10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


FORM 10-K

 


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

 


Commission File Number 1-4629

GOLDEN WEST FINANCIAL CORPORATION

Incorporated pursuant to the Laws of Delaware State

 


I.R.S. – Employer Identification No. 95-2080059

1901 Harrison Street, Oakland, California 94612

(510) 446-3420

 


Securities registered pursuant to section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.10 par value   New York Stock Exchange, Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨  No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x             Accelerated filer ¨             Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x

The approximate aggregate market value of the registrant’s common stock held by nonaffiliates of the registrant on June 30, 2005, was $16,600,543,628 (based upon nonaffiliated holdings of 257,852,495 shares and a market price of $64.38 per share). The number of shares outstanding of the registrant’s common stock on February 28, 2006, was 308,502,961 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement dated March 10, 2006 furnished to stockholders in connection with the registrant’s 2006 Annual Meeting of Stockholders, is incorporated by reference into Part III.

 



Table of Contents

GOLDEN WEST FINANCIAL CORPORATION

2005 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

     Page
INDEX OF TABLES    ii
Forward Looking Statements    1
PART I    1

Item 1. Business

   1

Overview

   1

Operations

   2

Risk Factors

   3

Competition

   5

Regulation

   5

Corporate Governance

   8

Executive Officers of the Company

   8

Supplemental Tables

   9

Item 1A. Risk Factors

   25

Item 1B. Unresolved Staff Comments

   25

Item 2. Properties

   25

Item 3. Legal Proceedings

   25

Item 4. Submission of Matters to a Vote of Security Holders

   25
PART II    26

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   26

Stock Dividend

   26

Market Prices of Stock

   26

Per Share Cash Dividends Data

   26

Stockholders

   27

Equity Compensation Plan Information

   27

Stock Repurchase Activity

   28

Item 6. Selected Financial Data

   29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   31

Overview

   31

Financial Condition

   33

Management of Risk

   44

Results of Operations

   61

Liquidity and Capital Management

   62

Off-Balance Sheet Arrangements and Contractual Obligations

   64

Critical Accounting Policies and Uses of Estimates

   64

New Accounting Pronouncements

   65

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

   66

Item 8. Financial Statements and Supplementary Data

   66

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   66

Item 9A. Controls and Procedures

   66

Item 9B. Other Information

   69
PART III    69

Item 10. Directors and Executive Officers of the Registrant

   69

Item 11. Executive Compensation

   69

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   69

Item 13. Certain Relationships and Related Transactions

   69

Item 14. Principal Accounting Fees and Services

   69
PART IV    70

Item 15. Exhibits and Financial Statement Schedules

   70

 

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INDEX OF TABLES

 

      Page
Selected Financial Data   

Five Year Consolidated Summary of Operations (Table 27)

   29

Five Year Summary of Financial Condition (Table 28)

   29

Five Year Selected Other Data (Table 29)

   30

Financial Highlights 2003 – 2005 (Table 30)

   32

Asset, Liability, and Equity Components as Percentages of Total Assets (Table 31)

   33

Selected Financial Results 2003 – 2005 (Table 55)

   61
Loan Portfolio   

Loans Receivable and MBS with Recourse by Type of Security (Table 1)

   10

Loans Receivable and MBS with Recourse by State (2005) (Table 2)

   11

Loans Receivable and MBS with Recourse by State (2004) (Table 3)

   12

Loans Due after One Year by Loan Type (Table 4)

   13

New Mortgage Loan Originations by Type and by Purpose (Table 5)

   13

Balance of Loans Receivable and MBS by Component (Table 32)

   34

Loan Originations and Loan and MBS Repayments (Table 33)

   34

Equity Lines of Credit and Fixed-Rate Second Mortgages (Table 34)

   35

Net Deferred Loan Costs (Table 35)

   36

Loan Originations by State (Table 36)

   36

Loans Receivable and MBS with Recourse by State (Table 37)

   37

ARM Originations by Index (Table 38)

   38

ARM Portfolio by Index (Table 39)

   39

ARM Portfolio by Lifetime Cap Bands (Table 40)

   40
Management of Credit Risk   

Nonperforming Assets by State (2005) (Table 6)

   14

Nonperforming Assets by State (2004) (Table 7)

   14

Risk Profile of Loans and MBS with Recourse (2005) (Table 8)

   15

Risk Profile of Loans and MBS with Recourse (2004) (Table 9)

   15

Changes in Allowance for Loan Losses 2001 – 2005 (Table 10)

   16

Composition of Allowance for Loan Losses at Yearend (Table 11)

   16

Mortgage Originations by LTV or CLTV Bands (Table 49)

   52

Mortgage Portfolio Balance by LTV or CLTV Bands (Table 50)

   54

Deferred Interest in the Loan Portfolio by LTV/CLTV Bands and Year of Origination (Table 51)

   56

Nonperforming Assets and Troubled Debt Restructured (Table 52)

   57

Nonperforming Assets by State (Table 53)

   58

Changes in Allowance for Loan Losses (Table 54)

   59
Asset / Liability Management   

Average Earning Assets and Interest-Bearing Liabilities (Table 18)

   20

Volume and Rate Analysis of Interest Income and Interest Expense (Table 19)

   21

Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on Primary Spread
(Table 43)

   45

Summary of Key Indexes (Table 44)

   46

Yield on Earning Assets, Cost of Funds, and Primary Spread (Table 45)

   47

Average Primary Spread (Table 46)

   47

Repricing of Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratios (Table 47)

   48

Summary of Market Risk on Financial Instruments (Table 48)

   49
Deposits   

Deposits by Original Term to Maturity (Table 12)

   17

Deposits by Interest Rate (Table 13)

   17

Deposit Maturities by Interest Rate (Table 14)

   18

Maturities of Time Certificates of Deposit Equal to or Greater than $100,000 (Table 15)

   18
Borrowings   

Composition of All Borrowings (Table 16)

   19

Composition of Short-Term Borrowings (Table 17)

   19

 

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INDEX OF TABLES (Continued)

 

Regulatory Capital   

Regulatory Capital Ratios, Minimum Capital Requirements, and Well-Capitalized Capital Requirements (2005) (Table 20)

   22

WSB and Subsidiaries Reconciliation of Equity Capital to Regulatory Capital (2005) (Table 21)

   23

WTX Reconciliation of Equity Capital to Regulatory Capital (2005) (Table 22)

   24
Common Stock and Related Stockholder Matters   

Common Stock Price Range (Table 23)

   26

Cash Dividends Per Share (Table 24)

   26

Stock Option and Incentive Plans (Table 25)

   27

Common Stock Repurchase Activity (Table 26)

   28
Other   

Federal Funds Sold, Securities Purchased under Agreements to Resell, and Other Investments (Table 41)

   41

Securities Available for Sale (Table 42)

   42

Contractual Obligations (Table 56)

   64

 

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Forward Looking Statements

This report may contain various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include projections, statements of the plans and objectives of management for future operations, statements of future economic performance, assumptions underlying these statements, and other statements that are not statements of historical facts. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond Golden West’s control. Should one or more of these risks, uncertainties or contingencies materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Among the key risk factors that may have a direct bearing on Golden West’s results of operations and financial condition are:

 

    competitive practices in the financial services industries;

 

    operational and systems risks;

 

    general economic and capital market conditions, including fluctuations in interest rates;

 

    economic conditions in certain geographic areas; and

 

    the impact of current and future laws, governmental regulations and accounting and other rulings and guidelines affecting the financial services industry in general and Golden West’s operations in particular.

In addition, actual results may differ materially from the results discussed in any forward-looking statements for the reasons, among others, discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7.

PART I

 

ITEM 1. BUSINESS

OVERVIEW

Golden West Financial Corporation is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly owned federally chartered savings bank subsidiary, World Savings Bank, FSB (WSB). WSB has a wholly owned subsidiary, World Savings Bank, FSB (Texas) (WTX) that is also a federally chartered savings bank. Golden West also has two subsidiaries, Atlas Advisers, Inc. and Atlas Securities, Inc., that provide advisory and distribution services to Atlas Funds, a registered investment company offering seventeen no-load mutual funds. References to the Company, Golden West, “we,” and “our” mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise.

Headquartered in Oakland, California, we are one of the nation’s largest financial institutions with assets of $124.6 billion as of December 31, 2005. We have one of the most extensive thrift branch systems in the country, with 283 savings branches in ten states and lending operations in 39 states at yearend 2005. We had a total of 10,495 full-time and 1,109 permanent part-time employees at December 31, 2005. Golden West was incorporated in 1959 under Delaware law.

Copies of Golden West’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available, free of charge, through the Securities and Exchange Commission’s website at www.sec.gov and our website at www.gdw.com as soon as reasonably practicable after their filing with the Securities and Exchange Commission.

 

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OPERATIONS

As a residential mortgage portfolio lender, our principal business, conducted through WSB and WTX, is attracting funds from the investing public and the capital markets and investing those funds principally in mortgage loans secured by residential real estate. As of December 31, 2005, 2004, and 2003, we had assets of $124.6 billion, $106.9 billion, and $82.5 billion, respectively. For the years ended December 31, 2005, 2004, and 2003, we had net income of $1.5 billion, $1.3 billion, and $1.1 billion, respectively. Additional selected financial data is included on pages 29-30 and further discussion and analysis can be found in Item 7, Management’s Discussion and Analysis (MD&A), beginning on page 31. In addition, supplemental tables begin on page 10.

Lending Operations. At December 31, 2005, we were originating loans in 39 states through offices that are staffed by employees who primarily contact local real estate brokers, mortgage brokers, and consumers regarding possible lending opportunities. Customers also may apply for home loans over the telephone and through the Internet at www.worldsavings.com. Our loan approval process assesses both the borrower’s ability to repay the loan and the adequacy of the property securing the loan. We require title insurance for all mortgage loans and require that fire and casualty insurance be maintained on all improved properties that are security for our loans. Documentation for all loans is maintained in our loan servicing offices in San Antonio, Texas.

Loan Products. Almost all of our loans are adjustable rate mortgages (ARMs) on residential properties. The portion of the mortgage portfolio, including securitized loans and mortgage-backed securities (MBS), composed of ARMs was 99% at yearend 2005. Our principal loan product is the “option ARM” that offers payment options to the borrower. Additional information about our option ARM product can be found in the MD&A under “The Loan Portfolio – Structural Features of Our ARMs.” Most of our ARMs carry an interest rate that changes monthly based on movements in the applicable index, have original terms to maturity of 30 years, and are secured by first liens on one- to four-family homes. In addition, we originate a small amount of multi-family loans. We also originate second deeds of trust most of which are equity lines of credit (ELOCs). We are not currently active in commercial real estate, construction loans, or other consumer lending. Additional information about our loan portfolio can be found in the MD&A under “The Loan Portfolio,” and in Tables 1 through 9.

Deposit Activities. We raise deposits on a retail basis through our branch system and the Internet, and, from time to time, through the money markets. We currently offer a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to five years. Retail deposits, which are deposits we sell directly to customers, increased $7.2 billion during 2005 and reached $60.2 billion at December 31, 2005. Additional detail about deposits can be found in Tables 12 through 15.

Borrowings. We also borrow money from a variety of sources to fund our loan origination activities. Borrowings include taking “advances” from the Federal Home Loan Bank (FHLB) system, entering into reverse repurchase agreements with selected dealers, and issuing unsecured debt securities. FHLB advances and reverse repurchase agreements require us to pledge collateral to the lenders, sometimes in the form of whole loans and sometimes in the form of securitized pools of loans. We regularly securitize loans from our portfolio into MBS and Real Estate Mortgage Investment Conduit securities (MBS-REMICs) to create collateral for our secured borrowings. Additional information about our borrowings and securitization activity can be found in the MD&A under “The Loan Portfolio – Securitization Activity” and “Borrowings,” and detailed borrowing Tables 16 and 17.

 

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RISK FACTORS

In addition to the other information contained in this report, the following are among the key risk factors that may affect us. If any of these or other risks occur, our business, financial condition or operating results could be adversely affected. The MD&A includes an extensive discussion under “Management of Risk” beginning on page 44 that describes how we manage the key risks associated with being a residential mortgage portfolio lender, namely interest rate risk and credit risk, as well as other risks such as operational, regulatory, and management risk.

General business and economic conditions, including movements in interest rates, may significantly affect our earnings. Our business and earnings are affected by general business and economic conditions that are beyond our control and difficult to predict. In particular, changes in interest rates and the shape of the yield curve (the difference between short-term and long-term interest rates) affect the attractiveness of ARMs relative to fixed-rate mortgages and also impact our primary spread, which is the difference between the yield on our assets and the cost of our liabilities. We manage interest rate risk by holding assets and liabilities that adjust in a similar manner to changes in interest rates, although timing lags inherent in our ARM indexes result in our assets adjusting more slowly to interest rate changes than the rates on our liabilities. When short-term interest rates rise, such as has occurred since mid-2004, the primary spread typically narrows temporarily until the index on our ARMs catches up with the higher market interest rates. Our more difficult operating environments typically occur during periods when there is little difference between short-term and long-term interest rates (a so-called “flat yield curve”) or when short-term rates are higher than long-term rates (an “inverted yield curve”) because ARMs offer smaller interest rate benefits over fixed-rate mortgages during these periods. A sustained period with a flat or inverted yield curve could adversely affect our earnings. Additional information about interest rate risk can be found in the MD&A under “Management of Risk – Management of Interest Rate Risk.”

The credit risk in our mortgage portfolio could be adversely affected by rising unemployment, a decrease in housing prices, increases in borrowers’ mortgage payments, or deferred interest levels. Adverse economic conditions, such as rising unemployment levels or declining housing prices in the areas in which we lend, could increase the credit risk in our portfolio from current levels and adversely affect our earnings. In addition, the credit risk of individual loans in our portfolio could increase if rising interest rates cause borrower mortgage payments to increase significantly or if deferred interest is added to the loan principal balance when the amount the borrower pays is less than the interest due on the loan. Nonperforming assets (NPAs), which are an indicator of the amount of credit risk in the portfolio, have been unusually low in recent years due in part to a strong economy, significant home price appreciation in many markets, and relatively low interest rates. We do not expect these historically low levels of NPAs to continue indefinitely. Additional information about credit risk can be found in the MD&A under “Management of Risk – Management of Credit Risk,” and discussion about deferred interest can be found in the MD&A under “The Loan Portfolio – Structural Features of Our ARMs – Deferred Interest” and “Management of Credit Risk – Close Monitoring of the Loan Portfolio.”

