ITEM 1. BUSINESS
Registrant
Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned savings bank subsidiary, World Savings Bank, FSB (WSB). Golden West also has two other subsidiaries, Atlas Advisers, Inc. and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s fourteen portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise.
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 FDIC to a federally chartered savings bank regulated by the 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 WSB and WTX became a wholly owned subsidiary of WSB. In addition, on December 31, 2000, World Savings and Loan Association, formally a wholly owned subsidiary of Golden West, was merged into WSB.
WSB is a federally chartered savings bank, with deposits insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF is a deposit insurance fund for commercial banks, federally chartered banks, and some state chartered banks. The SAIF is a deposit insurance fund for most savings associations. WSB is a member of the BIF, but a portion of WSB's deposits are insured through the SAIF. WTX's deposits are also insured by the FDIC and WTX is a member of the BIF.
WSB's home office is in Oakland, California. As of December 31, 2000 and 1999, WSB had assets of $55.7 billion and $42.0 billion, respectively. For the years ended December 31, 2000, 1999 and 1998, WSB had net income of $540 million, $479 million and $432 million, respectively.
Forward Looking Statements
This report contains 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. These 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, these forward-looking statements are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements for the reasons, among others, discussed under the heading "Asset/Liability Management" in the Management's Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7.
Regulatory Framework
The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act (HOLA), and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. WSB is a member of the Federal Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WTX is a member of the FHLB system and owns stock in the FHLB of Dallas. WSB's and WTX's savings accounts are insured by the FDIC up to the maximum amounts provided by law. The Company, WSB, and WTX are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of businesses that can be engaged in, capital requirements, and the payment of dividends. WSB and WTX are also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation).
Office Structure
As of December 31, 2000, the Company operated 120 savings branch offices in California, 37 in Florida, 36 in Colorado, 22 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, and four in Illinois. The Company also operates 278 loan origination offices of which 234 are located in the states listed above. The remaining 44 loan origination offices are located in Connecticut, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Washington, and Wisconsin. Of the 278 loan offices, 19 are fully-staffed offices that are located in the same premises as savings branch offices and 117 others are savings branch offices that have a single loan officer on site. The remaining loan origination offices are located in facilities that are separate from savings branch offices.
Acquisitions/Divestitures
During 1999, the Company sold three branches in Colorado and one branch in Kansas with a total of $149 million in deposits. During 1998, the Company sold one branch in Colorado with a total of $36 million in deposits. The foregoing divestitures are not material to the financial position or net earnings of Golden West and pro forma information is not deemed necessary.
Operations
The principal business of the Company, through WSB and WTX, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS). Funds for the WSB's and WTX's operations are also provided through earnings; loan repayments; sales of loans; wholesale certificates of deposit; borrowings from the Federal Home Loan Bank system; debt collateralized by mortgages, MBS, or other securities; and the issuance of medium-term notes. In addition, WSB has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from public offerings of debt, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain limited conditions, WSB may borrow from the Federal Reserve Bank of San Francisco and WTX may borrow from the Federal Reserve Bank of Dallas to meet short-term cash needs. The availability of these funds will vary depending on policies of the FHLB of San Francisco, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board.
The principal sources of funds for the holding company, Golden West, are dividends from WSB, interest on investments, and the proceeds from the issuance of debt and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities, capital contributions to WSB, dividends to stockholders, the purchase of Company stock, and general and administrative expenses.
Deposit Activities
Deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to seven years. All types of accounts presently offered by the Company have rates that are set by the Company, consistent with prevailing interest rates. The Company's certificate accounts are issued in non-negotiable form through its branch offices. The Company uses government securities dealers to sell certificates of deposit (CDs) to institutional investors. These are referred to in this document as "wholesale CDs." The Company's deposit balance at December 31, 2000 and 1999 included $185 million and $600 million, respectively, of these wholesale CDs. There were no wholesale CDs outstanding at December 31, 1998.
Retail deposits increased $2.7 billion during 2000, including interest credited of $1.3 billion, compared to an increase of $896 million during 1999, including interest credited of $1.1 billion, and an increase of $2.6 billion, including interest credited of $1.1 billion during 1998. Retail deposits increased in 2000 primarily due to the implementation of marketing campaigns that took advantage of the favorable savings environment, especially in the second half of the year. Retail deposits increased in 1999 as the Company concentrated efforts on building the loyalty of existing depositors. Retail deposits increased during 1998 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts. At December 31, 2000, 1999, and 1998, transaction accounts (which include checking, passbook, and money market accounts) represented 24%, 35%, and 35%, respectively, of the total balance of deposits.
The table on the following page summarizes the Company's deposits by original term to maturity at December 31.
The table below sets forth the Company's deposits by interest rate at December 31.
At December 31, the weighted average cost of deposits was 5.52% (2000) and 4.69% (1999).
The table below shows the maturities of deposits at December 31, 2000 by interest rate.
(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity.
As of December 31, 2000, the aggregate amount outstanding of time certificates of deposit in amounts of $100,000 or more was $4.0 billion, of which $645 million were retail jumbo CDs, $185 million were wholesale CDs, and the remainder were non-jumbo retail CDs. The following table presents the maturity of these time certificates of deposit at December 31, 2000.
More information regarding deposits is included in Note I to the Financial Statements included in Item 14.
Borrowings
The Company generally may borrow from the FHLB upon the security of a) the capital stock of the FHLB owned by the Company, b) certain of its residential mortgage loans and MBS, or c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances," to supplement cash flow and to provide funds for loan originations. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable. At December 31, 2000, the Company had $19.7 billion in FHLB advances outstanding, compared to $8.9 billion at yearend 1999. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 26.
The Company enters into reverse repurchase agreements with selected major government securities dealers, large banks, or the FHLB of San Francisco and the FHLB of Dallas. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions qualify to be accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company.
The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company.
The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses amounted to $857 million at December 31, 2000, compared to $1.0 billion at yearend 1999.
At December 31, 2000, Golden West, at the holding company level, had principal amounts outstanding of $600 million of subordinated debt. As of December 31, 2000, Golden West's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively.
During 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 December 31, 2000, WSB had not issued any notes under this authority.
During 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, subordinated debt, and preferred stock. The Company has not issued any securities under this registration statement.
The table below sets forth the composition of the Company's borrowings at December 31.
More information concerning the borrowings of the Company is included in Notes J, K, and L to the Financial Statements, which are included in Item 14.
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). MBS and MBS-REMICs are available to be used as collateral for borrowings. At December 31, 2000, 1999, and 1998, the balance of loans receivable including MBS was $52.3 billion, $39.6 billion, and $35.8 billion, respectively. Included in the $52.3 billion at December 31, 2000 was $7.8 billion of Federal National Mortgage Association (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 $39.6 billion at December 31, 1999 was $3.9 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company, $7.2 billion of MBS-REMICs, and $514 million of purchased MBS. Included in the $35.8 billion at December 31, 1998 was $3.9 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company, $5.5 billion of MBS-REMICs, and $686 million of purchased MBS.
The loan portfolio, including MBS, grew $12.8 billion or 32% and $3.8 billion or 11% for the year ended December 31, 2000 and 1999, respectively. Loan portfolio repayments were $6.9 billion, $7.7 billion, and $8.3 billion for the years ended December 31, 2000, 1999, and 1998, respectively. Loan portfolio repayments were lower in 2000 and in 1999 as compared to 1998 due to a decrease in prepayments.
Mortgage-Backed Securities
The Company classifies its MBS as either held to maturity or available for sale. The Company has no trading MBS. MBS held to maturity are recorded at cost because the Company has the ability and intent to hold these MBS to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. At December 31, 2000, 1999, and 1998, the Company had MBS held to maturity in the amount of $18.5 billion, $11.6 billion, and $9.9 billion, respectively.
MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 2000, 1999, and 1998, the Company had MBS available for sale in the amount of $70 million, $79 million, and $114 million, respectively, including unrealized gains on MBS available for sale of $1 million, $1 million, and $5 million, respectively. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS, using specific identification, adjusted for any unamortized premium or discount.
During 2000, 1999, and 1998, the Company securitized $4.6 billion, $3.7 billion, and $6.4 billion, respectively, of mortgage loans from its loan portfolio into Real Estate Mortgage Investment Conduits formed by WSB. Classified as MBS held to maturity, MBS-REMICs are being used as collateral for borrowings. The REMICs are not recorded as sales because 100% of the beneficial ownership interests are retained by the Company, including both the primary and subordinate retained interests.
During 2000, 1999, and 1998, the Company securitized $4.8 billion, $1.1 billion, and $1.8 billion, respectively, of adjustable rate mortgages (ARMs) into FNMA adjustable rate MBS. The FNMA MBS held to maturity are available to be used as collateral for borrowings and are subject to full credit recourse to the Company.
Repayments of MBS during the years 2000, 1999, and 1998 amounted to $2.5 billion, $2.8 billion, and $2.1 billion, respectively. MBS repayments were lower in 2000 due to a decrease in the prepayment rate. MBS repayments were higher in 1999 due to the increase in total MBS outstanding.
For more information on MBS, see Notes D and E to the Financial Statements included in Item 14.
Loans
Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens primarily on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the authority to originate loans in any part of the United States. At December 31, 2000, the Company was originating loans in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Indiana, Illinois, Kentucky, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Tennessee, Utah, Virginia, Washington, and Wisconsin. The Company also makes loans to customers on the security of their deposit accounts. Deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 2000 and 1999.
The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 2000 and 1999.
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the December 31, 2000 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the December 31, 1999 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
The table below sets forth the composition of the Company's loan portfolio by type of collateral at December 31.
At December 31, 2000, 99% of the loans in the portfolio (including loans securitized into MBS) had remaining terms to maturity in excess of 10 years.
The following table sets forth the amount of loans due after one year that have predetermined interest rates and the amount that have floating interest rates at December 31, 2000.
The following table sets forth information concerning new loans made by the Company during 2000, 1999, and 1998 by type and purpose of loan.
New loan originations in 2000, 1999, and 1998 amounted to $19.8 billion, $12.7 billion, and $8.2 billion, respectively. The increase in 2000 was due to a strong demand for adjustable rate loans, the Company's primary product. The increase in 1999 was due to a renewed demand for adjustable rate loans as interest rates moved up and the cost of fixed-rate loans increased. Also in 1999, the Company increased the size of its loan origination staff to take advantage of favorable market conditions.
