10-Q 1 gdw3q2002.txt GDW 3Q2002 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------- FORM 10-Q --------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- Commission file number 1-4629 GOLDEN WEST FINANCIAL CORPORATION Incorporated Pursuant to the Laws of Delaware State --------------------- IRS - Employer Identification No. 95-2080059 1901 Harrison Street, Oakland, California 94612 (510) 446-3420 --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of shares outstanding of the registrant's common stock as of October 31, 2002: Common Stock -- 153,454,902 shares. ================================================================================ GOLDEN WEST FINANCIAL CORPORATION TABLE OF CONTENTS Page No. PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements...............................................1 Consolidated Statement of Financial Condition - September 30, 2002 and 2001 and December 31, 2001........................1 Consolidated Statement of Net Earnings - For the three and nine months ended September 30, 2002 and 2001..........2 Consolidated Statement of Cash Flows - For the three and nine months ended September 30, 2002 and 2001..........3 Consolidated Statement of Stockholders' Equity - For the nine months ended September 30, 2002 and 2001....................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................6 New Accounting Pronouncements...............................................6 Financial Highlights........................................................8 Financial Condition.........................................................10 Cash and Investments........................................................12 Mortgage-Backed Securities (MBS) and Loans Receivable.......................12 Mortgage Servicing Rights...................................................20 Asset Quality...............................................................20 Deposits....................................................................23 Advances from Federal Home Loan Banks.......................................25 Securities Sold Under Agreements to Repurchase..............................25 Other Borrowings............................................................25 Stockholders' Equity........................................................26 Regulatory Capital..........................................................26 Results of Operations.......................................................28 Liquidity and Capital Resources.............................................35 Item 3. Quantitative and Qualitative Disclosures about Market Risk.........36 Item 4. Controls and Procedures............................................36 PART II - OTHER INFORMATION --------------------------- Item 5. Audit Services Disclosure..........................................36 Item 6. Exhibits and Reports on Form 8-K...................................37 i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (Golden West or Company), including World Savings Bank, FSB (WSB) and World Savings Bank, FSB (Texas) (WTX), for the three and nine months ended September 30, 2002 and 2001 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three- and nine-month periods have been included. The operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results for the full year.
Golden West Financial Corporation Consolidated Statement of Financial Condition (Dollars in thousands) September 30 December 31 September 30 2002 2001 2001 ------------------ ----------------- ------------------ (Unaudited) (Unaudited) ------------------ ------------------ Assets Cash $ 290,578 $ 339,059 $ 383,927 Securities available for sale at fair value 586,329 622,670 725,881 Purchased mortgage-backed securities available for sale 37,828 233,403 243,659 Purchased mortgage-backed securities held to maturity 193,747 275,150 309,171 Mortgage-backed securities with recourse held to maturity 6,539,387 13,569,619 15,244,959 Loans receivable 55,110,526 41,065,375 38,673,021 Interest earned but uncollected 203,042 255,600 253,328 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 1,063,098 1,105,773 1,099,758 Foreclosed real estate 11,774 11,101 9,458 Premises and equipment--at cost less accumulated depreciation 346,476 328,579 321,593 Other assets 1,132,042 779,942 858,367 ------------------ ----------------- ------------------ $ 65,514,827 $58,586,271 $ 58,123,122 ================== ================= ================== Liabilities and Stockholders' Equity Deposits $ 38,748,938 $34,472,585 $ 33,133,942 Advances from Federal Home Loan Banks 18,577,094 18,037,509 17,859,941 Securities sold under agreements to repurchase 21,766 223,523 420,596 Federal funds purchased 200,000 -0- -0- Bank notes 1,134,953 -0- 693,976 Senior debt--net of discount 989,295 198,215 198,117 Subordinated notes--net of discount 199,822 599,511 599,329 Taxes on income 470,623 457,964 579,691 Other liabilities 378,730 312,774 422,391 Stockholders' equity 4,793,606 4,284,190 4,215,139 ------------------ ----------------- ------------------ $ 65,514,827 $58,586,271 $ 58,123,122 ================== ================= ==================
Golden West Financial Corporation Consolidated Statement of Net Earnings (Unaudited) (Dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------- --------------- ------------- Interest Income Interest on loans $752,343 $683,732 $ 2,122,065 $ 2,061,379 Interest on mortgage-backed securities 105,700 298,303 398,147 1,035,569 Interest and dividends on investments 30,416 46,119 90,272 163,133 ------------- ------------- --------------- ------------- 888,459 1,028,154 2,610,484 3,260,081 Interest Expense Interest on deposits 270,530 365,666 810,259 1,202,531 Interest on advances 95,403 200,752 295,680 733,760 Interest on repurchase agreements 299 7,265 1,331 39,491 Interest on other borrowings 26,527 39,338 75,596 103,270 ------------- ------------- --------------- ------------- 392,759 613,021 1,182,866 2,079,052 ------------- ------------- --------------- ------------- Net Interest Income 495,700 415,133 1,427,618 1,181,029 Provision for loan losses 6,484 3,639 20,209 12,463 ------------- ------------- --------------- ------------- Net Interest Income after Provision for Loan Losses 489,216 411,494 1,407,409 1,168,566 Noninterest Income Fees 32,280 37,873 102,152 111,906 Gain on the sale of securities, MBS and loans 5,914 12,630 26,820 26,390 Change in fair value of derivatives (54) (7,923) 4,903 (13,837) Other 19,722 13,770 45,284 42,042 ------------- ------------- --------------- ------------- 57,862 56,350 179,159 166,501 Noninterest Expense General and administrative: Personnel 92,622 77,289 260,661 217,487 Occupancy 22,922 20,517 65,327 59,806 Deposit insurance 1,521 1,466 4,532 4,270 Advertising 4,048 4,632 10,975 9,557 Other 32,654 28,243 96,300 83,559 ------------- ------------- --------------- ------------- 153,767 132,147 437,795 374,679 Earnings before Taxes on Income and Cumulative Effect of Accounting Change 393,311 335,697 1,148,773 960,388 Taxes on income 148,852 129,857 439,865 369,540 ------------- ------------- --------------- ------------- Income before Cumulative Effect of Accounting Change 244,459 205,840 708,908 590,848 Cumulative effect of accounting change, net of tax -0- -0- -0- (6,018) ------------- ------------- --------------- ------------- Net Earnings $244,459 $205,840 $ 708,908 $ 584,830 ============= ============= =============== ============= Basic Earnings Per Share before Cumulative Effect of Accounting Change $ 1.58 $ 1.30 $ 4.58 $ 3.73 Cumulative effect of accounting change, net of tax .00 .00 .00 (.04) ------------- ------------- --------------- ------------- Basic Earnings Per Share $ 1.58 $ 1.30 $ 4.58 $ 3.69 ============= ============= =============== ============= Diluted Earnings Per Share before Cumulative Effect of Accounting Change $ 1.56 $ 1.28 $ 4.52 $ 3.68 Cumulative effect of accounting change, net of tax .00 .00 .00 (.04) ------------- ------------- --------------- ------------- Diluted Earnings Per Share $ 1.56 $ 1.28 $ 4.52 $ 3.64 ============= ============= =============== =============
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------- -------------- ------------ Cash Flows from Operating Activities Net earnings $ 244,459 $ 205,840 $ 708,908 $ 584,830 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 6,484 3,639 20,209 12,463 Amortization of loan (fees), costs, and (discounts) 16,111 5,601 36,567 16,691 Depreciation and amortization 9,698 8,484 27,621 24,746 Loans originated for sale (367,128) (524,923) (1,069,435) (1,418,349) Sales of loans 329,601 795,851 1,440,388 1,782,628 Decrease (increase) in interest earned but uncollected (3,988) 14,521 53,990 20,394 Federal Home Loan Bank stock dividends (12,491) (13,529) (40,539) (45,774) Decrease (increase) in other assets (137,260) 66,337 (353,388) (270,458) Increase in other liabilities 76,713 39,111 65,956 76,024 Increase in taxes on income 19,458 113,190 35,484 154,347 Other, net 3,138 9,487 20,672 (4,587) ------------- ------------- -------------- ------------ Net cash provided by operating activities 184,795 723,609 946,433 932,955 Cash Flows from Investing Activities New loan activity: New real estate loans originated for portfolio (6,344,827) (5,075,815) (17,968,879) (13,605,119) Other, net (214,111) (122,871) (588,471) (306,856) ------------- ------------- -------------- ------------ (6,558,938) (5,198,686) (18,557,350) (13,911,975) Real estate loan principal payments: Monthly payments 295,724 157,656 816,409 412,237 Payoffs, net of foreclosures 2,837,083 2,217,278 7,732,887 6,243,153 ------------- ------------- -------------- ------------ 3,132,807 2,374,934 8,549,296 6,655,390 Purchases of mortgage-backed securities available for sale -0- (27,528) -0- (189,511) Sales of mortgage-backed securities available for sale -0- -0- 176,063 -0- Repayments of mortgage-backed securities 566,604 1,810,759 2,608,395 4,901,506 Proceeds from sales of real estate 9,422 8,353 34,192 25,982 (Increase) in securities available for sale (245,685) (71,077) (13,756) (349,746) Decrease in other investments -0- 375 -0- 368,555 Purchases of Federal Home Loan Bank stock -0- (10,480) -0- (10,480) Redemptions of Federal Home Loan Bank stock -0- 112 81,782 26,880 Additions to premises and equipment (12,563) (13,347) (46,690) (39,020) ------------- ------------- -------------- ------------ Net cash used in investing activities (3,108,353) (1,126,585) (7,168,068) (2,522,419)
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------- -------------- ------------ Cash Flows from Financing Activities Net increase in deposits(a) $ 2,518,197 $1,641,983 $ 4,276,353 $ 3,086,023 Additions to Federal Home Loan Bank advances 1,345,551 425,000 4,485,551 1,306,550 Repayments of Federal Home Loan Bank advances (1,717,358) (1,510,511) (3,945,966) (3,178,406) Proceeds from agreements to repurchase securities 401,855 1,301,440 911,310 4,807,682 Repayments of agreements to repurchase securities (402,025) (1,732,041) (1,113,067) (5,244,360) Increase in federal funds purchased 150,000 -0- 200,000 -0- Increase in bank notes 82,131 58,880 1,134,953 693,803 Net proceeds from senior debt 790,708 198,060 790,708 198,060 Repayment of subordinated debt (200,000) -0- (400,000) -0- Dividends on common stock (11,159) (9,936) (33,665) (29,760) Exercise of stock options 1,284 3,550 13,209 12,481 Purchase and retirement of Company stock (77,075) (29,112) (146,232) (29,112) ------------- ------------- -------------- ------------ Net cash provided by financing activities 2,882,109 347,313 6,173,154 1,622,961 ------------- ------------- -------------- ------------ Net Increase (Decrease) in Cash (41,449) (55,663) (48,481) 33,497 Cash at beginning of period 332,027 439,590 339,059 350,430 ------------- ------------- -------------- ------------ Cash at end of period $ 290,578 $ 383,927 $ 290,578 $ 383,927 ============= ============= =============== ============= Supplemental cash flow information: Cash paid for: Interest $ 396,371 $ 632,138 $ 1,183,117 $ 2,134,662 Income taxes 133,261 16,694 408,439 211,550 Cash received for interest and dividends 884,259 1,043,780 2,663,042 3,283,059 Noncash investing activities: Loans receivable and loans underlying MBS converted from adjustable rate to fixed-rate 68,194 153,659 292,827 515,370 Loans transferred to foreclosed real estate 11,060 8,496 33,245 25,202 Loans securitized into mortgage-backed securities with recourse held to maturity -0- -0- -0- 2,995,949 Loans securitized into mortgage-backed securities with recourse recorded as loans receivable per SFAS 140 950,980 3,007,296 13,145,056 6,011,873 Mortgage-backed securities held to maturity desecuritized into adjustable rate loans and recorded as loans receivable -0- -0- 4,147,670 -0- (a) Includes a decrease of $119 million and $185 million of wholesale deposits for the quarter and nine months ended September 30, 2001, respectively.
