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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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-4629
GOLDEN WEST FINANCIAL CORPORATION
Incorporated Pursuant to the Laws of Delaware State
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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
April 30, 2002:
Common Stock -- 154,840,612 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 -
March 31, 2002 and 2001 and December 31, 2001...........................1
Consolidated Statement of Net Earnings -
For the three months ended March 31, 2002 and 2001......................2
Consolidated Statement of Cash Flows -
For the three months ended March 31, 2002 and 2001......................3
Consolidated Statement of Stockholders' Equity -
For the three months ended March 31, 2002 and 2001......................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................6
New Accounting Pronouncements..............................................6
Financial Highlights.......................................................8
Financial Condition.......................................................10
Cash and Investments......................................................12
Mortgage-Backed Securities (MBS) and Loans Receivable.....................12
Mortgage Servicing Rights.................................................19
Asset Quality.............................................................19
Deposits..................................................................22
Advances from Federal Home Loan Banks.....................................24
Securities Sold Under Agreements to Repurchase............................24
Other Borrowings..........................................................24
Stockholders' Equity......................................................24
Regulatory Capital........................................................25
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
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Golden West Financial
Corporation and subsidiaries (Golden West or Company), including World Savings
Bank, FSB (WSB) and World Savings Bank, FSB (Texas) (WTX), for the three months
ended March 31, 2002 and 2001 are unaudited. In the opinion of the Company, all
adjustments (consisting only of normal recurring accruals) that are necessary
for a fair statement of the results for such three month periods have been
included. The operating results for the three months ended March 31, 2002 are
not necessarily indicative of the results for the full year.
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Dollars in thousands)
March 31 December 31 March 31
2002 2001 2001
------------------ ----------------- -----------------
(Unaudited) (Unaudited)
------------------ -----------------
Assets
Cash $ 373,229 $ 339,059 $ 363,672
Securities available for sale at fair value 462,201 622,670 369,690
Other investments at cost -0- -0- 199,873
Purchased mortgage-backed securities available for sale 44,957 233,403 105,867
Purchased mortgage-backed securities held to maturity 238,934 275,150 369,268
Mortgage-backed securities with recourse held to maturity 10,114,205 13,569,619 20,003,219
Loans receivable 45,543,068 41,065,375 32,825,480
Interest earned but uncollected 208,521 255,600 276,699
Investment in capital stock of Federal Home Loan Banks--at cost
which approximates fair value 1,038,353 1,105,773 1,084,264
Foreclosed real estate 11,663 11,101 7,284
Premises and equipment--at cost less accumulated depreciation 336,827 328,579 310,216
Other assets 975,796 779,942 816,477
------------------ ----------------- -----------------
$ 59,347,754 $58,586,271 $56,732,009
================== ================= =================
Liabilities and Stockholders' Equity
Deposits $ 35,508,352 $34,472,585 $31,356,959
Advances from Federal Home Loan Banks 17,540,760 18,037,509 18,936,789
Securities sold under agreements to repurchase 28,523 223,523 854,507
Federal funds purchased 200,000 -0- 270,000
Senior debt--net of discount 198,311 198,215 -0-
Subordinated notes--net of discount 499,654 599,511 598,968
Taxes on income 569,938 457,964 520,224
Other liabilities 340,504 312,774 358,445
Stockholders' equity 4,461,712 4,284,190 3,836,117
------------------ ----------------- -----------------
$ 59,347,754 $58,586,271 $56,732,009
================== ================= =================
Golden West Financial Corporation
Consolidated Statement of Net Earnings
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended
March 31
-------------------------------
2002 2001
------------- -------------
Interest Income
Interest on loans $ 658,200 $ 704,824
Interest on mortgage-backed securities 179,968 365,597
Interest and dividends on investments 30,068 63,762
------------- -------------
868,236 1,134,183
Interest Expense
Interest on deposits 276,581 430,748
Interest on advances 100,267 293,436
Interest on repurchase agreements 420 17,689
Interest on other borrowings 24,069 29,715
------------- -------------
401,337 771,588
------------- -------------
Net Interest Income 466,899 362,595
Provision for loan losses 8,539 3,183
------------- -------------
Net Interest Income after Provision for Loan Losses 458,360 359,412
Noninterest Income
Fees 36,503 31,312
Gain on the sale of securities, MBS and loans 14,419 5,877
Change in fair value of derivatives 7,131 (7,502)
Other 11,951 13,636
------------- -------------
70,004 43,323
Noninterest Expense
General and administrative:
Personnel 82,832 68,196
Occupancy 21,165 19,809
Deposit insurance 1,502 1,386
Advertising 3,885 1,877
Other 31,677 26,149
------------- -------------
141,061 117,417
Earnings before Taxes on Income and
Cumulative Effect of Accounting Change 387,303 285,318
Taxes on income 149,222 109,239
------------- -------------
Income before Cumulative Effect of Accounting Change 238,081 176,079
Cumulative effect of accounting change, net of tax -0- (6,018)
------------- -------------
Net Earnings $ 238,081 $ 170,061
============= =============
Basic Earnings Per Share before
Cumulative Effect of Accounting Change $ 1.53 $ 1.11
Cumulative effect of accounting change, net of tax .00 (.04)
------------- -------------
Basic Earnings Per Share $ 1.53 $ 1.07
============= =============
Diluted Earnings Per Share before
Cumulative Effect of Accounting Change $ 1.51 $ 1.10
Cumulative effect of accounting change, net of tax .00 (.04)
------------- -------------
Diluted Earnings Per Share $ 1.51 $ 1.06
============= =============
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
------------------------------
2002 2001
--------------- ------------
Cash Flows from Operating Activities
Net earnings $ 238,081 $170,061
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 8,539 3,183
Amortization of loan (fees), costs, and (discounts) 7,201 4,814
Depreciation and amortization 8,785 8,295
Loans originated for sale (453,374) (222,192)
Sales of loans 771,289 274,572
Decrease (increase) in interest earned but uncollected 48,402 (342)
Federal Home Loan Bank stock dividends (15,685) (17,108)
Increase in other assets (198,546) (227,486)
Increase in other liabilities 27,730 7,720
Increase in taxes on income 117,975 96,796
Other, net 9,881 (7,921)
--------------- ------------
Net cash provided by operating activities 570,278 90,392
Cash Flows from Investing Activities
New loan activity:
New real estate loans originated for portfolio (4,975,202) (3,571,818)
Real estate loans purchased -0- -0-
Other, net (148,819) (73,975)
--------------- ------------
(5,124,021) (3,645,793)
Real estate loan principal payments:
Monthly payments 240,538 119,049
Payoffs, net of foreclosures 2,279,683 1,513,365
--------------- ------------
2,520,221 1,632,414
Purchases of mortgage-backed securities available for sale -0- (38,463)
Sales of mortgage-backed securities available for sale 176,063 -0-
Repayments of mortgage-backed securities 1,273,423 1,033,126
Proceeds from sales of real estate 13,265 9,519
Decrease (increase) in securities available for sale 150,468 (13)
Decrease in other investments -0- 168,682
Redemptions of Federal Home Loan Bank stock 81,782 593
Additions to premises and equipment (17,151) (10,805)
--------------- ------------
Net cash used in investing activities (925,950) (850,740)
Golden West Financial Corporation
Consolidated Statement of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
-----------------------------------
2002 2001
-------------- -------------
Cash Flows from Financing Activities
Net increase in deposits(a) $ 1,035,767 $ 1,309,040
Additions to Federal Home Loan Bank advances 1,020,000 413,690
Repayments of Federal Home Loan Bank advances (1,516,749) (1,208,698)
Proceeds from agreements to repurchase securities 8,265 2,300,957
Repayments of agreements to repurchase securities (203,265) (2,303,724)
Increase in federal funds purchased 200,000 270,000
Repayment of subordinated debt (100,000) -0-
Dividends on common stock (11,276) (9,904)
Exercise of stock options 5,757 2,229
Purchase and retirement of Company stock (48,657) -0-
-------------- ---------------
Net cash provided by financing activities 389,842 773,590
-------------- ---------------
Net Increase in Cash 34,170 13,242
Cash at beginning of period 339,059 350,430
-------------- ---------------
Cash at end of period $ 373,229 $ 363,672
============== ===============
Supplemental cash flow information:
Cash paid for:
Interest $ 404,913 $ 789,397
Income taxes 31,422 8,756
Cash received for interest and dividends 915,315 1,133,790
Noncash investing activities:
Loans converted from adjustable rate to fixed-rate 108,027 11,996
Loans transferred to foreclosed real estate 11,019 7,900
Loans securitized into mortgage-backed securities
with recourse held to maturity -0- 2,995,949
Loans securitized into mortgage-backed securities
with recourse held to maturity recorded as loans
receivable per SFAS 140 6,842,373 -0-
Mortgage-backed securities held to maturity desecuritized
into adjustable rate loans 2,075,052 -0-
(a) Includes an increase of $560 million of wholesale deposits for the quarter ended March 31, 2001.