The Company originates adjustable rate mortgages tied to various indexes, principally the Golden West Cost of Savings Index (COSI), the Eleventh District Cost of Funds Index (COFI), and the twelve-month rolling average of the One-Year U. S. Treasury Constant Maturity (TCM).
The following table shows the distribution of ARM originations by index for the years ended December 31, 2000, 1999, and 1998.
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 December 31.
The largest source of mortgage originations is loans secured by residential properties in California. Loans originated in California were $12.4 billion in 2000 compared to $8.0 billion in 1999 and $5.1 billion in 1998. In 2000, 63% of total origination volume was on California residential property compared to 63% in 1999 and 62% in 1998. The five largest states, other than California, for originations for the year ended December 31, 2000, were Florida, New Jersey, Texas, Washington, and Illinois with a combined total of 19% of total originations. The percentage of loans originated in California has remained consistently high during the three years under discussion due to the strong California real estate market.
Federal regulations permit federally chartered savings banks to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the savings bank but which must be readily available to, and independently verifiable by, the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or term.
Pursuant to the aforementioned powers, the Company offers adjustable rate mortgages, and this type of mortgage is the Company's primary real estate loan. The portion of the mortgage portfolio (including MBS) composed of rate-sensitive loans was 95% at yearend 2000 compared to 93% at yearend 1999 and 92% at yearend 1998. The Company's ARM originations constituted approximately 96% of new mortgage loans made in 2000, compared with 91% in 1999 and 82% in 1998.
Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain indices. The Company also offers a "modified" ARM, a loan that offers a low introductory rate generally below the initial fully indexed contract rate for a specified period, normally one to 12 months. However, the borrower must qualify at the initial fully indexed contract rate.
During the life of the 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 ARM MBS and MBS-REMICs before any reduction for loan servicing fees) was 12.28%, or 4.17% above the actual weighted average rate at December 31, 2000, versus 12.44%, or 5.32% above the weighted average rate at yearend 1999.
The following table shows the Company's ARM loans by lifetime cap bands as of December 31, 2000.
Approximately $5.2 billion of the Company's ARMs (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 December 31, 2000, $144 million of ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 8.01% at yearend 2000 compared to 7.69% at yearend 1999. Without the floor, the average rate on these loans would have been 7.80% at December 31, 2000 and 6.92% at December 31, 1999.
On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase or decrease of 7-1/2% of the prior year's payment. At five-year intervals, the payment may be adjusted without limit to amortize the loan fully within the then-remaining term. Within these five year periods, negative amortization (deferred interest) may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount.
On certain other ARMs, the payment and interest rate may change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation.
Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters.
The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers and mortgage brokers regarding possible lending opportunities. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas.
The 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 2000, 19% of loans originated exceeded 80% of the appraised value of the secured property, including $353 million of firsts and $3.5 billion of combined firsts and seconds. During 1999 and 1998, 19% and 5%, respectively, 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 $198 million and $99 million in 2000 and 1999, respectively. 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 the insured pool.
The following table shows mortgage originations with LTV ratios or combined LTV ratios greater than 80% for the year ended December 31, 2000 and 1999.
The following table shows the outstanding balance of mortgages with original LTV or combined LTV ratios greater than 80% at December 31, 2000 and 1999.
The Company requires title for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are security for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most having original terms of 30 years. However, the majority of such loans remain outstanding for a shorter period of time.
To generate income and to provide additional funds for lending and liquidity, the Company has from time to time sold, without recourse first mortgages, including whole loans and participations in pools of loans to the Federal National Mortgage Association. The Company also sells to FNMA whole first loans with recourse, for which a recourse liability has been provided. The Company continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on the buyer's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income.
Loans originated for sale were $114 million, $626 million, and $1.2 billion for the years ended December 31, 2000, 1999, and 1998, respectively. The reduction in loans originated for sale in 2000 and 1999 as compared to 1998 was attributable to the decrease in fixed-rate originations. During 2000, 1999, and 1998, $29 million, $522 million, and $229 million, respectively, of loans were converted at the customer's request, from adjustable rate to fixed-rate. The Company continues to sell most of its new and converted fixed-rate loans. The Company sold $152 million, $1.1 billion, and $1.4 billion of loans during 2000, 1999, and 1998, respectively. The Company recognized pre-tax gains on the sale of loans of $7 million in 2000 compared to $22 million in 1999 and $25 million in 1998. Included in the gains in 2000, 1999, and 1998 was $3 million, $21 million, and $23 million, respectively, due to the capitalization of mortgage servicing rights (see page 18 for further information). The loans held for sale portfolio had a balance of $128 million at December 31, 2000, all of which are carried at the lower of cost or market. At December 31, 2000, the balance of loans sold with recourse was $1.9 billion.
In addition to the loan portfolio (including MBS with recourse and MBS-REMICs), the Company was engaged in servicing approximately $2.9 billion of loan participations and whole loans for others at December 31, 2000. For each of the years ended December 31, 2000, 1999, and 1998, fees received for such servicing activities totaled $28 million, $21 million and $21 million, respectively.
Loan repayments consist of monthly loan amortization and loan payoffs. During 2000, 1999, and 1998, loan repayments (excluding MBS) amounted to $4.5 billion, $4.9 billion, and $6.2 billion, respectively. The decrease in repayments in 2000 was due to a decrease in loan payoffs and due to the securitization of loans into MBS, which reduced the balance of loans receivable. The decrease in repayments in 1999 was due to a decrease in prepayments during the second half of the year and due to the securitization of loans into MBS.
In addition to interest earned on loans, the Company receives points and fees for originating loans. The income represented by such fees varies with the volume and types of loans made. In 2000, 1999, and 1998, the Company responded to competition by offering more low and zero point adjustable rate mortgage options to its customers. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments, and other miscellaneous services.
The following table sets forth information relating to interest rates and loan points charged for the years indicated.
(a) Excludes loans purchased. (b) The current rate reflects the introductory rate on new loans being paid by the borrower.
If a borrower fails to make required payments on a loan, the Company takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted.
Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of such property and the amount owed by the borrower.
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 years ended 2000, 1999, and 1998.
The book value of the Company's servicing rights did not exceed the fair value at December 31, 2000, 1999, or 1998 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) to total assets. Nonperforming assets include nonaccrual 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 nonaccrual loans. The Company's troubled debt restructured (TDRs) are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions.
The following table sets forth the components of the Company's NPAs and TDRs and the various ratios to total assets at December 31.
NPAs at yearend 2000 were comparable to the NPAs outstanding at yearend 1999. The NPAs during 2000, 1999, and 1998 reflected the strong economy and housing market in those years. 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 $4 million in 2000, $4 million in 1999, and $8 million in 1998.
The Company's TDRs were $2 million or .00% of assets at December 31, 2000 compared to $11 million or .03% of assets at December 31, 1999 and $23 million or .06% of assets at yearend 1998. Interest foregone on TDRs amounted to $181 thousand in 2000 compared to $446 thousand in 1999 and $899 thousand in 1998.
The tables on the following page show the Company's nonperforming assets by state at December 31, 2000 and 1999.
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) The December 31, 2000 balances include loans that were securitized into FNMA MBS and MBS-REMICs. (c) Includes states with loans less than 2% of total loans.
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) The December 31, 1999 balances include loans that were securitized into FNMA MBS and MBS-REMICs. (c) Includes states with loans less than 2% of total loans.
A risk profile of loans, including securitized loans, is displayed by components in the following table as of December 31, 2000:
Management has included its estimate of probable losses on these loans in the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained.
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 and recourse obligations that is based on both 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 individual 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 and updated quarterly.
The table below shows the changes in the allowance for loan losses for the years indicated.
Net chargeoffs were minimal for the years ended 2000, 1999, and 1998 primarily due to the strong California economy and housing market.
The table below shows the changes in the reserve for losses on loans sold with recourse or securitized and retained for the years ended 2000, 1999, 1998, and 1997.
The table below shows the composition of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained at December 31.
As previously indicated, the low level of nonperforming assets (NPAs) and troubled debt restructured (TDRs) over the past three years resulted from the strong economy and housing market. The impact of the favorable environment is reflected in the components of the allowance and reserve accounts. Specific valuation allowances, primarily on large multi-family and commercial real estate loans, decreased from $18 million at December 31, 1998 to $4 million at December 31, 2000. General loss reserves on large multi-family and commercial real estate loans declined from $34 million at December 31, 1998 to $24 million at December 31, 2000. The general loss allowances on one-to-four single family real estate loans increased from $194 million at December 31, 1998 to $229 million at December 31, 2000 as a result of the increase in the total loan portfolio. As a result of improved asset quality and rapid portfolio growth, the overall ratio of the allowance and recourse reserves to total loans and loans sold or securitized with recourse declined from .68% at the end of 1998 to .48% at the end of 2000. The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was 107.31%, 104.82%, and 80.90% at December 31, 2000, 1999, and 1998, respectively.
Investment Activities
The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has Other Investments, which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality.
The table below sets forth the composition of the Company's securities available for sale at December 31.
Included in the balances above are net unrealized gains on investment securities available for sale of $382 million, $260 million, and $358 million at December 31, 2000, 1999, and 1998, respectively. The cost basis of the securities available for sale portfolio at December 31, 2000, 1999, and 1998 was $11 million, $59 million, and $19 million, respectively, and had weighted average yields (based on cost) of 38.31%, 12.78%, and 19.21% at December 31, 2000, 1999, and 1998, respectively. The yields in 2000, 1999, and 1998 reflect the effect of the high yield on the Federal Home Loan Mortgage Corporation stock.
The table below sets forth the composition of the Company's Other Investments at December 31.
The weighted average yields on the Other Investments portfolio were 6.21%, 5.00%, and 4.92% at December 31, 2000, 1999, and 1998, respectively. There were no sales of other investments during 2000, 1999, or 1998.
Goodwill
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," (SFAS 72) for goodwill related to the Company's acquisitions made prior to September 30, 1982. Up until 1996, the Company had applied SFAS 72 only to acquisitions made after September 30, 1982. The adoption of SFAS 72 for goodwill related to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. SFAS 72 requires, among other things, that goodwill be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. As a result, in 1996 the Company wrote off goodwill totaling $205 million as the cumulative effect of the change in accounting for goodwill. The remaining goodwill from acquisitions subsequent to 1982, amounting to less than .2% of total assets, was not material and was reclassified to other assets. Amortization of goodwill is recorded on the Company's Consolidated Statement of Net Earnings under the section titled "Noninterest Income - Other".
