UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549 - 1004
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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
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GREAT WESTERN FINANCIAL CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-1913457
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9200 Oakdale Avenue, Chatsworth, California 91311
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(Address of principal executive offices) (Zip Code)
(818) 775-3411
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(Registrant's telephone number, including area code)
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(Former name, address and fiscal year, if changed since last report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of April 30, 1996: 137,263,169
GREAT WESTERN FINANCIAL CORPORATION
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statement of Financial Condition -
March 31, 1996, December 31, 1995 and March 31, 1995... 4
Consolidated Condensed Statement of Operations -
Three Months Ended March 31, 1996 and 1995............. 5
Consolidated Condensed Statement of Cash Flows -
Three Months Ended March 31, 1996 and 1995............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three Months Ended March 31, 1996................... 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 34
Item 5. Other Information..................................... 35
Item 6. Exhibits and Reports on Form 8-K...................... 36
GREAT WESTERN FINANCIAL CORPORATION
PART I - FINANCIAL INFORMATION
------------------------------
PERSONS FOR WHOM THE INFORMATION IS TO BE GIVEN
- -----------------------------------------------
The accompanying financial information is filed for the Registrant, Great
Western Financial Corporation, and its subsidiaries comprising a savings bank
and companies engaged in consumer lending, mortgage banking, securities
operations and certain other financial services ("GWFC" or "the Company").
PRESENTATION OF FINANCIAL INFORMATION
- -------------------------------------
The financial information has been prepared in conformity with the accounting
principles or practices reflected in the financial statements included in the
Annual Report filed with the Commission for the year ended December 31, 1995.
The Registrant 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") in 1995, which establishes accounting
standards for such assets. The Registrant also adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("FAS 122") as of April 1, 1995. FAS 122 requires the capitalization
of servicing rights for loans originated with the intent to sell or
securitize such loans. The information further reflects all adjustments
which are, in the opinion of management, of a normal recurring nature and
necessary for a fair presentation of the results for the interim periods.
Item 1. Financial Statements
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
March 31 December 31 March 31
Dollars in thousands 1996 1995 1995
------------ ----------- ------------
ASSETS
Cash and securities
Cash $ 773,418 $ 837,292 $ 741,813
Certificates of deposit, repurchase agreements
and federal funds 257,125 257,125 215,125
Securities available for sale 1,152,256 1,029,459 988,870
----------- ----------- -----------
2,182,799 2,186,876 1,945,808
Mortgage-backed securities held to maturity
(fair value $1,843,391, $1,941,918 and $8,154,155) 1,827,150 1,886,736 8,193,363
Mortgage-backed securities available for
sale 7,549,632 7,916,705 2,891,642
----------- ----------- -----------
9,376,782 9,803,441 11,085,005
Loans receivable, net of reserve for
estimated losses 29,277,567 29,401,644 27,933,446
Loans receivable available for sale 527,016 485,705 348,743
----------- ----------- -----------
29,804,583 29,887,349 28,282,189
Real estate available for sale or
development, net 225,119 217,112 208,892
Interest receivable 256,349 298,640 258,478
Investment in Federal Home Loan Banks 360,414 341,102 342,138
Premises and equipment, at cost,
net of accumulated depreciation 592,651 604,672 609,879
Other assets 649,749 923,859 519,125
Intangibles arising from acquisitions 314,284 323,713 353,980
----------- ----------- -----------
$43,762,730 $44,586,764 $43,605,494
=========== =========== ===========
LIABILITIES
Customer accounts $29,341,730 $29,234,928 $29,300,503
Securities sold under agreements to repurchase 5,734,501 6,868,296 6,964,910
Short-term borrowings 2,335,527 2,056,493 1,340,300
Other borrowings 2,420,615 2,420,845 2,530,682
Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust,
holding solely $103,092,800 aggregate principle
amount of 8.25% subordinated deferrable interest
notes, due 2025, of the Company 100,000 100,000 -
Other liabilities and accrued expenses 682,254 705,345 677,504
Taxes on income, principally deferred 325,971 378,381 240,328
STOCKHOLDERS' EQUITY 2,822,132 2,822,476 2,551,267
----------- ----------- -----------
$43,762,730 $44,586,764 $43,605,494
=========== =========== ===========
Unaudited
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended
March 31
------------------------
Dollars in thousands, except per share 1996 1995
---- ----
INTEREST INCOME
Real estate loans $521,554 $465,527
Mortgage-backed securities 174,026 171,817
Consumer loans 104,296 97,425
Securities 14,163 12,583
Other 10,889 9,714
-------- --------
824,928 757,066
INTEREST EXPENSE
Customer accounts 303,004 278,916
Borrowings
Short-term 116,167 115,686
Long-term 53,471 55,372
-------- --------
472,642 449,974
-------- --------
NET INTEREST INCOME 352,286 307,092
Provision for loan losses 42,100 47,600
-------- --------
Net interest income after provision
for loan losses 310,186 259,492
Other operating income
Real estate services
Loan fees 6,460 6,199
Mortgage banking
Gain on mortgage sales 2,332 1,260
Servicing 11,453 13,798
-------- --------
20,245 21,257
Retail banking
Banking fees 41,664 36,028
Securities operations 6,210 3,967
-------- --------
47,874 39,995
Net (loss) gain on securities and investments (317) 466
Net insurance operations 7,365 6,727
Other 746 1,736
-------- --------
Total other operating income 75,913 70,181
Noninterest expense
Operating and administrative
Salaries and related personnel 116,531 116,878
Premises and occupancy 45,846 46,127
FDIC insurance premium 16,146 18,639
Advertising and promotion 9,159 8,129
Other 64,493 60,106
-------- --------
252,175 249,879
Amortization of intangibles 9,429 10,019
Real estate operations 5,701 (3,709)
Provision for real estate losses - 1,500
-------- --------
Total noninterest expense 267,305 257,689
-------- --------
EARNINGS BEFORE TAXES 118,794 71,984
Taxes on income 47,500 28,500
-------- --------
NET EARNINGS $ 71,294 $ 43,484
======== ========
Average common shares outstanding
Without dilution 139,142,551 135,060,229
Fully diluted 145,531,904 135,338,118
Earnings per share based on average
common shares outstanding
Primary $.47 $.28
Fully diluted .47 .28
Cash dividend per common share .23 .23
Unaudited
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
-------------------------
Dollars in thousands 1996 1995
---- ----
OPERATING ACTIVITIES
Net earnings $ 71,294 $ 43,484
Noncash adjustments to net earnings:
Provision for loan losses 42,100 47,600
Provision for real estate losses - 1,500
Depreciation and amortization 19,325 19,593
Amortization of intangibles 9,429 10,019
Income taxes (32,958) 10,327
Loss (gain) on sales of loans receivable
available for sale 1,546 (183)
Gain on sales of real estate (2,241) (9,177)
Gain on sales of consumer loans (538) -
Loss on sale of other investments, net 134 -
Capitalized interest (17,966) (5,635)
Net change in accrued interest 28,410 (42,740)
Other 258,652 176,330
----------- ------------
377,187 251,118
----------- ------------
Sales and repayments of loans
receivable available for sale 426,581 45,800
Originations and purchases of loans
receivable available for sale (418,868) (95,532)
----------- -----------
7,713 (49,732)
----------- -----------
Net cash provided by operating
activities 384,900 210,386
----------- -----------
FINANCING ACTIVITIES
Customer accounts
Net increase (decrease) in transaction
accounts 91,129 (677,551)
Net increase in term accounts 15,673 1,277,107
----------- -----------
106,802 599,556
Borrowings
Repayments of long-term debt (229) (28,462)
Net change in FHLB borrowings 648,031 (52,000)
Net change in securities sold under
agreements to repurchase (1,133,795) 665,855
Net change in short-term debt (368,998) 129,839
----------- -----------
(854,991) 715,232
Other financing activity
Proceeds from issuance of
common stock 3,025 11,031
Repurchase of common stock (5,219) -
Cash dividends paid (37,788) (37,147)
----------- ----------
(39,982) (26,116)
----------- ----------
Net cash (used in) provided by financing
activities (788,171) 1,288,672
----------- ----------
/TABLE
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
-------------------------
Dollars in thousands 1996 1995
---- ----
INVESTING ACTIVITIES
Investment securities
Proceeds from maturities $ 392,846 $ 242,100
Purchases of securities (456,105) (302,499)
----------- -----------
(63,259) (60,399)
Lending
Loans originated for investment (1,193,713) (2,813,330)
Purchases of mortgage-backed securities (8,511) -
Payments 1,598,612 1,151,873
Repurchases (41,004) (23,994)
Other (4,823) 4,675
----------- -----------
350,561 (1,680,776)
Other investing activity
Purchases and sales of premises
and equipment, net (9,203) (22,639)
Sales of real estate 84,264 125,208
Net change in investment in
FHLB stock (19,312) (36,097)
Other (3,654) (6,982)
----------- -----------
52,095 59,490
----------- -----------
Net cash provided by (used in) investing activities 339,397 (1,681,685)
----------- -----------
Net (decrease) in cash and cash equivalents (63,874) (191,627)
Cash and cash equivalents at beginning
of period 1,094,417 1,148,565
----------- -----------
Cash and cash equivalents at end of period $ 1,030,543 $ 956,938
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for
Interest on deposits $ 299,139 $ 278,522
Interest on borrowings 187,384 186,639
Income taxes 45,803 16,360
Noncash investing activities
Loans transferred to foreclosed
real estate $ 114,067 $ 107,745
Loans originated to finance the sale
of real estate 17,648 46,421
Loans originated to refinance existing loans 107,656 56,394
Loans exchanged for mortgage-backed
securities - 1,997,585
Unaudited
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
Great Western Financial Corporation reported net earnings of $71.3
million, or $.47 per share, in the 1996 first quarter compared with net
earnings of $43.5 million, or $.28 per share, in the 1995 first quarter.
