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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, 2003
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, 2003, was $6,562,564,698 (based upon nonaffiliated
holdings of 82,021,806 shares and a market price of $80.01 per share). The
number of shares outstanding of the registrant's common stock on February 29,
2004, was 152,302,089 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 12, 2004, furnished to stockholders in connection
with the registrant's 2004 Annual Meeting of Stockholders, is incorporated by
reference into Part III.
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GOLDEN WEST FINANCIAL CORPORATION
2003 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
Loans Receivable and Mortgage-Backed Securities .......................7
Mortgage Servicing Rights.............................................19
Asset Quality.........................................................19
Allowance for Loan Losses.............................................23
Investment Activities.................................................24
Stockholders' Equity..................................................25
Earnings Per Share....................................................26
Yield on Interest-Earning Assets/Cost of Funds........................26
Competition and Other Matters.........................................28
Thrift Industry.......................................................29
Regulation............................................................29
Employee Relations....................................................36
Corporate Governance..................................................36
Executive Officers of the Company.....................................37
Item 2. Properties........................................................38
Item 3. Legal Proceedings.................................................38
Item 4. Submission of Matters to a Vote of Security Holders...............38
PART II.......................................................................39
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters...........................................................39
Market Prices of Stock................................................39
Per Share Cash Dividends Data.........................................39
Stockholders..........................................................40
Equity Compensation Plan Information..................................40
Item 6. Selected Financial Data...........................................40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................44
Financial Condition...................................................46
Results of Operations.................................................64
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......70
Item 8. Financial Statements and Supplementary Data.......................70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................70
Item 9A. Controls and Procedures..........................................70
PART III ...................................................................71
Item 10. Directors and Executive Officers of the Registrant...............71
Item 11. Executive Compensation...........................................71
Item 12. Security Ownership of Certain Beneficial Owners and Management...71
Item 13. Certain Relationships and Related Transactions...................71
Item 14. Principal Accounting Fees and Services...........................71
PART IV ...................................................................72
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..72
i
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 sixteen 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, 2003, 2002,
and 2001, WSB had assets of $81.9 billion, $68.0 billion and $58.4 billion,
respectively. For the years ended December 31, 2003, 2002, and 2001, WSB had net
income of $1.1 billion, $978 million, and $827 million, respectively.
The Company's website is at 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, at
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, uncertainties or contingencies 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; and
o the impact of current and future laws, governmental regulations and
accounting and other rulings and guidelines 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, 2003, the Company operated 122 savings branch offices in
California, 48 in Florida, 34 in Colorado, 24 in Texas, 15 in Arizona, 12 in New
Jersey, eight in Kansas, six in Illinois, and two in Nevada. The Company also
operated 302 loan origination offices of which 240 were located in the states
listed above. The remaining 62 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 302 loan offices, 20 were fully staffed offices
that were located in the same premises as savings branch offices, and 94 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, conducted 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 loan repayments; borrowings from
the FHLB of San Francisco; deposits; debt collateralized by mortgages, MBS, or
securities; sales of loans; bank notes; earnings; borrowings from its parent;
and borrowings from its WTX subsidiary. In addition, WSB has other alternatives
available to provide liquidity or finance operations including wholesale
certificates of deposit; federal funds purchased, and borrowings from private
and public offerings of debt. Furthermore, under certain conditions, WSB may
borrow from the Federal Reserve Bank of San Francisco to meet short-term cash
needs. 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 MBS; and borrowings from affiliates.
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 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 raises deposits
through its retail branch system, through the Internet and, from time to time,
through money markets. 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. Occasionally, the Company may use 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, 2003, 2002 and 2001.
Retail deposits increased $5.7 billion during 2003 compared to an increase
of $6.6 billion during 2002 and an increase of $4.6 billion during 2001. Retail
deposits increased in 2003, 2002, and 2001 because the public found money market
deposit accounts to be a more favorable investment compared with other
alternatives and the Company successfully promoted those accounts. Deposit
inflows began to slow in the third quarter of 2003 due in part to the recovery
in the equities markets. At December 31, 2003, 2002, and 2001, transaction
accounts (which include checking, passbook, and money market deposit accounts)
represented 77%, 66%, and 40%, 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)
2003 2002 2001 2000 1999
-------------- -------------- -------------- --------------- --------------
Interest-bearing checking accounts $ 5,555,185 $ 4,572,970 $ 4,768,886 $ 3,134,526 $ 3,334,917
Passbook accounts 483,226 456,158 459,953 451,228 484,132
Money market deposit accounts 29,709,791 22,060,104 8,569,759 3,534,786 5,869,963
Time certificates of deposit with
original maturities of:
4 weeks to 1 year 3,766,962 4,714,712 10,852,181 12,325,768 8,554,573
1 to 2 years. 2,331,194 4,197,261 6,415,700 7,275,219 5,947,712
2 to 3 years. 1,491,893 1,857,234 1,619,868 1,367,147 1,349,180
3 to 4 years. 1,317,212 1,286,011 737,981 453,974 368,540
4 years and over 2,015,469 1,794,051 799,025 675,120 582,275
Retail jumbo CDs(a) 55,953 100,173 249,088 644,962 623,286
Wholesale CDs -0- -0- -0- 185,000 600,000
All other 80 123 144 189 332
-------------- -------------- -------------- --------------- --------------
Total deposits $ 46,726,965 $ 41,038,797 $ 34,472,585 $ 30,047,919 $ 27,714,910
============== ============== ============== =============== ==============
(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)
2003 2002
----------------- -----------------
0.00% -- 2.00% $ 34,394,349 $ 5,433,756
2.01% -- 4.00% 10,007,431 32,219,197
4.01% -- 6.00% 2,019,980 2,846,962
6.01% -- 8.00% 305,205 529,715
8.01% -- 10.00% -0- -0-
10.01% -- 12.00% -0- 9,167
----------------- -----------------
$ 46,726,965 $ 41,038,797
================= =================
At December 31, the weighted average cost of deposits was 1.85% (2003) and 2.56%
(2002).
The table below shows the maturities of deposits at December 31, 2003 by
interest rate.
TABLE 3
Deposit Maturities
by Interest Rate
(Dollars in Thousands)
2008 and
2004(a) 2005 2006 2007 thereafter Total
----------------- ---------------- -------------- ---------------- ---------------- ----------------
0.00% -- 2.00% $34,009,772 $ 370,364 $ 14,213 $ -0- $ -0- $34,394,349
2.01% -- 4.00% 8,733,310 628,683 263,222 97,695 284,521 10,007,431
4.01% -- 6.00% 347,172 394,878 244,813 1,023,161 9,956 2,019,980
6.01% -- 8.00% 14,527 280,689 1,198 8,791 -0- 305,205
----------------- ---------------- -------------- ---------------- ---------------- ----------------
$43,104,781 $ 1,674,614 $523,446 $1,129,647 $ 294,477 $46,726,965
================= ================ ============== ================ ================ ================
(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity.
As of December 31, 2003, the aggregate amount outstanding of
time certificates of deposit in amounts of $100,000 or more was
$2.2 billion. The following table presents the maturity of these
time certificates of deposit at December 31, 2003.
TABLE 4
Maturities of Time Certificates of Deposit Equal to or Greater than $100,000
(Dollars in Thousands)
3 months or less $ 540,334
Over 3 months through 6 months 439,594
Over 6 months through 12 months 401,813
Over 12 months 849,253
-----------------
$2,230,994
=================
As of December 31, 2003, the aggregate amount outstanding of transaction
accounts with balances of $100,000 or more was $18.4 billion. Of the $20.6
billion of total deposits with balances of $100,000 or more, $6.8 billion were
uninsured deposits at December 31, 2003.
More information regarding deposits is included in Note I to the Financial
Statements included in Item 15.
Borrowings
The Company generally may borrow from a 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, 2003, the Company had $22.0
billion in FHLB advances outstanding, compared to $18.6 billion at yearend 2002
and $18.0 billion at yearend 2001.
The Company enters into reverse repurchase agreements with selected major
government securities dealers and, large banks. A reverse repurchase agreement
involves the sale and delivery of U.S. Government securities or mortgage-backed
securities by the Company to a 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 monitors the level of activity with any one party in connection
with reverse repurchase agreements in order to minimize its risk exposure in
these transactions. Reverse repurchase agreements amounted to $3.0 billion at
December 31, 2003, compared to $522 million at yearend 2002 and $224 million at
yearend 2001.
At December 31, 2003, Golden West, at the holding company level, had no
subordinated debt outstanding compared with $200 million at December 31, 2002
and $600 million at December 31, 2001. As of December 31, 2003, Golden West's
subordinated debt ratings were A2 and A by Moody's Investors Service (Moody's)
and Standard & Poor's (S&P), respectively.
At December 31, 2003, Golden West, at the holding company level, had $991
million of senior debt outstanding compared to $990 million at December 31, 2002
and $198 million at December 31, 2001. As of December 31, 2003, 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 $5.0 billion of short-term
notes with maturities of less than 270 days can be outstanding at any point in
time. At December 31, 2003, WSB had $3.0 billion of bank notes outstanding
compared with $1.2 billion at December 31, 2002. There were no bank notes
outstanding at December 31, 2001. As of December 31, 2003, WSB's bank notes were
rated P-1 and A-1+ by Moody's and S&P, respectively.
WSB may issue long-term wholesale deposits and long-term unsecured senior
debt. At December 31, 2003, WSB had no long-term wholesale deposits or long-term
unsecured senior debt outstanding. In March 2004, WSB issued $700 million of
two-year unsecured senior notes and $300 million of five-year unsecured senior
notes. There were no unsecured senior notes outstanding at December 31, 2002 or
2001. As of December 31, 2003 and continuing through the March 2004 issuance,
WSB's unsecured senior debt ratings were Aa3 and AA- from 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)
2003 2002 2001 2000 1999
---------------- --------------- ---------------- ---------------- ----------------
FHLB advances $22,000,234 $18,635,099 $18,037,509 $19,731,797 $8,915,218
Reverse repurchase agreements 3,021,385 522,299 223,523 857,274 970,129
Dollar reverse repurchase
agreements -0- -0- -0- -0- 75,047
Bank notes 3,015,854 1,209,925 -0- -0- -0-
Senior debt 991,257 989,690 198,215 -0- -0-
Subordinated debt -0- 199,867 599,511 598,791 812,950
---------------- --------------- ---------------- ---------------- ----------------
Total borrowings $29,028,730 $21,556,880 $19,058,758 $21,187,862 $10,773,344
================ =============== ================ ================ ================
Weighted average interest rate
of total borrowings 1.37% 1.85% 2.72% 6.66% 5.77%
================ =============== ================ ================ ================
The table below shows the portion of the Company's total outstanding
borrowings that are short-term. These borrowings are also included in the
table above.
TABLE 6
Composition of Short-Term Borrowings
(Dollars in Thousands)
Year Ended December 31
---------------------------------------------------
2003 2002 2001
-------------- --------------- --------------
Reverse Repurchase Agreements
Weighted average interest rate, end of year 1.12% 1.31% .72%
Weighted average interest rate, during the year 1.12% 1.48% 4.57%
Balance at end of year $1,871,385 $522,299 $23,523
Average balance for the year 616,922 105,041 687,329
Maximum amount outstanding at any monthend 1,871,385 522,299 925,546
Bank Notes
Weighted average interest rate, end of year 1.12% 1.44% .00%
Weighted average interest rate, during the year 1.17% 1.78% 3.27%
Balance at end of year $3,015,854 $1,209,925 $ -0-
Average balance for the year 1,568,911 1,386,988 740,453
Maximum amount outstanding at any monthend 3,015,854 1,872,798 699,984
More information concerning the borrowings of the Company is included in
Notes J, K, L, M and N to the Financial Statements, which are included in
Item 15.
Loans Receivable and Mortgage-Backed Securities
The Company invests primarily in single-family residential real estate
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 (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. As of December 31, 2003, the Company had
retained all of the beneficial interest in these MBS securitizations, and,
therefore, 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 18 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 (Fannie Mae) 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 and MBS at December 31, 2003, 2002, and 2001.
TABLE 7
Balance of Loans Receivable and MBS by Component
(Dollars in Thousands)
As of December 31
------------------------------------------------------------
2003 2002 2001
------------------ ----------------- ------------------
Loans $49,937,769 $39,159,502 $35,952,918
Securitized loans(a) (b) 23,233,928 19,066,063 5,186,717
Other(c) 1,033,881 717,751 451,084
------------------ ----------------- ------------------
Total loans receivable 74,205,578 58,943,316 41,590,719
------------------ ----------------- ------------------
Fannie Mae MBS(d) -0- -0- 4,732,779
MBS-REMICs 3,650,048 5,871,069 8,836,840
Purchased MBS 455,390 196,389 508,553
------------------ ----------------- ------------------
Total MBS 4,105,438 6,067,458 14,078,172
------------------ ----------------- ------------------
Total loans receivable and MBS $78,311,016 $65,010,774 $55,668,891
================== ================= ==================
(a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on page 18).
(b) Includes $14.3 billion at December 31, 2003 of loans securitized with Fannie Mae where the underlying loans are subject to full
credit recourse to the Company.
(c) Includes net deferred loan costs, allowance for loan losses, other miscellaneous reserves and discounts, and loans in process.
Loans in process are funded, interest-earning loans that have not yet been entered into the loan servicing system due to the
normal five to seven day processing lag.
(d) The underlying loans of the Fannie Mae MBS are subject to full credit recourse to the Company. During the first half of 2002,
the Company desecuritized the remaining Fannie Mae MBS.
Repayments from loans receivable and MBS were $20.0 billion, $15.6 billion,
and $15.6 billion for the years ended December 31, 2003, 2002, and 2001,
respectively. Loans receivable and MBS repayments were higher in 2003 as
compared to 2002 due to increases in both the portfolio balance and the
prepayment rate. In 2002, repayments were similar to 2001 because there was a
small decrease in the prepayment rate that was offset by the growth in the loan
portfolio.
Loans Receivable and Lending Operations
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, 2003, the Company was
originating loans in 38 states. 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, 2003 and
2002.
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 assesses 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, 2003 and 2002.
TABLE 8
Loan Portfolio by State
December 31, 2003
(Dollars in Thousands)
Residential
Real Estate Commercial Loans
-------------------------------- Real Total as a % of
State 1 - 4 5+ Estate Loans Portfolio
-------------------------------- --------------- --------------- --------------- ---------------- -------------
Northern California $ 25,919,048 $ 1,752,975 $ 10,671 $ 27,682,694 36.04%
Southern California 19,700,342 1,490,911 1,972 21,193,225 27.59
Florida 4,342,723 57,597 56 4,400,376 5.73
New Jersey 3,020,156 -0- 383 3,020,539 3.93
Texas 2,813,124 140,726 256 2,954,106 3.85
Washington 1,384,464 692,009 -0- 2,076,473 2.70
Illinois 1,787,477 138,482 -0- 1,925,959 2.51
Colorado 1,508,909 181,434 3,953 1,694,296 2.21
Other(a) 11,689,649 171,341 1,307 11,862,297 15.44
-------------- --------------- --------------- ---------------- -----------
Totals $ 72,165,892 $ 4,625,475 $ 18,598 76,809,965 100.00%
============== =============== =============== ===========
Loans on deposits 11,780
Other (b) 1,033,881
----------------
Total loans receivable and MBS with recourse 77,855,626
MBS with recourse (3,650,048)(c)
----------------
Total loans receivable $74,205,578
================
(a) All states included in Other have total loan balances less than 2% of total loans.
(b) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.
(c) The above schedule includes the December 31, 2003 balances of loans that were securitized and retained as MBS with recourse.
TABLE 9
Loan Portfolio by State
December 31, 2002
(Dollars in Thousands)
Residential Commercial Loans
Real Estate 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
New Jersey 2,389,661 -0- -0- 945 2,390,606 3.73
Texas 2,554,814 115,511 112 804 2,671,241 4.17
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%
============== ============== =========== ============== ===========
Loans on deposits 13,240
Other (b) 717,751
---------------
Total loans receivable and MBS with recourse 64,814,385
MBS with recourse (5,871,069)(c)
---------------
Total loans receivable $ 58,943,316
===============
(a) All states included in Other have total loan balances less than 2% of total loans.
(b) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.
(c) The above schedule includes the December 31, 2002 balances of loans that were securitized and retained as MBS with recourse.
The table below sets forth the composition of the Company's loan portfolio
by type of collateral at December 31.
TABLE 10
Loan Portfolio by Type of Security
(Dollars in Thousands)
2003 2002 2001 2000 1999
-------------- -------------- --------------- -------------- -----------------
Loans collateralized by
primarily first deeds of trust:
One-to four-family units $ 69,586,604 $ 54,934,357 $ 38,326,759 $ 31,353,927 $ 26,041,066
Over four-family units 3,554,715 3,257,389 2,766,888 2,444,832 1,979,199
Commercial real estate 18,598 20,465 29,117 39,810 49,149
Land -0- 114 199 347 612
Loans on deposits 11,780 13,240 16,672 21,429 20,107
Other (a) 1,033,881 717,751 451,084 285,827 74,944
-------------- -------------- --------------- -------------- -----------------
Total loans receivable 74,205,578 58,943,316 41,590,719 34,146,172 28,165,077
MBS with recourse
collateralized by:
One-to four-family units 2,579,288 4,458,582 11,821,868 16,102,358 8,853,027
Over four-family units 1,070,760 1,412,487 1,747,751 2,022,629 2,294,874
-------------- -------------- --------------- -------------- -----------------
Total MBS with recourse 3,650,048 5,871,069 13,569,619 18,124,987 11,147,901
Loans receivable and
-------------- -------------- --------------- -------------- ---------------
MBS with recourse $ 77,855,626 $ 64,814,385 $ 55,160,338 $ 52,271,159 $ 39,312,978
============== ============== =============== ============== ===============
(a) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts and reserves.
At December 31, 2003, 99.8% of the loans in the portfolio and MBS with
recourse 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, 2003.
TABLE 11
Loans Due After One Year
(Dollars in Thousands)
MBS With
Recourse
Loans Held to
Receivable Maturity Total
----------------- ---------------- -----------------
Adjustable Rate $71,721,813 $3,496,077 $75,217,890
Fixed Rate 1,429,645 153,607 1,583,252
----------------- ---------------- -----------------
$73,151,458 $3,649,684 $76,801,142
================= ================ =================
The following table sets forth information concerning new loans made by the
Company during 2003, 2002, and 2001 by type and purpose of loan.
TABLE 12
New Mortgage Loan Originations by Type and by Purpose
(Dollars in Thousands)
2003 2002 2001
----------------------------------- ----------------------------------- --------------------------------
No. of % of No. of % of No. of % of
By Type Loans Amount Total Loans Amount Total Loans Amount Total
- -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Residential
(one unit) 181,042 $33,730,118 93.8% 117,664 $24,946,030 93.4% 97,224 $19,501,525 93.9%
Residential
(2 to 4 units) 5,752 1,308,127 3.6 3,456 817,466 3.1 2,495 575,585 2.8
Residential
(5 or more units) 1,564 946,476 2.6 1,265 919,394 3.5 1,105 686,127 3.3
--------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Totals 188,358 $35,984,721 100.0% 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0%
========= ============ ======= ========= ============ ======= ======== ============ =======
2003 2002 2001
----------------------------------- ----------------------------------- --------------------------------
No. of % of No. of % of No. of % of
By Purpose Loans Amount Total Loans Amount Total Loans Amount Total
- -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Purchase 50,540 $10,693,372 29.7% 48,292 $10,188,265 38.2% 45,989 $ 8,604,296 41.4%
Refinance 137,818 25,291,349 70.3 74,093 16,494,625 61.8 54,835 12,158,941 58.6
--------- ------------ ------- --------- ------------ ------- -------- ------------ -------
Totals 188,358 $35,984,721 100.0% 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0%
========= ============ ======= ========= ============ ======= ======== ============ =======
New loan originations in 2003, 2002, and 2001 amounted to $36.0 billion,
$26.7 billion, and $20.8 billion, respectively. The volume of originations
increased during 2003 due to the decline in mortgage rates to 45 year lows,
which led to a strong demand for home loans, including the Company's ARM
products. 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.
First mortgages originated for sale were $1.9 billion, $1.7 billion, and
$2.2 billion for the years ended December 31, 2003, 2002, and 2001,
respectively. During 2003, 2002, and 2001, $1.2 billion, $596 million, and $794
million, respectively, of loans and MBS were converted at the customer's request
from adjustable rate to fixed-rate loans. The Company sold $3.1 billion, $2.3
billion, and $2.7 billion of fixed-rate first mortgage loans during 2003, 2002,
and 2001, respectively. The Company recognized pre-tax gains on the sale of
loans of $72 million in 2003 compared to $42 million in 2002 and $43 million in
2001. Included in the gains in 2003, 2002, and 2001 were $58 million, $34
million, and $42 million, respectively, due to the capitalization of mortgage
servicing rights (see page 19 for further information). At December 31, 2003,
the loans held for sale portfolio had a balance of $125 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 $24.2 billion in
2003 compared to $17.9 billion in 2002 and $14.4 billion in 2001. In 2003, 67%
of total origination volume was secured by California residential property
compared to 67% in 2002 and 70% in 2001. The five largest states, other than
California, for originations for the year ended December 31, 2003, were Florida,
New Jersey, Texas, Illinois, and Virginia with a combined total of 16% 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 and
MBS with recourse that was comprised of residential loans in California was 64%
at December 31, 2003, 2002, and 2001.
