UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549 - 1004
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4075
GREAT WESTERN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1913457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9200 Oakdale Avenue, Chatsworth, California 91311-6519
(Address of principal executive offices) (Zip Code)
(818) 775-3411
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, $1 par value New York Stock Exchange
(and accompanying Preferred Pacific Stock Exchange
Stock Purchase Rights) London Stock Exchange
8 3/4% Cumulative Convertible New York Stock Exchange
Preferred Stock, $1 par value
8.30% Cumulative Preferred New York Stock Exchange
Stock, $1 par value
8 1/4 % Trust Originated New York Stock Exchange
Preferred Securities of
Great Western Financial Trust I
Securities registered pursuant to Section 12(g) of the Act: None
(Continued)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of February 29, 1996: $3,119,678,135
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 29, 1996: 137,153,873
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - Portions of Proxy Statement for Annual Meeting of
Stockholders, April 23, 1996.
GREAT WESTERN FINANCIAL CORPORATION
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business.................................................... 4
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters........................... 26
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 28
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 105
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 105
Item 11. Executive Compensation...................................... 105
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................................... 105
Item 13. Certain Relationships and Related Transactions.............. 105
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................... 105
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Great Western Financial Corporation ("GWFC", "Great Western" or "the
Company"), with consolidated assets of approximately $44.6 billion, is a
savings and loan holding company organized in 1955 under the laws of the
state of Delaware. The principal assets of the Company are the capital stock
of Great Western Bank, a Federal Savings Bank ("GWB", "Great Western Bank"
or "the Bank") and Aristar, Inc. ("Aristar"). GWB is a federally chartered
stock savings bank and conducts most of its retail banking through 418
offices located in California and Florida. Real estate lending operations
are conducted directly by the Bank or by direct subsidiaries through 261
offices in 23 states with concentration in California, Florida, Texas and
Washington. Directly or through its subsidiaries, the Bank also engages in
consumer finance, mortgage banking, and other related financial services.
Aristar conducts consumer finance operations through 528 offices in 24
states, most of which operate principally under the names Blazer Financial
Services or City Finance Company and provide direct installment loans and
related credit insurance services and purchase retail installment contracts.
For financial information concerning the Company's three principal lines of
business, see Segment Data in Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
The Company is a legal entity separate and distinct from the Bank. The
principal source of the Company's revenues on an unconsolidated basis has
been dividends, interest and management fees from GWB. Various statutory and
regulatory restrictions and tax considerations, however, can limit, directly
or indirectly, the amounts that may be paid by the Bank to GWFC. Dividends
from Aristar continue to be a source of revenue to the Company. For a
discussion of dividend restrictions, see "Regulation - Capital Requirements",
"Capital Distributions by GWB" and "Restrictions on Transactions with
Affiliates".
The operations of savings associations are significantly influenced by
general economic conditions, by the related monetary and fiscal policies of
the federal government, and by the regulatory policies of financial
institution regulatory authorities, including the Federal Reserve Board
("FRB"), the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). Deposit flows and cost of funds are
influenced by interest rates on competing investments and general market
rates of interest. Lending and other investment activities are affected by
the demand for mortgage financing and consumer and other types of loans,
which in turn are affected by the interest rates at which such financing may
be offered and other factors affecting the supply of housing and the
availability of funds.
ACQUISITIONS AND DISPOSITIONS
GWFC is, from time to time, engaged in discussions with other financial
institutions of various sizes in various locations throughout the United
States and with governmental agencies regarding mergers, acquisitions or
dispositions. No assurance can be given that GWFC will complete any
particular transaction.
Additional information on specific acquisitions is summarized in Note
2 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data".
INTEREST SPREAD
GWFC's core operating results depend primarily on the spread between
the income the Bank and Aristar receive from interest earning assets and
their costs of funds. The Bank now competes with commercial banks and other
financial intermediaries for funds in a deregulated environment. For
additional information see "Lending" and "Customer Accounts" below.
The composition of the interest spread is shown in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The following table shows the components of the change in net interest
income for the years ended December 31, 1995, 1994 and 1993 that are included
in the Consolidated Statement of Operations in Item 8, "Financial Statements
and Supplementary Data".
Year Ended December 31
---------------------------------------------
(Dollars in millions) 1995 vs. 1994 1994 vs. 1993 1993 vs. 1992
------------- ------------- -------------
Mortgage-backed securities
Rate (1) $ 66 $ (14) $ (47)
Volume (2) 332 113 (33)
Rate/Volume (3) 79 (9) 6
----- ----- -----
477 90 (74)
----- ----- -----
Real estate loans (4)
Rate (1) 176 (65) (327)
Volume (2) (96) (65) 31
Rate/Volume (3) (9) 2 (4)
----- ----- -----
71 (128) (300)
----- ----- -----
Consumer loans (4)
Rate (1) (13) (7) (17)
Volume (2) 39 - (15)
Rate/Volume (3) (1) - 1
----- ----- -----
25 (7) (31)
----- ----- -----
Securities and other
Rate (1) 10 (19) 8
Volume (2) 23 17 (12)
Rate/Volume (3) 3 (4) (1)
----- ----- -----
36 (6) (5)
----- ----- -----
Interest earning assets
Rate 239 (105) (383)
Volume 298 65 (29)
Rate/Volume 72 (11) 2
----- ----- -----
609 (51) (410)
----- ----- -----
Customer accounts
Rate (1) 307 (23) (325)
Volume (2) (31) 35 (92)
Rate/Volume (3) (9) (1) 22
----- ----- -----
267 11 (395)
----- ----- -----
Borrowings
Rate (1) (10) 8 (71)
Volume (2) 383 (9) 121
Rate/Volume (3) (11) - (26)
----- ----- -----
362 (1) 24
----- ----- -----
Interest bearing liabilities
Rate 297 (15) (396)
Volume 352 26 29
Rate/Volume (20) (1) (4)
----- ----- -----
629 10 (371)
----- ----- -----
Change in net interest income $ (20) $ (61) $ (39)
===== ===== =====
/TABLE
(1) The rate variance reflects the change in the average rate multiplied
by the average balance outstanding during the prior period.
(2) The volume variance reflects the change in the average balance
outstanding multiplied by the average rate during the prior period.
(3) The rate/volume variance reflects the change in average rate multiplied
by the change in the average balance outstanding.
(4) Nonaccrual loans and amortized deferred loan fees are included in the
interest income calculations.
ASSET LIABILITY MANAGEMENT
As noted above, net interest income is a critical component of GWFC's
earnings. Therefore, asset liability management is of continuing importance
to the profitability of the Company. Using its asset liability management
system, the sensitivity of interest variances is monitored using a model to
measure the effects of various rates, maturities and growth assumptions.
For information on interest earning assets and interest bearing
liabilities, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
LENDING
A summary of GWFC's lending activities is set forth on pages 100 and
101, titled Loan Analysis in Item 8, "Financial Statements and Supplementary
Data".
The Bank originates loans on existing residential property through
district sales offices which utilize mortgage loan consultants who are
compensated principally on a commission basis. The Bank has also developed
alternative sources of loan origination which include wholesale brokers and
a network of correspondent relationships in which the Bank purchases loans
originated by unaffiliated mortgage lenders. Loans originated by third
parties must meet the same underwriting standards used by the Bank in its own
lending. In 1995, third party origination sources produced more than $2.2
billion in new loan volume compared with $1.3 billion in 1994. The value of
the property as security for a loan is determined by qualified real estate
appraisers. The Bank requires title insurance equal to the amount of the
loan and fire and extended coverage insurance at least equal to the lesser
of full replacement value or the loan amount on all real estate which it
finances subject to any limitations imposed by state law.
Adjustable rate mortgages ("ARMs") represent the principal real estate
loan investment of the Company. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Many ARMs have annual percentage limits on the maximum amount of
interest change. In most cases, the interest rate charged on ARMs is lower
in the introductory period, generally three months, than the rate which is
charged thereafter and which is based on relevant indices. A significant
portion of the ARM portfolio is subject to lifetime maximum interest rates
("caps") and minimum interest rates ("floors") as well as periodic interest-
rate caps. ARMs which had reached their periodic cap rate totaled $775
million, or 2.9 percent of the adjustable rate loan portfolio at December 31,
1995. Periodic interest-rate caps are generally in effect for three years.
ARMs which had reached their floors totaled $229 million, or .86 percent of
the adjustable rate loan portfolio, at December 31, 1995 and $4.9 billion,
or 19.3 percent, at December 31, 1994.
Payments generally are adjusted annually and, during certain intervals,
negative amortization ("deferred interest") may occur. Amounts added to ARM
loan balances as a result of deferred interest were $62 million, or .23
percent of such balances, in 1995, and $16 million, or .06 percent of such
balances, in 1994.
The Bank generally does not make loans with loan-to-value ratios
("LTV") exceeding 90 percent. Federal laws and regulations restrict the
nature, amount, terms and security for real estate loans which savings
associations may originate or purchase. Savings associations are subject to
regulatory real estate lending standards which, with limited exceptions,
require that the LTVs of real estate loans not exceed 65 percent for raw
land, 75 percent for developed land, 80 percent for construction of
commercial, multifamily and other nonresidential property, and 85 percent for
one to four family residential property. Owner occupied one to four family
and home equity loans are not subject to specific percentages, but to the
extent the LTV exceeds 90 percent, the loan must have private mortgage
insurance or be secured by readily marketable collateral.
As of December 31, 1995 the contractual maturities of all loans and
mortgage-backed securities were as follows:
Mortgage-backed
Real Estate Loans Securities
----------------- ---------------
Fixed Fixed
(Dollars in millions) ARM Rate ARM Rate Consumer Total
------- ------- -------- ----- -------- -------
One year or less $ 418 $ 43 $ 120 $232 $ 823 $ 1,636
Over one to two years 677 39 128 71 576 1,491
Over two to three years 669 51 136 23 417 1,296
Over three to five years 1,139 147 299 37 171 1,793
Over five to ten years 3,383 396 921 101 489 5,290
Over ten to fifteen years 4,267 108 1,242 51 157 5,825
Over fifteen years 16,133 234 6,449 14 1 22,831
------- ------ ------ ---- ------ -------
$26,686 $1,018 $9,295 $529 $2,634 $40,162
======= ====== ====== ==== ====== =======
For information about real estate loans and mortgage-backed securities
("mortgages"), mortgage sales and servicing income see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 1, 4, 5 and 6 of the Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data".
Federal savings associations have consumer lending powers which permit
the origination of unsecured as well as secured consumer loans for personal,
family or household purposes, which together with investments in commercial
paper and corporate debt securities, may not exceed 35 percent of the Bank's
assets. The Bank makes unsecured consumer loans in the form of student
educational loans, overdraft protection on checking accounts and other
consumer loans. The Bank was well below the maximum allowable percentage.
See discussion in Related Financial Services Activities following.
Federal savings associations are authorized to invest up to 400 percent
of their capital in loans secured by nonresidential real property. GWB's
loans secured by nonresidential real property at December 31, 1995
represented approximately 51 percent of its capital, or 13 percent of the
maximum allowable investment. In addition, federal savings associations may
also make secured and unsecured loans for commercial, corporate, business or
agricultural purposes in a total amount of not more than 10 percent of the
savings association's assets. The Bank does not engage in this type of
lending.
NONPERFORMING ASSETS
There are certain risks and uncertainties in originating loans. These
pertain to credit, appraisal and other underwriting factors occurring in the
loan portfolio subsequent to origination. Market risk has become
increasingly important in an economic environment characterized by declining
market values. These risks may result in loans becoming nonperforming
assets.
Delinquencies of single-family real estate loans increased in 1995
compared with 1994, due to inflows of newly delinquent single-family
residential loans resulting from continuing weaknesses in the Southern
California economy.
Information regarding nonperforming assets, valuation reserves and loss
provisions is presented in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Notes 5 and 7 of the
Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data".
INVESTMENT ACTIVITIES
Income from securities and other short-term investments generally
provides the largest source of interest income for GWFC after interest on
mortgages and consumer loans. The Bank is required to maintain a specified
minimum amount of liquid assets which may be invested in securities specified
by regulations as qualifying liquidity. Liquidity in excess of legal
requirements at December 31, 1995 was $215 million. Substantially all
security investments are of investment grade.
Dividends on Federal Home Loan Bank ("FHLBank") stock are included in
income on securities in the Consolidated Statement of Operations (see Note
9 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data").
For information on the Company's securities portfolio, see Notes 1 and
3 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data".
CUSTOMER ACCOUNTS
Customer accounts have traditionally been an important source of the
Bank's funds for use in lending and for other general business purposes.
Inflows to customer accounts historically have been related to general
economic conditions. Rates offered on new accounts are primarily based on
yields on Treasury securities and rates offered by competing financial
institutions.
For information on the Company's customer accounts, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 of the Notes to Consolidated Financial Statements in
Item 8, "Financial Statements and Supplementary Data".
BORROWINGS
Borrowings increased $1.3 billion in 1995 to fund asset growth. The
Company utilized securities sold under agreements to repurchase as a major
source of funds in 1995. In addition, the Company issued $100 million of
trust originated preferred securities in 1995, through a wholly-owned grantor
trust, Great Western Financial Trust I. GWB borrows funds from many sources,
including the FHLBank of San Francisco. At December 31, 1995, GWB had excess
borrowing capacity with the FHLBank of $10.6 billion. In addition, both GWB
and Aristar have issued commercial paper, medium-term notes and have entered
into various borrowing agreements.
In June 1995, Fitch Investors Service ("Fitch") increased its rating
on GWFC's senior debt to A- and preferred depositary shares to BBB. Fitch
also increased GWB's ratings on senior debt to A, subordinated debt to A- and
commercial paper to F-1.
For information on the Company's borrowings see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 12, 13 and 14 of the Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data".
RELATED FINANCIAL SERVICES ACTIVITIES
The principal non-depository business activities of GWFC and GWB are
described below.
CONSUMER FINANCE GROUP Consumer finance activities are highly
regulated by federal and state laws of both general and specific
applicability. Federal regulations relate primarily to fair credit practice
matters. State regulations may include certain licensing requirements, which
vary from state to state and may require periodic examination to verify
compliance with, among other restraints, state interest rate and loan size
limits. GWB also has industrial banks which conduct activities similar to
those of consumer finance operations.
OTHER ACTIVITIES GWFC and its direct and indirect subsidiaries also
engage in related service businesses, including investment company advisor
and administration activities, insurance operations, real estate development
and other lines of business. GWFC and its direct and indirect subsidiaries
in the future may also pursue other business opportunities, although no
assurances concerning the timing or nature of such activities can be given.
COMPETITION AND OTHER MATTERS
Competition for customer accounts comes principally from other savings
associations, commercial banks, money market funds, credit unions,
corporations, governmental agencies and governmental debt securities,
insurance companies, pension funds, and other investment media, many of which
can offer investment alternatives. Many of these institutions also have
nationwide retail networks.
Competition in residential lending activities comes principally from
other savings associations, mortgage companies, commercial banks and, to a
lesser degree, from finance companies, insurance companies, governmental
agencies, pension funds and trusts, and sellers of properties.
Competition in the provision of services being offered by GWFC and its
subsidiaries and affiliates in consumer lending, investment company advisor
and administration activities and other activities comes principally from the
traditional providers of such services and from other financial institutions.
INFLATION
While inflation has declined significantly during the past several
years, the Company recognizes the adverse effects that inflation could bring
to its financial position and operations and consequently monitors its
effects closely.
CAUTIONARY STATEMENTS
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
results to differ materially from those expressed or implied in any forward
looking statement made herein or elsewhere by the Company or its directors,
officers or employees. The Company intends to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Adequacy of Allowance for Loan and Real Estate Losses
The Company regularly reviews its assets to determine that each
category is reasonably valued. In this review process, it monitors the loss
exposure relating to nonperforming assets, assets adversely classified for
regulatory purposes, delinquency trends and the market environment to
identify potential problems.
The Company assesses the status of general loss reserves on real estate
and consumer loans based upon expected future economic conditions and its
current loss experience as applied to the loan portfolio, including loans
that are delinquent or, in the case of real estate loans, adversely
classified because of declining collateral values. The amount of the
Company's general loss reserve represents management's estimate of the amount
of real estate loan losses likely to be incurred by the Company, based upon
various assumptions as to future interest rate environments, economic trends
and other conditions. As such, the general loss reserve does not represent
the amount of such losses that could be incurred under adverse conditions
that management does not consider to be the most likely to arise. In
addition, management's classification of assets and evaluation of the
adequacy of the general loss reserve is an ongoing process. Consequently,
there can be no assurance that material additions to the Company's general
loss reserve will not be necessary, thereby adversely affecting earnings.
In addition, regulatory agencies, as an integral part of the examination
process, periodically review the adequacy of the Company's loss reserves.
Regulatory examiners may require the Company to make additions to the loss
reserve based upon their judgment of the information available to them at the
time of their examination. While management believes that the current
general loss reserve is adequate to absorb the known and inherent risks in
the real estate loan portfolio, no assurances can be given that economic
conditions which may adversely affect the Company's market area or that
adverse regulatory action or other circumstances will not result in future
loan losses which may not be covered completely by the current allowance or
may require an increased provision which could have an adverse effect on the
Company's financial condition and results of operations. Significant
additional loan and real estate loss provisions could negatively impact the
Company's future results of operations and the levels of required regulatory
capital.
Economic Conditions in the Company's Market Area
The Company's business is subject to changes in local economic and
business conditions. The economic environment and real estate market in
California, especially Southern California, have suffered from the effects
of a prolonged recession that has adversely affected the ability of certain
borrowers of the Company to meet their obligations to the Company. The
recession in California has been characterized by, among other things, high
levels of unemployment, declining real estate activity, declining real estate
values, and slowing sales of new single family residential properties. While
the California economy has recently exhibited positive trends in selected
areas, a worsening of economic conditions in the State could have an adverse
effect on the Company's business, including reducing demand for new financing
and increasing nonperforming assets and real estate loan losses.
Insurance Premium Assessments and Proposed Legislation
On November 14, 1995, the FDIC announced that it would reduce the
deposit insurance premiums paid by most banks and keep existing assessment
rates intact for savings associations. Under the new rate structure, most
banks will have essentially no deposit premium assessments as of January
1996. Deposit insurance premiums for the Savings Association Insurance Fund
("SAIF") members remain at their current levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
future legislative action, SAIF members such as GWB will be competitively
disadvantaged by the resulting premium differential.
Legislation presently being considered by Congress, if adopted into
law, would recapitalize the SAIF fund to the required level of 1.25% of
insured deposits by levying a one-time assessment of roughly $.85 per $100
of domestic deposits held by SAIF-insured institutions. If the assessment
is made at the proposed rate, the effect on GWB would be a pretax charge of
approximately $250 million, or $150 million after tax.
In light of the different proposals currently under consideration and
the uncertainty of the legislative process, management cannot predict whether
legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on GWB. A significant continuing disparity
between SAIF and the Bank Insurance Fund ("BIF") insurance premiums or a
significant one-time assessment to recapitalize the SAIF fund would likely
have an adverse effect on the financial condition and results of operations
of GWB and the Company.
Fluctuations in Interest Rates
Prevailing economic conditions, particularly changes in market interest
rates, as well as governmental policies and regulations concerning, among
other things, monetary and fiscal affairs, significantly affect interest
rates and a savings institution's net interest income. The results of
operations of GWB depend to a large extent on net interest income, which is
the differential between interest GWB receives from its loans, securities and
other interest earning assets and the interest expense the bank pays on its
deposits and other interest bearing liabilities. GWB is subject to risk from
fluctuations of interest rates to the extent its interest bearing liabilities
mature or reprice at different times or on a different basis than its
interest earning assets.
Significant Regulation
The financial institutions industry, including the Company and GWB, is
subject to significant regulation which has materially affected the financial
institutions industry in the past and will likely do so in the future. Such
regulations may be changed at any time, and the interpretation of the
relevant law and regulation is also subject to change by the authorities who
examine financial institutions and their holding companies and interpret
those laws and regulations. There can be no assurance that any present or
future changes in the laws or regulations or in their interpretation will not
adversely affect the Company or GWB.
Restrictions on Distributions
OTS regulations impose certain limitations on capital distributions by
savings institutions, including the payment of cash dividends. The
regulations establish guidelines for categorizing institutions into three
tiers for purposes of determining eligibility to make distributions. These
tiers are based primarily on the institution's capital levels but also relate
to an institution's supervisory status with the OTS. Under these guidelines,
the ability to pay cash dividends is increasingly limited as an institution's
capital position, earnings and supervisory status worsens. In addition, the
OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the guidelines, if the OTS determines that
such a distribution would constitute an unsafe or unsound practice. Also,
certain tax considerations limit the amount of dividends GWB would otherwise
be able to pay. See "Regulation - Capital Distributions by GWB."
Environmental Risks
Under various federal, state and local environmental laws and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous substances on,
under or in such property. In addition, any person or entity who arranges
for the disposal or treatment of hazardous substances may also be liable for
the costs of removal or remediation of hazardous substances at the disposal
or treatment facility. Such laws and regulations often impose liability
regardless of fault and liability has been interpreted to be joint and
several unless the harm is devisable and there is a reasonable basis for
allocation of responsibility. Pursuant to these laws and regulations, under
certain circumstances, a lender may become liable for the environmental
liabilities in connection with its borrower's properties if, among other
things, it either forecloses or participates in the management of its
borrower's operations or hazardous substance handling or disposal practices.
Although the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 and certain state counterparts provide exemptions for secured
lenders, the scope of such exemptions is limited and rules issued by the
Environmental Protection Agency clarifying such exemption have been held
inapplicable in private party cost recovery actions. In addition, such laws
impose a statutory lien, which may be prior to GWB's interest securing a
loan, for certain costs incurred in connection with the removal or
remediation of hazardous substances. Other laws and regulations may also
require the removal or remediation of hazardous substances located on a
property before such property may be sold or transferred.
If certain properties securing GWB loans and properties GWB has
foreclosed upon are found to be environmentally contaminated or contain
hazardous substances, including building materials containing asbestos or
lead, GWB may be required to remove or remediate such contamination or
hazardous substances. Although there can be no assurances that the costs of
any required removal or remediation or related liabilities on these
properties or any other properties would not be material and substantially
exceed the value of the affected properties or the loans secured by the
properties or that GWB's ability to sell any foreclosed property would not
be adversely affected, management is not aware of any environmental liability
relating to these properties that it believes would have a material adverse
effect on its business or results of operations.
Competition
The Company faces substantial competition for loans and deposits
throughout its market areas. The Company competes on a daily basis with
commercial banks, other savings institutions, thrift and loans, credit
unions, finance companies, retail investment brokerage firms, mortgage banks,
money market and mutual funds and other investment alternatives, and other
financial intermediaries.
REGULATION
Holding Company Regulation
General The Company is a savings and loan holding company as a result
of its control of GWB. As such, it is subject to regulation, supervision,
and examination by, and the reporting requirements of, the OTS and is
governed by the savings and loan holding company provisions of the Home
Owners' Loan Act.
Restrictions on Activities A savings and loan holding company is
prohibited, directly or indirectly, from obtaining control of a savings
association or savings and loan holding company without the prior approval
of the OTS. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), permits the acquisition by a savings and loan holding
company of up to 5 percent of the voting shares of a savings association or
savings and loan holding company which is not one of its present affiliates.
No director, officer, or controlling shareholder of the Company may, except
with the prior approval of the OTS, acquire control of any savings
association which is not a subsidiary of the Company.
FIRREA empowers the OTS to impose restrictions when it determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of any particular activity constitutes a serious risk
to the financial safety, soundness, or stability of a holding company's
subsidiary savings association. Thus, FIRREA confers on the OTS oversight
authority for all holding company affiliates, not just the savings
association. Specifically, the OTS may (i) limit the payment of dividends
by a savings association; (ii) limit transactions between a savings
association, the holding company and the subsidiaries or affiliates of
either; and (iii) limit any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Any such limits will
be issued in the form of a directive having the effect of a cease and desist
order.
Regulation of Subsidiaries
General Deposits in GWB and the Company's industrial banks are
separately insured by the FDIC up to $100,000 and those institutions are
regulated by the FDIC. GWB is a federally chartered savings association
which is also regulated by the OTS. The industrial banks are state chartered
institutions which are regulated by state authorities in addition to being
regulated by the FDIC. State laws specify the investments which these state
institutions may make and the activities in which they may engage. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
however, insured state banks may not engage in activities not permissible for
national banks unless the FDIC determines the activity will pose no
significant risk to the insurance fund and the bank complies with applicable
capital standards.
The Company's consumer finance subsidiaries are governed by state and
federal laws. Federal laws relate primarily to fair credit practice matters.
State laws set out applicable licensing requirements, provide for periodic
examinations and establish maximum finance charges on credit extensions.
The Company's insurance subsidiaries are governed by state law and the
Company's securities brokerage and investment advisory subsidiaries are
governed by federal and state laws relating to their operation, registration,
capital and other matters. The Company's securities brokerage subsidiary is
required to conduct its activities in compliance with the interagency
guidelines of the federal bank and thrift regulators on retail sales of
uninsured, nondeposit investment products by federally insured financial
institutions. The interagency guidelines require that, among other things,
customers are fully informed that investment products are not insured, are
not deposits of or guaranteed by GWB and involve investment risk including
the potential loss of principal.
Qualified Thrift Lender FDICIA imposes revised requirements for
qualification as a qualified thrift lender ("QTL"). The test requires that
65 percent of a savings association's "portfolio assets" (all assets except
goodwill, intangibles, property used to conduct the thrift's business and
certain liquid assets up to 20 percent of assets) consist of "qualified
thrift investments" (including, subject to certain limits, residential
mortgage and construction loans, home improvement and repair loans, mortgage-
backed securities, home equity loans, FHLBank stock, Federal Savings and Loan
Insurance Corporation ("FSLIC"), FDIC, and Resolution Trust Corporation
("RTC") obligations, Residential Funding Corporation obligations, Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation
stock, consumer loans, certain small business loans and loans to construct
or purchase or maintain churches, schools, nursing homes and hospitals,
investments in residential housing-oriented service corporations, and 50
percent of mortgages originated and sold within 90 days). At December 31,
1995, the asset composition of GWB was substantially in excess of that
required to qualify it to meet the QTL test.
The following sanctions may apply as the result of failure of a savings
association to remain a QTL: (i) required conversion of the savings
association's charter to a bank charter; (ii) limitations on new investments
and activities to those permissible for national banks; (iii) imposition of
branching restrictions applicable to national banks; (iv) prohibitions on new
advances to the savings association from its FHLBank; and (v) imposition of
dividend restrictions applicable to national banks. Three years after a
savings association ceases to be a QTL, it would be required to divest all
investments and cease all activities not permissible for national banks and
all FHLBank advances would have to be repaid in a prompt and prudent manner.
In addition, a savings and loan holding company holding such an association
would be required to register as a bank holding company.
Deposit Insurance The FDIC maintains two separate funds - the BIF,
which insures the deposits of the industrial banks (the "Company's BIF-
insured institutions"), and the SAIF which insures the deposits of GWB.
The FDIC has adopted a new BIF assessment schedule which virtually
eliminates the BIF deposit insurance premium assessment in the first half of
1996 for most banks, as the BIF has exceeded the required level of 1.25
percent of insured deposits. At the same time the FDIC has continued the
current SAIF assessment schedule of premiums which range from 23 cents per
$100 of domestic deposits to 31 cents per $100 of domestic deposits,
depending on risk classification, because it is expected that the SAIF
reserves will not reach the required level for a number of years absent
Congressional action to provide additional funding. Such a deposit insurance
premium disparity could place SAIF-insured institutions, such as GWB, at a
competitive disadvantage with commercial banks and other BIF-insured
institutions. GWB's current assessment rate is 23 cents per $100 of domestic
SAIF-insured deposits. A small portion ($455 million or 1.6 percent) of
GWB's deposits are insured by the BIF.
Bills passed by both houses of Congress would have recapitalized the
SAIF to the required level of 1.25 percent of insured deposits by levying a
one time assessment of roughly 85 cents per $100 of domestic deposits held
by SAIF-insured institutions. While the bills were vetoed by President
Clinton, their provisions could be attached to other fiscal measures or
become the subject of separate legislation in 1996. If such legislation is
approved and the assessment is made at the proposed rate, the effect on GWB
would be a pretax charge of approximately $250 million, or $150 million after
tax. Upon recapitalization of the SAIF, it would be expected that the SAIF
deposit insurance premiums would be reduced from their current level.
On March 1, 1995, GWFC submitted applications to federal bank
regulators seeking the creation of two new national banks in California and
Florida in the effort to reduce the competitive disadvantage which could be
caused by a deposit insurance premium disparity. Both of the proposed
national banks would be insured by the Federal Deposit Insurance Corporation
through the BIF and would allow the Company to offer a wide variety of
banking products and services to its present and future customers. GWFC
would also be required to file an application with the Federal Reserve to
become a bank holding company. If the applications are approved, GWFC would
operate the banks at existing branch locations and it is anticipated that a
portion of GWB's present deposit base would voluntarily flow to the national
banks. The bank applications are currently pending and require the approval
of the Office of the Comptroller of the Currency and the FDIC. The bank
holding company application would require the approval of the Federal Reserve
Board.
FIRREA requires insured depository institutions to reimburse the FDIC
for any loss or anticipated loss to the FDIC that arises from a default of
a commonly controlled insured depository institution or assistance provided
to such an institution in danger of default.
There is a moratorium on conversions from SAIF membership to BIF
membership until SAIF reaches its designated reserve ratio of 1.25 percent.
FDICIA, however, permits savings associations and banks to merge with each
other with federal regulatory approval, so long as the resulting institution
continues to pay proportionate assessments to each respective insurance fund
until the moratorium expires. The legislation also permits a federal savings
association to acquire or be acquired by any insured depository institution.
Capital Requirements Capital standards applicable to savings
associations consist of three components - a leverage ratio requirement, a
tangible capital requirement and a risk-based capital requirement. All three
components are required by FIRREA to be no less stringent than the
corresponding requirements applicable to national banks, except that the
risk-based capital requirement for savings associations may deviate to
reflect interest-rate risk or other risks if such deviations do not, in the
aggregate, result in materially lower levels of capital being required of
savings associations than would be required under the risk-based capital
standards applicable to national banks.