Provisions for loan and real estate losses during the 1996 first quarter were
$42.1 million compared with $49.1 million in the first quarter of 1995.
HIGHLIGHTS (Dollars in thousands, except per share)
For the three months ended
March 31 1996 1995
- -------------------------- ---- ----
Net interest income $ 352,286 $ 307,092
Net earnings 71,294 43,484
Fully diluted earnings per common share $.47 $.28
New loan volume 1,737,885 3,011,677
Increase in customer accounts 106,802 599,556
Mortgage sales 415,750 19,278
Interest spread
Yield on interest earning assets 7.94% 7.48%
Cost of interest bearing liabilities 4.71 4.58
---- ----
Interest spread 3.23% 2.90%
==== ====
At March 31
- -----------
Total assets $43,762,730 $43,605,494
Stockholders' equity 2,822,132 2,551,267
Stockholders' equity per common share $18.42 $16.73
Tangible stockholders' equity per
common share 16.13 14.10
The Company's core business benefited from the December 1995 and
January 1996 Federal Reserve Board interest rate reductions as they affect
the net interest margin. Net interest income for the first quarter of 1996
increased to $352 million compared with $351 million in the fourth quarter
of 1995 and $307 million in the first quarter of 1995. The fourth quarter
of 1995 included a $13 million reduction in interest expense primarily due
to an expected favorable resolution of certain income tax contingencies. An
increase in average interest earning asset levels and a higher net interest
margin contributed to the increase in net interest income.
The following summarizes the contribution to pretax income from the
Company's principal business units:
Three Months Ended
March 31
-------------------
(Dollars in thousands) 1996 1995
---- ----
Banking operations $ 95,556 $48,084
Consumer finance group 23,238 23,900
-------- -------
Pretax earnings 118,794 71,984
Taxes on income 47,500 28,500
-------- -------
Net earnings $ 71,294 $43,484
======== =======
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 had no 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.
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. The
adoption of FAS 122 did not have a material effect on the Company's financial
condition or results of operations.
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.
Impairment is recognized through a valuation allowance.
INTEREST EARNING ASSETS
Interest earning assets comprise real estate loans and mortgage-backed
securities ("mortgages"), consumer finance loans and marketable securities.
The composition of interest earning assets at March 31, 1996 and March 31,
1995 follows:
March 31
----------------------------------
1996 1995
-------------- --------------
(Dollars in millions) Amount % Amount %
------- --- ------- ---
Loans receivable
Real estate
Residential
Single-family $24,701 60% $23,207 56%
Apartments 1,591 4 1,712 4
Commercial and other 1,336 3 1,435 3
Consumer finance 2,070 5 1,969 5
Other 537 1 473 1
------- --- ------- ---
30,235 73 28,796 69
Mortgage-backed securities 9,377 23 11,107 27
Securities 1,348 3 1,153 3
Investment in FHLB stock 360 1 342 1
------- --- ------- ---
$41,320 100% $41,398 100%
======= === ======= ===
Interest earning assets, primarily single-family mortgages, decreased
$469 million during the 1996 first quarter compared with an increase of $1.9
billion in the 1995 first quarter due to a shift in the mix of single-family
loan originations away from the Adjustable Rate Mortgage ("ARM"). ARMs are
held in the Company's portfolio, whereas, fixed-rate loans are sold shortly
after origination. The Company also relied less on purchasing loan
originations from wholesale lenders in the first quarter of 1996. Mortgage-
backed securities consist largely of single-family residential ARM loans
swapped for mortgage-backed securities in 1994 and 1995 to provide collateral
for borrowings. These securities are subject to full credit recourse.
The Company repurchases delinquent loans which were sold with recourse.
Repurchased loans totaled $41 million in the three months ended March 31,
1996 compared with $24 million in the three months ended March 31, 1995.
Commercial real estate loans continued to decrease as a result of the
Company's decision in 1987 to discontinue commercial real estate lending
except to finance the sale of foreclosed properties.
The ARM for single-family residential properties ("SFRs") is the
primary lending product held for investment. Approximately 76 percent of
mortgages in the portfolio were indexed 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") at March 31, 1996.
The Company also originates ARM products which are indexed to one-year
Treasury bills, the prime rate and the Federal Cost of Funds Index
("FCOFI"). The FCOFI is a combination of the average interest rate on the
combined marketable Treasury bills and the average interest rate on the
combined marketable Treasury notes. In March 1995, the Company introduced
a new product, the London Interbank Offered Rate ("LIBOR") Annual Monthly
Average ("LAMA") ARM. The LAMA ARM is indexed to a 12 month average of the
Federal National Mortgage Association ("FNMA") One Month LIBOR. The FCOFI
and LAMA ARMs are similar to the COFI ARM product with respect to interest-
rate caps and payment changes. At March 31, 1996, ARMs comprised 96.1
percent of the mortgage portfolio.
A summary of the Company's ARM and fixed rate mortgage portfolio
follows:
March 31
--------------------------------
1996 1995
-------------- --------------
(Dollars in millions) Amount % Amount %
------ --- -------- ---
ARM
COFI $28,033 76% $29,543 79%
FCOFI 3,838 10 4,413 12
LAMA 2,122 6 7 -
Other 1,566 4 1,738 4
------- --- ------- ---
35,559 96 35,701 95
Fixed rate
Long-term 900 2 1,199 3
Short-term 546 2 561 2
------- --- ------- ---
$37,005 100% $37,461 100%
======= === ======= ===
A significant portion of the ARM portfolio is subject to lifetime
interest-rate caps and floors. At March 31, 1996, $653 million of ARMs with
an average yield of 7.29 percent had reached their periodic cap rate.
