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, 1997
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 775-3411
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------------------------
(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, 1997: 137,908,547
1
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations--Three months ended March 31,
1997, December 31, 1996 and March 31, 1996........................... 4
Consolidated Statement of Financial Condition--March 31, 1997,
December 31, 1996 and March 31, 1996................................. 5
Consolidated Statement of Changes in Stockholders' Equity--Three
months ended March 31, 1997, December 31, 1996 and March 31, 1996.... 6
Consolidated Statement of Cash Flows--Three months ended March 31,
1997 and March 31, 1996.............................................. 7
Notes to Consolidated Financial Statements............................ 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months Ended March 31, 1997.... 11
Overview.............................................................. 11
Highlights............................................................ 11
Merger Agreement with Washington Mutual, Inc.......................... 12
H. F. Ahmanson & Company's Merger Proposal............................ 12
Litigation............................................................ 15
Line of Business...................................................... 19
Earnings Performance.................................................. 21
Balance Sheet Analysis................................................ 27
Asset Liability Management............................................ 45
Liquidity Management.................................................. 47
Parent Company Liquidity.............................................. 47
Capital Adequacy...................................................... 47
Adoption of Recently Issued Accounting Standards...................... 49
Impact of Recently Issued Accounting Standards........................ 50
Subsequent Events..................................................... 50
Part II. Other Information
Item 5. Other Information............................................... 51
Item 6. Exhibits and Reports on Form 8-K................................ 52
2
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", "the Company" or
"Great Western").
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, 1996 with the exception of the implementation of Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). 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.
During 1996, the Company changed its methodology to record losses on loans
underlying mortgage-backed securities as a write-down on the security rather
than as a charge against the allowance for loan and lease losses. On May 9,
1997 the Company amended its 1996 Form 10-K to reflect the reclassification of
these prior period charge-offs against the allowance to write-downs on the
mortgage backed securities.
3
ITEM 1. FINANCIAL STATEMENTS
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
INTEREST INCOME
Securities available-for-sale.......... $ 14,737 $ 16,325 $ 14,631
Mortgage-backed securities............. 138,577 143,369 174,026
Loans
Real estate.......................... 521,689 522,365 521,110
Consumer Finance..................... 91,205 93,973 93,888
Other................................ 4,178 12,359 10,852
----------- ----------- -----------
Total loan interest income......... 617,072 628,697 625,850
Other.................................. 13,872 13,156 10,421
----------- ----------- -----------
Total interest income.............. 784,258 801,547 824,928
INTEREST EXPENSE
Deposits............................... 279,776 293,186 303,004
Borrowings
Short-term borrowings................ 100,033 105,739 116,338
Long-term borrowings................. 66,285 67,611 53,300
----------- ----------- -----------
Total interest expense............. 446,094 466,536 472,642
NET INTEREST INCOME..................... 338,164 335,011 352,286
Provision for loan and lease losses..... 40,390 85,900 36,021
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES.............. 297,774 249,111 316,265
NONINTEREST INCOME
Retail banking fees.................... 54,033 50,722 41,664
Servicing fees......................... 12,317 13,304 11,453
Real estate fees....................... 7,989 8,301 6,460
Securities operations.................. 7,776 8,046 6,210
Gain (loss) on sale of premises and
equipment............................. 6,931 391 (205)
Net insurance operations............... 6,838 7,969 7,365
Net gain on sale of mortgages.......... 1,742 1,683 2,898
Gain (loss) on sale of mortgage-backed
securities available-for-sale......... (10) 10,186 (566)
Write-downs of mortgage-backed
securities............................ (4,200) (11,592) (6,079)
Gain on sale of leases................. 716 - 539
Net gain on sale of student loans...... 669 22,960 109
Loss on affordable housing investment.. (605) (1,308) (965)
Other.................................. 1,128 3,825 746
----------- ----------- -----------
Total noninterest income........... 95,324 114,487 69,629
NONINTEREST EXPENSE
Salaries and benefits.................. 104,060 96,673 115,123
Transaction costs...................... 33,721 - -
Premises and occupancy................. 30,383 31,135 31,843
Data processing........................ 17,337 19,417 17,513
Operating losses and settlements....... 9,837 13,426 7,173
Outside data processing................ 9,199 12,113 11,591
Professional fees...................... 9,162 14,274 6,123
Communications......................... 9,078 9,820 8,749
Amortization of intangibles............ 8,975 9,433 9,429
Postage................................ 6,772 4,310 4,805
Advertising and promotion.............. 5,094 7,382 9,159
FDIC insurance premium................. 4,577 16,488 16,146
Contract services...................... 4,336 3,861 1,617
Office supplies........................ 4,306 3,637 4,353
Net real estate operations............. 3,999 5,522 5,701
Insurance.............................. 2,164 4,065 2,233
Restructure expense.................... - 68,293 -
Retirement of subordinated debt........ - 21,406 -
Other.................................. 15,395 16,811 15,542
----------- ----------- -----------
Total noninterest expense.......... 278,395 358,066 267,100
----------- ----------- -----------
EARNINGS BEFORE TAXES................... 114,703 5,532 118,794
Income tax expense..................... 49,000 400 47,500
----------- ----------- -----------
NET EARNINGS............................ $ 65,703 $ 5,132 $ 71,294
=========== =========== ===========
Average common shares outstanding
Without dilution....................... 141,305,122 140,407,688 139,142,551
Fully diluted.......................... 141,595,846 140,434,137 145,531,904
Earnings per share based on average
common shares outstanding
Primary................................ $ 0.44 $ 0.01 $ 0.47
Fully diluted.......................... 0.44 0.01 0.47
Cash dividend per common share.......... 0.25 0.25 0.23
Unaudited
See Notes to Consolidated Financial Statements.
4
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash...................................... $ 339,256 $ 534,192 $ 773,418
Certificates of deposit, repurchase
agreements and federal funds............. 550,830 300,100 257,125
Securities available-for-sale............. 1,173,993 1,279,283 1,152,256
Mortgage-backed securities held-to-
maturity (fair value $1,572,046,
$1,622,573 and $1,843,391)............... 1,554,197 1,618,709 1,827,150
Mortgage-backed securities available-for-
sale..................................... 5,981,604 6,169,842 7,549,632
----------- ----------- -----------
7,535,801 7,788,551 9,376,782
Loans receivable, net of allowance for
loan and lease losses.................... 30,999,178 30,717,320 29,277,567
Loans available-for-sale.................. 211,675 105,872 527,016
----------- ----------- -----------
Net loans............................... 31,210,853 30,823,192 29,804,583
Investment in FHLB........................ 384,231 377,946 360,414
Real estate available-for-sale or
development, net......................... 115,149 159,997 225,119
Interest receivable....................... 238,849 245,539 266,777
Premises and equipment, net............... 525,178 552,422 592,651
Intangibles arising from acquisitions..... 277,016 285,991 314,284
Company owned life insurance.............. 182,643 180,319 165,722
Other assets.............................. 344,104 347,040 492,800
----------- ----------- -----------
Total assets............................ $42,877,903 $42,874,572 $43,781,931
=========== =========== ===========
LIABILITIES
Deposits................................. 28,158,331 28,586,773 29,341,730
Short-term borrowings from FHLB.......... 1,798,298 2,011,733 1,388,111
Securities sold under agreements to
repurchase.............................. 4,483,584 4,197,666 5,734,501
Short-term borrowings.................... 1,286,942 1,101,506 947,416
Long-term borrowings..................... 3,092,335 3,190,908 2,420,615
Accrued interest payable................. 141,687 172,324 101,155
Taxes on income, principally deferred.... 297,404 226,075 325,971
Other liabilities and accrued expenses... 634,252 692,387 600,300
----------- ----------- -----------
Total liabilities...................... 39,892,833 40,179,372 40,859,799
----------- ----------- -----------
Guaranteed preferred beneficial interest
in Company subordinated notes........... 400,000 100,000 100,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share; Authorized 10,000,000 shares;
Cumulative Convertible issued none, none
and 517,500; Cumulative issued 660,000,
660,000 and 660,000..................... 165,000 165,000 294,375
Common stock, par value $1.00 per share;
Authorized 200,000,000 shares; Issued
137,885,310, 137,875,955 and
137,204,953............................. 137,885 137,876 137,205
Additional paid-in-capital............... 677,250 680,428 711,770
Retained earnings-substantially
restricted.............................. 1,563,139 1,535,264 1,606,287
Unearned compensation.................... - (327) (3,294)
Securities valuation allowance........... 41,796 76,959 75,789
----------- ----------- -----------
Total stockholders' equity............. 2,585,070 2,595,200 2,822,132
----------- ----------- -----------
Total liabilities and stockholders'
equity................................ $42,877,903 $42,874,572 $43,781,931
=========== =========== ===========
Unaudited
See Notes to Consolidated Financial Statements.
5
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED
-----------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---------- ------------ ----------
(DOLLARS IN THOUSANDS)
PREFERRED STOCK
Balance, beginning of period.............. $ 165,000 $ 165,000 $ 294,375
---------- ---------- ----------
Balance, end of period.................... 165,000 165,000 294,375
---------- ---------- ----------
COMMON STOCK
Balance, beginning of period.............. 137,876 137,431 137,279
Common stock issued upon exercise of
options.................................. 988 531 136
Common stock issued under dividend
reinvestment plan........................ 22 30 17
Common stock acquired..................... (1,001) (116) (223)
Restricted stock awards granted, net of
cancellations............................ - - (4)
---------- ---------- ----------
Balance, end of period.................... 137,885 137,876 137,205
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period.............. 680,428 698,958 713,889
Common stock issued upon exercise of stock
options.................................. 27,004 11,095 2,554
Common stock issued under dividend
reinvestment plan........................ 825 833 380
Common stock acquired..................... (31,007) (3,486) (4,996)
Restricted stock awards granted, net of
cancellations............................ - - (57)
Common stock repurchased under repurchase
plan..................................... - (26,972) -
---------- ---------- ----------
Balance, end of period.................... 677,250 680,428 711,770
---------- ---------- ----------
RETAINED EARNINGS--SUBSTANTIALLY RE-
STRICTED
Balance, beginning of period.............. 1,535,264 1,567,993 1,572,782
Net earnings.............................. 65,703 5,132 71,294
Preferred stock dividends................. (3,424) (3,424) (6,254)
Common stock dividends.................... (34,404) (34,437) (31,535)
---------- ---------- ----------
Balance, end of period.................... 1,563,139 1,535,264 1,606,287
---------- ---------- ----------
UNEARNED COMPENSATION
Balance, beginning of period.............. (327) (1,308) (4,282)
Amortization of restricted stock.......... 327 981 988
---------- ---------- ----------
Balance, end of period.................... - (327) (3,294)
---------- ---------- ----------
SECURITIES VALUATION ALLOWANCE
Balance, beginning of period.............. 76,959 48,707 108,433
Change in unrealized net gain, net of
taxes.................................... (35,163) 28,252 (32,644)
---------- ---------- ----------
Balance, end of period.................... 41,796 76,959 75,789
---------- ---------- ----------
Total stockholders' equity.............. $2,585,070 $2,595,200 $2,822,132
========== ========== ==========
Unaudited
See Notes to Consolidated Financial Statements.
6
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
--------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net earnings....................................... $ 65,703 $ 71,294
Noncash adjustments to net earnings:
Provision for loan and lease losses.............. 40,390 36,021
Net decrease in interest receivable.............. 6,690 31,863
Net (decrease) in interest payable............... (30,637) (3,452)
Depreciation and amortization.................... 19,071 19,325
Amortization of intangibles...................... 8,975 9,429
Write-downs of mortgage-backed securities........ 4,200 6,079
Write-downs of real estate available-for-sale.... 1,753 -
Loss on sale of mortgage-backed securities
available-for-sale.............................. 10 566
(Gain) on sale of leases......................... (716) (539)
(Gain) on sale of real estate.................... (1,281) (2,241)
Loss on sale of loans available-for-sale......... 2,258 1,546
Capitalized interest............................. (13,989) (17,966)
Income taxes..................................... 95,743 (32,958)
Other............................................ (80,455) 258,220
Sales and payments of loans available-for-sale..... 431,428 426,581
Originations and purchases of loans available-for-
sale.............................................. (517,390) (418,868)
--------- -----------
Net cash provided by operating activities.......... 31,753 384,900
--------- -----------
FINANCING ACTIVITIES
(Decrease) increase in deposits.................. (428,442) 106,802
Borrowings
Net change in short-term borrowings from FHLB.... (213,435) 648,031
Net change in securities sold under agreements to
repurchase...................................... 285,918 (1,133,795)
Net change in short-term borrowings.............. 185,436 (368,997)
Proceeds from issuance of long-term borrowings... 1,800 -
Repayments of long-term borrowings............... (100,373) (229)
Proceeds from issuance of Company subordinated
notes........................................... 300,000 -
Other financing activity
Common stock issued.............................. 28,839 3,025
Common stock repurchased......................... (32,008) (5,219)
Payment of cash dividends on common stock........ (34,404) (31,535)
Payment of cash dividends on preferred stock..... (3,424) (6,254)
--------- -----------
Net cash (used in) financing activities............ (10,093) (788,171)
--------- -----------
Unaudited
See Notes to Consolidated Financial Statements.
7
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
----------- ----------
(DOLLARS IN THOUSANDS)
INVESTING ACTIVITIES
Securities available-for-sale
Proceeds from sales and maturities.................. $ 848,971 $ 392,846
Purchases of securities available-for-sale.......... (749,308) (456,105)
Mortgage-backed securities held-to-maturity
Payments received .................................. 64,640 70,914
Mortgage-backed securities available-for-sale
Proceeds from sales................................. 997 -
Purchases of mortgage-backed securities............. (73,867) (8,511)
Payments received................................... 167,959 288,479
Real estate loans
Payments received................................... 741,803 711,126
Loans originated for investment..................... (1,040,183) (738,119)
Repurchases......................................... (12,632) (13,960)
Consumer Finance and other loans
Loans originated for investment..................... (551,814) (455,594)
Proceeds from sales ................................ 2,216 1,115
Payments received .................................. 540,079 501,049
Other investing activity
Purchases and sales of premises and equipment, net.. 7,504 (9,203)
Proceeds from sale of real estate................... 77,985 84,264
Net change in investment in FHLB.................... (6,285) (19,312)
Other............................................... 16,069 (9,592)
----------- ----------
Net cash provided by investing activities............. 34,134 339,397
----------- ----------
Net increase (decrease) in cash and cash equivalents.. 55,794 (63,874)
Cash and cash equivalents at beginning of period...... 834,292 1,094,417
----------- ----------
Cash and cash equivalents at end of period............ $ 890,086 $1,030,543
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for
Interest on deposits................................ $ 281,713 $ 299,139
Interest on borrowings.............................. 195,943 187,384
Income taxes........................................ 591 45,803
Noncash investing activities
Loans transferred to real estate available-for-sale. $ 57,824 $ 114,067
Loans originated to finance the sale of real estate
available-for-sale................................. 9,913 17,648
Loans originated to refinance existing loans........ 101,013 107,656
Loans exchanged for mortgage-backed securities...... 1,002 -
Unaudited
See Notes to Consolidated Financial Statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: MORTGAGE SERVICING RIGHTS
On January 1, 1997 the Company adopted SFAS 125. SFAS 125 requires, among
other things, the application of fair value to the initial recording of
mortgage servicing assets and liabilities. Mortgage servicing assets and
liabilities are required to be evaluated for impairment. Mortgage servicing
assets are to be evaluated by risk tranche and are to be recorded at the lower
of cost or market. Mortgage servicing liabilities are to be evaluated at the
contract level and recorded at fair market value. The pronouncement also
requires that the right to retain interest in excess of the contractually
stated service fees be treated as interest only strips and valued in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
("SFAS 115").
In accordance with SFAS 125, the Company combined its normal and excess
service fees into one mortgage servicing asset, applied the concept of fair
value to the mortgage servicing liabilities, and reviewed applicable contracts
to ensure proper statement of both assets and liabilities on the statement of
condition. Mortgage servicing rights are included in "other assets" on the
Consolidated Statement of Financial Condition. Mortgage servicing liabilities
are included in "other liabilities and accrued expenses" on the Consolidated
Statement of Financial Condition.
As a result of the implementation of SFAS 125, the Company identified and
recorded impairment on the mortgage servicing liability in the amount of
$1,128,000. Impairment of $28,000 was identified and recorded on the mortgage
servicing rights asset. Review of servicing contracts identified no
requirement for the recognition of interest only strips on the Consolidated
Statement of Financial Condition.
Mortgage servicing rights are analyzed for impairment by stratifying the
underlying loans based on the predominant risk characteristics of rate,
geographic area and product type on a contract pool basis.
