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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-4629
GOLDEN WEST FINANCIAL CORPORATION
Incorporated Pursuant to the Laws of Delaware State
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IRS - Employer Identification No. 95-2080059
1901 Harrison Street, Oakland, California 94612
(510) 446-3420
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 2001:
Common Stock -- 157,619,237 shares.
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GOLDEN WEST FINANCIAL CORPORATION
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition -
September 30, 2001 and 2000 and December 31, 2000....................................1
Consolidated Statement of Net Earnings -
For the three and nine months ended September 30, 2001 and 2000......................2
Consolidated Statement of Cash Flows -
For the three and nine months ended September 30, 2001 and 2000......................3
Consolidated Statement of Stockholders' Equity -
For the nine months ended September 30, 2001 and 2000................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.......6
New Accounting Pronouncements.............................................................6
Financial Highlights......................................................................8
Financial Condition.......................................................................10
Cash and Investments......................................................................12
Loans Receivable and Mortgage-Backed Securities...........................................12
Mortgage Servicing Rights.................................................................18
Asset Quality.............................................................................19
Deposits..................................................................................21
Advances from Federal Home Loan Banks.....................................................23
Securities Sold Under Agreements to Repurchase............................................23
Other Borrowings..........................................................................23
Stockholders' Equity......................................................................23
Regulatory Capital........................................................................24
Results of Operations.....................................................................26
Liquidity and Capital Resources...........................................................33
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................34
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................35
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Golden West Financial Corporation
and subsidiaries (Golden West or Company) for the three and nine months ended
September 30, 2001 and 2000 are unaudited. In the opinion of the Company, all
adjustments (consisting only of normal recurring accruals) that are necessary
for a fair statement of the results for such three and nine-month periods have
been included. The operating results for the three and nine months ended
September 30, 2001 are not necessarily indicative of the results for the full
year.
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Dollars in thousands)
September 30 December 31 September 30
2001 2000 2000
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
------------------ ------------------
Assets
Cash $ 383,927 $ 350,430 $ 213,884
Securities available for sale at fair value 725,881 392,841 310,916
Other investments at cost -0- 368,555 138,096
Purchased mortgage-backed securities available for sale 243,659 69,960 68,464
Purchased mortgage-backed securities held to maturity 309,171 385,543 397,897
Mortgage-backed securities with recourse held to maturity 15,244,959 18,124,987 14,109,347
Loans receivable 38,673,021 33,762,643 34,906,911
Interest earned but uncollected 253,328 276,306 245,175
Investment in capital stock of Federal Home Loan Banks--at cost 1,067,800
which approximates fair value 1,099,758 937,752
Foreclosed real estate 9,458 8,261 9,884
Premises and equipment--at cost less accumulated depreciation 321,593 307,652 302,027
Other assets 858,367 588,991 725,028
------------------ ----------------- ------------------
$ 58,123,122 $55,703,969 $ 52,365,381
================== ================= ==================
Liabilities and Stockholders' Equity
Deposits $ 33,133,942 $30,047,919 $ 28,249,069
Advances from Federal Home Loan Banks 17,859,941 19,731,797 18,230,468
Securities sold under agreements to repurchase 420,596 857,274 858,676
Federal funds purchased -0- -0- 50,000
Bank notes 693,976 -0- -0-
Senior debt--net of discount 198,117 -0- -0-
Subordinated notes--net of discount 599,329 598,791 713,589
Taxes on income 579,691 432,207 375,874
Other liabilities 422,391 348,694 398,699
Stockholders' equity 4,215,139 3,687,287 3,489,006
------------------ ----------------- ------------------
$ 58,123,122 $55,703,969 $ 52,365,381
================== ================= ==================
Golden West Financial Corporation
Consolidated Statement of Net Earnings
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- --------------------------------
2001 2000 2001 2000
------------- ------------- --------------- --------------
Interest Income
Interest on loans $ 683,732 $ 653,432 $ 2,061,379 $ 1,786,134
Interest on mortgage-backed securities 298,303 283,360 1,035,569 726,659
Interest and dividends on investments 46,119 77,642 163,133 186,587
------------- ------------- --------------- --------------
1,028,154 1,014,434 3,260,081 2,699,380
Interest Expense
Interest on deposits 365,666 385,442 1,202,531 1,083,765
Interest on advances 200,752 283,681 733,760 635,096
Interest on repurchase agreements 7,265 23,827 39,491 62,460
Interest on other borrowings 39,338 33,572 103,270 79,989
------------- ------------- --------------- --------------
613,021 726,522 2,079,052 1,861,310
------------- ------------- --------------- --------------
Net Interest Income 415,133 287,912 1,181,029 838,070
Provision for loan losses 3,639 1,106 12,463 5,917
------------- ------------- --------------- --------------
Net Interest Income after Provision for Loan Losses 411,494 286,806 1,168,566 832,153
Noninterest Income
Fees 37,873 19,896 111,906 54,583
Gain on the sale of securities and loans 12,630 2,765 26,390 6,036
Change in fair value of derivatives (7,923) -0- (13,837) -0-
Other 13,770 18,715 42,042 54,173
------------- ------------- --------------- --------------
56,350 41,376 166,501 114,792
Noninterest Expense
General and administrative:
Personnel 77,289 62,313 217,487 177,718
Occupancy 20,517 18,426 59,806 53,033
Deposit insurance 1,466 1,444 4,270 4,298
Advertising 4,632 979 9,557 4,641
Other 28,243 23,974 83,559 69,793
------------- ------------- --------------- --------------
132,147 107,136 374,679 309,483
Earnings before Taxes on Income and
Cumulative Effect of Accounting Change 335,697 221,046 960,388 637,462
Taxes on income 129,857 83,643 369,540 240,863
------------- ------------- --------------- --------------
Income before Cumulative Effect of Accounting Change 205,840 137,403 590,848 396,599
Cumulative effect of accounting change, net of tax -0- -0- (6,018) -0-
------------- ------------- --------------- --------------
Net Earnings $ 205,840 $ 137,403 $ 584,830 $ 396,599
============= ============= =============== ==============
Basic Earnings Per Share before
Cumulative Effect of Accounting Change $ 1.30 $ .87 $ 3.73 $ 2.50
Cumulative effect of accounting change, net of tax .00 .00 (.04) .00
------------- ------------- --------------- --------------
Earnings Per Share $ 1.30 $ .87 $ 3.69 $ 2.50
============= ============= =============== ==============
Diluted Earnings Per Share before
Cumulative Effect of Accounting Change $ 1.28 $ .86 $ 3.68 $ 2.48
Cumulative effect of accounting change, net of tax .00 .00 (.04) .00
------------- ------------- --------------- --------------
Diluted Earnings Per Share $ 1.28 $ .86 $ 3.64 $ 2.48
============= ============= =============== ==============
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ --------------------------------
2001 2000 2001 2000
--------------- ------------- -------------- ---------------
Cash Flows from Operating Activities
Net earnings $ 205,840 $ 137,403 $ 584,830 $ 396,599
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 3,639 1,106 12,463 5,917
Amortization of loan (fees), costs, and (discounts) 5,601 1,952 16,691 4,896
Depreciation and amortization 8,484 7,547 24,746 21,914
Loans originated for sale (524,923) (54,698) (1,418,349) (169,153)
Sales of loans 795,851 89,923 1,782,628 225,219
Decrease (increase) in interest earned but uncollected 14,521 (23,547) 20,394 (63,817)
Federal Home Loan Bank stock dividends (13,529) (16,036) (45,774) (41,295)
Decrease (increase) in other assets 66,337 203,716 (270,458) (291,143)
Increase in accounts payable and accrued expenses 39,111 24,409 76,024 213,018
Increase in taxes on income 113,190 13,753 154,347 85,928
Other, net 9,487 (4,443) (4,587) (11,506)
--------------- ------------- -------------- ---------------
Net cash provided by operating activities 723,609 381,085 932,955 376,577
Cash Flows from Investing Activities
New loan activity:
New real estate loans originated for portfolio (5,075,815) (5,423,515) (13,605,119) (14,751,075)
Real estate loans purchased -0- -0- -0- (195)
Other, net (122,871) (87,983) (306,856) (198,337)
--------------- ------------- -------------- ---------------
(5,198,686) (5,511,498) (13,911,975) (14,949,607)
Real estate loan principal payments:
Monthly payments 157,656 142,645 412,237 419,894
Payoffs, net of foreclosures 2,217,278 1,002,439 6,243,153 2,849,304
--------------- ------------- -------------- ---------------
2,374,934 1,145,084 6,655,390 3,269,198
Purchases of mortgage-backed securities (27,528) -0- (189,511) -0-
Repayments of mortgage-backed securities 1,810,759 659,231 4,901,506 1,692,174
Proceeds from sales of real estate 8,353 9,361 25,982 34,029
Decrease (increase) in securities available for sale (71,077) (11) (349,746) 51,543
Decrease in other investments 375 164,156 368,555 329,060
Purchases of Federal Home Loan Bank stock (10,480) (141,326) (10,480) (398,139)
Redemptions of Federal Home Loan Bank stock 112 -0- 26,880 36,688
Additions to premises and equipment (13,347) (11,407) (39,020) (47,424)
--------------- ------------- -------------- ---------------
Net cash used in investing activities (1,126,585) (3,686,410) (2,522,419) (9,982,478)
Golden West Financial Corporation
Consolidated Statement of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ --------------------------------
2001 2000 2001 2000
--------------- ------------- -------------- --------------
Cash Flows from Financing Activities
Net increase in deposits (a) $ 1,641,983 $ 522,287 $ 3,086,023 $ 534,159
Additions to Federal Home Loan Bank advances 425,000 3,022,180 1,306,550 10,654,250
Repayments of Federal Home Loan Bank advances (1,510,511) (23,234) (3,178,406) (1,339,001)
Proceeds from agreements to repurchase securities 1,301,440 1,801,836 4,807,682 4,908,910
Repayments of agreements to repurchase securities (1,732,041) (2,103,696) (5,244,360) (5,095,410)
Increase in federal funds purchased -0- 50,000 -0- 50,000
Increase in bank notes 58,880 -0- 693,803 -0-
Proceeds from senior debt 198,060 -0- 198,060 -0-
Repayment of subordinated debt -0- -0- -0- (100,000)
Dividends on common stock (9,936) (8,297) (29,760) (24,991)
Exercise of stock options 3,550 3,691 12,481 7,372
Purchase and retirement of Company stock (29,112) -0- (29,112) (109,297)
--------------- ------------- -------------- --------------
Net cash provided by financing activities 347,313 3,264,767 1,622,961 9,485,992
--------------- ------------- -------------- --------------
Net Increase (Decrease) in Cash (55,663) (40,558) 33,497 (119,909)
Cash at beginning of period 439,590 254,442 350,430 333,793
--------------- ------------- -------------- --------------
Cash at end of period $ 383,927 $ 213,884 $ 383,927 $ 213,884
=============== ============= ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest $ 632,138 $ 694,079 $ 2,134,662 $ 1,769,053
Income taxes 16,694 69,890 211,550 155,055
Cash received for interest and dividends 1,043,780 987,610 3,283,059 2,629,556
Noncash investing activities:
Loans converted from adjustable rate to fixed-rate 79,393 4,075 281,506 20,522
Loans transferred to foreclosed real estate 8,496 8,055 25,202 29,167
Loans securitized into mortgage-backed securities
with recourse held to maturity -0- 1,133,656 2,995,949 4,695,770
Loans securitized into mortgage-backed securities
with recourse held to maturity recorded as loans
receivable per SFAS 140 3,007,296 -0- 6,011,873 -0-
(a) Includes a decrease of $119 million of wholesale deposits for the quarter
ended September 30, 2001. Includes a decrease of $185 million of wholesale
deposits for the nine months ended September 30, 2001 and a decrease of
$600 million of wholesale deposits for the nine months ended September 30,
2000.