Stockholders' Equity
The Company's stockholders' equity increased by $492 million during 2000 as a result of earnings and increased market values of securities available for sale partially offset by the $109 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $71 million during 1999 as a result of earnings offset by the $345 million cost of the repurchase of Company stock, decreased market values of securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $426 million during 1998 as a result of earnings and increased market values of securities available for sale, partially offset by the $80 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders.
In November 1999, the Company acted to effect a three-for-one split of its outstanding Common Stock in the form of a 200% stock dividend. This dividend was payable December 10, 1999, to holders of record at the close of business on November 15, 1999. Per share amounts in this 10-K filing have been restated to reflect this stock dividend unless otherwise noted.
Since 1993, through four separate actions, the Company's Board of Directors has authorized the purchase by the Company of up to 44.7 million shares of Golden West's common stock. As of December 31, 2000, 42.9 million shares had been repurchased and retired at a cost of $915 million since October 28, 1993, of which 3.7 million shares were purchased and retired at a cost of $109 million during 2000. Dividends from WSB are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with amendments issued in September 2000. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative instruments 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. The Company does not currently intend to use hedge accounting for the derivative financial instruments in portfolio at January 1, 2001.
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 FAS 140. The implementation of SFAS 140 is not expected to have a significant impact on the Company's financial statements.
Earnings Per Share (EPS)
The Company's Basic EPS was $3.44 for the year ended December 31, 2000, compared to $2.90 and $2.60 (before the extraordinary item) for the years ended December 31, 1999 and 1998, respectively. The Company reported Diluted EPS of $3.41 for the year ended December 31, 2000 as compared to $2.87 and $2.58 (before the extraordinary item) for the years ended December 31, 1999 and 1998, respectively.
Extraordinary Item
During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments, which was recorded as an extraordinary item.
Yield on Interest-Earning Assets/Cost of Funds
Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 2000, 1999, and 1998 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference.
The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2000, and is incorporated herein by reference.
The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities.
(a) Includes nonaccrual loans (90 days or more past due)
The table below presents the changes for 2000 and 1999 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates.
(a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously.
(b) The effects of interest rate swap activity has been included in income and expense of the related assets and liabilities.
(c) Includes nonaccrual loans (90 days or more past due).
Competition and Other Matters
The Company experiences strong competition in both attracting deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings institutions, commercial banks, and government and corporate debt securities. In addition, traditional financial institutions have found themselves in competition with other financial services entities, such as securities dealers, insurance companies, credit unions, and others, including Internet companies. The principal methods used by the Company to attract deposits, in addition to the interest rates and terms offered, include the offering of a variety of services and the convenience of office locations and hours of public operation.
Competition in making real estate loans comes principally from other savings institutions, mortgage banking companies, and commercial banks. Many of the nation's largest savings institutions, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their representatives. In addition, the Company competes indirectly with government-sponsored enterprises, notably the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal Home Loan Banks.
Thrift Industry
The operations of the thrift industry are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds.
Regulation
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve credit capacity for its members, which may include savings associations, savings banks, commercial banks, and credit unions. As members, WSB and WTX are required to own capital stock of an FHLB in an amount that depends generally upon their outstanding home mortgage loans or advances from such FHLB, and are authorized to borrow funds from such FHLB (see Borrowings).
LIQUIDITY. During 1998, 1999, and 2000, the Office of Thrift Supervision required insured institutions, such as WSB and WTX, to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or b) 4% of the prior quarter's ending balance of short-term deposits and borrowings. At December 31, 2000, 1999, and 1998, WSB had liquidity in excess of the regulatory requirements. WTX also met the applicable requirements during the periods under discussion. In December 2000, Congress passed legislation which eliminated the statutory requirements for the OTS to set minimum liquidity regulations.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund and the Savings Association Insurance Fund. Each fund insures deposit accounts up to the maximum amount permitted by law, currently $100,000 per insured depositor. The BIF is a deposit insurance fund for commercial banks, federally chartered banks, and some state chartered banks. The SAIF is a deposit insurance fund for most savings associations. WSB is a member of the BIF, but a portion of WSB's deposits are insured through the SAIF. WTX's deposits are also insured by the FDIC and WTX is a member of the BIF. As a result, WSB and WTX are subject to supervision, regulation, and examination by the FDIC. FDIC insurance is required for all federally chartered financial institutions such as WSB and WTX. Such BIF insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices.
During 1996, federal legislation was enacted to capitalize the SAIF in order to bring it into parity with the FDIC's other insurance fund, the BIF. The new banking law required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, the Company incurred a one-time charge of $133 million during 1996. The premiums paid for the years 1997 through 1999 were adjusted quarterly. Beginning on January 1, 2000, the premium paid by WSB and WTX to the FDIC was $.212 per $1,000.
The deposits of savings institutions insured by the SAIF may be converted to BIF insurance. Further, deposits insured by the BIF may be converted to SAIF insurance. Such conversions require payment of an exit fee to the insurance fund that the institution leaves and an entrance fee to the insurance fund that the institution enters.
OFFICE OF THRIFT SUPERVISION. Because they are federally chartered savings institutions, the principal regulator of both WSB and WTX is the OTS. Under various regulations of the OTS, savings institutions are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets above specified minimums, and to comply with various limitations on loans to one borrower, equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. WSB and WTX are currently in compliance with all applicable Federal Reserve Board reserve requirements.
Savings institutions have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings institutions to exhaust all FHLB sources before borrowing from the Federal Reserve Bank.
REGULATORY CAPITAL. The OTS requires federally insured institutions such as WSB and WTX to meet certain minimum capital requirements.
The following table summarizes WSB's regulatory capital ratios and compares them to the OTS minimum requirements at December 31. The December 31, 1999 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.
The following table summarizes WTX's regulatory capital ratio and compares them to the OTS minimum requirements at December 31, 2000.
In addition, institutions whose exposure to interest-rate risk as determined by the OTS is deemed to be above normal may be required to hold additional risk-based capital. The OTS has determined that WSB and WTX do not have above-normal exposure to interest-rate risk.
The OTS has adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an institution falls into a certain classification depends primarily on its capital ratios. As of December 31, 2000, the most recent notification from the OTS categorized WSB "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.
The table below shows a reconciliation of WSB's equity capital to regulatory capital at December 31, 2000.
The table below shows a reconciliation of WSB's equity capital to regulatory capital at December 31, 1999.
The table below shows a reconciliation of WTX's equity capital to regulatory capital at December 31, 2000.
The table below shows that WSB's regulatory capital exceeds the requirements of the well-capitalized classification at December 31.
The table below shows that WTX's regulatory capital exceeds the requirements of the well-capitalized classification at December 31, 2000.
At December 31, 1999, WTX operated under the name World Savings Bank, a State Savings Bank (WSSB) and was a state chartered savings bank regulated by the FDIC. At December 31, 1999, WSSB had the following regulatory capital calculated in accordance with the FDIC's capital standards:
CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS. During 2000, WSB paid no upstream dividends to Golden West. See Item 5, "MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS" on page 39, for a discussion on certain limitations imposed by the OTS on dividends paid by savings institutions.
LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings institutions to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral".) At December 31, 2000, the maximum that WSB could have loaned to one borrower (and related entities) was $597 million while the largest amount of loans it had to one borrower was $47 million. At December 31, 2000, the maximum amount that WTX could have loaned to one borrower (and related entities) was $43 million while the largest amount of loans WTX had outstanding to any one borrower was $198 thousand.
DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings bank, such as WSB, based upon the failure of the savings bank to meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of debt of WSB). Thus, in the event of a liquidation of WSB or a similar event, claims for deposits would have a priority over claims of holders of debt. As of December 31, 2000, WSB had approximately $30 billion of deposits outstanding.
POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as WSB, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate "contracts" extends to obligations such as the debt of the depository institution, and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation should be to accelerate the maturity of debt. Such repudiation would result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" above. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including the debt pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of its creditors.
In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the relevant deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience.
SAVINGS AND LOAN HOLDING COMPANY LAW. Golden West is a "savings and loan holding company" under the HomeOwners' Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company, and subsidiaries or affiliates of either.
As WSB's parent company, Golden West is considered an "affiliate" of WSB, for regulatory purposes. Savings banks are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h) of the Federal Reserve Act, and with respect to savings banks, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings institution from lending or otherwise extending credit to an affiliate, other than the institution's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining affiliates of a savings institution and in calculating compliance with the quantitative limitations on transactions with affiliates.
QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 2000, WSB and WTX were in compliance with the QTL test.
TAXATION. The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns.
The Company utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. 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.
Employee Relations
The Company had a total of 5,088 full-time and 1,015 permanent part-time employees at December 31, 2000. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
Properties owned by the Company are located in Arizona, California, Colorado, Florida, Illinois, Kansas, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities.
The Company owns a 450,000 square-foot office complex on a 111-acre site in San Antonio, Texas. This complex houses the Loan Service, Savings Operations, Information Systems Departments, and various other back-office functions.
The Company owns 213 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note I to the Financial Statements included in Item 14.
The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations, or is otherwise required to be discussed pursuant to Item 103 of Regulation S-K.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market Prices of Stock
Golden West's stock is listed on the New York Stock Exchange and Pacific Stock Exchange and traded on the Boston and Chicago Stock Exchanges under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 2000 and 1999 were as follows:
Per Share Cash Dividends Data
Golden West's cash dividends paid per share for 2000 and 1999 were as follows:
The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by WSB.
WSB and WTX may pay capital distributions during a calendar year, without notice or application to the OTS, equal to net income for the applicable calendar year plus retained net income for the two prior calendar years. WSB and WTX must file applications for approval of a proposed distribution, if (i) they are not eligible for expedited application processing, (ii) they would not be at least adequately capitalized following the capital distribution, or (iii) they would violate a prohibition contained in any applicable statute, regulation, or agreement with the OTS or the FDIC, or would violate a condition of OTS approval by making the proposed distribution. In addition, the regulations require 30-days advance notice to be filed for proposed capital distributions that would result in the savings association being less than well-capitalized or that involve the reduction or retirement of the savings association's stock. (See "CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS" on page 35.)
