-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E9YP4crItW1V2E8GQBmwjypabQYjrTTPoHVcm90SGHOq+Mkj7Tf7XSzrZE0t/ba5 7HUxwNGahyt9M1aB1Tneog== 0000042293-03-000028.txt : 20030326 0000042293-03-000028.hdr.sgml : 20030325 20030326172155 ACCESSION NUMBER: 0000042293-03-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 03618988 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612-3575 BUSINESS PHONE: 510-466-3402 MAIL ADDRESS: STREET 1: 1901 HARRISON STREET STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612-3575 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CO DATE OF NAME CHANGE: 19751124 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CORP DATE OF NAME CHANGE: 19760806 10-K 1 gdw10k2002.txt GDW 2002 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------------------------- FORM 10-K ---------------------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------------------- Commission File Number 1-4629 GOLDEN WEST FINANCIAL CORPORATION Incorporated pursuant to the Laws of Delaware State ---------------------------------- I.R.S. - Employer Identification No. 95-2080059 1901 Harrison Street, Oakland, California 94612 (510) 446-3420 ---------------------------------- Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, $.10 par value New York Stock Exchange, Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ] The approximate aggregate market value of the registrant's common stock held by nonaffiliates of the registrant on June 30, 2002, was $10,657,969,078. The number of shares outstanding of the registrant's common stock on February 28, 2003, was 153,329,403 shares. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement dated March 14, 2003, furnished to stockholders in connection with the registrant's 2003 Annual Meeting of Stockholders, is incorporated by reference into Part III. ================================================================================ GOLDEN WEST FINANCIAL CORPORATION 2002 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I.........................................................................1 Item 1. Business............................................................1 Registrant..................................................................1 Forward Looking Statements..................................................2 Regulatory Framework........................................................2 Office Structure............................................................2 Operations..................................................................3 Deposit Activities..........................................................3 Borrowings..................................................................5 Mortgage-Backed Securities and Loans Receivable.............................7 Mortgage Servicing Rights..................................................19 Asset Quality..............................................................19 Investment Activities......................................................25 Stockholders' Equity.......................................................26 New Accounting Pronouncements..............................................26 Earnings Per Share.........................................................28 Yield on Interest-Earning Assets/Cost of Funds.............................28 Competition and Other Matters..............................................30 Thrift Industry............................................................31 Regulation.................................................................31 Employee Relations.........................................................38 Executive Officers of the Company..........................................39 Item 2. Description of Property............................................40 Item 3. Legal Proceedings..................................................40 Item 4. Submission of Matters to a Vote of Security Holders................40 PART II.......................................................................41 Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...............................................41 Market Prices of Stock.....................................................41 Per Share Cash Dividends Data..............................................41 Stockholders...............................................................42 Equity Compensation Plan Information.......................................42 Item 6. Selected Financial Data............................................42 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................46 Financial Condition........................................................47 Results of Operations......................................................64 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........69 Item 8. Financial Statements and Supplementary Data........................69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................69 PART III......................................................................70 Item 10. Directors and Executive Officers of the Registrant.................70 Item 11. Executive Compensation.............................................70 Item 12. Security Ownership of Certain Beneficial Owners and Management.....70 Item 13. Certain Relationships and Related Transactions.....................70 Item 14. Controls and Procedures............................................70 PART IV.......................................................................71 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....71 42 PART I ITEM 1. BUSINESS Registrant Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned federally chartered savings bank subsidiary, World Savings Bank, FSB (WSB). WSB has a wholly owned subsidiary, World Savings Bank, FSB (Texas) (WTX), that is also a federally chartered savings bank. Atlas Advisers, Inc. and Atlas Securities, Inc. also are subsidiaries of Golden West. These two companies were formed to provide services to Atlas Assets, Inc., an open-ended registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s fifteen portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise. WSB's deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF is a deposit insurance fund for commercial banks and certain savings banks. The SAIF is a deposit insurance fund for most savings associations. WSB is a member of the BIF, but a portion of WSB's deposits are insured through the SAIF. WTX's deposits are also insured by the FDIC and WTX is a member of the BIF. WSB's home office is in Oakland, California. As of December 31, 2002 and 2001, WSB had assets of $68.0 billion and $58.4 billion, respectively. For the years ended December 31, 2002, 2001, and 2000, WSB had net income of $978 million, $827 million, and $540 million, respectively. The Company's Internet address is www.gdw.com. Copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available, free of charge, through www.gdw.com as soon as reasonably practicable after their filing with the Securities and Exchange Commission. Forward Looking Statements This report may contain various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include projections, statements of the plans and objectives of management for future operations, statements of future economic performance, assumptions underlying these statements and other statements that are not statements of historical facts. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond Golden West's control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Among the key risk factors that may have a direct bearing on Golden West's results of operations and financial condition are: o competitive practices in the financial services industries; o operational and systems risks; o general economic and capital market conditions, including fluctuations in interest rates; o economic conditions in certain geographic areas, particularly in California; and o the impact of current and future laws and governmental regulations affecting the financial services industry in general and Golden West's operations in particular. In addition, actual results may differ materially from the results discussed in any forward-looking statements for the reasons, among others, discussed under the heading "Asset/Liability Management" in the Management's Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7. Regulatory Framework The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act (HOLA) and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. WSB is a member of the Federal Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WTX is a member of the FHLB system and owns stock in the FHLB of Dallas. WSB's and WTX's savings accounts are insured by the FDIC up to the maximum amounts provided by law. The Company, WSB, and WTX are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS). Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of businesses that can be engaged in, capital requirements, and the payment of dividends. WSB and WTX are also subject to regulations of the FDIC and the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to deposit accounts, reserve requirements, and certain other matters (see Regulation), and regulations of other federal and state agencies concerning consumers, lending, and securities activities. Office Structure As of December 31, 2002, the Company operated 121 savings branch offices in California, 46 in Florida, 36 in Colorado, 23 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, six in Illinois, and two in Nevada. The Company also operated 311 loan origination offices of which 110 were located in the states listed above. The remaining 201 loan origination offices were located in Connecticut, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming. Of the 311 loan offices, 21 were fully-staffed offices that were located in the same premises as savings branch offices, and 110 others were savings branch offices that have a single loan officer on site. The remaining loan origination offices were located in facilities that were separate from savings branch offices. Operations The principal business of the Company, through WSB and WTX, is attracting funds from the investing public and the capital markets and investing those funds principally in loans secured by deeds of trust or mortgages on residential real estate, and mortgage-backed securities (MBS). WSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; wholesale certificates of deposit; bank notes; borrowings from the Federal Home Loan Bank of San Francisco; borrowings from its parent; borrowings from its WTX subsidiary; and debt collateralized by mortgages, MBS, or securities. In addition, WSB has other alternatives available to provide liquidity or finance operations including federal funds purchased, the issuance of medium-term notes, borrowings from public offerings of debt, issuance of commercial paper, and borrowings from commercial banks. Furthermore, under certain limited conditions, WSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending on policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. WTX's principal source of funds are cash flows generated from borrowings from the FHLB of Dallas; earnings; deposits; loan repayments; debt collateralized by mortgages or securities; and borrowings from WSB and WSB's parent. The principal sources of funds for the holding company, Golden West, are dividends from subsidiaries, interest on investments, and the proceeds from the issuance of debt and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on debt securities, capital contributions to WSB, dividends to stockholders, the repurchase of Company stock, and general and administrative expenses. Deposit Activities Deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to five years. All types of accounts presently offered by the Company have rates that are set by the Company, consistent with prevailing interest rates. The Company's certificate accounts are issued in non-negotiable form through its branch offices. From time to time, the Company uses securities dealers to sell certificates of deposit (CDs) to institutional investors. These are referred to in this document as "wholesale CDs." All other deposits offered by the Company are considered "retail deposits." There were no outstanding wholesale CDs at December 31, 2002 and 2001. The Company's deposit balance at December 31, 2000 included $185 million of these wholesale CDs. Retail deposits increased $6.6 billion during 2002, including interest credited of $1.0 billion, compared to an increase of $4.6 billion during 2001, including interest credited of $1.3 billion, and an increase of $2.7 billion, including interest credited of $1.3 billion during 2000. Retail deposits increased in 2002, 2001, and 2000 primarily due to the implementation of marketing campaigns that took advantage of the favorable savings environment in which the public found money market deposit accounts to be a more favorable investment compared with other alternatives. At December 31, 2002, 2001, and 2000, transaction accounts (which include checking, passbook, and money market deposit accounts) represented 66%, 40%, and 24%, respectively, of the total balance of deposits. The following table summarizes the Company's deposits by original term to maturity at December 31. TABLE 1 Deposits by Original Term to Maturity (Dollars in Thousands) 2002 2001 2000 1999 1998 -------------- -------------- -------------- -------------- -------------- Interest-bearing checking accounts......$ 165,320 $ 155,799 $ 74,598 $ 128,677 $ 102,874 Interest-bearing checking accounts swept into money market deposit accounts............................... 4,407,650 4,613,087 3,059,928 3,206,240 2,706,811 Passbook accounts........................ 456,158 459,953 451,228 484,132 514,265 Money market deposit accounts............ 22,060,104 8,569,759 3,534,786 5,869,963 5,825,450 Time certificates of deposit with original maturities of: 4 weeks to 1 year.................. 4,714,712 10,852,181 12,325,768 8,554,573 5,893,772 1 to 2 years........................ 4,197,261 6,415,700 7,275,219 5,947,712 7,717,692 2 to 3 years........................ 1,857,234 1,619,868 1,367,147 1,349,180 1,417,606 3 to 4 years........................ 1,286,011 737,981 453,974 368,540 368,615 4 years and over.................... 1,794,051 799,025 675,120 582,275 1,150,056 Retail jumbo CDs (a).................... 100,173 249,088 644,962 623,286 521,478 Wholesale CDs........................... -0- -0- 185,000 600,000 -0- All other............................... 123 144 189 332 476 -------------- -------------- -------------- -------------- -------------- Total deposits...........................$ 41,038,797 $ 34,472,585 $ 30,047,919 $ 27,714,910 $ 26,219,095 ============== ============== ============== ============== ============== (a) Retail jumbo CDs are certificates of deposit with a minimum balance of $100,000.
The table below sets forth the Company's deposits by interest rate at December 31. TABLE 2 Deposits by Interest Rate (Dollars in Thousands) 2002 2001 ----------------- ----------------- 0.00% -- 2.00% . . . . . . . . . . $ 5,433,756 $ 685,916 2.01% -- 4.00% . . . . . . . . . . 32,219,197 24,445,143 4.01% -- 6.00% . . . . . . . . . . 2,846,962 7,572,962 6.01% -- 8.00% . . . . . . . . . . 529,715 1,759,311 8.01% -- 10.00% . . . . . . . . . . -0- -0- 10.01% -- 12.00% . . . . . . . . . . 9,167 9,253 ----------------- ----------------- $ 41,038,797 $ 34,472,585 ================= ================= At December 31, the weighted average cost of deposits was 2.56% (2002) and 3.39% (2001).
The table below shows the maturities of deposits at December 31, 2002 by interest rate. TABLE 3 Deposit Maturities by Interest Rate (Dollars in Thousands) 2007 and 2003(a) 2004 2005 2006 thereafter Total ----------------- ---------------- -------------- -------------- ---------------- ------------ 0.00% -- 2.00% $ 5,320,343 $ 113,130 $ 283 $ -0- $ -0- $5,433,756 2.01% -- 4.00% 30,765,063 1,022,885 328,775 9,467 93,007 32,219,197 4.01% -- 6.00% 843,534 345,302 391,365 245,013 1,021,748 2,846,962 6.01% -- 8.00% 233,908 13,999 271,928 1,166 8,714 529,715 8.01% -- 10.00% -0- -0- -0- -0- -0- -0- 10.01% -- 12.00% 9,167 -0- -0- -0- -0- 9,167 ----------------- ---------------- -------------- -------------- ------------ -------------- $37,172,015 $1,495,316 $992,351 $255,646 $1,123,469 $41,038,797 ================= ================ ============== ============== ============ ============== (a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity.
As of December 31, 2002, the aggregate amount outstanding of time certificates of deposit in amounts of $100,000 or more was $2.7 billion, of which $100 million were retail jumbo CDs with a minimum balance of $100,000. There were no wholesale CDs. The following table presents the maturity of these time certificates of deposit at December 31, 2002. TABLE 4 Maturities of Time Certificates of Deposit Equal to or Greater than $100,000 (Dollars in Thousands) 3 months or less $ 774,496 Over 3 months through 6 months 495,459 Over 6 months through 12 months 575,276 Over 12 months 842,690 ----------------- $2,687,921 ================= More information regarding deposits is included in Note I to the Financial Statements included in Item 15. Borrowings The Company generally may borrow from the FHLB upon the security of (a) the capital stock of the FHLB owned by the Company, (b) certain of its residential mortgage loans and MBS, or (c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances," to provide funds for loan origination activities. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable. At December 31, 2002, the Company had $18.6 billion in FHLB advances outstanding, compared to $18.0 billion at yearend 2001. The Company enters into reverse repurchase agreements with selected major government securities dealers, large banks, or the FHLB of San Francisco and the FHLB of Dallas. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a counterparty coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company. The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company. The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses amounted to $522 million at December 31, 2002, compared to $224 million at yearend 2001. At December 31, 2002, Golden West, at the holding company level, had a total of $200 million of subordinated debt outstanding compared with $600 million at December 31, 2001. As of December 31, 2002, Golden West's subordinated debt securities were rated A2 and A by Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively. At December 31, 2002, the Company had outstanding $1.0 billion of senior debt compared to $200 million at December 31, 2001. As of December 31, 2002, the Company's senior debt was rated A1 and A+ by Moody's and S&P, respectively. WSB has a bank note program under which up to $5 billion of borrowings can be outstanding at any point in time. At December 31, 2002, WSB had $1.2 billion of bank notes outstanding. There were no bank notes outstanding at December 31, 2001 or 2000. As of December 31, 2002, WSB's bank notes were rated P-1 and A-1+ by Moody's and S&P, respectively. The table below sets forth the composition of the Company's borrowings at December 31. TABLE 5 Composition of Borrowings (Dollars in Thousands) 2002 2001 2000 1999 1998 -------------- --------------- ---------------- --------------- ------------- FHLB advances...................................$ 18,635,099 $ 18,037,509 $ 19,731,797 $ 8,915,218 $6,163,472 Reverse repurchase agreements................... 522,299 223,523 857,274 970,129 1,252,469 Dollar reverse repurchase agreements............ -0- -0- -0- 75,047 -0- Bank notes...................................... 1,209,925 -0- -0- -0- -0- Senior debt..................................... 989,690 198,215 -0- -0- -0- Subordinated debt............................... 199,867 599,511 598,791 812,950 911,753 -------------- --------------- ---------------- --------------- ------------- Total borrowings............................$ 21,556,880 $19,058,758 $ 21,187,862 $10,773,344 $8,327,694 ============== =============== ================ =============== ============= Weighted average interest rate of total borrowings......................... 1.85% 2.72% 6.66% 5.77% 5.87% ============== =============== ================ =============== ============= More information concerning the borrowings of the Company is included in Notes J, K, L and M to the Financial Statements, which are included in Item 15.
Mortgage-Backed Securities and Loans Receivable The Company invests primarily in whole loans. From time to time, the Company securitizes loans from its portfolio into mortgage-backed securities (MBS) and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs). Under Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date the Company has not sold any interests requiring disclosures under SFAS 140. Because the Company currently retains all of the beneficial interest in these MBS , the securitizations formed after March 31, 2001 are securities classified as securitized loans and included in loans receivable in accordance with SFAS 140 (see pages 26 and 27 for further discussion). Additionally, from time to time, the Company purchases MBS. Loans, securitized loans, and MBS are available to be used as collateral for borrowings. During the first half of 2002, the Company desecuritized $4.1 billion of Federal National Mortgage Association (FNMA) MBS that were classified as MBS held to maturity with recourse, and the underlying loans were reclassified to loans receivable. This desecuritization led to a significant decrease in the outstanding balance of MBS, which in turn contributed to lower MBS repayments and lower interest on mortgage-backed securities. The desecuritization also contributed to an increase in the outstanding balance of loans receivable and an increase in interest income on loans. The following table shows the components of the Company's loans receivable portfolio, including MBS, at December 31, 2002, 2001, and 2000. TABLE 6 Balance of Loans Receivable, Including MBS, by Component (Dollars in Thousands) December 31 December 31 December 31 2002 2001 2000 -------------------- -------------------- -------------------- Loans $ 39,159,502 $ 35,952,918 $ 33,860,345 Securitized loans (a) (b) 19,066,063 5,186,717 -0- -------------------- -------------------- -------------------- Total loans, excluding MBS 58,225,565 41,139,635 33,860,345 -------------------- -------------------- -------------------- FNMA MBS -0- 4,732,779 7,758,409 MBS-REMICs 5,871,069 8,836,840 10,366,578 Purchased MBS 196,389 508,553 455,503 -------------------- -------------------- -------------------- Total MBS 6,067,458 14,078,172 18,580,490 -------------------- -------------------- -------------------- Other (c) 43,334 (74,260) (97,702) -------------------- -------------------- -------------------- Total loans receivable, including MBS $ 64,336,357 $ 55,143,547 $ 52,343,133 ==================== ==================== ==================== (a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on pages 26 and 27). (b) Includes $10.9 billion at December 31, 2002 of loans securitized with FNMA where the securitized loans are subject to full credit recourse to the Company. (c) Includes deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
Repayments from the loan portfolio, including MBS, were $15.6 billion, $15.6 billion, and $6.9 billion for the years ended December 31, 2002, 2001, and 2000, respectively. In 2002, there was a small decrease in the prepayment rate offset by the growth in the loan portfolio. Loans receivable repayments were higher in 2001 as compared to 2000 due to an increase in the prepayment rate as well as an increase in the balance of the total loan portfolio outstanding. Mortgage-Backed Securities The Company classifies its MBS as either held to maturity or available for sale. The Company has no trading MBS. MBS held to maturity are recorded at cost because the Company has the ability and intent to hold these MBS to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. At December 31, 2002, 2001, and 2000, the Company had MBS held to maturity in the amount of $6.0 billion, $13.8 billion, and $18.5 billion, respectively. The sizable decrease in 2002 was due primarily to prepayments and to the desecuritization of $4.1 billion of FNMA MBS in 2002. During 2001, the Company securitized $3.0 billion of ARMs into MBS-REMICs during the first three months. Loans securitized after March 31, 2001 were classified as securitized loans in accordance with SFAS 140. During 2000, the Company securitized $4.8 billion of ARMs into FNMA MBS and securitized $4.6 billion of ARMs into MBS-REMICs. The Company has the ability and intent to hold these MBS until maturity and, accordingly, these MBS are classified as held to maturity. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 2002, 2001, and 2000, the Company had MBS available for sale in the amount of $35 million, $233 million, and $70 million, respectively, including net unrealized gains on MBS available for sale of $139 thousand, $2 million, and $1 million, respectively. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS adjusted for any unamortized premium or discount. During the first quarter of 2002, the Company sold $176 million of purchased MBS available for sale, which resulted in a gain of $3 million. Repayments of MBS during the years 2002, 2001, and 2000 amounted to $3.2 billion, $6.4 billion, and $2.5 billion, respectively. MBS repayments were lower in 2002 due primarily to a decrease in the balance of MBS outstanding. MBS repayments were higher in 2001 due to an increase in the prepayment rate. For more information on MBS, see Notes C and D to the Financial Statements included in Item 15. Loans Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the authority to originate loans in any part of the United States. At December 31, 2002, the Company was originating loans in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. The Company also makes loans to customers on the security of their deposit accounts. Deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 2002 and 2001. Interest rates set at the time of origination by the Company on real estate loans are affected principally by competition, the supply of money available for lending, loan demand, and other factors that are affected by general economic conditions, regulatory and monetary policies of the federal government, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers, mortgage brokers, and consumers regarding possible lending opportunities. Customers also may apply for home loans over the telephone and on line at www.worldsavings.com. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas. The following tables set forth the Company's loan portfolio by state as of December 31, 2002 and 2001. TABLE 7 Loan Portfolio by State December 31, 2002 (Dollars in Thousands) Residential Real Estate Commercial Loans ------------------------------- Real Total as a % of State 1 - 4 5+ Land Estate Loans Portfolio - ------------------------ -------------- -------------- ---------- -------------- ---------------- --------------- Northern California $ 20,874,426 $ 1,783,379 $ -0- $ 10,000 $ 22,667,805 35.37% Southern California 16,696,057 1,567,389 -0- 1,449 18,264,895 28.50 Florida 3,405,781 44,041 -0- 78 3,449,900 5.38 Texas 2,554,814 115,511 112 804 2,671,241 4.17 New Jersey 2,389,661 -0- -0- 945 2,390,606 3.73 Washington 1,273,255 700,172 -0- -0- 1,973,427 3.08 Illinois 1,545,752 131,149 -0- -0- 1,676,901 2.62 Colorado 1,375,382 187,861 -0- 4,341 1,567,584 2.45 Other(a) 9,277,811 140,374 2 2,848 9,421,035 14.70 -------------- -------------- ---------- -------------- ---------------- ----------- Totals $ 59,392,939 $ 4,669,876 $ 114 $ 20,465 64,083,394 100.00% ============== ============== ========== ============== =========== Net deferred loan costs 331,985 Allowance for loan losses (281,097) Undisbursed loan funds (7,554) Loans on deposits 13,240 ---------------- Total loan portfolio and loans securitized into MBS-REMICs 64,139,968 Loans securitized into MBS-REMICs (5,871,069)(b)(c) ---------------- Total loans receivable $ 58,268,899 ================ (a) All states included in Other have total loan balances less than 2% of total loans. (b) The above schedule includes the December 31, 2002 balances of loans that were securitized and retained as MBS-REMICs. (c) The significantly lower balance compared with December 31, 2001 (see Table 8) is due to the repayment of MBS-REMICs over the past year and the desecuritization of FNMA MBS with recourse in the first half of 2002. Since March 31, 2001, all new FNMA MBS with recourse and MBS-REMICs have been classified as securitized loans per SFAS 140 (see discussion on pages 26 and 27).
TABLE 8 Loan Portfolio by State December 31, 2001 (Dollars in Thousands) Residential Real Estate Commercial Loans ------------------------------- Real Total as a % of State 1 - 4 5+ Land Estate Loans Portfolio ----------------------- -------------- -------------- ---------- --------------- --------------- --------------- Northern California $ 16,668,387 $ 1,773,468 $ 19 $ 15,156 $ 18,457,030 33.75% Southern California 15,136,951 1,579,418 -0- 2,871 16,719,240 30.57 Florida 2,767,388 23,931 -0- 194 2,791,513 5.10 Texas 2,159,023 82,468 169 899 2,242,559 4.10 New Jersey 1,987,905 -0- -0- 1,817 1,989,722 3.64 Washington 1,094,565 650,818 -0- -0- 1,745,383 3.19 Illinois 1,407,339 119,020 -0- -0- 1,526,359 2.79 Colorado 1,222,142 186,155 -0- 4,548 1,412,845 2.58 Other(a) 7,704,927 99,361 11 3,632 7,807,931 14.28 -------------- -------------- ---------- --------------- --------------- ----------- Totals $ 50,148,627 $ 4,514,639 $ 199 $ 29,117 54,692,582 100.00% ============== ============== ========== =============== =========== Net deferred loan costs 193,924 Allowance for loan losses (261,013) Undisbursed loan funds (7,171) Loans on deposits 16,672 --------------- Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 54,634,994 Loans securitized into FNMA MBS with recourse and MBS-REMICs (13,569,619)(b) ---------------- Total loans receivable $ 41,065,375 =============== (a) All states included in Other have total loan balances less than 2% of total loans. (b) The above schedule includes the December 31, 2001 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
The table below sets forth the composition of the Company's loan portfolio by type of collateral at December 31. TABLE 9 Loan Portfolio by Type of Security (Dollars in Thousands) 2002 2001 2000 1999 1998 ------------- -------------- --------------- -------------- ----------------- Loans collateralized first deeds of trust: One-to four-family units.............$ 54,934,357 $ 38,326,759 $ 31,353,927 $ 26,041,066 $ 21,639,015 Over four-family units............... 3,257,389 2,766,888 2,444,832 1,979,199 4,260,631 Commercial real estate............... 20,465 29,117 39,810 49,149 65,865 Land................................. 114 199 347 612 798 Loans on deposits....................... 13,240 16,672 21,429 20,107 25,279 Net deferred costs (fees)............... 331,985 193,924 145,709 66,840 (22,754) Allowance for loan losses............... (281,097) (261,013) (236,708) (232,134) (244,466) Undisbursed loan funds.................. (7,554) (7,171) (6,703) (5,022) (3,080) ------------- -------------- --------------- -------------- ----------------- Total loans receivable.............. 58,268,899 41,065,375 33,762,643 27,919,817 25,721,288 Loans securitized into MBS collateralized by: One-to four-family units............. 4,458,582 11,821,868 16,102,358 8,853,027 9,346,004 Over four-family units............... 1,412,487 1,747,751 2,022,629 2,294,874 -0- ------------- -------------- --------------- -------------- ----------------- Total loans securitized into MBS........ 5,871,069 13,569,619 18,124,987 11,147,901 9,346,004 ------------- -------------- --------------- -------------- ----------------- Loan portfolio including MBS $ 64,139,968 $ 54,634,994 $ 51,887,630 $ 39,067,718 $ 35,067,292 ============= ============== =============== ============== =================
At December 31, 2002, 99.6% of the loans in the portfolio (including loans securitized into MBS) had remaining terms to maturity in excess of 10 years. The following table sets forth the amount of loans due after one year that have fixed interest rates and the amount that have adjustable interest rates at December 31, 2002. TABLE 10 Loans Due After One Year (Dollars in Thousands) Loans Securitized Loans into MBS Receivable Total ----------------- ---------------- ----------------- Adjustable Rate $5,515,045 $56,270,782 $61,785,827 Fixed Rate 355,154 1,977,766 2,332,920 ----------------- ---------------- ----------------- $5,870,199 $58,248,548 $64,118,747 ================= ================ =================
The following table sets forth information concerning new loans made by the Company during 2002, 2001, and 2000 by type and purpose of loan. TABLE 11 New Mortgage Loan Originations by Type and by Purpose (Dollars in Thousands) 2002 2001 2000 ----------------------------------- ----------------------------------- -------------------------------- No. of % of No. of % of No. of % of By Type Loans Amount Total Loans Amount Total Loans Amount Total - -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ ------- Residential (one unit) 117,664 $24,946,030 93.4% 97,224 $19,501,525 93.9% 108,539 $18,627,153 94.2% Residential (2 to 4 units) 3,456 817,466 3.1 2,495 575,585 2.8 2,238 478,297 2.4 Residential (5 or more units) 1,265 919,394 3.5 1,105 686,127 3.3 941 677,237 3.4 --------- ------------ ------- --------- ------------ ------- -------- ------------ ------- Totals 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0% 111,718 $19,782,687 100.0% ========= ============ ======= ========= ============ ======= ======== ============ ======= 2002 2001 2000 ----------------------------------- ----------------------------------- -------------------------------- No. of % of No. of % of No. of % of By Purpose Loans Amount Total Loans Amount Total Loans Amount Total - -------------------- --------- ------------ ------- --------- ------------ ------- -------- ------------ ------- Purchase 48,292 $10,188,265 38.2% 45,989 $ 8,604,296 41.4% 79,038 $13,045,821 65.9% Refinance 74,093 16,494,625 61.8 54,835 12,158,941 58.6 32,680 6,736,866 34.1 --------- ------------ ------- --------- ------------ ------- -------- ------------ ------- Totals 122,385 $26,682,890 100.0% 100,824 $20,763,237 100.0% 111,718 $19,782,687 100.0% ========= ============ ======= ========= ============ ======= ======== ============ =======
New mortgage loan originations in 2002, 2001, and 2000 amounted to $26.7 billion, $20.8 billion, and $19.8 billion, respectively. The volume of originations increased during 2002 due to the continued strong demand for mortgage loans and an increase in the popularity of adjustable rate mortgages, the Company's principal product. The volume of originations during 2001 increased due to an increase in the market demand for loans. The Company sells most of its new fixed-rate loans. First mortgages originated for sale were $1.7 billion, $2.2 billion, and $114 million for the years ended December 31, 2002, 2001, and 2000, respectively. The volume of loans originated for sale was high in 2002 and in 2001 as compared to 2000 due to an increase in fixed-rate mortgage originations caused by consumer preference for these loans in the prevailing low interest rate environment. During 2002, 2001, and 2000, $596 million, $794 million, and $29 million, respectively, of loans, including MBS, were converted at the customer's request from adjustable rate to fixed-rate. The Company also sells most of its converted fixed-rate loans. The Company sold $2.3 billion, $2.7 billion, and $152 million of fixed-rate first mortgage loans during 2002, 2001, and 2000, respectively. The Company recognized pre-tax gains on the sale of loans of $42 million in 2002 compared to $43 million in 2001 and $10 million in 2000. Included in the gains in 2002, 2001, and 2000 were $34 million, $42 million, and $3 million, respectively, due to the capitalization of mortgage servicing rights (see page 19 for further information). At December 31, 2002, the loans held for sale portfolio had a balance of $381 million, all of which were carried at the lower of cost or market. The largest source of mortgage originations is loans secured by residential properties in California. Loans originated in California were $17.9 billion in 2002 compared to $14.4 billion in 2001 and $12.4 billion in 2000. In 2002, 67% of total origination volume was secured by California residential property compared to 70% in 2001 and 63% in 2000. The five largest states, other than California, for originations for the year ended December 31, 2002, were Florida, Texas, New Jersey, Washington, and Colorado with a combined total of 17% of total originations. The percentage of loans originated in California has remained consistently high during the three years under discussion due to the strong California real estate market. The percentage of the total loan portfolio (including MBS, except purchased MBS) that was comprised of residential loans in California was 64% in 2002 compared to 64% in 2001 and 63% in 2000. Federal regulations permit federally chartered savings banks to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the savings bank but which must be readily available to, and independently verifiable by, the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or term. Pursuant to the aforementioned powers, the Company offers adjustable rate mortgages, and this type of mortgage is the Company's primary real estate loan. The portion of the mortgage portfolio (including securitized loans and MBS) composed of adjustable rate loans was 96% at yearend 2002 compared to 94% at yearend 2001 and 95% at yearend 2000. The Company's ARM originations constituted approximately 92% of new mortgage loans made by the Company in 2002, compared with 84% in 2001 and 96% in 2000. Golden West originates ARMs tied primarily to the Certificate of Deposit Index (CODI), the Eleventh District Cost of Funds Index (COFI), and Golden West Cost of Savings Index (COSI). Prior to 2001, the Company also originated ARMS tied to the twelve-month rolling average of One-Year Treasury Constant Maturity (TCM). For a description of these indexes, see page 47 in Item 7. The following table shows the distribution of ARM originations by index for the years ended December 31, 2002, 2001, and 2000. TABLE 12 Adjustable Rate Mortgage Originations by Index (Dollars in Thousands) ARM Index 2002 2001 2000 - ----------------------------- ----------------- ----------------- ------------------ CODI $13,173,161 $ 554,390 $ -0- COFI 3,370,412 9,813,174 5,701,413 COSI 7,899,702 7,064,962 12,872,834 TCM -0- -0- 470,171 ----------------- ----------------- ------------------ $24,443,275 $17,432,526 $19,044,418 ================= ================= ==================
The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS) at December 31, 2002, 2001, and 2000. TABLE 13 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS) (Dollars in Thousands) ARM Index 2002 2001 2000 - ---------------------------- ----------------- ----------------- ----------------- CODI $13,286,566 $ 552,746 $ -0- COFI 24,755,498 29,010,008 27,405,401 COSI 22,070,692 20,943,596 20,460,242 Other (a) 1,657,386 1,288,050 1,640,010 ----------------- ----------------- ----------------- $61,770,142 $51,794,400 $49,505,653 ================= ================= ================= (a) Includes equity lines of credit tied to the prime rate and ARMs tied to the TCM.
Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain indexes. The Company also offers a "modified" ARM, a loan that offers an introductory rate generally below the initial fully indexed contract rate for a specified period, normally one to 12 months. However, the borrower must qualify at the initial fully indexed contract rate. During the life of a typical ARM loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including securitized ARM loans, FNMA MBS, and MBS-REMICs before any reduction for loan servicing fees) was 12.13%, or 6.74% above the actual weighted average rate at December 31, 2002, versus 12.21%, or 5.77% above the weighted average rate at yearend 2001 and 12.28% or 4.17% above the weighted average rate at yearend 2000. The following table shows the Company's ARM loans by lifetime cap bands as of December 31, 2002. TABLE 14 Adjustable Rate Mortgage Portfolio by Lifetime Cap Bands December 31, 2002 (Dollars in Thousands) ARM Number % of Total Cap Bands Balance of Loans Balance --------------------------------- --------------- ---------------- --------------- Less than 9.00% $ 4,507 22 .0% 9.00% - 9.49% 107 1 .0% 9.50% - 9.99% 542 5 .0% 10.00% - 10.49% 8,556 22 .0% 10.50% - 10.99% 6,437 31 .0% 11.00% - 11.49% 80,362 605 .1% 11.50% - 11.99% 48,731,800 242,488 78.9% 12.00% - 12.49% 5,235,229 36,444 8.5% 12.50% - 12.99% 4,203,137 20,031 6.8% 13.00% - 13.49% 245,298 1,335 .4% 13.50% - 13.99% 749,410 6,012 1.2% 14.00% or greater 2,469,418 38,956 4.0% No Cap 35,339 355 .1% ---------------- ---------------- ---------------- Total $61,770,142 346,307 100.0% ================ ================ ================
Approximately $5.2 billion of the Company's ARMs (including MBS with recourse held to maturity) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of December 31, 2002, $2.0 billion of ARM loans had reached their rate floors compared with $560 million at December 31, 2001 and $144 million at December 31, 2000. The weighted average floor rate on the loans that had reached their floor was 5.87% at yearend 2002 compared to 7.15% at yearend 2001 and 8.01% at yearend 2000. Without the floor, the average rate on these loans would have been 5.19% at December 31, 2002, 5.91% at December 31, 2001, and 7.80% at December 31, 2000. On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase of 7-1/2% of the prior year's payment. If the contractual payment is not large enough to cover the interest due on the loan, the customer has the option of paying the portion of interest not covered by the payment or adding such interest to the balance of the loan. The portion of interest not covered by the payment that is added to the balance of the loan is referred to as deferred interest. At five-year intervals beginning in the sixth or eleventh year, the payment may be adjusted without limit to amortize the loan fully within the then-remaining term. Within these five-year periods, deferred interest may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount. If deferred interest reaches these limits, the Company may increase the loan payment to amortize the loan over its then-remaining term. On certain other ARMs, the payment and interest rate may change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation. Most of the Company's loans are collateralized by first deeds of trust on one-to four- family homes. The Company also originates second deeds of trust in the form of fixed-rate loans. The Company's fixed-rate second mortgage originations amounted to $160 million, $279 million, and $547 million for the years ended December 31, 2002, 2001, and 2000, respectively. The outstanding balance of fixed-rate seconds amounted to $215 million, $362 million, and $491 million at December 31, 2002, 2001 and 2000, respectively. The Company also establishes equity lines of credit (ELOCs) indexed to the prime rate which are collateralized by first or second deeds of trust. The Company established new ELOCs totaling $1.2 billion, $422 million, and $66 million for the years ended December 31, 2002, 2001, and 2000, respectively. The outstanding balance of ELOCs amounted to $999 million, $303 million, and $40 million at December 31, 2002, 2001, and 2000, respectively. The maximum total line of credit available on the Company's ELOCs amounted to $1.5 billion, $458 million, and $67 million at December 31, 2002, 2001, and 2000, respectively. The Company generally lends up to 80% of the appraised value of residential real property. In some cases, a higher amount is possible through a first mortgage loan or a combination of a first and a second mortgage loan on the same property. The second loan may be a fixed-rate loan or an adjustable rate equity line of credit. For the year ended December 31, 2002, 13% of loans originated exceeded 80% of the appraised value of the property compared to 13% for the year ended December 31, 2001 and 19% for the year ended December 31, 2000. The Company takes steps to reduce the potential credit risk with respect to loans with a loan to value (LTV) or a combined LTV (the sum of the first and second loan balances as a percentage of total value) over 80%. Among other things, the loan amount may not exceed 95% of the appraised value of a single-family residence at the time of origination. Also, most first mortgage loans with an LTV over 80% carry mortgage insurance, which reimburses the Company for losses up to a specified percentage per loan, thereby reducing the effective LTV to below 80%. Furthermore, the Company sells without recourse a significant portion of its second mortgage originations. Sales of second mortgages amounted to $139 million, $184 million, and $198 million in 2002, 2001, and 2000, respectively. In addition, the Company carries pool mortgage insurance on ELOCs and most fixed-rate seconds not sold. The cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the original balance of each insured pool. The following table shows mortgage originations with LTV ratios or combined LTV ratios greater than 80% for the years ended December 31, 2002, 2001, and 2000. TABLE 15 Mortgage Originations With Loan to Value and Combined Loan to Value Ratios Greater than 80% (Dollars in Thousands) For the Year Ended December 31 ------------------------------------------------------ 2002 2001 2000 ---------------- --------------- --------------- First mortgages with loan to value ratios greater than 80%: With mortgage insurance $ 292,210 $ 225,464 $ 124,066 With no mortgage insurance 70,478 123,387 229,397 ---------------- --------------- --------------- 362,688 348,851 353,463 ---------------- --------------- --------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 2,412,821 1,354,754 2,549,049 With no pool insurance 611,044 911,214 924,538 ---------------- --------------- --------------- 3,023,865 2,265,968 3,473,587 ---------------- --------------- --------------- Total $3,386,553 $ 2,614,819 $ 3,827,050 ================ =============== ===============
The following table shows the outstanding balance of mortgages with original LTV or combined LTV ratios greater than 80% at December 31, 2002, 2001, and 2000. TABLE 16 Balance of Mortgages With Loan to Value and Combined Loan to Value Ratios Greater than 80% (Dollars in Thousands) As of December 31 ------------------------------------------------------ 2002 2001 2000 ---------------- --------------- --------------- First mortgages with loan to value ratios greater than 80%: With mortgage insurance $ 553,747 $ 431,498 $ 388,625 With no mortgage insurance 293,851 548,507 823,864 ---------------- --------------- -------------- 847,598 980,005 1,212,489 ---------------- --------------- -------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 3,699,519 2,396,954 2,193,990 With no pool insurance 292,104 454,289 722,703 ---------------- --------------- -------------- 3,991,623 2,851,243 2,916,693 ---------------- --------------- -------------- Total $4,839,221 $ 3,831,248 $ 4,129,182 ================ =============== ==============
The Company requires title insurance for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are security for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most loans having original terms of 30 years. However, the majority of these loans remain outstanding for a shorter period of time. To generate income and to provide additional funds for lending and liquidity, the Company sells first mortgages to FNMA without recourse. The Company also sells first mortgages to FNMA with recourse, for which a recourse liability is provided. The Company continues to collect payments on the loans sold to FNMA as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on FNMA's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income. The Company also sells second mortgages without recourse privately on a servicing released basis and to FNMA on a servicing retained basis. At December 31, 2002, the balance of loans sold with recourse was $2.9 billion. In addition to the loan portfolio (including MBS with recourse and MBS-REMICs), the Company was engaged in servicing approximately $5.4 billion of loan participations and whole loans for others at December 31, 2002. For each of the years ended December 31, 2002, 2001, and 2000, fees received for such servicing activities totaled $16 million, $35 million, and $28 million, respectively. Loan repayments consist of monthly loan amortization and loan payoffs. For the years ended 2002, 2001, and 2000, loan repayments amounted to $12.3 billion, $9.2 billion, and $4.5 billion, respectively. The increase in repayments in 2002 was due primarily to an increase in the balance of loans receivable. The increase in repayments in 2001 was due to an increase in loanpayoffs. In addition to interest earned on loans, the Company receives points and fees for originating loans. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments, and other miscellaneous services. The following table sets forth information relating to interest rates and loan points charged for the years indicated. TABLE 17 Weighted Average Interest Rates and Points on New Loan Originations(a) 2002 2001 2000 1999 1998 ---------- ---------- ---------- ----------- ---------- Fully-indexed weighted average interest rate on new real estate loans originated 5.86% 7.72% 8.24% 7.60% 7.72% Current weighted average interest rate on new real estate loans originated(b) 4.32% 5.59% 6.18% 5.97% 6.20% Weighted average points received on new real estate loans originated .14% .20% .10% .16% .26% (a) Excludes loans purchased. (b) The current rate reflects the introductory rate on new loans being paid by the borrower.
If a borrower fails to make required payments on a loan, the Company takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted. Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a purchase money residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of the property and the amount owed by the borrower. Securitized Loans Subsequent to March 31, 2001, the effective date of SFAS 140, the Company securitized $6.0 billion of loans in 2001 and $18.9 billion of loans in 2002. These securities are classified as loans receivable on the Statement of Financial Position per SFAS 140 and are available to be used as collateral for borrowings. Mortgage Servicing Rights Capitalized mortgage servicing rights (CMSRs) are included in "Other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the years ended 2002, 2001, and 2000. TABLE 18 Capitalized Mortgage Servicing Rights (Dollars in Thousands) 2002 2001 2000 ------------ ------------- ------------- Beginning balance of CMSRs $56,056 $28,355 $37,295 New CMSRs from loan sales 34,044 41,587 3,404 Amortization of CMSRs (20,652) (13,886) (12,344) ------------ ------------- ------------- Ending balance of CMSRs $69,448 $56,056 $28,355 ============ ============= =============
The estimated amortization of the December 31, 2002 balance for the five years ending 2007 is $29.4 million (2003), $19.0 million (2004), $12.1 million (2005), $6.9 million (2006), and $2.0 million (2007). Actual results may vary depending upon the level of the payoffs of the loans currently serviced. The book value of the Company's CMSRs did not exceed the fair value at December 31, 2002, 2001, or 2000 and, therefore, no reserve was required to adjust the servicing rights to their fair value. Asset Quality An important measure of the soundness of the Company's loan and MBS portfolio is its ratio of nonperforming assets (NPAs) and troubled debt restructured (TDRs) to total assets. Nonperforming assets include nonaccrual loans (that is, loans, including loans securitized into MBS with recourse and loans securitized into MBS-REMICs, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's TDRs are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The following table sets forth the components of the Company's NPAs and TDRs and the various ratios to total assets at December 31. TABLE 19 Nonperforming Assets and Troubled Debt Restructured (Dollars in Thousands) 2002 2001 2000 1999 1998 ------------- ------------- ------------ ------------- ------------- Non-accrual loans $ 413,123 $382,510 $231,155 $225,409 $262,332 Real estate acquired through foreclosure 11,244 11,101 8,261 10,909 42,646 ------------- ------------- ------------ ------------- ------------- Total nonperforming assets $ 424,367 $393,611 $239,416 $236,318 $304,978 ============= ============= ============ ============= ============= TDRs, net of interest reserve $ 233 $ 1,505 $ 1,933 $ 10,542 $ 22,774 ============= ============= ============ ============= ============= Ratio of NPAs to total assets .62% .67% .43% .56% .79% ============= ============= ============ ============= ============= Ratio of TDRs to total assets .00% .00% .00% .03% .06% ============= ============= ============ ============= ============= Ratio of NPAs and TDRs to total assets .62% .67% .43% .59% .85% ============= ============= ============ ============= =============
NPAs at yearend 2002 and 2001 reflected the normal increase in delinquencies associated with the aging of the large volume of mortgages originated during the past two years together with the uncertain U.S. economy. The lower level of NPAs during 2000 and 1999 reflected the strong economy and housing market in those years. The Company closely monitors all delinquencies and takes appropriate steps to protect its interests. The Company mitigates its credit risk through strict underwriting standards and loan reviews. Interest foregone on non-accrual loans (loans 90 days or more past due) amounted to $3 million in 2002, $10 million in 2001, and $4 million in 2000. Interest foregone on TDRs amounted to $6 thousand in 2002 compared to $46 thousand in 2001 and $181 thousand in 2000. The tables on the following page show the Company's nonperforming assets by state at December 31, 2002 and 2001. TABLE 20 Nonperforming Assets by State December 31, 2002 (Dollars in Thousands) Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE) -------------------------------------------- ----------------------------------- Residential Commercial Residential Commercial NPAs as Real Estate Real Real Estate Real Total a % of State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans - --------------------- ------------- --------- ---------------- ---------- -------- ----------- --------- ---------- Northern California $ 96,805 $ -0- $ 221 $ 1,300 $ -0- $ -0- $ 98,326 .43% Southern California 104,059 -0- 309 2,031 -0- -0- 106,399 .58 Florida 35,055 -0- 15 410 -0- -0- 35,480 1.03 Texas 29,143 -0- 442 808 -0- -0- 30,393 1.14 New Jersey 18,256 -0- 622 -0- -0- -0- 18,878 .79 Washington 16,257 433 -0- 1,499 -0- -0- 18,189 .92 Illinois 13,656 1,507 -0- 862 -0- -0- 16,025 .96 Colorado 5,331 64 -0- -0- -0- -0- 5,395 .34 Other(c) 90,948 -0- -0- 4,604 -0- -0- 95,552 1.01 ------------- --------- ---------------- ---------- -------- ----------- --------- ----------- Totals $409,510 $2,004 $ 1,609 $11,514 $ -0- $ -0- 424,637 .66 - --------------------- ============= ========= ================ ========== ======== =========== FRE general valuation allowance (270) (.00) --------- ---------- Total nonperforming assets $424,367 .66% ========= =========== (a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans. (b) The December 31, 2002 balances include loans that were securitized into MBS. (c) All states included in Other have total loans balances with less than 2% of total loans.
TABLE 21 Nonperforming Assets by State December 31, 2001 (Dollars in Thousands) Non-Accrual Loans(a) (b) Foreclosed Real Estate (FRE) -------------------------------------------- ---------------------------------- Residential Commercial Residential Commercial NPAs as Real Estate Real Real Estate Real Total a % of State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs Loans - --------------------- ------------- --------- ---------------- ---------- -------- ----------- --------- ---------- Northern California $ 71,038 $ 496 $ 103 $ 55 $ -0- $ -0- $ 71,692 .39% Southern California 131,975 707 611 2,399 -0- -0- 135,692 .81 Florida 32,674 -0- 23 590 -0- -0- 33,287 1.19 Texas 17,713 -0- -0- 1,795 -0- -0- 19,508 .87 New Jersey 16,663 -0- -0- 484 -0- -0- 17,147 .86 Washington 10,427 421 -0- 317 -0- -0- 11,165 .64 Illinois 16,507 -0- -0- 512 215 -0- 17,234 1.13 Colorado 3,445 -0- -0- -0- -0- -0- 3,445 .24 Other(c) 79,396 298 13 5,051 -0- -0- 84,758 1.09 ------------- ---------- ---------------- --------- -------- ----------- --------- ----------- Totals $379,838 $1,922 $ 750 $11,203 $ 215 $ -0- 393,928 .72 - --------------------- ============ ========== ================ ========= ======== =========== FRE general valuation allowance (317) (.00) --------- ------- Total nonperforming assets $393,611 .72% ========= ======= (a) Non-accrual loans are 90 days or more past due and interest is not recognized on these loans. (b) The December 31, 2001 balances include loans that were securitized into MBS. (c) All states included in Other have total loan balances with less than 2% of total loans.
A risk profile of loans, including securitized loans, is displayed by components in the following table as of December 31, 2002: TABLE 22 Risk Profile of Loans and Securitized Loans December 31, 2002 (Dollars in Thousands) Residential Real Estate Commercial 1 - 4 5+ Real Estate Total ---------------- -------------- ---------------- --------------- Nonaccural loans $ 409,510 $ 2,004 $ 1,609 $ 413,123 Loans 30 to 89 days past due 752,203 2,398 18 754,619 Loans performing under bankruptcy protection 172,874 -0- -0- 172,874 Troubled debt restructured 314 -0- -0- 314 Other impaired loans 24 291 3,574 3,889 Performing loans (including MBS) not otherwise classified 58,058,014 4,665,183 15,378 62,738,575 ---------------- -------------- ---------------- --------------- Total gross loans $ 59,392,939 $ 4,669,876 $ 20,579 64,083,394 ================ ============== ================ Net deferred costs 331,985 Allowance for loan losses (281,097) Undisbursed loan funds (7,554) Loans on deposits 13,240 --------------- Total loan portfolio and loans securitized into MBS-REMICs $64,139,968 ===============
TABLE 23 Risk Profile of Loans and Securitized Loans December 31, 2001 (Dollars in Thousands) Residential Real Estate Commercial 1 - 4 5+ Real Estate Total ---------------- -------------- ---------------- --------------- Nonaccural loans $ 379,838 $ 1,922 $ 750 $ 382,510 Loans 30 to 89 days past due 757,252 2,771 -0- 760,023 Loans performing under bankruptcy protection 167,836 726 132 168,694 Troubled debt restructured -0- 1,582 -0- 1,582 Other impaired loans 371 7,525 3,329 11,225 Performing loans (including MBS) not otherwise classified 48,843,330 4,500,113 25,105 53,368,548 ---------------- -------------- ---------------- --------------- Total gross loans $ 50,148,627 $ 4,514,639 $ 29,316 54,692,582 ================ ============== ================ Net deferred costs 193,924 Allowance for loan losses (261,013) Undisbursed loan funds (7,171) Loans on deposits 16,672 --------------- Total loan portfolio and loans securitized into FNMA MBS and MBS-REMICs $54,634,994 ===============
The Company provides specific valuation allowances for losses on major loans when impaired and a write-down on foreclosed real estate when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating probable loan losses that is based on both the Company's historical loss experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. This process also takes into consideration current trends in economic growth, unemployment, housing market activity, and home prices for the nation and individual geographic regions. This approach further considers the impact of other events such as natural disasters. Based on the analysis of historical performance, current conditions, and other risks, management estimates a range of loss allowances by type of loan and risk category to cover probable losses in the portfolio. One-to-four single-family real estate loans are evaluated as a group. In addition, periodic reviews are made of major multi-family and commercial real estate loans and foreclosed real estate. Where indicated, valuation allowances are established or adjusted. In estimating probable losses, consideration is given to the estimated sale price, cost of refurbishing the security property, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings based upon quarterly reviews of the portfolio and the review methodology and historical analyses are reconsidered quarterly. The table below shows the changes in the allowance for loan losses for the years indicated. TABLE 24 Changes in Allowance for Loan Losses (Dollars in Thousands) 2002 2001 2000 1999 1998 ------------ ------------- ------------ ------------ ------------ Beginning allowance for loan losses $ 261,013 $ 236,708 $ 232,134 $ 244,466 $ 233,280 Provision for (recovery of) loan losses charged to expense 21,170 22,265 9,195 (2,089) 11,260 Loans charged off (1,943) (2,425) (623) -0- (1,387) Recoveries 857 351 472 1,800 1,313 Net transfer of allowance (to) from recourse liability -0- 4,114 (4,470) (12,043) -0- ------------ ------------- ------------ ------------ ------------ Ending allowance for loan losses $ 281,097 $ 261,013 $ 236,708 $ 232,134 $ 244,466 ============ ============= ============ ============ ============ Ratio of net chargeoffs (recoveries) to average loans outstanding (including MBS with recourse and MBS-REMICs) .00% .00% .00% (.01)% .00% ============ ============= ============ ============ ============ Ratio of allowance for loan losses to NPAs 66.2% 66.3% 98.9% 98.2% 80.2% ============ ============= ============ ============ ============
The table below shows the composition of the allowance for loan losses at December 31. TABLE 25 Composition of Allowance for Loan Losses (Dollars in Thousands) 2002 2001 2000 1999 1998 ------------ ------------- ------------- ------------ ------------- Real Estate 1 to 4 units General $263,004 $240,135 $213,507 $200,499 $184,357 Specific -0- -0- -0- 369 363 ------------ ------------- ------------- ------------ ------------- 263,004 240,135 213,507 200,868 184,720 ------------ ------------- ------------- ------------ ------------- 5+ units and commercial General 16,521 18,166 19,165 22,192 41,700 Specific 1,572 2,712 4,036 9,074 18,046 ------------ ------------- ------------- ------------ ------------- 18,093 20,878 23,201 31,266 59,746 ------------ ------------- ------------- ------------ ------------- Total $281,097 $261,013 $236,708 $232,134 $244,466 ============ ============= ============= ============ ============= Ratio of allowance for loan losses to total loans (including MBS with recourse and MBS-REMICs) .44% .48% .46% .59% .70% ============ ============= ============= ============ =============
The increase in the allowance account during 2002 reflected the uncertain U.S. economy. The increase in the allowance account during 2001 reflected the increase in NPAs and the recessionary economy. The impact of the favorable economy and housing environment during 2000 and 1999 is reflected in the components of the allowance account. Investment Activities The Company classifies its investment securities as available for sale. The Company has no trading securities. Securities available for sale are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. In 2000, the Company had Other Investments, which were recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. The Company had no Other Investments outstanding at December 31, 2001 or 2002. The table below sets forth the composition of the Company's securities available for sale at December 31. TABLE 26 Composition of Securities Available for Sale (Dollars in Thousands) 2002 2001 2000 --------------- -------------- -------------- Eurodollar time deposits $ 225,000 $ 200,000 $ -0- Commercial paper 199,986 -0- -0- Federal funds 153,838 49,397 -0- Equity securities 331,861 367,548 387,077 Other 11,492 5,725 5,764 --------------- -------------- -------------- $ 922,177 $ 622,670 $ 392,841 =============== ============== ==============
Included in the balances above are net unrealized gains on investment securities available for sale of $326 million, $362 million, and $382 million at December 31, 2002, 2001, and 2000, respectively. The cost basis of the securities available for sale portfolio at December 31, 2002, 2001, and 2000 was $596 million, $260 million, and $11 million, respectively, and had weighted average yields (based on cost) of 1.94%, 2.86%, and 38.31% at December 31, 2002, 2001, and 2000, respectively. The yield in 2000 primarily reflects the effect of the high yield on the Federal Home Loan Mortgage Corporation stock because of its low cost basis. The table below sets forth the composition of the Company's Other Investments at December 31. TABLE 27 Composition of Other Investments (Dollars in Thousands) 2000 -------------- Overnight Investments: Federal funds $ 318,736 Eurodollar time deposits 40,000 Longer-Term Investments: Collateralized mortgage obligations 9,819 -------------- $ 368,555 ==============
At December 31, 2002 and 2001, the Company had no Other Investments outstanding. The weighted average yield on the Other Investments portfolio was 6.21% at December 31, 2000. There were no sales of other investments during 2000. Stockholders' Equity The Company's stockholders' equity increased by $741 million during 2002 as a result of earnings partially offset by the $173 million cost of the repurchase of Company stock, decreased market values of equity securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $597 million during 2001 as a result of net earnings partially offset by the $186 million cost of the repurchase of Company stock, decreased market values of securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $492 million during 2000 as a result of net earnings and increased market values of securities available for sale partially offset by the $109 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. Since 1993, through five separate actions, the Company's Board of Directors has authorized the purchase by the Company of up to 60.6 million shares of Golden West's common stock. As of December 31, 2002, 49.3 million shares had been repurchased and retired at a cost of $1.3 billion since October 28, 1993, including 2.7 million shares purchased and retired at a cost of $173 million during 2002. Earnings from WSB are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the Statement of Financial Condition and measure those instruments at fair value. The Company adopted SFAS 133 as of January 1, 2001 and recorded a loss of $10 million before tax, or $6 million after tax. Because the Company has decided not to use permitted hedge accounting for the derivative financial instruments in portfolio on December 31, 2002 and 2001, the changes in fair value of these instruments are reported in Noninterest Income as the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net Earnings. In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). This statement replaces previously issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. From time to time, the Company securitizes loans from its portfolio into MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date, the Company has not sold any interests requiring disclosure under SFAS 140. In accordance with SFAS 140, the Company's securitizations after March 31, 2001 resulted in securities classified as securitized loans and recorded as loans receivable. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and the normal operation of a long-lived asset, except for certain obligations of lessees. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) which requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. In addition, this statement resolves implementation issues of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost should be recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company believes that SFAS 146 will not have a significant impact on its financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147), which provides guidance on the accounting for the acquisition of a financial institution. This statement was effective on October 1, 2002. The adoption of SFAS 147 had no impact on the Company's financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. This statement is effective for interim periods beginning after December 15, 2002. The Company is still considering the impact of the adoption of this statement. Earnings Per Share (EPS) The Company reported Basic EPS of $6.20 for the year ended December 31, 2002, compared to $5.18 (before the cumulative effect of accounting change) and $3.44 for the years ended December 31, 2001 and 2000, respectively. The Company reported Diluted EPS of $6.12 for the year ended December 31, 2002 as compared to $5.11 (before the cumulative effect of accounting change) and $3.41 for the years ended December 31, 2001 and 2000, respectively. Yield on Interest-Earning Assets/Cost of Funds Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 2002, 2001, and 2000 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference. The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2002, and is incorporated herein by reference. The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities. TABLE 28 Average Interest-Earning Assets and Interest-Bearing Liabilities At and for the Years Ended December 31 (Dollars in Thousands) 2002 2001 2000 --------------------------------- ------------------------------- ----------------------------- End of End of End of Average Average Period Average Average Period Average Average Period Balances (a) Yield Yield Balances Yield Yield Balances Yield Yield ------------- --------- --------- ------------ -------- --------- ----------- --------- ------- ASSETS Investment securities $ 3,119,920 1.98% 1.94% $ 3,200,407 4.30% 2.86% $ 2,966,636 6.61% 7.12% Mortgage-backed securities 8,343,896 5.88 5.64 17,264,807 7.39 6.35 14,040,134 7.64 7.98 Loans receivable(b) 50,840,594 5.69 5.25 36,566,720 7.49 6.39 31,970,102 7.73 8.05 Invest. in capital stock of FHLBs 1,055,015 4.88 3.91 1,084,383 5.10 3.51 788,306 7.40 6.53 ----------- --------- ------------ -------- ----------- --------- Interest-earning assets $63,359,425 5.52% $ 58,116,317 7.24% $49,765,178 7.63% =========== ========= ============ ======== =========== ========= LIABILITIES Deposits: Checking accounts $ 144,490 1.55% 1.23% $ 122,451 2.56% 1.33% $ 134,424 2.19% 2.91% Savings accounts 19,886,169 2.52 2.35 9,317,765 3.28 2.50 8,376,899 3.82 3.66 Term accounts 17,203,402 3.35 2.99 23,220,480 5.23 3.99 20,622,941 5.68 6.10 ------------- --------- --------- ------------ -------- --------- ----------- --------- ------- Total deposits 37,234,061 2.90 2.56 32,660,696 4.66 3.39 29,134,264 5.13 5.52 Advances from FHLBs 18,468,723 2.06 1.68 18,738,987 4.70 2.55 15,087,379 6.37 6.65 Reverse repurchases 122,389 1.49 1.31 917,287 4.59 1.96 1,399,580 6.18 6.56 Other borrowings 4,195,270 2.51 3.26 2,949,185 4.54 6.81 1,462,410 7.08 7.17 ------------- --------- ------------ -------- ----------- --------- Interest-bearing liabilities $60,020,443 2.61% $ 55,266,155 4.67% $47,083,633 5.62% ============= ========= ============ ======== =========== ========= Average net interest spread 2.91% 2.57% 2.01% ========= ======== ========= Net interest income $ 1,930,294 $ 1,631,332 $ 1,151,168 ============= ============ =========== Net yield on average interest-earning assets 3.05% 2.81% 2.31% ========= ======== ========= (a) Averages are computed using daily balances. (b) Includes nonaccrual loans (90 days or more past due).