The financial services industry is highly competitive. We operate in a highly competitive environment that is subject to a variety of factors, including technological advancements, regulatory developments, commoditization of products, and industry consolidation. Our future results could be adversely affected by the nature or level of competition. Our competitors may adopt practices to boost their loan production levels or efficiency – such as automated underwriting programs, shortcut appraisal methods, and outsourcing of customer service centers and other technology – that we choose not to adopt for risk management reasons or to maintain our customer service standards. Additional information can be found below under “Competition.”

Competitive, lending and regulatory practices relating to the option ARM product could adversely affect us. In recent years, there has been an industry-wide increase in the origination of option ARMs, our principal mortgage product for the past 25 years. This increase has been facilitated by the emergence of a secondary market for the product. The growing competition in the option ARM market, particularly from

 

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lenders who generate high volumes of option ARMs with practices we consider risky to borrowers and lenders, makes it a more challenging environment for us. The greater volume levels and aggressive lending practices of some new participants in the option ARM market have also increased regulatory and public scrutiny of the product. The federal banking agencies recently issued draft guidance relating to alternative mortgages, including the option ARM, which we support insofar as the proposed guidance reemphasizes the importance of strong risk management practices and disclosures to consumers. The content of the final guidance, as well as the agencies’ implementation of it, is uncertain.

We could be adversely affected by current and future laws, governmental regulations, and accounting and other rulings and guidelines affecting the financial services industry in general and Golden West’s operations in particular. We are heavily regulated at the federal and state levels. Failure to comply with applicable laws and regulations, even if inadvertent, could result in regulatory sanctions and damage to our reputation. In addition, new laws or regulations could be adopted, or existing laws and regulations could change or be applied in ways that adversely affect our business. As an example of regulations that are under review, the federal banking agencies are currently evaluating alternative risk-based capital regulations for regulated institutions. The impact of changes in these regulations is uncertain, but we continue to monitor developments to understand the public policy implications and impact on our business. Additional information can be found under “Regulation” below and in the MD&A under “Management of Risk – Management of Other Risks – Regulatory Risk.”

Our concentration in a single line of business could increase our risk. Our concentration in residential mortgages could make us more susceptible than our competitors with more diversified businesses to economic or regulatory developments that adversely affect residential lending. We believe this risk is mitigated by the size of the U.S. mortgage market, our relatively small percentage of that market, consumer demand for homeownership, and the ability of management to focus its attention and resources to a single line of business.

Our geographic concentration in California could increase our exposure to adverse conditions in the state. Our headquarters and a majority of our operations are in California, which is the largest economy and residential mortgage market in the United States. Our concentration in California could make us more susceptible to certain natural disasters or acts of war or terrorism and to regional economic downturns that affect California unemployment levels or house prices. Additional information about our activity in California can be found in the MD&A under “Management of Risk – Management of Credit Risk – Lending on Moderately Priced Properties.”

Because Golden West operates as a holding company, changes in the ability of our affiliates to pay dividends could adversely affect the Company’s security holders. WSB and WTX are subject to regulations governing their ability to make capital distributions to their parent. If Golden West were unable to receive capital distributions from its affiliates because of restrictions imposed by WSB’s and WTX’s regulator, it could materially restrict Golden West’s ability to pay dividends to stockholders, repurchase stock or service holding company debt.

We could be adversely affected by operational or management risks. We could suffer financial losses and other negative consequences, including reputational harm, due to inadequate or failed processes or systems, human factors, or external events. In addition, the loss of one or more members of our senior management could require internal organizational changes that, while already planned for by the Board of Directors and senior management, could result in a period of adjustment for the Company and its employees, investors, and other interested parties. Additional information about operational and management risk can be found in the MD&A under “Management of Risk – Management of Other Risks.”

 

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COMPETITION

Competition for deposits has historically come from other savings institutions, commercial banks, credit unions, the equities market, mutual funds, issuers of government and corporate debt securities, securities dealers, insurance companies, and other financial services providers. Our deposit flows and cost of funds are impacted by returns on competing investments and general market rates of interest. The principal methods we use to attract and retain deposits, in addition to the interest rates and terms offered, include the convenience of 283 savings branch locations, a commitment to outstanding customer service, and easy access to World Savings products and services by telephone or over the Internet at www.worldsavings.com.

Competition in making real estate loans comes principally from other savings institutions, mortgage banking companies, and commercial banks. Many of the nation’s largest savings institutions, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which we compete. The primary factors in competing for real estate loans are interest rates, payment amounts, loan fee charges, underwriting and appraisal standards, and the quality of service to borrowers and their representatives. Our lending activities are also 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 obtained and other factors affecting the supply of housing and the availability of funds.

REGULATION

The following discussion describes the primary regulatory issues applicable to savings and loan holding companies and savings banks like Golden West, WSB, and WTX. The description of any statutory or regulatory provisions is qualified in its entirety by reference to those provisions. In addition, laws and regulations affecting financial institutions change over time. We cannot predict if any such changes will occur or, if they do, whether they will have a material impact on our business.

Office of Thrift Supervision. Golden West is a savings and loan holding company under the Home Owners’ Loan Act (HOLA). As such, it has registered with the Office of Thrift Supervision (OTS) and is subject to OTS regulation, examination, supervision, and reporting requirements, as well as periodic assessments. 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. The OTS 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 federally chartered savings institutions, WSB and WTX also are regulated principally by the OTS. Under regulations of the OTS, savings institutions are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain a satisfactory level of liquid assets, and 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. In addition, savings institutions must comply with OTS regulations governing deposits and mortgage loans including regulations concerning the indexes and interest rate adjustments of our adjustable rate mortgage products.

Federal Deposit Insurance Corporation. Because their deposits are insured by the Federal Deposit Insurance Corporation (FDIC), WSB and WTX are also subject to FDIC regulation. The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Each fund insures deposit accounts up to the maximum amount permitted by law, currently $100,000 per insured depositor. WSB and WTX are members of the BIF, although approximately 10% of WSB’s deposits were insured through the SAIF at December 31, 2005.

 

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All FDIC-insured depository institutions are required to pay an annual assessment. The amount of FDIC assessments is based on an institution’s relative risk of default as measured by regulatory capital ratios and other factors. The BIF and SAIF assessment rate currently ranges from zero to 27 cents per $1,000 of domestic deposits. As of December 31, 2005, the premium paid by WSB and WTX to the FDIC was an annual rate of $.132 per $1,000 of deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. FDIC insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. A significant increase in the assessment rate, or a termination of deposit insurance, could have a material adverse effect on the Company’s earnings.

Federal Reserve Board. WSB and WTX are also subject to regulations of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Federal Reserve Board regulations require financial institutions to maintain noninterest-earning reserves against their checking accounts. The balances that are maintained to meet these reserve requirements may be used to satisfy liquidity requirements. WSB and WTX are currently in compliance with all applicable Federal Reserve Board reserve requirements, and WSB and WTX also have authority to borrow from the Federal Reserve Bank. The Federal Reserve Board also administers various consumer banking laws to which WSB and WTX are subject.

Federal Home Loan Bank System. The Federal Home Loan Bank (FHLB) system provides credit to its members, which include savings institutions, commercial banks, insurance companies, credit unions, and other entities. Both WSB and WTX are members of the FHLB system. WSB is a member of and owns capital stock in the FHLB of San Francisco. WTX is a member of and owns capital stock in the FHLB of Dallas. The amount of capital stock that WSB and WTX must own depends generally on their outstanding advances (borrowings) from their respective FHLB. Advances are secured by pledges of loans, mortgage-backed securities, and the capital stock of the respective FHLB owned by the member. In the event a member bank, such as WSB or WTX, defaults on an advance, the Federal Home Loan Bank Act establishes priority of the FHLB’s claim over various other claims. Regulations provide that each FHLB has joint and several liability for the obligations of the eleven other FHLBs in the system. In the event a FHLB falls below its minimum capital requirements, the FHLB may seek to require its members to purchase additional capital stock of the FHLB. If problems within the FHLB system were to occur, it could adversely affect the pricing or availability of advances, the amount and timing of dividends on capital stock issued by the FHLBs to members, or the ability of members to have their FHLB capital stock redeemed on a timely basis.

Regulatory Capital. WSB and WTX are subject to risk-based capital and leverage requirements that require capital-to-asset ratios to meet certain minimum standards. See Note R to Consolidated Financial Statements for a description of the requirements and the capital ratios of WSB and WTX, as well as Tables 20 through 22. As of December 31, 2005, the date of the most recent report to the OTS, WSB and WTX were considered “well-capitalized,” the highest capital tier established by the OTS and the other federal bank regulatory agencies. There are no conditions or events that have occurred since that date that we believe would have an adverse impact on how WSB or WTX are categorized. The payments of capital distributions by WSB and WTX to their parent are governed by OTS regulation. See Item 5, “Market for Registrant’s Common Stock and Related Stockholder Matters,” for a discussion of limitations imposed by the OTS on dividends paid by savings institutions.

Depositor Preference. As a result of federal laws that apply to insured depository institutions, claims of general unsecured creditors of WSB and WTX would be subordinated to claims of a receiver or conservator for administrative expenses and claims of depositors of WSB and WTX (including the FDIC, as the subrogee of depositors) in the event of a receivership, conservatorship or other resolution of WSB and WTX. As of December 31, 2005, WSB had approximately $60.2 billion of deposits outstanding on a consolidated basis, and WTX had approximately $1.2 billion of deposits outstanding.

 

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Powers of the FDIC in Connection with the Insolvency of an Insured Depository Institution. If the FDIC is appointed as a receiver or conservator of an insured depository institution, such as WSB or WTX, the FDIC may disaffirm or repudiate contracts and leases to which the institution is a party, where the performance of such contracts or leases is determined to be burdensome and the disaffirmance or repudiation promotes 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 a repudiation would likely be to accelerate the maturity of debt and would likely result in a claim by each holder of debt against the receivership or conservatorship. 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 conservatorship or receivership assets available for the payment of unsecured claims and the priority of the claims 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 Preference” above.

If the maturity of the debt were so accelerated, and the conservatorship or receivership paid a claim relating to the debt, 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 WSB or WTX, the FDIC as conservator or receiver may enforce most types of contracts, including debt contracts, pursuant to their terms, notwithstanding any such acceleration provision. Holders of debt may be prohibited from taking action to enforce the obligations owing to them. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution’s assets and liabilities, without the approval or consent of the institution’s creditors.

In its resolution 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 event of an 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.

Other Laws and Regulations.

Restrictions on Transactions with Affiliates. As WSB’s parent company, Golden West is considered an “affiliate” of WSB and WTX for regulatory purposes. Savings banks are subject to 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. In addition, savings banks are subject to additional limitations set forth in current law and as adopted by the OTS. Current law generally prohibits a savings institution from lending or otherwise extending credit to an affiliate, other than the institution’s subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank or financial services holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining what constitutes an affiliate of a savings institution and in calculating compliance with the quantitative limitations on transactions with affiliates.

Consumer Laws and Regulations. The Company’s activities are also subject to various laws and regulations, both at the federal and state level, concerning consumers. These include laws relating to the making, enforcement, and collection of consumer loans; deposit accounts; and the types of disclosures that need

 

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to be made to consumers for both loans and deposits. In addition, the Gramm-Leach-Bliley Act and other applicable privacy laws restrict our ability to share non-public customer information with affiliates and third parties.

Additional Laws and Requirements Affecting Golden West. Golden West is subject to additional laws and requirements by virtue of its incorporation in Delaware, registration with the Securities and Exchange Commission (SEC), and listing on the New York Stock Exchange (NYSE). These include laws and requirements relating to corporate governance, public disclosures and transactions in Golden West stock. In addition, the preparation of Golden West’s consolidated financial statements is governed by financial accounting and reporting standards, including those issued by the Financial Accounting Standards Board (FASB) and the SEC.

Nonbank Subsidiaries. Golden West’s nonbank subsidiaries, including Atlas Advisers, Inc. and Atlas Securities, Inc., are also subject to regulation by other applicable federal and state agencies. Atlas Securities, Inc., a registered broker dealer, is regulated primarily by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc., and state securities regulators. Atlas Advisers, Inc., a registered investment advisor, is regulated primarily by the SEC. World Savings Insurance Agency, Inc., a nonbank subsidiary that offers homeowners’ insurance and other insurance products, is subject to regulation by applicable state agencies.

CORPORATE GOVERNANCE

Golden West’s Board of Directors has determined that a majority of the members of the Board of Directors and all of the Audit Committee, Compensation and Stock Option Committee, and Nominating and Corporate Governance Committee members satisfy the independence standards under the New York Stock Exchange’s corporate governance rules. In addition, all of the Audit Committee members satisfy the independence standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934. Golden West’s Board of Directors has adopted Corporate Governance Guidelines and codes of conduct and ethics for directors, financial officers, and employees that are available, along with Board committee charters, on our website at www.gdw.com. Printed copies of these guidelines, codes, and charters are also available to any stockholder who submits a written request to the Corporate Secretary.

EXECUTIVE OFFICERS

The executive officers of Golden West are as follows:

 

Name and Age

  

Position

Herbert M. Sandler, 74    Chairman of the Board and Chief Executive Officer
Marion O. Sandler, 75    Chairman of the Board and Chief Executive Officer
James T. Judd, 67    Senior Executive Vice President
Russell W. Kettell, 62    President, Chief Financial Officer, and Treasurer(a)
Michael Roster, 60    Executive Vice President, General Counsel, and Secretary
Gary R. Bradley, 59    Executive Vice President(b)
Carl M. Andersen, 45    Group Senior Vice President and Tax Director(c)
William C. Nunan, 55    Group Senior Vice President and Chief Accounting Officer

 

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Each of the above persons holds the same position with WSB with the exceptions of James T. Judd who is President and Chief Operating Officer and Russell W. Kettell who is Senior Executive Vice President and Chief Financial Officer. Mr. Judd and Mr. Kettell are also members of the Board of Directors 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, served as Treasurer from 1995 to 2002 and beginning again in 2004, and has served as President of Golden West 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) Gary R. Bradley was elected Executive Vice President in April 2005. Mr. Bradley has served as Executive Vice President of WSB since 1998 and has served in various executive and operational capacities since 1977.

 

(c) Carl M. Andersen was elected Tax Director in 2002, Group Senior Vice President in 1999, and Senior Vice President of Golden West in 1997. He served as Senior Vice President of WSB since 1996. Prior thereto, he served as Vice President of WSB since 1990.

Supplemental Tables

The tables that follow provide supplemental information about our operations. We include these tables to provide the reader with additional information that may not otherwise be included in the MD&A or in the Notes to Consolidated Financial Statements beginning on page F-1.

