- -------------- -------------
Earnings before cumulative effect of accounting
change and extraordinary item (a) 958,279 818,823 545,791 479,979 447,091
Cumulative effect of accounting change,
net of tax -0- (6,018) -0- -0- -0-
Extraordinary item, net of tax -0- -0- -0- -0- (12,511)
------------- ------------- -------------- -------------- -------------
Net earnings $ 958,279 $ 812,805 $ 545,791 $ 479,979 $ 434,580
============= ============= ============== ============== =============
Basic earnings per share before cumulative
effect of accounting change and
extraordinary item (a) $ 6.20 $ 5.18 $ 3.44 $ 2.90 $ 2.60
Cumulative effect of accounting change,
net of tax .00 (.04) .00 .00 .00
Extraordinary item, net of tax .00 .00 .00 .00 (.07)
------------- ------------- -------------- -------------- -------------
Basic earnings per share $ 6.20 $ 5.14 $ 3.44 $ 2.90 $ 2.53
============= ============= ============== ============== =============
Diluted earnings per share before cumulative
effect of accounting change and
extraordinary item (a) $ 6.12 $ 5.11 $ 3.41 $ 2.87 $ 2.58
Cumulative effect of accounting change,
net of tax .00 (.04) .00 .00 .00
Extraordinary item, net of tax .00 .00 .00 .00 (.07)
------------- ------------- -------------- -------------- -------------
Diluted earnings per share $ 6.12 $ 5.07 $ 3.41 $ 2.87 $ 2.51
============= ============= ============== ============== =============
(a) On January 1, 2001, the Company adopted SFAS 133 which resulted in a one-time charge of $6 million. In 1998, the Company
incurred a $13 million one-time charge due to the prepayment of FHLB advances.
TABLE 40
Five Year Summary of Financial Condition
(Dollars in Thousands)
At December 31
------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ---------------- ---------------- --------------- ---------------
Assets $ 68,405,828 $ 58,586,271 $ 55,703,969 $ 42,142,205 $ 38,468,729
Cash, securities available for sale,
and other investments 1,241,091 961,729 1,111,826 1,120,393 1,050,265
Mortgage-backed securities 6,067,458 14,078,172 18,580,490 11,661,621 10,031,965
Loans receivable 58,268,899 41,065,375 33,762,643 27,919,817 25,721,288
--------------- ---------------- ---------------- --------------- ---------------
Total loan portfolio 64,336,357 55,143,547 52,343,133 39,581,438 35,753,253
Deposits 41,038,797 34,472,585 30,047,919 27,714,910 26,219,095
Advances from FHLBs 18,635,099 18,037,509 19,731,797 8,915,218 6,163,472
Securities sold under agreements to
repurchase and other borrowings 1,732,224 223,523 857,274 1,045,176 1,252,469
Senior debt 989,690 198,215 -0- -0- -0-
Subordinated debt 199,867 599,511 598,791 812,950 911,753
Stockholders' equity 5,025,250 4,284,190 3,687,287 3,194,854 3,124,318
TABLE 41
Five Year Selected Other Data
(Dollars in Thousands Except Per Share Figures)
Year Ended December 31
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- -------------
New real estate loans originated $26,682,890 $20,763,237 $19,782,687 $12,672,211 $8,187,934
Fully indexed rate on new real estate loans 5.86% 7.72% 8.24% 7.60% 7.72%
Current rate on new real estate loans(a) 4.32% 5.59% 6.18% 5.97% 6.20%
New adjustable rate mortgages as a percentage 91.61% 83.96% 96.27% 91.00% 82.26%
of new real estate loans originated
Deposits increase ($) $ 6,566,212 $ 4,424,666 $ 2,333,009 $ 1,495,815 $2,109,378
Deposits increase (%) 19.0% 14.7% 8.4% 5.7% 8.7%
Net earnings/average net worth (ROE) 20.62% 20.23%(b) 16.21% 15.19% 14.94%(c)
Net earnings/average assets (ROA) 1.53% 1.42%(b) 1.12% 1.22% 1.11%(c)
General and administrative expense (G&A) to:
Net interest income plus other income 27.63% 27.50% 32.38% 33.67% 32.08%
Total revenues 16.07% 11.56% 10.74% 13.01% 11.44%(c)
Average assets .96% .90% .87% .98% .90%
Ratio of earnings to fixed charges:(d)
Including interest on deposits 1.99x 1.51x 1.33x 1.42x 1.37x
Excluding interest on deposits 4.13x 2.25x 1.76x 2.32x 2.03x
Yield on loan portfolio 5.25% 6.39% 8.05% 7.16% 7.36%
Yield on MBS 5.64% 6.35% 7.98% 7.17% 7.20%
Yield on investments 1.94% 2.86% 7.12% 5.88% 5.53%
Yield on earning assets 5.25% 6.36% 8.02% 7.15% 7.30%
Cost of deposits 2.56% 3.39% 5.52% 4.69% 4.67%
Cost of borrowings 1.85% 2.72% 6.66% 5.77% 5.87%
Cost of funds 2.32% 3.15% 5.99% 5.00% 4.96%
Spread 2.93% 3.21% 2.03% 2.15% 2.34%
Nonperforming assets/total assets(e) .62% .67% .43% .56% .79%
Stockholders' equity/total assets 7.35% 7.31% 6.62% 7.58% 8.12%
Average stockholders' equity/average assets 7.41% 7.01% 6.89% 8.04% 7.41%
World Savings Bank, FSB (WSB)
regulatory capital ratios:(f)
Tangible capital 7.61% 7.71% 6.60% 6.64% 6.77%
Tier 1 7.61% 7.71% 6.60% 6.64% 6.77%
Total risk-based 14.26% 14.24% 12.44% 11.95% 12.93%
World Savings Bank, FSB (Texas) (WTX)
regulatory capital ratios:(f)
Tangible capital 5.23% 5.23% 5.34% --- ---
Tier 1 5.23% 5.23% 5.34% --- ---
Total risk-based 24.07% 25.05% 26.69% --- ---
Number of savings branch offices 268 265 253 249 248
Cash dividends per share $ .303 $ .26 $ .22 $ .193 $ .172
Dividend payout ratio 4.88% 5.02%(b) 6.40% 6.64% 6.79%(c)
(a) The current rate reflects the actual rate being paid by the borrower at time of origination.
(b) The ratios for the year ended December 31, 2001 include a pre-tax charge of $10 million or $.04 per basic and diluted earnings
per share, after tax, associated with the adoption of SFAS 133 on January 1, 2001. Excluding this cumulative effect of an
accounting change, ROE was 20.38%, ROA was 1.43%, and the dividend payout ratio was 5.06%.
(c) The ratios for the year ended December 31, 1998 include an extraordinary charge of $21 million before tax, or $.07 per basic
and diluted earnings per share, net of tax benefit, associated with the prepayment of FHLB advances and include a nonrecurring
gain of $13 million before tax, or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock
purchased at a discount was redeemed by the issuer at par. Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%,
and the dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to total revenues was 11.48%.
(d) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting,
extraordinary item, and fixed charges. Fixed charges include interest expense and amortization of debt expense.
(e) NPAs includes nonaccrual loans (loans that are 90 days or more past due) and foreclosed real estate.
(f) For regulatory purposes, the minimum capital requirement for tangible capital is 1.5%. The requirements to be considered
"well capitalized" are 5.0% and 10.0% for tier 1 (core) and total risk-based, respectively. In years prior to 2000, WTX was not
regulated by the OTS and, therefore, these ratios were not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The table below sets forth Golden West Financial Corporation's
(Golden West or Company) net earnings for the three years ended December 31,
2002, 2001, and 2000.
TABLE 42
Golden West Net Earnings, Basic Earnings Per Share,
and Diluted Earnings Per Share
2000 - 2002
(Dollars in Thousands Except Per Share Figures)
For the Year Ended December 31
------------------------------------------
2002 2001 2000
----------- ----------- -----------
Earnings before cumulative effect of accounting change $ 958,279 $ 818,823 $ 545,791
Cumulative effect of accounting change, net of tax(a) -0- (6,018) -0-
----------- ----------- -----------
Net Earnings $ 958,279 $ 812,805 $ 545,791
=========== =========== ===========
Basic earnings per share before cumulative effect of
accounting change $ 6.20 $ 5.18 $ 3.44
Cumulative effect of accounting change, net of tax(a) .00 (.04) .00
----------- ----------- -----------
Basic earnings per share $ 6.20 $ 5.14 $ 3.44
=========== =========== ===========
Diluted earnings per share before cumulative effect of
accounting change $ 6.12 $ 5.11 $ 3.41
Cumulative effect of accounting change, net of tax(a) .00 (.04) .00
----------- ----------- -----------
Diluted earnings per share $ 6.12 $ 5.07 $ 3.41
=========== =========== ===========
(a) On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which resulted in a one-time pre-tax charge of $10 million, or $.04 per share,
after tax. See "New Accounting Pronouncements" section on page 62.
Golden West's principal subsidiary is World Savings Bank, FSB (WSB).
WSB is headquartered in Oakland, California. At December 31, 2002, WSB had $68
billion in assets. At December 31, 2002, WSB had a savings network of 121
branches in California, 46 in Florida, 36 in Colorado, 23 in Texas, 15 in
Arizona, 11 in New Jersey, eight in Kansas, six in Illinois, and two in Nevada.
By virtue of being federally chartered, WSB can originate mortgages anywhere in
the nation, even though it may not be authorized to conduct deposit gathering
business in those jurisdictions. In addition to the states with savings
operations referenced above, WSB had lending operations in Connecticut,
Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming.
The savings accounts offered by WSB are insured by the Federal
Deposit Insurance Corporation (FDIC). The FDIC administers two separate deposit
insurance funds, the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF). The BIF is a deposit insurance fund for commercial banks,
federally chartered savings banks, and some state chartered savings banks. The
SAIF is a deposit insurance fund for most savings associations. WSB is a member
of the BIF, but at December 31, 2002, approximately 10% of WSB's deposits were
insured through the SAIF.
WSB has a subsidiary, World Savings Bank, FSB (Texas) (WTX), that is
also a federally chartered savings bank. WTX's deposits are also insured by the
FDIC and WTX is a member of the BIF.
In addition to WSB, Golden West has two other significant
subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two
companies were formed to provide services to Atlas Assets, Inc., an open-ended
registered investment company sponsored by the Company. Atlas Advisers, Inc., is
an investment adviser to the Atlas family of mutual funds and Atlas Securities,
Inc., is the distributor of the Atlas mutual funds and annuities.
The following narrative focuses on the significant financial
statement changes that have taken place at Golden West over the past three years
and includes a discussion of the Company's financial condition, results of
operations, and liquidity and capital resources.
Financial Condition
The following table summarizes the Company's major asset, liability,
and equity components in percentage terms at yearends 2002, 2001, 2000, and
1999.
TABLE 43
Asset, Liability, and Equity Components as
Percentages of the Total Balance Sheet
1999 - 2002
December 31
-----------------------------------------------------
2002 2001 2000 1999
---------- ---------- ----------- ----------
Assets:
Cash and investments 1.8% 1.6% 2.0% 2.7%
Loans receivable including
mortgage-backed securities 94.1 94.2 94.0 93.9
Other assets 4.1 4.2 4.0 3.4
---------- ---------- ----------- ----------
100.0% 100.0% 100.0% 100.0%
========== ========== =========== ==========
Liabilities and Stockholders' Equity:
Deposits 60.1% 58.9% 54.0% 65.8%
FHLB advances 27.2 30.8 35.4 21.2
Securities sold under
agreements to repurchase .8 .4 1.5 2.5
Bank notes 1.8 .0 .0 .0
Senior debt 1.4 .3 .0 .0
Subordinated notes .3 1.0 1.1 1.9
Other liabilities 1.1 1.3 1.4 1.0
Stockholders' equity 7.3 7.3 6.6 7.6
---------- ---------- ----------- ----------
100.0% 100.0% 100.0% 100.0%
========== ========== =========== ==========
As the table shows, deposits represent the majority of the Company's
liabilities. The largest asset component is loans receivable including
mortgage-backed securities (MBS), which consists primarily of long-term
mortgages. The Company emphasizes adjustable rate mortgages (ARMs) - loans with
interest rates that change periodically in accordance with movements in
specified indexes. Almost all of the Company's ARMs have rates that change
monthly and are tied to one of the following three indexes:
1. The Eleventh District Cost of Funds Index (COFI), which is equal to
the monthly average cost of deposits and borrowings of savings
institution members of the Federal Home Loan Bank System's Eleventh
District, which is composed of California, Arizona, and Nevada.
2. The Golden West Cost of Savings Index (COSI), which is equal to the
monthend weighted average rate paid on the Company's deposits.
3. The Certificate of Deposit Index (CODI), which is equal to the
12-month rolling average of the monthly average of the three-month
certificate of deposit rate as published in the Federal Reserve H-15
Statistical Report.
Asset/Liability Management
The Company's earnings depend primarily on its net interest income,
which is the difference between the amounts it receives from interest earned on
loans, MBS, and investments and the amounts it pays in interest on deposits and
borrowings. Therefore, the Company's profitability is largely dependent upon its
ability to manage interest rate risk. The Company manages interest rate risk by
managing the repricing of interest-rate sensitive assets and liabilities. The
Company enters into interest rate swaps as part of its interest rate risk
management strategy (see interest rate swaps on page 66). Such instruments are
entered into primarily to alter the repricing characteristics of designated
assets and liabilities.
The Company is subject to interest-rate risk to the extent its assets
and liabilities reprice at different times and by different amounts. The
disparity between the repricing (maturity, prepayment, or interest rate change)
of mortgage loans, including MBS, and investments and the repricing of deposits
and borrowings can have a material impact on the Company's results of
operations. The difference between the repricing characteristics of assets and
liabilities is commonly referred to as the "gap."
The Gap table on the following page shows that, as of December 31,
2002, the Company's assets reprice faster than its liabilities. If all repricing
assets and liabilities responded equally to changes in the interest rate
environment, then gap analysis would suggest that Golden West's earnings would
rise when interest rates increase and would fall when interest rates decrease.
However, the changes in Golden West's earnings are also affected by the built-in
reporting and repricing lags inherent in the adjustable rate mortgage indexes
used by the Company. Reporting lags occur because of the time it takes to gather
the data needed to compute the indexes. Repricing lags occur because it may take
a period of time before changes in interest rates are significantly reflected in
the indexes. COFI, which is the index Golden West uses to determine the rate on
$25 billion of its existing adjustable rate mortgages, has a two-month reporting
lag. As a result, the COFI in effect in any month actually reflects the Eleventh
District's cost of funds at the level it was two months prior. The COFI
repricing lag occurs because COFI is based on a portfolio of accounts, not all
of which reprice immediately. Many of these liabilities, including certificates
of deposit, do not reprice each month and, when they do reprice, may not reflect
the full change in market rates. Some liabilities, such as low-rate checking or
passbook savings accounts, may reprice by only small amounts. Still other
liabilities, such as noninterest bearing deposits, do not reprice at all.
Therefore, COFI does not fully reflect a change in market interest rates. COSI
has a one-month reporting lag. COSI also has a repricing lag, because the rates
paid on many of the deposits that make up COSI do not respond immediately or
fully to a change in market interest rates. CODI has a one-month reporting lag.
CODI also has a repricing lag, because the index is a 12-month rolling average
and consequently trails changes in short-term market interest rates. Partially
offsetting the index reporting and repricing lags are similar lags on a portion
of the Company's liabilities.
TABLE 44
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratios
As of December 31, 2002
(Dollars in Millions)
Projected Repricing(a)
--------------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
----------- ----------- ----------- ----------- -----------
Interest-Earning Assets:
Investments $ 920 $ 2 $ -0- $ -0- $ 922
MBS:
Adjustable rate 5,540 -0- -0- -0- 5,540
Fixed-rate 54 125 264 85 528
Loans receivable:
Adjustable rate 54,177 1,005 711 -0- 55,893
Fixed-rate 195 427 873 624 2,119
Other(b) 1,347 -0- -0- -0- 1,347
Impact of swaps 221 (117) (104) -0- -0-
----------- ----------- ----------- ----------- -----------
Total $ 62,454 $ 1,442 $ 1,744 $ 709 $ 66,349
=========== =========== =========== =========== ===========
Interest-Bearing Liabilities:
Deposits(c) $ 31,429 $ 5,743 $ 3,855 $ 12 $ 41,039
FHLB advances 18,164 -0- 3 468 18,635
Other borrowings 1,733 200 496 493 2,922
----------- ----------- ----------- ----------- -----------
Total $ 51,326 $ 5,943 $ 4,354 $ 973 $ 62,596
=========== =========== =========== =========== ===========
Repricing gap $ 11,128 $(4,501) $ (2,610) $ (264) $ 3,753
=========== =========== =========== =========== ===========
Cumulative gap $ 11,128 $ 6,627 $ 4,017 $ 3,753
=========== =========== =========== ===========
Cumulative gap as a percentage of
total assets 16.3% 9.7% 5.9%
=========== =========== ===========
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of
principal based on current rates of prepayment.
(b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock.
(c) Deposits with no maturity date, such as checking, passbook, and money market deposit accounts, are assigned zero months.
In addition to the index lags, other elements of ARM loans also have
an impact on earnings. These elements are introductory fixed rates on new ARM
loans, the interest rate adjustment frequency of ARM loans, interest rate caps
or limits on individual rate changes, and interest rate floors. When the
interest rate environment changes, the index lags and ARM structural features
cause assets to reprice more slowly than liabilities, enhancing earnings when
rates are falling and holding down earnings when rates rise.
The table on the following page reflects the Company's expected cash
flows and applicable yields on the balances of its interest sensitive assets and
liabilities as of December 31, 2002, and takes into consideration expected
prepayments of the Company's long-term assets (primarily MBS and loans
receivable) and the estimated current fair value.