Without the cap, the average yield on those ARMs would have been 7.62
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 $648,000 for the first quarter
of 1996 compared with $116,000 in the first quarter of 1995. At March 31,
1996, $221 million of ARM loans with an average yield of 8.44 percent had
reached their floor rate. Without the floor, the average yield on these
loans would have been 7.72 percent. The benefit to interest income from real
estate loans which have reached their floor interest rate was approximately
$371,000 for the first quarter of 1996 compared with $1.8 million in the
first quarter of 1995.
The Company's sources of loan originations include wholesale brokers
and a network of correspondent relationships in which the Company purchases
loans originated by unaffiliated mortgage lenders. In the first three months
of 1996, third party originations were $259 million, or 20.9 percent of new
real estate loans, compared with $1.1 billion, or 43.1 percent of new real
estate loans in the first three months of 1995.
The composition of new loan volume was as follows:
Three Months Ended
-------------------------------
March 31 December 31 March 31
(Dollars in millions) 1996 1995 1995
-------- ----------- --------
Real estate loans $1,240 $1,446 $2,500
Consumer loans 498 755 512
------ ------ ------
Total new loan volume $1,738 $2,201 $3,012
====== ====== ======
The composition of real estate loan originations by type was as follows:
Three Months Ended
-----------------------------------
March 31 December 31 March 31
1996 1995 1995
-------- ----------- --------
ARM
COFI 20% 25% 94%
LAMA 39 38 -
FCOFI - 1 1
T-Bill 2 1 1
Other 3 3 1
--- --- ---
64 68 97
Fixed rate 36 32 3
--- --- ---
100% 100% 100%
=== === ===
Refinances included above 55% 46% 32%
=== === ===
Fixed-rate lending tends to increase during periods of relatively low
interest rates. Such loans are originated exclusively for sale. The
portfolio of fixed-rate loans designated as available for sale has been
recorded at the lower of cost or fair value. The Company sells loans forward
into the secondary market and purchases short-term hedge contracts for the
commitment period to protect against rate fluctuations on its commitments to
fund fixed-rate loans originated for sale. Hedge contracts are recorded at
cost. At March 31, 1996, there were no open hedge contracts due to the
relatively low level of fixed-rate commitments.
During the first quarter of 1996, ARMs comprised 64 percent of total
real estate loan originations compared with 97 percent in the same period of
1995 and 68 percent for the fourth quarter of 1995. The principal mortgage
instrument for the first three months of 1996 was the LAMA ARM, whereas, the
COFI ARM had been the primary adjustable rate offering in the first three
months of 1995. The majority of the LAMA ARM production in 1996 were loans
with a fixed interest rate during the first three or five years of the loan
term. The ARM differential over the appropriate indices on new ARMs was 2.66
percent in the first quarter of 1996 compared with 2.65 percent a year ago.
The ARM differential on the total ARM real estate loan portfolio was 2.50
percent at March 31, 1996 and 2.47 percent at March 31, 1995.
The cost of funds for Great Western Bank, a Federal Savings Bank
("GWB"), relative to COFI, FCOFI and LAMA is shown as follows:
GWB Cost of
GWB Funds Less Than
Cost of ----------------------
Funds COFI FCOFI LAMA COFI FCOFI LAMA
------- ---- ----- ---- ---- ----- ----
March 31, 1996 4.463% 4.874% 5.957% 5.766% .411% 1.494% 1.303%
December 31, 1995 4.658 5.059 6.152 5.940 .401 1.494 1.282
March 31, 1995 4.580 5.007 6.336 5.402 .427 1.756 .822
The contractual maturities of all loans receivable and mortgage-backed
securities as of March 31, 1996 follow:
Mortgage-Backed
Real Estate Loans Securities
----------------- ---------------
Fixed Fixed
(Dollars in millions) ARM Rate ARM Rate Consumer Total
--- ----- --- ----- -------- -----
One year or less $ 437 $ 41 $ 129 $217 $ 812 $ 1,636
Over one to two years 708 49 138 25 558 1,478
Over two to three years 666 43 147 18 407 1,281
Over three to five years 1,119 150 316 41 162 1,788
Over five to ten years 3,410 383 955 99 501 5,348
Over ten to fifteen years 4,308 110 1,290 35 165 5,908
Over fifteen years 15,979 225 5,956 11 2 22,173
------- ------ ------ ---- ------ -------
$26,627 $1,001 $8,931 $446 $2,607 $39,612
======= ====== ====== ==== ===== =======
INTEREST BEARING LIABILITIES
The composition of interest bearing liabilities at March 31, 1996 and
March 31, 1995 follows:
March 31
-------------------------------
1996 1995
------------- -------------
(Dollars in millions) Amount % Amount %
------- --- ------- ---
Customer accounts
Retail accounts
Term $17,746 44% $17,396 44%
Transaction 11,174 28 11,336 28
Wholesale accounts 422 1 568 1
------- --- ------- ---
29,342 73 29,300 73
------- --- ------- ---
Borrowings
FHLB 1,503 4 135 -
Securities sold under
agreements to repurchase 5,735 14 6,965 18
Other 3,353 9 3,736 9
------- --- ------- ---
10,591 27 10,836 27
------- --- ------- ---
Total interest bearing liabilities $39,933 100% $40,136 100%
======= === ======= ===
Borrowings at March 31, 1996 decreased $245 million compared with the
same period last year. The level of borrowings is influenced by customer
account activity, deposit acquisitions and changes in assets.
The following table shows the components of the change in customer
account balances:
Three Months Ended
March 31
------------------
(Dollars in millions) 1996 1995
---- ----
Transaction
Demand accounts $117 $ (217)
Money market and other transaction
accounts (21) (459)
Certificates of deposit 51 1,272
Wholesale accounts (40) 4
---- ------
$107 $ 600
==== ======
The Company concentrates its retail deposit-gathering activity in two
states: California and Florida.
Certificates of deposit have increased in each of the past four
quarters. Customers have shifted from money market accounts as a result of
higher interest rates offered on certificate of deposit accounts.