These supplemental tables are not a substitute for the MD&A or the Notes to Consolidated Financial Statements, and we encourage readers to refer to these tables after reading the MD&A and the Notes to Consolidated Financial Statements. Doing so will also help identify some of the terminology and references used in these supplemental tables. We have tried, where appropriate, to include footnotes or other explanatory information with these supplemental tables and to cross-reference to related disclosures in the MD&A or the Notes to the Consolidated Financial Statements.

An index of all the tables used in this annual report, including these supplemental tables, can be found on page ii immediately following the Table of Contents.

 

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Supplemental Tables

Loans Receivable

Presented below is a summary of information about our loans receivable and mortgage-backed securities (MBS). More information about loans receivable and MBS is included in Notes A, D, E, and F to the Consolidated Financial Statements and in the MD&A.

TABLE 1

Loans Receivable and MBS with Recourse by Type of Security

2001 - 2005

(Dollars in Thousands)

 

     December 31
     2005    2004    2003    2002    2001

Loans collateralized by primarily first deeds of trust:

              

One-to four-family units

   $ 111,394,353    $ 94,449,233    $ 69,586,604    $ 54,934,357    $ 38,326,759

Over four-family units

     4,794,359      4,748,335      3,554,715      3,257,389      2,766,888

Commercial real estate

     10,205      15,220      18,598      20,465      29,117

Land

     -0-      -0-      -0-      114      199

Loans on deposits

     10,509      10,734      11,780      13,240      16,672

Other(a)

     1,672,539      1,335,657      1,033,881      717,751      451,084
                                  

Total loans receivable

     117,881,965      100,559,179      74,205,578      58,943,316      41,590,719

MBS with recourse collateralized by:

              

One-to four-family units

     1,168,480      1,719,982      2,579,288      4,458,582      11,821,868

Over four-family units

     -0-      -0-      1,070,760      1,412,487      1,747,751
                                  

Total MBS with recourse

     1,168,480      1,719,982      3,650,048      5,871,069      13,569,619
                                  

Loans receivable and MBS with recourse

   $ 119,050,445    $ 102,279,161    $ 77,855,626    $ 64,814,385    $ 55,160,338
                                  

 

(a) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts and reserves.

At December 31, 2005, 99.8% of loans receivable and MBS with recourse had remaining terms to maturity in excess of 10 years.

 

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Supplemental Tables

Loans Receivable (continued)

TABLE 2

Loans Receivable and MBS with Recourse by State

December 31, 2005

(Dollars in Thousands)

 

     Residential Real Estate   

Commercial

Real Estate

  

Total Loans

   

Loans

as a % of
Portfolio

 

State

   Single-Family
1 – 4 Units
   Multi-Family
5+ Units
       

Northern California

   $ 38,415,784    $ 1,751,342    $ 8,136    $ 40,175,262     34.23 %

Southern California

     30,566,045      1,502,523      901      32,069,469     27.32  
                                   

Total California

     68,981,829      3,253,865      9,037      72,244,731     61.55  

Florida

     8,133,373      83,976      120      8,217,469     7.00  

New Jersey

     5,392,039      -0-      256      5,392,295     4.59  

Texas

     3,256,839      155,631      39      3,412,509     2.91  

Illinois

     2,824,643      142,322      -0-      2,966,965     2.53  

Virginia

     2,610,051      2,972      -0-      2,613,023     2.23  

Washington

     1,803,743      726,347      -0-      2,530,090     2.16  

Other states(a)

     19,560,316      429,246      753      19,990,315     17.03  
                                   

Totals

   $ 112,562,833    $ 4,794,359    $ 10,205      117,367,397     100.00 %
                             

Loans on deposits

     10,509    

Other (b)

     1,672,539    
                   

Total loans receivable and MBS with recourse

     119,050,445    

MBS with recourse

     (1,168,480 )(c)  
                   

Total loans receivable

   $ 117,881,965    
                   

 

(a) Each state included in Other states has a total loan balance that is less than 2% of total loans as of December 31, 2005.

 

(b) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.

 

(c) The above schedule includes the balances of loans that were securitized and retained as MBS with recourse.

 

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Supplemental Tables

Loans Receivable (continued)

TABLE 3

Loans Receivable and MBS with Recourse by State

December 31, 2004

(Dollars in Thousands)

 

     Residential Real Estate   

Commercial

Real

Estate

  

Total

Loans

   

Loans

as a % of
Portfolio

 

State

   Single-Family
1 – 4 Units
   Multi-Family
5+ Units
       

Northern California

   $ 33,661,145    $ 1,793,597    $ 9,305    $ 35,464,047     35.14 %

Southern California

     26,337,702      1,480,989      982      27,819,673     27.56  
                                   

Total California

     59,998,847      3,274,586      10,287      63,283,720     62.70  

Florida

     5,935,369      68,100      218      6,003,687     5.95  

New Jersey

     4,413,954      -0-      282      4,414,236     4.37  

Texas

     3,213,171      146,496      147      3,359,814     3.33  

Illinois

     2,535,703      137,939      -0-      2,673,642     2.65  

Virginia

     2,081,746      3,818      -0-      2,085,564     2.07  

Washington

     1,618,875      725,753      -0-      2,344,628     2.32  

Other states(a)

     16,371,550      391,643      4,286      16,767,479     16.61  
                                   

Totals

   $ 96,169,215    $ 4,748,335    $ 15,220      100,932,770     100.00 %
                             

Loans on deposits

     10,734    

Other(b)

     1,335,657    
                   

Total loans receivable and MBS with recourse

     102,279,161    

MBS with recourse

     (1,719,982 )(c)  
                   

Total loans receivable

   $ 100,559,179    
                   

 

(a) Each state included in Other states has a total loan balance that is less than 2% of total loans as of December 31, 2005.

 

(b) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.

 

(c) The above schedule includes the balances of loans that were securitized and retained as MBS with recourse.

 

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Supplemental Tables

Loans Receivable (continued)

TABLE 4

Loans Due After One Year

by Loan Type

December 31, 2005

(Dollars in Thousands)

 

     Loans
Receivable
   MBS With
Recourse
Held to
Maturity
   Total

Adjustable Rate

   $ 115,255,753    $ 1,103,019    $ 116,358,772

Fixed Rate

     940,613      63,290      1,003,903
                    
   $ 116,196,366    $ 1,166,309    $ 117,362,675
                    

TABLE 5

New Mortgage Loan Originations by Type and by Purpose

2003 - 2005

(Dollars in Thousands)

 

     2005     2004     2003  

By Type

   No. of
Loans
   Amount    % of
Total
    No. of
Loans
   Amount    % of
Total
    No. of
Loans
   Amount    % of
Total
 

Residential (one unit)

   201,671    $ 48,908,517    94.9 %   218,575    $ 46,130,614    94.1 %   181,042    $ 33,730,118    93.8 %

Residential (2 to 4 units)

   6,523      1,758,539    3.4     7,482      1,794,050    3.7     5,752      1,308,127    3.6  

Residential (5 or more units)

   1,183      849,343    1.7     1,516      1,064,413    2.2     1,564      946,476    2.6  
                                                      

Totals

   209,377    $ 51,516,399    100.0 %   227,573    $ 48,989,077    100.0 %   188,358    $ 35,984,721    100.0 %
                                                      
     2005     2004     2003  

By Purpose

   No. of
Loans
   Amount    % of
Total
    No. of
Loans
   Amount    % of
Total
    No. of
Loans
   Amount    % of
Total
 

Purchase

   44,674    $ 11,676,045    22.7 %   59,893    $ 13,845,483    28.3 %   50,540    $ 10,693,372    29.7 %

Refinance

   164,703      39,840,354    77.3     167,680      35,143,594    71.7     137,818      25,291,349    70.3  
                                                      

Totals

   209,377    $ 51,516,399    100.0 %   227,573    $ 48,989,077    100.0 %   188,358    $ 35,984,721    100.0 %
                                                      

 

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Supplemental Tables

Loans Receivable (continued)

For additional information on our nonperforming assets, see “Management of Credit Risk - Asset Quality” in the MD&A.

TABLE 6

Nonperforming Assets by State

December 31, 2005

(Dollars in Thousands)

 

     Nonaccrual Loans(a) (b)    Foreclosed
Real Estate (FRE)
  

Total

NPAs

  

NPAs as
a % of

Loans

 
    

Residential

Real Estate

  

Commercial
Real

Estate

   Residential Real
Estate
     

State

   1 – 4    5+       1 - 4    5+      

Northern California

   $ 94,664    $ 693    $  -0-    $ 222    $  -0-    $ 95,579    .24 %

Southern California

     51,345      -0-      91      -0-      -0-      51,436    .16  
                                                

Total California

     146,009      693      91      222      -0-      147,015    .20  

Florida

     24,609      -0-      -0-      -0-      -0-      24,609    .30  

New Jersey

     23,641      -0-      -0-      -0-      -0-      23,641    .44  

Texas

     41,444      1,986      -0-      5,500      -0-      48,930    1.43  

Illinois

     15,332      -0-      -0-      261      -0-      15,593    .53  

Virginia

     2,064      -0-      -0-      -0-      -0-      2,064    .08  

Washington

     11,553      -0-      -0-      -0-      -0-      11,553    .46  

Other states(c)

     104,227      2,022      -0-      2,699      -0-      108,948    .55  
                                                

Totals

   $ 368,879    $ 4,701    $ 91    $ 8,682    $ -0-    $ 382,353    .33 %
                                                

 

(a) Nonaccrual loans are 90 days or more past due and interest is not recognized on these loans.

 

(b) The balances include loans that were securitized into MBS with recourse.

 

(c) Each state included in Other states has a total loan balance that is less than 2% of total loans as of December 31, 2005.

TABLE 7

Nonperforming Assets by State

December 31, 2004

(Dollars in Thousands)

 

     Nonaccrual Loans(a) (b)    Foreclosed Real
Estate (FRE)
  

Total

NPAs

  

NPAs as
a % of

Loans

 
    

Residential

Real Estate

   Commercial
Real Estate
  

Residential

Real Estate

     

State

   1 – 4    5+       1 - 4    5+      

Northern California

   $ 86,055    $ -0-    $ -0-    $ 851    $  -0-    $ 86,906    .25 %

Southern California

     48,247      -0-      104      -0-      -0-      48,351    .17  
                                                

Total California

     134,302      -0-      104      851      -0-      135,257    .21  

Florida

     22,713      1,190      -0-      -0-      -0-      23,903    .40  

New Jersey

     19,356      -0-      -0-      96      -0-      19,452    .44  

Texas

     42,393      -0-      -0-      6,192      -0-      48,585    1.45  

Illinois

     13,928      -0-      -0-      72      -0-      14,000    .52  

Virginia

     2,182      -0-      -0-      -0-      -0-      2,182    .10  

Washington

     12,671      -0-      -0-      65      -0-      12,736    .54  

Other states(c)

     83,267      223      -0-      4,185      -0-      87,675    .52  
                                                

Totals

   $ 330,812    $ 1,413    $ 104    $ 11,461    $ -0-    $ 343,790    .34 %
                                                

 

(a) Nonaccrual loans are 90 days or more past due and interest is not recognized on these loans.

 

(b) The balances include loans that were securitized into MBS with recourse.

 

(c) Each state included in Other states has a total loan balance that is less than 2% of total loans as of December 31, 2005.

 

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Supplemental Tables

Loans Receivable (continued)

TABLE 8

Risk Profile of Loans and MBS with Recourse

December 31, 2005

(Dollars in Thousands)

 

     Residential Real Estate    Commercial
Real Estate
   Total
      Single-Family
1 – 4 Units
   Multi-Family
5+ Units
     

Nonaccrual loans

   $ 368,879    $ 4,701    $ 91    $ 373,671

Loans 30 to 89 days past due

     1,038,866      5,126      -0-      1,043,992

Loans performing under bankruptcy protection

     273,160      239      -0-      273,399

Troubled debt restructured

     124      -0-      -0-      124

Other impaired loans

     48      -0-      359      407

Performing loans and MBS with recourse not otherwise classified

     110,881,756      4,784,293      9,755      115,675,804
                           

Total gross loans

   $ 112,562,833    $ 4,794,359    $ 10,205      117,367,397
                           

Loans on deposits

              10,509

Other(a)

              1,672,539
               

Total loan portfolio and MBS with recourse

            $ 119,050,445
               

 

(a) Includes loans in process, net deferred loan costs, allowance for loan losses, other miscellaneous discounts.

TABLE 9

Risk Profile of Loans and MBS with Recourse

December 31, 2004

(Dollars in Thousands)

 

     Residential Real Estate    Commercial
Real Estate
   Total
      Single-Family
1 – 4 Units
   Multi-Family
5+ Units
     

Nonaccrual loans

   $ 330,812    $ 1,413    $ 104    $ 332,329

Loans 30 to 89 days past due

     820,957      1,341      108      822,406

Loans performing under bankruptcy protection

     220,998      1,468      -0-      222,466

Troubled debt restructured

     127      3,683      -0-      3,810

Other impaired loans

     423      2,990      3,235      6,648

Performing loans and MBS with recourse not otherwise classified

     94,795,898      4,737,440      11,773      99,545,111
                           

Total gross loans

   $ 96,169,215    $ 4,748,335    $ 15,220      100,932,770
                           

Loans on deposits

              10,734

Other(a)

              1,335,657
               

Total loan portfolio and MBS with recourse

            $ 102,279,161
               

 

(a) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.

 

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Supplemental Tables

Loans Receivable (continued)

For additional information about our allowance for loan losses, see Notes A and F to the Consolidated Financial Statements.