TABLE 45
Summary of Market Risk on Financial Instruments and Payments Due by Period
As of December 31, 2002
(Dollars in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date as of December 31, 2002
--------------------------------------------------------------------------------------------
2008 & Total Fair
2003 2004 2005 2006 2007 Thereafter Balance Value
-------- -------- --------- --------- ---------- ----------- --------- ------
Interest-Sensitive Assets:
Investments $ 922 $ -0- $ -0- $ -0- $ -0- $ -0- $ 922 $ 922
Weighted average interest rate 1.94% .00% .00% .00% .00% .00% 1.94%
MBS
Fixed-Rate $ 103 $ 84 $ 67 $ 54 $ 44 $ 176 $ 528 $ 549
Weighted average interest rate 8.07% 8.03% 8.01% 7.99% 7.96% 7.87% 7.97%
Variable Rate $ 1,191 $ 957 $ 758 $ 589 $ 457 $ 1,588 $ 5,540 $ 5,663
Weighted average interest rate 5.48% 5.48% 5.48% 5.48% 5.48% 5.48% 5.48%
Loans Receivable
Fixed-Rate $ 711 $ 279 $ 216 $ 165 $ 128 $ 540 $ 2,039 $ 2,087
Weighted average interest rate 7.64% 8.28% 8.05% 7.88% 7.74% 7.39% 7.72%
Variable Rate $11,928 $ 9,382 $ 7,799 $ 6,281 $ 4,815 $16,025 $56,230 $56,273
Weighted average interest rate(a) 5.48% 5.40% 5.40% 5.40% 5.40% 5.42% 5.36%
-------- -------- -------- --------- ---------- ----------- --------- --------
Total $14,855 $10,702 $ 8,840 $ 7,089 $ 5,444 $18,329 $65,259 $65,494
======== ======== ======== ========= ========== =========== ========= ========
Interest-Sensitive Liabilities:
Deposits(b) $37,172 $ 1,495 $ 992 $ 256 $ 1,112 $ 12 $41,039 $41,273
Weighted average interest rate 2.39% 3.51% 4.62% 4.75% 4.72% 4.69% 2.56%
FHLB Advances
Fixed-Rate $ 139 $ 47 $ 40 $ 35 $ 32 $ 267 $ 560 $ 620
Weighted average interest rate 3.39% 6.19% 6.23% 6.23% 6.23% 6.26% 5.53%
Variable Rate $ 6,700 $ 3,400 $ 6,075 $ 1,900 $ -0- $ -0- $18,075 $18,066
Weighted average interest rate 1.51% 1.55% 1.61% 1.61% .00% .00% 1.56%
Other Borrowings
Fixed-Rate $ 1,910 $ -0- $ -0- $ 199 $ 298 $ 493 $ 2,900 $ 2,944
Weighted average interest rate 1.91% .00% .00% 5.73% 4.33% 4.95% 2.93%
Variable Rate $ 22 $ -0- $ -0- $ -0- $ -0- $ -0- $ 22 $ 22
Weighted average interest rate .37% .00% .00% .00% .00% .00% .37%
Interest Rate Swaps (notional values)
Receive Fixed Swaps $ 91 $ -0- $ -0- $ -0- $ -0- $ -0- $ 91 $ -0-
Weighted average receive rate 6.39% .00% .00% .00% .00% .00% 6.39%
Weighted average pay rate 1.86% .00% .00% .00% .00% .00% 1.86%
Pay Fixed Swaps $ 487 $ 104 $ -0- $ -0- $ -0- $ -0- $ 591 $ 12
Weighted average receive rate 1.63% 1.55% .00% .00% .00% .00% 1.61%
Weighted average pay rate 4.02% 6.65% .00% .00% .00% .00% 4.48%
-------- -------- -------- --------- ---------- ----------- --------- ---------
Total $46,521 $ 5,046 $ 7,107 $ 2,390 $ 1,442 $ 772 $63,278 $62,937
======== ======== ======== ========= ========== =========== ========= =========
(a) The total weighted average interest rate for variable loans receivable reflects loans with introductory rates in effect at
December 31, 2002. Those loans are assumed to mature outside the introductory period at fully-indexed rates (the fully-indexed
rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable
rate loans will not equal the weighted average rate of total variable rate loans at December 31, 2002 as indicated in the total
balance column.
(b) Deposits with no maturity are included in the 2003 column.
Golden West estimates the sensitivity of the Company's net interest
income, net earnings, and capital ratios to interest rate changes and
anticipated growth based on simulations using an asset/liability model which
takes into account the lags previously described. The simulation model projects
net interest income, net earnings, and capital ratios based on a significant
interest rate increase that is sustained for a thirty-six month period. The
model is based on the actual maturity and repricing characteristics of
interest-rate sensitive assets and liabilities. For mortgage assets, the model
incorporates assumptions regarding the impact of changing interest rates on
prepayment rates, which are based on the Company's historical prepayment
information. The model factors in projections for anticipated activity levels by
products offered by the Company. Based on the information and assumptions in
effect at December 31, 2002, a 200 basis point rate increase sustained over a
thirty-six month period would not affect the Company's long-term profitability
and financial strength.
Cash and Investments
Golden West invests primarily in federal funds, short-term repurchase
agreements collateralized by mortgage-backed securities, short-term money market
securities, EuroDollar time deposits, collateralized mortgage obligations, and
equity securities. In determining the amounts of assets to invest in each class
of investments, the Company considers relative rates, liquidity, and credit
quality.
At December 31, 2002, 2001 and 2000, the Company had securities
available for sale in the amount of $922 million, $623 million, and $393
million, respectively, including net unrealized gains on securities available
for sale of $326 million, $362 million, and $382 million, respectively. At
December 31, 2002, 2001 and 2000, the Company had no securities held for trading
in its investment securities portfolio.
Mortgage-Backed Securities and Loans Receivable
For the loan portfolio, the Company invests primarily in whole loans.
From time to time, the Company securitizes loans from its portfolio into MBS and
Real Estate Mortgage Investment Conduit Securities (MBS-REMICs). Under Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), if
the Company retains 100% of the beneficial interests in its MBS securitizations,
it will not have any effective "retained interests" requiring disclosures under
SFAS 140. To date, the Company has not sold any interests requiring disclosures
under SFAS 140. Because the Company currently retains all of the beneficial
interest in these MBS securitizations, the securitizations formed after March
31, 2001 are securities classified as securitized loans and included in loans
receivable in accordance with SFAS 140 (see page 62 for further discussion).
Additionally, from time to time, the Company purchases MBS. Loans, securitized
loans and MBS are available to be used as collateral for borrowings.
During the first half of 2002, the Company desecuritized $4.1 billion
of Federal National Mortgage Association (FNMA) MBS that were classified as MBS
held to maturity with recourse and the underlying loans were reclassified to
loans receivable. This desecuritization led to a significant decrease in the
outstanding balance of MBS, which in turn contributed to lower MBS repayments
and lower interest on mortgage-backed securities. The desecuritization also
contributed to an increase in the outstanding balance of loans receivable and an
increase in interest on loans.
The following table shows the components of the Company's loans
receivable portfolio, including MBS, at December 31, 2002, 2001, and 2000.
TABLE 46
Balance of Loans Receivable, Including MBS, by Component
2000 - 2002
(Dollars in Thousands)
As of December 31
---------------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Loans $39,159,502 $ 35,952,918 $33,860,345
Securitized loans(a) (b) 19,066,063 5,186,717 -0-
--------------- --------------- ---------------
Total loans, excluding MBS 58,225,565 41,139,635 33,860,345
--------------- --------------- ---------------
FNMA MBS(c) -0- 4,732,779 7,758,409
MBS-REMICs 5,871,069 8,836,840 10,366,578
Purchased MBS 196,389 508,553 455,503
--------------- --------------- ---------------
Total MBS 6,067,458 14,078,172 18,580,490
--------------- --------------- ---------------
Other(d) 43,334 (74,260) (97,702)
--------------- --------------- ---------------
Total loans receivable, including MBS $64,336,357 $ 55,143,547 $52,343,133
=============== =============== ===============
(a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on page 62).
(b) Includes $10.9 billion at December 31, 2002 of loans securitized with FNMA where the underlying loans are subject to full
credit recourse to the Company.
(c) The underlying loans of the FNMA MBS are subject to full credit recourse to the Company.
(d) Includes deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
Repayments from loans receivable, including MBS, were $15.6 billion,
$15.6 billion, and $6.9 billion for the years ended December 31, 2002, 2001, and
2000, respectively. In 2002, there was a small decrease in the prepayment rate
offset by the growth in the loan portfolio. Loans receivable repayments were
higher in 2001 as compared to 2000 due to an increase in the prepayment rate as
well as an increase in the balance of the total loan portfolio outstanding.
Mortgage-Backed Securities
At December 31, 2002, 2001, and 2000, the Company had MBS held to
maturity in the amount of $6.0 billion, $13.8 billion, and $18.5 billion,
respectively. The sizable decrease in 2002 was due primarily to prepayments and
to the desecuritization of $4.1 billion of FNMA MBS. During 2001, the Company
securitized $3.0 billion of ARMs into MBS-REMICs during the first three months.
The Company has the ability and intent to hold these MBS until maturity and,
accordingly, these MBS are classified as held to maturity.
At December 31, 2002, 2001, and 2000, the Company had MBS available
for sale in the amount of $35 million, $233 million, and $70 million,
respectively, including net unrealized gains on mortgage-backed securities
available for sale of $139 thousand, $2 million, and $1 million, respectively.
During the first quarter of 2002, the Company sold $176 million of purchased MBS
available for sale which resulted in a gain of $3 million. At December 31, 2002,
2001, and 2000, the Company had no trading MBS.
At December 31, 2002, $5.5 billion of the Company's total MBS
portfolio was backed by ARMs. The percentage of MBS backed by ARMs was 91% at
yearend 2002 compared to 92% at yearend 2001 and 93% at yearend 2000.
Repayments of MBS during the years 2002, 2001, and 2000 amounted to
$3.2 billion, $6.4 billion, and $2.5 billion, respectively. MBS repayments were
lower in 2002 due to a decrease in the outstanding balance. MBS repayments were
higher in 2001 due to an increase in the prepayment rate on the underlying
loans.
Loans
New loan originations in 2002, 2001, and 2000 amounted to $26.7
billion, $20.8 billion, and $19.8 billion, respectively. The volume of
originations increased during 2002 due to a continued strong demand for mortgage
loans and an increase in the popularity of ARMs, the Company's principal
product. The volume of originations during 2001 increased due to an increase in
the market demand for loans. Because consumers took advantage of low mortgage
interest rates, refinances were a large portion of the national mortgage market
in 2001 and 2002. Refinanced loans constituted 62% of the Company's new loan
originations in 2002 compared to 59% in 2001 and 34% in 2000.
First mortgages originated for sale were $1.7 billion, $2.2 billion,
and $114 million for the years ended December 31, 2002, 2001, and 2000,
respectively. During 2002, 2001, and 2000, $596 million, $794 million, and $29
million, respectively, of loans, including MBS, were converted at the customer's
request from adjustable rate to fixed-rate. The company sells most of its new
and converted fixed-rate loans. The Company sold $2.3 billion, $2.7 billion, and
$152 million of fixed-rate first mortgage loans during 2002, 2001, and 2000,
respectively.
At December 31, 2002, the Company had lending operations in 38
states. The largest source of mortgage originations was loans secured by
residential properties in California. In 2002, 67% of total loan originations
were on residential properties in California, compared to 70% and 63% in 2001
and 2000, respectively. The five largest states, other than California, for
originations for the year ended December 31, 2002, were Florida, Texas, New
Jersey, Washington, and Colorado with a combined total of 17% of total
originations. The percentage of the total loan portfolio (including MBS, except
purchased MBS) that was comprised of residential loans in California was 64% at
December 31, 2002, 64% at December 31, 2001, and 63% at December 31, 2000.
The portion of the mortgage portfolio (including securitized loans
and MBS) composed of adjustable rate loans was 96% at yearend 2002 compared to
94% at yearend 2001 and 95% at yearend 2000. Golden West's ARM originations
constituted approximately 92% of new mortgage loans made by the Company in 2002,
compared with 84% in 2001 and 96% in 2000.
Golden West originates ARMs tied primarily to the CODI, COFI, and
COSI. Prior to 2001, the Company also originated ARMs tied to the twelve-month
rolling average of the One-Year Treasury Constant Maturity (TCM). The following
table shows the distribution of ARM originations by index for the years ended
December 31, 2002, 2001 and 2000.
TABLE 47
Adjustable Rate Mortgage Originations by Index
2000 - 2002
(Dollars in Thousands)
For the Year Ended December 31
------------------------------------------------------
ARM Index 2002 2001 2000
--------------- ---------------- ----------------
CODI $ 13,173,161 $ 554,390 $ -0-
COFI 3,370,412 9,813,174 5,701,413
COSI 7,899,702 7,064,962 12,872,834
TCM -0- -0- 470,171
--------------- ---------------- ----------------
Total $ 24,443,275 $ 17,432,526 $ 19,044,418
=============== ================ ================
The following table shows the distribution by index of the Company's
outstanding balance of adjustable rate mortgages (including ARM MBS) at December
31, 2002, 2001 and 2000.
TABLE 48
Adjustable Rate Mortgage Portfolio by Index
(Including ARM MBS)
2000 - 2002
(Dollars in Thousands)
As of December 31
-----------------------------------------------------------
ARM Index 2002 2001 2000
----------------- ----------------- ----------------
CODI $ 13,286,566 $ 552,746 $ -0-
COFI 24,755,498 29,010,008 27,405,401
COSI 22,070,692 20,943,596 20,460,242
Other(a) 1,657,386 1,288,050 1,640,010
----------------- ----------------- ----------------
Total $ 61,770,142 $ 51,794,400 $ 49,505,653
================= ================= ================
(a) Includes equity lines of credit and ARMs tied to the TCM.
During the life of a typical ARM loan, the interest rate may not be
raised above a lifetime cap, set at the time of origination or assumption. The
weighted average maximum lifetime cap rate on the Company's ARM loan portfolio
(including securitized ARM loans, FNMA MBS, and MBS-REMICs before any reduction
for loan servicing fees) was 12.13% or 6.74% above the actual weighted average
rate at December 31, 2002, versus 12.21%, or 5.77% above the actual weighted
average at December 31, 2001 and 12.28% or 4.17% above the weighted average rate
at yearend 2000.
Approximately $5.2 billion of the Company's ARMs (including MBS with
recourse held to maturity) have terms that state that the interest rate may not
fall below a lifetime floor set at the time of origination or assumption. As of
December 31, 2002, $2.0 billion ARM loans had reached their rate floors compared
with $560 million at December 31, 2001 and $144 million at December 31, 2000.
The weighted average floor rate on the loans that had reached their floor was
5.87% at December 31, 2002, compared to 7.15% at December 31, 2001 and 8.01% at
December 31, 2000. Without the floor, the average rate on these loans would have
been 5.19% at December 31, 2002, 5.91% at December 31, 2001, and 7.80% at
December 31, 2000.
Most of the Company's loans are collateralized by first deeds of
trust on one-to four- family homes. The Company also originates second deeds of
trust in the form of fixed-rate loans. The Company's fixed-rate second mortgage
originations amounted to $160 million, $279 million, and $547 million for the
years ended December 31, 2002, 2001, and 2000, respectively. The outstanding
balance of fixed-rate seconds amounted to $215 million, $362 million and $491
million at December 31, 2002, 2001, and 2000, respectively.
The Company also establishes equity lines of credit (ELOCs) indexed
to the prime rate. The Company established new ELOCs totaling $1.2 billion, $422
million, and $66 million for the years ended December 31, 2002, 2001, and 2000,
respectively. The outstanding balance of ELOCs amounted to $999 million, $303
million, and $40 million at December 31, 2002, 2001, and 2000, respectively. The
maximum total line of credit available on the Company's ELOCs amounted to $1.5
billion, $458 million, and $67 million at December 31, 2002, 2001, and 2000,
respectively.
The Company generally lends up to 80% of the appraised value of
residential real estate property. In some cases, a higher amount is possible
through a first mortgage loan or a combination of a first and a second mortgage
loan on the same property. The second mortgage loan may be a fixed-rate loan or
an adjustable rate equity line of credit. For the year ended December 31, 2002,
13% of loans originated exceeded 80% of the appraised value of the property
compared to 13% for the year ended December 31, 2001, and 19% for the year ended
December 31, 2000.
The Company takes steps to reduce the potential credit risk with
respect to loans with a loan to value (LTV) or a combined loan to value over
80%. Among other things, the loan amount may not exceed 95% of the appraised
value of a single-family residence at the time of origination. Also, many first
mortgage loans with an LTV over 80% carry mortgage insurance, which reimburses
the Company for losses up to a specified percentage per loan, thereby reducing
the effective LTV to below 80%. Furthermore, the Company sells without recourse
a significant portion of its second mortgage originations. Sales of second
mortgages amounted to $139 million, $184 million, and $198 million for the years
ended December 31, 2002, 2001, and 2000, respectively. In addition, the Company
carries pool mortgage insurance on most seconds not sold, including equity lines
of credit. The cumulative losses covered by this pool mortgage insurance are
limited to 10% or 20% of the original balance of each insured pool.
The following table shows mortgage originations with LTV ratios or
combined LTV ratios greater than 80% for the years ended December 31, 2002,
2001, and 2000.
TABLE 49
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
2000 - 2002
(Dollars in Thousands)
For the Year Ended December 31
------------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
First mortgages with loan to value ratios greater than 80%:
With mortgage insurance $ 292,210 $ 225,464 $ 124,066
With no mortgage insurance 70,478 123,387 229,397
---------------- ---------------- ----------------
362,688 348,851 353,463
---------------- ---------------- ----------------
First and second mortgages with combined loan to value ratios greater than 80%:
With pool insurance on
second mortgages 2,412,821 1,354,754 2,549,049
With no pool insurance 611,044 911,214 924,538
---------------- ---------------- ----------------
3,023,865 2,265,968 3,473,587
---------------- ---------------- ----------------
Total $3,386,553 $2,614,819 $3,827,050
================ ================ ================
The following table shows the outstanding balance of mortgages with
original LTV or combined LTV ratios greater than 80% at December 31, 2002, 2001
and 2000.
