-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZ1E0BRnnMwG6VfQ6buf1vMKpCvyOP8rYhtZvCx1KBd/0T/zKENlyL0Za9IB5v0i VkBhPo9/zEiGUnmJxoXdvg== 0000043512-96-000012.txt : 19961118 0000043512-96-000012.hdr.sgml : 19961118 ACCESSION NUMBER: 0000043512-96-000012 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT WESTERN FINANCIAL CORP CENTRAL INDEX KEY: 0000043512 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 951913457 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04075 FILM NUMBER: 96662952 BUSINESS ADDRESS: STREET 1: 9200 OAKDALE AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187753411 MAIL ADDRESS: STREET 1: 9200 OAKDALE AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 - 1004 FORM 10-Q/A (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------ Commission file number 1-4075 ---------------------------------- 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 October 31, 1996: 137,710,442 GREAT WESTERN FINANCIAL CORPORATION TABLE OF CONTENTS Page ---- Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Financial Condition - September 30, 1996, December 31, 1995 and September 30, 1995................ ......................4 Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 1996 and 1995.....................................................5 Consolidated Statement of Changes in Stockholders' Equity................... ......................6 Consolidated Condensed Statement of Cash Flows - Three Months and Nine Months Ended September 30, 1996 and 1995......7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months and Nine Months Ended September 30, 1996.........9 Balance Sheet Analysis........................................10 Earnings Performance..........................................31 Part II. Other Information Item 5. Other Information..........................................42 Item 6. Exhibits and Reports on Form 8-K...........................43 GREAT WESTERN FINANCIAL CORPORATION PART I - FINANCIAL INFORMATION PERSONS FOR WHOM THE INFORMATION IS TO BE GIVEN - ----------------------------------------------- The accompanying financial information is filed for the Registrant, Great Western Financial Corporation, and its subsidiaries comprising a savings bank and companies engaged in consumer lending, mortgage banking, securities operations and certain other financial services ("GWFC" or "the Company"). PRESENTATION OF FINANCIAL INFORMATION - ------------------------------------- The financial information has been prepared in conformity with the accounting principles or practices reflected in the financial statements included in the Annual Report filed with the Commission for the year ended December 31, 1995. The information further reflects all adjustments which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the results for the interim periods. ITEM 1. FINANCIAL STATEMENTS GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands) September 30, 1996 December 31, 1995 September 30, 1995 ------------------ ------------------- ------------------ ASSETS Cash $ 445,195 $ 837,292 $ 849,096 Certificates of deposit, repurchase agreements and federal funds 250,125 257,125 287,125 Securities available for sale 1,316,592 1,092,459 1,054,453 Mortgage-backed securities held to maturity (fair value $1,715,532, $1,941,918 and $7,984,196) 1,694,937 1,886,736 7,827,138 Mortgage-backed securities available for sale 6,898,452 7,916,705 2,705,128 ---------- ---------- ---------- Total mortgage-backed securities 8,593,389 9,803,441 10,532,266 Loans, net of allowance for loan and lease losses 30,341,166 29,401,644 29,218,416 Loans available for sale 419,210 485,705 414,808 ---------- ----------- ----------- Net loans 30,760,376 29,887,349 29,633,224 Investment in Federal Home Loan Banks 371,221 341,102 341,102 Real estate available for sale or development, net 208,946 217,112 208,192 Accrued interest receivable 247,609 298,640 280,593 Premises and equipment, net 572,011 604,672 608,819 Intangibles arising from acquisitions 295,424 323,713 333,804 Other assets 487,705 923,859 564,340 ----------- ----------- ----------- Total assets $43,548,593 $44,586,764 $44,693,014 =========== =========== =========== LIABILITIES Deposits $28,852,700 $29,234,928 $29,432,176 Short-term borrowings from FHLB 1,678,039 740,080 - Securities sold under agreements to repurchase 4,586,645 6,868,295 7,253,023 Short-term borrowings 1,350,969 1,316,413 1,904,877 Accrued interest payable 102,046 79,872 74,049 Taxes on income, principally deferred 209,714 378,381 317,813 Other liabilities and accrued expenses 792,766 625,473 622,678 Long term borrowings 3,258,933 2,420,846 2,434,099 Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust holding solely $103,092,800 aggregate principle amount of 8.25% subordinated deferrable interest note, due 2025, of the Company 100,000 100,000 - ----------- ----------- ----------- Total liabilities 40,931,812 41,764,288 42,038,715 STOCKHOLDERS' EQUITY Preferred stock 165,000 294,375 294,375 Common stock 137,431 137,279 136,633 Additional capital 698,958 713,889 699,107 Retained earnings 1,567,993 1,572,782 1,511,898 Unearned compensation (1,308) (4,282) (5,450) Securities valuation allowance 48,707 108,433 17,736 ----------- ----------- ----------- Total stockholders' equity 2,616,781 2,822,476 2,654,299 Total liabilities and stockholders' equity $43,548,593 $44,586,764 $44,693,014 =========== =========== ===========