The table below presents the changes for 2002 and 2001 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates. TABLE 29 Volume and Rate Analysis of Interest Income and Interest Expense Years Ended December 31 (Dollars in Thousands) Increase/(Decrease) in Income/Expense Due to Changes in Volume and Rate(a) -------------------------------------------------------------------- 2002 2001 2000 2002 versus 2001 2001 versus 2000 ---------- ---------- ---------- --------------------------------- -------------------------------- Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------- --------- Interest Income Investments $ 61,750 $ 137,562 $ 196,092 $ (3,377) $(72,435) $ (75,812) $ 17,024 $ (75,554) $(58,530) Mortgage-backed securities 490,523 1,276,648 1,072,559 (562,848) (223,277) (786,125) 237,170 (33,081) 204,089 Loans receivable 2,893,299 2,740,101 2,469,556 399,189 (245,991) 153,198 341,651 (71,106) 270,545 Invest. in capital stock of Federal Home Loan Banks 51,462 55,301 58,333 (1,473) (2,366) (3,839) (17,583) 14,551 (3,032) ---------- ---------- ---------- Total interest income 3,497,034 4,209,612 3,796,540 Interest Expense Deposits Checking accounts 2,233 3,132 2,946 750 (1,649) (899) (212) 398 186 Savings accounts 501,681 305,532 319,594 246,215 (50,066) 196,149 55,980 (70,042) (14,062) Term accounts 576,023 1,213,664 1,171,907 (267,142) (370,499) (637,641) 114,997 (73,240) 41,757 ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------- --------- Total deposits 1,079,937 1,522,328 1,494,447 (20,177) (422,214) (442,391) 170,765 (142,884) 27,881 Advances from Federal Home Loan Banks 379,613 879,842 960,824 (12,512) (487,717) (500,229) 947,060 (1,028,042) (80,982) Securities sold under agreements to repurchase 1,826 42,113 86,549 (22,647) (17,640) (40,287) (25,428) (19,008) (44,436) Other borrowings 105,364 133,997 103,552 489,458 (518,091) (28,633) 47,017 (16,572) 30,445 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- --------- Total interest expense 1,566,740 2,578,280 2,645,372 ---------- ---------- ---------- Net interest income $1,930,294 $1,631,332 $1,151,168 $(602,631) $901,593 $ 298,962 $(561,152) $1,041,316 $480,164 ========== ========== ========== ========== ========== ========== ========== =========== ========= Net interest income increase (decrease) as a percentage of average earning assets(c) (.95%) 1.42% .47% (.96%) 1.79% .83% ========== ========== ========== ========== =========== ========= (a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of interest rate swap activity have been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due).
Competition and Other Matters The Company experiences strong competition in both attracting deposits and making real estate loans. Competition for savings deposits has historically come from other savings institutions, commercial banks, credit unions, the equities market, mutual funds, issuers of government and corporate debt securities, securities dealers, insurance companies, and other financial services providers. The principal methods used by the Company to attract deposits, in addition to the interest rates and terms offered, include the offering of a variety of free financial services, the convenience of over 260 office locations, and easy access to WSB's products and services over the Internet at www.worldsavings.com. Competition in making real estate loans comes principally from other savings institutions, mortgage banking companies, and commercial banks. Many of the nation's largest savings institutions, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which the Company competes. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their representatives. In addition, the Company competes indirectly with government-sponsored enterprises, notably the FNMA and the Federal Home Loan Mortgage Corporation. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. Thrift Industry The operations of the thrift industry are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. Regulation OFFICE OF THRIFT SUPERVISION. Because they are federally chartered savings institutions, both WSB and WTX are regulated principally by the OTS. Under various regulations of the OTS, savings institutions are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain a satisfactory level of liquid assets, and to comply with various limitations on loans to one borrower, equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade and comply with regulations governing deposits and mortgage loans. FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Each fund insures deposit accounts up to the maximum amount permitted by law, currently $100,000 per insured depositor. Initially, the BIF was a deposit insurance fund for commercial banks, federally chartered savings banks, and some state chartered savings banks and the SAIF was a deposit insurance fund for most other savings associations. Through the years, there has developed considerable overlap between the funds. WSB is a member of the BIF, but a portion of WSB's deposits are insured through the SAIF. At December 31, 2002, 10% of WSB's deposits were SAIF insured. WTX's deposits are also insured by the FDIC and WTX is a member of the BIF. FDIC insurance is required for all federally chartered financial institutions such as WSB and WTX. FDIC insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. During 1996, federal legislation was enacted to capitalize the SAIF in order to bring it into parity with the BIF. The new law required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered thrift deposit insurance premiums for SAIF members starting in 1997. As a result of this legislation, the Company incurred a one-time charge of $133 million during 1996. The premiums paid for the years 1997 through 1999 were adjusted quarterly and premiums paid starting 2000 were adjusted semi-annually. As of December 31, 2002, the premium paid by WSB and WTX to the FDIC was an annual rate of $.17 per $1,000 of deposits. FEDERAL RESERVE BOARD. Federal Reserve Board regulations require financial institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. WSB and WTX are currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings institutions have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings institutions to exhaust all FHLB sources before borrowing from the relevant Federal Reserve Bank. REGULATORY CAPITAL. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for federally insured financial institutions, such as WSB and WTX. Under FIRREA, savings institutions must have tangible capital equal to at least 1.5% of adjusted total assets, have core capital equal to at least 4% of adjusted total assets, and have risk-based capital equal to at least 8% of risk-weighted assets. The OTS and other bank regulatory agencies have established five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, the Tier 1 risk-based capital ratio is the ratio of core capital to risk-weighted assets, and the Tier 1 or leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. As of December 31, 2002, the most recent notification from the OTS categorized WSB and WTX as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of WSB or WTX. At December 31, 2002 and 2001, WSB and WTX had the following regulatory capital calculated in accordance with FIRREA's capital standards: TABLE 30 Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements As of December 31, 2002 (Dollars in Thousands) WELL-CAPITALIZED MINIMUM CAPITAL CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ------------------------- -------------------------- --------------------------- Capital Ratio Capital Ratio Capital Ratio -------------- ------- ---------------- ------- ---------------- ------- WSB and Subsidiaries - -------------------- Tangible $5,152,335 7.61% $ 1,015,695 1.50% --- --- Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00 $ 3,385,650 5.00% Tier 1 risk-based 5,152,335 13.52 --- --- 2,286,060 6.00 Total risk-based 5,431,860 14.26 3,048,080 8.00 3,810,101 10.00 WTX Tangible $ 413,885 5.23% $ 118,752 1.50% --- --- Tier 1 (core or leverage) 413,885 5.23 316,673 4.00 $ 395,841 5.00% Tier 1 risk-based 413,885 24.05 --- --- 103,277 6.00 Total risk-based 414,277 24.07 137,702 8.00 172,128 10.00
TABLE 31 Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements As of December 31, 2001 (Dollars in Thousands) WELL-CAPITALIZED MINIMUM CAPITAL CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ------------------------- -------------------------- --------------------------- Capital Ratio Capital Ratio Capital Ratio -------------- ------- ---------------- ------- ---------------- ------- WSB and Subsidiaries Tangible $4,480,834 7.71% $ 871,198 1.50% --- --- Tier 1 (core or leverage) 4,480,834 7.71 2,323,194 4.00 $ 2,903,992 5.00% Tier 1 risk-based 4,480,834 13.20 --- --- 2,037,158 6.00 Total risk-based 4,836,208 14.24 2,716,210 8.00 3,395,263 10.00 Tangible $ 401,886 5.23% $ 115,211 1.50% --- --- Tier 1 (core or leverage) 401,886 5.23 307,229 4.00 $ 384,036 5.00% Tier 1 risk-based 401,886 25.04 --- --- 96,289 6.00 Total risk-based 402,025 25.05 128,385 8.00 160,481 10.00
The table below shows a reconciliation of WSB's equity capital to regulatory capital at December 31, 2002. TABLE 32 World Savings Bank, FSB and Subsidiaries Reconciliation of Equity Capital to Regulatory Capital (Dollars in Thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------ ------------ ------------ ------------ Common stock $ 300 Paid-in surplus 2,145,764 Retained earnings 3,012,916 Unrealized gain on securities after tax 199,460 ------------ Equity capital $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440 $ 5,358,440 ============ Non-includable Subsidiary (2,971) (2,971) (2,971) (2,971) (2,971) Unrealized gain on securities after tax (199,460) (199,460) (199,460) (199,460) (199,460) Non-qualifying mortgage servicing rights (3,674) (3,674) (3,674) (3,674) (3,674) General valuation allowance 279,525 ------------ ------------ ------------ ------------ ------------ Regulatory capital $ 5,152,335 $ 5,152,335 $ 5,152,335 $ 5,152,335 $ 5,431,860 ============ ============ ============ ============ ============ Total assets $67,967,975 ============ Adjusted total assets $67,713,007 $67,713,007 $67,713,007 ============ ============ ============ Risk-weighted assets $38,101,006 $38,101,006 ============ ============ CAPITAL RATIO - ACTUAL 7.88% 7.61% 7.61% 7.61% 13.52% 14.26% ============ ============ ============ ============ ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============ ============
The table below shows a reconciliation of WSB's equity capital to regulatory capital at December 31, 2001. TABLE 33 World Savings Bank, FSB and Subsidiaries Reconciliation of Equity Capital to Regulatory Capital (Dollars in Thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------ ------------ ------------ ------------- Common stock $ 300 Paid-in surplus 2,145,764 Retained earnings 2,334,770 Unrealized gain on securities after tax 221,088 ------------ Equity capital $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922 $ 4,701,922 ============ Direct investments (2,927) Unrealized gain on securities after tax (221,088) (221,088) (221,088) (221,088) (221,088) General valuation allowance 258,301 Qualifying subordinated debt 100,000 ------------ ------------ ------------ ------------ ------------- Regulatory capital $ 4,480,834 $ 4,480,834 $ 4,480,834 $ 4,480,834 $ 4,836,208 ============ ============ ============ ============ ============= Total assets $58,377,834 ============ Adjusted total assets $58,079,843 $58,079,843 $58,079,843 ============ ============ ============ Risk-weighted assets $33,952,627 $ 33,952,627 ============ ============= CAPITAL RATIO - ACTUAL 8.05% 7.71% 7.71% 7.71% 13.20% 14.24% ============ ============ ============ ============ ============ ============= Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============ =============
The table below shows a reconciliation of WTX's equity capital to regulatory capital at December 31, 2002. TABLE 34 World Savings Bank, FSB (Texas) Reconciliation of Equity Capital to Regulatory Capital (Dollars in Thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------ ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 346,575 Retained earnings 67,160 ------------ Equity capital $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 413,885 ============ General valuation allowance 392 ------------ ------------ ------------ ------------ ------------- Regulatory capital $ 413,885 $ 413,885 $ 413,885 $ 413,885 $ 414,277 ============ ============ ============ ============ ============= Total assets $ 7,916,763 ============ Adjusted total assets $ 7,916,829 $ 7,916,829 $ 7,916,829 ============ ============ ============ Risk-weighted assets $ 1,721,275 $ 1,721,275 ============ ============= CAPITAL RATIO - ACTUAL 5.23% 5.23% 5.23% 5.23% 24.05% 24.07% ============ ============ ============ ============ ============ ============= Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============= ============ =============
The table below shows a reconciliation of WTX's equity capital to regulatory capital at December 31, 2001. TABLE 35 World Savings Bank, FSB (Texas) Reconciliation of Equity Capital to Regulatory Capital (Dollars in Thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------ ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 346,575 Retained earnings 55,161 ------------ Equity capital $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 401,886 ============ General valuation allowance 139 ------------ ------------ ------------ ------------ ------------ Regulatory capital $ 401,886 $ 401,886 $ 401,886 $ 401,886 $ 402,025 ============ ============ ============ ============ ============ Total assets $ 7,680,360 ============ Adjusted total assets $ 7,680,727 $ 7,680,727 $ 7,680,727 ============ ============ ============ Risk-weighted assets $ 1,604,811 $ 1,604,811 ============ ============ CAPITAL RATIO - ACTUAL 5.23% 5.23% 5.23% 5.23% 25.04% 25.05% ============ ============ ============ ============ ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============ ============
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides credit to its members, which include savings institutions, commercial banks, insurance companies, credit unions, and certain other entities. Each FHLB has joint and several liability for the obligations of the eleven other FHLBs in the system. WSB is a member of the FHLB of San Francisco and WTX is a member of the FHLB of Dallas. As members, WSB and WTX may obtain advances (borrowings) from, and must own capital stock of, their respective FHLB. Advances are secured by collateral pledges and a blanket lien on the assets of the institution. In the event a member bank, such as WSB or WTX, defaults on an advance, the Federal Home Loan Bank Act establishes priority of the FHLB's claim over various other claims. WSB and WTX must own an amount of capital stock that depends generally upon their outstanding FHLB advances. In the event a FHLB falls below its minimum capital requirements, the FHLB may require its members to purchase additional capital stock of the FHLB. CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS. See Item 5, "MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS" on page 41, for a discussion on certain limitations imposed by the OTS on dividends paid by savings institutions. During 2002, WSB paid $300 million in upstream dividends to Golden West. LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings institutions to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral.") At December 31, 2002, the maximum that WSB could have loaned to one borrower (and related entities) was $815 million, while the largest amount of loans it had to one borrower was $81 million. At December 31, 2002, the maximum amount that WTX could have loaned to one borrower (and related entities) was $62 million, while the largest amount of loans WTX had outstanding to any one borrower was $4 million. DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings bank, such as WSB, based upon the failure of the savings bank to meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of insured withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of certain debt of WSB). Thus, in the event of a liquidation of WSB or a similar event, claims for insured deposits would have a priority over claims of holders of certain debt. As of December 31, 2002, WSB had approximately $41 billion of deposits outstanding. POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as WSB or WTX, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate contracts extends to obligations such as the debt of the depository institution, and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation could be to accelerate the maturity of debt. Such repudiation would likely result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" above. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including debt contracts pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of the institution's creditors. In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the relevant deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience. SAVINGS AND LOAN HOLDING COMPANY LAW. Golden West is a "savings and loan holding company" under the Home Owners' Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation, and OTS examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company, and subsidiaries or affiliates of either. As WSB's parent company, Golden West is considered an "affiliate" of WSB for regulatory purposes. Savings banks are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h) of the Federal Reserve Act, and with respect to savings banks, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings institution from lending or otherwise extending credit to an affiliate, other than the institution's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank or financial services holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining affiliates of a savings institution and in calculating compliance with the quantitative limitations on transactions with affiliates. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 2002, WSB and WTX were in compliance with the QTL test. TAXATION. The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. The Company utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. Taxes as a percentage of earnings were 38.4% and 38.5% for the years ended 2002 and 2001, respectively. Included in taxes on income for 2002 was a non-recurring after-tax benefit of $2.7 million due to a change in the California tax law regarding reserves for loan losses. Employee Relations The Company had a total of 6,839 full-time and 1,002 permanent part-time employees at December 31, 2002. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good. Executive Officers of the Company The executive officers of the Company are as follows: Name and Age Position - ------------ -------- Herbert M. Sandler, 71 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 72 Chairman of the Board and Chief Executive Officer James T. Judd, 64 Senior Executive Vice President Russell W. Kettell, 59 President and Chief Financial Officer(a) Georganne C. Proctor, 46 Executive Vice President(b) Michael Roster, 57 Executive Vice President, General Counsel, and Secretary(c) Carl M. Andersen, 42 Group Senior Vice President and Tax Director(d) Roberta A. Conger, 55 Group Senior Vice President and Treasurer(e) William C. Nunan, 51 Group Senior Vice President and Chief Accounting Officer(f)
Each of the above persons holds the same position with WSB with the exceptions of James T. Judd who is President, Chief Operating Officer, and Director of WSB, and Russell W. Kettell who is a Senior Executive Vice President, Chief Financial Officer, and Director of WSB. Each executive officer has had the principal occupations shown for the prior five years except as follows: (a) Russell W. Kettell was elected Chief Financial Officer in December 1999 and has served as President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984 and from 1995 until 2002. (b) Georganne C. Proctor was elected Executive Vice President in February 2003. Prior thereto, Ms. Proctor was Chief Financial Officer for the Bechtel Group in San Francisco which provides engineering and construction services. (c) Michael Roster was elected Executive Vice President, General Counsel and Secretary in February 2000. Prior thereto, Mr. Roster was General Counsel at Stanford University. (d) Carl M. Andersen was elected Tax Director in 2002, Group Senior Vice President in 1999, and Senior Vice President of the Company in 1997. He served as Senior Vice President with WSB since 1996. Prior thereto, he served as Vice President of WSB since 1990. (e) Roberta A. Conger was elected Treasurer in July 2002 and Group Senior Vice President in February 2003. She served as Group Senior Vice President with WSB since 1996 and has served as Treasurer of WSB since 1994. (f) William C. Nunan was elected Chief Accounting Officer of the Company in December 1999, was elected Group Senior Vice President in 1999, and was elected Senior Vice President of the Company in 1997. He served as Senior Vice President with WSB and WTX since 1995. Prior thereto, he served as Vice President of WSB since 1985. ITEM 2. DESCRIPTION OF PROPERTY Properties owned by the Company for the operation of its business are located in Arizona, California, Colorado, Florida, Illinois, Kansas, Nevada, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities. The Company owns a 545,000 square-foot office complex on a 111-acre site in San Antonio, Texas. This complex houses the loan service, savings operations, and information systems departments, and various other back-office functions. The Company owns 233 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note H to the Financial Statements included in Item 14. The Company continuously evaluates the suitability and adequacy of the Company's offices and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations, or is otherwise required to be discussed pursuant to Item 103 of Regulation S-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the quarter ended December 31, 2002 to a vote of the Company's security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Prices of Stock Golden West's stock is listed on the New York Stock Exchange and the Pacific Exchange and options on Golden West are traded on the Chicago Board Options Exchange as well as the Pacific Exchange under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 2002 and 2001 were as follows: TABLE 36 Common Stock Price Range 2002 2001 ------------------------- -------------------------- First Quarter $58.04 - $65.80 $51.00 - $65.94 Second Quarter $63.17 - $70.25 $57.96 - $68.95 Third Quarter $58.15 - $68.95 $52.81 - $70.00 Fourth Quarter $57.91 - $72.98 $47.15 - $58.85
Per Share Cash Dividends Data Golden West's cash dividends paid per share for 2002 and 2001 were as follows: TABLE 37 Cash Dividends Per Share 2002 2001 ------------ ----------- First Quarter $ .0725 $ .0625 Second Quarter $ .0725 $ .0625 Third Quarter $ .0725 $ .0625 Fourth Quarter $ .0850 $ .0725
The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by subsidiaries. As a federal savings bank, WSB must file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the proposed capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, or agreement with the OTS or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after the distributions it remains at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WSB no longer to be adequately capitalized, require specific OTS approval. (See "CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS" on page 36.) At December 31, 2002, $3.0 billion of the WSB's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. Stockholders At the close of business on March 20, 2003, 152,934,708 shares of Golden West's Common Stock were outstanding and were held by 1,172 stockholders of record. At the close of business on March 20, 2003, the Company's common stock price was $73.00. The transfer agent and registrar for the Golden West common stock is Mellon Investor Services, L.L.C., San Francisco, California 94101. Equity Compensation Plan Information The Company's 1996 Stock Option Plan authorizes the granting of options to key employees for the purchase of up to 21 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under the terms of the plan, incentive stock options are granted at fair market value as of the date of grant and are exercisable any time after two to five years and prior to ten years from the grant date. Non-qualified options are granted at fair market value as of the date of grant and are exercisable after two to five years and prior to ten years and one month from the grant date. The following table sets forth information about the Company's stock option plan at December 31, 2002: TABLE 38 Golden West Financial Corporation 1996 Stock Option Plan As of December 31, 2002 Number of Number of Securities to be Weighted Securities Remaining Issued Upon Average Available for Exercise of Exercise Price Future Issuance Outstanding of Outstanding Under Stock Options Options Option Plan ---------------------- -------------------- ----------------------------- Equity Compensation Plan Approved by Stockholders: 1996 Stock Option Plan 5,598,799 $29.84 3,147,200 ====================== ==================== =============================
The Company does not have any equity compensation plans that have not been approved by stockholders. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. This information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference. TABLE 39 Five Year Consolidated Summary of Operations (Dollars in Thousands Except Per Share Figures) Year Ended December 31 -------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- -------------- -------------- ------------- Interest Income: Interest on loans $2,893,299 $2,740,101 $2,469,556 $1,851,790 $2,254,427 Interest on mortgage-backed securities 490,523 1,276,648 1,072,559 769,314 498,319 Interest on dividends and investments 113,212 192,863 254,425 204,741 209,807 ------------- ------------- -------------- -------------- ------------- 3,497,034 4,209,612 3,796,540 2,825,845 2,962,553 Interest Expense: Interest on deposits 1,079,937 1,522,328 1,494,447 1,250,364 1,285,343 Interest on advances and other borrowings 486,803 1,055,952 1,150,925 571,996 709,888 ------------- ------------- -------------- -------------- ------------- 1,566,740 2,578,280 2,645,372 1,822,360 1,995,231 ------------- ------------- -------------- -------------- ------------- Net interest income 1,930,294 1,631,332 1,151,168 1,003,485 967,322 Provision for (recovery of) loan losses 21,170 22,265 9,195 (2,089) 11,260 ------------- ------------- -------------- -------------- ------------- Net interest income after provision for (recovery of) loan losses 1,909,124 1,609,067 1,141,973 1,005,574 956,062 Noninterest Income: Fees 139,416 150,675 78,016 65,456 62,820 Gain on the sale of securities, MBS and loans 45,143 42,513 10,515 22,764 38,784 Change in fair value of derivatives 7,610 (9,738) -0- -0- -0- Other 54,831 53,289 72,289 55,082 36,009 ------------- ------------- -------------- -------------- ------------- 247,000 236,739 160,820 143,302 137,613 Noninterest Expense General and administrative expenses Personnel 355,543 298,435 243,787 215,483 196,153 Occupancy 88,387 80,908 72,355 67,015 62,549 Deposit insurance 6,062 5,712 5,699 5,358 5,925 Advertising 16,656 15,114 8,450 11,928 10,412 Other 134,846 113,633 94,556 86,363 79,468 ------------- ------------- -------------- -------------- ------------- 601,494 513,802 424,847 386,147 354,507 ------------- ------------- -------------- -------------- ------------- Earnings before taxes on income 1,554,630 1,332,004 877,946 762,729 739,168 Taxes on income 596,351 513,181 332,155 282,750 292,077 ------------- ------------- -------------- -------------- ------------- Earnings before cumulative effect of accounting change and extraordinary item (a) 958,279 818,823 545,791 479,979 447,091 Cumulative effect of accounting change, net of tax -0- (6,018) -0- -0- -0- Extraordinary item, net of tax -0- -0- -0- -0- (12,511) ------------- ------------- -------------- -------------- ------------- Net earnings $ 958,279 $ 812,805 $ 545,791 $ 479,979 $ 434,580 ============= ============= ============== ============== ============= Basic earnings per share before cumulative effect of accounting change and extraordinary item (a) $ 6.20 $ 5.18 $ 3.44 $ 2.90 $ 2.60 Cumulative effect of accounting change, net of tax .00 (.04) .00 .00 .00 Extraordinary item, net of tax .00 .00 .00 .00 (.07) ------------- ------------- -------------- -------------- ------------- Basic earnings per share $ 6.20 $ 5.14 $ 3.44 $ 2.90 $ 2.53 ============= ============= ============== ============== ============= Diluted earnings per share before cumulative effect of accounting change and extraordinary item (a) $ 6.12 $ 5.11 $ 3.41 $ 2.87 $ 2.58 Cumulative effect of accounting change, net of tax .00 (.04) .00 .00 .00 Extraordinary item, net of tax .00 .00 .00 .00 (.07) ------------- ------------- -------------- -------------- ------------- Diluted earnings per share $ 6.12 $ 5.07 $ 3.41 $ 2.87 $ 2.51 ============= ============= ============== ============== ============= (a) On January 1, 2001, the Company adopted SFAS 133 which resulted in a one-time charge of $6 million. In 1998, the Company incurred a $13 million one-time charge due to the prepayment of FHLB advances.