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
For the Nine Months Ended September 30, 2001
-----------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income Equity Income
---------- ----------- ------------- -------------- --------------- ----------------
Balance at January 1, 2001 $ 15,841 $ 151,458 $ 3,287,325 $ 232,663 $ 3,687,287
Comprehensive income:
Net earnings -0- -0- 584,830 -0- 584,830 $ 584,830
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- (10,587) (10,587) (10,587)
-----------------
Comprehensive Income $ 574,243
=================
Common stock issued upon
exercise of stock options 67 12,414 -0- -0- 12,481
Purchase and retirement of
Company stock (53) -0- (29,059) -0- (29,112)
Cash dividends on common
stock ($.1875 per share) -0- -0- (29,760) -0- (29,760)
----------- ---------- ------------- --------------- ---------------
Balance at September 30, 2001 $ 15,855 $ 163,872 $ 3,813,336 $ 222,076 $ 4,215,139
=========== =========== ============= =============== ===============
For the Nine Months Ended September 30, 2000
------------------------------------------------------------------------------------------
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
Comprehensive income:
Net earnings -0- -0- 396,599 -0- 396,599 $ 396,599
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- 24,472 24,472 24,472
Reclassification adjustment for
gains included in income -0- -0- -0- (3) (3) (3)
------------------
Comprehensive Income $ 421,068
==================
Common stock issued upon
exercise of stock options 44 7,328 -0- -0- 7,372
Purchase and retirement of
Company stock (367) -0- (108,930) -0- (109,297)
Cash dividends on common
stock ($.1575 per share) -0- -0- (24,991) -0- (24,991)
--------- ------------ ------------- ------------- --------------
Balance at September 30, 2000 $ 15,813 $ 142,883 $ 3,148,024 $ 182,286 $ 3,489,006
========= ============ ============= ============= ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis included herein covers those material
changes in liquidity and capital resources that have occurred since December 31,
2000, as well as material changes in results of operations during the three and
nine month periods ended September 30, 2001 and 2000, respectively.
The following narrative is written with the presumption that the
users have read or have access to the Company's 2000 Annual Report on Form 10-K,
which contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2000, and for the year then ended.
Therefore, only material changes in financial condition and results of
operations are discussed herein.
This report may contain certain forward-looking statements, which are
not historical facts and pertain to future operating results of the Company.
Such statements are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are
inherently subject to significant business, economic, and competitive
uncertainties and contingencies, many of which are beyond the Company's control.
In addition, forward-looking statements are subject to change. Actual results
may differ materially from the results discussed in forward-looking statements
for the reasons, among others, discussed under the heading "Asset/Liability
Management" in the Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Company's 2000 Annual Report on Form 10-K.
During the fourth quarter of 2000, World Savings Bank, a State
Savings Bank (WSSB), a wholly owned subsidiary of Golden West, received approval
to change from a Texas state savings bank regulated by the Federal Deposit
Insurance Corporation (FDIC) to a federally chartered savings bank regulated by
the Office of Thrift Supervision (OTS). WSSB's new name as a result of this
change is World Savings Bank, FSB Texas (WTX). On December 1, 2000, Golden West
contributed WTX to World Savings Bank, FSB (WSB) and WTX became a wholly owned
subsidiary of WSB. In addition, on December 31, 2000, World Savings and Loan
Association (WSL), formerly a wholly owned subsidiary of Golden West, was merged
into WSB. The reorganization of these subsidiaries had no effect on the Golden
West consolidated financial statements as of December 31, 2000 or September 30,
2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), with amendments issued September
2000. This Statement 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. In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133" (SFAS 137) which delayed the effective date of SFAS
133 until fiscal years beginning after June 15, 2000. 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 elected not to use permitted hedge
accounting for the derivative financial instruments in portfolio on September
30, 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 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. Because the Company retains 100% of the beneficial interests in its
MBS-REMIC securitizations, it does not have any effective "retained interests"
requiring disclosures under SFAS 140. In accordance with SFAS 140, the Company's
securitizations after March 31, 2001 have resulted in securitized loans being
recorded as loans receivable (see pages 12 and 13 for further discussions).
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS 141) and Statement of Financial
Accounting Standards No.142, "Goodwill and Other Intangible Assets" (SFAS No.
142). SFAS 141 requires that all business combinations initiated after September
30, 2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives will
not be amortized, but will rather be tested at least annually for impairment.
The Company does not expect the adoption of SFAS 142 for its fiscal year
beginning January 1, 2002 to have a material effect on its financial statements.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
September 30 December 31 September 30
2001 2000 2000
------------------ ---------------- ------------------
Assets $ 58,123,122 $ 55,703,969 $ 52,365,381
Loans receivable including mortgage-backed securities 54,470,810 52,343,133 49,482,619
Deposits 33,133,942 30,047,919 28,249,069
Stockholders' equity 4,215,139 3,687,287 3,489,006
Stockholders' equity/total assets 7.25% 6.62% 6.66%
Book value per common share $ 26.59 $ 23.28 $ 22.06
Common shares outstanding 158,550,637 158,410,137 158,127,033
Yield on loan portfolio 7.01% 8.05% 7.88%
Yield on mortgage-backed securities 6.95% 7.98% 7.82%
Yield on investments 4.34% 7.12% 8.70%
Yield on earning assets 6.97% 8.02% 7.86%
Cost of deposits 4.19% 5.52% 5.28%
Cost of borrowings 4.05% 6.66% 6.58%
Cost of funds 4.14% 5.99% 5.82%
Yield on earning assets less cost of funds 2.83% 2.03% 2.04%
Ratio of nonperforming assets to total assets .60% .43% .43%
Ratio of troubled debt restructured to total assets .00% .00% .01%
Loans serviced for others with recourse $ 2,448,472 $ 1,915,672 $ 1,947,895
Loans serviced for others without recourse 1,603,864 983,407 996,138
World Savings Bank, FSB (WSB) (a)
Total assets $ 57,916,010 $ 55,695,385 $ 48,516,389
Net worth 4,469,582 3,885,705 2,817,341
Net worth/total assets 7.72% 6.98% 5.81%
Regulatory capital ratios: (b)
Core capital 7.38% 6.60% 5.81%
Risk-based capital 13.72% 12.44% 10.62%
World Savings Bank, FSB Texas (WTX)
Total assets $ 5,945,315 $ 5,398,772 $ 4,518,247
Net worth 310,217 288,409 238,336
Net worth/total assets 5.22% 5.34% 5.27%
Regulatory capital ratios: (b)
Core capital 5.22% 5.34% --
Risk-based capital 26.08% 26.69% --
(a) Figures for WSB as of September 30, 2000 have not been restated for WSB's
merger with WSL in December 2000.