Golden West originates ARMs tied primarily to the Certificate of Deposit
Index (CODI), the Eleventh District Cost of Funds Index (COFI), and the Golden
West Cost of Savings Index (COSI). For a description of these indexes, see pages
46 and 47 in Item 7. Golden West also establishes Equity Lines of Credit (ELOCs)
indexed to the Prime Rate as published in the Money Rates table in The Wall
Street Journal (Central Edition). The Company's ARM originations constituted
approximately 94% of new mortgage loans made by the Company in 2003, compared
with 92% in 2002 and 84% in 2001. The following table shows the distribution of
ARM originations by index for the years ended December 31, 2003, 2002, and 2001.
TABLE 13
Adjustable Rate Mortgage Originations by Index
(Dollars in Thousands)
ARM Index 2003 2002 2001
- ----------------------------- ----------------- ----------------- ------------------
CODI $20,518,260 $13,173,161 $ 554,390
COFI 1,559,605 3,370,412 9,813,174
COSI 10,688,779 7,899,702 7,064,962
Prime(a) 887,363 --- ---
----------------- ----------------- ------------------
$33,654,007 $24,443,275 $17,432,526
================= ================= ==================
(a) As of January 2003, includes fundings of new ELOCs indexed to the Prime Rate. Only amounts drawn at the establishment of the
line of credit are included in originations. Prior to 2003, ELOCs were not included in originations.
The portion of the mortgage portfolio (including securitized loans and MBS)
composed of adjustable rate loans was 97% at yearend 2003 compared to 96% at
yearend 2002 and 94% at yearend 2001. The following table shows the distribution
by index of the Company's outstanding balance of adjustable rate mortgages
(including ARM MBS) at December 31, 2003, 2002, and 2001.
TABLE 14
Adjustable Rate Mortgage Portfolio by Index
(Including ARM MBS)
(Dollars in Thousands)
ARM Index 2003 2002 2001
- ---------------------------- ----------------- ----------------- -----------------
CODI $30,243,337 $13,286,566 $ 552,746
COFI 18,207,868 24,755,498 29,010,008
COSI 24,535,095 22,070,692 20,943,596
Prime(a) 1,827,435 999,251 303,035
Other(b) 424,988 658,135 985,015
----------------- ----------------- -----------------
$75,238,723 $61,770,142 $51,794,400
================= ================= =================
(a) ELOCs tied to the Prime Rate.
(b) Primarily ARMs tied to the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM).
Most of the Company's ARMs carry an interest rate that changes monthly
based on movements in the indexes shown in the table above. For all the
Company's ARM products, the borrower must qualify at the initial fully indexed
contract rate. For further information on the Company's ARM products, see
discussion in MD&A on pages 46 and 47.
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 and MBS
with recourse before any reduction for loan servicing fees was 12.20%, or 7.42%
above the actual weighted average rate at December 31, 2003, versus 12.13%, or
6.74% above the weighted average rate at yearend 2002 and 12.21% or 5.77% above
the weighted average rate at yearend 2001.
The following table shows the Company's ARM loans by lifetime cap bands as
of December 31, 2003.
TABLE 15
Adjustable Rate Mortgage Portfolio by Lifetime Cap Bands
December 31, 2003
(Dollars in Thousands)
ARM Number % of Total
Cap Bands Balance of Loans Balance
--------------------------------- --------------- ---------------- ---------------
Less than 9.00% $ 8,641 39 .0%
9.00% - 9.49% 104 1 .0%
9.50% - 9.99% 508 5 .0%
10.00% - 10.49% 7,743 20 .0%
10.50% - 10.99% 5,111 23 .0%
11.00% - 11.49% 62,452 495 .1%
11.50% - 11.99% 62,146,106 289,154 82.7%
12.00% - 12.49% 6,325,600 42,625 8.4%
12.50% - 12.99% 3,058,872 15,880 4.1%
13.00% - 13.49% 178,665 1,034 .2%
13.50% - 13.99% 541,250 4,666 .7%
14.00% or greater 2,871,906 59,372 3.8%
No Cap 31,765 302 .0%
---------------- ---------------- ----------------
Total $75,238,723 413,616 100.0%
================ ================ ================
At December 31, 2003, approximately $5.1 billion of the Company's ARM loans
(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, 2003, $2.3 billion of ARM loans had reached
their rate floors compared with $2.0 billion at December 31, 2002 and $560
million at December 31, 2001. The weighted average floor rate on the loans that
had reached their floor was 5.43% at yearend 2003 compared to 5.87% at yearend
2002 and 7.15% at yearend 2001. Without the floor, the average rate on these
loans would have been 4.38% at December 31, 2003, 5.19% at December 31, 2002,
and 5.91% at December 31, 2001.
On most of the Company's ARMs, monthly payments of principal and interest
are adjusted annually with a maximum increase of 7.5% 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. The borrower may pay down the
balance of deferred interest in whole or in part at any time. Every five years,
beginning with either the fifth or the tenth annual payment change, the payment
may be adjusted by the Company 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 7.5% payment
increase 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, a
portion of which are in the form of fixed-rate loans. The Company's fixed-rate
second mortgage originations amounted to $148 million, $160 million, and $279
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
outstanding balance of fixed-rate seconds amounted to $138 million, $215
million, and $362 million at December 31, 2003, 2002 and 2001, respectively.
The Company also establishes ELOCs indexed to the prime rate which are
collateralized typically by second and occasionally by first deeds of trust. The
following table shows the amounts of new ELOCs established in 2003, 2002, and
2001.
TABLE 16
New Equity Lines of Credit Established
(Dollars in Thousands)
For the Year Ended December 31
-----------------------------------------------------------
2003 2002 2001
------------------ ---------------- -----------------
New ELOCs
established $1,708,482 $1,179,467 $422,424
================== ================ =================
The following table shows the outstanding balance of ELOCs and the maximum
total line of credit available on the Company's ELOCs at December 31, 2003,
2002, and 2001.
TABLE 17
Equity Line of Credit
Outstanding Balance and Maximum Total Line of Credit Available
(Dollars in Thousands)
For the Year Ended December 31
--------------------------------------------------------------
2003 2002 2001
------------------- ------------------ --------------------
ELOC outstanding balance $1,827,435 $ 999,251 $ 303,035
=================== ================== ====================
ELOC maximum total line
of credit available $2,748,076 $1,501,725 $ 457,793
=================== ================== ====================
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 ELOC. For the
year ended December 31, 2003, 11% of loans originated exceeded 80% of the
appraised value of the property compared to 13% for the years ended December 31,
2002 and 2001.
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 or "CLTV") 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 $100 million, $139 million, and $184 million in 2003,
2002, and 2001, 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% to 20% of the
original balance of each insured pool.
The following table shows mortgage originations with LTV ratios or CLTV
ratios greater than 80% for the years ended December 31, 2003, 2002, and 2001.
TABLE 18
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater than 80%
(Dollars in Thousands)
For the Year Ended
December 31
-----------------------------------------------------
2003 2002 2001
---------------- --------------- ---------------
First mortgages with LTV ratios
greater than 80%:
With mortgage insurance $ 223,775 $ 292,210 $ 225,464
With no mortgage insurance 44,349 70,478 123,387
---------------- --------------- ---------------
268,124 362,688 348,851
---------------- --------------- ---------------
First and second mortgages with CLTV
ratios greater than 80%: (a)
With pool insurance on second mortgages 2,866,161 2,412,821 1,354,754
With no pool insurance 799,231 611,044 911,214
---------------- --------------- ---------------
3,665,392 3,023,865 2,265,968
---------------- --------------- ---------------
Total $ 3,933,516 $ 3,386,553 $ 2,614,819
================ =============== ===============
(a) For ELOCs, only amounts drawn at the establishment of the line of credit are included in originations. Prior to 2003, ELOCs
were not included in originations.
The following table shows the outstanding balance of mortgages with
original LTV or CLTV ratios greater than 80% at December 31, 2003, 2002, and
2001.
TABLE 19
Balance of Mortgages With Loan to Value and
Combined Loan to Value Ratios Greater than 80%
(Dollars in Thousands)
As of December 31
------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
First mortgages with LTV ratios
greater than 80%:
With mortgage insurance $ 566,817 $ 553,747 $ 431,498
With no mortgage insurance 160,225 293,851 548,507
---------------- ---------------- ----------------
727,042 847,598 980,005
---------------- ---------------- ----------------
First and second mortgages with CLTV
ratios greater than 80%:
With pool insurance on second mortgages 4,991,395 3,699,519 2,396,954
With no pool insurance 610,598 292,104 454,289
---------------- ---------------- ----------------
5,601,993 3,991,623 2,851,243
---------------- ---------------- ----------------
Total $6,329,035 $4,839,221 $3,831,248
================ ================ ================
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 protect the Company from interest rate risk, as well as generate income
and to provide additional funds for lending and liquidity, the Company sells
first mortgages to Fannie Mae without recourse. The Company also sells first
mortgages to Fannie Mae with recourse, for which a recourse liability is
provided. The Company continues to collect payments on the loans sold to Fannie
Mae as they become due, and otherwise to service the loans. The Company pays an
agreed-upon yield on Fannie Mae'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. At
December 31, 2003, the balance of loans sold with recourse was $3.1 billion.
In addition to the loan portfolio and MBS with recourse, the Company was
engaged in servicing approximately $5.8 billion of loan participations and whole
loans for others at December 31, 2003. For each of the years ended December 31,
2003, 2002, and 2001, fees received for such servicing activities totaled $34
million, $36 million, and $49 million, respectively. At December 31, 2003, the
average servicing fee was .64%.
Loans receivable repayments consist of monthly loan amortization and loan
payoffs. For the years ended 2003, 2002, and 2001, loan repayments (excluding
MBS) amounted to $18.0 billion, $12.3 billion, and $9.2 billion, respectively.
The increase in repayments in 2003 was due to growth in the balance of loans
receivable and an increase in the prepayment rate. The increase in loan
repayments in 2002 was due to an increase in the balance of loans receivable
outstanding partially offset by a decrease in the prepayment rate.
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.
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
The Company securitized $13.7 billion and $18.9 billion of loans for the
years ended December 31, 2003 and 2002, respectively. During the second and
third quarters of 2001, the Company securitized $6.0 billion of loans. These
securities are classified as loans receivable on the Statement of Financial
Condition and are available to be used as collateral for borrowings.
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, 2003, 2002, and
2001, the Company had MBS held to maturity in the amount of $4.1 billion, $6.0
billion, and $13.8 billion, respectively. The decrease in MBS held to maturity
in 2003 was due to prepayments, partially offset by the purchase of $367 million
of MBS for Community Reinvestment Act purposes. The sizable decrease in 2002 was
due primarily to prepayments and to the desecuritization of $4.1 billion of
Fannie Mae MBS. 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. 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,
2003, 2002, and 2001, the Company had MBS available for sale in the amount of
$22 million, $35 million, and $233 million, respectively, including net
unrealized gains on MBS available for sale of $91 thousand, $139 thousand, and
$2 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 2003, 2002, and 2001 amounted to $2.0
billion, $3.2 billion, and $6.4 billion, respectively. MBS repayments were lower
in 2003 and 2002 due primarily to a decrease in the balance of MBS outstanding.
MBS repayments were higher in 2001 due to an increase in the repayment rate on
the underlying loans.
For more information on MBS, see Notes C and D to the Financial Statements
included in Item 15.
Mortgage Servicing Rights
Capitalized mortgage servicing rights (CMSRs) are included in "Other
assets" on the Consolidated Statement of Financial Condition. The table on the
following page shows the changes in capitalized mortgage servicing rights for
the years ended 2003, 2002, and 2001.
TABLE 20
Capitalized Mortgage Servicing Rights
(Dollars in Thousands)
2003 2002 2001
------------ ------------- -------------
Beginning balance of CMSRs $69,448 $56,056 $28,355
New CMSRs from loan sales 58,249 34,044 41,587
Amortization of CMSRs (38,730) (20,652) (13,886)
------------ ------------- -------------
Ending balance of CMSRs $88,967 $69,448 $56,056
============ ============= =============
The estimated amortization of the December 31, 2003 balance for the five
years ending 2008 is $36.6 million (2004), $25.8 million (2005), $16.7 million
(2006), $7.9 million (2007), and $2.0 million (2008). 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, 2003, 2002, or 2001 and, therefore, no reserve was required to
adjust the servicing rights to their fair value.
More information concerning the capitalized mortgage servicing rights of
the Company is included in Notes A and F to the Financial Statements, which are
included in Item 15.
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, that
are 90 days or more past due) and real estate acquired through foreclosure. No
interest is recognized on nonaccrual 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 21
Nonperforming Assets and Troubled Debt Restructured
(Dollars in Thousands)
2003 2002 2001 2000 1999
------------- ------------- ------------ ------------- -------------
Nonaccrual loans $ 410,064 $ 413,123 $382,510 $231,155 $225,409
Foreclosed real estate 13,904 11,244 11,101 8,261 10,909
------------- ------------- ------------ ------------- -------------
Total nonperforming assets $ 423,968 $ 424,367 $393,611 $239,416 $236,318
============= ============= ============ ============= =============
TDRs $ 3,105 $ 233 $ 1,505 $ 1,933 $ 10,542
============= ============= ============ ============= =============
Ratio of NPAs to total assets .51% .62% .67% .43% .56%
============= ============= ============ ============= =============
Ratio of TDRs to total assets .00% .00% .00% .00% .03%
============= ============= ============ ============= =============
Ratio of NPAs and TDRs to total assets .51% .62% .67% .43% .59%
============= ============= ============ ============= =============
The balance of NPAs at yearend 2003 reflected the impact of an improving
economy and the strong housing market. However, continued economic weakness in a
few geographical areas of the U.S. contributed to a modest increase in
foreclosed real estate. The balance of 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 prior 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 nonaccrual loans (loans 90 days or more past
due) amounted to $2 million in 2003, $3 million in 2002, and $10 million in
2001.
The tables on the following page show the Company's nonperforming assets by
state at December 31, 2003 and 2002.
TABLE 22
Nonperforming Assets by State
December 31, 2003
(Dollars in Thousands)
Nonaccrual 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 $ 115,552 $ 568 $ -0- $ 2,202 $ -0- $ -0- $ 118,322 .43%
Southern California 79,105 491 134 43 -0- -0- 79,773 .38
Florida 29,641 -0- 40 328 -0- -0- 30,009 .68
New Jersey 20,338 -0- -0- 188 -0- -0- 20,526 .68
Texas 39,637 -0- -0- 3,852 -0- -0- 43,489 1.47
Washington 13,659 -0- -0- 609 -0- -0- 14,268 .69
Illinois 13,939 -0- -0- 570 -0- -0- 14,509 .75
Colorado 8,888 93 -0- 341 -0- -0- 9,322 .55
Other(c) 87,979 -0- -0- 5,771 -0- -0- 93,750 .79
------------- --------- ---------------- ---------- -------- ----------- ------------- ---------
Totals $ 408,738 $ 1,152 $ 174 $13,904 $ -0- $ -0- $ 423,968 .55%
============= ========= ================ ========== ======== =========== ============= =========
(a) Nonaccrual loans are 90 days or more past due and interest is not recognized on these loans.
(b) The December 31, 2003 balances include loans that were securitized into MBS with recourse.
(c) All states included in Other have total loan balances with less than 2% of total loans.
TABLE 23
Nonperforming Assets by State
December 31, 2002
(Dollars in Thousands)
Nonaccrual 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 $ 1,275 $ -0- $ -0- $ 98,301 .43%
Southern California 104,059 -0- 309 1,990 -0- -0- 106,358 .58
Florida 35,055 -0- 15 401 -0- -0- 35,471 1.03
New Jersey 18,256 -0- 622 -0- -0- -0- 18,878 .79
Texas 29,143 -0- 442 792 -0- -0- 30,377 1.14
Washington 16,257 433 -0- 1,469 -0- -0- 18,159 .92
Illinois 13,656 1,507 -0- 845 -0- -0- 16,008 .95
Colorado 5,331 64 -0- -0- -0- -0- 5,395 .34
Other(c) 90,948 -0- -0- 4,472 -0- -0- 95,420 1.01
------------ ---------- ---------------- --------- -------- ----------- ------------- ----------
Totals $ 409,510 $ 2,004 $ 1,609 $11,244 $ -0- $ -0- $ 424,367 .66%
============ ========== ================ ========= ======== =========== ============= ==========
(a) Nonaccrual 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 with recourse.
(c) All states included in Other have total loan balances with less than 2% of total loans.
A risk profile of loans and MBS with recourse is displayed by components in
the following tables as of December 31, 2003 and 2002.
TABLE 24
Risk Profile of Loans and MBS with Recourse
December 31, 2003
(Dollars in Thousands)
Residential
Real Estate Commercial
1 - 4 5+ Real Estate Total
---------------- -------------- ---------------- ---------------
Nonaccrual loans $ 408,738 $ 1,152 $ 174 $ 410,064
Loans 30 to 89 days past due 806,342 4,805 42 811,189
Loans performing under
bankruptcy protection 201,326 250 -0- 201,576
Troubled debt restructured 1,524 1,581 -0- 3,105
Other impaired loans 297 3,039 3,416 6,752
Performing loans and MBS with
recourse not otherwise classified 70,747,665 4,614,648 14,966 75,377,279
---------------- -------------- ---------------- ---------------
Total gross loans $ 72,165,892 $ 4,625,475 $ 18,598 76,809,965
================ ============== ================
Loans on deposits 11,780
Other (a) 1,033,881
---------------
Total loan portfolio and MBS with recourse $77,855,626
===============
(a) Includes loans in process, net deferred loan costs, allowance for loan losses, other miscellaneous discounts.
TABLE 25
Risk Profile of Loans and MBS with Recourse
December 31, 2002
(Dollars in Thousands)
Residential
Real Estate Commercial
1 - 4 5+ Real Estate Total
---------------- -------------- ---------------- ---------------
Nonaccrual 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 and MBS with
recourse 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
================ ============== ================
Loans on deposits 13,240
Other (a) 717,751
---------------
Total loan portfolio and MBS with recourse $64,814,385
===============
(a) Includes loans in process, net deferred loan costs, allowance for loan losses, other miscellaneous discounts.
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 and factors reflecting
current economic conditions. This approach uses a database that identifies and
measures 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. The
review methodology and historical analyses are reviewed quarterly.
The table below shows the changes in the allowance for loan losses for the
years indicated.
TABLE 26
Changes in Allowance for Loan Losses
(Dollars in Thousands)
2003 2002 2001 2000 1999
------------ ------------- ------------ ------------ ------------
Beginning allowance for loan losses $ 281,097 $ 261,013 $ 236,708 $ 232,134 $ 244,466
Provision for (recovery of) loan losses
charged to expense 11,864 21,170 22,265 9,195 (2,089)
Loans charged off (3,633) (1,943) (2,425) (623) -0-
Recoveries 609 857 351 472 1,800
Net transfer of allowance (to) from recourse
liability -0- -0- 4,114 (4,470) (12,043)
------------ ------------- ------------ ------------ ------------
Ending allowance for loan losses $ 289,937 $ 281,097 $ 261,013 $ 236,708 $ 232,134
============ ============= ============ ============ ============
Ratio of net chargeoffs (recoveries) to average
loans outstanding and MBS with recourse .00% .00% .00% .00% (.01)%
============ ============= ============ ============ ============
Ratio of allowance for loan losses to NPAs 68.4% 66.2% 66.3% 98.9% 98.2%
============ ============= ============ ============ ============
The table below shows the composition of the allowance for loan losses at
December 31.
TABLE 27
Composition of Allowance for Loan Losses
(Dollars in Thousands)
2003 2002 2001 2000 1999
------------ ------------- ------------- ------------ -------------
Real Estate
1 to 4 units
General $273,894 $263,004 $240,135 $213,507 $200,499
Specific -0- -0- -0- -0- 369
------------ ------------- ------------- ------------ -------------
273,894 263,004 240,135 213,507 200,868
------------ ------------- ------------- ------------ -------------
5+ units and commercial
General 15,005 16,521 18,166 19,165 22,192
Specific 1,038 1,572 2,712 4,036 9,074
------------ ------------- ------------- ------------ -------------
16,043 18,093 20,878 23,201 31,266
------------ ------------- ------------- ------------ -------------
Total $289,937 $281,097 $261,013 $236,708 $232,134
============ ============= ============= ============ =============
Ratio of allowance for loan losses to total
loans and MBS with recourse .37% .43% .47% .45% .59%
============ ============= ============= ============ =============
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.
The table below sets forth the composition of the Company's securities
available for sale at December 31.
TABLE 28
Composition of Securities Available for Sale
(Dollars in Thousands)
2003 2002 2001
--------------- -------------- --------------
Federal funds $ 941,267 $ 153,838 $ 49,397
Equity securities 327,758 331,861 367,548
Short-term repurchase agreements collateralized by MBS 300,000 -0- -0-
Eurodollar time deposits 298,238 225,000 200,000
Commercial paper -0- 199,986 -0-
Other 12,180 11,492 5,725
--------------- -------------- --------------
$ 1,879,443 $ 922,177 $ 622,670
=============== ============== ==============
Included in the balances above are net unrealized gains on investment
securities available for sale of $323 million, $326 million, and $362 million at
December 31, 2003, 2002, and 2001, respectively. The cost basis of the
securities available for sale portfolio at December 31, 2003, 2002, and 2001 was
$1.6 billion, $596 million, and $260 million, respectively, and had weighted
average yields (based on cost) of .93%, 1.94%, and 2.86% at December 31, 2003,
2002, and 2001, respectively.
More information concerning the securities available for sale of the
Company is included in Note B to the Financial Statements, which are included in
Item 15.
Stockholders' Equity
The Company's stockholders' equity increased by $922 million during 2003 as
a result of earnings partially offset by the $151 million cost of the repurchase
of Company stock, the payment of quarterly dividends to stockholders, and
decreased market values of equity securities available for sale. 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, the payment of quarterly dividends to stockholders, and decreased market
values of equity securities available for sale. 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,
the payment of quarterly dividends to stockholders, and decreased market values
of securities available for sale.