TABLE 40 Five Year Summary of Financial Condition (Dollars in Thousands) At December 31 ------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 --------------- ---------------- ---------------- --------------- --------------- Assets $ 68,405,828 $ 58,586,271 $ 55,703,969 $ 42,142,205 $ 38,468,729 Cash, securities available for sale, and other investments 1,241,091 961,729 1,111,826 1,120,393 1,050,265 Mortgage-backed securities 6,067,458 14,078,172 18,580,490 11,661,621 10,031,965 Loans receivable 58,268,899 41,065,375 33,762,643 27,919,817 25,721,288 --------------- ---------------- ---------------- --------------- --------------- Total loan portfolio 64,336,357 55,143,547 52,343,133 39,581,438 35,753,253 Deposits 41,038,797 34,472,585 30,047,919 27,714,910 26,219,095 Advances from FHLBs 18,635,099 18,037,509 19,731,797 8,915,218 6,163,472 Securities sold under agreements to repurchase and other borrowings 1,732,224 223,523 857,274 1,045,176 1,252,469 Senior debt 989,690 198,215 -0- -0- -0- Subordinated debt 199,867 599,511 598,791 812,950 911,753 Stockholders' equity 5,025,250 4,284,190 3,687,287 3,194,854 3,124,318
TABLE 41 Five Year Selected Other Data (Dollars in Thousands Except Per Share Figures) Year Ended December 31 -------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------------- -------------- -------------- -------------- ------------- New real estate loans originated $26,682,890 $20,763,237 $19,782,687 $12,672,211 $8,187,934 Fully indexed rate on new real estate loans 5.86% 7.72% 8.24% 7.60% 7.72% Current rate on new real estate loans(a) 4.32% 5.59% 6.18% 5.97% 6.20% New adjustable rate mortgages as a percentage 91.61% 83.96% 96.27% 91.00% 82.26% of new real estate loans originated Deposits increase ($) $ 6,566,212 $ 4,424,666 $ 2,333,009 $ 1,495,815 $2,109,378 Deposits increase (%) 19.0% 14.7% 8.4% 5.7% 8.7% Net earnings/average net worth (ROE) 20.62% 20.23%(b) 16.21% 15.19% 14.94%(c) Net earnings/average assets (ROA) 1.53% 1.42%(b) 1.12% 1.22% 1.11%(c) General and administrative expense (G&A) to: Net interest income plus other income 27.63% 27.50% 32.38% 33.67% 32.08% Total revenues 16.07% 11.56% 10.74% 13.01% 11.44%(c) Average assets .96% .90% .87% .98% .90% Ratio of earnings to fixed charges:(d) Including interest on deposits 1.99x 1.51x 1.33x 1.42x 1.37x Excluding interest on deposits 4.13x 2.25x 1.76x 2.32x 2.03x Yield on loan portfolio 5.25% 6.39% 8.05% 7.16% 7.36% Yield on MBS 5.64% 6.35% 7.98% 7.17% 7.20% Yield on investments 1.94% 2.86% 7.12% 5.88% 5.53% Yield on earning assets 5.25% 6.36% 8.02% 7.15% 7.30% Cost of deposits 2.56% 3.39% 5.52% 4.69% 4.67% Cost of borrowings 1.85% 2.72% 6.66% 5.77% 5.87% Cost of funds 2.32% 3.15% 5.99% 5.00% 4.96% Spread 2.93% 3.21% 2.03% 2.15% 2.34% Nonperforming assets/total assets(e) .62% .67% .43% .56% .79% Stockholders' equity/total assets 7.35% 7.31% 6.62% 7.58% 8.12% Average stockholders' equity/average assets 7.41% 7.01% 6.89% 8.04% 7.41% World Savings Bank, FSB (WSB) regulatory capital ratios:(f) Tangible capital 7.61% 7.71% 6.60% 6.64% 6.77% Tier 1 7.61% 7.71% 6.60% 6.64% 6.77% Total risk-based 14.26% 14.24% 12.44% 11.95% 12.93% World Savings Bank, FSB (Texas) (WTX) regulatory capital ratios:(f) Tangible capital 5.23% 5.23% 5.34% --- --- Tier 1 5.23% 5.23% 5.34% --- --- Total risk-based 24.07% 25.05% 26.69% --- --- Number of savings branch offices 268 265 253 249 248 Cash dividends per share $ .303 $ .26 $ .22 $ .193 $ .172 Dividend payout ratio 4.88% 5.02%(b) 6.40% 6.64% 6.79%(c) (a) The current rate reflects the actual rate being paid by the borrower at time of origination. (b) The ratios for the year ended December 31, 2001 include a pre-tax charge of $10 million or $.04 per basic and diluted earnings per share, after tax, associated with the adoption of SFAS 133 on January 1, 2001. Excluding this cumulative effect of an accounting change, ROE was 20.38%, ROA was 1.43%, and the dividend payout ratio was 5.06%. (c) The ratios for the year ended December 31, 1998 include an extraordinary charge of $21 million before tax, or $.07 per basic and diluted earnings per share, net of tax benefit, associated with the prepayment of FHLB advances and include a nonrecurring gain of $13 million before tax, or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%, and the dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to total revenues was 11.48%. (d) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, extraordinary item, and fixed charges. Fixed charges include interest expense and amortization of debt expense. (e) NPAs includes nonaccrual loans (loans that are 90 days or more past due) and foreclosed real estate. (f) For regulatory purposes, the minimum capital requirement for tangible capital is 1.5%. The requirements to be considered "well capitalized" are 5.0% and 10.0% for tier 1 (core) and total risk-based, respectively. In years prior to 2000, WTX was not regulated by the OTS and, therefore, these ratios were not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The table below sets forth Golden West Financial Corporation's (Golden West or Company) net earnings for the three years ended December 31, 2002, 2001, and 2000. TABLE 42 Golden West Net Earnings, Basic Earnings Per Share, and Diluted Earnings Per Share 2000 - 2002 (Dollars in Thousands Except Per Share Figures) For the Year Ended December 31 ------------------------------------------ 2002 2001 2000 ----------- ----------- ----------- Earnings before cumulative effect of accounting change $ 958,279 $ 818,823 $ 545,791 Cumulative effect of accounting change, net of tax(a) -0- (6,018) -0- ----------- ----------- ----------- Net Earnings $ 958,279 $ 812,805 $ 545,791 =========== =========== =========== Basic earnings per share before cumulative effect of accounting change $ 6.20 $ 5.18 $ 3.44 Cumulative effect of accounting change, net of tax(a) .00 (.04) .00 ----------- ----------- ----------- Basic earnings per share $ 6.20 $ 5.14 $ 3.44 =========== =========== =========== Diluted earnings per share before cumulative effect of accounting change $ 6.12 $ 5.11 $ 3.41 Cumulative effect of accounting change, net of tax(a) .00 (.04) .00 ----------- ----------- ----------- Diluted earnings per share $ 6.12 $ 5.07 $ 3.41 =========== =========== =========== (a) On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133) which resulted in a one-time pre-tax charge of $10 million, or $.04 per share, after tax. See "New Accounting Pronouncements" section on page 62.
Golden West's principal subsidiary is World Savings Bank, FSB (WSB). WSB is headquartered in Oakland, California. At December 31, 2002, WSB had $68 billion in assets. At December 31, 2002, WSB had a savings network of 121 branches in California, 46 in Florida, 36 in Colorado, 23 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, six in Illinois, and two in Nevada. By virtue of being federally chartered, WSB can originate mortgages anywhere in the nation, even though it may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, WSB had lending operations in Connecticut, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming. The savings accounts offered by WSB are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF is a deposit insurance fund for commercial banks, federally chartered savings banks, and some state chartered savings banks. The SAIF is a deposit insurance fund for most savings associations. WSB is a member of the BIF, but at December 31, 2002, approximately 10% of WSB's deposits were insured through the SAIF. WSB has a subsidiary, World Savings Bank, FSB (Texas) (WTX), that is also a federally chartered savings bank. WTX's deposits are also insured by the FDIC and WTX is a member of the BIF. In addition to WSB, Golden West has two other significant subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., an open-ended registered investment company sponsored by the Company. Atlas Advisers, Inc., is an investment adviser to the Atlas family of mutual funds and Atlas Securities, Inc., is the distributor of the Atlas mutual funds and annuities. The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources. Financial Condition The following table summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 2002, 2001, 2000, and 1999. TABLE 43 Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet 1999 - 2002 December 31 ----------------------------------------------------- 2002 2001 2000 1999 ---------- ---------- ----------- ---------- Assets: Cash and investments 1.8% 1.6% 2.0% 2.7% Loans receivable including mortgage-backed securities 94.1 94.2 94.0 93.9 Other assets 4.1 4.2 4.0 3.4 ---------- ---------- ----------- ---------- 100.0% 100.0% 100.0% 100.0% ========== ========== =========== ========== Liabilities and Stockholders' Equity: Deposits 60.1% 58.9% 54.0% 65.8% FHLB advances 27.2 30.8 35.4 21.2 Securities sold under agreements to repurchase .8 .4 1.5 2.5 Bank notes 1.8 .0 .0 .0 Senior debt 1.4 .3 .0 .0 Subordinated notes .3 1.0 1.1 1.9 Other liabilities 1.1 1.3 1.4 1.0 Stockholders' equity 7.3 7.3 6.6 7.6 ---------- ---------- ----------- ---------- 100.0% 100.0% 100.0% 100.0% ========== ========== =========== ==========
As the table shows, deposits represent the majority of the Company's liabilities. The largest asset component is loans receivable including mortgage-backed securities (MBS), which consists primarily of long-term mortgages. The Company emphasizes adjustable rate mortgages (ARMs) - loans with interest rates that change periodically in accordance with movements in specified indexes. Almost all of the Company's ARMs have rates that change monthly and are tied to one of the following three indexes: 1. The Eleventh District Cost of Funds Index (COFI), which is equal to the monthly average cost of deposits and borrowings of savings institution members of the Federal Home Loan Bank System's Eleventh District, which is composed of California, Arizona, and Nevada. 2. The Golden West Cost of Savings Index (COSI), which is equal to the monthend weighted average rate paid on the Company's deposits. 3. The Certificate of Deposit Index (CODI), which is equal to the 12-month rolling average of the monthly average of the three-month certificate of deposit rate as published in the Federal Reserve H-15 Statistical Report. Asset/Liability Management The Company's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on loans, MBS, and investments and the amounts it pays in interest on deposits and borrowings. Therefore, the Company's profitability is largely dependent upon its ability to manage interest rate risk. The Company manages interest rate risk by managing the repricing of interest-rate sensitive assets and liabilities. The Company enters into interest rate swaps as part of its interest rate risk management strategy (see interest rate swaps on page 66). Such instruments are entered into primarily to alter the repricing characteristics of designated assets and liabilities. The Company is subject to interest-rate risk to the extent its assets and liabilities reprice at different times and by different amounts. The disparity between the repricing (maturity, prepayment, or interest rate change) of mortgage loans, including MBS, and investments and the repricing of deposits and borrowings can have a material impact on the Company's results of operations. The difference between the repricing characteristics of assets and liabilities is commonly referred to as the "gap." The Gap table on the following page shows that, as of December 31, 2002, the Company's assets reprice faster than its liabilities. If all repricing assets and liabilities responded equally to changes in the interest rate environment, then gap analysis would suggest that Golden West's earnings would rise when interest rates increase and would fall when interest rates decrease. However, the changes in Golden West's earnings are also affected by the built-in reporting and repricing lags inherent in the adjustable rate mortgage indexes used by the Company. Reporting lags occur because of the time it takes to gather the data needed to compute the indexes. Repricing lags occur because it may take a period of time before changes in interest rates are significantly reflected in the indexes. COFI, which is the index Golden West uses to determine the rate on $25 billion of its existing adjustable rate mortgages, has a two-month reporting lag. As a result, the COFI in effect in any month actually reflects the Eleventh District's cost of funds at the level it was two months prior. The COFI repricing lag occurs because COFI is based on a portfolio of accounts, not all of which reprice immediately. Many of these liabilities, including certificates of deposit, do not reprice each month and, when they do reprice, may not reflect the full change in market rates. Some liabilities, such as low-rate checking or passbook savings accounts, may reprice by only small amounts. Still other liabilities, such as noninterest bearing deposits, do not reprice at all. Therefore, COFI does not fully reflect a change in market interest rates. COSI has a one-month reporting lag. COSI also has a repricing lag, because the rates paid on many of the deposits that make up COSI do not respond immediately or fully to a change in market interest rates. CODI has a one-month reporting lag. CODI also has a repricing lag, because the index is a 12-month rolling average and consequently trails changes in short-term market interest rates. Partially offsetting the index reporting and repricing lags are similar lags on a portion of the Company's liabilities. TABLE 44 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratios As of December 31, 2002 (Dollars in Millions) Projected Repricing(a) -------------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ----------- ----------- ----------- ----------- ----------- Interest-Earning Assets: Investments $ 920 $ 2 $ -0- $ -0- $ 922 MBS: Adjustable rate 5,540 -0- -0- -0- 5,540 Fixed-rate 54 125 264 85 528 Loans receivable: Adjustable rate 54,177 1,005 711 -0- 55,893 Fixed-rate 195 427 873 624 2,119 Other(b) 1,347 -0- -0- -0- 1,347 Impact of swaps 221 (117) (104) -0- -0- ----------- ----------- ----------- ----------- ----------- Total $ 62,454 $ 1,442 $ 1,744 $ 709 $ 66,349 =========== =========== =========== =========== =========== Interest-Bearing Liabilities: Deposits(c) $ 31,429 $ 5,743 $ 3,855 $ 12 $ 41,039 FHLB advances 18,164 -0- 3 468 18,635 Other borrowings 1,733 200 496 493 2,922 ----------- ----------- ----------- ----------- ----------- Total $ 51,326 $ 5,943 $ 4,354 $ 973 $ 62,596 =========== =========== =========== =========== =========== Repricing gap $ 11,128 $(4,501) $ (2,610) $ (264) $ 3,753 =========== =========== =========== =========== =========== Cumulative gap $ 11,128 $ 6,627 $ 4,017 $ 3,753 =========== =========== =========== =========== Cumulative gap as a percentage of total assets 16.3% 9.7% 5.9% =========== =========== =========== (a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of principal based on current rates of prepayment. (b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock. (c) Deposits with no maturity date, such as checking, passbook, and money market deposit accounts, are assigned zero months.
In addition to the index lags, other elements of ARM loans also have an impact on earnings. These elements are introductory fixed rates on new ARM loans, the interest rate adjustment frequency of ARM loans, interest rate caps or limits on individual rate changes, and interest rate floors. When the interest rate environment changes, the index lags and ARM structural features cause assets to reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down earnings when rates rise. The table on the following page reflects the Company's expected cash flows and applicable yields on the balances of its interest sensitive assets and liabilities as of December 31, 2002, and takes into consideration expected prepayments of the Company's long-term assets (primarily MBS and loans receivable) and the estimated current fair value. TABLE 45 Summary of Market Risk on Financial Instruments and Payments Due by Period As of December 31, 2002 (Dollars in Millions) - ------------------------------------------------------------------------------------------------------------------------------------ Expected Maturity Date as of December 31, 2002 -------------------------------------------------------------------------------------------- 2008 & Total Fair 2003 2004 2005 2006 2007 Thereafter Balance Value -------- -------- --------- --------- ---------- ----------- --------- ------ Interest-Sensitive Assets: Investments $ 922 $ -0- $ -0- $ -0- $ -0- $ -0- $ 922 $ 922 Weighted average interest rate 1.94% .00% .00% .00% .00% .00% 1.94% MBS Fixed-Rate $ 103 $ 84 $ 67 $ 54 $ 44 $ 176 $ 528 $ 549 Weighted average interest rate 8.07% 8.03% 8.01% 7.99% 7.96% 7.87% 7.97% Variable Rate $ 1,191 $ 957 $ 758 $ 589 $ 457 $ 1,588 $ 5,540 $ 5,663 Weighted average interest rate 5.48% 5.48% 5.48% 5.48% 5.48% 5.48% 5.48% Loans Receivable Fixed-Rate $ 711 $ 279 $ 216 $ 165 $ 128 $ 540 $ 2,039 $ 2,087 Weighted average interest rate 7.64% 8.28% 8.05% 7.88% 7.74% 7.39% 7.72% Variable Rate $11,928 $ 9,382 $ 7,799 $ 6,281 $ 4,815 $16,025 $56,230 $56,273 Weighted average interest rate(a) 5.48% 5.40% 5.40% 5.40% 5.40% 5.42% 5.36% -------- -------- -------- --------- ---------- ----------- --------- -------- Total $14,855 $10,702 $ 8,840 $ 7,089 $ 5,444 $18,329 $65,259 $65,494 ======== ======== ======== ========= ========== =========== ========= ======== Interest-Sensitive Liabilities: Deposits(b) $37,172 $ 1,495 $ 992 $ 256 $ 1,112 $ 12 $41,039 $41,273 Weighted average interest rate 2.39% 3.51% 4.62% 4.75% 4.72% 4.69% 2.56% FHLB Advances Fixed-Rate $ 139 $ 47 $ 40 $ 35 $ 32 $ 267 $ 560 $ 620 Weighted average interest rate 3.39% 6.19% 6.23% 6.23% 6.23% 6.26% 5.53% Variable Rate $ 6,700 $ 3,400 $ 6,075 $ 1,900 $ -0- $ -0- $18,075 $18,066 Weighted average interest rate 1.51% 1.55% 1.61% 1.61% .00% .00% 1.56% Other Borrowings Fixed-Rate $ 1,910 $ -0- $ -0- $ 199 $ 298 $ 493 $ 2,900 $ 2,944 Weighted average interest rate 1.91% .00% .00% 5.73% 4.33% 4.95% 2.93% Variable Rate $ 22 $ -0- $ -0- $ -0- $ -0- $ -0- $ 22 $ 22 Weighted average interest rate .37% .00% .00% .00% .00% .00% .37% Interest Rate Swaps (notional values) Receive Fixed Swaps $ 91 $ -0- $ -0- $ -0- $ -0- $ -0- $ 91 $ -0- Weighted average receive rate 6.39% .00% .00% .00% .00% .00% 6.39% Weighted average pay rate 1.86% .00% .00% .00% .00% .00% 1.86% Pay Fixed Swaps $ 487 $ 104 $ -0- $ -0- $ -0- $ -0- $ 591 $ 12 Weighted average receive rate 1.63% 1.55% .00% .00% .00% .00% 1.61% Weighted average pay rate 4.02% 6.65% .00% .00% .00% .00% 4.48% -------- -------- -------- --------- ---------- ----------- --------- --------- Total $46,521 $ 5,046 $ 7,107 $ 2,390 $ 1,442 $ 772 $63,278 $62,937 ======== ======== ======== ========= ========== =========== ========= ========= (a) The total weighted average interest rate for variable loans receivable reflects loans with introductory rates in effect at December 31, 2002. Those loans are assumed to mature outside the introductory period at fully-indexed rates (the fully-indexed rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable rate loans will not equal the weighted average rate of total variable rate loans at December 31, 2002 as indicated in the total balance column. (b) Deposits with no maturity are included in the 2003 column.
Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes and anticipated growth based on simulations using an asset/liability model which takes into account the lags previously described. The simulation model projects net interest income, net earnings, and capital ratios based on a significant interest rate increase that is sustained for a thirty-six month period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. For mortgage assets, the model incorporates assumptions regarding the impact of changing interest rates on prepayment rates, which are based on the Company's historical prepayment information. The model factors in projections for anticipated activity levels by products offered by the Company. Based on the information and assumptions in effect at December 31, 2002, a 200 basis point rate increase sustained over a thirty-six month period would not affect the Company's long-term profitability and financial strength. Cash and Investments Golden West invests primarily in federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, EuroDollar time deposits, collateralized mortgage obligations, and equity securities. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. At December 31, 2002, 2001 and 2000, the Company had securities available for sale in the amount of $922 million, $623 million, and $393 million, respectively, including net unrealized gains on securities available for sale of $326 million, $362 million, and $382 million, respectively. At December 31, 2002, 2001 and 2000, the Company had no securities held for trading in its investment securities portfolio. Mortgage-Backed Securities and Loans Receivable For the loan portfolio, the Company invests primarily in whole loans. From time to time, the Company securitizes loans from its portfolio into MBS and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs). Under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date, the Company has not sold any interests requiring disclosures under SFAS 140. Because the Company currently retains all of the beneficial interest in these MBS securitizations, the securitizations formed after March 31, 2001 are securities classified as securitized loans and included in loans receivable in accordance with SFAS 140 (see page 62 for further discussion). Additionally, from time to time, the Company purchases MBS. Loans, securitized loans and MBS are available to be used as collateral for borrowings. During the first half of 2002, the Company desecuritized $4.1 billion of Federal National Mortgage Association (FNMA) MBS that were classified as MBS held to maturity with recourse and the underlying loans were reclassified to loans receivable. This desecuritization led to a significant decrease in the outstanding balance of MBS, which in turn contributed to lower MBS repayments and lower interest on mortgage-backed securities. The desecuritization also contributed to an increase in the outstanding balance of loans receivable and an increase in interest on loans. The following table shows the components of the Company's loans receivable portfolio, including MBS, at December 31, 2002, 2001, and 2000. TABLE 46 Balance of Loans Receivable, Including MBS, by Component 2000 - 2002 (Dollars in Thousands) As of December 31 --------------------------------------------------------- 2002 2001 2000 --------------- --------------- --------------- Loans $39,159,502 $ 35,952,918 $33,860,345 Securitized loans(a) (b) 19,066,063 5,186,717 -0- --------------- --------------- --------------- Total loans, excluding MBS 58,225,565 41,139,635 33,860,345 --------------- --------------- --------------- FNMA MBS(c) -0- 4,732,779 7,758,409 MBS-REMICs 5,871,069 8,836,840 10,366,578 Purchased MBS 196,389 508,553 455,503 --------------- --------------- --------------- Total MBS 6,067,458 14,078,172 18,580,490 --------------- --------------- --------------- Other(d) 43,334 (74,260) (97,702) --------------- --------------- --------------- Total loans receivable, including MBS $64,336,357 $ 55,143,547 $52,343,133 =============== =============== =============== (a) Loans securitized after March 31, 2001 are classified as securitized loans per SFAS 140 (see discussion on page 62). (b) Includes $10.9 billion at December 31, 2002 of loans securitized with FNMA where the underlying loans are subject to full credit recourse to the Company. (c) The underlying loans of the FNMA MBS are subject to full credit recourse to the Company. (d) Includes deferred loan costs, allowance for loan losses, and other miscellaneous reserves and discounts.
Repayments from loans receivable, including MBS, were $15.6 billion, $15.6 billion, and $6.9 billion for the years ended December 31, 2002, 2001, and 2000, respectively. In 2002, there was a small decrease in the prepayment rate offset by the growth in the loan portfolio. Loans receivable repayments were higher in 2001 as compared to 2000 due to an increase in the prepayment rate as well as an increase in the balance of the total loan portfolio outstanding. Mortgage-Backed Securities At December 31, 2002, 2001, and 2000, the Company had MBS held to maturity in the amount of $6.0 billion, $13.8 billion, and $18.5 billion, respectively. The sizable decrease in 2002 was due primarily to prepayments and to the desecuritization of $4.1 billion of FNMA MBS. During 2001, the Company securitized $3.0 billion of ARMs into MBS-REMICs during the first three months. The Company has the ability and intent to hold these MBS until maturity and, accordingly, these MBS are classified as held to maturity. At December 31, 2002, 2001, and 2000, the Company had MBS available for sale in the amount of $35 million, $233 million, and $70 million, respectively, including net unrealized gains on mortgage-backed securities available for sale of $139 thousand, $2 million, and $1 million, respectively. During the first quarter of 2002, the Company sold $176 million of purchased MBS available for sale which resulted in a gain of $3 million. At December 31, 2002, 2001, and 2000, the Company had no trading MBS. At December 31, 2002, $5.5 billion of the Company's total MBS portfolio was backed by ARMs. The percentage of MBS backed by ARMs was 91% at yearend 2002 compared to 92% at yearend 2001 and 93% at yearend 2000. Repayments of MBS during the years 2002, 2001, and 2000 amounted to $3.2 billion, $6.4 billion, and $2.5 billion, respectively. MBS repayments were lower in 2002 due to a decrease in the outstanding balance. MBS repayments were higher in 2001 due to an increase in the prepayment rate on the underlying loans. Loans New loan originations in 2002, 2001, and 2000 amounted to $26.7 billion, $20.8 billion, and $19.8 billion, respectively. The volume of originations increased during 2002 due to a continued strong demand for mortgage loans and an increase in the popularity of ARMs, the Company's principal product. The volume of originations during 2001 increased due to an increase in the market demand for loans. Because consumers took advantage of low mortgage interest rates, refinances were a large portion of the national mortgage market in 2001 and 2002. Refinanced loans constituted 62% of the Company's new loan originations in 2002 compared to 59% in 2001 and 34% in 2000. First mortgages originated for sale were $1.7 billion, $2.2 billion, and $114 million for the years ended December 31, 2002, 2001, and 2000, respectively. During 2002, 2001, and 2000, $596 million, $794 million, and $29 million, respectively, of loans, including MBS, were converted at the customer's request from adjustable rate to fixed-rate. The company sells most of its new and converted fixed-rate loans. The Company sold $2.3 billion, $2.7 billion, and $152 million of fixed-rate first mortgage loans during 2002, 2001, and 2000, respectively. At December 31, 2002, the Company had lending operations in 38 states. The largest source of mortgage originations was loans secured by residential properties in California. In 2002, 67% of total loan originations were on residential properties in California, compared to 70% and 63% in 2001 and 2000, respectively. The five largest states, other than California, for originations for the year ended December 31, 2002, were Florida, Texas, New Jersey, Washington, and Colorado with a combined total of 17% of total originations. The percentage of the total loan portfolio (including MBS, except purchased MBS) that was comprised of residential loans in California was 64% at December 31, 2002, 64% at December 31, 2001, and 63% at December 31, 2000. The portion of the mortgage portfolio (including securitized loans and MBS) composed of adjustable rate loans was 96% at yearend 2002 compared to 94% at yearend 2001 and 95% at yearend 2000. Golden West's ARM originations constituted approximately 92% of new mortgage loans made by the Company in 2002, compared with 84% in 2001 and 96% in 2000. Golden West originates ARMs tied primarily to the CODI, COFI, and COSI. Prior to 2001, the Company also originated ARMs tied to the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the years ended December 31, 2002, 2001 and 2000. TABLE 47 Adjustable Rate Mortgage Originations by Index 2000 - 2002 (Dollars in Thousands) For the Year Ended December 31 ------------------------------------------------------ ARM Index 2002 2001 2000 --------------- ---------------- ---------------- CODI $ 13,173,161 $ 554,390 $ -0- COFI 3,370,412 9,813,174 5,701,413 COSI 7,899,702 7,064,962 12,872,834 TCM -0- -0- 470,171 --------------- ---------------- ---------------- Total $ 24,443,275 $ 17,432,526 $ 19,044,418 =============== ================ ================
The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS) at December 31, 2002, 2001 and 2000. TABLE 48 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS) 2000 - 2002 (Dollars in Thousands) As of December 31 ----------------------------------------------------------- ARM Index 2002 2001 2000 ----------------- ----------------- ---------------- CODI $ 13,286,566 $ 552,746 $ -0- COFI 24,755,498 29,010,008 27,405,401 COSI 22,070,692 20,943,596 20,460,242 Other(a) 1,657,386 1,288,050 1,640,010 ----------------- ----------------- ---------------- Total $ 61,770,142 $ 51,794,400 $ 49,505,653 ================= ================= ================ (a) Includes equity lines of credit and ARMs tied to the TCM.