(b) For regulatory purposes, the requirements to be considered
"well-capitalized" are 5.0% and 10.0% for core and risk-based capital,
respectively. Prior to December 2000, WTX was not regulated by the OTS and,
therefore, these ratios were not applicable.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- -----------------------------------
2001 2000 2001 2000
--------------- ---------------- ---------------- ---------------
New real estate loans originated $ 5,600,738 $ 5,478,213 $ 15,023,468 $ 14,920,228
New adjustable rate mortgages as a percentage of
new real estate loans originated 86.57% 96.37% 85.79% 96.41%
Refinances as a percentage of new real estate
loans originated 56.91% 30.98% 56.04% 32.83%
Deposits increase (a) $ 1,641,983 $ 522,287 $ 3,086,023 $ 534,159
Net earnings before cumulative effect of
accounting change $ 205,840 $ 137,403 $ 590,848 $ 396,599
Net earnings 205,840 137,403 584,830 396,599
Basic earnings per share before cumulative effect
of accounting change 1.30 .87 3.73 2.50
Basic earnings per share 1.30 .87 3.69 2.50
Diluted earnings per share before cumulative effect
of accounting change 1.28 .86 3.68 2.48
Diluted earnings per share 1.28 .86 3.64 2.48
Cash dividends on common stock $ .0625 $ .0525 $ .1875 $ .1575
Average common shares outstanding 158,868,462 158,032,942 158,691,819 158,661,510
Average diluted common shares outstanding 161,000,195 160,095,066 160,784,091 160,214,868
Ratios: (b)
Net earnings before accounting change/
average net worth (ROE) 19.89% 16.23% 19.97% 16.07%
Net earnings before accounting change/
average assets (ROA) 1.42% 1.08% 1.38% 1.12%
Net interest margin (c) 2.96% 2.33% 2.84% 2.45%
General and administrative expense/average assets .91% .84% .88% .88%
Efficiency ratio (d) 28.03% 32.54% 27.80% 32.48%
(a) Includes a decrease of $119 million of wholesale deposits for the quarter
ended September 30, 2001. Includes a decrease of $185 million of wholesale
deposits for the nine months ended September 30, 2001 and a decrease of
$600 million of wholesale deposits for the nine months ended September 30,
2000.
(b) Ratios are annualized by multiplying the quarterly computation by four and
the nine-month computation by one and one-third. Averages are computed by
adding the beginning balance and each monthend balance during the quarter
and nine-month period and dividing by four and ten, respectively.
(c) Net interest margin is net interest income divided by average
interest-earnings assets.
(d) The efficiency ratio is calculated by dividing general and administrative
expense by net interest income plus other income.
Financial Condition
The consolidated condensed balance sheet shown in the table below presents
the Company's assets and liabilities in percentage terms at September 30, 2001,
December 31, 2000, and September 30, 2000. The reader is referred to page 45 of
the Company's 2000 Annual Report on Form 10-K for similar information for the
years 1997 through 2000 and a discussion of the changes in the composition of
the Company's assets and liabilities in those years.
TABLE 1
Consolidated Condensed Balance Sheet
In Percentage Terms
September 30 December 31 September 30
2001 2001 2000
------------------ --------------- -----------------
Assets
Cash and investments 1.9% 2.0% 1.3%
Loans receivable including mortgage-backed
securities 93.7 94.0 94.5
Other assets 4.4 4.0 4.2
----------------- ---------------- -----------------
100.0% 100.0% 100.0%
================== ================ =================
Liabilities and Stockholders' Equity
Deposits 57.0% 54.0% 53.9%
Federal Home Loan Bank advances 30.7 35.4 34.8
Securities sold under agreements to repurchase 0.7 1.5 1.6
Federal funds purchased 0.0 0.0 0.1
Bank notes 1.2 0.0 0.0
Senior debt 0.3 0.0 0.0
Subordinated debt 1.0 1.1 1.4
Other liabilities 1.8 1.4 1.5
Stockholders' equity 7.3 6.6 6.7
------------------ ---------------- -----------------
100.0% 100.0% 100.0%
================== ================ =================
As the above table shows, the largest asset component is the loan portfolio
(including mortgage-backed securities), which consists primarily of long-term
mortgages. Deposits represent the majority of the Company's liabilities. The
disparity between the repricing (maturity, prepayment, or interest rate change)
of mortgage loans and investments and the repricing of deposits and borrowings
can have a material impact on the Company's results of operations. The
difference between the repricing characteristics of assets and liabilities is
commonly referred to as "the gap."
The following gap table shows that, as of September 30, 2001, the Company's
assets reprice sooner than its liabilities. If all repricing assets and
liabilities responded equally to changes in the interest rate environment, then
the gap analysis would suggest that the Company's earnings would rise when
interest rates increase and would fall when interest rates decrease. However,
the Company's earnings are also affected by the built-in reporting and repricing
lags inherent in the Eleventh District Cost of Funds Index (COFI), which is the
benchmark Golden West uses to determine the rate on the majority of its
adjustable rate mortgages (ARMs). The reporting lag occurs because of the time
it takes to gather the data needed to compute the index. 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 repricing lag occurs because COFI is
based on a portfolio of accounts, not all of which reprice immediately.
Therefore, COFI does not initially fully reflect a change in market interest
rates. Consequently, when the interest rate environment changes, the COFI lags
cause assets to initially reprice more slowly than liabilities, enhancing
earnings when rates are falling and holding down income when rates rise.
Additionally, the Company originates loans that are tied to the Golden West Cost
of Savings Index (COSI). The COSI in effect in any month reflects the actual
Golden West Cost of Savings at the level it was one month prior. For more
information on how these lags affect net interest income, see page 26.
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of September 30, 2001
(Dollars in Millions)
Projected Repricing (a)
---------------------------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
------------- --------------- -------------- -------------- --------------
Interest-Earning Assets
Investments $ 725 $ -0- $ -0- $ 1 $ 726
Mortgage-backed securities:
Rate-sensitive 14,536 -0- -0- -0- 14,536
Flex-rate 80 201 524 457 1,262
Loans receivable:
Rate-sensitive 33,358 2,710 504 -0- 36,572
Fixed-rate 53 156 560 1,148 1,917
Other (b) 1,411 -0- -0- -0- 1,411
Impact of interest rate swaps 481 (50) (431) -0- -0-
------------- --------------- -------------- -------------- --------------
Total $ 50,644 $ 3,017 $ 1,157 $ 1,606 $ 56,424
============= =============== ============== ============== ==============
Interest-Bearing Liabilities
Deposits (c) $ 19,921 $ 10,745 $ 2,448 $ 20 $ 33,134
FHLB advances 17,150 210 99 401 17,860
Other borrowings 915 600 397 -0- 1,912
Impact of interest rate swaps 103 (12) (91) -0- -0-
------------- --------------- -------------- -------------- --------------
Total $ 38,089 $ 11,543 $ 2,853 $ 421 $ 52,906
============= =============== ============== ============== ==============
Repricing gap $ 12,555 $ (8,526) $ (1,696) $ 1,185
============= =============== ============== ==============
Cumulative gap $ 12,555 $ 4,029 $ 2,333 $ 3,518
============= =============== ============== ==============
Cumulative gap as a percentage of
total assets 21.6% 6.9% 4.0%
============= =============== ==============
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect
scheduled repayments and projected prepayments of principal based on
current rates of prepayment.
(b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock.
(c) Liabilities with no maturity date, such as checking, passbook and money
market deposit accounts, are assigned zero months.
Cash and Investments
At September 30, 2001, December 31, 2000, and September 30, 2000, the
Company had securities available for sale in the amount of $726 million, $393
million and $311 million, respectively, including unrealized gains on securities
available for sale of $360 million, $382 million, and $299 million,
respectively. At September 30, 2001, December 31, 2000, and September 30, 2000,
the Company had no securities held for trading in its investment securities
portfolio.
Loans Receivable and Mortgage-Backed Securities
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).
Because the Company currently retains all of the beneficial interest in these
MBS and MBS-REMIC securitizations and because the securitizations meet all the
requirements for separate security recognition, 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 7 for further
discussion). Additionally, from time to time, the Company purchases MBS. MBS,
MBS-REMICs and securitized loans are available to be used as collateral for
borrowings.
At September 30, 2001, December 31, 2000, and September 30, 2000, the
balance of loans receivable including mortgage-backed securities was $54.5
billion, $52.3 billion, and $49.5 billion, respectively. Included in the $54.5
billion at September 30, 2001 was $5.4 billion of Federal National Mortgage
Association (FNMA) MBS with the underlying loans subject to full credit recourse
to the Company, $9.8 billion of MBS-REMICs, $5.7 billion of securitized loans,
and $553 million of purchased MBS. Included in the $52.3 billion at December 31,
2000 was $7.8 billion of FNMA MBS with the underlying loans subject to full
credit recourse to the Company, $10.4 billion of MBS-REMICs, and $456 million of
purchased MBS. Included in the $49.5 billion at September 30, 2000 was $5.9
billion of FNMA MBS with the underlying loans subject to full credit recourse to
the Company, $8.2 billion of MBS-REMICs, and $466 million of purchased MBS.
Mortgage-Backed Securities
At September 30, 2001, December 31, 2000, and September 30, 2000, the
Company had MBS held to maturity in the amount of $15.6 billion, $18.5 billion,
and $14.5 billion, respectively. The increase in MBS from September 30, 2000 to
September 30, 2001 was due to the securitization of $2.2 billion of adjustable
rate mortgages (ARMs) into FNMA MBS and the securitization of $2.6 billion of
ARMs into MBS-REMICs during the last three months of 2000. In addition, the
Company securitized $3.0 billion of ARMs into MBS-REMICs in the first quarter of
2001. The FNMA MBS and the MBS-REMICs are available to be used as collateral for
borrowings. The Company has the ability and intent to hold these MBS until
maturity and, accordingly, these MBS are classified as held to maturity.
At September 30, 2001, December 31, 2000, and September 30, 2000, the
Company had MBS available for sale in the amount of $244 million, $70 million,
and $68 million, respectively, including unrealized gains on MBS available for
sale of $6 million at September 30, 2001, and $1 million at December 31, 2000
and September 30, 2000. At September 30, 2001, December 31, 2000, and September
30, 2000, the Company had no trading MBS.
Repayments of MBS during the third quarter and first nine months of 2001
were $1.8 billion and $4.9 billion, respectively, compared to $659 million and
$1.7 billion during the same periods of 2000. MBS repayments were higher during
the first nine months of 2001 as compared to the first nine months of 2000 due
to an increase in the prepayment rate as well as an increase of the balance of
MBS outstanding.
Securitized Loans
At September 30, 2001, the Company had $6.0 billion of loans that were
securitized during the second and third quarters of 2001. These loans are
classified as loans receivable on the statement of financial position.