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
For the Three Months Ended March 31, 2002
----------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income Equity Income
------------- -------------- -------------- ------------- -------------- -------------
Balance at January 1, 2002 $ 15,553 $ 173,500 $ 3,873,758 $ 221,379 $ 4,284,190
Comprehensive income:
Net earnings -0- -0- 238,081 -0- 238,081 $ 238,081
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- (5,636) (5,636) (5,636)
Reclassification adjustment for
gains included in income -0- -0- -0- (747) (747) (747)
------------
Comprehensive Income $ 231,698
============
Common stock issued upon
exercise of stock options 25 5,732 -0- -0- 5,757
Purchase and retirement of
Company stock (77) -0- (48,580) -0- (48,657)
Cash dividends on common
stock ($.0725 per share) -0- -0- (11,276) -0- (11,276)
------------- -------------- -------------- ------------- ---------------
Balance at March 31, 2002 $ 15,501 $ 179,232 $ 4,051,983 $ 214,996 $ 4,461,712
============= ============== ============== ============= ===============
For the Three Months Ended March 31, 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- 170,061 -0- 170,061 $ 170,061
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- (13,556) (13,556) (13,556)
-----------
Comprehensive Income $ 156,505
===========
Common stock issued upon
exercise of stock options 15 2,214 -0- -0- 2,229
Cash dividends on common
stock ($.0625 per share) -0- -0- (9,904) -0- (9,904)
------------- -------------- -------------- ------------- ---------------
Balance at March 31, 2001 $ 15,856 $ 153,672 $ 3,447,482 $ 219,107 $ 3,836,117
============= ============== ============== ============= ===============
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,
2001, as well as material changes in results of operations during the three
month periods ended March 31, 2002 and 2001, respectively.
The following narrative is written with the presumption that the
users have read or have access to the Company's 2001 Annual Report on Form 10-K,
which contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2001, and for the year then ended.
Therefore, only material changes in financial condition and results of
operations are discussed herein.
The Securities and Exchange Commission (SEC) maintains a web-site,
which contains reports, proxy and information statements, and other information
pertaining to registrants that file electronically with the SEC including Golden
West. The address is: www.sec.gov. In addition, financial information about
Golden West can also be obtained at the Company's website, www.gdw.com.
This report may contain certain forward-looking statements, which are
not historical facts and pertain to future operating results of the Company.
Such statements are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are
inherently subject to significant business, economic, and competitive
uncertainties and contingencies, many of which are beyond the Company's control.
In addition, forward-looking statements are subject to change. Actual results
may differ materially from the results discussed in forward-looking statements.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company adopted SFAS 133 as of January 1,
2001 and recorded a loss of $10 million before tax, or $6 million after tax.
Because the Company has decided not to use permitted hedge accounting for the
derivative financial instruments in portfolio on March 31, 2002, the changes in
fair value of these instruments are reported in Noninterest Income as the
"Change in Fair Value of Derivatives" in the Consolidated Statement of Net
Earnings.
In September 2000, Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
140). This statement replaces previously issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS 125's provisions without reconsideration. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Because the Company retains 100% of
the beneficial interests in its MBS and 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
resulted in securities classified as securitized loans and recorded as loans
receivable (see pages 12 and 19 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 June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives will
not be amortized, but will rather be tested at least annually for impairment.
The adoption of SFAS 142 on January 1, 2002 had no impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, and the normal operation
of a long-lived asset, except for certain obligations of lessees. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not expect the adoption of this statement to have a material
impact on its financial statements and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions. In addition, this
statement resolves implementation issues of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of SFAS 144 on January 1, 2002 had no impact on the
Company's financial statements and results of operations.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
March 31 December 31 March 31
2002 2001 2001
----------------- ---------------- -----------------
Assets $59,347,754 $58,586,271 $56,732,009
Loans receivable including mortgage-backed securities 55,941,164 55,143,547 53,303,834
Adjustable rate mortgages including MBS 53,038,536 51,794,400 50,337,242
Deposits 35,508,352 34,472,585 31,356,959
Stockholders' equity 4,461,712 4,284,190 3,836,117
Stockholders' equity/total assets 7.52% 7.31% 6.76%
Book value per common share $ 28.78 $ 27.55 $ 24.19
Common shares outstanding 155,011,562 155,531,777 158,563,907
Yield on loan portfolio 5.85% 6.39% 8.03%
Yield on mortgage-backed securities 5.70% 6.35% 7.97%
Yield on investments 5.95% 2.86% 7.35%
Yield on earning assets 5.82% 6.36% 8.01%
Cost of deposits 3.04% 3.39% 5.35%
Cost of borrowings 2.35% 2.72% 5.59%
Cost of funds 2.81% 3.15% 5.45%
Yield on earning assets less cost of funds 3.01% 3.21% 2.56%
Ratio of nonperforming assets to total assets .71% .67% .48%
Ratio of troubled debt restructured to total assets .01% .00% .00%
Loans serviced for others with recourse $ 3,019,909 $ 2,797,634 $ 1,944,903
Loans serviced for others without recourse 2,243,958 2,035,250 1,054,007
World Savings Bank, FSB
Total assets $59,335,091 $ 58,377,834 $ 56,724,124
Net worth 4,938,396 4,701,922 4,045,248
Net worth/total assets 8.32% 8.05% 7.13%
Regulatory capital ratios:(a)
Tier 1 capital (core or leverage) 8.00% 7.71% 6.78%
Total risk-based capital 14.60% 14.24% 12.71%
World Savings Bank, FSB (Texas)
Total assets $ 7,711,823 $ 7,680,360 $ 5,404,069
Net worth 404,702 401,886 291,338
Net worth/total assets 5.25% 5.23% 5.39%
Regulatory capital ratios:(a)
Tier 1 capital (core or leverage) 5.25% 5.23% 5.39%
Total risk-based capital 25.17% 25.05% 26.94%
(a) For regulatory purposes, the requirements to be considered "well-capitalized" are 5.0% and 10.0% for tier 1 and total
risk-based capital, respectively.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended
March 31
-----------------------------------
2002 2001
--------------- ----------------
New real estate loans originated $ 5,428,576 $ 3,794,010
New adjustable rate mortgages as a percentage of
New real estate loans originated 89% 88%
Refinances as a percentage of new real estate
loans originated 63% 52%
Deposits increase(a) $ 1,035,767 $ 1,309,040
Net earnings before cumulative effect of
accounting change $ 238,081 $ 176,079
Net earnings 238,081 170,061
Basic earnings per share before cumulative effect
of accounting change 1.53 1.11
Basic earnings per share 1.53 1.07
Diluted earnings per share before cumulative effect
of accounting change 1.51 1.10
Diluted earnings per share 1.51 1.06
Cash dividends on common stock $ .0725 $ .0625
Average common shares outstanding 155,415,549 158,478,170
Average diluted common shares outstanding 157,570,350 160,694,897
Ratios:(b)
Net earnings before accounting change/
average net worth (ROE) 21.73% 18.78%
Net earnings before accounting change/
average assets (ROA) 1.62% 1.25%
Net interest margin(c) 3.27% 2.65%
General and administrative expense/average assets .96% .84%
Efficiency ratio(d) 26.27% 28.93%
(a) Includes an increase of $560 million of wholesale deposits for the quarter
ended March 31, 2001.
(b) Ratios are annualized by multiplying the quarterly computation by four.
Averages are computed by adding the beginning balance and each monthend
balance during the quarter and dividing by four.
(c) Net interest margin is net interest income divided by average
interest-earnings assets.
(d) The efficiency ratio is defined as general and administrative expense
divided by the sum of net interest income and noninterest income.
Financial Condition
The consolidated condensed balance sheet shown in the table below
presents the Company's assets and liabilities in percentage terms at March 31,
2002, December 31, 2001, and March 31, 2001. The reader is referred to page 46
of the Company's 2001 Annual Report on Form 10-K for similar information for
the years 1998 through 2001 and a discussion of the changes in the composition
of the Company's assets and liabilities in those years.