The following table shows the balances and activity of the mortgage
servicing assets and liabilities for the three months ended March 31, 1997:
ORIGINATED
MORTGAGE MORTGAGE MORTGAGE
SERVICING EXCESS SERVICING SERVICING
RIGHTS* SERVICING* RIGHTS LIABILITIES
---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
Balance at December 31, 1996....... $ 17,018 $ 28,241 $ - $(20,714)
Eliminate distinction between
originated mortgage servicing
rights and excess servicing....... (17,018) (28,241) 45,259 -
Additions from sales............... - - 4,820 -
Amortization....................... - - (2,180) 1,050
Impairment activity................ - - (28) (1,128)
-------- -------- ------- --------
Balance at March 31, 1997.......... $ - $ - $47,871 $(20,792)
======== ======== ======= ========
Fair value at March 31, 1997....... $ - $ - $69,785 $(20,792)
- --------
* There was no impairment reserve required or recorded for originated mortgage
servicing or excess servicing rights at December 31, 1996.
NOTE 2: GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY SUBORDINATED NOTES
On January 27, 1997, Great Western Financial Trust II (the "subsidiary trust
II"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$300,000,000 of 8.206% Trust Originated Preferred Securities (the "preferred
securities II"). In connection with subsidiary trust II's issuance of the
preferred securities II, Great Western Financial Corporation issued to
subsidiary trust II $309,000,000 principal amount of its 8.206% subordinated
deferrable interest notes, due 2027 (the "subordinated notes II"). The sole
assets of
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiary trust II are and will be the subordinated notes II. Great Western
Financial Corporation's obligations under the subordinated notes II and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust II's obligations under the
preferred securities II.
In December 1995, Great Western Financial Trust I (the "subsidiary trust
I"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$100,000,000 of 8.25% Trust Originated Preferred Securities (the "preferred
securities I"). In connection with subsidiary trust I's issuance of the
preferred securities I, Great Western Financial Corporation issued to the
subsidiary trust I $103,092,800 principal amount of its 8.25% subordinated
deferrable interest notes, due 2025 (the "subordinated notes I"). The sole
assets of subsidiary trust I are and will be the subordinated notes I. Great
Western Financial Corporation's obligations under the subordinated notes I and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust I's obligations under the
preferred securities I.
The following table shows the balances of Great Western Financial Trust I
and II at March 31, 1997, December 31, 1996 and March 31, 1996:
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
-------------- ----------------- --------------
Great Western Financial Trust
I............................. $100,000 $100,000 $100,000
Great Western Financial Trust
II............................ 300,000 - -
-------- -------- --------
$400,000 $100,000 $100,000
======== ======== ========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Great Western reported consolidated net earnings of $65.7 million, or $.44
per share, for the first quarter of 1997 compared to $71.3 million, or $.47
per share for the first quarter of 1996 and $5.1 million, or $.01 per share
for the fourth quarter of 1996. The Company's net earnings for the first
quarter of 1997 were reduced by $33.7 million in merger related transaction
costs. Without these transaction costs, operating earnings for the three
months ended March 31, 1997 would have been $89.1 million, or $.61 per share.
The provision for loan and lease losses in the first quarter of 1997
declined to $40.4 million, down from $85.9 million in the fourth quarter of
1996 and up from $36 million in the first quarter of 1996. The decrease was
due to reduced credit costs as a result of the bulk sale of nonperforming
assets in the fourth quarter of 1996. Nonperforming assets were $547.8
million, or 1.28% of assets at March 31, 1997, $791.3 million, or 1.81% of
assets at March 31, 1996 and $546 million, or 1.27% of assets at December 31,
1996.
Net interest income was $338.2 million for the first quarter of 1997
compared with $352.3 million for the first quarter of 1996 and $335 million
for the fourth quarter of 1996. The interest spread for the first quarter of
1997 was 3.13% compared with 3.23% for the first quarter of 1996 and 3.05% for
the fourth quarter of 1996. The Company's net interest margin was 3.32% for
the first quarter of 1997 compared with 3.39% for the first quarter of 1996
and 3.25% for the fourth quarter of 1996.
Noninterest income was $95.3 million in the first quarter of 1997, $69.6
million in the first quarter of 1996 and $114.5 million in the fourth quarter
of 1996. In the first quarter of 1997, banking fees increased $12.4 million
and gain on sale of premises and equipment increased $7.1 million from the
year ago first quarter.
Excluding the impact of the merger-related transaction costs, noninterest
expense in the first quarter of 1997 totaled $244.7 million, compared with
$267.1 million in the first quarter of 1996. Noninterest expense for the
fourth quarter of 1996, excluding the impact of several non-recurring charges
was $260 million. The decrease of $22.4 million from the first quarter of 1996
was due primarily to a decrease in salaries of $11.1 million and a decrease in
FDIC premium of $11.6 million.
HIGHLIGHTS
AT OR FOR THE THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Net interest income..................... $ 338,164 $ 335,011 $ 352,286
Net earnings............................ 65,703 5,132 71,294
Fully diluted earnings per common
share.................................. .44 .01 .47
New loan volume......................... 2,220,312 2,332,117 1,737,885
Real estate loans sold.................. 419,715 475,528 415,750
Return on average assets (annualized)... .61% .05% .65%
Return on average equity (annualized)... 10.06% .79% 10.11%
Interest spread
Yield on interest earning assets...... 7.69% 7.77% 7.94%
Cost of interest bearing liabilities.. 4.56 4.72 4.71
----------- ----------- -----------
Interest spread....................... 3.13% 3.05% 3.23%
=========== =========== ===========
Total assets............................ $42,877,903 $42,874,572 $43,781,931
Stockholders' equity.................... 2,585,070 2,595,200 2,822,132
Stockholders' equity per common share... 17.55 17.63 18.42
Tangible stockholders' equity per common
share.................................. 15.54 15.55 16.13
11
MERGER AGREEMENT WITH WASHINGTON MUTUAL, INC.
On March 6, 1997, Great Western announced that it had entered into a
strategic business combination with Washington Mutual, Inc. ("Washington
Mutual"). The terms of the Agreement and Plan of Merger dated as of March 5,
1997 (the "Merger Agreement") entered into by and between Great Western,
Washington Mutual and New American Capital, Inc., ("NAC"), a wholly-owned
subsidiary of Washington Mutual provide for a tax-free merger (the "Merger")
of Great Western with and into NAC pursuant to which each outstanding share of
Great Western common stock, par value $1.00 per share (the "Common Stock"),
will be converted into 0.9 shares of Washington Mutual common stock, no par
value, with cash being paid in lieu of fractional shares. Each outstanding
share of GWFC 8.30% Preferred Stock will be converted into one share of
Washington Mutual 8.30% Preferred Stock, Series F.
The consummation of the Merger is subject to certain conditions, including
approval by the stockholders of Great Western and Washington Mutual and the
receipt of applicable regulatory approvals. The Board of Directors of Great
Western ("the Board") has fixed June 13, 1997 as the date for the special
meeting of stockholders to vote on the approval and adoption of the Merger
Agreement. The parties expect that the Merger will be consummated in the third
quarter of 1997.
The description of the Merger Agreement above does not purport to be
complete and is qualified in its entirety by reference to the text of the
Merger Agreement, which is filed as an exhibit to the Company's Annual Report
on Form 10-K.
H. F. AHMANSON & COMPANY'S MERGER PROPOSAL
On February 18, 1997, H. F. Ahmanson & Company ("Ahmanson") unilaterally
announced a proposal for a merger between Ahmanson and Great Western pursuant
to which each outstanding share of Common Stock would be converted into 1.05
shares of Ahmanson common stock (the "Original Ahmanson Merger Proposal").
On March 17, 1997, Ahmanson revised the Original Ahmanson Merger Proposal to
provide that the Common Shares would be converted into the right to receive
not less than 1.1 nor more than 1.2 common shares of Ahmanson (as so revised,
the "Ahmanson Merger Proposal"). On March 26, 1997, Great Western announced
that after careful consideration of Ahmanson's request that Great Western
provide information to and engage in negotiations or discussion with Ahmanson,
the Board of Directors of Great Western has unanimously determined not to
authorize such action. The Board also stated its belief that a combination of
Great Western and Washington Mutual will provide Great Western stockholders
with a superior value opportunity and reiterated its commitment to the Merger
as being in the best interest of Great Western's stockholders. On May 12,
1997, Ahmanson publicly announced that it intended to commence an exchange
offer for all of the outstanding shares of Common Stock on the same financial
terms as the Ahmanson Merger Proposal. The Board has not yet reviewed the
terms of Ahmanson's exchange offer as set forth in its May 13, 1997 filing
with the Securities and Exchange Commission. Promptly after its consideration
thereof, the Board will advise Great Western's Stockholders of its position
with respect to the Ahmanson exchange offer.
On March 3, 1997, Ahmanson commenced the Ahmanson consent solicitation (the
"Ahmanson Consent Solicitation") and sought consents from Great Western
stockholders to approve five proposals. That same day, pursuant to Great
Western's Bylaws, the Board fixed March 13, 1997 as the record date for these
five proposals. On March 17, 1997 (concurrently with the announcement of the
Ahmanson Merger Proposal and subsequent to the announcement of the Merger),
Ahmanson withdrew two of the five proposals and commenced a solicitation of
consents for two new proposals (the "New Ahmanson Consent Proposals"), in
addition to proposals 3, 4 and 5 of the Ahmanson Consent Solicitation as
originally commenced. To date, Great Western has not received a request from
Ahmanson to fix a record date with respect to the New Ahmanson Consent
Proposal and accordingly, no such record date has been so fixed. See
"LITIGATION."
12
On April 9, 1997, Ahmanson presented to the Company consents which Ahmanson
claimed represented consents from a majority of the outstanding shares of
Common Stock for adoption of three of the five Ahmanson proposals. One of the
proposals for which Ahmanson presented consents would amend the Company's By-
laws to require that the Company's annual meeting of stockholders (the "Annual
Meeting") be held on the fourth Tuesday in April or within two weeks thereof
(the "Annual Meeting By-laws"). This year, the fourth Tuesday in April was
April 22, 1997 and the fourteenth day thereafter was May 6, 1997. On April 11,
1997, Ahmanson presented to the Company consents which Ahmanson claimed
represented consents from a majority of the outstanding shares of Common Stock
for adoption of one of the two New Ahmanson Consent Proposals.
The consents presented by Ahmanson and the revocations of consent received
by Great Western were turned over to independent inspectors of election. After
the independent inspectors reported the results of their preliminary
tabulation as of April 9 with respect to proposals 3, 4 and 5 of the Ahmanson
Consent Solicitation, which indicated that those proposals had been adopted,
Great Western identified a voting irregularity involving the double voting of
more than five million shares of Common Stock held by a major institutional
stockholder. That stockholder promptly sent a letter to the independent
inspectors stating that 5.2 million of its shares "represent a duplicate vote"
and requesting that such duplicate vote be disregarded. Ahmanson insisted that
the independent inspectors were not authorized to take cognizance of the
letter from the major institutional stockholder and that the shares be counted
twice. The independent inspectors took the positions that they were not
empowered to address the double vote issue. On April 28, 1997, the independent
inspectors certified that Ahmanson had received consents representing a
majority of the outstanding shares of Common Stock with respect to proposal 3,
4 and 5 as of April 9, 1997. On that same day Great Western filed suit in the
Court of Chancery of the State of Delaware seeking an order declaring, among
other things, that there was an overvote entitling the independent inspectors
to consider extrinsic evidence concerning the double-voted shares. See
"LITIGATION." On May 1, 1997, Great Western and Ahmanson each requested that
the independent inspectors retabulate the vote without giving effect to the
double-counted shares and recertify the results of the Ahmanson Consent
Solicitation. On May 5, 1997, the independent inspectors completed a second
tabulation regarding certain of Ahmanson's proposals, certifying that, as of
April 9, 1997, Ahmanson had received consents representing a majority of the
outstanding shares of Common Stock with respect to proposal 3. Also on May 5,
1997, the independent inspector reported on a preliminary basis, and on May
12, 1997, the independent inspectors certified that Ahmanson received
unrevoked consents representing a majority of the outstanding shares of Common
Stock with respect to proposals 4 and 5 as of April 10, 1997.
In light of the dispute between Great Western and Ahmanson as to whether a
record date exists with respect to the New Ahmanson Consent Proposals, the
independent inspectors have not tabulated the results of the solicitation with
respect to such proposals. Under Great Western's Bylaws, any stockholder of
Great Western seeking to have Great Western's stockholders authorize or take
corporate action by written consent must, by written notice to Great Western's
Secretary, request that the Board fix a record date. The Board is then
required, within ten days after the date on which such request is received, to
adopt a resolution fixing the record date. Under Section 213 of the Delaware
General Corporation Law (the "DGCL") and Section 11 of Great Western's Bylaws,
the record date must be within ten days of the date of the resolution fixing
the record date. Ahmanson has never requested the setting of a record date
with respect to the New Ahmanson Consent Proposals. Pursuant to the Company's
Bylaws, a record date will be fixed by the Board upon Ahmanson's written
request that such a date be fixed.
Even though the independent inspectors certified on May 5, 1997 that, as of
April 9, 1997, consents from a majority of the outstanding Common Stock have
been presented to the Company with respect to the Annual Meeting Bylaws, Rule
14a-13 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company to disseminate broker scratch cards at least 20
business days prior to the record date for the Annual Meeting and New York
Stock Exchange rules recommend that a listed company, such as Great Western,
allow a minimum of 30 days from the record date to the stockholder meeting
date for the solicitation of proxies. Therefore, in light of the relevant
timing constraints, rules and regulations governing the Company and practical
considerations relating to the time required for dissemination of proxy
materials to beneficial owners of shares of Common Stock, the time required
for the solicitation of proxies as well as the time necessary
13
to permit meaningful deliberation by holders of shares of Common Stock and the
return of proxies by both record and beneficial owners of shares of Common
Stock, on April 10, 1997 the Board scheduled the Annual Meeting for June 13,
1997 and fixed May 9, 1997 as the record date for holders of shares of Common
Stock entitled to receive notice of and to vote at the Annual Meeting. On
April 9, 1997, Ahmanson filed a Complaint in the Court of Chancery of the
State of Delaware seeking an order compelling Great Western to hold the Annual
Meeting on or before May 6, 1997. See "LITIGATION." On May 8, 1997, Ahmanson
publicly announced that it would no longer seek to advance the date of the
Annual Meeting.
Ahmanson has also indicated its intent to solicit proxies in connection with
the Annual Meeting. In that proxy solicitation, Ahmanson intends to seek to
elect three directors nominated by Ahmanson to the Board and to have
additional amendments to Great Western's Bylaws adopted.
14
LITIGATION
On February 18, 1997, Ahmanson filed a Verified Complaint for Declaratory
and Injunctive Relief against Great Western and its directors (the "Ahmanson
Complaint") in the Court of Chancery of the State of Delaware. The Ahmanson
Complaint alleges, among other things, that: (i) the defendants have breached
their fiduciary duties with respect to the Great Western's rights plan (the
"Great Western Rights Plan"); (ii) the adoption of any defensive measure by
the defendants which has the effect of impeding, thwarting, frustrating or
interfering with the Ahmanson Merger Proposal would constitute a breach of the
defendants' fiduciary duties; and (iii) the individual directors of Great
Western have breached their fiduciary duties with respect to Section 203 of
the DGCL (the "Delaware Business Combination Statute").
Ahmanson seeks declaratory and injunctive relief as follows: (i) an order
enjoining the defendants from adopting any defensive measure which has the
effect of impeding, thwarting, frustrating or interfering with the Ahmanson
Merger Proposal; (ii) an order compelling the defendants to redeem the rights
associated with the Great Western Rights Plan or to amend the Great Western
Rights Plan so as to make it inapplicable to the Ahmanson Merger Proposal;
(iii) an order enjoining the defendants from taking any action pursuant to the
Great Western Rights Plan that would dilute or interfere with Ahmanson's
voting rights or otherwise discriminate against Ahmanson; (iv) an order
compelling the defendants to approve the Ahmanson Merger Proposal for the
purposes of the Delaware Business Combination Statute; (v) an order enjoining
the defendants from taking any action to enforce or apply the Delaware
Business Combination Statute that would impede, thwart, frustrate or interfere
with the Ahmanson Merger Proposal; and (vi) an order awarding Ahmanson its
costs and expenses in the action.
On February 26, 1997, Great Western and the individual defendants filed
their Answer, and Affirmative Defenses to the Ahmanson Complaint and Great
Western filed its and the individual defendants' Counterclaims to the Ahmanson
Complaint. In the Answer, Great Western and the individual defendants denied
all of the material allegations raised by the Ahmanson Complaint and asserted
affirmative defenses, including that: (i) the Ahmanson Complaint fails to
state a claim on which relief can be granted; and (ii) Ahmanson is acting in
its own self interest at the expense of Great Western and its stockholders and
thus comes to Court with unclean hands. In its Counterclaims to the Ahmanson
Complaint, Great Western seeks, among other things, declaratory and injunctive
relief, including dismissal of the Ahmanson Complaint with prejudice and
denial of the relief requested by Ahmanson. Ahmanson and Great Western have
commenced discovery. Great Western and Ahmanson are currently in the process
of responding to reciprocal requests for documents.