At December 31, 2000, $1.5 billion of the WSB's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes.
Stockholders
At the close of business on March 19, 2001, 158,554,007 shares of Golden West's Common Stock were outstanding and were held by 1,262 stockholders of record. At the close of business on March 19, 2001, the Company's common stock price was $58.25.
The transfer agent and registrar for the Golden West common stock is Mellon Investor Services LLC, San Francisco, California 94101.
The Securities and Exchange Commission (Commission) maintains a web site, which contains reports, proxy and information statements, and other information pertaining to registrants that file electronically with the Commission including Golden West. The address is: http://www.sec.gov.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. Such information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference.
(a) The current rate reflects the actual rate being paid by the borrower at time of origination. (b) The ratios for the year ended December 31, 1998 include an extraordinary charge of $21 million before tax, or $.07 per basic and diluted earnings per share, net of tax benefit, associated with the prepayment of FHLB advances and include a nonrecurring gain of $13 million before tax, or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%, and the dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to total revenues was 11.48%. (c) The numbers for the year ended December 31, 1996 include the 1996 SAIF assessment of $133 million, the special tax credit of $139 million, and the $205 million cumulative effect of the change in accounting for goodwill. The ratios for the year ended December 31, 1996, excluding the three 1996 nonrecurring items are: ROE 13.97%, ROA .86%, G&A to net interest income plus other income 34.32%, G&A to total revenues 12.08%, and G&A to average assets .89%. (d) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, extraordinary item, and fixed charges. Fixed charges include interest expense and amortization of debt expense. (e) NPAs includes nonaccrual loans (loans that are 90 days or more past due) and foreclosed real estate. (f) For regulatory purposes, the requirements to be considered "well capitalized" are 5.0% and 10.0% for core and risk-based capital, respectively. In years prior to 2000, WTX was not regulated by the OTS and, therefore, these ratios were not applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below sets forth Golden West Financial Corporation's (Golden West or Company) net earnings for the three years ended December 31, 2000, 1999, and 1998.
(a) 1999 includes a nonrecurring gain of $8 million or $.03 per basic and diluted share, after tax, from the sale of four savings branches and a nonrecurring tax benefit of $3 million or $.02 per basic and diluted share, from the donation of land to a non-profit organization. (b) 1998 includes a nonrecurring gain of $13 million or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. (c) Penalties resulting from the prepayment of Federal Home Loan Bank of San Francisco advances during 1998. See "Extraordinary Item" section on page 65.
Golden West's principal subsidiary is World Savings Bank, FSB (WSB). WSB is headquartered in Oakland, California. At December 31, 2000, WSB had $56 billion in assets. At December 31, 2000, Golden West had a savings network of 120 branches in California, 37 in Florida, 36 in Colorado, 22 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, and four in Illinois. By virtue of being federally chartered, WSB can originate mortgages anywhere in the nation, even though they may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, the Company had lending operations in Connecticut, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Washington, and Wisconsin.
The savings accounts offered by WSB are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC administers two separate funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF is a deposit insurance fund for commercial banks, federally chartered savings banks, and some state chartered savings banks. The SAIF is a deposit insurance fund for most savings associations. WSB is a member of the BIF, but a portion of WSB's deposits are insured through the SAIF.
Two other subsidiaries of Golden West are Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-ended registered investment company sponsored by the Company. Atlas Advisers, Inc., is an investment adviser to the Atlas family of mutual funds and Atlas Securities, Inc., is the distributor of the Atlas mutual funds and annuities.
During the fourth quarter of 2000, World Savings Bank, SSB (WSSB), a wholly owned subsidiary of Golden West, received approval to change from a Texas state savings bank regulated by the 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 WSB and WTX became a wholly owned subsidiary of WSB. In addition, on December 31, 2000, World Savings and Loan Association, a wholly owned subsidiary of Golden West, was merged into WSB.
The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources.
Financial Condition
The following table summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 2000, 1999, 1998, and 1997. As the 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.
Asset/Liability Management
The Company's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on loans, MBS, and investments and the amounts it pays in interest on deposits and borrowings. Therefore, the Company's profitability is largely dependent upon its ability to manage interest rate risk and credit risk (see "Asset Quality" section on page 54). The Company mitigates its credit risk through strict underwriting standards and loan reviews. The Company manages interest rate risk by managing the repricing of interest-rate-sensitive assets and liabilities. The Company enters into interest rate swaps as part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities.
One measure of exposure to interest rate risk is the repricing gap, the difference between the repricing of assets and liabilities. The Company is subject to interest rate risk to the extent its assets and liabilities reprice at different times. 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 following table shows the Company's repricing gap at December 31, 2000:
(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 FHLB stock. (c) Liabilities with no maturity date, such as checking, passbook, and money market deposit accounts, are assigned zero months.
The gap table shows that, as of December 31, 2000, 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 Golden West's earnings would rise when interest rates increase and would fall when interest rates decrease. However, Golden West'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 the Company 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.
In addition to the index lags, other elements of ARM loans also have an impact on earnings. These elements are introductory fixed rates on new ARM loans, the interest rate adjustment frequency of ARM loans, interest rate caps or limits on individual rate changes, and interest rate floors. Partially offsetting the impact of the index lags are similar lags on a portion of the Company's liabilities. 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.
The table below reflects the Company's expected cash flows and applicable yields on the balances of its interest-sensitive assets and liabilities as of December 31, 2000, and takes into consideration expected prepayments of the Company's long-term assets (primarily mortgage-backed securities and loans receivable) and the estimated current fair value.
(a) The total weighted average interest rate for variable loans receivable reflects loans with introductory rates in effect at December 31, 2000. Those loans are assumed to mature outside the introductory period at fully-indexed rates (the fully-indexed rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable rate loans will not equal the weighted average rate of total variable rate loans at December 31, 2000 as indicated in the total balance column. (b) Deposits with no maturity are included in the 2001 column.
Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes and anticipated growth based on simulations using an asset/liability model which takes into account the lags previously described. The simulation model projects net interest income, net earnings, and capital ratios based on interest rate increases or decreases that are 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 December 31, 2000, Management believes that a 200 basis point rate increase sustained over a thirty-six month period would not adversely affect the Company's long-term profitability and financial strength.
Cash and Investments
Golden West's investment portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, collateralized mortgage obligations, and corporate bonds. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality.
The Office of Thrift Supervision (OTS) requires insured institutions, such as WSB, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. The current minimum requirement is to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either 4% of the quarterly average of daily balances of short-term deposits and borrowings or 4% of the prior quarter's ending balance of short-term deposits and borrowings. At December 31, 2000, 1999, and 1998, WSB had liquidity in excess of the regulatory requirements. WTX also met the applicable requirements during the periods under discussion.
At December 31, 2000, and 1999, the Company had securities available for sale in the amount of $393 million and $319 million, respectively, including net unrealized gains on securities available for sale of $382 million and $260 million, respectively. At December 31, 2000 and 1999, the Company had no securities classified as 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). MBS and MBS-REMICs are available to be used as collateral for borrowings. At December 31, 2000 and 1999, the balance of loans receivable including mortgage-backed securities was $52.3 billion and $39.6 billion, respectively. Included in the $52.3 billion at December 31, 2000 was $7.8 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities 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 $39.6 billion at December 31, 1999 was $3.9 billion of FNMA mortgage-backed securities with the underlying loans subject to full credit recourse to the Company, $7.2 billion of MBS-REMICs, and $514 million of purchased MBS.
The loan portfolio, including MBS, grew $12.8 billion or 32% for the year ended December 31, 2000. The balance of the loan portfolio increased by $3.8 billion or 11% for the year ended December 31, 1999. Loan portfolio repayments were $6.9 billion, $7.7 billion, and $8.3 billion for the years ended December 31, 2000, 1999, and 1998, respectively. Loan portfolio repayments were lower in 2000 and in 1999 as compared to 1998 due to a decrease in the prepayment rate.
Mortgage-Backed Securities
At December 31, 2000 and 1999, the Company had MBS held to maturity in the amount of $18.5 billion and $11.6 billion, respectively. The increase in MBS in 2000 was due to the securitization of $4.8 billion of adjustable rate mortgages (ARMs) into FNMA MBS and the securitization of $4.6 billion of ARMs in MBS-REMICs. During 1999, the Company securitized $1.1 billion of adjustable rate mortgages into FNMA MBS and securitized $3.7 billion of mortgage loans into MBS-REMICs. 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 December 31, 2000 and 1999, the Company had MBS available for sale in the amount of $70 million and $79 million, respectively, including net unrealized gains on mortgage-backed securities available for sale of $1 million and $1 million, respectively. At December 31, 2000 and 1999, the Company had no trading MBS.
At December 31, 2000, $17.2 billion of the Company's total MBS portfolios were backed by ARMs. The percentage of MBS backed by ARMs was 93% at yearend 2000 compared to 87% at yearend 1999 and 94% at yearend 1998. The large amount of adjustable rate MBS is mainly due to the large amount of ARM loans securitized in the last five years.
Repayments of MBS during the years 2000, 1999, and 1998 amounted to $2.5 billion, $2.8 billion, and $2.1 billion, respectively. MBS repayments were lower in 2000 due to a decrease in the prepayment rate. MBS repayments were higher in 1999 due to an increase in total MBS outstanding.
Loans
New loan originations in 2000, 1999, and 1998 amounted to $19.8 billion, $12.7 billion, and $8.2 billion, respectively. The record high volume of originations during 2000 was due to a strong demand for adjustable rate loans, the Company's primary product. The increase in 1999 was due to renewed demand for adjustable rate loans as interest rates moved up and the cost of fixed-rate loans increased. In addition, the Company increased the size of its loan origination staff to take advantage of favorable market conditions. Refinanced loans constituted 34% of new loan originations in 2000 compared to 40% in 1999 and 44% in 1998.
Loans originated for sale were $241 million, $793 million, and $1.2 billion for the years ended December 31, 2000, 1999, and 1998, respectively. The reduction in loans originated for sale in 2000 and in 1999 as compared to 1998 was attributable to the decrease in fixed-rate originations. During 2000, 1999, and 1998, $29 million, $522 million, and $229 million, respectively, of loans were converted at the customer's request from adjustable rate to fixed-rate. The Company continues to sell most of its new and converted fixed-rate loans. The Company sold $350 million, $1.2 billion, and $1.4 billion of loans during 2000, 1999, and 1998, respectively.