TABLE 10

Changes in Allowance for Loan Losses

2001 - 2005

(Dollars in Thousands)

 

     2005     2004     2003     2002     2001  

Beginning allowance for loan losses

   $ 290,110     $ 289,937     $ 281,097     $ 261,013     $ 236,708  

Provision for loan losses charged to expense

     8,290       3,401       11,864       21,170       22,265  

Loans charged off

     (4,363 )     (4,613 )     (3,633 )     (1,943 )     (2,425 )

Recoveries

     1,822       1,385       609       857       351  

Net transfer of allowance from recourse liability

     -0-       -0-       -0-       -0-       4,114  
                                        

Ending allowance for loan losses

   $ 295,859     $ 290,110     $ 289,937     $ 281,097     $ 261,013  
                                        

Ratio of net chargeoffs to average loans outstanding and MBS with recourse

     .00 %     .00 %     .00 %     .00 %     .00 %
                                        

Ratio of allowance for loan losses to NPAs

     77.4 %     84.4 %     68.4 %     66.2 %     66.3 %
                                        

TABLE 11

Composition of Allowance for Loan Losses at Yearend

2001 - 2005

(Dollars in Thousands)

 

     2005     2004     2003     2002     2001  

Real Estate

          

1 to 4 units

          

General

   $ 283,152     $ 274,660     $ 273,894     $ 263,004     $ 240,135  

Specific

     -0-       339       -0-       -0-       -0-  
                                        
     283,152       274,999       273,894       263,004       240,135  
                                        

5+ units and commercial

          

General

     12,062       14,095       15,005       16,521       18,166  

Specific

     645       1,016       1,038       1,572       2,712  
                                        
     12,707       15,111       16,043       18,093       20,878  
                                        

Total

   $ 295,859     $ 290,110     $ 289,937     $ 281,097     $ 261,013  
                                        

Ratio of allowance for loan losses to total loans held for investment & MBS with recourse

     .25 %     .28 %     .37 %     .43 %     .47 %
                                        

Included in the general allowance for loan losses is an unallocated component to address the imprecision and range of probable outcomes inherent in the estimates of credit losses. At December 31, 2005, the unallocated component amounted to $60 million.

 

16


Table of Contents

Supplemental Tables

Deposit Activities

Presented below is a summary of information about our deposit activities. More information about deposits is included in Note J to the Consolidated Financial Statements.

TABLE 12

Deposits

by Original Term to Maturity

2001 - 2005

(Dollars in Thousands)

 

     December 31
     2005    2004    2003    2002    2001

Interest-bearing checking accounts

   $ 4,916,067    $ 5,425,183    $ 5,555,185    $ 4,572,970    $ 4,768,886

Savings accounts(a)

     14,141,337      33,990,906      30,193,017      22,516,262      9,029,712

Time certificates of deposit with

original maturities of:

              

4 weeks to 1 year

     28,956,796      4,315,419      3,766,962      4,714,712      10,852,181

1 to 2 years

     8,082,385      4,217,192      2,331,194      4,197,261      6,415,700

2 to 3 years

     1,086,506      1,344,881      1,491,893      1,857,234      1,619,868

3 to 4 years

     728,817      1,230,919      1,317,212      1,286,011      737,981

4 years and over

     2,227,145      2,405,210      2,015,469      1,794,051      799,025

Retail jumbo CDs(b)

     19,266      35,565      55,953      100,173      249,088

All other

     -0-      36      80      123      144
                                  

Total deposits

   $ 60,158,319    $ 52,965,311    $ 46,726,965    $ 41,038,797    $ 34,472,585
                                  

 

(a) Includes money market deposit accounts and passbook accounts.

 

(b) Retail jumbo CDs are certificates of deposit with a minimum balance of $100,000.

TABLE 13

Deposits by Interest Rate

2004 - 2005

(Dollars in Thousands)

 

     December 31
     2005    2004

0.00 % — 2.00 %

   $ 9,124,142    $ 22,891,278

2.01 % — 4.00 %

     35,173,204      27,968,050

4.01 % — 6.00 %

     15,851,030      1,806,104

6.01 % — 8.00 %

     9,943      299,879
             
   $ 60,158,319    $ 52,965,311
             

At December 31, the weighted average cost of deposits was 3.24% (2005) and 2.08% (2004).

 

17


Table of Contents

Supplemental Tables

Deposit Activities (continued)

TABLE 14

Deposit Maturities

by Interest Rate

December 31, 2005

(Dollars in Thousands)

 

     2006(a)    2007    2008    2009    2010 and
thereafter
   Total

0.00 % — 2.00 %

   $ 9,122,378    $ 1,764    $ 0-    $ -0-    $ -0-    $ 9,124,142

2.01 % — 4.00 %

     33,535,447      795,066      480,706      305,904      56,081      35,173,204

4.01 % — 6.00 %

     14,537,907      1,070,171      14,471      129,447      99,034      15,851,030

6.01 % — 8.00 %

     1,265      8,678      -0-      -0-      -0-      9,943
                                         
   $ 57,196,997    $ 1,875,679    $ 495,177    $ 435,351    $ 155,115    $ 60,158,319
                                         

 

(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity.

TABLE 15

Maturities of Time Certificates of Deposit Equal to or Greater than $100 Thousand

December 31, 2005

(Dollars in Thousands)

 

3 months or less

   $ 7,006,970

Over 3 months through 6 months

     4,741,344

Over 6 months through 12 months

     3,520,388

Over 12 months

     825,252
      
   $ 16,093,954
      

As of December 31, 2005, the aggregate amount outstanding of time certificates of deposit in amounts of $100 thousand or more was $16.1 billion and the aggregate amount outstanding of transaction accounts in amounts of $100 thousand or more was $8.0 billion. Of the $24.1 billion of total accounts with balances of $100 thousand or more, $6.7 billion were uninsured deposits at December 31, 2005.

 

18


Table of Contents

Supplemental Tables

Borrowings

Presented below is a summary of information about our borrowings. More information about the borrowings of the Company is included in Notes K, L, M, and N to the Consolidated Financial Statements and in “Borrowings” in the MD&A.

TABLE 16

Composition of All Borrowings

2001 - 2005

(Dollars in Thousands)

 

     December 31  
     2005     2004     2003     2002     2001  

FHLB advances

   $ 38,961,165     $ 33,781,895     $ 22,000,234     $ 18,635,099     $ 18,037,509  

Reverse repurchase agreements

     5,000,000       3,900,000       3,021,385       522,299       223,523  

Bank notes

     2,393,951       2,709,895       3,015,854       1,209,925       -0-  

Senior debt(a)

     8,194,266       5,291,840       991,257       989,690       198,215  

Subordinated debt

     -0-       -0-       -0-       199,867       599,511  
                                        

Total borrowings

   $ 54,549,382     $ 45,683,630     $ 29,028,730     $ 21,556,880     $ 19,058,758  
                                        

Weighted average interest rate of total borrowings(b)

     4.37 %     2.38 %     1.37 %     1.85 %     2.72 %
                                        

 

(a) As of December 31, 2005, the Company had entered into three interest rate swaps to effectively convert certain fixed-rate debt to variable-rate debt.

 

(b) The effect of the interest rate swaps is reflected in the weighted average interest rate.

TABLE 17

Composition of Short-Term Borrowings(a)

2003 - 2005

(Dollars in Thousands)

 

     December 31  
     2005     2004     2003  

Reverse Repurchase Agreements

      

Weighted average interest rate, end of year

     4.30 %     2.15 %     1.12 %

Weighted average interest rate, during the year

     3.43 %     1.51 %     1.12 %

Balance at end of year

   $ 3,050,000     $ 1,850,000     $ 1,871,385  

Average balance for the year

     2,377,972       1,520,677       616,922  

Maximum amount outstanding at any monthend

     3,050,000       2,100,000       1,871,385  

Bank Notes

      

Weighted average interest rate, end of year

     4.33 %     2.29 %     1.12 %

Weighted average interest rate, during the year

     3.26 %     1.37 %     1.17 %

Balance at end of year

   $ 2,393,951     $ 2,709,895     $ 3,015,854  

Average balance for the year

     2,489,083       2,298,716       1,568,911  

Maximum amount outstanding at any monthend

     2,949,653       3,508,896       3,015,854  

 

(a) Short-term borrowings are borrowings with original maturities of one year or less.

 

19


Table of Contents

Supplemental Tables

Asset / Liability Management

Presented below is a summary of information with respect to yields earned and rates paid on our earning assets and interest-bearing liabilities. For additional information, see “Management of Interest Rate Risk - Asset/Liability Management” in the MD&A.

TABLE 18

Average Daily Balances, Annualized Average Yield, and End of Period Yield

For Earning Assets and Interest-Bearing Liabilities

At and for the Years Ended December 31

(Dollars in Thousands)

 

     2005     2004     2003  
     Average Daily
Balances(a)
   Average
Yield
    End of
Period
Yield
    Average Daily
Balances(a)
   Average
Yield
    End of
Period
Yield
    Average Daily
Balances(a)
   Average
Yield
    End of
Period
Yield
 

Assets

                     

Loans receivable and MBS(b)

   $ 111,101,985    5.46 %   6.05 %   $ 89,149,520    4.61 %   4.75 %   $ 69,852,274    4.92 %   4.61 %

Investments

     1,703,970    3.89     4.11 (c)     1,475,869    1.77     2.08 (c)     3,632,896    1.31     .93 (c)

Invest. in capital stock of FHLBs

     1,709,786    4.17     n/a (d)     1,335,559    3.33     n/a (d)     1,125,097    3.63     n/a (d)
                                                         

Earning assets

   $ 114,515,741    5.41 %   6.03 %   $ 91,960,948    4.54 %   4.73 %   $ 74,610,267    4.73 %   4.54 %
                                                         

Liabilities

                     

Deposits:

                     

Checking accounts

   $ 4,868,331    1.46 %   1.69 %   $ 5,669,317    1.38 %   1.35 %   $ 5,070,536    1.56 %   1.38 %

Savings accounts(e)

     19,507,640    1.93     2.20       31,932,705    1.80     1.94       27,251,850    1.96     1.72  

Term accounts

     33,030,346    3.34     3.78       11,723,928    2.48     2.74       12,205,343    2.67     2.45  
                                                         

Total deposits

     57,406,317    2.70     3.24       49,325,950    1.91     2.08       44,527,729    2.11     1.85  

Advances from FHLBs

     36,531,354    3.34     4.33       28,372,344    1.58     2.30       19,621,477    1.38     1.28  

Reverse repurchases

     4,602,694    3.38     4.30       3,279,313    1.51     2.23       803,481    1.13     1.13  

Other borrowings(f)

     9,197,410    3.66     4.55       5,355,996    2.20     2.78       4,921,266    2.09     2.06  
                                                         

Interest-bearing liabilities

   $ 107,737,775    3.03 %   3.78 %   $ 86,333,603    1.81 %   2.22 %   $ 69,873,953    1.89 %   1.67 %
                                                         

Average net yield

      2.38 %        2.73 %        2.84 %  
                                 

Primary spread

        2.25 %        2.51 %        2.87 %
                                 

Net interest income

   $ 2,935,071        $ 2,618,605        $ 2,208,384     
                                 

Net yield on average earning assets(g)

      2.56 %        2.85 %        2.96 %  
                                 

 

(a) Includes balances of assets and liabilities that were acquired and matured within the same month.

 

(b) Includes nonaccrual loans (90 days or more past due).

 

(c) Freddie Mac stock pays dividends; no end of period interest yield applies.

 

(d) FHLB stock pays dividends; no end of period interest yield applies.

 

(e) Includes money market deposit accounts and passbook accounts.

 

(f) As of December 31, 2005, the Company had entered into three interest rate swaps to effectively convert certain fixed-rate debt to variable-rate debt. The effect of the interest rate swaps is reflected in the average yield and end of period yield.

 

(g) Net interest income divided by daily average of earning assets.

 

20


Table of Contents

Supplemental Tables

Asset / Liability Management (continued)

The table below presents the changes for 2005 and 2004 from the respective preceding year of the interest income and expense associated with each category of earning assets and interest-bearing liabilities as allocated to changes in volume and changes in rates.

TABLE 19

Volume and Rate Analysis of Interest Income and Interest Expense

For the Years Ended December 31

(Dollars in Thousands)

 

                   

Increase/(Decrease) in Income/Expense

Due to Changes in Volume and Rate(a)

 
     2005    2004    2003    2005 versus 2004     2004 versus 2003  
     Income/
Expense(b)
   Income/
Expense(b)
   Income/
Expense(b)
   Volume     Rate     Total     Volume     Rate     Total  

Interest Income

                     

Loans receivable and MBS

   $ 6,062,312    $ 4,108,339    $ 3,439,799    $ 1,118,240     $ 835,733     $ 1,953,973     $ 870,816     $ (202,276 )   $ 668,540  

Investments

     66,218      26,060      47,691      4,579       35,579       40,158       (51,629 )     29,998       (21,631 )

Invest. in capital stock of FHLBs

     71,366      44,457      40,854      14,116       12,793       26,909       6,495       (2,892 )     3,603  
                                                                     

Total interest income

     6,199,896      4,178,856      3,528,344      1,136,935       884,105       2,021,040       825,682       (175,170 )     650,512  

Interest Expense

                     

Deposits:

                     

Checking accounts

     71,150      78,417      78,900      (12,125 )     4,858       (7,267 )     (8,108 )     7,625       (483 )

Savings accounts(c)

     377,062      575,039      533,402      (243,972 )     45,995       (197,977 )     77,900       (36,263 )     41,637  

Term accounts

     1,102,305      291,037      325,821      682,038       129,230       811,268       (12,526 )     (22,258 )     (34,784 )
                                                                     

Total deposits

     1,550,517      944,493      938,123      425,941       180,083       606,024       57,266       (50,896 )     6,370  

Advances from FHLBs

     1,221,795      448,535      269,793      158,478       614,782       773,260       133,812       44,930       178,742  

Reverse repurchases

     155,511      49,589      9,048      26,098       79,824       105,922       36,482       4,059       40,541  

Other borrowings

     337,002      117,634      102,996      113,556       105,812       219,368       9,387       5,251       14,638  
                                                                     

Total interest expense

     3,264,825      1,560,251      1,319,960      724,073       980,501       1,704,574       236,947       3,344       240,291  
                                                                     

Net interest income

   $ 2,935,071    $ 2,618,605    $ 2,208,384    $ 412,862     $ (96,396 )   $ 316,466     $ 588,735     $ (178,514 )   $ 410,221  
                                                                     

Net interest income increase (decrease) as a percentage of average earning assets(d)

              .36 %     (.08 %)     .28 %     .64 %     (.19 %)     .45 %
                                                         

 

(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 are calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously.

 

(b) The effects of interest rate swap activity have been included in income and expense of the related assets and liabilities.

 

(c) Includes money market deposit accounts and passbook accounts.

 

(d) Includes nonaccrual loans (90 days or more past due).

 

21


Table of Contents

Supplemental Tables

Regulatory Capital

Presented below is a summary of information about the regulatory capital ratios for WSB and its subsidiary, WTX. Additional information is included in Note R to the Consolidated Financial Statements.