Between February 18, 1997 and February 26, 1997, six complaints (the
"Complaints") were filed against Great Western and its directors in the Court
of Chancery of the State of Delaware by Fred T. Isquith, Harry Lewis, Bernard
Bildstein, Charles Uttenreither, Melvyn Zupnick and Emil Schachter. Each
action was brought on behalf of the plaintiff, individually, and as a
purported class action on behalf of all stockholders of Great Western. The
Complaints allege, among other things, that the defendants are violating their
fiduciary duties owed to the stockholders of Great Western with respect to the
Ahmanson Merger Proposal. The plaintiffs generally seek: (i) an order
declaring that the action may be maintained as a class action; (ii) an order
preliminarily and permanently enjoining the defendants to consider and
negotiate with respect to all bona fide offers or proposals for Great Western
or its assets, in the best interests of Great Western stockholders; and (iii)
compensatory damages, the costs and disbursements of the action and such other
and further relief as may be just and proper. In addition, certain plaintiffs
seek judgments ordering Great Western's directors, individually, to announce
their intention with respect to certain matters relating to the Ahmanson
Merger Proposal. Great Western and its directors deny the operative
allegations of the Complaints and will file responses thereto as appropriate;
however, answers have not been filed.
On March 7, 1997, Ahmanson filed a Motion for Leave to File Amended and
Supplemental Complaint against Great Western and its directors (the "Ahmanson
Supplemental Complaint") in the Court of Chancery of the State of Delaware. In
addition to the allegations made in the Ahmanson Complaint, the Ahmanson
Supplemental Complaint further alleges, among other things, that: (i) the
defendants have failed to create a level playing field by discriminatorily
favoring other potential bidders to the exclusion of Ahmanson and by entering
15
into the Merger Agreement; (ii) the defendants have actively and unlawfully
sought to thwart its stockholders from exercising certain of their rights for
the purpose of entrenchment; (iii) the defendants have failed to find the best
value reasonably available; and (iv) the defendants have irreparably harmed
Ahmanson by depriving it of the unique opportunity to acquire Great Western.
Consequently, Ahmanson seeks additional declaratory and injunctive relief
enjoining Great Western and the individual defendants from, among other
things, discriminating against Ahmanson, delaying Great Western's annual
meeting of stockholders, or taking steps to consummate the Merger or other
transactions with Washington Mutual.
On March 14, 1997, a complaint (an "Additional Complaint") was filed against
Great Western and its directors in the Court of Chancery of the State of
Delaware by Marcel Ullman and Joseph Sonnenberg. The Additional Complaint was
brought on behalf of the plaintiffs, individually, and as a purported class
action on behalf of all stockholders of Great Western. The Additional
Complaint alleges, among other things, that the defendants are violating their
fiduciary duties owed to the stockholders of Great Western by failing to hold
an open and fair auction of Great Western, failing to negotiate the
acquisition of Great Western with all interested parties, and failing to
provide a level playing field through the use of a termination fee in the
Merger Agreement and employment of a "poison pill." The plaintiffs generally
seek: (i) an order declaring that the action may be maintained as a class
action; (ii) an order that the defendants carry out their fiduciary duties and
requiring them to respond in good faith to all bona fide potential acquirors
of Great Western; (iii) an order preliminarily and permanently enjoining
implementation of Great Western's poison pill; (iv) an order rescinding the
severance agreements to be paid to the defendants and the termination fee to
be made to Washington Mutual; and (v) the costs and disbursements of the
action and such other and further relief as may be just and proper. Great
Western and its directors deny the operative allegations of the Additional
Complaint; however, an answer has not yet been filed.
On March 18, 1997, Fred T. Isquith, Harris Lewis, Bernard Bildstein, Charles
Uttenreither and Emil Schachter filed an Amended Class Action Complaint
against Great Western and its directors in the Court of Chancery of the State
of Delaware (the "Amended Class Action Complaint"). The Amended Class Action
Complaint alleges, among other things, that: (i) the individual defendants are
violating their fiduciary duties owed to plaintiffs and other members of the
class with respect to the Ahmanson Merger Proposal; (ii) the individual
defendants have violated their fiduciary duties with respect to certain
actions taken in connection with the proposed merger between Great Western and
Washington Mutual; and (iii) the individual defendants are acting to entrench
themselves by favoring Washington Mutual at the expense and to the detriment
of the public stockholders of Great Western. The plaintiffs seek judgments:
(i) declaring that the action is a proper class action and certifying
plaintiffs as class representatives; (ii) ordering the individual defendants
to announce their intention with respect to certain matters relating to, among
other things, the maximization of stockholders value and the employment of the
Great Western Rights Plan; (iii) enjoining any transaction between Great
Western and Washington Mutual which does not maximize stockholder value; (iv)
declaring the approval of the fee to be paid to Washington Mutual in the event
that the Merger Agreement is terminated to be a breach of fiduciary duty and
rescinding it; (v) ordering the individual defendants, jointly and severally,
to account to plaintiffs and the class for all damages suffered as a result of
the acts and transactions alleged in the Amended Class Action Complaint; and
(vi) awarding plaintiffs the costs and disbursements of the action and
granting such other and further relief as may be just and proper. Great
Western and its directors deny the operative allegations of the Amended Class
Action Complaint; however, an answer has not yet been filed.
On March 21, 1997, Ahmanson filed a second Motion for Leave to File Amended
and Supplemental Complaint against Great Western and its directors (the
"Ahmanson Second Supplemental Complaint") in the Court of Chancery of the
State of Delaware and on April 14, 1997, pursuant to a stipulation among the
parties, Ahmanson filed the Ahmanson Second Supplemental Complaint. In
addition to the allegations made in the Ahmanson Complaint and the Ahmanson
Supplemental Complaint, the Ahmanson Second Supplemental Complaint further
alleges, among other things, that (i) Great Western is attempting to impede
Ahmanson's solicitation of consents by not recognizing March 13, 1997 as the
record date for Ahmanson's solicitation of consents for the New Ahmanson
Proposals; and (ii) Great Western has failed to make full disclosure of
matters
16
relating to the availability of the pooling of interests method of accounting
for the Merger. Consequently, Ahmanson seeks additional declaratory and
injunctive relief compelling Great Western and the individual defendants to,
among other things, (i) recognize March 13, 1997 as the record date for
Ahmanson's solicitation of consents for the New Ahmanson Proposals and (ii)
disclose certain information that Ahmanson alleges relates to the availability
of pooling of interests accounting for the Merger.
On April 9, 1997, Ahmanson filed a Complaint against Great Western pursuant
to Section 225 of the DGCL (the "225 Complaint") in the Court of Chancery of
the State of Delaware. The 225 Complaint alleges, among other things, that
written consents executed by the record holders of a majority of the Common
Stock outstanding on March 13, 1997 were delivered to Great Western on April
9, 1997 that were effective at the time of delivery to adopt the Annual
Meeting Bylaw. Ahmanson seeks an order (i) declaring that the Annual Meeting
Bylaw was duly and validly adopted on April 9, 1997; and (ii) compelling Great
Western to hold its Annual Meeting on or before May 6, 1997.
On April 11, 1997, Ahmanson filed an Amended Complaint against Great Western
and, additionally, its directors (the "Amended 225 Complaint") in the Court of
Chancery of the State of Delaware. In addition to the allegations made in the
225 Complaint, the Amended 225 Complaint alleges, among other things, that:
(i) the Annual Meeting Bylaw was effective at the time the consents were
delivered; and (ii) by their actions in announcing a May 9, 1997 record date
and setting a meeting for election of directors for June 13, 1997,
Great Western's directors violated the Annual Meeting Bylaw and the provision
of Great Western's Bylaws regarding special meetings, thereby breaching their
fiduciary duties. In addition to the relief sought in the 225 Complaint,
Ahmanson seeks an order enjoining Great Western from scheduling or holding any
vote on any proposed transaction, including but not limited to the Merger,
prior to two weeks following the certification of the election of directors.
On April 18, 1997, Ahmanson filed a Motion for Leave to File a Second
Amended Complaint against Great Western and its directors (the "Second Amended
225 Complaint") in the Court of Chancery of the State of Delaware. In addition
to the allegations made in the 225 Complaint and the Amended 225 Complaint,
the Second Amended 225 Complaint further alleged, among other things, that the
Great Western directors breached their fiduciary duties and engaged in
"unlawful manipulation of the corporate machinery" by changing the date of the
Annual Meeting. Consequently, Ahmanson seeks additional injunctive relief
enjoining Great Western from scheduling or holding any vote on any proposed
transaction, including but not limited to the Merger, for a "reasonable time"
following the election of directors and enjoining Great Western from failing
to comply with Great Western's By-laws regarding special meetings.
On April 25, 1997, the Court of Chancery of the State of Delaware (i)
granted, in part, Great Western and its directors' April 16, 1997 Motion to
Dismiss and for a Protective Order by dismissing, insofar as it sought
injunctive relief before the date of the Annual Meeting, Ahmanson's claim in
the Second Amended 225 Complaint that the Great Western directors breached
their fiduciary duties by manipulating the corporate machinery, and (ii)
ordered limited discovery concerning the scheduling of the Annual Meeting for
June 13, 1997.
On April 28, 1997, Great Western filed a Complaint for Declaratory and
Injunctive Relief against Ahmanson in the Court of Chancery of the State of
Delaware and on April 29, 1997, Great Western filed an Amended Complaint for
Declaratory Relief against Ahmanson (the "Amended Great Western Complaint") in
the Court of Chancery of the State of Delaware. The Amended Great Western
Complaint alleges, among other things, that an approximately 5.2 million share
double vote occurred in connection with the Ahmanson Consent Solicitation
resulting in a substantial overvote, that certain revocations and abstentions
were not properly given effect and that certain Ahmanson consent cards
indicating consent to one or more but not all of the proposals for which
Ahmanson was soliciting consents were improperly counted as having consented
to all of such proposals. Great Western seeks, among other things, an order
declaring that there was an overvote entitling the independent inspectors of
election to consider extrinsic evidence concerning the duplicate vote of
approximately 5.2 million shares, that the revocations and abstentions at
issue revoked previously given consents and that the Ahmanson
17
consent cards as to which one or more but not all proposals were consented to
constitute consent only as to the specific proposals marked. On May 1, 1997,
Great Western and Ahmanson each requested that the independent inspectors
retabulate the vote without giving effect to the double-counted shares and
recertify the results of the Ahmanson Consent Solicitation.
On May 1, 1997, Fred T. Isquith, Harry Lewis, Bernard Bildstein, Charles
Uttenreither, and Emil Schachter filed a Motion for Leave to File Second
Amended Class Action Complaint against Great Western and its directors in the
Court of Chancery of the State of Delaware (the "Second Amended Class Action
Complaint"). The Second Amended Class Action Complaint further alleges, among
other things, that the defendants are: (i) violating their fiduciary duties by
wrongfully manipulating the proxy solicitation machinery; (ii) failing to
timely call a stockholder meeting in contravention of Great Western's By-laws;
and (iii) interfering with and delaying the consideration of a slate of
directors proposed by Ahmanson for election to the Board. Consequently, the
plaintiffs seek additional relief including, among other things: (i) an order
that the Board refrain from taking any action which impedes or interferes with
the voting rights of Great Western stockholders; and (ii) an order that the
Board schedule a stockholder meeting to elect directors on May 6, 1997 or as
soon thereafter as practicable. The parties have agreed to initiate discovery
on a limited basis.
On May 6, 1997, Great Western and the individual defendants filed their
Answer and Affirmative Defenses to the Ahmanson Second Supplemental Complaint.
In the answer, the defendants denied all of the material allegations raised by
the Ahmanson Second Supplemental Complaint and asserted affirmative defenses,
including that: (i) the Ahmanson Second Supplemental Complaint fails to state
a claim on which relief can be granted; (ii) Ahmanson is acting in its own
self interest at the expense of Great Western and its stockholders and thus
comes to the Court with unclean hands; and (iii) Ahmanson's claims are not
ripe.
On May 7, 1997, Great Western and the individual defendants filed their
Answer and Affirmative Defenses to the Ahmanson Second Amended 225 Complaint
and asserted affirmative defenses, including that: (i) the Ahmanson Second
Amended 225 Complaint fails to state a claim on which relief can be granted;
(ii) that Ahmanson is acting in its own self interest at the expense of Great
Western and its stockholders and thus comes to the Court with unclean hands
and (iii) Ahmanson's claims are not ripe.
On May 8, 1997, Ahmanson submitted a letter (the "May 8 Letter") to the
Court of Chancery of the State of Delaware relating to its claims in the
Second Amended 225 Complaint. In the May 8 Letter, Ahmanson (i) states that it
is no longer seeking to advance the Annual Meeting forward from June 13, 1997,
and (ii) requests that the Court require that the separate special meeting of
stockholders of Great Western at which the Merger will be voted upon occur no
earlier than six weeks after certification of the results of the Annual
Meeting.
On May 13, 1997, Ahmanson filed a motion with the Court of Chancery of the
State of Delaware seeking to require a six-week gap between the certification
of results of the election of directors at the Annual Meeting and the vote by
the stockholders of Great Western on the Merger. The Court has agreed to hear
such motion on May 30, 1997.
Great Western and its directors intend to vigorously defend the claims in
the Ahmanson Complaint, the Ahmanson Supplemental Complaint, the Complaints
and the Additional Complaint, the Amended Class Action Complaint, the Ahmanson
Second Supplemental Complaint, the 225 Complaint, the Amended 225 Complaint,
the Second Amended 225 Complaint and the Second Amended Class Action
Complaint.
18
LINE OF BUSINESS
Great Western Financial Corporation is managed along four major lines of
business: Consumer Finance, Real Estate Services, Retail Banking and Treasury.
The financial performance of these business lines is measured by the Company's
profitability reporting system. The system uses various management accounting
principles to ensure each business line's financial results reflect the
underlying economics of that business.
To properly assess the profitability of each business unit, charges for
funds employed and credits for funds generated are assigned on a matched
maturity basis to minimize interest-rate risk in the business line and
centralize that exposure in the Treasury unit where it is managed for the
Company as a whole. Expenses incurred in the Company's support units are
assigned to business lines based on services provided to a particular business
unit. Residual expenses, assets employed and other overhead costs are
allocated based on the ratio of a business unit's noninterest expense to the
Company total noninterest expense. Loss provision and capital are allocated
based on management's assessment of the risk profile of each business line.
Finally, loans originated in the Real Estate unit are purchased by the
Treasury unit at a transfer price that reflects the risk-adjusted value of the
loans.
Since there is no authoritative guidance for management accounting
principles, the organizational structure of the institution and the allocation
methodologies it employs result in business line financial results that are
not necessarily comparable across companies. As such, Great Western's business
line performance may not be directly comparable with similar information from
other financial institutions. Results by line of business for the three months
ended March 31, 1997 and March 31, 1996 are presented below:
SELECTED FINANCIAL HIGHLIGHTS BY LINE OF BUSINESS
Results of line of business for the quarters ended March 31, 1997 and March
31, 1996 are presented below.
REAL ESTATE
CONSUMER FINANCE SERVICES RETAIL BANKING TREASURY CONSOLIDATED
------------------ -------------- -------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
INCOME STATEMENT:
Net interest income.... $ 61.9 $ 67.2 $ 10.7 $ 4.5 $ 128.9 $ 158.4 $ 136.6 $ 122.3 $ 338.1 $ 352.4
Provision for loan and
lease losses.......... 15.4 14.5 - - 0.2 0.5 24.8 21.0 40.4 36.0
Net interest income
after provision....... 46.5 52.7 10.7 4.5 128.7 157.9 111.8 101.3 297.7 316.4
Noninterest income..... 6.1 6.6 76.6 55.0 69.2 49.6 (56.5) (41.6) 95.4 69.6
Noninterest expense.... 35.2 36.0 51.8 58.1 154.3 170.3 3.4 2.7 244.7 267.1
Merger expense......... - - 10.9 - 21.8 - 1.0 - 33.7 -
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Income before tax....... 17.4 23.3 24.6 1.4 21.8 37.2 50.9 57.0 114.7 118.9
Tax.................... 7.1 9.2 10.6 0.6 9.4 14.9 21.9 22.9 49.0 47.6
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Net income.............. $ 10.3 $ 14.1 $ 14.0 $ 0.8 $ 12.4 $ 22.3 $ 29.0 $ 34.1 $ 65.7 $ 71.3
======== ======== ====== ====== ========= ========= ========= ========= ========= =========
AVERAGE BALANCE SHEET
DATA:
Real estate loans....... $ - $ - $ - $ - $ - $ - $28,825.0 $27,662.8 $28,825.0 $27,662.8
Consumer loans.......... 2,171.4 2,102.5 - - 241.9 540.0 - - 2,413.3 2,642.5
Net loans and leases.... 2,171.4 2,102.5 - - 241.9 540.0 28,825.0 27,662.8 31,238.3 30,305.3
Assets.................. 2,446.3 2,337.5 297.1 365.8 1,411.6 1,883.6 38,694.9 39,462.7 42,849.9 44,049.7
Deposits................ 194.0 160.8 - - 28,072.4 28,938.6 21.2 149.2 28,287.6 29,248.6
Equity.................. 384.8 498.4 425.6 329.5 1,025.9 1,524.5 775.4 467.3 2,611.7 2,819.7
PERFORMANCE METRICS
Return on average
equity................. 10.67% 11.26% 13.13% 1.01% 4.84% 5.84% 14.98% 29.25% 10.06% 10.11%
Efficiency ratio........ 51.80% 48.85% 71.89% 97.67% 88.87% 81.88% 5.49% 3.32% 64.22% 63.31%
PERFORMANCE METRICS
(EXCLUDING MERGER
EXPENSE OF $33.7
MILLION)
Return on average
equity................. 10.67% - 16.81% - 7.88% - 15.17% - 11.91% -
Efficiency ratio........ 51.80% - 59.37% - 77.88% - 4.20% - 56.44% -
CONSUMER FINANCE
The Consumer Finance line of business is made up of Blazer Financial
Services, City Finance Company, First Community Industrial Bank and Great
Western Thrift & Loan. These companies offer retail installment financing
primarily in the Southeast and Southwest areas of the United States.