The capital regulations contain special capital rules affecting savings
associations with certain kinds of subsidiaries. For purposes of determining
compliance with each of the capital standards, an increasing portion of a
savings association's investment in and extensions of credit to subsidiaries
engaged in activities not permissible for a national bank are, with certain
exceptions, deducted from the savings association's capital. At December 31,
1995, GWB's investments in and extensions of credit to such subsidiaries
aggregated $30 million, all of which was deducted from capital at December
31, 1995.
The leverage ratio requirement requires a savings association to
maintain "core capital" of not less than 3 percent of adjusted total assets.
As mentioned below, the OTS proposed, but has not yet adopted, a stricter
standard which has become applicable to banks and under which banks are
required to maintain a core capital ratio of at least 3 percent and up to 5
percent depending upon their condition and the rating they have received from
the applicable regulatory body. Under the current standard, "core capital"
generally includes common equity, noncumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, less
certain intangible assets (including goodwill), plus certain qualifying
intangible assets. GWB's fully phased-in ratio at December 31, 1995 was 5.66
percent. The Bank had no qualifying supervisory goodwill.
The tangible capital requirement requires a savings association to
maintain "tangible capital" in an amount not less than 1.5 percent of
adjusted total assets. "Tangible capital" means core capital less any
intangible assets (including qualifying supervisory goodwill), plus certain
qualifying intangible assets. At December 31, 1995, GWB had a fully phased-
in ratio of tangible capital to total adjusted assets of 5.66 percent.
The risk-based capital requirements for savings associations are
similar in many respects to the risk-based capital guidelines of the FRB, the
Comptroller of the Currency and the FDIC. Among other things, the risk-based
capital requirements provide that the capital ratio applicable to an asset
will be adjusted to reflect the degree of credit risk associated with such
asset and the asset base for computing a savings association's capital
requirement will include off-balance-sheet assets. The regulations require
savings associations to maintain capital equal to 8 percent of risk-weighted
assets. A savings association's supplementary capital may be used to satisfy
the risk-adjusted capital ratios only to the extent of that association's
core capital. At December 31, 1995, GWB had a fully phased-in ratio of
capital to risk-based assets of 11.81 percent.
FDICIA requires the federal regulatory agencies to review the risk-
based capital standards to ensure that they adequately address interest-rate
risk, concentration of credit risk and risks from nontraditional activities.
The OTS amended its risk-based capital rules to incorporate interest-rate
risk requirements which require a savings association to hold additional
capital if it is projected to experience an excessive decline in "net
portfolio value" in the event interest rates increase or decrease by two
percentage points. The additional capital required is equal to one-half of
the amount by which any decline in net portfolio value exceeds 2 percent of
the savings association's total net portfolio value. The standards are not
yet in effect. However, GWB does not expect the interest-rate risk
requirements to have a material impact on its required capital levels.
A savings association which fails to meet the capital standards must
submit to the OTS Director a business plan which describes the manner in
which it proposes to increase its capital and the activities in which it will
engage. Any increase in the savings association's assets must be met with a
commensurate increase in the savings association's tangible capital and risk-
based capital. As part of the submission of a capital plan, a savings
association will be required to certify that during the pendency of its
application for approval of its capital plan, it will adhere to certain
asset growth restrictions, and will not make any capital distributions or
engage in certain other prohibited or restricted activities. The OTS
Director must, with certain limited exceptions, limit the asset growth of any
such savings association. In addition, the OTS Director may issue a capital
directive to such a savings association which may contain restrictions the
OTS Director deems necessary or appropriate. GWB is not subject to any
capital directive at this time.
Pursuant to FDICIA, the federal banking agencies have adopted
regulations which establish a system of progressive constraints as capital
levels decline at banks and savings associations. The "prompt corrective
action" rules classify banks and savings associations into one of five
categories based upon capital adequacy, ranging from "well capitalized" to
"critically undercapitalized". Furthermore, FDICIA provides that under
certain circumstances a federal banking agency may reclassify an institution
to the next lower capital category based on supervisory information other
than the capital levels of the institution. A savings association is deemed
to be "well capitalized" if it: (a) has a risk-based capital ratio of 10
percent or greater; (b) has a ratio of core capital to risk-adjusted assets
of 6 percent or greater; (c) has a ratio of core capital to adjusted total
assets of 5 percent or greater; and (d) is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure. A savings
association is deemed to be "adequately capitalized" if it is not "well
capitalized" and: (a) has a risk-based capital ratio of 8 percent or greater;
(b) has a ratio of core capital to risk-adjusted assets of 4 percent or
greater; and (c) has a ratio of core capital to adjusted total assets of 4
percent or greater (except that certain associations rated "composite 1"
under the OTS's CAMEL (Capital adequacy, Asset quality, Management, Earnings
and Liquidity) rating system may be adequately capitalized if their ratio of
core capital to adjusted total assets is 3 percent or greater). GWB believes
that it met the requirements to be "well capitalized" under the regulations
in effect as of December 31, 1995.
FDICIA also requires the appropriate federal banking agencies to take
corrective action to restrict asset growth, acquisitions, branching and new
business with respect to an "undercapitalized" institution and to take
increasingly severe additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized". FDICIA
also prohibits dividends and other capital distributions and the payment of
management fees to a controlling person if, following such distribution or
payment, the institution would fall within one of the three
"undercapitalized" categories.
FDICIA also requires an institution which is "undercapitalized" to
submit a capital restoration plan for improving its capital to the
appropriate federal banking agency. The holding company of such an
institution must guarantee that the institution will meet its capital
restoration plan, subject to certain limitations. If such a guarantee were
deemed to be a commitment to maintain capital under the federal Bankruptcy
Code, a claim under such guarantee in a bankruptcy proceeding involving the
holding company would be entitled to a priority over third party creditors
of the holding company.
As a condition of prior regulatory approval of certain transactions,
the Company has provided federal regulators with a commitment to maintain the
regulatory net worth of GWB at the minimum required amount and, if necessary,
to infuse sufficient additional capital to maintain such level. See
"Regulation - Capital Requirements".
Under FDICIA, a bank or savings association that is "significantly
undercapitalized" is subject to severe restrictions on its activities, and
may be required, among other things, to issue additional debt or stock, to
sell assets or to be acquired by a depository institution holding company or
combine with another depository institution if one or more grounds exist for
appointing a conservator or receiver for the institution. A bank or savings
association that is "critically undercapitalized" will be subject, with
certain exceptions, to the mandatory appointment of a conservator or receiver
by the appropriate federal banking agency within 90 days after such
institution becomes "critically undercapitalized". The effect of this
provision is to increase significantly the circumstances in which a
conservator or receiver may be appointed for an institution. In addition,
a bank or savings association that is "critically undercapitalized" is
subject to more severe restrictions on its activities and on payment of
subordinated debt, and may be prohibited, among other things, from entering
into material investment, expansion, acquisition or disposition transactions
or paying interest on new or renewed liabilities at a rate that would
significantly increase the institution's weighted average cost of funds. An
institution will be considered to be "critically undercapitalized" if the
institution has a ratio of "tangible equity" to total assets that is equal
to or less than 2 percent.
The FDIC has adopted a minimum core capital standard under which state
nonmember banks are required to hold core capital consisting generally of
common equity, minority interests in equity accounts of consolidated
subsidiaries, and qualifying perpetual preferred stock of at least 3 percent
and up to 5 percent of total assets. Banks receiving the highest rating
from the FDIC are permitted to maintain core capital of 3 percent of total
assets, while less healthy banks are required to maintain core capital of 4
to 5 percent. A bank with core capital of less than 2 percent would be
deemed to be in an unsafe and unsound condition. The OTS may or may not
adopt a similar standard that will be applicable to savings associations.
With respect to savings associations, the FDIC will use the core
capital standard in determining whether to approve applications for deposit
insurance, the right to exercise additional powers, or to merge or make
acquisitions. The FDIC may also use the new standard in determining whether
to take enforcement action against a savings association when an unsafe or
unsound practice exists.
The Company's BIF-insured institutions are required to have risk-based
capital of 8 percent of risk-weighted assets, based on the credit risk deemed
inherent in institutions' assets, including certain off-balance-sheet assets.
In addition, core capital must be 4 percent of risk-weighted assets. At
December 31, 1995, the industrial banks exceeded the required ratios.
Capital Distributions by GWB The Company is a legal entity separate
and distinct from the Bank and the Company's other subsidiaries. The primary
source of the Company's revenues on an unconsolidated basis has been
dividends from GWB. Various regulatory and tax considerations, however,
limit directly or indirectly the amount of dividends GWB can pay. Should GWB
distribute dividends in excess of the amount of its available earnings and
profits (as determined for federal income tax purposes), such excess would
be subject to federal income tax. At December 31, 1995, the Bank had
approximately $725 million of retained earnings available for the payment of
dividends without adverse tax consequences. Dividend payments are further
restricted by regulations as discussed below.
The OTS regulations impose limitations upon "capital distributions" by
savings associations, including cash dividends. The regulations establish
a three-tiered system: Tier 1 includes savings associations with capital at
least equal to their fully phased-in capital requirement which have not been
notified that they are in need of more than normal supervision; Tier 2
includes savings associations with capital above their minimum capital
requirement but less than their fully phased-in requirement; and Tier 3
includes savings associations with capital below their minimum capital
requirement. Tier 1 associations may, after prior notice but without
approval of the OTS, make capital distributions up to the higher of (1) 100
percent of their net income during the calendar year plus the amount that
would reduce by one half their "surplus capital ratio" (the excess over their
fully phased-in capital requirement) at the beginning of the calendar year
or (2) 75 percent of their net income over the most recent four-quarter
period. Tier 2 associations may, after prior notice but without approval
of the OTS, make capital distributions of up to 25 percent to 75 percent of
their net income over the most recent four-quarter period depending upon
their current risk-based capital position. Tier 3 associations may not make
capital distributions without prior approval. Amendments to these rules
have been proposed by the OTS to conform the rules to FDICIA requirements.
The Company believes that GWB is a Tier 1 association as of December 31,
1995. Notwithstanding the foregoing, the regulatory authorities have broad
discretion to prohibit any payment of dividends and take other actions if
they determine that the payment of such dividends would constitute an unsafe
or unsound practice. In addition, FDICIA prohibits dividends and other
capital distributions if, following such distribution, the savings
association would fall within one of three "undercapitalized" categories.
See "Regulation - Capital Requirements".
Community Reinvestment Act The Community Reinvestment Act ("CRA")
requires each savings association to identify the communities it serves and
the types of credit the savings association is prepared to extend within
those communities. CRA also requires the OTS to assess the savings
association's record of helping to meet the credit needs of its community and
to take such assessment into consideration when evaluating applications for
mergers, acquisitions and other transactions. A less than satisfactory CRA
rating may be the basis for denying such applications.
In connection with its assessment of CRA performance, the OTS assigns
a rating of "outstanding", "satisfactory", "needs to improve" or "substantial
noncompliance". Based on the most recent CRA examination conducted in 1995,
the Bank received a rating of "outstanding".
Restrictions on Transactions with Affiliates FIRREA imposes on savings
associations the affiliate transaction restrictions contained in Sections
23A, 23B, 22(g) and 22(h) of the Federal Reserve Act in the same manner and
to the same extent as such restrictions now apply to member banks. Such
restrictions are also applicable to the industrial banks. In addition, a
savings association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies. Further, a savings association may not purchase or
invest in securities issued by an affiliate other than a subsidiary. The OTS
is authorized to impose more stringent restrictions on a savings
association's affiliated transactions than those contained in Sections 23A
and 23B.
Subsidiary Investment Limits The amount which a federal savings bank
may invest in service corporations and subsidiaries (whether in equity or
debt of such corporations) is limited to an amount equal to 3 percent of
assets, provided investments in excess of 2 percent of assets serve certain
community purposes. The service corporation investment limit (for savings
associations like GWB which meet net worth and certain other requirements)
is exclusive of an amount not to exceed 50 percent of net worth which may be
invested in "conforming" (i.e., otherwise authorized) loans to service
corporations. At December 31, 1995, GWB's aggregate investment in service
corporations (exclusive of conforming loans of $21 million) was approximately
.3 percent of its assets.
Notice of Certain Activities FIRREA requires a savings association
seeking to establish a new subsidiary, acquire control of an existing company
(after which it would be a subsidiary), or conduct a new activity through a
subsidiary, to provide 30 days prior notice to the FDIC and the OTS and
conduct any activities of the subsidiary in accordance with regulations and
orders of the OTS. The OTS has the power to force a savings association to
divest or terminate any activity that it determines is a serious threat to
the financial safety, soundness or stability of such savings association or
is otherwise inconsistent with sound banking practices. In addition, the
FDIC is authorized to determine whether any specific investment activity
poses a threat to the SAIF and to prohibit any SAIF member from engaging
directly in such activity, even if it is an activity that is a permissible
investment for a federal savings association.
Loans-to-One Borrower Limitations FIRREA conforms savings
associations' loans-to-one borrower limitations to those applicable to
national banks. The lending limits for national banks apply to all savings
associations in the same manner and to the same extent as they now apply to
national banks. The basic lending limit is 15 percent of the amount of Tier
1 and Tier 2 capital actually included in risk-based capital, plus the
allowance for loan and lease losses not included in Tier 2 capital. It is
not expected that this limitation will have any significant effect upon GWB's
lending activities as currently conducted.
Brokered Deposits A rule adopted by the FDIC permits only "well
capitalized" institutions to obtain brokered deposits. "Adequately
capitalized" institutions may obtain brokered deposits if they receive a
waiver from the FDIC. The rule adopted by the FDIC also prohibits
institutions which are not "well capitalized" from soliciting deposits at
rates significantly higher than prevailing rates. GWB believes that it is
a "well capitalized" institution at December 31, 1995.
Liquidity OTS regulations require savings associations to maintain for
each calendar month an average daily balance of liquid assets (including cash
and certain time deposits, bankers' acceptances, specified corporate
obligations and specified United States government, state government and
federal agency obligations) of not less than 5 percent of the average daily
balance of its net withdrawable deposit accounts (the amount of all deposit
accounts less the unpaid balance of all loans made on the security of such
accounts) and borrowings payable on demand or in one year or less. This
liquidity requirement may be changed from time to time by the OTS within the
range of 4 percent to 10 percent. OTS regulations also require each savings
association to maintain for each calendar month an average daily balance of
short-term liquid assets (generally those having maturities of 12 months or
less) at an amount not less than 1 percent of the average daily balance of
its net withdrawable accounts plus such short-term debt during the preceding
calendar month. At December 31, 1995, the liquidity ratio of GWB was 5.56
percent and its short-term liquidity ratio was 2.74 percent which was in
compliance with these requirements.
Federal Home Loan Bank System GWB is a member of the FHLBank System,
which consists of 12 regional Federal Home Loan Banks. It is required to
acquire and hold shares of capital stock in the applicable FHLBank in an
amount equal to the greater of 1 percent of the aggregate principal amount
of its unpaid residential mortgages, one-twentieth of its outstanding
advances and letters of credit from the FHLBanks or .3 percent of total
assets as of the close of each calendar year.
The FHLBank serves as a reserve or central bank for the member
institutions within its assigned region. It makes advances (i.e. loans) to
members in accordance with its established policies and procedures. The
maximum amount of credit which the FHLBank will extend for purposes other
than meeting withdrawals varies from time to time in accordance with its
policies. The FHLBank interest rates charged for advances vary depending
upon maturity, the cost of funds to the FHLBank and the purpose of the
borrowing.
FIRREA required the FHLBanks to contribute a significant amount of
their reserves and up to $300 million a year in annual earnings to fund the
principal and a portion of the interest payable on bonds issued to fund the
resolution of failed savings associations. In addition, the statute provides
that each FHLBank must transfer a percentage of its annual net earnings to
a specified affordable housing program. As a result of these requirements,
it is anticipated that the FHLBanks will continue to pay reduced dividends
with respect to their stock and that GWB will continue to receive reduced
dividends on such stock in the foreseeable future. As of December 31, 1995,
GWB held $341 million of FHLBank stock and received dividends in the amount
of $16.5 million in 1995 with respect to such stock.
Federal Reserve Board Regulations Pursuant to the Depository
Institutions Deregulation and Monetary Control Act of 1980, the FRB adopted
regulations that require depository institutions to maintain reserves against
their transaction accounts and nonpersonal time deposits. In December 1990,
the FRB eliminated the reserve requirement on nonpersonal time deposits. The
balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements imposed by the OTS. At December
31, 1995, GWB's balances with the FRB totaled $153 million. The effect of
this reserve requirement is to decrease an institution's available investment
funds. The current reserve requirement on transaction accounts is 10
percent. Savings associations have authority to use various FRB services and
to borrow from the Federal Reserve Bank's "discount window", but FRB
regulations require them to exhaust all FHLBank sources before borrowing from
a Federal Reserve Bank. In addition, FDICIA restricts the period during
which discount advances may be outstanding to undercapitalized depository
institutions. As a creditor and a financial institution, GWB is subject to
additional regulations promulgated by the FRB, including, without limitation,
Regulation B (Equal Credit Opportunity Act), Regulation E (Electronic Funds
Transfers Act), Regulation F (Interbank Liabilities), Regulation Z (Truth in
Lending Act), Regulation CC (Expedited Funds Availability Act) and Regulation
DD (Truth in Savings Act).
Safety and Soundness Standards Pursuant to statutory requirements, the
OTS has issued a rule that sets forth guidelines, rather than a regulation,
in the areas of excessive compensation, internal controls, information
systems, documentation, credit underwriting, interest risk exposure, asset
growth and compliance with laws and regulations. Under the excessive
compensation standard, the OTS will analyze a person's compensation history,
post-employment benefits, the financial condition of the institution,
compensation practices at comparable institutions and other relevant
information. The final rule authorizes, rather than requires, the OTS to
seek a compliance plan from institutions failing to meet the safety and
soundness guidelines. In addition to the final rule on safety and soundness,
the OTS has proposed asset quality and earnings standards that would require
monitoring and reporting systems to identify emerging problems and corrective
actions to resolve them.
Real Estate Lending Standards The federal banking regulatory agencies,
including the OTS, adopted regulations which require institutions to adopt
written real estate lending policies that, among other things, must be
consistent with guidelines adopted by the agencies. Among the guidelines
adopted by the OTS and the other agencies are maximum loan-to-value ratios
for land loans (65 percent); land development loans (75 percent);
construction loans (80-85 percent); loans on owner-occupied 1-4 unit
residential properties, including home equity loans (no specific required
limit, but loans at or above 90 percent require private mortgage insurance
or readily marketable collateral); and loans on other improved property (85
percent).
The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's total capital, and the aggregate of nonconforming loans secured
by real estate other than 1-4 unit residential properties should not exceed
30 percent of total capital. Institutions are required to review, and update
as appropriate, their real estate lending policies on at least an annual
basis.
Classification of Assets Savings associations are required to classify
their assets on a regular basis, to establish allowances for losses and
report the results of such classification quarterly to the OTS. For
additional information see Note 1 of the Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data".
With respect to classified assets, if the OTS concludes that additional
assets should be classified or that the valuation allowances established by
the savings association are inadequate, the examiner may determine, subject
to review by the savings association's Regional Director, the need for and
extent of additional classification or any increase necessary in the savings
association's general or specific valuation allowances.
A savings association is also required to set aside adequate valuation
allowances to the extent that an affiliate holds assets posing a risk to the
association. A savings association must also establish liabilities for off-
balance-sheet items, such as letters of credit, when loss becomes both
probable and reasonably estimable.
The OTS has issued guidance for the classification of assets and a
policy on the classification of collateral-dependent loans (where proceeds
from repayment can be expected to come only from the operation and/or sale
of the collateral). For troubled collateral-dependent loans where it is
probable that the lender will be unable to collect all amounts due, a savings
association must classify as "loss" any excess of the recorded investment in
the loan over its "value", and classify the remainder as "substandard". The
"value" of a loan is the fair value of the collateral less estimated costs
to sell.
The federal banking agencies, including the OTS, have issued an
interagency policy statement on the allowance for loan and lease losses (the
"Policy Statement"). The Policy Statement requires that federally-insured
depository institutions maintain an allowance for loan and lease losses
("ALLL") adequate to absorb credit losses associated with the loan and lease
portfolio, including all binding commitments to lend. Given the appropriate
facts and circumstances as of the evaluation date, the Policy Statement
defines an adequate ALLL as a level that is no less than the sum of (1) for
loans and leases classified as substandard or doubtful, credit losses over
the remaining effective lives of such loans and leases; (2) for loans and
leases that are not classified, all estimated credit losses forecasted for
the upcoming 12 months; and (3) amounts for estimated losses from transfer
risk on international loans. Additionally, an adequate level of ALLL should
reflect an additional margin for imprecision inherent in most estimates of
expected credit losses.
The Policy Statement also provides guidance to examiners in evaluating
the adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of (1) 50 percent of the portfolio that is
classified doubtful, (2) 15 percent of the portfolio that is classified
substandard; and (3) for the portions of the portfolio that have not been
classified (including those loans and leases designated special mention),
estimated credit losses over the upcoming 12 months given the facts and
circumstances as of the evaluation date (based on the institution's average
annual rate of net charge-offs experienced over the previous two or three
years on similar loans and leases, adjusted for current conditions and
trends).
The Policy Statement specifies that the amount of ALLL determined by
the sum of the amounts above is neither a floor nor a "safe harbor".
However, it is expected that examiners will review a shortfall relative to
this amount as indicating a need to more closely review management's analysis
to determine whether it is reasonable, supported by the weight of reliable
evidence and that all relevant factors have been appropriately considered.
TAXATION
Under the Internal Revenue Code, chartered savings associations that
meet certain definitional tests and conditions are allowed federal income tax
deductions for additions to bad debt reserves. Such additions may be
determined under the experience method or the percentage of taxable income
method. In order to retain the special bad debt reserve treatment, savings
associations must maintain 60 percent or more of their assets in certain
qualifying assets, consisting of some of the same assets as in the QTL test,
as well as other assets. GWB has met all tests for all applicable years.
If in some future year the Bank either fails the QTL test and converts
to a bank charter or fails to meet the tax asset test, it would be ineligible
to obtain a bad debt deduction under the reserve method and may be required
to recapture its existing tax bad debt reserves.
The Budget Reconciliation Bill, which was vetoed by President Clinton,
included provisions that would have eliminated the deduction for additions
to tax bad debt reserves and repealed the requirement to recapture tax bad
debt reserves into income upon conversion to a commercial bank or loss of tax
status as a savings association to the extent that the reserves do not exceed
a base year amount (generally the balance of tax bad debt reserves as of
December 31, 1987) under certain circumstances. The Bank's existing tax bad
debt reserve balance as of December 31, 1995, of $724,488,000 does not exceed
its base year amount. The Company cannot predict whether legislation similar
to that vetoed will be enacted.
In 1995, GWB paid dividends totaling $71 million to GWFC. Future
dividends by GWB are subject to certain tax restrictions in addition to
regulatory and other considerations. Retained earnings that have not been
subject to federal income tax, because of the above bad debt deduction, are
not available for dividends or any other distribution, including one made on
dissolution or liquidation, without the payment of federal income taxes.
Further, at December 31, 1995, GWB's limitations on capital distributions
would have restricted the payment of dividends before untaxed retained
earnings were reached.
Notes 1, 15, and 17 of the Notes to Consolidated Financial Statements
in Item 8, "Financial Statements and Supplementary Data", present the
accounting implications for income taxes.
EMPLOYEES
GWFC employed 14,393 persons at December 31, 1995. Employees are not
represented by a union or collective bargaining group and GWFC considers its
employee relations to be satisfactory. Employees are provided retirement,
savings incentive and other benefits, including life, health and accident and
hospital insurance.
ITEM 2. PROPERTIES
The executive offices of both GWFC and GWB are located in the home
office building owned by GWB at 9200 Oakdale Avenue, Chatsworth, California.
GWFC owns approximately 41 percent of the 6.1 million square feet in which
its headquarters, administrative and branch offices are located throughout
several states, including California and Florida.
See Note 10 of the Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data", for information on
properties, leases and property operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The following information appears in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Item 8,
"Financial Statements and Supplementary Data".
(a) Market and market prices of the common stock - page 104
(b) Approximate number of common security holders - page 104
(c) Common stock dividend history and restrictions - page 104
(d) Common stock dividend policy - pages 44, 45, 82 and 83
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
(Dollars in thousands, except per share) 1995 1994 1993 1992 1991
Summary of Operations ----------- ----------- ----------- ----------- -----------
Interest income $ 3,238,711 $ 2,629,718 $ 2,680,784 $ 3,091,093 $ 3,718,796
Interest expense 1,936,582 1,307,448 1,297,930 1,668,731 2,453,540
----------- ----------- ----------- ----------- -----------
Net interest income 1,302,129 1,322,270 1,382,854 1,422,362 1,265,256
Provision for loan losses 187,700 207,200 463,000 420,000 149,900
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,114,429 1,115,070 919,854 1,002,362 1,115,356
Other income 327,668 367,897 327,855 282,131 257,582
Noninterest expense 1,019,975 1,076,433 1,155,662 1,188,981 867,508
----------- ----------- ----------- ----------- -----------
Earnings before taxes on income 422,122 406,534 92,047 95,512 505,430
Federal and state taxes on income 161,100 155,300 30,000 41,600 207,300
Accounting changes - - - 31,094 -
----------- ----------- ----------- ----------- -----------
Net earnings $ 261,022 $ 251,234 $ 62,047 $ 85,006 $ 298,130
=========== =========== =========== =========== ===========
Summary of Financial Condition
Cash and securities $ 2,186,876 $ 2,065,660 $ 1,846,780 $ 1,660,485 $ 1,397,529
Loans receivable and mortgage-backed
securities 39,690,790 37,647,975 33,850,799 33,752,661 35,115,730
Real estate 217,112 256,967 434,077 1,153,383 1,123,043
Other assets 2,491,986 2,247,655 2,216,704 1,872,657 1,963,326
----------- ----------- ----------- ----------- -----------
Total assets $44,586,764 $42,218,257 $38,348,360 $38,439,186 $39,599,628
=========== =========== =========== =========== ===========
Customer accounts $29,234,928 $28,700,947 $31,531,563 $30,908,665 $30,570,368
Borrowings and debentures 11,445,634 10,120,660 3,479,341 4,151,052 5,592,453
Other liabilities 1,083,726 912,864 914,055 929,735 1,115,747
Stockholders' equity 2,822,476 2,483,786 2,423,401 2,449,734 2,321,060
----------- ----------- ----------- ----------- -----------
Total liabilities and equity $44,586,764 $42,218,257 $38,348,360 $38,439,186 $39,599,628
=========== =========== =========== =========== ===========
Per Common Share Data
Fully diluted earnings $ 1.71 $ 1.69 $ .28 $ .53 $ 2.24
Dividends .92 .92 .92 .91 .87
Stock price - high 27 1/8 20 7/8 20 3/8 19 3/4 20 7/8
- low 16 15 3/8 15 5/8 13 11 1/4
Year-end closing price 25 3/8 16 20 17 1/2 18
Stockholders' equity 18.42 16.30 16.05 16.48 17.01
Tangible stockholders' equity 16.06 13.59 12.80 14.01 14.37
Earnings rate of return on stockholders'
equity 10.03% 10.35% 2.53% 3.50% 13.73%
Price earnings ratio 15 9 71 33 8
Dividend rate of return 3.6% 5.8% 4.6% 5.2% 4.8%
Dividend rate as a percent of earnings 53.8% 54.4% 328.6% 171.7% 38.8%
At Year End
Average equity to average assets 5.9% 6.2% 6.5% 6.2% 5.5%
Return on average assets .59% .65% .16% .22% .75%
Number of common shares issued 137,279,331 134,315,592 132,616,172 130,814,018 128,875,761
Number of beneficial and record stockholders 51,178 52,633 55,469 42,332 33,662
Number of employees 14,393 15,644 17,029 16,016 14,786
Number of offices 1,207 1,210 1,180 1,101 1,095
/TABLE
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Great Western reported consolidated net earnings of $261 million, or
$1.71 per share, for 1995 compared with $251 million, or $1.69 per share, for
1994 and $62 million, or $.28 per share, for 1993. Earnings before taxes in
1995 were $422 million compared with $407 million in 1994 and $92 million in
1993. Earnings in 1994 included a $62.3 million pretax gain on the sale of
31 Florida West Coast retail banking branches. In addition, the Company
wrote off approximately $11.7 million of intangibles in 1994 related to
interstate banking access rights.
Provisions for losses on loans and real estate in 1995 fell to $189
million, down from $219 million and $555 million in 1994 and 1993,
respectively. The level of loan and real estate loss provisions in 1995 and
1994 reflects a slower rate of deterioration in the real estate market and
a declining level of nonperforming real estate loans. Charge-offs of 1-4
unit residential loans ("single-family" or "SFR") increased $195 million in
1995 from $192 million in 1994 as a result of the continued weak Southern
California real estate market. Provisions for loan losses in 1995 were
lower due to the reversal of previously established reserves on commercial
and apartment loans. This segment of the portfolio experienced a significant
decline in new nonperforming activity. Nonperforming assets declined from
$846 million, or 1.98 percent of assets, at December 31, 1994 to $768
million, or 1.72 percent of assets, at December 31, 1995. The higher loss
provisions on real estate loans and real estate in 1993 included $150 million
related to four bulk sales of $659 million of troubled real estate assets
completed in the second half of the year, in addition to the significant
increases in SFR delinquencies.
Net interest income for 1995 was $1.30 billion compared with $1.32
billion in 1994 and $1.38 billion in 1993. In 1995 and 1994, the decline in
net interest income was attributed to a declining interest spread, which more
than offset the increase in interest earning assets. The interest spread was
compressed in the first half of 1995 as interest rates rose slightly, however
during the second half of 1995, the interest spread began to benefit from
declining interest rates. In a declining interest rate environment,
borrowing costs fall more swiftly than rates charged on ARMs. Should
interest rates continue to decrease, the interest spread may continue to
increase, but may also be offset by earning asset declines.