TABLE 1
Consolidated Condensed Balance Sheet
In Percentage Terms
March 31 December 31 March 31
2002 2001 2001
------------------ ---------------- -----------------
Assets
Cash and investments 1.4% 1.6% 1.6%
Loans receivable including mortgage-backed
securities 94.3 94.2 94.0
Other assets 4.3 4.2 4.4
------------------ ---------------- -----------------
100.0% 100.0% 100.0%
================== ================ =================
Liabilities and Stockholders' Equity
Deposits 59.8% 58.9% 55.3%
Federal Home Loan Bank advances 29.6 30.8 33.4
Securities sold under agreements to repurchase .1 .4 1.5
Federal funds purchased .3 .0 .5
Senior debt .3 .3 .0
Subordinated debt .8 1.0 1.0
Other liabilities 1.6 1.3 1.5
Stockholders' equity 7.5 7.3 6.8
------------------ ---------------- -----------------
100.0% 100.0% 100.0%
================== ================ =================
As the above table shows, the largest asset is loans receivable
including mortgage-backed securities, which consists primarily of long-term
mortgages. Deposits represent the largest portion of the Company's liabilities.
The disparity between the repricing (maturity, prepayment, or interest rate
change) of mortgage loans and investments and the repricing of deposits and
borrowings can have a material impact on the Company's results of operations.
The difference between the repricing characteristics of assets and liabilities
is commonly referred to as "the gap."
The following gap table shows that, as of March 31, 2002, 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 adjustable rate mortgage indexes used by the Company, in
particular, the Eleventh District Cost of Funds Index (COFI), which is the index
Golden West uses to determine the rate on the majority of its existing
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, resulting in a two month reporting lag.
The repricing lag occurs because COFI is based on a portfolio of accounts, not
all of which reprice immediately. Many of these liabilities, including
certificates of deposit, do not reprice each month, and, when they do reprice,
may not reflect the
full change in market rates. Some liabilities, such as
low-rate checking or passbook savings accounts, reprice very little. Still,
other liabilities, such as non-interest bearing deposits, do not reprice at all.
Therefore, COFI does not fully reflect a change in market interest rates.
Consequently, when the interest rate environment changes, the COFI lags cause
assets initially to 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 reflects the actual rate on Golden West's deposits as of
the prior monthend and has a one-month reporting lag. The Company also
originates loans that are tied to the Certificate of Deposit Index (CODI), which
is the 12-month rolling average of the monthly average of the three-month
certificate of deposit rate as published in the Federal Reserve H-15 Statistical
Report. CODI has a one-month reporting lag. In addition, by virtue of being a
12-month rolling average, the repricing of CODI trails changes in short-term
market interest rates. For more information on how these lags affect net
interest income, see page 26. Partially offsetting the index lags are similar
lags on a portion of the Company's liabilities.
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of March 31, 2002
(Dollars in millions)
Projected Repricing(a)
---------------------------------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
------------- --------------- -------------- -------------- --------------
Interest-Earning Assets
Investments $ 461 $ -0- $ -0- $ 1 $ 462
Mortgage-backed securities
Adjustable rate 9,550 -0- -0- -0- 9,550
Fixed-rate 61 143 370 274 848
Loans receivable:
Adjustable rate 40,186 2,465 685 -0- 43,336
Fixed-rate 110 214 691 939 1,954
Other(b) 1,343 -0- -0- -0- 1,343
Impact of interest rate swaps 661 (405) (256) -0- -0-
------------- --------------- -------------- -------------- --------------
Total $ 52,372 $ 2,417 $ 1,490 $ 1,214 $ 57,493
============= =============== ============== ============== ==============
Interest-Bearing Liabilities
Deposits(c) $ 23,553 $ 8,785 $ 3,154 $ 16 $ 35,508
FHLB advances 16,800 302 2 437 17,541
Other borrowings 329 200 398 -0- 927
Impact of interest rate swaps 103 (103) -0- -0- -0-
------------- --------------- -------------- -------------- --------------
Total $ 40,785 $ 9,184 $ 3,554 $ 453 $ 53,976
============= =============== ============== ============== ==============
Repricing gap $ 11,587 $ (6,767) $ (2,064) $ 761
============= =============== ============== ==============
Cumulative gap $ 11,587 $ 4,820 $ 2,756 $ 3,517
============= =============== ============== ==============
Cumulative gap as a percentage of
total assets 19.5% 8.1% 4.6%
============= =============== ==============
(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 March 31, 2002, December 31, 2001, and March 31, 2001, the Company
had securities available for sale in the amount of $462 million, $623 million
and $370 million, respectively, including unrealized gains on securities
available for sale of $351 million, $362 million, and $359 million,
respectively. At March 31, 2002, December 31, 2001, and March 31, 2001, the
Company had no securities held for trading in its investment securities
portfolio.
Mortgage-Backed Securities and Loans Receivable
The Company invests primarily in whole loans. From time to time, the
Company securitizes loans from its portfolio into 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 do not 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 6 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 March 31, 2002, December 31, 2001, and March 31, 2001, the balance
of loans receivable including mortgage-backed securities was $55.9 billion,
$55.1 billion, and $53.3 billion, respectively. Included in the $55.9 billion at
March 31, 2002 was $2.2 billion of Federal National Mortgage Association (FNMA)
MBS with the underlying loans subject to full credit recourse to the Company,
$8.0 billion of MBS-REMICs, $11.5 billion of securitized loans, and $284 million
of purchased MBS. Included in the $55.1 billion at December 31, 2001 was $4.7
billion of FNMA MBS with the underlying loans subject to full credit recourse to
the Company, $8.8 billion of MBS-REMICs, $5.2 billion of securitized loans, and
$509 million of purchased MBS. Included in the $53.3 billion at March 31, 2001
was $7.3 billion of FNMA MBS with the underlying loans subject to full credit
recourse to the Company, $12.7 billion of MBS-REMICs, and $475 million of
purchased MBS.
Loan portfolio repayments were $3.8 billion and $2.7 billion for the
three months ended March 31, 2002 and 2001. Loan portfolio repayments were
higher in 2002 as compared to 2001 due to an increase in the prepayment rate.
Mortgage-Backed Securities
At March 31, 2002, December 31, 2001, and March 31, 2001, the Company
had MBS held to maturity in the amount of $10.4 billion, $13.8 billion, and
$20.4 billion, respectively. The decrease in MBS from March 31, 2001 to March
31, 2002 was due primarily to prepayments and to the desecuritization of $2.1
billion of FNMA MBS during the first quarter of 2002. 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 March 31, 2002, December 31, 2001, and March 31, 2001, the Company
had MBS available for sale in the amount of $45 million, $233 million, and $106
million, respectively, including unrealized gains on MBS available for sale of
$1 million at March 31, 2002, $2 million at December 31, 2001, and $1 million at
March 31, 2001. During the first quarter of 2002, the Company sold $176 million
of MBS available for sale which resulted in a gain of $3 million. At March 31,
2002, December 31, 2001, and March 31, 2001, the Company had no trading MBS.
Repayments of MBS during the first quarter of 2002 were $1.3 billion
compared to $1.0 billion during the same period of 2001. MBS repayments were
higher during the first quarter of 2002 as compared to the first three months of
2001 due to an increase in the prepayment rate partially offset by a decrease in
the balance of MBS outstanding.
Loans
New loan originations for the three months ended March 31, 2002
amounted to $5.4 billion compared to $3.8 billion for the same period in 2001.
The volume of originations increased during 2002 due to a continued strong
demand for mortgage loans and an increase in the popularity of adjustable rate
mortgages, the Company's principal product. The decrease in interest rates over
the past 12 months led to an increase in refinance activity nationwide.
Refinanced loans constituted 63% of new loan originations for the three months
ended March 31, 2002, compared to 52% for the three months ended March 31, 2001.
First mortgages originated for sale amounted to $440 million for the
three months ended March 31, 2002, compared to $200 million for the same period
in 2001. During the first quarter of 2002, $108 million of loans were converted
at the customer's request from adjustable rate to fixed-rate compared to $12
million for the same period in 2001. The Company continues to sell most of its
new and converted fixed-rate loans. For the three months ended March 31, 2002,
the Company sold $737 million of fixed-rate first mortgage loans compared to
$215 million for the same period in 2001.
At March 31, 2002, the Company had lending operations in 38 states.