TABLE 20

Regulatory Capital Ratios, Minimum Capital Requirements,

and Well-Capitalized Capital Requirements

As of December 31, 2005

(Dollars in Thousands)

 

     ACTUAL     MINIMUM CAPITAL
REQUIREMENTS
    WELL-CAPITALIZED
CAPITAL
REQUIREMENTS
 
     Capital    Ratio     Capital    Ratio     Capital    Ratio  

WSB and Subsidiaries

               

Tangible

   $ 8,384,582    6.76 %   $ 1,860,332    1.50 %     —      —    

Tier 1 (core or leverage)

     8,384,582    6.76       4,960,885    4.00     $ 6,201,106    5.00 %

Tier 1 risk-based

     8,384,582    12.58       —      —         3,997,503    6.00  

Total risk-based

     8,671,909    13.02       5,330,004    8.00       6,662,505    10.00  

WTX

               

Tangible

   $ 744,749    5.61 %   $ 199,060    1.50 %     —      —    

Tier 1 (core or leverage)

     744,749    5.61       530,827    4.00     $ 663,534    5.00 %

Tier 1 risk-based

     744,749    24.68       —      —         181,080    6.00  

Total risk-based

     747,543    24.77       241,440    8.00       301,799    10.00  

 

22


Table of Contents

Supplemental Tables

Regulatory Capital (continued)

TABLE 21

World Savings Bank, FSB and Subsidiaries

Reconciliation of Equity Capital to Regulatory Capital

As of December 31, 2005

(Dollars in Thousands)

 

           Regulatory Capital Ratios  
    

Equity

Capital

    Tangible
Capital
    Tangible
Equity
   

Core/

Leverage
Capital

    Tier 1
Risk-Based
Capital
    Total
Risk-Based
Capital
 

Common stock

   $ 300            

Paid-in surplus

     2,145,764            

Retained earnings

     6,238,518            

Unrealized gain on securities after tax

     222,594            
                  

Equity capital

   $ 8,607,176     $ 8,607,176     $ 8,607,176     $ 8,607,176     $ 8,607,176     $ 8,607,176  
                  

Direct Investments

               (7,887 )

Unrealized gain on securities after tax

       (222,594 )     (222,594 )     (222,594 )     (222,594 )     (222,594 )

General allowance for loan losses

               295,214  
                                          

Regulatory capital

     $ 8,384,582     $ 8,384,582     $ 8,384,582     $ 8,384,582     $ 8,671,909  
                                          

Total assets

   $ 124,370,304            
                  

Adjusted total assets

     $ 124,022,123     $ 124,022,123     $ 124,022,123      
                              

Risk-weighted assets

           $ 66,625,050     $ 66,625,050  
                        

CAPITAL RATIO - ACTUAL

     6.92 %     6.76 %     6.76 %     6.76 %     12.58 %     13.02 %
                                                

Regulatory Capital Ratio Requirements:

            

Well-capitalized, equal to or greater than

           5.00 %     6.00 %     10.00 %
                              

 

23


Table of Contents

Supplemental Tables

Regulatory Capital (continued)

TABLE 22

World Savings Bank, FSB (Texas)

Reconciliation of Equity Capital to Regulatory Capital

As of December 31, 2005

(Dollars in Thousands)

 

           Regulatory Capital Ratios  
     Equity
Capital
    Tangible
Capital
    Tangible
Equity
    Core/
Leverage
Capital
    Tier 1
Risk-Based
Capital
    Total
Risk-Based
Capital
 

Common stock

   $ 150            

Paid-in surplus

     606,804            

Retained earnings

     137,795            
                  

Equity capital

   $ 744,749     $ 744,749     $ 744,749     $ 744,749     $ 744,749     $ 744,749  
                  

General allowance for loan losses

               2,794  
                                          

Regulatory capital

     $ 744,749     $ 744,749     $ 744,749     $ 744,749     $ 747,543  
                                          

Total assets

   $ 13,270,487            
                  

Adjusted total assets

     $ 13,270,683     $ 13,270,683     $ 13,270,683      
                              

Risk-weighted assets

           $ 3,017,994     $ 3,017,994  
                        

CAPITAL RATIO - ACTUAL

     5.61 %     5.61 %     5.61 %     5.61 %     24.68 %     24.77 %
                                                

Regulatory Capital Ratio Requirements:

            

Well-capitalized, equal to or greater than

           5.00 %     6.00 %     10.00 %
                              

 

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ITEM 1A. RISK FACTORS

See “Risk Factors” on pages 3 and 4 in Item 1.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our executive offices are located at 1901 Harrison Street, Oakland, California, in leased facilities. We own real estate properties for the operation of our business that are located in Arizona, California, Colorado, Florida, Illinois, Kansas, Nevada, New Jersey, and Texas, including a 737,000 square-foot office complex on a 111-acre site in San Antonio, Texas. This complex houses loan service, savings operations, and information systems departments, and various other back-office functions. We also own 245 of our 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 Consolidated Financial Statements.

We continuously evaluate the suitability and adequacy of our offices and have a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities.

 

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, are material to our consolidated financial condition or results of operations.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the quarter ended December 31, 2005 to a vote of our security holders.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Dividend

On October 20, 2004, the Company’s Board of Directors approved a two-for-one stock split of its outstanding common stock in the form of a 100% stock dividend. The stock split became effective on December 10, 2004. 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 reflect the stock split.

Market Prices of Stock

Golden West’s stock is listed on the New York Stock Exchange and the Pacific Exchange and options on Golden West are traded on the Chicago Board Options Exchange as well as the Pacific Exchange under the ticker symbol GDW. The quarterly price ranges, based on the daily closing price, for the Company’s common stock during 2005 and 2004 were as follows:

TABLE 23

Common Stock Price Range

 

     2005    2004

First Quarter

   $ 58.51 - $ 66.94    $ 49.33 - $ 58.40

Second Quarter

   $ 59.03 - $ 66.74    $ 49.89 - $ 56.25

Third Quarter

   $ 58.53 - $ 68.92    $ 50.58 - $ 57.53

Fourth Quarter

   $ 55.64 - $ 68.07    $ 54.38 - $ 61.90

Per Share Cash Dividends Data

The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by subsidiaries. Golden West’s cash dividends paid per share for 2005 and 2004 were as follows:

TABLE 24

Cash Dividends Per Share

 

     2005    2004

First Quarter

   $ .0600    $ .0500

Second Quarter

     .0600      .0500

Third Quarter

     .0600      .0500

Fourth Quarter

     .0800      .0600

Because WSB is a subsidiary of a savings and loan holding company, WSB must file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the proposed capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, or agreement with the OTS or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WSB may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year’s net income plus retained net income for the preceding two years, as long as immediately after the distributions it remains at least adequately

 

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capitalized. Capital distributions in excess of such amount, or which would cause WSB no longer to be adequately capitalized, require specific OTS approval.

At December 31, 2005, $6.2 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 February 28, 2006, 308,502,961 shares of Golden West’s Common Stock were outstanding and were held by 996 stockholders of record. At the close of business on February 28, 2006, the Company’s common stock price was $71.03. The transfer agent and registrar for the Golden West common stock is Mellon Investor Services, L.L.C., San Francisco, California 94101.

Equity Compensation Plan Information

The Company’s 1996 Stock Option Plan authorized the granting of options to employees for the purchase of up to 42 million shares of the Company’s common stock. As of February 1, 2006, no further options can be issued under this plan. The Company’s 2005 Stock Incentive Plan authorizes the granting of stock options and other equity-based awards to employees for up to a ten-year period expiring April 27, 2015. The aggregate number of shares authorized for issuance under the 2005 Stock Incentive Plan is 25 million shares of the Company’s common stock. The plan permits the issuance of non-qualified stock options and incentive stock options as well as restricted stock, stock units, and stock appreciation rights.

The following table sets forth information about the Company’s stock option and incentive plans at December 31, 2005:

TABLE 25

Golden West Financial Corporation

Stock Option and Incentive Plans

As of December 31, 2005

 

     Number of
Shares to be
Issued Upon
Exercise of
Outstanding
Options
   Weighted
Average
Exercise Price
of Outstanding
Options
   Number of
Shares Remaining
Available for
Future Issuance
Under Stock
Option Plan
 

Equity Compensation Plan Approved by Stockholders:

        

1996 Stock Option Plan

   10,262,688    $ 33.24    1,332,000  (a)
                  

2005 Stock Incentive Plan

   -0-      n/a    25,000,000  
                  

 

(a) The 1996 Stock Option Plan expired on February 1, 2006, after which no further options may be granted under this Plan.

The Company does not have any equity compensation plans that have not been approved by the stockholders.

 

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Stock Repurchase Activity

The following table shows repurchases of Golden West common stock for each quarter end and for each calendar month in the quarter ended December 31, 2005.

TABLE 26

Common Stock Repurchase Activity

For the Year Ended December 31, 2005

 

     Total
Number of
Shares
Repurchased
   Weighted-
Average Price
Paid Per
Share
   Total Number
of Shares
Repurchased as
Part of
Authorization(a)
   Maximum Number of
Shares that May Yet
Be Repurchased
Under the
Authorization

First quarter

   -0-      —      -0-    18,656,358

Second quarter

   -0-      —      -0-    18,656,358

Third quarter

   425,000    $ 59.19    425,000    18,231,358

October

   560,000    $ 58.44    560,000    17,671,358

November

   -0-      —      -0-    17,671,358

December

   -0-      —      -0-    17,671,358
                     

Fourth quarter

   560,000    $ 58.44    560,000    17,671,358

Total

   985,000    $ 58.76    985,000    17,671,358
                     

 

(a) In September 2001, the Company’s Board of Directors authorized the repurchase of up to 31,733,708 shares. Unless modified or revoked by the Board of Directors, the 2001 authorization does not expire.

WSB earnings are expected to continue to be the major source of funding for the stock purchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial and other data for Golden West for the years indicated. This information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference.

TABLE 27

Five Year Consolidated Summary of Operations

(Dollars in thousands except per share figures)

 

     Year Ended December 31
     2005    2004    2003    2002    2001

Interest income

   $ 6,199,896    $ 4,178,856    $ 3,528,344    $ 3,497,034    $ 4,209,612

Interest expense

     3,264,825      1,560,251      1,319,960      1,566,740      2,578,280
                                  

Net interest income

     2,935,071      2,618,605      2,208,384      1,930,294      1,631,332

Provision for loan losses

     8,290      3,401      11,864      21,170      22,265
                                  

Net interest income after provision for loan losses

     2,926,781      2,615,204      2,196,520      1,909,124      1,609,067

Noninterest income

     462,136      293,923      313,330      247,000      236,739

General and administrative expense

     962,415      840,126      720,515      601,494      513,802
                                  

Earnings before taxes on income

     2,426,502      2,069,001      1,789,335      1,554,630      1,332,004

Taxes on income

     940,338      789,280      683,236      596,351      513,181
                                  

Net earnings before cumulative effect of accounting change(a)

   $ 1,486,164    $ 1,279,721    $ 1,106,099    $ 958,279    $ 818,823
                                  

Basic earnings per share(a)

   $ 4.83    $ 4.19    $ 3.63    $ 3.10    $ 2.59
                                  

Diluted earnings per share(a)

   $ 4.77    $ 4.13    $ 3.57    $ 3.06    $ 2.55
                                  

 

(a) Excludes the cumulative effect of accounting change resulting in an after tax charge of $6 million, or $.02 per basic and diluted earning per share, one-time charge due to the adoption of SFAS 133 on January 1, 2001.

TABLE 28

Five Year Summary of Financial Condition

(Dollars in thousands)

 

     At December 31
     2005    2004    2003    2002    2001

Total assets

   $ 124,615,163    $ 106,888,541    $ 82,549,890    $ 68,405,828    $ 58,586,271
                                  

Loans receivable and MBS(a)

     119,365,929      102,669,231      78,311,016      65,010,774      55,668,891

Adjustable rate mortgages including MBS(b)

     116,369,564      99,730,701      75,238,723      61,770,142      51,794,400

Fixed-rate mortgages for investment including MBS(b)

     1,241,426      1,550,548      1,913,495      2,141,469      2,997,866

Fixed-rate mortgages held for sale including MBS(b)

     82,400      52,325      124,917      381,232      428,748

Deposits

     60,158,319      52,965,311      46,726,965      41,038,797      34,472,585

Total borrowings

     54,549,382      45,683,630      29,028,730      21,556,880      19,058,758

Stockholders’ equity

     8,670,965      7,274,876      5,947,268      5,025,250      4,284,190

 

(a) Includes loans in process, net deferred loan costs, allowance for loan losses, and discounts.

 

(b) Excludes loans in process, net deferred loan costs, allowance for loan losses, and discounts.

 

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TABLE 29

Five Year Selected Other Data

(Dollars in thousands except per share figures)

 

     At or for the Year Ended December 31  
     2005     2004     2003     2002     2001  

Real estate loans originated

   $ 51,516,399     $ 48,989,077     $ 35,984,721     $ 26,682,890     $ 20,763,237  

New adjustable rate mortgages as a percentage of real estate loans originated

     99.2 %     98.9 %     93.5 %     91.6 %     84.0 %

Adjustable rate mortgages as a % of total loans receivable and MBS

     99 %     98 %     97 %     96 %     94 %

Refinances as a percentage of real estate loans originated

     77.3 %     71.7 %     70.3 %     61.8 %     58.6 %

Yield on loan portfolio and MBS

     6.05 %     4.75 %     4.61 %     5.28 %     6.38 %

Loans serviced for others with recourse

   $ 1,726,037     $ 2,270,490     $ 3,092,641     $ 2,897,859     $ 2,797,634  

Loans serviced for others without recourse

     2,432,713       2,266,534       2,672,345       2,510,635       2,035,250  

Deposits increase

   $ 7,193,008     $ 6,238,346     $ 5,688,168     $ 6,566,212     $ 4,424,666  

Cost of deposits

     3.24 %     2.08 %     1.85 %     2.56 %     3.39 %

Net earnings/average net worth (ROE)

     18.72 %     19.45 %     20.33 %     20.62 %     20.23 % (a)

Net earnings/average assets (ROA)

     1.27 %     1.37 %     1.50 %     1.53 %     1.42 % (a)

Net interest margin

     2.54 %     2.83 %     3.05 %     3.17 %     2.93 %

General and administrative expense (G&A) to:

          

Net interest income plus other income

     28.33 %     28.85 %     28.57 %     27.63 %     27.50 %

Average assets

     .82 %     .90 %     .98 %     .96 %     .90 %

Yield on interest-earning assets

     6.03 %     4.73 %     4.54 %     5.25 %     6.36 %

Cost of funds

     3.78 %     2.22 %     1.67 %     2.32 %     3.15 %

Primary spread

     2.25 %     2.51 %     2.87 %     2.93 %     3.21 %

Nonperforming assets and troubled debt restructured/total assets(b)

     .31 %     .33 %     .51 %     .62 %     .67 %

Net chargeoffs/average loans

     .00 %     .00 %     .00 %     .00 %     .00 %

Stockholders’ equity/total assets

     6.96 %     6.81 %     7.20 %     7.35 %     7.31 %

World Savings Bank, FSB (WSB) regulatory capital ratios:(c)

          

Tier 1 (core or leverage)

     6.76 %     6.71 %     7.45 %     7.61 %     7.71 %

Total risk-based

     13.02 %     12.92 %     14.16 %     14.26 %     14.24 %

World Savings Bank, FSB (Texas) (WTX) regulatory capital ratios:(c)

          

Tier 1 (core or leverage)

     5.61 %     5.22 %     5.16 %     5.23 %     5.23 %

Total risk-based

     24.77 %     23.67 %     22.88 %     24.07 %     25.05 %

Cash dividends per share

   $ .26     $ .21     $ .178     $ .151     $ .13  

Dividend payout ratio

     5.38 %     5.01 %     4.90 %     4.88 %     5.02 % (a)

Book value per share

     28.15       23.73       19.55       16.37       13.77  

Average common shares outstanding

     307,388,071       305,470,587       305,047,184       309,122,480       316,524,948  

 

(a) The ratios for the year ended December 31, 2001 include a pre-tax charge of $10 million or $.02 per basic and diluted earnings per share, after tax, associated with the adoption of SFAS 133 on January 1, 2001. Excluding this cumulative effect of an accounting change, ROE was 20.38%, ROA was 1.43%, and the dividend payout ratio was 5.06%.