As a result of the lower provisions for losses in 1995 and 1994, the
returns on average assets and average equity have improved from the level of
the prior two years. The components of the ratio to average assets follow:
Year Ended December 31
----------------------------------------
Ratio to Average Assets 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net interest income 2.96% 3.40% 3.64% 3.66% 3.19%
Other income .74 .94 .86 .73 .65
Less: Operating expenses (2.21) (2.53) (2.60) (2.37) (2.05)
Provisions for losses (.43) (.56) (1.46) (1.64) (.43)
Other expenses (.10) (.20) (.20) (.13) (.09)
----- ----- ----- ----- -----
Income before taxes and
accounting changes .96 1.05 .24 .25 1.27
Taxes (.37) (.40) (.08) (.11) (.52)
Accounting changes - - - .08 -
----- ----- ----- ----- -----
Return on average assets .59% .65% .16% .22% .75%
===== ===== ===== ==== =====
Return on average equity 10.03% 10.35% 2.53% 3.50% 13.73%
===== ===== ===== ==== =====
The following summarizes the contribution to net earnings from the
principal business units:
Year Ended December 31
--------------------------
(Dollars in millions) 1995 1994 1993
---- ---- ----
Banking operations $197 $188 $ 5
Consumer finance operations 64 63 57
---- ---- ---
$261 $251 $62
==== ==== ===
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("FAS 122") as of April 1,
1995. FAS 122, an amendment to Statement of Financial Accounting Standards
No. 65, "Accounting for Certain Mortgage Banking Activities," requires an
entity that originates or purchases loans with the intent of selling or
securitizing such loans to capitalize the mortgage servicing rights. The
value of these servicing rights is based on the assumption that a normal
servicing fee will be received for the estimated life of the loans.
FAS 122 also requires that all capitalized mortgage servicing rights
be measured for impairment. Impairment is measured by stratifying the
underlying loans based on one or more predominant risk characteristics,
including interest rate, product type and geographic area. Impairment is
recognized through a valuation allowance.
In 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("FAS 121"). FAS 121 establishes
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles. The adoption of FAS 121 did not have a material
impact on the Company's financial statements. As a result of FAS 121, real
estate available for development is recorded at the lower of cost or fair
value. Real estate available for development was previously recorded at the
lower of cost or net realizable value.
The Company adopted Statement of Financial Accounting Standards No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" ("FAS 119") as of December 31, 1994. FAS 119 requires
disclosure of information regarding amounts, nature and terms of derivative
financial instruments and options. The disclosure requires the description
of the objectives, strategies and classes of derivatives and related gains
and losses in the financial statements or in the notes thereto.
In the fourth quarter of 1994, the Company adopted Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan -Income Recognition and Disclosure" ("FAS 118"). The
Company's income recognition policy was in compliance with the provisions of
FAS 118 and the adoption of this statement had no effect on the Company's
financial condition or results of operations.
The presentation of this information is included below and in the Notes
to Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data".
INTEREST EARNING ASSETS
Interest earning assets primarily comprise mortgages, consumer finance
loans and marketable securities. Average interest earning assets increased
13 percent in 1995 compared with an increase of 3 percent in 1994 and a
decrease of 1 percent in 1993.
ARMs on residential property continue to be the primary lending
product. The demand for this product is a principal factor governing asset
growth. The Federal Reserve Board increased interest rates in 1994 to curb
inflationary concerns. As rates declined in 1995, the ARM became less
popular with customers as the predominant mortgage product. ARMs comprised
83 percent of real estate loans originated in 1995 compared with 88 percent
in 1994 and 62 percent in 1993. In the latter months of 1995, ARMs were
approximately 68 percent of new loan originations. Loans originated at fixed
rates, which comprised the remainder of the volume, were sold to others to
minimize portfolio interest-rate risk. Also, as a result of the declining
rate environment, the mortgage market transitioned from a purchase property
market to a refinance market in 1995. Refinance activity comprised 37
percent of real estate lending in 1995 compared with 44 percent in 1994 and
64 percent in 1993. Late in 1995, refinance activity comprised 46 percent
of real estate lending.
To complement loan originations in 1994, the Company purchased
mortgage-backed securities as part of a program designed to enhance interest
earning assets' growth with low-credit-risk assets. These securities are
tied to the cost of funds index for financial institutions comprising the
11th District Federal Home Loan Bank of San Francisco ("FHLB") Cost of Funds
Index ("COFI"). There were no purchases of mortgage-backed securities in
1995 compared with $1.5 billion in 1994 and $925 million in 1993. The 1994
purchases of adjustable rate securities had an average spread of 172 basis
points over COFI, and were included in the Company's available-for-sale
portfolio. During 1995, the Company swapped $2 billion of single-family
residential ARM loans for mortgage-backed securities to provide collateral
for borrowings compared with $5.5 billion in 1994. The majority of these
securities are recorded in the Company's available-for-sale portfolio and are
subject to full credit recourse.
The mix of interest earning assets continued to reflect a declining
percentage of apartment and commercial ("income-producing") loans. Income-
producing loans were 7.2 percent of total interest earning assets at year-end
1995 compared with 7.8 percent at year-end 1994 and 9.5 percent at year-end
1993. This trend is the result of Great Western's decision in 1987 to
discontinue commercial real estate lending except to finance the sale of
foreclosed properties. The SFR portfolio, combined with mortgage-backed
securities, represented 83 percent of total interest earning assets at year-
ends 1995 and 1994 and compared with 81 percent at year-end 1993. The
following table shows the shift in the composition of interest earning
assets:
December 31
--------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
Loans receivable
Single-family 59.1% 59.2% 71.7% 71.2% 70.4%
Apartments 3.9 4.3 5.1 5.4 5.7
Commercial 3.3 3.5 4.4 4.4 4.8
Consumer 6.3 6.1 6.2 6.6 6.6
----- ----- ----- ----- -----
72.6 73.1 87.4 87.6 87.5
Mortgage-backed securities 23.5 23.5 8.9 8.9 9.7
Securities 3.1 2.6 2.9 2.6 2.0
Investment in FHLB stock .8 .8 .8 .9 .8
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table summarizes the real estate loan portfolio as of
December 31, 1995 by security type and year of origination:
(Dollars in millions) SFRs Apartments Commercial Total
------- ---------- ---------- -------
Year of Origination
1995 $ 5,525 $ 42 $ 73 $ 5,640
1994 3,356 44 52 3,452
1993 2,802 49 96 2,947
1992 1,952 48 39 2,039
1991 1,681 30 9 1,720
Prior to 1991 9,399 1,402 1,105 11,906
------- ------ ------ -------
$24,715 $1,615 $1,374 $27,704
======= ====== ====== =======
The tables on pages 96, 101, and 102 in Item 8, "Financial Statements
and Supplementary Data", present additional data on the interest earning
asset portfolio.
INTEREST BEARING LIABILITIES
Interest bearing liabilities comprise retail and wholesale customer
accounts and borrowings.
Customer accounts increased $534 million in 1995, or 2 percent of the
beginning balance, compared with a decrease of $2.8 billion, or 9 percent,
in 1994 and an increase of $623 million, or 2 percent, in 1993. The decrease
in 1994 included the sale of $1 billion in retail deposits to First Union
National Bank, offset by the acquisition of $52 million of deposits from
Citibank, F.S.A. The 1993 increase included approximately $4.4 billion in
retail deposits from acquisitions, primarily from the RTC. Since 1990, Great
Western has concentrated on increasing transaction account balances while
certificates of deposit declined and were not renewed in many instances
because of lower interest rates. Borrowings increased $1.3 billion in 1995
and $6.6 billion in 1994. The increase in 1994 was to enable asset growth
and to fund the Florida branch sale and customer account outflows.
Borrowings had declined in each of the prior three years. The following
table shows the shift in interest bearing liabilities:
December 31
-----------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
Customer accounts
Retail accounts
Term 43.5% 41.5% 50.2% 50.1% 55.2%
Transaction 27.2 30.9 38.2 36.1 26.4
Wholesale accounts 1.2 1.5 1.7 2.0 2.9
----- ----- ----- ----- -----
71.9 73.9 90.1 88.2 84.5
Borrowings 28.1 26.1 9.9 11.8 15.5
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table shows the components of the change in customer
account balances:
Year Ended December 31
---------------------------------------------------
(Dollars in millions) 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Transaction
Demand accounts $ (85) $ 193 $ 314 $ 802 $ 348
Money market and other
transaction accounts (851) (1,175) (511) 1,301 1,564
Certificates of deposit 1,572 (843) (3,179) (3,657) (2,645)
Wholesale accounts (102) (24) (95) (366) (1,129)
------- ------- ------- ------- -------
534 (1,849) (3,471) (1,920) (1,862)
Acquisitions (sales) of
Florida deposits - (1,034) - 1,773 1,870
Acquisitions of California
deposits - 52 4,420 469 2,080
Withdrawals of high-rate
accounts included in
acquisitions - - - - (1,055)
Other purchase and sale
activity - - (326) 16 (112)
------- ------- ------- ------- -------
$ 534 $(2,831) $ 623 $ 338 $ 921
======= ======= ======= ======= =======
The Company concentrates its retail deposit-gathering activity in two
states: California and Florida.
Transaction accounts declined $936 million in 1995 compared with
decreases of $982 million in 1994 and $197 million in 1993. Transaction
accounts comprised 38 percent of total customer deposits at year-end 1995
compared with 42 percent at year-end 1994 and 43 percent at year-end 1993.
These balances include 17 percent, 19 percent and 21 percent, respectively,
in money market accounts in 1995, 1994 and 1993.
Certificates of deposit increased $1.6 billion in 1995, compared with
declines of $843 million and $3.2 billion in 1994 and 1993, respectively.
As interest rates offered increased in 1994 and the first half of 1995,
customers shifted from money market accounts. Certificates of deposit
declined in 1993 due to the low interest rates offered on such accounts. A
portion of the 1993 decrease in certificates of deposit was the withdrawal
of $1.6 billion of deferred compensation accounts, which included $1.3
billion from the state of California.
Wholesale accounts, which are able to be used as an alternative source
of lendable funds, totaled $462 million at December 31, 1995 and have
continued to run off during the past three years. The balance of wholesale
accounts at year-end 1995 comprised 2 percent of total deposits. Wholesale
accounts totaled $564 million at year-end 1994 and $588 million at year-end
1993. Wholesale account activity will fluctuate depending upon the need for
funding sources for asset growth.
Borrowings, other than customer accounts, totaled $11.4 billion at
December 31, 1995 compared with $10.1 billion at December 31, 1994 and $3.5
billion at December 31, 1993. The Company increased reverse repurchase
agreements $569 million in 1995 and $6.3 billion in 1994. Borrowings were
not a significant factor in funding new lending during 1993 as a result of
customer deposit acquisitions. At December 31, 1995, customer accounts
comprised 72 percent of interest bearing liabilities, compared with 74
percent and 90 percent at year-ends 1994 and 1993, respectively.
The tables on pages 97, 98 and 99 in Item 8, "Financial Statements and
Supplementary Data" present a detailed composition of customer accounts and
borrowings.
INTEREST SPREAD AND NET INTEREST INCOME
Net interest income was $1.30 billion in 1995 compared with $1.32
billion in 1994 and $1.38 billion in 1993. For the year 1995, the interest
spread was 3.00 percent compared with 3.50 percent for 1994 and 3.79 percent
for 1993. Net interest income and the interest spread are the two primary
measures of core earnings strength. The interest spread contracted in 1994
and the first half of 1995, as market rates rose sharply and the Company's
margin was affected by the ARM repricing lag. During the second half of
1995, the interest spread began to benefit from declining interest rates,
improving to 3.01 percent in the third quarter and 3.19 percent in the fourth
quarter from a low of 2.83 percent in the second quarter of 1995.
Great Western offers various adjustable rate mortgage products which
are tied to: the COFI, the Federal Cost of Funds Index ("FCOFI"), the London
Interbank Offered Rate ("LIBOR") Annual Monthly Average Index ("LAMA"), one
year Treasury bills and the prime rate. The FCOFI is tied to two components
of the federal government's cost of funds - the monthly average interest rate
on all marketable Treasury bills and the monthly average interest rate on all
marketable Treasury notes. In March 1995, the Company introduced a new
product, the LAMA ARM. The LAMA ARM is indexed to a 12 month average of the
Federal National Mortgage Association ("FNMA") One Month LIBOR. Customer
acceptance of a product depends upon the relationship of the index and
initial offering rates. The interest differential over the appropriate index
was approximately 18 to 19 basis points lower for FCOFI loans than COFI loans
during 1995. The principal mortgage instrument for the last three years was
the COFI ARM, however, the LAMA ARM has become the primary instrument in the
second half of 1995. The majority of the LAMA ARM production in 1995 were
a loans with a fixed interest rate during the first three or five years of
the loan term.
The composition of real estate loan originations by type was as
follows:
Year Ended December 31
------------------------
1995 1994 1993
---- ---- ----
ARM
COFI 56% 79% 48%
LAMA 23 - -
FCOFI 1 1 9
T-bill 1 6 2
Other 2 2 3
--- --- ---
Total ARM 83 88 62
Fixed rate 17 12 38
--- --- ---
100% 100% 100%
=== === ===
The cost of funds of GWB relative to COFI, FCOFI and LAMA is shown as
follows:
GWB Cost of
Funds Less Than
GWB Cost ---------------------
of Funds COFI FCOFI LAMA COFI FCOFI LAMA
-------- ---- ----- ---- ---- ----- ----
December 31, 1995 4.658% 5.059% 6.152% 5.940% .401% 1.494% 1.282%
September 30, 1995 4.776 5.111 6.254 6.009 .335 1.478 1.233
June 30, 1995 4.815 5.179 6.352 5.782 .364 1.537 .967
March 31, 1995 4.580 5.007 6.336 5.402 .427 1.756 .822
December 31, 1994 4.019 4.589 5.971 - .570 1.952 -
December 31, 1993 3.319 3.879 4.892 - .560 1.573 -
Both FCOFI and COFI ARMs lag changes in market rates by approximately
two months. In a declining-rate environment, the cost of short-term
liabilities will decrease ahead of the ARMs; whereas, in a rising-rate
environment, net interest income and the interest spread decrease during the
lag period. The repricing lag on COFI, FCOFI and LAMA ARMs reduced the
interest spread by approximately eight basis points in 1995 and 1994 compared
with an increase of eight basis points in 1993. The interest spread widens
in a declining interest-rate environment as decreases in COFI, to which most
interest earning assets are tied, lag behind deposit and borrowing rate
decreases.
The Company currently originates ARMs for its own portfolio and
originates fixed-rate residential loans for sale in the secondary market.
The Company utilizes both a short-term hedge contract program and forward
sales for the fixed-rate commitment period to protect against rate
fluctuations on the commitments to fund fixed-rate loans. Fixed-rate lending
totaled $1.2 billion in 1995, $923 million in 1994 and $3.4 billion in 1993.
Sales of these mortgages totaled $1.1 billion in 1995, $1.1 billion in 1994
and $3.1 billion in 1993. Total mortgage sales in 1995 were $1.6 billion,
compared with $1.2 billion in 1994, and $3.6 billion in 1993, which included
$473 million of distressed asset bulk sales. In 1994, the Company sold a $55
million adjustable rate, nonperforming troubled debt restructuring ("TDR")
from the real estate loans held for investment portfolio. Nearly all
mortgage sales, excluding bulk sales, were loans originated for sale or held
as available for sale. At December 31, 1995, the Company serviced for others
$11.1 billion in mortgages with a loan servicing spread of 42 basis points,
$11 billion at December 31, 1994 with a loan servicing spread of 44 basis
points and $12.3 billion at December 31, 1993 with a loan servicing spread
of 42 basis points. The increase in loans serviced for others in 1995 was
the result of new loan sales exceeding loan principal repayments. The
decline in loans serviced for others in 1994 and 1993 was the result of loan
principal repayments exceeding new loan sales.
Loans available for sale are valued at the lower of cost or fair value,
generally on an individual loan basis. As of December 31, 1995, $159 million
of real estate loans, primarily fixed-rate loans, were designated as
available for sale. Gains on mortgage sales of $22.4 million were
recognized, which included a $13.6 million gain from mortgage-backed
securities sales and a $7.2 million gain representing originated mortgage
servicing rights capitalized in accordance with FAS 122. Unrecognized gains
on real estate loans available for sale totaled $1.4 million at year end.
Mortgage-backed securities and other securities available for sale are
carried at fair value. At December 31, 1995, $7.9 billion in mortgage-backed
securities, primarily ARM securitized products, were designated as available
for sale. There were $498 million of mortgage-backed securities sold in
1995. Gains and losses are calculated on the specific identification method.
Securities available for sale at the end of 1995 had a fair value of $1.1
billion.
Great Western monitors asset and liability maturities and reviews
exposure to interest-rate risk, giving consideration to interest-rate trends
and funding requirements. The following table shows that the portfolio of
short-term assets exceeded liabilities maturing or subject to interest
adjustment within one year by $3.6 billion, or 8.7 percent of interest
earning assets at December 31, 1995. This compared with $3.8 billion, or 9.5
percent of interest earning assets at December 31, 1994 and $3.1 billion, or
8.7 percent of interest earning assets at December 31, 1993.
Maturity/Rate Sensitivity
------------------------------------------------------------------
December 31, 1995 % of Within Over
(Dollars in millions) Rate Balance Total 1 year 1-5 years 5-15 years 15 years
---- ------- ----- ------ --------- ---------- --------
Interest Earning Assets
Securities 6.23% $ 1,286 3 $ 1,286 $ - $ - $ -
Mortgage-backed securities 7.34 9,824 24 9,617 91 89 27
Investment in FHLB stock 5.00 341 1 - - - 341
Loans receivable
Real estate
Adjustable rate 7.66 26,686 64 25,250 1,436 - -
Fixed-rate
Short-term 8.91 488 1 56 107 166 159
Long-term 8.56 530 1 107 103 161 159
Consumer 16.45 2,634 6 641 1,618 282 93
----- ------- --- ------- ------- ----- ----
8.10 41,789 100 36,957 3,355 698 779
----- ------- --- ------- ------- ----- ----
Interest Bearing Liabilities
Customer accounts
Regular savings 2.00 1,763 5 1,763 - - -
Checking and limited access 2.09 9,314 23 9,314 - - -
Wholesale transaction - 174 - 174 - - -
Term accounts 5.59 17,984 44 13,023 4,957 4 -
----- ------- --- ------- ------- ----- ----
4.23 29,235 72 24,274 4,957 4 -
Borrowings
Federal Home Loan Bank 5.60 855 2 855 - - -
Other 6.32 10,591 26 8,290 1,655 499 147
Impact of interest-rate swaps - - - (109) 109 - -
----- ------- --- ------- ------- ----- ----
4.80 40,681 100 33,310 6,721 503 147
----- ------- --- ------- ------- ----- ----
Excess of Interest Earning Assets
over Interest Bearing Liabilities
at December 31, 1995 3.30% $ 1,108 $ 3,647 $(3,366) $ 195 $632
===== ======= ======= ======= ===== ====
Excess of Interest Earning Assets
over Interest Bearing Liabilities
at December 31, 1994 3.08% $ 715 $ 3,757 $(3,573) $(105) $636
===== ======= ======= ======= ===== ====
December 31
-------------
Calculation of Adjusted Margin 1995 1994
---- ----
Unadjusted margin 3.30% 3.08%
Benefit of net interest earning assets .13 .08
---- ----
Adjusted Margin 3.43% 3.16%
==== ====
The following table shows the year-end interest-rate margins and the
components used in the margin calculation, reflecting the trends during the
past five years:
December 31
-----------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
Average Yield on
Loans 8.46% 7.75% 7.54% 8.32% 9.84%
Mortgage-backed securities 7.34 6.55 5.93 7.08 8.63
Securities 5.97 6.15 4.49 4.07 6.24
----- ----- ----- ----- -----
Earning assets 8.10 7.42 7.28 8.06 9.62
----- ----- ----- ----- -----
Average Cost of
Customer accounts 4.23 3.60 3.10 3.48 5.34
Borrowings 6.27 6.42 7.34 7.60 7.69
----- ----- ----- ----- -----
Funds 4.80 4.34 3.52 3.97 5.70
----- ----- ----- ----- -----
Net Interest Margin 3.30% 3.08% 3.76% 4.09% 3.92%
===== ===== ===== ===== =====
Because the effective yield is subject to varying interest rates during
the year and also is affected by the loss of interest on nonaccrual loans,
the following table on net interest income shows the average monthly
balances, interest income and interest expense, and effective average rates
by asset and liability component. This table also reflects the yield which
results because of the benefit of interest earning assets exceeding interest
bearing liabilities.
<caption
Year Ended
December 31, 1995
------------------------
Average Average
(Dollars in millions) Balance Interest Rate
------- -------- -------
Interest earning assets
Securities $ 1,545 $ 98 6.36%
Mortgage-backed securities 10,486 753 7.18
Loans receivable
Real estate 27,076 1,985 7.33
Consumer 2,493 403 16.15
------- ------ -----
Total interest earning assets 41,600 3,239 7.79
Other assets 2,378
-------
Total assets $43,978
=======
Interest bearing liabilities
Customer accounts
Term accounts $17,790 994 5.59
Transaction accounts 11,421 223 1.95
------- ------ -----
29,211 1,217 4.17
Borrowings
Federal Home Loan Bank 187 8 4.23
Other 10,995 712 6.47
------- ------ -----
Total interest bearing liabilities 40,393 1,937 4.79
Other liabilities 983
Stockholders' equity 2,602
-------
Total liabilities and equity $43,978
=======
Interest spread 3.00%
====
Effective yield summary
Interest income/interest
earning assets $41,600 $3,239 7.79%
Interest expense/interest
earning assets 41,600 1,937 4.66
------ -----
Net yield on interest earning assets $1,302 3.13%
====== ====
/TABLE
Year Ended
December 31, 1994
------------------------
Average Average
(Dollars in millions) Balance Interest Rate
------- -------- -------
Interest earning assets
Securities $ 1,121 $ 62 5.51%
Mortgage-backed securities 4,763 276 5.80
Loans receivable
Real estate 28,507 1,914 6.71
Consumer 2,261 378 16.73
------- ------ -----
Total interest earning assets 36,652 2,630 7.17
Other assets 2,289
-------
Total assets $38,941
=======
Interest bearing liabilities
Customer accounts
Term accounts $16,953 713 4.20
Transaction accounts 13,233 237 1.79
------- ------ -----
30,186 950 3.15
Borrowings
Federal Home Loan Bank 307 18 5.80
Other 5,089 340 6.67
------- ------ -----
Total interest bearing liabilities 35,582 1,308 3.67
Other liabilities 931
Stockholders' equity 2,428
-------
Total liabilities and equity $38,941
=======
Interest spread 3.50%
====
Effective yield summary
Interest income/interest
earning assets $36,652 $2,630 7.17%
Interest expense/interest
earning assets 36,652 1,308 3.57
------ -----
Net yield on interest earning assets $1,322 3.60%
====== ====
/TABLE
Year Ended
December 31, 1993
------------------------
Average Average
(Dollars in millions) Balance Interest Rate
------- -------- -------
Interest earning assets
Securities $ 897 $ 68 7.60%
Mortgage-backed securities 2,958 186 6.27
Loans receivable
Real estate 29,439 2,042 6.94
Consumer 2,263 385 17.02
------- ------ -----
Total interest earning assets 35,557 2,681 7.54
Other assets 2,453
-------
Total assets $38,010
=======
Interest bearing liabilities
Customer accounts
Term accounts $16,378 693 4.23
Transaction accounts 12,712 246 1.93
------- ------ -----
29,090 939 3.23
Borrowings
Federal Home Loan Bank 1,058 51 4.79
Other 4,482 308 6.88
------- ------ -----
Total interest bearing liabilities 34,630 1,298 3.75
Other liabilities 926
Stockholders' equity 2,454
-------
Total liabilities and equity $38,010
=======
Interest spread 3.79%
=====
Effective yield summary
Interest income/interest
earning assets $35,557 $2,681 7.54%
Interest expense/interest
earning assets 35,557 1,298 3.65
------ -----
Net yield on interest earning assets $1,383 3.89%
====== =====
ASSET QUALITY
The Company regularly reviews its assets to determine that each
category is reasonably valued. In this review process, it monitors the loss
exposure relating to nonperforming assets, assets adversely classified for
regulatory purposes, the delinquency trend and market environment to identify
potential problems.
Loss reserves have been provided, where necessary in management's
judgment, for interest earning assets, including residential loans and
consumer loans. Valuation reserves for consumer loans are provided based
upon a percentage of the loans outstanding in relation to the loss experience
within the loan categories.
The Company assesses the status of general loss reserves on real estate
loans based upon expected future economic conditions and its current loss
experience as applied to the loan portfolio, including loans that are
delinquent or adversely classified because of declining collateral values.
In 1995 and 1994, the portfolio of commercial and apartment loans experienced
a significant decline in new nonperforming activity enabling the Company to
reduce reserve levels on that segment of the real estate loan and real estate
portfolios. In 1993, the Company increased its general loss reserves on both
loans and real estate to give effect to the recessionary environment in
valuing its loan and real estate portfolios.
The California real estate market requires continued review. There
appear to be regional differences in economic performance within California
and among property types which are attributable to differing recovery rates
for the wide range of economic activities within California.
On a regional basis, the economic factors affecting the office space
market have been somewhat more favorable in Northern California than in
Southern California. In particular, the vacancy rate in the San Francisco
area decreased to 8 percent at December 31, 1995 from 10 percent a year
earlier. In the Los Angeles area, the vacancy rate was 19 percent at
December 31, 1995 and 20 percent at December 31, 1994. In San Diego County,
the vacancy rate was 18 percent at both December 31, 1995 and December 31,
1994.
In the industrial space market, Northern and Southern California
vacancy rates have been more comparable. In the San Francisco area, the
vacancy rate decreased to 9 percent at December 31, 1995 from 10 percent a
year earlier. In the Los Angeles area, the vacancy rate remained at 8
percent at December 31, 1995 from a year earlier. San Diego County's
industrial space market had the lowest vacancy rate consisting of 4 percent
at both December 31, 1995 and December 31, 1994.
In the single-family market, regional differences also exist in the
economic performance of Northern, Central and Southern California. For
example, the median metropolitan area sales price of existing single-family
homes in the San Jose area increased from the third quarter of 1994 to the
third quarter of 1995 by 4 percent. During the same period, the median sales
price declined 7 percent in the Los Angeles area and almost 3 percent in the
San Diego area.
Loans delinquent over 30 days, together with restructured loans, have
been included in the process to determine estimated losses. The effects of
various loan characteristics such as geography, delinquency, date of
origination, property type and LTV are considered in this review process.
As a monitoring device, the Company reviews the trends of loans and
mortgage-backed securities with full credit recourse delinquent for periods
of less than 90 days on a monthly (and within-month) basis. The following
summarizes mortgages delinquent for periods from 30 to 89 days:
December 31
--------------------------
(Dollars in millions) 1995 1994 1993
------ ------ ------
30-59 days delinquent
SFR $202.1 $168.6 $190.9
Other 9.1 24.0 19.0
60-89 days delinquent
SFR 95.8 90.4 105.2
Other 6.3 6.7 8.8
The following table shows the trend in the single-family residential
portfolio, including mortgage-backed securities with full credit recourse,
and delinquencies (two or more payments delinquent) over the past three
years:
December 31
--------------------
1995 1994 1993
---- ---- ----
SFRs and mortgage-backed securities
with full credit recourse as a
percent of total mortgages 91.3% 90.3% 88.3%
SFR delinquency as a percent of total
SFR mortgages 2.3 2.6 3.2
The level of nonperforming assets declined 9 percent in 1995, 25
percent in 1994 and 44 percent in 1993. In 1995, bulk sales of foreclosed
single-family properties totaled $230 million compared with $304 million in
1994. Auction sales have also been utilized to accelerate the disposition
of foreclosed properties. In the second half of 1993, the Company completed
four bulk asset sales, which totaled $659 million, in an effort to reduce
nonperforming assets. Bulk sales in 1993 included two sales totaling $330
million of single-family real estate loans and real estate and the sale of
$115 million of single-family owned real estate. Nonperforming SFR loans
have fallen to $445 million at December 31, 1995 compared with $509 million
and $522 million at year-end 1994 and 1993, respectively. A sale of $214
million of income property loans, some of which were performing assets, was
also completed in 1993.
Net charge-offs in the SFR portfolio were $194 million, or .63 percent
of the SFR portfolio, in 1995, $190 million, or .71 percent, in 1994, and
$252 million, or .98 percent, in 1993. The loss exposure on the SFR
portfolio increased in 1993, due in part to the Company's accelerated
disposition program, and has declined slightly in 1994 and 1995, reflecting
the signs of economic recovery, although it still remains high by historical
standards. At December 31, 1995, the Company's real estate loan portfolio
included $2.7 billion in uninsured residential mortgage loans that were
originated with terms on which the LTV exceeded 80 percent (but not in excess
of 90 percent). This balance represents a decline from the level of $3
billion a year ago. For the year 1995, losses totaled $33.4 million, or 1.00
percent of this portfolio, compared with $24.3 million, or .59 percent, in
1994 and $44.8 million, or .81 percent, in 1993. Since November 1, 1990, the
Company has purchased mortgage insurance on all new single-family residential
mortgages originated with LTVs in excess of 80 percent.
Certain loans (where GWB works with borrowers encountering economic
difficulty) meet the criteria of, and are classified as, TDRs because of
modification to loan terms. In the second quarter of 1993, federal banking
regulators issued a joint release regarding credit availability, which
allowed some nonperforming loans to be returned to performing status. As a
result, TDRs which meet certain conditions of repayment and performance have
not been included in nonperforming assets. At December 31, 1995, $17.8
million of TDRs were classified as performing assets compared with $23.5
million at December 31, 1994.
The recorded investment in loans for which impairment has been
recognized in accordance with FAS 114, "Accounting by Creditors for
Impairment of a Loan," totaled $268 million at December 31, 1995, net of $62
million of reserves for estimated losses related to such loans and $213
million at December 31, 1994, net of $45 million of reserves for estimated
losses. A change in the fair value of an impaired loan is reported as an
increase or reduction to the provision for loan losses.
Real estate acquired through foreclosure is classified as performing
when it meets certain criteria of operating profitability. As of December
31, 1995, such assets totaled $13 million.
The following table presents nonperforming assets together with related
ratios to total assets:
December 31
------------------------
(Dollars in millions) 1995 1994 1993
---- ---- ----
Delinquent loans $486 $565 $ 626
TDRs 108 125 213
Real estate 174 156 293
---- ---- ------
$768 $846 $1,132
==== ==== ======
Ratio of nonperforming assets
to total assets 1.72% 1.98% 2.90%
The table on page 101 in Item 8, "Financial Statements and
Supplementary Data" presents nonperforming assets together with related
ratios to total assets, and the table on page 102 in Item 8, "Financial
Statements and Supplementary Data" presents nonperforming real estate assets
by state and by security type.