19
REAL ESTATE SERVICES
The Real Estate Services line of business houses the Company's residential
mortgage origination and loan servicing businesses. Loans are originated in
Great Western's nationwide retail lending offices and through the Company's
wholesale origination function. Fixed rate loans are typically sold in the
secondary market and adjustable loans are primarily transferred to the
Treasury line of business for portfolio investment.
RETAIL BANKING
The Retail Banking line of business includes Great Western's branch banking
franchise, direct banking business and diversified retail businesses including
Sierra Capital Management and Great Western Financial Securities Corporation.
Also in this business unit are Great Western's business banking and consumer
lending functions which figure prominently in the Company's evolution into a
full service bank.
TREASURY
The Treasury line of business houses the Company's mortgage loan and
investment securities portfolios and meets the wholesale funding needs of the
Company. Additionally, the Treasury function is responsible for hedging the
Company's interest rate risk and as such, houses the funds transfer pricing
mismatch unit. The mismatch unit is counterparty to the internal charges and
credits for funds received by each of the other business lines.
20
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income was $338.2 million in the first quarter of 1997 compared
with $352.3 million in the first quarter of 1996 and $335 million in the
fourth quarter of 1996. The interest spread increased in the first quarter of
1997 due to lower rates paid on deposits and borrowings, partially offset by
lower rates on real estate and consumer loans. During the three months ended
December 31, 1996 the interest spread was reduced primarily due to higher
rates on borrowings and lower yields on real estate and Consumer
Finance loans. For the three months ended March 31, 1996, the interest spread
benefitted by approximately 9 basis points from the interest rate lag on ARM
loans. The interest spread decreases in an increasing interest-rate
environment as increases in COFI, to which most interest earning assets are
tied, lag behind deposit and borrowing rate increases. The Company's net
interest margin was 3.32% for the three months ended March 31, 1997 compared
with 3.39% for the same period a year ago. The Company's net interest margin
was 3.25% for the three months ended December 31, 1996.
The following tables of net interest income displays the average balances,
interest income and expense and average rates by asset and liability component
for the periods indicated:
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- -------- ---------- ----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
Earning Assets
Repurchase agreements
and federal funds..... $ 451,154 $ 5,983 5.30% $ 321,186 $ 4,570 5.69% $ 350,984 $ 4,777 5.44%
Securities available-
for-sale.............. 965,101 14,737 6.11 1,058,937 16,325 6.17 951,735 14,631 6.15
Mortgage-backed
securities............ 7,624,849 138,577 7.27 8,058,016 143,369 7.12 9,610,728 174,026 7.24
Loans
Real estate.......... 28,825,042 521,689 7.24 28,696,621 522,365 7.28 27,662,772 521,110 7.54
Consumer Finance..... 2,171,358 91,205 16.80 2,144,796 93,973 17.53 2,102,546 93,888 17.86
Other................ 241,872 4,178 6.91 499,578 12,359 9.90 540,020 10,852 8.04
----------- -------- ----- ----------- -------- ----- ----------- -------- -----
Total loans........ 31,238,272 617,072 7.90 31,340,995 628,697 8.02 30,305,338 625,850 8.26
Other.................. 510,510 7,889 6.18 504,953 8,586 6.80 332,512 5,644 6.79
----------- -------- ----- ----------- -------- ----- ----------- -------- -----
Total earning
assets............ 40,789,886 784,258 7.69 41,284,087 801,547 7.77 41,551,297 824,928 7.94
Other assets............ 2,060,102 2,022,416 2,498,365
----------- ----------- -----------
Total assets....... 42,849,988 43,306,503 44,049,662
=========== =========== ===========
Interest Bearing
Liabilities
Deposits
Checking............. 4,276,095 6,613 0.62 4,395,367 7,875 0.72 4,457,642 8,522 0.76
Money market and
other savings....... 7,103,560 56,723 3.19 6,621,412 52,906 3.20 6,553,877 46,542 2.84
Term................. 16,685,904 216,139 5.18 17,556,719 231,778 5.28 17,790,521 244,175 5.49
Wholesale............ 222,059 301 0.54 213,685 628 1.18 446,566 3,765 3.37
----------- -------- ----- ----------- -------- ----- ----------- -------- -----
Total deposits..... 28,287,618 279,776 3.96 28,787,183 293,187 4.07 29,248,606 303,004 4.14
Borrowings
Short-term borrowings
from FHLB........... 1,454,875 20,050 5.51 1,441,553 20,773 5.76 1,052,974 14,613 5.55
Securities sold under
repurchase
agreements.......... 4,713,046 64,078 5.44 4,815,685 67,234 5.58 6,193,162 84,558 5.46
Short-term
borrowings.......... 1,186,580 15,905 5.36 1,320,154 17,731 5.37 1,155,897 17,168 5.94
Long-term
borrowings(1)....... 3,462,799 66,285 7.66 3,210,625 67,611 8.42 2,520,769 53,299 8.46
----------- -------- ----- ----------- -------- ----- ----------- -------- -----
Total borrowings... 10,817,300 166,318 6.15 10,788,017 173,349 6.43 10,922,802 169,638 6.21
----------- -------- ----- ----------- -------- ----- ----------- -------- -----
Total interest
bearing
liabilities....... 39,104,918 446,094 4.56 39,575,200 466,536 4.72 40,171,408 472,642 4.71
Other liabilities....... 1,133,372 1,095,014 1,058,560
Stockholders' equity.... 2,611,698 2,636,289 2,819,694
----------- ----------- -----------
Total liabilities
and equity........ $42,849,988 $43,306,503 $44,049,662
=========== =========== ===========
Interest spread......... 3.13% 3.05% 3.23%
===== ===== =====
Effective yield
Interest income/total
earning assets........ $40,789,886 $784,258 7.69% $41,284,087 $801,547 7.77% $41,551,297 $824,928 7.94%
Interest expense/total
earning assets........ 40,789,886 446,094 4.37 41,284,087 466,536 4.52 41,551,297 472,642 4.55
-------- ----- -------- ----- -------- -----
Net interest income/net
interest margin........ $338,164 3.32% $335,011 3.25% $352,286 3.39%
======== ===== ======== ===== ======== =====
- -------
(1) Includes an average balance of $316,129 of guaranteed preferred beneficial
interest in Company subordinated notes at March 31, 1997 and $100,000 at
December 31, 1996 and March 31, 1996.
The average balance of loans 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 decreased to
$7.3 million for the quarter ended March 31, 1997 compared with $8.9 million
for the quarter ended March 31, 1996. For the quarter ended December 31, 1996,
interest foregone on nonaccrual loans was $9 million.
21
The following table shows the components of the change in net interest
income for the quarters ended March 31, 1997, 1996 and 1995.
THREE MONTHS ENDED MARCH 31
---------------------------------
1997 VS 1996 1996 VS 1995
-------------- -------------
(DOLLARS IN MILLIONS)
Repurchase agreements and federal funds
Rate(1).............................. $ - $ -
Volume(2)............................ 1 1
Rate/Volume(3)....................... - -
-------------- -------------
1 1
-------------- -------------
Securities available-for-sale
Rate(1).............................. - -
Volume(2)............................ - 2
Rate/Volume(3)....................... - -
-------------- -------------
- 2
-------------- -------------
Mortgage-backed securities
Rate(1).............................. 1 13
Volume(2)............................ (36) (10)
Rate/Volume(3)....................... - (1)
-------------- -------------
(35) 2
-------------- -------------
Real estate loans
Rate(1).............................. (20) 32
Volume(2)............................ 22 23
Rate/Volume(3)....................... (1) 1
-------------- -------------
1 56
-------------- -------------
Consumer Finance
Rate(1).............................. (6) (2)
Volume(2)............................ 3 6
Rate/Volume(3)....................... - -
-------------- -------------
(3) 4
-------------- -------------
Other loans
Rate(1).............................. (1) (2)
Volume(2)............................ (6) 6
Rate/Volume(3)....................... 1 -
-------------- -------------
(6) 4
-------------- -------------
Other assets
Rate(1).............................. (1) 1
Volume(2)............................ 3 (1)
Rate/Volume(3)....................... - -
-------------- -------------
2 -
-------------- -------------
Interest earning assets
Rate................................. (27) 45
Volume............................... (13) 23
Rate/Volume.......................... - -
-------------- -------------
(40) 68
-------------- -------------
Deposits
Rate(1).............................. (13) 21
Volume(2)............................ (13) 3
Rate/Volume(3)....................... 3 -
-------------- -------------
(23) 24
-------------- -------------
Borrowings
Rate(1).............................. (7) (10)
Volume(2)............................ 6 9
Rate/Volume(3)....................... (2) -
-------------- -------------
(3) (1)
-------------- -------------
Interest bearing liabilities
Rate................................. (20) 11
Volume............................... (7) 12
Rate/Volume.......................... 1 -
-------------- -------------
(26) 23
-------------- -------------
Change in net interest income.......... $ (14) $ 45
============== =============
- --------
(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 are included in their respective loan categories.
Amortized net deferred loan fees are included in the interest income
calculations. The amortization of net deferred loan fees was $4 million,
$6.1 million and $10.8 million for the three months ended March 31, 1997,
March 31, 1996 and March 31, 1995, respectively.
22
NONINTEREST INCOME
Income from noninterest sources for the three months ended March 31, 1997,
1996 and December 31, 1996 were as follows:
THREE MONTHS ENDED
--------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
Retail banking fees
NSF and overdraft protection................ $27,686 $ 23,177 $15,334
Service charges-checking accounts........... 11,079 11,129 9,007
ATM transaction fees........................ 7,808 7,489 7,036
Other banking fees.......................... 7,460 8,927 10,287
------- -------- -------
Total banking fees........................ 54,033 50,722 41,664
------- -------- -------
Servicing fees................................ 12,317 13,304 11,453
Real estate fees.............................. 7,989 8,301 6,460
Securities operations
Brokerage................................... 6,014 5,598 3,521
Mutual fund asset management................ 1,762 2,448 2,689
------- -------- -------
Total securities operations............... 7,776 8,046 6,210
------- -------- -------
Gain (loss) on sale of premises and equipment. 6,931 391 (205)
Net insurance operations...................... 6,838 7,969 7,365
Net gain on sale of mortgages................. 1,742 1,683 2,898
Gain (loss) on sale of mortgage-backed
securities available-for-sale................ (10) 10,186 (566)
Write-downs of mortgage-backed securities..... (4,200) (11,592) (6,079)
Gain on sale of leases........................ 716 - 539
Net gain on sale of student loans............. 669 22,960 109
Loss on affordable housing investment......... (605) (1,308) (965)
Other......................................... 1,128 3,825 746
------- -------- -------
$95,324 $114,487 $69,629
======= ======== =======
Retail banking fee income increased to $54 million in the three months ended
March 31, 1997 from $41.7 million in the three months ended March 31, 1996, an
increase of 30%. The increase was due to a $12.4 million increase in NSF and
overdraft protection and due to expanded use of fee-based products and more
active management of fee collection.
Servicing fees totaled $12.3 million for the three months ended March 31,
1997 compared with $11.5 million for the three months ended March 31, 1996. At
March 31, 1997, the servicing spread was 43 basis points on the $11.5 billion
average servicing portfolio compared with a servicing spread of 41 basis
points on an $11.1 billion average servicing portfolio at March 31, 1996. As a
result of the implementation of SFAS 125 during the first quarter of 1997, the
Company identified and recorded impairment on the mortgage servicing asset and
liability in the amount of $28,000 and $1.1 million, respectively.
Real estate fees were $8 million in the first three months of 1997 compared
with $6.5 million for the same period of 1996 and $8.3 million in the fourth
quarter of 1996. Loan prepayment fees included in real estate fees were
$777,000 in the first quarter of this year compared with $502,000 in the first
quarter of 1996 and $578,000 in the fourth quarter of 1996.
Income from brokerage operations was $6 million during the first quarter of
1997 compared to $3.5 million in the first quarter of 1996 and $5.6 million in
the fourth quarter of 1996. The $2.5 million increase in income from the first
quarter of 1996 was due to increased sales volume in annuities and non-
proprietary mutual funds.
23
Income from mutual fund asset management was $1.8 million in the three
months ended March 31, 1997 compared with $2.7 million in the same period of
1996 and $2.4 million in the fourth quarter of 1996. The decrease was due
primarily to lower sales volume. The Company managed mutual funds with assets
aggregating $3.1 billion at March 31, 1997 compared with $3.4 billion at March
31, 1996.
Gain (loss) on sale of premises and equipment was $6.9 million in the first
quarter of 1997, ($205,000) in the first quarter of 1996 and $391,000 in the
fourth quarter of 1996. The gain during the first quarter of 1997 included a
$4.2 million gain on sale of corporate property and a $2.7 million gain on
sale of equipment.
During 1996, the Company changed its methodology to record losses on loans
underlying mortgage-backed securities as a write-down on the security rather
than as a charge against the allowance for loan and lease losses. On May 9,
1997, the Company amended its 1996 Form 10-K to reflect the reclassification
of these prior period charge-offs against the allowance to write-downs on the
mortgage-backed securities. For the first three months of 1997, $4.2 million
was recorded to reflect impairment in the mortgage-backed securities
portfolio, $6.1 million in the first quarter of 1996 and $11.6 million in the
fourth quarter of 1996.
During the fourth quarter of 1996, the Company sold its student loan
business to Crestar Bank for $386.6 million. The Company sold a portfolio of
$356.6 million of loans and, after expenses and costs, realized a gain of
$22.5 million on the sale. At December 31, 1996, there was a balance of
student loans remaining of $21.5 million. These loans have been aggressively
marketed for sale, and as of March 31, 1997 the remaining balance in this
portfolio was $2.2 million.
Gain on sales of mortgages and mortgage-backed securities available-for-sale
were comprised of:
FOR THE THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
-------------- ----------------- ---------------
MORTGAGES MBS MORTGAGES MBS MORTGAGES MBS
--------- ---- --------- ------- --------- -----
(DOLLARS IN THOUSANDS)
Mortgage servicing spread.. $ 4,800 $ - $ 1,145 $13,530 $ 2,947 $ -
Premiums (discounts), net.. (2,942) (10) (1,024) (3,344) (1,591) -
Deferred loan fees......... (57) - 1,077 - 2,142 -
Gain on servicing.......... 1,082 - 456 - 432 -
Adjust to lower of cost or
market.................... (1,156) - 85 - (930) -
Net hedging gains.......... 125 - - - - -
Miscellaneous fees......... (110) - (56) - (102) -
Other...................... - - - - - (566)
------- ---- ------- ------- ------- -----
$ 1,742 $(10) $ 1,683 $10,186 $ 2,898 $(566)
======= ==== ======= ======= ======= =====
The net gain on sale of mortgages was $1.7 million in the first quarter of
1997, $2.9 million in the first quarter of 1996 and $1.7 million in the fourth
quarter of 1996. Mortgage sales during the first quarter, primarily fixed-
rate, totaled $419.7 million at a gain of .42% of the portfolio sold, compared
to $415.7 million in the first quarter of 1996 at a gain of .70% of the
portfolio sold and $475.5 million in the fourth quarter of 1996 at a gain of
.35% of the portfolio sold. The decline in the gain as a percentage of the
portfolio sold is due to the prevailing market conditions at the time of the
sale. In conjunction with the sales of mortgages, capitalized servicing rights
of $4.8 million were recorded in the first quarter of 1997, $2.9 million in
the first quarter of 1996, and $1.1 million in the fourth quarter of 1996.
Loss on sale of mortgage-backed securities available-for-sale was $10,000 in
the first quarter of 1997 compared to a $10.2 million gain in the fourth
quarter of 1996. Sales of mortgage-backed securities available-for-sale were
$997,000 in the first quarter of 1997 compared with $557.7 million in the
fourth quarter of 1996. No sales of mortgage-backed securities available-for-
sale occurred in the first quarter of 1996.