The largest source of mortgage origination was loans secured by residential
properties in California. For the three months ended March 31, 2002, 68% of
total loan originations were on residential properties in California compared to
70% for the same period in 2001. The five largest states, other than California,
for originations for the three months ended March 31, 2002, were Florida, Texas,
New Jersey, Washington, and Illinois with a combined total of 17% of total
originations. The percentage of the total loan portfolio (including MBS with
recourse and MBS-REMICs) that was comprised of residential loans in California
was 64% at March 31, 2002 compared to 64% at December 31, 2001 and 63% at March
31, 2001. Of the 64% at March 31, 2002, 53.0% were in Northern California and
47.0% were in Southern California.
The Company continues to emphasize adjustable rate mortgages -- 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 adjustable rate loans was 95% at March 31, 2002 compared
to 94% at December 31, 2001, and 94% at March 31, 2001. The Company's ARM
originations constituted 89% of new mortgage loans made for the first three
months of 2002 compared to 88% for the first three months of 2001.
Golden West originates ARMs tied primarily to COSI , COFI, and CODI.
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 first quarters of 2002 and 2001.
TABLE 3
Adjustable Rate Mortgage Originations by Index
(Dollars in thousands)
Three Months Ended
March 31
---------------------------------
ARM Index 2002 2001
- ----------------------- --------------- --------------
COSI $2,293,879 $ 2,236,244
COFI 1,013,657 1,114,239
CODI 1,543,648 -0-
--------------- --------------
$4,851,184 $ 3,350,483
=============== ==============
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 March 31, 2002, December 31, 2001, and March 31,
2001.
TABLE 4
Adjustable Rate Mortgage Portfolio
by Index (Including ARM MBS with
Recourse and ARM MBS-REMICs)
(Dollars in thousands)
March 31 December 31 March 31
ARM Index 2002 2001 2001
- --------------- -------------- --------------- --------------
COSI $21,538,709 $ 20,943,596 $ 21,745,292
COFI 28,105,771 29,010,008 27,045,052
CODI 2,085,148 552,746 -0-
Other(a) 1,308,908 1,288,050 1,546,898
-------------- --------------- --------------
$53,038,536 $ 51,794,400 $ 50,337,242
============== =============== ==============
(a) Includes equity lines of credit
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 12.19% or 6.34% above the actual weighted average rate at
March 31, 2002, versus 12.26% or 4.13% above the weighted average rate at March
31, 2001.
Approximately $5.0 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 March 31, 2002, $2.2 billion of ARM loans had reached their rate floors as
compared to $154 million at March 31, 2001. The weighted average floor rate on
the loans that had reached their floor was 6.00% at March 31, 2002 compared to
7.99% at March 31, 2001. Without the floor, the average rate on these loans
would have been 5.29% at March 31, 2002 and 7.73% at March 31, 2001.
Most of the Company's loans are collateralized by first deeds of
trust on one-to-four family homes. The Company also originates second deeds of
trust in the form of fixed-rate loans and equity lines of credit (ELOCs) indexed
to the prime rate. The Company's fixed-rate second mortgage originations
amounted to $14 million and $22 million for the first quarters of 2002 and 2001,
respectively. The outstanding balance of fixed-rate seconds amounted to $53
million and $71 million at March 31, 2002 and 2001, respectively. The Company
established 4,543 and 665 new equity lines of credit in the first quarter of
2002 and 2001, respectively. The outstanding balance of ELOCs amounted to $436
million and $57 million at March 31, 2002 and 2001, respectively. The maximum
total line of credit available on the Company's ELOCs amounted to $716 million
and $96 million at March 31, 2002 and 2001, respectively.
The Company generally lends up to 80% of the appraised value of
residential real property. In some cases, a higher amount is possible through a
first mortgage loan or a combination of a first and a second mortgage loan on
the same property. The second mortgage loan may be a fixed-rate loan or an
equity line of credit.
During the first three months of 2002, 13% of loans originated
exceeded 80% of the appraised value of the secured property, including $70
million of firsts and $644 million of combined firsts and seconds. For the first
three months of 2001, 12% 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) or a combined loan to value (CLTV)
over 80%. Among other things, the loan amount may not exceed 95% of the
appraised value of a single-family residence. Also, many first mortgage loans
with an LTV over 80% carry mortgage insurance, which reimburses the Company for
losses up to a specified percentage per loan, thereby reducing the effective LTV
to below 80%. Furthermore, the Company sells without recourse a significant
portion of its second mortgage originations. Sales of second mortgages amounted
to $35 million for the first quarter of 2002 as compared to $60 million for the
same period in 2001. In addition, the Company carries pool mortgage insurance on
most seconds not sold, including equity lines of credit. The cumulative losses
covered by this pool mortgage insurance are limited to 10% or 20% of the
original balance of each insured pool.
The following table shows mortgage originations with LTV ratios or
combined LTV ratios greater than 80% for the three months ended March 31, 2002
and 2001.
TABLE 5
Mortgage Originations With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
(Dollars in thousands)
Three Months Ended
March 31
------------------------------
2002 2001
------------- -------------
First mortgages with loan to
value ratios greater than 80%:
With insurance $ 51,063 $ 35,752
With no insurance 19,423 19,996
------------- -------------
70,486 55,748
------------- -------------
First and second mortgages with
combined loan to value ratios
greater than 80%:
With pool insurance 559,743 234,018
With no insurance 84,671 183,316
------------- -------------
644,414 417,334
------------- -------------
Total $714,900 $473,082
============= =============
The following table shows the outstanding balance of mortgages with
original LTV or combined LTV ratios greater than 80% at March 31, 2002 and 2001.
TABLE 6
Balance of Mortgages With Loan to Value and
Combined Loan to Value Ratios Greater Than 80%
(Dollars in thousands)
As of March 31
---------------------------------
2002 2001
-------------- --------------
First mortgages with loan to
value ratios greater than 80%:
With insurance $ 440,768 $ 395,009
With no insurance 491,699 770,039
-------------- --------------
932,467 1,165,048
-------------- --------------
First and second mortgages with
combined loan to value ratios
greater than 80%:
With pool insurance 2,596,262 2,259,406
With no insurance 396,276 862,232
-------------- --------------
2,992,538 3,121,638
-------------- --------------
Total $ 3,925,005 $ 4,286,686
============== ==============
The following tables show the Company's loan portfolio by state at
March 31, 2002 and 2001.
TABLE 7
Loan Portfolio by State
March 31, 2002
(Dollars in thousands)
Residential
Real Estate Commercial Loans
------------------------- Real Total as a % of
State 1 - 4 5+ Land Estate Loans Portfolio
- -------------------------- ------------ ---------- ------ ------------ ----------- ------------
Northern California $ 17,221,769 $1,742,429 $ 13 $ 14,743 $18,978,954 34.08%
Southern California 15,293,800 1,538,950 -0- 2,819 16,835,569 30.23
Florida 2,870,414 29,391 -0- 141 2,899,946 5.21
Texas 2,211,487 91,968 151 871 2,304,477 4.14
New Jersey 2,017,962 -0- -0- 1,500 2,019,462 3.63
Washington 1,117,166 659,241 -0- -0- 1,776,407 3.19
Illinois 1,399,859 120,585 -0- -0- 1,520,444 2.73
Colorado 1,220,212 181,039 -0- 4,512 1,405,763 2.52
Arizona 992,042 32,111 -0- 12 1,024,165 1.84
Pennsylvania 1,007,463 1,140 -0- 80 1,008,683 1.81
Other(a) 5,829,561 78,836 3 3,274 5,911,674 10.62
-------------- ---------- ------ ----------- ------------- ---------
Totals $ 51,181,735 $4,475,690 $ 167 $ 27,952 55,685,544 100.00%
============== ========== ====== =========== =========
Deferred loan costs 232,259
Loan discount on purchased loans (970)
Undisbursed loan funds (5,943)
Allowance for loan losses (269,327)
Loans to facilitate (LTF) interest reserve (158)
Troubled debt restructured (TDR) interest reserve -0-
Loans on deposits 15,868
-------------
Total loan portfolio and loans securitized into FNMA MBS with recourse 55,657,273
and MBS-REMICs
Loans securitized into FNMA MBS and MBS-REMICs (10,114,205)(b)
-------------
Total loans receivable $45,543,068
=============
(a) All states included in other have total loan balances with less than 2%
of total loans.
(b) The above schedule includes the March 31, 2002 balances of loans that were
securitized and retained as FNMA MBS with recourse
and MBS-REMICs.