Provisions for loan losses totaled $188 million in 1995 compared with
$207 million in 1994 and $463 million in 1993. In 1995 and 1994, the Company
decreased the provision for loan losses as a result of decreasing
nonperforming assets. Provisions for loans losses in 1995 were lower due to
the reversal of previously established reserves on commercial and apartment
loans. This segment of the portfolio experienced a significant decline in
new nonperforming activity. Provisions in 1993 included $125 million related
to three bulk loan sales of $544 million and $20 million for the continued
accelerated disposition of single-family real estate in 1994. At December
31, 1995, real estate owned had been written down to 69.5 percent of the loan
balances at the date of foreclosure and 53.6 percent at December 31, 1994.
Loan loss reserves were 61 percent of nonperforming or restructured loans as
of December 31, 1995 compared with 63 percent a year earlier.
The Company recorded provisions for real estate losses of $1.5 million,
$12 million and $92 million for 1995, 1994 and 1993, respectively, on its
real estate available for sale or development. The decline in the 1995 and
1994 provision is the result of improving property values and declining
levels of nonperforming real estate. Loss provisions in 1993 included $31
million for single-family real estate developments located in Southern
California and $25 million related to the $115 million SFR bulk real estate
sale.
The Company's provision for loan losses, charge-off experience, and
reserve for estimated losses for the last five years is presented in the
Notes to Consolidated Financial Statements in Item 8, "Financial Statements
and Supplementary Data" on page 66.
The Company has not experienced a need for loss reserves on security
investments, which are of investment grade. Security investments available
for sale are carried at fair value.
OPERATIONS
Net interest income declined in 1995 due to a 50-basis-point lower
interest spread, which more than offset the $4.9 billion increase in average
interest earning assets. Other interest income totaled $44 million in 1995.
This compared with $33 million in 1994 and $39 million in 1993. Other
interest income included interest on settlements with the IRS, dividends on
FHLB stock and interest on short-term investments.
Real estate services income was $102 million in 1995 compared with
$85.6 million in 1994 and $114 million in 1993. Gain on mortgage sales was
$22.4 million, $5.3 million and $24.8 million for the years 1995, 1994 and
1993, respectively. The gain as a percent of mortgage-banking sales,
primarily fixed-rate mortgages, was 1.38 percent in 1995 compared with .48
percent in 1994 and .80 percent in 1993. The increased gain as a percentage
of mortgage sales was a result of the adoption of FAS 122. As a result of
the adoption of FAS 122, the amount of servicing capitalized in 1995 and
included in gain on mortgage sales was $7.2 million. Mortgage servicing
income totaled $55.2 million in 1995 compared with $50.9 million in 1994 and
$51.2 million in 1993. Real estate servicing and origination-related fee
income was $24.2 million in 1995 compared with $29.4 million in 1994 and
$37.9 million in 1993. Additional information on mortgage banking sales is
provided in Note 6 of the Notes to Consolidated Financial Statements in Item
8, "Financial Statements and Supplementary Data".
Retail banking fee income increased in 1995 to $155 million from $141
million in 1994 and $113 million in 1993. The growth in this income is
attributable to an increase in customer transaction activity and in branch
related fee activity. The Company managed mutual funds with assets
aggregating $3.3 billion at December 31, 1995 compared with $3 billion at
December 31, 1994. Net revenue from these operations, which comprises
commissions and other income from mutual fund operations, totaled $21.1
million in 1995 compared with $39.9 million in 1994 and $38 million in 1993.
The decrease in 1995 net revenue was a result of a shift in the product mix
from mutual funds and annuities to individual bonds, which generate lower
commissions.
In 1994, the Company recorded a $62.3 million pretax gain on the sale
of 31 Florida West Coast retail banking branches with deposits of $1 billion.
This branch network was not able to develop the economies of scale necessary
to meet the Company's performance objectives.
In 1993, the Company sold its $219 million bank card portfolio because
it was not expected to achieve the economies of scale that are increasingly
necessary in the bank card business, resulting in a net gain of $22.9
million. The following is a summary of gains and losses on the Company's
securities and investments:
Year Ended December 31
----------------------
(Dollars in millions) 1995 1994 1993
----- ----- ----
Gain on sale of operating leases $14.7 $ - $ -
Loss on affordable housing investment (7.6) - -
Gain on sale of bank card portfolio - - 22.9
Gain on securities - .4 .2
Other gains 6.4 3.2 2.1
----- ----- -----
$13.5 $ 3.6 $25.2
===== ===== =====
/TABLE
Other income totaled $7.5 million in 1995 compared with $8.2 million
in 1994 and $7 million in 1993. In 1994, the Company received $1.2 million
on the sale of a computer program license of the Consumer Finance Group.
Operating expenses were as follows:
Year Ended December 31
----------------------
(Dollars in millions) 1995 1994 1993
---- ---- ----
Salaries and related personnel $441 $469 $487
Premises and occupancy 180 199 185
FDIC insurance premiums 66 77 51
Advertising and promotion 36 37 40
Other 251 204 226
---- ---- ----
$974 $986 $989
==== ==== ====
The decline in operating expenses in 1995 from the same period last
year was the result of a cost containment program. The workforce has
declined by approximately 1,300 positions in 1995, and by more than 2,600
positions since the implementation of the cost reduction program. The growth
in operating and administrative expenses during 1994 and 1993 was primarily
the result of significant branch acquisitions. The Company acquired 399
branches in California and Florida from the RTC and other sources since 1990
when it began its program to increase transaction accounts. Nearly half of
these branches were consolidated with existing facilities. The January 17,
1994 Northridge earthquake caused damage at the Company's administrative
headquarters. Operating expenses in 1994 included $11.7 million of building
repairs. All future repairs should be covered by earthquake insurance.
Operating expenses in 1993 included restructuring charges of $30 million,
primarily severance benefits associated with the cost-reduction program at
the Company's administrative headquarters.
The following summarizes the composition of other operating expenses:
Year Ended December 31
----------------------
(Dollars in millions) 1995 1994 1993
---- ---- ----
Outside data processing $ 61 $ 33 $ 32
Communications 45 39 38
Branch losses 23 15 9
Office supplies 18 16 20
Postage 14 17 17
Insurance 10 12 13
Other 80 72 97
---- ---- ----
$251 $204 $226
==== ==== ====
The increase in outside data processing expenses in 1995 was the result
of the Company's decision to outsource certain data processing functions.
Operating expenses declined by 2.89 percent during the past year
compared with an increase of 1.4 percent in 1994. The overhead ratios were
as follows:
1995 1994 1993
---- ---- ----
As a percent of average assets
Corporate 2.21% 2.53% 2.60%
Banking operations 2.04 2.34 2.38
As a percent of average retail deposits
Banking operations 2.98 2.91 3.04
As a percent of revenue
Corporate 62.24 63.45 61.02
Banking operations 65.71 66.54 62.75
Revenue is defined as net interest income and other operating income.
Amortization of intangibles in 1994 included approximately $11.7 million of
accelerated amortization related to interstate banking access rights.
Real estate operations expense totaled $4.1 million in 1995, compared
with $19.9 million in 1994 and $33.8 million in 1993, and included $28.2
million in operating losses and holding costs in 1995, compared with $27.6
million in 1994 and $45.9 million in 1993.
The Company's effective tax rate for 1995 and 1994 was 38.2 percent
compared with 32.6 percent in 1993. The lower effective tax rate in 1993 was
mainly due to the favorable settlement of tax issues and the reversal of
certain tax liabilities no longer required.
CAPITAL RESOURCES AND LIQUIDITY
Stockholders' equity ("capital") totaled $2.8 billion at year-end 1995
compared with $2.5 billion at year-end 1994 and $2.4 billion at year-end
1993. The ratio of capital to total assets was 6.3 percent, 5.9 percent and
6.3 percent at December 31, 1995, 1994 and 1993, respectively. Equity
increased $164 million from unrealized holding gains, net of taxes, on
securities available for sale. The increase in capital in 1995 was
attributable to an additional $84 million of unrealized gains on securities
available for sale. The additional gains were the result of the
reclassification of certain mortgage-backed securities from held-to-maturity
to available-for-sale in accordance with the guide to implementing Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115") issued by the Financial Accounting Standards
Board ("FASB").
Legislation pending in Congress could impose a one time assessment on
SAIF-insured institutions which would recapitalize the SAIF to the required
level of 1.25 percent of domestic insured deposits. If approved at the rate
of approximately 85 cents per $100 of such deposits, the effect on GWB would
be a charge of approximately $250 million, $150 million net of taxes.
The unrealized holding gains and losses on securities available for
sale, net of income taxes, included as a component of stockholders' equity
follows:
Year Ended December 31
-------------------------------
(Dollars in thousands) 1995 1994 1993
---- ---- ----
Balance at beginning of period $(55,084) $ 22,651 $ -
Unrealized holding gains
(losses), net of taxes 163,517 (77,735) 22,651
-------- -------- -------
Balance at end of period $108,433 $(55,084) $22,651
======== ======== =======
The Company's primary subsidiary, GWB, is subject to certain capital
requirements under the regulations of the FDIC and the OTS and meets all such
requirements. At December 31, 1995, GWB's capital was $3.1 billion,
including eligible subordinated notes of $429 million.
Total dividends per share were $.92 in 1995, 1994 and 1993. Payment
of dividends by the Company is subject to regulatory restrictions on the
receipt of dividends from GWB.
Liquidity provided by financing activities was $1.8 billion in 1995
compared with $3.7 billion in 1994 and funds used of $164 million in 1993.
GWB disposed of $982 million of retail deposits in 1994, and acquired $4.1
billion in 1993. Planned withdrawals of repriced wholesale accounts totaled
$102 million in 1995, $24 million in 1994 and $95 million in 1993. The
retail branch network experienced net customer account inflows of $636
million in 1995 compared with outflows of $1.8 billion in 1994 and $3.4
billion in 1993, primarily certificate of deposit accounts being repriced
upward. Funds of $1.3 billion and $6.6 billion were provided by new
borrowings in 1995 and 1994, respectively, including $100 million of trust
originated preferred securities in 1995. In 1993, repayment of borrowings
totaled $672 million.
Funds used in investing activities were $2 billion in 1995, $4.3
billion in 1994 and $551 million in 1993. Real estate loans originated for
investment were $5.8 billion in 1995, $6.5 billion in 1994 and $5.1 billion
in 1993 which reflects the increased ARM production. Mortgage payments in
1995 were $3.4 billion, $4 billion in 1994 and $4.9 billion in 1993.
Mortgage payments fluctuate for various reasons including the level of
refinancings. Consumer loans increased $152 million in 1995 and $195 million
in 1994 compared with a decrease of $121 million in 1993.
Funds provided by operating activities were $182 million in 1995
compared with $762 million in 1994 and $653 million in 1993. The net change
in assets available for sale used cash of $44.4 million in 1995 compared with
cash provided of $309 million and $245 million in 1994 and 1993,
respectively. Cash provided from earnings totaled $227 million in 1995
compared with $456 million in 1994 and $408 million in 1993.
The Company has several sources for raising funds for lending among
which are customer deposits, mortgage sales, asset securitization for
borrowing collateral, FHLB borrowings and public debt offerings. The
following table presents the debt ratings of the Company and GWB at December
31, 1995:
Standard Moody's Investors
& Poor's Service Fitch
-------------- ----------------- --------
GWFC GWB GWFC GWB GWFC GWB
---- --- ---- --- ---- ---
Unsecured short-term A-2 A-2 P-2 P-1 F-1
Senior term debt BBB+ A- Baa1 A2 A-
A
Subordinated term debt BBB+ A3 A-
Preferred stock BBB- Baa2 BBB
Cash and securities totaled $2.2 billion at December 31, 1995. The
balance was $2.1 billion at December 31, 1994 and $1.8 billion at December
31, 1993. GWB had funds in excess of required liquidity levels. The excess
balances in the above amounts over those required for regulatory purposes
will fluctuate between periods and are a source of short-term funding.
SEGMENT DATA
The Company operates in the mortgage, bank retail bank and consumer
finance businesses. The mortgage bank includes origination, portfolio, sale
and servicing of real estate loans. The retail bank focuses on primarily
attracting customer deposits and other related retail activities. Consumer
finance operations include installment loans to consumers and installment
contracts purchased from retail merchants as well as home equity loans.
The business segment information is presented in the accompanying
table:
Mortgage Retail Consumer
(Dollars in thousands) Bank Bank Finance Consolidated
-------- ------ -------- ------------
1995
Total revenue $ 475,391 $ 867,127 $ 287,279 $ 1,629,797
Earnings before income
taxes 105,161 210,369 106,592 422,122
Depreciation and
amortization 23,401 82,366 10,594 116,361
Capital expenditures 38,352 48,291 487 87,130
Identifiable assets 39,626,338* 30,402,857* 2,354,708* 44,586,764
[FN]
* Excludes the elimination of $27,797,139 representing intersegment loans
used as the basis for funds transfer pricing. The transferred balances
are used in calculating revenue and earnings before income taxes of these
segments.
[/FN]
Banking Consumer
(Dollars in thousands) Operations Finance Consolidated
---------- -------- ------------
1994
Total revenue $ 1,414,656 $ 275,511 $ 1,690,167
Earnings before income
taxes 306,006 100,528 406,534
Depreciation and
amortization 128,135 9,807 137,942
Capital expenditures 94,965 4,484 99,449
Identifiable assets 40,006,963 2,211,294 42,218,257
1993
Total revenue $ 1,443,751 $ 266,958 $ 1,710,709
Earnings before income
taxes 1,309 90,738 92,047
Depreciation and
amortization 106,690 9,726 116,416
Capital expenditures 104,596 6,580 111,176
Identifiable assets 36,293,223 2,055,137 38,348,360
During 1995, the Company underwent a change in the way it manages and
measures its lines of business. The mortgage bank and retail bank segments
are being separately reported for 1995. Segment data along these lines is
not available for 1994 and 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Statement of Operations for the three years
ended December 31, 1995, 1994 and 1993........................... 49
Consolidated Statement of Financial Condition at
December 31, 1995 and 1994....................................... 50
Consolidated Statement of Cash Flows for the three years
ended December 31, 1995, 1994 and 1993........................... 51
Consolidated Statement of Stockholders' Equity for the
three years ended December 31, 1995, 1994 and 1993............... 53
Notes to Consolidated Financial Statements......................... 54
Report of Independent Accountants.................................. 94
Management's Commentary on Financial Statements.................... 94
Statistical Information............................................ 96
Stockholder and Quarterly Information.............................. 104
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31
(Dollars in thousands, except per share) 1995 1994 1993
---------- ---------- ----------
Interest Income
Real estate loans $1,985,346 $1,913,602 $2,041,989
Mortgage-backed securities 752,524 276,112 185,500
Consumer loans 402,591 378,282 385,145
Securities 53,972 28,774 29,242
Other 44,278 32,948 38,908
---------- ---------- ----------
3,238,711 2,629,718 2,680,784
Interest Expense
Customer accounts 1,217,085 950,299 939,081
Borrowings
Short-term 523,365 132,049 59,688
Long-term 196,132 225,100 299,161
---------- ---------- ----------
1,936,582 1,307,448 1,297,930
---------- ---------- ----------
Net Interest Income 1,302,129 1,322,270 1,382,854
Provision for loan losses 187,700 207,200 463,000
---------- ---------- ----------
Net interest income after provision for
loan losses 1,114,429 1,115,070 919,854
Other operating income
Real estate services
Loan fees 24,208 29,385 37,855
Mortgage banking
Gain on mortgage sales 22,409 5,339 24,754
Servicing 55,159 50,853 51,185
---------- ---------- ----------
101,776 85,577 113,794
Retail banking
Banking fees 154,862 140,703 113,461
Securities operations 21,092 39,902 38,045
---------- ---------- ----------
175,954 180,605 151,506
Net gain on securities and investments 13,543 3,578 25,169
Net insurance operations 28,861 27,636 30,341
Gain on sale of branches - 62,337 -
Other 7,534 8,164 7,045
---------- ---------- ----------
Total other operating income 327,668 367,897 327,855
Noninterest expense
Operating and administrative
Salaries and related personnel 441,366 469,115 487,532
Premises and occupancy 179,654 199,048 184,682
FDIC insurance premium 66,365 77,451 51,328
Advertising and promotion 35,661 36,573 39,631
Other 251,038 203,703 225,908
---------- ---------- ----------
974,084 985,890 989,081
Amortization of intangibles 40,286 58,689 40,798
Real estate operations 4,105 19,854 33,783
Provision for real estate losses 1,500 12,000 92,000
---------- ---------- ----------
Total noninterest expense 1,019,975 1,076,433 1,155,662
---------- ---------- ----------
Earnings Before Taxes 422,122 406,534 92,047
Taxes on income 161,100 155,300 30,000
---------- ---------- ----------
Net Earnings $ 261,022 $ 251,234 $ 62,047
========== ========== ==========
Earnings per share based on average
common shares outstanding
Primary $1.72 $1.69 $.28
Fully diluted 1.71 1.69 .28
See Notes to Consolidated Financial Statements.
/TABLE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31
-------------------------
(Dollars in thousands, except per share) 1995 1994
----------- -----------
Assets
Cash and securities
Cash $ 837,292 $ 983,440
Certificates of deposit, repurchase
agreements and federal funds 257,125 165,125
Securities available for sale 1,092,459 917,095
----------- -----------
2,186,876 2,065,660
Mortgage-backed securities held to maturity
(fair value $1,941,918 and $6,211,731) 1,886,736 6,335,104
Mortgage-backed securities available for sale 7,916,705 2,934,503
----------- -----------
9,803,441 9,269,607
Loans receivable, net of reserves for
estimated losses 29,401,644 28,079,620
Loans receivable available for sale 485,705 298,748
----------- -----------
29,887,349 28,378,368
Real estate available for sale or development, net 217,112 256,967
Interest receivable 298,640 230,925
Investment in Federal Home Loan Banks 341,102 306,041
Premises and equipment, at cost, net of
accumulated depreciation 604,672 616,116
Other assets 923,859 730,574
Intangibles arising from acquisitions 323,713 363,999
----------- -----------
$44,586,764 $42,218,257
=========== ===========
Liabilities
Customer accounts $29,234,928 $28,700,947
Securities sold under agreements to repurchase 6,868,296 6,299,055
Short-term borrowings 1,316,413 1,210,461
Other borrowings 3,160,925 2,611,144
Company-obligated mandatorily redeemable
preferred securities of the Company's
subsidiary trust, holding solely
$103,092,800 aggregate principal amount
of 8.25% subordinated deferrable interest
notes, due 2025, of the Company 100,000 -
Other liabilities and accrued expenses 705,345 716,741
Taxes on income, principally deferred 378,381 196,123
----------- -----------
41,764,288 39,734,471
----------- -----------
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock, par value $1.00 a share;
Authorized 10,000,000 shares;
Cumulative convertible issued 517,500 129,375 129,375
Cumulative issued 660,000 165,000 165,000
Common stock, par value $1.00 a share;
Authorized 200,000,000 shares;
Issued 137,279,331 and 134,315,592 137,279 134,316
Additional capital 713,889 656,644
Retained earnings - substantially restricted 1,572,782 1,461,448
Unearned compensation (4,282) (7,913)
Unrealized holding gains and losses, net of taxes 108,433 (55,084)
----------- -----------
2,822,476 2,483,786
----------- -----------
$44,586,764 $42,218,257
=========== ===========
See Notes to Consolidated Financial Statements.
/TABLE
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
--------------------------------------------
(Dollars in thousands) 1995 1994 1993
----------- ----------- ------------
Operating Activities
Net earnings $ 261,022 $ 251,234 $ 62,047
Noncash adjustments to net earnings:
Provision for loan losses 187,700 207,200 463,000
Provision for real estate losses 1,500 12,000 92,000
Depreciation and amortization 76,075 79,253 75,618
Amortization of intangibles 40,286 58,689 40,798
Income taxes 72,445 65,441 (30,566)
Loss on sales of loans receivable
available for sale 597 1,414 870
Gain on mortgage sales (8,926) - (1,097)
Gain on securities available for sale (25) (432) (254)
Gain on sales of consumer loans (14,909) - (22,851)
Gain on disposition of assets - (62,337) -
Gain on sales of real estate (21,709) (6,437) (11,079)
Capitalized interest (61,746) (8,431) (14,950)
Net change in accrued interest (67,709) 13,859 14,248
Other (237,790) (157,791) (259,725)
----------- ----------- -----------
226,811 453,662 408,059
----------- ----------- -----------
Sales and repayments of loans receivable
available for sale 1,189,955 1,203,636 3,256,846
Originations and purchases of loans receivable
available for sale (1,234,399) (894,870) (3,011,733)
----------- ----------- -----------
(44,444) 308,766 245,113
----------- ----------- -----------
Net cash provided by operating activities 182,367 762,428 653,172
----------- ----------- -----------
Financing Activities
Customer accounts
Net decrease in transaction accounts (919,610) (997,264) (220,828)
Net increase (decrease) in term accounts 1,453,591 (851,827) (3,250,080)
----------- ----------- -----------
533,981 (1,849,091) (3,470,908)
Customer account (dispositions) acquisitions, net - (981,525) 4,093,806
Borrowings
Proceeds from new long-term debt 939,986 1,174,643 1,121,805
Repayments of long-term debt (290,205) (1,366,357) (1,266,314)
Net change in securities sold under
agreements to repurchase 569,241 6,299,055 (716,962)
Net change in short-term debt 105,952 533,978 189,760
----------- ----------- -----------
1,324,974 6,641,319 (671,711)
Other financing activity
Proceeds from issuance of common stock 60,195 29,842 31,168
Cash dividends paid (149,688) (147,539) (145,892)
----------- ----------- -----------
(89,493) (117,697) (114,724)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,769,462 3,693,006 (163,537)
----------- ----------- -----------
/TABLE
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31
--------------------------------------------
(Dollars in thousands) 1995 1994 1993
----------- ----------- ------------
Investing Activities
Investment securities
Proceeds from sales and maturities $ 1,436,328 $ 1,147,505 $ 1,767,836
Purchases of securities (1,585,030) (1,218,586) (1,541,383)
----------- ----------- -----------
(148,702) (71,081) 226,453
Real estate loans and mortgage-backed securities
Loans originated for investment (5,816,535) (6,506,744) (5,051,966)
Purchases of mortgage-backed securities - (1,539,349) (924,843)
Net change in undisbursed loan funds 9,221 1,656 (6,318)
Mortgage payments 3,446,094 4,031,437 4,882,985
Mortgage sales 507,025 55,243 510,574
Repurchases (116,547) (547,674) (185,825)
----------- ----------- -----------
(1,970,742) (4,505,431) (775,393)
Consumer loans
Loans originated for investment (2,284,775) (2,168,029) (2,161,269)
Loan sales 34,997 - 242,005
Dispositions (acquisitions), net - 2,094 (12,649)
Loan payments 2,097,401 1,971,142 2,053,371
----------- ----------- -----------
(152,377) (194,793) 121,458
Other investing activity
Purchases and sales of premises and equipment, net (86,094) (82,559) (103,169)
Sales of real estate 390,807 468,304 804,809
Acquisition and disposition of assets, net - 74,159 (672,852)
Net change in investment in FHLB stock (35,061) 1,311 7,021
Other (3,808) 27,515 (158,835)
----------- ----------- -----------
265,844 488,730 (123,026)
----------- ----------- -----------
Net cash (used in) investing activities (2,005,977) (4,282,575) (550,508)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (54,148) 172,859 (60,873)
Cash and cash equivalents at beginning of year 1,148,565 975,706 1,036,579
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,094,417 $ 1,148,565 $ 975,706
=========== =========== ===========
Supplemental Cash Flow Disclosure
Cash paid for
Interest on deposits $ 1,214,881 $ 951,140 $ 939,842
Interest on borrowings 721,695 326,479 358,849
Income taxes 86,338 111,656 62,277
Noncash investing activities
Loans transferred to foreclosed real estate $ 420,973 $ 504,585 $ 761,939
Loans originated to finance the sale of real estate 86,366 92,586 101,476
Loans originated to refinance existing loans 266,135 567,119 754,431
Loans exchanged for mortgage-backed securities 1,997,585 5,502,401 2,036
See Notes to Consolidated Financial Statements.
/TABLE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrealized
Holding Total
(Dollars in thousands, Preferred Common Additional Retained Unearned Gains and Stockholders'
except per share) Stock Stock Capital Earnings Compensation Losses Equity
--------- ------ ---------- -------- ------------ ----------- ------------
Balance December 31, 1992 $294,375 $130,814 $598,927 $1,441,598 $(15,980) $ - $2,449,734
Common stock issued upon exercise
of stock options 441 6,877 7,318
Common stock issued under Dividend
Reinvestment Plan 1,391 22,459 23,850
Restricted stock awards granted, net
of cancellations (30) (546) 576 -
Unearned compensation amortized to
expense 3,693 3,693
Net earnings for the year 1993 62,047 62,047
Cash dividends paid:
$.92 per common share (120,877) (120,877)
$21.88 per cumulative convertible
preferred share (11,320) (11,320)
$20.75 per cumulative preferred share (13,695) (13,695)
Unrealized holding gains and losses,
net of taxes 22,651 22,651
-------- -------- -------- ---------- -------- -------- ----------
Balance December 31, 1993 294,375 132,616 627,717 1,357,753 (11,711) 22,651 2,423,401
Common stock issued upon exercise of
stock options 282 4,576 4,858
Common stock issued under Dividend
Reinvestment Plan 1,418 23,566 24,984
Unearned compensation amortized to
expense 3,798 3,798
Net earnings for the year 1994 251,234 251,234
Cash dividends paid:
$.92 per common share (122,524) (122,524)
$21.88 per cumulative convertible
preferred share (11,320) (11,320)
$20.75 per cumulative preferred share (13,695) (13,695)
Tax benefit of restricted stock awards 785 785
Unrealized holding gains and losses,
net of taxes (77,735) (77,735)
-------- -------- -------- ---------- -------- -------- ----------
Balance December 31, 1994 294,375 134,316 656,644 1,461,448 (7,913) (55,084) 2,483,786
Common stock issued upon exercise of
stock options 704 12,341 13,045
Common stock issued under Dividend
Reinvestment Plan 2,283 44,867 47,150
Restricted stock awards granted, net
of cancellations (24) (350) 374 -
Unearned compensation amortized to
expense 3,257 3,257
Net earnings for the year 1995 261,022 261,022
Cash dividends paid:
$.92 per common share (124,673) (124,673)
$21.88 per cumulative convertible
preferred share (11,320) (11,320)
$20.75 per cumulative preferred share (13,695) (13,695)
Tax benefit of restricted stock awards 387 387
Unrealized holding gains and losses,
net of taxes 163,517 163,517
-------- -------- -------- ---------- -------- -------- ----------
Balance December 31, 1995 $294,375 $137,279 $713,889 $1,572,782 $ (4,282) $108,433 $2,822,476
======== ======== ======== ========== ======== ======== ==========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: STATEMENT OF ACCOUNTING POLICIES
Principles of Accounting and Consolidation
The accounts of Great Western Financial Corporation ("GWFC", or "the
parent company") and its wholly-owned subsidiaries, Great Western Bank,
Aristar, a consumer finance holding company, and companies operating in
related fields, are included in the accompanying consolidated financial
statements and are referred to collectively as the Company. Significant
intercompany items have been eliminated. Certain prior-year amounts have
been reclassified to conform with the 1995 presentation.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
Adoption of Recently Issued Accounting Standards
The Company adopted FAS 122 as of April 1, 1995. FAS 122 requires an
entity that originates or purchases loans with the intent of selling or
securitizing such loans to capitalize the mortgage servicing rights. FAS 122
also requires that all capitalized mortgage servicing rights be measured for
impairment.
In 1995, the Company adopted FAS 121 which establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles.
The Company adopted FAS 119 as of December 31, 1994. FAS 119 requires
disclosure of information regarding amounts, nature and terms of derivative
financial instruments and options. The disclosure requires the description
of the objectives, strategies and classes of derivatives and related gains
and losses in the financial statements or in the notes thereto.
In the fourth quarter of 1994, the Company adopted FAS 118. The
Company's income recognition policy was in compliance with the provisions of
FAS 118 and the adoption of this statement had no effect on the Company's
financial condition or results of operations.
The Company adopted FAS 115 as of December 31, 1993. The Company
adopted Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("FAS 114") as of January 1, 1993.
The adoption of these accounting standards did not materially affect
comparability of the financial statements.
Impact of Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("FAS 123"). This statement establishes methods of
accounting for stock-based compensation plans. FAS 123 is effective for
fiscal years beginning after December 15, 1995. The Company expects to
continue to apply Accounting Principles Board Opinion 25 for measurement of
stock compensation and will provide the disclosure required by FAS 123
beginning in fiscal year 1996. The adoption of FAS 123 is not expected to
have a material effect on the financial statements of the Company.
Fair Value Disclosure
Quoted market prices are used, where available, to estimate the fair
value of financial instruments. Because no quoted market prices exist for
a significant portion of the Company's financial instruments, fair value is
estimated using comparable market prices for similar instruments or using
management's economic estimates of discounted cash flows for the underlying
asset or liability. A change in management's assumptions could significantly
affect these estimates and, accordingly, fair value is not necessarily
indicative of the value which would be realized upon disposition of the
financial instruments.
Cash and Securities
Liquid assets consist principally of cash, certificates of deposit,
federal funds, repurchase agreements, U.S. government, corporate and other
securities approved for investment by regulations. Certificates of deposit,
federal funds and repurchase agreements purchased with a maturity of three
months or less are considered to be cash equivalents. Other securities,
readily convertible into cash, are available for sale and are recorded at
fair value. Fair value is generally determined on the aggregate method.
Certain securities are designated as held for investment based on
management's positive intent and ability to hold those securities to
maturity. Securities held for investment are recorded at amortized cost.
Discounts or premiums on securities recorded at cost are amortized using the
interest method. For the Consolidated Statement of Cash Flows, cash includes
cash on hand, cash in banks and cash equivalents.
Mortgage-backed Securities
The Company's mortgage-backed securities portfolio consists of real
estate loan receivables originated by the Bank and subsequently securitized
primarily through the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Federal National Mortgage Association ("FNMA"). Loans are also securitized
for sale directly in the public market. The Company purchases, for
investment and liquidity purposes, FNMA and FHLMC securities, Collateralized
Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits
("REMICs"). The Company also purchases commercial mortgage pass-through
certificates from the RTC. In 1994 and 1995, the Company swapped single-
family residential ARMs for mortgage-backed securities to provide collateral
for borrowings. These securities are subject to full credit recourse and
the swaps can be unwound at the option of the Company. Certain ARMs swapped
in 1994 and 1995, REMICs and GWB-originated pass-through certificates are
held for investment based on management's positive intent and ability to hold
these securities until maturity and are recorded at amortized cost. All
other mortgage-backed securities are available for sale and recorded at fair
value. Fair value is generally determined on the aggregate method giving
effect to servicing rights and estimated losses from credit recourse.