A summary of customer certificates of deposit by interest rate and
maturity as of March 31, 1996 follows:
90 Days 180 Days One Year Two Years
Within to to to to Three Years March 31 December 31 March 31
(Dollars in millions) 90 Days 180 Days One Year Two Years Three Years and Over 1996 1995 1995
------- -------- -------- --------- ----------- ----------- -------- ----------- --------
Under 4% $ 105 $ 20 $ 28 $ 4 $ 8 $ - $ 165 $ 199 $ 1,967
4 to 6% 4,750 3,641 3,434 1,783 275 319 14,202 12,825 9,110
6 to 8% 545 878 1,250 475 43 431 3,622 4,763 6,518
Over 8% 2 2 1 1 1 4 11 197 212
------ ------ ------ ------ ---- ---- ------- ------- -------
$5,402 $4,541 $4,713 $2,263 $327 $754 $18,000 $17,984 $17,807
====== ====== ====== ====== ==== ==== ======= ======= =======
$100,000 accounts
included above $1,289 $ 859 $ 913 $ 231 $ 56 $163 $ 3,511 $ 3,502 $ 3,471
INTEREST SPREAD AND NET INTEREST INCOME
Net interest income increased to $352 million in the first quarter
of 1996 compared with $307 million in the first quarter of 1995. Net
interest income was $351 million in the fourth quarter of 1995. The fourth
quarter of 1995 included a $13 million reduction in interest expense
primarily due to an expected favorable resolution of certain income tax
contingencies. While average interest earning assets have increased during
the past year, the interest spread has increased as interest rates have
fallen. The Company's net interest margin, the difference between the yield
on interest earning assets (interest on mortgages, consumer loans and
securities) and the cost of funds (interest on customer accounts and
borrowings) was 3.47 percent at March 31, 1996 compared with 3.02 percent a
year ago. The interest spread for the 1996 first quarter was 3.23 percent
compared with 3.19 percent in the 1995 fourth quarter and 2.90 percent in
the 1995 first quarter. The repricing lag on COFI, FCOFI and LAMA ARMs
increased the interest spread by approximately 9 basis points in the first
quarter of 1996 and 2 basis points in the fourth quarter of 1995. For the
first quarter of 1995, the repricing lag accounted for a reduction of
approximately 25 basis points to the interest spread. 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 following table of net interest income displays the average monthly
balances, interest income and expense and average rates by asset and
liability component for the periods indicated:
Three Months Ended March 31
-------------------------------------------------------
1996 1995
-------------------------- --------------------------
Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
Interest earning assets
Securities $ 1,635 $ 25 6.13% $ 1,448 $ 22 6.16%
Mortgage-backed securities 9,611 174 7.24 10,195 172 6.74
Loans receivable
Real estate 27,680 522 7.54 26,393 466 7.06
Consumer 2,625 104 15.89 2,435 97 16.01
------- ---- ----- ------- ---- -----
Total interest earning assets 41,551 825 7.94 40,471 757 7.48
Other assets 2,499 2,288
------- -------
Total assets $44,050 $42,759
======= =======
Interest bearing liabilities
Customer accounts
Term accounts $18,063 248 5.49 $17,342 225 5.20
Transaction accounts 11,186 55 1.97 11,643 54 1.84
------- ---- ----- ------- ---- -----
29,249 303 4.14 28,985 279 3.85
Borrowings
FHLB 1,168 16 5.47 158 2 5.61
Other 9,754 154 6.30 10,197 169 6.62
------- ---- ----- ------- ---- -----
Total interest bearing liabilities 40,171 473 4.71 39,340 450 4.58
Other liabilities 1,059 912
Stockholders' equity 2,820 2,507
------- -------
Total liabilities and equity $44,050 $42,759
======= =======
Interest spread 3.23% 2.90%
===== =====
Effective yield summary
Interest income/interest earning assets $41,551 $825 7.94% $40,471 $757 7.48%
Interest expense/interest earning assets 41,551 473 4.55 40,471 450 4.45
---- ----- ---- -----
Net yield on interest earning assets $352 3.39% $307 3.03%
==== ===== ==== =====
The average balance of loans receivable above includes nonaccrual loans
and therefore the interest income and average rate, as presented, are
affected by the loss of interest on such loans. Interest foregone on
nonaccrual loans that were nonperforming declined to $8.9 million for the
quarter ended March 31, 1996 compared with $9.1 million for the quarter ended
March 31, 1995.
ASSET LIABILITY MANAGEMENT
The Company monitors its asset and liability structure and interest-
rate/ maturity risks on a regular basis. In this process, consideration is
given to interest-rate trends and funding requirements. ARMs comprised
approximately 96 percent of the real estate loan portfolio at both March 31,
1996 and March 31, 1995.
At March 31, 1996, mortgages totaling $7.7 billion were available for
sale, primarily mortgage-backed securities. Real estate loans available for
sale are valued at the lower of cost or fair value, generally on an
individual loan basis. As of March 31, 1996 and 1995, real estate loans
available for sale, primarily fixed-rate loans, were $168 million and $66.5
million, respectively. During the three months ended March 31, 1996, gains
from this portfolio totaled $2.9 million compared with $1.3 million in the
first three months of 1995. Unrealized holding gains on real estate loans
available for sale totaled $1.2 million at March 31, 1996 compared with
$269,000 at March 31, 1995.
Mortgage-backed securities available for sale and other securities
available for sale are carried at fair value. At March 31, 1996, mortgage-
backed securities available for sale included $215 million of fixed-rate
loans and $7.3 billion of ARMs. There were $566,000 of realized losses in
the first three months of 1996. Unrealized holding gains were $124 million
at March 31, 1996, $173 million at December 31, 1995 compared with an
unrealized holding loss of $6.3 million at March 31, 1995.
Marketable securities available for sale at March 31, 1996 had an
amortized cost of $1.1 billion and a fair value of $1.2 billion. There were
no significant gains realized during the first quarter of 1996 and 1995.
Unrealized holding gains on marketable securities were $4.9 million at March
31, 1996 and $8.3 million at December 31, 1995. Unrealized holding losses
on marketable securities were $6.9 million at March 31, 1995.
The unrealized holding gains and losses on securities available for
sale, net of income taxes, included as a component of stockholders' equity,
were as follows:
Three Months Ended
----------------------------------
March 31 December 31 March 31
(Dollars in thousands) 1996 1995 1995
--------- ----------- --------
Balance at beginning of
period $ 108,433 $ 17,736 $(55,084)
Unrealized holding (losses)
gains, net of taxes (32,644) 90,697 49,163
--------- -------- --------
Balance at end of period $ 75,789 $108,433 $ (5,921)
========= ======== ========
The following table shows that the portfolio of short-term assets
exceeded liabilities maturing or subject to interest adjustment within one
year by $1.9 billion, or 4.7 percent of interest earning assets at March 31,
1996 compared with $3.6 billion, or 8.7 percent of interest earning assets
at December 31, 1995 and $4.9 billion, or 11.8 percent of interest earning
assets at March 31, 1995. The Company is better protected against rising
rates with an excess of interest earning assets maturing or repricing within
one year.
Maturity/Rate Sensitivity
-----------------------------------------------------------------
March 31, 1996 % of Within Over
(Dollars in millions) Rate Balance Total 1 Year 1-5 Years 5-15 Years 15 Years
---- ------- ----- ------ --------- ---------- --------
Interest earning assets
Securities 6.09% $ 1,348 3 $ 1,348 $ - $ - $ -
Mortgage-backed securities 7.29 9,377 23 9,188 96 77 16
Investment in FHLB stock 5.53 360 1 - - - 360
Loans receivable
Real estate
Adjustable rate 7.61 26,627 64 24,849 1,778 - -
Fixed rate
Short-term 8.85 494 1 69 106 163 156
Long-term 8.56 507 2 103 98 154 152
Consumer 16.03 2,607 6 670 1,559 285 93
----- ------- --- ------- ------- ----- ----
8.02 41,320 100 36,227 3,637 679 777
Interest bearing liabilities
Customer accounts
Regular savings 1.97 1,789 4 1,789 - - -
Checking and limited access 1.99 9,384 24 9,384 - - -
Wholesale transactions - 169 - 169 - - -
Term accounts 5.37 18,000 45 14,656 3,327 17 -
----- ------- --- ------- ------- ----- ----
4.05 29,342 73 25,998 3,327 17 -
Borrowings
FHLB 5.28 1,503 4 1,503 - - -
Other 6.05 9,088 23 6,887 1,555 499 147
Impact of interest-rate swaps - - - (109) 109 - -
----- ------- --- ------- ------- ----- ----
4.55 39,933 100 34,279 4,991 516 147
----- ------- --- ------- ------- ----- ----
Excess of interest earning
assets over interest bearing
liabilities at March 31, 1996 3.47% $ 1,387 $ 1,948 $(1,354) $ 163 $630
===== ======= ======= ======= ===== ====
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 March 31, 1995 3.02% $ 1,262 $ 4,895 $(4,375) $(187) $929
===== ====== ======= ======= ===== ====
March 31
------------
1996 1995
---- ----
Calculation of adjusted margin
Unadjusted margin 3.47% 3.02%
Benefit of net interest earning assets .16 .14
---- ----
Adjusted margin 3.63% 3.16%
==== ====
/TABLE
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.
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. 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 1995.
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 single-family
market appear to be somewhat more favorable in Northern California than in
Southern California. In particular, the median metropolitan area sales price
of existing single-family homes in the San Jose area increased from the
fourth quarter of 1994 to the fourth quarter of 1995 by 3 percent. During
the same period, the median sales price for the Los Angeles and San Diego
areas declined 5 percent and 1 percent, respectively.