During the life of a typical ARM loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including securitized ARM loans, FNMA MBS, and MBS-REMICs before any reduction for loan servicing fees) was 12.13% or 6.74% above the actual weighted average rate at December 31, 2002, versus 12.21%, or 5.77% above the actual weighted average at December 31, 2001 and 12.28% or 4.17% above the weighted average rate at yearend 2000. Approximately $5.2 billion of the Company's ARMs (including MBS with recourse held to maturity) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of December 31, 2002, $2.0 billion ARM loans had reached their rate floors compared with $560 million at December 31, 2001 and $144 million at December 31, 2000. The weighted average floor rate on the loans that had reached their floor was 5.87% at December 31, 2002, compared to 7.15% at December 31, 2001 and 8.01% at December 31, 2000. Without the floor, the average rate on these loans would have been 5.19% at December 31, 2002, 5.91% at December 31, 2001, and 7.80% at December 31, 2000. Most of the Company's loans are collateralized by first deeds of trust on one-to four- family homes. The Company also originates second deeds of trust in the form of fixed-rate loans. The Company's fixed-rate second mortgage originations amounted to $160 million, $279 million, and $547 million for the years ended December 31, 2002, 2001, and 2000, respectively. The outstanding balance of fixed-rate seconds amounted to $215 million, $362 million and $491 million at December 31, 2002, 2001, and 2000, respectively. The Company also establishes equity lines of credit (ELOCs) indexed to the prime rate. The Company established new ELOCs totaling $1.2 billion, $422 million, and $66 million for the years ended December 31, 2002, 2001, and 2000, respectively. The outstanding balance of ELOCs amounted to $999 million, $303 million, and $40 million at December 31, 2002, 2001, and 2000, respectively. The maximum total line of credit available on the Company's ELOCs amounted to $1.5 billion, $458 million, and $67 million at December 31, 2002, 2001, and 2000, respectively. The Company generally lends up to 80% of the appraised value of residential real estate property. In some cases, a higher amount is possible through a first mortgage loan or a combination of a first and a second mortgage loan on the same property. The second mortgage loan may be a fixed-rate loan or an adjustable rate equity line of credit. For the year ended December 31, 2002, 13% of loans originated exceeded 80% of the appraised value of the property compared to 13% for the year ended December 31, 2001, and 19% for the year ended December 31, 2000. The Company takes steps to reduce the potential credit risk with respect to loans with a loan to value (LTV) or a combined loan to value over 80%. Among other things, the loan amount may not exceed 95% of the appraised value of a single-family residence at the time of origination. Also, many first mortgage loans with an LTV over 80% carry mortgage insurance, which reimburses the Company for losses up to a specified percentage per loan, thereby reducing the effective LTV to below 80%. Furthermore, the Company sells without recourse a significant portion of its second mortgage originations. Sales of second mortgages amounted to $139 million, $184 million, and $198 million for the years ended December 31, 2002, 2001, and 2000, respectively. In addition, the Company carries pool mortgage insurance on most seconds not sold, including equity lines of credit. The cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the original balance of each insured pool. The following table shows mortgage originations with LTV ratios or combined LTV ratios greater than 80% for the years ended December 31, 2002, 2001, and 2000. TABLE 49 Mortgage Originations With Loan to Value and Combined Loan to Value Ratios Greater Than 80% 2000 - 2002 (Dollars in Thousands) For the Year Ended December 31 ------------------------------------------------------------ 2002 2001 2000 ---------------- ---------------- ---------------- First mortgages with loan to value ratios greater than 80%: With mortgage insurance $ 292,210 $ 225,464 $ 124,066 With no mortgage insurance 70,478 123,387 229,397 ---------------- ---------------- ---------------- 362,688 348,851 353,463 ---------------- ---------------- ---------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 2,412,821 1,354,754 2,549,049 With no pool insurance 611,044 911,214 924,538 ---------------- ---------------- ---------------- 3,023,865 2,265,968 3,473,587 ---------------- ---------------- ---------------- Total $3,386,553 $2,614,819 $3,827,050 ================ ================ ================
The following table shows the outstanding balance of mortgages with original LTV or combined LTV ratios greater than 80% at December 31, 2002, 2001 and 2000. TABLE 50 Balance of Mortgages with Loan to Value and Combined Loan to Value Ratios Greater Than 80% 2000 - 2002 (Dollars in Thousands) As of December 31 ----------------------------------------------------- 2002 2001 2000 --------------- ---------------- -------------- First mortgages with loan to value ratios greater than 80%: With mortgage insurance $ 553,747 $ 431,498 $ 388,625 With no mortgage insurance 293,851 548,507 823,864 --------------- ---------------- -------------- 847,598 980,005 1,212,489 --------------- ---------------- -------------- First and second mortgages with combined loan to value ratios greater than 80%: With pool insurance on second mortgages 3,699,519 2,396,954 2,193,990 With no pool insurance 292,104 454,289 722,703 --------------- ---------------- -------------- 3,991,623 2,851,243 2,916,693 --------------- ---------------- -------------- Total $ 4,839,221 $ 3,831,248 $ 4,129,182 =============== ================ ==============
Loan repayments consist of monthly loan amortization and loan payoffs. During the years 2002, 2001, and 2000, loan repayments amounted to $12.3 billion, $9.2 billion, and $4.5 billion, respectively. The increase in loan repayments in 2002 was due primarily to an increase in the balance of loans receivable. The increase in repayments in 2001 was due to an increase in loan prepayments. Securitized Loans During 2002, the Company securitized $18.9 billion of loans. During the second and third quarters of 2001, the Company securitized $6.0 billion of loans. These securitized loans are available to be used as collateral for borrowings and are classified as loans receivable on the Statement of Financial Position per SFAS 140. Mortgage Servicing Rights Capitalized mortgage servicing rights (CMSRs) are included in "Other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the years ended December 31, 2002, 2001, and 2000. TABLE 51 Capitalized Mortgage Servicing Rights 2000 - 2002 (Dollars in Thousands) 2002 2001 2000 ------------- ------------- ----------- Beginning balance of CMSRs $ 56,056 $ 28,355 $37,295 New CMSRs from loan sales 34,044 41,587 3,404 Amortization of CMSRs (20,652) (13,886) (12,344) ------------- ------------- ----------- Ending balance of CMSRs $ 69,448 $ 56,056 $28,355 ============= ============= ===========
The estimated amortization of the December 31, 2002 CMSR balance for the five years ending 2007 is $29.4 million (2003), $19.0 million (2004), $12.1 million (2005), $6.9 million (2006), and $2.0 million (2007). Actual results may vary depending upon the level of the payoffs of the loans currently serviced. The book value of Golden West's CMSRs did not exceed the fair value at December 31, 2002, 2001, or 2000 and, therefore, no reserve was required to adjust the servicing rights to their fair value. Asset Quality An important measure of the soundness of the Company's loan and MBS portfolio is its ratio of nonperforming assets (NPAs) and troubled debt restructured (TDRs) to total assets. Nonperforming assets include non-accrual loans (that is, loans, including loans securitized into MBS with recourse and loans securitized into MBS-REMICs, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's TDRs are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers impacted by adverse economic conditions. The table on the next page sets forth the components of the Company's NPAs and TDRs and the various ratios to total assets at December 31. TABLE 52 Nonperforming Assets and Troubled Debt Restructured 2000-2002 (Dollars in Thousands) As of December 31 ----------------------------------------------------------- 2002 2001 2000 ---------------- --------------- ----------------- Non-accrual loans $ 413,123 $ 382,510 $ 231,155 Foreclosed real estate 11,244 11,101 8,261 ---------------- --------------- ----------------- Total nonperforming assets $ 424,367 $ 393,611 $ 239,416 ================ =============== ================= TDRs, net of interest reserve $ 233 $ 1,505 $ 1,933 ================ =============== ================= Ratio of NPAs to total assets .62% .67% .43% ================ =============== ================= Ratio of TDRs to total assets .00% .00% .00% ================ =============== ================= Ratio of NPAs and TDRs to total assets .62% .67% .43% ================ =============== =================
NPAs at yearend 2002 reflected the normal increase in delinquencies associated with the aging of the large volume of mortgages originated during the past two years together with the uncertain U.S. economy. The Company closely monitors all delinquencies and takes appropriate steps to protect its interests. The Company mitigates its credit risk through strict underwriting standards and loan reviews. The Company has other impaired loans on which specific loss reserves have been provided and that were not included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $4 million at yearend 2002 compared to $11 million and $23 million at yearends 2001 and 2000, respectively. Allowance for Loan Losses The Company provides specific valuation allowances for losses on major loans when impaired, and a write-down on foreclosed real estate when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating probable loan losses that is based on both the Company's historical loss experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. This approach also takes into consideration current trends in economic growth, unemployment, housing market activity, and home prices for the nation and individual geographical regions. This approach further considers the impact of other events such as natural disasters. Based on the analysis of historical performance, current conditions, and other risks, management estimates a range of loss allowances by type of loan and risk category to cover probable losses in the portfolio. One-to-four single-family real estate loans are evaluated as a group. In addition, periodic reviews are made of major multi-family and commercial real estate loans and foreclosed real estate. Where indicated, valuation allowances are established or adjusted. In estimating probable losses, consideration is given to the estimated sale price, cost of refurbishing the security property, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings based upon quarterly reviews of the portfolio and the review methodology and historical analyses are reviewed quarterly. The table below shows the changes in the allowance for loan losses for the three years ended December 31, 2002, 2001, and 2000. TABLE 53 Changes in Allowance for Loan Losses 2000 - 2002 (Dollars in Thousands) 2002 2001 2000 --------------- -------------- --------------- Beginning allowance for loan losses $ 261,013 $ 236,708 $ 232,134 Provision for losses charged to expense 21,170 22,265 9,195 Loans charged off (1,943) (2,425) (623) Recoveries 857 351 472 Net transfer of allowance (to) from recourse liability -0- 4,114 (4,470) --------------- -------------- --------------- Ending allowance for loan losses $ 281,097 $ 261,013 $ 236,708 =============== ============== =============== Ratio of provision for loan losses to loan portfolio (including MBS with recourse and MBS-REMICs) .03% .04% .02% =============== ============== =============== Ratio of net chargeoffs to average loans outstanding (including MBS with recourse and MBS-REMICs) .00% .00% .00% =============== ============== =============== Ratio of allowance for loan losses to total loans (including MBS with recourse and MBS-REMICs) .44% .48% .46% =============== ============== =============== Ratio of allowance for loan losses to NPAs 66.2% 66.3% 98.9% =============== ============== ===============
Foreclosed Real Estate At December 31, 2002 and 2001, the Company had foreclosed real estate in the amount of $11 million. At December 31, 2000, the Company had foreclosed real estate in the amount of $8 million. Deposits The Company raises deposits through its retail branch system as well as through the money markets. Retail deposits increased by $6.6 billion in 2002 compared to increases of $4.6 billion and $2.7 billion in 2001 and 2000, respectively. Retail deposits increased during 2002 and 2001 because the public found money market accounts to be a more favorable investment compared with other alternatives. At December 31, 2002, 2001, and 2000, transaction accounts (which include checking, passbook, and money market accounts) represented 66%, 40%, and 24%, respectively, of the total balance of deposits. From time to time, the Company uses government securities dealers to sell wholesale certificates of deposit (CDs) to institutional investors. The Company's deposit balance at December 31, 2000 included $185 million of these wholesale CDs. There were no outstanding wholesale CDs at December 31, 2002 and 2001. Advances from the Federal Home Loan Banks The Company uses borrowings from the Federal Home Loan Banks (FHLBs), also known as "advances," to provide funds for loan origination activities. Advances are secured by pledges of certain loans, MBS, and capital stock of the FHLBs. FHLB advances amounted to $18.6 billion at December 31, 2002, compared to $18.0 billion and $19.7 billion at December 31, 2001 and 2000, respectively. Securities Sold Under Agreements to Repurchase The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered into with selected major government securities dealers and large banks, using MBS from the Company's portfolio. Reverse Repos with dealers and banks amounted to $522 million, $224 million, and $857 million at yearends 2002, 2001, and 2000, respectively. Other Borrowings At December 31, 2002, Golden West, at the holding company level, had a total of $200 million of subordinated debt issued and outstanding as compared to $600 million at December 31, 2001 and 2000. As of December 31, 2002, the Company's subordinated debt securities were rated A2 and A by Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively. At December 31, 2002, the Company had issued and outstanding $1.0 billion of senior debt as compared to $200 million at December 31, 2001. As of December 31, 2002, the Company's senior debt was rated A1 and A+ by Moody's and S&P, respectively. WSB has a bank note program under which up to $5 billion can be outstanding at any point in time. At December 31, 2002, WSB had $1.2 billion of bank notes outstanding. There were no bank notes outstanding at December 31, 2001 or 2000. As of December 31, 2002 WSB's bank notes were rated P-1 and A-1+ by Moody's and S&P, respectively. Stockholders' Equity The Company's stockholders' equity increased by $741 million during 2002 as a result of earnings partially offset by decreased market values of securities available for sale, the $173 million cost of the repurchase of Company stock, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $597 million during 2001 as a result of earnings partially offset by decreased market values of securities available for sale, the $186 million cost of the repurchase of Company stock, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $492 million during 2000 as a result of earnings and increased market values of securities available for sale partially offset by the $109 million cost of the repurchase of Company stock, and the payment of quarterly dividends to stockholders. Since 1993, through five separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to a total of 60.6 million shares of Golden West's common stock. As of December 31, 2002, 49.3 million shares had been repurchased and retired at a cost of $1.3 million since October 28, 1993, of which 2.7 million shares were purchased and retired at a cost of $173 million during 2002. Earnings from WSB are expected to continue to be the major source of funding for the stock repurchase program. The repurchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for federally insured financial institutions, such as WSB and WTX. Under FIRREA, thrifts and savings banks must have tangible capital equal to at least 1.5% of adjusted total assets, have core capital equal to at least 4% of adjusted total assets, and have risk-based capital equal to at least 8% of risk-weighted assets. The OTS and other bank regulatory agencies have adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a financial institution is "well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio is the ratio of core capital to risk-weighted assets, and the Tier 1 or leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. As of December 31, 2002, the most recent notification from the OTS categorized WSB and WTX as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of WSB or WTX. At December 31, 2002, WSB and WTX had the following regulatory capital calculated in accordance with FIRREA's capital standards. TABLE 54 Regulatory Capital Requirements As of December 31, 2002 (Dollars in Thousands) MINIMUM CAPITAL ACTUAL REQUIREMENTS --------------------------------- --------------------------------- Capital Ratio Capital Ratio ---------------- -------------- ----------------- ------------- WSB - --- Tangible $ 5,152,335 7.61% $ 1,015,695 1.50% Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00 Tier 1 risk-based 5,152,335 13.52 --- --- Total risk-based 5,431,860 14.26 3,048,080 8.00 WTX - --- Tangible $ 413,885 5.23% $ 118,752 1.50% Tier 1 (core or leverage) 413,885 5.23 316,673 4.00 Tier 1 risk-based 413,885 24.05 --- --- Total risk-based 414,277 24.07 137,702 8.00
Because WSB is a subsidiary of a savings and loan holding company, WSB must file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the proposed capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions it remains at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WSB to no longer be adequately capitalized, require specific OTS approval. Off-Balance Sheet Arrangements Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses. Prior to entering each commitment, the Company evaluates the customer's creditworthiness and the value of the property. The amount of outstanding loan commitments at December 31, 2002 was $1.4 billion. The vast majority of these commitments were for adjustable rate mortgages. At December 31, 2002, the Company had $1.0 billion of commitments outstanding to borrow advances from the FHLB of Dallas and these advances will be indexed to three-month LIBOR. New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the Statement of Financial Condition and measure those instruments at fair value. The Company adopted SFAS 133 as of January 1, 2001 and recorded a loss of $10 million before tax, or $6 million after tax. Because the Company has decided not to use permitted hedge accounting for the derivative financial instruments in portfolio on December 31, 2002, the changes in fair value of these instruments are reported in Noninterest Income as the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net Earnings. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). This statement replaces previously issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. From time to time, the Company securitizes loans from its portfolio into MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosures under SFAS 140. To date, the Company has not sold any interests requiring disclosure under SFAS 140. In accordance with SFAS 140, the Company's securitizations after March 31, 2001 resulted in securities classified as securitized loans and recorded as loans receivable. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. In addition, this Statement resolves implementation issues of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost should be recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company believes that SFAS 146 will not have a significant impact on its financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147), which provides guidance on the accounting for the acquisition of a financial institution. This statement is effective on October 1, 2002. The adoption of SFAS 147 had no impact on the Company's financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. This statement is effective for interim periods beginning after December 15, 2002. The Company is still considering the impact of the adoption of this statement. Uses of Estimates Golden West's financial statements are prepared in accordance with generally accepted accounting principles (GAAP). Most of Golden West's assets, liabilities, revenues, and expenses are reported using actual results for the reporting period. However, GAAP requires that certain assets, liabilities, revenues, and expenses be reported using estimates of fair value that are based on a variety of assumptions, including such items as future interest rate levels and repayments rates. As a consequence, assets, liabilities, revenues, and expenses reported using fair value estimates may fluctuate from one reporting period to the next because of changes in the business environment that lead to revisions to the assumptions underlying the fair value calculations. The following is a discussion of the most critical accounting policies involving the use of estimates which senior management discussed with the Company's Audit Committee. An important use of estimates occurs when the Company establishes its allowance for loan losses. An in-depth discussion can be found in the Allowance for Loan Losses section on page 58. As of December 31, 2002, Golden West's Consolidated Statement of Financial Condition reflected fair value estimates for equity and debt securities available for sale and for purchased mortgage-backed securities available for sale as follows. Equity securities available for sale amounted to $332 million and $368 million at yearend 2002 and 2001, respectively, compared with amortized costs of $6 million at yearends 2002 and 2001, respectively. Debt securities available for sale amounted to $590 million and $255 million at yearend 2002 and 2001, respectively, compared with amortized costs of $590 million and $254 million at yearends 2002 and 2001, respectively. Purchased mortgage-backed securities available for sale amounted to $35 million and $233 million at yearend 2002 and 2001, respectively, compared with amortized costs of $34 million and $232 million at yearend 2002 and 2001, respectively. Fair values are based on quoted market prices on securities available for sale. For the year ended December 31, 2002 and 2001, Golden West's Consolidated Statement of Net Earnings reflected fair value estimates for the Company's interest rate swap portfolio, amounting to a pre-tax gain of $7.6 million and a pre-tax loss of $9.7 million, respectively, as seen in "Change in Fair Value of Derivatives." In addition, upon the adoption of SFAS 133 on January 1, 2001, Golden West reported a one-time pre-tax charge of $10 million associated with the initial valuation of the Company's interest rate swap portfolio. For the year ended December 31, 2002, these fair value changes related to SFAS 133 were the principal fair value items affecting Golden West's earnings. Fair values are based on quoted market prices for interest rate swaps. Additionally, pursuant to GAAP, Golden West establishes Capitalized Mortgage Servicing Rights when the Company sells mortgage loans and retains the servicing for them. The Company periodically reviews the CMSRs for impairment based on fair value. Golden West's CMSRs have never experienced impairment. Golden West's CMSR balances amounted to $69 million and $56 million at yearend 2002 and 2001, respectively. Results of Operations Net Earnings Net earnings increased in 2002 as compared to 2001 primarily due to an increase in net interest income, partially offset by an increase in general and administrative expenses. Two non-recurring items contributed to net earnings during 2002. The Company received $9.4 million from the FHLB of San Francisco for 1998 prepayment fees that were refunded. In addition, the Company had a one-time after-tax benefit of $2.7 million due to a change in the California tax law regarding reserves for loan losses. Net earnings increased in 2001 as compared to 2000 as a result of increased net interest income and increased noninterest income, partially offset by an increase in general and administrative expense. Earnings Per Share The Company's Basic Earnings Per Share (EPS) was $6.20 for the year ended December 31, 2002 compared to $5.18 (before the cumulative effect of the accounting change) and $3.44 for the years ended December 31, 2001 and 2000, respectively. The Company reported Diluted EPS of $6.12 for the year ended December 31, 2002 as compared to $5.11 (before the cumulative effect of the accounting change) and $3.41 for the years ended December 31, 2001 and 2000, respectively. Net Interest Income The largest component of the Company's revenue and earnings is net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings. Long-term growth of the Company's net interest income, and hence earnings, is related to the ability to expand the mortgage portfolio, the Company's primary earning asset, by originating and retaining high-quality adjustable rate home loans. Over the short term, however, net interest income can be influenced by business conditions, especially movements in short-term interest rates, which can temporarily increase or reduce changes in net interest income. Net interest income amounted to $1.9 billion, $1.6 billion, and $1.2 billion for the years ended December 31, 2002, 2001, and 2000, respectively. These amounts represented 18%, 42%, and 15% increases, respectively, over the previous years. As discussed below, the significant growth of net interest income in 2002 compared with the prior year resulted from both the expansion of the Company's average primary spread, which is the difference between the yield on loans and other investments and the rate paid on deposits and borrowings. The average primary spread for the years ended December 31, 2002, 2001, and 2000 was 2.99%, 2.70%, and 2.05%, respectively. The significant growth of net interest income in 2001 compared with the prior year resulted from two principal factors: the substantial growth of the mortgage portfolio during 2000; and an increase in 2001 in the Company's primary spread. Between December 31, 2002 and December 31, 2001, the Company's earning asset balance increased by $9.4 billion or 17%. This growth resulted from strong mortgage originations which more than offset loan repayments and loan sales. Net interest income in 2001 benefited from the 32% growth of the mortgage portfolio in the prior year. Specifically, in 2000, the Company originated a record loan volume that, in combination with a moderate level of mortgage repayments, resulted in unusually rapid growth of the Company's loans receivable. Thus, there was a significantly larger average loan balance outstanding during 2001 versus 2000, and this contributed to the substantial net interest income increase in 2001. As noted in the discussion of the Gap on page 48, the Company's liabilities respond more rapidly to movements in short-term interest rates than the Company's assets, most of which are adjustable rate mortgages tied to indexes that lag changes in market interest rates. Consequently, when short-term interest rates decline, the Company's primary spread temporarily widens, because the index lags slow the downward movement of the yield on the Company's adjustable rate mortgage portfolio. When interest rates stabilize after a period of falling rates, the primary spread usually declines for a while until the yield on the ARM portfolio catches up to previous rate decreases. The opposite occurs when interest rates increase. Specifically, when short-term interest rates move up, the Company's primary spread compresses for a period of time, because the index lags slow the upward adjustment of the yield on the Company's ARMs. When interest rates stabilize after a period of rising rates, the primary spread expands for a while until the ARM yield catches up to previous rate increases. For the five years ended December 31, 2002, which included periods of both falling and rising interest rates, the Company's primary spread averaged 2.44% with a monthend high of 3.21% and a monthend low of 1.88%. During 2001, the Federal Reserve's Open Market Committee lowered the Federal Funds rate, a key short-term interest rate, by a total of 475 basis points in order to stimulate the then-weak economy. Other short-term market rates experienced similar decreases. In response to significantly lower short-term interest rates, the Company's cost of funds declined by 284 basis points during 2001. At the same time, the yield on the Company's assets fell by only 166 basis points, because the indexes to which the large adjustable rate mortgage portfolio is tied moved down more slowly. As a consequence, the Company's primary spread widened substantially during 2001, and at December 31, 2001 reaching 3.21%, the highest in the company's history. During 2002, the Company's cost of funds declined by an additional 83 basis points. At the same time, the Company's asset yield fell by 111 basis points, as the ARM indexes continued to adjust downward in response to the large interest rate declines experienced in 2001. Because the yield on earning assets fell faster than the cost of funds in 2002, the Company's primary spread narrowed from 3.21% at December 31, 2001 to 2.93% at December 31, 2002. However, the average primary spread in 2002 was greater that the average reported in 2001, contributing to the increase in net interest income for 2002 as compared with 2001. In November 2002, the Federal Reserve's Open Market Committee lowered the Federal Funds rate by an additional 50 basis points to 1.25%. Because this action occurred near the end of 2002, the rate decrease had a minimal impact on Golden West's earnings asset yield, cost of funds, and primary spread at yearend 2002. The following table shows the components of the Company's primary spread at the end of the years 2000 through 2002. TABLE 55 Yield on Earning Assets, Cost of Funds, and Primary Spread 2000 - 2002 December 31 -------------------------------------- 2002 2001 2000 ----------- ---------- ----------- Yield on loan portfolio 5.28% 6.38% 8.03% Yield on investments 1.94 2.86 7.12 ----------- ---------- ----------- Yield on earning assets 5.25 6.36 8.02 ----------- ---------- ----------- Cost of deposits 2.56 3.39 5.52 Cost of borrowings 1.85 2.72 6.66 ----------- ---------- ----------- Cost of funds 2.32 3.15 5.99 ----------- ---------- ----------- Primary spread 2.93% 3.21% 2.03% =========== ========== ===========
Interest Rate Swaps The Company enters into interest rate swaps as a part of its interest rate risk management strategy. Such instruments are entered into primarily to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. TABLE 56 Interest Rate Swap Activity 2001 - 2002 (Notional Amounts in Millions) Receive Pay Fixed Fixed Swaps Swaps ------------ ------------- Balance at January 1, 2001 $ 217 $ 717 Maturities (114) (96) ------------ ------------- Balance at December 31, 2001 103 621 Additions -0- 275 Maturities (12) (305) ------------ ------------- Balance at December 31, 2002 $ 91 $ 591 ============ =============
Interest rate swap payment activity decreased net interest income by $19 million, $13 million, and $4 million for the years ended December 31, 2002, 2001, and 2000, respectively. The Company accounts for interest rate swaps under the provisions in SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, the Company reported a one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. As a result of the ongoing valuation of the Company's swaps, the Company reported pre-tax income of $8 million, or $.03 after tax per diluted share for the year ended December 31, 2002, as compared to pre-tax expense of $10 million, or $.04 after tax per diluted share for the year ended December 31, 2001. This additional income and expense occurred because the fair value of Golden West's swaps changed in 2002 and 2001 as a result of interest rate movements and maturities of interest rate swaps. The changes in fair value of these swap contracts are reflected as a net liability on the Consolidated Statement of Financial Condition with corresponding amounts reported in Noninterest Income as the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net Earnings. The Company has decided not to utilize permitted hedge accounting for the derivative financial instruments in portfolio at December 31, 2002. Interest on Loans Interest on loans was $2.9 billion, $2.7 billion, and $2.5 billion for the years ended December 31, 2002, 2001, and 2000, respectively. The increase in 2002 was due to an increase in the average portfolio balance partially offset by a decrease in the average portfolio yield. The increase in 2001 was due to an increase in the average portfolio balance partially offset by a decrease in the average portfolio yield. Interest on MBS Interest on MBS was $491 million, $1.3 billion, and $1.1 billion for the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in 2002 was due to a decrease in the average portfolio balance and a decrease in the average portfolio yield. The increase in 2001 was due to an increase in the average portfolio balance partially offset by a decrease in the average portfolio yield. Interest and Dividends on Investments The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. Interest and dividends on investments was $113 million, $193 million, and $254 million for the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in 2002 was primarily due to a decrease in the average portfolio yield and a decrease in the average portfolio balance. The decrease in 2001 was primarily due to a decrease in the average portfolio yield partially offset by an increase in the average portfolio balance. Interest on Deposits Interest on deposits was $1.1 billion, $1.5 billion, and $1.5 billion for the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in 2002 was due to a decrease in the average cost of deposits partially offset by an increase in the average balance of deposits. Interest on deposits in 2001 was similar to 2000. Interest on Advances Interest paid on FHLB advances was $380 million, $880 million, and $961 million for the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in 2002 was due to a decrease in the average cost of these borrowings and a decrease in the average outstanding balance. The decrease in 2001 was due to a decrease in the average cost of these borrowings partially offset by an increase in the average outstanding balance. Interest on Other Borrowings Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $107 million, $176 million, and $190 million for the years ended 2002, 2001, and 2000, respectively. The decrease in the expense in 2002 compared with 2001 was due to a decrease in the average cost partially offset by an increase in the average balance of these liabilities. The decrease in the expense in 2001 was due to a decrease in the average cost of these liabilities partially offset by an increase in the average balance. Provision for Loan Losses The provision for loan losses was $21 million for the year ended December 31, 2002, compared to provisions of $22 million and $9 million for the years ended 2001 and 2000, respectively. An in-depth discussion on the calculation of the Company's allowance for loan losses can be found on page 58. Noninterest Income Noninterest income was $247 million, $237 million, and $161 million for the years ended December 31, 2002, 2001, and 2000, respectively. The increase in 2002 resulted primarily from the income associated with ongoing valuation of interest rate swaps compared with an expense in 2001. Also included in noninterest income during 2002 was a $7.9 million refund for 1998 FHLB prepayment fees refunded by the FHLB of San Francisco. The increase in 2001 was primarily due to higher loan prepayment fees and increased gains on the sale of fixed-rate mortgages. General and Administrative Expenses General and administrative expenses (G&A) were $601 million, $514 million, and $425 million for the years ended 2002, 2001, and 2000, respectively. Expenses increased in 2002 and 2001 because of the costs associated with the year's record loan and savings volumes as well as the increased activity associated with the expansion of the Company's earning assets over the prior three years. Additionally, the Company continued to make sizeable investments in technology including the installation of a new loan origination system, the enhancement of loans and savings internet web sites, and the expansion of computer and network resources to handle the transmission and processing of increased volumes of data. General and administrative expenses as a percentage of average assets was .96% for the year ended December 31, 2002 compared with .90% and .87% for the years ended December 31, 2001 and 2000, respectively. G&A as a percentage of average assets increased in 2002 because expenses grew faster than average assets. G&A as a percentage of net interest income plus noninterest income (the "efficiency ratio") amounted to 27.63% for the year ended December 31, 2002 compared with 27.50% and 32.38% for the years ended December 31, 2001 and 2000, respectively. Taxes on Income Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. Taxes as a percentage of earnings decreased slightly in 2002 as compared to 2001 and increased slightly in 2001 compared with 2000. Included in taxes on income for 2002 was a nonrecurring after-tax benefit of $2.7 million due to a change in the California tax law regarding reserves for loan losses. Liquidity and Capital Resources WSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; wholesale certificates of deposit; borrowings from the FHLB of San Francisco; bank notes; borrowings from its parent; borrowings from its WTX subsidiary; and debt collateralized by mortgages, MBS, or securities. In addition, WSB has other alternatives available to provide liquidity or finance operations including federal funds purchased, bank notes, the issuance of medium-term notes, borrowings from public offerings of debt, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. WTX's principal sources of funds are cash flows generated from borrowings from the FHLB Dallas; earnings; deposits; loan repayments; debt collateralized by mortgages or securities; and borrowings from affiliates. The principal sources of funds for WSB's parent, Golden West, are dividends from subsidiaries, interest on investments, and the proceeds from the issuance of debt securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on senior debt and subordinated debt securities, capital contributions to its insured subsidiaries ($20 million in 2000), dividends to stockholders, the repurchase of Golden West stock, and general and administrative expenses. Common Stock The quarterly price ranges for the Company's common stock during 2002 and 2001 were as follows: TABLE 57 Common Stock Price Range 2001 - 2002 2002 2001 ------------------------------- ------------------------------- First Quarter $58.04 - $65.80 $51.00 - $65.94 Second Quarter $63.17 - $70.25 $57.96 - $68.95 Third Quarter $58.15 - $68.95 $52.81 - $70.00 Fourth Quarter $57.91 - $72.98 $47.15 - $58.85