TABLE 50
Balance of Mortgages with Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
2000 - 2002
(Dollars in Thousands)
As of December 31
-----------------------------------------------------
2002 2001 2000
--------------- ---------------- --------------
First mortgages with loan to value ratios
greater than 80%:
With mortgage insurance $ 553,747 $ 431,498 $ 388,625
With no mortgage insurance 293,851 548,507 823,864
--------------- ---------------- --------------
847,598 980,005 1,212,489
--------------- ---------------- --------------
First and second mortgages with combined
loan to value ratios greater than 80%:
With pool insurance on
second mortgages 3,699,519 2,396,954 2,193,990
With no pool insurance 292,104 454,289 722,703
--------------- ---------------- --------------
3,991,623 2,851,243 2,916,693
--------------- ---------------- --------------
Total $ 4,839,221 $ 3,831,248 $ 4,129,182
=============== ================ ==============
Loan repayments consist of monthly loan amortization and loan
payoffs. During the years 2002, 2001, and 2000, loan repayments amounted to
$12.3 billion, $9.2 billion, and $4.5 billion, respectively. The increase in
loan repayments in 2002 was due primarily to an increase in the balance of loans
receivable. The increase in repayments in 2001 was due to an increase in loan
prepayments.
Securitized Loans
During 2002, the Company securitized $18.9 billion of loans. During
the second and third quarters of 2001, the Company securitized $6.0 billion of
loans. These securitized loans are available to be used as collateral for
borrowings and are classified as loans receivable on the Statement of Financial
Position per SFAS 140.
Mortgage Servicing Rights
Capitalized mortgage servicing rights (CMSRs) are included in "Other
assets" on the Consolidated Statement of Financial Condition. The following
table shows the changes in capitalized mortgage servicing rights for the years
ended December 31, 2002, 2001, and 2000.
TABLE 51
Capitalized Mortgage Servicing Rights
2000 - 2002
(Dollars in Thousands)
2002 2001 2000
------------- ------------- -----------
Beginning balance of CMSRs $ 56,056 $ 28,355 $37,295
New CMSRs from loan sales 34,044 41,587 3,404
Amortization of CMSRs (20,652) (13,886) (12,344)
------------- ------------- -----------
Ending balance of CMSRs $ 69,448 $ 56,056 $28,355
============= ============= ===========
The estimated amortization of the December 31, 2002 CMSR balance for
the five years ending 2007 is $29.4 million (2003), $19.0 million (2004), $12.1
million (2005), $6.9 million (2006), and $2.0 million (2007). Actual results may
vary depending upon the level of the payoffs of the loans currently serviced.
The book value of Golden West's CMSRs did not exceed the fair value
at December 31, 2002, 2001, or 2000 and, therefore, no reserve was required to
adjust the servicing rights to their fair value.
Asset Quality
An important measure of the soundness of the Company's loan and MBS
portfolio is its ratio of nonperforming assets (NPAs) and troubled debt
restructured (TDRs) to total assets. Nonperforming assets include non-accrual
loans (that is, loans, including loans securitized into MBS with recourse and
loans securitized into MBS-REMICs, that are 90 days or more past due) and real
estate acquired through foreclosure. No interest is recognized on non-accrual
loans. The Company's TDRs are made up of loans on which delinquent payments have
been capitalized or on which temporary interest rate reductions have been made,
primarily to customers impacted by adverse economic conditions. The table on the
next page sets forth the components of the Company's NPAs and TDRs and the
various ratios to total assets at December 31.
TABLE 52
Nonperforming Assets and Troubled Debt Restructured
2000-2002
(Dollars in Thousands)
As of December 31
-----------------------------------------------------------
2002 2001 2000
---------------- --------------- -----------------
Non-accrual loans $ 413,123 $ 382,510 $ 231,155
Foreclosed real estate 11,244 11,101 8,261
---------------- --------------- -----------------
Total nonperforming assets $ 424,367 $ 393,611 $ 239,416
================ =============== =================
TDRs, net of interest reserve $ 233 $ 1,505 $ 1,933
================ =============== =================
Ratio of NPAs to total assets .62% .67% .43%
================ =============== =================
Ratio of TDRs to total assets .00% .00% .00%
================ =============== =================
Ratio of NPAs and TDRs to total assets .62% .67% .43%
================ =============== =================
NPAs at yearend 2002 reflected the normal increase in delinquencies
associated with the aging of the large volume of mortgages originated during the
past two years together with the uncertain U.S. economy. The Company closely
monitors all delinquencies and takes appropriate steps to protect its interests.
The Company mitigates its credit risk through strict underwriting standards and
loan reviews.
The Company has other impaired loans on which specific loss reserves
have been provided and that were not included in nonperforming loans or troubled
debt restructured because the loans were performing in full accordance with the
loan terms. Other impaired loans amounted to $4 million at yearend 2002 compared
to $11 million and $23 million at yearends 2001 and 2000, respectively.
Allowance for Loan Losses
The Company provides specific valuation allowances for losses on
major loans when impaired, and a write-down on foreclosed real estate when any
significant and permanent decline in value is identified. The Company also
utilizes a methodology for monitoring and estimating probable loan losses that
is based on both the Company's historical loss experience in the loan portfolio
and factors reflecting current economic conditions. This approach uses a
database that identifies losses on loans and foreclosed real estate from past
years to the present, broken down by year of origination, type of loan, and
geographical area. This approach also takes into consideration current trends in
economic growth, unemployment, housing market activity, and home prices for the
nation and individual geographical regions. This approach further considers the
impact of other events such as natural disasters. Based on the analysis of
historical performance, current conditions, and other risks, management
estimates a range of loss allowances by type of loan and risk category to cover
probable losses in the portfolio. One-to-four single-family real estate loans
are evaluated as a group. In addition, periodic reviews are made of major
multi-family and commercial real estate loans and foreclosed real estate. Where
indicated, valuation allowances are established or adjusted. In estimating
probable losses, consideration is given to the estimated sale price, cost of
refurbishing the security property, payment of delinquent taxes, cost of
disposal, and cost of holding the property. Additions to and reductions from the
allowances are reflected in current earnings based upon quarterly reviews of the
portfolio and the review methodology and historical analyses are reviewed
quarterly.
The table below shows the changes in the allowance for loan losses
for the three years ended December 31, 2002, 2001, and 2000.
TABLE 53
Changes in Allowance for Loan Losses
2000 - 2002
(Dollars in Thousands)
2002 2001 2000
--------------- -------------- ---------------
Beginning allowance for loan losses $ 261,013 $ 236,708 $ 232,134
Provision for losses
charged to expense 21,170 22,265 9,195
Loans charged off (1,943) (2,425) (623)
Recoveries 857 351 472
Net transfer of allowance (to) from
recourse liability -0- 4,114 (4,470)
--------------- -------------- ---------------
Ending allowance for loan losses $ 281,097 $ 261,013 $ 236,708
=============== ============== ===============
Ratio of provision for loan
losses to loan portfolio (including
MBS with recourse and MBS-REMICs) .03% .04% .02%
=============== ============== ===============
Ratio of net chargeoffs to
average loans outstanding (including
MBS with recourse and MBS-REMICs) .00% .00% .00%
=============== ============== ===============
Ratio of allowance for loan losses to total loans
(including MBS with recourse and MBS-REMICs) .44% .48% .46%
=============== ============== ===============
Ratio of allowance for loan losses to NPAs 66.2% 66.3% 98.9%
=============== ============== ===============
Foreclosed Real Estate
At December 31, 2002 and 2001, the Company had foreclosed real estate
in the amount of $11 million. At December 31, 2000, the Company had foreclosed
real estate in the amount of $8 million.
Deposits
The Company raises deposits through its retail branch system as well
as through the money markets.
Retail deposits increased by $6.6 billion in 2002 compared to
increases of $4.6 billion and $2.7 billion in 2001 and 2000, respectively.
Retail deposits increased during 2002 and 2001 because the public found money
market accounts to be a more favorable investment compared with other
alternatives. At December 31, 2002, 2001, and 2000, transaction accounts (which
include checking, passbook, and money market accounts) represented 66%, 40%, and
24%, respectively, of the total balance of deposits.
From time to time, the Company uses government securities dealers to
sell wholesale certificates of deposit (CDs) to institutional investors. The
Company's deposit balance at December 31, 2000 included $185 million of these
wholesale CDs. There were no outstanding wholesale CDs at December 31, 2002 and
2001.
Advances from the Federal Home Loan Banks
The Company uses borrowings from the Federal Home Loan Banks (FHLBs),
also known as "advances," to provide funds for loan origination activities.
Advances are secured by pledges of certain loans, MBS, and capital stock of the
FHLBs. FHLB advances amounted to $18.6 billion at December 31, 2002, compared to
$18.0 billion and $19.7 billion at December 31, 2001 and 2000, respectively.
Securities Sold Under Agreements to Repurchase
The Company borrows funds through transactions in which securities
are sold under agreements to repurchase (Reverse Repos). Reverse Repos are
entered into with selected major government securities dealers and large banks,
using MBS from the Company's portfolio. Reverse Repos with dealers and banks
amounted to $522 million, $224 million, and $857 million at yearends 2002, 2001,
and 2000, respectively.
Other Borrowings
At December 31, 2002, Golden West, at the holding company level, had
a total of $200 million of subordinated debt issued and outstanding as compared
to $600 million at December 31, 2001 and 2000. As of December 31, 2002, the
Company's subordinated debt securities were rated A2 and A by Moody's Investors
Service (Moody's) and Standard & Poor's (S&P), respectively.
At December 31, 2002, the Company had issued and outstanding $1.0
billion of senior debt as compared to $200 million at December 31, 2001. As of
December 31, 2002, the Company's senior debt was rated A1 and A+ by Moody's and
S&P, respectively.
WSB has a bank note program under which up to $5 billion can be
outstanding at any point in time. At December 31, 2002, WSB had $1.2 billion of
bank notes outstanding. There were no bank notes outstanding at December 31,
2001 or 2000. As of December 31, 2002 WSB's bank notes were rated P-1 and A-1+
by Moody's and S&P, respectively.
Stockholders' Equity
The Company's stockholders' equity increased by $741 million during
2002 as a result of earnings partially offset by decreased market values of
securities available for sale, the $173 million cost of the repurchase of
Company stock, and the payment of quarterly dividends to stockholders. The
Company's stockholders' equity increased by $597 million during 2001 as a result
of earnings partially offset by decreased market values of securities available
for sale, the $186 million cost of the repurchase of Company stock, and the
payment of quarterly dividends to stockholders. The Company's stockholders'
equity increased by $492 million during 2000 as a result of earnings and
increased market values of securities available for sale partially offset by the
$109 million cost of the repurchase of Company stock, and the payment of
quarterly dividends to stockholders.
Since 1993, through five separate actions, Golden West's Board of
Directors has authorized the purchase by the Company of up to a total of 60.6
million shares of Golden West's common stock. As of December 31, 2002, 49.3
million shares had been repurchased and retired at a cost of $1.3 million since
October 28, 1993, of which 2.7 million shares were purchased and retired at a
cost of $173 million during 2002. Earnings from WSB are expected to continue to
be the major source of funding for the stock repurchase program. The repurchase
of Golden West stock is not intended to have a material impact on the normal
liquidity of the Company.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) established capital standards for federally insured financial
institutions, such as WSB and WTX. Under FIRREA, thrifts and savings banks must
have tangible capital equal to at least 1.5% of adjusted total assets, have core
capital equal to at least 4% of adjusted total assets, and have risk-based
capital equal to at least 8% of risk-weighted assets.
The OTS and other bank regulatory agencies have adopted rules based
upon five capital tiers: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. The rules provide that a financial institution is
"well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based
capital ratio is 6% or greater, its total risk-based capital ratio is 10% or
greater and the institution is not subject to a capital directive.
As used herein, the total risk-based capital ratio is the ratio of
total capital to risk-weighted assets, Tier 1 risk-based capital ratio is the
ratio of core capital to risk-weighted assets, and the Tier 1 or leverage ratio
is the ratio of core capital to adjusted total assets, in each case as
calculated in accordance with current OTS capital regulations. As of December
31, 2002, the most recent notification from the OTS categorized WSB and WTX as
"well-capitalized" under the current requirements. There are no conditions or
events that have occurred since that notification that the Company believes
would have an impact on the categorization of WSB or WTX.
At December 31, 2002, WSB and WTX had the following regulatory
capital calculated in accordance with FIRREA's capital standards.
TABLE 54
Regulatory Capital Requirements
As of December 31, 2002
(Dollars in Thousands)
MINIMUM CAPITAL
ACTUAL REQUIREMENTS
--------------------------------- ---------------------------------
Capital Ratio Capital Ratio
---------------- -------------- ----------------- -------------
WSB
- ---
Tangible $ 5,152,335 7.61% $ 1,015,695 1.50%
Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00
Tier 1 risk-based 5,152,335 13.52 --- ---
Total risk-based 5,431,860 14.26 3,048,080 8.00
WTX
- ---
Tangible $ 413,885 5.23% $ 118,752 1.50%
Tier 1 (core or leverage) 413,885 5.23 316,673 4.00
Tier 1 risk-based 413,885 24.05 --- ---
Total risk-based 414,277 24.07 137,702 8.00
Because WSB is a subsidiary of a savings and loan holding company,
WSB must file a notice with the OTS prior to making capital distributions and,
in some cases, may need to file applications. The OTS may disapprove a notice or
deny an application, in whole or in part, if the OTS finds that: (a) the insured
subsidiary would be undercapitalized or worse following the proposed capital
distribution; (b) the proposed capital distribution raises safety and soundness
concerns; or (c) the proposed capital distribution violates a prohibition
contained in any statute, regulation, agreement with the OTS, or a condition
imposed upon the insured subsidiary in an OTS approved application or notice. In
general, WSB may, with prior notice to the OTS, make capital distributions
during a calendar year in an amount equal to that year's net income plus
retained net income for the preceding two years, as long as immediately after
such distributions it remains at least adequately capitalized. Capital
distributions in excess of such amount, or which would cause WSB to no longer be
adequately capitalized, require specific OTS approval.
Off-Balance Sheet Arrangements
Commitments to originate mortgage loans are agreements to lend to a
customer providing that the customer satisfies the terms of the contract.
Commitments generally have fixed expiration dates or other termination clauses.
Prior to entering each commitment, the Company evaluates the customer's
creditworthiness and the value of the property. The amount of outstanding loan
commitments at December 31, 2002 was $1.4 billion. The vast majority of these
commitments were for adjustable rate mortgages.
At December 31, 2002, the Company had $1.0 billion of commitments
outstanding to borrow advances from the FHLB of Dallas and these advances will
be indexed to three-month LIBOR.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the Statement of Financial Condition and measure
those instruments at fair value. The Company adopted SFAS 133 as of January 1,
2001 and recorded a loss of $10 million before tax, or $6 million after tax.
Because the Company has decided not to use permitted hedge accounting for the
derivative financial instruments in portfolio on December 31, 2002, the changes
in fair value of these instruments are reported in Noninterest Income as the
"Change in Fair Value of Derivatives" in the Consolidated Statement of Net
Earnings.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 140). This statement replaces
previously issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. From time to time, the Company securitizes loans from its portfolio into
MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the
beneficial interests in its MBS securitizations, it will not have any effective
"retained interests" requiring disclosures under SFAS 140. To date, the Company
has not sold any interests requiring disclosure under SFAS 140. In accordance
with SFAS 140, the Company's securitizations after March 31, 2001 resulted in
securities classified as securitized loans and recorded as loans receivable.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. The adoption of SFAS 142 on January
1, 2002 had no impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and the normal operation
of a long-lived asset, except for certain obligations of lessees. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This Statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not expect the adoption of this statement to have a material
impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions. In addition, this
Statement resolves implementation issues of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of SFAS 144 on January 1, 2002 had no impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost should be recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized. The Company believes that SFAS 146 will not have a
significant impact on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" (SFAS 147), which provides guidance on the
accounting for the acquisition of a financial institution. This statement is
effective on October 1, 2002. The adoption of SFAS 147 had no impact on the
Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation" (SFAS 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. This statement is effective for interim
periods beginning after December 15, 2002. The Company is still considering the
impact of the adoption of this statement.
Uses of Estimates
Golden West's financial statements are prepared in accordance with
generally accepted accounting principles (GAAP). Most of Golden West's assets,
liabilities, revenues, and expenses are reported using actual results for the
reporting period. However, GAAP requires that certain assets, liabilities,
revenues, and expenses be reported using estimates of fair value that are based
on a variety of assumptions, including such items as future interest rate levels
and repayments rates. As a consequence, assets, liabilities, revenues, and
expenses reported using fair value estimates may fluctuate from one reporting
period to the next because of changes in the business environment that lead to
revisions to the assumptions underlying the fair value calculations.
The following is a discussion of the most critical accounting
policies involving the use of estimates which senior management discussed with
the Company's Audit Committee.
An important use of estimates occurs when the Company establishes its
allowance for loan losses. An in-depth discussion can be found in the Allowance
for Loan Losses section on page 58.
As of December 31, 2002, Golden West's Consolidated Statement of
Financial Condition reflected fair value estimates for equity and debt
securities available for sale and for purchased mortgage-backed securities
available for sale as follows. Equity securities available for sale amounted to
$332 million and $368 million at yearend 2002 and 2001, respectively, compared
with amortized costs of $6 million at yearends 2002 and 2001, respectively. Debt
securities available for sale amounted to $590 million and $255 million at
yearend 2002 and 2001, respectively, compared with amortized costs of $590
million and $254 million at yearends 2002 and 2001, respectively. Purchased
mortgage-backed securities available for sale amounted to $35 million and $233
million at yearend 2002 and 2001, respectively, compared with amortized costs of
$34 million and $232 million at yearend 2002 and 2001, respectively. Fair values
are based on quoted market prices on securities available for sale.