In the Los Angeles area, the vacancy rate of the office space market
was 19 percent at December 31, 1995 and 20 percent December 31, 1994. In San
Diego County, the vacancy rate was 18 percent at both December 31, 1995 and
December 31, 1994.
In the Los Angeles area, the vacancy rate of the industrial space
market remained at 8 percent at December 31, 1995 from a year earlier. San
Diego County's industrial space market had a vacancy rate of 4 percent at
both December 31, 1995 and December 31, 1994.
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 loan-to-value ratios ("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 ninety days on a monthly (and within-month) basis. The
following summarizes mortgages delinquent for periods from thirty to eighty-
nine days:
March 31 December 31 March 31
(Dollars in millions) 1996 1995 1995
-------- ----------- --------
30-59 days delinquent
SFR $218.4 $202.1 $183.4
Other 5.5 9.1 6.5
60-89 days delinquent
SFR 95.6 95.8 93.0
Other 3.3 6.3 16.9
The increase in thirty to eighty-nine day delinquencies at March 31,
1996 compared with March 31, 1995 is primarily due to inflows of newly
delinquent single-family residential loans resulting from continuing weakness
in the Southern California economy.
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) compared to the growth
in the related portfolio.
March 31 December 31 March 31
1996 1995 1995
-------- ----------- --------
SFRs and mortgage-backed securities
with full credit recourse as a
percent of total mortgages 91.4% 91.3% 90.7%
SFR delinquency as a percent
of total SFR mortgages 2.4 2.3 2.4
The Company's real estate loan portfolio included approximately $2.6
billion of uninsured single-family mortgage loans at March 31, 1996, compared
with $2.9 billion a year ago, which were originated with terms where the LTV
exceeded 80 percent (but not in excess of 90 percent). During the first
quarter of 1996, losses on the higher LTV mortgages totaled $2.7 million, or
.32 percent (annualized), compared with $7.3 million, or .85 percent
(annualized) for the same period a year ago. For the year 1995, losses
totaled $33.4 million, or 1.00 percent of such loans, compared with $24.3
million, or .59 percent, for 1994. The Company began to purchase mortgage
insurance on all new single-family residential mortgages originated with LTVs
in excess of 80 percent in 1990. Therefore, this portfolio of uninsured
loans is becoming more seasoned and the balance is declining.
The recorded investment in loans for which impairment has been
recognized in accordance with Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" and the reserve for
estimated losses related to such loans 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) March 31, 1996
-------------------------------------------------------------------
Real estate loans
Residential
Single-family $ 65,083 $14,137 $ 50,946 $ 28,910 $ 79,856
Apartments 85,986 18,866 67,120 22,294 89,414
Commercial
Offices 22,302 8,459 13,843 9,595 23,438
Retail 31,677 6,813 24,864 776 25,640
Hotel/motel 37,632 9,097 28,535 - 28,535
Industrial 20,919 5,346 15,573 3,587 19,160
Other 1,638 167 1,471 3,246 4,717
-------- ------- -------- -------- --------
$265,237 $62,885 $202,352 $ 68,408 $270,760
======== ======= ======== ======== ========
March 31, 1995
-------------------------------------------------------------------
Real estate loans
Residential
Single-family $ 36,779 $ 9,883 $ 26,896 $ 16,318 $ 43,214
Apartments 88,825 19,350 69,475 35,314 104,789
Commercial
Offices 27,959 10,679 17,280 12,026 29,306
Retail 27,236 5,765 21,471 9,005 30,476
Hotel/motel 20,962 2,912 18,050 782 18,832
Industrial 14,204 3,668 10,536 5,230 15,766
Other 3,600 648 2,952 2,262 5,214
-------- ------- -------- -------- --------
$219,565 $52,905 $166,660 $ 80,937 $247,597
======== ======= ======== ======== ========
The impaired loan portfolio increased at March 31, 1996 compared with
March 31, 1995. The increase was primarily the result of a change in
procedure allowing for an accelerated identification of impaired single-
family loans. 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 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.
A change in the fair value of an impaired loan is reported as an
increase or reduction to the provision for loan losses.
Certain loans (where GWB works with borrowers encountering economic
difficulty) meet the criteria of, and are classified as, troubled debt
restructurings ("TDRs") because of modification to loan terms. TDRs totaled
$112 million at March 31, 1996 compared with $149 million at March 31, 1995.
Real estate available for sale is recorded at the lower of cost or fair
value and is included in a periodic review of assets to determine whether,
in management's judgment, there has been any deterioration in value. Real
estate held for development, also subject to the same review process, is
carried at the lower of cost or fair value. Real estate is also included
in the general reserve evaluation. At March 31, 1996, foreclosed real estate
properties totaling $2.6 million are operating profitably after provisions
for interest and depreciation and are performing assets.
Nonperforming assets include loans which are delinquent ninety days or
more, TDRs which do not meet certain performance criteria and certain real
estate owned which does not generate sufficient income to meet return on
investment criteria. The following table indicates the amount of the
Company's nonperforming assets and the ratio of nonperforming assets to total
assets:
[CAPTION]
March 31 December 31 March 31
1996 1995 1995
------------- ------------- -------------
(Dollars in millions) Amount % Amount % Amount %
------ --- ------ --- ------ ---
Loans receivable
Real estate
Residential
Single-family $448 1.03% $445 1.00% $466 1.07%
Apartments 46 .10 41 .09 66 .15
Commercial 81 .19 81 .18 96 .22
Consumer finance 26 .06 25 .06 21 .05
Other 1 - 2 - 2 -
---- ---- ---- ---- ---- ----
602 1.38 594 1.33 651 1.49
Real estate 189 .43 174 .39 163 .38
---- ---- ---- ---- ---- ----
Total nonperforming assets $791 1.81% $768 1.72% $814 1.87%
==== ==== ==== ==== ==== ====
The geographic distribution of the real estate loan and real estate
portfolios at March 31, 1996 follows:
Connecticut/
Massachusetts/ Oregon/ Oklahoma/
(Dollars in millions) Total California Florida New York Washington Texas Georgia Arizona Other
----- ---------- ------- ------------- ---------- -------- ------- ------- -----
Real estate loans
Residential
Single-family $24,701 $16,080 $1,779 $1,636 $1,482 $771 $431 $363 $2,159
Apartments 1,591 1,291 68 - 8 24 51 61 88
Commercial
Offices 390 339 15 5 16 2 4 4 5
Retail 247 209 18 - 9 - - 2 9
Hotel/motel 220 139 5 - - 2 - 3 71
Industrial 303 256 12 - 4 13 2 4 12
Other 176 130 11 - 6 1 2 11 15
------- ------- ------ ------ ------ ---- ---- ---- ------
27,628 18,444 1,908 1,641 1,525 813 490 448 2,359
------- ------- ------ ------ ------ ---- ---- ---- ------
Real estate available
for sale, net
Acquired through
foreclosure 188 165 7 5 - 5 - - 6