 

(b) NPAs include nonaccrual loans (loans that are 90 days or more past due) and foreclosed real estate.

 

(c) For regulatory purposes, the requirements to be considered “well capitalized” are 5.0% and 10.0% for tier 1 (core or leverage) and total risk-based, respectively.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Headquartered in Oakland, California, Golden West Financial Corporation is one of the nation’s largest financial institutions with assets of $124.6 billion as of December 31, 2005. Our principal operating subsidiary is World Savings Bank, FSB (WSB). WSB has a subsidiary, World Savings Bank, FSB (Texas) (WTX). As of December 31, 2005, we operated 283 savings branches in ten states and had lending operations in 39 states under the World name.

Our Business Model

We are a residential mortgage portfolio lender. In order to increase net earnings under this business model, we focus principally on:

 

    growing net interest income, which is the difference between the interest and dividends earned on loans and other investments and the interest paid on customer deposits and borrowings;

 

    maintaining a healthy primary spread, which is the difference between the yield on interest-earning assets and the cost of deposits and borrowings;

 

    expanding the adjustable rate mortgage (ARM) portfolio, which is our primary earning asset;

 

    managing interest rate risk, principally by originating and retaining monthly adjusting ARMs in portfolio, and matching these ARMs with liabilities that respond in a similar manner to changes in interest rates;

 

    managing credit risk, principally by originating high-quality loans to minimize nonperforming assets and troubled debt restructured;

 

    maintaining a strong capital position to support growth and provide operating flexibility;

 

    controlling expenses; and

 

    managing operations risk through strong internal controls.

2005 In Review

We had a strong year in 2005 with substantial growth in net interest income driven primarily by the 16% expansion of our loan portfolio. Our volume of ARM originations reached record levels. Partially offsetting the benefit to net interest income of a larger average earning asset balance in 2005 was a decrease in our average primary spread. The average primary spread decreased because short-term interest rates continued to increase in 2005 and the yield on the Company’s earning assets responded more slowly than interest rates on our deposits and borrowings.

Our financial highlights include the following:

 

    diluted earnings per share reached a record of $4.77, up 15% from the $4.13 reported in 2004;

 

    net interest income grew 12% to a record high of $2.9 billion, despite an average primary spread that compressed from 2.76% during 2004 to 2.38% in 2005;

 

    our general and administrative expense to average assets ratio fell from .90% to .82%; our general and administrative expense divided by the sum of net interest income and noninterest income (efficiency ratio) was 28.33% compared to 28.85% in 2004;

 

    our loan portfolio increased to $119.4 billion, up 16% from $102.7 billion at December 31, 2004;

 

    we had record originations of $51.5 billion as compared to $49.0 billion for 2004;

 

    99% of originations in 2005 were ARMs;

 

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    our ARM portfolio increased to a record high of $116.4 billion, up 17% from $99.7 billion at yearend 2004;

 

    nonperforming assets and troubled debt restructured remained at very low levels, and for the eighth straight year our ratio of net chargeoffs to average loans and MBS was zero basis points;

 

    we had a record deposit increase of $7.2 billion;

 

    our capital expanded to a record level of $8.7 billion, up 19% from the $7.3 billion reported at yearend 2004; and

 

    our stockholders’ equity to asset ratio was 6.96% at December 31, 2005 compared to 6.81% at December 31, 2004.

The following table summarizes selected financial information about how we performed in 2005, as compared to 2004 and 2003.

TABLE 30

Financial Highlights

2003 - 2005

(Dollars in Millions Except Per Share Figures)

 

     Year Ended December 31  
     2005     2004     2003  

Operating Results:

      

Net earnings

   $ 1,486     $ 1,280     $ 1,106  

Diluted earnings per share

     4.77       4.13       3.57  

Net interest income

   $ 2,935     $ 2,618     $ 2,209  

Average earning assets

     115,401       92,441       72,351  

Net interest margin

     2.54 %     2.83 %     3.05 %

General and administrative expense

   $ 963     $ 840     $ 721  

General and administrative expense/average assets

     .82 %     .90 %     .98 %

Efficiency ratio

     28.33 %     28.85 %     28.57 %
     December 31  
     2005     2004     2003  

Selected Balance Sheet Items:

      

Assets

   $ 124,615     $ 106,889     $ 82,550  

Loans receivable and mortgage-backed securities (MBS)

     119,366       102,669       78,311  

Deposits

     60,158       52,965       46,727  

Borrowings

     54,549       45,684       29,028  

Stockholders’ equity

     8,671       7,275       5,947  

Stockholders’ equity/total assets

     6.96 %     6.81 %     7.20 %

World Savings Bank, FSB:

      

Total assets

   $ 124,370     $ 106,787     $ 81,939  

Regulatory capital ratios:(a)

      

Core/leverage

     6.76 %     6.71 %     7.45 %

Total risk-based

     13.02 %     12.92 %     14.16 %

 

(a) For regulatory purposes, the requirements to be considered “well-capitalized” are 5.0% for core/leverage and 10.0% for total risk-based capital.

 

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FINANCIAL CONDITION

The following table summarizes our major asset, liability, and equity components in percentage terms at year ends 2005, 2004, and 2003.

TABLE 31

Asset, Liability, and Equity Components as

Percentages of Total Assets

2003 – 2005

 

     December 31  
     2005     2004     2003  

Assets:

      

Cash and investments

   1.8 %   1.6 %   2.6 %

Loans receivable and MBS

   95.8     96.0     94.9  

Other assets

   2.4     2.4     2.5  
                  
   100.0 %   100.0 %   100.0 %
                  

Liabilities and Stockholders’ Equity:

      

Deposits

   48.3 %   49.6 %   56.6 %

FHLB advances

   31.2     31.6     26.7  

Other borrowings

   12.5     11.1     8.5  

Other liabilities

   1.0     0.9     1.0  

Stockholders’ equity

   7.0     6.8     7.2  
                  
   100.0 %   100.0 %   100.0 %
                  

The Loan Portfolio

Almost all of our assets are adjustable rate mortgages on residential properties. As discussed below, we emphasize ARMs with interest rates that change monthly to reduce our exposure to interest rate risk. We originate and retain these loans in portfolio. We sell most of the fixed-rate loans that we originate, as well as loans that customers convert from ARMs to fixed-rate loans.

Loans Receivable and Mortgage-Backed Securities

The following table shows the components of our loans receivable and mortgage-backed securities (MBS) portfolio at December 31, 2005, 2004, and 2003.

 

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TABLE 32

Balance of Loans Receivable and MBS by Component

2003 – 2005

(Dollars in Thousands)

 

     December 31  
     2005     2004     2003  

Loans

   $ 66,339,220     $ 65,266,464     $ 49,937,769  

Securitized loans(a)

     49,870,206       33,957,058       23,233,928  

Other(b)

     1,672,539       1,335,657       1,033,881  
                        

Total loans receivable

     117,881,965       100,559,179       74,205,578  
                        

MBS with recourse(c)

     1,168,480       1,719,982       3,650,048  

Purchased MBS

     315,484       390,070       455,390  
                        

Total MBS

     1,483,964       2,110,052       4,105,438  
                        

Total loans receivable and MBS

   $ 119,365,929     $ 102,669,231     $ 78,311,016  
                        

ARMs as a percentage of total loans receivable and MBS

     99 %     98 %     97 %
                        

 

(a) Loans securitized after March 31, 2001 are classified as securitized loans and included in loans receivable.

 

(b) Includes loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.

 

(c) Loans securitized prior to April 1, 2001 are classified as MBS with recourse held to maturity.

The balance of loans receivable and MBS is affected primarily by loan originations and loan and MBS repayments. The following table provides information about our loan originations and loan and MBS repayments for the years ended 2005, 2004, and 2003.

TABLE 33

Loan Originations and Loan and MBS Repayments

2003 – 2005

(Dollars in Millions)

 

     Year Ended December 31  
     2005     2004     2003  

Loan Originations

      

Real estate loans originated

   $ 51,516     $ 48,989     $ 35,985  

ARMs as a % of originations

     99 %     99 %     94 %

Fixed-rate mortgages as a % of originations

     1 %     1 %     6 %

Refinances as a % of originations

     77 %     72 %     70 %

Purchases as a % of originations

     23 %     28 %     30 %

First mortgages originated for portfolio as a % of originations

     97 %     97 %     92 %

First mortgages originated for sale as a % of originations

     1 %     1 %     5 %

Repayments

      

Loan and MBS repayments(a)

   $ 33,822     $ 24,155     $ 20,043  

Repayment rate(b)

     33 %     31 %     31 %

 

(a) Loan and MBS repayments consist of monthly amortization and loan payoffs.

 

(b) The repayment rate is the annual repayments as a percentage of the prior year’s ending loan and MBS balance.

The dollar volume of our originations increased 5% in 2005 versus 2004 due to the continued popularity of adjustable rate mortgages and an increase in the average loan size, offset by a decrease in the number of loans originated.

 

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Loan and MBS repayments, including amortization and loan payoffs, were higher in 2005 as compared to 2004 as a result of a larger portfolio balance and a higher repayment rate. Repayment rates increased because mortgage interest rates remained low from a historical standpoint leading to continued high levels of both home loan purchases and refinance activity.

Equity Lines of Credit and Fixed-Rate Second Mortgages

Most of our loans are collateralized by first deeds of trust on one- to four-family homes. However, we also offer borrowers equity lines of credit (ELOCs). These ELOCs are collateralized typically by second deeds of trust and occasionally by first deeds of trust. The ELOCs we originate are indexed either to the Certificate of Deposit Index (CODI) discussed in “Management of Interest Rate Risk – Asset/Liability Management” or the Prime Rate as published in the Money Rates table in The Wall Street Journal (Central Edition). For the year ended December 31, 2005, $1.2 billion of ELOCs were originated (includes only amounts drawn at the time of establishment), of which $849 million were tied to CODI and $358 million were tied to the Prime Rate. We also originate a small volume of fixed-rate second mortgages secured by second deeds of trust. In almost all cases, we only originate second deeds of trust on properties that have a first mortgage with us. The following table provides information about our activity in ELOCs and fixed-rate second mortgages in the past three years.

TABLE 34

Equity Lines of Credit and Fixed-Rate Second Mortgages

2003 – 2005

(Dollars in Thousands)

 

     At and for the Year Ended December 31
     2005    2004    2003

Equity Lines of Credit

        

ELOC originations(a)

   $ 1,206,626    $ 1,063,102    $ 887,363

New ELOCs established during the year(b)

     2,453,799      2,146,322      1,708,482

ELOC outstanding balance at year end

     2,862,861      2,575,524      1,827,435

ELOC maximum total line of credit available

     4,526,292      3,907,947      2,748,076

Fixed-Rate Second Mortgages

        

Fixed-rate second mortgage originations

   $ 7,753    $ 109,054    $ 148,070

Sales of second mortgages

     -0-      36,985      100,410

Fixed-rate seconds held for sale

     -0-      -0-      57,854

Fixed-rate seconds held for investment

     59,894      127,428      79,998

 

(a) Only the dollar amount of ELOCs drawn at the establishment of the line of credit is included in originations.

 

(b) Includes the maximum total line of credit available for new ELOCs.

Net Deferred Loan Costs

Included in the balance of loans receivable are net deferred loan costs associated with originating loans. In accordance with accounting principles generally accepted in the United States of America (GAAP), we defer loan fees charged at the time of origination and certain loan origination costs. Over the past five years, the combined amounts have resulted in net deferred costs. These net deferred loan costs are amortized over the contractual life of the related loans. The amortized amount lowers loan interest income and net interest income which reduces the reported yield on our loan portfolio, our primary spread, and our net interest margin. If a loan pays off before the end of its contractual life, any remaining net deferred cost is charged to loan interest income at that time. The vast majority of the amortization of net deferred loan costs shown in Table 35 is accelerated amortization resulting from early payoffs of loans.

 

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The following table provides information on net deferred loan costs for the years ended December 31, 2005, 2004, and 2003.

TABLE 35

Net Deferred Loan Costs

2003 – 2005

(Dollars in Thousands)

 

     Year Ended December 31  
     2005     2004     2003  

Beginning balance of net deferred loan costs

   $ 915,008     $ 547,318     $ 331,985  

Net loan costs deferred

     578,061       558,290       313,331  

Amortization of net deferred loan costs

     (341,873 )     (185,685 )     (97,998 )

Net deferred loan costs (fees) transferred from MBS

     947       (4,915 )     -0-  
                        

Ending balance of net deferred loan costs

   $ 1,152,143     $ 915,008     $ 547,318  
                        

The growth in net deferred loan costs in the past three years resulted primarily from the growth in loan origination volume. The increase in the amortization of net deferred loan costs resulted from higher loan repayments.

Lending Operations

At December 31, 2005, we had lending operations in 39 states. Our largest source of mortgage origination volume continues to be loans secured by residential properties in California, which is the largest residential mortgage market in the United States. The following table shows originations for the three years ended December 31, 2005, 2004, and 2003 for Northern and Southern California and for our five next largest origination states by dollar amount in 2005.