For the year ended December 31, 2002 and 2001, Golden West's
Consolidated Statement of Net Earnings reflected fair value estimates for the
Company's interest rate swap portfolio, amounting to a pre-tax gain of $7.6
million and a pre-tax loss of $9.7 million, respectively, as seen in "Change in
Fair Value of Derivatives." In addition, upon the adoption of SFAS 133 on
January 1, 2001, Golden West reported a one-time pre-tax charge of $10 million
associated with the initial valuation of the Company's interest rate swap
portfolio. For the year ended December 31, 2002, these fair value changes
related to SFAS 133 were the principal fair value items affecting Golden West's
earnings. Fair values are based on quoted market prices for interest rate swaps.
Additionally, pursuant to GAAP, Golden West establishes Capitalized
Mortgage Servicing Rights when the Company sells mortgage loans and retains the
servicing for them. The Company periodically reviews the CMSRs for impairment
based on fair value. Golden West's CMSRs have never experienced impairment.
Golden West's CMSR balances amounted to $69 million and $56 million at yearend
2002 and 2001, respectively.
Results of Operations
Net Earnings
Net earnings increased in 2002 as compared to 2001 primarily due to
an increase in net interest income, partially offset by an increase in general
and administrative expenses. Two non-recurring items contributed to net earnings
during 2002. The Company received $9.4 million from the FHLB of San Francisco
for 1998 prepayment fees that were refunded. In addition, the Company had a
one-time after-tax benefit of $2.7 million due to a change in the California tax
law regarding reserves for loan losses. Net earnings increased in 2001 as
compared to 2000 as a result of increased net interest income and increased
noninterest income, partially offset by an increase in general and
administrative expense.
Earnings Per Share
The Company's Basic Earnings Per Share (EPS) was $6.20 for the year
ended December 31, 2002 compared to $5.18 (before the cumulative effect of the
accounting change) and $3.44 for the years ended December 31, 2001 and 2000,
respectively. The Company reported Diluted EPS of $6.12 for the year ended
December 31, 2002 as compared to $5.11 (before the cumulative effect of the
accounting change) and $3.41 for the years ended December 31, 2001 and 2000,
respectively.
Net Interest Income
The largest component of the Company's revenue and earnings is net
interest income, which is the difference between the interest and dividends
earned on loans and other investments and the interest paid on customer deposits
and borrowings. Long-term growth of the Company's net interest income, and hence
earnings, is related to the ability to expand the mortgage portfolio, the
Company's primary earning asset, by originating and retaining high-quality
adjustable rate home loans. Over the short term, however, net interest income
can be influenced by business conditions, especially movements in short-term
interest rates, which can temporarily increase or reduce changes in net interest
income.
Net interest income amounted to $1.9 billion, $1.6 billion, and $1.2
billion for the years ended December 31, 2002, 2001, and 2000, respectively.
These amounts represented 18%, 42%, and 15% increases, respectively, over the
previous years. As discussed below, the significant growth of net interest
income in 2002 compared with the prior year resulted from both the expansion of
the Company's average primary spread, which is the difference between the yield
on loans and other investments and the rate paid on deposits and borrowings. The
average primary spread for the years ended December 31, 2002, 2001, and 2000 was
2.99%, 2.70%, and 2.05%, respectively. The significant growth of net interest
income in 2001 compared with the prior year resulted from two principal factors:
the substantial growth of the mortgage portfolio during 2000; and an increase in
2001 in the Company's primary spread.
Between December 31, 2002 and December 31, 2001, the Company's
earning asset balance increased by $9.4 billion or 17%. This growth resulted
from strong mortgage originations which more than offset loan repayments and
loan sales. Net interest income in 2001 benefited from the 32% growth of the
mortgage portfolio in the prior year. Specifically, in 2000, the Company
originated a record loan volume that, in combination with a moderate level of
mortgage repayments, resulted in unusually rapid growth of the Company's loans
receivable. Thus, there was a significantly larger average loan balance
outstanding during 2001 versus 2000, and this contributed to the substantial net
interest income increase in 2001.
As noted in the discussion of the Gap on page 48, the Company's
liabilities respond more rapidly to movements in short-term interest rates than
the Company's assets, most of which are adjustable rate mortgages tied to
indexes that lag changes in market interest rates. Consequently, when short-term
interest rates decline, the Company's primary spread temporarily widens, because
the index lags slow the downward movement of the yield on the Company's
adjustable rate mortgage portfolio. When interest rates stabilize after a period
of falling rates, the primary spread usually declines for a while until the
yield on the ARM portfolio catches up to previous rate decreases. The opposite
occurs when interest rates increase. Specifically, when short-term interest
rates move up, the Company's primary spread compresses for a period of time,
because the index lags slow the upward adjustment of the yield on the Company's
ARMs. When interest rates stabilize after a period of rising rates, the primary
spread expands for a while until the ARM yield catches up to previous rate
increases. For the five years ended December 31, 2002, which included periods of
both falling and rising interest rates, the Company's primary spread averaged
2.44% with a monthend high of 3.21% and a monthend low of 1.88%.
During 2001, the Federal Reserve's Open Market Committee lowered the
Federal Funds rate, a key short-term interest rate, by a total of 475 basis
points in order to stimulate the then-weak economy. Other short-term market
rates experienced similar decreases. In response to significantly lower
short-term interest rates, the Company's cost of funds declined by 284 basis
points during 2001. At the same time, the yield on the Company's assets
fell by only 166 basis points, because the indexes to which the large adjustable
rate mortgage portfolio is tied moved down more slowly. As a consequence, the
Company's primary spread widened substantially during 2001, and at December 31,
2001 reaching 3.21%, the highest in the company's history. During 2002, the
Company's cost of funds declined by an additional 83 basis points. At the same
time, the Company's asset yield fell by 111 basis points, as the ARM indexes
continued to adjust downward in response to the large interest rate declines
experienced in 2001. Because the yield on earning assets fell faster than the
cost of funds in 2002, the Company's primary spread narrowed from 3.21% at
December 31, 2001 to 2.93% at December 31, 2002. However, the average primary
spread in 2002 was greater that the average reported in 2001, contributing to
the increase in net interest income for 2002 as compared with 2001. In November
2002, the Federal Reserve's Open Market Committee lowered the Federal Funds rate
by an additional 50 basis points to 1.25%. Because this action occurred near the
end of 2002, the rate decrease had a minimal impact on Golden West's earnings
asset yield, cost of funds, and primary spread at yearend 2002.
The following table shows the components of the Company's primary
spread at the end of the years 2000 through 2002.
TABLE 55
Yield on Earning Assets, Cost of Funds, and Primary Spread
2000 - 2002
December 31
--------------------------------------
2002 2001 2000
----------- ---------- -----------
Yield on loan portfolio 5.28% 6.38% 8.03%
Yield on investments 1.94 2.86 7.12
----------- ---------- -----------
Yield on earning assets 5.25 6.36 8.02
----------- ---------- -----------
Cost of deposits 2.56 3.39 5.52
Cost of borrowings 1.85 2.72 6.66
----------- ---------- -----------
Cost of funds 2.32 3.15 5.99
----------- ---------- -----------
Primary spread 2.93% 3.21% 2.03%
=========== ========== ===========
Interest Rate Swaps
The Company enters into interest rate swaps as a part of its interest
rate risk management strategy. Such instruments are entered into primarily to
alter the repricing characteristics of designated assets and liabilities. The
Company does not hold any derivative financial instruments for trading purposes.
TABLE 56
Interest Rate Swap Activity
2001 - 2002
(Notional Amounts in Millions)
Receive Pay
Fixed Fixed
Swaps Swaps
------------ -------------
Balance at January 1, 2001 $ 217 $ 717
Maturities (114) (96)
------------ -------------
Balance at December 31, 2001 103 621
Additions -0- 275
Maturities (12) (305)
------------ -------------
Balance at December 31, 2002 $ 91 $ 591
============ =============
Interest rate swap payment activity decreased net interest income by
$19 million, $13 million, and $4 million for the years ended December 31, 2002,
2001, and 2000, respectively.
The Company accounts for interest rate swaps under the provisions in
SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, the Company reported a
one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. As
a result of the ongoing valuation of the Company's swaps, the Company reported
pre-tax income of $8 million, or $.03 after tax per diluted share for the year
ended December 31, 2002, as compared to pre-tax expense of $10 million, or $.04
after tax per diluted share for the year ended December 31, 2001. This
additional income and expense occurred because the fair value of Golden West's
swaps changed in 2002 and 2001 as a result of interest rate movements and
maturities of interest rate swaps. The changes in fair value of these swap
contracts are reflected as a net liability on the Consolidated Statement of
Financial Condition with corresponding amounts reported in Noninterest Income as
the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net
Earnings. The Company has decided not to utilize permitted hedge accounting for
the derivative financial instruments in portfolio at December 31, 2002.
Interest on Loans
Interest on loans was $2.9 billion, $2.7 billion, and $2.5 billion
for the years ended December 31, 2002, 2001, and 2000, respectively. The
increase in 2002 was due to an increase in the average portfolio balance
partially offset by a decrease in the average portfolio yield. The increase in
2001 was due to an increase in the average portfolio balance partially offset by
a decrease in the average portfolio yield.
Interest on MBS
Interest on MBS was $491 million, $1.3 billion, and $1.1 billion for
the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in
2002 was due to a decrease in the average portfolio balance and a decrease in
the average portfolio yield. The increase in 2001 was due to an increase in the
average portfolio balance partially offset by a decrease in the average
portfolio yield.
Interest and Dividends on Investments
The income earned on the investment portfolio fluctuates, depending
upon the volume outstanding and the yields available on short-term investments.
Interest and dividends on investments was $113 million, $193 million, and $254
million for the years ended December 31, 2002, 2001, and 2000, respectively. The
decrease in 2002 was primarily due to a decrease in the average portfolio yield
and a decrease in the average portfolio balance. The decrease in 2001 was
primarily due to a decrease in the average portfolio yield partially offset by
an increase in the average portfolio balance.
Interest on Deposits
Interest on deposits was $1.1 billion, $1.5 billion, and $1.5 billion
for the years ended December 31, 2002, 2001, and 2000, respectively. The
decrease in 2002 was due to a decrease in the average cost of deposits partially
offset by an increase in the average balance of deposits. Interest on deposits
in 2001 was similar to 2000.
Interest on Advances
Interest paid on FHLB advances was $380 million, $880 million, and
$961 million for the years ended December 31, 2002, 2001, and 2000,
respectively. The decrease in 2002 was due to a decrease in the average cost of
these borrowings and a decrease in the average outstanding balance. The decrease
in 2001 was due to a decrease in the average cost of these borrowings partially
offset by an increase in the average outstanding balance.
Interest on Other Borrowings
Interest expense on other borrowings, including interest on reverse
repurchase agreements, amounted to $107 million, $176 million, and $190 million
for the years ended 2002, 2001, and 2000, respectively. The decrease in the
expense in 2002 compared with 2001 was due to a decrease in the average cost
partially offset by an increase in the average balance of these liabilities. The
decrease in the expense in 2001 was due to a decrease in the average cost of
these liabilities partially offset by an increase in the average balance.
Provision for Loan Losses
The provision for loan losses was $21 million for the year ended
December 31, 2002, compared to provisions of $22 million and $9 million for the
years ended 2001 and 2000, respectively. An in-depth discussion on the
calculation of the Company's allowance for loan losses can be found on page 58.
Noninterest Income
Noninterest income was $247 million, $237 million, and $161 million
for the years ended December 31, 2002, 2001, and 2000, respectively. The
increase in 2002 resulted primarily from the income associated with ongoing
valuation of interest rate swaps compared with an expense in 2001. Also included
in noninterest income during 2002 was a $7.9 million refund for 1998 FHLB
prepayment fees refunded by the FHLB of San Francisco. The increase in 2001 was
primarily due to higher loan prepayment fees and increased gains on the sale of
fixed-rate mortgages.
General and Administrative Expenses
General and administrative expenses (G&A) were $601 million, $514
million, and $425 million for the years ended 2002, 2001, and 2000,
respectively. Expenses increased in 2002 and 2001 because of the costs
associated with the year's record loan and savings volumes as well as the
increased activity associated with the expansion of the Company's earning assets
over the prior three years. Additionally, the Company continued to make sizeable
investments in technology including the installation of a new loan origination
system, the enhancement of loans and savings internet web sites, and the
expansion of computer and network resources to handle the transmission and
processing of increased volumes of data.
General and administrative expenses as a percentage of average assets
was .96% for the year ended December 31, 2002 compared with .90% and .87% for
the years ended December 31, 2001 and 2000, respectively. G&A as a percentage of
average assets increased in 2002 because expenses grew faster than average
assets. G&A as a percentage of net interest income plus noninterest income (the
"efficiency ratio") amounted to 27.63% for the year ended December 31, 2002
compared with 27.50% and 32.38% for the years ended December 31, 2001 and 2000,
respectively.
Taxes on Income
Golden West utilizes the accrual method of accounting for income tax
purposes and for preparing its published financial statements. Taxes as a
percentage of earnings decreased slightly in 2002 as compared to 2001 and
increased slightly in 2001 compared with 2000. Included in taxes on income for
2002 was a nonrecurring after-tax benefit of $2.7 million due to a change in the
California tax law regarding reserves for loan losses.
Liquidity and Capital Resources
WSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; sales of loans; wholesale certificates of
deposit; borrowings from the FHLB of San Francisco; bank notes; borrowings from
its parent; borrowings from its WTX subsidiary; and debt collateralized by
mortgages, MBS, or securities. In addition, WSB has other alternatives available
to provide liquidity or finance operations including federal funds purchased,
bank notes, the issuance of medium-term notes, borrowings from public offerings
of debt, issuances of commercial paper, and borrowings from commercial banks.
Furthermore, under certain conditions, WSB 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.
WTX's principal sources of funds are cash flows generated from
borrowings from the FHLB Dallas; earnings; deposits; loan repayments; debt
collateralized by mortgages or securities; and borrowings from affiliates.
The principal sources of funds for WSB's parent, Golden West, are
dividends from subsidiaries, interest on investments, and the proceeds from the
issuance of debt securities. Various statutory and regulatory restrictions and
tax considerations limit the amount of dividends WSB can pay. The principal
liquidity needs of Golden West are for payment of interest and principal on
senior debt and subordinated debt securities, capital contributions to its
insured subsidiaries ($20 million in 2000), dividends to stockholders, the
repurchase of Golden West stock, and general and administrative expenses.
Common Stock
The quarterly price ranges for the Company's common stock during 2002
and 2001 were as follows:
TABLE 57
Common Stock Price Range
2001 - 2002
2002 2001
------------------------------- -------------------------------
First Quarter $58.04 - $65.80 $51.00 - $65.94
Second Quarter $63.17 - $70.25 $57.96 - $68.95
Third Quarter $58.15 - $68.95 $52.81 - $70.00
Fourth Quarter $57.91 - $72.98 $47.15 - $58.85
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Asset/Liability Management" on pages 48 through 50 in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index included on page 78 and the financial statements, which
begin on page F-1, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors and executive officers of
the Registrant, see pages 2, 3, and 7 of the Registrant's Proxy Statement dated
March 14, 2003, which are incorporated herein by reference, and page 39 of Item
1 herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in Registrant's
Proxy Statement dated March 14, 2003, on pages 5, 6 and 9 through 11 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 403 of Regulation S-K is set
forth on pages 2, 3, 7 and 8 of Registrant's Proxy Statement dated March 14,
2003, and is incorporated herein by reference. The information required by Item
201(d) of Regulation S-K is set forth in Item 5 herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Indebtedness of Management" on page 10 of the Registrant's Proxy
Statement dated March 14, 2003, which is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officers and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officers and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. No significant changes were made
in the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
See Index included on page 78 and the financial statements, which
begin on page F-1.
(2) Index to Financial Statement Schedules
Financial statement schedules are omitted because they are not
required or because the required information is included in the financial
statements or the notes thereto.
(3) Index to Exhibits
Exhibit No. Description
----------- -----------
3(a) Certificate of Incorporation, as amended, and amendments
thereto, are incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K (File No. 1-4269) for
the year ended December 31, 1990.
3(b) By-Laws, as amended in 1997, are incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K
(File No. 1-4269) for the year ended December 31, 1997.
4(a) The Registrant agrees to furnish to the Commission,
upon request, a copy of each instrument with respect to
issues of long-term debt, the authorized principal amount
of which does not exceed 10% of the total assets of the
Company.
10(a) 1996 Stock Option Plan, as amended and restated February 2,
1996, and as further amended May 2, 2001.
10(b) Incentive Bonus Plan, as amended and restated, is
incorporated by reference to Exhibit A of the Company's
Definitive Proxy Statement on Schedule 14A, filed on March
15, 2002, for the Company's 2002 Annual Meeting of
Stockholders.
10(c) Deferred Compensation Agreement between the Company and
James T. Judd is incorporated by reference to Exhibit 10(b)
of the Company's Annual Report on Form 10-K (File No. 1-4629)
for the year ended December 31, 1986.
10(d) Deferred Compensation Agreement between the Company and
Russell W. Kettell is incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K
(File No. 1-4629) for the year ended December 31, 1986.
10(e) Deferred Compensation Agreement between the Company and
Michael Roster.
10(f) Operating lease on Company headquarters building, 1901
Harrison Street, Oakland, California 94612, is incorporated
by reference to Exhibit 10(h) of the Company's Quarterly
Report on Form 10-Q (File No. 1-4629) for the quarter ended
September 30, 1998.
10(g) Form of Supplemental Retirement Agreement between the Company
and certain executive officers.
(3) Index to Exhibits (continued)
Exhibit No. Description
----------- -----------
21 (a) Subsidiaries of the Registrant.
23 (a) Independent Auditors' Consent.
99.1 Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350.
99.2 Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350.
99.3 Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350.
(b) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K with the
Commission in the fourth quarter of 2002.