Loans
New loan originations for the three and nine months ended September 30,
2001 amounted to $5.6 billion and $15.0 billion, respectively, compared to $5.5
billion and $14.9 billion for the same periods in 2000. The volume of
originations during 2001 was comparable to the 2000 volume due to a continued
strong demand for mortgage loans. The decrease in interest rates over the past
12 months led to an increase in refinance activity nationwide. Refinanced loans
constituted 57% and 56%, respectively, of new loan originations for the three
and nine months ended September 30, 2001, compared to 31% and 33% for the three
and nine months ended September 30, 2000.
First mortgages originated for sale amounted to $506 million and $1.3
billion for the three and nine months ended September 30, 2001, compared to $24
million and $69 million for the same periods in 2000. During the third quarter
and first nine months of 2001, $79 million and $282 million of loans were
converted at the customer's request from adjustable rate to fixed-rate compared
to $4 million and $21 million for the same periods in 2000. The Company
continues to sell most of its new and converted fixed-rate loans. For the three
and nine months ended September 30, 2001, the Company sold $756 million and $1.6
billion, respectively, of fixed-rate first mortgage loans compared to $33
million and $107 million for the same periods in 2000.
At September 30, 2001, the Company had lending operations in 37 states. The
largest source of mortgage origination is loans secured by residential
properties in California. For the three and nine months ended September 30,
2001, 69% and 70%, respectively, of total loan originations were on residential
properties in California compared to 63% and 62% for the same periods in 2000.
The five largest states, other than California, for originations for the nine
months ended September 30, 2001, were Florida, Texas, Colorado, New Jersey, and
Washington with a combined total of 16% of total originations. The percentage of
the total loan portfolio (including MBS with recourse and MBS-REMICs) that is
comprised of residential loans in California was 64% at September 30, 2001
compared to 63% at December 31, 2000 and at September 30, 2000. Of the 64% at
September 30, 2001, 51.9% were in Northern California and 48.1% were in Southern
California.
Golden West originates ARMs tied primarily to the Golden West Cost of
Savings Index (COSI) and the Eleventh District Cost of Funds Index (COFI). Prior
to 2001, the Company also originated ARMs tied to the twelve-month rolling
average of the One-Year Treasury Constant Maturity (TCM).
The following table shows the distribution of ARM originations by index for
the third quarter and first nine months of 2001 and 2000.
TABLE 3
Adjustable Rate Mortgage Originations by Index
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ----------------------------------
ARM Index 2001 2000 2001 2000
- ----------------- --------------- -------------- ---------------- ----------------
COSI $ 1,086,362 $ 3,572,980 $ 5,758,232 $ 9,409,556
COFI 3,761,926 1,639,846 7,130,071 4,506,629
TCM -0- 66,454 -0- 468,013
--------------- -------------- ---------------- ----------------
$ 4,848,288 $ 5,279,280 $ 12,888,303 $ 14,384,198
=============== ============== ================ ================
The following table shows the distribution by index of the Company's
outstanding balance of adjustable rate mortgages (including ARM MBS with
recourse and ARM MBS-REMICs) at September 30, 2001, December 31, 2000, and
September 30, 2000.
TABLE 4
Adjustable Rate Mortgage Portfolio by Index
(Including ARM MBS with Recourse and ARM MBS-REMICs)
(Dollars in thousands)
September 30 December 31 September 30
ARM Index 2001 2000 2000
- --------------------- ------------------ ------------------ -----------------
COSI $ 21,501,188 $ 20,460,242 $ 17,552,743
COFI 28,332,486 27,405,401 27,369,143
TCM 1,038,355 1,457,232 1,532,717
Other 303,786 182,778 150,142
------------------ ------------------ -----------------
$ 51,175,815 $ 49,505,653 $ 46,604,745
================== ================== =================
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. During the first nine months of 2001, 13% of loans originated exceeded
80% of the appraised value of the secured property, including $259 million of
firsts and $1.7 billion of combined firsts and seconds. For the first nine
months of 2000, 20% of loans originated were in excess of 80% of the appraised
value of the residence.
The Company takes steps to reduce the potential credit risk with respect to
loans with a loan to value (LTV) over 80%. Among other things, the loan amount
may not exceed 95% of the appraised value of a single-family residence. Also,
some 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 $40 million and $140 million for the third quarter
and first nine months of 2001 as compared to $56 million and $118 million for
the same periods in 2000. In addition, the Company carries pool mortgage
insurance on most 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 three and nine months ended September 30,
2001 and 2000.
TABLE 5
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- -------------- --------------
First mortgages with loan to
value ratios greater than 80%:
With insurance $ 61,838 $ 37,706 $ 163,458 $ 83,756
With no insurance 37,826 42,889 95,565 209,512
------------- ------------- -------------- --------------
99,664 80,595 259,023 293,268
------------- ------------- -------------- --------------
First and second mortgages with
combined loan to value ratios
greater than 80%:
With pool insurance 435,052 761,747 894,530 1,958,975
With no insurance 251,141 226,441 800,651 730,606
------------- ------------- -------------- --------------
686,193 988,188 1,695,181 2,689,581
------------- ------------- -------------- --------------
Total $ 785,857 $ 1,068,783 $ 1,954,204 $ 2,982,849
============= ============= ============== ==============
The following table shows the outstanding balance of mortgages with
original LTV or combined LTV ratios greater than 80% at September 30, 2001 and
2000.
TABLE 6
Balance of Mortgages With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
(Dollars in thousands)
As of September 30
---------------------------------
2001 2000
--------------- ---------------
First mortgages with loan
to value ratios greater than 80%:
With insurance $ 416,028 $ 371,363
With no insurance 612,677 870,215
--------------- ---------------
1,028,705 1,241,578
--------------- ---------------
First and second mortgages with
combined loan to value ratios
greater than 80%:
With pool insurance 2,359,929 1,785,294
With no insurance 524,951 772,960
--------------- --------------
2,884,880 2,558,254
--------------- --------------
Total $ 3,913,585 $ 3,799,832
=============== ==============
(a) Amounts restated from prior period.
The following tables show the Company's loan portfolio by state at
September 30, 2001 and 2000.
TABLE 7
Loan Portfolio by State
September 30, 2001
(Dollars in thousands)
Residential
Real Estate Commercial Loans
------------------------------------ Real Total as a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ------------- ---------------- -------------- ------------ ------------- ---------------- -------------
California $ 31,182,293 $ 3,396,248 $ 23 $ 20,192 $ 34,598,756 64.10%
Florida 2,696,823 21,319 -0- 202 2,718,344 5.04
Texas 2,128,283 72,278 182 941 2,201,684 4.08
New Jersey 1,973,278 -0- -0- 2,083 1,975,361 3.66
Washington 1,090,659 628,098 -0- -0- 1,718,757 3.18
Illinois 1,425,232 122,257 -0- -0- 1,547,489 2.87
Colorado 1,236,884 191,115 -0- 4,576 1,432,575 2.65
Pennsylvania 1,038,547 1,202 -0- 133 1,039,882 1.93
Arizona 1,004,192 17,829 -0- 14 1,022,035 1.89
Other (b) 5,649,251 68,795 14 3,745 5,721,805 10.60
----------------- --------------- ----------- ------------- ---------------- -------------
Totals $ 49,425,442 $ 4,519,141 $ 219 $ 31,886 53,976,688 100.00%
================= =============== =========== ============= =============
SFAS 91 deferred loan costs 181,498
Loan discount on purchased loans (1,159)
Undisbursed loan funds (6,951)
Allowance for loan losses (250,444)
Loans to facilitate (LTF) interest reserve (169)
Troubled debt restructured (TDR) interest reserve (6)
Loans on deposits 18,523
----------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMICs 53,917,980
Loans securitized into FNMA MBS and MBS-REMICs (15,244,959) (c)
----------------
Total loans receivable $ 38,673,021
================
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) All states included in other have total loan balances with less than 2% of
total loans.
(c) The above schedule includes the September 30, 2001 balances of loans that
were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
TABLE 8
Loan Portfolio by State
September 30, 2000
(Dollars in thousands)
Residential
Real Estate Commercial Loans
----------------------------------- Real Total as a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- -------------- ---------------- --------------- ------------- -------------- ---------------- ----------------
California $ 27,507,502 $ 3,430,029 $ 167 $ 24,926 $ 30,962,624 63.07%
Florida 2,375,465 15,035 -0- 290 2,390,790 4.87
Texas 1,976,429 56,581 297 1,099 2,034,406 4.14
New Jersey 1,819,686 -0- -0- 2,588 1,822,274 3.71
Washington 986,057 551,405 -0- -0- 1,537,462 3.13
Illinois 1,473,469 120,634 -0- -0- 1,594,103 3.25
Colorado 1,239,024 185,371 -0- 4,651 1,429,046 2.91
Pennsylvania 1,010,560 2,695 -0- 2,375 1,015,630 2.07
Arizona 1,023,546 17,450 -0- -0- 1,040,996 2.12
Other (b) 5,211,631 48,084 43 5,002 5,264,760 10.73
---------------- --------------- ------------- -------------- ---------------- ------------
Totals $ 44,623,369 $ 4,427,284 $ 507 $ 40,931 49,092,091 100.00%
================ =============== ============= ============== ============
SFAS 91 deferred loan costs 147,307
Loan discount on purchased loans (1,581)
Undisbursed loan funds (6,836)
Allowance for loan losses (235,569)
Loans to facilitate (LTF) interest reserve (237)
Troubled debt restructured (TDR) interest reserve (475)
Loans on deposits 21,558
----------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMICs 49,016,258
Loans securitized into FNMA MBS and MBS-REMICs (14,109,347) (c)
----------------
Total loans receivable $ 34,906,911
================
(a) The Company has no commercial loans other than commercial real estate
loans.