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands) For the Nine Months Ended September 30, 2002 ------------------------------------------------------------------------------------------------ Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Comprehensive Stock Capital Earnings Income Equity Income ------------- -------------- -------------- --------------- --------------- -------------- Balance at January 1, 2002 $ 15,553 $ 173,500 $ 3,873,758 $ 221,379 $ 4,284,190 Comprehensive income: Net earnings -0- -0- 708,908 -0- 708,908 $ 708,908 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- (32,057) (32,057) (32,057) Reclassification adjustment for gains included in income -0- -0- -0- (747) (747) (747) ------------- Comprehensive Income $ 676,104 ============= Common stock issued upon exercise of stock options 59 13,150 -0- -0- 13,209 Purchase and retirement of Company stock (231) -0- (146,001) -0- (146,232) Cash dividends on common stock ($.2175 per share) -0- -0- (33,665) -0- (33,665) ------------- -------------- -------------- --------------- --------------- Balance at September 30, 2002 $ 15,381 $ 186,650 $ 4,403,000 $ 188,575 $ 4,793,606 ============= ============== ============== =============== ===============
For the Nine Months Ended September 30, 2001 ------------------------------------------------------------------------------------------------ Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Comprehensive Stock Capital Earnings Income Equity Income ------------- -------------- -------------- --------------- --------------- -------------- Balance at January 1, 2001 $ 15,841 $ 151,458 $ 3,287,325 $ 232,663 $ 3,687,287 Comprehensive income: Net earnings -0- -0- 584,830 -0- 584,830 $ 584,830 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- (10,587) (10,587) (10,587) -------------- Comprehensive Income $ 574,243 ============== Common stock issued upon exercise of stock options 67 12,414 -0- -0- 12,481 Purchase and retirement of Company stock (53) -0- (29,059) -0- (29,112) Cash dividends on common stock ($.1875 per share) -0- -0- (29,760) -0- (29,760) ------------- -------------- -------------- --------------- --------------- Balance at September 30, 2001 $ 15,855 $ 163,872 $ 3,813,336 $ 222,076 $ 4,215,139 ============= ============== ============== =============== ===============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis covers those material changes in liquidity and capital resources that have occurred since December 31, 2001, as well as material changes in results of operations during the three- and nine-month periods ended September 30, 2002 and 2001, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 2001 Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2001, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed here. The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy and information statements, and other information pertaining to registrants that file electronically with the SEC, including Golden West. The address is: www.sec.gov. In addition, financial information about Golden West can be obtained at the Company's web site, www.gdw.com. This report may contain certain forward-looking statements, which are not historical facts and pertain to future operating results of the Company. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, forward-looking statements are subject to change. Actual results may differ materially from the results discussed in forward-looking statements for the reasons, among others, discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2001 Annual Report on Form 10-K. New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the Statement of Financial Condition and measure those instruments at fair value. The Company adopted SFAS 133 as of January 1, 2001 and recorded a loss of $10 million before tax, or $6 million after tax. Because the Company has decided not to use permitted hedge accounting for the derivative financial instruments in portfolio on September 30, 2002, the changes in fair value of these instruments are reported in Noninterest Income as the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net Earnings. In September 2000, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). This statement replaces previously issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. From time to time, the Company securitizes loans from its portfolio into mortgage-backed securities (MBS), including Real Estate Mortgage Investment Conduit securities (MBS-REMICs). Under SFAS 140, if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date, the Company has not sold any interests requiring disclosure under SFAS 140. In accordance with SFAS 140, the Company's securitizations after March 31, 2001 resulted in securities classified as securitized loans and recorded as loans receivable (see pages 12, 13, and 20 for further discussion). In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of a long-lived asset, except for certain obligations of lessees. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. In addition, this statement resolves implementation issues of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost should be recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company believes that SFAS 146 will not have a significant impact on its financial statements. Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) September 30 December 31 September 30 2002 2001 2001 ------------------ ----------------- ----------------- Assets $ 65,514,827 $ 58,586,271 $ 58,123,122 Loans receivable including MBS 61,881,488 55,143,547 54,470,810 Adjustable rate mortgages including MBS 59,158,704 51,794,400 51,175,815 Deposits 38,748,938 34,472,585 33,133,942 Stockholders' equity 4,793,606 4,284,190 4,215,139 Stockholders' equity/total assets 7.32% 7.31% 7.25% Book value per common share $ 31.17 $ 27.55 $ 26.59 Common shares outstanding 153,813,352 155,531,777 158,550,637 Yield on loan portfolio 5.47% 6.39% 7.01% Yield on mortgage-backed securities 5.74% 6.35% 6.95% Yield on investments 3.50% 2.86% 4.34% Yield on earning assets 5.49% 6.36% 6.97% Cost of deposits 2.81% 3.39% 4.19% Cost of borrowings 2.10% 2.72% 4.05% Cost of funds 2.56% 3.15% 4.14% Yield on earning assets less cost of funds 2.93% 3.21% 2.83% Ratio of nonperforming assets to total assets .64% .67% .60% Ratio of troubled debt restructured to total assets .01% .00% .00% Loans serviced for others with recourse $ 2,866,544 $2,797,634 $ 2,448,472 Loans serviced for others without recourse 2,265,450 2,035,250 1,603,864 World Savings Bank, FSB Total assets $ 65,501,652 $58,377,834 $57,916,010 Net worth 5,091,742 4,701,922 4,469,582 Net worth/total assets 7.77% 8.05% 7.72% Regulatory capital ratios:(a) Tier 1 capital (core or leverage) 7.51% 7.71% 7.38% Total risk-based capital 14.07% 14.24% 13.72% World Savings Bank, FSB (Texas) Total assets $ 7,839,006 $7,680,360 $ 5,945,315 Net worth 410,787 401,886 310,217 Net worth/total assets 5.24% 5.23% 5.22% Regulatory capital ratios:(a) Tier 1 capital (core or leverage) 5.24% 5.23% 5.22% Total risk-based capital 24.76% 25.05% 26.08% (a) 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.
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------- ----------------------------------- 2002 2001 2002 2001 --------------- ---------------- ---------------- --------------- New real estate loans originated $ 6,711,955 $ 5,600,738 $ 19,038,314 $ 15,023,468 New adjustable rate mortgages as a percentage of new real estate loans originated 93% 87% 93% 86% Refinances as a percentage of new real estate loans originated 59% 57% 59% 56% Deposits increase(a) $ 2,518,197 $ 1,641,983 $ 4,276,353 $ 3,086,023 Net earnings before cumulative effect of accounting change $ 244,459 $ 205,840 $ 708,908 $ 590,848 Net earnings 244,459 205,840 708,908 584,830 Basic earnings per share before cumulative effect of accounting change $ 1.58 $ 1.30 $ 4.58 $ 3.73 Basic earnings per share 1.58 1.30 4.58 3.69 Diluted earnings per share before cumulative effect of accounting change $ 1.56 $ 1.28 $ 4.52 $ 3.68 Diluted earnings per share 1.56 1.28 4.52 3.64 Cash dividends on common stock $ .0725 $ .0625 $ .2175 $ .1875 Average common shares outstanding 154,441,454 158,868,462 154,915,165 158,691,819 Average diluted common shares outstanding 156,490,431 161,000,195 156,979,733 160,784,091 Ratios:(b) Net earnings before accounting change/ average net worth (ROE) 20.66% 19.89% 20.73% 19.97% Net earnings before accounting change/ average assets (ROA) 1.52% 1.42% 1.54% 1.38% Net interest margin(c) 3.19% 2.96% 3.20% 2.84% General and administrative expense/average assets .96% .91% .95% .88% Efficiency ratio(d) 27.78% 28.03% 27.25% 27.80% (a) Includes a decrease of $119 million and $185 million of wholesale deposits for the quarter and nine months ended September 30, 2001, respectively. (b) Ratios are annualized by multiplying the quarterly computation by four and the nine-month computation by one and one-third. Averages are computed by adding the beginning balance and each monthend balance during the quarter and nine-month period and dividing by four and ten, respectively. (c) Net interest margin is net interest income divided by average interest-earning assets. (d) The efficiency ratio is defined as general and administrative expense divided by the sum of net interest income and noninterest income.