Unaudited GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------ (Dollars in thousands, except per share) 1996 1995 1996 1995 ----------- ---------- ---------- ---------- INTEREST INCOME Securities $ 16,899 $ 13,674 $ 48,062 $ 39,507 Mortgage-backed securities 156,422 196,596 495,055 563,480 Real estate loans 511,821 513,423 1,544,135 1,469,598 Consumer finance 91,439 91,345 276,340 270,079 Other 11,252 10,677 32,468 28,431 ---------- ---------- ---------- ---------- Total loan interest income 614,512 615,445 1,852,943 1,768,108 Other 12,681 13,382 36,324 32,729 ---------- ---------- ---------- ---------- Total interest income 800,514 839,097 2,432,384 2,403,824 INTEREST EXPENSE Deposits 292,835 316,577 886,293 903,312 Borrowings Short-term 111,743 137,587 338,443 389,796 Long-term 57,164 51,334 164,642 159,428 ---------- ---------- ---------- ---------- Total interest expense 461,742 505,498 1,389,378 1,452,536 ---------- ---------- ---------- ---------- NET INTEREST INCOME 338,772 333,599 1,043,006 951,288 Provision for loan losses 41,671 46,600 123,071 137,400 Net interest income after provision ---------- ---------- --------- ---------- for loan losses 297,101 286,999 919,935 813,888 Noninterest Income Retail banking fees 44,482 40,045 129,149 113,935 Servicing fees 9,541 13,246 32,380 40,920 Securities operations 7,911 5,110 22,129 13,363 Net insurance operations 6,623 7,002 21,601 20,875 Real estate fees 7,517 6,013 20,804 17,917 Gain (loss) on sale of mortgages (6,125) 1,315 (3,182) 4,375 Net gain (loss) on securities and investments (7,061) 1,854 (7,819) 4,731 Other 825 1,574 2,667 5,081 ---------- ---------- --------- --------- Total noninterest income 63,713 76,159 217,729 221,197 Noninterest Expense Salaries and benefits 105,881 105,931 340,033 337,439 SAIF special assessment 188,359 - 188,359 - Premises and occupancy 44,478 44,080 135,214 136,341 FDIC insurance premium 16,438 16,974 48,612 49,968 Outside data processing 13,906 16,981 41,844 47,107 Communications 10,565 11,421 29,021 34,663 Amortization of intangibles 9,430 11,089 28,289 30,196 Advertising and promotion 6,880 8,559 25,579 25,700 Net real estate operations (13,086) 2,231 (4,796) (495) Other 46,238 32,557 124,419 105,611 ---------- ---------- ---------- --------- Total noninterest expense 429,089 249,823 956,574 766,530 ---------- ---------- ---------- --------- EARNINGS (LOSS) BEFORE TAXES (68,275) 113,335 181,090 268,555 Income tax expense (benefit) (28,400) 44,800 70,400 106,100 ----------- ---------- ---------- --------- NET EARNINGS (LOSS) $ (39,875) $ 68,535 $ 110,690 $ 162,455 =========== ========== ========== ========= Average common shares outstanding Without dilution 134,063,270 137,690,681 138,069,484 136,466,836 Fully diluted 134,063,270 138,125,045 138,586,815 137,323,937 Earnings per share based on average common shares outstanding Primary $ (0.31) $ 0.45 $ 0.68 $ 1.05 Fully diluted (0.31) 0.45 0.68 1.05 Cash dividend per common share 0.25 0.23 0.73 0.69
Unaudited GREAT WESTERN FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30 -------------------------------- 1996 1995 ---- ---- (Dollars in thousands) PREFERRED STOCK Balance, beginning of period $ 294,375 $ 294,375 Preferred stock redeemed (953) - Preferred stock converted to common stock (128,422) - ----------- ----------- Balance, end of period 165,000 294,375 ----------- ----------- COMMON STOCK Balance, beginning of period 137,279 134,316 Common stock issued upon exercise of options 516 557 Common stock issued under dividend reinvestment plan 71 1,750 Common stock acquired from restricted stock plan (223) - Restricted stock awards granted, net of cancellations (7) 10 Common stock repurchased under repurchase plan (6,500) - Common stock converted from preferred stock 6,295 - ----------- ----------- Balance, end of period 137,431 136,633 ----------- ----------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 713,889 656,644 Preferred stock converted to common stock 122,082 - Common stock issued upon exercise of options 9,754 9,521 Common stock issued under dividend reinvestment plan 1,612 32,715 Common stock acquired from restricted stock plan (4,996) - Restricted stock awards granted, net of cancellations (123) 227 Common stock repurchased under repurchase plan (143,260) - ----------- ----------- Balance, end of period 698,958 699,107 ----------- ----------- RETAINED EARNINGS Balance, beginning of period 1,572,782 1,461,448 Net income 110,690 162,455 Preferred stock dividends (16,871) (18,761) Common stock dividends (98,608) (93,244) ---------- ---------- Balance, end of period 1,567,993 1,511,898 ---------- ---------- UNEARNED COMPENSATION Balance, beginning of period (4,282) (7,913) Amortization of restricted stock 2,953 2,849 Restricted stock awards granted, net of cancellations 21 (386) ---------- ---------- Balance, end of period (1,308) (5,450) ---------- ---------- INVESTMENT SECURITIES VALUATION ALLOWANCE Balance, beginning of period 108,433 (55,084) Change in unrealized net gain (loss), net of taxes (59,726) 72,820 ---------- ---------- Balance, end of period 48,707 17,736 ---------- ---------- Total stockholders' equity $2,616,781 $2,654,299 ========== ==========