(c) Form S-8 Undertaking
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned Registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into Registrant's Registration Statement on Form
S-8 No. 33-14833 (filed June 5, 1987):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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/ Russell W. Kettell
------------------------------------------------------------------
Russell W. Kettell,
President and Chief Financial Officer
By: /s/ William C. Nunan
------------------------------------------------------------------
William C. Nunan,
Chief Accounting Officer
Dated: March 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Maryellen Cattani Herringer 3/26/03 /s/ Bernard A. Osher 3/26/03
- ------------------------------- --------- -------------------------- ---------
Maryellen Cattani Herringer Bernard A. Osher
Director Director
/s/ Louis J. Galen 3/26/03 /s/ Kenneth T. Rosen 3/26/03
- ------------------------------- --------- -------------------------- ---------
Louis J. Galen Kenneth T. Rosen
Director Director
/s/ Antonia Hernandez 3/26/03 /s/ Herbert M. Sandler 3/26/03
- ------------------------------- --------- -------------------------- ---------
Antonia Hernandez Herbert M. Sandler
Director Director
/s/ Patricia A. King 3/26/03 /s/ Marion O. Sandler 3/26/03
- ------------------------------- --------- -------------------------- ---------
Patricia A. King Marion O. Sandler
Director Director
/s/ Leslie Tang Schilling 3/26/03
-------------------------- ---------
Leslie Tang Schilling
Director
CERTIFICATION
I, Herbert M. Sandler, certify that:
1) I have reviewed this annual report on Form 10-K of Golden West
Financial Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this annual report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Audit Committee of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have significant role in the Company's
internal controls; and
6) The Company's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 26, 2003 /s/ Herbert M. Sandler
- --------------------------------------- ---------------------------------
Date Herbert M. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
CERTIFICATION
I, Marion O. Sandler, certify that:
1) I have reviewed this annual report on Form 10-K of Golden West
Financial Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this annual report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Audit Committee of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have significant role in the Company's
internal controls; and
6) The Company's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 26, 2003 /s/ Marion O. Sandler
- --------------------------------------- ---------------------------------
Date Marion O. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
CERTIFICATION
I, Russell W. Kettell, certify that:
1) I have reviewed this annual report on Form 10-K of Golden West
Financial Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this annual report;
4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Audit Committee of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have significant role in the Company's
internal controls; and
6) The Company's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 26, 2003 /s/ Russell W. Kettell
- --------------------------------------- -------------------------------------
Date Russell W. Kettell
President and Chief Financial Officer
Golden West Financial Corporation
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, 2002, and 2001.............................................F-2
Consolidated Statement of Net Earnings for the years
ended December 31, 2002, 2001, and 2000 ................................F-3
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 2002, 2001, and 2000...........................F-4
Consolidated Statement of Cash Flows for the years
ended December 31, 2002, 2001, and 2000............................F-5, F-6
Notes to Consolidated Financial Statements...............................F-7
All supplemental schedules are omitted as inapplicable or because the required
information is included in the financial statements or notes thereto.
Independent Auditors' Report
Board of Directors and Stockholders
Golden West Financial Corporation
Oakland, California
We have audited the accompanying consolidated statement of financial
condition of Golden West Financial Corporation and subsidiaries (the "Company")
as of December 31, 2002 and 2001, and the related consolidated statements of net
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Golden West
Financial Corporation and subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for derivative financial instruments,
effective January 1, 2001, to conform with Statement of Financial Accounting
Standards No. 133.
Oakland, California
January 23, 2003
F-1
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands except per share figures)
ASSETS
December 31
-------------------------------------
2002 2001
----------------- ----------------
Cash $ 318,914 $ 339,059
Securities available for sale at fair value
(cost of $596,282 and $260,200) (Note B) 922,177 622,670
Purchased mortgage-backed securities (MBS) available for sale at
fair value (cost of $34,404 and $231,613) (Notes C and K) 34,543 233,403
Purchased mortgage-backed securities held to maturity at cost
(fair value of $170,173 and $282,366) (Notes D, J and K) 161,846 275,150
Mortgage-backed securities with recourse held to maturity at cost
(fair value of $6,007,230 and $13,697,951) (Notes D, J and K) 5,871,069 13,569,619
Loans receivable less allowance for loan losses of
$281,097 and $261,013 (Notes E and J) 58,268,899 41,065,375
Interest earned but uncollected (Note G) 183,130 255,600
Investment in capital stock of Federal Home Loan Banks,
at cost which approximates fair value (Note J) 1,072,817 1,105,773
Foreclosed real estate 11,244 11,101
Premises and equipment, net (Note H) 351,942 328,579
Other assets (Note F) 1,209,247 779,942
----------------- ----------------
$68,405,828 $58,586,271
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
-------------------------------------
2002 2001
---------------- -----------------
Deposits (Note I) $41,038,797 $34,472,585
Advances from Federal Home Loan Banks (Note J) 18,635,099 18,037,509
Securities sold under agreements to repurchase (Note K) 522,299 223,523
Bank notes, due 2003, at 1.27% to 1.53% 1,209,925 -0-
Senior debt (Note L) 989,690 198,215
Subordinated notes (Note M) 199,867 599,511
Taxes on income (Note N) 489,252 457,964
Other liabilities 295,649 312,774
---------------- -----------------
63,380,578 54,302,081
Stockholders' equity (Notes A, O and Q):
Preferred stock, par value $1.00:
Authorized 20,000,000 shares
Issued and outstanding, none
Common stock, par value $.10:
Authorized 200,000,000 shares
Issued and outstanding, 153,521,103 and 155,531,777 shares 15,352 15,553
Additional paid-in capital 198,162 173,500
Retained earnings 4,612,529 3,873,758
---------------- -----------------
4,826,043 4,062,811
Accumulated other comprehensive income from unrealized gains
on securities, net of income tax of $126,827 and $142,881 199,207 221,379
---------------- -----------------
Total Stockholders' Equity 5,025,250 4,284,190
---------------- -----------------
$68,405,828 $58,586,271
================ =================
See notes to consolidated financial statements.
F-2
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET EARNINGS
(Dollars in thousands except per share figures)
Year Ended December 31
-------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
Interest Income:
Interest on loans $2,893,299 $2,740,101 $2,469,556
Interest on mortgage-backed securities 490,523 1,276,648 1,072,559
Interest and dividends on investments 113,212 192,863 254,425
--------------- --------------- --------------
3,497,034 4,209,612 3,796,540
Interest Expense:
Interest on deposits (Note I) 1,079,937 1,522,328 1,494,447
Interest on advances 379,613 879,842 960,824
Interest on repurchase agreements 1,826 42,113 86,549
Interest on other borrowings 105,364 133,997 103,552
--------------- --------------- --------------
1,566,740 2,578,280 2,645,372
--------------- --------------- --------------
Net Interest Income 1,930,294 1,631,332 1,151,168
Provision for loan losses 21,170 22,265 9,195
--------------- --------------- --------------
Net Interest Income after Provision for Loan Losses 1,909,124 1,609,067 1,141,973
Noninterest Income:
Fees 139,416 150,675 78,016
Gain on the sale of securities, MBS, and loans 45,143 42,513 10,515
Change in fair value of derivatives 7,610 (9,738) -0-
Other 54,831 53,289 72,289
--------------- --------------- --------------
247,000 236,739 160,820
Noninterest Expense:
General and administrative:
Personnel 355,543 298,435 243,787
Occupancy 88,387 80,908 72,355
Deposit insurance 6,062 5,712 5,699
Advertising 16,656 15,114 8,450
Other 134,846 113,633 94,556
--------------- --------------- --------------
601,494 513,802 424,847
Earnings before Taxes on Income and
Cumulative Effect of Accounting Change 1,554,630 1,332,004 877,946
Taxes on Income (Note N) 596,351 513,181 332,155
--------------- --------------- --------------
Earnings before Cumulative Effect of Accounting Change 958,279 818,823 545,791
Cumulative Effect of Accounting Change, Net of Tax (Note A) -0- (6,018) -0-
--------------- --------------- --------------
Net Earnings $ 958,279 $ 812,805 $ 545,791
=============== =============== ==============
Basic Earnings Per Share before
Cumulative Effect of Accounting Change $ 6.20 $ 5.18 $ 3.44
Cumulative Effect of Accounting Change, Net of Tax (Note A) .00 (.04) .00
--------------- --------------- --------------
Basic Earnings Per Share (Note P) $ 6.20 $ 5.14 $ 3.44
=============== =============== ==============
Diluted Earnings Per Share before
Cumulative Effect of Accounting Change $ 6.12 $ 5.11 $ 3.41
Cumulative Effect of Accounting Change, Net of Tax (Note A) .00 (.04) .00
--------------- --------------- --------------
Diluted Earnings Per Share (Note P) $ 6.12 $ 5.07 $ 3.41
=============== =============== ==============
See notes to consolidated financial statements.
F-3
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands except per share figures)
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income Equity Income
----------- ----------- ------------ ----------------- --------------- ----------------
Balance at January 1, 2000 $ 16,136 $ 135,555 $2,885,346 $ 157,817 $ 3,194,854
Net earnings -0- -0- 545,791 -0- 545,791 $ 545,791
Change in unrealized gains on
securities available for sale -0- -0- -0- 74,849 74,849 74,849
Reclassification adjustment for
gains included in income -0- -0- -0- (3) (3) (3)
----------------
Comprehensive income $ 620,637
================
Common stock issued upon exercise
of stock options, including tax
benefits - 725,004 shares (Note Q) 72 15,903 -0- -0- 15,975
Purchase and retirement of 3,673,300
shares of Company stock (Note O) (367) -0- (108,930) -0- (109,297)
Cash dividends on common stock
($.22 per share) (Note O) -0- -0- (34,882) -0- (34,882)
----------- ----------- ------------ ----------------- ---------------
Balance at December 31, 2000 15,841 151,458 3,287,325 232,663 3,687,287
Net earnings -0- -0- 812,805 -0- 812,805 $ 812,805
Change in unrealized gains on
securities available for sale -0- -0- -0- (11,246) (11,246) (11,246)
Reclassification adjustment for
gains included in income -0- -0- -0- (38) (38) (38)
----------------
Comprehensive income $ 801,521
================
Common stock issued upon exercise
of stock options, including tax
benefits - 797,090 shares (Note Q) 80 22,042 -0- -0- 22,122
Purchase and retirement of 3,675,450
shares of Company stock (Note O) (368) -0- (185,276) -0- (185,644)
Cash dividends on common stock
($.26 per share) (Note O) -0- -0- (41,096) -0- (41,096)
----------- ----------- ------------ ----------------- ---------------
Balance at December 31, 2001 15,553 173,500 3,873,758 221,379 4,284,190
Net earnings -0- -0- 958,279 -0- 958,279 $ 958,279
Change in unrealized gains on
securities available for sale -0- -0- -0- (21,425) (21,425) (21,425)
Reclassification adjustment for
gains included in income -0- -0- -0- (747) (747) (747)
----------------
Comprehensive income $ 936,107
================
Common stock issued upon exercise
of stock options, including tax
benefits - 730,986 shares (Note Q) 73 24,662 -0- -0- 24,735
Purchase and retirement of 2,741,660
shares of Company stock (Note O) (274) -0- (172,762) -0- (173,036)
Cash dividends on common stock
($.3025 per share) (Note O) -0- -0- (46,746) -0- (46,746)
----------- ----------- ------------ ----------------- ---------------
Balance at December 31, 2002 $ 15,352 $ 198,162 $4,612,529 $ 199,207 $ 5,025,250
=========== =========== ============ ================= ===============
See notes to consolidated financial statements.
F-4
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
----------------------------------------------------
2002 2001 2000
--------------- ---------------- -------------
Cash Flows from Operating Activities:
Net earnings $ 958,279 $ 812,805 $ 545,791
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for loan losses 21,170 22,265 9,195
Amortization of net loan costs 59,171 23,288 7,877
Depreciation and amortization 37,869 33,538 30,242
Loans originated for sale (1,799,589) (2,327,382) (240,684)
Sales of loans 2,429,131 2,919,066 349,809
Decrease (increase) in interest earned but uncollected 73,115 14,257 (93,118)
Federal Home Loan Bank stock dividends (51,462) (55,301) (58,333)
(Increase) in other assets (431,046) (193,224) (155,637)
Increase (decrease) in other liabilities (17,125) (31,806) 160,653
Increase in taxes on income 47,342 33,071 109,742
Other, net 37,038 15,798 (16,268)
--------------- ---------------- -------------
Net cash provided by operating activities 1,363,893 1,266,375 649,269
Cash Flows from Investing Activities:
New loan activity:
Real estate loans originated for portfolio (24,883,301) (18,435,855) (19,542,003)
Other, net (826,124) (428,778) (277,188)
--------------- ---------------- -------------
(25,709,425) (18,864,633) (19,819,191)
Real estate loan principal payments:
Monthly payments 1,133,269 601,623 537,989
Payoffs, net of foreclosures 11,208,645 8,582,589 3,926,007
--------------- ---------------- -----------
12,341,914 9,184,212 4,463,996
Purchases of mortgage-backed securities available for sale -0- (199,314) (4,356)
Sales of mortgage-backed securities available for sale 176,063 4,642 -0-
Repayments of mortgage-backed securities 3,208,823 6,386,071 2,457,365
Proceeds from sales of real estate 49,433 35,166 43,537
Decrease (increase) in securities available for sale (331,159) (243,761) 52,521
Decrease in other investments -0- 368,555 98,601
Purchases of Federal Home Loan Bank stock -0- (88,030) (512,979)
Redemptions of Federal Home Loan Bank stock 83,773 111,807 36,688
Additions to premises and equipment (62,804) (54,884) (62,344)
--------------- ---------------- -------------
Net cash used in investing activities (10,243,382) (3,360,169) (13,246,162)
See notes to consolidated financial statements.
F-5
Year Ended December 31
---------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Net increase in deposits $ 6,566,212 $ 4,424,666 $ 2,333,009
Additions to Federal Home Loan Bank advances 6,063,051 2,945,500 13,664,250
Repayments of Federal Home Loan Bank advances (5,465,461) (4,639,788) (2,847,672)
Proceeds from agreements to repurchase securities 1,412,593 5,410,609 7,809,989
Repayments of agreements to repurchase securities (1,113,817) (6,044,360) (7,997,891)
Increase in bank notes 1,209,925 -0- -0-
Proceeds from senior debt 790,708 198,060 -0-
Repayments of subordinated notes (400,000) -0- (215,000)
Dividends on common stock (46,746) (41,096) (34,882)
Exercise of stock options 15,915 14,476 11,024
Purchase and retirement of Company stock (173,036) (185,644) (109,297)
--------------- --------------- ---------------
Net cash provided by financing activities 8,859,344 2,082,423 12,613,530
--------------- --------------- ---------------
Net Increase (Decrease) in Cash (20,145) (11,371) 16,637
Cash at beginning of period 339,059 350,430 333,793
--------------- --------------- ---------------
Cash at end of period $ 318,914 $ 339,059 $ 350,430
=============== =============== ===============
Supplemental cash flow information:
Cash paid for:
Interest $ 1,580,156 $ 2,671,740 $ 2,543,728
Income taxes 544,598 469,970 218,385
Cash received for interest and dividends 3,569,504 4,230,318 3,695,585
Noncash investing activities:
Loans receivable and loans underlying mortgage-backed
securities converted from adjustable rate to fixed-rate 596,213 794,308 28,930
Loans transferred to foreclosed real estate 47,305 34,792 35,948
Loans securitized into mortgage-backed securities with
recourse held to maturity -0- 2,995,949 9,482,904
Loans securitized into mortgage-backed securities with
recourse recorded as loans receivable per SFAS 140 18,892,282 6,011,873 -0-
Mortgage-backed securities held to maturity desecuritized
into adjustable rate loans and recorded as loans
receivable 4,147,670 -0- -0-
See notes to consolidated financial statements.
F-6
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Golden
West Financial Corporation, a Delaware corporation, and its wholly owned
subsidiaries (the Company or Golden West). Intercompany accounts and
transactions have been eliminated. World Savings Bank, FSB (WSB), is a federally
chartered savings bank and the Company's principal operating subsidiary with
$68.0 billion in assets at December 31, 2002. WSB has a wholly owned subsidiary,
World Savings Bank, FSB (Texas) (WTX) that is also a federally chartered savings
bank regulated by the Office of Thrift Supervision (OTS). WTX had $7.9 billion
of assets at December 31, 2002. Certain reclassifications have been made to
prior year financial statements to conform to current presentation.
Nature of Operations
Golden West Financial Corporation, through its financial institution
subsidiaries, operates 268 savings branches in nine states and 311 loan offices
in 38 states, of which 110 loan offices are located in savings branches. The
Company's primary source of revenue is interest from loans on residential real
estate and mortgage-backed securities.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash
For the purpose of presentation in the Consolidated Statement of Cash
Flows, cash is defined as cash held in office and amounts due from banks.
Securities Available for Sale
The Company classifies its investment securities as available for
sale. The Company has no trading securities. Securities available for sale are
reported at fair value. Net unrealized gains and losses are excluded from
earnings and reported net of applicable income taxes in other comprehensive
income and as a separate component of stockholders' equity until realized.
Realized gains or losses on sales of securities are 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.
Mortgage-Backed Securities
The Company has no mortgage-backed securities (MBS) classified as
trading. Mortgage-backed securities held to maturity are recorded at cost
because the Company has the ability and intent to hold these MBS to maturity.
Premiums and discounts on MBS are amortized or accreted using the interest
method over the estimated life of the security. MBS available for sale are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported net of applicable income taxes as a separate component of
stockholders' equity until realized. Realized gains or losses on sales of MBS
are recorded in earnings at the time of sale and are determined by the
difference between the net sales proceeds and the cost of MBS, using specific
identification, adjusted for any unamortized premium or discount. Prior to April
1, 2001, the Company securitized certain loans from its held for investment loan
portfolio into MBS with recourse and into Real Estate Mortgage Investment
Conduits (REMICs) which are held to maturity and available to be used as
collateral for borrowings. REMICs and loan securitizations are not recorded as
sales because 100% of the beneficial ownership interests are retained by the
Company, including both the primary and subordinate retained interests in
REMICs. REMIC securities are recorded at cost and are evaluated with the other
held-to-maturity MBS for impairment based upon the characteristics of the
underlying loans.