Financial Condition The consolidated condensed balance sheet shown in the table below presents the Company's assets and liabilities in percentage terms at September 30, 2002, December 31, 2001, and September 30, 2001. The reader is referred to page 46 of the Company's 2001 Annual Report on Form 10-K for similar information for the years 1998 through 2001 and a discussion of the changes in the composition of the Company's assets and liabilities in those years. TABLE 1 Consolidated Condensed Balance Sheet In Percentage Terms September 30 December 31 September 30 2002 2001 2001 ------------------ ----------------- ------------------ Assets Cash and investments 1.3% 1.6% 1.9% Loans receivable including mortgage-backed securities 94.5 94.2 93.7 Other assets 4.2 4.2 4.4 ------------------ ----------------- ------------------ 100.0% 100.0% 100.0% ================== ================= ================== Liabilities and Stockholders' Equity Deposits 59.2% 58.9% 57.0% Federal Home Loan Bank advances 28.4 30.8 30.7 Securities sold under agreements to repurchase .0 .4 .7 Federal funds purchased .3 .0 .0 Bank notes 1.7 .0 1.2 Senior debt 1.5 .3 .3 Subordinated debt .3 1.0 1.0 Other liabilities 1.3 1.3 1.8 Stockholders' equity 7.3 7.3 7.3 ------------------ ----------------- ------------------ 100.0% 100.0% 100.0% ================== ================= ==================
As the above table shows, the largest asset is loans receivable including mortgage-backed securities, which consists primarily of long-term mortgages. The Company emphasizes adjustable rate mortgages (ARMs) -- loans with interest rates that change periodically in accordance with movements in specified indexes. Almost all of the Company's ARMs have rates that change monthly and are tied to one of the following three indexes: 1. The Eleventh District Cost of Funds Index (COFI), which is equal to the monthly average cost of deposits and borrowings of the savings institution members of the Federal Home Loan Bank System's Eleventh District which is composed of California, Arizona, and Nevada. 2. The Golden West Cost of Savings Index (COSI), which is equal to the monthend weighted average rate paid on the Company's deposits. 3. The Certificate of Deposit Index (CODI), which is equal to the 12-month rolling average of the monthly average of the three-month certificate of deposit rate as published in the Federal Reserve H-15 Statistical Report. Deposits represent the largest portion of the Company's liabilities. The disparity between the repricing (maturity, prepayment, or interest rate change) of mortgage loans and investments and the repricing of deposits and borrowings can have a material impact on the Company's results of operations. The difference between the repricing characteristics of assets and liabilities is commonly referred to as the "gap." The following gap table shows that, as of September 30, 2002, the Company's assets reprice faster than its liabilities. If all repricing assets and liabilities responded equally to changes in the interest rate environment, then gap analysis would suggest that the Company's earnings would rise when interest rates increase and would fall when interest rates decrease. However, the changes in the Company's earnings are also affected by the built-in reporting and repricing lags inherent in the adjustable rate mortgage indexes used by the Company. Reporting lags occur because of the time it takes to gather the data needed to compute the indexes. Repricing lags occur because it may take a period of time before changes in interest rates are significantly reflected in the indexes. COFI, which is the index Golden West uses to determine the rate on the largest portion of its existing adjustable rate mortgages, has a two-month reporting lag. As a result, the COFI in effect in any month actually reflects the Eleventh District's cost of funds at the level it was two months prior. The COFI repricing lag occurs because COFI is based on a portfolio of accounts, not all of which reprice immediately. Many of these liabilities, including certificates of deposit, do not reprice each month and, when they do reprice, may not reflect the full change in market rates. Some liabilities, such as low-rate checking or passbook savings accounts, may reprice by only small amounts. Still other liabilities, such as noninterest bearing deposits, do not reprice at all. Therefore, COFI does not fully reflect a change in market interest rates. COSI has a one-month reporting lag. COSI also has a repricing lag, because the rates paid on many of the deposits that make up COSI do not respond immediately or fully to a change in market interest rates. CODI has a one-month reporting lag. CODI also has a repricing lag, because the index is a 12-month rolling average and consequently trails changes in short-term market interest rates. When the interest rate environment changes, the index lags cause assets to reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down earnings when rates rise. For more information on how these lags affect net interest income, see pages 28 and 29. Partially offsetting the index reporting and repricing lags are similar lags on a portion of the Company's liabilities. TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of September 30, 2002 (Dollars in millions) Projected Repricing(a) --------------------------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------------- --------------- -------------- -------------- -------------- Interest-Earning Assets Investments $ 586 $ -0- $ -0- $ -0- $ 586 Mortgage-backed securities: Adjustable rate 6,127 -0- -0- -0- 6,127 Fixed-rate 56 135 330 123 644 Loans receivable: Adjustable rate 50,859 1,382 718 -0- 52,959 Fixed-rate 151 281 811 658 1,901 Other(b) 1,298 -0- -0- -0- 1,298 Impact of interest rate swaps 531 (295) (236) -0- -0- ------------- --------------- -------------- -------------- -------------- Total $ 59,608 $ 1,503 $ 1,623 $ 781 $ 63,515 ============= =============== ============== ============== ============== Interest-Bearing Liabilities Deposits(c) $ 27,896 $ 6,905 $ 3,936 $ 12 $ 38,749 FHLB advances 18,031 90 3 453 18,577 Other borrowings 1,357 -0- 696 493 2,546 Impact of interest rate swaps 91 (91) -0- -0- -0- ------------- --------------- -------------- -------------- -------------- Total $ 47,375 $ 6,904 $ 4,635 $ 958 $ 59,872 ============= =============== ============== ============== ============== Repricing gap $ 12,233 $ (5,401) $ (3,012) $ (177) ============= =============== ============== ============== Cumulative gap $ 12,233 $ 6,832 $ 3,820 $ 3,643 ============= =============== ============== ============== Cumulative gap as a percentage of total assets 18.7% 10.4% 5.8% ============= =============== ============== (a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of principal based on current rates of prepayment. (b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock. (c) Liabilities with no maturity date, such as checking, passbook and money market deposit accounts, are assigned zero months.
Cash and Investments At September 30, 2002, December 31, 2001, and September 30, 2001, the Company had securities available for sale in the amount of $586 million, $623 million and $726 million, respectively, including unrealized gains on securities available for sale of $308 million, $362 million, and $360 million, respectively. At September 30, 2002, December 31, 2001, and September 30, 2001, the Company had no securities held for trading in its investment securities portfolio. Mortgage-Backed Securities and Loans Receivable The Company invests primarily in whole loans. From time to time, the Company securitizes loans from its portfolio into MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date the Company has not sold any interests requiring disclosures under SFAS 140. Because the Company currently retains all of the beneficial interest in these MBS securitizations, the securitizations formed after March 31, 2001 are securities classified as securitized loans and included in loans receivable in accordance with SFAS 140 (see page 6 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 FNMA MBS that were classified as MBS held to maturity with recourse. This desecuritization led to a significant decrease in the outstanding balance of MBS, which in turn contributed to lower MBS repayments and lower interest on mortgage-backed securities. The desecuritization also contributed to an increase in the outstanding balance of loans receivable and an increase in interest on loans. The following table shows the components of the Company's loans receivable portfolio, including MBS, at September 30, 2002, December 31, 2001, and September 30, 2001. TABLE 3 Balance of Loans Receivable, Including MBS, by Component (Dollars in thousands) September 30 December 31 September 30 2002 2001 2001 ------------------ ----------------- ------------------ Loans $ 39,853,568 $35,952,918 $ 33,078,124 Securitized loans (a) (b) 15,240,963 5,186,717 5,672,128 ------------------ ----------------- ------------------ Total loans, excluding MBS 55,094,531 41,139,635 38,750,252 ------------------ ----------------- ------------------ FNMA MBS (c) -0- 4,732,779 5,418,000 MBS-REMICs 6,539,387 8,836,840 9,826,959 Purchased MBS 231,575 508,553 552,830 ------------------ ----------------- ------------------ Total MBS 6,770,962 14,078,172 15,797,789 ------------------ ----------------- ------------------ Other (d) 15,995 (74,260) (77,231) ------------------ ----------------- ------------------ Total loans receivable, including MBS $ 61,881,488 $55,143,547 $ 54,470,810 ================== ================= ================== (a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on page 6). (b) Includes $4.8 billion at September 30, 2002 of loans securitized with FNMA where the securitized loans are subject to full credit recourse to the Company. (c) The underlying loans of the FNMA MBS are subject to full credit recourse to the Company. (d) Includes deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
Repayments from the loan portfolio, including MBS, were $3.7 billion and $11.2 billion for the three and nine months ended September 30, 2002 as compared to $4.2 billion and $11.6 billion during the same periods in 2001. Loan portfolio repayments were lower in the third quarter and the first nine months of 2002 as compared to the same periods in 2001 due to a decrease in the prepayment rate. Mortgage-Backed Securities At September 30, 2002, December 31, 2001, and September 30, 2001, the Company had MBS held to maturity in the amount of $6.7 billion, $13.8 billion, and $15.6 billion, respectively. The decrease was due primarily to prepayments and to the desecuritization of $4.1 billion of FNMA MBS during the first six months of 2002. The Company has the ability and intent to hold these MBS until maturity and, accordingly, these MBS are classified as held to maturity. At September 30, 2002, December 31, 2001, and September 30, 2001, the Company had MBS available for sale in the amount of $38 million, $233 million, and $244 million, respectively, including unrealized gains on MBS available for sale of $635 thousand at September 30, 2002, $2 million at December 31, 2001, and $6 million at September 30, 2001. 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 September 30, 2002, December 31, 2001, and September 30, 2001, the Company had no trading MBS. Repayments of MBS during the third quarter and first nine months of 2002 were $567 million and $2.6 billion compared to $1.8 billion and $4.9 billion during the same periods in 2001. MBS repayments were lower during the first nine months of 2002 as compared to the first nine months of 2001 due primarily to a decrease in the balance of MBS outstanding. Loans New loan originations for the three and nine months ended September 30, 2002 amounted to $6.7 billion and $19.0 billion compared to $5.6 billion and $15.0 billion for the same periods in 2001. The volume of originations increased during 2002 due to a continued strong demand for mortgage loans and an increase in the popularity of adjustable rate mortgages, the Company's principal product. The decrease in interest rates in 2001 led to an increase in refinance activity nationwide. Refinances have continued to constitute a large portion of the mortgage market in 2002. Refinanced loans were 59% of new loan originations for the three and nine months ended September 30, 2002, compared to 57% and 56%, respectively, for the three and nine months ended September 30, 2001. First mortgages originated for sale amounted to $355 million and $1.0 billion for the three and nine months ended September 30, 2002, compared to $506 million and $1.3 billion for the same periods in 2001. During the third quarter and first nine months of 2002, $68 million and $293 million of loans, including MBS, were converted at the customers' request from adjustable rate to fixed-rate compared to $154 million and $515 million for the same periods in 2001. The Company sells most of its new and converted fixed-rate loans. For the three and nine months ended September 30, 2002, the Company sold $294 million and $1.3 billion, respectively, of fixed-rate first mortgage loans compared to $756 million and $1.6 billion for the same periods in 2001. At September 30, 2002, the Company had lending operations in 38 states. The largest source of mortgage originations was loans secured by residential properties in California. For the three and nine months ended September 30, 2002, 65% and 67%, respectively, of total loan originations were on residential properties in California compared to 69% and 70% for the same periods in 2001. The five largest states, other than California, for originations for the nine months ended September 30, 2002, were Florida, Texas, New Jersey, Washington, and Illinois with a combined total of 17% of total originations. The percentage of the total loan portfolio (including MBS, except purchased MBS) that was comprised of residential loans in California was 64% at September 30, 2002, December 31, 2001 and September 30, 2001. The portion of the mortgage portfolio (including securitized loans and MBS) composed of adjustable rate loans was 96% at September 30, 2002 compared to 94% at December 31, 2001 and September 30, 2001. The Company's ARM originations constituted 93% of new mortgage loans made for the third quarter and first nine months of 2002 compared to 87% and 86%, respectively, for the same periods in 2001. Golden West originates ARMs tied primarily to CODI, COFI, and COSI. Prior to 2001, the Company also originated ARMs tied to the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the third quarter and first nine months of 2002 and 2001. TABLE 4 Adjustable Rate Mortgage Originations by Index (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 --------------------------------- ---------------------------------- ARM Index 2002 2001 2002 2001 ----------------------- --------------- -------------- ---------------- ---------------- CODI $ 3,737,727 $ -0- $ 8,598,127 $ -0- COFI 689,933 3,761,926 2,829,982 7,130,071 COSI 1,823,191 1,086,362 6,232,726 5,758,232 --------------- -------------- ---------------- ---------------- $ 6,250,851 $ 4,848,288 $17,660,835 $12,888,303 =============== ============== ================ ================ The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS) at September 30, 2002, December 31, 2001, and September 30, 2001.