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Asset/Liability Management" on pages 48 through 50 in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 78 and the financial statements, which begin on page F-1, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning the directors and executive officers of the Registrant, see pages 2, 3, and 7 of the Registrant's Proxy Statement dated March 14, 2003, which are incorporated herein by reference, and page 39 of Item 1 herein. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 14, 2003, on pages 5, 6 and 9 through 11 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 403 of Regulation S-K is set forth on pages 2, 3, 7 and 8 of Registrant's Proxy Statement dated March 14, 2003, and is incorporated herein by reference. The information required by Item 201(d) of Regulation S-K is set forth in Item 5 herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Indebtedness of Management" on page 10 of the Registrant's Proxy Statement dated March 14, 2003, which is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officers and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements See Index included on page 78 and the financial statements, which begin on page F-1. (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index to Exhibits Exhibit No. Description ----------- ----------- 3(a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1990. 3(b) By-Laws, as amended in 1997, are incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1997. 4(a) The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed 10% of the total assets of the Company. 10(a) 1996 Stock Option Plan, as amended and restated February 2, 1996, and as further amended May 2, 2001. 10(b) Incentive Bonus Plan, as amended and restated, is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 15, 2002, for the Company's 2002 Annual Meeting of Stockholders. 10(c) Deferred Compensation Agreement between the Company and James T. Judd is incorporated by reference to Exhibit 10(b) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(d) Deferred Compensation Agreement between the Company and Russell W. Kettell is incorporated by reference to Exhibit 10(c) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(e) Deferred Compensation Agreement between the Company and Michael Roster. 10(f) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the quarter ended September 30, 1998. 10(g) Form of Supplemental Retirement Agreement between the Company and certain executive officers. (3) Index to Exhibits (continued) Exhibit No. Description ----------- ----------- 21 (a) Subsidiaries of the Registrant. 23 (a) Independent Auditors' Consent. 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 99.2 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 99.3 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the Commission in the fourth quarter of 2002. (c) Form S-8 Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statement on Form S-8 No. 33-14833 (filed June 5, 1987): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION By: /s/ Herbert M. Sandler ------------------------------------------------------------------ Herbert M. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler ------------------------------------------------------------------ Marion O. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Russell W. Kettell ------------------------------------------------------------------ Russell W. Kettell, President and Chief Financial Officer By: /s/ William C. Nunan ------------------------------------------------------------------ William C. Nunan, Chief Accounting Officer Dated: March 26, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Maryellen Cattani Herringer 3/26/03 /s/ Bernard A. Osher 3/26/03 - ------------------------------- --------- -------------------------- --------- Maryellen Cattani Herringer Bernard A. Osher Director Director /s/ Louis J. Galen 3/26/03 /s/ Kenneth T. Rosen 3/26/03 - ------------------------------- --------- -------------------------- --------- Louis J. Galen Kenneth T. Rosen Director Director /s/ Antonia Hernandez 3/26/03 /s/ Herbert M. Sandler 3/26/03 - ------------------------------- --------- -------------------------- --------- Antonia Hernandez Herbert M. Sandler Director Director /s/ Patricia A. King 3/26/03 /s/ Marion O. Sandler 3/26/03 - ------------------------------- --------- -------------------------- --------- Patricia A. King Marion O. Sandler Director Director /s/ Leslie Tang Schilling 3/26/03 -------------------------- --------- Leslie Tang Schilling Director CERTIFICATION I, Herbert M. Sandler, certify that: 1) I have reviewed this annual report on Form 10-K of Golden West Financial Corporation; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6) The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 26, 2003 /s/ Herbert M. Sandler - --------------------------------------- --------------------------------- Date Herbert M. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation CERTIFICATION I, Marion O. Sandler, certify that: 1) I have reviewed this annual report on Form 10-K of Golden West Financial Corporation; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6) The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 26, 2003 /s/ Marion O. Sandler - --------------------------------------- --------------------------------- Date Marion O. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation CERTIFICATION I, Russell W. Kettell, certify that: 1) I have reviewed this annual report on Form 10-K of Golden West Financial Corporation; 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4) The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the Company's internal controls; and 6) The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 26, 2003 /s/ Russell W. Kettell - --------------------------------------- ------------------------------------- Date Russell W. Kettell President and Chief Financial Officer Golden West Financial Corporation INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report.................................................F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 2002, and 2001.............................................F-2 Consolidated Statement of Net Earnings for the years ended December 31, 2002, 2001, and 2000 ................................F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002, 2001, and 2000...........................F-4 Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001, and 2000............................F-5, F-6 Notes to Consolidated Financial Statements...............................F-7 All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto. Independent Auditors' Report Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for derivative financial instruments, effective January 1, 2001, to conform with Statement of Financial Accounting Standards No. 133. Oakland, California January 23, 2003 F-1 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Dollars in thousands except per share figures) ASSETS December 31 ------------------------------------- 2002 2001 ----------------- ---------------- Cash $ 318,914 $ 339,059 Securities available for sale at fair value (cost of $596,282 and $260,200) (Note B) 922,177 622,670 Purchased mortgage-backed securities (MBS) available for sale at fair value (cost of $34,404 and $231,613) (Notes C and K) 34,543 233,403 Purchased mortgage-backed securities held to maturity at cost (fair value of $170,173 and $282,366) (Notes D, J and K) 161,846 275,150 Mortgage-backed securities with recourse held to maturity at cost (fair value of $6,007,230 and $13,697,951) (Notes D, J and K) 5,871,069 13,569,619 Loans receivable less allowance for loan losses of $281,097 and $261,013 (Notes E and J) 58,268,899 41,065,375 Interest earned but uncollected (Note G) 183,130 255,600 Investment in capital stock of Federal Home Loan Banks, at cost which approximates fair value (Note J) 1,072,817 1,105,773 Foreclosed real estate 11,244 11,101 Premises and equipment, net (Note H) 351,942 328,579 Other assets (Note F) 1,209,247 779,942 ----------------- ---------------- $68,405,828 $58,586,271 ================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ------------------------------------- 2002 2001 ---------------- ----------------- Deposits (Note I) $41,038,797 $34,472,585 Advances from Federal Home Loan Banks (Note J) 18,635,099 18,037,509 Securities sold under agreements to repurchase (Note K) 522,299 223,523 Bank notes, due 2003, at 1.27% to 1.53% 1,209,925 -0- Senior debt (Note L) 989,690 198,215 Subordinated notes (Note M) 199,867 599,511 Taxes on income (Note N) 489,252 457,964 Other liabilities 295,649 312,774 ---------------- ----------------- 63,380,578 54,302,081 Stockholders' equity (Notes A, O and Q): Preferred stock, par value $1.00: Authorized 20,000,000 shares Issued and outstanding, none Common stock, par value $.10: Authorized 200,000,000 shares Issued and outstanding, 153,521,103 and 155,531,777 shares 15,352 15,553 Additional paid-in capital 198,162 173,500 Retained earnings 4,612,529 3,873,758 ---------------- ----------------- 4,826,043 4,062,811 Accumulated other comprehensive income from unrealized gains on securities, net of income tax of $126,827 and $142,881 199,207 221,379 ---------------- ----------------- Total Stockholders' Equity 5,025,250 4,284,190 ---------------- ----------------- $68,405,828 $58,586,271 ================ =================
See notes to consolidated financial statements. F-2 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS (Dollars in thousands except per share figures) Year Ended December 31 ------------------------------------------------- 2002 2001 2000 --------------- --------------- -------------- Interest Income: Interest on loans $2,893,299 $2,740,101 $2,469,556 Interest on mortgage-backed securities 490,523 1,276,648 1,072,559 Interest and dividends on investments 113,212 192,863 254,425 --------------- --------------- -------------- 3,497,034 4,209,612 3,796,540 Interest Expense: Interest on deposits (Note I) 1,079,937 1,522,328 1,494,447 Interest on advances 379,613 879,842 960,824 Interest on repurchase agreements 1,826 42,113 86,549 Interest on other borrowings 105,364 133,997 103,552 --------------- --------------- -------------- 1,566,740 2,578,280 2,645,372 --------------- --------------- -------------- Net Interest Income 1,930,294 1,631,332 1,151,168 Provision for loan losses 21,170 22,265 9,195 --------------- --------------- -------------- Net Interest Income after Provision for Loan Losses 1,909,124 1,609,067 1,141,973 Noninterest Income: Fees 139,416 150,675 78,016 Gain on the sale of securities, MBS, and loans 45,143 42,513 10,515 Change in fair value of derivatives 7,610 (9,738) -0- Other 54,831 53,289 72,289 --------------- --------------- -------------- 247,000 236,739 160,820 Noninterest Expense: General and administrative: Personnel 355,543 298,435 243,787 Occupancy 88,387 80,908 72,355 Deposit insurance 6,062 5,712 5,699 Advertising 16,656 15,114 8,450 Other 134,846 113,633 94,556 --------------- --------------- -------------- 601,494 513,802 424,847 Earnings before Taxes on Income and Cumulative Effect of Accounting Change 1,554,630 1,332,004 877,946 Taxes on Income (Note N) 596,351 513,181 332,155 --------------- --------------- -------------- Earnings before Cumulative Effect of Accounting Change 958,279 818,823 545,791 Cumulative Effect of Accounting Change, Net of Tax (Note A) -0- (6,018) -0- --------------- --------------- -------------- Net Earnings $ 958,279 $ 812,805 $ 545,791 =============== =============== ============== Basic Earnings Per Share before Cumulative Effect of Accounting Change $ 6.20 $ 5.18 $ 3.44 Cumulative Effect of Accounting Change, Net of Tax (Note A) .00 (.04) .00 --------------- --------------- -------------- Basic Earnings Per Share (Note P) $ 6.20 $ 5.14 $ 3.44 =============== =============== ============== Diluted Earnings Per Share before Cumulative Effect of Accounting Change $ 6.12 $ 5.11 $ 3.41 Cumulative Effect of Accounting Change, Net of Tax (Note A) .00 (.04) .00 --------------- --------------- -------------- Diluted Earnings Per Share (Note P) $ 6.12 $ 5.07 $ 3.41 =============== =============== ==============
See notes to consolidated financial statements. F-3 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands except per share figures) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Comprehensive Stock Capital Earnings Income Equity Income ----------- ----------- ------------ ----------------- --------------- ---------------- Balance at January 1, 2000 $ 16,136 $ 135,555 $2,885,346 $ 157,817 $ 3,194,854 Net earnings -0- -0- 545,791 -0- 545,791 $ 545,791 Change in unrealized gains on securities available for sale -0- -0- -0- 74,849 74,849 74,849 Reclassification adjustment for gains included in income -0- -0- -0- (3) (3) (3) ---------------- Comprehensive income $ 620,637 ================ Common stock issued upon exercise of stock options, including tax benefits - 725,004 shares (Note Q) 72 15,903 -0- -0- 15,975 Purchase and retirement of 3,673,300 shares of Company stock (Note O) (367) -0- (108,930) -0- (109,297) Cash dividends on common stock ($.22 per share) (Note O) -0- -0- (34,882) -0- (34,882) ----------- ----------- ------------ ----------------- --------------- Balance at December 31, 2000 15,841 151,458 3,287,325 232,663 3,687,287 Net earnings -0- -0- 812,805 -0- 812,805 $ 812,805 Change in unrealized gains on securities available for sale -0- -0- -0- (11,246) (11,246) (11,246) Reclassification adjustment for gains included in income -0- -0- -0- (38) (38) (38) ---------------- Comprehensive income $ 801,521 ================ Common stock issued upon exercise of stock options, including tax benefits - 797,090 shares (Note Q) 80 22,042 -0- -0- 22,122 Purchase and retirement of 3,675,450 shares of Company stock (Note O) (368) -0- (185,276) -0- (185,644) Cash dividends on common stock ($.26 per share) (Note O) -0- -0- (41,096) -0- (41,096) ----------- ----------- ------------ ----------------- --------------- Balance at December 31, 2001 15,553 173,500 3,873,758 221,379 4,284,190 Net earnings -0- -0- 958,279 -0- 958,279 $ 958,279 Change in unrealized gains on securities available for sale -0- -0- -0- (21,425) (21,425) (21,425) Reclassification adjustment for gains included in income -0- -0- -0- (747) (747) (747) ---------------- Comprehensive income $ 936,107 ================ Common stock issued upon exercise of stock options, including tax benefits - 730,986 shares (Note Q) 73 24,662 -0- -0- 24,735 Purchase and retirement of 2,741,660 shares of Company stock (Note O) (274) -0- (172,762) -0- (173,036) Cash dividends on common stock ($.3025 per share) (Note O) -0- -0- (46,746) -0- (46,746) ----------- ----------- ------------ ----------------- --------------- Balance at December 31, 2002 $ 15,352 $ 198,162 $4,612,529 $ 199,207 $ 5,025,250 =========== =========== ============ ================= ===============
See notes to consolidated financial statements. F-4 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Year Ended December 31 ---------------------------------------------------- 2002 2001 2000 --------------- ---------------- ------------- Cash Flows from Operating Activities: Net earnings $ 958,279 $ 812,805 $ 545,791 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 21,170 22,265 9,195 Amortization of net loan costs 59,171 23,288 7,877 Depreciation and amortization 37,869 33,538 30,242 Loans originated for sale (1,799,589) (2,327,382) (240,684) Sales of loans 2,429,131 2,919,066 349,809 Decrease (increase) in interest earned but uncollected 73,115 14,257 (93,118) Federal Home Loan Bank stock dividends (51,462) (55,301) (58,333) (Increase) in other assets (431,046) (193,224) (155,637) Increase (decrease) in other liabilities (17,125) (31,806) 160,653 Increase in taxes on income 47,342 33,071 109,742 Other, net 37,038 15,798 (16,268) --------------- ---------------- ------------- Net cash provided by operating activities 1,363,893 1,266,375 649,269 Cash Flows from Investing Activities: New loan activity: Real estate loans originated for portfolio (24,883,301) (18,435,855) (19,542,003) Other, net (826,124) (428,778) (277,188) --------------- ---------------- ------------- (25,709,425) (18,864,633) (19,819,191) Real estate loan principal payments: Monthly payments 1,133,269 601,623 537,989 Payoffs, net of foreclosures 11,208,645 8,582,589 3,926,007 --------------- ---------------- ----------- 12,341,914 9,184,212 4,463,996 Purchases of mortgage-backed securities available for sale -0- (199,314) (4,356) Sales of mortgage-backed securities available for sale 176,063 4,642 -0- Repayments of mortgage-backed securities 3,208,823 6,386,071 2,457,365 Proceeds from sales of real estate 49,433 35,166 43,537 Decrease (increase) in securities available for sale (331,159) (243,761) 52,521 Decrease in other investments -0- 368,555 98,601 Purchases of Federal Home Loan Bank stock -0- (88,030) (512,979) Redemptions of Federal Home Loan Bank stock 83,773 111,807 36,688 Additions to premises and equipment (62,804) (54,884) (62,344) --------------- ---------------- ------------- Net cash used in investing activities (10,243,382) (3,360,169) (13,246,162)
See notes to consolidated financial statements. F-5 Year Ended December 31 --------------------------------------------------- 2002 2001 2000 --------------- --------------- --------------- Cash Flows from Financing Activities: Net increase in deposits $ 6,566,212 $ 4,424,666 $ 2,333,009 Additions to Federal Home Loan Bank advances 6,063,051 2,945,500 13,664,250 Repayments of Federal Home Loan Bank advances (5,465,461) (4,639,788) (2,847,672) Proceeds from agreements to repurchase securities 1,412,593 5,410,609 7,809,989 Repayments of agreements to repurchase securities (1,113,817) (6,044,360) (7,997,891) Increase in bank notes 1,209,925 -0- -0- Proceeds from senior debt 790,708 198,060 -0- Repayments of subordinated notes (400,000) -0- (215,000) Dividends on common stock (46,746) (41,096) (34,882) Exercise of stock options 15,915 14,476 11,024 Purchase and retirement of Company stock (173,036) (185,644) (109,297) --------------- --------------- --------------- Net cash provided by financing activities 8,859,344 2,082,423 12,613,530 --------------- --------------- --------------- Net Increase (Decrease) in Cash (20,145) (11,371) 16,637 Cash at beginning of period 339,059 350,430 333,793 --------------- --------------- --------------- Cash at end of period $ 318,914 $ 339,059 $ 350,430 =============== =============== =============== Supplemental cash flow information: Cash paid for: Interest $ 1,580,156 $ 2,671,740 $ 2,543,728 Income taxes 544,598 469,970 218,385 Cash received for interest and dividends 3,569,504 4,230,318 3,695,585 Noncash investing activities: Loans receivable and loans underlying mortgage-backed securities converted from adjustable rate to fixed-rate 596,213 794,308 28,930 Loans transferred to foreclosed real estate 47,305 34,792 35,948 Loans securitized into mortgage-backed securities with recourse held to maturity -0- 2,995,949 9,482,904 Loans securitized into mortgage-backed securities with recourse recorded as loans receivable per SFAS 140 18,892,282 6,011,873 -0- Mortgage-backed securities held to maturity desecuritized into adjustable rate loans and recorded as loans receivable 4,147,670 -0- -0-
See notes to consolidated financial statements. F-6 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). Intercompany accounts and transactions have been eliminated. World Savings Bank, FSB (WSB), is a federally chartered savings bank and the Company's principal operating subsidiary with $68.0 billion in assets at December 31, 2002. WSB has a wholly owned subsidiary, World Savings Bank, FSB (Texas) (WTX) that is also a federally chartered savings bank regulated by the Office of Thrift Supervision (OTS). WTX had $7.9 billion of assets at December 31, 2002. Certain reclassifications have been made to prior year financial statements to conform to current presentation. Nature of Operations Golden West Financial Corporation, through its financial institution subsidiaries, operates 268 savings branches in nine states and 311 loan offices in 38 states, of which 110 loan offices are located in savings branches. The Company's primary source of revenue is interest from loans on residential real estate and mortgage-backed securities. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash For the purpose of presentation in the Consolidated Statement of Cash Flows, cash is defined as cash held in office and amounts due from banks. Securities Available for Sale The Company classifies its investment securities as available for sale. The Company has no trading securities. Securities available for sale are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. Mortgage-Backed Securities The Company has no mortgage-backed securities (MBS) classified as trading. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability and intent to hold these MBS to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. Prior to April 1, 2001, the Company securitized certain loans from its held for investment loan portfolio into MBS with recourse and into Real Estate Mortgage Investment Conduits (REMICs) which are held to maturity and available to be used as collateral for borrowings. REMICs and loan securitizations are not recorded as sales because 100% of the beneficial ownership interests are retained by the Company, including both the primary and subordinate retained interests in REMICs. REMIC securities are recorded at cost and are evaluated with the other held-to-maturity MBS for impairment based upon the characteristics of the underlying loans. F-7 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share) Securitized Loans In accordance with Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), securities resulting from real estate loan securitizations formed after March 31, 2001 are included in Loans Receivable, and are not considered investments subject to Statement of Financial Accounting Standards Statement No. 115 classification. Loans Receivable The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first deeds of trust on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. A portion of the Company's ARMs is originated with a fixed-rate for an initial period, primarily one to 12 months. The Company originates certain loans that are held for sale, primarily fixed-rate loans. These loans are recorded at the lower of cost or market. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's policy is to measure impairment based on the fair value of the collateral. When the value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the fair value of the collateral. Impairment is measured on an individual loan basis for larger multi-family loans and on a group basis for smaller single-family one-to-four unit loans. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the life of the related loans using the interest method. Loan origination fees, net of certain direct loan origination costs, on loans originated for sale are deferred until the loans are sold and recognized at the time of sale. "Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from deposit accounts, and miscellaneous fees, are recorded when collected. Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and foreclosed real estate. For loans past due 90 days or more, all interest earned but uncollected is fully reserved. Troubled debt restructured consists of loans that have been modified by the Company to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or the borrower's ability to make scheduled payments. Foreclosed Real Estate Foreclosed real estate is comprised of improved property acquired through foreclosure. All foreclosed real estate is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. F-8 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) Allowance for Loan Losses The Company provides specific valuation allowances for losses on loans when impaired and a write-down on foreclosed real estate when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating probable loan losses that is based on both the Company's historical loss experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. This approach also takes into consideration current trends in economic growth, unemployment, housing market activity, and home prices for the nation and individual geographical regions. This approach further considers the impact of other events such as natural disasters. Based on the analysis of historical performance, current conditions, and other risks, management estimates a range of loss allowances by type of loan and risk category to cover probable losses in the portfolio. One-to-four single-family real estate loans are evaluated as a group. In addition, periodic reviews are made of major multi-family and commercial real estate loans and foreclosed real estate. Where indicated, valuation allowances are established or adjusted. In estimating probable losses, consideration is given to the estimated sales price, cost of refurbishing the security property, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings based upon quarterly reviews of the portfolio and the methodology and historical analyses are reviewed quarterly. Mortgage Servicing Rights The balance of Capitalized Mortgage Servicing Rights (CMSRs) is included in "Other assets" in the Consolidated Statement of Financial Condition and is being amortized over the projected servicing period. The amortization of the CMSRs is included in "Fees" in the Consolidated Statement of Net Earnings. Securities Sold Under Agreements to Repurchase The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. Interest Rate Swaps The Company utilizes certain derivative financial instruments, primarily various types of interest rate swaps, as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), beginning January 1, 2001, the Company recognized the fair value of its interest rate swap agreements as assets or liabilities on the Consolidated Statement of Financial Condition. Because the Company has decided not to utilize permitted hedge accounting for its existing swap positions, the changes in fair value of these instruments are reflected in the Consolidated Statement of Net Earnings as "Change in Fair Value of Derivatives." F-9 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) Taxes on Income The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. Regulatory Capital Requirements The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for federally insured financial institutions, such as WSB and WTX. Under FIRREA, thrifts and savings banks must have tangible capital equal to at least 1.5% of adjusted total assets, have core capital equal to at least 4% of adjusted total assets, and have risk-based capital equal to at least 8% of risk-weighted assets. The OTS and other bank regulatory agencies have adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater, and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio is the ratio of core capital to risk-weighted assets, and the Tier 1 or leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. As of December 31, 2002, the most recent notification from the OTS categorized WSB and WTX as "well-capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of WSB or WTX. At December 31, 2002 and 2001, WSB and WTX had the following regulatory capital calculated in accordance with FIRREA's capital standards: December 31, 2002 ----------------------------------------------------------------------------------------- WELL-CAPITALIZED MINIMUM CAPITAL CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ------------------------ ----------------------- ------------------------ Capital Ratio Capital Ratio Capital Ratio ------------- ------- ------------ ------- ------------- -------- WSB Tangible $ 5,152,335 7.61% $ 1,015,695 1.50% --- --- Tier 1 (core or leverage) 5,152,335 7.61 2,708,520 4.00 $ 3,385,650 5.00% Tier 1 risk-based 5,152,335 13.52 --- --- 2,286,060 6.00 Total risk-based 5,431,860 14.26 3,048,080 8.00 3,810,101 10.00 WTX Tangible $ 413,885 5.23% $ 118,752 1.50% --- --- Tier 1 (core or leverage) 413,885 5.23 316,673 4.00 $ 395,841 5.00% Tier 1 risk-based 413,885 24.05 --- --- 103,277 6.00 Total risk-based 414,277 24.07 137,702 8.00 172,128 10.00 December 31, 2001 ----------------------------------------------------------------------------------------- WELL-CAPITALIZED MINIMUM CAPITAL CAPITAL ACTUAL REQUIREMENTS REQUIREMENTS ------------------------ ----------------------- ------------------------ Capital Ratio Capital Ratio Capital Ratio ------------- ------- ------------ ------- ------------- -------- WSB Tangible $ 4,480,834 7.71% $ 871,198 1.50% --- --- Tier 1 (core or leverage) 4,480,834 7.71 2,323,194 4.00 $ 2,903,992 5.00% Tier 1 risk-based 4,480,834 13.20 --- --- 2,037,158 6.00 Total risk-based 4,836,208 14.24 2,716,210 8.00 3,395,263 10.00 WTX Tangible $ 401,886 5.23% $ 115,211 1.50% --- --- Tier 1 (core or leverage) 401,886 5.23 307,229 4.00 $ 384,036 5.00% Tier 1 risk-based 401,886 25.04 --- --- 96,289 6.00 Total risk-based 402,025 25.05 128,385 8.00 160,481 10.00
F-10 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) Retained Earnings Because they are subsidiaries of a savings and loan holding company, WSB and WTX must file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB and WTX may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions they remain at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WSB or WTX to no longer be adequately capitalized, require specific OTS approval. At December 31, 2002, $3.0 billion of WSB's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as are WSB and WTX. Stock The Company has a stock-based employee compensation plan, which is described more fully in Note Q. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for awards granted under the plan. Had compensation cost been determined using the fair value based method prescribed by SFAS 123 "Accounting for Stock Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31 -------------------------------------------------- 2002 2001 2000 -------------- -------------- -------------- Net income, as reported $ 958,279 $ 812,805 $ 545,791 Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects (3,464) (4,808) (5,989) -------------- -------------- -------------- Pro forma net income $ 954,815 $ 807,997 $ 539,802 ============== ============== ============== Diluted earning per share As reported $ 6.20 $ 5.14 $ 3.44 Pro forma 6.18 5.11 3.40 Diluted earning per share As reported $ 6.12 $ 5.07 $ 3.41 Pro forma 6.09 5.04 3.37
New Accounting Pronouncements Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS 133 as of January 1, 2001 and recorded a loss of $10 million before tax, or $6 million after tax. Because the Company has decided not to use permitted hedge accounting for the derivative financial instruments in portfolio on December 31, 2002 and 2001, the changes in fair value of these instruments are reported in Noninterest Income as the "Change in Fair Value of Derivatives" in the Consolidated Statement of Net Earnings. F-11 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140 (SFAS 140). This statement replaces previously issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. From time to time, the Company securitizes loans from its portfolio into MBS, including MBS-REMICs. Under SFAS 140, if the Company retains 100% of the beneficial interests in its MBS securitizations, it will not have any effective "retained interests" requiring disclosure under SFAS 140. To date, the Company has not sold any interests requiring disclosure under SFAS 140. In accordance with SFAS 140, the Company's securitizations after March 31, 2001 resulted in securities classified as securitized loans and recorded as loans receivable. In June 2001, the FASB issued Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The adoption of SFAS 142 on January 1, 2002 had no impact on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its financial statements and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), which requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. In addition, this statement resolves implementation issues of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 on January 1, 2002 had no impact on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost should be recognized at the date of the Company's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. This statement is effective for disposal activity initiated after December 31, 2002. The Company believes that SFAS 146 will not have a significant impact on its financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147), which provides guidance on the accounting for the acquisition of a financial institution. This statement was effective on October 1, 2002. The adoption of SFAS 147 had no impact on the Company's financial statements. F-12 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) In December 2002, the FASB issued Statement of Financial Accounting Standards No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. This statement is effective for interim periods beginning after December 15, 2002. The Company is still considering the impact of the adoption of this statement. NOTE B - Securities Available for Sale The following is a summary of securities available for sale: December 31, 2002 ------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- --------------- -------------- --------------- Eurodollar time deposits $ 225,000 $ -0- $ -0- $ 225,000 Commercial paper 199,993 -0- 7 199,986 Federal funds 153,838 -0- -0- 153,838 Equity securities 5,530 326,331 -0- 331,861 Other 11,921 4 433 11,492 -------------- --------------- -------------- --------------- $ 596,282 $ 326,335 $ 440 $ 922,177 ============== =============== ============== =============== December 31, 2001 ------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- --------------- -------------- --------------- Eurodollar time deposits $ 200,000 $ -0- $ -0- $ 200,000 Federal funds 49,397 -0- -0- 49,397 Equity securities 5,530 362,018 -0- 367,548 Other 5,273 481 29 5,725 -------------- --------------- -------------- --------------- $ 260,200 $ 362,499 $ 29 $ 622,670 ============== =============== ============== ===============