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, 2003, 51.3 million shares had
been repurchased and retired at a cost of $1.4 billion since October 28, 1993,
including 2.0 million shares purchased and retired at a cost of $151 million
during 2003. 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.
The following table summarizes the activity in the Company's stock
repurchase program during 2003.
TABLE 29
Stock Repurchase Program
Maximum Number of
Weighted Average Shares That May Yet
Number of Shares Price Per Share Be Purchased Under
Repurchased Repurchased the Plan
--------------------- -------------------- -----------------------
January -0- $ -0- 11,284,549
February 260,000 73.72 11,024,549
March 579,395 71.74 10,445,154
April 180,000 73.16 10,265,154
May 127,800 76.47 10,137,354
June 179,175 78.94 9,958,179
July 150,000 82.45 9,808,179
August 300,000 84.69 9,508,179
September 180,000 86.85 9,328,179
October -0- -0- 9,328,179
November -0- -0- 9,328,179
December -0- -0- 9,328,179
--------------------- -------------------- -----------------------
1,956,370 $ 77.30 9,328,179
===================== ==================== =======================
Earnings Per Share (EPS)
The Company reported Basic EPS of $7.25 for the year ended December 31,
2003, compared to $6.20 and $5.18 (before the cumulative effect of accounting
change) for the years ended December 31, 2002 and 2001, respectively. The
Company reported Diluted EPS of $7.14 for the year ended December 31, 2003 as
compared to $6.12 and $5.11 (before the cumulative effect of accounting change)
for the years ended December 31, 2002 and 2001, respectively.
Yield on Earning Assets/Cost of Funds
Information regarding the Company's yield on earning assets and cost of
funds at December 31, 2003, 2002, and 2001 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 earning assets and
interest-bearing liabilities at December 31, 2003, 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 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 earning assets and interest-bearing
liabilities.
TABLE 30
Average Earning Assets and Interest-Bearing Liabilities
At and for the Years Ended December 31
(Dollars in Thousands)
2003 2002 2001
-------------------------------- -------------------------------- -------------------------------
End of End of End of
Average Average Period Average Average Period Average Average Period
Balances(a)(b) Yield Yield Balances(a)(b) Yield Yield Balances(a)(b) Yield Yield
-------------- ------- ------- -------------- ------- -------- -------------- -------- ------
Assets
Investments $ 3,632,896 1.31% .93%(c) $ 3,119,920 1.98% 1.94% $ 3,200,407 4.30% 2.86%
Loans receivable and MBS(d) 69,852,274 4.92 4.61 59,622,496 5.68 5.28 54,306,639 7.40 6.38
Invest. in capital stock of 1,125,097 3.63 n/a(e) 1,055,015 4.88 n/a(e) 1,084,383 5.10 n/a(e)
FHLBs
-------------- ------- -------------- ------- -------------- --------
Earning assets $ 74,610,267 4.73% $ 63,797,431 5.48% $ 58,591,429 7.18%
============== ======= ============== ======= ============== ========
Liabilities
Deposits:
Checking accounts $ 5,070,536 1.56% 1.38% $ 4,659,240 1.87% 1.77% $ 3,582,578 3.21% 2.04%
Savings accounts 27,251,850 1.96 1.72 15,371,419 2.71 2.46 5,857,638 3.31 2.72
Term accounts 12,205,343 2.67 2.45 17,203,402 3.35 2.99 23,220,480 5.23 3.99
-------------- ------- ------- -------------- ------- -------- -------------- -------- ------
Total deposits 44,527,729 2.11 1.85 37,234,061 2.90 2.56 32,660,696 4.66 3.39
Advances from FHLBs 19,621,477 1.38 1.28 18,468,723 2.06 1.68 18,738,987 4.70 2.55
Reverse repurchases 803,481 1.13 1.13 122,389 1.49 1.31 917,287 4.59 1.96
Other borrowings 4,921,266 2.09 2.06 4,195,270 2.51 3.26 2,949,185 4.54 6.81
-------------- ------- -------------- ------- -------------- --------
Interest-bearing liabilities $ 69,873,953 1.89% $ 60,020,443 2.61% $ 55,266,155 4.67%
============== ======= ============== ======= ============= ========
Average net interest spread 2.84% 2.87% 2.51%
======= ======= ========
Net interest income $ 2,208,384 $ 1,930,294 $ 1,631,332
=============== ============== ==============
Net yield on average
earning assets 2.96% 3.03% 2.78%
======= ======= ========
(a) Averages are computed using daily balances.
(b) Includes balances of assets and liabilities that were acquired and matured within the same month.
(c) Freddie Mac stock is excluded from the end of period yield calculation, effective January 1, 2003.
(d) Includes nonaccrual loans (90 days or more past due).
(e) FHLB stock pays dividends; no end of period interest yield applies.
The table below presents the changes for 2003 and 2002 from the respective
preceding year of the interest income and expense associated with each category
of earning assets and interest-bearing liability as allocated to changes in
volume and changes in rates.
TABLE 31
Volume and Rate Analysis of Interest Income and Interest Expense
For the Years Ended December 31
(Dollars in Thousands)
Increase/(Decrease) in Income/Expense
Due to Changes in Volume and Rate(a)
-----------------------------------------------------------------
2003 2002 2001 2003 versus 2002 2002 versus 2001
---------- ---------- ---------- --------------------------------- ------------------------------
Income/ Income/ Income/
Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total
---------- ---------- ---------- -------- ---------- ---------- --------- ---------- --------
Interest Income
Investments $ 47,691 $ 61,750 $ 137,562 $ 13,418 $(27,477) $ (14,059) $ (3,377) $ (72,435) $(75,812)
Loans receivable and MBS 3,439,799 3,383,822 4,016,749 244,693 (188,716) 55,977 459,622 (1,092,549) (632,927)
Invest. in capital stock of
FHLBs 40,854 51,462 55,301 3,725 (14,333) (10,608) (1,473) (2,366) (3,839)
---------- ---------- ----------
Total interest income 3,528,344 3,497,034 4,209,612
Interest Expense
Deposits:
Checking accounts 78,900 86,983 114,880 9,116 (17,199) (8,083) 71,490 (99,387) (27,897)
Savings accounts 533,402 416,931 193,784 182,040 (65,569) 116,471 250,977 (27,830) 223,147
Term accounts 325,821 576,023 1,213,664 (147,368) (102,834) (250,202) (267,142) (370,499) (637,641)
---------- ---------- ---------- -------- --------- ---------- --------- ----------- ---------
Total deposits 938,123 1,079,937 1,522,328 43,788 (185,602) (141,814) 55,325 (497,716) (442,391)
Advances from FHLBs 269,793 379,613 879,842 25,519 (135,339) (109,820) (12,512) (487,717) (500,229)
Reverse repurchases 9,048 1,826 42,113 7,555 (333) 7,222 (22,647) (17,640) (40,287)
Other borrowings 102,996 105,364 133,997 (64,250) 61,882 (2,368) 489,458 (518,091) (28,633)
---------- ---------- ---------- -------- --------- ---------- --------- ----------- ---------
Total interest expense 1,319,960 1,566,740 2,578,280
---------- ---------- ----------
Net interest income $2,208,384 $1,930,294 $1,631,332 $249,224 $ 28,866 $ 278,090 $(54,852) $353,814 $298,962
========== ========== ========== ======== ========= ========== ========= =========== =========
Net interest income increase
(decrease) as a percentage
of average earning assets(c) .33% .04% .37% (.09%) .56% .47%
======== ========= ========== ========= =========== =========
(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 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 270 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 Fannie Mae and Freddie Mac. 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 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. In addition, savings institutions must comply with OTS regulations
governing deposits and mortgage loans including regulations concerning the
indexes and interest rate adjustments of the Company's ARMs products.
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, 2003, 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, 2003, the premium paid by
WSB and WTX to the FDIC was an annual rate of $.154 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.
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 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, 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, 2003, 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, 2003 and 2002, WSB and WTX had the following regulatory
capital calculated in accordance with FIRREA's capital standards:
TABLE 32
Regulatory Capital Ratios, Minimum Capital Requirements,
and Well-Capitalized Capital Requirements
As of December 31, 2003
(Dollars in Thousands)
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------- -------------------------- ---------------------------
Capital Ratio Capital Ratio Capital Ratio
-------------- ------- ---------------- ------- ---------------- -------
WSB and Subsidiaries
Tangible $6,085,283 7.45% $ 1,225,819 1.50% --- ---
Tier 1 (core or leverage) 6,085,283 7.45 3,268,850 4.00 $ 4,086,062 5.00%
Tier 1 risk-based 6,085,283 13.52 --- --- 2,701,449 6.00
Total risk-based 6,374,182 14.16 3,601,932 8.00 4,502,415 10.00
WTX
Tangible $ 504,735 5.16% $ 146,846 1.50% --- ---
Tier 1 (core or leverage) 504,735 5.16 391,591 4.00 $ 489,488 5.00%
Tier 1 risk-based 504,735 22.85 --- --- 132,557 6.00
Total risk-based 505,530 22.88 176,743 8.00 220,929 10.00
TABLE 33
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
The table below shows a reconciliation of WSB's equity capital to
regulatory capital at December 31, 2003.
TABLE 34
World Savings Bank, FSB and Subsidiaries
Reconciliation of Equity Capital to Regulatory Capital
As of December 31, 2003
(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 3,945,532
Unrealized gain on securities after tax 197,451
------------
Equity capital $ 6,289,047 $ 6,289,047 $ 6,289,047 $ 6,289,047 $ 6,289,047 $ 6,289,047
============
Non-includable subsidiary (2,971) (2,971) (2,971) (2,971) (2,971)
Unrealized gain on securities after tax (197,451) (197,451) (197,451) (197,451) (197,451)
Non-qualifying CMSRs (3,342) (3,342) (3,342) (3,342) (3,342)
General allowance for loan losses 288,899
------------ ------------- ------------ ------------- --------------
Regulatory capital $ 6,085,283 $ 6,085,283 $ 6,085,283 $ 6,085,283 $ 6,374,182
============ ============= ============ ============= ==============
Total assets $81,938,826
============
Adjusted total assets $81,721,244 $81,721,244 $81,721,244
============ ============= ============
Risk-weighted assets $ 45,024,147 $45,024,147
============= ==============
CAPITAL RATIO - ACTUAL 7.68% 7.45% 7.45% 7.45% 13.52% 14.16%
============ ============ ============= ============ ============= ==============
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, 2002.
TABLE 35
World Savings Bank, FSB and Subsidiaries
Reconciliation of Equity Capital to Regulatory Capital
As of December 31, 2002
(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 CMSRs (3,674) (3,674) (3,674) (3,674) (3,674)
General allowance for loan losses 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 WTX's equity capital to
regulatory capital at December 31, 2003.
TABLE 36
World Savings Bank, FSB (Texas)
Reconciliation of Equity Capital to Regulatory Capital
As of December 31, 2003
(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 421,575
Retained earnings 83,010
------------
Equity capital $ 504,735 $ 504,735 $ 504,735 $ 504,735 $ 504,735 $ 504,735
============
General allowance for loan losses 795
------------ ------------ ------------ ------------- -------------
Regulatory capital $ 504,735 $ 504,735 $ 504,735 $ 504,735 $ 505,530
============ ============ ============ ============= =============
Total assets $ 9,789,764
============
Adjusted total assets $ 9,789,764 $ 9,789,764 $ 9,789,764
============ ============ ============
Risk-weighted assets $ 2,209,290 $ 2,209,290
============= =============
CAPITAL RATIO - ACTUAL 5.16% 5.16% 5.16% 5.16% 22.85% 22.88%
============= ============ ============ ============ ============= =============
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 37
World Savings Bank, FSB (Texas)
Reconciliation of Equity Capital to Regulatory Capital
As of December 31, 2002
(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 allowance for loan losses 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%
============ ============= =============
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 39, for a
discussion on certain limitations imposed by the OTS on dividends paid by
savings institutions. During 2003, WSB paid $200 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, 2003, the maximum that WSB could have loaned to one borrower (and
related entities) was $956 million, while the largest amount of loans it had to
one borrower was $74 million. At December 31, 2003, the maximum amount that WTX
could have loaned to one borrower (and related entities) was $76 million, while
the largest amount of loans WTX had outstanding to any one borrower was $7
million.
DEPOSITOR PREFERENCE. As a result of federal laws that apply to insured
depository institutions, claims of general unsecured creditors of WSB would be
subordinated to claims of a receiver for administrative expenses and claims of
holders of deposit liabilities of WSB (including the FDIC, as the subrogee of
those holders) in the event of a liquidation or other resolution of WSB. As of
December 31, 2003, WSB had approximately $46 billion of deposits outstanding on
a consolidated basis.
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 the 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 likely 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 a repudiation would likely be to
accelerate the maturity of debt. A repudiation would likely result in a claim by
each holder of debt against the receivership or conservatorship. 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 conservatorship or receivership
assets available for the payment of unsecured claims and the priority of the
claims 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
Preference" above.
If the maturity of the debt were so accelerated, and a claim relating to
the debt paid by the conservatorship or 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 WSB or WTX,
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, 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 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,
2003, 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 38.2% and 38.4% for the years ended 2003 and 2002,
respectively. Included in taxes on income for 2003 was a nonrecurring tax
benefit of $6.6 million resulting from the closure of an audit and other issues.
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.
Employee Relations
The Company had a total of 8,457 full-time and 983 permanent part-time
employees at December 31, 2003. 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.
Corporate Governance
The Board of Directors has determined that a majority of the members of the
Company's Board of Directors and all of the Audit Committee, Compensation and
Stock Option Committee, and Nominating and Corporate Governance Committee
members satisfy the independence standards under the New York Stock Exchange's
corporate governance rules. In addition, all of the Audit Committee members
satisfy the independence standards set forth in Rule 10A-3 under the Securities
Exchange Act of 1934. The Board of Directors has adopted Corporate Governance
Guidelines and codes of conduct and ethics for directors, financial officers,
and employees that are available, along with Board committee charters, on the
Company's website at www.gdw.com.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name and Age Position
Herbert M. Sandler, 72 Chairman of the Board and Chief Executive Officer
Marion O. Sandler, 73 Chairman of the Board and Chief Executive Officer
James T. Judd, 65 Senior Executive Vice President
Russell W. Kettell, 60 President and Chief Financial Officer(a)
Georganne C. Proctor, 47 Executive Vice President(b)
Michael Roster, 58 Executive Vice President, General Counsel, and Secretary(c)
Carl M. Andersen, 43 Group Senior Vice President and Tax Director(d)
Roberta A. Conger, 56 Group Senior Vice President and Treasurer(e)
William C. Nunan, 53 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 since 1995. Prior thereto, he served as Vice
President of WSB since 1985.
ITEM 2. PROPERTIES
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 640,000 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 243 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 15.
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, 2003 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, based on the daily closing price, for the Company's
common stock during 2003 and 2002 were as follows:
TABLE 38
Common Stock Price Range
2003 2002
-------------------------- --------------------------
First Quarter $69.67 - $ 75.56 $58.04 - $65.80
Second Quarter $72.07 - $ 85.05 $63.17 - $70.25
Third Quarter $80.58 - $ 90.36 $58.15 - $68.95
Fourth Quarter $91.95 - $103.45 $57.91 - $72.98
Per Share Cash Dividends Data
Golden West's cash dividends paid per share for 2003 and 2002 were as
follows:
TABLE 39
Cash Dividends Per Share
2003 2002
------------ -----------
First Quarter $ .0850 $ .0725
Second Quarter $ .0850 $ .0725
Third Quarter $ .0850 $ .0725
Fourth Quarter $ .1000 $ .0850
The principal sources of funds for the payment by Golden West of cash
dividends are cash dividends paid to it by subsidiaries.
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, 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 34.)
At December 31, 2003, $3.9 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 5, 2004, 152,425,514 shares of Golden
West's Common Stock were outstanding and were held by 1,098 stockholders of
record. At the close of business on March 5, 2004, the Company's common stock
price was $116.33.
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, 2003:
TABLE 40
Golden West Financial Corporation
1996 Stock Option Plan
As of December 31, 2003
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 6,596,174 $ 42.93 1,595,450
===================== =================== ===========================
The Company does not have any equity compensation plans that have not been
approved by the 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 41
Five Year Consolidated Summary of Operations
(Dollars in Thousands Except Per Share Figures)
Year Ended December 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- -------------- -------------- -------------
Interest Income:
Interest on loans $3,178,087 $2,893,299 $2,740,101 $2,469,556 $1,851,790
Interest on mortgage-backed securities 261,712 490,523 1,276,648 1,072,559 769,314
Interest and dividends on investments 88,545 113,212 192,863 254,425 204,741
------------- ------------- -------------- -------------- -------------
3,528,344 3,497,034 4,209,612 3,796,540 2,825,845
Interest Expense:
Interest on deposits 938,123 1,079,937 1,522,328 1,494,447 1,250,364
Interest on advances and other borrowings 381,837 486,803 1,055,952 1,150,925 571,996
------------- ------------- -------------- -------------- -------------
1,319,960 1,566,740 2,578,280 2,645,372 1,822,360
------------- ------------- -------------- -------------- -------------
Net interest income 2,208,384 1,930,294 1,631,332 1,151,168 1,003,485
Provision for (recovery of) loan losses 11,864 21,170 22,265 9,195 (2,089)
------------- ------------- -------------- -------------- -------------
Net interest income after provision for
(recovery of) loan losses 2,196,520 1,909,124 1,609,067 1,141,973 1,005,574
Noninterest Income:
Fees 163,306 139,416 150,675 78,016 65,456
Gain on the sale of securities,
MBS and loans 72,274 45,143 42,513 10,515 22,764
Change in fair value of derivatives 10,890 7,610 (9,738) -0- -0-
Other 66,860 54,831 53,289 72,289 55,082
------------- ------------- -------------- -------------- -------------
313,330 247,000 236,739 160,820 143,302
Noninterest Expense (a)
General and administrative
Personnel 453,476 378,099 315,984 259,442 228,622
Occupancy 76,649 69,559 64,747 58,330 53,713
Technology and telecommunications 78,701 66,318 52,621 42,082 40,559
Deposit insurance 6,683 6,062 5,712 5,699 5,358
Advertising 22,516 16,528 15,012 8,379 11,874
Other 82,490 64,928 59,726 50,915 46,021
------------- ------------- -------------- -------------- -------------
720,515 601,494 513,802 424,847 386,147
------------- ------------- -------------- -------------- -------------
Earnings before taxes on income and
cumulative effect of accounting change 1,789,335 1,554,630 1,332,004 877,946 762,729
Taxes on income 683,236 596,351 513,181 332,155 282,750
------------- ------------- -------------- -------------- -------------
Earnings before cumulative effect of accounting
change(b) 1,106,099 958,279 818,823 545,791 479,979
Cumulative effect of accounting change,
net of tax -0- -0- (6,018) -0- -0-
------------- ------------- -------------- -------------- -------------
Net earnings $1,106,099 $ 958,279 $ 812,805 $ 545,791 $ 479,979
============= ============= ============== ============== =============
Basic earnings per share before cumulative
effect of accounting change(b) $ 7.25 $ 6.20 $ 5.18 $ 3.44 $ 2.90
Cumulative effect of accounting change,
net of tax .00 .00 (.04) .00 .00
------------- ------------- -------------- -------------- -------------
Basic earnings per share $ 7.25 $ 6.20 $ 5.14 $ 3.44 $ 2.90
============= ============= ============== ============== =============
Diluted earnings per share before cumulative
effect of accounting change(b) $ 7.14 $ 6.12 $ 5.11 $ 3.41 $ 2.87
Cumulative effect of accounting change,
net of tax .00 .00 (.04) .00 .00
------------- ------------- -------------- -------------- -------------
Diluted earnings per share $ 7.14 $ 6.12 $ 5.07 $ 3.41 $ 2.87
============= ============= ============== ============== =============
(a) Certain reclassifications have been made to prior period expense categories to conform to the current period presentation,
which includes a separate category for "Technology and telecommunications".
(b) On January 1, 2001, the Company adopted SFAS 133 which resulted in a one-time charge of $6 million.