TABLE 5 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS) (Dollars in thousands) September 30 December 31 September 30 ARM Index 2002 2001 2001 -------------------------- ------------------ ------------------ ----------------- CODI $ 8,955,178 $ 552,746 $ -0- COFI 26,296,529 29,010,008 28,332,486 COSI 22,363,740 20,943,596 21,501,188 Other(a) 1,543,257 1,288,050 1,342,141 ------------------ ------------------ ----------------- $ 59,158,704 $ 51,794,400 $ 51,175,815 ================== ================== ================= (a) Includes equity lines of credit and ARMs tied to the TCM.
During the life of a typical ARM loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including securitized ARM loans, FNMA MBS, and MBS-REMICs before any reduction for loan servicing fees) was 12.15% or 6.57% above the actual weighted average rate at September 30, 2002, versus 12.21%, or 5.77% above the actual weighted average at December 31, 2001 and 12.23% or 5.16% above the actual weighted average rate at September 30, 2001. Approximately $5.2 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 September 30, 2002, $2.0 billion of ARM loans had reached their rate floors as compared to $560 million at December 31, 2001 and $406 million at September 30, 2001. The weighted average floor rate on the loans that had reached their floor was 5.95% at September 30, 2002 compared to 7.15% at December 31, 2001 and 7.55% at September 30, 2001. Without the floor, the average rate on these loans would have been 5.30% at September 30, 2002, 5.91% at December 31, 2001 and 6.54% at September 30, 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 in the form of fixed-rate loans and equity lines of credit (ELOCs) indexed to the prime rate. The Company's fixed-rate second mortgage originations amounted to $34 million and $129 million for the third quarter and first nine months of 2002 compared to $76 million and $231 million for the same periods in 2001. The outstanding balance of fixed-rate seconds amounted to $259 million and $410 million at September 30, 2002 and 2001, respectively. The Company established new ELOCs totaling $309 million and $847 million for the three and nine months ended September 30, 2002 as compared to $128 million and $257 million for the same periods in 2001. The outstanding balance of ELOCs amounted to $812 million and $198 million at September 30, 2002 and 2001, respectively. The maximum total line of credit available on the Company's ELOCs amounted to $1.2 billion and $301 million at September 30, 2002 and 2001, respectively. The Company generally lends up to 80% of the appraised value of residential real estate property. In some cases, a higher amount is possible through a first mortgage loan or a combination of a first and a second mortgage loan on the same property. The second mortgage loan may be a fixed-rate loan or an adjustable rate equity line of credit. During the third quarter and first nine months of 2002, 13% of loans originated exceeded 80% of the appraised value of the property. For the third quarter and first nine months of 2001, 14% and 13%, respectively, of loans originated exceeded 80% of the appraised value of the property. 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 (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, many first mortgage loans with an LTV over 80% carry mortgage insurance, which reimburses the Company for losses up to a specified percentage per loan, thereby reducing the effective LTV to below 80%. Furthermore, the Company sells without recourse a significant portion of its second mortgage originations. Sales of second mortgages amounted to $35 million and $107 million for the third quarter and first nine months of 2002 as compared to $40 million and $140 million for the same periods in 2001. In addition, the Company carries pool mortgage insurance on most seconds not sold, including equity lines of credit. The cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the original balance of each insured pool. The following table shows mortgage originations with LTV ratios or combined LTV ratios greater than 80% for the three and nine months ended September 30, 2002 and 2001. TABLE 6 Mortgage Originations with Loan to Value and Combined Loan to Value Ratios Greater than 80% (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------ ----------------------------- 2002 2001 2002 2001 ------------- ------------- -------------- ------------- First mortgages with loan to value ratios greater than 80%: With mortgage insurance $ 87,712 $ 61,838 $ 209,626 $ 163,458 With no mortgage insurance 18,913 37,826 55,009 95,565 ------------- ------------- -------------- ------------- 106,625 99,664 264,635 259,023 ------------- ------------- -------------- ------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 576,350 435,052 1,781,975 894,530 With no pool insurance 157,321 251,141 458,662 800,651 ------------- ------------- -------------- ------------- 733,671 686,193 2,240,637 1,695,181 ------------- ------------- -------------- ------------- Total $ 840,296 $785,857 $2,505,272 $1,954,204 ============= ============= ============== =============
The following table shows the outstanding balance of mortgages with original LTV or combined LTV ratios greater than 80% at September 30, 2002 and 2001. TABLE 7 Balance of Mortgages with Loan to Value and Combined Loan to Value Ratios Greater than 80% (Dollars in thousands) As of September 30 --------------------------------- 2002 2001 -------------- -------------- First mortgages with original loan to value ratios greater than 80%: With mortgage insurance $ 520,691 $ 416,028 With no mortgage insurance 344,340 612,677 -------------- -------------- 865,031 1,028,705 -------------- -------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 3,373,445 2,359,929 With no pool insurance 363,014 524,951 -------------- -------------- 3,736,459 2,884,880 -------------- -------------- Total $4,601,490 $3,913,585 ============== ==============
The following tables show the Company's loan portfolio by state at September 30, 2002 and 2001. TABLE 8 Loan Portfolio by State September 30, 2002 (Dollars in thousands) Residential Real Estate Commercial Loans -------------------------------- Real Total as a % of State 1 - 4 5+ Land Estate Loans Portfolio -------------------------- ---------------- ------------- ------------- ---------------- ---------------- ----------- Northern California $ 19,743,499 $1,774,291 $ -0- $ 11,717 $21,529,507 34.94% Southern California 16,351,726 1,569,829 -0- 1,493 17,923,048 29.09 Florida 3,235,635 35,823 -0- 89 3,271,547 5.31 Texas 2,474,542 111,086 122 827 2,586,577 4.20 New Jersey 2,274,294 -0- -0- 1,303 2,275,597 3.69 Washington 1,231,955 695,530 -0- -0- 1,927,485 3.13 Illinois 1,497,881 130,375 -0- -0- 1,628,256 2.64 Colorado 1,324,988 187,719 -0- 4,378 1,517,085 2.46 Other(a) 8,827,781 129,617 2 2,810 8,960,210 14.54 ---------------- ------------- ------------- ---------------- ---------------- ---------- Total $ 56,962,301 $4,634,270 $ 124 $ 22,617 61,619,312 100.00% ================ ============= ============= ================ ==========
Deferred loan costs 305,058 Loan discount on purchased loans (796) Undisbursed loan funds (8,329) Allowance for loan losses (279,818) Loans to facilitate (LTF) interest reserve (119) Troubled debt restructured (TDR) interest reserve (1) Loans on deposits 14,606 ---------------- Total loan portfolio and loans securitized into MBS-REMICs 61,649,913 Loans securitized into MBS-REMICs (6,539,387)(b)(c) ---------------- Total loans receivable $55,110,526 ================ (a) All states included in Other have total loan balances less than 2% of total loans. (b) The above schedule includes the September 30, 2002 balances of loans that were securitized and retained as MBS-REMICs. (c) The significantly lower balance compared with September 30, 2001 (see Table 9) is due to the repayment of MBS-REMICs over the past year and the desecuritization of FNMA MBS with recourse in the first half of 2002. Since March 31, 2001, all new FNMA MBS with recourse and MBS-REMICs have been classified as securitized loans per SFAS 140 (see discussion on page 6).