Discounts or premiums on mortgage-backed securities recorded at cost are
amortized using the interest method.
Loans Receivable
REAL ESTATE LOANS
The Company's real estate loan portfolio consists primarily of long-
term loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The ARM is the Bank's
primary loan investment.
Fees are charged for originating loans at the time the loan is granted.
Loan origination fees, partially offset by the deferral of certain expenses
associated with loans originated, are amortized to interest income over the
life of the loan using the interest method. ARMs with a lower rate during
the introductory period (usually three months) will reflect the amortization
of a substantial portion of the net deferred fee as a yield adjustment
during the introductory period. Amortization is discontinued for
nonperforming loans and loans available for sale and is realized upon the
ultimate disposition of the assets.
Loan fee income represents income from the prepayment of loans,
delinquent payments or miscellaneous loan services and is recorded when
collected.
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loan
payments generally are deemed to be in nonaccrual status when they become 90
days past due. When a loan is designated as nonaccrual, all previously
accrued interest is reversed.
Below-market-rate loans are made to facilitate the sale of certain
foreclosed real estate. These transactions reduce the gain on sale and
provide a loan discount which is amortized on the interest method resulting
in a market yield on the new loan.
CONSUMER LOANS
The Bank's consumer loans include student educational loans insured by
the U.S. government or the State of California, fully secured loans made to
holders of customer accounts and checking overdraft loans. Consumer loans
made by the consumer finance subsidiaries of Aristar have maximum terms of
180 months. The weighted average contractual term of all loans written by
the consumer finance subsidiaries in 1995 was 50 months. Experience,
however, has shown that a majority of consumer loans will be renewed prior
to maturity. Finance charges included in consumer loans receivable are
deferred and amortized into income over the term of the loan with appropriate
limitation for delinquent installments for which collection is not reasonably
assured. Student educational loans are available for sale and are recorded
at the lower of cost or fair value. Fair value is determined on the
aggregate method. All other consumer loans are held to maturity.
RESERVE FOR ESTIMATED LOAN LOSSES
It is the policy of the Company to provide for estimated losses on real
estate loans when any significant and permanent decline in value is
identified. A change in the fair value of an impaired loan is reported as
an increase or reduction to the reserve for loan losses. Loans transferred
to foreclosed real estate are transferred at the lower of the net loan value
or the fair value of the collateral, less estimated costs to sell.
Loans receivable are segregated into three categories for review as to
the adequacy of reserve levels: SFR, income producing property and consumer.
Real estate loans (SFR and income producing property) are classified
satisfactory, special mention, substandard, doubtful or loss. Loans
classified loss are written down to fair value, less estimated costs to sell,
with a specific reserve.
Reserves on loans classified satisfactory, special mention, substandard
and doubtful are included in the general valuation allowance ("GVA"). These
loans are subjected to extensive migration analyses which attempt to project
future performance based on past experience and expected future economic
conditions. In addition, the classifications are segmented into various risk
categories based upon geography, delinquency, date of origination, property
type and loan-to-value ratio. Individual markets for specific property
types are examined for current economic trends and business conditions.
Estimated future economic trends, both local and national, by various
forecasting services as well as external factors such as competition and
legal or regulatory requirements are used to develop qualitative factors that
can either increase or decrease the required level of GVA.
Loans made by consumer finance subsidiaries are also reviewed on a
systematic basis. In evaluating the adequacy of the allowance, consideration
is given to recent loan loss experience and such other factors which, in
management's judgment, deserve current recognition in estimating losses.
Non-real estate secured accounts are charged off based on contractual
delinquency of 120 days on closed-end accounts and 180 days on open-end
accounts.
Similar reviews are made for retail banking consumer loan operations,
where provisions are based upon recent loss experience.
Mortgage Banking Activities
Real estate loans are originated principally for investment. Since the
Company is primarily an ARM portfolio lender for its own investment, most
other products are originated and available for sale.
As of December 31, 1995, the following loans were designated as
available for sale and were carried at the lower of cost or fair value:
1. All single-family, fixed-rate product in the portfolio originated
subsequent to January 1, 1989.
2. Single-family, adjustable rate product designated as available for
sale.
3. Loans other than single-family which have been designated at the date
of origination.
The Company sells loans or participating interests in loans to generate
servicing income, to limit interest-rate risk and to provide funds for
additional investment. Under the servicing agreements, the Company continues
to service the loans and the investor is paid its share of principal
collections together with interest at an agreed upon rate, which generally
differs from the loan's contractual interest rate. Such difference results
in a "loan servicing spread". Gains or losses on sales of loans are
recognized at time of sale and are generally determined by: 1) the difference
between the net sales proceeds and the book value of the loans sold; 2)
recognition of deferred loan fees; 3) an adjustment, if necessary, to
increase or decrease the loan servicing spread in order to provide for normal
servicing; and 4) the capitalization of mortgage servicing rights. In sales
involving credit enhancements, fair value is used in calculating the gain or
loss.
Real Estate Available for Sale or Development
Real estate available for sale or development comprises both purchased
and foreclosed properties. Foreclosed properties are carried at cost at
acquisition, which is the lower of the net loan value on the property or the
fair value of the property, less estimated costs to sell, at the date of
foreclosure. Thereafter, specific valuation allowances have been established
for changes in the fair value of real estate. Acquisition and refurbishment
costs are generally expensed when incurred. Other real estate available for
sale is carried at the lower of cost or fair value. Property development
projects, carried at the lower of cost or fair value, are accounted for on
the equity method. Gains on the sale of real estate financed by the Company
are recognized giving consideration to down payment and other investment
criteria. Losses are recognized when identified.
Premises and Equipment
The Company has followed the policy of capitalizing expenditures for
improvements and major refurbishments and has charged ordinary maintenance
and repairs to earnings as incurred. Depreciation and amortization are
computed principally on the straight-line method over the estimated useful
lives as follows:
___________________________________________________________________________
Buildings 25 to 60 years
- ---------------------------------------------------------------------------
Leasehold improvements Lesser of term of lease or useful
life of property
- ---------------------------------------------------------------------------
Furniture, fixtures and equipment 4 to 10 years
- ---------------------------------------------------------------------------
Software 3 to 7 years
- ---------------------------------------------------------------------------
Intangibles Arising from Acquisitions
Because of the earning power or other special values of certain
purchased companies or businesses, the Company paid amounts in excess of fair
value for businesses, core deposits and tangible assets acquired. Generally,
such amounts are being amortized by systematic charges to income (primarily
for periods from six to 25 years) over a period no greater than the estimated
remaining life of the assets acquired or not exceeding the estimated average
remaining life of the existing deposit base assumed. The Company
periodically reviews intangibles to assess recoverability and impairment is
recognized in operations if permanent loss of value occurs.
Customer Accounts
Customer accounts comprise primarily the Bank's savings and checking
accounts. Customer accounts vary as to terms, with the major differences
being minimum balance required, maturity, interest rates and the provisions
for payment of interest. The Bank's customer accounts are insured by the
FDIC, through either the BIF or the SAIF for up to an aggregate amount of
$100,000 per customer.
The Bank may offer large denomination negotiable certificates of
deposit. The negotiable certificates of deposit are primarily sold through
brokers and may subsequently be traded on the open market.
Interest is accrued and either paid to the customer or added to the
customer's account on a periodic basis. On term accounts, the forfeiture of
interest (because of withdrawal prior to maturity) is offset as of the date
of withdrawal against interest expense.
Federal and State Taxes on Income
Taxes are provided on substantially all income and expense items
included in earnings, regardless of the period in which such items are
recognized for tax purposes. Tax benefits are recognized for general loss
reserve additions.
Taxes on income are determined by using the liability method. This
approach requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, consideration is given to all expected future events other than
enactments of changes in the tax law or rates.
Earnings Per Common Share
Income for the calculation of primary earnings per common share is
based on net income less preferred stock dividend requirements. The average
common shares and common share equivalents outstanding, based upon amounts
used in the calculation of primary earnings per common share, were
137,111,074 in 1995, 133,769,724 in 1994 and 132,007,559 in 1993. Fully
diluted earnings per common share give effect to the dilutive effect of stock
options and assume the conversion of all convertible securities into common
stock at the later of the beginning of the year or the date of issuance
(unless antidilutive). The average common shares and common share
equivalents outstanding, based upon amounts used in the calculation of fully
diluted earnings per common share, were 137,951,442 in 1995, 133,769,724 in
1994 and 138,853,346 in 1993.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
In December 1994, GWB completed the sale of $1 billion of deposits and
31 branches in West Florida to First Union National Bank. The deposits were
sold for a net pretax gain of $62.3 million, which included the write-off of
intangibles related to the sold branches of $10 million and other sale
related expenses of $2.2 million.
In October 1994, GWB purchased the deposits of six branches located in
San Diego County from Citibank, F.S.A., totaling $52 million. The deposits
were acquired for a premium of $1 million.
In December 1993, GWB purchased certain assets and assumed certain
liabilities from the RTC of HomeFed Bank, F.A., San Diego, California. As
a result of the transaction, GWB acquired 119 branches with retail deposits
of $4.1 billion. The deposits were acquired for a premium of $151 million.
During the first quarter 1993, the Company exchanged 12 of its branches
located in the State of Washington, with deposits aggregating $327 million,
with Pacific First Bank, a Federal Savings Bank, for seven branches located
in Southern California with deposits aggregating $360 million.
Intangibles arising from acquisitions as shown on the Consolidated
Statement of Financial Condition consisted of the following:
December 31
---------------------
(Dollars in thousands) 1995 1994
--------- --------
Balance at acquisition $ 575,603 $ 575,603
Accumulated amortization (251,890) (211,604)
--------- ---------
$ 323,713 $ 363,999
In 1994, the Company wrote off approximately $11.7 million of
intangibles related to interstate banking access rights.
NOTE 3: CASH AND SECURITIES
An analysis of cash and securities by investment type at December 31,
1995 and December 31, 1994 and by maturity at December 31, 1995 is included
in the table on page 96 under the caption "By Type" and "Year-end 1995 by
Maturity."
Following is a summary of the amortized cost and fair values of the
Company's securities portfolio available for sale:
Gross Gross
Weighted Unrealized Unrealized
Average Amortized Holding Holding Fair
Yield Cost Gains Losses Value
-------- ---------- ---------- ---------- ----------
(Dollars in thousands) December 31, 1995
--------------------------------------------------------
U.S. government securities 5.55% $ 10,810 $ 84 $ 20 $ 10,874
Federal agency securities 6.43 599,940 6,237 383 605,794
Corporate debt securities 6.19 442,943 2,564 193 445,314
Other securities 6.10 30,425 170 118 30,477
----- ---------- ------ ------- ----------
6.32% $1,084,118 $9,055 $ 714 $1,092,459
===== ========== ====== ======= ==========
December 31, 1994
--------------------------------------------------------
U.S. government securities 6.89% $ 10,580 $ 3 $ 755 $ 9,828
Federal agency securities 6.40 523,211 59 8,691 514,579
Corporate debt securities 6.44 372,013 267 8,026 364,254
Other securities 5.67 29,587 50 1,203 28,434
----- ---------- ------ ------- ----------
6.40% $ 935,391 $ 379 $18,675 $ 917,095
===== ========== ====== ======= ==========
December 31, 1993
--------------------------------------------------------
U.S. government securities 3.24% $ 335,509 $ 120 $ 4 $ 335,625
Federal agency securities 6.24 40,841 1,418 694 41,565
Corporate debt securities 6.49 426,910 6,564 694 432,780
Other securities 5.11 60,619 524 39 61,104
----- ---------- ------ ------- ----------
5.13% $ 863,879 $8,626 $1,431 $ 871,074
===== ========== ====== ======= ==========
At December 31, 1995, 1994 and 1993, there were no securities held for
investment.
Realized gains and losses on the available-for-sale portfolio are
calculated on the specific identification method and were as follows:
Year Ended December 31
-------------------------
(Dollars in thousands) 1995 1994 1993
---- ---- ----
Realized gains $ 25 $457 $333
Realized losses - 25 79
The Company purchases securities under agreements to resell
("repurchase agreements") having terms of up to 90 days; however, they are
typically overnight investments. Repurchase agreements outstanding at
December 31, 1995 were $125,000,000 at 5.88 percent, sold by Morgan Stanley
and Company, Inc., $50,000,000 at 5.87 percent, sold by Smith Barney, Inc.,
$37,000,000 at 5.76 percent, sold by Goldman Sachs and Company, $20,000,000
at 5.57 percent and $25,000,000 at 5.67 percent, sold by CS First Boston
Corporation. Repurchase agreements outstanding at December 31, 1994 were
$50,000,000 at 5.78 percent, sold by CS First Boston Corporation and
$65,000,000 at 6.08 percent, sold by J.P. Morgan. The repurchase
agreements were collateralized by federal agency issues with market values
at least 2 percent above the repurchase agreements. The highest month-end
balances outstanding were $337,000,000 in 1995 and $350,000,000 in 1994. The
average balances outstanding were $236,308,000 at a rate of 6.03 percent in
1995 and $207,308,000 at 4.25 percent in 1994.
GWB is required to maintain certain minimum reserve balances with the
FRB. Included in cash were deposits at the FRB of $152,893,000 at December
31, 1995 and $328,809,000 at December 31, 1994.
NOTE 4: MORTGAGE-BACKED SECURITIES
An analysis of the mortgage-backed securities portfolio by loan type
at December 31, 1995 and December 31, 1994 is included in the table on page
101 under the caption "Mortgage-backed Securities by Type."
Mortgage-backed securities held to maturity consisted of the following:
Gross Gross
Weighted Unrealized Unrealized
Average Amortized Holding Holding Fair
Yield Cost Gains Losses Value
-------- --------- ---------- ---------- ----------
(Dollars in thousands) December 31, 1995
---------------------------------------------------------
FNMA 9.87% $ 39,967 $ 5,427 $ - $ 45,394
FHLMC 8.50 1,735,016 56,765 - 1,791,781
Other 5.91 111,753 38 7,048 104,743
---- ---------- ------- -------- ----------
8.38% $1,886,736 $62,230 $ 7,048 $1,941,918
==== ========== ======= ======== ==========
December 31, 1994
---------------------------------------------------------
FNMA 6.57% $2,385,128 $ - $ 38,640 $2,346,488
FHLMC 6.79 3,288,789 - 50,101 3,238,688
REMIC 5.24 387,126 3 12,535 374,594
Other 5.80 274,061 - 22,100 251,961
---- ---------- ------- -------- ----------
6.57% $6,335,104 $ 3 $123,376 $6,211,731
==== ========== ======= ======== ==========
December 31, 1993
---------------------------------------------------------
REMIC 4.80% $ 518,979 $ 974 $ 3,133 $ 516,820
Other 3.66 99,595 - 10,903 88,692
---- ---------- ------- -------- ----------
4.61% $ 618,574 $ 974 $ 14,036 $ 605,512
==== ========== ======= ======== ==========
Mortgage-backed securities available for sale consisted of the
following:
Gross Gross
Weighted Unrealized Unrealized
Average Amortized Holding Holding Fair
Yield Cost Gains Losses Value
-------- ---------- ---------- ---------- ----------
(Dollars in thousands) December 31, 1995
---------------------------------------------------------
FNMA 7.33% $2,585,802 $ 66,326 $ - $2,652,128
FHLMC 7.11 4,356,331 112,203 - 4,468,534
REMIC 4.96 226,305 10 1,366 224,949
RTC 6.72 228,180 - 5,387 222,793
Other 6.66 352,217 290 4,206 348,301
---- ---------- -------- ------- ----------
7.09% $7,748,835 $178,829 $10,959 $7,916,705
==== ========== ======== ======= ==========
December 31, 1994
---------------------------------------------------------
FNMA 6.02% $1,055,152 $ 416 $19,125 $1,036,443
FHLMC 6.83 1,379,856 114 40,991 1,338,979
RTC 6.62 186,028 - 7,743 178,285
Other 6.66 390,750 - 9,954 380,796
---- ---------- -------- ------- ----------
6.51% $3,011,786 $ 530 $77,813 $2,934,503
==== ========== ======== ======= ==========
December 31, 1993
---------------------------------------------------------
FNMA 6.24% $ 529,882 $ 8,718 $ - $ 538,600
FHLMC 6.79 1,233,625 24,577 - 1,258,202
RTC 6.03 248,140 - 3,054 245,086
Other 5.03 528,126 1,161 353 528,934
---- ---------- -------- ------- ----------
6.24% $2,539,773 $ 34,456 $ 3,407 $2,570,822
==== ========== ======== ======= ==========
At December 31, 1995, reserves for losses of $5,034,000 were
established for the loans underlying the mortgage-backed securities with full
credit recourse included in the portfolio.
Gross realized gains on mortgage-backed securities, which are included
in gain on mortgage sales on the Consolidated Statement of Operations, were
as follows:
Year Ended December 31
------------------------
(Dollars in thousands) 1995 1994 1993
------- ---- ------
Realized gains $13,585 $ - $1,097
Proceeds from the sales of mortgage-backed securities in 1995 were
$202,357,000 and $35,142,000 in 1993. There were no mortgage-backed
securities sold in 1994.
There were no realized losses in 1995, 1994 or 1993. Gains and losses
on mortgage-backed securities are calculated on the specific identification
method.
At December 31, 1995, certain mortgage-backed securities were
reclassified in accordance with the guide to implementing FAS 115 issued by
the FASB. The following table presents the effect of the reclassification:
Mortgage-Backed Securities Unrealized
-------------------------------- Holding Gains
Held-to- Available- and (Losses) Net
(Dollars in millions) Maturity for-Sale Total of Taxes
-------- ---------- ----- ----------------
Balance prior to reclassification $ 7,563 $2,097 $9,660 $ 24
Reclassified from held-to-maturity
to available-for-sale (5,920) 5,920 - -
Reclassified from available-for-sale
to held-to-maturity 244 (244) - -
Unrealized gains - 143 143 143
Tax effect of unrealized gains - - - (59)
------- ------ ------ ----
Balance at December 31, 1995 $ 1,887 $7,916 $9,803 $108
======= ====== ====== ====
/TABLE
NOTE 5: LOANS RECEIVABLE
An analysis of the loan portfolio by type at December 31, 1995 and
December 31, 1994 is included in the table on page 101 under the caption
"Loan Portfolio by Type." An analysis of the real estate loan portfolio by
security type and state at December 31, 1995 is included in the table on page
102 titled "Real Estate Loans and Real Estate by State." An analysis of the
California real estate loan portfolio and nonperforming loans by region at
December 31, 1995 is included in the table on page 103 under the caption
"California Real Estate Loans and Real Estate."
The following comprised loans receivable:
December 31
---------------------------
(Dollars in thousands) 1995 1994
----------- -----------
Loans receivable
Real estate
Held for investment $27,544,299 $26,430,658
Available for sale 159,939 61,302
Consumer
Held for investment 2,307,131 2,186,969
Available for sale 327,395 238,476
----------- -----------
30,338,764 28,917,405
----------- -----------
Loans in process (487) 10,712
Unearned income (88,079) (111,698)
Reserve for estimated losses (362,849) (438,051)
----------- -----------
(451,415) (539,037)
----------- -----------
$29,887,349 $28,378,368
=========== ===========
In accordance with FAS 114, a loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company measures impairment based on the fair value of the
loan's collateral. Changes in fair value are recorded through a valuation
allowance. Charge-offs occur upon modification
of the loan terms or in the event of foreclosure. The Company's policy for
recognizing income on impaired loans is to accrue earnings unless a loan is
in foreclosure or becomes nonperforming, at which time the accrued earnings
are reversed. Cash receipts for impaired loans are allocated to principal
and interest in accordance with the contractual terms of the loan. The
recorded investment in loans for which impairment has been recognized and the
related reserves for estimated losses follows:
Impaired Loans
-------------------------------------------------------------------
Having Having
related Reserves for Net with no related
reserves estimated reserves reserves for Net of reserves
for losses losses for losses losses for losses
---------- ------------ ---------- ------------ ---------------
(Dollars in thousands) December 31, 1995
-------------------------------------------------------------------
Real estate loans
Residential
Single-family $ 52,189 $11,889 $ 40,300 $31,690 $ 71,990
Apartments 81,222 18,797 62,425 25,595 88,020
Commercial
Offices 24,196 8,958 15,238 9,793 25,031
Retail 31,758 6,812 24,946 5,875 30,821
Hotel/motel 38,727 9,292 29,435 - 29,435
Industrial 22,509 5,515 16,994 3,004 19,998
Other 1,836 526 1,310 1,823 3,133
-------- ------- -------- ------- --------
$252,437 $61,789 $190,648 $77,780 $268,428
======== ======= ======== ======= ========
December 31, 1994
-------------------------------------------------------------------
Real estate loans
Residential
Single-family $ 31,011 $ 6,456 $ 24,555 $17,063 $ 41,618
Apartments 77,934 16,418 61,516 28,395 89,911
Commercial
Offices 26,698 9,303 17,395 5,426 22,821
Retail 25,916 5,547 20,369 3,902 24,271
Hotel/motel 19,659 3,194 16,465 2,207 18,672
Industrial 12,646 3,018 9,628 1,728 11,356
Other 4,671 1,090 3,581 329 3,910
-------- ------- -------- ------- --------
$198,535 $45,026 $153,509 $59,050 $212,559
======== ======= ======== ======= ========
Single-family residential mortgage loans are generally evaluated for
impairment as homogeneous pools of loans. Certain situations may arise
leading to single-family residential mortgage loans being evaluated for
impairment on an individual basis.
The average recorded investment in impaired loans and the related
amount of interest income recognized during the period of impairment follows:
Year Ended December 31
----------------------
(Dollars in thousands) 1995 1994
---- ----
Average recorded investment
in impaired loans $243,079 $298,315
Interest income recognized 17,809 24,733
Interest income recognized
on cash-basis 17,758 25,061
Loans receivable totaling $8,732,819,000 at December 31, 1995 were
pledged to secure FHLB borrowings, certain deposits, securities sold under
agreements to repurchase and other obligations and accounts.
Gross unrealized gains on real estate loans available for sale totaled
$1,443,000 at December 31, 1995 and $176,000 at December 31, 1994.
A significant portion of the ARM portfolio is subject to lifetime
interest-rate caps and floors as well as periodic interest rate caps. Each
loan is priced separately with a maximum cap and a minimum floor. The
weighted-average cap was 13.08 percent and the weighted-average floor was
4.75 percent at December 31, 1995. At December 31, 1995, $775 million of
ARMs with an average yield of 7.34 percent had reached their periodic cap
rate. Without the cap, the average yield on those ARMs would have been 7.72
percent. Periodic interest-rate caps are generally in effect for three
years. The loss to interest income from real estate loans which have reached
their ceiling interest rate was approximately $2,103,000 in 1995. At
December 31, 1995, $229,188,000 of ARMs with an average yield of 8.45 percent
had reached their floor rate. Without the floor, the average yield on those
ARMs would have been 7.87 percent. The benefit to interest income from real
estate loans which have reached their floor interest rate was approximately
$3,152,000 in 1995 compared with $53,985,000 in 1994. The contract amount
on ARMs subject to interest-rate caps and floors does not represent the
exposure to market loss.
The amortization of deferred loan fees included in interest income
totaled $33,493,000 in 1995, $53,378,000 in 1994 and $50,339,000 in 1993.
Certain loans meet the criteria of TDRs. TDRs totaled $126,147,000 at
December 31, 1995. This compared with $148,244,000 at the end of 1994 and
$294,772,000 at the end of 1993. There were no additional funds committed
at December 31, 1995. The decrease in TDRs in 1994 was primarily the result
of both a sale and a foreclosure of two nonperforming loans with a combined
balance of approximately $92,390,000. In addition, $63,375,000 of performing
TDR loans reached the end of the restructuring period, bringing them back to
a normal amortization schedule.
Interest on nonaccrual loans totaled $38,058,000 for the year ended
December 31, 1995 compared with $46,909,000 for the year ended December 31,
1994 and $79,588,000 for the year ended December 31, 1993.
Following is a summary of the reserve for estimated losses and charge-
off experience for loans receivable:
Real Estate Loans Consumer Loans
--------------------- ------------------------------
Consumer Bank
(Dollars in thousands) SFR Other Finance Card Other Total
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1990 $ 70,262 $ 126,600 $ 60,408 $ 12,291 $ 9,285 $ 278,846
Provision for losses 61,724 23,576 32,600 27,200 4,800 149,900
Charge-offs (32,529) (68,366) (63,949) (20,192) (8,309) (193,345)
Recoveries 896 5,831 8,923 1,874 1,420 18,944
Reserves of acquired companies - - 7,434 - 1,271 8,705
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1991 100,353 87,641 45,416 21,173 8,467 263,050
Provision for losses 113,808 228,492 41,900 30,254 5,546 420,000
Charge-offs (53,459) (117,611) (55,436) (28,150) (8,069) (262,725)
Recoveries 240 5,008 14,661 2,022 2,641 24,572
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1992 160,942 203,530 46,541 25,299 8,585 444,897
Adoption of FAS 114 3,153 44,821 - - - 47,974
--------- --------- -------- -------- ------- ---------
Balance at January 1, 1993 164,095 248,351 46,541 25,299 8,585 492,871
Provision for losses 300,185 123,468 37,900 (6,533) 7,980 463,000
Charge-offs (254,075) (151,700) (50,174) (20,794) (1,911) (478,654)
Recoveries 2,034 4,273 15,523 2,028 1,194 25,052
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1993 212,239 224,392 49,790 - 15,848 502,269
Provision for losses 167,049 693 41,900 - (2,442) 207,200
Charge-offs (191,701) (42,981) (54,041) - (3,351) (292,074)
Recoveries 1,420 2,924 15,568 - 744 20,656
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1994 189,007 185,028 53,217 - 10,799 438,051
Provision for losses 161,025 (18,000) 48,500 - (3,825) 187,700
Charge-offs (195,357) (22,739) (62,206) - (1,265) (281,567)
Recoveries 1,500 860 16,057 - 248 18,665
--------- --------- -------- -------- ------- ---------
Balance at December 31, 1995 $ 156,175 $ 145,149 $ 55,568 $ - $ 5,957 $ 362,849
========= ========= ======== ======== ======= =========
As a result of the Company's review of reserve levels which showed an
excess of commercial and apartment loan reserves, the Company reduced the
Other real estate loans provision for losses by $20,000,000 in 1995.
Provisions for losses on the leasing portfolio in both 1995 and 1994,
included in Other consumer loan loss provisions, decreased as a result of the
reversal of provisions originally established for expected losses which did
not materialize.
The ratio of net charge-offs to average loans and loans underlying
mortgage-backed securities with full credit recourse follows:
Real Estate Loans Consumer Loans
--------------------- ------------------------------
Consumer Bank
SFR Other Finance Card Other Total
--- ----- -------- ----- ----- -----
Year Ended December 31,
1995 .63% .71% 2.29% -% .21% .72%
1994 .71 1.23 2.06 - .66 .84
1993 .98 3.96 2.01 10.44 .19 1.43
1992 .21 3.07 2.42 9.62 1.41 .76
1991 .13 1.53 3.84 6.18 1.75 .55
The following table presents the Company's reserve for estimated losses
as a percent of the respective loans receivable portfolios, including loans
underlying mortgage-backed securities with full credit recourse.
Real Estate Loans Consumer Loans
--------------------- ------------------------------
Consumer Bank
SFR Other Finance Card Other Total
--- ----- -------- ----- ----- -----
December 31,
1995 .50% 4.86% 2.60% -% 1.20% .98%
1994 .66 5.96 2.66 - 2.53 1.28
1993 .83 6.59 2.72 - 4.20 1.60
1992 .63 5.83 2.70 9.88 2.34 1.43
1991 .39 2.27 2.64 7.06 2.18 .82
NOTE 6: MORTGAGE BANKING
Data pertaining to mortgage banking operations follow:
Year Ended December 31
------------------------------------
(Dollars in thousands) 1995 1994 1993
---------- ---------- ----------
Loans sold
Adjustable rate $ - $ 55,243 $ 420,864
Fixed-rate 1,113,259 1,115,751 3,112,773
Mortgage-backed securities sold
Adjustable rate 498,099 - 32,010
Fixed-rate - - 2,035
---------- ---------- ----------
$1,611,358 $1,170,994 $3,567,682
========== ========== ==========
In 1994, the Company sold a $55 million adjustable rate, nonperforming
TDR from the real estate loans held for investment portfolio.
December 31
----------------------------------------
(Dollars in thousands) 1995 1994 1993
----------- ----------- ----------
Loans serviced for others $11,110,068 $10,992,369 $12,336,807
Loan servicing spread .42% .44% .42%
Loan servicing spread represents net servicing income as a percentage
of the average portfolio serviced. Custodial escrow balances maintained in
connection with the foregoing loan servicing are included in wholesale
transaction accounts and totaled $173,856,000 at December 31, 1995 and
$157,783,000 at December 31, 1994.
The present value of retained yield on loans sold is amortized using
the interest method adjusted quarterly for actual prepayment experience. At
December 31, 1995, excess servicing of $24,830,000 was included in other
assets and short servicing of $21,214,000 was included in other liabilities.
At December 31, 1994, excess servicing was $25,934,000 and short servicing
was $25,356,000. Following is a summary of the net unamortized balance of
excess servicing on loans sold:
(Dollars in thousands) 1995 1994
------ --------
Balance at beginning of year $ 578 $ 9,160
Additions (reductions) from sales 994 604
Amortization 2,044 (9,186)
------ -------
Balance at end of year $3,616 $ 578
====== =======
Capitalized mortgage servicing rights are recorded as a component of
gain on mortgage sales. The value of these servicing rights is based on the
assumption that a normal servicing fee will be received for the estimated
life of the loans. The following is a summary of capitalized mortgage
servicing rights:
(Dollars in thousands) 1995
----
Balance at beginning of year $ -
Originated mortgage servicing rights capitalized 7,248
Amortization (214)
------
Balance at end of year $7,034
======
Capitalized mortgage servicing rights are measured for impairment by
stratifying the underlying loans based on the predominant risk
characteristics of rate, geographic area and product type. Impairment is
recognized through a valuation allowance. At December 31, 1995, no
impairment was found.