TABLE 42
Five Year Summary of Financial Condition
(Dollars in Thousands)
At December 31
-------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- --------------- --------------- ----------------
Total assets $ 82,549,890 $ 68,405,828 $ 58,586,271 $ 55,703,969 $ 42,142,205
Cash, securities available for sale,
and other investments 2,140,266 1,241,091 961,729 1,111,826 1,120,393
Mortgage-backed securities 4,105,438 6,067,458 14,078,172 18,580,490 11,661,621
Loans receivable 74,205,578 58,943,316 41,590,719 34,146,172 28,165,077
--------------- ---------------- --------------- --------------- ----------------
Total loans receivable and MBS 78,311,016 65,010,774 55,668,891 52,726,662 39,826,698
Deposits 46,726,965 41,038,797 34,472,585 30,047,919 27,714,910
Advances from FHLBs 22,000,234 18,635,099 18,037,509 19,731,797 8,915,218
Reverse repurchases 3,021,385 522,299 223,523 857,274 1,045,176
Bank notes 3,015,854 1,209,925 -0- -0- -0-
Senior debt 991,257 989,690 198,215 -0- -0-
Subordinated debt -0- 199,867 599,511 598,791 812,950
Stockholders' equity 5,947,268 5,025,250 4,284,190 3,687,287 3,194,854
TABLE 43
Five Year Selected Other Data
(Dollars in Thousands Except Per Share Figures)
Year Ended December 31
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- -------------
Real estate loans originated $35,984,721 $26,682,890 $20,763,237 $19,782,687 $12,672,211
New adjustable rate mortgages as a percentage
of real estate loans originated 93.5% 91.6% 84.0% 96.3% 91.0%
Loans serviced for others with recourse $3,092,641 $2,897,859 $2,797,634 $ 1,915,672 $2,055,987
Loans serviced for others without recourse 2,672,345 2,510,635 2,035,250 983,407 1,037,655
Deposits increase ($) $5,688,168 $6,566,212 $4,424,666 $ 2,333,009 $1,495,815
Deposits increase (%) 13.9% 19.0% 14.7% 8.4% 5.7%
Net earnings/average net worth (ROE) 20.33% 20.62% 20.23% (a) 16.21% 15.19%
Net earnings/average assets (ROA) 1.50% 1.53% 1.42% (a) 1.12% 1.22%
Net interest margin 3.05% 3.17% 2.93% 2.42% 2.63%
General and administrative expense (G&A) to:
Net interest income plus other income 28.57% 27.63% 27.50% 32.38% 33.67%
Total revenues 18.76% 16.07% 11.56% 10.74% 13.01%
Average assets .98% .96% .90% .87% .98%
Ratio of earnings to fixed charges:(b)
Including interest on deposits 2.35x 1.99x 1.51x 1.33x 1.42x
Excluding interest on deposits 5.56x 4.13x 2.25x 1.76x 2.32x
Yield on interest-earning assets 4.54% 5.25% 6.36% 8.02% 7.15%
Cost of funds 1.67% 2.32% 3.15% 5.99% 5.00%
Primary spread 2.87% 2.93% 3.21% 2.03% 2.15%
Nonperforming assets/total assets(c) .51% .62% .67% .43% .56%
Stockholders' equity/total assets 7.20% 7.35% 7.31% 6.62% 7.58%
Average stockholders' equity/average assets 7.39% 7.41% 7.01% 6.89% 8.04%
World Savings Bank, FSB (WSB)
regulatory capital ratios:(d)
Tier 1 (core or leverage) 7.45% 7.61% 7.71% 6.60% 6.64%
Total risk-based 14.16% 14.26% 14.24% 12.44% 11.95%
World Savings Bank, FSB (Texas) (WTX)
regulatory capital ratios:(d)
Tier 1 (core or leverage) 5.16% 5.23% 5.23% 5.34% ---
Total risk-based 22.88% 24.07% 25.05% 26.69% ---
Number of savings branch offices 271 268 265 253 249
Cash dividends per share $ .355 $ .303 $ .26 $ .22 $ .193
Dividend payout ratio 4.90% 4.88% 5.02% (a) 6.40% 6.64%
(a) 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%.
(b) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, and
fixed charges. Fixed charges include interest expense and amortization of debt expense.
(c) NPAs include nonaccrual loans (loans that are 90 days or more past due) and foreclosed real estate.
(d) For regulatory purposes, the requirements to be considered "well capitalized" are 5.0% and 10.0% for tier 1 (core
or leverage) 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
Overview
Headquartered in Oakland, California, Golden West Financial Corporation
(Golden West or Company) is one of the nation's largest financial institutions
with assets of $82.5 billion as of December 31, 2003. The Company's principal
operating subsidiary is World Savings Bank, FSB (WSB). WSB has a subsidiary
World Savings Bank, FSB (Texas) (WTX). As of December 31, 2003, the Company
operated 479 savings and lending offices in 38 states under the World name.
The Company is a residential mortgage portfolio lender. In order to
increase net earnings under this business model, management focuses principally
on:
o growing 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;
o maintaining a healthy primary spread, which is the difference between the
yield on interest-earning assets and the cost of deposits and borrowings;
o expanding the adjustable rate mortgage (ARM) portfolio, which is the
Company's primary earning asset;
o managing interest rate risk, principally by originating and retaining
monthly adjusting ARMs in portfolio, and matching these ARMs with
liabilities that respond in a similar manner to changes in interest rates;
o managing credit risk, principally by originating high-quality loans to
minimize nonperforming assets and troubled debt restructured; and
o controlling expenses.
2003 in Review
In 2003, interest rates fell to the lowest levels since 1958. The low
short- and long-term interest rates in 2003 facilitated the continuation of the
three-year-old mortgage refinance boom, bolstered home sales, and spurred
national homeownership to reach its highest level ever at 68.6% of households,
up from 64% in 1990. Due to the unprecedented consumer demand for home loans in
2003, national mortgage originations set an all-time high for the third
consecutive year, with lending on one- to four-family homes reaching $3.8
trillion, or 53% higher than the previous record of $2.5 trillion set just a
year earlier.
Historically, a low-interest rate environment such as 2003 tends to favor
fixed-rate mortgages over ARMs because consumers are drawn to fixed-rate loans
to lock in low payments for the long term. Despite these challenging competitive
conditions for ARM lenders, Golden West turned in record loan origination
numbers in 2003 of $36.0 billion, of which $33.7 billion, or 94%, were in the
form of ARMs, almost all of which adjust monthly in response to changes in
short-term interest rates.
Summary of Results of Operations
The following table sets forth selected financial information about how the
Company performed in 2003, as compared to 2002 and 2001. Financial information
is reflected as of and for the years ended December 31, 2003, 2002, and 2001.
TABLE 44
Golden West Financial Corporation Financial Highlights
2001-2003
(Dollars in Millions Except Per Share Figures)
2003 2002 2001
------------- ------------- ---------------
Operating Results:
Net earnings $1,106 $ 958 $ 819(a)
Diluted earnings per share 7.14 6.12 5.11(a)
Net interest income $2,208 $1,930 $1,631
Average earning assets 72,351 61,476 56,274
Net interest margin 3.05% 3.17% 2.93%
General and administrative expense $ 721 $ 601 $ 514
General and administrative expense/average assets .98% .96% .90%
Selected Balance Sheet Items:
Assets $82,550 $68,406 $58,586
Loans receivable and
mortgage-backed securities (MBS) 78,311 65,011 55,669
Deposits 46,727 41,039 34,473
Borrowings 29,028 21,557 19,060
Stockholders' equity 5,947 5,025 4,284
Stockholders' equity/total assets 7.20% 7.35% 7.31%
World Savings Bank, FSB:
Total assets $81,939 $67,968 $58,378
Stockholders' equity 6,289 5,358 4,702
Regulatory capital ratios:(b)
Tier 1 capital (core or leverage) 7.45% 7.61% 7.71%
Total risk-based 14.16% 14.26% 14.24%
(a) For 2001, excludes the cumulative effect of an accounting change resulting in a $6 million, or $.04 per diluted earnings per
share after tax, one-time charge due to the adoption of SFAS 133 on January 1, 2001.
(b) For regulatory purposes, the requirements to be considered "well-capitalized" are 5.0% and 10.0% for tier 1 capital and total
risk-based capital, respectively.
The higher loan origination volume in 2003 led to a significant increase in
the average outstanding balance of loans receivable and MBS. This growth was the
principal reason for the increase in net interest income, which in turn was the
primary reason for the increase in the Company's net earnings. For more
discussion of the Company's Results of Operations, please refer to page 64.
Financial Condition
The following table summarizes the Company's major asset, liability, and
equity components in percentage terms at yearends 2003, 2002, and 2001. The
sections that follow discuss the Company's ARM products and management of the
Company's assets and liabilities, as well as further detail about each of the
components of the balance sheet.
TABLE 45
Asset, Liability, and Equity Components as
Percentages of the Total Balance Sheet
2001 - 2003
December 31
-----------------------------------------
2003 2002 2001
---------- ---------- -----------
Assets:
Cash and investments 2.6% 1.8% 1.6%
Loans receivable and MBS 94.9 95.0 95.0
Other assets 2.5 3.2 3.4
---------- ---------- -----------
100.0% 100.0% 100.0%
========== ========== ===========
Liabilities and Stockholders' Equity:
Deposits 56.6% 60.1% 58.9%
FHLB advances 26.7 27.2 30.8
Other borrowings 8.5 4.3 1.7
Other liabilities 1.0 1.1 1.3
Stockholders' equity 7.2 7.3 7.3
---------- ---------- -----------
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 and MBS, which
consists primarily of residential 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 interest rates that change monthly
and are tied to one of the following three indexes:
1. The Certificate of Deposit Index (CODI) is based on the monthly rate of
three-month certificates of deposits (secondary market), as published by
the Federal Reserve Board. CODI is calculated by adding the twelve most
recently published monthly rates together and dividing the result by
twelve.
2. 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.
3. The Golden West Cost of Savings Index (COSI), which is equal to the
monthend weighted average rate paid on the Company's deposits.
The Company originates ARMs that allow borrowers to select an initial
monthly payment amount fixed for one year that is lower than the payment amount
that would be necessary to fully amortize the loan over its scheduled maturity
at its initial rate and term. The borrower's monthly payment is reset annually,
up or down, subject to a 7.5% limit on payment increases as discussed below. If
the borrower's monthly payment is not large enough to pay the monthly interest
owed on the loan, the unpaid interest is added to the outstanding loan balance
as deferred interest. The borrower may pay down the balance of deferred interest
in whole or in part at any time.
The annual payment reset is based on the amount that is sufficient to
amortize the outstanding loan balance at the then applicable interest rate on
the loan over the remaining term of the loan. However, in order to protect the
borrower from large annual payment increases, the new monthly payment for the
year may increase by no more than 7.5% of the prior year's monthly payment
amount. Every five years, beginning with either the fifth or the tenth annual
payment change, the payment may be reset without regard to the 7.5% payment
change limitation in order to amortize the loan fully over its remaining term.
In addition, the Company originates a small volume of modified ARMs, that
is ARMs with initial interest rates and monthly payments fixed for periods of 12
to 36 months, after which the interest rate adjusts monthly and the monthly
payment is reset annually as described above.
From time to time, as part of the Company's loan retention efforts, the
Company may temporarily modify certain terms of the loan. Additionally, at the
borrower's request, the Company may convert an ARM to a fixed-rate mortgage. The
Company sells most ARMs that are converted to fixed-rate mortgages.
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 and dividends
earned on loans, MBS, and investments and the amounts it pays in interest on
deposits and borrowings. The Company is subject to interest-rate risk to the
extent its assets and liabilities reprice at different times and by different
amounts. Repricing of an asset and a liability is the change in rate due to
maturity, prepayment, the movement of an interest rate index, or any other
interest rate change. The disparity between the repricing of assets (mortgage
loans, MBS, and investment) and the repricing of liabilities (deposits and
borrowings) can have a material impact on the Company's net interest income and
net earnings. The difference between the response of assets and liabilities to
changes in interest rates is commonly referred to as the "gap" or the "repricing
gap."
The gap table on the following page shows the volume of assets and
liabilities that reprice within certain time periods as of December 31, 2003. 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, Golden West's repricing assets and liabilities do not
respond equally to changes in the interest rate environment due to 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. On balance, the reporting and repricing lags cause the Company's
assets to initially reprice more slowly than the Company's liabilities. For more
discussion, see Net Interest Income on page 65.
CODI, which is the index Golden West uses to determine the rate on $30
billion of its existing adjustable rate mortgages, 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.
COFI, which is the index Golden West uses to determine the rate on $18
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. COFI also has a
repricing lag because COFI is based on a portfolio of liabilities, not all of
which reprice immediately. Many of these liabilities, including certificates of
deposit and fixed-rate borrowings, do not reprice each month. In addition, when
certificates of deposit do reprice, they 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, which is the index Golden West uses to determine the rate on $25
billion of its existing adjustable rate mortgages, 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. However, the COSI repricing lag is offset by the same
repricing lag on the Company's deposits.
Partially offsetting the index reporting and repricing lags are similar
lags on portions of the Company's liabilities.
TABLE 46
Repricing of Earning Assets and Interest-Bearing Liabilities,
Repricing Gaps, and Gap Ratios
As of December 31, 2003
(Dollars in Millions)
Projected Repricing(a)
--------------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
----------- ----------- ----------- ----------- -----------
Earning Assets:
Securities available for sale $ 1,879 $ -0- $ -0- $ -0- $ 1,879
MBS:
Adjustable rate 3,512 -0- -0- -0- 3,512
Fixed-rate 38 78 279 198 593
Loans receivable:(b) (c)
Adjustable rate 70,788 1,103 461 -0- 72,352
Fixed-rate held for investment 136 286 543 357 1,322
Fixed-rate held for sale 122 -0- -0- -0- 122
Other(d) 1,340 -0- 3 140 1,483
Impact of swaps 17 (17) -0- -0- -0-
----------- ----------- ----------- ----------- -----------
Total $ 77,832 $ 1,450 $ 1,286 $ 695 $ 81,263
=========== =========== =========== =========== ===========
Interest-Bearing Liabilities:
Deposits(e) $ 38,671 $ 4,434 $ 3,617 $ 5 $ 46,727
FHLB advances 20,733 202 487 578 22,000
Other borrowings 6,037 -0- 497 494 7,028
----------- ----------- ----------- ----------- -----------
Total $ 65,441 $ 4,636 $ 4,601 $ 1,077 $ 75,755
===========
=========== =========== =========== ===========
Repricing gap $ 12,391 $ (3,186) $ (3,315) $ (382) $ 5,508
=========== =========== =========== =========== ===========
Cumulative gap $ 12,391 $ 9,205 $ 5,890 $ 5,508
=========== =========== =========== ===========
Cumulative gap as a percentage of
total assets 15.0% 11.2% 7.1%
=========== =========== ===========
(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) Excludes nonaccrual loans (90 days or more past due).
(c) Includes loans in process. Loans in process are funded, interest-earning loans that have not yet been entered into the loan
servicing system due to the normal five to seven day processing lag.
(d) Includes primarily cash in banks and Federal Home Loan Bank (FHLB) stock.
(e) Liabilities with no maturity date, such as checking, passbook, and money market deposit accounts, are assigned zero months.
The Company's principal strategy to limit the sensitivity of net interest
income to changes in interest rates is to originate and keep in portfolio ARMs
that provide interest sensitivity to the asset side of the balance sheet. At
December 31, 2003, ARMs constituted 97% of the Company's loan and MBS portfolio.
Asset rate sensitivity is further enhanced by the use of adjustable rate
mortgages on which the rate changes monthly. At December 31, 2003, such monthly
adjustable mortgages accounted for 96% of the Company's ARM portfolio.
Additionally, the Company emphasizes home loans tied to certain adjustable rate
mortgage indexes so that the ARM index rates and the rates on the liabilities
that fund these mortgages respond in a similar manner to changes in market
rates. Specifically, COSI-indexed ARMs track the Company's cost of deposits and
CODI-indexed ARMs follow the Company's cost of borrowings. ARMs indexed to COSI
and CODI constituted 93% of the ARM originations in 2003 and 73% of the ARM
portfolio at December 31, 2003. While the index strategy has improved the match
between Golden West's ARM portfolio and its savings and borrowings, there still
exist some differences in the timing of the repricing of the Company's ARMs and
liabilities, primarily due to lags in the repricing of the indexes, particularly
CODI and COFI. In addition to the index lags, other elements of ARM loans can
have an impact on earnings. These elements are interest rate caps or limits on
individual rate changes, interest rate floors, the interest rate adjustment
frequency of ARM loans, and introductory fixed rates on new ARM loans.
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 restraining earnings when rates
are rising.
From time to time, the Company enters into interest rate swaps as part of
its interest rate risk management strategy in order to alter the repricing
characteristics of designated assets and liabilities (see Interest Rate Swaps on
pages 67 and 68).
The table on the following page shows the Company's expected cash flows and
applicable yields on the balances of its interest-sensitive assets and
liabilities as of December 31, 2003, taking into consideration expected
prepayments of the Company's long-term assets (primarily MBS and loans
receivable). The table also includes the estimated current fair value of the
assets and liabilities shown.
TABLE 47
Summary of Market Risk on Financial Instruments
As of December 31, 2003
(Dollars in Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date as of December 31, 2003(a)
--------------------------------------------------------------------------------------------
2009 & Total Fair
2004 2005 2006 2007 2008 Thereafter Balance Value
------- ------- ------- ------- ------- ---------- ------- -------
Interest-Sensitive Assets:
Securities Available for Sale $ 1,879 $ -0- $ -0- $ -0- $ -0- $ -0- $ 1,879 $ 1,879
Weighted average interest rate .93% .00% .00% .00% .00% .00% .93%
MBS
Fixed-Rate $ 102 $ 86 $ 70 $ 57 $ 47 $ 231 $ 593 613
Weighted average interest rate 6.50% 6.34% 6.24% 6.14% 6.06% 5.75% 6.08%
Variable Rate $ 835 $ 636 $ 485 $ 370 $ 282 $ 904 $ 3,512 3,525
Weighted average interest rate 4.81% 4.82% 4.82% 4.82% 4.82% 4.82% 4.82%
Loans Receivable(b)
Fixed-Rate $ 383 $ 225 $ 166 $ 127 $ 100 $ 444 $ 1,445 1,493
Weighted average interest rate 7.67% 7.59% 7.34% 7.15% 7.02% 6.70% 7.21%
Variable Rate $14,662 $12,163 $10,475 $ 8,003 $ 6,124 $ 20,300 $71,727 73,333
Weighted average interest rate(c) 4.74% 4.73% 4.73% 4.73% 4.72% 4.72% 4.74%
------- --------- ------- ------- ------- ----------- ------- -------
Total $17,861 $13,110 $11,196 $ 8,557 $ 6,553 $ 21,879 $79,156 $80,843
======= ========= ======= ======= ======= =========== ========= =======
Interest-Sensitive Liabilities:
Deposits(d) $43,104 $ 1,675 $ 523 $ 1,130 $ 290 $ 5 $46,727 $46,898
Weighted average interest rate 1.68% 3.51% 3.54% 4.71% 3.24% 4.22% 1.85%
FHLB Advances
Fixed-Rate $ 748 $ 128 $ 382 $ 36 $ 81 $ 392 $ 1,767 1,807
Weighted average interest rate 1.48% 3.24% 2.34% 5.97% 4.82% 5.81% 3.00%
Variable Rate $ 4,100 $ 7,425 $ 5,208 $ 500 $ 3,000 $ -0- $20,233 20,213
Weighted average interest rate 1.11% 1.14% 1.13% 1.17% 1.14% .00% 1.13%
Other Borrowings
Fixed-Rate $ 4,866 $ -0- $ 199 $ 298 $ -0- $ 494 $ 5,857 5,894
Weighted average interest rate 1.12% .00% 5.72% 4.32% .00% 4.94% 1.76%
Variable Rate $ 21 $ 650 $ 500 $ -0- $ -0- $ -0- $ 1,171 1,171
Weighted average interest rate .22% 1.17% 1.14% .00% .00% .00% 1.14%
Interest Rate Swaps (notional values)
Pay Fixed Swaps $ 104 $ -0- $ -0- $ -0- $ -0- $ -0- $ 104 1
Weighted average receive rate 1.18% .00% .00% .00% .00% .00% 1.18%
Weighted average pay rate 6.65% .00% .00% .00% .00% .00% 6.65%
------- ------- ------- ------- ------- ---------- ------- -------
Total $52,943 $ 9,878 $ 6,812 $ 1,964 $ 3,371 $ 891 $75,859 $75,984
======= ======= ======= ======= ======= ========== ======= =======
(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) Excludes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.
(c) The total weighted average interest rate for variable rate loans receivable reflects loans with introductory rates in effect at
December 31, 2003. 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, 2003 as indicated in the total
balance column.
(d) Deposits with no maturity are included in the 2004 column.
The Company estimates the sensitivity of its 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 also factors
in projections for loan and liability growth. Based on the information and
assumptions in effect at December 31, 2003, a 200 basis point rate increase
sustained over a thirty-six month period would initially, but temporarily,
reduce the Company's primary spread, and would not adversely 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, 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, 2003, 2002, and 2001, the Company had securities available
for sale in the amount of $1.9 billion, $922 million, and $623 million,
respectively, including net unrealized gains on securities available for sale of
$323 million, $326 million, and $362 million, respectively. At December 31,
2003, 2002 and 2001, the Company had no securities held for trading in its
investment securities portfolio.
Loans Receivable and Mortgage-Backed Securities
The Company invests primarily in single-family residential real estate
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. As of December 31, 2003, the Company has
retained all of the beneficial interests in these MBS securitizations, and
therefore, 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 57 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.
The table on the following page shows the components of the Company's loans
receivable portfolio and MBS at December 31, 2003, 2002, and 2001.
TABLE 48
Balance of Loans Receivable and MBS by Component
2001 - 2003
(Dollars in Thousands)
As of December 31
---------------------------------------------------------
2003 2002 2001
--------------- -------------- ---------------
Loans $49,937,769 $ 39,159,502 $ 35,952,918
Securitized loans(a) (b) 23,233,928 19,066,063 5,186,717
Other(c) 1,033,881 717,751 451,084
--------------- -------------- ---------------
Total loans receivable 74,205,578 58,943,316 41,590,719
--------------- -------------- ---------------
Fannie Mae MBS(d) -0- -0- 4,732,779
MBS-REMICs 3,650,048 5,871,069 8,836,840
Purchased MBS 455,390 196,389 508,553
--------------- -------------- ---------------
Total MBS 4,105,438 6,067,458 14,078,172
--------------- -------------- ---------------
Total loans receivable and MBS $78,311,016 $ 65,010,774 $ 55,668,891
=============== ============== ===============
(a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140.
(b) Includes $14.3 billion at December 31, 2003 of loans securitized with Fannie Mae where the underlying loans are subject to full
credit recourse to the Company.
(c) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
(d) The underlying loans of the Fannie Mae MBS are subject to full credit recourse to the Company. During the first half of 2002,
the Company desecuritized the remaining Fannie Mae MBS.