TABLE 8
Loan Portfolio by State
March 31, 2001
(Dollars in thousands)
Residential
Real Estate Commercial Loans
------------------------- Real Total as a % of
State 1 - 4 5+ Land Estate Loans Portfolio
- -------------------------- ------------ ----------- ------ ----------- ----------- -----------
Northern California $ 15,433,081 $1,801,514 $103 $ 19,882 $17,254,580 32.62%
Southern California 14,703,349 1,624,795 -0- 4,093 16,332,237 30.87
Florida 2,589,922 15,205 -0- 213 2,605,340 4.92
Texas 2,103,290 60,129 208 1,022 2,164,649 4.09
New Jersey 1,981,352 -0- -0- 2,263 1,983,615 3.75
Washington 1,084,615 588,355 -0- -0- 1,672,970 3.16
Illinois 1,497,373 124,391 -0- -0- 1,621,764 3.07
Colorado 1,285,309 184,313 -0- 4,616 1,474,238 2.79
Arizona 1,039,360 16,644 -0- 14 1,056,018 2.00
Pennsylvania 1,068,376 2,183 -0- 171 1,070,730 2.02
Other(a) 5,604,269 59,763 15 4,480 5,668,527 10.71
------------- ------------ ----- ----------- ------------ ----------
Totals $ 48,390,296 $4,477,292 $326 $ 36,754 52,904,668 100.00%
============= ============ ===== =========== ==========
Deferred loan costs 149,097
Loan discount on purchased loans (1,363)
Undisbursed loan funds (5,716)
Allowance for loan losses (237,964)
Loans to facilitate (LTF) interest reserve (188)
Troubled debt restructured (TDR) interest reserve (303)
Loans on deposits 20,468
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
And MBS-REMICs 52,828,699
Loans securitized into FNMA MBS and MBS-REMICs (20,003,219)(b)
------------
Total loans receivable $32,825,480
============
(a) All states included in other have total loan balance less than 2% of total
loans.
(b) The above schedule includes the March 31, 2001 balances of loans that were
securitized and retained as FNMA MBS with recourse and MBS-REMICs.
Loan repayments consist of monthly loan amortization and loan
payoffs. For the three months ended March 31, 2002, loan repayments were $2.5
billion compared to $1.6 billion in the same period of 2001. The increase in
loan repayments was primarily due to an increase in loan payoffs in the first
three months of 2002.
Securitized Loans
During the first quarter of 2002, the Company securitized $6.8
billion of loans. During the second and third quarters of 2001, the Company
securitized $6.0 billion of loans. At March 31, 2002, the balance of these
securitized loans was $11.5 billion. These loans are classified as loans
receivable on the Statement of Financial Position.
Mortgage Servicing Rights
Capitalized mortgage servicing rights (CMSRs) are included in "Other
assets" on the Consolidated Statement of Financial Condition. The following
table shows the changes in capitalized mortgage servicing rights for the three
months ended March 31, 2002 and 2001.
TABLE 9
Capitalized Mortgage Servicing Rights
(Dollars in thousands)
Three Months Ended
March 31
---------------------------
2002 2001
----------- ------------
Beginning balance of capitalized mortgage servicing rights $56,056 $28,355
New capitalized mortgage servicing rights from loan sales 9,921 4,290
Amortization of capitalized mortgage servicing rights (4,507) (2,667)
----------- ------------
Ending balance of capitalized mortgage servicing rights $61,470 $29,978
=========== ============
The estimated amortization of the March 31, 2002 balance for the
remainder of 2002 and the five years ending 2007 is $14.6 million (2002), $15.1
million (2003), $11.1 million (2004), $7.4 million (2005), $4.8 million (2006),
and $7.6 million (2007). Actual results may vary depending upon the level of the
payoffs of the loans currently serviced.
The book value of Golden West's servicing rights did not exceed the
fair value at March 31, 2002 or 2001 and, therefore, no write-down of the
servicing rights to their fair value 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)
March 31 December 31 March 31
2002 2001 2001
---------------- ----------------- ---------------
Non-accrual loans $ 408,862 $ 382,510 $ 267,298
Real estate acquired through foreclosure 10,574 10,177 7,142
Real estate in judgment 1,089 924 142
---------------- ----------------- ---------------
Total nonperforming assets $ 420,525 $ 393,611 $ 274,582
================ ================= ===============
TDRs, net of interest reserve $ 3,479 $ 1,505 $ 1,945
================ ================= ===============
Ratio of NPAs to total assets .71% .67% .48%
================ ================= ===============
Ratio of TDRs to total assets .01% .00% .00%
================ ================= ===============
Ratio of NPAs and TDRs to total assets .72% .67% .48%
================ ================= ===============
The increase in NPAs during the first three months of 2002 reflected
the normal increase in delinquencies associated with the aging of the large
volume of mortgages originated during the past two years together with the weak
U.S. economy in 2001. 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 $2 million for the three
months ended March 31, 2002 and 2001, respectively. Interest foregone on TDRs
amounted to $5 thousand for the three months ended March 31, 2002, compared to
$27 thousand for the three months ended March 31, 2001.
The tables on the following page show the Company's nonperforming
assets by state as of March 31, 2002 and 2001.
TABLE 11
Nonperforming Assets by State
March 31, 2002
(Dollars in thousands)
Non-Accrual Loans(a) Foreclosed Real Estate (FRE)
------------------------------------- ---------------------------------
Residential Commercial Residential Commercial NPAs as
Real Estate Real Real Estate Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans
- ----------------------- ------------ ---------- ---------- ----------- -------- ---------- ---------- -----------
Northern California $ 85,118 $ 251 $ 104 $ 275 $ -0- $ -0- $ 85,748 .45%
Southern California 131,327 568 656 1,589 -0- -0- 134,140 .80
Florida 36,549 -0- 23 825 -0- -0- 37,397 1.29
Texas 19,913 -0- -0- 2,637 -0- -0- 22,550 .98
New Jersey 19,304 -0- -0- 183 -0- -0- 19,487 .96
Washington 14,710 421 -0- -0- -0- -0- 15,131 .85
Illinois 18,601 -0- -0- 525 -0- -0- 19,126 1.26
Colorado 2,383 66 -0- -0- -0- -0- 2,449 .17
Arizona 6,085 -0- -0- 308 -0- -0- 6,393 .62
Pennsylvania 12,003 -0- -0- 1,263 -0- -0- 13,266 1.32
Other(c) 60,637 143 -0- 4,395 -0- -0- 65,175 1.10
------------ ---------- ----------- --------- -------- ---------- ---------- -----------
Totals $406,630 $1,449 $ 783 $ 12,000 $ -0- $ -0- 420,862 .76
============ ========== =========== ========= ======== ==========
FRE general valuation allowance (337) (.00)
---------- -----------
Total nonperforming assets $420,525 .76%
========== ===========
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued.
(b) The March 31, 2002 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
March 31, 2001
(Dollars in thousands)
Non-Accrual Loans(a) Foreclosed Real Estate (FRE)
------------------------------------- ---------------------------------
Residential Commercial Residential Commercial NPAs as
Real Estate Real Real Estate Real Total a % of
State 1 - 4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans
- ----------------------- ------------ ---------- ---------- ----------- -------- ---------- --------- -----------
Northern California $ 45,582 $ 450 $ 103 $ 305 $ -0- $ -0- $ 46,440 .27%
Southern California 89,445 -0- 581 2,094 -0- -0- 92,120 .56
Florida 24,580 -0- 25 14 -0- -0- 24,619 .95
Texas 13,891 -0- -0- 302 -0- -0- 14,193 .66
New Jersey 15,938 -0- -0- 392 -0- 156 16,486 .83
Washington 5,191 -0- -0- -0- -0- -0- 5,191 .31
Illinois 10,825 215 -0- 592 -0- -0- 11,632 .72
Colorado 1,719 -0- -0- -0- -0- -0- 1,719 .12
Arizona 4,811 -0- -0- 564 -0- -0- 5,375 .51
Pennsylvania 12,105 -0- -0- 1,238 -0- -0- 13,343 1.25
Other(c) 41,753 84 -0- 1,793 -0- -0- 43,630 .77
------------ ---------- --------- --------- ------- ---------- ----------- -----------
Totals $265,840 $ 749 $ 709 $7,294 $ -0- $ 156 274,748 .52
============ ========== ========= ========= ======= ==========
FRE general valuation allowance (166) (.00)
----------- -----------
Total nonperforming assets $274,582 .52%
=========== ===========
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued.