Other 11 11 - - - - - - -
Property development 47 47 - - - - - - -
------- ------- ------ ------ ------ ---- ---- ---- ------
246 223 7 5 - 5 - - 6
------- ------- ------ ------ ------ ---- ---- ---- ------
Total real estate loans
and real estate $27,874 $18,667 $1,915 $1,646 $1,525 $818 $490 $448 $2,365
======= ======= ====== ====== ====== ==== ==== ==== ======
Percent of total 100.0% 67.0% 6.9% 5.9% 5.5% 2.9% 1.7% 1.6% 8.5%
The geographic distribution of nonperforming real estate loans and real
estate at March 31, 1996 follows:
Connecticut/
Massachusetts/ Oregon/ Oklahoma/
(Dollars in millions) Total California Florida New York Washington Texas Georgia Arizona Other
----- ---------- ------- ------------- ---------- -------- ------- ------- -----
Real estate loans
Residential
Single-family $448 $362 $22 $22 $ 7 $ 6 $ 4 $ 3 $22
Apartments 46 37 - - 1 - 4 - 4
Commercial
Offices 21 16 - 5 - - - - -
Retail 18 15 3 - - - - - -
Hotel/motel 24 24 - - - - - - -
Industrial 13 13 - - - - - - -
Other 5 3 1 - - - - 1 -
---- ---- --- --- --- --- --- --- ---
575 470 26 27 8 6 8 4 26
---- ---- --- --- --- --- --- --- ---
Real estate
Residential
Single-family 140 128 2 4 - 1 - - 5
Apartments 30 23 3 - - 4 - - -
Commercial
Offices 6 5 1 - - - - - -
Retail 3 3 - - - - - - -
Industrial 3 3 - - - - - - -
Other 7 5 1 1 - - - - -
---- ---- --- --- --- --- --- --- ---
189 167 7 5 - 5 - - 5
---- ---- --- --- --- --- --- --- ---
Total nonperforming real
estate loans and real
estate $764 $637 $ 33 $ 32 $ 8 $11 $ 8 $ 4 $31
==== ==== ==== ==== === === === === ===
Percent of total 100.0% 83.5% 4.3% 4.2% 1.0% 1.4% 1.0% .5% 4.1%
A comparison of the California real estate loan and real estate
portfolios and nonperforming real estate loans and real estate by region at
March 31, 1996 follows:
California Northern California
------------------------------- --------------------------------
(Dollars in millions) Portfolio Nonperforming % Portfolio Nonperforming %
--------- ------------- --- --------- ------------- ---
Real estate loans
Residential
Single-family $16,080 $362 2.3 $4,966 $ 74 1.5
Apartments 1,291 37 2.9 158 3 1.9
Commercial
Offices 339 16 4.7 74 11 14.9
Retail 209 15 7.2 49 1 2.0
Hotel/motel 139 24 17.3 45 - -
Industrial 256 13 5.1 35 5 14.3
Other 130 3 2.3 38 - -
------- ---- ----- ------ --- ----
18,444 470 2.5 5,365 94 1.8
------- ---- ----- ------ --- ----
Real estate
Residential
Single-family 128 128 100.0 17 17 100.0
Apartments 23 23 100.0 2 2 100.0
Commercial
Offices 5 5 100.0 - - -
Retail 4 3 75.0 - - -
Industrial 3 3 100.0 - - -
Other 60 5 8.3 21 - -
------- ---- ----- ------ --- ----
223 167 74.9 40 19 47.5
------- ---- ----- ------ --- ----
Total real estate loans
and real estate $18,667 $637 3.4 $5,405 $113 2.1
======= ==== ===== ====== ==== =====
/TABLE
Central California Southern California
-------------------------------- --------------------------------
(Dollars in millions) Portfolio Nonperforming % Portfolio Nonperforming %
--------- ------------- --- --------- ------------- ---
Real estate loans
Residential
Single-family $1,345 $22 1.6 $ 9,769 $266 2.7
Apartments 230 6 2.6 903 28 3.1
Commercial
Offices 38 - - 227 5 2.2
Retail 28 - - 132 14 10.6
Hotel/motel 25 3 12.0 69 21 30.4
Industrial 14 1 7.1 207 7 3.4
Other 16 1 6.3 76 2 2.6
------ --- ----- ------- ---- -----
1,696 33 1.9 11,383 343 3.0
------ --- ----- ------- ---- -----
Real estate
Residential
Single-family 7 7 100.0 104 104 100.0
Apartments 8 8 100.0 13 13 100.0
Commercial
Offices 1 1 100.0 4 4 100.0
Retail - - - 4 3 75.0
Industrial - - - 3 3 100.0
Other 12 - - 27 5 18.5
------ --- ----- ------- ---- -----
28 16 57.1 155 132 85.2
------ --- ----- ------- ---- -----
Total real estate loans
and real estate $1,724 $49 2.8 $11,538 $475 4.1
====== === ===== ======= ==== =====
Nonperforming real estate loans and real estate increased by $23
million during the first quarter of 1996. Total nonperforming single-family
residential properties increased $22 million in the first quarter of 1996 due
primarily to continued high foreclosure rates. Single-family residential
properties in California increased $16 million while out of state properties
increased $6 million. Nonperforming commercial and apartment properties
increased $1 million in the first quarter of 1996.
In the first three months of 1996, bulk sales of foreclosed single-
family properties totaled $57.8 million compared with $60.4 million in the
first three months of 1995. Auction sales have also been utilized to
accelerate the disposition of foreclosed properties.
The Company provides a reserve for uncollected interest which is
essentially based upon loans delinquent ninety days or more or in
foreclosure. These loans are considered in "nonaccrual" status.
A summary of loan loss provisions, charge-offs and recoveries by loan
type follows:
At or For The
Three Months Ended
March 31
----------------------
(Dollars in thousands) 1996 1995
---- ----
Beginning balance $362,849 $438,051
Provision for loss
Real estate loans
SFR 26,932 35,600
Other - 1,000
Consumer finance 14,500 10,600
Other 668 400
-------- --------
42,100 47,600
-------- --------
Charge-offs
Real estate loans
SFR (40,991) (50,365)
Other (2,818) (5,492)
Consumer finance (17,600) (14,801)
Other (358) (275)
-------- --------
(61,767) (70,933)
-------- --------
Recoveries
Real estate loans
SFR 169 472
Other 10 24
Consumer finance 4,147 4,090
Other 70 83
-------- --------
4,396 4,669
-------- --------
Net charge-offs
Real estate loans
SFR (40,822) (49,893)
Other (2,808) (5,468)
Consumer finance (13,453) (10,711)
Other (288) (192)
-------- --------
(57,371) (66,264)
-------- --------
Ending balance $347,578 $419,387
======== ========
Ratio of net charge-offs
(annualized) to average loans
Real estate loans
SFR .52% .67%
Other .38 .70
Consumer finance 2.56 2.16
Other .22 .17
---- ----
.62% .75%
==== ====
/TABLE
The following table presents the Company's reserve for estimated losses
and the reserve as a percent of the respective loans receivable portfolios:
March 31
------------------------------------
1996 1995
--------------- ---------------
(Dollars in millions) Amount % Amount %
------ --- ------ ---
Real estate loans
SFR $142 .46% $175 .57%
Commercial and other 143 4.86 180 5.74
Consumer finance 57 2.74 53 2.70
Other 6 1.18 11 2.32
---- ---- ---- ----
Total $348 .95% $419 1.16%
==== ==== ==== ====
A summary of real estate reserve activity by real estate type follows:
At or For The
Three Months Ended
March 31
------------------
(Dollars in millions) 1996 1995
---- ----
Beginning balance
SFR $ 1 $ 3
Commercial and other 56 74
--- ----
57 77
Provision for losses
SFR - -
Commercial and other - 1
--- ----
- 1
Net charge-offs
SFR - -
Commercial and other (2) (11)
--- ----
(2) (11)
Ending balance
SFR 1 3
Commercial and other 54 64
--- ----
$55 $ 67
=== ====
OPERATIONS
Net interest income totaled $352 million in the first quarter of 1996
compared with $307 million in the first quarter of 1995. The following table
shows the components of the change in net interest income between periods.