Gains on mortgage sales were derived from:
Year Ended December 31
------------------------------
(Dollars in thousands) 1995 1994 1993
------- ------- -------
Loan servicing spread
Gains $10,834 $ 1,922 $ 5,271
Losses (2,592) (1,318) (8,598)
------- ------- -------
Net 8,242 604 (3,327)
Premiums (discounts), net 7,834 (4,559) 4,985
Deferred loan fees 5,883 8,879 29,968
Hedging gains (losses), net - 1,472 (6,822)
Adjust to lower of cost or market 450 (1,057) (50)
------- ------- -------
$22,409 $ 5,339 $24,754
======= ======= =======
Mortgage banking servicing income consisted of:
Year Ended December 31
--------------------------------
(Dollars in thousands) 1995 1994 1993
------- ------- --------
Collections $61,980 $68,968 $ 77,706
Guarantee fees (8,651) (8,929) (10,965)
Amortization of mortgage
servicing rights 1,830 (9,186) (15,556)
------- ------- --------
$55,159 $50,853 $ 51,185
======= ======= ========
GWB, as seller and servicer, issued mortgage pass-through certificates
comprised of Class A certificates and Class B certificates. The Class B
certificates, which GWB retained, are subordinated to the rights of the Class
A certificate holders. GWB also sold loans to FNMA and FHLMC whereby a
portion or all of the credit risk was retained. Following are data related
to loans sold with credit enhancements and the accompanying exposure related
thereto:
December 31
------------------------------------
(Dollars in thousands) 1995 1994 1993
---------- ---------- ----------
Loans sold with credit enhancements
outstanding $1,397,411 $1,409,631 $1,756,576
Maximum exposure under credit
enhancements 779,902 778,705 778,896
To facilitate the servicing of delinquent loans under these
commitments and to minimize losses to the Company, loans in the amount of
$115,636,000 in 1995, $71,400,000 in 1994 and $165,103,000 in 1993 have been
repurchased from investors. Repurchased loans are included in the Company's
periodic analysis of the adequacy of valuation reserves. Delinquent interest
of approximately $2,939,000 in 1995, $1,669,000 in 1994 and $8,187,000 in
1993 was repurchased and subsequently written off. Periodically, the Company
repurchases, for investment, loans which were previously sold. The Company
repurchased loans totaling $1,061,000 in 1995, $476,274,000 in 1994 and
$20,723,000 in 1993.
NOTE 7: REAL ESTATE
An analysis of the real estate portfolio and nonperforming real estate
by state at December 31, 1995 is included in the table on page 102 titled
"Real Estate Loans and Real Estate by State." An analysis of California real
estate and nonperforming real estate by region at December 31, 1995 is
included in the table on page 103 titled "California Real Estate Loans and
Real Estate."
Real estate available for sale or development consisted of:
December 31
----------------------
(Dollars in thousands) 1995 1994
-------- --------
Real estate available for sale
Real estate acquired through foreclosure $188,802 $226,574
Other 23,017 55,673
-------- --------
211,819 282,247
Property development 68,436 69,958
Accumulated depreciation (6,081) (18,213)
Reserve for estimated losses (57,062) (77,025)
-------- --------
$217,112 $256,967
======== ========
Interest capitalized on property development totaled $4,088,000 at
December 31, 1995 and $4,581,000 at December 31, 1994.
Real estate operations are summarized below:
Year Ended December 31
------------------------------
(Dollars in thousands) 1995 1994 1993
-------- -------- --------
Net (gain) on sales of real estate $(21,709) $ (6,437) $(11,079)
Interest recognized on advances (2,337) (1,341) (1,023)
Net operating losses and holding costs 28,151 27,632 45,885
-------- -------- --------
$ 4,105 $ 19,854 $ 33,783
======== ======== ========
Following is a summary of the reserve for estimated losses:
(Dollars in thousands) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Balance at beginning of year $ 77,025 $123,551 $185,204 $ 6,862 $ 13,389
Adoption of FAS 114 - - (66,102) - -
-------- -------- -------- -------- --------
Adjusted balance at
beginning of year 77,025 123,551 119,102 6,862 13,389
Provision for losses 1,500 12,000 92,000 220,000 21,000
Charge-offs (21,469) (65,769) (87,673) (41,658) (28,266)
Recoveries 6 7,243 122 - 739
-------- -------- -------- -------- --------
Balance at end of year $ 57,062 $ 77,025 $123,551 $185,204 $ 6,862
======== ======== ======== ======== ========
NOTE 8: INTEREST RECEIVABLE
Following is a summary of interest receivable:
December 31
---------------------
(Dollars in thousands) 1995 1994
-------- --------
Real estate loans $147,893 $129,052
Mortgage-backed securities 88,628 68,908
Consumer loans 19,338 8,081
Securities 17,738 12,937
Taxes 24,197 11,120
Other 846 827
-------- --------
$298,640 $230,925
======== ========
Other includes interest receivable on interest-rate swaps.
NOTE 9: INVESTMENT IN THE FEDERAL HOME LOAN BANK SYSTEM
The investment in the Federal Home Loan Banks consisted of capital
stock, at cost, totaling $341,102,000 at December 31, 1995 and $306,041,000
at December 31, 1994.
The Company earned 4.93 percent in 1995, 5.18 percent in 1994 and 3.93
percent in 1993 from dividends on its investment in FHLB stock. FHLB capital
stock is pledged to secure FHLB borrowings. Earnings on FHLB stock will
presumably continue to be restricted due to the funding requirements imposed
on the Federal Home Loan Banks for affordable housing programs and the
Resolution Funding Corporation.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31
------------------------
(Dollars in thousands) 1995 1994
---------- ----------
Land $ 89,044 $ 89,630
Buildings and leasehold improvements 435,204 439,717
Furniture, fixtures and equipment 554,256 540,919
Software 31,060 5,965
Construction in progress 13,218 14,065
---------- ----------
1,122,782 1,090,296
Accumulated depreciation and amortization (518,110) (474,180)
---------- ----------
$ 604,672 $ 616,116
========== ==========
The Company leases various branch offices under capital and
noncancellable operating leases which expire at various dates through 2073.
Some leases contain escalation provisions for adjustments in the consumer
price index and provide for renewal options for five- to 10-year periods.
Future minimum lease payments under all noncancellable leases at December 31,
1995 were as follows:
Operating Capital
(Dollars in thousands) Leases Leases
--------- -------
Year ending December 31,
1996 $ 49,650 $ 8,148
1997 43,528 8,591
1998 35,930 8,641
1999 29,069 8,656
2000 24,486 8,835
Thereafter 135,717 115,463
-------- --------
Total minimum lease payments $318,380 158,334
========
Amount representing interest 51,141
--------
Present value of minimum lease payments $107,193
========
Rental expense charged to earnings was $46,433,000 in the year ended
December 31, 1995, $55,011,000 in the year ended December 31, 1994 and
$53,638,000 in the year ended December 31, 1993.
NOTE 11: CUSTOMER ACCOUNTS
A summary of balances at December 31, 1995 and December 31, 1994 by
type of account, and at December 31, 1995 by maturity of account is presented
on pages 97 and 98, under the captions "By Type," "By Product," and "Year-end
1995 by Maturity." An analysis of term deposits by interest rate and
maturity at December 31, 1995 and by interest rate at December 31, 1994 is
presented under the caption "Year-end 1995 Term Accounts by Maturity by
Interest Rate."
The average interest rate is based upon stated interest rates without
giving consideration to daily compounding of interest or forfeiture of
interest because of premature withdrawals. Noninterest bearing checking
accounts represented 5.40 percent of total customer accounts at December 31,
1995 and 5.07 percent at December 31, 1994. Accrued but unpaid interest on
customer accounts included in other liabilities totaled $12,091,000 at
December 31, 1995 and $9,888,000 at December 31, 1994.
The following is a summary of interest expense on customer accounts:
Year Ended December 31
----------------------------------
(Dollars in thousands) 1995 1994 1993
Checking $ 35,286 $ 40,034 $ 42,976
Limited access 150,860 152,081 162,568
Regular savings 36,995 45,370 40,418
Term 993,944 712,814 693,119
---------- -------- --------
$1,217,085 $950,299 $939,081
========== ======== ========
NOTE 12: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally represent
borrowings of less than one year. The book value for these agreements
approximates fair value. Agreements to repurchase are secured by mortgage
loans and securities held by the Company. The collateral is summarized as
follows:
December 31
-----------------------
(Dollars in thousands) 1995 1994
---------- ----------
Repurchase liability $6,868,296 $6,299,055
Weighted average yield 5.78% 5.80%
U.S. government and federal agency obligations
Book value $7,041,492 $6,719,178
Fair value 7,102,655 6,481,469
(Dollars in thousands) 1995 1994 1993
---- ---- ----
Securities sold under agreements
to repurchase
Balance at year end $6,868,296 $6,299,055 $ -
Maximum outstanding at
any month end 7,536,524 6,299,055 1,384,092
Average balance during the year 7,050,882 1,984,652 991,964
Weighted average rate during
the year 5.90% 5.17% 3.19%
Weighted average rate at
year end 5.78 5.80 -
NOTE 13: SHORT-TERM BORROWINGS
An analysis of borrowings by type at December 31, 1995 and December 31,
1994 and by maturity at December 31, 1995 is presented in the table titled
"Borrowings" on page 99.
The following is a summary of short-term borrowings:
December 31
-------------------------
(Dollars in thousands) 1995 1994
---------- ----------
Commercial paper $1,036,413 $ 745,461
Federal funds 280,000 275,000
Note payable to Student Loan
Marketing Association - 190,000
---------- ----------
$1,316,413 $1,210,461
========== ==========
Commercial paper has maturities of less than 270 days, and at December
31, 1995, the average maturity was 26 days. Other short-term borrowings
mature in periods of up to 12 months.
Short-term borrowings are summarized as follows:
(Dollars in thousands) 1995 1994 1993
---------- -------- --------
Commercial paper
Balance at year end $1,036,413 $745,461 $392,658
Maximum outstanding at any
month end 1,551,200 887,514 856,973
Average balance during the year 1,142,851 431,021 521,509
Weighted average rate during
the year 6.02% 4.78% 3.35%
Weighted average rate at
year end 5.88 6.06 3.46
Other short-term borrowings
Balance at year end $ 280,000 $465,000 $283,825
Maximum outstanding at any
month end 727,000 540,000 428,618
Average balance during the year 450,154 328,383 303,850
Weighted average rate during
the year 6.03% 4.69% 3.77%
Weighted average rate at
year end 5.85 6.29 3.78
NOTE 14: OTHER BORROWINGS
An analysis of borrowings by type at December 31, 1995 and December 31,
1994 and by maturity at December 31, 1995 is presented in the table titled
"Borrowings" on page 99. Debt issue costs are amortized on the interest
method over the term of the debt.
The following is a summary of other borrowings:
December 31
-------------------------
(Dollars in thousands) 1995 1994
---------- ----------
Senior debt $2,258,417 $2,374,781
FHLB borrowings 855,080 187,000
Other 47,428 49,363
---------- ----------
3,160,925 2,611,144
Company-obligated preferred
securities of subsidiary trust 100,000 -
---------- ----------
$3,260,925 $2,611,144
========== ==========
FHLB Borrowings
FHLB borrowings are secured by pledges of real estate loans and the
capital stock of the FHLB. At December 31, 1995, interest rates, both fixed
and variable, ranged from 5.04 percent to 8.45 percent. Average FHLB
borrowings were $186,698,000 in 1995, $306,431,000 in 1994 and $1,058,257,000
in 1993. Based upon these balances, the weighted average interest rate was
5.39 percent in 1995, 5.63 percent in 1994 and 4.59 percent in 1993.
GWB has various borrowing alternatives with the FHLB, which include a
$200,000,000 facility for overnight advances.
Senior Debt
The Company has the following senior debt outstanding:
December 31
Rate at ------------------------
(Dollars in thousands) 12-31-95 1995 1994
-------- ---------- ----------
GWB fixed-rate notes, due
between 1997 and 2001
at various rates 10.07% $ 581,638 $ 581,400
Parent company fixed-rate
notes, due between 1998
and 2002 7.39 672,970 672,585
Parent company Eurodollar
note, floating rate - - 28,250
Aristar medium-term note,
fixed rate, due in 1996 8.75 5,000 23,000
Other Aristar senior
indebtedness, due between
1996 and 2001 at various rates 7.30 998,809 1,069,546
---------- ----------
$2,258,417 $2,374,781
========== ==========
In July 1995, Aristar issued $100,000,000 in senior debt with a coupon
of 6.30 percent which matures on July 15, 2000.
In December 1994, Aristar issued $100,000,000 in senior debt with a
coupon of 8.125 percent which matures on December 1, 1997.
In July 1994, Aristar issued $150,000,000 in senior debt with a coupon
of 7.75 percent which matures on June 15, 2001.
Credit Facilities
In October 1994, amended June 1995, Aristar syndicated a multi-year
$450,000,000 Credit Facility with 22 banks for back-up liquidity and general
corporate purposes. This agreement provides for drawdowns at a spread to the
LIBOR. Aristar pays an annual commitment fee of 11 basis points on the
unused portion. There were no borrowings under this agreement in 1995.
In July 1994, amended April 1995, GWB syndicated a multi-year
$400,000,000 Credit Facility with 20 banks for back-up liquidity and general
corporate purposes. This agreement provides for drawdowns at a spread to the
LIBOR. The Bank pays an annual commitment fee of 12.5 basis points on the
unused portion of this credit facility. There were no borrowings under this
agreement in 1995.
In July 1994, amended April 1995, GWFC syndicated a multi-year
$200,000,000 Credit Facility with 20 banks for back-up liquidity and general
corporate purposes. The agreement provides for drawdowns at a spread to the
LIBOR. The Company pays an annual commitment fee of 17.5 basis points on the
unused portion. There were no borrowings under this agreement in 1995.
The Company is subject to various debt covenants and believes it is
in compliance at December 31, 1995.
Company-Obligated Preferred Securities of Subsidiary Trust
In December 1995, Great Western Financial Trust I (the "subsidiary
trust"), a wholly-owned subsidiary of Great Western Financial Corporation,
issued $100,000,000 of 8.25 percent Trust Originated Preferred Securities
(the "preferred securities"). In connection with the subsidiary trust's
issuance of the preferred securities, Great Western Financial Corporation
issued to the subsidiary trust $103,092,800 principal amount of its 8.25
percent subordinated deferrable interest notes, due 2025 (the "subordinated
notes"). The sole assets of the subsidiary trust are and will be the
subordinated notes. Great Western Financial Corporation's obligations under
the subordinated notes and related agreements, taken together, constitute a
full and unconditional guarantee by the Company of the subsidiary trust's
obligations under the preferred securities.
NOTE 15: FEDERAL AND STATE TAXES ON INCOME
Following is a summary of the provision for taxes on income:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
-------- -------- -------
Current tax expense (benefit)
Federal $ 80,800 $120,100 $21,300
State 24,400 32,500 (800)
-------- -------- -------
105,200 152,600 20,500
-------- -------- -------
Deferred tax expense (benefit)
Federal 51,400 900 (800)
State 4,500 1,800 10,300
-------- -------- -------
55,900 2,700 9,500
-------- -------- -------
$161,100 $155,300 $30,000
======== ======== =======
Deferred tax liabilities (assets) are comprised of the following:
December 31
-----------------------
(Dollars in thousands) 1995 1994
--------- ---------
Deferred tax liabilities
Loan fees and interest income $ 202,816 $ 190,479
Financial leases 74,772 81,847
Unrealized holding gains on securities 72,619 -
FHLB dividends 63,050 54,914
Depreciation 42,303 19,829
Amortization of intangibles 23,872 29,743
Accrued interest income 16,919 11,291
Cash method of accounting for income
tax reporting 8,325 7,964
Election to reduce basis 6,186 1,275
Sales of unearned interest income 2,488 10,202
Partnership income 1,871 5,741
Other deferred income items 65,554 43,015
--------- ---------
580,775 456,300
--------- ---------
Deferred tax assets
Loss reserves (117,504) (173,886)
State taxes (31,761) (24,498)
Postemployment benefits (27,433) (26,577)
Deferred compensation (11,456) (9,603)
Unearned insurance commission (11,084) (10,153)
Gain on mortgage sales (6,615) (7,510)
Unrealized holding losses on securities - (37,581)
Other deferred deduction items (98,560) (56,180)
--------- ---------
(304,413) (345,988)
Deferred tax assets valuation allowance - -
--------- ---------
Net deferred tax liabilities $ 276,362 $ 110,312
========= =========
The following table reconciles the statutory income tax rate to the
consolidated effective income tax rate:
Year Ended December 31
1995 1994 1993
---- ---- ----
Federal income tax rate 35.0% 35.0% 35.0%
State franchise tax rate, net of federal
income tax effect 6.1 6.0 7.2
---- ---- ----
Statutory income tax rate 41.1 41.0 42.2
Increase (reduction) in tax rate resulting from:
Amortization of intangibles .9 1.3 7.6
Settlements with Internal Revenue Service - - (9.8)
Reversal of taxes previously provided (.6) (2.9) (5.9)
Low income housing accounting method change (1.2) - -
Adjustment of deferred tax rate .1 (.2) 2.2
Other items, net (2.1) (1.0) (3.7)
---- ---- ----
38.2% 38.2% 32.6%
==== ==== ====
Taxes on income included the following:
December 31
(Dollars in thousands) 1995 1994
-------- --------
Net deferred liability
Federal income tax $193,588 $ 56,614
State franchise tax 82,774 53,698
-------- --------
276,362 110,312
Taxes payable 102,019 85,811
-------- --------
$378,381 $196,123
======== ========
Thrift institutions that meet certain tests prescribed by the Internal
Revenue Code are allowed a bad debt deduction for federal income tax purposes
of either 8 percent of taxable income, or an amount determined from the
thrift's loss experience. For 1995, 1994 and 1993 the Company used its loss
experience to determine federal taxes payable.
In accordance with Financial Accounting Standards No. 109 "Accounting
for Income Taxes", a federal deferred tax liability of $253,571,000 has not
been recognized at December 31, 1995 for $724,488,000 of temporary
differences relating to the tax bad debt reserves of the Bank that arose
prior to 1988.
The Company's tax returns have been examined by the Internal Revenue
Service through December 31, 1987 and by the California Franchise Tax Board
through December 31, 1991.
NOTE 16: EMPLOYEE BENEFIT PLANS
Pension Plans
The Great Western Retirement Plan ("the plan") covers a majority of
employees. Benefits under this plan are generally based on years of service
and the highest consecutive 60-months earnings during the last 120 months of
credited service prior to retirement. The Company's general funding policy
is to contribute the maximum amount deductible for federal income tax
purposes.
The net periodic pension cost is computed as follows:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
-------- -------- --------
Return on plan assets:
Actual return $(37,162) $ 1,877 $(15,715)
Expected return lower (higher)
than actual return 21,459 (17,559) 2,003
-------- -------- --------
Expected return (15,703) (15,682) (13,712)
Service cost 9,360 11,400 9,899
Interest cost 14,266 13,981 12,351
Net amortization of initial
unrecognized net
(asset) as of January 1, 1987 (676) (676) (676)
Amortization of unrecognized net
gain and deferrals 530 1,398 1,076
Amortization of unrecognized prior
service cost (185) (185) (185)
-------- -------- --------
$ 7,592 $ 10,236 $ 8,753
======== ======== ========
Assumptions used in determining the net periodic pension cost were:
Year Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Weighted average discount rate 8.25% 7.75% 8.00%
Rate of increase in future compensation levels 5.50 5.50 5.75
Expected long-term rate of return on plan assets 9.00 9.00 9.00
Although the actual return on plan assets is shown, the expected long-
term rate of return is used in determining net periodic pension cost. The
difference between the actual return and expected return is shown as
amortization of unrecognized net gain (loss).
Accumulated plan benefit information and the funded status of the plan
follow:
December 31
---------------------
(Dollars in thousands) 1995 1994
-------- --------
Accumulated benefit obligation
Vested $165,016 $142,865
Nonvested 4,516 4,887
-------- --------
$169,532 $147,752
======== ========
Projected benefit obligation $201,421 $178,043
Fair value of plan assets 212,084 170,808
-------- --------
Plan assets in excess of (less
than) benefit obligation 10,663 (7,235)
Unrecognized net transition asset - (676)
Unrecognized prior service costs - (185)
Unrecognized net loss 20,467 34,294
-------- --------
Prepaid pension cost included in
other assets $ 31,130 $ 26,198
======== ========
The assumptions used in determining the actuarial present value of the
projected benefit obligation were:
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
Weighted average discount rate 7.50% 8.25% 7.75%
Rate of increase in future
compensation levels 5.25 5.50 5.50
Expected long-term rate of return
on plan assets 9.00 9.00 9.00
/TABLE
Plan assets include certificates of deposit at GWB, equity securities,
mutual funds, mortgage-backed securities and other fixed-income securities.
There were no certificates of deposit at GWB at December 31, 1995.
Certificates of deposit at GWB totaled $6,400,000 at December 31, 1994.
The Company has an unfunded retirement restoration plan for employees
whose benefits under the principal funded plan are reduced because of
compensation deferral elections or limitations under federal tax laws.
Pension expense for these plans totaled $945,000 in 1995 and $213,000 in
1994. At December 31, 1995, the projected benefit obligation for these plans
was $5,785,000.
The Company also sponsors a nonqualified, unfunded, supplemental
executive retirement plan for certain senior officers and a nonqualified
unfunded directors' retirement plan. Data related to these plans follow:
December 31
-------------------
(Dollars in thousands) 1995 1994
------- -------
Projected benefit obligation $28,074 $27,993
Unrecognized net obligation 3,280 3,787
Pension expense for these plans totaled $4,231,000 in 1995, $4,590,000
in 1994 and $4,420,000 in 1993.
The Company provides an optional deferred compensation plan for certain
employees. Eligible employees can defer a portion of their compensation and
the Company agrees to pay interest on the balance of funds deferred. An
enhanced rate is paid on funds deferred over three years.
The Company has purchased cost recovery life insurance, primarily with
one carrier, on the lives of the participants of the supplemental executive
retirement plan, directors' retirement plan and deferred compensation plan
and it is sole owner and beneficiary of said policies. The amount of
coverage is designed to provide sufficient revenues to fund said plans.
The net cash surrender value of this life insurance, recorded in other
assets, was $163,736,000 at December 31, 1995 and $151,393,000 at December
31, 1994, and net premium income related to insurance purchased was
$6,846,000 in 1995, $2,646,000 in 1994 and $5,967,000 in 1993.
Postretirement Plans
The Company sponsors unfunded defined benefit postretirement plans that
provide medical and life insurance coverage to eligible employees and
dependents based on age and length of service. Medical coverage options are
the same as available to active employees. The cost of plan coverage for
retirees and their qualifying dependents is based upon a point system that
combines age and years of service which results, generally, in lower costs
to retirees in conjunction with higher accumulated points within limits.
The following table shows the plan's status reconciled to the accrued
postretirement benefit cost included in other liabilities on the Consolidated
Statement of Financial Condition.
December 31
-------------------
(Dollars in thousands) 1995 1994
------- -------
Accumulated postretirement benefit obligation
Retirees $29,000 $24,900
Fully eligible active employees 4,300 4,100
Other active employees 19,700 18,100
------- -------
53,000 47,100
Unrecognized net gain 728 2,959
------- -------
Accrued postretirement benefit $53,728 $50,059
======= =======
The net postretirement medical and life insurance costs follow:
Year ended December 31
----------------------------
(Dollars in thousands) 1995 1994 1993
------ ------ ------
Service cost $2,307 $2,349 $1,856
Interest cost of accumulated
postretirement benefit
obligation 3,896 3,730 3,370
Curtailment gain (570) - -
------ ------ ------
$5,633 $6,079 $5,226
====== ====== ======
For measurement purposes, the cost of medical benefits was projected
to increase at a rate of 10.75 percent in 1995, and 9.00 percent in 1996
thereafter decreasing 1 percent per year until a stable 5.00 percent medical
inflation rate is reached in 2000. Increasing the assumed health care cost
trend by 1 percent in each year would increase the accumulated postretirement
benefit obligation at December 31, 1995 by approximately $3,300,000 and the
aggregate of the service and interest components of net periodic
postretirement benefit cost for the year ended December 31, 1995 by $600,000.
The present value of the accumulated benefit obligation assumed a 7.50
percent discount rate compounded annually at December 31, 1995 and 8.25
percent at December 31, 1994.
Stock Option Plans
The Company currently has a stock option plan in effect: the 1988 Stock
Option and Incentive Plan ("stock option plan"). Options are granted at the
market value of the common stock on the date of grant. The stock option plan
consists of two separate plans: the Key Employee Program under which options
(both incentive and nonqualified), stock appreciation rights, dividend
equivalents and certain other performance and incentive awards may be
granted to officers, key employees and certain other individuals; and the
Non-employee Director Program under which non-qualified options will be
automatically granted to non-employee directors under certain circumstances.
The Company has set aside 12,500,000 shares of common stock to be delivered
pursuant to the stock option plan, of which a maximum of 750,000 may be
delivered under the Non-employee Director Program. Options may be exercised
either by payment of cash, or the optionee may deliver GWFC common stock of
an equivalent market value at the date of exercise. Proceeds from the
exercise of stock options are credited to common stock for the aggregate par
value of shares issued, and the excess is credited to additional capital.
The Company has granted performance-based restricted stock awards to
encourage and reward high levels of performance of the Company as measured
by returns to shareholders. The shares will fully vest 10 years after the
award date, and prior to such time, they are subject to accelerated vesting
based on the Company's performance. At December 31, 1995, a total of
1,115,244 shares with a value of $20,709,000 had been granted. The unearned
compensation is recorded as a separate reduction of stockholders' equity and
is being amortized to expense over 60 months. The total amount of
compensation expense related to restricted stock awards recorded was
$3,257,000 in 1995, $3,798,000 in 1994 and $3,693,000 in 1993.
Stock appreciation rights ("SAR") may be granted in conjunction with
certain options previously granted or with future options. An SAR entitles
the holder, at the discretion of the Company, to receive cash or shares of
GWFC common stock, or a combination thereof, at a value equal to the excess
of the fair market value on the date of exercise over the option price.
Exercise of an option or companion SAR automatically cancels the related
option or right.
Information with respect to stock options follows:
Option Shares Option Price Range
------------- ------------------
1994
Outstanding at beginning of year 5,316,595 $ 7.70 - $22.15
Granted 2,287,806 16.63 - 20.25
Cancelled (209,860) 14.75 - 18.88
Exercised (282,300) 10.38 - 18.88
---------- ---------------
Outstanding at end of year 7,112,241 7.70 - 22.15
1995
Granted 451,548 16.00 - 21.38
Cancelled (254,960) 10.38 - 18.88
Exercised (704,985) 7.70 - 20.50
---------- ---------------
Outstanding at end of year 6,603,844 $ 7.70 - $22.15
========== ===============
Options exercisable at
December 31, 1995 4,236,288 $ 7.70 - $22.15
========== ===============
/TABLE
Savings Plans
The Company has an Employee Savings Incentive Plan which grants to all
eligible employees the opportunity to invest up to 14 percent of their
earnings in certain investment alternatives. For investments by employees
of up to 6 percent of their earnings, the Company is obligated to and has
contributed an amount equal to one-half thereof for credit to the employees'
accounts. Further, the board of directors, at its discretion, may increase
the Company's contribution to match up to 100 percent of the Company's
obligated contribution. In 1995 and 1994 discretionary awards were made.
The Company contributed approximately $7,342,000 in 1995, including a
discretionary addition of $1,794,000, $7,886,000 in 1994, including a
discretionary addition of $1,877,000 and $6,703,000 in 1993.
NOTE 17: STOCKHOLDERS' EQUITY
In September 1992, the Company issued 6,600,000 depositary shares,
each representing a one-tenth interest in a share of 8.30 percent cumulative
preferred stock. The preferred stock has a liquidation value of $250 per
share. The preferred stock will not be redeemable prior to November 1, 1997.
Each share of preferred stock, $1.00 par value, will be redeemable at the
option of the Company on or after November 1, 1997 at $250 per share, plus
accrued and unpaid dividends. Dividends are cumulative from the date of
issue and are payable quarterly.
In May 1991, the Company issued 2,587,500 depositary shares, each
representing a one-fifth interest in a share of 8.75 percent cumulative
convertible preferred stock. The preferred stock has a liquidation value of
$250 per share. The preferred stock will not be redeemable prior to May 1,
1996. Each share of preferred stock, $1.00 par value, will be redeemable for
cash at the option of the Company, in whole or in part, at prices declining
to $250 per share on or after May 1, 2001, from $260.94 per share on or after
May 1, 1996, plus accrued and unpaid dividends. Each share of preferred
stock will be convertible at the option of the holder into shares of common
stock of the Company at a conversion price of $20.40 per share of common
stock, subject to adjustment in certain events. Dividends are cumulative
from the date of issue and are payable quarterly.
Authorized but unissued shares of common stock reserved for stock
options were 11,562,521 at December 31, 1995 and 12,242,175 at December 31,
1994. In addition, 245,947 shares of common stock had been reserved for the
Dividend Reinvestment Plan.
Parent company equity in retained earnings of subsidiaries was
$1,377,535,000 at December 31, 1995 and $1,179,243,000 at December 31, 1994.
The payment of dividends to the parent company from its subsidiaries
is subject to certain regulatory requirements, restrictions imposed by
lenders and federal income tax consequences.
GWB is subject to the regulations of the OTS. A regulation applicable
to savings associations imposes limitations upon capital distributions,
including cash dividends. Tier 1 associations may, after prior notice but
without approval of the OTS, make capital distributions up to the higher of
1) 100 percent of their net income during the calendar year, plus the amount
that would reduce by one-half their "surplus capital ratio" (the excess over
their fully phased-in capital requirement) at the beginning of the calendar
year or 2) 75 percent of their net income over the most recent four quarter
periods. Tier 1 includes savings associations with capital at least equal
to their fully phased-in capital requirements, which have not been notified
that they are in need of more than normal supervision. Minimum capital
requirements are imposed by the thrift regulators. GWB believes that it is
a Tier 1 association.