TABLE 9 Loan Portfolio by State September 30, 2001 (Dollars in thousands) Residential Real Estate Commercial Loans --------------------------------- Real Total as a % of State 1 - 4 5+ Land Estate Loans Portfolio ------------------------- --------------- -------------- ------------- ---------------- --------------- ----------- Northern California $ 16,168,887 $ 1,771,328 $ 23 $ 16,780 $17,957,018 33.27% Southern California 15,013,406 1,624,920 -0- 3,412 16,641,738 30.83 Florida 2,696,823 21,319 -0- 202 2,718,344 5.04 Texas 2,128,283 72,278 182 941 2,201,684 4.08 New Jersey 1,973,278 -0- -0- 2,083 1,975,361 3.66 Washington 1,090,659 628,098 -0- -0- 1,718,757 3.18 Illinois 1,425,232 122,257 -0- -0- 1,547,489 2.87 Colorado 1,236,884 191,115 -0- 4,576 1,432,575 2.65 Other(a) 7,691,990 87,826 14 3,892 7,783,722 14.42 --------------- -------------- ------------- ---------------- --------------- ----------- Total $ 49,425,442 $ 4,519,141 $ 219 $ 31,886 53,976,688 100.00% =============== ============== ============= ================ ===========
Deferred loan costs 181,498 Loan discount on purchased loans (1,159) Undisbursed loan funds (6,951) Allowance for loan losses (250,444) Loans to facilitate (LTF) interest reserve (169) Troubled debt restructured (TDR) interest reserve (6) Loans on deposits 18,523 --------------- Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 53,917,980 Loans securitized into FNMA MBS with recourse and MBS-REMICs (15,244,959)(b) --------------- Total loans receivable $38,673,021 =============== (a) All states included in Other have total loan balances less than 2% of total loans. (b) The above schedule includes the September 30, 2001 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
Loan repayments consist of monthly loan amortization and loan payoffs. For the three and nine months ended September 30, 2002, loan repayments were $3.1 billion and $8.5 billion, respectively, compared to $2.4 billion and $6.7 billion for the same periods in 2001. The increase in loan repayments was primarily due to an increase in the balance of loans receivable outstanding partially offset by a decrease in the prepayment rate. Securitized Loans During the third quarter and first nine months of 2002, the Company securitized $951 million and $13.1 billion of loans, respectively. During the second and third quarters of 2001, the Company securitized $6.0 billion of loans. At September 30, 2002, the balance of securitized loans was $15.2 billion. These securitized loans are available to be used as collateral for borrowings and are classified as loans receivable on the Statement of Financial Condition per SFAS 140. Mortgage Servicing Rights Capitalized mortgage servicing rights (CMSRs) are included in "Other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the three and nine months ended September 30, 2002 and 2001. TABLE 10 Capitalized Mortgage Servicing Rights (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 --------------------------- -------------------------- 2002 2001 2002 2001 ----------- ------------ ----------- ------------ Beginning balance of capitalized mortgage servicing rights $61,778 $36,109 $56,056 $28,355 New capitalized mortgage servicing rights from loan sales 4,175 11,899 19,387 25,357 Amortization of capitalized mortgage servicing rights (5,266) (3,652) (14,756) (9,356) ----------- ------------ ----------- ----------- Ending balance of capitalized mortgage servicing rights $60,687 $44,356 $60,687 $44,356 =========== ============ =========== ===========
The estimated amortization of the September 30, 2002 balance for the remainder of 2002 and the five years ending 2007 is $5.5 million (2002), $17.1 million (2003), $12.8 million (2004), $8.7 million (2005), $5.8 million (2006), and $8.3 million (2007). Actual results may vary depending upon the level of the payoffs of the loans currently serviced. The book value of Golden West's servicing rights did not exceed the fair value at September 30, 2002 or 2001 and, therefore, no reserve was required to adjust the servicing rights to their fair value. Asset Quality An important measure of the soundness of the Company's loan and MBS portfolio is its ratio of nonperforming assets (NPAs) and troubled debt restructured (TDRs) to total assets. Nonperforming assets include non-accrual loans (that is, loans, including loans securitized into MBS with recourse and loans securitized into MBS-REMICs, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's TDRs are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers impacted by adverse economic conditions. The following table shows the components of the Company's NPAs and TDRs and the various ratios to total assets. TABLE 11 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) September 30 December 31 September 30 2002 2001 2001 ------------------ ----------------- ------------------- Non-accrual loans $ 405,806 $ 382,510 $ 336,686 Real estate acquired through foreclosure 10,830 10,177 8,200 Real estate in judgment 944 924 1,258 ------------------ ----------------- ------------------- Total nonperforming assets $ 417,580 $ 393,611 $ 346,144 ================== ================= =================== TDRs, net of interest reserve $ 3,388 $ 1,505 $ 129 ================== ================= =================== Ratio of NPAs to total assets .64% .67% .60% ================== ================= =================== Ratio of TDRs to total assets .01% .00% .00% ================== ================= =================== Ratio of NPAs and TDRs to total assets .65% .67% .60% ================== ================= ===================
The balance of NPAs increased from December 31, 2001 to September 30, 2002. NPAs continue to reflect the normal increase in delinquencies associated with the aging of the large volume of mortgages originated during the past two years together with the uncertain U.S. economy. The Company closely monitors all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans (loans 90 days or more past due) is computed as the change in the interest reserve on non-accrual loans. This interest reserve is the amount of interest income that would have been recognized on these loans if they had been performing. Interest foregone on non-accrual loans was an expense of $1 million and $2 million for the three and nine months ended September 30, 2002 compared to an expense of $3 million and $7 million for the same periods in 2001. Interest foregone on TDRs for the nine months ended September 30, 2002 amounted to $6 thousand. The amount of interest foregone on TDRs for the third quarter of 2002 was less than $1 thousand, compared to $1 thousand and $40 thousand for the three and nine months ended September 30, 2001. The tables on the following page show the Company's nonperforming assets by state and the ratio of NPAs to total loans (including securitized loans, FNMA MBS with recourse, and MBS-REMICs) as of September 30, 2002 and 2001. TABLE 12 Nonperforming Assets by State September 30, 2002 (Dollars in thousands) Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE) ----------------------------------------- --------------------------------------- Residential Commercial Residential Commercial NPAs as Real Estate Real Real Estate Real Total a % of State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans --------------------- ------------ -------- ----------- --------- -------- -------------- ------------- -------- Northern California $ 94,329 $ -0- $ 6 $ 388 $ -0- $ -0- $ 94,723 .44% Southern California 106,272 -0- 310 2,614 -0- -0- 109,196 .61 Florida 38,545 -0- 21 -0- -0- -0- 38,566 1.18 Texas 23,488 -0- 442 1,163 -0- -0- 25,093 .97 New Jersey 19,094 -0- 224 -0- -0- -0- 19,318 .85 Washington 14,998 -0- -0- 1,133 -0- -0- 16,131 .84 Illinois 16,096 -0- -0- 1,290 -0- -0- 17,386 1.07 Colorado 4,524 65 -0- 349 -0- -0- 4,938 .33 Other(c) 87,333 59 -0- 5,163 -0- -0- 92,555 1.03 ------------ -------- ---------- --------- -------- ------------ ------------- ---------- Total $404,679 $ 124 $1,003 $12,100 $ -0- $ -0- 417,906 .68 ============ ======== ========== ========= ======== ============ FRE general valuation allowance (326) (.00) ------------- ---------- Total nonperforming assets $417,580 .68% ============= ========== (a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans. (b) The September 30, 2002 balances include loans that were securitized into MBS. (c) All states included in Other have total loan balances less than 2% of total loans.
TABLE 13 Nonperforming Assets by State September 30, 2001 (Dollars in thousands) Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE) ----------------------------------------- --------------------------------------- Residential Commercial Residential Commercial NPAs as Real Estate Real Real Estate Real Total a % of State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans --------------------- ------------ -------- ----------- --------- -------- ------------- ------------- -------- Northern California $ 61,376 $ 500 $ 103 $ 89 $ -0- $ -0- $ 62,068 .35% Southern California 111,598 321 564 1,558 -0- -0- 114,041 .69 Florida 30,426 -0- 80 280 -0- -0- 30,786 1.13 Texas 17,126 -0- -0- 758 -0- -0- 17,884 .81 New Jersey 18,813 -0- -0- 573 -0- -0- 19,386 .98 Washington 8,554 -0- -0- 425 -0- -0- 8,979 .52 Illinois 14,770 -0- -0- 594 215 -0- 15,579 1.01 Colorado 2,745 -0- -0- -0- -0- -0- 2,745 .19 Other(c) 69,412 298 -0- 5,280 -0- -0- 74,990 .96 ------------ -------- ---------- --------- -------- ------------ ------------- ---------- Total $334,820 $1,119 $ 747 $ 9,557 $ 215 $ -0- 346,458 .64 ============ ======== ========== ========= ======== ============ FRE general valuation allowance (314) (.00) ------------- ---------- Total nonperforming assets $ 346,144 .64% ============= ========== (a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans. (b) The September 30, 2001 balances include loans that were securitized into MBS. (c) All states included in Other have total loan balances with less than 2% of total loans.
The Company provides specific valuation allowances for losses on major loans when impaired, and a write-down on foreclosed real estate when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating probable loan losses that is based on both the Company's historical loss experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. This approach also takes into consideration current trends in economic growth, unemployment, housing market activity, and home prices for the nation and individual geographical regions. This approach further considers other risks such as the impact of 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, specific and general 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 and nine months ended September 30, 2002 and 2001. TABLE 14 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Beginning allowance for loan losses $ 273,881 $ 245,078 $ 261,013 $ 236,708 Provision for losses charged to expense 6,484 3,639 20,209 12,463 Loans charged off (646) (628) (1,766) (1,383) Recoveries 99 161 362 329 Net transfer to allowance from recourse liability -0- 2,194 -0- 2,327 ------------- ------------- ------------- ------------- Ending allowance for loan losses $ 279,818 $ 250,444 $ 279,818 $ 250,444 ============= ============= ============= ============= Annualized ratio of net chargeoffs to average loans outstanding (including MBS with recourse and MBS-REMICs) .00% .00% .00% .00% ============= ============= ============= ============= Ratio of allowance for loan losses to total loans (including MBS with recourse and MBS-REMICs) .45% .46% ============= ============= Ratio of allowance for loan losses to nonperforming assets 67.0% 72.4% ============= =============
Deposits The Company raises deposits through its retail branch system as well as through the money markets. Retail deposits increased during the third quarter of 2002 by $2.5 billion, including interest credited of $240 million, compared to an increase of $1.8 billion, including interest credited of $312 million in the third quarter of 2001. Retail deposits increased during the first nine months of 2002 by $4.3 billion, including interest credited of $704 million, compared to an increase of $3.3 billion, including interest credited of $994 million in the first nine months of 2001. Retail deposits increased during the first nine months of 2002 because the public found money market deposit accounts to be a more favorable investment compared with other alternatives. At September 30, 2002 and 2001, transaction accounts (which include checking, passbook, and money market accounts) represented 60% and 34%, respectively, of the total balance of deposits. From time to time, the Company uses government securities dealers to sell wholesale certificates of deposit (CDs) to institutional investors. There were no outstanding wholesale CDs at September 30, 2002, December 31, 2001, or September 30, 2001. The table below shows the Company's deposits by interest rate and by remaining maturity at September 30, 2002 and 2001. TABLE 15 Deposits (Dollars in millions) September 30 ----------------------------------------------------------- 2002 2001 ---------------------------- ---------------------------- Rate* Amount Rate* Amount ----------- ------------- ----------- ------------- Deposits by rate: Interest-bearing checking accounts 1.44% $ 140 1.85% $ 98 Interest-bearing checking accounts swept into money market deposit accounts 1.94 4,220 3.06 4,317 Passbook accounts .83 451 1.20 461 Money market deposit accounts 2.81 18,617 3.66 6,341 Term certificate accounts with original maturities of: 4 weeks to 1 year 2.11 5,739 4.21 11,908 1 to 2 years 2.80 4,586 5.02 6,785 2 to 3 years 4.09 1,887 5.45 1,560 3 to 4 years 4.62 1,242 5.54 602 4 years and over 5.13 1,752 5.78 735 Retail jumbo CDs 3.90 115 4.86 327 ------------- ------------- $ 38,749 $ 33,134 ============= ============= Deposits by remaining maturity: No contractual maturity 2.60% $ 23,428 3.31% $ 11,217 Maturity within one year 2.71 11,372 4.58 19,449 1 to 5 years 4.31 3,937 5.12 2,448 Over 5 years 5.10 12 5.74 20 ------------- ------------- $ 38,749 $ 33,134 ============= ============= * Weighted average interest rate, including the impact of interest rate swaps.