(b) All states included in other have total loan balance less than 2% of total
loans.
(c) The above schedule includes the September 30, 2000 balances of loans that
were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
The Company continues to emphasize ARM loans with interest rates that
change periodically in accordance with movements in specified indexes. The
portion of the mortgage portfolio (including MBS and MBS-REMICs) composed of
rate-sensitive loans was 94% at September 30, 2001 compared to 95% at December
31, 2000, and 94% at September 30, 2000. The Company's ARM originations
constituted 86% of new mortgage loans made for the first nine months of 2001
compared to 96% for the first nine months of 2000.
During the life of the 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
ARMs swapped into MBS with recourse and MBS-REMICs before any reduction for loan
servicing fees) was 12.23% or 5.16% above the actual weighted average rate at
September 30, 2001, versus 12.31% or 4.41% above the weighted average rate at
September 30, 2000.
Approximately $5.1 billion of the Company's ARM loans (including MBS with
recourse and MBS-REMICs) have terms that state that the interest rate may not
fall below a lifetime floor set at the time of origination or assumption. As of
September 30, 2001, $406 million of ARM loans had reached their rate floors. The
weighted average floor rate on the loans that had reached their floor was 7.55%
at September 30, 2001 compared to 7.92% at September 30, 2000. Without the
floor, the average rate on these loans would have been 6.54% at September 30,
2001 and 7.65% at September 30, 2000.
Loan repayments consist of monthly loan amortization and loan payoffs. For
the three and nine months ended September 30, 2001, loan repayments were $2.4
billion and $6.7 billion, respectively, compared to $1.1 billion and $3.3
billion in the same periods of 2000. The increase in loan repayments was
primarily due to an increase in loan payoffs in the first nine months of 2001.
Mortgage Servicing Rights
Capitalized mortgage servicing rights are included in "Other assets" on the
Consolidated Statement of Financial Condition. The following table shows the
changes in capitalized mortgage servicing rights for the three and nine months
ended September 30, 2001 and 2000.
TABLE 9
Capitalized Mortgage Servicing Rights
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ------------ ------------ -----------
Beginning balance of capitalized mortgage servicing rights $ 36,109 $ 32,695 $ 28,355 $ 37,295
New capitalized mortgage servicing rights from loan sales 11,899 694 25,357 2,179
Amortization of capitalized mortgage servicing rights (3,652) (3,105) (9,356) (9,190)
----------- ------------ ------------ -----------
Ending balance of capitalized mortgage servicing rights $ 44,356 $ 30,284 $ 44,356 $ 30,284
=========== ============ ============ ===========
The book value of Golden West's servicing rights did not exceed the fair
value at September 30, 2001 or 2000 and, therefore, no write-down of the
servicing rights was necessary.
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 (loans, including loans securitized into MBS with recourse and loans
securitized into MBS-REMICs, that are 90 days or more past due) and real estate
acquired through foreclosure. No interest is recognized on non-accrual loans.
The Company's TDRs are made up of loans on which delinquent payments have been
capitalized or on which temporary interest rate reductions have been made,
primarily to customers impacted by adverse economic conditions.
The following table shows the components of the Company's NPAs and TDRs and
the various ratios to total assets.
TABLE 10
Nonperforming Assets and Troubled Debt Restructured
(Dollars in thousands)
September 30 December 31 September 30
2001 2000 2000
------------------ ---------------- ------------------
Non-accrual loans $ 336,686 $ 231,155 $ 213,956
Real estate acquired through foreclosure 8,200 8,061 9,774
Real estate in judgment 1,258 200 110
------------------ ---------------- ------------------
Total nonperforming assets $ 346,144 $ 239,416 $ 223,840
================== ================ ==================
TDRs $ 129 $ 1,933 $ 4,175
================== ================ ==================
Ratio of NPAs to total assets .60% .43% .43%
================== ================ ==================
Ratio of TDRs to total assets .00% .00% .01%
================== ================ ==================
Ratio of NPAs and TDRs to total assets .60% .43% .44%
================== ================ ==================
The increase in NPAs during the first nine months of 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 slowing of
the economy. The Company closely monitors all delinquencies and takes
appropriate steps to protect its interests. Interest foregone on non-accrual
loans (loans 90 days or more past due) amounted to $3 million and $7 million for
the three and nine months ended September 30, 2001 compared to $885 thousand and
$2 million for the same periods in 2000. Interest foregone on TDRs amounted to
$1 thousand and $40 thousand for the three and nine months ended September 30,
2001, compared to $41 thousand and $153 thousand for the three and nine months
ended September 30, 2000.
The tables on the following page show the Company's nonperforming assets by
state as of September 30, 2001 and 2000.
TABLE 11
Nonperforming Assets by State
September 30, 2001
(Dollars in thousands)
Non-Accrual Loans (a) Foreclosed Real Estate
----------------------------------- -----------------------------------
Residential Commercial Commercial NPAs as
Real Estate Real Residential Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs (b) Loans
- ----------- ----------- ---------- ---------- --------- -------- ------------ ------------ ------------
California $ 172,974 $ 821 $ 667 $ 1,647 $ -0- $ -0- $ 176,109 .51%
Florida 30,426 -0- 80 280 -0- -0- 30,786 1.13
Texas 17,126 -0- -0- 758 -0- -0- 17,884 .81
New Jersey 18,813 -0- -0- 573 -0- -0- 19,386 .98
Washington 8,554 -0- -0- 425 -0- -0- 8,979 .52
Illinois 14,770 -0- -0- 594 215 -0- 15,579 1.01
Colorado 2,745 -0- -0- -0- -0- -0- 2,745 .19
Pennsylvania 12,940 -0- -0- 603 -0- -0- 13,543 1.30
Arizona 5,178 -0- -0- 88 -0- -0- 5,266 .52
Other (c) 51,294 298 -0- 4,589 -0- -0- 56,181 .98
------------ ---------- ---------- --------- ------- ------------ ------------ ------------
Totals $ 334,820 $ 1,119 $ 747 $ 9,557 $ 215 $ -0- 346,458 .64%
============ ========== ========== ========= ======= ============
FRE general valuation allowance (314) (.00)
------------ ------------
Total nonperforming assets $ 346,144 .64%
============ ============
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest
accrued.
(b) The September 30, 2001 balances include loans that were securitized into
FNMA MBS and MBS-REMICs.
(c) All states included in other have total loan balance less than 2% of total
loans.
TABLE 12
Nonperforming Assets by State
September 30, 2000
(Dollars in thousands)
Non-Accrual Loans (a) Foreclosed Real Estate
------------------------------------------ --------------------------------------
Residential Commercial Commercial NPAs as
Real Estate Real Residential Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs (b) Loans
- ------------- ------------- ---------- ------------ ---------- --------- ----------- ----------- ----------
California $ 111,403 $ 985 $ 576 $ 3,649 $ -0- $ -0- $ 116,613 .38%
Florida 16,819 -0- 57 675 -0- 108 17,659 .74
Texas 10,074 -0- -0- 523 -0- -0- 10,597 .52
New Jersey 16,004 -0- 18 243 -0- 314 16,579 .91
Washington 3,555 -0- -0- 113 -0- -0- 3,668 .24
Illinois 10,320 215 -0- 696 -0- -0- 11,231 .70
Colorado 2,377 -0- -0- -0- -0- -0- 2,377 .17
Pennsylvania 10,147 -0- -0- 1,420 -0- -0- 11,567 1.14
Arizona 4,812 -0- -0- -0- -0- -0- 4,812 .46
Other (c) 26,510 84 -0- 1,875 -0- 508 28,977 .55
------------- ---------- ------------ ---------- --------- ----------- ----------- ------------
Totals $ 212,021 $ 1,284 $ 651 $ 9,194 $ -0- $ 930 224,080 .46
============= ========== ============ ========== ========= ===========
FRE general valuation allowance (240) (.00)
----------- ------------
Total nonperforming assets $ 223,840 .46%
============ ============
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) The September 30, 2000 balances include loans that were securitized into
FNMA MBS and MBS-REMICs.
(c) All states included in other have total loan balances with less than 2% of
total loans.
The Company provides specific valuation allowances for losses on 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 loan losses that is based on both
historical 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. Based on these
historical analyses, management is then able to estimate a range of general loss
allowances by type of loan and risk category to cover losses inherent in the
portfolio. One-to-four single-family real estate loans are evaluated as a group.
In addition, periodic reviews are made of major multi-family and commercial real
estate loans and foreclosed real estate. Where indicated, specific and general
valuation allowances are established or adjusted. In estimating probable losses
inherent in the portfolio, consideration is given to the estimated sale price,
cost of refurbishing the security property, payment of delinquent taxes, cost of
disposal, and cost of holding the property. Additions to and reductions from the
allowances are reflected in current earnings based upon quarterly reviews of the
portfolio. The review methodology and historical analyses are reconsidered
quarterly.
The table below shows the changes in the allowance for loan losses for the
three and nine months ended September 30, 2001 and 2000.
TABLE 13
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Beginning allowance for loan losses $ 245,078 $ 234,834 $ 236,708 $ 232,134
Provision for losses charged to expense 3,639 1,106 12,463 5,917
Less loans charged off (628) (54) (1,383) (674)
Recoveries 161 121 329 302
Net transfer of allowance (to) from recourse liability 2,194 (438) 2,327 (2,110)
------------- ------------- ------------- -------------
Ending allowance for loan losses $ 250,444 $ 235,569 $ 250,444 $ 235,569
============= ============= ============= =============
Ratio of net chargeoffs (recoveries) to average loans
outstanding (including MBS with recourse
and MBS-REMICs) .00% .00% .00% .00%
============= ============= ============= =============
Ratio of allowance for loan losses to total loans
(including MBS with recourse and MBS-REMICs) .46% .48%
============= =============
Ratio of allowance for loan losses to nonperforming assets 72.4% 105.2%
============= =============
Deposits
The Company raises deposits through its retail branch system as well as
through the capital markets.