(b) The March 31, 2001 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 probable loan losses that
is based on both the Company's historical loss experience in the loan portfolio
and factors reflecting current economic conditions. This approach uses a
database that identifies losses on loans and foreclosed real estate from past
years to the present, broken down by year of origination, type of loan, and
geographical area. 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, 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 months ended March 31, 2002 and 2001.
TABLE 13
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended
March 31
------------------------------
2002 2001
------------- -------------
Beginning allowance for loan losses $ 261,013 $ 236,708
Provision for loan losses charged to expense 8,539 3,183
Loans charged off (321) (29)
Recoveries 96 133
Net transfer of allowance (to) from recourse liability -0- (2,031)
------------- -------------
Ending allowance for loan losses $ 269,327 $ 237,964
============= =============
Ratio of net chargeoffs (recoveries) to average loans
outstanding (including MBS with recourse
and MBS-REMICs) .00% .00%
============= =============
Ratio of allowance for loan losses to total loans
(including MBS with recourse and MBS-REMICs) .48% .45%
============= =============
Ratio of allowance for loan losses to nonperforming assets 64.0% 86.7%
============= =============
Deposits
The Company raises deposits through its retail branch system as well
as through the capital markets.
Retail deposits increased during the first quarter of 2002 by $1.0
billion, including interest credited of $230 million, compared to an increase of
$749 million, including interest credited of $348 million in the first quarter
of 2001. Retail deposits increased during the first quarter of 2002 because the
public found savings to be a more favorable investment compared with other
alternatives. At March 31, 2002 and 2001, transaction accounts (which include
checking, passbook, and money market accounts) represented 47% and 23%,
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 March 31, 2001 included $745 million of these wholesale CDs. There
were no outstanding wholesale CDs at March 31, 2002 or December 31, 2001.
The table below shows the Company's deposits by interest rate and by
remaining maturity at March 31, 2002 and 2001.
TABLE 14
Deposits
(Dollars in millions)
March 31
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Rate* Amount Rate* Amount
----------- ------------- ----------- -------------
Deposits by rate:
Interest-bearing checking accounts 1.28 % $ 97 3.18 % $ 90
Interest-bearing checking accounts swept
into money market deposit accounts 1.96 4,544 3.28 3,167
Passbook accounts .85 470 1.52 454
Money market deposit accounts 2.82 11,471 4.21 3,422
Term certificate accounts with original maturities of:
4 weeks to 1 year 2.61 8,848 5.82 13,455
1 to 2 years 3.86 6,152 6.04 6,931
2 to 3 years 4.74 1,616 5.73 1,352
3 to 4 years 5.01 912 5.80 466
4 years and over 5.31 1,232 5.92 673
Retail jumbo CDs 3.99 166 5.73 602
Wholesale CDs .00 -0- 5.23 745
------------- -------------
$ 35,508 $ 31,357
============= =============
Deposits by remaining maturity:
No contractual maturity 2.52 % $ 16,582 3.61 % $ 7,133
Maturity within one year 3.28 15,756 5.87 22,099
1 to 5 years 4.60 3,154 5.79 2,093
Over 5 years 5.55 16 5.41 32
------------- -------------
$ 35,508 $ 31,357
============= =============
* Weighted average interest rate, including the impact of interest rate swaps.
At March 31, the weighted average cost of deposits was 3.04% (2002) and
5.35% (2001).
Advances from Federal Home Loan Banks
The Company uses borrowings from the FHLBs, also known as "advances,"
to provide funds for loan origination activities. Advances are secured by
pledges of certain loans, MBS-REMICs, other MBS, and capital stock of the FHLBs.
FHLB advances amounted to $17.5 billion at March 31, 2002, compared to $18.0
billion at December 31, 2001, and $18.9 billion at March 31, 2001, 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 $29 million, $224 million, and $855 million at March 31, 2002,
December 31, 2001, and March 31, 2001, respectively.
Other Borrowings
At March 31, 2002, Golden West, at the holding company level, had a
total of $500 million of subordinated debt issued and outstanding as compared to
$600 million at March 31, 2001. As of March 31, 2002, the Company's subordinated
debt securities were rated A2 and A- by Moody's Investors Service (Moody's) and
Standard & Poor's Corporation (S&P), respectively.
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 March 31, 2002, the Company had
issued and outstanding $200 million of five-year senior debt in connection with
the aforementioned registration statement. As of March 31, 2002, the Company's
senior debt was rated A1 and A by Moody's and S&P, respectively.
During 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 March 31, 2002, WSB had not issued any notes
under this authority. As of March 31, 2002, WSB's long-term deposits and other
senior obligations were rated Aa3 by Moody's and A+ by S&P.
Stockholders' Equity
The Company's stockholders' equity increased by $178 million during
the first three months of 2002 as a result of net earnings partially offset by
decreased market values of securities available for sale, the payment of
quarterly dividends to stockholders and the $49 million cost of the repurchase
of Company stock. The Company's stockholders' equity increased by $149 million
during the first three months of 2001 as a result of net earnings partially
offset by decreased market values of securities available for sale and by the
payment of quarterly dividends to stockholders. Unrealized gains, net of taxes,
on securities and MBS available for sale included in stockholders' equity at
March 31, 2002, December 31, 2001, and March 31, 2001 were $215 million, $221
million, and $219 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 March 31, 2002, 47.3 million shares
had been repurchased and retired at a cost of $1.1 billion since October 1993,
of which 765 thousand were purchased and retired at a cost of $49 million during
the first three months of 2002. Dividends from subsidiaries are expected to
continue to be the major source of funding for the stock repurchase program. The
repurchase of Golden West stock is not intended to have a material impact on the
normal liquidity of the Company.
Regulatory Capital
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) established capital standards for federally insured financial
institutions, such as WSB and WTX. Under FIRREA, thrifts must have tangible
capital equal to at least 1.5% of adjusted total assets, core capital equal to
at least 4% of adjusted total assets, and risk-based capital equal to at least
8% of risk-weighted assets.
The OTS and other bank regulatory agencies have adopted rules based
upon five capital tiers: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. The rules provide that a financial institution is
"well-capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based
capital ratio is 6% or greater, its total risk-based capital ratio is 10% or
greater and the institution is not subject to a capital directive.
As used herein, the total risk-based capital ratio is the ratio of
total capital to risk-weighted assets, the Tier 1 risk-based capital ratio is
the ratio of core capital to risk-weighted assets, and the Tier 1 or leverage
ratio is the ratio of core capital to adjusted total assets, in each case as
calculated in accordance with current OTS capital regulations. As of March 31,
2002, the most recent notification from the OTS categorized WSB and WTX as
"well-capitalized" under the current requirements. There are no conditions or
events that have occurred since that notification that the Company believes
would have an impact on the categorization of WSB or WTX.
The following tables show WSB's and WTX's regulatory capital ratios
and compares them to the OTS minimum requirements at March 31, 2002 and 2001.
TABLE 15
Regulatory Capital Ratios, Minimum Capital Requirements,
and Well-Capitalized Capital Requirements
As of March 31, 2002
(Dollars in thousands)
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------- -------------------------- ---------------------------
Capital Ratio Capital Ratio Capital Ratio
-------------- ------- ---------------- ------- ---------------- -------
WSB and Subsidiaries
Tangible $4,723,573 8.00% $ 885,434 1.50% --- ---
Tier 1 (core or leverage) 4,723,573 8.00 2,361,158 4.00 $ 2,951,447 5.00%
Tier 1 risk-based 4,723,573 13.55 --- --- 2,091,647 6.00
Total risk-based 5,088,062 14.60 2,788,862 8.00 3,486,078 10.00
WTX
Tangible $ 404,702 5.25% $ 115,677 1.50% --- ---
Tier 1 (core or leverage) 404,702 5.25 308,473 4.00 $ 385,591 5.00%
Tier 1 risk-based 404,702 25.16 --- --- 96,512 6.00
Total risk-based 404,847 25.17 128,682 8.00 160,853 10.00
TABLE 16
Regulatory Capital Ratios, Minimum Capital Requirements,
and Well-Capitalized Capital Requirements
As of March 31, 2001
(Dollars in thousands)
WELL-CAPITALIZED
MINIMUM CAPITAL CAPITAL
ACTUAL REQUIREMENTS REQUIREMENTS
------------------------- -------------------------- ---------------------------
Capital Ratio Capital Ratio Capital Ratio
-------------- ------- ---------------- ------- ---------------- -------
WSB and Subsidiaries
Tangible $3,826,199 6.78% $ 846,144 1.50% --- ---
Tier 1 (core or leverage) 3,826,199 6.78 2,256,384 4.00 $ 2,820,480 5.00%
Tier 1 risk-based 3,826,199 11.70 --- --- 1,962,209 6.00
Total risk-based 4,157,555 12.71 2,616,279 8.00 3,270,349 10.00
WTX
Tangible $ 291,338 5.39% $ 81,061 1.50% --- ---
Tier 1 (core or leverage) 291,338 5.39 216,163 4.00 $ 270,203 5.00%
Tier 1 risk-based 291,338 26.94 --- --- 64,882 6.00
Total risk-based 291,339 26.94 86,510 8.00 108,137 10.00
Results Of Operations
Net Earnings
Net earnings for the three months ended March 31, 2002 were $238
million compared to net earnings of $176 million (excluding the cumulative
effect of the accounting change) for the three months ended March 31, 2001. Net
earnings increased in 2002 as compared to 2001 primarily as a result of
increased net interest income and increased noninterest income, which were
partially offset by an increase in general and administrative expenses. Net
earnings for the three months ended March 31, 2001, including the cumulative
effect of the accounting change, net of tax, were $170 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 increase or reduce changes in net interest income.