The following ratios compare GWB with the fully phased-in capital
requirements under regulations issued by the OTS:
December 31, 1995
----------------------------------------------
Actual OTS Benchmark Capital
(Dollars in millions) Amount % Amount % Excess
------ --- ------ --- -------
Leverage/tangible ratio $2,366 5.66 $1,254 3.00 $1,112
Tier 1 risk-based ratio 2,361 9.40 1,004 4.00 1,357
Total risk-based ratio 2,966 11.81 2,008 8.00 958
Certain debt agreements of GWB and Aristar provide for the maintenance
of minimum levels of equity. The federal income tax consequences arising
from the payment of dividends by GWB are discussed below. Management
believes, after taking into consideration all of the foregoing restrictions
and requirements, that the Company will be able to continue to pay dividends
to its stockholders without adverse tax consequences.
Thrift institutions that meet certain tests prescribed by the Internal
Revenue Code are allowed a bad debt deduction for federal income tax
purposes. Because of such deductions, only $725,000,000 of retained earnings
of the Bank at December 31, 1995 are available for use without adverse tax
consequences. This amount represents the earnings and profits of the bank
which, in accordance with the Internal Revenue Code, are available for the
payment of dividends. If retained earnings in excess of earnings and profits
are subsequently used by the Bank for purposes other than to absorb loan
losses, including distributions in liquidation, the amounts used will be
subject to federal income taxes at the then prevailing corporate tax rates.
It is not contemplated that retained earnings will be used in a manner which
will create federal income tax liabilities.
Rights Plan
On June 24, 1986, the Board of Directors of the Company adopted a
Rights Plan pursuant to which the Company distributed certain rights (a
"Right") for each outstanding share of common stock held as of the close of
business on July 14, 1986.
Each full Right, if it becomes exercisable, initially entitles the
holder to purchase from the Company a unit of one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $1.00 per share,
at a purchase price of $175 per unit, subject to adjustment. The Rights
attach to shares of common stock issued after July 14, 1986, and will expire
on July 14, 1996 unless redeemed earlier. The Rights may not be exercised,
and will not detach or trade separately from the common stock, except as
described below.
The Rights will detach from the common stock and may be exercised only
if a person or group becomes the beneficial owner of 15 percent or more of
the common stock ( a "Stock Acquisition"). If a Stock Acquisition occurs
(except pursuant to an offer for all outstanding shares of the common stock
which the Company's independent directors determine is fair to and otherwise
in the best interest of the Company and its stockholders), the Rights flip-in
and each Right not owned by such person will entitle the holder to purchase,
at the Right's then current exercise price, common stock (or, if the number
of shares of authorized common stock is insufficient to permit the full
exercise of the Rights, cash, property or other securities of the Company)
having a formula value equal to twice the Right's exercise price. In
addition, if at any time following a Stock Acquisition, (i) the Company is
acquired in a merger or other business combination transaction in which the
Company is not the surviving corporation (other than a merger which follows
an offer at the same price and for the same consideration as the offer
approved by the Board of Directors of the Company as described in the
immediately preceding sentence), or (ii) 50 percent or more of the Company's
assets or earnings power is sold or transferred, the Rights flip-over and
each unexcerised Right will entitle its holder to purchase, at the Right's
then current exercise price, common shares of the other person having a
formula value equal to twice the Right's exercise price. The Rights may be
redeemed by the Company at any time prior to ten days following the date of
a Stock Acquisition (which period may be extended by the Company's Board of
Directors at any time while the Rights are still redeemable). Upon the
occurrence of a flip-in or flip-over event, if the Rights are not redeemed,
the Rights would result in substantial dilution to any person who has
acquired 15 percent or more of the outstanding common stock or who attempts
to merge or consolidate with the Company. As a result, the Rights may deter
potential attempts to acquire control of the Company without the approval of
the Company's board of directors.
On June 27, 1995, the Board of Directors of the Company also declared
a dividend distribution of one Right (each a "new Right") for each
outstanding share of common stock to stockholders of record at the close of
business on the earlier of the date on which the current Rights Plan expires
or the date on which the existing Rights are redeemed in accordance with the
provisions of the current Rights Plan. Each new Right is identical to the
existing Rights, except that the new Rights will initially entitle the holder
to purchase from the Company a unit of one one-hundredth of a share of Series
A Junior Participating Preferred Stock, par value $1.00 per share, at a
purchase price of $80.00 per unit, subject to adjustment, and the new Rights
will expire July 14, 2006.
NOTE 18: CONTINGENCIES
In the normal course of its business, the Company is named a defendant
in various legal proceedings and claims. In the opinion of management, after
consultation with outside legal counsel representing the Company in these
lawsuits, their outcomes will not have a material effect on the Company's
financial position, liquidity or results of operations.
The operations of the Company are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the
federal government, and by the regulatory policies of financial institution
regulatory authorities. Deposit flows and cost of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending and other investment activities are affected by the demand for
mortgage financing and consumer and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and
other factors affecting the supply of housing and the availability of funds.
NOTE 19: PARENT COMPANY FINANCIAL INFORMATION
Effective March 31, 1994, Bryant Financial Corporation ("Bryant"), a
property development subsidiary, became a wholly-owned direct subsidiary of
the Company. This realignment was in the form of a dividend from GWB to GWFC
in the amount of Bryant's book value of $38,442,000.
Effective June 30, 1993, Aristar became a wholly-owned subsidiary of
the Company. This realignment was in the form of a dividend from GWB to GWFC
and a simultaneous cash capital contribution by GWFC to GWB of $369,473,000
which represented the dividended company's book value. Aristar is expected
to continue to be a source of operating income.
Statement of Operations
Year Ended December 31
---------------------------------
(Dollars in thousands) 1995 1994 1993
-------- -------- ---------
Income
Dividends from subsidiary banks $ 71,320 $139,764 $ 500,970
Dividends from nonbanking
subsidiaries 27,500 29,500 23,500
Management fees and interest
charged subsidiaries 6,814 6,959 10,705
Income (loss) from securities
and investments 8,895 8,188 (343)
Other 1,136 1,848 3,056
-------- -------- ---------
115,665 186,259 537,888
-------- -------- ---------
Expenses
Interest expense on borrowings 59,125 56,567 45,219
Operating and administrative 18,036 21,703 17,805
Federal and state taxes
(credits) on income (26,008) (24,294) (22,368)
-------- -------- ---------
51,153 53,976 40,656
-------- -------- ---------
Earnings before undistributed
net earnings of subsidiaries 64,512 132,283 497,232
Undistributed (overdistributed) net
earnings of subsidiaries 196,510 118,951 (435,185)
-------- -------- ---------
$261,022 $251,234 $ 62,047
======== ======== =========
The parent company joins with its subsidiaries, other than the life
insurance subsidiary, in filing a consolidated federal income tax return.
In the return, the parent company's taxable income or loss is consolidated
with the taxable income or loss of its subsidiaries. The parent company's
share of income taxes is based on the amount of tax which would be payable
if separate returns were filed. Therefore, the parent company's equity in
net earnings of subsidiaries is excluded from its computation of the
provision for taxes on income for financial statement purposes. Taxes
receivable consist primarily of amounts due from subsidiaries for taxes paid
on their behalf.
Statement of Financial Condition
December 31
------------------------
(Dollars in thousands) 1995 1994
---------- ----------
Assets
Cash $ 831 $ 1,933
Certificates of deposit and federal funds 82,000 115,000
Securities available for sale 57,913 86,726
Investment in subsidiaries at cost plus
equity in undistributed earnings
Great Western Bank 2,717,788 2,256,089
Aristar 451,570 414,262
Nonbanking subsidiaries 97,882 97,902
Company owned life insurance 163,354 151,044
Advances to subsidiaries 96,741 98,146
Taxes receivable 38,433 30,363
Other assets 104,223 98,238
---------- ----------
$3,810,735 $3,349,703
========== ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 162,467 $ 151,651
Commercial paper 49,729 13,431
Floating-rate notes - 28,250
Fixed-rate notes 672,970 672,585
Subordinated notes 103,093 -
---------- ----------
988,259 865,917
Stockholders' equity (see Consolidated
Statement of Financial Condition) 2,822,476 2,483,786
---------- ----------
$3,810,735 $3,349,703
========== ==========
Following is a summary of the parent company debt by maturity:
(Dollars in thousands) December 31, 1995
-----------------
1996 $ 49,729
1998 249,689
2000 223,960
2001 and thereafter 302,414
--------
$825,792
========
Statement of Cash Flows
Year Ended December 31
---------------------------------
(Dollars in thousands) 1995 1994 1993
--------- --------- ---------
Operating Activities
Net earnings $ 261,022 $ 251,234 $ 62,047
Noncash adjustments to net earnings
(Undistributed) overdistributed
net earnings of subsidiaries (196,510) (118,951) 435,185
Income taxes (8,303) 31,528 46,170
Other (2,432) (40,044) 245,699
--------- --------- ---------
Net cash provided by operating
activities 53,777 123,767 789,101
--------- --------- ---------
Financing Activities
Proceeds from issuance of
Common stock 60,195 29,842 31,168
Cash dividends paid (149,688) (147,539) (145,892)
--------- --------- ---------
(89,493) (117,697) (114,724)
Borrowings
Proceeds from new long-term debt 103,093 - 373,019
Repayment of long-term debt (28,250) - (77,785)
Net change in short-term debt 36,298 13,431 -
--------- --------- ---------
111,141 13,431 295,234
--------- --------- ---------
Net cash provided by (used in)
financing activities 21,648 (104,266) 180,510
--------- --------- ---------
Investing Activities
Proceeds from maturities 49,852 24,863 -
Purchases of securities (19,532) (87,754) (24,919)
Investment in subsidiaries (139,847) (50,177) (734,231)
--------- --------- ---------
Net cash (used in) investing
activities (109,527) (113,068) (759,150)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (34,102) (93,567) 210,461
Cash and cash equivalents at
beginning of year 116,933 210,500 39
--------- --------- ---------
Cash and cash equivalents at
end of year $ 82,831 $ 116,933 $ 210,500
========= ========= =========
Supplemental cash flow disclosure
Cash paid (received) for
Interest on borrowings $ 59,195 $ 56,300 $ 38,427
Income taxes (17,937) (54,594) 8,761
NOTE 20: FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet
risk and other derivative financial instruments in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. All financial instruments are
held or issued for purposes other than trading. These financial instruments
include commitments to extend credit, at both fixed and variable rates, loans
sold with credit enhancements, standby letters of credit, interest-rate caps
and floors written, and interest-rate and cash flow swap agreements. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the Consolidated Statement of
Financial Condition. The contract or notional amounts of these instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments. For interest-rate caps, floors, swap transactions,
loans sold with credit enhancements, purchased put options and forward sales,
the contract or notional amounts do not represent exposure to risk of loss.
The Company extends credit and requires collateral for loans sold with
credit enhancements under the same lending policies as for all other real
estate loans.
Interest Rate Risks
The Company uses derivative financial instruments to manage its
exposure to interest rate changes related to its portfolio of loans and
borrowings. The Company's objective is to manage the impact of interest rate
changes on earnings. The notional amounts of interest-rate risk management
instruments used by the Company are indicated in the following table:
December 31
--------------------
(Dollars in thousands) 1995 1994
-------- --------
Forward sales contracts $ 60,700 $ 1,410
Interest-rate swaps 109,000 109,000
Cash flow swaps 180,711 197,991
The Company, from time to time, uses purchased put options to hedge
its exposure to increasing interest rates with respect to its fixed-rate loan
commitments. Put options grant the Company, for a premium payment, the right
to sell to the writer a specified financial instrument at a predetermined
price for a predetermined period of time. The cost is recorded in other
assets and amortized to gains and losses on loan sales over the life of the
hedged assets. Realized gains from option contracts are recorded at the time
the hedged instrument expires.
The Company's credit risk exposure in the event of nonperformance by
a counterparty is the loss of potential gains on the exercise of the option.
The Company's exposure to risk of accounting loss is limited to the premium
paid for the option.
The Company uses forward sales contracts to hedge its exposure to
increasing interest rates with respect to its fixed-rate commitments.
Forward sales contracts are used to sell specific financial instruments
(fixed-rate loans) at a future date for a specified price. Gains or losses
are recognized at the time the contracts mature and are recorded as a
component of gain on mortgage sales.
The Company uses interest-rate swaps to manage interest-rate risk and
reduce interest expense by improving the execution of borrowings to which the
interest-rate swap is tied. At December 31, 1995 and 1994, the Company had
outstanding interest-rate swaps related to FHLB borrowings in which the
Company paid a fixed rate and received a rate tied to three month LIBOR. At
December 31, 1995, the rate paid was 5.26 percent and the rate received was
5.95 percent. Interest receivable on these swaps is recorded in interest
receivable and interest payable is recorded in other liabilities. The income
and expense related to these interest-rate swaps was recorded as a decrease
or increase to interest expense on borrowings. The net benefit of interest-
rate swap agreements was $953,000 for the year ended December 31, 1995,
compared to a net cost of $775,000 for the year ended December 31, 1994 and
$3,825,000 for the year ended December 31, 1993.
The Company's current credit exposure on swaps is limited to the value
of interest-rate swaps that have become favorable to the Company. The
Company manages the potential credit exposure through careful evaluation of
counterparty credit standing.
The Company uses cash flow swap agreements to reduce its interest-rate
exposure with regard to its Investor CD, an insured account which is indexed
to the Standard and Poor's (S&P) 500 performance. The Company agreed to pay
a fixed or variable rate in exchange for the customer receiving a return tied
to the S&P 500. The average interest rate paid by GWB was 5.13 percent at
December 31, 1995 and 4.39 percent at December 31, 1994. The monthly payment
is recorded in interest expense on customer accounts and the amount received
is passed to the customer as the yield on the Investor CD. The exposure to
accounting loss on the cash flow swap agreements in the event of the failure
of a counterparty to perform according to the terms of the contract would
approximate the amount of interest to be paid to the Bank's customers on the
Investor CD portfolio.
Credit Commitments
The Company enters into commitments to fund real estate loans to meet
the financing needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced and are then recognized over the term
of the loan as an adjustment of the yield. Fees on commitments that expire
unused are recognized in loan fees at expiration. Since a portion of the
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on management's credit
evaluation of the counterparty. The value of the property as security for
a mortgage loan is determined by qualified real estate appraisers.
The Company had outstanding commitments to fund real estate loans of
$716,924,000 at December 31, 1995 which consisted of $144,587,000 fixed-rate
and $572,337,000 adjustable rate, and $881,575,000 at December 31, 1994 which
consisted of $22,264,000 fixed-rate and $859,311,000 adjustable rate.
The Company has issued standby letters of credit from time to time to
meet the credit needs of its customers. The letters of credit outstanding
are generally performance guarantees supporting certain property development
projects and totaled $10,410,000 at December 31, 1995 and $12,892,000 at
December 31, 1994. The notional value of letters of credit does not
necessarily represent future cash requirements.
The Company's maximum potential exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Concentrations of Credit Risk
The Company primarily originates real estate loans of which a
substantial portion of the portfolio is secured by real estate located in
California and Florida.
Fair Value of Financial Instruments
Fair value estimates and the methods and assumptions used to determine
the fair value of the Company's financial instruments follow:
Short-term Investments and Debt Securities
The carrying amount of short-term instruments is a reasonable estimate
of their fair value. The fair value of securities available for sale and
mortgage-backed securities is principally based on quoted market prices from
various sources. For securities which have no quoted market price and are
short-term in nature, the fair value is determined to be the book value at
the reporting date.
The following table presents the carrying amount and fair value of
investments and mortgage-backed securities:
December 31, 1995 December 31, 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
---------- ---------- ---------- ----------
Certificates of deposit and
federal funds $ 257,125 $ 257,125 $ 165,125 $ 165,125
Securities available for sale 1,092,459 1,092,459 917,095 917,095
Mortgage-backed securities 9,803,441 9,858,623 9,269,607 9,146,234
Loans Receivable
Fair value on fixed-rate real estate product is generally determined
on the specific identification method. An aggregate method is used on
adjustable rate products.
The fair value of single-family real estate loans is principally based
on readily available market prices, adjusted for excess yields and various
risk factors. Fair value of commercial and apartment loans is determined by
computing discounted cash flows on various segments of the loan portfolio.
Recent national commitment rates were used as a guide in establishing
regional discount rates for commercial and apartment loans. The fair value
of these portfolios will fluctuate with changes in interest rates.
Fair value of consumer loans is predominantly based on discounted
future cash flows. The discount rate used was based upon a projected
treasury yield curve adjusted for various risk factors depending on the type
of loan. The fair value of student loans is based on market quotes. The
fair value of nonterm consumer loans generally is the book value at the
reporting date. These loans include checking overdraft, installment loans
and other miscellaneous consumer loan related accounts.
Mortgage Servicing Rights
The fair value of mortgage servicing rights, which includes
excess/short servicing fees and originated mortgage servicing rights, is
determined by recalculation of the discounted cash flows at market rates.
The following table presents fair value information for loans
receivable, net of allowance for loan losses and undisbursed loan funds, for
excess/short servicing fees and originated mortgage servicing rights. The
fair value of lease financing receivables is not estimated as they are not
considered financial instruments.
December 31, 1995 December 31, 1994
------------------------ ------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
----------- ----------- ----------- -----------
Loans receivable
Real estate $27,314,352 $27,304,438 $26,016,944 $25,113,197
Consumer
Term 2,046,377 2,052,536 1,929,278 1,908,099
Nonterm 451,848 457,237 340,450 341,971
Excess/short servicing fees 3,616 6,286 578 8,833
Originated mortgage servicing
rights 7,034 7,034 - -
Customer Accounts
Term deposits are stratified by remaining maturity, and fair value is
calculated based on discounted future cash flows. The discount rate used was
based upon a projected treasury yield curve. Fair value includes the effects
of compounding where applicable.
The fair value of nonterm deposits has been determined to be the
amount payable on demand at the reporting date. Nonterm deposits include all
customer accounts without defined maturities, such as checking, money market
savings and regular savings.
The following table presents information for deposit liabilities:
December 31, 1995 December 31, 1994
------------------------- -------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
----------- ----------- ----------- -----------
Customer accounts
Term $17,983,752 $18,022,943 $16,530,164 $16,173,443
Nonterm 11,251,176 11,251,176 12,170,783 12,170,783
Short-term Borrowings
Because of the short-term nature of these borrowings, fair value
approximates book value.
Securities Sold Under Agreements to Repurchase and Other Borrowings
Long-term borrowings are stratified by remaining maturity, and fair
value is calculated based on discounted future cash flows. The discount rate
used was based upon a projected treasury yield. The maturity used in the
present value calculation of long-term, variable-rate borrowings is the date
at which the borrowing would next be repriced.
The following table presents information for borrowings:
December 31, 1995 December 31, 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
---------- ---------- ---------- ----------
Securities sold under
agreements to repurchase $6,868,296 $6,868,296 $6,299,055 $6,281,300
Short-term borrowings 1,316,413 1,316,413 1,210,461 1,210,461
Other borrowings
Fixed-rate notes 2,253,417 2,419,265 2,323,531 2,291,933
FHLB borrowings 855,080 855,636 187,000 186,719
Medium-term notes 5,000 5,060 23,000 23,442
Floating-rate notes - - 28,250 28,246
Company-obligated preferred
securities of subsidiary
trust 100,000 101,500 - -
Other 47,428 64,055 49,363 54,981
Financial Instruments with Off-Balance-Sheet Risk
The fair value of cash flow swaps, put options purchased as a hedge
of fixed-rate commitments and commitments to fund real estate loans is
estimated using current market prices adjusted for various risk factors and
market volatility. The fair value of letters of credit is based on the
estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date. The fair value of outstanding
interest-rate swaps is based on expected remaining net cash flows discounted
at three-month LIBOR.
The estimated fair values of the Company's off-balance-sheet financial
instruments were as follows:
December 31, 1995 December 31, 1994
--------------------- ---------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
-------- -------- -------- -------
Other financial instruments
Assets
Loan commitments
Fixed $ - $ (76) $ - $ (1,194)
Variable - 13,164 - (15,224)
Forward sales contract - 384 - 2
Standby letters of credit - (62) - (77)
Liabilities
Interest-rate swaps 113 320 95 8,543
Cash flow swaps (796) 9,672 (747) (631)
The carrying value of off-balance-sheet financial instruments
represents accruals or deferred income arising from those financial
instruments.
NOTE 21: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial operating data are included in
"Stockholder Data and Quarterly Information (Unaudited)" on page 104 of this
annual report to stockholders.
Fourth quarter 1994 earnings included a $62.3 million pretax gain
($37.1 million, or $.28 per share after tax) on the sale of 31 Florida West
Coast retail banking branches sold in December. In addition, the Company
wrote off approximately $11.7 million ($7.5 million, or $.06 per share, after
tax) of intangibles related to interstate banking access rights.
Third quarter 1993 earnings were affected by an additional $150 million
of provisions for losses on loans and real estate established for four
separate bulk sales of distressed assets.
NOTE 22: SEGMENT DATA
A description and summary of business segments is included in the
section titled "Segment Data" in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Great Western Financial Corporation
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Great Western Financial Corporation and
its subsidiaries ("the Company") at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company adopted
accounting standards that changed its methods of accounting for impairment
of loans and certain debt and equity securities in 1993 and its methods of
accounting for mortgage servicing rights and long-lived assets in 1995.
/s/ Price Waterhouse LLP
Los Angeles, California
January 18, 1996
MANAGEMENT'S COMMENTARY ON FINANCIAL STATEMENTS
Management is responsible for the integrity and objectivity of the
financial statements and other information in this report. The statements
were prepared in accordance with generally accepted accounting principles
appropriate in the circumstances. They meet the requirements of the
Securities and Exchange Commission. The financial statements reflect
management's judgement and estimates relating to events not concluded by year
end.
The Company's code of conduct, communicated to all officers and
employees, requires adherence to high ethical standards in the conduct of the
Company's business.
Management is responsible for maintaining a system of internal control
and has established a system of internal accounting control designed to
provide reasonable assurance that transactions are recorded properly to
permit preparation of financial statements, that transactions are executed
in accordance with management's authorizations and that assets are
safeguarded from significant loss or unauthorized use.
Management supports an extensive program of internal audits to evaluate
the adequacy of internal controls as well as to monitor compliance with
management's directives and regulatory agencies' requirements. The audit
committee of the board of directors is composed of nine outside directors,
none of whom is an officer or employee of the Company. The audit committee
meets with the internal and external auditors to review the scope of audits,
findings and actions to be taken by management.