Included in the balance of loans receivable are net deferred loan costs
associated with originating loans. In accordance with generally accepted
accounting principles (GAAP), the Company defers loan origination fees and
certain loan origination costs. The net deferred loan costs are then amortized
as a yield reduction over the life of the related loans, thereby lowering net
interest income and the reported yield on the Company's loan portfolio. As shown
in the following table, the net deferred loan costs balance grew by $402 million
between January 1, 2001 and December 31, 2003. This growth resulted primarily
from the growth in loan origination volume.
TABLE 49
Net Deferred Loan Costs
2001 - 2003
(Dollars in Thousands)
For the Year Ended December 31
------------------------------------------------
2003 2002 2001
--------------- ------------- -------------
Beginning balance of net deferred loan costs $ 331,985 $ 193,924 $ 145,709
Net loan costs deferred 313,331 173,570 78,329
Amortization of net deferred loan costs (97,998) (54,144) (17,070)
Net deferred loan costs transferred from (to) MBS -0- 18,635 (13,044)
--------------- ------------- -------------
Ending balance of net deferred loan costs $ 547,318 $ 331,985 $ 193,924
=============== ============= =============
The balance of loans receivable and MBS is affected by loan originations
and loan and MBS repayments. Repayments from loans receivable and MBS were $20.0
billion, $15.6 billion, and $15.6 billion for the years ended December 31, 2003,
2002, and 2001, respectively. Loans receivable and MBS repayments were higher in
2003 as compared to 2002 due to both an increase in the portfolio balance and
the prepayment rate. In 2002, repayments were similar to 2001 because there was
a small decrease in the prepayment rate that was offset by the growth in the
loan portfolio.
Loans Receivable and Lending Operations
New loan originations in 2003, 2002, and 2001 amounted to $36.0 billion,
$26.7 billion, and $20.8 billion, respectively. The volume of originations
increased during 2003 due to the decline in mortgage rates to 45 year lows,
which led to a strong demand for home loans, including the Company's ARM
products. During 2003, consumers took advantage of these low interest rates to
refinance their mortgages and, as a result, refinanced loans constituted 70% of
the Company's new loan originations in 2003 compared to 62% in 2002 and 59% in
2001. The volume of originations increased during 2002 due to low interest rates
and a strong demand for mortgage loans, including ARMs, the Company's principal
product.
At December 31, 2003, the Company had lending operations in 38 states. The
largest source of mortgage origination volume was loans secured by residential
properties in California. In 2003, 67% of total loan originations were on
residential properties in California, compared to 67% and 70% in 2002 and 2001,
respectively. The five largest states, other than California, for originations
for the year ended December 31, 2003, were Florida, New Jersey, Texas, Illinois,
and Virginia, with a combined total of 16% 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, 2003, 2002,
and 2001.
First mortgages originated for portfolio (excluding equity lines of credit
"ELOCs") amounted to $33.1 billion in 2003 compared to $24.8 billion and $18.2
billion in 2002 and 2001, respectively. First mortgages originated for sale were
$1.9 billion, $1.7 billion, and $2.2 billion for the years ended December 31,
2003, 2002, and 2001, respectively. During 2003, 2002, and 2001, $1.2 billion,
$596 million, and $794 million, respectively, of loans and MBS were converted at
the customer's request from adjustable rate to fixed-rate loans. The Company
sells most of its new and converted fixed-rate loans. The Company sold $3.1
billion, $2.3 billion, and $2.7 billion of fixed-rate first mortgage loans
during 2003, 2002, and 2001, respectively.
Golden West originates ARMs indexed primarily to the CODI, COFI, and COSI.
Golden West also establishes ELOCs indexed to the Prime Rate as published in the
Money Rates table in The Wall Street Journal (Central Edition). Golden West's
ARM originations constituted approximately 94% of new mortgage volume made by
the Company in 2003, compared with 92% in 2002 and 84% in 2001. The table on the
following page shows the distribution of ARM originations by index for the years
ended December 31, 2003, 2002, and 2001.
TABLE 50
Adjustable Rate Mortgage Originations by Index
2001 - 2003
(Dollars in Thousands)
As of December 31
-----------------------------------------------------------
ARM Index 2003 2002 2001
----------------- ----------------- ----------------
CODI $ 20,518,260 $ 13,173,161 $ 554,390
COFI 1,559,605 3,370,412 9,813,174
COSI 10,688,779 7,899,702 7,064,962
Prime(a) 887,363 -0- -0-
---------------- ---------------- ----------------
Total $ 33,654,007 $ 24,443,275 $ 17,432,526
================= ================ ================
(a) As of January 2003, includes fundings of new ELOCs indexed to the Prime
Rate. Only amounts drawn at the establishment of the line of credit are
included in originations. Prior to 2003, ELOCs were not included in
originations.
The portion of the mortgage portfolio (including securitized loans and MBS)
composed of adjustable rate loans was 97% at yearend 2003 compared to 96% at
yearend 2002 and 94% at yearend 2001. The following table shows the distribution
by index of the Company's outstanding balance of adjustable rate mortgages
(including ARM MBS) at December 31, 2003, 2002 and 2001.
TABLE 51
Adjustable Rate Mortgage Portfolio by Index
(Including ARM MBS)
2001 - 2003
(Dollars in Thousands)
As of December 31
-----------------------------------------------------------
ARM Index 2003 2002 2001
----------------- ----------------- ----------------
CODI $ 30,243,337 $ 13,286,566 $ 552,746
COFI 18,207,868 24,755,498 29,010,008
COSI 24,535,095 22,070,692 20,943,596
Prime(a) 1,827,435 999,251 303,035
Other(b) 424,988 658,135 985,015
----------------- ----------------- ----------------
Total $ 75,238,723 $ 61,770,142 $ 51,794,400
================= ================= ================
(a) ELOCs tied to the Prime Rate.
(b) Primarily ARMs tied to the twelve-month rolling average of the One-Year
Treasury Constant Maturity (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, and MBS-REMICs before any reduction for loan servicing
and guarantee fees) was 12.20% or 7.42% above the actual weighted average rate
at December 31, 2003, versus 12.13% or 6.74% above the actual weighted average
at December 31, 2002 and 12.21% or 5.77% above the weighted average rate at
yearend 2001.
At December 31, 2003, approximately $5.1 billion of the Company's ARM loans
(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, 2003, $2.3 billion ARM loans had reached their
rate floors compared with $2.0 billion at December 31, 2002 and $560 million at
December 31, 2001. The weighted average floor rate on the loans that had reached
their floor was 5.43% at December 31, 2003, compared to 5.87% at December 31,
2002 and 7.15% at December 31, 2001. Without the floor, the average rate on
these loans would have been 4.38% at December 31, 2003, 5.19% at December 31,
2002, and 5.91% at December 31, 2001.
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, a
portion of which are in the form of fixed-rate loans. The Company's fixed-rate
second mortgage originations amounted to $148 million, $160 million, and $279
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
outstanding balance of fixed-rate seconds amounted to $138 million, $215 million
and $362 million at December 31, 2003, 2002, and 2001, respectively.
The Company also establishes ELOCs indexed to the Prime Rate, which are
collateralized typically by second and occasionally by first deeds of trust. The
following table shows the amounts of new ELOCs established in 2003, 2002, and
2001.
TABLE 52
New Equity Lines of Credit Established
2001 - 2003
(Dollars in Thousands)
For the Year Ended December 31
-----------------------------------------------------------
2003 2002 2001
------------------ ---------------- -----------------
New ELOCs
established $1,708,482 $1,179,467 $422,424
================== ================ =================
The following table shows the outstanding balance of ELOCs and the maximum
total line of credit available on the Company's ELOCs at December 31, 2003,
2002, and 2001.
TABLE 53
Equity Line of Credit
Outstanding Balance and Maximum Total Line of Credit Available
2001 - 2003
(Dollars in Thousands)
For the Year Ended December 31
-------------------------------------------------------
2003 2002 2001
---------------- ----------------- -----------------
ELOC outstanding balance $1,827,435 $ 999,251 $ 303,035
================ ================= =================
ELOC maximum total line
of credit available $2,748,076 $1,501,725 $ 457,793
================ ================= =================
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 ELOC. For the
year ended December 31, 2003, 11% of loans originated exceeded 80% of the
appraised value of the property compared to 13% for the years ended December 31,
2002 and 2001.
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 (the sum of the
first and second loan balances as a percentage of total value or "CLTV") 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 $100 million, $139 million, and $184 million for the years
ended December 31, 2003, 2002, and 2001, respectively. In addition, the Company
carries pool mortgage insurance on most 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 CLTV
ratios greater than 80% for the years ended December 31, 2003, 2002, and 2001.
TABLE 54
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
2001 - 2003
(Dollars in Thousands)
For the Year Ended December 31
-------------------------------------------------------
2003 2002 2001
---------------- --------------- ---------------
First mortgages with LTV ratios
greater than 80%:
With mortgage insurance $ 223,775 $ 292,210 $ 225,464
With no mortgage insurance 44,349 70,478 123,387
---------------- --------------- ---------------
268,124 362,688 348,851
---------------- --------------- ---------------
First and second mortgages with
CLTV ratios greater than 80%:(a)
With pool insurance on
second mortgages 2,866,161 2,412,821 1,354,754
With no pool insurance 799,231 611,044 911,214
---------------- --------------- ---------------
3,665,392 3,023,865 2,265,968
---------------- --------------- ---------------
Total $3,933,516 $3,386,553 $2,614,819
================ =============== ===============
(a) For ELOCs, only amounts drawn at the establishment of the line of credit are included in originations. Prior to 2003, ELOCs
were not included in originations.
The following table shows the outstanding balance of mortgages with
original LTV or CLTV ratios greater than 80% at December 31, 2003, 2002, and
2001.
TABLE 55
Balance of Mortgages With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
2001 - 2003
(Dollars in Thousands)
As of December 31
-----------------------------------------------------
2003 2002 2001
--------------- ---------------- --------------
First mortgages with LTV ratios
greater than 80%:
With mortgage insurance $ 566,817 $ 553,747 $ 431,498
With no mortgage insurance 160,225 293,851 548,507
--------------- ---------------- --------------
727,042 847,598 980,005
--------------- ---------------- --------------
First and second mortgages with
CLTV ratios greater than 80%:
With pool insurance on
second mortgages 4,991,395 3,699,519 2,396,954
With no pool insurance 610,598 292,104 454,289
--------------- ---------------- --------------
5,601,993 3,991,623 2,851,243
--------------- ---------------- --------------
Total $ 6,329,035 $ 4,839,221 $ 3,831,248
=============== ================ ==============
Loan receivable repayments consist of monthly loan amortization and loan
payoffs. During the years 2003, 2002, and 2001, loan repayments (excluding MBS)
amounted to $18.0 billion, $12.3 billion, and $9.2 billion, respectively. The
increase in loan repayment in 2003 was due to growth in the balance of loans
receivable and an increase in the prepayment rate. The increase in loan
repayments in 2002 was due to an increase in the balance of loans receivable
outstanding partially offset by a decrease in the prepayment rate.
Securitized Loans
The Company securitized $13.7 billion and $18.9 billion of loans for the
years ended December 31, 2003 and 2002, respectively. 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 Condition.
Mortgage-Backed Securities
At December 31, 2003, 2002, and 2001, the Company had MBS held to maturity
in the amount of $4.1 billion, $6.0 billion, and $13.8 billion, respectively.
The Company has the ability and intent to hold these MBS until maturity and,
accordingly, these MBS are classified as held to maturity. The decrease in MBS
held to maturity in 2003 was due to prepayments, partially offset by the
purchase of $367 million of MBS for Community Reinvestment Act purposes. The
large decrease in 2002 was due primarily to prepayments and to the
desecuritization of $4.1 billion of Fannie Mae MBS.
At December 31, 2003, 2002, and 2001, the Company had MBS available for
sale in the amount of $22 million, $35 million, and $233 million, respectively,
including net unrealized gains on MBS available for sale of $91 thousand, $139
thousand, and $2 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, 2003, $3.5 billion of the Company's total MBS portfolio was
backed by ARMs. The percentage of MBS backed by ARMs was 86% at yearend 2003
compared to 91% at yearend 2002 and 92% at yearend 2001.
Repayments of MBS during the years 2003, 2002, and 2001 amounted to $2.0
billion, $3.2 billion, and $6.4 billion, respectively. MBS repayments were lower
in 2003 and 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.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for
others. When the servicing rights are retained by the Company upon the sale of
loans, the allocated cost of these rights is then capitalized as an asset. The
amount capitalized is based on the relative fair value of the servicing rights
and the mortgage loan on the date the mortgage loan is sold. 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, 2003, 2002, and 2001.
TABLE 56
Capitalized Mortgage Servicing Rights
2001 - 2003
(Dollars in Thousands)
2003 2002 2001
------------ ------------ ------------
Beginning balance of CMSRs $ 69,448 $ 56,056 $28,355
New CMSRs from loan sales 58,249 34,044 41,587
Amortization of CMSRs (38,730) (20,652) (13,886)
------------ ------------ ------------
Ending balance of CMSRs $ 88,967 $ 69,448 $56,056
============ ============ ============
The estimated amortization of the December 31, 2003 CMSR balance for the
five years ending 2008 is $36.6 million (2004), $25.8 million (2005), $16.7
million (2006), $7.9 million (2007), and $2.0 million (2008). Actual results may
vary depending upon the level of the payoffs of the loans currently serviced.
CMSRs are reviewed monthly for impairment based on fair value. The
estimated fair value of CMSRs as of December 31, 2003, 2002, and 2001 was $95
million, $73 million, and $70 million, respectively. The book value of Golden
West's CMSRs did not exceed the fair value at December 31, 2003, 2002, or 2001
and, therefore, no impairment was required to be recognized.
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, that
are 90 days or more past due) and real estate acquired through foreclosure. No
interest is recognized on nonaccrual 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, 2003, 2002 and 2001.
TABLE 57
Nonperforming Assets and Troubled Debt Restructured
2001 - 2003
(Dollars in Thousands)
As of December 31
------------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
Nonaccrual loans $ 410,064 $ 413,123 $ 382,510
Foreclosed real estate 13,904 11,244 11,101
-------------- -------------- ---------------
Total nonperforming assets $ 423,968 $ 424,367 $ 393,611
============== ============== ===============
TDRs $ 3,105 $ 233 $ 1,505
============== ============== ===============
Ratio of NPAs to total assets .51% .62% .67%
============== ============== ===============
Ratio of TDRs to total assets .00% .00% .00%
============== ============== ===============
Ratio of NPAs and TDRs to total assets .51% .62% .67%
============== ============== ===============
The balance of NPAs at yearend 2003 reflected the impact of an improving
economy and the strong housing market. However, continued economic weakness in a
few geographical areas of the U.S. contributed to a small increase in foreclosed
real estate in 2003. The balance of NPAs at yearends 2002 and 2001 reflected
normal increases in delinquencies associated with the aging of the large volume
of mortgages originated during the prior 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. Also, the Company
uses mortgage insurance as previously discussed on page 56.
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 $7 million at yearend 2003 compared to
$4 million and $11 million at yearends 2002 and 2001, 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 in the
loan portfolio that is based on both the Company's historical loss experience
and factors reflecting current economic conditions. This approach uses a
database that identifies and measures 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 geographical regions. The 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. 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, 2003, 2002, and 2001.
TABLE 58
Changes in Allowance for Loan Losses
2001 - 2003
(Dollars in Thousands)
2003 2002 2001
--------------- -------------- ---------------
Beginning allowance for loan losses $ 281,097 $ 261,013 $ 236,708
Provision for losses charged to expense 11,864 21,170 22,265
Loans charged off (3,633) (1,943) (2,425)
Recoveries 609 857 351
Net transfer of allowance from recourse liability -0- -0- 4,114
--------------- -------------- ---------------
Ending allowance for loan losses $ 289,937 $ 281,097 $ 261,013
=============== ============== ===============
Ratio of provision for loan losses to average loans
receivable and MBS with recourse held to maturity .02% .04% .04%
=============== ============== ===============
Ratio of net chargeoffs to average loans receivable
and MBS with recourse held to maturity .00% .00% .00%
=============== ============== ===============
Ratio of allowance for loan losses to total loans held
in portfolio and MBS with recourse held to maturity .37% .43% .47%
=============== ============== ===============
Ratio of allowance for loan losses to NPAs 68.4% 66.2% 66.3%
=============== ============== ===============
Deposits
The Company raises deposits through its retail branch system, through the
Internet, and from time to time, through the money markets.
Retail deposits increased by $5.7 billion in 2003 compared to increases of
$6.6 billion and $4.6 billion in 2002 and 2001, respectively. Retail deposits
increased during these three years because the public found money market
accounts to be a more favorable investment compared with other alternatives and
the Company successfully promoted those accounts. Deposit inflows began to slow
in the third quarter of 2003 due in part to the recovery in the equities market.
At December 31, 2003, 2002, and 2001, transaction accounts (which include
checking, passbook, and money market accounts) represented 77%, 66%, and 40%,
respectively, of the total balance of deposits.
Advances from 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
owned by the Company. FHLB advances amounted to $22.0 billion at December 31,
2003, compared to $18.6 billion and $18.0 billion at December 31, 2002 and 2001,
respectively.
Other Borrowings
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 as collateral. Reverse Repos with dealers and banks
amounted to $3.0 billion, $522 million, and $224 million at yearends 2003, 2002,
and 2001, respectively.
At December 31, 2003, Golden West, at the holding company level, had no
subordinated debt outstanding as compared to $200 million at December 31, 2002
and $600 million at December 31, 2001. As of December 31, 2003, the Company's
subordinated debt ratings were A2 and A by Moody's Investors Service (Moody's)
and Standard & Poor's (S&P), respectively.
At December 31, 2003, Golden West, at the holding company level, had $991
million of senior debt outstanding as compared to $990 million at December 31,
2002 and $198 million at December 31, 2001. As of December 31, 2003, 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 $5.0 billion of short-term
notes with maturities of less than 270 days can be outstanding at any point in
time. At December 31, 2003 and 2002, WSB had $3.0 billion and $1.2 billion,
respectively, of bank notes outstanding. There were no bank notes outstanding at
December 31, 2001. As of December 31, 2003, WSB's bank notes were rated P-1 and
A-1+ by Moody's and S&P, respectively.
WSB may issue long-term wholesale deposits and long-term unsecured senior
debt. At December 31, 2003, WSB had no long-term wholesale deposits or long-term
unsecured senior debt outstanding. As of December 31, 2003, WSB's unsecured
senior debt ratings were Aa3 and AA- from Moody's and S&P, respectively.
Stockholders' Equity
The Company's stockholders' equity amounted to $5.9 billion, $5.0 billion,
and $4.3 billion at December 31, 2003, 2002, and 2001, respectively.
Stockholders' equity increased by $922 million during 2003 as a result of
earnings partially offset by the $151 million cost of the repurchase of Company
stock, the payment of quarterly dividends to stockholders, and the decreased
market values of securities available for sale. 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, the payment of quarterly
dividends to stockholders, and the decreased market values of securities
available for sale. The Company's stockholders' equity increased by $597 million
during 2001 as a result of earnings partially offset by the $186 million cost of
the repurchase of Company stock, the payment of quarterly dividends to
stockholders, and the decreased market values of securities available for sale.
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, 2003, 51.3 million
shares had been repurchased and retired at a cost of $1.4 billion since October
28, 1993, of which 2.0 million shares were purchased and retired at a cost of
$151 million during 2003. 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 liquidity of
the Company.
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 Office of Thrift Supervision (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 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 in the discussion, 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, 2003, the most recent notification from the OTS categorized WSB and WTX as
"well-capitalized." See Footnote A in the audited financial statements. There
are no conditions or events that have occurred since that notification that the
Company believes would have an adverse impact on how WSB or WTX are categorized.
The payments of capital distributions by WSB and WTX to their parent are
governed by OTS regulation. WSB and WTX must at least 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 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 it
remains 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.
Off-Balance Sheet Arrangements
Commitments to originate mortgage loans for portfolio are agreements to
lend to a customer provided that the customer satisfies the terms of the
contract. Loan commitments 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, 2003 was $1.7 billion. The vast majority of these
commitments were for adjustable rate mortgages.
At December 31, 2003, the Company had $2.5 billion of commitments
outstanding for advances from the FHLB of Dallas and these advances will be
indexed to three-month LIBOR.
Contractual Cash Obligations
The following table summarizes the Company's obligations and commitments to
make future payments under contracts, such as debt and lease agreements, by
remaining maturity at December 31, 2003.
TABLE 59
Contractual Cash Obligations
As of December 31, 2003
(Dollars in Thousands)
Payments Due by Period
-------------------------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
--------------- --------------- -------------- ------------- -------------
Long-term debt $24,141,491 $4,848,040 $14,491,343 $3,915,063 $887,045
Operating leases 192,691 28,180 49,254 32,641 82,616
--------------- --------------- -------------- ------------- -------------
Total $24,334,182 $4,876,220 $14,540,597 $3,947,704 $969,661
=============== =============== ============== ============= =============
New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS 149). This statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement is effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS 149 on July 1, 2003, did
not have a significant impact on the Company's financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150).
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 on July 1, 2003 had no
impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 provides guidance on how to
identify a variable interest entity and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a variable interest
entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. In December 2003, the FASB
revised FIN 46. The adoption of FIN 46 on July 1, 2003 and the adoption of FIN
46(R) had no impact on the Company's financial statements.
Uses of Estimates
Golden West's financial statements are prepared in accordance with 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.
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 59.