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended Nine Months Ended (Dollars in thousands) September 30 September 30 -------------------------- -------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ------------ OPERATING ACTIVITIES Net earnings $ (39,875) $ 68,535 $ 110,690 $ 162,455 Noncash adjustments to net earnings: Provision for loan losses 41,671 46,600 123,071 137,400 Provision for real estate losses - - - 1,500 Depreciation and amortization 20,542 18,421 59,093 56,913 Amortization of intangibles 9,430 10,088 28,289 30,196 Income taxes (87,911) 36,143 (125,074) 71,759 Loss (gain) on sales of loans receivable available for sale 365 2,244 4,741 1,509 Gain on sales of real estate (3,905) (4,713) (11,241) (19,000) Gain on sales of consumer loans (166) (249) (811) (249) Gain on sale of other investments, net (431) - (866) - Capitalized interest (4,664) (19,140) (36,263) (42,254) Net change in accrued interest 23,390 (18,260) 67,214 (63,576) Other 274,231 (63,756) 588,187 133,761 ----------- ----------- ----------- ------------ 232,677 75,913 807,030 470,414 ----------- ----------- ----------- ------------ Sales and repayments of loans receivable available for sale 213,685 481,268 1,031,620 664,870 Originations and purchases of loans receivable available for sale (216,795) (514,946) (948,650) (779,060) ----------- ----------- ----------- ------------ (3,110) (33,678) 82,970 (114,190) ----------- ----------- ----------- ------------ Net cash provided by operating activities 229,567 42,235 890,000 356,224 ----------- ----------- ----------- ------------ FINANCING ACTIVITIES Customer accounts Net (decrease) in transaction accounts (206,616) (137,860) (263,946) (756,691) Net (decrease) increase in term accounts 179,497 47,352 (118,282) 1,487,920 ----------- ----------- ----------- ------------ (27,119) 185,212 (382,228) 731,229 Borrowings Repayments of long-term debt (100,241) (21,210) (105,686) (204,951) Proceeds from new long-term debt 199,931 99,906 299,773 99,906 Net change in FHLB borrowings 267,740 - 1,581,959 (72,000) Net change in securities sold under agreements to repurchase (781,048) (176,275) (2,281,650) 953,968 Net change in short-term debt 405,941 25,633 34,556 694,416 ----------- ----------- ----------- ------------ (7,677) (71,946) (471,048) 1,471,339 Other financing activity Proceeds from issuance of common stock 5,422 14,800 11,953 44,780 Repurchases of common stock (149,760) - (154,979) - Conversion and redemption of preferred stock (129,375) - (129,375) - Issuance of common stock on conversion of preferred stock 128,378 - 128,378 - Cash dividends paid (37,129) (37,523) (115,479) (112,005) ----------- ----------- ----------- ------------ (182,464) (22,723) (259,502) (67,225) ----------- ----------- ----------- ------------ Net cash (used in) provided by financing activities (217,260) 90,543 (1,112,778) 2,135,343 ----------- ----------- ----------- ------------
GREAT WESTERN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- ------------------------- (Dollars in thousands) 1996 1995 1996 1995 ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Investment securities Proceeds from maturities $ 609,142 $ 359,704 $ 1,432,434 $ 1,047,120 Purchases of securities (534,749) (417,359) (1,666,585) (1,162,469) ----------- ----------- ----------- ----------- 74,393 (57,655) (234,151) (115,349) Lending Loans originated for investment (1,956,270) (1,606,409) (4,904,078) (6,450,885) Purchases of mortgage-backed securities - - (30,367) - Payments 1,502,420 1,521,902 4,808,941 3,913,622 Mortgage sales - 3,170 3,722 3,170 Repurchases (6,305) (10,683) (23,147) (34,225) Other (2,454) (29,232) (6,175) (18,194) ----------- ----------- ----------- ----------- (462,609) (121,252) (151,104) (2,586,512) Other investing activity Purchases and sales of premises and equipment, net (8,041) (28,433) (28,632) (71,008) Sales of real estate 96,575 116,539 267,543 306,255 Net change in investment in FHLB stock (5,715) 3,531 (30,119) (35,061) Other 221 (35,167) 144 (2,236) ----------- ----------- ----------- ----------- 83,040 56,470 208,936 197,950 ----------- ----------- ----------- ----------- Net cash (used in) provided by investing activities (305,176) (122,437) (176,319) (2,503,911) ----------- ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (292,869) 10,341 (399,097) (12,344) Cash and cash equivalents at beginning of period 988,189 1,125,880 1,094,417 1,148,565 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 695,320 $ 1,136,221 $ 695,320 $ 1,136,221 =========== =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid for Interest on deposits $ 277,942 $ 330,459 $ 856,290 $ 904,180 Interest on borrowings 176,403 193,987 516,904 562,264 Income taxes 59,223 13,564 155,775 36,838 Noncash investing activities Loans transferred to foreclosed real estate $ 99,573 $ 103,534 $ 320,997 $ 317,422 Loans originated to finance the sale of real estate 16,201 11,902 51,282 77,263 Loans originated to refinance existing loans 62,158 71,304 254,114 180,316 Loans exchanged for mortgage-backed securities - - - 1,997,585
Unaudited GREAT WESTERN FINANCIAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 Great Western Financial Corporation reported a net loss of $39.9 million, or $.31 per share, in the 1996 third quarter compared with net earnings of $79.3 million, or $.52 per share, in the 1996 second quarter and $68.5 million, or $.45 per share, in the 1995 third quarter. For the nine months ended September 30, 1996, net earnings were $111 million, or $.68 per share, compared with $162 million, or $1.05 per share, for the same period a year ago. The 1996 third quarter loss includes a $188 million pre-tax charge to recapitalize the Savings Association Insurance Fund ("SAIF"). The provision for loan losses during the 1996 third quarter was $41.7 million compared with $39.3 million in the second quarter of 1996 and $46.6 million in the third quarter of 1995. The provision for loan losses during the first nine months of 1996 and 1995 was $123 million and $137 million, respectively.