24
NONINTEREST EXPENSE
Noninterest expenses were as follows:
THREE MONTHS ENDED
-------------------------------
MARCH DECEMBER 31, MARCH
31, 1997 1996 31, 1996
-------- ------------ --------
(DOLLARS IN THOUSANDS)
Salaries and benefits
Salaries..................................... $ 85,624 $ 84,371 $ 92,923
Taxes, benefits and other.................... 18,436 12,302 22,200
-------- -------- --------
Total salaries and benefits................ 104,060 96,673 115,123
Transaction costs.............................. 33,721 - -
Premises and occupancy......................... 30,383 31,135 31,843
Data processing................................ 17,337 19,417 17,513
Operating losses and settlements............... 9,837 13,426 7,173
Outside data processing........................ 9,199 12,113 11,591
Professional fees.............................. 9,162 14,274 6,123
Communications................................. 9,078 9,820 8,749
Amortization of intangibles.................... 8,975 9,433 9,429
Postage........................................ 6,772 4,310 4,805
Advertising and promotion...................... 5,094 7,382 9,159
FDIC insurance premium......................... 4,577 16,488 16,146
Contract services.............................. 4,336 3,861 1,617
Office supplies................................ 4,306 3,637 4,353
Net real estate operations..................... 3,999 5,522 5,701
Insurance...................................... 2,164 4,065 2,233
Restructure expense............................ - 68,293 -
Retirement of subordinated debt................ - 21,406 -
Other.......................................... 15,395 16,811 15,542
-------- -------- --------
$278,395 $358,066 $267,100
======== ======== ========
Net real estate operations
Net operating losses and holding costs....... $ 4,361 $ 7,975 $ 7,951
Write-downs.................................. 1,753 2,254 -
Interest recognized on advances.............. (834) (328) (9)
Net (gain) on sale of real estate............ (1,281) (4,379) (2,241)
-------- -------- --------
Total real estate operations............... $ 3,999 $ 5,522 $ 5,701
======== ======== ========
Total noninterest expense for the quarter ended March 31, 1997, excluding
transaction costs of $33.7 million, was $244.7 million. Total noninterest
expense for the quarter ended March 31, 1996 was $267.1 million. Total
noninterest expense for the quarter ended December 31, 1996, excluding the
restructuring expense of $68.3 million, loss on early retirement of debt of
$21.4 million and the $8.4 million charge related to legal settlements, was
$260 million.
The Company's results of operations reflect transaction costs of $33.7
million in the first quarter of 1997. These transaction costs include
investment banking, legal and consulting fees and additional severance costs
related to merger activities.
25
The Company employed 12,719 persons at March 31, 1997, a number of which
worked part-time. The full-time equivalent of employees at that date was
11,646. The Company employed 12,641 persons and 11,579 full-time equivalents
at December 31, 1996 and 14,194 persons and 12,861 full-time equivalents at
March 31, 1996.
Salaries and benefits decreased $11.1 million from $115.1 million in the
first quarter of 1996 to $104 million in the first quarter of 1997. The
decrease was the result of the realization of the benefits of the
comprehensive program to reengineer the Company's mortgage business and other
efficiency initiatives.
The FDIC insurance premium was $4.6 million in the first quarter of 1997
compared with $16.1 million in the first quarter of 1996 and $16.5 million in
the fourth quarter of 1996. The reduction in the premium of $11.6 million in
the first quarter of 1997 was due to the signing of the Deposit Insurance
Funds Act of 1996.
In the first quarter of 1997, professional fees increased to $9.2 million
from $6.1 million in the first quarter of 1996. The $3.1 million increase in
the first quarter of 1997 was primarily due to increased consulting fees of
$2.9 million. Professional fees were $14.3 million in the fourth quarter of
1996.
Operating losses and settlements were $9.8 million for the first quarter of
1997 compared to $7.2 million in the first quarter of 1996 and $13.4 million
for the fourth quarter of 1996. The increase from the first quarter of 1996
was primarily due to an increase to the legal reserve.
The Company implemented a corporate wide restructure plan in 1996 to improve
competitive position, accelerate expense reduction and enhance future revenue
growth by streamlining operations, making efficient use of premises and
modernizing the systems platform.
Due to potential merger activities with Washington Mutual, Inc., some of the
Company's planned restructure activities have been suspended. Consolidation of
campus premises originally planned for June 1997 has been temporarily
suspended, as well as the standardization of the Company's distributed systems
platform. Reserves related to these activities have not been reversed.
During the quarter ended March 31, 1997, approximately 90 employee
separations occurred. Severance benefits of $3 million were applied against
the restructure liability. At March 31, 1997, approximately 632 employees are
receiving or will be eligible to receive $18.2 million in severance benefits.
Additional severance costs were triggered effective February 25, 1997 upon
the adoption of a broad-based, change-in-control severance plan. At March 31,
1997, the Company accrued an additional $7 million for severance benefits
expected to be paid to approximately 475 employees affected by the
restructuring plan and change-in-control benefits program. This increase to
the fourth quarter 1996 restructuring accrual is for incremental severance
charges which employees terminated after February 24, 1997 are entitled to
receive under provisions of the change-in-control severance plan adopted on
that date.
Premises of $2.7 million were written off against the restructure liability
due to consolidation of the Company's corporate headquarters and loan
origination and processing network. To date, 44 loan offices and one building
at the corporate headquarters have been vacated.
Office equipment amounting to $84,000 related to the discontinuance and
outsourcing of the Company's deferred compensation business was written off
during the quarter ended March 31, 1997.
Following is an analysis of restructure reserve activity during the quarter
ended March 31, 1997:
BALANCE BALANCE
DECEMBER 31, CHANGE IN MARCH 31,
1996 ACTIVITY CONTROL 1997
------------ -------- --------- ---------
(DOLLARS IN MILLIONS)
Severance....................... $14.2 $(3.0) $7.0 $18.2
Premises........................ 29.5 (2.7) - 26.8
Equipment....................... 3.4 (.1) - 3.3
----- ----- ---- -----
Total......................... $47.1 $(5.8) $7.0 $48.3
===== ===== ==== =====
26
INCOME TAX
The Company's effective tax rate increased 2.7% from 40.0% in the first
quarter of 1996 to 42.7% in the first quarter of 1997. This increase was
primarily due to the nondeductibility of certain merger related transaction
costs.
Under provisions of the Small Business Job Protection Act of 1996, Great
Western Bank, ("GWB" or "the Bank"), lost the use of the bad debt reserve
method beginning in 1996. Since the reserve balance at March 31, 1997 of
$724.5 million arose prior to 1988, it is not currently subject to federal
income tax and would not be if GWB were to convert to a commercial bank or
otherwise lose its tax status as a qualified thrift institution. However, it
will be subject to such tax upon certain occurrences (including its
distribution to shareholders), none of which are currently contemplated.
Consequently, in accordance with Financial Accounting Standard No. 109
"Accounting for Income Taxes," a federal deferred tax liability of $253.6
million has not been recognized for the temporary differences relating to the
tax bad debt reserve of GWB.
BALANCE SHEET ANALYSIS
EARNING ASSETS
Average earning assets decreased $494.2 million in the first three months of
1997 compared with a decrease of $761.4 million from the first quarter of
1996. The decrease in the first quarter of 1997 was primarily due to the
$557.7 million sale of mortgage-backed securities in the fourth quarter of
1996.
Securities Available-For-Sale
Securities available-for-sale are carried at fair value. Marketable
securities available-for-sale at March 31, 1997 had both an amortized cost and
a fair value of $1.2 billion. There were no significant gains realized during
the quarters ended March 31, 1997, March 31, 1996 and December 31, 1996. In
determining which security to invest in, the Company considers among other
factors, relative rates, liquidity and credit quality. At March 31, 1997,
March 31, 1996 and December 31, 1996 there were no investment securities
issued by a single issuer (excluding the U.S. Government and its agencies)
that exceeded 10% of stockholders' equity.
The unrealized net gains (losses) on securities available-for-sale, net of
income taxes (securities valuation allowance), included as a component of
stockholders' equity, were as follows:
THREE MONTHS ENDED
--------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................ $ 2,023 $ (684) $ 4,952
Change in unrealized net gains (losses), net
of taxes..................................... (3,211) 2,707 (2,203)
------- ------ -------
Balance at end of period...................... $(1,188) $2,023 $ 2,749
======= ====== =======
Mortgage-Backed Securities
Mortgage-backed securities consist largely of single-family residential
loans swapped for mortgage-backed securities in 1994 and 1995 to provide
collateral for borrowings. Underlying these securities are loans that were
originated by Great Western Bank. Mortgage-backed securities totaled $7.5
billion at March 31, 1997, compared with $9.4 billion at March 31, 1996 and
$7.8 billion at December 31, 1996. Because the Company retained the credit
risk on the loans underlying these securities, delinquent loans totaling $40.4
million for the quarter ended March 31, 1997, $33.1 million for the quarter
ended March 31, 1996 and $51.3 million for the quarter ended December 31, 1996
were repurchased.
27
A summary of the Company's mortgage-backed securities portfolio follows:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---------- ------------ ----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------------ ------ ---
(DOLLARS IN MILLIONS)
Adjustable Rate
COFI...................................... $5,666 75 $ 5,902 76 $7,116 76
FCOFI..................................... 1,281 17 1,335 17 1,499 16
Other..................................... 251 3 262 3 316 3
------ --- ------- ---- ------ ---
Total adjustable rate mortgage-backed
securities............................. 7,198 95 7,499 96 8,931 95
Fixed-rate
Long-term................................. 197 3 217 3 393 4
Short-term................................ 141 2 73 1 53 1
------ --- ------- ---- ------ ---
Total fixed-rate mortgage-backed
securities............................. 338 5 290 4 446 5
------ --- ------- ---- ------ ---
Total mortgage-backed securities........ $7,536 100 $7,789 100 $9,377 100
====== === ======= ==== ====== ===
At March 31, 1997, approximately 75% of mortgage-backed securities 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"). The Company has also swapped products which are
indexed to 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.
At March 31, 1997, adjustable rate mortgage-backed securities comprised 95% of
the mortgage-backed securities portfolio compared with 95% in the comparable
period in 1996 and 96% at December 31, 1996.
Mortgage-backed securities available-for-sale are carried at fair value. At
March 31, 1997, mortgage-backed securities available-for-sale of $6 billion
included $155.9 million of fixed-rate securities and $5.9 billion of
adjustable rate securities.
The contractual maturities of all mortgage-backed securities as of March 31,
1997 follow:
MORTGAGE-BACKED SECURITIES
----------------------------
ADJUSTABLE
RATE FIXED RATE TOTAL
---------- ---------- ------
(DOLLARS IN MILLIONS)
One year or less............................... $ 114 $115 $ 229
Over one to two years.......................... 122 53 175
Over two to three years........................ 125 33 158
Over three to five years....................... 274 36 310
Over five to ten years......................... 811 75 886
Over ten to fifteen years...................... 1,100 18 1,118
Over fifteen years............................. 4,652 8 4,660
------ ---- ------
$7,198 $338 $7,536
====== ==== ======
During the first quarter of 1997, the Company securitized and sold $997,000
of mortgage-backed securities.
28
The unrealized net gains on mortgage-backed securities, net of income taxes
(securities valuation allowance), included as a component of stockholders'
equity, were as follows:
THREE MONTHS ENDED
---------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period............. $ 74,936 $49,391 $103,481
Change in unrealized net gains, net of
taxes..................................... (31,952) 25,545 (30,441)
-------- ------- --------
Balance at end of period................... $ 42,984 $74,936 $ 73,040
======== ======= ========
Loans
The composition of real estate, Consumer Finance and other loans at March 31,
1997, December 31, 1996 and March 31, 1996 are as follows:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN MILLIONS)
Real estate................................. $29,172 $28,761 $27,611
Consumer Finance............................ 2,153 2,186 2,070
Other loans................................. 248 240 555
------- ------- -------
$31,573 $31,187 $30,236
======= ======= =======
MARCH 31, MARCH 31,
1997 DECEMBER 31, 1996 1996
------------ ----------------- ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------ ------ ------- ---
(DOLLARS IN MILLIONS)
REAL ESTATE
Single-family................ $26,600 91 $ 26,079 91 $24,684 89
Apartments................... 1,447 5 1,490 5 1,591 6
Commercial properties........ 1,125 4 1,192 4 1,336 5
------- --- ---------- ------ ------- ---
Total real estate loans.. 29,172 100 28,761 100 27,611 100
------- --- ---------- ------ ------- ---
CONSUMER FINANCE
Real estate secured loans.... 902 42 880 39 793 38
Installment loans............ 909 42 940 43 928 46
Retail installment contracts. 342 16 366 18 349 16
------- --- ---------- ------ ------- ---
Total Consumer Finance
loans................... 2,153 100 2,186 100 2,070 100
------- --- ---------- ------ ------- ---
OTHER LOANS
Lease financing.............. 69 28 71 30 76 14
Checking overdraft........... 65 26 62 26 41 7
Savings account.............. 48 19 54 23 59 11
Small business loans......... 29 12 13 5 - -
Home equity.................. 19 8 3 1 - -
Mobile home loans............ 13 5 14 6 17 3
Student loans................ 2 1 21 9 360 65
Other........................ 3 1 2 1 2 *
------- --- ---------- ------ ------- ---
Total other loans........ 248 100 240 100 555 100
------- --- ---------- ------ ------- ---
Total loans.............. 31,573 31,187 30,236
------- ---------- -------
Allowance for loan and lease
losses...................... (321) (314) (348)
Unearned income and other.... (43) (61) (80)
Loans in process............. 2 11 (3)
------- ---------- -------
Total.................... (362) (364) (431)
------- ---------- -------
Net loans receivable..... $31,211 $ 30,823 $29,805
======= ========== =======
- --------
*Less than one percent
29
A summary of the Company's real estate loan portfolio by product type
follows:
MARCH 31, MARCH 31,
1997 DECEMBER 31, 1996 1996
----------- ----------------- -----------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
(DOLLARS IN MILLIONS)
REAL ESTATE
ARM
COFI.............................. $20,706 71 $20,803 72 $20,599 75
FCOFI............................. 1,942 7 2,005 7 2,333 8
LAMA.............................. 3,744 13 3,318 12 2,121 8
Other............................. 1,877 6 1,816 6 1,566 5
------- --- ------- --- ------- ---
Total ARM loans................. 28,269 97 27,942 97 26,619 96
Fixed-rate
Long-term......................... 486 2 411 2 502 2
Short-term........................ 417 1 408 1 490 2
------- --- ------- --- ------- ---
Total fixed-rate loans.......... 903 3 819 3 992 4
------- --- ------- --- ------- ---
Total real estate loans......... $29,172 100 $28,761 100 $27,611 100
======= === ======= === ======= ===
Number of real estate loans........... 365,066 347,530 333,416
The origination and sale of real estate loans is dependent upon general
market conditions. In an active real estate market, loan originations may
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.
The ARM for single-family residential properties is the primary lending
product held for investment. At March 31, 1997, ARMs comprised 97% of the real
estate loan portfolio compared with 96% and 97% at March 31, 1996 and December
31, 1996, respectively. At March 31, 1997, approximately 71% of real estate
loans in the portfolio were indexed to COFI. The Company also originates ARM
products which are indexed to one-year Treasury bills, the prime rate and
FCOFI.
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. At March 31, 1997,
$393.8 million of ARMs with an average yield of 7.31% had reached their
periodic rate cap. Without the cap, the average yield on those ARMs would have
been 7.64%. The loss to interest income from real estate loans which have
reached their cap interest rate was approximately $486,000 for the quarter
ended March 31, 1997 compared with $648,000 for the quarter ended March 31,
1996 and $425,000 for the quarter ended December 31, 1996. At March 31, 1997,
$441.6 million of ARMs with an average yield of 7.67% had reached their floor
rate. Without the floor, the average yield on these loans would have been
7.28%. The benefit to interest income from real estate loans which have
reached their floor interest rate was approximately $408,000 for the first
quarter of 1997 compared with $371,000 for the quarter ended March 31, 1996
and $418,000 for the quarter ended December 31, 1996. The contract amount on
ARMs subject to interest rate caps and floors does not represent the exposure
to market loss.
Fixed-rate lending tends to increase during periods of relatively low
interest rates. Such loans are originated primarily for sale. 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, 1997, hedge contracts had a notional value
of $83 million and a fair value of $490,000. Fair value is estimated using
current market prices adjusted for various risk factors and market volatility.
30
Real estate loans available-for-sale are valued at the lower of cost or fair
value. Real estate loans available for sale are primarily fixed-rate loans.
Gains from this portfolio totaled $1.7 million for the quarter ended March 31,
1997, compared to $2.9 million and $1.7 million, for the quarters ended March
31, 1996 and December 31, 1996, respectively. Included in the gains on real
estate loan sales were gains on the sale of servicing rights of $1.1 million
for the quarter ended March 31, 1997, and $432,000 and $456,000 for the
quarters ended March 31, 1996 and December 31, 1996, respectively. Unrealized
gains on real estate loans available-for-sale totaled $1.5 million at March
31, 1997, compared to $1.2 and $500,000 at March 31, 1996 and December 31,
1996, respectively.