At September 30, the weighted average cost of deposits was 2.81% (2002) and 4.19% (2001). Advances from Federal Home Loan Banks The Company uses borrowings from the FHLBs, also known as "advances," to provide funds for loan origination activities. Advances are secured by pledges of certain loans, MBS, and capital stock of the FHLBs. FHLB advances amounted to $18.6 billion at September 30, 2002, compared to $18.0 billion at December 31, 2001, and $17.9 billion at September 30, 2001. Securities Sold Under Agreements to Repurchase The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered into primarily with selected major government securities dealers and large banks, using MBS from the Company's portfolio. Reverse Repos amounted to $22 million, $224 million, and $421 million at September 30, 2002, December 31, 2001, and September 30, 2001, respectively. Other Borrowings At September 30, 2002, Golden West, at the holding company level, had a total of $200 million of subordinated debt issued and outstanding as compared to $600 million at September 30, 2001. As of September 30, 2002, the Company's subordinated debt securities were rated A2 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. On November 8, 2002, S&P raised the rating to A. In July 2000, the Company filed a registration statement with the Securities and Exchange Commission for the issuance or sale of up to $1.0 billion of securities, including senior debt. During the third quarter of 2002, the Company issued $300 million of five-year and $500 million of ten-year senior debt in two separate transactions pursuant to such registration statement, bringing the balance issued under this registration statement to $1.0 billion at September 30, 2002. As of September 30, 2002, the Company's senior debt was rated A1 and A by Moody's and S&P, respectively. On November 8, 2002, S&P raised the rating to A+. WSB has a $5 billion revolving bank note program. At September 30, 2002, WSB had $1.1 billion of bank notes outstanding as compared to $694 million at September 30, 2001. As of September 30, 2002, WSB's bank notes were rated P1 and A1 by Moody's and S&P, respectively. On November 8, 2002, S&P raised the rating to A-1+. In 1996, WSB received permission from the OTS to issue non-convertible medium-term notes to institutional investors under rules similar to Office of the Comptroller of the Currency rules applicable to similarly situated national banks. As of September 30, 2002, WSB had not issued any notes under this authority. As of September 30, 2002, WSB's long-term deposits and other senior obligations were rated Aa3 by Moody's and A+ by S&P. On November 8, 2002, S&P raised the rating to AA-. Stockholders' Equity The Company's stockholders' equity increased by $509 million during the first nine months of 2002 as a result of net earnings partially offset by decreased market values of securities available for sale, the payment of quarterly dividends to stockholders, and the $146 million cost of the repurchase of Company stock. The Company's stockholders' equity increased by $528 million during the first nine months of 2001 as a result of net earnings partially offset by decreased market values of securities available for sale, the payment of quarterly dividends to stockholders and the $29 million cost of the repurchase of Company stock. Unrealized gains, net of taxes, on securities and MBS available for sale included in stockholders' equity at September 30, 2002, December 31, 2001, and September 30, 2001 were $189 million, $221 million, and $222 million, respectively. Since 1993, through five separate actions, Golden West's Board of Directors has authorized the repurchase by the Company of up to 60.6 million shares of Golden West's common stock. As of September 30, 2002, 48.9 million shares had been repurchased and retired at a cost of $1.2 billion since October 1993, of which 2.3 million shares were purchased and retired at a cost of $146 million during the first nine months of 2002. Dividends from subsidiaries are expected to continue to be the major source of funding for the stock repurchase program. The repurchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. 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 WSB's subsidiary, WTX. Under FIRREA, savings institutions must have tangible capital equal to at least 1.5% of adjusted total assets, core capital equal to at least 4% of adjusted total assets, and risk-based capital equal to at least 8% of risk-weighted assets. The OTS and other bank regulatory agencies have adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a financial institution is "well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, 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 September 30, 2002, the most recent notification from the OTS categorized WSB and WTX as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of WSB or WTX. The following tables show WSB's and WTX's regulatory capital ratios and compare them to the OTS minimum requirements at September 30, 2002 and 2001. TABLE 16 Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements As of September 30, 2002 (Dollars in thousands) Well-Capitalized Minimum Capital Capital Actual Requirements Requirements ------------------------- -------------------------- --------------------------- Capital Ratio Capital Ratio Capital Ratio -------------- ------- ---------------- ------- ---------------- ------- WSB and Subsidiaries -------------------- Tangible $4,899,824 7.51% $ 978,899 1.50% --- --- Tier 1 (core or leverage) 4,899,824 7.51 2,610,398 4.00 $ 3,262,997 5.00% Tier 1 risk-based 4,899,824 13.32 --- --- 2,207,546 6.00 Total risk-based 5,178,292 14.07 2,943,395 8.00 3,679,244 10.00 WTX --- Tangible $ 410,787 5.24% $ 117,585 1.50% --- --- Tier 1 (core or leverage) 410,787 5.24 313,560 4.00 $ 391,950 5.00% Tier 1 risk-based 410,787 24.75 --- --- 99,599 6.00 Total risk-based 411,011 24.76 132,799 8.00 165,998 10.00
TABLE 17 Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements As of September 30, 2001 (Dollars in thousands) Well-Capitalized Minimum Capital Capital Actual Requirements Requirements ------------------------- -------------------------- --------------------------- Capital Ratio Capital Ratio Capital Ratio -------------- ------- ---------------- ------- ---------------- ------- WSB and Subsidiaries -------------------- Tangible $4,247,559 7.38% $ 863,820 1.50% --- --- Tier 1 (core or leverage) 4,247,559 7.38 2,303,520 4.00 $ 2,879,400 5.00% Tier 1 risk-based 4,247,559 12.69 --- --- 2,007,708 6.00 Total risk-based 4,591,460 13.72 2,676,943 8.00 3,346,179 10.00 WTX --- Tangible $ 310,217 5.22% $ 89,180 1.50% --- --- Tier 1 (core or leverage) 310,217 5.22 237,813 4.00 $ 297,266 5.00% Tier 1 risk-based 310,217 26.08 --- --- 71,375 6.00 Total risk-based 310,218 26.08 95,167 8.00 118,959 10.00
Results Of Operations Net Earnings Net earnings for the three months ended September 30, 2002 were $244 million compared to net earnings of $206 million for the three months ended September 30, 2001. Net earnings for the nine months ended September 30, 2002 were $709 million compared to net earnings of $591 million (excluding the cumulative effect of the accounting change) for the nine months ended September 30, 2001. Net earnings for the first nine months increased in 2002 as compared to 2001 primarily as a result of increased net interest income and increased noninterest income, which were partially offset by an increase in general and administrative expenses. Including the cumulative effect of the accounting change, net of tax, net earnings for the nine months ended September 30, 2001 were $585 million. See page 6 for further discussion on SFAS 133 and the cumulative effect of the accounting change. Two non-recurring items contributed to net earnings during the third quarter of 2002. The Company received $9.4 million from the Federal Home Loan Bank of San Francisco for 1998 prepayment fees that were refunded. In addition, the Company had a one-time after-tax benefit of $2.7 million due to a change in the California tax law regarding reserves for loan losses. Net Interest Income The largest component of the Company's revenue and earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Long-term growth of the Company's net interest income, and hence earnings, is related to the ability to expand the mortgage portfolio, the Company's primary earning asset, by originating and retaining high-quality adjustable rate home loans. Over the short term, however, net interest income can be influenced by business conditions, especially movements in short-term interest rates, which can temporarily increase or reduce changes in net interest income. Net interest income amounted to $496 million and $1.4 billion, respectively, for the three and nine months ended September 30, 2002. These amounts represented 19% and 21% increases, respectively, over the $415 million and $1.2 billion reported during the same periods in 2001. As discussed below, the growth of net interest income in 2002 compared with the prior year resulted from both expansion of the Company's earning assets and an increase in the Company's average primary spread, which is the difference between the yield on loans and other investments and the rate paid on deposits and borrowings. Between September 30, 2001 and September 30, 2002, the Company's earning asset balance increased by $7.1 billion or 13%. This growth resulted from strong mortgage originations which more than offset loan repayments and loan sales, especially in the second and third quarters of 2002. As noted in the discussion of the gap on pages 10 and 11, the Company's liabilities respond more rapidly to movements in short-term interest rates than the Company's assets, most of which are adjustable rate mortgages tied to indexes that lag changes in market interest rates. Consequently, when short-term interest rates decline, the Company's primary spread temporarily widens, because the index lags slow the downward movement of the yield on the Company's adjustable rate mortgage portfolio. When interest rates stabilize after a period of falling rates, the primary spread usually declines for a while until the yield on the ARM portfolio catches up to previous rate decreases. The opposite occurs when interest rates increase. Specifically, when short-term interest rates move up, the Company's primary spread compresses for a period of time, because the index lags slow the upward adjustment of the yield on the Company's ARMs. When interest rates stabilize after a period of rising rates, the primary spread expands for a while until the ARM yield catches up to previous rate increases. For the five years ended September 30, 2002, which included periods of both falling and rising interest rates, the Company's primary spread averaged 2.41% with a monthend high of 3.21% and a monthend low of 1.88%. During 2001, the Federal Reserve's Open Market Committee lowered the Federal Funds rate, a key short-term interest rate, by a total of 475 basis points in order to stimulate the then-weak economy. Other short-term market rates experienced similar decreases. In response to significantly lower short-term interest rates, the Company's cost of funds declined by 284 basis points during 2001. At the same time, the yield on the Company's assets fell by only 166 basis points, because the indexes to which the large adjustable rate mortgage portfolio is tied moved down more slowly. As a consequence, the Company's primary spread widened substantially during 2001, and at December 31, 2001 reached 3.21%, the highest level in the Company's history. During the first nine months of 2002, the Company's cost of funds declined by an additional 59 basis points. At the same time, the Company's asset yield fell by 87 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 the first nine months of 2002, the Company's primary spread narrowed from 3.21% at December 31, 2001 to 2.93% at September 30, 2002. However, the average primary spread in the first nine months of 2002 was greater than the average reported for the same period in 2001, contributing to the increase in net interest income for the first nine months of 2002 compared with the first nine months of 2001. The table below shows the components of the Company's spread at September 30, 2002, December 31, 2001, and September 30, 2001. TABLE 18 Yield on Earning Assets, Cost of Funds, and Primary Spread September 30 December 31 September 30 2002 2001 2001 ------------------ ---------------- ------------------ Yield on loan portfolio 5.47% 6.39% 7.01% Yield on MBS 5.74 6.35 6.95 Yield on investments 3.50 2.86 4.34 ------------------ ---------------- ------------------ Yield on earning assets 5.49 6.36 6.97 ------------------ ---------------- ------------------ Cost of deposits 2.81 3.39 4.19 Cost of borrowings 2.10 2.72 4.05 ------------------ ---------------- ------------------ Cost of funds 2.56 3.15 4.14 ------------------ ---------------- ------------------ Primary spread 2.93% 3.21% 2.83% ================== ================ ==================