HIGHLIGHTS (Dollars in thousands, except per share) For the three months ended September 30 1996 1995 - -------------------------- ---- ---- Net interest income $ 338,772 $ 333,599 Net earnings (loss) (39,875) 68,535 Fully diluted earnings (loss) ($.31) $.45 per common share New loan volume 2,251,424 2,204,741 Increase (decrease) in deposits (27,119) 185,212 Mortgage sales 204,117 483,790 Return on average assets (annualized) (.36%) .61% Return on average equity (annualized) (5.89%) 10.46% Interest spread Yield on interest earning assets 7.72% 7.94% Cost of interest bearing liabilities 4.62 4.93 ---- ---- Interest spread 3.10% 3.01% ==== ==== For the nine months ended September 30 - ------------------------- Net interest income $ 1,043,006 $ 951,288 Net earnings 110,690 162,455 Fully diluted earnings per common share $.68 $1.05 New loan volume 6,158,124 7,487,524 Increase (decrease) in deposits (382,228) 731,229 Mortgage sales 1,006,202 605,893 Return on average assets (annualized) .34% .49% Return on average equity (annualized) 5.33 8.44 Interest spread Yield on interest earning assets 7.82% 7.73% Cost of interest bearing liabilities 4.63 4.81 ---- ---- Interest spread 3.19% 2.92% ==== ==== At September 30 - --------------- Total assets $43,548,593 $44,693,014 Stockholders' equity 2,616,781 2,654,299 Stockholders' equity per common share $17.84 $17.27 Tangible stockholders' equity per common share $15.69 $14.83 /TABLE LINE OF BUSINESS RESULTS The following summarizes the contribution to pretax income (loss) from the Company's principal business units:
Three Months Ended Nine Months Ended ------------------- --------------------- September 30 September 30 ------------------- ---------------------- (Dollars in thousands) 1996 1995 1996 1995 -------- ------- -------- -------- Banking Operations $(89,070) $85,221 $104,978 $189,406 Consumer Finance Group 20,795 28,114 76,112 79,149 -------- ------- -------- -------- Pretax earnings (loss) (68,275) 113,335 181,090 268,555 Income tax expense (benefit) (28,400) 44,800 70,400 106,100 -------- ------- -------- -------- Net earnings (loss) $(39,875) $68,535 $110,690 $162,455 ======== ======= ======== ========
BALANCE SHEET ANALYSIS EARNING ASSETS Earning assets comprise securities, mortgage-backed securities, loans and investment in FHLB stock. The composition of earning assets at September 30, 1996 and September 30, 1995 follows:
September 30 ---------------------------------- 1996 1995 -------------- -------------- (Dollars in millions) Amount % Amount % ------- --- ------- --- Securities $ 1,504 3 $ 1,280 3 Mortgage-backed securities 8,593 21 10,553 25 Loans Real estate Single-family residential 25,665 62 24,518 58 Apartments 1,527 4 1,646 4 Commercial 1,264 3 1,395 3 ------- --- ------- --- Total real estate loans 28,456 69 27,559 65 Consumer Finance 2,115 5 2,019 5 Other 577 1 518 1 ------- --- ------- --- Total loans 31,148 75 30,096 71 Investment in FHLB stock 371 1 341 1 ------- --- ------- --- Total earning assets $41,616 100 $42,270 100 ======= === ======= === /TABLE Included in securities are certificates of deposit, repurchase agreements and federal funds. Securities exclude $62 million of securities held by the Company's life insurance subsidiary at September 30, 1996 and 1995. Earning assets decreased $173 million in the first nine months of 1996 compared with an increase of $2.7 billion in the same period of 1995. The decrease in 1996 represented a decline in mortgage-backed securities of $1.2 billion which reflects repayments and maturities, offset by an increase in single-family residential real estate loans of $948 million. Earning assets increased $145 million in the third quarter of 1996. The increase represented an increase in single-family residential real estate loans of $661 million offset by a decline in mortgage-backed securities of $337 million and a decrease in securities of $198 million. The increase in single-family residential real estate loans is due to customer demand for Adjustable Rate Mortgage ("ARM") lending rather than fixed-rate loans, which are sold shortly after origination. SECURITIES Securities available for sale are carried at fair value. Marketable securities available for sale at September 30, 1996 had both an amortized cost and a fair value of $1.3 billion. There were no significant gains realized during the third quarter and nine months ended September 30, 1996 and 1995. Unrealized net gains (losses) on marketable securities were $(1.7) million at September 30, 1996, $8.3 million at December 31, 1995 and $3.7 million at September 30, 1995. 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 Nine Months Ended --------------------------------- -------------------- September 30 June 30 March 31 September 30 ------------ ------- -------- -------------------- 1996 1996 1996 1996 1995 ------- ------- -------- -------- --------- (Dollars in thousands) Balance at beginning of period $45,293 $75,789 $108,433 $108,433 $(55,084) Change in unrealized net gains (losses), net of taxes 3,414 (30,496) (32,644) (59,726) 72,820 ------- ------- -------- -------- -------- Balance at end of period $48,707 $45,293 $ 75,789 $ 48,707 $ 17,736 ======= ======= ======== ======== ========
The majority of the unrealized net gains at September 30, 1996 is derived from the excess servicing component of mortgage servicing rights. This unrealized gain is recorded based on the assumption that the mortgage-backed securities classified as available for sale will be sold with gains recognized on servicing rights retained. 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, a Federal Savings Bank ("GWB") and the Company is at risk for losses on these loans. These securities totaled $6.3 billion at September 30, 1996 compared with $7.1 billion at September 30, 1995. As a result of the retention of credit risk on these securities, the Company repurchased delinquent loans totaling $28 million and $94 million for the quarter and nine months ended September 30, 1996, respectively. Repurchases for the third quarter and nine months of 1995 totaled $20 million and $49 million, respectively. At September 30, 1996, approximately 79% 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 September 30, 1996, adjustable rate mortgage-backed securities comprised 96% of the mortgage-backed securities portfolio compared with 94% in the comparable period in 1995. A summary of the Company's mortgage-backed securities portfolio follows:
September 30 ------------------------------ 1996 1995 ------------- ------------ (Dollars in millions) Amount % Amount % ------- --- ------- --- Adjustable Rate COFI $ 6,801 79 $ 8,248 78 FCOFI 1,391 16 1,626 15 Other 91 1 90 1 ------- --- ------- -- Total adjustable rate mortgage-backed securities 8,283 96 9,964 94 Fixed-rate Long-term 243 3 530 5 Short-term 67 1 59 1 ------- --- ------- --- Total fixed-rate mortgage-backed securities 310 4 589 6 ------- --- ------- --- Total mortgage-backed securities $ 8,593 100 $10,553 100 ======= === ======= === /TABLE Mortgage-backed securities available for sale are carried at fair value. At September 30, 1996, mortgage-backed securities available for sale of $6.9 billion included $104 million of fixed-rate securities and $6.8 billion of adjustable rate securities. There were no sales of mortgage-backed securities during the third quarter of 1996. During the nine months ended September 30, 1996, realized losses on the sale of mortgage-backed securities were $2.0 million. In the second quarter, the Company realized a $1.4 million loss on the sale of a commercial mortgage note. Unrealized net gains on mortgage-backed securities were $79.1 million at September 30, 1996, compared with $173 million at December 31, 1995 and $25.9 million at September 30, 1995. The contractual maturities of all mortgage-backed securities as of September 30, 1996 follow:
Mortgage-Backed Securities ---------------------------- Adjustable Fixed (Dollars in millions) Rate Rate Total ---------- ----- ------ One year or less $ 124 $ 98 $ 222 Over one to two years 132 27 159 Over two to three years 140 22 162 Over three to five years 301 37 338 Over five to ten years 906 86 992 Over ten to fifteen years 1,212 30 1,242 Over fifteen years 5,468 10 5,478 ------ ---- ------ $8,283 $310 $8,593 ====== ==== ======
LOANS The following comprised loans receivable:
September 30 -------------------------------- (Dollars in thousands) 1996 1995 -------- -------- Real estate Single-family residential $ 25,665 $ 24,518 Apartments 1,527 1,646 Commercial 1,264 1,395 -------- -------- Total real estate loans 28,456 27,559 Consumer Finance 2,115 2,019 Other 505 420 Leases 72 98 -------- -------- Total loans receivable 31,148 30,096 Allowance for loan and lease losses (322) (379) Unearned income and other (66) (84) -------- -------- Total (388) (463) -------- -------- Net loans receivable $ 30,760 $ 29,633 ======== ========
The ARM for single-family residential properties ("SFRs") is the primary lending product held for investment. At September 30, 1996, ARMs comprised 97% of the real estate loan portfolio compared with 96% in the comparable period in 1995. At September 30, 1996, approximately 73% 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. In March 1995, the Company introduced a new product, the London Interbank Offered Rate ("LIBOR") Annual Monthly Average ("LAMA") ARM. The LAMA ARM is indexed to a 12 month average of the Federal National Mortgage Association ("FNMA") One Month LIBOR. The FCOFI and LAMA ARMs are similar to the COFI ARM product with respect to interest-rate caps and payment changes. 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. A summary of the Company's real estate loan portfolio by product type follows:
September 30 ------------------------------- 1996 1995 ------------- ------------- (Dollars in millions) Amount % Amount % ------- --- ------- --- ARM COFI $20,905 73 $21,233 77 FCOFI 2,145 8 2,531 9 LAMA 2,872 10 1,127 4 Other 1,726 6 1,559 6 ------- --- ------- -- Total ARM loans 27,648 97 26,450 96 Fixed-rate Long-term 386 1 606 2 Short-term 422 2 503 2 ------- --- ------- --- Total fixed-rate loans 808 3 1,109 4 ------- --- ------- --- Total real estate loans $28,456 100 $27,559 100 ======= === ======= ===
A significant portion of the ARM portfolio is subject to lifetime interest-rate floors. At September 30, 1996, $455 million of ARMs with an average yield of 7.75% had reached their floor rate. Without the floor, the average yield on these loans would have been 7.37%. The benefit to interest income from real estate loans which have reached their floor interest rate was approximately $1.3 million for the nine months ended September 30, 1996 compared with $2.8 million in the same period of last year. The Company repurchases delinquent loans which were sold with recourse. Repurchased loans totaled $23.1 million in the nine months ended September 30, 1996 compared with $34.2 million in the nine months ended September 30, 1995. The balance of loans and mortgage-backed securities sold with recourse totaled $1.3 billion at both September 30, 1996 and September 30, 1995. The composition of the loans available for sale portfolio at September 30, 1996 and September 30, 1995 follows:
September 30 ----------------------------- (Dollars in millions) 1996 1995 ---- ---- Loans available for sale Real estate loans available for sale, net $ 43,883 $108,693 Other consumer 375,327 306,115 -------- -------- Total loans available for sale $419,210 $414,808 ======== ========
Other consumer loans available for sale represent the portfolio of student loans. 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 September 30, 1996, there were no open hedge contracts on the pipeline due to the relatively low level of fixed- rate commitments. Real estate loans available for sale are valued at the lower of cost or fair value. As of September 30, 1996 and 1995, real estate loans available for sale, primarily fixed-rate loans, were $43.9 million and $109 million, respectively. During the quarter and nine months ended September 30, 1996, gains from this portfolio totaled $2.5 million and $7.4 million, respectively, compared with $1.3 million and $4.4 million in the third quarter and nine months of 1995. Included in gains on real estate loan sales were gains on the sale of servicing rights of $431,000 and $1.4 million for the third quarter and nine months ended September 30, 1996, respectively. There were no sales of servicing rights for the same period of 1995. Unrealized holding gains on real estate loans available for sale totaled $91,000 at September 30, 1996 and $720,000 at September 30, 1995. The contractual maturities of loans as of September 30, 1996 follow:
Real Estate Loans ----------------- Fixed Consumer Total ARM Rate Finance Other Loans ------- ----- -------- ----- ------- (Dollars in millions) One year or less $ 514 $ 32 $ 699 $ 138 $ 1,383 Over one to two years 759 43 568 8 1,378 Over two to three years 706 38 405 9 1,158 Over three to five years 1,156 146 160 8 1,470 Over five to ten years 3,571 282 193 337 4,383 Over ten to fifteen years 4,514 92 88 77 4,771 Over fifteen years 16,428 175 2 - 16,605 ------- ----- ------ ----- ------- Total $27,648 $ 808 $2,115 $ 577 $31,148 ======= ===== ====== ===== =======
The composition of new loan volume was as follows:
Three Months Ended Nine Months Ended ----------------------------------- ----------------- September 30 June 30 September 30 September 30 ------------ ------- ------------ ----------------- (Dollars in millions) 1996 1996 1995 1996 1995 ---- ---- ---- ---- ---- Real estate loans $1,685 $1,589 $1,635 $4,514 $5,835 Consumer Finance 480 510 503 1,394 1,445 Other 86 70 67 250 208 ------ ------ ------ ------ ------ Total new loan volume $2,251 $2,169 $2,205 $6,158 $7,488 ====== ====== ====== ====== ======
For the third quarter of 1996, third party originations were $707 million or 42.0% of new real estate loans, compared with $372 million or 22.7% of new real estate loans in the same period of 1995. In the nine months ended September 30, 1996, third party originations were $1.5 billion, or 33.2% of new real estate loans, compared with $1.9 billion, or 32.4% of new real estate loans in the same period of 1995. The composition of real estate loan originations by type was as follows:
Three Months Ended Nine Months Ended ------------------------------------- ----------------- September 30 June 30 September 30 September 30 ------------ -------- ------------ ----------------- 1996 1996 1995 1996 1995 ---- ---- ---- ---- ---- ARM COFI 51% 42% 28% 39% 64% LAMA 24 27 37 29 19 FCOFI - - - - 1 T-Bill 10 7 1 7 1 Other 3 3 2 3 2 --- --- --- --- --- Total ARM 88 79 68 78 87 Fixed-rate 12 21 32 22 13 --- --- --- --- --- Total 100% 100% 100% 100% 100% === === === === === Refinances, included above 36% 43% 42% 44% 35% === === === === ===
During the third quarter of 1996, ARMs comprised 88% of total real estate loan originations compared with 79% for the second quarter of 1996 and 68% in the third quarter of 1995. The principal mortgage instruments for the nine months ended September 30, 1996 were both the COFI and LAMA ARMs. A popular ARM product in 1996 was the LAMA ARM loan with a fixed interest rate during the first three or five years of the loan term. The ARM differential over the appropriate indices on new ARMs was 2.64% in the third quarter of 1996 compared with 2.58% a year ago. The ARM differential on the total ARM real estate loan portfolio was 2.52% at September 30, 1996 and 2.48% at September 30, 1995. The cost of funds for GWB, relative to COFI, FCOFI and LAMA is shown as follows:
GWB GWB Cost of Cost of Funds Less Than ---------------------- Funds COFI FCOFI LAMA COFI FCOFI LAMA ------- ---- ----- ---- ---- ----- ---- September 30, 1996 4.468% 4.834% 5.991% 5.512% .366% 1.523% 1.044% June 30, 1996 4.396 4.809 5.935 5.636 .413 1.539 1.240 March 31, 1996 4.463 4.874 5.957 5.766 .411 1.494 1.303 December 31, 1995 4.658 5.059 6.152 5.940 .401 1.494 1.282 September 30, 1995 4.776 5.111 6.254 6.009 .335 1.478 1.233 /TABLE The geographic distribution of the real estate loan portfolio and nonaccrual and restructured loans at September 30, 1996 follows:
Connecticut Massachusetts California Florida New York -------------------- -------------------- --------------------- Restructured Restructured Restructured and and and (Dollars in millions) Portfolio Nonaccrual Portfolio Nonaccrual Portfolio Nonaccrual --------- ---------- --------- ---------- --------- ---------- Real estate loans Single family residential $16,021 $ 365 $1,844 $ 23 $1,794 $ 35 Apartments 1,275 36 56 - - - Commercial Offices 334 16 14 - - - Retail 203 16 17 3 - - Hotel/motel 127 15 5 - - - Industrial 236 10 12 - - - Other 122 3 10 - - - ------------------ ----------------- ------------------ Total $18,318 $ 461 $1,958 $ 26 $1,794 $ 35 ------------------ ----------------- ------------------ Percent of total loans 64.4% 6.9% 6.3% Nonaccrual and restructured as a % of total by state 2.5% 1.3% 2.0%
Oregon Washington Other Total -------------------- -------------------- --------------------- Restructured Restructured Restructured and and and (Dollars in millions) Portfolio Nonaccrual Portfolio Nonaccrual Portfolio Nonaccrual --------- ---------- --------- ---------- --------- ---------- Real estate loans Single family residential $1,540 $ 9 $4,466 $43 $25,665 $475 Apartments 7 1 189 8 1,527 45 Commercial Offices 17 - 15 - 380 16 Retail 9 - 10 - 239 19 Hotel/motel - - 77 - 209 15 Industrial 1 - 24 - 273 10 Other 4 - 27 1 163 4 ----------------- ----------------- ------------------- Total $1,578 $10 $4,808 $52 $28,456 $584 ----------------- ----------------- ------------------- Percent of total loans 5.5% 16.9% 100% Nonaccrual and restructured as a % of total by state 0.6% 1.1% 2.1% /TABLE A comparison of the California real estate loan portfolio and nonaccrual and restructured real estate loans by region as of September 30, 1996 follows:
Northern California Central California ---------------------------- ------------------------- Restructured Restructured and and (Dollars in millions) Portfolio Nonaccrual Portfolio Nonaccrual --------- ---------- --------- ---------- Real estate loans Single-family residential $ 5,031 $ 79 $1,344 $ 20 Apartments 155 2 228 7 Commercial Offices 73 11 37 - Retail 48 1 28 - Hotel/Motel 44 - 25 3 Industrial 31 1 13 1 Other 39 - 19 - ------- ---- ------ ---- Total by region $ 5,421 $ 94 $1,694 $ 31 ------- ---- ------ ---- Percent of total loans 29.6% 9.2% Nonaccrual and restructured as a % of total by region 1.7% 1.8%
Southern California California ------------------------ ------------------------- Restructured Restructured and and (Dollars in millions) Portfolio Nonaccrual Portfolio Nonaccrual --------- ------------ --------- ------------- Real estate loans Single-family residential $9,646 $ 266 $16,021 $ 365 Apartments 892 27 1,275 36 Commercial Offices 224 5 334 16 Retail 127 15 203 16 Hotel/Motel 58 12 127 15 Industrial 192 8 236 10 Other 64 3 122 3 ------- ------ ------- ------ Total by region $11,203 $ 336 $18,318 $ 461 ------- ------ ------- ------ Percent of total loans 61.2% 100.0% Nonaccrual and restructured as a % of total by region 3.0% 2.5%
The California real estate market requires continued review. There appear to be regional differences in economic performance within California and among property types which are attributable to differing recovery rates for the wide range of economic activities within California. On a regional basis, the economic factors affecting the single-family market appear to be somewhat more favorable in Northern California than in Southern California. In particular, the median metropolitan area sales price of existing single-family homes in the San Jose area decreased from the second quarter of 1995 to the second quarter of 1996 by 1%. During the same period, the median sales price for the Los Angeles area declined 3% while the median sales price for the San Diego area increased by approximately 1%. In the office space market, regional differences exist between Northern and Southern California. In the San Francisco area, the vacancy rate declined to 7% at June 30, 1996 from 10% a year earlier. In the Los Angeles area, the vacancy rate of the office space market was 19% at June 30, 1996 compared with 20% at June 30, 1995. In San Diego County, the vacancy rate was 15% at June 30, 1996 and 18% at June 30, 1995. In the industrial space market, Northern and Southern California vacancy rates have been more comparable. In the San Francisco area, the vacancy rate remained at 9% at June 30, 1996, the same as a year earlier. In the Los Angeles area, the vacancy rate of the industrial space market was 8% at June 30, 1996 and 1995. San Diego County's industrial space market had a vacancy rate of 7% at June 30, 1996 compared with 4% at June 30, 1995. NONPERFORMING ASSETS The following table presents comparative data for nonperforming assets and the ratios to total assets. Nonperforming assets include nonaccrual and restructured loans and real estate. 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.