Retail deposits increased during the third quarter of 2001 by $1.8 billion,
including interest credited of $312 million, compared to an increase of $522
million, including interest credited of $328 million in the third quarter of
2000. Retail deposits increased during the first nine months of 2001 by $3.3
billion, including interest credited of $994 million, compared to an increase of
$1.1 billion, including interest credited of $896 million in the first nine
months of 2000. Retail deposits increased during the first nine months of 2001
because the public found savings to be a more favorable investment compared with
other alternatives. The increase in 2000 was primarily due to interest credited.
At September 30, 2001 and 2000, transaction accounts (which include checking,
passbook, and money market accounts) represented 34% and 28%, respectively, of
the total balance of deposits.
The Company uses government securities dealers to sell wholesale
certificates of deposit (CDs) to institutional investors. The Company's deposit
balance as of December 31, 2000 included $185 million, respectively, of these
wholesale CDs. There were no outstanding wholesale CDs at September 30, 2001 or
September 30, 2000.
The table below shows the Company's deposits by interest rate and by remaining
maturity at September 30, 2001 and 2000.
TABLE 14
Deposits
(Dollars in Millions)
September 30
-----------------------------------------------------------
2001 2000
---------------------------- ----------------------------
Rate* Amount Rate* Amount
----------- ------------- ----------------------------
Deposits by rate:
Interest-bearing checking accounts 1.85% $ 98 3.02% $ 74
Interest-bearing checking accounts swept
into money market deposit accounts 3.06 4,317 3.40 3,157
Passbook accounts 1.20 461 1.48 463
Money market deposit accounts 3.66 6,341 4.24 4,217
Term certificate accounts with original maturities of:
4 weeks to 1 year 4.21 11,908 5.95 9,569
1 to 2 years 5.02 6,785 5.85 7,511
2 to 3 years 5.45 1,560 5.62 1,388
3 to 4 years 5.54 602 5.74 451
4 years and over 5.78 735 5.96 678
Retail jumbo CDs 4.86 327 5.81 741
------------- -------------
$ 33,134 $ 28,249
============= =============
2001 2000
------------- -------------
Deposits by remaining maturity:
No contractual maturity 3.31% $ 11,217 3.73% $ 7,911
Maturity within one year 4.58 19,449 5.86 18,054
1 to 5 years 5.12 2,448 6.08 2,252
Over 5 years 5.74 20 5.35 32
------------- -------------
$ 33,134 $ 28,249
============= =============
* Weighted average interest rate, including the impact of interest rate
swaps.
At September 30, the weighted average cost of deposits was 4.19% (2001) and
5.28% (2000).
Advances from Federal Home Loan Banks
The Company uses borrowings from the FHLBs, also known as "advances," to
provide funds for loan origination activities. Advances are secured by pledges
of certain loans, MBS-REMICs, other MBS, and capital stock of the FHLBs. FHLB
advances amounted to $17.9 billion at September 30, 2001, compared to $19.7
billion at December 31, 2000, and $18.2 billion at September 30, 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
$421 million, $857 million, and $859 million at September 30, 2001, December 31,
2000, and September 30, 2000, respectively.
Other Borrowings
At September 30, 2001, Golden West, at the holding company level, had
principal amounts of $600 million of subordinated debt issued and outstanding as
compared to $715 million at September 30, 2000. As of September 30, 2001, the
Company's subordinated debt securities were rated A3 and A- by Moody's Investors
Service (Moody's) and Standard & Poor's Corporation (S&P), respectively.
In July 2000, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance or sale of up to $1.0
billion of securities, including senior debt. At September 30, 2001, the Company
had issued and outstanding $200 million of five-year senior debt in connection
with the aforementioned registration statement.
At September 30, 2001, WSB had $694 million of bank notes outstanding.
In November 1996, WSB received permission from the OTS to issue
non-convertible medium-term notes to institutional investors under rules similar
to Office of the Comptroller of the Currency rules applicable to similarly
situated national banks. As of September 30, 2001, WSB had not issued any notes
under this authority.
Stockholders' Equity
The Company's stockholders' equity increased by $528 million during the
first nine months of 2001 as a result of net earnings partially offset by
decreased market values of securities available for sale, the payment of
quarterly dividends to stockholders and the $29 million cost of the repurchase
of Company stock. The Company's stockholders' equity increased by $294 million
during the first nine months of 2000 as a result of net earnings and increased
market values of securities available for sale, partially offset by the payment
of quarterly dividends to stockholders and the $109 million cost of the
repurchase of Company stock. Unrealized gains, net of taxes, on securities and
MBS available for sale included in stockholders' equity at September 30, 2001,
December 31, 2000, and September 30, 2000 were $222 million, $233 million, and
$182 million, respectively.
Since 1993, through five separate actions, Golden West's Board of Directors
has authorized the repurchase by the Company of up to 60.6 million shares of
Golden West's common stock. As of September 30, 2001, 43.4 million shares had
been repurchased and retired at a cost of $944 million since October 1993, of
which 529,000 were purchased and retired at a cost of $29 million during the
first nine months of 2001. Dividends 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.
Regulatory Capital
The OTS requires federally insured institutions such as WSB and WTX to meet
certain minimum capital requirements. The following table shows WSB's regulatory
capital ratios and compares them to the OTS minimum requirements at September
30, 2001 and 2000. The September 30, 2000 numbers are as reported to the OTS and
have not been restated because the OTS did not require them to be restated to
reflect the reorganization that took place in 2000 as discussed on page 6.
TABLE 15
World Savings Bank, FSB
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 2001 September 30, 2000
----------------------------------------------------- ----------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
------------------------- ------------------------- ------------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
------------- --------- ------------- --------- ------------ ---------- ------------ --------
Tangible $4,247,559 7.38% $ 863,820 1.50% $2,817,341 5.81% $ 727,749 1.50%
Core 4,247,559 7.38 2,303,520 4.00 2,817,341 5.81 1,940,664 4.00
Risk-based 4,591,460 13.72 2,676,943 8.00 2,985,238 10.62 2,249,282 8.00
The following table shows WTX's current regulatory capital ratios and
compares them to the OTS minimum requirements at September 30, 2001.
TABLE 16
World Savings Bank, FSB Texas
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 2001
--------------------------------------------------------
ACTUAL REQUIRED
--------------------------- --------------------------
Capital Ratio Capital Ratio
------------- ----------- ------------- ----------
Tangible $ 310,217 5.22% $ 89,180 1.50%
Core 310,217 5.22 237,813 4.00
Risk-based 310,218 26.08 95,167 8.00
The OTS has adopted rules based upon five capital tiers: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The determination of whether a savings bank falls
into a certain classification depends primarily on its capital ratios. As the
following two tables show, as of September 30, 2001, WSB and WTX exceeded the
qualifications for well-capitalized institutions under the rules applicable to
them.
TABLE 17
World Savings Bank, FSB
Regulatory Capital Compared to Well-Capitalized Classification
(Dollars in thousands)
ACTUAL WELL-CAPITALIZED
---------------------------- --------------------------------
Capital Ratio Capital Ratio
------------- ---------- -------------- ------------
Leverage $ 4,247,559 7.38% $ 2,879,400 5.00%
Tier 1 risk-based 4,247,559 12.69 2,007,708 6.00
Total risk-based 4,591,460 13.72 3,346,179 10.00
TABLE 18
World Savings Bank, FSB Texas
Regulatory Capital Compared to Well-Capitalized Classification
(Dollars in thousands)
ACTUAL WELL-CAPITALIZED
---------------------------- ---------------------------------
Capital Ratio Capital Ratio
-------------- ---------- -------------- -------------
Leverage $ 310,217 5.22% $297,266 5.00%
Tier 1 risk-based 310,217 26.08 71,375 6.00
Total risk-based 310,218 26.08 118,959 10.00
Results Of Operations
Net Earnings
Net earnings for the three months ended September 30, 2001 were $206
million compared to net earnings of $137 million for the three months ended
September 30, 2000. Net earnings for the nine months ended September 30, 2001
were $591 million (excluding the cumulative effect of the accounting change)
compared to net earnings of $397 million for the nine months ended September 30,
2000. Net earnings increased in 2001 as compared to 2000 primarily as a result
of increased net interest income and increased noninterest income, which were
partially offset by an increase in general and administrative expenses. Net
earnings for the nine months ended September 30, 2001, including the cumulative
effect of the accounting change, net of tax, were $585 million. See page 6 for
further discussion on SFAS 133 and the cumulative effect of the accounting
change.
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 interest
rates, which can temporarily accelerate or restrain net interest income changes.
Net interest income amounted to $415 million and $1.2 billion,
respectively, for the three and nine months ended September 30, 2001. These
amounts represented 44% and 41% increases, respectively, over the $288 million
and $838 million reported during the same periods in 2000. As discussed below,
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,
which is the difference between the yield on loans and other investments and the
rate paid on deposits and borrowings.
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.
Net interest income increases in 2001 were also influenced by a temporary
widening of the Company's primary spread. As noted in the discussion of the Gap
on page 11, the Company's liabilities respond more rapidly to movements in
short-term interest rates than the Company's assets, most of which are
adjustable rate mortgages tied to indexes that lag changes in market interest
rates. Consequently, when short-term interest rates decline, the Company's
primary spread temporarily widens, and when short-term interest rates move up,
the Company's primary spread compresses for a period of time. When interest
rates stabilize, the primary spread returns to more normal levels. For the five
years ended September 30, 2001, which included periods of both falling and
rising interest rates, the Company's primary spread averaged 2.21% with a high
of 2.83% and a low of 1.88%.