For the year ended December 31, 2003 and 2002, 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 $11 million and a
pre-tax gain of $8 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, 2003, these fair value changes related to SFAS 133 were
the principal fair value items affecting Golden West's earnings. Fair value
estimates 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 $89 million and $69 million at yearend
2003 and 2002, respectively. See page 58 for further discussion.
Results of Operations
The table below sets forth selected financial results for Golden West.
TABLE 60
Golden West Financial Corporation
Selected Financial Results
2001 - 2003
(Dollars in Millions)
2003 2002 2001
----------- ------------ -----------
Net earnings $ 1,106 $ 958 $ 819(a)
Net interest income 2,208 1,930 1,631
Average earning assets 72,351 61,476 56,274
Average primary spread 2.94% 2.99% 2.70%
(a) For 2001, excludes the cumulative effect of an accounting change resulting
in a $6 million one-time charge net of tax, due to the adoption of SFAS 133
on January 1, 2001.
Net Earnings
Net earnings increased in 2003 as compared to 2002 primarily due to an
increase in average earning assets which resulted in an increase in net interest
income. In addition, net earnings reflected an increase in noninterest income
and an increase in general and administrative expenses. 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. In
addition, $6.6 million of nonrecurring tax items contributed to net earnings
during 2003. Two nonrecurring items contributed $12.1 million to net earnings
during 2002. These nonrecurring items resulted from a one-time tax benefit and a
refund from the FHLB of San Francisco for 1998 prepayment fees.
Earnings Per Share
The Company's Basic Earnings Per Share (EPS) was $7.25 for the year ended
December 31, 2003, compared to $6.20 for the year ended December 31, 2002 and
$5.18 (before the cumulative effect of the accounting change) for the year ended
December 31, 2001. The Company reported Diluted EPS of $7.14 for the year ended
December 31, 2003 as compared to $6.12 and $5.11 (before the cumulative effect
of the accounting change) for the years ended December 31, 2002 and 2001,
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 affect the level of net interest income.
Net interest income amounted to $2.2 billion, $1.9 billion, and $1.6
billion for the years ended December 31, 2003, 2002, and 2001, respectively.
These amounts represented 14%, 18%, and 42% increases, respectively, over the
previous years.
The increase in net interest income in 2003 compared with the prior year
resulted primarily from the growth in the loan portfolio, the Company's
principal earning asset. Between December 31, 2003 and December 31, 2002, the
Company's earning asset balance increased by $14.2 billion or 21%. This growth
resulted from strong mortgage originations which more than offset loan
repayments and loan sales. Partially offsetting the benefit to net interest
income of a larger average earning asset balance in 2003, was a modest decrease
in the Company's average primary spread, which is the monthly average of the
monthend difference between the yield on loans and other investments and the
rate paid on deposits and borrowings. The significant growth of net interest
income in 2002 compared with the prior year resulted from both the expansion of
the Company's earning assets and an increase in the Company's average primary
spread.
The level and movement of the Company's primary spread are influenced by a
variety of factors including: the amount and speed of movements in market
interest rates; the shape of the yield curve, that is the difference between
short-term and long-term interest rates; competition in the home lending market,
which influences the pricing of the Company's adjustable and fixed-rate mortgage
products; the Company's need for deposits and competition in the retail savings
market, which influence the pricing of the Company's deposit products; and the
prices that the Company pays for its borrowings. On a year-to-year basis, the
most significant factor that leads to changes in the Company's primary spread is
market interest rate movements, as discussed below.
As noted in the discussion of the gap on page 48, the cost of the Company's
liabilities responds more rapidly to movements in short-term market interest
rates than the yield on the Company's assets, most of which are ARMs tied to
indexes that lag changes in interest rates. Consequently, when 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 temporarily 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 temporarily until the ARM yield catches up to previous rate increases.
For the five years ended December 31, 2003, which included periods of both
falling and rising interest rates, the Company's primary spread averaged 2.59%.
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, while the yield on the Company's assets fell by only 166
basis points. As a consequence, the Company's primary spread widened
substantially during 2001, and by yearend reached 3.21%, the highest level in
the Company's history. In 2002, the Federal Funds rate remained steady at 1.75%
until November, when the Federal Reserve's Open Market Committee lowered the
Federal Funds rate by 50 basis points to 1.25%. 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. On June 25, 2003, the Federal Reserve's Open Market
Committee lowered the Federal Funds rate by an additional 25 basis points to
1.00%. Reflecting the decline of short-term interest rates at the end of 2002
and the rate decrease in June, the Company's cost of funds declined by 65 basis
points during 2003, while the yield on the Company's assets fell by 71 points.
The following table shows the components of the Company's primary spread at
the end of the years 2001 through 2003.
TABLE 61
Yield on Earning Assets, Cost of Funds, and Primary Spread
2001 - 2003
December 31
--------------------------------------
2003 2002 2001
----------- ---------- -----------
Yield on loan portfolio and MBS 4.61% 5.28% 6.38%
Yield on investments .93 1.94 2.86
----------- ---------- -----------
Yield on earning assets 4.54 5.25 6.36
----------- ---------- -----------
Cost of deposits 1.85 2.56 3.39
Cost of borrowings 1.37 1.85 2.72
----------- ---------- -----------
Cost of funds 1.67 2.32 3.15
----------- ---------- -----------
Primary spread 2.87% 2.93% 3.21%
=========== ========== ===========
Interest on Loans
Interest on loans was $3.2 billion, $2.9 billion, and $2.7 billion for the
years ended December 31, 2003, 2002, and 2001, respectively. The increase in
2003 and 2002 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 $262 million, $491 million, and $1.3 billion for the
years ended December 31, 2003, 2002, and 2001, respectively. The decrease in
2003 and 2002 was due to a decrease in the average portfolio balance and 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 $89 million, $113 million, and $193
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
decrease in 2003 was primarily due to a decrease in the average portfolio yield
partially offset by an increase in the average portfolio balance. The decrease
in 2002 was primarily due to a decrease in the average portfolio yield and a
decrease in the average portfolio balance.
Interest on Deposits
Interest on deposits was $938 million, $1.1 billion, and $1.5 billion for
the years ended December 31, 2003, 2002, and 2001, respectively. The decrease in
2003 and 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 Advances
Interest paid on FHLB advances was $270 million, $380 million, and $880
million for the years ended December 31, 2003, 2002, and 2001, respectively. The
decrease in 2003 was due to a decrease in the average cost of these borrowings
partially offset by an increase in the average outstanding balance. The decrease
in 2002 was due to a decrease in the average cost of these borrowings and a
decrease in the average outstanding balance.
Interest on Other Borrowings
Interest expense on other borrowings, including interest on reverse
repurchase agreements, amounted to $112 million, $107 million, and $176 million
for the years ended 2003, 2002, and 2001, respectively. The increase in 2003 was
due to an increase in the average balance partially offset by a decrease in the
average cost of other borrowings. 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.
Interest Rate Swaps
From time to time, 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. The Company did not enter into any interest rate swaps in
2003.
TABLE 62
Interest Rate Swap Activity
2001 - 2003
(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
Maturities (91) (487)
------------ -------------
Balance at December 31, 2003 $ -0- $ 104
============ =============
Interest rate swap payment activity decreased net interest income by $12
million, $19 million, and $13 million for the years ended December 31, 2003,
2002, and 2001, respectively.
The Company accounts for interest rate swaps under the provisions in SFAS
133, as amended. 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 $11 million, or $.04 after tax per diluted share for
the year ended December 31, 2003, as compared to pre-tax income of $8 million,
or $.03 after tax per diluted share for the year ended December 31, 2002 and a
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 2003, 2002, and 2001 as a result of
interest rate movements. Because the Company intends to hold these interest rate
swaps to maturity, valuation gains and losses will net to zero over the lives of
the 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, 2003.
Provision for Loan Losses
The provision for loan losses was $12 million for the year ended 2003,
compared to provisions of $21 million and $22 million for the years ended 2002
and 2001, 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 $313 million, $247 million, and $237 million for the
years ended December 31, 2003, 2002, and 2001, respectively. The increase in
2003 as compared to 2002 resulted primarily from the increase in income
associated with the gains on a larger volume of loan sales and higher loan
prepayment fees. The increase in 2002 resulted primarily from the income
associated with the ongoing valuation of interest rate swaps compared to an
expense in 2001. Also included in noninterest income during 2002 was a $7.9
million refund in 2002 for 1998 FHLB prepayment fees refunded by the FHLB of San
Francisco.
General and Administrative Expenses
General and administrative expenses (G&A) were $721 million, $601 million,
and $514 million for the years ended 2003, 2002, and 2001, respectively.
Expenses increased in 2003 and 2002 because of the large increase in activity on
both the loan and savings sides of the business as well as the continued
investment in resources to support future expansion of the Company.
General and administrative expenses as a percentage of average assets was
..98% for the year ended December 31, 2003 compared with .96% and .90% for the
years ended December 31, 2002 and 2001, respectively. G&A as a percentage of net
interest income plus noninterest income (the "efficiency ratio") amounted to
28.57% for the year ended December 31, 2003 compared with 27.63% and 27.50% for
the years ended December 31, 2002 and 2001, respectively.
Taxes on Income
Golden West utilizes the accrual method of accounting for income tax
purposes. Taxes as a percentage of earnings decreased slightly in 2003 as
compared to 2002 and decreased slightly in 2002 compared with 2001. Included in
taxes on income for 2003 was nonrecurring tax benefits of $6.6 million resulting
from the closure of an audit and other issues. 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 loan
repayments; borrowings from the FHLB of San Francisco; deposits; debt
collateralized by mortgages, MBS, or securities; sales of loans; short-term bank
notes; earnings; borrowings from its parent; and borrowings from its WTX
subsidiary. In addition, WSB has other alternatives available to provide
liquidity or finance operations including wholesale certificates of deposit,
federal funds purchased, and borrowings from private and public offerings of
debt. Furthermore, under certain conditions, WSB may borrow from the Federal
Reserve Bank of San Francisco to meet short-term cash needs.
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 MBS; 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 debt
securities, capital contributions to its insured subsidiaries, dividends to
stockholders, the repurchase of Golden West stock, and general and
administrative expenses.
Common Stock
The quarterly price ranges, based on the daily closing price, for the
Company's common stock during 2003 and 2002 were as follows:
TABLE 63
Common Stock Price Range
2002 - 2003
2003 2002
---------------------- -----------------------------
First Quarter $69.67 - $ 75.56 $58.04 - $65.80
Second Quarter $72.07 - $ 85.05 $63.17 - $70.25
Third Quarter $80.58 - $ 90.36 $58.15 - $68.95
Fourth Quarter $91.95 - $103.45 $57.91 - $72.98
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Asset/Liability Management" on pages 47 through 50 in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index included on page 76 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.
ITEM 9A. CONTROLS AND PROCEDURES
The Company has 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 as of
December 31, 2003. 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 during the quarter ended December 31, 2003.
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 through 4, 10, and 11 of the Registrant's Proxy
Statement dated March 12, 2004, which are incorporated herein by reference, and
page 37 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 12, 2004, on pages 8 through 10 and 13 through 15 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 through 4, 10 and 11 of Registrant's Proxy Statement dated March 12,
2004, 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 14 of the Registrant's Proxy
Statement dated March 12, 2004, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A is set forth on page
16 of Registrant's Proxy Statement dated March 12, 2004, and is incorporated
herein by reference.
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 76 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 1, 2001, is incorporated by reference to Exhibit 10 (a)
to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year
ended December 31, 2002.
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, is
incorporated by reference to Exhibit 10 (e) to the Company's Annual Report
on Form 10-K (File No. 1-4269) for the year ended December 31, 2002.
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 is incorporated by reference to Exhibit 10 (g) to the
Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended
December 31, 2002.
(3) Index to Exhibits (continued)
Exhibit No. Description
21 (a) Subsidiaries of the Registrant.
23 (a) Independent Auditors' Consent.
31.1 Section 302 Certification of Principal Executive Officer.
31.2 Section 302 Certification of Principal Executive Officer.
31.3 Section 302 Certification of Principal Financial Officer.
32 Section 906 Certification of Principal Executive Officers and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
The Registrant filed one current report on Form 8-K with the Commission
during the fourth quarter of 2003 and has since filed one more report on Form
8-K with the Commission:
1. Report filed October 22, 2003. Item 7. Exhibits. The report dated
October 21, 2003 included the Golden West Third Quarter 2003 Earnings Press
Release and the Golden West September 30, 2003 Thirteen Month Statistical Data
Press Release.
2. Report filed January 23, 2004. Item 7. Exhibits. The report dated
January 22, 2004 included the Golden West Fourth Quarter 2003 Earnings Press
Release and the Golden West December 31, 2003 Thirteen Month Statistical Data
Press Release.
(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 12, 2004
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 C. Herringer 3/12/04 /s/ Bernard A. Osher 3/12/04
- -------------------------- ------- -------------------------- -------
Maryellen C. Herringer Bernard A. Osher
Director Director
/s/ Louis J. Galen 3/12/04 /s/ Kenneth T. Rosen 3/12/04
- -------------------------- ------- -------------------------- -------
Louis J. Galen Kenneth T. Rosen
Director Director
/s/ Antonia Hernandez 3/12/04 /s/ Herbert M. Sandler 3/12/04
- -------------------------- ------- -------------------------- -------
Antonia Hernandez Herbert M. Sandler
Director Director
/s/ Patricia A. King 3/12/04 /s/ Marion O. Sandler 3/12/04
- -------------------------- ------- -------------------------- -------
Patricia A. King Marion O. Sandler
Director Director
/s/ Leslie Tang Schilling 3/12/04
-------------------------- -------
Leslie Tang Schilling
Director
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, 2003 and 2002...........................................F-2
Consolidated Statement of Net Earnings for the years
ended December 31, 2003, 2002, and 2001 .............................F-3
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 2003, 2002, and 2001........................F-4
Consolidated Statement of Cash Flows for the years
ended December 31, 2003, 2002, and 2001.........................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.
EXHIBIT 21(a)
SUBSIDIARIES OF REGISTRANT:
WORLD SAVINGS BANK, FSB
Federal Savings Bank, Chartered January 20, 1995
California Corporation, Incorporated October 26, 1912
WORLD SAVINGS BANK, FSB (TEXAS)
Federal Savings Bank, Chartered December 1, 2000
Texas State Savings Bank, Incorporated January 12, 1995
ATLAS ADVISERS, INC.
California Corporation, Incorporated May 6, 1987
ATLAS SECURITIES, INC.
California Corporation, Incorporated May 6, 1987
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-14833 on Form S-8 and Registration Statement No. 333-41278 on Form S-3 of our
report dated January 30, 2004 appearing in this Annual Report on Form 10-K of
Golden West Financial Corporation for the year ended December 31, 2003.
/s/ Deloitte & Touche LLP
Oakland, California
March 12, 2004
EXHIBIT 31.1
SECTION 302 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, or caused such disclosure
controls and procedures to be designed under our supervision 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the Company's internal
control over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting;
and
5) The Company's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the Audit Committee of the Company's Board of
Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the Company's internal controls over
financial reporting.
March 12, 2004 /s/ Herbert M. Sandler
- ----------------------- -------------------------------------
Date Herbert M. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
EXHIBIT 31.2
SECTION 302 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, or caused such disclosure
controls and procedures to be designed under our supervision 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the Company's internal
control over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting;
and
5) The Company's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the Audit Committee of the Company's Board of
Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the Company's internal controls over
financial reporting.
March 12, 2004 /s/ Marion O. Sandler
- ----------------------- -------------------------------------
Date Marion O. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
EXHIBIT 31.3
SECTION 302 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, or caused such disclosure
controls and procedures to be designed under our supervision 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the Company's internal
control over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting;
and
5) The Company's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the Audit Committee of the Company's Board of
Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the Company's internal controls over
financial reporting.
March 12, 2004 /s/ Russell W. Kettell
- ----------------------- -------------------------------------
Date Russell W. Kettell
President and Chief Financial Officer
Golden West Financial Corporation
EXHIBIT 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERS AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Form 10-K of Golden West Financial
Corporation for the annual period ended December 31, 2003, each of the
undersigned, hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1) such Form 10-K of Golden West Financial Corporation for the annual period
ended December 31, 2003 fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in such Form 10-K of Golden West Financial
Corporation for the annual period ended December 31, 2003 fairly
presents, in all material respects, the financial condition and results
of operations of Golden West Financial Corporation.
March 12, 2004 /s/ Herbert M. Sandler
- ----------------------- -------------------------------------
Date Herbert M. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
March 12, 2004 /s/ Marion O. Sandler
- ----------------------- -------------------------------------
Date Marion O. Sandler
Chairman of the Board and
Chief Executive Officer
Golden West Financial Corporation
March 12, 2004 /s/ Russell W. Kettell
- ----------------------- -------------------------------------
Date Russell W. Kettell
President and Chief Financial Officer
Golden West Financial Corporation
Independent Auditors' Report
Board of Directors and Stockholders
Golden West Financial Corporation
Oakland, California
We have audited the accompanying consolidated statements of financial
condition of Golden West Financial Corporation and subsidiaries as of December
31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 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 30, 2004
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands except per share figures)
ASSETS
December 31
-------------------------------------
2003 2002
----------------- ----------------
Cash $ 260,823 $ 318,914
Securities available for sale at fair value
(cost of $1,556,827 and $596,282) 1,879,443 922,177
Purchased mortgage-backed securities available for sale at
fair value (cost of $21,980 and $34,404) 22,071 34,543
Purchased mortgage-backed securities held to maturity at cost
(fair value of $441,750 and $170,173) 433,319 161,846
Mortgage-backed securities with recourse held to maturity at cost
(fair value of $3,673,690 and $6,007,230) 3,650,048 5,871,069
Loans Receivable:
Loans held for sale 124,917 381,232
Loans held for investment less allowance for loan losses of
$289,937 and $281,097 74,080,661 58,562,084
----------------- ----------------
Total Loans Receivable 74,205,578 58,943,316
Interest earned but uncollected 183,761 183,130
Investment in capital stock of Federal Home Loan Banks,
at cost which approximates fair value 1,152,339 1,072,817
Foreclosed real estate 13,904 11,244
Premises and equipment, net 360,327 351,942
Other assets 388,277 534,830
----------------- ----------------
$82,549,890 $68,405,828
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
-------------------------------------
2003 2002
---------------- -----------------
Deposits $46,726,965 $41,038,797
Advances from Federal Home Loan Banks 22,000,234 18,635,099
Securities sold under agreements to repurchase 3,021,385 522,299
Bank notes 3,015,854 1,209,925
Senior debt 991,257 989,690
Subordinated notes -0- 199,867
Taxes on income 561,406 489,252
Other liabilities 285,521 295,649
---------------- -----------------
76,602,622 63,380,578
Stockholders' equity:
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, 152,119,108 and 153,521,103 shares 15,212 15,352
Additional paid-in capital 220,923 198,162
Retained earnings 5,513,434 4,612,529
---------------- -----------------
5,749,569 4,826,043
Accumulated other comprehensive income from unrealized gains
on securities, net of income tax of $125,008 and $126,827 197,699 199,207
---------------- -----------------
Total Stockholders' Equity 5,947,268 5,025,250
---------------- -----------------
$82,549,890 $68,405,828
================ =================
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET EARNINGS
(Dollars in thousands except per share figures)
Year Ended December 31
--------------------------------------------------
2003 2002 2001
--------------- --------------- --------------
Interest Income:
Interest on loans $ 3,178,087 $ 2,893,299 $ 2,740,101
Interest on mortgage-backed securities 261,712 490,523 1,276,648
Interest and dividends on investments 88,545 113,212 192,863
--------------- --------------- --------------
3,528,344 3,497,034 4,209,612
Interest Expense:
Interest on deposits 938,123 1,079,937 1,522,328
Interest on advances 269,793 379,613 879,842
Interest on repurchase agreements 9,048 1,826 42,113
Interest on other borrowings 102,996 105,364 133,997
--------------- --------------- --------------
1,319,960 1,566,740 2,578,280
--------------- --------------- --------------
Net Interest Income 2,208,384 1,930,294 1,631,332
Provision for loan losses 11,864 21,170 22,265
--------------- --------------- --------------
Net Interest Income after Provision for Loan Losses 2,196,520 1,909,124 1,609,067
Noninterest Income:
Fees 163,306 139,416 150,675
Gain on the sale of securities, MBS, and loans 72,274 45,143 42,513
Change in fair value of derivatives 10,890 7,610 (9,738)
Other 66,860 54,831 53,289
--------------- --------------- --------------
313,330 247,000 236,739
Noninterest Expense:
General and administrative:
Personnel 453,476 378,099 315,984
Occupancy 76,649 69,559 64,747
Technology and telecommunications 78,701 66,318 52,621
Deposit insurance 6,683 6,062 5,712
Advertising 22,516 16,528 15,012
Other 82,490 64,928 59,726
--------------- --------------- --------------
720,515 601,494 513,802
Earnings before Taxes on Income and
Cumulative Effect of Accounting Change 1,789,335 1,554,630 1,332,004
Taxes on Income 683,236 596,351 513,181
--------------- --------------- --------------
Earnings before Cumulative Effect of Accounting Change 1,106,099 958,279 818,823
Cumulative Effect of Accounting Change, Net of Tax -0- -0- (6,018)
--------------- --------------- --------------
Net Earnings $ 1,106,099 $ 958,279 $ 812,805
=============== =============== ==============
Basic Earnings Per Share before
Cumulative Effect of Accounting Change $ 7.25 $ 6.20 $ 5.18
Cumulative Effect of Accounting Change, Net of Tax .00 .00 (.04)
--------------- --------------- --------------
Basic Earnings Per Share $ 7.25 $ 6.20 $ 5.14
=============== =============== ==============
Diluted Earnings Per Share before
Cumulative Effect of Accounting Change $ 7.14 $ 6.12 $ 5.11
Cumulative Effect of Accounting Change, Net of Tax .00 .00 (.04)
--------------- --------------- ---------------
Diluted Earnings Per Share $ 7.14 $ 6.12 $ 5.07
=============== =============== ===============
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands except per share figures)
Accumulated
Additional Other Total
Number of Common Paid-in Retained Comprehensive Stockholders'
Shares Stock Capital Earnings Income Equity
-------------- ----------- ------------ ------------ ------------------ ---------------
Balance at January 1, 2001 158,410,137 $ 15,841 $151,458 $ 3,287,325 $ 232,663 $ 3,687,287
Net earnings -0- -0- 812,805 -0- 812,805
Change in unrealized gains on
securities available for sale -0- -0- -0- (11,246) (11,246)
Reclassification adjustment for
gains included in income -0- -0- -0- (38) (38)
---------------
Comprehensive income 801,521
Common stock issued upon exercise
of stock options, including tax benefits 797,090 80 22,042 -0- -0- 22,122
Purchase and retirement of shares
of Company stock (3,675,450) (368) -0- (185,276) -0- (185,644)
Cash dividends on common stock
($.26 per share) -0- -0- (41,096) -0- (41,096)
-------------- ----------- ------------ ------------ ------------------ ---------------
Balance at December 31, 2001 155,531,777 15,553 173,500 3,873,758 221,379 4,284,190
Net earnings -0- -0- 958,279 -0- 958,279
Change in unrealized gains on
securities available for sale -0- -0- -0- (21,425) (21,425)
Reclassification adjustment for
gains included in income -0- -0- -0- (747) (747)
----------------
Comprehensive income 936,107
Common stock issued upon exercise
of stock options, including tax benefits 730,986 73 24,662 -0- -0- 24,735
Purchase and retirement of shares
of Company stock (2,741,660) (274) -0- (172,762) -0- (173,036)
Cash dividends on common stock
($.3025 per share) -0- -0- (46,746) -0- (46,746)
-------------- ----------- ------------ ------------ ------------------ ---------------
Balance at December 31, 2002 153,521,103 15,352 198,162 4,612,529 199,207 5,025,250
Net earnings -0- -0- 1,106,099 -0- 1,106,099
Change in unrealized gains on
securities available for sale -0- -0- -0- (1,501) (1,501)
Reclassification adjustment for
gains included in income -0- -0- -0- (7) (7)
----------------
Comprehensive income 1,104,591
Common stock issued upon exercise
of stock options, including tax 554,375 55 22,761 -0- -0- 22,816
benefits
Purchase and retirement of shares
of Company stock (1,956,370) (195) -0- (151,035) -0- (151,230)
Cash dividends on common stock
($.355 per share) -0- -0- (54,159) -0- (54,159)
------------- ----------- ------------ ------------ ------------------ ----------------
Balance at December 31, 2003 152,119,108 $ 15,212 $220,923 $ 5,513,434 $ 197,699 $ 5,947,268
============= =========== ============ ============ ================== ================
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
Cash Flows from Operating Activities:
Net earnings $ 1,106,099 $ 958,279 $ 812,805
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Provision for loan losses 11,864 21,170 22,265
Amortization of net loan costs 100,579 59,171 23,288
Depreciation and amortization 42,379 37,869 33,538
Loans originated for sale (2,003,352) (1,799,589) (2,327,382)
Sales of loans 3,217,876 2,429,131 2,919,066
Decrease (increase) in interest earned but uncollected (2,114) 73,115 14,257
Federal Home Loan Bank stock dividends (40,854) (51,462) (55,301)
Increase (decrease) in other assets 146,553 (281,973) (51,409)
Decrease in other liabilities (10,128) (17,125) (31,806)
Increase in taxes on income 73,973 47,342 33,071
Other, net 13,787 37,038 15,798
--------------- ---------------- ---------------
Net cash provided by operating activities 2,656,662 1,512,966 1,408,190
Cash Flows from Investing Activities:
New loan activity:
New real estate loans originated for investment portfolio (33,981,369) (24,883,301) (18,435,855)
Real estate loans purchased (2,115) -0- -0-
Other, net (378,367) (975,197) (570,593)
--------------- ---------------- ---------------
(34,361,851) (25,858,498) (19,006,448)
Real estate loan principal payments:
Monthly payments 1,382,599 1,133,269 601,623
Payoffs, net of foreclosures 16,652,204 11,208,645 8,582,589
--------------- ---------------- ---------------
18,034,803 12,341,914 9,184,212
Purchases of mortgage-backed securities available for sale -0- -0- (199,314)
Sales of mortgage-backed securities available for sale -0- 176,063 4,642
Purchases of mortgage-backed securities held to maturity (366,509) -0- -0-
Repayments of mortgage-backed securities 2,007,746 3,208,823 6,386,071
Proceeds from sales of foreclosed real estate 54,231 49,433 35,166
Increase in securities available for sale (957,753) (331,159) (243,761)
Decrease in other investments -0- -0- 368,555
Purchases of Federal Home Loan Bank stock (37,185) -0- (88,030)
Redemptions of Federal Home Loan Bank stock -0- 83,773 111,807
Additions to premises and equipment (53,892) (62,804) (54,884)
--------------- ---------------- ---------------
Net cash used in investing activities (15,680,410) (10,392,455) (3,501,984)
See notes to consolidated financial statements.