Net interest income amounted to $467 million for the three months
ended March 31, 2002. This amount represented a 29% increase over the $363
million reported during the same period in 2001. As discussed below, the
significant growth of net interest income in 2002 compared with the prior year
resulted primarily from an increase 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.
As noted in the discussion of the Gap on pages 10 and 11, the
Company's liabilities respond more rapidly to movements in short-term interest
rates than the Company's assets, most of which are adjustable rate mortgages
tied to indexes that lag changes in market interest rates. Consequently, when
short-term interest rates decline, the Company's primary spread temporarily
widens, because the index lags slow the downward movement of the yield on the
Company's adjustable rate mortgage portfolio. When interest rates stabilize
after a period of falling rates, the primary spread usually declines for a while
until the yield on the ARM portfolio catches up to previous rate decreases. The
opposite occurs when interest rates increase. Specifically, when short-term
interest rates move up, the Company's primary spread compresses for a period of
time, because the index lags slow the upward adjustment of the yield on the
Company's ARMs. When interest rates stabilize after a period of rising rates,
the primary spread expands for a while until the ARM yield catches up to
previous rate increases. For the five years ended March 31, 2002, which included
periods of both falling and rising interest rates, the Company's primary spread
averaged 2.31% with a high of 3.21% and a low of 1.88%.
During 2001, the Federal Reserve's Open Market Committee lowered the
Federal Funds rate, a key short-term interest rate, by a total of 475 basis
points in order to stimulate the then-weak economy. Other short-term market
rates experienced similar decreases. In response to significantly lower
short-term interest rates, the Company's cost of funds declined by 284 basis
points during 2001. While the Company's cost of funds declined considerably
during 2001, the yield on the Company's assets fell by only 166 basis points,
because the indexes to which the large adjustable rate mortgage portfolio is
tied moved down more slowly. As a consequence, the Company's primary spread
widened substantially during 2001, and by yearend reached 3.21%, the highest
level in the Company's history. During the first quarter of 2002, the Company's
cost of funds declined by an additional 34 basis points. At the same time, the
Company's asset yield fell by 54 basis points, as the ARM indexes continued to
adjust downward in response to the large interest rate declines experienced in
2001. Because the yield on earning assets fell faster than the cost of funds in
the first quarter of 2002, the Company's primary spread narrowed from 3.21% at
December 31, 2001 to 3.01% at March 31, 2002. However, the average primary
spread in the first quarter of 2002 was significantly greater than the level
reported for the same period in 2001, leading to a substantial increase in net
interest income for the first three months of 2002 compared with the first
quarter of 2001.
The table below shows the components of the Company's spread at March
31, 2002, December 31, 2001, and March 31, 2001.
TABLE 17
Yield on Earning Assets,
Cost of Funds, and Primary Spread
March 31 December 31 March 31
2002 2001 2001
-------------- ----------------- -------------
Yield on loan portfolio 5.85% 6.39% 8.03%
Yield on MBS 5.70 6.35 7.97
Yield on investments 5.95 2.86 7.35
-------------- ----------------- -------------
Yield on earning assets 5.82 6.36 8.01
-------------- ----------------- -------------
Cost of deposits 3.04 3.39 5.35
Cost of borrowings 2.35 2.72 5.59
-------------- ----------------- -------------
Cost of funds 2.81 3.15 5.45
-------------- ----------------- -------------
Primary spread 3.01% 3.21% 2.56%
============== ================= =============
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. The majority 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 (COFI). The
Company's portfolio also contains loans that are tied to the Golden West Cost of
Savings Index (COSI) and to the Certificate of Deposit Index (CODI). As
previously discussed on pages 10 and 11, there is a two-month reporting lag for
COFI and a one-month reporting lag for COSI and CODI, as well as repricing lags
for COFI and CODI. Additionally, certain features of adjustable rate mortgages
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 18
Average Interest-Earning Assets and Interest-Bearing Liabilities
(Dollars in thousands)
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
--------------------------------------------- ------------------------------------------
Annualized End of Annualized End of
Average Average Period Average Average Period
Balances(a) Yield Yield Balances(a) Yield Yield
---------------- --------------- ---------- ------------- -------------- ----------
ASSETS
Investment securities $ 2,904,853 1.98% 5.95% $ 3,164,205 5.90% 7.35%
Mortgage-backed securities 12,090,974 5.95 5.70 18,315,427 7.98 7.97
Loans receivable(b) 43,316,336 6.08 5.85 34,633,307 8.14 8.03
Invest. in capital stock of FHLBs 1,055,578 5.94 4.32 1,078,277 6.35 6.49
---------------- ------------- ------------- -------------
Interest-earning assets $59,367,741 5.85% $57,191,216 7.93%
================ ============= ============= =============
LIABILITIES
Deposits:
Checking accounts $ 105,546 2.10% 1.28% $ 137,933 2.19% 3.18%
Savings accounts 15,053,235 2.44 2.53 6,957,652 3.55 3.62
Term accounts 20,065,569 3.67 3.50 24,795,967 5.94 5.86
---------------- ------------- ---------- ------------- ------------- ----------
Total deposits 35,224,350 3.14 3.04 31,891,552 5.40 5.35
Advances from FHLBs 17,550,669 2.29 2.19 19,293,276 6.08 5.56
Reverse repurchases 95,510 1.76 0.78 1,229,272 5.76 5.15
Other borrowings 3,393,103 2.84 5.55 1,943,601 6.12 6.65
---------------- ------------- ------------- -------------
Interest-bearing liabilities $56,263,632 2.85% $54,357,701 5.68%
================ ============= ============= =============
Average net interest spread 3.00% 2.25%
============= =============
Net interest income $ 466,899 $ 362,595
================ =============
Net yield on average interest-
earning assets 3.15% 2.54%
============= =============
(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 months ended March 31, 2002 and 2001.
TABLE 19
Selected Revenue and Expense Items
as Percentages of Total Revenues
Three Months Ended
March 31
---------------------------
2002 2001
------------ ----------
Interest on loans 70.2% 59.9%
Interest on mortgage-backed securities 19.2 31.0
Interest and dividends on investments 3.2 5.4
------------ ----------
92.6 96.3
Less:
Interest on deposits 29.5 36.6
Interest on advances and other borrowings 13.3 28.9
------------ ----------
42.8 65.5
Net interest income 49.8 30.8
Provision for loan losses .9 .3
------------ ----------
Net interest income after provision for loan losses 48.9 30.5
Add:
Fees 3.9 2.7
Gain on the sale of securities, MBS and loans 1.5 .5
Change in fair value of derivatives .8 (.7)
Other non-interest income 1.2 1.2
------------ ----------
7.4 3.7
Less:
General and administrative expenses 15.0 10.0
Taxes on income 15.9 9.3
Cumulative effect of accounting change 0.0 .5
----------- ----------
Net earnings 25.4% 14.4%
=========== ==========
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 20
Schedule of Interest Rate Swaps Activity
(Notional amounts in millions)
Three Months Ended
March 31, 2002
--------------------------------
Receive Pay
Fixed Fixed
Swaps Swaps
------------- --------------
Balance at December 31, 2001 $ 103 $ 621
Additions -0- 275
Maturities -0- (76)
-------------- ---------------
Balance at March 31, 2002 $ 103 $ 820
============== ===============
The range of floating interest rates received on swap contracts in
the first three months of 2002 was 1.72% to 3.67%, and the range of floating
interest rates paid on swap contracts was 1.80% to 2.00%. The range of fixed
interest rates received on swap contracts in the first three months of 2002 was
6.39% to 6.56% and the range of fixed interest rates paid on swap contracts was
2.16% to 8.15%.