During the first nine months of 2001, the Federal Reserve's Open Market
Committee lowered the Federal Funds rate, a key short-term interest rate, by a
total of 350 basis points in order to stimulate the 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 185 basis
points between December 31, 2000 and September 30, 2001. This large drop
occurred, in part, because the Company used primarily adjustable market-rate
borrowings to fund the rapid expansion of the loan portfolio in 2000. As a
result, a significant portion of the Company's liabilities responded almost
immediately to the sharp decrease in market rates in 2001. While the Company's
cost of funds declined considerably during the first nine months of 2001, the
yield on the Company's assets fell by only 105 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, reaching 2.83%, the highest point since 1987, and resulted in a
temporary boost to net interest income in 2001.
The table below shows the components of the Company's spread at September
30, 2001, December 31, 2000, and September 30, 2000.
TABLE 19
Yield on Earning Assets,
Cost of Funds, and Primary Spread
September 30 December 31 September 30
2001 2000 2000
--------------- ---------------- ----------------
Yield on loan portfolio 7.01% 8.05% 7.88%
Yield on MBS 6.95 7.98 7.82
Yield on investments 4.34 7.12 8.70
------------- ------------ -------------
Yield on earning assets 6.97 8.02 7.86
------------- ------------ -------------
Cost of deposits 4.19 5.52 5.28
Cost of borrowings 4.05 6.66 6.58
------------- ------------ -------------
Cost of funds 4.14 5.99 5.82
------------- ------------ -------------
Primary spread 2.83% 2.03% 2.04%
============= ============ =============
The Company holds ARMs in order to manage the rate sensitivity of the asset
side of the balance sheet. The yield on the Company's ARM portfolio tends to lag
changes in market interest rates principally because of lags related to the
indexes. Most of the Company's ARMs have interest rates that change in
accordance with an index based on the cost of deposits and borrowings of savings
institutions that are members of the FHLB of San Francisco (the COFI). The
Company also originates loans that are tied to the Golden West Cost of Savings
Index (COSI). As previously discussed, there is a two-month reporting lag for
the COFI and a one-month reporting lag for COSI. Additionally, certain loan
features cause the yield on the Company's ARM portfolio to lag changes in market
interest rates. These features include 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. On balance, the
index lags and ARM structural features cause the Company's assets initially to
reprice more slowly than its liabilities, resulting in a temporary reduction in
net interest income when rates increase and a temporary increase in net interest
income when rates fall.
TABLE 20
Average Interest-Earning Assets and Interest-Bearing Liabilities
(Dollars in thousands)
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
--------------------------------------------- -----------------------------------------------
Annualized End of Annualized End of
Average Average Yield Period Average Average Period
Balances (a) Yield Balances (a) Yield Yield
-------------- ---------------- ---------- ---------------- -------------- -----------
ASSETS
Investment securities $ 3,184,270 4.09% 4.34% $ 3,600,512 6.84% 8.70%
Mortgage-backed securities 16,797,464 7.10% 6.95% 14,791,819 7.66% 7.82%
Loans receivable (b) 37,237,843 7.34% 7.01% 33,067,747 7.90% 7.88%
Invest. in capital stock of FHLBs 1,091,375 4.96% 4.97% 886,441 7.24% 6.55%
-------------- --------------- ---------------- --------------
Interest-earning assets $ 58,310,952 7.05% $ 52,346,519 7.75%
============== =============== ================ ==============
LIABILITIES
Deposits:
Checking accounts $ 120,250 2.77% 1.85% $ 156,644 1.84% 3.02%
Savings accounts 10,115,826 3.45% 3.32% 8,189,258 3.76% 3.74%
Term accounts 22,255,697 4.99% 4.65% 20,820,381 5.91% 5.88%
--------------- --------------- ---------- ---------------- --------------- -----------
Total deposits 32,491,773 4.50% 4.19% 29,166,283 5.29% 5.28%
Advances from FHLBs 18,681,114 4.30% 4.00% 17,250,092 6.58% 6.55%
Reverse repurchases 758,561 3.83% 3.01% 1,486,301 6.41% 6.24%
Other borrowings 3,545,252 4.44% 4.95% 1,883,200 7.13% 7.63%
--------------- -------------- ---------------- ---------------
Interest-bearing liabilities $ 55,476,700 4.42% $ 49,785,876 5.84%
=============== ============== ================ ===============
Net interest spread 2.63% 1.91%
============== ===============
Net interest income $ 415,132 $ 287,912
=============== ================
Net yield on average interest-
earning assets 2.85% 2.20%
============== ===============
(a) Averages are computed using daily balances.
(b) Includes nonaccrual loans (90 days or more past due).
TABLE 21
Average Interest-Earning Assets and Interest-Bearing Liabilities
(Dollars in thousands)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
----------------------------------------------- --------------------------------------------
Annualized End of Annualized End of
Average Average Yield Period Average Average Period
Balances (a) Yield Balances (a) Yield Yield
---------------- ---------------- --------- ---------------- -------------- ----------
ASSETS
Investment securities $ 3,167,297 4.94% 4.34% $ 2,972,977 6.52% 8.70%
Mortgage-backed securities 18,100,472 7.63% 6.95% 12,963,639 7.47% 7.82%
Loans receivable (b) 35,398,324 7.77% 7.01% 31,218,757 7.63% 7.88%
Invest. in capital stock of FHLBs 1,082,383 5.64% 4.97% 724,472 7.60% 6.55%
--------------- --------------- ---------------- --------------
Interest-earning assets $ 57,748,476 7.53% $ 47,879,845 7.52%
=============== =============== ================ ==============
LIABILITIES
Deposits:
Checking accounts $ 125,870 2.57% 1.85% $ 136,543 2.13% 3.02%
Savings accounts 8,204,319 3.51% 3.32% 8,857,741 3.80% 3.74%
Term accounts 23,861,265 5.50% 4.65% 22,167,349 4.99% 5.88%
--------------- --------------- --------- ---------------- --------------- --------
Total deposits 32,191,454 4.98% 4.19% 31,161,633 4.64% 5.28%
Advances from FHLBs 18,989,841 5.15% 4.00% 13,608,999 6.22% 6.55%
Reverse repurchases 1,079,398 4.88% 3.01% 1,378,630 6.04% 6.24%
Other borrowings 2,698,127 5.10% 4.95% 1,510,799 7.06% 7.63%
--------------- --------------- ---------------- ---------------
Interest-bearing liabilities $ 54,958,820 5.04% $ 47,660,061 5.21%
=============== =============== ================ ===============
Net interest spread 2.49% 2.31%
=============== ===============
Net interest income $ 1,181,028 $ 838,071
=============== ================
Net yield on average interest-
earning assets 2.73% 2.33%
=============== ===============
(a) Averages are computed using daily balances.
(b) Includes nonaccrual loans (90 days or more past due).
The following table shows the Company's revenues and expenses as a
percentage of total revenues for the three and nine months ended September 30,
2001 and 2000.
TABLE 22
Selected Revenue and Expense Items
as Percentages of Total Revenues
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -------------------------
2001 2000 2001 2000
------------ ---------- ---------- ----------
Interest on loans 63.0% 61.8% 60.1% 63.5%
Interest on mortgage-backed securities 27.5 26.8 30.2 25.8
Interest and dividends on investments 4.3 7.4 4.8 6.6
------------ ---------- ---------- ----------
94.8 96.0 95.1 95.9
Less:
Interest on deposits 33.7 36.5 35.1 38.5
Interest on advances and other borrowings 22.8 32.3 25.5 27.6
------------ ---------- ---------- ----------
56.5 68.8 60.6 66.1
Net interest income 38.3 27.2 34.5 29.8
Provision for loan losses .3 .1 .4 .2
------------ ---------- ---------- ----------
Net interest income after provision for loan losses 38.0 27.1 34.1 29.6
Add:
Fees 3.5 1.9 3.3 1.9
Gain on the sale of securities and loans 1.2 .3 .8 .2
Change in fair value of derivatives (.7) 0.0 (.4) 0.0
Other non-interest income 1.2 1.8 1.2 2.0
------------ ---------- ---------- ----------
5.2 4.0 4.9 4.1
Less:
General and administrative expenses 12.2 10.2 10.9 11.0
Taxes on income 12.0 7.9 10.8 8.6
Cumulative effect of accounting change 0.0 0.0 .2 0.0
------------ ---------- ---------- ----------
Net earnings 19.0% 13.0% 17.1% 14.1%
============ ========== ========== ==========
Interest Rate Swaps
The Company enters into interest rate swaps as a part of its interest rate
risk management strategy. Such instruments are entered into solely to alter the
repricing characteristics of designated assets and liabilities. The Company does
not hold any interest rate swaps or other derivative financial instruments for
trading purposes.
TABLE 23
Schedule of Interest Rate Swaps Activity
(Notional amounts in millions)
Nine Months Ended
September 30, 2001
--------------------------------
Receive Pay
Fixed Fixed
Swaps Swaps
------------- --------------
Balance at December 31, 2000 $ 217 $ 717
Maturities (114) (56)
-------------- ---------------
Balance at September 30, 2001 $ 103 $ 661
============== ===============
The range of floating interest rates received on swap contracts in the
first nine months of 2001 was 2.58% to 6.90%, and the range of floating interest
rates paid on swap contracts was 3.36% to 6.76%. The range of fixed interest
rates received on swap contracts in the first nine months of 2001 was 5.81% to
7.06% and the range of fixed interest rates paid on swap contracts was 5.58% to
8.85%.
Interest rate swap payment activity decreased net interest income by $3.8
million and $7.5 million for the three and nine months ended September 30, 2001,
as compared to decreases of $682 thousand and $3.5 million for the same periods
in 2000.