/s/ Carl F. Geuther
Carl F. Geuther
Executive Vice President and Chief Financial Officer
January 18, 1996
STATISTICAL INFORMATION
CASH AND SECURITIES ANALYSIS
December 31
----------------------------------------------------------
Rate at
(Dollars in millions) 12-31-95 1995 1994 1993 1992 1991
-------- ---- ---- ---- ---- ----
By Type
Certificates of deposit, federal funds,
repurchase agreements 5.81% $ 257 $ 165 $ 217 $ 350 $ 105
U.S. government securities 5.55 11 10 336 4 107
Federal agency securities 6.43 606 515 41 49 23
Corporate debt securities 6.19 445 364 433 452 455
Other securities 6.10 31 28 61 119 93
---- ------ ------ ------ ------ ------
1,350 1,082 1,088 974 783
Cash 837 984 759 686 615
------ ------ ------ ------ ------
$2,187 $2,066 $1,847 $1,660 $1,398
====== ====== ====== ====== ======
Yield to maturity on interest earning
securities at year end, excluding
insurance subsidiary 6.23% 6.28% 4.66% 5.21% 6.74%
Year-end 1995 by Maturity Less than 1-5 5-10 After 10
(Dollars in millions) Total one year years years years
----- ----------- ----- ----- --------
Fair Value
Certificates of deposit, federal funds,
repurchase agreements $ 257 5.81% $257 5.81% $ - -% $ - -% $ - -%
U.S. government securities 11 5.55 2 5.10 6 5.66 3 5.65 - -
Federal agency securities 606 6.43 319 6.40 280 6.47 7 6.47 - -
Corporate debt securities 445 6.19 248 5.90 135 6.29 49 7.33 13 6.43
Other securities 31 6.10 17 5.94 7 5.86 3 6.70 4 6.79
------ ---- ---- ---- ---- ---- --- ---- --- ----
$1,350 6.22% $843 6.06% $428 6.39% $62 7.13% $17 6.51%
====== ==== ==== ==== ==== ==== === ==== === ====
Securities, excluding insurance subsidiary $1,286 6.23% $826 6.07% $415 6.41% $40 7.66% $ 5 6.88%
====== ==== ==== ==== ==== ==== === ==== === ====
Amortized Cost
Certificates of deposit, federal funds,
repurchase agreements $ 257 $257 $ - $ - $ -
U.S. government securities 11 2 6 3 -
Federal agency securities 599 317 276 6 -
Corporate debt securities 443 247 135 49 12
Other securities 31 17 7 3 4
------ ---- ---- --- ---
$1,341 $840 $424 $61 $16
====== ==== ==== === ===
/TABLE
STATISTICAL INFORMATION (continued)
CUSTOMER ACCOUNTS
Coupon December 31
rate at ------------------------------------------------------------------------------------
(Dollars in millions) 12-31-95 1995 % 1994 % 1993 % 1992 % 1991 %
-------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
By Type
Retail accounts
Transaction accounts
Checking .81% $ 4,488 15 $ 4,573 16 $ 4,533 14 $ 3,859 12 $ 2,764 9
Limited access 3.28 4,826 16 5,440 19 6,699 21 7,012 23 5,431 18
Regular savings 2.00 1,763 6 2,000 7 2,146 7 1,790 6 1,363 5
Term accounts
Less than 6 months 4.79 1,320 5 1,610 5 2,872 9 5,018 16 5,851 19
6 months 5.33 7,626 26 5,135 18 7,004 22 5,338 17 7,850 26
1 year 6.06 4,601 16 4,891 17 2,868 9 1,515 5 1,543 5
2 years 5.24 511 2 558 2 595 2 547 2 611 2
3 years and over 6.13 2,277 8 2,558 9 2,878 9 2,173 7 1,298 4
Deferred compensation 5.48 1,361 4 1,372 5 1,349 5 2,974 10 2,811 9
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total retail accounts 28,773 98 28,137 98 30,944 98 30,226 98 29,522 97
Wholesale accounts 3.50 462 2 564 2 588 2 683 2 1,048 3
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$29,235 $28,701 $31,532 $30,909 $30,570
======= ======= ======= ======= =======
Average rate at year end 4.23% 3.60% 3.10% 3.48% 5.34%
By Product
Checking accounts $ 9,196 31 $ 9,856 34 $11,040 35 $10,703 35 $ 8,092 27
Regular savings accounts 1,763 6 1,999 7 2,146 7 1,790 6 1,363 4
Wholesale transaction 174 1 158 1 173 * 197 1 330 1
Public funds 288 1 403 1 411 1 457 1 514 2
Other broker accounts - - 4 * 4 * 28 * 203 1
Tax-deferred accounts
Deferred compensation 1,361 5 1,372 5 1,349 5 2,974 10 2,811 9
IRA/Keogh 2,766 9 2,712 10 2,894 9 2,825 9 2,743 9
Consumer term accounts 13,687 47 12,197 42 13,515 43 11,935 38 14,514 47
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$29,235 $28,701 $31,532 $30,909 $30,570
======= ======= ======= ======= =======
*less than one percent
STATISTICAL INFORMATION (continued)
Year-end 1995 Term Accounts by Maturity by Interest Rate
90 days 180 days December 31
Within to to 1-2 2-3 3 years -----------------
(Dollars in millions) 90 days 180 days 1 year years years and over 1995 1994
------- -------- -------- ----- ----- -------- ------ -------
Under 4% $ 127 $ 29 $ 23 $ 9 $ 4 $ 7 $ 199 $3,745
4 to 6% 3,064 4,076 2,803 2,269 319 294 12,825 9,363
6 to 8% 1,159 553 1,182 1,371 66 432 4,763 3,197
Over 8% 2 2 2 186 1 4 197 225
$100,000 accounts included above 1,007 940 789 533 74 159 3,502 3,300
Year-end 1995 by Maturity
No Within
(Dollars in millions) maturity one year 1997 1998 1999 2000 After 2000
-------- -------- ---- ---- ---- ---- ----------
Balances $11,251 $13,023 $3,835 $390 $375 $357 $ 4
Average coupon rate 2.04% 5.49% 5.85% 5.39% 5.81% 6.36% 5.86%
STATISTICAL INFORMATION (continued)
BORROWINGS
December 31
Rate at ----------------------------------------------------
(Dollars in millions) 12-31-95 1995 1994 1993 1992 1991
-------- ---- ---- ---- ---- ----
By Type
Securities sold under agreements to repurchase 5.78% $ 6,868 $ 6,299 $ - $ 717 $1,419
Short-term borrowings 5.87 1,317 1,211 676 487 777
FHLB borrowings 5.60 855 187 306 311 364
Senior debt 8.09 2,306 2,424 2,497 2,636 3,032
Company-obligated preferred securities of
subsidiary trust 8.25 100 - - - -
------- ------- ------ ------ ------
$11,446 $10,121 $3,479 $4,151 $5,592
======= ======= ====== ====== ======
Average interest rate on borrowings at year end 6.27% 6.42% 7.34% 7.60% 7.69%
Less than 1-2 2-5 5-10 After 10
(Dollars in millions) Total one year years years years years
----- --------- ----- ----- ----- --------
Year-end 1995 by Maturity
Securities sold under agreements to repurchase $ 6,868 $6,868 $ - $ - $ - $ -
Short-term borrowings 1,317 1,317 - - - -
FHLB borrowings 855 746 - 109 - -
Senior debt 2,306 105 352 1,303 499 47
Company-obligated preferred securities of
subsidiary trust 100 - - - - 100
------- ------ ---- ------ ---- ----
$11,446 $9,036 $352 $1,412 $499 $147
======= ====== ==== ====== ==== ====
Average interest rate on borrowings by maturity 6.27% 5.79% 8.59% 7.55% 8.77% 8.93%
STATISTICAL INFORMATION (continued)
LOAN ANALYSIS
Year Ended December 31
---------------------------------------------------------------------------------------
(Dollars in millions) 1995 % 1994 % 1993 % 1992 % 1991 %
---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Sources of Real Estate
Lending Funds
Mortgage principal repayments $ 3,759 $ 4,615 $ 5,720 $ 6,324 $ 5,056
Mortgage sales 1,611 1,171 3,568 4,154 2,491
Retail customer accounts
(sold) acquired - (982) 4,094 2,258 2,783
Increase (decrease) in borrowings 1,325 6,641 (672) (1,441) (947)
Customer accounts increase (decrease) 534 (1,849) (3,471) (1,920) (1,862)
Cash and securities (increase)
decrease (121) (219) (186) (263) 422
Mortgage-backed securities purchased - (1,539) (925) (655) (262)
Net earnings 261 251 62 85 298
Other (88) (168) 598 674 (436)
------- ------- ------- ------- -------
$ 7,281 $ 7,921 $ 8,788 $ 9,216 $ 7,543
======= ======= ======= ======= =======
Real Estate Lending for the Year
By Security Type
Single-family $ 7,162 98 $ 7,807 98 $ 8,623 98 $ 9,098 98 $ 7,484 99
Apartments 43 1 51 1 52 1 68 1 36 1
Commercial properties 76 1 63 1 113 1 50 1 23 *
------- ----- ------- ----- ------- ----- ------- ----- ------- ----
$ 7,281 $ 7,921 $ 8,788 $ 9,216 $ 7,543
======= ======= ======= ======= =======
By Purpose
Purchase of property $ 4,546 63 $ 4,421 56 $ 3,152 36 $ 3,205 35 $ 3,682 49
Refinance 2,710 37 3,479 44 5,607 64 6,005 65 3,850 51
Construction 25 * 21 * 29 * 6 * 11 *
------- ----- ------- ----- ------- ----- ------- ----- ------- ----
$ 7,281 $ 7,921 $ 8,788 $ 9,216 $ 7,543
======= ======= ======= ======= =======
By Loan Type
Long-term - essentially 30-40 years
ARM $ 5,922 81 $ 6,868 87 $ 5,243 60 $ 4,734 51 $ 4,759 63
Fixed 893 12 603 7 2,102 24 2,688 29 1,828 24
Short-term - essentially 15 years
or less
ARM 116 2 130 2 185 2 253 3 333 5
Fixed 350 5 320 4 1,258 14 1,541 17 623 8
------- ----- ------- ----- ------- ----- ------- ----- ------- ----
$ 7,281 $ 7,921 $ 8,788 $ 9,216 $ 7,543
======= ======= ======= ======= =======
Average new loan rate 6.78% 5.89% 7.05% 8.25% 9.78%
Average ARM differential 2.62% 2.59% 2.47% 2.25% 2.30%
*Less than one percent
/TABLE
STATISTICAL INFORMATION (CONTINUED)
LOAN ANALYSIS (continued)
Year Ended December 31
------------------------------------------------------------------------------------------
(Dollars in millions) 1995 % 1994 % 1993 % 1992 % 1991 %
---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Loan Portfolio by Type
Real estate
Long-term-essentially 30-40 years
ARM $26,059 94 $24,783 94 $27,082 93 $26,489 92 $27,170 92
Fixed 530 2 589 2 912 3 1,053 3 1,334 4
Short-term-essentially 15 years
or less
ARM 627 2 666 2 566 2 824 3 667 2
Fixed 488 2 454 2 553 2 493 2 448 2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
27,704 26,492 29,113 28,859 29,619
Consumer loans 2,634 2,426 2,208 2,346 2,408
------- ------- ------- ------- -------
$30,338 $28,918 $31,321 $31,205 $32,027
======= ======= ======= ======= =======
Yield at year end 8.46% 7.75% 7.54% 8.32% 9.84%
ARM differential 2.49% 2.46% 2.41% 2.37% 2.39%
Real Estate Loan Portfolio
By Security Type
Single-family $24,715 89 $23,387 88 $25,710 88 $25,367 88 $25,760 87
Apartments 1,615 6 1,712 7 1,814 6 1,939 7 2,090 7
Commercial properties 1,374 5 1,393 5 1,589 6 1,553 5 1,769 6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$27,704 $26,492 $29,113 $28,859 $29,619
======= ======= ======= ======= =======
Number of real estate loans 352,855 372,108 429,294 466,852 483,709
Loans serviced for others $11,110 $10,992 $12,337 $13,106 $12,812
Consumer Loan Portfolio
Consumer finance/installment $ 2,136 81 $ 1,999 82 $ 1,831 83 $ 1,723 74 $ 1,733 72
Customer account loans 93 4 87 4 97 4 97 4 113 5
Student loans 327 12 239 10 180 8 165 7 148 6
Lease financing 78 3 101 4 100 5 105 4 114 5
Bank cards - - - - - - 256 11 300 12
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$ 2,634 $ 2,426 $ 2,208 $ 2,346 $ 2,408
======= ======= ======= ======= =======
Mortgage-backed Securities by Type
ARM $ 9,295 95 $ 8,553 92 $ 2,168 68 $ 1,969 62 $ 2,131 60
Fixed 529 5 733 8 1,028 32 1,208 38 1,414 40
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$ 9,824 $ 9,286 $ 3,196 $ 3,177 $ 3,545
======= ======= ======= ======= =======
Yield at year end 7.34% 6.55% 5.93% 7.08% 8.63%
Nonperforming Assets
Delinquent loans $ 486 $ 565 $ 626 $ 880 $ 611
Troubled debt restructurings 108 125 213 161 152
Loans in-substance foreclosed - - - 480 486
Real estate 174 156 293 490 376
------- ------- ------- ------- -------
$ 768 $ 846 $ 1,132 $ 2,011 $ 1,625
Percent of total assets 1.72% 1.98% 2.90% 5.12% 4.04%
STATISTICAL INFORMATION (continued)
REAL ESTATE LOANS AND REAL ESTATE BY STATE
Connecticut/
December 31, 1995 Massachusetts/
(Dollars in millions) Total California Florida New York
------- ---------- ------- ------------
Total Real Estate Loans
and Real Estate
Real estate loans
Residential
Single-family $24,715 $16,233 $1,772 $1,603
Apartments 1,615 1,304 70 -
Commercial
Offices 394 350 8 5
Retail 249 211 17 -
Hotel/motel 220 140 4 -
Industrial 317 270 12 -
Other 194 141 17 -
------- ------- ------ ------
27,704 18,649 1,900 1,608
------- ------- ------ ------
Real estate available for sale, net
Real estate acquired through
foreclosure 181 151 18 3
Other 12 12 - -
Property development 46 46 - -
------- ------- ------ ------
239 209 18 3
------- ------- ------ ------
Total real estate loans
and real estate $27,943 $18,858 $1,918 $1,611
======= ======= ====== ======
Percent of total 100.0% 67.5% 6.9% 5.8%
Nonperforming Real Estate
Loans and Real Estate
Real estate loans
Residential
Single-family $ 445 $ 363 $ 21 $ 21
Apartments 42 33 1 -
Commercial
Offices 18 18 - -
Retail 23 15 3 -
Hotel/motel 24 24 - -
Industrial 10 10 - -
Other 5 3 1 -
------- ------- ------ ------
567 466 26 21
------- ------- ------ ------
Real estate
Residential
Single-family 121 111 1 3
Apartments 30 24 3 -
Commercial
Offices 7 6 1 -
Retail 4 3 1 -
Hotel/motel 2 - 2 -
Industrial 3 3 - -
Other 7 6 1 -
------- ------- ------ ------
174 153 9 3
------- ------- ------ ------
Total nonperforming real
estate loans and real
estate $ 741 $ 619 $ 35 $ 24
======= ======= ====== ======
Percent of total 100.0% 83.6% 4.7% 3.2%
STATISTICAL INFORMATION (continued)
REAL ESTATE LOANS AND REAL ESTATE BY STATE
December 31, 1995 Oregon/ Oklahoma/
(Dollars in millions) Washington Texas Georgia Arizona Other
---------- -------- ------- ------- ------
Total Real Estate Loans
and Real Estate
Real estate loans
Residential
Single-family $1,497 $761 $430 $358 $2,061
Apartments 8 24 51 66 92
Commercial
Offices 16 2 4 4 5
Retail 9 - - 2 10
Hotel/motel - 2 - 3 71
Industrial 4 13 2 4 12
Other 7 1 2 11 15
------ ---- ---- ---- ------
1,541 $803 489 448 2,266
------ ---- ---- ---- ------
Real estate available for sale, net
Real estate acquired through
foreclosure 1 4 1 - 3
Other - - - - -
Property development - - - - -
------ ---- ---- ---- ------
1 4 1 - 3
------ ---- ---- ---- ------
Total real estate loans
and real estate $1,542 $807 $490 $448 $2,269
====== ==== ==== ==== ======
Percent of total 5.5% 2.9% 1.7% 1.6% 8.1%
Nonperforming Real Estate
Loans and Real Estate
Real estate loans
Residential
Single-family $ 8 $ 5 $ 4 $ 2 $ 21
Apartments 1 - 4 - 3
Commercial
Offices - - - - -
Retail 5 - - - -
Hotel/motel - - - - -
Industrial - - - - -
Other - - - 1 -
------ ---- ---- ---- ------
14 5 8 3 24
------ ---- ---- ---- ------
Real estate
Residential
Single-family 1 1 1 - 3
Apartments - 3 - - -
Commercial
Offices - - - - -
Retail - - - - -
Hotel/motel - - - - -
Industrial - - - - -
Other - - - - -
------ ---- ---- ---- ------
1 4 1 - 3
------ ---- ---- ---- ------
Total nonperforming real
estate loans and real
estate $ 15 $ 9 $ 9 $ 3 $ 27
====== ==== ==== ==== ======
Percent of total 2.0% 1.2% 1.2% .4% 3.7%
/TABLE
STATISTICAL INFORMATION (continued)
CALIFORNIA REAL ESTATE LOANS AND REAL ESTATE
December 31, 1995 California Northern California
------------------------------- --------------------------------
(Dollars in millions) Portfolio Nonperforming % Portfolio Nonperforming %
--------- ------------- --- --------- ------------- ---
Real estate loans
Residential
Single-family $16,233 $363 2.2 $4,985 $ 71 1.4
Apartments 1,304 33 2.5 161 4 2.5
Commercial
Offices 350 18 5.1 74 12 16.2
Retail 211 15 7.1 49 1 2.0
Hotel/motel 140 24 17.1 45 - -
Industrial 270 10 3.7 44 4 9.1
Other 141 3 2.1 48 - -
------- ---- ----- ------ ---- -----
18,649 466 2.5 5,406 92 1.7
------- ---- ----- ------ ---- -----
Real estate
Residential
Single-family 111 111 100.0 16 16 100.0
Apartments 25 24 96.0 2 2 100.0
Commercial
Offices 6 6 100.0 1 1 100.0
Retail 5 3 60.0 - - -
Hotel/motel - - - - - -
Industrial 3 3 100.0 - - -
Other 59 6 10.2 21 - -
------- ---- ----- ------ ---- -----
209 153 73.2 40 19 47.5
------- ---- ----- ------ ---- -----
Total real estate loans
and real estate $18,858 $619 3.3 $5,446 $111 2.0
======= ==== ===== ====== ==== =====
/TABLE
STATISTICAL INFORMATION (continued)
CALIFORNIA REAL ESTATE LOANS AND REAL ESTATE
December 31, 1995 Central California Southern California
-------------------------------- --------------------------------
(Dollars in millions) Portfolio Nonperforming % Portfolio Nonperforming %
--------- ------------- --- --------- ------------- ---
Real estate loans
Residential
Single-family $1,353 $19 1.4 $ 9,895 $273 2.8
Apartments 234 5 2.1 909 24 2.6
Commercial
Offices 40 - - 236 6 2.5
Retail 28 - - 134 14 10.4
Hotel/motel 26 3 11.5 69 21 30.4
Industrial 15 - - 211 6 2.8
Other 16 - - 77 3 3.9
------ --- ----- ------- ---- -----
1,712 27 1.6 11,531 347 3.0
------ --- ----- ------- ---- -----
Real estate
Residential
Single-family 5 5 100.0 90 90 100.0
Apartments 8 8 100.0 15 14 93.3
Commercial
Offices - - - 5 5 100.0
Retail 1 1 100.0 4 2 50.0
Hotel/motel - - - - - -
Industrial - - - 3 3 100.0
Other 12 - - 26 6 23.1
------ --- ----- ------- ---- -----
26 14 53.8 143 120 83.9
------ --- ----- ------- ---- -----
Total real estate loans
and real estate $1,738 $41 2.4 $11,674 $467 4.0
======= === ===== ======= ==== =====
STOCKHOLDER DATA AND QUARTERLY INFORMATION (UNAUDITED)
1995
--------------------------------------------------
Fourth Third Second First
(Dollars in thousands, except per share) Total Quarter Quarter Quarter Quarter
---------- -------- -------- -------- --------
Interest income $3,238,711 $834,887 $839,097 $807,661 $757,066
Interest expense 1,936,582 484,046 505,498 497,064 449,974
---------- -------- -------- -------- --------
Net interest income 1,302,129 350,841 333,599 310,597 307,092
Noninterest income 327,668 106,471 76,159 74,857 70,181
Provision for loan losses 187,700 50,300 46,600 43,200 47,600
Provision for real estate losses 1,500 - - - 1,500
Noninterest expense 1,018,475 253,445 249,823 259,018 256,189
---------- -------- -------- -------- --------
Earnings (loss) before taxes 422,122 153,567 113,335 83,236 71,984
Taxes (benefit) on income 161,100 55,000 44,800 32,800 28,500
---------- -------- -------- -------- --------
Net earnings (loss) $ 261,022 $ 98,567 $ 68,535 $ 50,436 $ 43,484
========== ======== ======== ======== ========
Per common share:
Primary earnings (loss) $1.72 $.67 $.45 $.32 $.28
Fully diluted earnings (loss) 1.71 .66 .45 .32 .28
Dividends .92 .23 .23 .23 .23
Stock price:
High $27 1/8 $23 3/4 $22 1/2 $18 7/8
Low 22 5/8 20 1/4 18 7/8 16
End of period 25 3/8 23 3/4 20 5/8 18 5/8
Per preferred depositary share:
Dividends
Cumulative convertible $4.375 $1.09375 $1.09375 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $67 7/8 $62 3/4 $60 3/8 $55 5/8
Low 58 1/4 57 1/2 55 1/2 50 3/8
Cumulative
High $26 1/8 $26 13/64 $25 7/8 $24 7/8
Low 25 3/8 25 1/4 24 3/8 22 3/4
Exchange Listings: New York Stock Exchange, Pacific Stock Exchange and
London Stock Exchange.
Approximate number of common stockholders of record at December 31, 1995:
9,415
Under regulations, retained earnings are subject to substantial restrictions
for the payment of dividends. See Note 17 to the Consolidated Financial
Statements.
STOCKHOLDER DATA AND QUARTERLY INFORMATION (UNAUDITED)
1994
--------------------------------------------------
Fourth Third Second First
(Dollars in thousands, except per share) Total Quarter Quarter Quarter Quarter
---------- -------- -------- -------- --------
Interest income $2,629,718 $704,611 $661,312 $633,803 $629,992
Interest expense 1,307,448 385,076 330,544 296,080 295,748
---------- -------- -------- -------- --------
Net interest income 1,322,270 319,535 330,768 337,723 334,244
Noninterest income 367,897 134,331 74,723 81,378 77,465
Provision for loan losses 207,200 52,800 49,700 52,900 51,800
Provision for real estate losses 12,000 1,500 1,500 6,000 3,000
Noninterest expense 1,064,433 263,692 262,861 265,146 272,734
---------- -------- -------- -------- --------
Earnings (loss) before taxes 406,534 135,874 91,430 95,055 84,175
Taxes (benefit) on income 155,300 47,200 34,200 39,200 34,700
---------- -------- -------- -------- --------
Net earnings (loss) $ 251,234 $ 88,674 $ 57,230 $ 55,855 $ 49,475
========== ======== ======== ======== ========
Per common share:
Primary earnings (loss) $1.69 $.61 $.38 $.38 $.32
Fully diluted earnings (loss) 1.69 .61 .38 .38 .32
Dividends .92 .23 .23 .23 .23
Stock price:
High $19 $20 7/8 $19 3/8 $20 1/2
Low 15 3/4 18 3/8 15 3/8 16 1/8
End of period 16 19 1/4 18 3/8 16 1/8
Per preferred depositary share:
Dividends
Cumulative convertible $4.375 $1.09375 $1.09375 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $56 5/8 $59 1/8 $58 1/4 $62 5/8
Low 50 1/8 55 1/4 53 3/4 55 3/4
Cumulative
High $24 3/8 $25 1/8 $25 $26 7/8
Low 22 1/8 24 23 24 1/8
STOCKHOLDER DATA AND QUARTERLY INFORMATION (UNAUDITED)
1993
--------------------------------------------------
Fourth Third Second First
(Dollars in thousands, except per share) Total Quarter Quarter Quarter Quarter
---------- -------- -------- -------- --------
Interest income $2,680,784 $652,872 $665,616 $674,497 $687,799
Interest expense 1,297,930 313,261 322,102 324,361 338,206
---------- -------- -------- -------- --------
Net interest income 1,382,854 339,611 343,514 350,136 349,593
Noninterest income 327,855 82,910 101,531 75,079 68,335
Provision for loan losses 463,000 111,400 203,600 85,500 62,500
Provision for real estate losses 92,000 38,000 28,000 500 25,500
Noninterest expense 1,063,662 302,343 250,178 254,024 257,117
---------- -------- -------- -------- --------
Earnings (loss) before taxes 92,047 (29,222) (36,733) 85,191 72,811
Taxes (benefit) on income 30,000 (11,000) (19,200) 32,600 27,600
---------- -------- -------- -------- --------
Net earnings (loss) $ 62,047 $(18,222) $(17,533) $ 52,591 $ 45,211
========== ======== ======== ======== ========
Per common share:
Primary earnings (loss) $.28 $(.19) $(.18) $.35 $.30
Fully diluted earnings (loss) .28 (.19) (.18) .35 .30
Dividends .92 .23 .23 .23 .23
Stock price:
High $20 3/8 $19 3/4 $18 7/8 $19 1/4
Low 17 5/8 16 1/8 15 5/8 16
End of period 20 19 5/8 16 3/4 17 5/8
Per preferred depositary share:
Dividends
Cumulative convertible $4.375 $1.09375 $1.09375 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $63 1/4 $61 5/8 $60 3/4 $60 1/8
Low 59 56 1/4 55 1/2 54 3/4
Cumulative
High $26 3/4 $26 3/8 $25 7/8 $ 25 3/8
Low 25 1/8 25 1/8 24 7/8 23 3/8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors, executive officers and principal
shareholders appears in "General Information" and "Employee Benefit Plans"
of the Proxy Statement for the Annual Meeting of Stockholders, April 23,
1996, and is incorporated herein by reference, except as noted therein.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears in "Compensation
of Directors and Executive Officers" and "Employee Benefit Plans" of the
Proxy Statement for the Annual Meeting of Stockholders, April 23, 1996, and
is incorporated herein by reference, except as noted therein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management appears in "General Information" and "Employee Benefit Plans"
of the Proxy Statement for the Annual Meeting of Stockholders, April 23, 1996
and is incorporated herein by reference, except as noted therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears in "Compensation of Directors and Executive Officers" and "Certain
Relationships and Related Party Transactions" of the Proxy Statement for the
Annual Meeting of Stockholders, April 23, 1996 and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index to Item 8, "Financial Statements and Supplementary
Data" on page 48.
2. Financial Statement Schedules
------------------------------
No financial statement schedules are required because they are not
applicable or the required information is shown in the financial
statements or notes thereto included in Item 8, "Financial Statements
and Supplementary Data".
3. Executive Compensation Plans and Arrangements indicated by asterisk
in next section.
-------------------------------------------------------------------
4. Exhibits Required by Securities and Exchange
Commission Regulations S-K
--------------------------------------------
3.1 Restated Certificate of Incorporation of GWFC, as in effect on the date
of this report (filed as an exhibit to GWFC's Annual Report on Form
10-K for the year ended December 31, 1992 and incorporated herein by
reference).
3.2 Certificate of Designations of GWFC's 8.30 percent Cumulative Preferred
Stock (filed as an exhibit to GWFC's Current Report on Form 8-K dated
September 9, 1992, event date September 2, 1992, and incorporated
herein by reference).
3.3 By-laws of GWFC as in effect on the date of this report (filed as an
exhibit to GWFC's Current Report on Form 8-K dated June 30, 1995, event
date June 27, 1995, and incorporated herein by reference).
4.1 GWFC agrees to furnish the Securities and Exchange Commission, upon
request, with copies of all instruments defining rights of holders of
long-term debt of GWFC and its consolidated subsidiaries.
4.2 Indenture dated as of May 31, 1988, as amended and supplemented as of
June 14, 1988 and October 31, 1988, between GWB and Morgan Guaranty
Trust Company of New York (filed as an exhibit to GWFC's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989 and
incorporated herein by reference).
10.1 Rights Agreement (the "Rights Agreement") dated as of June 24, 1986,
between GWFC and First Chicago Trust Company of New York, as amended
and restated on June 27, 1995 (filed as an exhibit to the Company's
Current Report on Form 8-K dated June 30, 1995, event date June 27,
1995, and incorporated herein by reference).
10.2 New Rights Agreement dated as of June 27, 1995, between GWFC and First
Chicago Trust Company of New York (filed as an exhibit to the Company's
Current Report on Form 8-K dated June 30, 1995, event date June 27,
1995, and incorporated herein by reference).
10.3 Consulting Agreement between GWFC and James F. Montgomery dated April
25, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, and incorporated herein by
reference).
10.4* Employment Agreement between GWFC and John F. Maher dated December 19,
1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and incorporated herein by
reference).
10.5* Employment Agreement between GWFC and Carl F. Geuther dated as of
March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 and incorporated
herein by reference).
10.6* Employment Agreement between GWFC and Michael M. Pappas dated as of
March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 and incorporated
herein by reference).
10.7* Employment Agreement between GWFC and J. Lance Erikson dated as of
March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 and incorporated
herein by reference).
10.8* Employment Agreement between GWFC and E. A. Crane effective March 1,
1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, and incorporated herein by
reference).
10.9* Employment Agreement between GWFC and A. William Schenck III dated as
of July 31, 1995 (filed as an exhibit to GWFC's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, and incorporated
herein by reference).
10.10* Supplemental Executive Retirement Plan as amended through July 25,
1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, and incorporated herein by
reference).
10.11* 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan
as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992, and incorporated herein
by reference).
10.12* Addendum to the 1979 Incentive and Nonstatutory Stock Option and
Appreciation Plan (filed as an exhibit to GWFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.13* Form of Non-Qualified Stock Option Agreement relating to the 1979
Incentive and Nonstatutory Stock Option and Appreciation Plan
utilized from April 20, 1982 to April 22, 1986 (filed as an exhibit
to Post-Effective Amendment No. 3 to GWFC's Registration Statement
No. 2-67233 on Form S-8, and incorporated herein by reference).
10.14* Form of Non-Qualified Stock Option Agreement relating to the 1979
Incentive and Nonstatutory Stock Option and Appreciation Plan
utilized from April 22, 1986 through 1988 (filed as an exhibit to
Post-Effective Amendment No. 3 to GWFC's Registration Statement No.
2-67233 on Form S-8, and incorporated herein by reference).
10.15* The 1988 Stock Option and Incentive Plan (as amended effective July
26, 1994), (filed as an exhibit to GWFC's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and incorporated herein
by reference).
10.16* Form of Director Stock Option Agreement (filed as an exhibit to
GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to
GWFC's 1988 Stock Option and Incentive Plan and incorporated herein
by reference).
10.17* Form of Director Stock Option Agreement effective January 3, 1994,
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.18* Employee Non-Qualified Stock Option Agreement (filed as an exhibit
to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining
to GWFC's 1988 Stock Option and Incentive Plan and incorporated
herein by reference).
10.19* Revised Form of Non-Qualified Stock Option Agreement effective
January 28, 1992 (filed as an exhibit to Post-Effective Amendment
No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8
pertaining to GWFC's 1988 Stock Option and Incentive Plan and
incorporated herein by reference).
10.20* Revised Form of Non-Qualified Stock Option Agreement effective
January 25, 1994, (filed as an exhibit to GWFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference).
10.21* Form of Non-Qualified Stock Option Agreement (Early Vesting
Provisions), (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
10.22* Revised Form of Non-Qualified Stock Option Agreement effective
December 12, 1994, (filed as an exhibit to GWFC's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
10.23* Form of Senior Officer's Non-Qualified Stock Option Agreement
effective January 23, 1995.
10.24 Special Non-Qualified Stock Option Agreement dated as of April 25,
1995 and amendments to Non-Qualified Stock Option Agreements dated
February 26, 1991, January 25, 1994, and December 12, 1994 with
James F. Montgomery (filed as an exhibit to GWFC's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995 and incorporated
herein by reference).
10.25* Form of Restricted Stock Award Agreement and General Provisions
Applicable to Restricted Stock Awards Granted Under the 1988 Stock
Option and Incentive Plan (filed as an exhibit to Post-Effective
Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on
Form S-8, and incorporated herein by reference).
10.26* General Provisions applicable to Performance Restricted Stock Awards
granted under the Great Western Financial Corporation 1988 Stock
Option and Incentive Plan, as amended (March 1994) (filed as an
exhibit to GWFC's quarterly report on Form 10-Q for the quarter ended
March 31, 1994 and incorporated herein by reference).
10.27 General Provisions applicable to Performance Restricted Stock Award
granted to James F. Montgomery, as amended effective December 28,
1995 (filed as an exhibit to GWFC's quarterly report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference).
10.28* GWFC Deferred Compensation Plan (1992 Restatement) (filed as an
exhibit to GWFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, and incorporated herein by reference).
10.29* GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement)
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, and incorporated herein by
reference).
10.30* GWFC Directors' Deferred Compensation Plan (1992 Restatement) (filed
as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, and incorporated herein by reference).
10.31* Amendment to GWFC Directors', Senior Officers' and basic Deferred
Compensation Plans (1992 Restatement) (filed as an exhibit to GWFC's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, and incorporated herein by reference).
10.32* Great Western Supplemental Incentive Plan, effective December 1, 1984
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1984, and incorporated herein by
reference).
10.33* GWFC Umbrella Trust for Senior Officers (filed as an exhibit to
GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1989, and incorporated herein by reference).
10.34* Amendment to GWFC Umbrella Trust for Senior Officers effective
October 25, 1994 (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, and incorporated
herein by reference)..
10.35* GWFC Umbrella Trust for Directors (filed as an exhibit to GWFC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1989,
and incorporated herein by reference).
10.36* Restated Retirement Plan for Directors (filed as an exhibit to GWFC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
and incorporated herein by reference).
10.37* Summary of certain additional executive benefits (filed as an exhibit
to GWFC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and incorporated herein by reference).
10.38* Employee Home Loan Program (filed as an exhibit to GWFC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993, and
incorporated herein by reference).
10.39* GWFC Annual Incentive Compensation Plan for Executive Officers,
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.40 GWFC Retirement Restoration Plan effective January 1, 1994, (filed
as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by reference).
11.1 Statement re Computation of Per Share Earnings.
12.1 Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries.
23.1 Consent of Price Waterhouse LLP included on page 114 of this Form 10-K.
24.1 Power of Attorney included on page 112 of this Form 10-K.
27.1 Financial Data Schedule.
The 1995 Annual Report to Stockholders is being furnished to each
stockholder of record who is entitled to receive a copy thereof. A copy of
the 1995 Annual Report to Stockholders will be furnished without charge upon
specific request of any stockholder of record on February 29, 1996 and any
beneficial owner of the Company's common stock on such date who has not
previously received a copy and who represents such facts in good faith to the
Company in writing direct to:
Corporate Secretary
Great Western Financial Corporation
9200 Oakdale Avenue
Chatsworth, California 91311-6519
Other exhibits will be supplied to any such stockholder at a charge
equal to the Company's cost of copying, postage and handling.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated November 29, 1995 (as amended by
Form 8-K/A dated December 6, 1995) was filed with the SEC reporting
three lawsuits in which the Company and certain of its subsidiaries are
defendants arising out of the sale of mutual fund shares and other
securities. The Report also states that the Company and its
subsidiaries have been advised by the SEC of an inquiry into the
allegations in two of the lawsuits.
A Current Report on Form 8-K dated December 14, 1995, included exhibits
relating to the sale of $100 million of 8 1/4% Trust Originated
Preferred Securities of Great Western Financial Trust I.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GREAT WESTERN FINANCIAL CORPORATION
/s/ John F. Maher February 27, 1996
- ------------------------------ -------------------
John F. Maher, President and Date
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes John F.
Maher, Carl F. Geuther and Barry R. Barkley, and each of them or any of them,
as attorney-in-fact to sign on his or her behalf as an individual and in
every capacity stated below, and to file all amendments to the registrant's
Form 10-K, and the registrant hereby confers like authority to sign and file
in its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on February 27, 1996, by the following
persons on behalf of the registrant and in the capacities indicated.
/s/ John F. Maher
- ----------------------------------------------------
John F. Maher, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Carl F. Geuther
- ---------------------------------------------------------------------
Carl F. Geuther, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Barry R. Barkley
- ----------------------------------------------------------
Barry R. Barkley, Senior Vice President and Controller
(Principal Accounting Officer)
/s/ James F. Montgomery
- ----------------------------------------------------------
James F. Montgomery, Director and Chairman of the Board
/s/ Dr. David Alexander /s/ Enrique Hernandez, Jr.
- --------------------------------- ---------------------------------
Dr. David Alexander, Director Enrique Hernandez, Jr., Director
/s/ H. Frederick Christie /s/ Charles D. Miller
- --------------------------------- ---------------------------------
H. Frederick Christie, Director Charles D. Miller, Director
/s/ Stephen E. Frank /s/ Dr. Alberta E. Siegel
- --------------------------------- ---------------------------------
Stephen E. Frank, Director Dr. Alberta E. Siegel, Director
/s/ John V. Giovenco /s/ Willis B. Wood, Jr.
- --------------------------------- ---------------------------------
John V. Giovenco, Director Willis B. Wood, Jr., Director
/s/ Firmin A. Gryp
- ---------------------------------
Firmin A. Gryp, Director
INDEX OF ADDITIONAL FINANCIAL DATA
DECEMBER 31, 1995
Pages
Consent of Independent Accountants S-2
S-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-19884,
33-63535 and 33-60206), on Form S-4 (Nos. 33-15135 and 33-17705) and on Form
S-8 (Nos. 2-67233, 2-90750, 33-6174 and 33-21469) of Great Western Financial
Corporation of our report dated January 18, 1996 appearing on page 94 of this
Form 10-K.
/s/ PRICE WATERHOUSE LLP
Los Angeles, California
March 6, 1996