The following tables set forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities for the three and nine months ended September 30, 2002 and 2001. TABLE 19 Average Interest-Earning Assets and Interest-Bearing Liabilities (Dollars in thousands) Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 --------------------------------------------- -------------------------------------------- Annualized End of Annualized End of Average Average Period Average Average Period Balances(a) Yield Yield Balances(a) Yield Yield --------------- ------------ --------- -------------- ------------ ---------- ASSETS Investment securities $ 3,306,584 2.17% 3.50% $ 3,184,270 4.09% 4.34% Mortgage-backed securities 7,067,078 5.98 5.74 16,797,464 7.10 6.95 Loans receivable(b) 53,508,620 5.62 5.47 37,237,843 7.34 7.01 Invest. in capital stock of FHLBs 1,055,276 4.73 4.32 1,091,375 4.96 4.97 --------------- ------------ -------------- ------------ Interest-earning assets $64,937,558 5.47% $58,310,952 7.05% =============== ============ ============== ============ LIABILITIES Deposits: Checking accounts $ 125,031 1.76% 1.44% $ 120,250 2.77% 1.85% Savings accounts 21,170,685 2.62 2.61 10,115,826 3.45 3.32 Term accounts 16,309,182 3.22 3.12 22,255,697 4.99 4.65 --------------- ------------ -------- -------------- ------------ ---------- Total deposits 37,604,898 2.88 2.81 32,491,773 4.50 4.19 Advances from FHLBs 19,073,771 2.00 1.93 18,681,114 4.30 4.00 Reverse repurchases 82,965 1.44 .41 758,561 3.83 3.01 Other borrowings 4,641,925 2.29 3.36 3,545,252 4.44 4.95 --------------- ------------ -------------- ------------ Interest-bearing liabilities $61,403,559 2.56% $55,476,700 4.42% =============== ============ ============== ============ Average net interest spread 2.91% 2.63% ============ ============ Net interest income $ 495,700 $ 415,133 =============== ============== Net yield on average interest- earning assets 3.05% 2.85% ============ ============ (a) Averages are computed using daily balances. (b) Includes nonaccrual loans (90 days or more past due).
TABLE 20 Average Interest-Earning Assets and Interest-Bearing Liabilities (Dollars in thousands) Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 --------------------------------------------- -------------------------------------------- Annualized End of Annualized End of Average Average Period Average Average Period Balances(a) Yield Yield Balances(a) Yield Yield --------------- ------------ --------- -------------- ------------ ---------- ASSETS Investment securities $ 3,250,088 2.04% 3.50% $ 3,167,297 4.94% 4.34% Mortgage-backed securities 8,988,601 5.91 5.74 18,100,472 7.63 6.95 Loans receivable(b) 48,861,244 5.79 5.47 35,398,324 7.77 7.01 Invest. In capital stock of FHLBs 1,051,363 5.14 4.32 1,082,383 5.64 4.97 --------------- ------------ -------------- ------------ Interest-earning assets $62,151,296 5.60% $57,748,476 7.53% =============== ============ ============== ============ LIABILITIES Deposits: Checking accounts $ 161,013 1.38% 1.44% $ 125,870 2.57% 1.85% Savings accounts 18,054,485 2.54 2.61 8,204,319 3.51 3.32 Term accounts 18,061,197 3.43 3.12 23,861,265 5.50 4.65 --------------- ------------ --------- --------------- ------------ ---------- Total deposits 36,276,695 2.98 2.81 32,191,454 4.98 4.19 Advances from FHLBs 18,501,192 2.13 1.93 18,989,841 5.15 4.00 Reverse repurchases 109,468 1.62 .41 1,079,398 4.88 3.01 Other borrowings 3,993,764 2.52 3.36 2,698,127 5.10 4.95 --------------- ------------ -------------- ------------ Interest-bearing liabilities $58,881,119 2.68% $54,958,820 5.04% =============== ============ ============== ============ Average net interest spread 2.92% 2.49% ============ ============ Net interest income $ 1,427,618 $ 1,181,029 =============== ============== Net yield on average interest- earning assets 3.06% 2.73% ============ ============ (a) Averages are computed using daily balances. (b) Includes nonaccrual loans (90 days or more past due).
The following table shows the Company's revenues and expenses as a percentage of total revenues for the three and nine months ended September 30, 2002 and 2001. TABLE 21 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ------------------------- 2002 2001 2002 2001 ------------ ---------- ---------- ---------- Interest on loans 79.5% 63.0% 76.1% 60.1% Interest on mortgage-backed securities 11.2 27.5 14.3 30.2 Interest and dividends on investments 3.2 4.3 3.2 4.8 ------------ ---------- ---------- ---------- 93.9 94.8 93.6 95.1 Less: Interest on deposits 28.6 33.7 29.0 35.1 Interest on advances and other borrowings 12.9 22.8 13.4 25.5 ------------ ---------- ---------- ---------- 41.5 56.5 42.4 60.6 Net interest income 52.4 38.3 51.2 34.5 Provision for loan losses .7 .3 .7 .4 ------------ ---------- ---------- ---------- Net interest income after provision for loan losses 51.7 38.0 50.5 34.1 Add: Fees 3.4 3.5 3.7 3.3 Gain on the sale of securities, MBS, and loans .6 1.2 .9 .8 Change in fair value of derivatives .0 (.7) .2 (.4) Other noninterest income 2.1 1.2 1.6 1.2 ------------ ---------- ---------- ---------- 6.1 5.2 6.4 4.9 Less: General and administrative expenses 16.3 12.2 15.7 10.9 Taxes on income 15.7 12.0 15.8 10.8 Cumulative effect of accounting change .0 .0 .0 .2 ------------ ---------- ---------- ---------- Net earnings 25.8% 19.0% 25.4% 17.1% ============ ========== ========== ==========
Interest Rate Swaps The Company enters into interest rate swaps as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any interest rate swaps or other derivative financial instruments for trading purposes. TABLE 22 Schedule of Interest Rate Swaps Activity (Notional amounts in millions) Nine Months Ended September 30, 2002 -------------------------------- Receive Pay Fixed Fixed Swaps Swaps ------------- -------------- Balance at December 31, 2001 $ 103 $ 621 Additions -0- 275 Maturities (12) (190) -------------- --------------- Balance at September 30, 2002 $ 91 $ 706 ============== ===============
The range of floating interest rates received on swap contracts in the first nine months of 2002 was 1.72% to 3.67%, and the range of floating interest rates paid on swap contracts was 1.80% to 2.00%. The range of fixed interest rates received on swap contracts in the first nine months of 2002 was 6.39% to 6.56% and the range of fixed interest rates paid on swap contracts was 2.16% to 8.15%. Interest rate swap payment activity decreased net interest income by $4.3 million and $15.2 million for the three and nine months ended September 30, 2002, respectively, as compared to decreases of $3.8 million and $7.5 million for the same periods in 2001. The Company accounts for interest rate swaps under the provisions in SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, the Company reported a one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. As a result of the ongoing valuation of the Company's swaps, the Company reported pre-tax income of $5 million, or $.02 after tax per diluted share for the nine months ended September 30, 2002 as compared to pre-tax expense of $14 million, or $.05 after tax per diluted share for the nine months ended September 30, 2001. This additional income and expense occurred because the fair value of Golden West's swaps changed in 2002 and 2001 as a result of interest rate movements. 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 September 30, 2002. Interest on Loans In the third quarter of 2002, interest on loans increased by $69 million or 10.0% from the comparable period in 2001. The increase in the third quarter of 2002 was due to a $16.3 billion increase in the average portfolio balance, which was partially offset by a 172 basis point decrease in the average portfolio yield. In the first nine months of 2002, interest on loans increased by $61 million or 2.9% from the comparable period in 2001. The increase in the first nine months of 2002 was due to a $13.5 billion increase in the average portfolio balance partially offset by a 197 basis point decrease in the average portfolio yield. Interest on Mortgage-Backed Securities In the third quarter of 2002, interest on mortgage-backed securities decreased by $193 million or 64.6% from the comparable period in 2001. The decrease in the third quarter of 2002 was primarily due to a $9.7 billion decrease in the average portfolio balance and a 119 basis point decrease in the average portfolio yield. In the first nine months of 2002, interest on mortgage-backed securities decreased by $637 million or 61.6% from the comparable period in 2001. The decrease in the first nine months of 2002 was primarily due to an $9.1 billion decrease in the average portfolio balance and a 174 basis point decrease in the average portfolio yield. The decrease in the mortgage-backed securities portfolio was primarily due to the desecuritization of $4.1 billion FNMA MBS into loans and the prepayment of loans underlying the MBS, as discussed on pages 12 and 13. Interest and Dividends on Investments The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. In the third quarter of 2002, interest and dividends on investments decreased by $16 million or 34.0% from the comparable period in 2001. The decrease in the third quarter of 2002 was due to a 193 basis point decrease in the average portfolio yield which was partially offset by a $122 million increase in the average portfolio balance. In the first nine months of 2002, interest and dividends on investments decreased by $73 million or 44.7% from the comparable period in 2001. The decrease in the first nine months of 2002 was due to a 282 basis point decrease in the average portfolio yield which was partially offset by an $83 million increase in the average portfolio balance. During the third quarter of 2002, the Company received $9.4 million from the FHLB of San Francisco for a refund of 1998 prepayment fees. Of the total $9.4 million refund, $1.5 million was interest that was recorded as other interest income while the remaining $7.9 million was recorded as other noninterest income during the third quarter of 2002 (see "Noninterest Income" on page 35). Interest on Deposits In the third quarter of 2002, interest on deposits decreased by $95 million or 26.0% from the comparable period in 2001. The decrease in the third quarter of 2002 was due to a 162 basis point decrease in the average cost of deposits which was partially offset by a $5.2 billion increase in the average balance of deposits. In the first nine months of 2002, interest on deposits decreased by $392 million or 32.6% from the comparable period in 2001. The decrease in the first nine months of 2002 was due to a 201 basis point decrease in the average cost of deposits which was partially offset by a $4.0 billion increase in the average balance of deposits. Interest on Advances and Other Borrowings In the third quarter of 2002, interest on advances and other borrowings decreased by $125 million or 50.6% from the comparable period of 2001. The decrease