Upon adoption of SFAS 133 on January 1, 2001 (refer to discussion on page
6), the Company reported a one-time pre-tax charge of $10 million, or $.04 after
tax per diluted share. In addition to the one-time charge, the Company reported
pre-tax expense of $8 million, or $.03 after tax per diluted share for the three
months ended September 30, 2001, associated with the on going quarterly
valuation of the Company's swaps and pre-tax expense of $14 million, or $.05
after tax per diluted share for the nine months ended September 30, 2001. This
additional expense occurred because the market value of Golden West's swaps
declined during the third quarter and the first nine months of 2001 in
conjunction with falling short-term rates. The changes in fair value of these
swap contracts are reflected as assets or liabilities on the Consolidated
Statement of 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 elected not to use permitted hedge accounting for
the derivative financial instruments in portfolio at September 30, 2001.
Interest on Loans
In the third quarter of 2001, interest on loans was higher than in the
comparable 2000 period by $30 million or 4.6%. The increase in the third quarter
of 2001 was due to a $4.2 billion increase in the average portfolio balance,
which was partially offset by a 56 basis point decrease in the average portfolio
yield. In the first nine months of 2001, interest on loans was higher than in
the comparable 2000 period by $275 million or 15.4%. The increase in the first
nine months of 2001 was due to a $4.2 billion increase in the average portfolio
balance and a 14 basis point increase in the average portfolio yield.
Interest on Mortgage-Backed Securities
In the third quarter of 2001, interest on mortgage-backed securities was
higher than in the comparable 2000 period by $15 million or 5.3%. The increase
in the third quarter of 2001 was primary due to a $2.0 billion increase in the
average portfolio balance, which was partially offset by a 56 basis point
decrease in the average portfolio yield. In the first nine months of 2001,
interest on mortgage-backed securities was higher than in the comparable 2000
period by $309 million or 42.5%. The increase in the first nine months of 2001
was due to a $5.1 billion increase in the average portfolio balance and a 16
basis point increase in the average portfolio yield. The increase in the
mortgage-backed securities portfolio was primarily due to the securitization of
loans into FNMA MBS and MBS-REMICs, as discussed on page 12.
Interest and Dividends on Investments
The income earned on the investment portfolio fluctuates, depending upon
the volume outstanding and the yields available on short-term investments. In
the third quarter of 2001, interest and dividends on investments decreased by
$32 million or 40.6% from the comparable period in 2000. The decrease in the
third quarter of 2001 was due to a $416 million decrease in the average
portfolio balance and a 289 basis point decrease in the average portfolio yield.
In the first nine months of 2001, interest and dividends on investments
decreased by $23 million or 12.6% from the comparable period in 2000. The
decrease in the first nine months of 2001 was primarily due to a 170 basis point
decrease in the average portfolio yield, which was partially offset by a $194
million increase in the average portfolio balance.
Interest on Deposits
In the third quarter of 2001, interest on deposits decreased by $20 million
or 5.1% from the comparable period in 2000. The decrease in the third quarter of
2001 was due to a 76 basis point decrease in the average cost of deposits
partially offset by a $3.2 billion increase in the average balance of deposits.
In the first nine months of 2001, interest on deposits increased by $119 million
or 11.0% from the comparable period in 2000. The increase in the first nine
months of 2001 was due to a $3.3 billion increase in the average balance of
deposits.
Interest on Advances and Other Borrowings
In the third quarter of 2001, interest on advances and other borrowings
decreased by $94 million or 27.5% from the comparable period of 2000. The
decrease in the third quarter of 2001 was primarily due to a 229 basis point
decrease in the average cost of these borrowings partially offset by a $2.4
billion increase in the average balance. In the first nine months of 2001,
interest on advances and other borrowings increased by $99 million or 12.7% from
the comparable period of 2000. The increase in the first nine months of 2001 was
primarily due to a $6.3 billion increase in the average balance, which was
partially offset by a 115 basis point decrease in the average cost of these
borrowings.
Provision for Loan Losses
The provision for loan losses was $4 million and $12 million for the three
and nine months ended September 30, 2001, compared to $1 million and $6 million
for the same periods in 2000. The increase in the provision for loan losses in
2001 reflected the growth in the loan portfolio over the prior year and the
increase in nonperforming assets.
Noninterest Income
Noninterest income was $56 million and $167 million, respectively, for the
three and nine months ended September 30, 2001, compared to $41 million and $115
million for the same periods in 2000. The increases in 2001 as compared to 2000
resulted primarily from a higher amount of prepayment fees and increased gains
on the sale of fixed-rate mortgages.
General and Administrative Expenses
For the third quarter and first nine months of 2001, general and
administrative expenses (G&A) were $132 million and $375 million compared to
$107 million and $309 million for the comparable periods in 2000. G&A as a
percentage of average assets on an annualized basis was .91% and .88% for the
third quarter and first nine months of 2001 compared to .84% and .88% for the
same periods in 2000. G&A expenses increased in 2001 because of the costs
associated with the 32% growth of the mortgage portfolio in the prior year as
well as ongoing investments in personnel, facilities, and technology.
Taxes on Income
The Company utilizes the accrual method of accounting for income tax
purposes and for preparing its published financial statements. For financial
reporting purposes only, the Company uses purchase accounting in connection with
certain assets acquired through mergers. The purchase accounting portion of
income is not subject to tax.
Taxes as a percentage of earnings were 38.7% and 38.5%for the third quarter
and first nine months of 2001, respectively, compared to 37.8% for both the
third quarter and first nine months of 2000.
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; borrowings from its parent; 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 and bank 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 of Dallas; earnings; deposits; loan repayments; debt
collateralized by mortgages or securities; and borrowings from affiliates.
The principal sources of funds for WSB's parent, Golden West, are dividends
from subsidiaries, interest on investments, and the proceeds from the issuance
of debt securities. Various statutory and regulatory restrictions and tax
considerations limit the amount of dividends WSB can pay. The principal
liquidity needs of Golden West are for payment of interest and principal on
senior debt and subordinated debt securities, capital contributions to its
insured subsidiaries, dividends to stockholders, the repurchase of Golden West
stock (see stockholders' equity section on page 23), and general and
administrative expenses. At September 30, 2001, December 31, 2000, and September
30, 2000, Golden West's total cash and investments amounted to $532 million,
$387 million, and $516 million, respectively. Included in the cash and
investments above are a subordinated note receivable from WSB in the amount of
$100 million at September 30, 2001 and December 31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Golden West estimates the sensitivity of the Company's net interest income,
net earnings, and capital ratios to interest rate changes and anticipated growth
based on simulations using an asset/ liability model which takes into account
the lags described on pages 11 and 27. The simulation model projects net
interest income, net earnings, and capital ratios based on an immediate 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 certain assets, the model incorporates
assumptions regarding the impact of changing interest rates on prepayment rates,
which are based on the Company's historical prepayment information. The model
factors in projections for anticipated activity levels by product lines offered
by the Company. Based on the information and assumptions in effect at September
30, 2001, Management believes that a 200 basis point rate increase sustained
over a thirty-six month period would not materially affect the Company's
long-term profitability and financial strength.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit No. Description
- ----------- -----------
3(a) Certificate of Incorporation, as amended, and amendments thereto, are
incorporated by reference to Exhibit 3(a) to the Company's Annual Report on
Form 10-K (File No. 1-4269) for the year ended December 31, 1990.
3(b) By-Laws of the Company, as amended in 1997, are incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File
No. 1-4269) for the year ended December 31, 1997.
4(a) The Registrant agrees to furnish to the Commission, upon request, a
copy of each instrument with respect to issues of long-term debt, the
authorized principal amount of which does not exceed 10% of the total
assets of the Company.
10(a)1996 Stock Option Plan, as amended, is incorporated by reference to
Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A,
filed on March 15, 1996, for the Company's 1996 Annual Meeting of
Stockholders.
10(b)Annual Incentive Bonus Plan is incorporated by reference to Exhibit A
of the Company's Definitive Proxy Statement on Schedule 14A, filed on March
16, 1998, for the Company's 1998 Annual Meeting of Stockholders.
10(c)Deferred Compensation Agreement between the Company and James T. Judd
is incorporated by reference to Exhibit 10(b) of the Company's Annual
Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986.
10(d)Deferred Compensation Agreement between the Company and Russell W.
Kettell is incorporated by reference to Exhibit 10(c) of the Company's
Annual Report on Form 10-K (File No. 1-4629) for the year ended December
31, 1986.
10(e)Form of Supplemental Retirement Agreement between the Company and
certain executive officers is incorporated by reference to Exhibit 10(j) to
the Company's Annual Report on Form 10-K (File No. 1-4629) for the year
ended December 31, 1990.
10(f)Operating lease on Company headquarters building, 1901 Harrison Street,
Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of
the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the
quarter ended September 30, 1998.
11 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K
The Registrant filed the following report on Form 8-K with the Commission
during the quarter for which the report is filed:
1. Report filed July 27, 2001. Item 7. Financial Statements and Exhibits. The
report included a press release announcing the Company's second quarter
financial results.
2. Report filed August 3, 2001. Item 7. Financial Statements and Exhibits.
This report included a Statement of Eligibility on Form T-1 of Bankers
Trust Company, as trustee under the Company's Senior Debt Indenture dated
as of August 8, 2001.
3. Report filed August 8, 2001. Item 7. Financial Statements and Exhibits.
This report included the final form of the Company's Senior Debt Indenture
dated as of August 8, 2001 with Bankers Trust Company, as trustee, as well
as the form of the 5 1/2% Senior Note due August 8, 2006 issued by the
Company on August 8, 2001.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
Dated: November 14, 2001 /s/ Russell W. Kettell
-------------------------------------
Russell W. Kettell
President and Chief Financial Officer
/s/ William C. Nunan
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William C. Nunan
Group Senior Vice President
and Chief Accounting Officer