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, or to refinance existing
loans in the normal course of business.
The composition of the loans available for sale portfolio at March 31, 1997,
December 31, 1996 and March 31, 1996 follows:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN MILLIONS)
Loans available-for-sale
Real estate loans......................... $210 $ 82 $168
Student loans............................. 2 21 359
---- ---- ----
Total loans available-for-sale.......... $212 $106 $527
==== ==== ====
The contractual maturities of loans as of March 31, 1997 follow:
REAL ESTATE LOANS
---------------------
FIXED CONSUMER TOTAL
ARM RATE TOTAL FINANCE OTHER LOANS
------- ----- ------- -------- ----- -------
(DOLLARS IN MILLIONS)
One year or less................ $ 527 $ 36 $ 563 $ 712 $143 $ 1,418
Over one to two years........... 778 48 826 578 11 1,415
Over two to three years......... 724 44 768 412 3 1,183
Over three to five years........ 1,185 164 1,349 163 13 1,525
Over five to ten years.......... 3,663 316 3,979 197 13 4,189
Over ten to fifteen years....... 4,588 100 4,688 90 62 4,840
Over fifteen years.............. 16,804 195 16,999 1 3 17,003
------- ---- ------- ------ ---- -------
Total......................... $28,269 $903 $29,172 $2,153 $248 $31,573
======= ==== ======= ====== ==== =======
31
The following table summarizes the Company's loan volume with real estate
loan volume composition by security type, purpose and loan type for the three
months ended March 31, 1997, December 31, 1996 and March 31, 1996:
MARCH 31, DECEMBER MARCH 31,
1997 31, 1996 1996
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
LOAN VOLUME
Real estate................................ $1,665 75 $1,632 70 $1,240 72
Consumer Finance........................... 464 21 602 26 405 23
Other loans................................ 91 4 98 4 93 5
------ --- ------ --- ------ ---
Total new loan volume.................... $2,220 100 $2,332 100 $1,738 100
====== === ====== === ====== ===
REAL ESTATE LOAN VOLUME
Security Type
Single-family.............................. $1,658 100 $1,615 100 $1,223 100
Apartments................................. 5 * 8 * 5 *
Commercial properties...................... 2 * 9 * 12 *
------ --- ------ --- ------ ---
Total real estate by security type $1,665 100 $1,632 100 $1,240 100
====== === ====== === ====== ===
Purpose
Purchase of property....................... $ 804 48 $ 883 54 $ 552 45
Refinance.................................. 861 52 749 46 688 55
------ --- ------ --- ------ ---
Total real estate by purpose............. $1,665 100 $1,632 100 $1,240 100
====== === ====== === ====== ===
Loan Type
Long-term--essentially
30-40 years
ARM.................................... $1,079 65 $1,343 82 $ 768 62
Fixed.................................. 382 23 174 11 291 23
Short-term--essentially
15 years or less
ARM.................................... 30 2 36 2 30 2
Fixed.................................. 174 10 79 5 151 13
------ --- ------ --- ------ ---
Total real estate by loan type $1,665 100 $1,632 100 $1,240 100
====== === ====== === ====== ===
Average new loan rate...................... 6.46% 6.26% 6.92%
Average ARM differential on new ARM's...... 2.66% 2.60% 2.66%
Average ARM differential on total ARM
portfolio................................. 2.54% 2.53% 2.50%
- --------
*Less than one percent
For the first quarter of 1997, third party originations were $843.1 million
or 50.6% of new real estate loans, compared with $258.5 million or 20.9% and
$718.3 million or 44% for the quarters ended March 31, 1996 and December 31,
1996, respectively.
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.
32
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 first
quarter of 1996 to the first quarter of 1997 by approximately 4%. During the
same period, the median sales price for the Los Angeles area declined 4% while
the median sales price for the San Diego area increased by 2%.
The Company repurchases delinquent loans which were sold with recourse.
Repurchased loans totaled $8.4 million in the three months ended March 31,
1997 compared with $7.9 million and $12.7 million in the three months ended
March 31, 1996 and December 31, 1996, respectively. The balance of loans sold
with recourse totaled $1.2 billion at March 31, 1997 and $1.4 billion and $1.2
billion at March 31, 1996 and December 31, 1996, respectively.
The geographic distribution of the real estate loan portfolio and nonaccrual
and restructured loans at March 31, 1997 follows:
CONNECTICUT
MASSACHUSETTS
CALIFORNIA FLORIDA NEW YORK
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family
residential.......... $15,952 $271 $1,927 $22 $1,927 $18
Apartments............ 1,242 26 51 - - -
Commercial
Offices............. 330 12 14 - - -
Industrial.......... 222 9 11 - - -
Retail.............. 173 1 13 - - -
Hotel/motel......... 85 14 5 - - -
Other............... 113 1 10 1 - -
------- ---- ------ --- ------ ---
Total............. $18,117 $334 $2,031 $23 $1,927 $18
======= ==== ====== === ====== ===
Percent of total loans.. 62.1% 7.0% 6.6%
Nonaccrual and
restructured as a % of
total by state......... 1.8% 1.1% 0.9%
OREGON
WASHINGTON OTHER TOTAL
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family
residential.......... $1,618 $ 8 $5,176 $33 $26,600 $352
Apartments............ 6 1 148 6 1,447 33
Commercial
Offices............. 16 - 13 - 373 12
Industrial.......... - - 24 - 257 9
Retail.............. 4 - 10 - 200 1
Hotel/motel......... - - 54 - 144 14
Other............... 4 - 24 1 151 3
------ --- ------ --- ------- ----
Total............. $1,648 $ 9 $5,449 $40 $29,172 $424
====== === ====== === ======= ====
Percent of total loans.. 5.6% 18.7% 100.0%
Nonaccrual and
restructured as a % of
total by state......... 0.5% 0.7% 1.5%
33
A comparison of the California real estate loan portfolio and nonaccrual and
restructured real estate loans by region as of March 31, 1997 follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
----------------------- -----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family residential...... $ 4,905 $ 58 $ 1,298 $ 14
Apartments..................... 145 1 219 8
Commercial
Offices...................... 68 9 36 -
Industrial................... 29 1 13 1
Retail....................... 47 1 19 -
Hotel/motel.................. 12 - 20 3
Other........................ 32 - 19 1
-------- ----- -------- -----
Total by region............ $ 5,238 $ 70 $ 1,624 $ 27
======== ===== ======== =====
Percent of total loans........... 28.9% 9.0%
Nonaccrual and restructured as a
% of total by region............ 1.3% 1.7%
SOUTHERN CALIFORNIA CALIFORNIA
----------------------- -----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family residential...... $ 9,749 $ 199 $ 15,952 $ 271
Apartments..................... 878 17 1,242 26
Commercial
Offices...................... 226 3 330 12
Industrial................... 180 7 222 9
Retail....................... 107 - 173 1
Hotel/motel.................. 53 11 85 14
Other........................ 62 - 113 1
-------- ----- -------- -----
Total by region............ $ 11,255 $ 237 $ 18,117 $ 334
======== ===== ======== =====
Percent of total loans........... 62.1% 100.0%
Nonaccrual and restructured as a
% of total by region............ 2.1% 1.8%
34
Nonperforming Assets
The following table summarizes nonaccrual and restructured loans and real
estate:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN MILLIONS)
Nonaccrual loans
Real estate
Single-family residential.................. $352 $285 $432
Apartments................................. 18 12 13
Commercial................................. 7 8 18
---- ---- ----
Total nonaccrual real estate loans....... 377 305 463
Consumer Finance............................. 45 46 26
Other........................................ 2 1 1
---- ---- ----
Total nonaccrual loans..................... 424 352 490
Restructured loans
Single-family residential.................. 1 15 17
Apartments................................. 15 26 33
Commercial................................. 31 33 62
---- ---- ----
Total restructured loans................. 47 74 112
---- ---- ----
Nonaccrual and restructured loans.............. 471 426 602
As a percentage of total loans................. 1.51% 1.38% 2.02%
Nonperforming real estate...................... 77 120 189
---- ---- ----
Total nonperforming assets..................... $548 $546 $791
==== ==== ====
As a percentage of total assets................ 1.28% 1.27% 1.81%
Management's classification of a loan as nonaccrual or restructured does not
necessarily indicate that the principal of the loan is uncollectible in whole
or in part. Loans are placed on nonaccrual status when they become more than
90 days past due. Nonperforming real estate includes foreclosed and investment
properties which do not generate sufficient income to meet return on
investment criteria.
Nonaccrual real estate loans were $377 million at March 31, 1997, a decrease
of $86 million from $463 million at March 31, 1996 and an increase of $72
million from $305 million at December 31, 1996. The increase during the first
quarter of 1997 is primarily the result of continued deterioration within the
portfolio of loans originated during the 1989-1991 period which tend to
exhibit characteristics with high loan-to-value ratios (" LTV's") and low
credit scores.
35
Impaired Loans
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 NO
RELATED RESERVES NET WITH RELATED NET OF
RESERVES FOR RESERVES RESERVES RESERVES
FOR ESTIMATED FOR FOR FOR
LOSSES LOSSES LOSSES LOSSES LOSSES
-------- --------- -------- -------- --------
MARCH 31, 1997
---------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate loans
Residential
Single-family................. $ 37,400 $ 8,139 $ 29,261 $56,455 $ 85,716
Apartments.................... 59,806 11,974 47,832 5,993 53,825
Commercial
Offices....................... 26,440 7,657 18,783 2,705 21,488
Retail........................ 14,114 4,259 9,855 5,572 15,427
Hotel/motel................... 22,644 7,692 14,952 - 14,952
Industrial.................... 15,449 4,085 11,364 1,164 12,528
Other......................... 1,976 173 1,803 537 2,340
-------- ------- -------- ------- --------
Total commercial............ 80,623 23,866 56,757 9,978 66,735
-------- ------- -------- ------- --------
Total....................... $177,829 $43,979 $133,850 $72,426 $206,276
======== ======= ======== ======= ========
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
-------- ------- -------- ------- --------
Total commercial............ 114,168 29,882 84,286 17,204 101,490
-------- ------- -------- ------- --------
Total....................... $265,237 $62,885 $202,352 $68,408 $270,760
======== ======= ======== ======= ========
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.
36
Delinquent Assets
The Company continuously reviews the trends of loans and mortgage-backed
securities with full credit risk. The following summarizes delinquent assets
at March 31, 1997, December 31, 1996 and March 31, 1996, for real estate,
Consumer Finance and other loans and mortgage-backed securities which are over
thirty to ninety days delinquent:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
--------- ------------ ---------
(DOLLARS IN MILLIONS)
Real Estate Loans
Single-family residential
Over 30 to 60 days delinquent.............. $228 $263 $206
Over 60 to 90 days delinquent.............. 91 99 88
Other
Over 30 to 60 days delinquent.............. 10 9 6
Over 60 to 90 days delinquent.............. 9 8 3
---- ---- ----
Total.................................... $338 $379 $303
==== ==== ====
Percentage of related portfolio.......... 1.16% 1.32% 1.10%
Consumer Finance Loans
Over 30 to 60 days delinquent................ $ 40 $ 44 $ 39
Over 60 to 90 days delinquent................ 17 18 16
---- ---- ----
Total.................................... $ 57 $ 62 $ 55
==== ==== ====
Percentage to related portfolio.......... 2.64% 2.84% 2.66%
Other Loans
Over 30 to 60 days delinquent................ $ 1 $ 2 $ 10
Over 60 to 90 days delinquent................ 1 1 7
---- ---- ----
Total.................................... $ 2 $ 3 $ 17
==== ==== ====
Percentage to related portfolio.......... .89% 1.25% 3.07%
Total Loans
Over 30 to 60 days delinquent................ $279 $318 $261
Over 60 to 90 days delinquent................ 118 126 114
---- ---- ----
Total.................................... $397 $444 $375
==== ==== ====
Percentage to related portfolio.......... 1.26% 1.42% 1.24%
Mortgage-Backed Securities
Over 30 to 60 days delinquent................ $ 40 $ 47 $ 27
Over 60 to 90 days delinquent................ 13 17 11
---- ---- ----
Total.................................... $ 53 $ 64 $ 38
==== ==== ====
Percentage to related portfolio.......... .70% .82% .41%
37
Allowance for Loan and Lease Losses
Summarized below are loan balances by type, their reserve for estimated
losses and the percentage the reserve balance bears to the loan balance for
the periods ended March 31, 1997, December 31, 1996 and March 31, 1996.
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
------------------------- ------------------------- -------------------------
AMOUNT ALLL % AMOUNT ALLL % AMOUNT ALLL %
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
(DOLLARS IN THOUSANDS)
Real estate loans
SFR.................... $26,599,820 $167,561 .63 $26,078,926 $147,908 .57 $24,683,788 $142,123 .58
Commercial and other... 2,571,979 78,347 3.05 2,682,082 90,867 3.39 2,927,306 142,341 4.86
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total real estate
loans............... 29,171,799 245,908 .84 28,761,008 238,775 .83 27,611,094 284,464 1.03
Consumer Finance........ 2,153,429 70,345 3.27 2,185,903 70,045 3.20 2,069,878 56,615 2.74
Other loans............. 248,260 4,547 1.83 240,535 4,879 2.03 554,402 6,499 1.17
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total loans............. $31,573,488 $320,800 1.02 $31,187,446 $313,699 1.01 $30,235,374 $347,578 1.15
=========== ======== ==== =========== ======== ==== =========== ======== ====
At March 31, 1997, the ALLL was $320.8 million, or 1.02% of total loans,
compared with $347.6 million, or 1.15% at March 31, 1996 and $313.7 million,
or 1.01% at December 31, 1996. The provision for loan losses was $40.4 million
for the quarter ended March 31, 1997, up from $36 million in the first quarter
of 1996. Net charge-offs for single family residential real estate loans for
the first quarter of 1997 were $14.1 million or .21% compared with $34.7
million or .56% for the first quarter of 1996 and $83.6 million or 1.29% for
the fourth quarter of 1996. The decrease in the first quarter of 1997 was
primarily due to the bulk sale and related charge-offs of nonperforming loans
in the fourth quarter of 1996.
The Company has a process to determine the adequacy of the allowance for
loan losses that assesses the risks and losses inherent in its portfolio. The
process provides an allowance consisting of two components, general and
specific. The specific component reflects inherent losses resulting from an
analysis of individual loans.
Beginning in the third quarter of 1996, the Company stratified the SFR
portfolio based on such items as borrower performance, current credit scores
and estimated current loan to value ratios ("LTV"). The purpose of the
stratification was to assist the Company in its quarterly assessment of the
allowance for possible loan losses. In addition, the Company modified its
practice for recording charge-offs associated with full credit risk mortgage-
backed securities. Charge-offs related to credit risk on the Company's
mortgage-backed securities held as investments are reflected as a writedown of
the mortgage-backed security. Charge-offs related to loans and securities sold
with recourse are reflected in the related liability account. In addition, the
Company evaluated the current economic conditions, concentrations within the
portfolio and other subjective factors in assessing the adequacy of its
allowance for loan losses. The change in the allowance for SFR loans from
$142.1 million at March 31, 1996, or .58% of the SFR portfolio to $167.6
million at March 31, 1997, or .63% reflects the Company's assessment of the
SFR portfolio and the current economic conditions impacting the SFR portfolio.
The allowance for commercial loans is developed through specific credit
allocations applying historical loss experience and loan category based on
asset quality for individual loans, including impaired loans subject to SFAS
114. The allowance for commercial real estate loans has decreased from $142.3
million at March 31, 1996, or 4.9% to $78.3 million at March 31, 1997, or
3.0%. The reserve for commercial real estate and apartment loans was reduced
by a $9.4 million credit to the provision for loan and lease losses during the
first quarter of 1997, in addition to a $40 million credit in 1996. These
reductions were primarily a result of the Company's review of required levels
for the allowance of this portfolio. The commercial real estate loan portfolio
has continued to decrease as a result of a decision in 1987 to discontinue
commercial real estate lending except to finance the sale of foreclosed
properties or to refinance existing loans in the normal course of business.
The quality of the commercial real estate loan portfolio continues to improve
as a result of the recovery in the commercial real estate markets nationwide
and particularly in California. There has been a substantial amount of
liquidity that has returned to the real estate markets. This liquidity has
contributed significantly to the Company's progress in reducing this
portfolio. The Company expects this portfolio to continue to decline and
improve in quality.
38
The allowance for Consumer Finance loans is based upon a percentage of loans
outstanding in relation to the loss experience within the loan categories
generally stratified by delinquency. The allowance for Consumer Finance loans
increased from $56.6 million at March 31, 1996, or 2.74% of the outstanding
portfolio, to $70.3 million at March 31, 1997, or 3.27% of the outstanding
portfolio, as a result of some deterioration in credit quality.
The allowance for leases was $1.3 million at March 31, 1997, down from $3.2
million at March 31, 1996, or a decline of 59%. Provisions for losses on the
leasing portfolio, included in other loan loss provisions, decreased in 1996
as a result of the reversal of $1.8 million of excess reserves.