in the third quarter of 2002 was primarily due to a 223 basis point decrease in the average cost of these borrowings which was partially offset by a $814 million increase in the average balance. In the first nine months of 2002, interest on advances and other borrowings decreased by $504 million or 57.5% from the comparable period of 2001. The decrease in the first nine months of 2002 was primarily due to a 294 basis point decrease in the average cost of these borrowings and a $163 million decrease in the average balance. Provision for Loan Losses The provision for loan losses was $6 million and $20 million, respectively, for the three and nine months ended September 30, 2002 compared to $4 million and $12 million for the same periods in 2001. The provision for loan losses in 2002 reflected the growth in the loan portfolio. Noninterest Income Noninterest income was $58 million and $179 million, respectively, for the three and nine months ended September 30, 2002 compared to $56 million and $167 million for the same periods in 2001. The increase for the first nine months of 2002 resulted primarily from the income associated with the ongoing valuation of interest rate swaps compared with an expense in 2001. Also included in Noninterest income for the third quarter of 2002 was a $7.9 million refund for 1998 FHLB prepayment fees refunded by the FHLB of San Francisco (see "Interest and Dividends on Investments" on page 34). General and Administrative Expenses For the third quarter and first nine months of 2002, general and administrative expenses (G&A) were $154 million and $438 million compared to $132 million and $375 million for the comparable periods in 2001. G&A as a percentage of average assets on an annualized basis was .96% and .95% for the third quarter and first nine months of 2002 compared to .91% and .88% for the same periods in 2001. G&A expenses increased in 2002 because of the growth of loans and deposits and the costs associated with the ongoing investments in personnel, facilities, and technology. In addition, the G&A ratio increased because expenses grew faster than average assets in 2002. G&A as a percentage of net interest income plus noninterest income (the "efficiency ratio") amounted to 27.78% and 27.25% for the third quarter and first nine months of 2002 compared to 28.03% and 27.80% for the same periods in 2001. Taxes on Income 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 37.8% and 38.3%, respectively, for the third quarter and first nine months of 2002 compared to 38.7% and 38.5% for the comparable periods in 2001. Included in taxes on income for the third quarter of 2002 was a non-recurring after-tax benefit of $2.7 million due to a change in the California tax law regarding reserves for loan losses. Liquidity and Capital Resources WSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; wholesale certificates of deposit; borrowings from the FHLB of San Francisco; bank notes; borrowings from its parent; borrowings from its WTX subsidiary; and debt collateralized by mortgages, MBS, or other securities. In addition, WSB has other alternatives available to provide liquidity or finance operations including federal funds purchased, the issuance of medium-term notes, borrowings from public offerings of debt, and borrowings from commercial banks. Furthermore, under certain conditions, WSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. WTX's principal sources of funds are cash flows generated from borrowings from the FHLB of Dallas; earnings; deposits; loan repayments; debt collateralized by mortgages or securities; and borrowings from affiliates. The principal sources of funds for WSB's parent, Golden West, are dividends from subsidiaries, interest on investments, and the proceeds from the issuance of debt securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on senior debt and subordinated debt securities, capital contributions to its insured subsidiaries, dividends to stockholders, the repurchase of Golden West stock (see stockholders' equity section on page 26), and general and administrative expenses. At September 30, 2002, December 31, 2001, and September 30, 2001, Golden West's total cash and investments amounted to $870 million, $364 million, and $532 million, respectively. Included in the cash and investments above are a subordinated note receivable from WSB in the amount of $100 million at December 31, 2001, and September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes and anticipated growth based on simulations using an asset/liability model which takes into account the lags described on pages 10, 11 and 28. The simulation model projects net interest income, net earnings, and capital ratios based on a significant interest rate increase that is sustained for a thirty-six month period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. For mortgage assets, the model incorporates assumptions regarding the impact of changing interest rates on prepayment rates, which are based on the Company's historical prepayment information. The model factors in projections for anticipated activity levels by product lines offered by the Company. Based on the information and assumptions in effect at September 30, 2002, a 200 basis point rate increase sustained over a thirty-six month period would not materially affect the Company's long-term profitability and financial strength. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officers and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 5. AUDIT SERVICES DISCLOSURE On October 24, 2002, pursuant to Section 10A of the Securities Exchange Act of 1934, as amended, the Audit Committee of the Board of Directors of the Company approved the engagement of Deloitte & Touche LLP to perform auditing services and certain non-audit services for the Company. The non-audit services include tax compliance and planning, tax return reviews, other tax related services, and attestations confirming the calculation of COSI for mortgage loan purposes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits Exhibit No. Description ----------- ----------- 3 (a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1990. 3 (b) By-Laws of the Company, as amended in 1997, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1997. 4 (a) The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed 10% of the total assets of the Company. 10 (a) 1996 Stock Option Plan, as amended, is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 15, 1996, for the Company's 1996 Annual Meeting of Stockholders. 10 (b) Annual Incentive Bonus Plan is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 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) Form of Supplemental Retirement Agreement between the Company and certain executive officers is incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1990. 10 (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. 11 Statement of Computation of Earnings Per Share. 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 99.2 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 99.3 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K The Registrant filed the following reports on Form 8-K with the Commission during the quarter for which the report is filed: 1. Report filed August 1, 2002. Item 9. Regulation FD Disclosure. The report dated July 30, 2002 included a Statement Under Oath of Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. 2. Report filed August 2, 2002. Item 7. Exhibits. The report dated July 18, 2002 included an excerpt of a press release announcing the Company's earnings and other financial results for the second quarter ended June 30, 2002. Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION Dated: November 8, 2002 /s/ Russell W. Kettell ---------------------------------- Russell W. Kettell President and Chief Financial Officer /s/ William C. Nunan ---------------------------------- William C. Nunan Group Senior Vice President and Chief Accounting Officer CERTIFICATION I, Herbert M. Sandler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Golden West Financial Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 8, 2002 /s/ Herbert M. Sandler ---------------- --------------------------------- Date Herbert M. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation CERTIFICATION I, Marion O. Sandler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Golden West Financial Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 8, 2002 /s/ Marion O. Sandler ---------------- --------------------------------- Date Marion O. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation CERTIFICATION I, Russell W. Kettell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Golden West Financial Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 8, 2002 /s/ Russell W. Kettell ---------------- --------------------------------- Date Russell W. Kettell President and Chief Financial Officer Golden West Financial Corporation EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Basic and Diluted Earnings Per Share (Dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 --------------------------------- ---------------------------------- 2002 2001 2002 2001 --------------- --------------- ---------------- ---------------- Income before Cumulative Effect of Accounting Change $ 244,459 $ 205,840 $ 708,908 $ 590,848 Cumulative effect of accounting change, net of tax -0- -0- -0- (6,018) --------------- --------------- ---------------- ---------------- Net Earnings $ 244,459 $ 205,840 $ 708,908 $ 584,830 =============== =============== ================ ================ Weighted Average Shares 154,441,454 158,868,462 154,915,165 158,691,819 Dilutive effect of outstanding common stock equivalents 2,048,977 2,131,733 2,064,568 2,092,272 --------------- --------------- ---------------- ---------------- Diluted Average Shares Outstanding 156,490,431 161,000,195 156,979,733 160,784,091 =============== =============== ================ ================ Basic Earnings Per Share before Cumulative Effect of Accounting Change $ 1.58 $ 1.30 $ 4.58 $ 3.73 Cumulative effect of accounting change, net of tax .00 .00 .00 (.04) --------------- --------------- ---------------- ---------------- Basic Earnings Per Share $ 1.58 $ 1.30 $ 4.58 $ 3.69 =============== =============== ================ ================ Diluted Earnings Per Share before Cumulative Effect of Accounting Change $ 1.56 $ 1.28 $ 4.52 $ 3.68 Cumulative effect of accounting change, net of tax .00 .00 .00 (.04) --------------- --------------- ---------------- ---------------- Diluted Earnings Per Share $ 1.56 $ 1.28 $ 4.52 $ 3.64 =============== =============== ================ ================
EXHIBIT 99.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002, I, Herbert M. Sandler, Chairman of the Board and Chief Executive Officer of Golden West Financial Corporation, hereby certify 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. November 8, 2002 /s/ Herbert M. Sandler ---------------- --------------------------------- Date Herbert M. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002, I, Marion O. Sandler, Chairman of the Board and Chief Executive Officer of Golden West Financial Corporation, hereby certify 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. November 8, 2002 /s/ Marion O. Sandler ---------------- --------------------------------- Date Marion O. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation EXHIBIT 99.3 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002, I, Russell W. Kettell, President and Chief Financial Officer of Golden West Financial Corporation, hereby certify 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 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-Q of Golden West Financial Corporation for the quarterly period ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. November 8, 2002 /s/ Russell W. Kettell ---------------- --------------------------------- Date Russell W. Kettell President and Chief Financial Officer Golden West Financial Corporation