TABLE 36

Loan Originations by State

2003 – 2005

(Dollars in Thousands)

 

     Year Ended December 31
     2005    2004    2003

Northern California

   $ 19,050,587    $ 17,891,625    $ 13,269,180

Southern California

     15,487,649      14,932,040      10,955,465
                    

Total California

     34,538,236      32,823,665      24,224,645

Florida

     3,775,129      2,664,693      1,955,151

New Jersey

     1,987,585      2,001,661      1,309,496

Arizona

     1,334,374      676,431      494,113

Virginia

     1,200,986      1,080,273      704,363

Illinois

     950,923      1,219,630      786,228

Other states

     7,729,166      8,522,724      6,510,725
                    

Total

   $ 51,516,399    $ 48,989,077    $ 35,984,721
                    

 

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The following table shows loans receivable and MBS with recourse by state for the three years ended December 31, 2005, 2004, and 2003 for Northern and Southern California and all other states with more than 2% of the total loan balance at December 31, 2005.

TABLE 37

Loans Receivable and MBS with Recourse by State

2003 – 2005

(Dollars in Thousands)

 

     Year Ended December 31

State

   2005    2004    2003

Northern California

   $ 40,175,262    $ 35,464,047    $ 27,682,694

Southern California

     32,069,469      27,819,673      21,193,225
                    

Total California

     72,244,731      63,283,720      48,875,919

Florida

     8,217,469      6,003,687      4,400,376

New Jersey

     5,392,295      4,414,236      3,020,539

Texas

     3,412,509      3,359,814      2,954,106

Illinois

     2,966,965      2,673,642      1,925,959

Virginia

     2,613,023      2,085,564      1,393,601

Washington

     2,530,090      2,344,628      2,076,473

Other states

     19,990,315      16,767,479      12,162,992
                    
     117,367,397      100,932,770      76,809,965

Other(a)

     1,683,048      1,346,391      1,045,661
                    

Total loans receivable and MBS with recourse

   $ 119,050,445    $ 102,279,161    $ 77,855,626
                    

 

(a) Other includes loans on deposits, loans in process, net deferred loan costs, allowance for loan losses, and other miscellaneous discounts.

Securitization Activity

We often securitize our portfolio loans into mortgage-backed securities. We do this because MBS are a more valuable form of collateral for borrowings than whole loans. Because we have retained all of the beneficial interests in these MBS securitizations to date, the accounting rules require that securities formed after March 31, 2001 be classified as securitized loans and included in our loans receivable. Securitization activity for the years ended December 31, 2005, 2004, and 2003, amounted to $34.3 billion, $24.5 billion, and $13.7 billion, respectively. The volume of securitization activity fluctuates depending on the amount of collateral needed for borrowings and liquidity risk management.

Loans securitized prior to April 1, 2001 are classified as MBS with recourse held to maturity. MBS that are classified as held to maturity are those that we have the ability and intent to hold until maturity.

Structural Features of Our ARMs

After bank regulators authorized ARMs in 1981 to help mortgage lenders better manage interest rate risk, we and other major residential portfolio lenders in California and elsewhere evaluated various ARM products to find solutions that would benefit borrowers and also allow us to manage interest rate risk without assuming undue credit risk. The product selected by most major residential portfolio lenders on the West Coast, and various others throughout the country, was a product often described as an “option ARM” because of the payment options available to borrowers. For the past 25 years, we have continued to originate our version of the option ARM because we believe that borrowers benefit from its structural features and because we have developed pricing, underwriting, appraisal, and other processes over the years to help us manage potential credit risks. Although we have originated some other types of ARMs, almost all of our ARMs are option ARMs.

 

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The option ARMs that we have originated since 1981 have the following structural features that are described in more detail below:

 

    an interest rate that changes monthly and is based on an index plus a fixed margin set at origination;

 

    payment options;

 

    features that allow for deferred interest to be added to the loans; and

 

    lifetime interest rate caps, and in some cases interest rate floors, that limit the range of interest rates on the loans.

Interest Rates and Indexes. The option ARMs we originate have interest rates that change monthly based on an index plus a fixed margin that is set at the time we make the loan. The index value changes monthly and consequently the loan rate changes monthly. For most of our lending, the indexes used are the Golden West Cost of Savings Index (COSI) and the Certificate of Deposit Index (CODI). Our portfolio also contains loans indexed to the Eleventh District Cost of Funds Index (COFI). Details about these indexes, including the reporting and repricing lags associated with them, are discussed in “Management of Interest Rate Risk - Asset/Liability Management.” The ELOCs we originate are indexed either to CODI or the Prime Rate.

As further described in “Management of Interest Rate Risk - Asset/Liability Management,” we have focused on originating ARMs with indexes that meet our customers’ needs and match well with our liabilities. The following table shows the distribution of ARM originations by index for the years ending December 31, 2005, 2004, and 2003.

TABLE 38

Adjustable Rate Mortgage Originations by Index(a)

2003 - 2005

(Dollars in Thousands)

 

     Year Ended December 31  

ARM Index

   2005    % of
Total
    2004    % of
Total
    2003    % of
Total
 

COSI

   $ 35,835,729    70 %   $ 14,447,060    30 %   $ 10,688,779    32 %

CODI(b)

     14,429,577    28 %     32,264,494    67 %     20,518,260    61 %

COFI

     463,614    1 %     654,926    1 %     1,559,605    5 %

Prime

     357,763    1 %     1,063,102    2 %     887,363    2 %

LIBOR(c)

     8,268    0 %     -0-    0 %     -0-    0 %
                                       

Total

   $ 51,094,951    100 %   $ 48,429,582    100 %   $ 33,654,007    100 %
                                       

 

(a) Only the dollar amount of ELOCs drawn at the establishment of the line of credit is included in originations.

 

(b) Includes ELOCs tied to CODI.

 

(c) LIBOR is the London Interbank Offered Rate.

 

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The following table shows the distribution by index of the Company’s outstanding balance of adjustable rate mortgages (including ARM MBS) at December 31, 2005, 2004, and 2003.

TABLE 39

Adjustable Rate Mortgage Portfolio by Index

(Including ARM MBS)

2003 - 2005

(Dollars in Thousands)

 

     December 31  

ARM Index

   2005    % of
Total
    2004    % of
Total
    2003    % of
Total
 

COSI

   $ 56,382,694    48 %   $ 30,900,888    31 %   $ 24,535,095    33 %

CODI(a)

     47,557,461    41 %     52,412,249    52 %     30,243,337    40 %

COFI

     10,408,640    9 %     13,537,745    14 %     18,207,868    24 %

Prime

     1,793,888    2 %     2,575,524    3 %     1,827,435    2 %

Other(b)

     226,881    0 %     304,295    0 %     424,988    1 %
                                       

Total

   $ 116,369,564    100 %   $ 99,730,701    100 %   $ 75,238,723    100 %
                                       

 

(a) Includes ELOCs tied to CODI.

 

(b) Primarily ARMs tied to the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM).

Payment Options. The option ARM provides our borrowers with up to four payment options. These payment options include a minimum payment, an interest-only payment, a payment that enables the loan to pay off over its original term, and a payment that enables the loan to pay off 15 years from origination. In addition to these four specified payment options, borrowers may elect a payment of any amount above the minimum payment.

Substantially all of the ARMs we originate allow the borrower to select an initial monthly payment for the first year of the loan. The initial monthly payment selected by the borrower is limited by a floor that we set. If the initial monthly payment selected by the borrower is less than the amount of interest due on the loan, then deferred interest occurs, as described below under “Deferred Interest.” In 2005, the initial monthly payment selected on almost all new loans was lower than the amount of interest due on the loans. The minimum monthly payment for substantially all our ARMs is reset annually. The new minimum monthly payment amount generally cannot exceed the prior year’s minimum monthly payment amount by more than 7.5%. Periodically, this 7.5% cap does not apply. For example, for most of the loans this 7.5% cap does not apply on the tenth annual payment change of the loan and every fifth annual payment change thereafter. For a small number of loans, the 7.5% cap does not apply on the fifth annual payment change of the loan and every fifth annual payment change thereafter.

Although most of our loans have payments due on a monthly cycle, a significant number of borrowers elect to make payments on a biweekly cycle. A biweekly payment cycle results in a shorter period required to fully amortize the loan.

Deferred Interest. Deferred interest refers to interest that is added to the outstanding loan principal balance when the payment a borrower makes is less than the monthly interest due on the loan. Our loans have had this deferred interest feature for almost a quarter of a century. Borrowers may always make a high enough monthly payment to avoid deferred interest, and many borrowers do so. Borrowers may also pay down the balance of deferred interest in whole or in part at any time without a prepayment fee.

Our loans provide that deferred interest may occur as long as the loan balance remains below a cap based on a percentage of the original mortgage amount. A 125% cap on the loan balance applies to loans with original loan-to-value ratios at or below 85%, which includes almost all of the loans we originate. Loans with original loan-to-values above 85% have a 110% cap. If the loan balance reaches the applicable limit, additional deferred interest may not be allowed to occur and we may increase the minimum monthly payment to an amount

 

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that would amortize the loan over its remaining term. In this case, the new minimum monthly payment amount could increase beyond the 7.5% annual payment cap described above, and continue to increase each month thereafter, if the applicable loan balance cap is still being reached and the current minimum monthly payment amount would not be enough to fully amortize the loan by the scheduled maturity date.

The amount of deferred interest a loan incurs depends on a number of factors outside our control, including changes in the underlying index and the borrower’s payment behavior. If a loan’s index were to increase and remain at relatively high levels, the amount of deferred interest on the loan would be expected to trend higher, absent other mitigating factors such as monthly payments that meet or exceed the amount of interest then due. Similarly, if the index were to decline and remain at relatively low levels, the amount of deferred interest on the loan would be expected to trend lower.

Additional discussion of deferred interest can be found in “Management of Credit Risk – Close Monitoring of the Loan Portfolio.”

Lifetime Caps and Floors. During the life of a typical ARM loan, the interest rate may not be raised above a lifetime cap which is set at the time of origination or assumption. Virtually all of our ARMs are subject to a lifetime cap. The weighted average maximum lifetime cap rate on our ARM loan portfolio (including MBS with recourse before any reduction for loan servicing and guarantee fees) was 12.15% or 5.68% above the actual weighted average rate at December 31, 2005, versus 12.16% or 7.16% above the actual weighted average rate at yearend 2004 and 12.20% or 7.42% above the weighted average rate at yearend 2003.

The following table shows the Company’s ARM loans by lifetime cap bands as of December 31, 2005.

TABLE 40

Adjustable Rate Mortgage Portfolio by Lifetime Cap Bands

December 31, 2005

(Dollars in Thousands)

 

Cap Bands

   ARM Balance    Number
of Loans
   % of
Total
Balance
 

Less than 11.00%

   $ 29,313    96    .0 %

11.00% - 11.49%

     740,070    3,675    .6 %

11.50% - 11.99%

     100,059,007    399,390    86.0 %

12.00% - 12.49%

     9,743,738    54,651    8.4 %

12.50% - 12.99%

     2,655,751    29,119    2.3 %

13.00% - 13.49%

     95,333    696    .1 %

13.50% - 13.99%

     329,782    3,188    .3 %

14.00% or greater(a)

     2,692,464    56,503    2.3 %

No Cap

     24,106    216    .0 %
                  

Total

   $ 116,369,564    547,534    100.0 %
                  

 

(a) Includes $2.1 billion of one- to four-family ELOCs, most of which have an 18% cap.

 

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During the life of some ARM loans, the interest rate may not be decreased to a rate below a lifetime floor which is set at the time of origination or assumption. A portion of our ARMs is subject to lifetime floors. At December 31, 2005, approximately $4.6 billion of our ARM loans (including MBS with recourse) 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, 2005, $277 million of ARM loans had reached their rate floors, compared to $1.6 billion at December 31, 2004, and $2.3 billion at December 31, 2003. The weighted average floor rate on the loans that had reached their floor was 6.09% at yearend 2005 compared to 5.36% at yearend 2004 and 5.43% at yearend 2003. Without the floor, the weighted average rate on these loans would have been 5.52% at December 31, 2005, 4.44% at December 31, 2004, and 4.38% at December 31, 2003.

Other Lending Activity

In addition to the monthly adjusting ARMs described above, we originate and have in portfolio a small volume of ARMs with initial interest rates and monthly payments that are fixed for periods of 12 to 36 months, after which the interest rate adjusts monthly and the monthly payment is reset annually. Additionally, we originate a small volume of ARMs where the interest rate adjusts every six months subject to a periodic interest rate cap; some of these ARMs provide for interest-only payments for the first five years.

From time to time, as part of our efforts to retain loans and loan customers, we may waive or temporarily modify certain terms of a loan. Some borrowers elect to modify their loans to fixed-rate loans for one, three, or five years. These modifications amounted to $1.5 billion during 2005 compared to $548 million and $458 million for the years ended December 31, 2004 and 2003. We retain these modified loans in portfolio. Additionally, some borrowers choose to convert their ARM to a fixed-rate mortgage for the remainder of the term. During 2005, $522 million of loans were converted at the customer’s request from ARMs to fixed-rate loans, compared to $150 million and $1.2 billion in 2004 and 2003, respectively. We sell most of the converted fixed-rate loans.

Investments

We invest funds not immediately needed to fund our loan operations in short-term instruments. Our practice is to invest only with counterparties that have high credit ratings. Investments are reported in either “Federal funds sold, securities purchased under agreements to resell, and other investments” or “Securities available for sale, at fair value” on the Consolidated Statement of Financial Condition. The following tables summarize information about the Company’s investments.

TABLE 41

Federal Funds Sold, Securities Purchased Under Agreements to Resell,

and Other Investments

(Dollars in Thousands)

 

     December 31
     2005    2004    2003

Federal funds sold

   $ 1,096,626    $ 861,353    $ 941,267

Securities purchased under agreements to resell

     -0-      -0-      300,000

Eurodollar time deposits

     225,000      75,000      298,238
                    

Total federal funds sold, securities purchased under agreements to resell, and other investments

   $ 1,321,626    $ 936,353    $ 1,539,505
                    

The weighted average yields on federal funds sold, securities purchased under agreements to resell and other investments were 4.11%, 2.08%, and .93% at December 31, 2005, 2004, and 2003, respectively.