At December 31, 2000, the Company had lending operations in 32 states. The largest source of mortgage origination is loans secured by residential properties in California. In 2000, 63% of total loan origination volume was on residential properties in California, compared to 63% and 62% in 1999 and 1998, respectively. The five largest states, other than California, for originations for the year ended December 31, 2000, were Florida, New Jersey, Texas, Washington, and Illinois with a combined total of 19% 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 63% at December 31, 2000, 64% at December 31, 1999, and 66% at December 31, 1998.
Golden West continues to emphasize adjustable rate mortgages--loans with interest rates that change monthly in accordance with movements in specified indexes. The portion of the mortgage portfolio (including MBS and MBS-REMICs) composed of rate-sensitive loans was 95% at yearend 2000 compared to 93% at yearend 1999 and 92% at yearend 1998. Golden West's ARM originations constituted approximately 96% of new mortgage loans made by the Company in 2000, compared with 91% in 1999 and 82% in 1998.
Golden West originates ARMs tied to a variety of indexes, principally the Golden West Cost of Savings Index (COSI), the Eleventh District Cost of Funds Index (COFI), and the twelve-month rolling average of the One-Year U.S. Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the years ended December 31, 2000 and 1999.
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 December 31, 2000 and 1999.
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 2000, 19% of loans originated exceeded 80% of the appraised value of the secured property, including $353 million of firsts and $3.5 billion of combined firsts and seconds.
The Company takes steps to minimize 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. In addition, the Company carries pool mortgage insurance on most seconds not sold, such that the cumulative losses covered by this pool mortgage insurance are limited to 10% or 20% of the original balance of the insured pool.
The following table shows mortgage originations with LTV ratios or combined LTV ratios greater than 80% for the years ended December 31, 2000 and 1999.
The following table shows the outstanding balance of mortgages with original LTV or combined LTV ratios greater than 80% at December 31, 2000 and 1999.
Approximately $5.2 billion of the Company's ARMs (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 December 31, 2000, $144 million of ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 8.01% at December 31, 2000, compared to 7.69% at December 31, 1999. Without the floor, the average yield on these loans would have been 7.80% at December 31, 2000 and 6.92% at December 31, 1999.
Loan repayments consist of monthly loan amortization and loan payoffs. During the years 2000, 1999, and 1998, loan repayments amounted to $4.5 billion, $4.9 billion, and $6.2 billion, respectively. The decrease in repayments in 2000 was due to a decrease in loan payoffs and due to the securitization of loans into MBS. The decrease in repayments in 1999 was due to a decrease in loan prepayments during the second half of the year and due to the securitization of loans into MBS.
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 years ended December 31, 2000 and 1999.
The book value of Golden West's servicing rights did not exceed the fair value at December 31, 2000 or 1999 and, therefore, no writedown 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) to total assets. Nonperforming assets include non-accrual loans (loans, including loans swapped 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. NPAs amounted to $239 million, $236 million, and $305 million at yearends 2000, 1999, and 1998, respectively. NPAs at yearend 2000 were comparable to NPAs at yearend 1999. The NPAs during 2000 and 1999 reflected the strong economy and housing market. The Company closely monitors all delinquencies and takes appropriate steps to protect its interests.
The Company's troubled debt restructured (TDRs) are made up of loans on which delinquent loan payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The Company's TDRs were $2 million or .00% of assets at December 31, 2000, compared to $11 million or .03% of assets at December 31, 1999 and $23 million or .06% of assets at December 31, 1998.
The Company's ratio of NPAs and TDRs to total assets decreased to .43% at December 31, 2000, compared to .59% and .85% at yearends 1999 and 1998, respectively.
The Company has other impaired loans on which specific loss reserves have been provided and that were not included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $23 million at yearend 2000, $60 million, and $71 million at yearends 1999 and 1998, respectively.
Allowance for Loan Losses and Reserve for Losses on Loans Sold with Recourse or Securitized and Retained
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 loss experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a data base 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 individual 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 sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings based upon quarterly reviews of the portfolio and the adequacy of the allowance and reserves for loan losses. The review methodology and historical analyses are updated at least annually as needed.
The table below shows the changes in the allowance for loan losses for the three years ended December 31, 2000, 1999, and 1998.
As previously mentioned, the Company has securitized loans from its portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to hold these MBS and MBS-REMICs to maturity. Because the loans underlying the MBS and MBS-REMICs are similar to the loans in its loan portfolio, the Company sets its reserve on these securities in a manner similar to the method it uses for the allowance for loan losses. The Company also sells loans with full credit recourse and has established a reserve for potential losses on these loans. The liability for the reserve for losses on loans sold or securitized and retained is included in other liabilities. The table below shows the changes in the reserve for losses on loans sold with recourse or securitized and retained for the years ended 2000, 1999, and 1998.
The table below shows the composition of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained at December 31.
As previously indicated, the low level of nonperforming assets (NPAs) and troubled debt restructured (TDRs) over the past three years resulted from the strong economy and housing market. The impact of the favorable environment is reflected in the components of the allowance account. Specific valuation allowances, primarily on large multi-family and commercial real estate loans, decreased from $18 million at December 31, 1998 to $4 million at December 31, 2000. General loss reserves on large multi-family and commercial real estate loans declined from $34 million at December 31, 1998 to $24 million at December 31, 2000. The general loss allowances on one-to-four single family real estate loans increased from $194 million at December 31, 1998 to $229 million at December 31, 2000 as a result of the increase in the total loan portfolio. As a result of improved asset quality and rapid portfolio growth, the overall ratio of the allowance and recourse reserves to total loans and loans sold or securitized with recourse declined from .68% at the end of 1998 to .48% at the end of 2000. The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was 107.31%, 104.82%, and 80.90% at December 31, 2000, 1999, and 1998, respectively.
Foreclosed Real Estate
At December 31, 2000, the Company had foreclosed real estate in the amount of $8 million, compared to $11 million a year earlier. The low balances in foreclosed real estate reflect the strong economy and housing market.
Deposits
Retail deposits increased by $2.7 billion in 2000 compared to increases of $896 million and $2.6 billion in 1999 and 1998, respectively. Retail deposits increased during 2000 primarily due to the implementation of marketing campaigns that took advantage of a favorable savings environment, especially in the second half of the year. Retail deposits increased during 1999 as the Company concentrated marketing efforts on building the loyalty of existing depositors. In addition, the Company sold four branches with a total of $149 million in deposits in 1999 and sold one branch with $36 million in deposits in 1998. At December 31, 2000, 1999, and 1998, transaction accounts (which include checking, passbook, and money market accounts) represented 24%, 35%, and 35%, respectively, of the total balance of deposits.
The Company has a program to use government securities dealers to sell certificates of deposit (CDs) to institutional investors (wholesale CDs). The Company's deposit balance at December 31, 2000 and 1999 included $185 million and $600 million, respectively, of these wholesale CDs. There were no outstanding wholesale CDs at December 31, 1998.
Advances from the Federal Home Loan Banks
The Company uses borrowings from the Federal Home Loan Banks (FHLBs), also known as "advances," to supplement cash flow and to provide funds for loan originations. Advances are secured by pledges of certain loans, MBS-REMICs, other MBS, and capital stock of the FHLBs. FHLB advances amounted to $19.7 billion at December 31, 2000, compared to $8.9 billion and $6.2 billion at December 31, 1999 and 1998, respectively. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 65.
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, large banks, and the Federal Home Loan Bank of San Francisco, using from the Company's portfolio. Reverse Repos amounted to $857 million, $1.0 billion, and $1.3 billion at yearends 2000, 1999, and 1998, respectively.
Other Borrowings
As of December 31, 2000, Golden West, at the holding company level, had a total of $600 million of subordinated debt issued and outstanding. As of December 31, 2000, the Company's subordinated debt securities were rated A3 and A- by Moody's Investors Service, Inc. (Moody's) and Standard & Poor's (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 December 31, 2000, WSB had not issued any notes under this authority.
During 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, subordinated debt, and preferred stock. The Company has not issued any securities under this registration statement.
Stockholders' Equity
The Company's stockholders' equity increased by $492 million during 2000 as a result of earnings and increased market values of securities available for sale partially offset by the $109 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $71 million during 1999 as a result of earnings offset by the $345 million cost of the repurchase of Company stock, decreased market values of securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $426 million during 1998 as a result of earnings and increased market values of securities available for sale, partially offset by the $80 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders.
During the fourth quarter of 1999, the Company acted to effect a three-for-one stock split of its Common Stock in the form of a 200% stock dividend. This dividend was payable December 10, 1999, to holders of record at the close of business on November 15, 1999. Per share amounts in this discussion have been restated to reflect this stock dividend unless otherwise noted.
Since 1993, through four separate actions, the Company's Board of Directors has authorized the purchase by the Company of up to 44.7 million shares of Golden West's common stock. As of December 31, 2000, 42.9 million shares had been repurchased and retired at a cost of $915 million since October 28, 1993, of which 3.7 million shares were purchased and retired at a cost of $109 million during 2000. Dividends from subsidiaries are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company.
The OTS requires federally insured institutions, such as WSB and WTX, to meet minimum capital requirements. Under these regulations, a savings institution is required to meet three separate capital requirements. The first requirement is to have tangible capital of 1.5% of adjusted total assets. At December 31, 2000, WSB had tangible capital of $3.7 billion or 6.60% of adjusted total assets, $2.8 billion in excess of the regulatory requirement. At December 31, 2000, WTX had tangible capital of $288 million or 5.34% of adjusted total assets, $207 million in excess of the regulatory requirement.
The second requirement is to have core capital of 4% of adjusted total assets. At December 31, 2000, WSB had core capital of $3.7 billion or 6.60% of adjusted total assets, $1.4 billion in excess of the regulatory requirement. At December 31, 2000, WTX had core capital of $288 million or 5.34% of adjusted total assets, $72 million in excess of the regulatory requirement.
The third capital requirement is to have risk-based capital equal to 8% of risk-weighted assets. At December 31, 2000, WSB had risk-based capital in the amount of $4.0 billion or 12.44% of risk-weighted assets, exceeding the current requirement by $1.4 billion. At December 31, 2000, WTX had risk-based capital in the amount of $288 million or 26.69% of risk-weighted assets, exceeding the current requirement by $202 million.