F-7
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share)
Securitized Loans
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 140), securities resulting from real
estate loan securitizations formed after March 31, 2001 are included in Loans
Receivable, and are not considered investments subject to Statement of Financial
Accounting Standards Statement No. 115 classification.
Loans Receivable
The Company's real estate loan portfolio consists primarily of
long-term loans collateralized by first deeds of trust on single-family
residences and multi-family residential property. In addition to real estate
loans, the Company makes loans on the security of savings accounts.
The adjustable rate mortgage (ARM) is the Company's primary real
estate loan. The ARM carries an interest rate that may change as often as
monthly, based on movements in certain cost of funds or other indexes. Interest
rate changes and monthly payments of principal and interest may be subject to
maximum increases or decreases. Negative amortization may occur during periods
when payments are limited. A portion of the Company's ARMs is originated with a
fixed-rate for an initial period, primarily one to 12 months.
The Company originates certain loans that are held for sale,
primarily fixed-rate loans. These loans are recorded at the lower of cost or
market.
A loan is impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company's policy is to
measure impairment based on the fair value of the collateral. When the value of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. The valuation allowance
and provision for loan losses are adjusted for changes in the fair value of the
collateral. Impairment is measured on an individual loan basis for larger
multi-family loans and on a group basis for smaller single-family one-to-four
unit loans.
Loan origination fees, net of certain direct loan origination costs,
are deferred and amortized as an interest income yield adjustment over the life
of the related loans using the interest method. Loan origination fees, net of
certain direct loan origination costs, on loans originated for sale are deferred
until the loans are sold and recognized at the time of sale.
"Fees," which include fees for prepayment of loans, income for
servicing loans, late charges for delinquent payments, fees from deposit
accounts, and miscellaneous fees, are recorded when collected.
Nonperforming assets consist of loans 90 days or more delinquent,
with balances not reduced for loan loss reserves, and foreclosed real estate.
For loans past due 90 days or more, all interest earned but uncollected is fully
reserved.
Troubled debt restructured consists of loans that have been modified
by the Company to grant a concession to the borrower because of a perceived
temporary weakness in the collateral and/or the borrower's ability to make
scheduled payments.
Foreclosed Real Estate
Foreclosed real estate is comprised of improved property acquired
through foreclosure. All foreclosed real estate is recorded at the lower of cost
or fair value. Included in the fair value is the estimated selling price in the
ordinary course of business less estimated costs to repair, hold, and dispose of
the property. Costs relating to holding property, net of rental and option
income, are expensed in the current period. Gains on the sale of real estate are
recognized at the time of sale. Losses realized and expenses incurred in
connection with the disposition of foreclosed real estate are charged to current
earnings.
F-8
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
Allowance for Loan Losses
The Company provides specific valuation allowances for losses on
loans when impaired and a write-down on foreclosed real estate when any
significant and permanent decline in value is identified. The Company also
utilizes a methodology for monitoring and estimating probable loan losses that
is based on both the Company's historical loss experience in the loan portfolio
and factors reflecting current economic conditions. This approach uses a
database that identifies losses on loans and foreclosed real estate from past
years to the present, broken down by year of origination, type of loan, and
geographical area. This approach also takes into consideration current trends in
economic growth, unemployment, housing market activity, and home prices for the
nation and individual geographical regions. This approach further considers the
impact of other events such as natural disasters. Based on the analysis of
historical performance, current conditions, and other risks, management
estimates a range of loss allowances by type of loan and risk category to cover
probable losses in the portfolio. One-to-four single-family real estate loans
are evaluated as a group. In addition, periodic reviews are made of major
multi-family and commercial real estate loans and foreclosed real estate. Where
indicated, valuation allowances are established or adjusted. In estimating
probable losses, consideration is given to the estimated sales price, cost of
refurbishing the security property, payment of delinquent taxes, cost of
disposal, and cost of holding the property. Additions to and reductions from the
allowances are reflected in current earnings based upon quarterly reviews of the
portfolio and the methodology and historical analyses are reviewed quarterly.
Mortgage Servicing Rights
The balance of Capitalized Mortgage Servicing Rights (CMSRs) is
included in "Other assets" in the Consolidated Statement of Financial Condition
and is being amortized over the projected servicing period. The amortization of
the CMSRs is included in "Fees" in the Consolidated Statement of Net Earnings.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) only with selected dealers and banks.
Reverse repurchase agreements are treated as financings and the obligations to
repurchase securities sold are reflected as a liability in the Consolidated
Statement of Financial Condition. The securities underlying the agreements
remain in the asset accounts.
Interest Rate Swaps
The Company utilizes certain derivative financial instruments,
primarily various types of interest rate swaps, as a part of its interest rate
risk management strategy. Such instruments are entered into solely to alter the
repricing characteristics of designated assets and liabilities. The Company does
not hold any derivative financial instruments for trading purposes.
An interest rate swap is an agreement between two parties in which
one party exchanges cash payments based on a fixed or floating rate of interest
for a counterparty's cash payment based on a floating rate of interest. The
amounts to be paid are defined by agreement and determined by applying the
specified interest rates to a notional principal amount. Interest rate swap
agreements are entered into to limit the impact of changes in interest rates on
mortgage loans, or other designated assets, deposits or borrowings. The interest
rate differential paid or received on interest rate swap agreements is
recognized over the life of the agreements, with income and expense recorded in
the same category as the designated balance sheet item. The designated balance
sheet item is generally a pool of assets or liabilities with similar interest
rate characteristics.
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
beginning January 1, 2001, the Company recognized the fair value of its interest
rate swap agreements as assets or liabilities on the Consolidated Statement of
Financial Condition. Because the Company has decided not to utilize permitted
hedge accounting for its existing swap positions, the changes in fair value of
these instruments are reflected in the Consolidated Statement of Net Earnings as
"Change in Fair Value of Derivatives."
F-9
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
Taxes on Income
The Company files consolidated federal income tax returns with its
subsidiaries. The provision for federal and state taxes on income is based on
taxes currently payable and taxes expected to be payable in the future as a
result of events that have been recognized in the financial statements or tax
returns.
Regulatory Capital Requirements
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) established capital standards for federally insured financial
institutions, such as WSB and WTX. Under FIRREA, thrifts and savings banks must
have tangible capital equal to at least 1.5% of adjusted total assets, have core
capital equal to at least 4% of adjusted total assets, and have risk-based
capital equal to at least 8% of risk-weighted assets.
The OTS and other bank regulatory agencies have adopted rules based
upon five capital tiers: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. The rules provide that a savings association is
"well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based
capital ratio is 6% or greater, its total risk-based capital ratio is 10% or
greater, and the institution is not subject to a capital directive.
As used herein, the total risk-based capital ratio is the ratio of
total capital to risk-weighted assets, Tier 1 risk-based capital ratio is the
ratio of core capital to risk-weighted assets, and the Tier 1 or leverage ratio
is the ratio of core capital to adjusted total assets, in each case as
calculated in accordance with current OTS capital regulations. As of December
31, 2002, the most recent notification from the OTS categorized WSB and WTX as
"well-capitalized" under the current requirements. There are no conditions or
events that have occurred since that notification that the Company believes
would have an impact on the categorization of WSB or WTX.
At December 31, 2002 and 2001, WSB and WTX had the following
regulatory capital calculated in accordance with FIRREA's capital standards:
December 31, 2002
-----------------------------------------------------------------------------------------
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------ ----------------------- ------------------------
Capital Ratio Capital Ratio Capital Ratio
------------- ------- ------------ ------- ------------- --------
WSB
Tangible $ 5,152,335 7.61% $ 1,015,695 1.50% --- ---
Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00 $ 3,385,650 5.00%
Tier 1 risk-based 5,152,335 13.52 --- --- 2,286,060 6.00
Total risk-based 5,431,860 14.26 3,048,080 8.00 3,810,101 10.00
WTX
Tangible $ 413,885 5.23% $ 118,752 1.50% --- ---
Tier 1 (core or leverage) 413,885 5.23 316,673 4.00 $ 395,841 5.00%
Tier 1 risk-based 413,885 24.05 --- --- 103,277 6.00
Total risk-based 414,277 24.07 137,702 8.00 172,128 10.00
December 31, 2001
-----------------------------------------------------------------------------------------
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------ ----------------------- ------------------------
Capital Ratio Capital Ratio Capital Ratio
------------- ------- ------------ ------- ------------- --------
WSB
Tangible $ 4,480,834 7.71% $ 871,198 1.50% --- ---
Tier 1 (core or leverage) 4,480,834 7.71 2,323,194 4.00 $ 2,903,992 5.00%
Tier 1 risk-based 4,480,834 13.20 --- --- 2,037,158 6.00
Total risk-based 4,836,208 14.24 2,716,210 8.00 3,395,263 10.00
WTX
Tangible $ 401,886 5.23% $ 115,211 1.50% --- ---
Tier 1 (core or leverage) 401,886 5.23 307,229 4.00 $ 384,036 5.00%
Tier 1 risk-based 401,886 25.04 --- --- 96,289 6.00
Total risk-based 402,025 25.05 128,385 8.00 160,481 10.00
F-10
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
Retained Earnings
Because they are subsidiaries of a savings and loan holding company,
WSB and WTX must file a notice with the OTS prior to making capital
distributions and, in some cases, may need to file applications. The OTS may
disapprove a notice or deny an application, in whole or in part, if the OTS
finds that: (a) the insured subsidiary would be undercapitalized or worse
following the capital distribution; (b) the proposed capital distribution raises
safety and soundness concerns; or (c) the proposed capital distribution violates
a prohibition contained in any statute, regulation, agreement with the OTS, or a
condition imposed upon the insured subsidiary in an OTS approved application or
notice. In general, WSB and WTX may, with prior notice to the OTS, make capital
distributions during a calendar year in an amount equal to that year's net
income plus retained net income for the preceding two years, as long as
immediately after such distributions they remain at least adequately
capitalized. Capital distributions in excess of such amount, or which would
cause WSB or WTX to no longer be adequately capitalized, require specific OTS
approval.
At December 31, 2002, $3.0 billion of WSB's retained earnings were
available for the payment of cash dividends without the imposition of additional
federal income taxes. The Company is not subject to the same tax and reporting
restrictions as are WSB and WTX.
Stock
The Company has a stock-based employee compensation plan, which is
described more fully in Note Q. The Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for awards granted under the plan. Had compensation cost
been determined using the fair value based method prescribed by SFAS 123
"Accounting for Stock Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net income, as reported $ 958,279 $ 812,805 $ 545,791
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (3,464) (4,808) (5,989)
-------------- -------------- --------------
Pro forma net income $ 954,815 $ 807,997 $ 539,802
============== ============== ==============
Diluted earning per share
As reported $ 6.20 $ 5.14 $ 3.44
Pro forma 6.18 5.11 3.40
Diluted earning per share
As reported $ 6.12 $ 5.07 $ 3.41
Pro forma 6.09 5.04 3.37
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company adopted SFAS 133 as of January 1,
2001 and recorded a loss of $10 million before tax, or $6 million after tax.
Because the Company has decided not to use permitted hedge accounting for the
derivative financial instruments in portfolio on December 31, 2002 and 2001, the
changes in fair value of these instruments are reported in Noninterest Income as
the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net
Earnings.
F-11
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140 (SFAS 140). This statement replaces previously issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
125). SFAS 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. From time to time, the Company securitizes loans from its portfolio into
MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the
beneficial interests in its MBS securitizations, it will not have any effective
"retained interests" requiring disclosure under SFAS 140. To date, the Company
has not sold any interests requiring disclosure under SFAS 140. In accordance
with SFAS 140, the Company's securitizations after March 31, 2001 resulted in
securities classified as securitized loans and recorded as loans receivable.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No.142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. The adoption of SFAS 142 on January
1, 2002 had no impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of this statement to have a material impact
on its financial statements and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), which requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
In addition, this statement resolves implementation issues of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost should be recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized. This statement is effective for disposal activity initiated
after December 31, 2002. The Company believes that SFAS 146 will not have a
significant impact on its financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions" (SFAS 147), which provides guidance on the
accounting for the acquisition of a financial institution. This statement was
effective on October 1, 2002. The adoption of SFAS 147 had no impact on the
Company's financial statements.
F-12
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
In December 2002, the FASB issued Statement of Financial Accounting
Standards No.148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. This statement is effective for interim
periods beginning after December 15, 2002. The Company is still considering the
impact of the adoption of this statement.
NOTE B - Securities Available for Sale
The following is a summary of securities available for sale:
December 31, 2002
-------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- --------------- -------------- ---------------
Eurodollar time deposits $ 225,000 $ -0- $ -0- $ 225,000
Commercial paper 199,993 -0- 7 199,986
Federal funds 153,838 -0- -0- 153,838
Equity securities 5,530 326,331 -0- 331,861
Other 11,921 4 433 11,492
-------------- --------------- -------------- ---------------
$ 596,282 $ 326,335 $ 440 $ 922,177
============== =============== ============== ===============
December 31, 2001
-------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- --------------- -------------- ---------------
Eurodollar time deposits $ 200,000 $ -0- $ -0- $ 200,000
Federal funds 49,397 -0- -0- 49,397
Equity securities 5,530 362,018 -0- 367,548
Other 5,273 481 29 5,725
-------------- --------------- -------------- ---------------
$ 260,200 $ 362,499 $ 29 $ 622,670
============== =============== ============== ===============
The weighted average portfolio yields on securities available for
sale were 1.94% and 2.86% (based on cost) at December 31, 2002 and 2001,
respectively. Principal proceeds from the sales of securities from the
securities available for sale portfolio were $1,396 (2002), $-0- (2001), and $14
(2000) and resulted in realized gains of $32 (2002), $-0- (2001), and $4 (2000)
and no realized losses in 2002, 2001, or 2000.
At December 31, 2002, the securities available for sale had
maturities as follows:
Amortized Fair
Maturity Cost Value
------------------------------------------ -------------- ---------------
No maturity $ 15,163 $ 341,086
2003 580,591 580,585
2004 through 2007 -0- -0-
2008 through 2012 423 406
2013 and thereafter 105 100
-------------- ---------------
$ 596,282 $ 922,177
============== ===============
F-13
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE C - Purchased Mortgage-Backed Securities Available for Sale
Purchased mortgage-backed securities available for sale are
summarized as follows:
December 31, 2002
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
FNMA $ 16,953 $ 148 $ 5 $ 17,096
FHLMC 8,955 -0- 4 8,951
GNMA 8,496 -0- -0- 8,496
--------------- ---------------- --------------- ----------------
$ 34,404 $ 148 $ 9 $ 34,543
=============== ================ =============== ================
December 31, 2001
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
FNMA $ 96,700 $ 472 $ 105 $ 97,067
FHLMC 123,362 927 18 124,271
GNMA 11,551 517 3 12,065
--------------- ---------------- --------------- ----------------
$ 231,613 $ 1,916 $ 126 $ 233,403
=============== ================ =============== ================
The weighted average portfolio yields on mortgage-backed securities
available for sale were 8.54% and 7.11% at December 31, 2002, and 2001,
respectively. In 2002 and 2001, the Company sold $176 million and $4.6 million,
respectively, of mortgage-backed securities available for sale and realized a
gain of $3 million (2002) and $13 thousand (2001). There were no sales of
securities from the mortgage-backed securities available for sale portfolio in
2000.
At December 31, 2002, purchased mortgage-backed securities available
for sale had contractual maturities as follows:
Amortized Fair
Maturity Cost Value
------------------------------------------ ----------------- ----------------
2003 through 2007 $ 392 $ 394
2008 through 2012 1,468 1,474
2013 and thereafter 32,544 32,675
----------------- ----------------
$ 34,404 $ 34,543
================= ================
F-14
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE D - Mortgage-Backed Securities Held to Maturity
Mortgage-backed securities held to maturity are summarized as
follows:
December 31, 2002
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
Purchased MBS held to maturity
-----------------------------------------------
FNMA $ 139,467 $ 7,066 $ -0- $ 146,533
FHLMC 10,876 623 -0- 11,499
GNMA 11,503 638 -0- 12,141
--------------- ---------------- --------------- ----------------
Subtotal 161,846 8,327 -0- 170,173
MBS with recourse held to maturity
-----------------------------------------------
REMICs 5,871,069 136,161 -0- 6,007,230
--------------- ---------------- --------------- ----------------
Total $ 6,032,915 $ 144,488 $ -0- $ 6,177,403
=============== ================ =============== ================
December 31, 2001
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
Purchased MBS held to maturity
-----------------------------------------------
FNMA $ 242,739 $ 4,887 $ -0- $ 247,626
FHLMC 15,845 1,256 -0- 17,101
GNMA 16,566 1,073 -0- 17,639
--------------- ---------------- --------------- ----------------
Subtotal 275,150 7,216 -0- 282,366
MBS with recourse held to maturity
-----------------------------------------------
FNMA 4,732,779 53,018 31,495 4,754,302
REMICs 8,836,840 106,809 -0- 8,943,649
--------------- ---------------- --------------- ----------------
Subtotal 13,569,619 159,827 31,495 13,697,951
--------------- ---------------- --------------- ----------------
Total $13,844,769 $ 167,043 $ 31,495 $13,980,317
=============== ================ =============== ================
The weighted average portfolio yields on mortgage-backed securities
held to maturity were 5.62% and 6.34% at December 31, 2002 and 2001,
respectively. There were no sales of securities from the mortgage-backed
securities held to maturity portfolio during 2002, 2001, or 2000.
During the first half of 2002, the Company desecuritized $4.1 billion
of FNMA MBS that were classified as MBS held to maturity with recourse and the
underlying loans were reclassified to loans receivable.