Three Months Ended March 31
------------------------------
(Dollars in millions) 1996 vs 1995 1995 vs 1994
------------ ------------
Mortgage-backed securities
Rate (1) $ 13 $ 7
Volume (2) (10) 102
Rate/Volume (3) (1) 18
---- ----
2 127
---- ----
Real estate loans (4)
Rate (1) 32 30
Volume (2) 22 (43)
Rate/Volume (3) 2 (3)
---- ----
56 (16)
---- ----
Consumer loans (4)
Rate (1) (1) (2)
Volume (2) 8 9
Rate/Volume (3) - -
---- ----
7 7
---- ----
Securities and investments
Rate (1) - 5
Volume (2) 3 3
Rate/Volume (3) - 1
---- ----
3 9
---- ----
Interest earning assets
Rate 44 40
Volume 23 71
Rate/Volume 1 16
---- ----
68 127
---- ----
Customer accounts
Rate (1) 21 67
Volume (2) 3 (16)
Rate/Volume (3) - (4)
---- ----
24 47
---- ----
Borrowings
Rate (1) (10) (9)
Volume (2) 9 137
Rate/Volume (3) - (21)
---- ----
(1) 107
---- ----
Interest bearing liabilities
Rate 11 58
Volume 12 121
Rate/Volume - (25)
---- ----
23 154
---- ----
Change in net interest income $ 45 $(27)
==== ====
(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 the 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.
Real estate services income totaled $20.2 million for the three months
ended March 31, 1996 compared with $21.3 million for the three months ended
March 31, 1995. The decrease in income was attributed to lower servicing
income. Mortgage sales in the first three months of 1996, all fixed rate,
totaled $416 million, at a gain of .82 percent of mortgage sales, compared
with $19.3 million in the first three months of last year at a gain of 1.59
percent of mortgage sales. The decrease in gains as a percentage of mortgage
sales was the result of the recent rise in long term interest rates which
affected the pricing of loans available for sale in the first quarter of
1996. As a result of the adoption of FAS 122, the amount of servicing
capitalized in 1996 and included in gain on mortgage sales was $2.5 million.
At March 31, 1996, the servicing spread was 41 basis points on the $11.1
billion servicing portfolio compared with a servicing spread of 44 basis
points on a $10.8 billion portfolio at March 31, 1995. Loan prepayment fees
were $489,000 in the first quarter of this year compared with $45,000 in the
first quarter last year. In the first quarter of 1996, the Company sold the
servicing rights on $95 million of loans at a gain of $432,000. The
portfolio of loans serviced for others is expected to increase if the level
of fixed-rate loan originations and sales increase.
Retail banking fee and commission income increased to $47.9 million in
the three months ended March 31, 1996 from $40 million in the three months
ended March 31, 1995. Banking fees increased to $41.7 million in the first
three months of 1996 compared with $36 million in the same period last year.
Income from mutual fund and securities brokerage operations has increased as
a result of increased sales of mutual funds. Net revenue from these
operations totaled $6.2 million in the three months ended March 31, 1996
compared with $4 million in the same period of 1995. The Company managed
mutual funds with assets aggregating $3.4 billion at March 31, 1996 compared
with $3 billion at March 31, 1995.
Other income was $7.8 million for the three months ended March 31, 1996
compared with $8.9 million for the same period a year ago.
Operating expenses were as follows:
Three Months Ended
(Dollars in millions) March 31
------------------
1996 1995
---- ----
Salaries and related personnel $117 $117
Premises and occupancy 46 46
FDIC insurance premiums 16 19
Advertising and promotion 9 8
Outside data processing 13 15
Communications 10 12
Branch losses 7 4
Office supplies 5 4
Postage 4 4
Insurance 2 3
Other 23 18
---- ----
$252 $250
==== ====
The operating ratios were as follows:
Three Months Ended
March 31
-------------------
1996 1995
---- ----
Operating and administrative expenses (annualized)
As a percent of average assets
Corporate 2.29% 2.34%
Banking operations 2.09 2.15
As a percent of average assets and assets
serviced for others
Corporate 1.83 1.86
Banking operations 1.65 1.69
As a percent of average retail deposits
Banking operations 3.05 3.08
As a percent of revenue
Corporate 61.09 68.89
Banking operations 63.54 73.14
/TABLE
The following table presents net earnings (annualized) as a percent of
average assets and as a percent of average equity:
Three Months Ended
March 31
------------------
1996 1995
---- ----
Return on average assets .65% .41%
Return on average equity 10.11 6.94
The Company's effective tax rate was 40 percent in the first three
months of 1996 and 39.6 percent in the same period of 1995.
DEPOSIT INSURANCE PREMIUMS
The Federal Deposit Insurance Corporation (the "FDIC") has adopted a
new Bank Insurance Fund (the "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 Savings Association Insurance Fund (the "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 has placed SAIF-insured
institutions, such as GWB, at a competitive disadvantage with commercial
banks and other BIF-insured institutions. GWB's assessment rate in the first
quarter of 1996 is 23 cents per $100 of domestic SAIF-insured deposits. A
small portion ($455 million or 1.55 percent) of GWB's deposits are insured
by the BIF.
Proposals have been introduced in Congress to recapitalize 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. The Company is unable to predict if any such proposals
might be enacted into law, but if they were, 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.
In 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.
CAPITAL RESOURCES AND LIQUIDITY
Capital (stockholders' equity) was $2.8 billion at March 31, 1996 and
$2.6 billion at March 31, 1995. At the end of the 1996 first quarter, the
ratio of capital to total assets was 6.4 percent compared with 5.9 percent
a year ago.
GWB is subject to certain capital requirements under applicable
regulations and meets all such requirements. At March 31, 1996, GWB's
capital was $3.1 billion, including eligible subordinated notes of $374
million.
The following ratios compare GWB with the capital requirements under
regulations issued by the Office of Thrift Supervision ("OTS"):
March 31, 1996
--------------------------------------------
Actual OTS Benchmark
-------------- ------------- Capital
(Dollars in millions) Amount % Amount % Excess
------ --- ------ --- -------
Leverage/tangible ratio $2,404 5.84 $1,235 3.00 1,169
Tier 1 risk-based ratio 2,399 9.77 982 4.00 2,586
Total risk-based ratio 2,999 12.21 1,965 8.00 1,034
The OTS amended its risk-based capital rules to incorporate interest-
rate risk ("IRR") requirements to 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.
The OTS has proposed to amend its capital rule on the leverage ratio
requirement to reflect amendments made by the Office of the Comptroller of
the Currency ("OCC") to the capital requirements for national banks. The
proposal would establish a 3 percent leverage ratio (defined as the ratio of
core capital to adjusted total assets) for savings associations in the
strongest financial and managerial condition. All other savings
associations would be required to maintain leverage ratios of at least 4
percent. Only savings associations rated composite 1 under the OTS CAMEL
rating system will be permitted to operate at or near the regulatory minimum
leverage ratio of 3 percent. For all other savings associations, the minimum
core capital leverage ratio will be 3 percent plus an additional 100 to 200
basis points.
In determining the amount of additional capital, the OTS will assess
both the quality of risk management systems and the level of overall risk in
each individual savings association through the supervisory process on a
case-by-case basis. The OTS' supervisory judgment on a savings association's
capital adequacy, both in terms of risk-based capital and the minimum
leverage ratio, will continue to be based upon an assessment of the relevant
factors present in each institution.
Savings associations that do not pass the minimum capital standards
established under the new core capital leverage ratio requirements will be
required to submit capital plans detailing steps to be taken to reach
compliance.
GWB currently meets these proposed requirements.
As of March 31, 1996, real estate loan commitments totaled $870 million
compared with $717 million at December 31, 1995 and $816 million at March 31,
1995. These commitments included $627 million of ARMs and $243 million at
fixed rates at March 31, 1996. The high percentage of ARM commitments is
indicative of a fully adjusted interest rate on COFI ARMs that is more than
100 basis points lower than the rates offered on 30-year fixed-rate loans.
The Company has several sources for raising funds for lending, among which
are mortgage repayments, mortgage sales, customer deposits, Federal Home Loan
Bank borrowings and other borrowings.