Under OTS regulations which implement the prompt corrective action system mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), an institution is well-capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to total assets is 5% or more and it is not subject to any written agreement, order or directive to meet a specified capital level. WSB and WTX exceeded the qualifications for well-capitalized institutions under the rules applicable to them.
Because WSB is a subsidiary of a savings and loan holding company, WSB must at least file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the proposed capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions it remains at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WSB to no longer be adequately capitalized, require specific OTS approval.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with amendments issued September 28, 2000. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative instruments 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. The Company does not currently intend to use hedge accounting for the derivative financial instruments in portfolio at January 1, 2001.
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 FAS 140. The implementation of SFAS 140 is not expected to have a significant impact on the Company's financial statements.
Results of Operations
Net earnings increased in 2000 as compared to 1999 as a result of increased net interest income partially offset by an increase in general and administrative expense. Net earnings increased in 1999 as compared to 1998 primarily due to an increase in net interest income, a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets, and an increase in noninterest income. These increases to net earnings were partially offset by an increase in general and administrative expenses.
Earnings Per Share
The Company's Basic Earnings Per Share (EPS) was $3.44 for the year ended December 31, 2000 as compared to $2.90 and $2.60 (before the extraordinary item) for the years ended December 31, 1999 and 1998, respectively. The Company reported Diluted EPS of $3.41 for the year ended December 31, 2000 as compared to $2.87 and $2.58 (before the extraordinary item) for the years ended December 31, 1999 and 1998, respectively.
Profit Margins/Spreads
An important determinant of Golden West's earnings is its primary spread--the difference between its yield on earning assets and its cost of funds. The following table shows the components of the Company's primary spread at the end of the years 1998 through 2000.
Yield on Earning Assets
The yield on earning assets increased in 2000 versus 1999 principally due to increases in the indexes on adjustable rate mortgages due to interest rate increases that began in the third quarter of 1999 and continued into 2000. 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 because of lags related to the indexes and because of certain loan features. 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 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.
Cost of Funds
Approximately 94% of Golden West's rate-sensitive liabilities are subject to repricing in less than one year. Golden West's cost of funds increased during 1999 and 2000 due to an increase in the cost of deposits and an increase in borrowings as a proportion of interest-costing liabilities.
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 derivative financial instruments for trading purposes.
Interest rate swap activity decreased net interest income by $4 million, $11 million, and $9 million for the years ended December 31, 2000, 1999, and 1998, respectively.
The table below summarizes the unrealized gains and losses for interest rate swaps at December 31, 2000 and 1999.
Interest on Loans
Interest on loans was $2.5 billion, $1.9 billion, and $2.3 billion for the years ended December 31, 2000, 1999, and 1998, respectively. The increase in 2000 was due to an increase in the average portfolio balance and an increase in the average portfolio yield. The decrease in 1999 was due to a decrease in the average portfolio balance and a decrease in the average portfolio yield. The decreases in the average loan portfolio balances during 1999 were primarily due to the securitization of loans into FNMA MBS and MBS-REMICs as discussed in " Loans Receivable and Mortgage-Backed Securities" on pages 49 and 50.
Interest on MBS
Interest on MBS was $1.1 billion, $769 million, and $498 million for the years ended December 31, 2000, 1999, and 1998, respectively. The increase in 2000 was due to an increase in the average portfolio balance and an increase in the average portfolio yield. The increase in 1999 was due to an increase in the average portfolio balance, which was partially offset by a decrease in the average portfolio yield. The increases in the MBS portfolio during 2000 and 1999 were primarily due to the securitization of loans into FNMA MBS and MBS-REMICs, as previously discussed.
Interest and Dividends on Investments
The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. Interest and dividends on investments was $254 million, $205 million, and $210 million for the years ended December 31, 2000, 1999, and 1998, respectively. The increase in 2000 was primarily due to an increase in the average portfolio yield partially offset by a decrease in the average portfolio balance. In addition, included in interest and dividends on investments for the year ended December 31, 2000 was $3.7 million of special dividends from the FHLB of San Francisco and $2.8 million of special dividends from the FHLB of Dallas for a total of $6.5 million. The decrease in 1999 was primarily due to a decrease in the average portfolio yield which was partially offset by an increase in the average portfolio balance.
Interest on Deposits
Interest on deposits was $1.5 billion, $1.3 billion, and $1.3 billion for the years ended December 1, 2000, 1999, and 1998, respectively. The increase in 2000 was due to an increase in the average cost of deposits and an increase in the average balance of deposits. Interest on deposits in 1999 was comparable to 1998.
Interest on Advances
Interest paid on FHLB advances was $961 million, $380 million, and $439 million for the years ended December 31, 2000, 1999, and 1998, respectively. The increase in 2000 was due to an increase in the average cost of these borrowings and an increase in the average balance of these borrowings. The decrease in 1999 was due to a decrease in the average cost of these borrowings and a decrease in the average outstanding balance.
Interest on Other Borrowings
Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $190 million, $192 million, and $271 million for the years ended 2000, 1999, and 1998, respectively. The decrease in the expense in 2000 compared with 1999 was due to a decrease in the average balance of these liabilities partially offset by an increase in the average cost. The decrease in the expense in 1999 compared with 1998 was due to a decrease in the average balance of these liabilities and a decrease in the average cost.
Provision for (Recovery of) Loan Losses
The provision for loan losses was $9 million for the year ended 2000, compared to a recovery of $2 million for the year ended 1999 and a provision of $11 million for the year ended 1998. The provision in 2000 reflected the rapid growth in the loan portfolio. The recoveries in 1999 reflected declining nonperforming assets as a result of the strong economy and housing market.
Noninterest Income
Noninterest income was $161 million, $143 million, and $138 million for the years ended December 31, 2000, 1999, and 1998, respectively. The increase in 2000 was primarily due to higher loan fee income. In addition, in 2000, other income included $24 million of income earned on our check outsourcing program which started in September 1999. Under the new program, interest from float on outstanding checks is reported in other income instead of interest income as had been done previously. For the year ended December 31, 1999, noninterest income also included gains of $8 million from the sale of four savings offices located in markets with limited growth potential. There were no branch sales in 2000. Noninterest income for the year ended December 31, 1998, included a gain of $13 million from the redemption of preferred stock which was called by the issuer and a gain of $3 million from the sale of one savings branch.
General and Administrative Expenses
General and administrative expenses (G&A) were $425 million, $386 million, and $355 million for the years ended 2000, 1999, and 1998, respectively. Expenses increased in 2000 because of ongoing investments in personnel, facilities, and technology. Expenses increased in 1999 because of normal increases in employee compensation, the expansion of the loan origination organization to take advantage of opportunities to increase mortgage volume, investments in new computers to enhance customer service in the Company's branches, enhancements to data processing systems to take advantage of new technologies, and the completion of the "Year 2000" project.
General and administrative expenses as a percentage of average assets was .87% for the year ended December 31, 2000 compared with .98% and .90% for the years ended December 31, 1999 and 1998, respectively. G&A as a percentage of average assets decreased in 2000 because assets grew faster than G&A expense.
Taxes on Income
Golden West 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 increased slightly in 2000 compared with 1999 and decreased slightly in 1999 over 1998. The decrease in the tax rate in 1999 as compared to 1998 was due to a lower overall state tax rate due to the expansion of business in lower taxing states and the tax benefit associated with the donation of land to the Alamo Community College district in San Antonio, Texas.
Extraordinary Item
During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments.
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; investments and borrowings from its affiliates; and debt collateralized by mortgages, MBS, or securities. In addition, WSB has other alternatives available to provide liquidity or finance operations including federal funds purchased, the issuance of medium-term notes, borrowings from public offerings of debt, 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 earnings; deposits; loan repayments; borrowings from the FHLB Dallas; debt collateralized by mortgages or securities, and borrowings from its parent WSB.
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 and equity securities. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities, capital contributions to its subsidiaries ($20 million in 2000 and $117 thousand in 1999), dividends to stockholders, the purchase of Golden West stock, and general and administrative expenses.
Common Stock
The quarterly price ranges for the Company's common stock during 2000 and 1999 were as follows:
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 46 through 49 in Item 7.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index included on page 73 and the financial statements, which begin on page, which are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows (see footnote explanations on the following page):
Each of the above persons holds the same position with WSB with the exception of James T. Judd who is President, Chief Operating Officer, and Director of WSB and Russell W. Kettell who is a Senior Executive Vice President and Director of WSB. Each executive officer has had the principal occupations shown for the prior five years except as follows:
(a) Russell W. Kettell was elected Chief Financial Officer in December 1999, was elected Treasurer of the Company in January 1995, and has served as President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984.
(b) Michael Roster was elected Executive Vice President, General Counsel and Secretary in February 2000. Prior thereto, Mr. Roster was General Counsel at Stanford University.
(c) Carl M. Andersen was elected Group Senior Vice President in 1999 and Senior Vice President of the Company in 1997. He served as Senior Vice President with WSB and WTX since 1996. Prior thereto, he served as Vice President of WSB since 1990.
(d) William C. Nunan was elected Chief Accounting Officer of the Company in December 1999, was elected Group Senior Vice President in 1999, and was elected Senior Vice President of the Company in 1997. He served as Senior Vice President with WSB and WTX since 1995. Prior thereto, he served as Vice President of WSB since 1985.
For further information concerning the directors and executive officers of the Registrant, see pages 2 and 3 of the Registrant's Proxy Statement dated March 12, 2001, which are incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 12, 2001, on pages 4 through 6 and 8 through 10 and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth on pages 2, 3, 6 and 7 of Registrant's Proxy Statement dated March 12, 2001, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Indebtedness of Management" on page 9 of the Registrant's Proxy Statement dated March 12, 2001, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
See Index included on page 73 and the financial statements, which begin on page.
(2) Index to Financial Statement Schedules
Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto.
(3) Index to Exhibits
Exhibit No. Description ----------- ------------ 3(a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 1990.
3(b) By-Laws, as amended in 1997.
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 14, 1997, 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(g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the quarter ended September 30, 1998.
10(h) 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.
21(a) Subsidiaries of the Registrant.
23(a) Independent Auditors' Consent.