Year Ended December 31
---------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Net increase in deposits $ 5,688,168 $ 6,566,212 $ 4,424,666
Additions to Federal Home Loan Bank advances 10,240,000 6,063,051 2,945,500
Repayments of Federal Home Loan Bank advances (6,874,865) (5,465,461) (4,639,788)
Proceeds from agreements to repurchase securities 4,504,306 1,412,593 5,410,609
Repayments of agreements to repurchase securities (2,005,220) (1,113,817) (6,044,360)
Increase in bank notes 1,805,929 1,209,925 -0-
Net proceeds from senior debt -0- 790,708 198,060
Repayments of subordinated notes (200,000) (400,000) -0-
Dividends on common stock (54,159) (46,746) (41,096)
Exercise of stock options 12,728 15,915 14,476
Purchase and retirement of Company stock (151,230) (173,036) (185,644)
--------------- --------------- ---------------
Net cash provided by financing activities 12,965,657 8,859,344 2,082,423
--------------- --------------- ---------------
Net Decrease in Cash (58,091) (20,145) (11,371)
Cash at beginning of period 318,914 339,059 350,430
--------------- --------------- ---------------
Cash at end of period $ 260,823 $ 318,914 $ 339,059
=============== =============== ===============
Supplemental cash flow information:
Cash paid for:
Interest $ 1,328,673 $ 1,580,156 $ 2,671,740
Income taxes 599,367 544,598 469,970
Cash received for interest and dividends 3,527,713 3,569,504 4,230,318
Noncash investing activities:
Loans receivable and loans underlying mortgage-backed
securities converted from adjustable rate to fixed rate 1,227,486 596,213 794,308
Loans transferred to foreclosed real estate 57,008 47,305 34,792
Loans securitized into mortgage-backed securities with
recourse held to maturity -0- -0- 2,995,949
Loans securitized into mortgage-backed securities with
recourse recorded as loans receivable 13,663,049 18,892,282 6,011,873
Mortgage-backed securities held to maturity desecuritized
into adjustable rate loans and recorded as loans
receivable -0- 4,147,670 -0-
Transfer of loans held for investment to (from) loans held for sale (144,323) 24,938 182,239
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002, and 2001
(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 $81.9 billion in assets at
December 31, 2003. WSB has a wholly owned subsidiary, World Savings Bank, FSB
(Texas) (WTX) that is also a federally chartered savings bank and had $9.8
billion of assets at December 31, 2003. Both WSB and WTX are regulated by the
Office of Thrift Supervision (OTS).
Certain reclassifications have been made to prior year financial statements
to conform to current year presentation. Specifically, "Loans in process" was
reclassified on the Consolidated Statement of Financial Condition from "Other
assets" to "Loans Receivable." Loans in process are funded, interest earning
loans that have not yet been entered into the loan servicing system due to the
normal five to seven day processing lag. On the Consolidated Statement of Net
Earnings, certain expenses were reclassified in the "Noninterest expense"
category primarily to report technology and telecommunication expenses
separately.
Nature of Operations
Golden West Financial Corporation, through its financial institution
subsidiaries, operates 271 savings branches in nine states and 302 loan offices
in 38 states, of which 94 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 accumulated 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.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share)
Mortgage-Backed Securities
The Company has no mortgage-backed securities (MBS) classified as trading.
Mortgage-backed securities held to maturity are recorded at cost because the
Company has the ability 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.
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 SFAS. 115, "Accounting
for Certain Investments in Debt and Equity Securities," 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 collateralized by savings accounts.
The adjustable rate mortgage (ARM) is the Company's primary real estate
loan. Most of the Company's ARMs carry an interest rate that changes 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. Negative amortization may occur during periods when payment increases
are limited. A small portion of the Company's ARMs is originated with a fixed
rate for an initial period, primarily 12-36 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. The
fair value of loans held for sale is primarily based on observable market
prices.
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.
Certain direct loan origination costs, net of loan origination fees, 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. Interest income on nonaccrual loans is only recognized as cash is
received and these cash receipts are applied in accordance with the loan's
amortization schedule.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
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.
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 Company recognizes as assets the rights to service mortgage loans for
others. When the servicing rights are retained by the Company upon the sale of
loans, these rights are then capitalized as an asset. The amount capitalized is
based on the relative fair value of the servicing rights and the mortgage loan
on the date the mortgage loan is sold. 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.
CMSRs are reviewed monthly for impairment based on fair value. A present
value cash flow model is used to estimate the fair 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, 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 stratified by year of origination, original
term to maturity, and weighted average interest rate. The other key assumptions
used in calculating the fair value of CMSRs at December 31, 2003 were a weighted
average repayment rate of 20.3%, 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, 2003 and 2002 was $95,139 and $73,082, respectively. At
December 31, 2003 and 2002, there was no impairment.
Premises and Equipment
Buildings, leasehold improvements, and equipment are carried at amortized
cost. Buildings and equipment are depreciated over their estimated useful lives
using the straight-line method. The estimated useful life of newly constructed
buildings is 40 years and the lives of new assets that are added to existing
buildings are based on the remaining life of the original building. The
estimated useful life for equipment is 3-10 years. Leasehold improvements are
amortized over the shorter of their useful lives or lease terms.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
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."
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, 2003, 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.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
At December 31, 2003 and 2002, WSB and WTX had the following regulatory
capital calculated in accordance with FIRREA's capital standards:
December 31, 2003
-----------------------------------------------------------------------------------------
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------ ----------------------- ------------------------
Capital Ratio Capital Ratio Capital Ratio
------------- ------- ------------ ------- ------------- --------
WSB
Tangible $ 6,085,283 7.45% $ 1,225,819 1.50% --- ---
Tier 1 (core or leverage) 6,085,283 7.45 3,268,850 4.00 $ 4,086,062 5.00%
Tier 1 risk-based 6,085,283 13.52 --- --- 2,701,449 6.00
Total risk-based 6,374,182 14.16 3,601,932 8.00 4,502,415 10.00
WTX
Tangible $ 504,735 5.16% $ 146,846 1.50% --- ---
Tier 1 (core or leverage) 504,735 5.16 391,591 4.00 $ 489,488 5.00%
Tier 1 risk-based 504,735 22.85 --- --- 132,557 6.00
Total risk-based 505,530 22.88 176,743 8.00 220,929 10.00
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
Retained Earnings
The payments of capital distributions by WSB and WTX to their parent are
governed by OTS regulations. 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, 2003, $3.9 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.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
Stock Based Compensation
The Company has a stock-based employee compensation plan, which is
described more fully in Note R. 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
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net income, as reported $ 1,106,099 $ 958,279 $ 812,805
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (8,162) (3,464) (4,808)
-------------- -------------- --------------
Pro forma net income $ 1,097,937 $ 954,815 $ 807,997
============== ============== ==============
Basic earning per share
As reported $ 7.25 $ 6.20 $ 5.14
Pro forma 7.20 6.18 5.11
Diluted earning per share
As reported $ 7.14 $ 6.12 $ 5.07
Pro forma 7.10 6.09 5.04
New Accounting Pronouncements
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133. This statement is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS 149 on July
1, 2003, did not have a significant impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS 150).
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 on July 1, 2003, had no
impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 provides guidance on how to
identify a variable interest entity and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a variable interest
entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. In December 2003, the FASB
revised FIN 46. The adoption of FIN 46 on July 1, 2003 and the adoption of FIN
46 (R)had no impact on the Company's financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE B - Securities Available for Sale
The following is a summary of securities available for sale:
December 31, 2003
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- ---------------
Federal funds $ 941,267 $ -0- $ -0- $ 941,267
Short-term repurchase agreements collateralized by MBS 300,000 -0- -0- 300,000
Eurodollar time deposits 298,238 -0- -0- 298,238
Equity securities 5,530 322,228 -0- 327,758
Other 11,792 453 65 12,180
------------- ------------- ------------- ---------------
$1,556,827 $ 322,681 $ 65 $ 1,879,443
============= ============= ============= ===============
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
============= ============= ============= ===============
The weighted average portfolio yields on securities available for sale were
..93% and 1.94% (based on cost) at December 31, 2003 and 2002, respectively.
Effective January 1, 2003, equity securities are excluded from the weighted
average portfolio yield calculation. For 2002, the weighted average portfolio
yield calculation would have been 1.10% excluding equity securities.
There have been no securities available for sale that have been in a
continuous unrealized loss position for more than 12 months and all unrealized
losses have been determined to be temporary. Principal proceeds from the sales
of securities from the securities available for sale portfolio were $1,479
(2003), $1,396 (2002), and $0 (2001) and resulted in realized gains of $21
(2003), $32 (2002), and $0 (2001) and no realized losses in 2003, 2002, or
2001.
At December 31, 2003, the securities available for sale had maturities as
follows:
Amortized Fair
Maturity Cost Value
- --------------------------------------- -------------- --------------
No maturity $ 15,285 $ 337,918
2004 1,541,264 1,541,265
2005 through 2008 217 204
2009 through 2013 -0- -0-
2014 and thereafter 61 56
-------------- --------------
$ 1,556,827 $ 1,879,443
============== ==============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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, 2003
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- ---------------- ---------------
Fannie Mae $ 10,841 $ 94 $ 3 $ 10,932
Ginnie Mae 5,700 -0- -0- 5,700
Freddie Mac 5,439 -0- -0- 5,439
---------------- --------------- ---------------- ---------------
$ 21,980 $ 94 $ 3 $ 22,071
================ =============== ================ ===============
December 31, 2002
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- ---------------- ---------------
Fannie Mae $ 16,953 $ 148 $ 5 $ 17,096
Freddie Mac 8,955 -0- 4 8,951
Ginnie Mae 8,496 -0- -0- 8,496
---------------- --------------- ---------------- ---------------
$ 34,404 $ 148 $ 9 $ 34,543
================ =============== ================ ===============
The weighted average portfolio yields on mortgage-backed securities
available for sale were 8.54% at December 31, 2003 and 2002. There have been no
MBS available for sale that have been in a continuous unrealized loss position
for more than 12 months and all unrealized losses have been determined to be
temporary. There were no sales of securities from the mortgage-back securities
available for sale portfolio in 2003. In 2002, the Company sold $176 million of
purchased mortgage-backed securities available for sale and realized a gain of
$3 million.
At December 31, 2003, purchased mortgage-backed securities available for
sale had contractual maturities as follows:
Amortized Fair
Maturity Cost Value
- --------------------------------------- ----------------- ----------------
2004 through 2008 $ 271 $ 272
2009 through 2013 1,834 1,842
2014 and thereafter 19,875 19,957
----------------- ----------------
$ 21,980 $ 22,071
================= ================
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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, 2003
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
Purchased MBS held to maturity
-----------------------------------------------
Fannie Mae $ 399,883 $ 8,191 $ 119 $ 407,955
Freddie Mac 26,546 359 -0- 26,905
Ginnie Mae 6,890 -0- -0- 6,890
--------------- ---------------- --------------- ----------------
Subtotal 433,319 8,550 119 441,750
MBS with recourse held to maturity
-----------------------------------------------
REMICs 3,650,048 23,659 17 3,673,690
--------------- ---------------- --------------- ----------------
Total $ 4,083,367 $ 32,209 $ 136 $ 4,115,440
=============== ================ =============== ================
December 31, 2002
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
Purchased MBS held to maturity
-----------------------------------------------
Fannie Mae $ 139,467 $ 7,066 $ -0- $ 146,533
Freddie Mac 10,876 623 -0- 11,499
Ginnie Mae 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
=============== ================ =============== ================
The weighted average portfolio yields on mortgage-backed securities held to
maturity were 5.00% and 5.62% at December 31, 2003 and 2002, respectively. There
have been no MBS held to maturity that have been in a continuous unrealized loss
position for more than 12 months and all unrealized losses have been determined
to be temporary. There were no sales of securities from the mortgage-backed
securities held to maturity portfolio during 2003, 2002, or 2001.
During the first half of 2002, the Company desecuritized $4.1 billion of
Fannie Mae MBS that were classified as MBS held to maturity with recourse and
the underlying loans were reclassified to loans receivable.
At December 31, 2003, MBS with an amortized cost of $1.9 billion were
pledged to secure FHLB advances and securities sold under agreements to
repurchase.
At December 31, 2003, mortgage-backed securities held to maturity had
contractual maturities as follows:
Amortized Fair
Maturity Cost Value
- --------------------------------------- ----------------- ----------------
2004 through 2008 $ 23 $ 23
2009 through 2013 47 48
2014 and thereafter 4,083,297 4,115,369
----------------- ----------------
$ 4,083,367 $ 4,115,440
================= ================
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE E - Loans Receivable
December 31
---------------------------------------------
2003 2002
--------------------- ---------------------
Loans collateralized by:
One- to four-family dwelling units $69,586,604 $54,934,357
Over four-family dwelling units 3,554,715 3,257,389
Commercial property 18,598 20,465
Land -0- 114
--------------------- ---------------------
73,159,917 58,212,325
Loans on savings accounts 11,780 13,240
--------------------- ---------------------
73,171,697 58,225,565
Loans in process 785,459 674,417
Net deferred costs 547,318 331,985
Allowance for loan losses (289,937) (281,097)
Undisbursed loan funds (8,959) (7,554)
--------------------- ---------------------
$ 74,205,578 $ 58,943,316
===================== =====================
As of December 31, 2003 and 2002, the Company had $1.9 billion and $1.2
billion, respectively, of second mortgages and Equity Lines of Credit (ELOC)
balances outstanding.
At December 31, 2003 and 2002, the Company had $125 million and $381
million, respectively, in loans held for sale, all of which were carried at the
lower of cost or market. At December 31, 2003, the Company had $23.2 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 April 1, 2001 are included in MBS.
A summary of the changes in the allowance for loan losses is as follows:
Year Ended December 31
----------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Balance at January 1 $ 281,097 $ 261,013 $ 236,708
Provision for loan losses charged to expense 11,864 21,170 22,265
Loans charged off (3,633) (1,943) (2,425)
Recoveries 609 857 351
Net transfer of allowance from recourse liability -0- -0- 4,114
--------------- -------------- --------------
Balance at December 31 $ 289,937 $ 281,097 $ 261,013
=============== ============== ==============
The following is a summary of impaired loans:
December 31
----------------------------------
2003 2002
--------------- --------------
Nonperforming loans $ 410,064 $ 413,123
Troubled debt restructured 3,105 233
Other impaired loans 6,752 3,889
--------------- --------------
$ 419,921 $ 417,245
=============== ==============
The portion of the allowance for loan losses that was specifically provided
for impaired loans was $1,038 and $1,572 at December 31, 2003 and 2002,
respectively. The average recorded investment in total impaired loans was
$428,716 and $407,621 during 2003 and 2002, 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, 2003, 2002, and 2001 on the total of impaired loans at each yearend
$12,975 (2003), $14,874 (2002), and $17,056 (2001).
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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, 2003 and 2002, the
outstanding balance of loans sold with servicing retained by the Company was
$5.8 billion and $5.4 billion, respectively. Included in those amounts were $3.1
billion and $2.9 billion at December 31, 2003 and 2002 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
--------------------------------
2003 2002
-------------- -------------
Balance at January 1 $ 69,448 $ 56,056
New CMSRs from loan sales 58,249 34,044
Amortization of CMSRs (38,730) (20,652)
-------------- -------------
Balance at December 31 $ 88,967 $ 69,448
============== =============
The estimated amortization of the December 31, 2003 balance of CMSRs for
the five years ending 2008 is $36.6 million (2004), $25.8 million (2005), $16.7
million (2006), $7.9 million (2007), and $2.0 million (2008). Actual results may
vary depending upon the level of the payoffs of the loans currently serviced.
NOTE G - Interest Earned But Uncollected
December 31
-----------------------------------
2003 2002
------------- --------------
Loans receivable $ 164,028 $ 150,766
Mortgage-backed securities 12,779 21,685
Interest rate swaps -0- 2,252
Other 6,954 8,427
------------- --------------
$ 183,761 $ 183,130
============= ==============
NOTE H - Premises and Equipment
December 31
----------------------------------
2003 2002
------------- ---------------
Land $ 82,169 $ 81,592
Building and leasehold improvements 269,071 256,019
Furniture, fixtures, and equipment 297,799 278,973
------------- ---------------
649,039 616,584
Accumulated depreciation and amortization 288,712 264,642
------------- ---------------
$ 360,327 $ 351,942
============= ===============
The aggregate future rentals under long-term operating leases on land or
premises in effect on December 31, 2003, and which expire between 2004 and 2064,
amounted to approximately $192,691. The approximate minimum payments during the
five years ending 2008 are $28,180 (2004), $26,042 (2005), $23,212 (2006),
$19,851 (2007), $12,790 (2008) and $82,616 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 $30,960 (2003),
$28,480 (2002), and $26,381 (2001).