The general component includes management's judgment of the amounts
necessary for concentrations, economic uncertainties and other subjective
factors. Although management has allocated the allowance to specific loan
categories, the adequacy of the allowance must be considered in its entirety.
The Company's determination of the level of the allowance and,
correspondingly, the provision for loan and lease losses rests upon various
judgments and assumptions, including general economic conditions, loan
portfolio composition, prior loan loss experience and the Company's ongoing
examination process and that of its regulators. The Company has an Internal
Asset Review Committee ("IARC") that reports to the Board of Directors and
continuously reviews loan quality. The Company also has internal staff
regularly review the classification of commercial loans and also reports to
the IARC. Such reviews also assist management in establishing the level of the
allowance. The Bank is examined by its primary regulator, the OTS. These
examinations generally occur annually and target various activities of the
Bank, including specific segments of the loan portfolio. In addition to the
Bank being examined by the OTS, Great Western Financial Corporation and the
nonbank subsidiaries are also subject to OTS examination.
The Company considers the allowance for loan and lease losses of $320.8
million adequate to cover losses inherent in the loan and lease portfolio at
March 31, 1997. However, no assurance can be given that the Company will not,
in any particular period, sustain loan and lease losses that are sizable in
relation to the amount reserved, or that subsequent evaluation of the loan and
lease portfolio, in light of the factors then prevailing, including economic
conditions and the Company's ongoing examination process and that of its
regulators, will not require significant increases in the allowances for loan
and lease losses.
At March 31, 1997, the Company had $1.2 billion of loans sold with recourse
and a contingent liability of $8.5 million. The Company considers the
contingent liability for loans sold with recourse to be adequate to cover
losses in this portfolio. All of the loans sold in the first quarter of 1997
were without recourse. The Company has not sold loans with recourse since
February, 1995.
39
An analysis of the changes in the ALLL including charge-offs and recoveries
by loan category is presented in the following table:
REAL ESTATE LOANS
------------------ CONSUMER OTHER
SFR OTHER FINANCE LOANS TOTAL
(DOLLARS IN THOUSANDS) -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31,
1995................... $156,016 $145,149 $ 55,568 $ 6,116 $362,849
Provision for losses.... 20,853 - 14,500 668 36, 021
Charge-offs............. (34,912) (2,818) (17,600) (358) (55,688)
Recoveries.............. 166 10 4,147 73 4,396
-------- -------- -------- ------- --------
BALANCE AT MARCH 31,
1996................... 142,123 142,341 56,615 6,499 347,578
Provision for losses.... 19,766 - 13,600 (800) 32,566
Charge-offs............. (32,079) (4,726) (16,862) (1,036) (54,703)
Recoveries.............. 398 166 4,234 82 4,880
-------- -------- -------- ------- --------
BALANCE AT JUNE 30,
1996................... 130,208 137,781 57,587 4,745 330,321
Provision for losses.... 50,036 (24,915) 15,300 1,250 41,671
Charge-offs............. (32,677) (2,637) (18,290) (972) (54,776)
Recoveries.............. 251 30 3,988 145 4,414
-------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30,
1996................... 147,618 110,259 58,585 5,168 321,630
Provision for losses.... 83,876 (14,993) 15,400 1,617 85,900
Charge-offs............. (84,027) (4,421) (7,768) (2,122) (98,338)
Recoveries.............. 441 22 3,828 216 4,507
-------- -------- -------- ------- --------
BALANCE AT DECEMBER 31,
1996................... 147,908 90,867 70,045 4,879 313,699
Provision for losses.... 33,710 (10,184) 15,400 1,464 40,390
Charge-offs............. (14,319) (2,768) (18,934) (1,950) (37,971)
Recoveries.............. 262 432 3,834 154 4,682
-------- -------- -------- ------- --------
BALANCE AT MARCH 31,
1997................... $167,561 $ 78,347 $ 70,345 $ 4,547 $320,800
======== ======== ======== ======= ========
The average balances and related charge-off percentages for the three months
ended March 31, 1997, December 31, 1996 and March 31, 1996 follow:
AT OR FOR THE
THREE MONTHS ENDED
--------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
(DOLLARS IN MILLIONS) --------- ------------ ---------
Average balance
Real estate loans
SFR...................................... $26,212 $25,961 $24,695
Other.................................... 2,613 2,736 2,967
Consumer Finance........................... 2,171 2,145 2,103
Other loans................................ 242 499 540
------- ------- -------
$31,238 $31,341 $30,305
======= ======= =======
Ratio of net charge-offs (annualized) to
average loans
Real estate loans
SFR...................................... 0.21% 1.29% 0.56%
Other.................................... 0.36 0.64 0.38
Consumer Finance........................... 2.78 0.73 2.56
Other loans................................ 2.97 1.53 0.21
------- ------- -------
0.43% 1.20% 0.68%
======= ======= =======
40
Real Estate
Real estate available-for-sale or development was $115.9 million on March
31, 1997 compared to $204.7 million on March 31, 1996 and $160.8 million on
December 31, 1996.
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. At March 31, 1997, foreclosed real estate
properties totaling $39 million are operating profitably after consideration
for interest and depreciation, and accordingly are classified as performing
assets.
The geographic distribution of real estate and nonperforming real estate for
March 31, 1997 follows:
CALIFORNIA FLORIDA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
Real estate
Single family residential.......... $ 39 $ 39 $ 1 $ 1
Apartments......................... 8 8 3 3
Commercial
Property Development............. 34 - - -
Retail........................... 14 12 2 2
Offices.......................... 4 4 - -
Industrial....................... 3 - - -
Other............................ 4 4 - -
----- ---- --- ---
Total................................ $ 106 $ 67 $ 6 $ 6
===== ==== === ===
Percent of total real estate......... 91.3% 5.2%
Nonperforming real estate as a % of
total by state...................... 63.2% 100%
CONNECTICUT
MASSACHUSETTS
NEW YORK OTHER TOTAL
-------------------- -------------------- --------------------
NON- NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
Real estate
Single family
residential.......... $ 1 $ 1 $ 3 $ 3 $ 44 $ 44
Apartments............ - - - - 11 11
Commercial
Property
Development........ - - - - 34 -
Retail.............. - - - - 16 14
Offices............. - - - - 4 4
Industrial.......... - - - - 3 -
Other............... - - - - 4 4
--- --- --- --- ----- ----
Total................... $ 1 $ 1 $ 3 $ 3 $ 116 $ 77
=== === === === ===== ====
Percent of total real
estate................. .9% 2.6% 100%
Nonperforming real
estate as a % of total
by state............... 100% 100% 66.4%
41
A comparison of California real estate and nonperforming real estate by
region as of March 31, 1997, follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
Real estate
Single-family residential.......... $ 4 $ 4 $ 1 $ 1
Apartments......................... - - 5 5
Commercial
Property Development............. 12 - 12 -
Retail........................... - - - -
Offices.......................... - - - -
Industrial....................... - - - -
Other............................ 3 3 - -
---- ---- ---- ----
Total by region...................... $ 19 $ 7 $ 18 $ 6
==== ==== ==== ====
Percent of total California real
estate.............................. 17.9% 17.0%
Nonperforming as a % of total by
region.............................. 36.8% 33.3%
SOUTHERN CALIFORNIA CALIFORNIA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
Real estate
Single-family residential.......... $ 34 $ 34 $ 39 $ 39
Apartments......................... 3 3 8 8
Commercial
Property Development............. 10 - 34 -
Retail........................... 14 12 14 12
Offices.......................... 4 4 4 4
Industrial....................... 3 - 3 -
Other............................ 1 1 4 4
---- ---- ----- ----
Total by region...................... $ 69 $ 54 $ 106 $ 67
==== ==== ===== ====
Percent of total California real
estate.............................. 65.1% 100.0%
Nonperforming as a % of total by
region.............................. 78.3% 63.2%
In the first quarter of 1997, bulk sales of foreclosed single-family
properties totaled $40.5 million compared with $58.2 million in the first
quarter of 1996 and $50 million in the fourth quarter of 1996. Auction sales
have also been utilized to accelerate the disposition of foreclosed
properties.
42
INTEREST BEARING LIABILITIES
Deposits
Deposits by product at March 31, 1997, December 31, 1996, and March 31, 1996
follow:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------- -----------
AMOUNT % AMOUNT % AMOUNT %
------- --- -------- ---- ------- ---
(DOLLARS IN MILLIONS)
By Product
Checking accounts....................... $ 4,384 15 $ 4,420 15 $ 4,605 16
Money market and other savings.......... 7,114 25 6,633 23 6,451 22
Wholesale transaction................... 142 1 158 1 169 1
Public funds............................ 8 * 28 * 253 1
Tax-deferred accounts
Deferred compensation................. 1,190 4 1,197 4 1,163 4
IRA/Keogh(1).......................... 2,445 9 2,570 9 2,736 9
Customer term accounts.................. 12,875 46 13,581 48 13,965 47
------- --- -------- ---- ------- ---
$28,158 100 $28,587 100 $29,342 100
======= === ======== ==== ======= ===
- --------
(1) Included in IRA/Keogh are money market accounts of $117 million at March
31, 1997, December 31, 1996 and March 31, 1996.
* Less than one percent
The Company concentrates its retail deposit-gathering activity in two
states: California and Florida. The total decrease in deposits reflects the
competitive environment of banking institutions and the wide array of
investment opportunities available to consumers.
An analysis of term deposits by interest rate and maturity at March 31, 1997
is presented below:
3 OVER OVER OVER OVER
MONTHS 3 MONTHS 6 MONTHS 12 MONTHS 24 MONTHS MARCH 31,
OR BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER ------------------
LESS 6 MONTHS 12 MONTHS 24 MONTHS 36 MONTHS 36 MONTHS 1997 1996
------ ---------- ---------- ---------- ---------- --------- ------- -------
(DOLLARS IN MILLIONS)
INTEREST RATE
Under 3%................ $ 43 $ - $ - $ - $ - $ - $ 43 $ 177
3 to 3.99%.............. 61 14 13 7 - - 95 108
4 to 4.99%.............. 2,690 1,068 870 84 10 26 4,748 6,175
5 to 5.99%.............. 2,070 3,639 2,729 1,109 253 558 10,358 7,907
6 to 6.99%.............. 261 162 87 105 296 150 1,061 2,624
7 to 7.99%.............. 9 30 10 11 27 1 88 998
8 to 8.99%.............. - 1 - 1 1 1 4 8
9 to 9.99%.............. - - - 1 - - 1 1
Over 10%................ - - - - 2 - 2 2
------ ------ ------ ------ ---- ---- ------- -------
Total................. $5,135 $4,914 $3,709 $1,318 $589 $736 $16,401 $18,000
====== ====== ====== ====== ==== ==== ======= =======
$100,000 accounts
included above......... $ 803 $ 936 $ 691 $ 279 $153 $154 $ 3,016(1) $ 3,522(1)
- --------
(1) Includes wholesale term accounts of $8 million at March 31, 1997 and $253
million at March 31, 1996.
43
Borrowings
The following summarizes borrowings at March 31, 1997, December 31, 1996 and
March 31, 1996:
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
(DOLLARS IN MILLIONS)
Short-term borrowings from FHLB...... $ 1,798 16 $ 2,012 19 $ 1,388 13
Securities sold under agreements to
repurchase.......................... 4,484 40 4,198 40 5,735 54
Short-term borrowings................ 1,287 12 1,101 10 947 9
Long-term borrowings from FHLB....... 760 7 758 7 115 1
Senior debt*......................... 2,732 25 2,533 24 2,406 23
------- ---- ------- ---- ------- ----
Total borrowings..................... $11,061 100% $10,602 100% $10,591 100%
======= ==== ======= ==== ======= ====
Interest rate on borrowings at
quarter end......................... 6.13% 6.03% 5.94%
- --------
* Includes $400 million of guaranteed preferred beneficial interest in Company
subordinated notes at March 31, 1997 and $100 million at December 31, 1996
and March 31, 1996.
The following summarizes borrowings by date of maturity as of March 31,
1997:
LESS THAN 1-2 2-5 5-10 AFTER 10
TOTAL ONE YEAR YEARS YEARS YEARS YEARS
------- --------- ----- ------ ----- --------
(DOLLARS IN MILLIONS)
Short-term borrowings from
FHLB......................... $ 1,798 $1,798 $ - $ - $ - $ -
Securities sold under
agreements to repurchase..... 4,484 3,990 192 302 - -
Short-term borrowings......... 1,287 1,287 - - - -
Long-term borrowings from
FHLB......................... 760 445 109 206 - -
Senior debt*.................. 2,732 252 663 1,372 - 445
------- ------ ----- ------ ---- ----
Total borrowings*............. $11,061 $7,772 $ 964 $1,880 $ - $445
======= ====== ===== ====== ==== ====
Average interest rate on
borrowings by maturity....... 6.13% 5.65% 6.96% 7.11% -% 8.44%
- --------
* Includes $400 million of guaranteed preferred beneficial interest in Company
subordinated notes at March 31, 1997 and $100 million at December 31, 1996
and March 31, 1996.
Total borrowings increased $459 million from $10.6 billion at December 31,
1996 and $470 million from $10.6 billion at March 31, 1996 to $11.1 billion at
March 31, 1997. The Company reduced its percentage of total borrowings from
securities sold under agreements to repurchase by 14% from 54% at March 31,
1996 to 40% at March 31, 1997, and increased its short-term borrowings from
the FHLB, as a percentage to total borrowings, to 16% and its long-term
borrowings to 7% at March 31, 1997.
Short-term borrowings from the FHLB decreased to $1.8 billion at March 31,
1997 from $2 billion at December 31, 1996 and increased from $1.4 billion at
March 31, 1996. Borrowings from securities sold under agreements to repurchase
increased to $4.5 billion at March 31, 1997 from $4.2 billion at December 31,
1996 and decreased from $5.7 billion at March 31, 1996. Short-term borrowings
increased $186 million from $1.1 billion at December 31, 1996 and $340 million
from $947 million at March 31, 1996 to $1.3 billion at March 31, 1997 while
senior debt (including $400 million of guaranteed preferred beneficial
interest in company subordinated notes) increased $199 million from $2.5
billion at December 31, 1996 and $326 million from $2.4 billion at March 31,
1996 to $2.7 billion at March 31, 1997.
On January 27, 1997, Great Western Financial Trust II (the "subsidiary trust
II"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$300 million of 8.206% Trust Originated Preferred Securities (the "preferred
securities II"). In connection with subsidiary trust II's issuance of the
preferred securities II, Great Western Financial Corporation issued to
subsidiary trust II $309 million principal amount of its 8.206% subordinated
deferrable interest notes, due 2027 (the "subordinated notes II"). The sole
assets of
44
subsidiary trust II are and will be the subordinated notes II. Great Western
Financial Corporation's obligations under the subordinated notes II and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust II's obligations under the
preferred securities II.
In December 1995, Great Western Financial Trust I (the "subsidiary trust
I"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$100 million of 8.25% Trust Originated Preferred Securities (the "preferred
securities I"). In connection with subsidiary trust I's issuance of the
preferred securities I, Great Western Financial Corporation issued to
subsidiary trust I $103 million principal amount of its 8.25% subordinated
deferrable interest notes, due 2025 (the "subordinated notes I"). The sole
assets of subsidiary trust I are and will be the subordinated notes I. Great
Western Financial Corporation's obligations under subordinated notes I and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust I's obligations under the
preferred securities I.
ASSET LIABILITY MANAGEMENT
The Company's principal ongoing objectives in managing its assets and
liabilities are to maintain and increase the spread that exists between the
return received on its interest-earning assets and the price paid on
liabilities to fund such assets, to reduce the volatility caused by changes in
interest rates, to ensure risk-taking is calculated and not excessive, and to
provide sufficient liquidity at all times.
The Company employs numerous strategies and strict policies to accomplish
and maintain these objectives. As the Company's main earning assets are loans
and mortgage-backed securities, it primarily makes or invests in ARM loans or
securities. In so doing, it reduces the extreme volatility and loss in value
that would result by owning low fixed-rate loans during a period of rapidly
rising interest rates.
Although it costs the Company during the "lag" that exists between the time
loan rates rise and when loan rates are adjusted upwards, the Company benefits
in the same measure from the lag when rates fall. Other financial risks exist
in the Company's operation and balance sheet. These main risks, including
basis, repricing, options, and yield curve twists, are more difficult to
quantify and manage.
The cost of funds for 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, 1997.............. 4.387% 4.780% 5.943% 5.495% .393% 1.556% 1.108%
December 31, 1996........... 4.416 4.842 5.940 5.442 .426 1.524 1.026
March 31, 1996.............. 4.463 4.874 5.957 5.766 .411 1.494 1.303
To accomplish its objectives, the Company stabilizes its balance sheet
primarily by matching various characteristics of the assets purchased with the
liabilities incurred. It also sells the low margin fixed rate loans and ARMs
it originates into the secondary market while retaining more profitable ARMs.
When necessary, off-balance sheet instruments allow the Company to pursue
marketing strategies consistent with customer needs while compensating for the
risk these strategies create. The most frequently used instruments are various
types of interest rate swaps, caps, floors, and futures.