(b) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a part of section (a), Exhibits.
(c) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K with the Commission in the fourth quarter.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statement on Form S-8 No. 33-14833 (filed June 5, 1987):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
By: /s/ Herbert M. Sandler ------------------------------------------------- Herbert M. Sandler, Chairman of the Board and Chief Executive Officer
By: /s/ Marion O. Sandler ------------------------------------------------- Marion O. Sandler, Chairman of the Board and Chief Executive Officer
By: /s/ Russell W. Kettell ------------------------------------------------- Russell W. Kettell, President and Chief Financial Officer
By: /s/ William C. Nunan ------------------------------------------------- William C. Nunan, Group Senior Vice President and Chief Accounting Officer
Dated: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
/s/ Maryellen Cattani Herringer 3/29/01 /s/ Bernard A. Osher 3/29/01 - --------------------------------------- -------------------------------------- Maryellen Cattani Herringer Bernard A. Osher Director Director
/s/ Louis J. Galen 3/29/01 /s/ Kenneth T. Rosen 3/29/01 - -------------------------------------- -------------------------------------- Louis J. Galen Kenneth T. Rosen Director Director
/s/ Herbert M. Sandler 3/29/01 - -------------------------------------- -------------------------------------- Antonia Hernandez Herbert M. Sandler Director Director
/s/ Patricia A. King 3/29/01 /s/ Marion O. Sandler 3/29/01 - -------------------------------------- -------------------------------------- Patricia A. King Marion O. Sandler Director Director
/s/ Leslie Tang Schilling 3/29/01 -------------------------------------- Leslie Tang Schilling Director
Page ---- Independent Auditors' Report.........................................F-1
Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 2000, and 1999.................................F-2 Consolidated Statement of Net Earnings for the years ended December 31, 2000, 1999, and 1998 ....................F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998...............F-4 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999, and 1998.....................F-5, Notes to Consolidated Financial Statements.......................F-7
All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto.
Independent Auditors' Report ----------------------------
Board of Directors and Stockholders Golden West Financial Corporation Oakland, California
We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Oakland, California January 22, 2001
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS -------------------------------------- (Dollars in thousands except per share figures)
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE A - Summary of Significant Accounting Policies
Principles of Consolidation - ---------------------------
The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). Intercompany accounts and transactions have been eliminated. World Savings Bank, a federally chartered savings bank (WSB), is the Company's principal operating subsidiary with $55.7 billion in assets on December 31, 2000. Certain reclassifications have been made to prior year financial statements to conform to current presentation.
Organizational Structure - ------------------------
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 WSB and WTX became a wholly owned subsidiary of WSB. In addition, on December 31, 2000, World Savings and Loan Association, 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.
Nature of Operations - --------------------
Golden West Financial Corporation, through its financial institution subsidiaries, operates 253 savings branches in eight states and 278 loan offices in 32 states, of which 117 loan offices are located in savings branches. The Company's primary source of revenue is interest from loans on residential real estate and mortgage-backed securities.
Use of Estimates in the Preparation of Financial Statements - -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash - ----
For the purpose of presentation in the Consolidated Statement of Cash Flows, cash is defined as cash held in office and amounts due from banks.
The Office of Thrift Supervision requires insured institutions to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either (a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or (b) 4% of the prior quarter's ending balance of short-term deposits and borrowings.
Securities Available for Sale and Other Investments - ---------------------------------------------------
The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using the interest method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, consisting of overnight investments such as Eurodollar time deposits and federal funds, and longer-term investments such as Bank notes, medium-term notes, and collateralized mortgage obligations. These other investments are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ----------------------------------------------------- Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share)
Mortgage-Backed Securities - --------------------------
The Company has no mortgage-backed securities (MBS) classified as trading. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability and intent to hold these MBS to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. The Company has securitized certain loans from its held for investment loan portfolio into MBS with recourse and into Real Estate Mortgage Investment Conduits (REMICs) which are held to maturity and available to be used as collateral for borrowings. The REMICs are not recorded as sales because 100% of the beneficial ownership interests are retained by the Company, including both the primary and subordinate retained interests. The REMIC securities are recorded at cost and are evaluated with the other held-to-maturity MBS for impairment based upon the characteristics of the underlying loans.
Loans Receivable - ----------------
The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first deeds of trust on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts.
The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. A portion of the Company's ARMs are originated with a low, fixed rate for an initial period, primarily one to 12 months.
The Company originates loans that are held for sale, primarily fixed-rate loans. These loans are recorded at the lower of cost or market.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's policy is to measure impairment based on the fair value of the collateral. When the value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the fair value of the collateral. Impairment is measured on an individual loan basis for larger multi-family loans and on a group basis for smaller single family one-to-four unit loans.
Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the actual life of the related loans using the interest method. Loan origination fees, net of certain direct loan origination costs, on loans originated for sale are deferred until the loans are sold and recognized at the time of sale.
"Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from deposit accounts, and miscellaneous fees, are recorded when collected.
Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and real estate owned through foreclosure. For loans past due 90 days or more, all interest earned but uncollected is fully reserved.
Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or the borrower's ability to make scheduled payments.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
Foreclosed Real Estate - ----------------------
Foreclosed real estate is comprised of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings.
Allowance for Loan Losses - -------------------------
The Company provides specific valuation allowances for losses on loans when impaired and on real estate owned 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. Management is then able to estimate a range of general loss allowances to cover losses inherent in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating probable losses, consideration is given to the estimated sales price, cost of refurbishing, 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.
Reserve for Losses on Loans Sold with Recourse and Securitized and Retained - ---------------------------------------------------------------------------
The Company has securitized loans from its portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to hold these MBS and MBS-REMICs to maturity. Because these loans underlying the MBS and MBS-REMICs are similar in all respects to the loans in its loan portfolio, the Company estimates its reserve on these securities in a manner similar to the method it uses for the allowance for loan losses. The Company also sells certain loans with full credit recourse and has established a reserve for probable losses on these loans. The liability for the reserve for losses on loans sold or securitized and retained is included in other liabilities.
Mortgage Servicing Rights - -------------------------
Capitalized Mortgage Servicing Rights (CMSRs) are periodically reviewed for impairment based on fair value. The fair value of the CMSRs, for the purposes of impairment measurement, is determined by using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. At December 31, 2000 and 1999, there was no impairment. The balance of CMSRs is included in "Other assets" in the Consolidated Statement of Financial Condition and is being amortized over the projected servicing period. The amortization of the CMSRs is included in "Fee income" in the Consolidated Statement of Net Earnings.
Securities Sold Under Agreements to Repurchase - ----------------------------------------------
The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
Interest Rate Swaps - -------------------
The Company utilizes certain derivative financial instruments, primarily various types of interest rate swaps, as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes.
An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. Some interest rate swaps are entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets.
Taxes on Income - ---------------
The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns.
Regulatory Capital Requirements - -------------------------------
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for OTS regulated institutions, such as WSB and WTX. Under FIRREA, thrifts and savings banks must have tangible capital equal to 1.5% of adjusted total assets, have core capital equal to 4% of adjusted total assets, and have risk-based capital equal to 8% of risk-weighted assets.
At December 31, 2000, WSB had the following regulatory capital calculated in accordance with FIRREA's capital standards:
At December 31, 1999, WSB had the following regulatory capital calculated in accordance with FIRREA's capital standards. The December 31, 1999 numbers are as reported and have not been restated because the OTS does not require that these numbers be restated to reflect the reorganization that took place in 2000.
At December 31, 2000, WTX had the following regulatory capital calculated in accordance with FIRREA's capital standards:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
The OTS has adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well-capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive.
As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio is the ratio of core capital to risk-weighted assets, and the leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. WSB and WTX are both regulated by the OTS. As of December 31, 2000, the most recent notification from the OTS categorized WSB 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.
The tables below show that WSB's regulatory capital exceeded the well-capitalized classification at December 31, 2000 and 1999.
The table below shows that WTX's regulatory capital exceeded the well-capitalized classification at December 31, 2000.
At December 31, 1999, WTX operated under the name World Savings Bank, a State Savings Bank and was a state chartered savings bank regulated by the FDIC. At December 31, 1999, WSSB had the following regulatory capital calculated in accordance with the FDIC's capital standards:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
Retained Earnings - -----------------
Because they are subsidiaries of a savings and loan holding company, WSB and WTX must at least file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB and WTX may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions they remain at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WSB or WTX to no longer be adequately capitalized, require specific OTS approval.
At December 31, 2000, $1.5 billion of the WSB's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as are WSB and WTX.
Extraordinary Item - ------------------
During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. These penalties are reflected as an extraordinary charge on the Consolidated Statement of Net Earnings.
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 28, 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. The Company does not currently intend to use hedge accounting for the derivative financial instruments in portfolio on January 1, 2001.
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 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 REMIC securitizations, it does not have any effective "retained interests" requiring disclosure under SFAS 140. The implementation of SFAS 140 is not expected to have a significant impact on the Company's financial statements.
The weighted average portfolio yields on securities available for sale were 38.31% and 12.78% at December 31, 2000 and 1999, respectively. Principal proceeds from the sales of securities from the securities available for sale portfolio were $14 (2000), $1,269 (1999), and $94,846 (1998) and resulted in realized gains of $4 (2000), $1,250 (1999), and $13,480 (1998) and realized losses of $-0- (2000), $-0- (1999), and $7 (1998).
At December 31, 2000, the securities available for sale had maturities as follows:
NOTE C - Other Investments
The following is a summary of other investments:
The weighted average portfolio yields on other investments were 6.21% and 5.00% at December 31, 2000 and 1999, respectively. There were no sales of other investments during 2000, 1999, or 1998.
At December 31, 2000, the other investments portfolio had maturities as follows:
NOTE D - Purchased Mortgage-Backed Securities Available for Sale
Purchased mortgage-backed securities available for sale are summarized as follows:
The weighted average portfolio yields on mortgage-backed securities available for sale were 8.98% and 8.95% at December 31, 2000, and 1999, respectively. There were no sales of securities from the mortgage-backed securities available for sale portfolio in 2000, 1999, or 1998.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE E - Mortgage-Backed Securities Held to Maturity
Mortgage-backed securities held to maturity are summarized as follows:
The weighted average portfolio yields on mortgage-backed securities held to maturity were 7.97% and 7.13% at December 31, 2000 and 1999, respectively. There were no sales of securities from the mortgage-backed securities held to maturity portfolio during 2000, 1999, or 1998.