At December 31, 2002, mortgage-backed securities held to maturity had
contractual maturities as follows:
Amortized Fair
Maturity Cost Value
------------------------------------------ ----------------- ----------------
2003 through 2007 $ 7 $ 7
2008 through 2012 94 99
2013 and thereafter 6,032,814 6,177,297
----------------- ----------------
$ 6,032,915 $ 6,177,403
================= ================
F-15
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE E - Loans Receivable
December 31
----------------------------------
2002 2001
---------------- ---------------
Loans collateralized by:
One- to four-family dwelling units $54,934,357 $38,326,759
Over four-family dwelling units 3,257,389 2,766,888
Commercial property 20,465 29,117
Land 114 199
---------------- ---------------
58,212,325 41,122,963
Loans on savings accounts 13,240 16,672
---------------- ---------------
58,225,565 41,139,635
Net deferred costs 331,985 193,924
Allowance for loan losses (281,097) (261,013)
Undisbursed loan funds (7,554) (7,171)
---------------- ---------------
$58,268,899 $41,065,375
================ ===============
As of December 31, 2002 and 2001, the Company had $1.2 billion and
$670 million, respectively, of second mortgages outstanding.
At December 31, 2002 and 2001, the Company had $381 million and $429
million, respectively, in loans held for sale, all of which were carried at the
lower of cost or market. At December 31, 2002, the Company had $19.1 billion of
loans that were securitized after March 31, 2001 that are securities classified
as loans receivable in accordance with SFAS 140. The outstanding balances of
securitizations created prior to March 31, 2001 are included in MBS.
A summary of the changes in the allowance for loan losses is as
follows:
Year Ended December 31
----------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
Balance at January 1 $ 261,013 $ 236,708 $ 232,134
Provision for loan losses charged to expense 21,170 22,265 9,195
Loans charged off (1,943) (2,425) (623)
Recoveries 857 351 472
Net transfer of allowance (to) from recourse liability -0- 4,114 (4,470)
--------------- --------------- --------------
Balance at December 31 $ 281,097 $ 261,013 $ 236,708
=============== =============== ==============
The following is a summary of impaired loans:
December 31
----------------------------------
2002 2001
-------------- ---------------
Nonperforming loans $ 413,123 $ 382,510
Troubled debt restructured 233 1,505
Other impaired loans 3,889 11,225
-------------- ---------------
$ 417,245 $ 395,240
============== ===============
The portion of the allowance for loan losses that was specifically
provided for impaired loans was $1,572 and $2,712 at December 31, 2002 and 2001,
respectively. The average recorded investment in total impaired loans was
$407,621 and $322,844 during 2002 and 2001, respectively. All amounts involving
impaired loans have been measured based upon the fair value of the related
collateral. The amount of interest income recognized during the years ended
December 31, 2002, 2001, and 2000 on the total of impaired loans at each yearend
was $14,874 (2002), $17,056 (2001), and $11,187 (2000).
F-16
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE F - Loan Servicing
In addition to loans receivable and MBS with recourse held to
maturity, the Company services loans for others. At December 31, 2002 and 2001,
the outstanding balance of loans sold with servicing retained by the Company was
$5,408,494 and $4,832,884, respectively. Included in those amounts were
$2,897,859 and $2,797,634 at December 31, 2002 and 2001 of loans sold with
recourse.
Capitalized mortgage servicing rights are included in "Other assets"
on the Consolidated Statement of Financial Condition. The following is a summary
of CMSRs:
Year Ended December 31
--------------------------------
2002 2001
------------- -------------
Balance at January 1 $ 56,056 $ 28,355
New CMSRs from loan sales 34,044 41,587
Amortization of CMSRs (20,652) (13,886)
------------- -------------
Balance at December 31 $ 69,448 $ 56,056
============= =============
CMSRs are reviewed at least quarterly for impairment based on fair
value. Because quoted market prices from active markets are not readily
available, a present value cash flow model is used to estimate the value that
the CMSR could be sold for in the open market as of the valuation date. The
Company's model estimates a fair value based on a variety of factors including
documented observable data such as cost of servicing, loan prepayment rates, and
market discount rates. Currently, all of the loans associated with the Company's
CMSRs portfolio are single-family, fixed-rate loans. For the purposes of the
fair value calculation, the loans are divided by year of origination and
weighted average interest rate. The other key assumptions used in calculating
the fair value of CMSRs at December 31, 2002 were a weighted average repayment
rate of 24.4%, a discount rate of 10%, and the market rate of the annual cost of
servicing of 7.7 basis points. The estimated fair value of CMSRs as of December
31, 2002 and 2001 was $73,082 and $69,520, respectively. At December 31, 2002
and 2001, there was no impairment.
The estimated amortization of the December 31, 2002 balance of CMSRs
for the five years ending 2007 is $29.4 million (2003), $19.0 million (2004),
$12.1 million (2005), $6.9 million (2006), and $2.0 million (2007). Actual
results may vary depending upon the level of the payoffs of the loans currently
serviced.
NOTE G - Interest Earned But Uncollected
December 31
----------------------------------
2002 2001
------------- -------------
Loans receivable $ 150,766 $154,209
Mortgage-backed securities 21,685 91,228
Interest rate swaps 2,252 2,377
Other 8,427 7,786
------------- -------------
$ 183,130 $255,600
============= =============
NOTE H - Premises and Equipment
December 31
---------------------------------
2002 2001
------------- -------------
Land $ 81,592 $ 79,660
Building and leasehold improvements 256,019 241,522
Furniture, fixtures, and equipment 278,973 242,024
------------- -------------
616,584 563,206
Accumulated depreciation and amortization 264,642 234,627
------------- -------------
$ 351,942 $328,579
============= =============
Depreciation and amortization, computed by the straight-line method
for financial statement purposes, are provided over the useful lives of the
various classes of premises and equipment.
The aggregate future rentals under long-term operating leases on land
or premises in effect on December 31, 2002, and which expire between 2003 and
2064, amounted to approximately $181,314. The approximate minimum payments
during the five years ending 2007 are $25,382 (2003), $22,860 (2004), $20,430
(2005), $17,640 (2006), $14,444 (2007) and $80,558 thereafter. Certain of the
leases provide for options to renew and for the payment of taxes, insurance, and
maintenance costs. The rental expense for the year amounted to $28,480 (2002),
$26,381 (2001), and $24,016 (2000).
F-17
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE I - Deposits
December 31
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Rate* Amount Rate* Amount
---------- ---------------- ---------- ---------------
Deposits by rate:
Interest-bearing checking accounts 1.23% $ 165,320 1.33% $ 155,799
Interest-bearing checking accounts swept
into money market deposit accounts 1.79 4,407,650 2.06 4,613,087
Passbook accounts 0.75 456,158 0.87 459,953
Money market deposit accounts 2.50 22,060,104 2.82 8,569,759
Term certificate accounts with original
maturities of:
4 weeks to 1 year 1.86 4,714,712 3.37 10,852,181
1 to 2 years 2.52 4,197,261 4.39 6,415,700
2 to 3 years 3.82 1,857,234 5.11 1,619,868
3 to 4 years 4.48 1,286,011 5.23 737,981
4 years and over 5.07 1,794,051 5.59 799,025
Retail jumbo CDs 3.85 100,173 4.47 249,088
All other 4.88 123 6.94 144
---------------- ---------------
$41,038,797 $34,472,585
================ ===============
* Weighted average interest rate including the impact of interest rate swaps.
December 31
-----------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Rate* Amount Rate* Amount
---------- ---------------- ---------- ---------------
Deposits by remaining maturity at yearend:
No contractual maturity 2.34% $ 27,089,232 2.49% $ 13,798,598
Maturity within one year 2.51 10,082,783 3.87 17,893,723
After one but within two years 3.51 1,495,316 4.47 1,759,044
After two but within three years 4.62 992,351 4.62 475,167
After three but within four years 4.75 255,646 6.58 282,114
After four but within five years 4.72 1,111,603 4.81 245,504
Over five years 4.69 11,866 5.69 18,435
---------------- ---------------
$ 41,038,797 $ 34,472,585
================ ===============
* Weighted average interest rate including the impact of interest rate swaps.
At December 31, the weighted average cost of deposits was 2.56%
(2002) and 3.39% (2001).
Interest expense on deposits is summarized as follows:
Year Ended December 31
---------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Interest-bearing checking accounts $ 2,233 $ 3,132 $ 2,946
Interest-bearing checking accounts swept
into money market deposit accounts 84,750 111,748 109,492
Passbook accounts 3,855 5,917 8,837
Money market deposit accounts 413,076 187,867 201,265
Term certificate accounts 576,023 1,213,664 1,171,907
-------------- -------------- ---------------
$ 1,079,937 $ 1,522,328 $ 1,494,447
============== ============== ===============
F-18
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE J - Advances from Federal Home Loan Banks
Advances are borrowings secured by pledges of certain loans, MBS and
capital stock of the Federal Home Loan Banks with a total book value of
$23,892,141.
The Company's advances have maturities and interest rates as follows:
December 31, 2002
-----------------------------------------------------------------
Stated
Maturity Amount Rate
---------------- ------------
2003 $ 6,839,285 1.55%
2004 3,446,622 1.61
2005 6,114,557 1.64
2006 1,935,539 1.69
2007 31,875 6.23
2008 and thereafter 267,221 6.26
----------------
$ 18,635,099
================
December 31, 2001
-----------------------------------------------------------------
Stated
Maturity Amount Rate
---------------- ------------
2002 $ 5,461,178 2.16%
2003 6,829,909 2.69
2004 1,038,304 2.29
2005 2,532,043 2.98
2006 1,928,818 2.21
2007 and thereafter 247,257 6.45
----------------
$ 18,037,509
================
Financial data pertaining to advances from FHLBs were as follows:
Year Ended December 31
-----------------------------------
2002 2001
--------------- ----------------
Weighted average interest rate, end of year 1.68% 2.55%
Weighted average interest rate during the year 2.06% 4.70%
Average balance of FHLB advances $18,468,723 $18,738,987
Maximum outstanding at any monthend 19,169,627 19,633,825
Of the advances outstanding at December 31, 2002, $18.1 billion were
tied to a LIBOR index and were scheduled to reprice within 90 days. At December
31, 2002, the Company had $1.0 billion of commitments outstanding to borrow
advances from the FHLB of Dallas and these advances will be indexed to
three-month LIBOR.
F-19
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE K - Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by
mortgage-backed securities with a book value of $527,318 and $224,546 at
December 31, 2002 and 2001, respectively.
December 31, 2002
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- ------------- ----------
2003 $522,299 1.31%
=============
December 31, 2001
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- ------------- ----------
2002 $223,523 1.96%
=============
At the end of 2002 and 2001, all of the agreements to repurchase with
brokers/dealers were to reacquire the same securities.
NOTE L - Senior Debt
December 31
------------------------------
2002 2001
------------- -------------
Golden West Financial Corporation senior debt, unsecured,
due from 2006 to 2012, at coupon rates of 4.125% to 5.50%,
net of unamortized discount of $10,310 (2002) and $1,785
(2001) $ 989,690 $198,215
============= =============
At December 31, the senior debt had a weighted average interest rate
of 4.92% (2002) and 5.75% (2001). At December 31, 2002, senior debt had
maturities and interest rates as follows:
Stated
Maturity Rate Amount
--------------------------- -------------- ---------------
2006 5.73% $ 198,603
2007 4.33 297,663
2012 4.95 493,424
---------------
$ 989,690
===============
NOTE M - Subordinated Notes
December 31
------------------------------
2002 2001
------------ -------------
Golden West Financial Corporation subordinated notes,
unsecured, due 2003, at a coupon rate of 6.00%, net of
unamortized discount of $133 (2002) and $489 (2001) $ 199,867 $ 599,511
============ =============
At December 31, subordinated notes had a weighted average interest
rate of 6.09% (2002) and 7.16% (2001).
F-20
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE N - Taxes on Income
The following is a comparative analysis of the provision for federal
and state taxes on income.
Year Ended December 31
----------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Federal income tax:
Current $ 479,732 $ 454,381 $ 218,874
Deferred 43,611 (21,791) 65,261
State tax:
Current 69,933 81,235 34,449
Deferred 3,075 (644) 13,571
-------------- ------------- --------------
$ 596,351 $ 513,181 $ 332,155
============== ============= ==============
The amounts of net deferred liability included in taxes on income in
the Consolidated Statement of Financial Condition are as follows:
December 31
---------------------------------
2002 2001
-------------- --------------
Federal income tax $ 318,328 $ 267,099
State tax 63,214 70,490
The deferred tax liability results from changes in the amounts of
temporary differences during the year. The components of the net deferred tax
liability are as follows:
December 31
----------------------------------
2002 2001
-------------- --------------
Deferred tax liabilities:
Loan fees and interest income $ 255,563 $ 208,559
FHLB stock dividends 158,162 142,255
Unrealized gains on debt and equity securities 126,827 142,881
Depreciation 22,302 17,402
Bad debt reserve 3,161 14,039
Other deferred tax liabilities 26 41
-------------- --------------
Gross deferred tax liabilities 566,041 525,177
Deferred tax assets:
Provision for losses on loans 113,712 106,413
State taxes 31,590 30,333
Other deferred tax assets 39,197 50,842
-------------- --------------
Gross deferred tax assets 184,499 187,588
-------------- --------------
Net deferred tax liability $ 381,542 $ 337,589
============== ==============
F-21
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
A reconciliation of income taxes at the federal statutory corporate
rate to the effective tax rate is as follows:
Year Ended December 31
-----------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------ ------------------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------- ------------ ------------- ------------ ------------- ------------
Computed standard
corporate tax expense $544,120 35.0% $466,201 35.0% $307,281 35.0%
Increases (reductions) in
taxes resulting from:
State tax, net of federal
income tax benefit 60,666 3.9 55,915 4.2 36,579 4.2
Net financial income, not
subject to income tax,
primarily related to
acquisitions (4,830) (.3) (8,105) (.6) (9,309) (1.1)
Other (3,605) (.2) (830) (.1) (2,396) (.3)
------------- ------------ ------------- ------------ ------------- ------------
$596,351 38.4% $513,181 38.5% $332,155 37.8%
============= ============ ============= ============ ============= ============
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," a deferred tax liability has not been
recognized for the tax bad debt reserve of WSB that arose in tax years that
began prior to December 31, 1987. At December 31, 2002 and 2001, the portion of
the tax bad debt reserve attributable to pre-1988 tax years was approximately
$252 million. The amount of unrecognized deferred tax liability at December 31,
2002 and 2001, was approximately $88 million. This deferred tax liability could
be recognized if certain distributions are made with respect to the stock of
WSB, or the bad debt reserve is used for any purpose other than absorbing bad
debt losses.
NOTE O - Stockholders' Equity
Changes in common stock issued and outstanding were as follows:
-----------------------------------------------------
Year Ended December 31
-----------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
Shares issued and outstanding, beginning of year 155,531,777 158,410,137 161,358,433
Common stock issued through options exercised 730,986 797,090 725,004
Common stock repurchased and retired (2,741,660) (3,675,450) (3,673,300)
-------------- --------------- ---------------
Shares issued and outstanding, end of year 153,521,103 155,531,777 158,410,137
============== =============== ===============
The quarterly cash dividends paid on the Company's common stock were
as follows:
--------------------------------------------
Year Ended December 31
--------------------------------------------
2002 2001 2000
------------ ----------- -----------
First Quarter $ .0725 $ .0625 $ .0525
Second Quarter .0725 .0625 .0525
Third Quarter .0725 .0625 .0525
Fourth Quarter .0850 .0725 .0625
The Company's Board of Directors, through five separate actions
beginning in 1993, authorized the repurchase by the Company of up to 60.6
million shares of Golden West's common stock. As of December 31, 2002,
49,314,258 of such shares had been repurchased and retired at a cost of $1.3
billion since October 28, 1993. During 2002, 2,741,660 of the shares were
purchased and retired at a cost of $173 million.
F-22
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE P - Earnings Per Share
The Company calculates Basic Earnings Per Share (EPS) and Diluted EPS
in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, but uses the average share price for the period in determining
the number of incremental shares that are to be added to the weighted average
number of shares outstanding.
The following is a summary of the calculation of basic and diluted EPS:
Year Ended December 31
------------------------------------------------------
2002 2001 2000
----------------- --------------- ---------------
Earnings before cumulative effect of accounting change $ 958,279 $ 818,823 $ 545,791
Cumulative effect of accounting change, net of tax -0- (6,018) -0-
----------------- --------------- ---------------
Net earnings $ 958,279 $ 812,805 $ 545,791
================= =============== ===============
Weighted average shares 154,561,240 158,262,474 158,559,273
Dilutive effect of outstanding common stock equivalents 2,120,940 2,096,011 1,718,724
----------------- --------------- ---------------
Diluted average shares outstanding 156,682,180 160,358,485 160,277,997
================= =============== ===============
Basic Earnings Per Share Calculation:
Basic earnings per share before
cumulative effect of accounting change $ 6.20 $ 5.18 $ 3.44
Cumulative effect of accounting change, net of tax .00 (.04) .00
----------------- --------------- ---------------
Basic earnings per share $ 6.20 $ 5.14 $ 3.44
================= =============== ===============
Diluted Earnings Per Share Calculation:
Diluted earnings per share before
cumulative effect of accounting change $ 6.12 $ 5.11 $ 3.41
Cumulative effect of accounting change, net of tax .00 (.04) .00
----------------- --------------- ---------------
Diluted earnings per share $ 6.12 $ 5.07 $ 3.41
================= =============== ===============
F-23
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE Q - Stock Options
The Company's 1996 stock option plan authorizes the granting of
options to key employees to purchase up to 21 million shares of the Company's
common stock.
The plan permits the issuance of either non-qualified stock options
or incentive stock options. Under terms of the plan, incentive stock options
have been granted at fair market value as of the date of grant and are
exercisable any time after two to five years and prior to ten years from the
grant date. Non-qualified options have been granted at fair market value as of
the date of grant and are exercisable after two to five years and prior to ten
years and one month from the grant date. At December 31, shares available to be
granted under options amounted to 3,147,200 (2002), 3,088,500 (2001), and
4,002,650 (2000). Outstanding options at December 31, 2002, were held by 533
employees and had expiration dates ranging from April 29, 2003, to November 19,
2012.