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE I - Deposits
December 31
------------------------------------------------------------------
2003 2002
------------------------------- --------------------------------
Rate Amount Rate* Amount
---------- ---------------- ----------- ----------------
Deposits by rate:
Interest-bearing checking accounts 1.38% $ 5,555,185 1.77% $ 4,572,970
Passbook accounts .40 483,226 .75 456,158
Money market deposit accounts 1.74 29,709,791 2.50 22,060,104
Term certificate accounts with original
maturities of:
4 weeks to 1 year 1.32 3,766,962 1.86 4,714,712
1 to 2 years 1.32 2,331,194 2.52 4,197,261
2 to 3 years 2.73 1,491,893 3.82 1,857,234
3 to 4 years 3.78 1,317,212 4.48 1,286,011
4 years and over 4.80 2,015,469 5.07 1,794,051
Retail jumbo CDs 2.33 55,953 3.85 100,173
All other 3.75 80 4.88 123
---------------- ----------------
$ 46,726,965 $ 41,038,797
================ ================
* Weighted average interest rate including the impact of interest rate swaps.
December 31
------------------------------------------------------------------
2003 2002
------------------------------ -------------------------------
Rate Amount Rate* Amount
----------- ---------------- ---------- ----------------
Deposits by remaining maturity
at yearend:
No contractual maturity 1.67% $ 35,748,202 2.34% $ 27,089,232
Maturity within one year 1.75 7,356,579 2.51 10,082,783
After one but within two years 3.51 1,674,614 3.51 1,495,316
After two but within three years 3.54 523,446 4.62 992,351
After three but within four years 4.71 1,129,647 4.75 255,646
After four but within five years 3.24 289,505 4.72 1,111,603
Over five years 4.22 4,972 4.69 11,866
---------------- ----------------
$ 46,726,965 $ 41,038,797
================ ================
* Weighted average interest rate including the impact of interest rate swaps.
At December 31, the weighted average cost of deposits was 1.85% (2003) and
2.56% (2002).
As of December 31, 2003, the aggregate amount outstanding of time
certificates of deposit in amounts of $100,000 or more was $2.2 billion and the
aggregate amount outstanding of transaction accounts in amounts of $100,000 or
more was $18.4 billion.
Interest expense on deposits is summarized as follows:
Year Ended December 31
---------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
Interest-bearing checking accounts $ 78,900 $ 86,983 $ 114,880
Passbook accounts 2,859 3,855 5,917
Money market deposit accounts 530,543 413,076 187,867
Term certificate accounts 325,821 576,023 1,213,664
-------------- -------------- ---------------
$ 938,123 $ 1,079,937 $ 1,522,328
============== ============== ===============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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
$30,540,181 as of December 31, 2003.
The Company's advances have maturities and interest rates as follows:
December 31, 2003
-----------------------------------------------------------------
Stated
Maturity Amount Rate
---------------- -------------
2004 $ 4,848,040 1.17%
2005 7,552,750 1.17
2006 5,589,602 1.22
2007 535,793 1.49
2008 3,081,102 1.24
2009 and thereafter 392,947 5.81
----------------
$ 22,000,234
================
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
================
Financial data pertaining to advances from FHLBs were as follows:
Year Ended December 31
---------------------------------------
2003 2002
--------------- ----------------
Weighted average interest rate, end of year 1.28% 1.68%
Weighted average interest rate during the year 1.37% 2.06%
Average balance of FHLB advances $19,621,477 $18,468,723
Maximum outstanding at any monthend 22,000,234 19,169,627
Of the advances outstanding at December 31, 2003, $20.2 billion were tied
to a LIBOR index and were scheduled to reprice within 90 days. At December 31,
2003, the Company had $2.5 billion of commitments outstanding to borrow advances
from the FHLB of Dallas and these advances will be indexed to three-month LIBOR.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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 $3,112,307 and $527,318 at
December 31, 2003 and 2002, respectively.
December 31, 2003
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- -------------- ----------
2004 $ 1,871,385 1.12%
2005 650,000 1.17
2006 500,000 1.14
--------------
$ 3,021,385
==============
December 31, 2002
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- ------------- ----------
2003 $522,299 1.31%
=============
At the end of 2003 and 2002, all of the agreements to repurchase with
brokers/dealers were to reacquire the same securities.
NOTE L - Bank Notes
WSB has a bank note program under which up to $5.0 billion of borrowings
can be outstanding at any point in time. These unsecured bank notes have
maturities of 270 days or less.
December 31, 2003
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- -------------- ----------
2004 $ 3,015,854 1.12%
==============
December 31, 2002
------------------------------------------------------------
Stated
Maturity Amount Rate
------------------------- -------------- ----------
2003 $ 1,209,925 1.44%
==============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE M - Senior Debt
December 31
------------------------------
2003 2002
------------ -------------
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 $8,743 (2003) and $10,310 (2002) $ 991,257 $989,690
============ =============
At December 31, the senior debt had a weighted average interest rate of
4.91% (2003) and 4.92% (2002). At December 31, 2003, senior debt had maturities
and interest rates as follows:
Stated
Maturity Rate Amount
--------------------------- -------------- ---------------
2006 5.72% $ 198,991
2007 4.32 298,168
2012 4.94 494,098
---------------
$ 991,257
===============
NOTE N - Subordinated Notes
December 31
------------------------------
2003 2002
------------ -------------
Golden West Financial Corporation
subordinated notes, unsecured, due
2003, at a coupon rate of 6.00%,
net of unamortized discount
of $133 (2002) $ -0- $ 199,867
============ =============
At December 31, 2002, subordinated notes had a weighted average interest
rate of 6.09%.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE O - Taxes on Income
The following is a comparative analysis of the provision for federal and
state taxes on income.
Year Ended December 31
----------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Federal income tax:
Current $ 556,885 $ 479,732 $ 454,381
Deferred 44,349 43,611 (21,791)
State tax:
Current 87,403 69,933 81,235
Deferred (5,401) 3,075 (644)
-------------- -------------- --------------
$ 683,236 $ 596,351 $ 513,181
============== ============== ==============
The amounts of net deferred liability included in taxes on income in the
Consolidated Statement of Financial Condition are as follows:
December 31
---------------------------------
2003 2002
-------------- --------------
Federal income tax $ 370,597 $ 318,328
State tax 56,399 63,214
-------------- --------------
$ 426,996 $ 381,542
============== ==============
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
----------------------------------
2003 2002
-------------- --------------
Deferred tax liabilities:
Loan fees and interest income $ 292,633 $ 255,563
FHLB stock dividends 173,901 158,162
Unrealized gains on debt and equity securities 125,009 126,827
Depreciation 24,733 22,302
Bad debt reserve -0- 3,161
Other deferred tax liabilities 15 26
-------------- --------------
Gross deferred tax liabilities 616,291 566,041
Deferred tax assets:
Provision for losses on loans 116,834 113,712
State taxes 33,306 31,590
Other deferred tax assets 39,155 39,197
-------------- --------------
Gross deferred tax assets 189,295 184,499
-------------- --------------
Net deferred tax liability $ 426,996 $ 381,542
============== ==============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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
-----------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------- ------------------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------- ----------- ------------- ------------- ------------- ------------
Computed standard
corporate tax expense $626,267 35.0% $544,120 35.0% $466,201 35.0%
Increases (reductions) in
taxes resulting from:
State tax, net of federal
income tax benefit 58,344 3.3 60,666 3.9 55,915 4.2
Net financial income, not
subject to income tax,
primarily related to
acquisitions (1,234) (.1) (4,830) (.3) (8,105) (.6)
Other (141) .0 (3,605) (.2) (830) (.1)
------------- ----------- ------------- ------------- ------------- ------------
$683,236 38.2% $596,351 38.4% $513,181 38.5%
============= =========== ============= ============= ============= ============
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, 2003 and 2002, 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, 2003 and 2002,
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 P - Stockholders' Equity
Changes in common stock issued and outstanding were as follows:
-----------------------------------------------------
Year Ended December 31
-----------------------------------------------------
2003 2002 2001
-------------- --------------- --------------
Shares issued and outstanding, beginning of year 153,521,103 155,531,777 158,410,137
Common stock issued through options exercised 554,375 730,986 797,090
Common stock repurchased and retired (1,956,370) (2,741,660) (3,675,450)
-------------- --------------- --------------
Shares issued and outstanding, end of year 152,119,108 153,521,103 155,531,777
============== =============== ==============
The quarterly cash dividends paid on the Company's common stock were as
follows:
--------------------------------------------
Year Ended December 31
--------------------------------------------
2003 2002 2001
----------- ----------- ------------
First Quarter $ .0850 $ .0725 $ .0625
Second Quarter .0850 .0725 .0625
Third Quarter .0850 .0725 .0625
Fourth Quarter .1000 .0850 .0725
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, 2003, 51,270,628 of such
shares had been repurchased and retired at a cost of $1.4 billion since October
28, 1993. During 2003, 1,956,370 of the shares were purchased and retired at a
cost of $151 million.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE Q - Earnings Per Share
The Company calculates Basic Earnings Per Share (EPS) and Diluted EPS in
accordance with SFAS 128. The following is a summary of the calculation of basic
and diluted EPS:
Year Ended December 31
------------------------------------------------------
2003 2002 2001
----------------- ----------------- ---------------
Earnings before cumulative effect of accounting change $ 1,106,099 $ 958,279 $ 818,823
Cumulative effect of accounting change, net of tax -0- -0- (6,018)
----------------- ----------------- ---------------
Net earnings $ 1,106,099 $ 958,279 $ 812,805
================= ================= ===============
Weighted average shares 152,523,592 154,561,240 158,262,474
Dilutive effect of outstanding common stock equivalents 2,463,611 2,120,940 2,096,011
----------------- ----------------- ---------------
Diluted average shares outstanding 154,987,203 156,682,180 160,358,485
================= ================= ===============
Basic Earnings Per Share Calculation:
Basic earnings per share before
cumulative effect of accounting change $ 7.25 $ 6.20 $ 5.18
Cumulative effect of accounting change, net of tax .00 .00 (.04)
----------------- ----------------- ---------------
Basic earnings per share $ 7.25 $ 6.20 $ 5.14
================= ================= ===============
Diluted Earnings Per Share Calculation:
Diluted earnings per share before
cumulative effect of accounting change $ 7.14 $ 6.12 $ 5.11
Cumulative effect of accounting change, net of tax .00 .00 (.04)
----------------- ----------------- ---------------
Diluted earnings per share $ 7.14 $ 6.12 $ 5.07
================= ================= ===============
As of December 31, 2003, 2002, and 2001, options to purchase 419,500,
7,250, and 17,250 shares, respectively, were outstanding but not included in the
computation of earnings per share because the exercise price was higher than the
average market price, and therefore they were antidilutive.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE R - Stock Options
The Company's 1996 stock option plan authorizes the granting of options to
key employees to purchase up to 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 1,595,450 (2003), 3,147,200 (2002), and 3,088,500 (2001).
Outstanding options at December 31, 2003, were held by 609 employees and had
expiration dates ranging from January 15, 2004 to December 30, 2014.
The following table sets forth the range of exercise prices on outstanding
options at December 31, 2003:
Currently Exercisable
------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Exercise Remaining Number of Exercise
Exercise Price Options Price Contractual Life Options Price
- ---------------------- ----------------- ----------------- -------------------- ---------------- ------------------
$11.50 - $17.83 969,350 $ 15.17 1.5 years 969,350 $ 15.17
$27.60 - $38.75 3,190,999 30.55 5.7 years 1,225,275 29.70
$46.68 - $103.15 2,435,825 70.18 9.0 years 375,700 47.55
----------------- ----------------
6,596,174 2,570,325
================= ================
A summary of the transactions of the stock option plan follows:
Average
Exercise
Price Per
Shares Share
-------------- --------------
Outstanding, January 1, 2001 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
Granted 1,572,200 82.69
Exercised (554,375) 22.96
Canceled (20,450) 58.55
-------------- --------------
Outstanding, December 31, 2003 6,596,174 $ 42.93
============== ==============
At December 31, options exercisable amounted to 2,570,325 (2003), 2,688,175
(2002), and 2,913,435 (2001). The weighted average exercise price of the options
exercisable at December 31 was $26.83 (2003), $22.69 (2002) and $21.08 (2001).
The weighted average fair value per share of options granted during 2003
was $22.72 per share, $17.27 per share for those granted during 2002, and $14.14
per share for those granted during 2001. 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 2003, 2002 and 2001, respectively: dividend yield
of 0.7% (2003), 0.5% (2002) and 0.8% (2001); expected volatility of 23% (2003),
26% (2002) and 26% (2001); expected lives of 5.7 years (2003), 5.3 years (2002)
and 5.3 years (2001); and risk-free interest rates of 3.57% (2003), 2.73% (2002)
and 4.30% (2001).
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE S - Concentrations of Credit Risk and Derivatives
As of December 31, 2003, the balance of the Company's loans receivable and
MBS with recourse held to maturity was $77 billion. Of that $77 billion balance,
36% were Northern California loans, 28% were Southern California loans, 6% were
Florida loans, 4% were New Jersey loans, 4% were Texas 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,
2003 and 2002 was $1.7 billion and $1.4 billion, respectively. The vast majority
of these commitments were for adjustable rate mortgages.
The Company enters into commitments to sell mortgage loans. The commitments
generally have a fixed delivery settlement date. The Company had no significant
outstanding commitments to sell mortgage loans as of December 31, 2003 or 2002.
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, 2003 or 2002.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE T - 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,
2003. To the extent that rates change, variable interest rate information will
change.
The following table illustrates the weighted average rates as of December
31, 2003 for interest rate swaps held by the Company by product type. The
interest rate swaps held by the Company at December 31, 2003, mature in 2004.
December 31
2003
---------------
Pay fixed generic swaps:
Notional amount $ 103,600
Weighted average receive rate 1.18%
Weighted average pay rate 6.65%
During 2003, the range of floating interest rates received on swap
contracts was 1.02% to 1.83% and the range of floating interest rates paid on
swap contracts was 1.78% to 1.84%. 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 2.42% to 7.53%.
Activity in interest rate swaps is summarized as follows:
Interest Rate Swap Activity
For the years ended December 31, 2003, 2002, and 2001
(Notional amounts in millions)
Receive Pay
Fixed Fixed
Swaps Swaps
---------- ----------
Balance, January 1, 2001 $ 217 $ 717
Maturities (114) (96)
---------- ----------
Balance, December 31, 2001 103 621
Additions -0- 275
Maturities (12) (305)
---------- ----------
Balance, December 31, 2002 91 591
Maturities (91) (487)
---------- ----------
Balance, December 31, 2003 $ -0- $ 104
========== ==========
Interest rate swap payment activity decreased net interest income by $12
million, $19 million, and $13 million for the years ended
December 31, 2003, 2002, and 2001, respectively.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 2003, 2002, and 2001
(Dollars in thousands except per share figures)
The Company accounts for interest rate swaps under the provisions in SFAS
133, as amended. 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 $11 million, or $.04 after tax per diluted share for
the year ended December 31, 2003 and pre-tax income of $8 million, or $.03 after
tax per diluted share for the year ended December 31, 2002. This additional
income occurred because the fair value of Golden West's swaps changed in 2003
and 2002 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, 2003.
NOTE U - 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, 2003 and
2002, 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.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(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
-----------------------------------------------------------------------
2003 2002
--------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- --------------- -------------- ----------------
Financial Assets:
Cash $ 260,823 $ 260,823 $ 318,914 $ 318,914
Securities available for sale 1,879,443 1,879,443 922,177 922,177
Mortgage-backed securities available for sale 22,071 22,071 34,543 34,543
Mortgage-backed securities held to maturity 4,083,367 4,115,440 6,032,915 6,177,403
Loans receivable 74,205,578 74,825,796 58,943,316 59,033,944
Interest earned but uncollected 183,761 183,761 183,130 183,130
Investment in capital stock of Federal Home
Loan Banks 1,152,339 1,152,339 1,072,817 1,072,817
Capitalized mortgage servicing rights 88,967 95,139 69,448 73,082
Financial Liabilities:
Deposits 46,726,965 46,898,313 41,038,797 41,273,390
Advances from Federal Home Loan Banks 22,000,234 22,020,154 18,635,099 18,686,486
Securities sold under agreements to
repurchase 3,021,385 3,021,415 522,299 522,307
Bank notes 3,015,824 3,016,048 1,209,925 1,210,189
Senior debt 991,257 1,027,745 989,690 1,027,655
Subordinated notes -0- -0- 199,867 206,258
Interest rate swaps 991 991 12,031 12,031
Off-Balance Sheet Instruments (based on estimated fair value at December 31):
December 31
------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------- ---------------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain Gains Losses Gain
------------- ------------- --------------- ------------ ------------- ---------------
Loan commitments for
investment portfolio $ 12,963 $ -0- $ 12,963 $ 19,967 $ -0- $ 19,967
============= ============= =============== ============ ============= ===============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE V - Parent Company Financial Information
Statement of Net Earnings
Year Ended December 31
----------------------------------------------------
2003 2002 2001
--------------- -------------- ---------------
Revenues:
Dividends from subsidiaries $ 200,112 $ 300,188 $ 2,222
Investment income 8,576 7,766 20,106
Insurance commissions 2,331 2,354 1,600
--------------- -------------- ---------------
211,019 310,308 23,928
Expenses:
Interest 57,826 45,859 47,445
General and administrative 6,693 5,053 4,235
--------------- -------------- ---------------
64,519 50,912 51,680
--------------- -------------- ---------------
Earnings (loss) before income tax benefit
and equity in undistributed net earnings
of subsidiaries 146,500 259,396 (27,752)
Income tax benefit 20,723 15,793 11,693
Equity in undistributed
net earnings of subsidiaries 938,876 683,090 828,864
--------------- -------------- ---------------
Net Earnings $ 1,106,099 $ 958,279 $ 812,805
=============== ============== ===============
Statement of Financial Condition
Assets
December 31
-------------------------------------
2003 2002
----------------- ----------------
Cash $ 6,178 $ 1,481
Securities available for sale 603,080 429,066
Overnight note receivable from subsidiary -0- 399,369
Other investments with subsidiary 105 103
Investment in subsidiaries 6,310,185 5,373,706
Other assets 35,183 30,346
----------------- -----------------
$ 6,954,731 $ 6,234,071
================= =================
Liabilities and Stockholders' Equity
Senior debt $ 991,257 $ 989,690
Subordinated notes, net -0- 199,867
Other liabilities 16,206 19,264
Stockholders' equity 5,947,268 5,025,250
---------------- -----------------
$ 6,954,731 $ 6,234,071
================ =================
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE V - Parent Company Financial Information (Continued)
Statement of Cash Flows
Year Ended December 31
--------------------------------------------------
2003 2002 2001
-------------- --------------- --------------
Cash flows from operating activities:
Net earnings $ 1,106,099 $ 958,279 $ 812,805
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in undistributed net earnings of subsidiaries (938,876) (683,090) (828,864)
Amortization of discount on senior debt and
subordinated notes 1,700 1,123 875
Other, net 1,590 3,377 7,211
-------------- --------------- --------------
Net cash provided by (used in) operating activities 170,513 279,689 (7,973)
Cash flows from investing activities:
Increase in securities available for sale (172,522) (226,762) (200,002)
Decrease (increase) in overnight notes receivable
from subsidiary 399,369 (349,208) 228,851
Increase in other investments with subsidiary (2) (3) (3)
Repayments of subordinated note receivable
from subsidiary -0- 100,000 -0-
-------------- --------------- --------------
Net cash provided by (used in) investing activities 226,845 (475,973) 28,846
Cash flows from financing activities:
Proceeds from senior debt -0- 790,708 198,060
Repayment of subordinated notes (200,000) (400,000) -0-
Dividends on common stock (54,159) (46,746) (41,096)
Exercise of stock options 12,728 15,915 14,476
Purchase and retirement of Company stock (151,230) (173,036) (185,644)
-------------- --------------- --------------
Net cash provided by (used in) financing activities (392,661) 186,841 (14,204)
Net increase (decrease) in cash 4,697 (9,443) 6,669
Cash at beginning of period 1,481 10,924 4,255
-------------- --------------- --------------
Cash at end of period $ 6,178 $ 1,481 $ 10,924
============== =============== ==============
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share figures)
NOTE W - Selected Quarterly Financial Data (Unaudited)
2003
---------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------- ---------------- ---------------- ----------------
Interest income $ 877,434 $ 871,323 $ 876,886 $ 902,701
Interest expense 348,693 329,702 323,556 318,009
---------------- ---------------- ---------------- ----------------
Net interest income 528,741 541,621 553,330 584,692
Provision for loan losses 4,479 3,501 2,082 1,802
Noninterest income 67,062 82,930 90,740 72,598
Noninterest expense 169,710 177,180 181,053 192,572
---------------- ---------------- ---------------- ----------------
Earnings before taxes on income 421,614 443,870 460,935 462,916
Taxes on income 161,549 171,397 178,029 172,261
---------------- ---------------- ---------------- ----------------
Net earnings $ 260,065 $ 272,473 $ 282,906 $ 290,655
================ ================ ================ ================
Basic earnings per share $ 1.70 $ 1.79 $ 1.86 $ 1.91
================ ================ ================ ================
Diluted earnings per share $ 1.67 $ 1.76 $ 1.83 $ 1.88
================ ================ ================ ================
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
================ ================ ================ ================