Interest rate swap payment activity increased net interest income by
$8.3 million for the three months ended March 31, 2002 as compared to a decrease
of $1.2 million for the same period in 2001.
Upon adoption of SFAS 133 on January 1, 2001, the Company reported a
one-time pre-tax charge of $10 million, or $.04 after tax per diluted share. In
addition to the one-time charge, the Company reported pre-tax income of $7
million, or $.03 after tax per diluted share for the three months ended March
31, 2002 as compared to pre-tax expense of $8 million, or $.03 after tax per
diluted share for the quarter ended March 31, 2001, associated with the ongoing
valuation of the Company's swaps. This additional income/expense occurred
because the market value of Golden West's swaps changed in 2002 and 2001 in
conjunction with changes in short-term interest rates. The changes in fair value
of these swap contracts are reflected as assets or liabilities on the
Consolidated Statement of Financial Condition with corresponding amounts
reported in Noninterest Income as the "Change in Fair Value of Derivatives" in
the Consolidated Statement of Net Earnings. The Company has decided not to
utilize permitted hedge accounting for the derivative financial instruments in
portfolio at March 31, 2002.
Interest on Loans
In the first quarter of 2002, interest on loans decreased by $47
million or 6.6% from the comparable period in 2001. The decrease in the first
quarter of 2002 was due to a 206 basis point decrease in the average portfolio
yield which was partially offset by a $8.7 billion increase in the average
portfolio balance.
Interest on Mortgage-Backed Securities
In the first quarter of 2002, interest on mortgage-backed securities
decreased by $186 million or 50.8% from the comparable period in 2001. The
decrease in the first quarter of 2002 was primarily due to a $6.2 billion
decrease in the average portfolio balance and a 203 basis point decrease in the
average portfolio yield. The decrease in the mortgage-backed securities
portfolio was primarily due to the desecuritization of FNMA MBS into loans and
the high prepayment rate on the loans underlying the MBS, 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 first quarter of 2002, interest and dividends on investments decreased by
$34 million or 52.8% from the comparable period in 2001. The decrease in the
first quarter of 2002 was due to a $259 million decrease in the average
portfolio balance and a 392 basis point decrease in the average portfolio yield.
Investment income in the first quarter 2002 was also bolstered by $4.4
million because the fourth quarter 2001 FHLB of San Francisco dividend,
which we received in February 2002, was unexpectedly high.
Interest on Deposits
In the first quarter of 2002, interest on deposits decreased by $154
million or 35.8% from the comparable period in 2001. The decrease in the first
quarter of 2002 was due to a 228 basis point decrease in the average cost of
deposits partially offset by a $3.2 billion increase in the average balance of
deposits.
Interest on Advances and Other Borrowings
In the first quarter of 2002, interest on advances and other
borrowings decreased by $216 million or 63.4% from the comparable period of
2001. The decrease in the first quarter of 2002 was primarily due to a 375 basis
point decrease in the average cost of these borrowings and a $1.4 billion
decrease in the average balance.
Provision for Loan Losses
The provision for loan losses was $9 million for the three months
ended March 31, 2002 compared to $3 million for the same period in 2001. The
increase in the provision for loan losses in 2002 reflected the growth in the
loan portfolio over the prior year and the increase in nonperforming assets.
Noninterest Income
Noninterest income was $70 million for the three months ended March
31, 2002 compared to $43 million for the same period in 2001. The increase in
2002 as compared to 2001 resulted primarily from increased gains on the sale of
fixed-rate mortgages and the income associated with the ongoing valuation of
swaps.
General and Administrative Expenses
For the first quarter of 2002, general and administrative expenses
(G&A) were $141 million compared to $117 million for the comparable period in
2001. G&A as a percentage of average assets on an annualized basis was .96% for
the first quarter of 2002 compared to .84% for the same period in 2001. G&A
expenses increased in 2002 because of the costs associated with the 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. Taxes as a
percentage of earnings were 38.5% for the first quarter of 2002 compared to
38.3% for the first quarter of 2001.
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;
borrowings from its subsidiary; and debt collateralized by mortgages, MBS, or
securities. In addition, WSB has other alternatives available to provide
liquidity or finance operations including federal funds purchased, bank notes,
the issuance of medium-term notes, borrowings from public offerings of debt,
issuances of commercial paper, and borrowings from commercial banks.
Furthermore, under certain conditions, WSB may borrow from the Federal Reserve
Bank of San Francisco to meet short-term cash needs. The availability of these
funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of
San Francisco, and the Federal Reserve Board.
WTX's principal sources of funds are cash flows generated from
borrowings from the FHLB 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 24), and general and
administrative expenses. At March 31, 2002, December 31, 2001, and March 31,
2001, Golden West's total cash and investments amounted to $213 million, $364
million, and $385 million, respectively. Included in the cash and investments
above are a subordinated note receivable from WSB in the amount of $100 million
at March 31, 2002, December 31, 2001, and March 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Golden West estimates the sensitivity of the Company's net interest
income, net earnings, and capital ratios to interest rate changes and
anticipated growth based on simulations using an asset/ liability model which
takes into account the lags described on pages 10, 11 and 28. The simulation
model projects net interest income, net earnings, and capital ratios based on 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 March 31, 2002, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) April 30, 2002 - Annual Meeting
For Against Withheld Abstain
------------------ -------------- --------------- --------------
(b) Directors elected:
Louis J. Galen 142,656,696 1,785,354
Antonia Hernandez 143,032,058 1,409,992
Bernard A. Osher 143,020,107 1,421,943
(c) Ratification of Auditors:
Appointment of Deloitte & Touche LLP,
independent public accountants, for
the fiscal year 2002
142,143,298 1,799,830 498,922
(d) Approval of the Amended and Restated
Golden West Financial Corporation
Incentive Bonus Plan
140,902,224 2,125,897 1,413,929
Other Directors continuing in office are:
Maryellen Cattani Herringer, Patricia A. King, Kenneth T. Rosen, Marion O. Sandler, Herbert M. Sandler, and Leslie Tang Schilling.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit No. Description
3 (a) Certificate of Incorporation, as amended, and amendments
thereto, are incorporated by reference to Exhibit 3(a)
to the Company's Annual Report on Form 10-K
(File No. 1-4269) for the year ended December 31, 1990.
3 (b) By-Laws of the Company, as amended in 1997, are
incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K (File No. 1-4269)
for the year ended December 31, 1997.
4 (a) The Registrant agrees to furnish to the Commission, upon
request, a copy of each instrument with respect to
issues of long-term debt, the authorized principal amount
of which does not exceed 10% of the total assets of the
Company.
10 (a) 1996 Stock Option Plan, as amended, is incorporated
by reference to Exhibit A of the Company's Definitive
Proxy Statement on Schedule 14A, filed on March 15,
1996, for the Company's 1996 Annual Meeting of
Stockholders.
10 (b) Annual Incentive Bonus Plan is incorporated by reference
to Exhibit A of the Company's Definitive Proxy Statement
on Schedule 14A, filed on March 15, 2002, for the
Company's 2002 Annual Meeting of Stockholders.
10 (c) Deferred Compensation Agreement between the Company and
James T. Judd is incorporated by reference to Exhibit
10(b) of the Company's Annual Report on Form 10-K
(File No. 1-4629) for the year ended December 31, 1986.
10 (d) Deferred Compensation Agreement between the Company and
Russell W. Kettell is incorporated by reference to
Exhibit 10(c) of the Company's Annual Report on Form 10-K
(File No. 1-4629) for the year ended December 31, 1986.
10 (e) Form of Supplemental Retirement Agreement between the
Company and certain executive officers is incorporated by
reference to Exhibit 10(j) to the Company's Annual Report
on Form 10-K (File No. 1-4629) for the year ended
December 31, 1990.
10 (f) Operating lease on Company headquarters building,
1901 Harrison Street, Oakland, California 94612, is
incorporated by reference to Exhibit 10(h) of the
Company's Quarterly Report on Form 10-Q (File No.
1-4629) for the quarter ended September 30, 1998.
11 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K with the
Commission during the first quarter for of 2002.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
Dated: May 9, 2002
/s/ Russell W. Kettell
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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