The following table presents the debt ratings of the Company and GWB
at March 31, 1996:
Moody's Investors
Standard & Poor's Service Fitch
----------------- ----------------- -----------
GWFC GWB GWFC GWB GWFC GWB
---- --- ---- --- ---- ---
Unsecured short-term debt A-2 A-2 P-2 P-1 F-1
Senior term debt BBB+ A- Baa1 A-2 A- A
Subordinated term debt BBB+ A-3 A-
Preferred stock BBB- Baa2 BBB
The origination and sale of real estate loans is dependent upon general
market conditions. In an active real estate market loan originations
increase. In such periods mortgage sales are usually increased to fund a
portion of originations and to control asset growth. However, in some
periods mortgage sales occur to fund customer account outflows and repay
borrowings which result in asset shrinkage. Mortgage sales also occur to
limit interest-rate risk and for restructuring purposes.
As presented in the Consolidated Condensed Statement of Cash Flows the
sources of liquidity vary between quarters. The primary source of funds in
the first quarter of 1996 was principal payments on mortgage-backed
securities and loans held for investment of $1.6 billion. New loans
originated for investment required $1.2 billion in the first quarter of 1996.
Operating activities provided $385 million in the current quarter.
The Company continued to maintain liquidity balances each period in
excess of funding and legal requirements. Cash and securities totaled $2.2
billion at March 31, 1996 and $1.9 billion at March 31, 1995.
DIVIDENDS
Quarterly cash dividends have been paid since 1977. At its April 1996
meeting, the Board of Directors increased the quarterly cash dividend from
$.23 to $.25 per common share. The quarterly cash dividend of $.23 per
common share had previously been paid at that level since the second quarter
of 1992. The dividend increase was due to the Company's improved earnings
and strong capital position.
In the first quarter of 1996 the regular quarterly dividend on the $129
million 8 3/4 percent cumulative convertible preferred stock, issued in May
1991, and the regular quarterly dividend on the $165 million 8.3 percent
cumulative preferred stock, issued in September 1992, were paid.
The principal source of operating income of the Company on an
unconsolidated basis is dividends from GWB and Aristar, Inc ("Aristar"). In
the first quarter of 1996, cash dividends received from GWB and Aristar
totaled $37.8 million and $9.1 million, respectively. GWB is subject to the
regulations of the OTS and FDIC. 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. An
association subject to more stringent restrictions imposed by agreement may
apply to remove the more stringent restrictions.
The Company believes that GWB is a Tier 1 association. 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.
Among the circumstances posing such risk would be a capital distribution by
a Tier 1 or Tier 2 association whose capital is decreasing because of
substantial losses.
AVERAGE SHARES OUTSTANDING
The average common shares outstanding, based upon daily amounts used
in the calculation of earnings per share, are shown below:
Three Months Ended March 31
---------------------------
1996 1995
---- ----
Primary 139,142,551 135,060,229
Fully diluted 145,531,904 135,338,118
/TABLE
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company's Annual Meeting of Shareholders was held on April 23,
1996. 118,413,497 shares of GWFC common stock were represented at the Annual
Meeting in person or by proxy.
Shareholders voted in favor of the election of three nominees for
director. The voting results for each nominee were as follows:
Votes in Favor
Nominee of Election Votes Withheld
- ------- -------------- --------------
Dr. David Alexander 114,163,324 4,250,173
H. Frederick Christie 114,176,306 4,237,191
Charles D. Miller 114,168,843 4,244,654
In addition, the term of office of the following directors continued
after the meeting:
Stephen E. Frank
John V. Giovenco
Firmin A. Gryp
Enrique Hernandez, Jr.
John F. Maher
James F. Montgomery
Dr. Alberta E. Siegel
Willis B. Wood, Jr.
ITEM 5. OTHER INFORMATION
- --------------------------
The calculation of the Company's ratio of earnings to fixed charges as
of the dates indicated follows:
Three Months Ended Twelve Months Ended Three Months Ended
(Dollars in thousands) March 31, 1996 December 31, 1995 March 31, 1995
------------------ ------------------- ------------------
Earnings
- --------
Net earnings $ 71,294 $ 261,022 $ 43,484
Taxes on income 47,500 161,100 28,500
-------- ---------- --------
Earnings before taxes $118,794 $ 422,122 $ 71,984
======== ========== ========
Interest expense
- ----------------
Customer accounts $303,004 $1,217,085 $278,916
Borrowings 181,619 734,670 186,175
-------- ---------- --------
Total $484,623 $1,951,755 $465,091
======== ========== ========
Rent expense
- ------------
Total $ 15,784 $ 46,433 $ 13,770
1/3 thereof 5,261 15,478 4,590
Capitalized interest $ 6 $ - $ -
- --------------------
Preferred stock dividends $ 6,254 $ 25,015 $ 6,254
- -------------------------
Ratio of earnings to fixed charges
and preferred stock dividends
- ----------------------------------
Excluding customer accounts
---------------------------
Earnings before fixed charges $305,674 $1,172,270 $262,749
Fixed charges 197,307 790,602 201,118
Ratio 1.55 1.48 1.31
Including customer accounts
---------------------------
Earnings before fixed charges $608,678 $2,389,355 $541,665
Fixed charges 500,311 2,007,687 480,034
Ratio 1.22 1.19 1.13
Ratio of earnings to fixed charges
- ----------------------------------
Excluding customer accounts
---------------------------
Earnings before fixed charges $305,674 $1,172,270 $262,749
Fixed charges 186,886 750,148 190,765
Ratio 1.64 1.56 1.38
Including customer accounts
---------------------------
Earnings before fixed charges $608,678 $2,389,355 $541,665
Fixed charges 489,890 1,967,233 469,681
Ratio 1.24 1.21 1.15
/TABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a. Exhibits
--------
4.1 The Company has outstanding certain long-term debt as set forth in
Note 14 of the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. The Company agrees to furnish copies of the
instruments representing its long-term debt to the Securities and
Exchange Commission (the "SEC") upon request.
10.1 Amendment No. 2 to GWFC Deferred Compensation Plan 1992 Restatement.
10.2 Amendment No. 2 to GWFC Directors' Deferred Compensation Plan 1992
Restatement.
10.3 Amendment No. 2 to GWFC Senior Officers' Deferred Compensation Plan
1992 Restatement.
10.4 Amendment 1996-1 to GWFC Supplemental Executive Retirement Plan 1988
Restatement.
10.5 Amendment 1996-1 to GWFC Retirement Restoration Plan.
11.1 Statement re computation of per share earnings.
27.1 Financial Data Schedule
b. Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which this report
is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT WESTERN FINANCIAL CORPORATION
- -----------------------------------
Registrant
/s/Carl F. Geuther
- -----------------------------------
Carl F. Geuther
Vice Chairman and Chief Financial
Officer
/s/Barry R. Barkley
- -----------------------------------
Barry R. Barkley
Senior Vice President and
Controller
DATE: May 13, 1996
GREAT WESTERN FINANCIAL CORPORATION
EXHIBIT INDEX
March 31, 1996
Exhibit Page
Number Number
- ------- ------
10.1 Amendment No. 2 to GWFC Deferred Compensation 39
Plan 1992 Restatement.
10.2 Amendment No. 2 to GWFC Directors' Deferred Compensation 41
Plan 1992 Restatement.
10.3 Amendment No. 2 to GWFC Senior Officers' Deferred Compensation 42
Plan 1992 Restatement.
10.4 Amendment 1996-1 to GWFC Supplemental Executive Retirement 45
Plan 1988 Restatement.
10.5 Amendment 1996-1 to GWFC Retirement Restoration Plan. 47
11.1 Statement re computation of per share earnings 49
27.1 Financial Data Schedule 50