The following table sets forth the range of exercise prices on
outstanding options at December 31, 2002:
Weighted Weighted
Average Average
Range of Number of Exercise Remaining
Exercise Price Options Price Contractual Life
- ---------------------- ----------------- -------------------- ---------------------
$11.50 - $17.83 1,270,900 $ 14.80 2.2 years
$27.60 - $38.75 3,386,499 30.51 6.6 years
$46.68 - $68.65 941,400 47.74 8.8 years
-----------------
5,598,799
=================
All of the options in the range from $11.50 to $17.83 are
exercisable. Of the options in the range from $27.60 to $38.75, 1,412,275 are
exercisable. Of the options in the range from $46.68 to $68.65, 5,000 are
exercisable.
A summary of the transactions of the stock option plan follows:
Average
Exercise
Price per
Shares Share
--------------- --------------
Outstanding, January 1, 2000 5,650,829 $ 22.17
Granted 1,375,150 30.59
Exercised (725,004) 15.21
Canceled (29,550) 30.25
--------------- --------------
Outstanding, December 31, 2000 6,271,425 $ 24.78
Granted 931,650 47.52
Exercised (797,090) 18.16
Canceled (17,500) 37.94
--------------- --------------
Outstanding, December 31, 2001 6,388,485 $ 28.89
Granted 13,250 63.65
Exercised (730,986) 21.77
Canceled (71,950) 33.33
--------------- --------------
Outstanding, December 31, 2002 5,598,799 $ 29.84
=============== ==============
At December 31, options exercisable amounted to 2,688,175 (2002),
2,913,435 (2001), and 2,818,325 (2000).
The weighted average fair value per share of options granted during
2002 was $17.27 per share, $14.14 per share for those granted during 2001, and
$8.88 per share for those granted during 2000. For these disclosure purposes,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield
of 0.5% (2002), 0.8% (2001) and 1.1% (2000); expected volatility of 26% (2002),
26% (2001) and 25% (2000); expected lives of 5.3 years for all years; and
risk-free interest rates of 2.73% (2002), 4.30% (2001) and 4.97% (2000).
F-24
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method prescribed by SFAS 123 "Accounting for Stock Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
Year Ended December 31
------------------------------------------------
2002 2001 2000
------------- ------------- --------------
Net income
As reported $ 958,279 $ 812,805 $ 545,791
Pro forma 954,815 807,997 539,802
Basic earnings per share
As reported $ 6.20 $ 5.14 $ 3.44
Pro forma 6.18 5.11 3.40
Diluted earning per share
As reported $ 6.12 $ 5.07 $ 3.41
Pro forma 6.09 5.04 3.37
NOTE R - Concentrations of Credit Risk and Derivatives
As of December 31, 2002, the balance of the Company's loans
receivable and MBS with recourse held to maturity was $64 billion. Of that $64
billion balance, 35% were Northern California loans, 29% were Southern
California loans, 5% were Florida loans, 4% were Texas loans, 4% were New Jersey
loans, 3% were Washington loans, 3% were Illinois loans, and 2% were Colorado
loans. No other single state made up more than 2% of the total loan portfolio.
The vast majority of these loans are secured by first deeds of trust on one- to
four-family residential property. Economic conditions and real estate values in
the states in which the Company lends are the key factors that affect the credit
risk of the Company's loan portfolio.
In order to further reduce its exposure to fluctuations in interest
rates, the Company is a party to certain derivative instruments entered into in
the normal course of business, specifically interest rate swaps. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the Consolidated Statement of
Financial Condition. The contract or notional amounts of these instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments. To limit credit exposure, among other things, the Company
enters into financial instrument contracts only with the Federal Home Loan Bank
and with major banks and securities dealers selected by the Company upon the
basis of their creditworthiness and other matters. The Company uses strong
counterparties and, if needed, obtains collateral or other security to support
these financial instruments. The Company does not anticipate nonperformance by
any current counterparties.
Commitments to originate mortgage loans are agreements to lend to a
customer providing that the customer satisfies the terms of the contract.
Commitments generally have fixed expiration dates or other termination clauses.
Prior to entering each commitment, the Company evaluates the customer's
creditworthiness. The amount of outstanding loan commitments at December 31,
2002 and 2001 was $1.4 billion and $984 million, respectively. The vast majority
of these commitments were for adjustable rate mortgages.
From time to time, the Company enters into commitments to purchase or
sell mortgage-backed securities. The commitments generally have a fixed delivery
or receipt settlement date. The Company controls the credit risk of such
commitments through credit evaluations, limits, and monitoring procedures. The
interest rate risk of the commitment is considered by the Company and may be
matched with the appropriate funding sources. The Company had no significant
outstanding commitments to purchase or sell mortgage-backed securities as of
December 31, 2002 or 2001.
F-25
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE S - Interest Rate Swaps
The Company has entered into interest rate swap agreements with
selected banks and government security dealers to reduce its exposure to
fluctuations in interest rates. The possible inability of counterparties to
satisfy the terms of these contracts exposes the Company to credit risk to the
extent of the net difference between the calculated pay and receive amounts on
each transaction. Net differences of that amount are generally settled
quarterly. The Company has not experienced any credit losses from interest rate
swaps.
The information presented below is based on interest rates at
December 31, 2002. To the extent that rates change, variable interest rate
information will change.
The following table illustrates the maturities and weighted average
rates as of December 31, 2002 for interest rate swaps held by the Company by
product type.
Maturities of Interest Rate Swaps at December 31, 2002
----------------------------------------------------------------------------------------------------
Maturity Balance at
----------------------------- December 31, 2002
2003 2004
------------- -------------
Receive fixed generic swaps:
Notional amount $ 91,300 $ -0- $ 91,300
Weighted average receive rate 6.39% 0.00% 6.39%
Weighted average pay rate 1.86% 0.00% 1.86%
Pay fixed generic swaps:
Notional amount $ 487,000 $ 103,600 $ 590,600
Weighted average receive rate 1.63% 1.55% 1.61%
Weighted average pay rate 4.02% 6.65% 4.48%
------------- ------------- --------------
Total notional value $ 578,300 $ 103,600 $ 681,900
============= ============= ==============
Total weighted average rate on swaps:
Receive rate 2.38% 1.55% 2.25%
============= ============= ==============
Pay rate 3.68% 6.65% 4.13%
============= ============= ==============
During 2002, the range of floating interest rates received on swap
contracts was 1.40% to 3.67% and the range of floating interest rates paid on
swap contracts was 1.78% to 2.00%. The range of fixed interest rates received on
swap contracts was 6.39% to 6.56% and the range of fixed interest rates paid on
swap contracts was 2.16% to 8.15%.
Activity in interest rate swaps is summarized as follows:
Interest Rate Swap Activity
For the years ended December 31, 2002, 2001, and 2000
(Notional amounts in millions)
Receive Pay
Fixed Fixed
Swaps Swaps
---------- ----------
Balance, January 1, 2000 $ 263 $ 727
Maturities (46) (10)
---------- ----------
Balance, December 31, 2000 217 717
Maturities (114) (96)
---------- ----------
Balance, December 31, 2001 103 621
Additions -0- 275
Maturities (12) (305)
---------- ----------
Balance, December 31, 2002 $ 91 $ 591
========== ==========
Interest rate swap payment activity decreased net interest income by
$19 million, $13 million, and $4 million for the years ended December 31, 2002,
2001, and 2000, respectively.
F-26
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 2002, 2001, and 2000
(Dollars in thousands except per share figures)
The Company accounts for interest rate swaps under the provisions in
SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, the Company reported a
one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. As
a result of the ongoing valuation of the Company's swaps, the Company reported
pre-tax income of $8 million, or $.03 after tax per diluted share for the year
ended December 31, 2002 and pre-tax expense of $10 million, or $.04 after tax
per diluted share for the year ended December 31, 2001. This additional income
and expense occurred because the fair value of Golden West's swaps changed in
2002 and 2001 as a result of interest rate movements and the maturities of
interest rate swaps. The changes in fair value of these swap contracts are
reflected as a net liability on the Consolidated Statement of Financial
Condition with corresponding amounts reported in Noninterest Income on the
Consolidated Statement of Net Earnings as "Change in Fair Value of Derivatives."
The Company has decided not to utilize permitted hedge accounting for the
derivative financial instruments in portfolio at December 31, 2002.
NOTE T - Disclosure About Fair Value of Financial Instruments
The Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of financial instruments for which it is practicable to estimate that
value. The statement provides for a variety of different valuation methods,
levels of aggregation, and assessments of practicability of estimating fair
value.
The values presented are based upon information as of December 31,
2002 and 2001, and do not reflect any subsequent changes in fair value. Fair
values may have changed significantly following the balance sheet dates. The
estimates presented herein are not necessarily indicative of amounts that could
be realized in a current transaction.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
The historical cost amounts approximate the fair value of the
following financial instruments: cash, interest earned but
uncollected, investment in capital stock of Federal Home Loan Banks,
other overnight investments, demand deposits, and securities sold
under agreements to repurchase with brokers/dealers due within 90
days.
Fair values are based on quoted market prices for securities
available for sale, other long-term investments, mortgage-backed
securities available for sale, mortgage-backed securities held to
maturity, securities sold under agreements to repurchase with
brokers/dealers with terms greater than 90 days, senior debt,
subordinated notes and interest rate swaps.
Fair values are estimated using projected cash flows present valued
at replacement rates currently offered for instruments of similar
remaining maturities for: term deposits, advances from Federal Home
Loan Banks, and consumer repurchase agreements.
For loans receivable and loan commitments for investment portfolio,
the fair value is estimated by present valuing projected future cash
flows, using current rates at which similar loans would be made to
borrowers and with assumed rates of prepayment. Adjustment for credit
risk is estimated based upon the classification status of the loans.
For mortgage servicing rights, the fair value is estimated using a
discounted cash flow analysis based on the Company's estimated annual
cost of servicing, prepayment rates, and discount rates.
F-27
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
The table below discloses the carrying value and the fair value of
Golden West's financial instruments as of December 31.
December 31
------------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- --------------- -------------- ----------------
Financial Assets:
Cash $ 318,914 $ 318,914 $ 339,059 $ 339,059
Securities available for sale 922,177 922,177 622,670 622,670
Mortgage-backed securities available for sale 34,543 34,543 233,403 233,403
Mortgage-backed securities held to maturity 6,032,915 6,177,403 13,844,769 13,980,317
Loans receivable 58,268,899 58,359,527 41,065,375 41,136,294
Interest earned but uncollected 183,130 183,130 255,600 255,600
Investment in capital stock of Federal Home
Loan Banks 1,072,817 1,072,817 1,105,773 1,105,773
Capitalized mortgage servicing rights 69,448 73,082 56,056 69,520
Financial Liabilities:
Deposits 41,038,797 41,273,390 34,472,585 34,642,385
Advances from Federal Home Loan Banks 18,635,099 18,686,486 18,037,509 18,067,815
Securities sold under agreements to
repurchase 522,299 522,307 223,523 223,562
Bank notes 1,209,925 1,210,189 -0- -0-
Senior debt 989,690 1,027,655 198,215 200,662
Subordinated notes 199,867 206,258 599,511 614,909
Interest rate swaps 12,031 12,031 19,641 19,641
Off-Balance Sheet Instruments (based on estimated fair value at December 31):
December 31
------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------- ---------------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain Gains Losses Gain
------------- ------------- --------------- ------------ ------------- ---------------
Loan commitments for
investment portfolio $ 19,967 $ -0- $ 19,967 $9,394 $ -0- $ 9,394
============= ============= =============== ============ ============= ===============
F-28
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE U - Parent Company Financial Information
Statement of Net Earnings
Year Ended December 31
----------------------------------------------------
2002 2001 2000
--------------- -------------- ---------------
Revenues:
Investment income $ 7,766 $ 20,106 $ 31,306
Insurance commissions 2,354 1,600 1,389
--------------- -------------- ---------------
10,120 21,706 32,695
Expenses:
Interest 45,859 47,445 54,119
General and administrative 5,053 4,235 4,617
--------------- -------------- ---------------
50,912 51,680 58,736
--------------- -------------- ---------------
Loss before earnings of subsidiaries
and income tax credit (40,792) (29,974) (26,041)
Income tax credit 15,793 11,693 10,140
Earnings of subsidiaries 983,278 831,086 561,692
--------------- -------------- ---------------
Net Earnings $ 958,279 $ 812,805 $ 545,791
=============== ============== ===============
Statement of Financial Condition
Assets
December 31
-------------------------------------
2002 2001
----------------- ----------------
Cash $ 1,481 $ 10,924
Securities available for sale 429,066 203,177
Overnight note receivable from subsidiary 399,369 50,161
Other investments with subsidiary 103 100
Subordinated note receivable from subsidiary -0- 100,000
Investment in subsidiaries 5,373,706 4,712,241
Other assets 30,346 24,966
----------------- -----------------
$ 6,234,071 $ 5,101,569
================= =================
Liabilities and Stockholders' Equity
Senior debt $ 989,690 $ 198,215
Subordinated notes, net 199,867 599,511
Other liabilities 19,264 19,653
Stockholders' equity 5,025,250 4,284,190
---------------- -----------------
$ 6,234,071 $ 5,101,569
================ =================
F-29
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE U - Parent Company Financial Information (Continued)
Statement of Cash Flows
Year Ended December 31
-------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Cash flows from operating activities:
Net earnings $ 958,279 $ 812,805 $ 545,791
Adjustments to reconcile net earnings to net cash
used in operating activities:
Earnings of subsidiaries (983,278) (831,086) (561,692)
Amortization of discount on senior debt and
subordinated notes 1,123 875 841
Other, net 3,377 7,211 4,114
-------------- --------------- --------------
Net cash used in operating activities (20,499) (10,195) (10,946)
Cash flows from investing activities:
Capital contributed to subsidiaries -0- -0- (20,000)
Dividends received from subsidiaries 300,188 2,222 4,746
(Increase) in securities available for sale (226,762) (200,002) (13)
Decrease (increase) in overnight notes receivable
from subsidiary (349,208) 228,851 (275,050)
Decrease (increase) in other investments
with subsidiary (3) (3) 146,998
Issuance of subordinated note receivable
from subsidiary -0- -0- (100,000)
Repayments of subordinated note receivable
from subsidiary 100,000 -0- -0-
Repayments of notes receivable
from subsidiary -0- -0- 600,000
-------------- --------------- --------------
Net cash provided by (used in) investing activities (175,785) 31,068 356,681
Cash flows from financing activities:
Proceeds from senior debt 790,708 198,060 -0-
Repayment of subordinated notes (400,000) -0- (215,000)
Dividends on common stock (46,746) (41,096) (34,882)
Exercise of stock options 15,915 14,476 11,024
Purchase and retirement of Company stock (173,036) (185,644) (109,297)
-------------- --------------- --------------
Net cash provided by (used in) financing activities 186,841 (14,204) (348,155)
Net increase (decrease) in cash (9,443) 6,669 (2,420)
Cash at beginning of period 10,924 4,255 6,675
-------------- --------------- --------------
Cash at end of period $ 1,481 $ 10,924 $ 4,255
============== =============== ==============
F-30
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2002, 2001, and 2000
(Dollars in thousands except per share figures)
NOTE V - Selected Quarterly Financial Data (Unaudited)
2002
---------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
Interest income $ 868,236 $ 853,789 $ 888,459 $ 886,550
Interest expense 401,337 388,770 392,759 383,874
---------------- ---------------- ---------------- ----------------
Net interest income 466,899 465,019 495,700 502,676
Provision for loan losses 8,539 5,186 6,484 961
Noninterest income 70,004 51,293 57,862 67,841
Noninterest expense 141,061 142,967 153,767 163,699
---------------- ---------------- ---------------- ----------------
Earnings before taxes on income 387,303 368,159 393,311 405,857
Taxes on income 149,222 141,791 148,852 156,486
---------------- ---------------- ---------------- ----------------
Net earnings $ 238,081 $ 226,368 $ 244,459 $ 249,371
================ ================ ================ ================
Basic earnings per share $ 1.53 $ 1.46 $ 1.58 $ 1.62
================ ================ ================ ================
Diluted earnings per share $ 1.51 $ 1.44 $ 1.56 $ 1.60
================ ================ ================ ================
2001
---------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ---------------- ---------------- -----------------
Interest income $ 1,134,183 $ 1,097,744 $ 1,028,154 $ 949,531
Interest expense 771,588 694,443 613,021 499,228
----------------- ---------------- ---------------- -----------------
Net interest income 362,595 403,301 415,133 450,303
Provision for loan losses 3,183 5,641 3,639 9,802
Noninterest income 43,323 66,828 56,350 70,238
Noninterest expense 117,417 125,115 132,147 139,123
----------------- ---------------- ---------------- -----------------
Earnings before taxes on income and
cumulative effect of accounting change 285,318 339,373 335,697 371,616
Taxes on income 109,239 130,444 129,857 143,641
----------------- ---------------- ---------------- -----------------
Earnings before cumulative effect of
accounting change 176,079 208,929 205,840 227,975
Cumulative effect of accounting change,
net of tax (6,018) -0- -0- -0-
----------------- ---------------- ---------------- -----------------
Net earnings $ 170,061 $ 208,929 $ 205,840 $ 227,975
================= ================ ================ =================
Basic earnings per share before
cumulative effect of accounting change $ 1.11 $ 1.32 $ 1.30 $ 1.45
Cumulative effect of accounting change,
net of tax (.04) .00 .00 .00
----------------- ---------------- ---------------- -----------------
Basic earnings per share $ 1.07 $ 1.32 $ 1.30 $ 1.45
================= ================ ================ =================
Diluted earnings per share before
cumulative effect of accounting change $ 1.10 $ 1.30 $ 1.28 $ 1.44
Cumulative effect of accounting change,
net of tax
(.04) .00 .00 .00
----------------- ---------------- ---------------- -----------------
Diluted earnings per share $ 1.06 $ 1.30 $ 1.28 $ 1.44
================= ================ ================ =================
F-31