 

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TABLE 42

Securities Available for Sale

(Dollars in Thousands)

 

     December 31
     2005    2004    2003

U.S. government obligation

   $ 1,765    $ 1,760    $ 1,760

Freddie Mac stock

     367,267      414,194      327,758

Other

     13,467      22,078      10,420
                    

Total securities available for sale

   $ 382,499    $ 438,032    $ 339,938
                    

We hold stock in the Federal Home Loan Mortgage Corporation (Freddie Mac) that we obtained in 1984 with a cost basis of $6 million. Included in the balances above are net unrealized gains on Freddie Mac stock of $362 million, $409 million, and $322 million at December 31, 2005, 2004, and 2003, respectively. The weighted average yields of securities available for sale, excluding equity securities, were 4.24%, 2.43%, and 1.31% at December 31, 2005, 2004, and 2003, respectively. We had no securities held for trading during 2005, 2004, and 2003.

Other Assets

Capitalized Mortgage Servicing Rights

The Company recognizes as assets the rights to service loans for others. When we retain the servicing rights upon the sale of loans, the allocated cost of these rights is capitalized as an asset and then amortized over the expected life of the loan. The amount capitalized is based on the relative fair value of the servicing rights and the loans on the sale date. We do not have a large portfolio of mortgage servicing rights, primarily because we retain our ARM originations in portfolio and only sell a limited number of other loans to third parties. The balance of capitalized mortgage servicing rights (CMSRs) at December 31, 2005, 2004, and 2003 was $39 million, $53 million, and $89 million, respectively. CMSRs are included in “Other assets” on the Consolidated Statement of Financial Condition.

The estimated fair value of CMSRs is regularly reviewed and can change up or down depending on market conditions. We stratify the serviced loans by year of origination or modification, term to maturity, and loan type. If the estimated fair value of a loan strata is less than its book value, we establish a valuation allowance for the estimated temporary impairment through a charge to noninterest income. We also recognize any other-than-temporary impairment as a direct write-down.

The net estimated fair value of CMSRs as of December 31, 2005, 2004, and 2003 was $54 million, $62 million, and $95 million, respectively. The book value of the Company’s CMSRs for certain of the Company’s loan strata exceeded the fair value by $1 million at December 31, 2005 and by $7 million at December 31, 2004 and as a result, we had a valuation allowance of those amounts. The book value of the Company’s CMSRs did not exceed the fair value at December 31, 2003 and, therefore, no valuation allowance for impairment was required.

Deposits

We raise deposits on a retail basis through our branch system and the Internet, and, from time to time, through the money markets. Retail deposits increased by $7.2 billion in 2005 compared to increases of $6.2 billion and $5.7 billion in 2004 and 2003, respectively. Retail deposits increased during these three years due to favorable customer response to our promoted products. At December 31, 2005, transaction accounts represented 32% of the total balance of deposits, compared to 74% and 77% at year ends 2004 and 2003,

 

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respectively. These transaction accounts included checking accounts, money market deposit accounts, and passbook accounts.

Borrowings

In addition to funding real estate loans with deposits, we also utilize borrowings. Most of our borrowings are variable interest rate instruments tied to LIBOR. Borrowings increased by $8.9 billion to $54.5 billion in 2005 and by $16.7 billion to $45.7 billion in 2004 in order to fund the loan growth described earlier.

Advances from Federal Home Loan Banks

An important type of borrowing we use comes from the Federal Home Loan Banks (FHLBs). These borrowings are known as “advances.” WSB is a member of the FHLB of San Francisco, and WTX is a member of the FHLB of Dallas. Advances are secured by pledges of certain loans, MBS, and capital stock of the FHLBs that we own. FHLB advances amounted to $39.0 billion at December 31, 2005, compared to $33.8 billion and $22.0 billion at December 31, 2004 and 2003, respectively.

Other Borrowings

In addition to borrowing from the FHLBs, we borrow from other sources to maintain flexibility in managing the availability and cost of funds for the Company.

We borrow funds from the capital markets on both a secured and unsecured basis. Most of WSB’s capital market funding consists of unsecured senior debt and bank notes. Debt securities with maturities 270 days or longer are reported as senior debt and debt securities with maturities less than 270 days are reported as bank notes on the Consolidated Statement of Financial Condition. WSB has a program that allows for the issuance of up to an aggregate amount of $8.0 billion of unsecured senior notes with maturities ranging from 270 days to thirty years. WSB issued $2.95 billion in notes under this program in 2005 and $1.3 billion in 2004, and as of December 31, 2005, $3.75 billion remained available for issuance under this program. WSB issued $3.0 billion of senior debt under a prior program in 2004. As of December 31, 2005 and 2004, WSB had a total of $7.2 billion and $4.3 billion of long-term unsecured senior debt outstanding. WSB did not have any senior debt outstanding as of December 31, 2003. As of December 31, 2005, WSB’s unsecured senior debt ratings were Aa3 and AA- from Moody’s and S&P, respectively.

WSB also has a short-term bank note program that allows up to $5.0 billion of short-term notes with maturities of less than 270 days to be outstanding at any point in time. WSB had $2.4 billion, $2.7 billion, and $3.0 billion of short-term bank notes outstanding as of December 31, 2005, 2004, and 2003, respectively. As of December 31, 2005, WSB’s short-term bank notes were rated P-1 and A-1+ by Moody’s and S&P, respectively.

We also borrow funds on a secured basis through transactions in which securities are sold under agreements to repurchase. Securities sold under agreements to repurchase are entered into with selected major government securities dealers and large banks, using MBS from our portfolio as collateral, and amounted to $5.0 billion, $3.9 billion, and $3.0 billion at December 31, 2005, 2004, and 2003, respectively.

Golden West, at the holding company level, occasionally issues senior or subordinated unsecured debt. In December 2005, Golden West filed a registration statement that allows us to issue up to $2.0 billion of debt securities. As of December 31, 2005, no debt was outstanding under this registration statement. At December 31, 2005, Golden West, at the holding company level, had $994 million of senior debt outstanding compared to $993 million and $991 million at December 31, 2004 and 2003, respectively. Golden West had no subordinated debt outstanding during those time periods. As of December 31, 2005, Golden West’s senior debt

 

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was rated A1 and A+ by Moody’s and S&P, respectively, and its subordinated debt was rated A2 and A by Moody’s and S&P, respectively.

MANAGEMENT OF RISK

Our business strategy is to achieve sustainable earnings growth utilizing a low-risk business approach. We continue to execute and refine our business model to manage the key risks associated with being a residential mortgage portfolio lender, namely interest rate risk and credit risk. We also manage other risks, such as operational, regulatory, and management risk.

Management of Interest Rate Risk

Overview

Interest rate risk generally refers to the risk associated with changes in market interest rates that could adversely affect a company’s financial condition. We strive to manage interest rate risk through the operation of our business, rather than relying on capital market techniques such as derivatives. Our strategy for managing interest rate risk includes:

 

    focusing on originating and retaining monthly adjusting ARMs in our portfolio;

 

    funding these ARM assets with liabilities that respond in a similar manner to changes in market rates; and

 

    selling most of the limited number of fixed-rate loans that we originate, as well as fixed-rate loans that result from existing customers converting from ARMs.

As discussed further below, these strategies help us to maintain a close relationship between the yield on our assets and the cost of our liabilities throughout the interest rate cycle and thereby limit the sensitivity of net interest income and our primary spread to changes in market rates.

Asset/Liability Management

Our principal strategy to manage interest rate risk is to originate and keep in portfolio ARMs that provide interest sensitivity to the asset side of the balance sheet. The interest rates on most of our ARMs adjust monthly, which means that the yield on our loan portfolio responds to movements in interest rates. At December 31, 2005, ARMs constituted 99% of our loan and MBS portfolio, and 96% of our ARM portfolio adjusted monthly.

The primary difference between how our ARMs and how our liabilities respond to interest rate changes is principally timing related. Specifically, rates on our liabilities tend to adjust more rapidly to interest rate changes than the yield on our ARM portfolio, primarily because of built-in reporting and repricing lags that are inherent in the indexes. Reporting lags occur because of the time it takes to gather the data needed to compute the indexes. Repricing lags occur because it may take a period of time before changes in market interest rates are significantly reflected in the indexes. In addition to the index lags, other structural features of the ARMs, described under “The Loan Portfolio - Structural Features of our ARMs,” can delay the repricing of our assets.

This timing disparity between our assets and liabilities can temporarily affect our primary spread until the indexes are able to reflect, or “catch up” with, the changes in market rates. Over a full interest rate cycle, the timing lags will tend to offset one another. The following chart summarizes the different relationships the indexes and short-term market interest rates could have at any point in time and the expected impact on our primary spread.

 

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TABLE 43

Relationship between Indexes and Short-Term Market Interest Rates

and Expected Impact on Primary Spread

 

Market Interest Rate Scenarios

  

Relationship between Indexes and Short-Term Market Interest Rates and Expected Impact on Primary
Spread

Market interest rates increase

  

The index increase lags the market interest rate increase, and therefore the primary spread would normally be expected to narrow temporarily until the index catches up with the higher market interest rates.

Market interest rates decline

  

The index decrease lags the market interest rate decrease, and therefore the primary spread would normally be expected to widen temporarily until the index catches up with the lower market interest rates.

Market interest rates remain constant

  

The primary spread would normally be expected to stabilize when the index catches up to the current market rate level.

As the table above indicates, although market rate changes impact the primary spread, the impact is principally a timing issue until the market rates are reflected in the applicable index. Also, a gradual change in rates would tend to have less of an impact on the primary spread than a sharp rise or decline in rates.

To mitigate the lags discussed above, our ARM index strategy strives to match portions of our ARM portfolio with liabilities that have similar repricing characteristics, by which we mean the frequency of rate changes and the responsiveness of rate changes to fluctuations in market interest rates. The following table describes the indexes we use and shows how these indexes are intended to match with our liabilities. As discussed in the table, ARMs funded with savings historically have had similar repricing lags. The repricing lags of ARMs and LIBOR-based market-rate borrowings have historically been somewhat different but these differences have been principally timing related. In particular, most of the Company’s interest rate sensitivity has come from CODI loans funded with borrowings.

 

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TABLE 44

Summary of Key Indexes

 

    

COSI

  

CODI

  

COFI

How the Index

is Calculated

   Equal to Golden West’s cost of deposits as reported monthly.    Based on a market rate, specifically the monthly yield of three-month certificates of deposit (secondary market), as published by the Federal Reserve Board. CODI is calculated by adding the twelve most recently published monthly yields together and dividing the result by twelve.    Equal to the monthly average cost of deposits and borrowings of savings institution members of the Federal Home Loan Bank System’s Eleventh District, which is comprised of California, Arizona, and Nevada.

Matching and Activity Levels

How the Index Matches the Company’s Liabilities    COSI equals our own cost of deposits. COSI and the cost of our deposits are therefore matched subject only to the reporting lag described below.    Historically, the three-month CD yield on which CODI is based has closely tracked LIBOR. Most of our borrowings from the FHLBs and the capital markets are based on LIBOR. The 12-month rolling aspect of CODI creates a timing lag.    Historically, COFI has tracked our cost of deposits. The match is not perfect , however, because COFI includes the cost of savings and borrowings of many other institutions as well as our own.
Percentage of 2005 ARM Originations    70%    28%    1%
Percentage of ARM Portfolio at 12/31/05    48%    41%    9%

Timing Lags (see descriptions in the paragraph below)

Reporting Lag    One month    One month    Two months
Repricing Lag    Yes, because the rates paid on many of our deposits may not respond immediately or fully to a change in market rates, but this lag is offset by the same repricing lag on our deposits.    Yes, because CODI is a 12-month rolling average, and it takes time before the index is able to reflect, or “catch up” with, a change in market rates.    Yes, because the portfolio of liabilities comprising COFI do not all reprice immediately or fully to changes in market rates. Historically, this lag has been largely offset by a similar repricing lag on our deposits.

As discussed above, market interest rate movements are the most significant factor that affects our primary spread. The primary spread is also influenced by:

 

    the shape of the yield curve (the difference between short-term and long-term interest rates) and competition in the home lending market, both of which influence the pricing of our adjustable and fixed-rate mortgage products;

 

    our efforts to attract deposits and competition in the retail savings market, which influence the pricing of our deposit products;

 

    the prices that we pay for our borrowings; and

 

    loan prepayment rates.

 

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The table below shows the primary spread, and its main components, at December 31, 2005, 2004, and 2003.

TABLE 45

Yield on Earning Assets, Cost of Funds, and Primary Spread

2003 - 2005

 

     December 31  
     2005     2004     2003  

Yield on loan portfolio and MBS

   6.05 %   4.75 %   4.61 %

Yield on investments

   4.11     2.08     .93  
                  

Yield on earning assets

   6.03     4.73     4.54  
                  

Cost of deposits

   3.24     2.08     1.85  

Cost of borrowings

   4.37     2.38     1.37  
                  

Cost of funds

   3.78     2.22     1.67  
                  

Primary spread

   2.25 %   2.51 %   2.87 %
                  

During 2004, the Federal Reserve’s Open Market Committee raised the Federal Funds rate, a key short-term interest rate, five times, bringing the rate up to 2.25% at December 31, 2004 as compared to 1.00% at December 31, 2003. During 2005, the Federal Reserve’s Open Market Committee raised the Federal Funds rate eight times, bringing the rate up to 4.25% at December 31, 2005. As a consequence, our cost of funds, which is related primarily to the level of short-term market interest rates, also increased. At the same time, the yield on our earning assets responded more slowly due to the ARM index lags previously described.

The following table shows the average primary spread by quarter.

TABLE 46

Average Primary Spread

 

     For the Quarter Ended  
     Dec. 31
2005
    Sep. 30
2005
    Jun. 30
2005
    Mar. 31
2005
    Dec. 31
2004
 

Average primary spread

   2.29 %   2.37 %   2.39 %   2.46 %   2.60 %
                              

For the five years ended December 31, 2005, which included periods of both falling and rising interest rates, our primary spread averaged 2.75%.

Mortgage portfolio lenders often provide a table with information about the “repricing gap,” which is the difference between the repricing of assets and liabilities. The following gap table shows the volume of assets and liabilities that reprice within certain time periods as of December 31, 2005, as well as the repricing gap and the cumulative repricing gap as a percentage of assets.

 

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TABLE 47

Repricing of Earning Assets and Interest-Bearing Liabilities,

Repricing Gaps, and Gap Ratios

As of December 31, 2005

(Dollars in Millions)

 

     Projected Repricing(a)
     0 - 3
Months
    4 – 12
Months
    1 - 5
Years
    Over 5
Years
    Total

Earning Assets:

          

Investments

   $ 1,702     $ 2     $