To protect against rate fluctuations for items before they are put on the
balance sheet, items such as commitments to fund fixed-rate loans originated
for sale, the Company from time to time uses off balance sheet instruments
including interest rate forwards, caps, floors, and future contracts as
asset/liability management tools. They are used to reduce the Company's
exposure to interest rate fluctuations and provide more stable spreads between
asset yields and the rates on their funding sources.
To evaluate the Company's current interest-rate position, it is necessary to
analyze the amount and proportionate share of each of its major earning
assets, including each major type of short-term or long-term real estate loan,
and the amount and proportionate share of each major category of short-term or
long-term deposits
45
and borrowings. The Company utilizes a variety of analytical tools including
static gap, duration gap, risk point reports, net interest income simulation
and market value of equity sensitivity analysis. The standard static gap
report appears below.
The following table shows that the portfolio of short-term assets exceeded
liabilities maturing or subject to interest adjustment within one year by $2.3
billion, or 5.5% of total earning assets at March 31, 1997 compared with $2.3
billion, or 5.6% of total earning assets at December 31, 1996 and $1.9
billion, or 4.7% of total earning assets at March 31, 1996. The Company is
better protected against rising rates with an excess of interest earning
assets maturing or repricing within one year.
INTEREST/RATE SENSITIVITY
----------------------------------------------
MARCH 31, 1997
----------------------------------------------
WITHIN 1-5 5-15 OVER % OF
1 YEAR YEARS YEARS 15 YEARS TOTAL TOTAL
------- ------- ----- -------- ------- -----
(DOLLARS IN MILLIONS)
EARNING ASSETS
Repurchase agreements and
federal funds................. $ 551 $ - $ - $ - $ 551 1%
Securities available-for-sale.. 1,111 - - - 1,111 3
Mortgage-backed securities..... 7,376 53 68 39 7,536 18
Loans
Real estate
Adjustable rate............ 25,790 2,479 - - 28,269 69
Fixed-rate
Short-term............... 60 12 29 316 417 1
Long-term................ 170 52 95 169 486 1
------- ------- ---- ------ ------- ---
Total real estate
loans................. 26,020 2,543 124 485 29,172 71
Consumer Finance............. 180 1,546 308 119 2,153 5
Other loans.................. 187 56 1 4 248 1
------- ------- ---- ------ ------- ---
Total loans............ 26,387 4,145 433 608 31,573 77
Investment in FHLB ............ - - - 384 384 1
------- ------- ---- ------ ------- ---
Total earning assets... 35,425 4,198 501 1,031 41,155 100
------- ------- ---- ------ ------- ---
INTEREST BEARING LIABILITIES
Deposits
Checking..................... 4,384 - - - 4,384 11
Money market and other
savings..................... 7,231 - - - 7,231 19
Term accounts................ 13,739 2,639 15 - 16,393 42
Wholesale.................... 150 - - - 150 -
------- ------- ---- ------ ------- ---
Total deposits......... 25,504 2,639 15 - 28,158 72
Borrowings
Short-term borrowings from
FHLB........................ 1,798 - - - 1,798 5
Securities sold under
agreement to repurchase..... 3,990 494 - - 4,484 11
Short-term borrowings........ 1,287 - - - 1,287 3
Long-term borrowings......... 697 2,350 - 45 3,092 8
Guaranteed preferred
beneficial interest in
Company subordinated notes.. - - - 400 400 1
Impact of interest-rate
swaps....................... (109) 109 - - - -
------- ------- ---- ------ ------- ---
Total borrowings....... 7,663 2,953 - 445 11,061 28
------- ------- ---- ------ ------- ---
Total interest bearing
liabilities................... 33,167 5,592 15 445 39,219 100%
------- ------- ---- ------ ------- ===
Earning assets over (under)
interest bearing liabilities
at March 31, 1997............. $ 2,258 $(1,394) $486 $ 586 $ 1,936
======= ======= ==== ====== =======
46
LIQUIDITY MANAGEMENT
Liquidity refers to the capability of a company to fund its operations and
meet its obligations and commitments on both a timely and cost-effective basis
out of its cash flow.
Customer deposits provide the Company with a sizeable source of stable low-
cost funds. Customer deposits and stockholders' equity funded 72.1% and 72.8%
of its average total assets in the first quarter of 1997 and the first quarter
of 1996, respectively. The remaining funding is provided by a combination of
wholesale short-term funding sources including reverse repurchase agreements
and intermediate-term sources including senior debt.
The Company's real estate loans totaled $29.2 billion at March 31, 1997. Of
this amount, $563 million matures within one year and $2.9 billion matures
within one to five years on a contractual basis.
GWB, at March 31, 1997 had excess borrowing capacity at the FHLB of
approximately $10 billion which includes a $200 million overnight federal
funds line. Other sources of liquidity include federal funds, commercial paper
and reverse repurchase agreements and/or the sale of assets.
As presented in the Consolidated Statement of Cash Flows, the sources of
liquidity vary between years. The primary sources of funds in the first
quarter were sales and principal payments on mortgage-backed securities and
loans held for investment of $1.5 billion. New loans originated for investment
required $1.6 billion in the first quarter of 1997. Operating activities
provided $31.8 million in the first quarter.
GWB maintains liquidity balances each period in excess of funding and legal
requirements. Cash, certificates of deposit, repurchase agreements and federal
funds and securities available for sale totaled $2.1 billion at March 31, 1997
and $2.2 billion at March 31, 1996. GWB had funds in excess of required
liquidity levels. The amounts over those required for regulatory purposes will
fluctuate between periods and are a source of short-term funding.
PARENT COMPANY LIQUIDITY
GWFC, the parent company, derives substantially all of its cash income from
dividends received from its subsidiaries. During the first quarter, it
received cash dividends in the amount of $45.8 million. Of that amount, $37.8
million was received from GWB, $7 million was received from Aristar and $1
million from other subsidiaries.
In July, 1996, GWFC renewed its July, 1994 $200 million syndicated multi-
year credit facility with 21 banks. This is a revolving line of credit which
is a contingent source of liquidity. This line is used to backup commercial
paper for the Company's issuances. To date, there have been no borrowings
under this agreement.
Short-term liquidity can also be generated by the Company's ability to raise
funds in a number of capital and money markets as well as by liquidating
short-term investments.
CAPITAL ADEQUACY
Capital (stockholders' equity) was $2.6 billion at March 31, 1997 and $2.8
billion at March 31, 1996. At March 31, 1997, the ratio of capital to total
assets was 6.0% compared with 6.4% a year ago.
On July 23, 1996, the Board of Directors authorized the repurchase of up to
7.5 million shares of outstanding common stock, representing approximately 5%
of the total number of shares outstanding as of June 30, 1996. On July 29,
1996, 6.5 million shares were repurchased at a weighted average price of
$26.85 per share. By February 20, 1997, the remaining balance of 1.0 million
shares had been repurchased at a weighted average price of $31.91 per share.
On January 28, 1997, the Board of Directors authorized the repurchase of up
to 5 million shares of outstanding common stock, representing approximately
3.6% of the total number of outstanding shares at December 31, 1996. As of
February 28, 1997, there had been no repurchases under this program. On March
5, 1997 the Board of Directors voted to discontinue the repurchase program.
47
At March 31, 1997 preferred stock totaled $165 million compared with $294
million at March 31, 1996. In September 1996, the Company called for the
redemption of its $129 million, 8.75% Cumulative Convertible Preferred Stock.
The holders had the option to redeem their shares or convert them into shares
of the Company's Common Stock. 2,561,642 shares were converted into 6,278,421
common shares, while 19,058 shares were redeemed for cash payments of
$994,589. In the second quarter of 1996, shares of preferred stock totaling
$340 thousand were converted to common stock at the holder's option.
GWB is subject to certain capital requirements under applicable regulations
and meets all such requirements. GWB's total risk-based capital was $2.7
billion, including eligible subordinated notes of $157.7 million at March 31,
1997 and $3 billion, including eligible subordinated notes of $373.5 million
at March 31, 1996.
The following ratios compare GWB with the capital requirements under
regulations issued by the OTS:
MARCH 31, 1997 MARCH 31, 1996
-------------------------- --------------------------
ACTUAL OTS BENCHMARK ACTUAL OTS BENCHMARK
------------ ------------- ------------ -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------------- ------ ----- -------------
(DOLLARS IN MILLIONS)
Leverage/tangible ratio... $2,385 5.99 $ 1,194 3.00 $2,404 5.84 $ 1,235 3.00
Tier 1 risk-based ratio... 2,380 9.96 955 4.00 2,399 9.77 982 4.00
Total risk-based ratio.... 2,739 11.47 1,911 8.00 2,999 12.21 1,965 8.00
The OTS previously 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% 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%. Only savings associations rated
composite 1 under the OTS CAMELS rating system will be permitted to operate at
or near the regulatory minimum leverage ratio of 3%. For all other savings
associations, the minimum core capital leverage ratio will be 3% 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.
The following table presents the debt ratings of the Company and GWB at
March 31, 1997:
MOODY'S
INVESTORS
STANDARD & POOR'S SERVICES 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
48
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 1997 the regular quarterly dividend on the $165
million 8.3% cumulative preferred stock, issued in September 1992, was paid.
The principal source of operating income of the Company on an unconsolidated
basis is dividends from GWB and Aristar. In the first quarter of 1997,
dividends from GWB and Aristar totaled $37.8 million and $7 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% 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% 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 75% 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.
As of March 31, 1997, GWB's dividend limitation for 1997 is approximately
$472 million. Therefore, after taking into consideration dividends declared
and paid in the three months ending March 31, 1997, GWB may declare dividends
or make other capital distributions of approximately $434 million, without
obtaining prior regulatory approval. The limitation for 1997 will increase by
net income earned after March 31, 1997.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 125
On January 1, 1997, the Company adopted SFAS 125. The purpose of this
pronouncement is to provide consistent accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities,
to provide guidelines to distinguish those transfers of financial assets that
are sales from those that are secured borrowings, and to introduce the concept
of control which requires an entity to recognize and record financing and
servicing assets it controls and liabilities it has incurred, and derecognize
financial assets when control has been surrendered and derecognize liabilities
when extinguished.
SFAS 125 requires the application of fair value to the initial recording of
all mortgage servicing assets and liabilities at the time of loan sales or
securitizations. Mortgage servicing assets are to be evaluated for impairment
by risk tranche and are to be recorded at the lower of cost or market.
Mortgage servicing liabilities are to be evaluated at the contract level and
recorded at fair market value. The pronouncement also requires that the right
to retain interest in excess of the contractually stated service fees be
treated as interest only strips and valued in accordance with SFAS 115. See
"Note 1: Mortgage Servicing Rights" in "Item 1. Financial Statements."
49
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 128
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share
(EPS) by replacing the presentation of primary EPS with a presentation of
basic EPS. Primary EPS included common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS, while making the
computation in the United States more compatible to the standards of other
countries and the International Accounting Standards Committee, ("IASC"). It
also requires dual presentation of basic and fully diluted EPS on the face of
the income statement for all entities with complex capital structures.
The Company will adopt SFAS 128 effective December 31, 1997 and does not
expect the adoption of SFAS 128 to have a material impact on its financial
statements.
SFAS 129
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure", ("SFAS 129"). SFAS 129 establishes disclosure requirements
regarding pertinent rights and privileges of outstanding securities. Examples
of disclosure items regarding securities include items such as dividend and
liquidation preferences, participation rights, call prices and dates,
conversion or exercise prices and rates. The number of shares issued upon
conversion, exercise or satisfaction of required conditions during at least
the most recent annual fiscal period and any subsequent interim period must
also be disclosed.
Disclosure of liquidation preferences of preferred stock in the equity
section of the statement of financial condition is also required.
Issuers of redeemable stock must disclose the amount of redemption
requirements for all issues of capital stock that are redeemable at fixed or
determinable prices on fixed or determinable dates in each of the five years
following the date of the latest statement of financial position presented.
The Company will adopt SFAS 129 effective December 31, 1997.
SUBSEQUENT EVENTS
At its April 22, 1997 meeting Great Western Financial Corporation's Board of
Directors declared a quarterly cash dividend to shareholders of record on May
12, 1997 payable May 30, 1997.
At its April 22, 1997 meeting, Great Western Bank's Board of Directors
declared a regular quarterly common stock dividend of $35 million payable May
30, 1997 to Great Western Financial Corporation and a regular quarterly
preferred stock dividend of $2.8 million payable May 30, 1997 to Great Western
Financial Corporation.
For subsequent events related to merger activities, see "Merger Agreement
with Washington Mutual, Inc.", "H. F. Ahmanson & Company's Merger Proposal"
and "Litigation" in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
50
PART II--OTHER INFORMATION
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
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
------------------ ------------------- ------------------
(DOLLARS IN THOUSANDS)
Earnings
Net earnings.......... $ 65,703 $ 115,822 $ 71,294
Taxes on income....... 49,000 70,800 47,500
-------- ---------- --------
Earnings before taxes. $114,703 $ 186,622 $118,794
======== ========== ========
Interest expense
Deposits.............. $279,776 $1,179,479 $303,004
Borrowings............ 178,201 688,134 181,619
-------- ---------- --------
Total............... $457,977 $1,867,613 $484,623
======== ========== ========
Rent expense
Total................. $ 14,115 $ 63,980 $ 15,784
1/3 thereof........... 4,705 21,327 5,261
Capitalized interest.... $ - $ 33 $ 6
Preferred stock
dividends.............. $ 3,423 $ 20,295 $ 6,254
Ratio of earnings to
fixed charges and
preferred stock
dividends..............
Excluding deposits
Earnings before
fixed charges...... $297,609 $ 896,083 $305,674
Fixed charges....... 188,882 742,195 197,307
Ratio............... 1.58 1.21 1.55
Including deposits
Earnings before
fixed charges...... $577,385 $2,075,562 $608,678
Fixed charges....... 468,658 1,921,674 500,311
Ratio............... 1.23 1.08 1.22
Ratio of earnings to
fixed charges
Excluding deposits
Earnings before
fixed charges...... $297,609 $ 896,083 $305,674
Fixed charges....... 182,906 709,494 186,886
Ratio............... 1.63 1.26 1.64
Including deposits
Earnings before
fixed charges...... $577,385 $2,075,562 $608,678
Fixed charges....... 462,682 1,888,973 489,890
Ratio............... 1.25 1.10 1.24
51
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.2 Form of Amendments to the By-laws of Great Western Financial
Corporation, together with the Amended and Restated By-laws of Great
Western Financial Corporation.
4.1 The Company has outstanding certain long-term debt as set forth in
Note 15 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, 1996. 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 Agreement and Plan of Merger By and Among Washington Mutual, Inc., New
American Capital, Inc., and Great Western Financial Corporation, dated
as of March 5, 1997 (filed as an exhibit to GWFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference).
10.2 Amendment No. 1997-1 to GWFC Supplemental Executive Retirement Plan
1988 Restatement effective March 24, 1997.
10.3 Amendment No. 1997-1 to GWFC Retirement Restoration Plan effective
March 24, 1997.
11.1 Statement re computation of per share earnings.
27.1 Financial Data Schedule
b. Reports on Form 8-K
A Current Report on Form 8-K dated May 5, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 30, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 28, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 10, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 3, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated March 26, 1997 was filed with the SEC,
which contained as an exhibit a press release reporting that the Company's
Board of Directors had determined not to authorize providing information to
or engaging in discussions with H.F. Ahmanson & Company ("Ahmanson") with
regard to its unsolicited proposal for the merger of the Company and
Ahmanson.
A Current Report on Form 8-K/A dated March 26, 1997 was filed with the SEC
which contained as an exhibit a revised slide to the presentation to
investment analysts filed with the Form 8-K filed on March 24, 1997.
A Current Report on Form 8-K dated March 24, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated February 20, 1997 was filed with the SEC
reporting the adoption of an amendment to Great Western Financial
Corporation's Bylaws.
A Current Report on Form 8-K dated January 27, 1997 was filed with the SEC
which contained exhibits relating to the issuance of $300 million of 8.206%
Capital Securities, Series A, of Great Western Financial Trust II.
A Current Report on Form 8-K dated January 22, 1997 was filed with the SEC
reporting the Company's earnings for the fourth quarter of 1996 and annual
earnings for 1996.
52
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
DATE: May 14, 1997
53
EXHIBIT INDEX
MARCH 31, 1997
EXHIBIT PAGE
NUMBER NUMBER
------- ------
3.2 Form of Amendments to the By-laws of Great Western Financial
Corporation, together with the Amended and Restated By-laws
of Great Western Financial Corporation...................... 55
10.2 Amendment No. 1997-1 to GWFC Supplemental Executive
Retirement Plan 1988 Restatement effective March 24, 1997... 67
10.3 Amendment No. 1997-1 to GWFC Retirement Restoration Plan
effective March 24, 1997.................................... 69
11.1 Statement re computation of per share earnings............... 71
27.1 Financial Data Schedule...................................... 72
54