At December 31, 2000, mortgage-backed securities held to maturity had contractual maturities as follows:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE F - Loans Receivable
As of December 31, 2000, the Company had $550 million of second mortgages outstanding. The balance of the second mortgages is included in the table above in the one- to four-family dwelling units.
In addition to loans receivable and MBS with recourse held to maturity, the Company services loans for others. At December 31, 2000 and 1999, the amount of loans sold with servicing retained by the Company was $2,899,079 and $3,093,642, respectively. At December 31, 2000 and 1999, the balance outstanding of loans sold with recourse amounted to $1,915,672 and $2,055,987, respectively.
At December 31, 2000 and 1999, the Company had $128 million and $88 million, respectively, in loans held for sale, all of which are carried at the lower of cost or market.
During 1997, the Company desecuritized $856 million of MBS with recourse into adjustable rate mortgages which had a balance of $574 million at December 31, 2000. These adjustable rate mortgages were separately identified as "held to maturity" and the Company reclassified them on January 1, 2001 as "held for investment" as permitted under SFAS 133.
Capitalized mortgage servicing rights are included in "Other assets" on the Consolidated Statement of Financial Condition. The following is a summary of capitalized mortgage servicing rights:
A summary of the changes in the allowance for loan losses is as follows:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
A summary of the changes in the reserve for losses on loans sold with recourse or securitized and retained, included in "Other liabilities," is as follows:
The portion of the allowance for loan losses that was specifically provided for impaired loans was $4,036 and $9,443 at December 31, 2000 and 1999, respectively. The average recorded investment in total impaired loans was $264,895 and $328,029 during 2000 and 1999, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized during the years ended December 31, 2000, 1999, and 1998 on the total of impaired loans at each yearend was $11,187 (2000), $13,912 (1999), and $17,265 (1998).
NOTE G - Interest Earned But Uncollected
NOTE H - Premises and Equipment
Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment.
The aggregate future rentals under long-term operating leases on land or premises in effect on December 31, 2000, and which expire between 2001 and 2064, amounted to approximately $175,456. The approximate minimum payments during the five years ending 2005 are $20,836 (2001), $19,669 (2002), $17,616 (2003), $14,866 (2004), and $13,306 (2005). Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $24,016 (2000), $22,233 (1999), and $20,350 (1998).
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE I - Deposits
* Weighted average interest rate including the impact of interest rate swaps.
* Weighted average interest rate including the impact of interest rate swaps.
At December 31, the weighted average cost of deposits was 5.52% (2000) and 4.69% (1999).
Interest expense on deposits is summarized as follows:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE J - Advances from Federal Home Loan Banks
Advances are secured by pledges of $22,817,853 of certain loans and MBS-REMIC principal, capital stock of the Federal Home Loan Banks, and other MBS with a market value of $1,575,177. These borrowings have maturities and interest rates as follows:
At December 31, the weighted average adjusted interest rate was 6.65% (2000) and 5.64% (1999). These borrowings averaged $14,761,217 (2000) and $6,943,505 (1999) and the maximum outstanding at any monthend was $19,731,797 (2000) and $8,915,218 (1999). Of the advances outstanding at December 31, 2000, $18.0 billion were tied to a LIBOR index and were scheduled to reprice within 90 days.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE K - Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by mortgage-backed securities with a market value of $948,664 and $1,120,661 at December 31, 2000 and 1999, respectively.
At December 31, these liabilities had a weighted average adjusted interest rate of 6.56% (2000) and 5.46% (1999). These borrowings averaged $966,255 (2000) and $909,329 (1999) and the weighted average interest rate on these averages was 5.99% for 2000 and 5.22% for 1999. The maximum outstanding at any monthend was $1,160,536 (2000) and $1,291,128 (1999). At the end of 2000 and 1999, all of the agreements to repurchase with brokers/dealers were to reacquire the same securities.
NOTE L - Subordinated Notes
At December 31, subordinated notes had a weighted average interest rate of 7.17% (2000) and 7.63% (1999). At December 31, 2000, subordinated notes had maturities and interest rates as follows:
*Weighted average interest rate.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE M - Taxes on Income
The following is a comparative analysis of the provision for federal and state taxes on income.
The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are as follows:
The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows:
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate follows:
In accordance with Financial Accounting Standards Board Pronouncement 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of WSB that arose in tax years that began prior to December 31, 1987. At December 31, 2000 and 1999, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 2000 and 1999, was approximately $88 million. This deferred tax liability could be recognized if certain distributions are made with respect to the stock of WSB, or the bad debt reserve is used for any purpose other than absorbing bad debt losses.
NOTE N - Stockholders' Equity
The Company's Board of Directors, through four separate actions beginning in 1993, authorized the purchase by the Company of up to 44.7 million shares of Golden West's common stock. As of December 31, 2000, 42,897,148 of such shares had been repurchased and retired at a cost of $915 million since October 28, 1993. During 2000, 3,673,300 of the shares were purchased and retired at a cost of $109 million.
In November 1999, the Company's Board of Directors authorized a three-for-one stock split of the outstanding common stock of the Company by declaring a 200 percent stock dividend. The stock split became effective on December 10, 1999. All references in the consolidated financial statements to the number of shares of common stock, prices per share, earnings and dividends per share, and other per share amounts have been restated to reflect the stock split.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE O - Earnings Per Share
The Company calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.
The following is a summary of the calculation of basic and diluted EPS:
NOTE P - Stock Options
The Company's 1996 stock option plan authorizes the granting of options to key employees to purchase up to 21 million shares of the Company's common stock.
The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to five years and prior to ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to five years and prior to ten years and one month from the grant date. At December 31, shares available to be granted under options amounted to 4,002,650 (2000), 5,348,250 (1999), and 7,420,650 (1998). Outstanding options at December 31, 2000, were held by 491 employees and had expiration dates ranging from December 2, 2001, to December 18, 2010.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
The following table sets forth the range of exercise prices on outstanding options at December 31, 2000:
All of the options in the range from $11.67 to $17.83 are exercisable. Of the options in the range from $27.60 to $30.83, 613,675 are exercisable. None of the options in the range $31.58 to $57.75 are exercisable.
A summary of the transactions of the stock option plan follows:
At December 31, options exercisable amounted to 2,818,325 (2000), 2,736,929 (1999), and 4,237,290 (1998).
The weighted-average fair value per share of options granted during 2000 was $8.88 per share, $9.93 per share for those granted during 1999, and $7.77 per share for those granted during 1998. For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively; dividend yield of 1.1% (2000) and 0.9% (1999 and 1998); expected volatility of 25% (2000), 23% (1999) and 24% (1998); expected lives of 5.3 years for all years; and risk-free interest rates of 4.97% (2000), 6.28% (1999) and 4.54% (1998).
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
The Company applies APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
NOTE Q - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk
As of December 31, 2000, the balance of the Company's loans receivable and MBS with recourse held to maturity was $52 billion. Of that $52 billion balance, 32% were Northern California loans, 31% were Southern California loans, 5% were Florida loans, 4% were Texas loans, 4% were New Jersey loans, 3% were Washington loans, 3% were Illinois loans, 3% were Colorado loans, 2% were Arizona loans and 2% were Pennsylvania loans. No other single state made up more than 2% of the total loan portfolio. The majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio.
In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage-backed securities, and loans; and interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank of San Francisco and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company initially has not required collateral or other security to support these financial instruments because of the creditworthiness of the counterparties.
Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 2000 and 1999, was $596 million and $594 million, respectively. Most of these commitments were for adjustable rate mortgages.
The Company enters into commitments to purchase or sell mortgage-backed securities and other mortgage derivative products. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. The Company had no significant outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 2000 or 1999.
Interest rate swaps are utilized to limit the Company's sensitivity to interest rate changes. The Company is exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the other parties.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE R - Interest Rate Swaps
The Company has entered into interest rate swap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The possible inability of counterparties to satisfy the terms of these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps.
The information presented below is based on interest rates at December 31, 2000. To the extent that rates change, variable interest rate information will change.
The following table illustrates the maturities and weighted average rates as of December 31, 2000 for interest rate swaps held by the Company by product type.
During 2000, the range of floating interest rates received on swap contracts was 5.68% to 7.11% and the range of floating interest rates paid on swap contracts was 6.00% to 6.87%. The range of fixed interest rates received on swap contracts was 5.50% to 7.06% and the range of fixed interest rates paid on swap contracts was 5.58% to 8.85%.
Activity in interest rate swaps is summarized as follows:
Interest rate swap activity decreased net interest income by $4 million, $11 million, and $9 million for the years ended December 31, 2000, 1999, and 1998, respectively.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE S - Disclosure About Fair Value of Financial Instruments
The Financial Accounting Standards Board Pronouncement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value.
Fair value estimates are not necessarily more relevant than historical cost values. Fair values may have limited usefulness in evaluating portfolios of long-term financial instrument assets and liabilities held by going concerns. Moreover, there are significant inherent weaknesses in any estimating techniques employed. Differences in the alternative methods and assumptions selected by various companies as well as differences in the methodology utilized between years may, and probably will, significantly limit comparability and usefulness of the data displayed. For these reasons, as well as others, management believes that the disclosure presented herein has limited relevance to the Company and its operations.
The values presented are based upon information as of December 31, 2000 and 1999, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Banks, other overnight investments, demand deposits, and securities sold under agreements to repurchase with brokers/dealers due within 90 days.
Fair values are based on quoted market prices for securities available for sale, other long-term investments, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, securities sold under agreements to repurchase with brokers/dealers with terms greater than 90 days, and subordinated notes.
Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: term deposits, advances from Federal Home Loan Banks, and consumer repurchase agreements.
For loans receivable and loan commitments, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans.
For mortgage servicing rights, the fair value is estimated using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates.
The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreements on the reporting date, considering current interest rates.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
The table below discloses the carrying value and the fair value of Golden West's financial instruments as of December 31.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE T - Parent Company Financial Information
Statement of Financial Condition - --------------------------------
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE T- Parent Company Financial Information (Continued)
Statement of Cash Flows - -----------------------
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 2000, 1999, and 1998 (Dollars in thousands except per share figures)
NOTE U - Selected Quarterly Financial Data (Unaudited)