The weighted average portfolio yields on securities available for sale were 1.94% and 2.86% (based on cost) at December 31, 2002 and 2001, respectively. Principal proceeds from the sales of securities from the securities available for sale portfolio were $1,396 (2002), $-0- (2001), and $14 (2000) and resulted in realized gains of $32 (2002), $-0- (2001), and $4 (2000) and no realized losses in 2002, 2001, or 2000. At December 31, 2002, the securities available for sale had maturities as follows: Amortized Fair Maturity Cost Value ------------------------------------------ -------------- --------------- No maturity $ 15,163 $ 341,086 2003 580,591 580,585 2004 through 2007 -0- -0- 2008 through 2012 423 406 2013 and thereafter 105 100 -------------- --------------- $ 596,282 $ 922,177 ============== ===============
F-13 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE C - Purchased Mortgage-Backed Securities Available for Sale Purchased mortgage-backed securities available for sale are summarized as follows: December 31, 2002 ----------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ---------------- --------------- ---------------- FNMA $ 16,953 $ 148 $ 5 $ 17,096 FHLMC 8,955 -0- 4 8,951 GNMA 8,496 -0- -0- 8,496 --------------- ---------------- --------------- ---------------- $ 34,404 $ 148 $ 9 $ 34,543 =============== ================ =============== ================ December 31, 2001 ----------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ---------------- --------------- ---------------- FNMA $ 96,700 $ 472 $ 105 $ 97,067 FHLMC 123,362 927 18 124,271 GNMA 11,551 517 3 12,065 --------------- ---------------- --------------- ---------------- $ 231,613 $ 1,916 $ 126 $ 233,403 =============== ================ =============== ================
The weighted average portfolio yields on mortgage-backed securities available for sale were 8.54% and 7.11% at December 31, 2002, and 2001, respectively. In 2002 and 2001, the Company sold $176 million and $4.6 million, respectively, of mortgage-backed securities available for sale and realized a gain of $3 million (2002) and $13 thousand (2001). There were no sales of securities from the mortgage-backed securities available for sale portfolio in 2000. At December 31, 2002, purchased mortgage-backed securities available for sale had contractual maturities as follows: Amortized Fair Maturity Cost Value ------------------------------------------ ----------------- ---------------- 2003 through 2007 $ 392 $ 394 2008 through 2012 1,468 1,474 2013 and thereafter 32,544 32,675 ----------------- ---------------- $ 34,404 $ 34,543 ================= ================
F-14 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE D - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows: December 31, 2002 ----------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ---------------- --------------- ---------------- Purchased MBS held to maturity ----------------------------------------------- FNMA $ 139,467 $ 7,066 $ -0- $ 146,533 FHLMC 10,876 623 -0- 11,499 GNMA 11,503 638 -0- 12,141 --------------- ---------------- --------------- ---------------- Subtotal 161,846 8,327 -0- 170,173 MBS with recourse held to maturity ----------------------------------------------- REMICs 5,871,069 136,161 -0- 6,007,230 --------------- ---------------- --------------- ---------------- Total $ 6,032,915 $ 144,488 $ -0- $ 6,177,403 =============== ================ =============== ================ December 31, 2001 ----------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- ---------------- --------------- ---------------- Purchased MBS held to maturity ----------------------------------------------- FNMA $ 242,739 $ 4,887 $ -0- $ 247,626 FHLMC 15,845 1,256 -0- 17,101 GNMA 16,566 1,073 -0- 17,639 --------------- ---------------- --------------- ---------------- Subtotal 275,150 7,216 -0- 282,366 MBS with recourse held to maturity ----------------------------------------------- FNMA 4,732,779 53,018 31,495 4,754,302 REMICs 8,836,840 106,809 -0- 8,943,649 --------------- ---------------- --------------- ---------------- Subtotal 13,569,619 159,827 31,495 13,697,951 --------------- ---------------- --------------- ---------------- Total $13,844,769 $ 167,043 $ 31,495 $13,980,317 =============== ================ =============== ================
The weighted average portfolio yields on mortgage-backed securities held to maturity were 5.62% and 6.34% at December 31, 2002 and 2001, respectively. There were no sales of securities from the mortgage-backed securities held to maturity portfolio during 2002, 2001, or 2000. During the first half of 2002, the Company desecuritized $4.1 billion of FNMA MBS that were classified as MBS held to maturity with recourse and the underlying loans were reclassified to loans receivable. At December 31, 2002, mortgage-backed securities held to maturity had contractual maturities as follows: Amortized Fair Maturity Cost Value ------------------------------------------ ----------------- ---------------- 2003 through 2007 $ 7 $ 7 2008 through 2012 94 99 2013 and thereafter 6,032,814 6,177,297 ----------------- ---------------- $ 6,032,915 $ 6,177,403 ================= ================
F-15 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE E - Loans Receivable December 31 ---------------------------------- 2002 2001 ---------------- --------------- Loans collateralized by: One- to four-family dwelling units $54,934,357 $38,326,759 Over four-family dwelling units 3,257,389 2,766,888 Commercial property 20,465 29,117 Land 114 199 ---------------- --------------- 58,212,325 41,122,963 Loans on savings accounts 13,240 16,672 ---------------- --------------- 58,225,565 41,139,635 Net deferred costs 331,985 193,924 Allowance for loan losses (281,097) (261,013) Undisbursed loan funds (7,554) (7,171) ---------------- --------------- $58,268,899 $41,065,375 ================ ===============
As of December 31, 2002 and 2001, the Company had $1.2 billion and $670 million, respectively, of second mortgages outstanding. At December 31, 2002 and 2001, the Company had $381 million and $429 million, respectively, in loans held for sale, all of which were carried at the lower of cost or market. At December 31, 2002, the Company had $19.1 billion of loans that were securitized after March 31, 2001 that are securities classified as loans receivable in accordance with SFAS 140. The outstanding balances of securitizations created prior to March 31, 2001 are included in MBS. A summary of the changes in the allowance for loan losses is as follows: Year Ended December 31 ---------------------------------------------------- 2002 2001 2000 --------------- --------------- -------------- Balance at January 1 $ 261,013 $ 236,708 $ 232,134 Provision for loan losses charged to expense 21,170 22,265 9,195 Loans charged off (1,943) (2,425) (623) Recoveries 857 351 472 Net transfer of allowance (to) from recourse liability -0- 4,114 (4,470) --------------- --------------- -------------- Balance at December 31 $ 281,097 $ 261,013 $ 236,708 =============== =============== ============== The following is a summary of impaired loans: December 31 ---------------------------------- 2002 2001 -------------- --------------- Nonperforming loans $ 413,123 $ 382,510 Troubled debt restructured 233 1,505 Other impaired loans 3,889 11,225 -------------- --------------- $ 417,245 $ 395,240 ============== ===============
The portion of the allowance for loan losses that was specifically provided for impaired loans was $1,572 and $2,712 at December 31, 2002 and 2001, respectively. The average recorded investment in total impaired loans was $407,621 and $322,844 during 2002 and 2001, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized during the years ended December 31, 2002, 2001, and 2000 on the total of impaired loans at each yearend was $14,874 (2002), $17,056 (2001), and $11,187 (2000). F-16 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE F - Loan Servicing In addition to loans receivable and MBS with recourse held to maturity, the Company services loans for others. At December 31, 2002 and 2001, the outstanding balance of loans sold with servicing retained by the Company was $5,408,494 and $4,832,884, respectively. Included in those amounts were $2,897,859 and $2,797,634 at December 31, 2002 and 2001 of loans sold with recourse. Capitalized mortgage servicing rights are included in "Other assets" on the Consolidated Statement of Financial Condition. The following is a summary of CMSRs: Year Ended December 31 -------------------------------- 2002 2001 ------------- ------------- Balance at January 1 $ 56,056 $ 28,355 New CMSRs from loan sales 34,044 41,587 Amortization of CMSRs (20,652) (13,886) ------------- ------------- Balance at December 31 $ 69,448 $ 56,056 ============= =============
CMSRs are reviewed at least quarterly for impairment based on fair value. Because quoted market prices from active markets are not readily available, a present value cash flow model is used to estimate the value that the CMSR could be sold for in the open market as of the valuation date. The Company's model estimates a fair value based on a variety of factors including documented observable data such as cost of servicing, loan prepayment rates, and market discount rates. Currently, all of the loans associated with the Company's CMSRs portfolio are single-family, fixed-rate loans. For the purposes of the fair value calculation, the loans are divided by year of origination and weighted average interest rate. The other key assumptions used in calculating the fair value of CMSRs at December 31, 2002 were a weighted average repayment rate of 24.4%, a discount rate of 10%, and the market rate of the annual cost of servicing of 7.7 basis points. The estimated fair value of CMSRs as of December 31, 2002 and 2001 was $73,082 and $69,520, respectively. At December 31, 2002 and 2001, there was no impairment. The estimated amortization of the December 31, 2002 balance of CMSRs for the five years ending 2007 is $29.4 million (2003), $19.0 million (2004), $12.1 million (2005), $6.9 million (2006), and $2.0 million (2007). Actual results may vary depending upon the level of the payoffs of the loans currently serviced. NOTE G - Interest Earned But Uncollected December 31 ---------------------------------- 2002 2001 ------------- ------------- Loans receivable $ 150,766 $154,209 Mortgage-backed securities 21,685 91,228 Interest rate swaps 2,252 2,377 Other 8,427 7,786 ------------- ------------- $ 183,130 $255,600 ============= ============= NOTE H - Premises and Equipment December 31 --------------------------------- 2002 2001 ------------- ------------- Land $ 81,592 $ 79,660 Building and leasehold improvements 256,019 241,522 Furniture, fixtures, and equipment 278,973 242,024 ------------- ------------- 616,584 563,206 Accumulated depreciation and amortization 264,642 234,627 ------------- ------------- $ 351,942 $328,579 ============= =============
Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment. The aggregate future rentals under long-term operating leases on land or premises in effect on December 31, 2002, and which expire between 2003 and 2064, amounted to approximately $181,314. The approximate minimum payments during the five years ending 2007 are $25,382 (2003), $22,860 (2004), $20,430 (2005), $17,640 (2006), $14,444 (2007) and $80,558 thereafter. Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $28,480 (2002), $26,381 (2001), and $24,016 (2000). F-17 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE I - Deposits December 31 ----------------------------------------------------------------- 2002 2001 ------------------------------- ------------------------------- Rate* Amount Rate* Amount ---------- ---------------- ---------- --------------- Deposits by rate: Interest-bearing checking accounts 1.23% $ 165,320 1.33% $ 155,799 Interest-bearing checking accounts swept into money market deposit accounts 1.79 4,407,650 2.06 4,613,087 Passbook accounts 0.75 456,158 0.87 459,953 Money market deposit accounts 2.50 22,060,104 2.82 8,569,759 Term certificate accounts with original maturities of: 4 weeks to 1 year 1.86 4,714,712 3.37 10,852,181 1 to 2 years 2.52 4,197,261 4.39 6,415,700 2 to 3 years 3.82 1,857,234 5.11 1,619,868 3 to 4 years 4.48 1,286,011 5.23 737,981 4 years and over 5.07 1,794,051 5.59 799,025 Retail jumbo CDs 3.85 100,173 4.47 249,088 All other 4.88 123 6.94 144 ---------------- --------------- $41,038,797 $34,472,585 ================ =============== * Weighted average interest rate including the impact of interest rate swaps. December 31 ----------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ Rate* Amount Rate* Amount ---------- ---------------- ---------- --------------- Deposits by remaining maturity at yearend: No contractual maturity 2.34% $ 27,089,232 2.49% $ 13,798,598 Maturity within one year 2.51 10,082,783 3.87 17,893,723 After one but within two years 3.51 1,495,316 4.47 1,759,044 After two but within three years 4.62 992,351 4.62 475,167 After three but within four years 4.75 255,646 6.58 282,114 After four but within five years 4.72 1,111,603 4.81 245,504 Over five years 4.69 11,866 5.69 18,435 ---------------- --------------- $ 41,038,797 $ 34,472,585 ================ =============== * Weighted average interest rate including the impact of interest rate swaps.
At December 31, the weighted average cost of deposits was 2.56% (2002) and 3.39% (2001). Interest expense on deposits is summarized as follows: Year Ended December 31 --------------------------------------------------- 2002 2001 2000 -------------- -------------- --------------- Interest-bearing checking accounts $ 2,233 $ 3,132 $ 2,946 Interest-bearing checking accounts swept into money market deposit accounts 84,750 111,748 109,492 Passbook accounts 3,855 5,917 8,837 Money market deposit accounts 413,076 187,867 201,265 Term certificate accounts 576,023 1,213,664 1,171,907 -------------- -------------- --------------- $ 1,079,937 $ 1,522,328 $ 1,494,447 ============== ============== ===============
F-18 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE J - Advances from Federal Home Loan Banks Advances are borrowings secured by pledges of certain loans, MBS and capital stock of the Federal Home Loan Banks with a total book value of $23,892,141. The Company's advances have maturities and interest rates as follows: December 31, 2002 ----------------------------------------------------------------- Stated Maturity Amount Rate ---------------- ------------ 2003 $ 6,839,285 1.55% 2004 3,446,622 1.61 2005 6,114,557 1.64 2006 1,935,539 1.69 2007 31,875 6.23 2008 and thereafter 267,221 6.26 ---------------- $ 18,635,099 ================ December 31, 2001 ----------------------------------------------------------------- Stated Maturity Amount Rate ---------------- ------------ 2002 $ 5,461,178 2.16% 2003 6,829,909 2.69 2004 1,038,304 2.29 2005 2,532,043 2.98 2006 1,928,818 2.21 2007 and thereafter 247,257 6.45 ---------------- $ 18,037,509 ================
Financial data pertaining to advances from FHLBs were as follows: Year Ended December 31 ----------------------------------- 2002 2001 --------------- ---------------- Weighted average interest rate, end of year 1.68% 2.55% Weighted average interest rate during the year 2.06% 4.70% Average balance of FHLB advances $18,468,723 $18,738,987 Maximum outstanding at any monthend 19,169,627 19,633,825
Of the advances outstanding at December 31, 2002, $18.1 billion were tied to a LIBOR index and were scheduled to reprice within 90 days. At December 31, 2002, the Company had $1.0 billion of commitments outstanding to borrow advances from the FHLB of Dallas and these advances will be indexed to three-month LIBOR. F-19 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE K - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by mortgage-backed securities with a book value of $527,318 and $224,546 at December 31, 2002 and 2001, respectively. December 31, 2002 ------------------------------------------------------------ Stated Maturity Amount Rate ------------------------- ------------- ---------- 2003 $522,299 1.31% ============= December 31, 2001 ------------------------------------------------------------ Stated Maturity Amount Rate ------------------------- ------------- ---------- 2002 $223,523 1.96% ============= At the end of 2002 and 2001, all of the agreements to repurchase with brokers/dealers were to reacquire the same securities. NOTE L - Senior Debt December 31 ------------------------------ 2002 2001 ------------- ------------- Golden West Financial Corporation senior debt, unsecured, due from 2006 to 2012, at coupon rates of 4.125% to 5.50%, net of unamortized discount of $10,310 (2002) and $1,785 (2001) $ 989,690 $198,215 ============= =============
At December 31, the senior debt had a weighted average interest rate of 4.92% (2002) and 5.75% (2001). At December 31, 2002, senior debt had maturities and interest rates as follows: Stated Maturity Rate Amount --------------------------- -------------- --------------- 2006 5.73% $ 198,603 2007 4.33 297,663 2012 4.95 493,424 --------------- $ 989,690 =============== NOTE M - Subordinated Notes December 31 ------------------------------ 2002 2001 ------------ ------------- Golden West Financial Corporation subordinated notes, unsecured, due 2003, at a coupon rate of 6.00%, net of unamortized discount of $133 (2002) and $489 (2001) $ 199,867 $ 599,511 ============ ============= At December 31, subordinated notes had a weighted average interest rate of 6.09% (2002) and 7.16% (2001). F-20 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures)
NOTE N - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income. Year Ended December 31 ---------------------------------------------------- 2002 2001 2000 -------------- ------------- -------------- Federal income tax: Current $ 479,732 $ 454,381 $ 218,874 Deferred 43,611 (21,791) 65,261 State tax: Current 69,933 81,235 34,449 Deferred 3,075 (644) 13,571 -------------- ------------- -------------- $ 596,351 $ 513,181 $ 332,155 ============== ============= ==============
The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are as follows: December 31 --------------------------------- 2002 2001 -------------- -------------- Federal income tax $ 318,328 $ 267,099 State tax 63,214 70,490
The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows: December 31 ---------------------------------- 2002 2001 -------------- -------------- Deferred tax liabilities: Loan fees and interest income $ 255,563 $ 208,559 FHLB stock dividends 158,162 142,255 Unrealized gains on debt and equity securities 126,827 142,881 Depreciation 22,302 17,402 Bad debt reserve 3,161 14,039 Other deferred tax liabilities 26 41 -------------- -------------- Gross deferred tax liabilities 566,041 525,177 Deferred tax assets: Provision for losses on loans 113,712 106,413 State taxes 31,590 30,333 Other deferred tax assets 39,197 50,842 -------------- -------------- Gross deferred tax assets 184,499 187,588 -------------- -------------- Net deferred tax liability $ 381,542 $ 337,589 ============== ==============
F-21 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate is as follows: Year Ended December 31 ----------------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------------- ------------------------------ ------------------------------ Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------------- ------------ ------------- ------------ ------------- ------------ Computed standard corporate tax expense $544,120 35.0% $466,201 35.0% $307,281 35.0% Increases (reductions) in taxes resulting from: State tax, net of federal income tax benefit 60,666 3.9 55,915 4.2 36,579 4.2 Net financial income, not subject to income tax, primarily related to acquisitions (4,830) (.3) (8,105) (.6) (9,309) (1.1) Other (3,605) (.2) (830) (.1) (2,396) (.3) ------------- ------------ ------------- ------------ ------------- ------------ $596,351 38.4% $513,181 38.5% $332,155 37.8% ============= ============ ============= ============ ============= ============
In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of WSB that arose in tax years that began prior to December 31, 1987. At December 31, 2002 and 2001, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 2002 and 2001, was approximately $88 million. This deferred tax liability could be recognized if certain distributions are made with respect to the stock of WSB, or the bad debt reserve is used for any purpose other than absorbing bad debt losses. NOTE O - Stockholders' Equity Changes in common stock issued and outstanding were as follows: ----------------------------------------------------- Year Ended December 31 ----------------------------------------------------- 2002 2001 2000 -------------- --------------- --------------- Shares issued and outstanding, beginning of year 155,531,777 158,410,137 161,358,433 Common stock issued through options exercised 730,986 797,090 725,004 Common stock repurchased and retired (2,741,660) (3,675,450) (3,673,300) -------------- --------------- --------------- Shares issued and outstanding, end of year 153,521,103 155,531,777 158,410,137 ============== =============== ===============
The quarterly cash dividends paid on the Company's common stock were as follows: -------------------------------------------- Year Ended December 31 -------------------------------------------- 2002 2001 2000 ------------ ----------- ----------- First Quarter $ .0725 $ .0625 $ .0525 Second Quarter .0725 .0625 .0525 Third Quarter .0725 .0625 .0525 Fourth Quarter .0850 .0725 .0625
The Company's Board of Directors, through five separate actions beginning in 1993, authorized the repurchase by the Company of up to 60.6 million shares of Golden West's common stock. As of December 31, 2002, 49,314,258 of such shares had been repurchased and retired at a cost of $1.3 billion since October 28, 1993. During 2002, 2,741,660 of the shares were purchased and retired at a cost of $173 million. F-22 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE P - Earnings Per Share The Company calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following is a summary of the calculation of basic and diluted EPS: Year Ended December 31 ------------------------------------------------------ 2002 2001 2000 ----------------- --------------- --------------- Earnings before cumulative effect of accounting change $ 958,279 $ 818,823 $ 545,791 Cumulative effect of accounting change, net of tax -0- (6,018) -0- ----------------- --------------- --------------- Net earnings $ 958,279 $ 812,805 $ 545,791 ================= =============== =============== Weighted average shares 154,561,240 158,262,474 158,559,273 Dilutive effect of outstanding common stock equivalents 2,120,940 2,096,011 1,718,724 ----------------- --------------- --------------- Diluted average shares outstanding 156,682,180 160,358,485 160,277,997 ================= =============== =============== Basic Earnings Per Share Calculation: Basic earnings per share before cumulative effect of accounting change $ 6.20 $ 5.18 $ 3.44 Cumulative effect of accounting change, net of tax .00 (.04) .00 ----------------- --------------- --------------- Basic earnings per share $ 6.20 $ 5.14 $ 3.44 ================= =============== =============== Diluted Earnings Per Share Calculation: Diluted earnings per share before cumulative effect of accounting change $ 6.12 $ 5.11 $ 3.41 Cumulative effect of accounting change, net of tax .00 (.04) .00 ----------------- --------------- --------------- Diluted earnings per share $ 6.12 $ 5.07 $ 3.41 ================= =============== ===============
F-23 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE Q - Stock Options The Company's 1996 stock option plan authorizes the granting of options to key employees to purchase up to 21 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to five years and prior to ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to five years and prior to ten years and one month from the grant date. At December 31, shares available to be granted under options amounted to 3,147,200 (2002), 3,088,500 (2001), and 4,002,650 (2000). Outstanding options at December 31, 2002, were held by 533 employees and had expiration dates ranging from April 29, 2003, to November 19, 2012. The following table sets forth the range of exercise prices on outstanding options at December 31, 2002: Weighted Weighted Average Average Range of Number of Exercise Remaining Exercise Price Options Price Contractual Life - ---------------------- ----------------- -------------------- --------------------- $11.50 - $17.83 1,270,900 $ 14.80 2.2 years $27.60 - $38.75 3,386,499 30.51 6.6 years $46.68 - $68.65 941,400 47.74 8.8 years ----------------- 5,598,799 =================
All of the options in the range from $11.50 to $17.83 are exercisable. Of the options in the range from $27.60 to $38.75, 1,412,275 are exercisable. Of the options in the range from $46.68 to $68.65, 5,000 are exercisable. A summary of the transactions of the stock option plan follows: Average Exercise Price per Shares Share --------------- -------------- Outstanding, January 1, 2000 5,650,829 $ 22.17 Granted 1,375,150 30.59 Exercised (725,004) 15.21 Canceled (29,550) 30.25 --------------- -------------- Outstanding, December 31, 2000 6,271,425 $ 24.78 Granted 931,650 47.52 Exercised (797,090) 18.16 Canceled (17,500) 37.94 --------------- -------------- Outstanding, December 31, 2001 6,388,485 $ 28.89 Granted 13,250 63.65 Exercised (730,986) 21.77 Canceled (71,950) 33.33 --------------- -------------- Outstanding, December 31, 2002 5,598,799 $ 29.84 =============== ==============
At December 31, options exercisable amounted to 2,688,175 (2002), 2,913,435 (2001), and 2,818,325 (2000). The weighted average fair value per share of options granted during 2002 was $17.27 per share, $14.14 per share for those granted during 2001, and $8.88 per share for those granted during 2000. For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield of 0.5% (2002), 0.8% (2001) and 1.1% (2000); expected volatility of 26% (2002), 26% (2001) and 25% (2000); expected lives of 5.3 years for all years; and risk-free interest rates of 2.73% (2002), 4.30% (2001) and 4.97% (2000). F-24 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123 "Accounting for Stock Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31 ------------------------------------------------ 2002 2001 2000 ------------- ------------- -------------- Net income As reported $ 958,279 $ 812,805 $ 545,791 Pro forma 954,815 807,997 539,802 Basic earnings per share As reported $ 6.20 $ 5.14 $ 3.44 Pro forma 6.18 5.11 3.40 Diluted earning per share As reported $ 6.12 $ 5.07 $ 3.41 Pro forma 6.09 5.04 3.37
NOTE R - Concentrations of Credit Risk and Derivatives As of December 31, 2002, the balance of the Company's loans receivable and MBS with recourse held to maturity was $64 billion. Of that $64 billion balance, 35% were Northern California loans, 29% were Southern California loans, 5% were Florida loans, 4% were Texas loans, 4% were New Jersey loans, 3% were Washington loans, 3% were Illinois loans, and 2% were Colorado loans. No other single state made up more than 2% of the total loan portfolio. The vast majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio. In order to further reduce its exposure to fluctuations in interest rates, the Company is a party to certain derivative instruments entered into in the normal course of business, specifically interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company uses strong counterparties and, if needed, obtains collateral or other security to support these financial instruments. The Company does not anticipate nonperformance by any current counterparties. Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 2002 and 2001 was $1.4 billion and $984 million, respectively. The vast majority of these commitments were for adjustable rate mortgages. From time to time, the Company enters into commitments to purchase or sell mortgage-backed securities. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. The Company had no significant outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 2002 or 2001. F-25 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE S - Interest Rate Swaps The Company has entered into interest rate swap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The possible inability of counterparties to satisfy the terms of these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps. The information presented below is based on interest rates at December 31, 2002. To the extent that rates change, variable interest rate information will change. The following table illustrates the maturities and weighted average rates as of December 31, 2002 for interest rate swaps held by the Company by product type. Maturities of Interest Rate Swaps at December 31, 2002 ---------------------------------------------------------------------------------------------------- Maturity Balance at ----------------------------- December 31, 2002 2003 2004 ------------- ------------- Receive fixed generic swaps: Notional amount $ 91,300 $ -0- $ 91,300 Weighted average receive rate 6.39% 0.00% 6.39% Weighted average pay rate 1.86% 0.00% 1.86% Pay fixed generic swaps: Notional amount $ 487,000 $ 103,600 $ 590,600 Weighted average receive rate 1.63% 1.55% 1.61% Weighted average pay rate 4.02% 6.65% 4.48% ------------- ------------- -------------- Total notional value $ 578,300 $ 103,600 $ 681,900 ============= ============= ============== Total weighted average rate on swaps: Receive rate 2.38% 1.55% 2.25% ============= ============= ============== Pay rate 3.68% 6.65% 4.13% ============= ============= ==============
During 2002, the range of floating interest rates received on swap contracts was 1.40% to 3.67% and the range of floating interest rates paid on swap contracts was 1.78% to 2.00%. The range of fixed interest rates received on swap contracts was 6.39% to 6.56% and the range of fixed interest rates paid on swap contracts was 2.16% to 8.15%. Activity in interest rate swaps is summarized as follows: Interest Rate Swap Activity For the years ended December 31, 2002, 2001, and 2000 (Notional amounts in millions) Receive Pay Fixed Fixed Swaps Swaps ---------- ---------- Balance, January 1, 2000 $ 263 $ 727 Maturities (46) (10) ---------- ---------- Balance, December 31, 2000 217 717 Maturities (114) (96) ---------- ---------- Balance, December 31, 2001 103 621 Additions -0- 275 Maturities (12) (305) ---------- ---------- Balance, December 31, 2002 $ 91 $ 591 ========== ========== Interest rate swap payment activity decreased net interest income by $19 million, $13 million, and $4 million for the years ended December 31, 2002, 2001, and 2000, respectively. F-26 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 2002, 2001, and 2000 (Dollars in thousands except per share figures) The Company accounts for interest rate swaps under the provisions in SFAS 133. Upon adoption of SFAS 133 on January 1, 2001, the Company reported a one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. As a result of the ongoing valuation of the Company's swaps, the Company reported pre-tax income of $8 million, or $.03 after tax per diluted share for the year ended December 31, 2002 and pre-tax expense of $10 million, or $.04 after tax per diluted share for the year ended December 31, 2001. This additional income and expense occurred because the fair value of Golden West's swaps changed in 2002 and 2001 as a result of interest rate movements and the maturities of interest rate swaps. The changes in fair value of these swap contracts are reflected as a net liability on the Consolidated Statement of Financial Condition with corresponding amounts reported in Noninterest Income on the Consolidated Statement of Net Earnings as "Change in Fair Value of Derivatives." The Company has decided not to utilize permitted hedge accounting for the derivative financial instruments in portfolio at December 31, 2002. NOTE T - Disclosure About Fair Value of Financial Instruments The Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. The values presented are based upon information as of December 31, 2002 and 2001, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Banks, other overnight investments, demand deposits, and securities sold under agreements to repurchase with brokers/dealers due within 90 days. Fair values are based on quoted market prices for securities available for sale, other long-term investments, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, securities sold under agreements to repurchase with brokers/dealers with terms greater than 90 days, senior debt, subordinated notes and interest rate swaps. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: term deposits, advances from Federal Home Loan Banks, and consumer repurchase agreements. For loans receivable and loan commitments for investment portfolio, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans. For mortgage servicing rights, the fair value is estimated using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, prepayment rates, and discount rates. F-27 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) The table below discloses the carrying value and the fair value of Golden West's financial instruments as of December 31. December 31 ------------------------------------------------------------------------ 2002 2001 ---------------------------------- ---------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- --------------- -------------- ---------------- Financial Assets: Cash $ 318,914 $ 318,914 $ 339,059 $ 339,059 Securities available for sale 922,177 922,177 622,670 622,670 Mortgage-backed securities available for sale 34,543 34,543 233,403 233,403 Mortgage-backed securities held to maturity 6,032,915 6,177,403 13,844,769 13,980,317 Loans receivable 58,268,899 58,359,527 41,065,375 41,136,294 Interest earned but uncollected 183,130 183,130 255,600 255,600 Investment in capital stock of Federal Home Loan Banks 1,072,817 1,072,817 1,105,773 1,105,773 Capitalized mortgage servicing rights 69,448 73,082 56,056 69,520 Financial Liabilities: Deposits 41,038,797 41,273,390 34,472,585 34,642,385 Advances from Federal Home Loan Banks 18,635,099 18,686,486 18,037,509 18,067,815 Securities sold under agreements to repurchase 522,299 522,307 223,523 223,562 Bank notes 1,209,925 1,210,189 -0- -0- Senior debt 989,690 1,027,655 198,215 200,662 Subordinated notes 199,867 206,258 599,511 614,909 Interest rate swaps 12,031 12,031 19,641 19,641
Off-Balance Sheet Instruments (based on estimated fair value at December 31): December 31 ------------------------------------------------------------------------------------------------ 2002 2001 ----------------------------------------------- --------------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain Gains Losses Gain ------------- ------------- --------------- ------------ ------------- --------------- Loan commitments for investment portfolio $ 19,967 $ -0- $ 19,967 $9,394 $ -0- $ 9,394 ============= ============= =============== ============ ============= ===============
F-28 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE U - Parent Company Financial Information Statement of Net Earnings Year Ended December 31 ---------------------------------------------------- 2002 2001 2000 --------------- -------------- --------------- Revenues: Investment income $ 7,766 $ 20,106 $ 31,306 Insurance commissions 2,354 1,600 1,389 --------------- -------------- --------------- 10,120 21,706 32,695 Expenses: Interest 45,859 47,445 54,119 General and administrative 5,053 4,235 4,617 --------------- -------------- --------------- 50,912 51,680 58,736 --------------- -------------- --------------- Loss before earnings of subsidiaries and income tax credit (40,792) (29,974) (26,041) Income tax credit 15,793 11,693 10,140 Earnings of subsidiaries 983,278 831,086 561,692 --------------- -------------- --------------- Net Earnings $ 958,279 $ 812,805 $ 545,791 =============== ============== ===============
Statement of Financial Condition Assets December 31 ------------------------------------- 2002 2001 ----------------- ---------------- Cash $ 1,481 $ 10,924 Securities available for sale 429,066 203,177 Overnight note receivable from subsidiary 399,369 50,161 Other investments with subsidiary 103 100 Subordinated note receivable from subsidiary -0- 100,000 Investment in subsidiaries 5,373,706 4,712,241 Other assets 30,346 24,966 ----------------- ----------------- $ 6,234,071 $ 5,101,569 ================= ================= Liabilities and Stockholders' Equity Senior debt $ 989,690 $ 198,215 Subordinated notes, net 199,867 599,511 Other liabilities 19,264 19,653 Stockholders' equity 5,025,250 4,284,190 ---------------- ----------------- $ 6,234,071 $ 5,101,569 ================ =================
F-29 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE U - Parent Company Financial Information (Continued) Statement of Cash Flows Year Ended December 31 ------------------------------------------------- 2002 2001 2000 -------------- --------------- -------------- Cash flows from operating activities: Net earnings $ 958,279 $ 812,805 $ 545,791 Adjustments to reconcile net earnings to net cash used in operating activities: Earnings of subsidiaries (983,278) (831,086) (561,692) Amortization of discount on senior debt and subordinated notes 1,123 875 841 Other, net 3,377 7,211 4,114 -------------- --------------- -------------- Net cash used in operating activities (20,499) (10,195) (10,946) Cash flows from investing activities: Capital contributed to subsidiaries -0- -0- (20,000) Dividends received from subsidiaries 300,188 2,222 4,746 (Increase) in securities available for sale (226,762) (200,002) (13) Decrease (increase) in overnight notes receivable from subsidiary (349,208) 228,851 (275,050) Decrease (increase) in other investments with subsidiary (3) (3) 146,998 Issuance of subordinated note receivable from subsidiary -0- -0- (100,000) Repayments of subordinated note receivable from subsidiary 100,000 -0- -0- Repayments of notes receivable from subsidiary -0- -0- 600,000 -------------- --------------- -------------- Net cash provided by (used in) investing activities (175,785) 31,068 356,681 Cash flows from financing activities: Proceeds from senior debt 790,708 198,060 -0- Repayment of subordinated notes (400,000) -0- (215,000) Dividends on common stock (46,746) (41,096) (34,882) Exercise of stock options 15,915 14,476 11,024 Purchase and retirement of Company stock (173,036) (185,644) (109,297) -------------- --------------- -------------- Net cash provided by (used in) financing activities 186,841 (14,204) (348,155) Net increase (decrease) in cash (9,443) 6,669 (2,420) Cash at beginning of period 10,924 4,255 6,675 -------------- --------------- -------------- Cash at end of period $ 1,481 $ 10,924 $ 4,255 ============== =============== ==============
F-30 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share figures) NOTE V - Selected Quarterly Financial Data (Unaudited) 2002 --------------------------------------------------------------------------- Quarter Ended --------------------------------------------------------------------------- March 31 June 30 September 30 December 31 ---------------- ---------------- ---------------- ---------------- Interest income $ 868,236 $ 853,789 $ 888,459 $ 886,550 Interest expense 401,337 388,770 392,759 383,874 ---------------- ---------------- ---------------- ---------------- Net interest income 466,899 465,019 495,700 502,676 Provision for loan losses 8,539 5,186 6,484 961 Noninterest income 70,004 51,293 57,862 67,841 Noninterest expense 141,061 142,967 153,767 163,699 ---------------- ---------------- ---------------- ---------------- Earnings before taxes on income 387,303 368,159 393,311 405,857 Taxes on income 149,222 141,791 148,852 156,486 ---------------- ---------------- ---------------- ---------------- Net earnings $ 238,081 $ 226,368 $ 244,459 $ 249,371 ================ ================ ================ ================ Basic earnings per share $ 1.53 $ 1.46 $ 1.58 $ 1.62 ================ ================ ================ ================ Diluted earnings per share $ 1.51 $ 1.44 $ 1.56 $ 1.60 ================ ================ ================ ================
2001 --------------------------------------------------------------------------- Quarter Ended --------------------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------------- ---------------- ---------------- ----------------- Interest income $ 1,134,183 $ 1,097,744 $ 1,028,154 $ 949,531 Interest expense 771,588 694,443 613,021 499,228 ----------------- ---------------- ---------------- ----------------- Net interest income 362,595 403,301 415,133 450,303 Provision for loan losses 3,183 5,641 3,639 9,802 Noninterest income 43,323 66,828 56,350 70,238 Noninterest expense 117,417 125,115 132,147 139,123 ----------------- ---------------- ---------------- ----------------- Earnings before taxes on income and cumulative effect of accounting change 285,318 339,373 335,697 371,616 Taxes on income 109,239 130,444 129,857 143,641 ----------------- ---------------- ---------------- ----------------- Earnings before cumulative effect of accounting change 176,079 208,929 205,840 227,975 Cumulative effect of accounting change, net of tax (6,018) -0- -0- -0- ----------------- ---------------- ---------------- ----------------- Net earnings $ 170,061 $ 208,929 $ 205,840 $ 227,975 ================= ================ ================ ================= Basic earnings per share before cumulative effect of accounting change $ 1.11 $ 1.32 $ 1.30 $ 1.45 Cumulative effect of accounting change, net of tax (.04) .00 .00 .00 ----------------- ---------------- ---------------- ----------------- Basic earnings per share $ 1.07 $ 1.32 $ 1.30 $ 1.45 ================= ================ ================ ================= Diluted earnings per share before cumulative effect of accounting change $ 1.10 $ 1.30 $ 1.28 $ 1.44 Cumulative effect of accounting change, net of tax (.04) .00 .00 .00 ----------------- ---------------- ---------------- ----------------- Diluted earnings per share $ 1.06 $ 1.30 $ 1.28 $ 1.44 ================= ================ ================ =================
F-31 EX-23 2 gdw10k2002exhibit23a.txt GDW10K2002 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-14833 on Form S-8 and Registration Statement No. 333-41278 on Form S-3 of our report dated January 23, 2003 appearing in this Annual Report on Form 10-K of Golden West Financial Corporation for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Oakland, California March 25, 2003 EX-99 3 gdw10k2002exhibit99hms.txt GDW10K2002 HMS CERTIFICATION EXHIBIT 99.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. March 26, 2003 /s/ Herbert M. Sandler - -------------------------------------- ----------------------------------- Date Herbert M. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation EX-99 4 gdw10k2002exhibit99mos.txt GDW10K2002 MOS CERTIFICATION EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. March 26, 2003 /s/ Marion O. Sandler - ------------------------------------------ --------------------------------- Date Marion O. Sandler Chairman of the Board and Chief Executive Officer Golden West Financial Corporation EX-99 5 gdw10k2002exhibit99rwk.txt GDW10K2002 RWK CERTIFICATION EXHIBIT 99.3 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the accompanying Form 10-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 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-K of Golden West Financial Corporation for the annual period ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of Golden West Financial Corporation. March 26, 2003 /s/ Russell W. Kettell - ------------------------------------- ------------------------------------- Date Russell W. Kettell President and Chief Financial Officer Golden West Financial Corporation EX-21 6 gdw10k2002exhibit21a.txt GDW10K2002 SUBSIDIARIES OF REGISTRANT EXHIBIT 21(a) SUBSIDIARIES OF REGISTRANT: WORLD SAVINGS BANK, FSB Federal Savings Bank, Chartered January 20, 1995 California Corporation, Incorporated October 26, 1912 WORLD SAVINGS, BANK, FSB (TEXAS) Federal Savings Bank, Chartered December 1, 2000 Texas State Savings Bank, Incorporated January 12, 1995 ATLAS ADVISERS, INC. California Corporation, Incorporated May 6, 1987 ATLAS SECURITIES, INC. California Corporation, Incorporated May 6, 1987 EX-10 7 gdw10k2002exhibit10a10e10g.txt GDW10K2002 MATERIAL CONTRACTS EXHIBIT 10(a) GOLDEN WEST FINANCIAL CORPORATION AMENDED AND RESTATED 1996 STOCK OPTION PLAN (As Amended and Restated February 2, 1996) (As Further Amended May 1, 2001) ARTICLE I GENERAL 1. Purpose. This 1996 Stock Option Plan (the "Plan") is intended to increase incentive and to encourage stock ownership on the part of (i) selected key employees of Golden West Financial Corporation (the "Company") or of other corporations which are or become subsidiaries of the Company, and (ii) certain consultants, advisory board members, and other independent contractors who provide services to the Company or its subsidiaries, but who are neither employees of the Company or its subsidiaries nor directors of the Company ("consultants"). It is also the purpose of the Plan to provide such employees and consultants with a proprietary interest, or to increase their proprietary interest, in the Company and its subsidiaries, and to encourage them to remain in the employ of and/or to increase their efforts on behalf of the Company or its subsidiaries. It is intended that certain options granted pursuant to the Plan shall constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("incentive stock options"), and that certain other options granted pursuant to the Plan shall not constitute incentive stock options ("nonqualified stock options"). Prior to February 2, 1996, the Plan was known as the 1987 Stock Option Plan. 2. Administration. The Plan shall be administered by the Stock Option Committee (the "Committee") of the Board of Directors of Golden West Financial Corporation (the "Board"). The Committee shall from time to time at its discretion make determinations with respect to the persons to whom options shall be granted and the amount of such options. The Committee shall consist of not fewer than two members of the Board. The Committee shall be comprised solely of Directors who both are (i) "outside directors" under section 162(m) of the Code and (ii) "disinterested persons" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"). The Committee may delegate to the CEO of the Company or such other Board member or members as the Committee may specify from time to time the authority to grant options under the Plan, provided (a) the grants made to any one person pursuant to the delegated authority of this paragraph shall not exceed 5,000 options to that person in a calendar year; (b) the grants made pursuant to this paragraph are to persons who are not employees of the Company or, if they are employees, are below the level of Group Senior Vice President; and (c) grants shall not be made pursuant to this paragraph to individuals who (i) are subject to Section 16 of the Securities Exchange Act of 1934, or (ii) are subject to the limitation on deductible compensation found in Section 162(m) of the Code. The Committee shall receive a periodic summary of the grants made pursuant to this paragraph and may revoke at any time the delegated authority hereunder. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it shall be final. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. 3. Eligibility. Subject to Section 2 of this Article I, the persons who shall be eligible to receive options under the Plan shall be such persons selected by the Committee from among the officers, key employees (including directors who are also salaried employees of the Company) and consultants of the Company, as may be determined by the Committee in its sole discretion. Notwithstanding any contrary provision of the Plan, consultants shall not be eligible to receive incentive stock options. Except where the context otherwise requires, the term "Company," as used herein, shall include (i) Golden West Financial Corporation and (ii) [any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with Golden West Financial Corporation (each a "subsidiary corporation")], and the terms "officers, key employees and consultants of the Company," and words of similar import, shall include officers, key employees and consultants of each such subsidiary corporation, as well as officers, key employees and consultants of Golden West Financial Corporation. 4. Shares of Stock Subject to the Plan. The shares that may be issued under the Plan shall be authorized and unissued or reacquired shares of the Company's common stock (the "Common Stock"). The aggregate number of shares, which may be issued under the Plan, shall not exceed 7,000,000 shares of Common Stock, unless an adjustment is required in accordance with Article III. If an option expires or is cancelled for any reason without having been fully exercised or vested, the number of shares subject to such option, which were not purchased or did not vest prior to such expiration or cancellation may again be made subject to an option granted hereunder (to the same person or to a different person). 5. Amendment of the Plan. The Board, in its sole discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. However, if and to the extent required to maintain the Plan's qualification under Rule 16b-3, any such amendment shall be subject to stockholder approval. The amendment or termination of the Plan shall not, without the consent of the option holder, alter or impair any rights or obligations under any option theretofore granted to such individual. 6. Term of Plan. The Plan, as amended and restated herein, shall remain in effect until amended or terminated by the Board in accordance with Section 5 of Article I. However, without further stockholder approval, no option, which is intended to be an incentive stock option, may be granted under the Plan after February 1, 2006. 7. Restrictions. All options granted under the Plan shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares subject to options granted under the Plan upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such options or the issuance, if any, or purchase of shares in connection therewith, such options may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 8. Nonassignability. No option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution. During the lifetime of the optionee, the option shall be exercisable only by such optionee, and no other person shall acquire any rights therein. 9. Withholding Taxes. Whenever shares of Common Stock are to be issued under the Plan, the Company shall have the right to require the optionee to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. 10. Definition of "Fair Market Value." For the purposes of this Plan, the term "Fair Market Value," when used in reference to the date of grant of an option or the date of surrender of Common Stock in payment for the purchase of shares pursuant to the exercise of an option, as the case may be, shall mean the closing sale price of the Common Stock quoted on the Composite Tape for New York Stock Exchange--Listed Stocks, as published in "The Wall Street Journal," or if no sale price was quoted on such date, then as of the next preceding date on which such a sale price was quoted. If the Common Stock is not listed on the New York Stock Exchange, Fair Market Value shall mean the mean between the highest and lowest sale prices on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, as published in "The Wall Street Journal" and determined by the Committee, or, if such stock is not listed on any such securities exchange, the mean between the highest and lowest sale prices or bid quotations with respect to a share of such stock on the date such option is granted on the National Association of Securities Dealers, Inc. Automated Quotations System or any successor system or, if no such sale prices or quotations are available, the Fair Market Value on the date in question of a share of such stock as determined in good faith by the Committee. ARTICLE II STOCK OPTIONS 1. Award of Stock Options. Awards of stock options may be made under the Plan under all the terms and conditions contained herein. However, the aggregate Fair Market Value (determined as of the date of grant) of the stock with respect to which incentive stock options are exercisable for the first time by such officer or key employee during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000. The nature of options under the foregoing sentence shall be determined by taking options into account in the order in which they were granted. In no event shall an option constitute an incentive stock option if, at the time such option is granted, the terms of the option provide that it shall not constitute an incentive stock option. The date on which any option is granted shall be the date of the Committee's authorization of such grant or such later date as may be determined by the Committee at the time such grant is authorized. 2. Term of Options and Effect of Termination. Notwithstanding any other provision of the Plan, no option granted under the Plan shall be exercisable after the expiration of ten (10) years from the date of its grant. In addition, notwithstanding any other provision of the Plan, no incentive stock option granted under the Plan to a person who, at the time such option is granted and in accordance with Section 424(d) of the Code, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company shall be exercisable after the expiration of five (5) years from the date of its grant. 3. Terms and Conditions of Options. Options granted pursuant to the Plan shall be evidenced by agreements in such form as the Committee shall from time to time determine, which agreements shall contain such terms and conditions as determined by the Committee in its sole discretion and which also shall comply with the following terms and conditions. (A) Optionee's Agreement. Each optionee shall agree to remain in the employ of and/or to render to the Company his or her services for a period of two (2) years from the date of the option, but such agreement shall not impose upon the Company any obligation to retain the optionee in its employee and/or service for any period. (B) Number of Shares and Type of Option. Each option agreement shall state the number of shares to which the option pertains and whether the option is intended to be an incentive stock option or a nonqualified stock option. During any calendar year, no individual shall be granted options covering more than 300,000 shares. An option, which is intended to be an incentive stock option, may be granted only to an individual who on the grant date is an employee of Golden West Financial Corporation or of a corporation, which constitutes a subsidiary corporation (within the meaning of Section 424(f) of the Code) of Golden West Financial Corporation. (C) Option Price. Each option agreement shall state the option price per share (or the method by which such price shall be computed). The option price per share shall not be less than 100% of the Fair Market Value of a share of the Common Stock on the date such option is granted. Notwithstanding the foregoing, the option price per share of an incentive stock option granted to a person who, on the date of such grant and in accordance with Section 424(d) of the Code, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company shall be not less than 110% of the Fair Market Value of a share of the Common Stock on the date that the option is granted. (D) Medium and Time of Payment. The option price shall be payable upon the exercise of an option in the legal tender of the United States or, in the discretion of the Committee, (i) by tendering previously acquired shares having an aggregate Fair Market Value at the time of exercise equal to the total option price, or (ii) by any other means which the Committee, in its sole discretion, determines to both provide legal consideration for the shares, and to be consistent with the purposes of the Plan. Upon receipt of payment, the Company shall deliver to the optionee (or the person entitled to exercise the option) a certificate or certificates for the shares of Common Stock to which the option pertains. (E) Exercise of Options. Each option shall state the time or times when it becomes exercisable, which shall be determined by the Committee. The Committee may, in its discretion, waive any vesting provisions contained in an option agreement. To the extent that an option has become vested (except as provided in Article III), and subject to the foregoing restrictions, it may be exercised in whole or in such lesser amount as may be authorized by the option agreement; provided, however, that no partial exercise of an option shall be for fewer than fifty (50) shares of Common Stock. If exercised in part, the unexercised portion of an option shall continue to be held by the optionee and May thereafter be exercised as herein provided. (F) Termination and Transfer of Options. In connection with the grant of any option under the Plan, the Committee may provide in the option agreement for the termination of all or any portion of an option under certain circumstances, including, without limitation, termination of the recipient's employment or service as a result of resignation, retirement, disability or death, or for cause, and may distinguish among various causes of termination as the Committee deems appropriate. In addition, the Committee may provide, through an option agreement or otherwise, that in the event an optionee's employment (or other service for the Company) is terminated, (i) such optionee's options may be exercised (by the optionee or, if appropriate, his or her beneficiary or personal representative) for specified periods thereafter within the option period, or (ii) to the extent not fully exercisable or otherwise vested on the termination date, such optionee's options may continue to become exercisable within the option period. ARTICLE III RECAPITALIZATION AND REORGANIZATIONS The number of shares of Common Stock covered by the Plan, and the number of shares and price per share of each outstanding option shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, each outstanding option shall pertain to and apply to the securities to which a holder of the same number of shares of Common Stock that are subject to that option would have been entitled. A dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation (a "Terminating Transaction") shall cause each outstanding option to terminate, unless the agreement of merger or consolidation shall otherwise provide; provided, however, that each optionee in the event of a Terminating Transaction which will cause his or her option to terminate shall have the right immediately prior to such Terminating Transaction to exercise such option in whole or in part, subject to every limitation on the exercisability of such option, other than any vesting provisions not required by the Code. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. ARTICLE IV MISCELLANEOUS PROVISIONS 1. Rights as a Stockholder. An optionee or a transferee of an option shall have no rights as a stockholder of the Company with respect to any shares covered by an option until the date of the receipt of payment (including any amounts required by the Company pursuant to Section 9 of Article I) by the Company. No adjustment shall be made as to any option for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to such date, except as provided in Article III. 2. Other Provisions. The option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the option or restrictions required by any applicable securities laws, as the Committee shall deem advisable. 3. Application of Funds. The proceeds received by the Company from the sale of Common Stock pursuant to the exercise of options will be used for general corporate purposes. 4. No Obligation to Exercise Option. The granting of an option shall impose no obligation upon the optionee or a transferee of the option to exercise such option. EXHIBIT 10(e) SUPPLEMENTAL RETIREMENT AGREEMENT Between GOLDEN WEST FINANCIAL CORPORATION And Michael Roster (Employee) THIS AGREEMENT is effective as of February 15, 2000, by and between Golden West Financial Corporation, a California corporation, on behalf of itself and its subsidiary corporations ("Golden West"), and the above-named Employee. W I T N E S S E T H: WHEREAS, Employee is employed by Golden West or one of its subsidiaries, and WHEREAS, Golden West recognizes that Employee is a valuable management employee and Golden West desires to reward and retain the services of Employee: NOW, THEREFORE, the parties agree as follows: 1. Supplemental Retirement For purposes hereof the "Principal Sum" is the amount so described and set forth in Schedule A hereto. Subject to the provisions of paragraph 3 below, Golden West agrees to pay to Employee or Employee's named beneficiary or estate, in installments as hereafter set forth, an amount equal to that percentage of the Principal Sum (if any) as is set forth on Schedule A after the date upon which Employee's employment with Golden West and all of its subsidiaries terminates. Notwithstanding the foregoing, but subject to the provisions of paragraph 3 below, if Employee's employment is terminated at any time after the date hereof and prior to full vesting as set forth in Schedule A by reason of his death, then Golden West agrees to pay to Employee's named beneficiary or his estate, in installments as hereafter set forth and in lieu of the amount determined pursuant to the preceding sentence, the full Principal Sum. 2. Time of Payments Subject to the provisions of paragraph 3 below, the amount provided for in paragraph 1 hereof shall be paid without interest in 240 equal, consecutive, semi-monthly installments over a ten-year period, commencing on the Commencement Date. The Commencement Date shall be the first day of the month following the death of Employee or the date upon which Employee reaches age 65, whichever is earlier. 3. Cashouts of Small Sums If the lump sum present value of the amount that remains to be paid as of the date of Employee's termination of employment with Golden West and all of its subsidiaries is less than or equal to $3,500, then in lieu of any payments that would otherwise subsequently be due under paragraphs 1 and 2 above, Golden West shall make a single lump sum cash payment to Employee (or Employee's beneficiary or estate, if Employee has died between date of termination of employment with Golden West and date of lump sum payment) of an amount equal to the present value (determined as of the date of Employee's termination of employment) of the 240 payments the employee would have otherwise received starting at age 65. For purposes of computing the present value of the future payments, Golden West shall use as a discount rate, the yield (determined at the date of employee's termination of employment) on the U.S. Treasury Security with a maturity date closest to the mid-point of the ten year term during which the employee would have received the 240 payments. Such lump sum payment shall be made as soon as practicable after Employee's termination of employment. 4. Recipient of Payments Payments provided to be made hereunder shall be made to Employee so long as he shall be living, and thereafter to such beneficiary as Employee may designate in a writing filed with Golden West, and if no beneficiary has been so designated by Employee, or if the beneficiary so designated is deceased at the time payment is due and no successor beneficiary has been so designated who is then surviving, then to Employee's estate. 5. Life Insurance Golden West in its discretion may apply for and procure as owner and for its own benefit insurance on the life of Employee, in such amounts and in such forms as Golden West may determine. Employee shall have no direct or indirect interest whatsoever in any such policy or policies, but at the request of Golden West Employee shall submit to medical examination and supply such information and execute such documents as may be required by the insurance company or companies to which Golden West applies for insurance. The rights of Employee, or his beneficiary, or estate, to benefits under this Agreement shall be solely those of an unsecured creditor of Golden West. Any insurance policy or other assets held by Golden West or any of its subsidiaries in connection with the liabilities assumed pursuant to this Agreement shall not be deemed to be held under any trust for the benefit of Employee, or his beneficiary, or his estate, or to be security for the performance of the obligations of Golden West but shall be, and remain, general, unpledged, and unrestricted assets of Golden West. 6. Nonalienability of Benefits No portion of the benefits payable hereunder shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge. 7. State of Agreements The benefits payable hereunder shall be independent of, and in addition to, any compensation or other benefit payable under any other agreement or plan relating to Employee's employment that may exist from time to time. Nothing contained herein shall restrict the right of Golden West or any of its subsidiaries to discharge Employee, or restrict the right of Employee to terminate his employment. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first above written. GOLDEN WEST FINANCIAL CORPORATION By /s/ Carl M. Andersen --------------------------------- Carl M. Andersen Group Senior Vice President Employee /s/ Michael Roster --------------------------------- Michael Roster SCHEDULE "A" To SUPPLEMENTAL RETIREMENT AGREEMENT EMPLOYEE: Michael Roster PRINCIPAL SUM: $2,000,000 FULL VESTING PERIOD: 10 Years Commencing February 15, 2000 Vesting Percentage: If the Employee's employment with Golden West Financial Corporation and all of its subsidiaries terminates before the full vesting period is completed, partial vesting of the principal sum will be as follows: 6.66 % per year for years 1 - 5 13.33 % per year for years 6 - 10 The vesting percentages set forth above shall be prorated for any partial year of employment with Golden West or any of its subsidiaries prior to the completion of the full vesting period. EXHIBIT 10(g) SUPPLEMENTAL RETIREMENT AGREEMENT Between GOLDEN WEST FINANCIAL CORPORATION And (Employee Name) (Employee) THIS AGREEMENT is effective as of ________ __, 200__, by and between Golden West Financial Corporation, a Delaware corporation, on behalf of itself and its subsidiaries (collectively, "Golden West"), and the above-named Employee. W I T N E S S E T H: WHEREAS, Employee is employed by Golden West; and WHEREAS, Golden West recognizes that Employee is a valuable management employee and Golden West desires to reward and retain the services of Employee. NOW, THEREFORE, the parties agree as follows: 1. Supplemental Retirement For purposes hereof, the "Principal Sum" is the amount so described and set forth in Schedule A hereto. Subject to the provisions of paragraph 3 below, Golden West agrees to pay to Employee or Employee's named beneficiary or estate, in installments as hereafter set forth, an amount equal to that percentage of the Principal Sum (if any) as is set forth on Schedule A as of the first date upon which (a) Employee's employment with Golden West terminates, or (b) Employee ceases to work full-time (as defined from time to time by company policy) for Golden West. Notwithstanding the foregoing, but subject to the provisions of paragraph 3 below, if Employee's employment is terminated at any time after the date hereof and prior to full vesting as set forth in Schedule A by reason of his or her death, then Golden West agrees to pay to Employee's named beneficiary or his or her estate, in installments as hereafter set forth and in lieu of the amount determined pursuant to the preceding sentence, the full Principal Sum. 2. Time of Payments Subject to the provisions of paragraph 3 below, the amount provided for in paragraph 1 hereof shall be paid without interest in 240 equal, consecutive, semi-monthly installments over a ten-year period, commencing on the Commencement Date. The Commencement Date shall be the first day of the month following the death of Employee or the date upon which Employee reaches age 65, whichever is earlier. 3. Cashouts of Small Sums If the lump sum present value of the amount that remains to be paid as of the date of Employee's termination of employment with Golden West is less than or equal to $3,500, then in lieu of any payments that would otherwise subsequently be due under paragraphs 1 and 2 above, Golden West shall make a single lump sum cash payment to Employee (or Employee's beneficiary or estate, if Employee has died between date of termination of employment with Golden West and date of lump sum payment) of an amount equal to the present value (determined as of the date of Employee's termination of employment) of the 240 payments the employee would have otherwise received starting at age 65. For purposes of computing the present value of the future payments, Golden West shall use as a discount rate, the yield (determined at the date of employee's termination of employment) on the U.S. Treasury Security with a maturity date closest to the mid-point of the ten-year term during which the employee would have received the 240 payments. Such lump sum payment shall be made as soon as practicable after Employee's termination of employment. 4. Recipient of Payments Payments provided to be made hereunder shall be made to Employee so long as he or she shall be living, and thereafter to such beneficiary as Employee may designate in a writing filed with Golden West, and if no beneficiary has been so designated by Employee, or if the beneficiary so designated is deceased at the time payment is due and no successor beneficiary has been so designated who is then surviving, then to Employee's estate. 5. Life Insurance Golden West in its discretion may apply for and procure as owner and for its own benefit insurance on the life of Employee, in such amounts and in such forms as Golden West may determine. Employee shall have no direct or indirect interest whatsoever in any such policy or policies, but at the request of Golden West, Employee shall submit to medical examination and supply such information and execute such documents as may be required by the insurance company or companies to which Golden West applies for insurance. The rights of Employee, or his or her beneficiary, or estate, to benefits under this Agreement shall be solely those of an unsecured creditor of Golden West. Any insurance policy or other assets held by Golden West in connection with the liabilities assumed pursuant to this Agreement shall not be deemed to be held under any trust for the benefit of Employee, or his or her beneficiary, or his or her estate, or to be security for the performance of the obligations of Golden West but shall be, and remain, general, unpledged, and unrestricted assets of Golden West. 6. Nonalienability of Benefits No portion of the benefits payable hereunder shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge. 7. State of Agreements The benefits payable hereunder shall be independent of, and in addition to, any compensation or other benefit payable under any other agreement or plan relating to Employee's employment that may exist from time to time. Nothing contained herein shall restrict the right of Golden West to discharge Employee, or restrict the right of Employee to terminate his or her employment. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first above written. GOLDEN WEST FINANCIAL CORPORATION By --------------------------------- Carl M. Andersen Group Senior Vice President Employee --------------------------------- (Employee Name) SCHEDULE A To SUPPLEMENTAL RETIREMENT AGREEMENT EMPLOYEE: (Employee Name) PRINCIPAL SUM: $__________ FULL VESTING PERIOD: __ Years Commencing ___________ __, 200__ Vesting Percentages: The Principal Sum vests as follows: ____% per year for year 1 ____% per year for years 2 - __ ____% per year for years __ - __ The vesting percentages set forth above shall be prorated for any partial year prior to the completion of the full vesting period. -----END PRIVACY-ENHANCED MESSAGE-----