September 30 June 30 March 31 December 31 September 30 (Dollars in millions) 1996 1996 1996 1995 1995 ------------- ------------- ------------ ------------- ------------- Nonaccrual Loans Real estate Single-family residential $454 $424 $432 $432 $424 Apartments 13 11 13 13 23 Commercial 24 10 18 14 17 ---- ---- ---- ---- ---- Total nonaccrual real estate loans 491 445 463 459 464 Consumer Finance 29 27 26 25 24 Other 6 1 1 2 1 ---- ---- ---- ---- ---- Total nonaccrual loans 526 473 490 486 489 Restructured loans Single-family residential 21 19 17 13 13 Apartments 32 32 33 28 28 Commercial 40 62 62 67 68 ---- ---- ---- ---- ---- Total restructured loans 93 113 112 108 109 ---- ---- ---- ---- ---- Nonaccrual and restructured loans 619 586 602 594 598 As a percentage of total loans 2.01% 1.95% 2.02% 1.99% 2.02% Real estate 159 184 189 174 164 ---- ---- ---- ---- ---- Total nonperforming assets $778 $770 $791 $768 $762 ==== ==== ==== ==== ==== As a percentage of total assets 1.79% 1.76% 1.81% 1.72% 1.71%
Nonaccrual and restructured loans increased by $33 million during the third quarter of 1996. Total nonaccrual and restructured single-family residential properties increased $32 million in the third quarter of 1996. Single-family residential loans in California increased $13 million while out-of-state loans increased $19 million. Nonaccrual and restructured commercial properties decreased by $8 million in the third quarter of 1996, primarily due to a single large payoff. Nonaccrual apartment loans decreased $2 million during the third quarter of 1996. Nonperforming real estate declined $25 million in the third quarter of 1996. Certain loans (where the Company works with borrowers encountering economic difficulty) meet the criteria of, and are classified as, troubled debt restructurings ("TDRs") because of modification to loan terms. TDRs totaled $93 million at September 30, 1996 compared with $113 million at June 30, 1996 and $130 million at September 30, 1995. The decrease in the third quarter of 1996 was primarily comprised of $13 million of loans which had been reclassed to nonaccrual status and an additional $11 million which had been paid-off in full. These reductions were partially offset by an additional $4 million of restructured loans. 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 Reserves Having related for Net with no related Net of reserves estimated reserves reserves reserves for losses losses for losses for losses for losses ---------- --------- ---------- ---------- ---------- (Dollars in thousands) September 30, 1996 ------------------------------------------------------------------- Real estate loans Single-family residential $ 91,264 $20,324 $ 70,940 $37,919 $108,859 Apartments 73,809 14,913 58,896 15,415 74,311 Commercial Offices 22,119 8,681 13,438 11,241 24,679 Retail 31,215 6,321 24,894 2,517 27,411 Hotel/motel 24,212 8,066 16,146 - 16,146 Industrial 15,358 4,200 11,158 1,177 12,335 Other 1,627 167 1,460 2,036 3,496 -------- ------- -------- ------- -------- Total commercial 94,351 27,435 67,096 16,971 84,067 -------- ------- -------- ------- -------- Total $259,604 $62,672 $196,932 $70,305 $267,237 ======== ======= ======== ======= ========
September 30, 1995 ------------------------------------------------------------------ Real estate loans Single-family residential $ 30,315 $ 6,790 $ 23,525 $ 15,682 $ 39,207 Apartments 84,770 18,624 66,146 21,611 87,757 Commercial Offices 23,769 8,783 14,986 12,154 27,140 Retail 32,146 7,116 25,030 5,887 30,917 Hotel/motel 38,812 9,295 29,517 - 29,517 Industrial 24,400 5,520 18,880 3,022 21,902 Other 1,839 526 1,313 1,981 3,294 -------- ------- -------- -------- -------- Total commercial 120,966 31,240 89,726 23,044 112,770 -------- ------- -------- -------- -------- Total $236,051 $56,654 $179,397 $ 60,337 $239,734 ======== ======= ======== ======== ========
The impaired loan portfolio increased at September 30, 1996 compared with September 30, 1995. The increase was primarily the result of a change in procedure allowing for an accelerated identification of impaired single- family loans. Single-family residential mortgage loans are generally evaluated for impairment as homogeneous pools of loans. Certain situations may arise leading to single-family residential mortgage loans being evaluated for impairment on an individual basis. The Company's policy for recognizing income on impaired loans is to accrue earnings until a loan becomes nonaccrual, at which time the accrued earnings are reversed. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses. DELINQUENT ASSETS The Company continuously reviews the trends of loans and mortgage- backed securities with full credit risk. The following summarizes the quarterly trend for the last five quarters of real estate loans, Consumer Finance and other loans and mortgage-backed securities which are over thirty to ninety days delinquent:
September 30 June 30 March 31 December 31 September 30 (Dollars in millions) 1996 1996 1996 1995 1995 ------------ ------- -------- ----------- ------------ Real Estate Loans - ----------------- Over 30 to 60 days delinquent Single-family residential $ 311 $ 216 $ 206 $ 194 $ 190 Other 17 10 6 9 7 Over 60 to 90 days delinquent Single-family residential 111 90 88 87 89 Other 7 14 3 6 4 ------ ------ ------ ------ ------ Total $ 446 $ 330 $ 303 $ 296 $ 290 ====== ====== ====== ====== ====== Percentage of related portfolio 1.57% 1.19% 1.10% 1.07% 1.05% Consumer Finance Loans - ---------------------- Over 30 to 60 days delinquent $ 45 $ 41 $ 39 $ 43 $ 43 Over 60 to 90 days delinquent 19 17 16 17 15 ------ ------ ------ ------ ------ Total $ 64 $ 58 $ 55 $ 60 $ 58 ====== ====== ====== ====== ====== Percentage to related portfolio 3.03% 2.79% 2.66% 2.81% 2.87% Other Loans - ------------ Over 30 to 60 days delinquent $ 13 $ 7 $ 10 $ 5 $ 5 Over 60 to 90 days delinquent 4 3 7 3 5 ------ ------ ------ ------ ------ Total $ 17 $ 10 $ 17 $ 8 $ 10 ====== ====== ====== ====== ====== Percentage to related portfolio 2.95% 1.81% 3.07% 1.55% 1.93% Total Loans - ------------ Over 30 to 60 days delinquent $ 386 $ 274 $ 261 $ 251 $ 245 Over 60 to 90 days delinquent 141 124 114 113 113 ------ ------ ------ ------ ------ Total $ 527 $ 398 $ 375 $ 364 $ 358 ====== ====== ====== ====== ====== Percentage to related portfolio 1.69% 1.31% 1.24% 1.20% 1.19% Mortgage-Backed Securities - -------------------------- Over 30 to 60 days delinquent $ 48 $ 27 $ 27 $ 25 $ 18 Over 60 to 90 days delinquent 19 12 11 11 9 ------ ------ ------ ------ ------ Total $ 67 $ 39 $ 38 $ 36 $ 27 ====== ====== ====== ====== ====== Percentage to related portfolio 0.78% 0.44% 0.41% 0.37% 0.26% /TABLE The increase in over 30 to 60 day delinquencies at September 30, 1996 compared with September 30, 1995 is primarily due to a temporary disruption in the collection process as a result of the re-engineering of loan servicing and the related installation of a new loan servicing system in July 1996. In addition, borrower performance continues to be weak on a portion of loans originated during the late 1980's and early 1990's. ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL) The following table presents the Company's reserve for estimated losses and the reserve as a percent of the respective loans receivable portfolios, including loans underlying mortgage-backed securities with full credit risk. Prior to September 30, 1996, percentages were computed using the loan portfolio including loans underlying mortgage-backed securities with full credit risk.
September 30 ----------------------------------- 1996 1995 --------------- -------------- (Dollars in millions) Amount % Amount % ------ --- ------ --- Real estate Single-family residential $148 .58 $172 .55 Other 110 3.93 148 4.87 Consumer Finance 59 2.77 53 2.61 Leases 1 1.75 3 3.28 Other 4 .80 3 .58 ---- ---- ---- ---- Total ALLL $322 1.03 $379 1.02 ==== ==== ==== ====
An analysis of the changes in the ALLL including charge-offs and recoveries by loan category is presented in the following table:
At or For The At or For the Three Months Ended Nine Months Ended September 30 September 30 -------------------- ----------------------- (Dollars in thousands) 1996 1995 1996 1995 ---- ---- ---- ---- Beginning balance $330,321 $391,652 $ 362,849 $ 438,051 Provision for loss Real estate loans SFR 49,919 54,300 103,519 128,500 Other (24,915) (20,000) (24,915) (18,000) Consumer Finance 15,300 11,600 43,400 31,400 Other 1,367 700 1,067 (4,500) -------- -------- --------- --------- 41,671 46,600 123,071 137,400 -------- -------- --------- --------- Charge-offs Real estate loans SFR (32,881) (43,664) (112,894) (146,294) Other (2,637) (4,525) (10,181) (19,542) Consumer Finance (18,290) (15,587) (52,752) (44,220) Other (968) (230) (2,153) (926) -------- -------- --------- --------- (54,776) (64,006) (177,980) (210,982) -------- -------- --------- --------- Recoveries Real estate loans SFR 251 326 818 1,204 Other 30 26 206 446 Consumer Finance 3,988 3,933 12,369 12,271 Other 145 31 297 172 -------- -------- --------- --------- 4,414 4,316 13,690 14,093 -------- -------- --------- --------- Net charge-offs Real estate loans SFR (32,630) (43,338) (112,076) (145,090) Other (2,607) (4,499) (9,975) (19,096) Consumer Finance (14,302) (11,654) (40,383) (31,949) Other (823) (199) (1,856) (754) -------- -------- --------- --------- (50,362) (59,690) (164,290) (196,889) -------- -------- --------- --------- Ending balance $321,630 $378,562 $ 321,630 $ 378,562 ======== ======== ========= ========= Average balance (Dollars in millions) MBS with credit risk $ - $ 7,092 $ 4,581 $ 6,838 Real estate loans SFR 25,304 24,359 24,969 23,803 Other 2,836 3,065 2,900 3,096 Consumer finance 2,089 2,012 2,090 1,995 Other 546 485 536 471
At or For The At or For the Three Months Ended Nine Months Ended September 30 September 30 -------------------- ----------------------- (Dollars in thousands) 1996 1995 1996 1995 ---- ---- ---- ---- Ratio of net charge-offs (annualized) to average loans Real estate loans SFR .52% .55% .51% .63% Other .37 .59 .46 .82 Consumer Finance 2.74 2.32 2.58 2.14 Other .60 .16 .46 .21 ----- ----- ----- ----- .65% .65% .62% .73% ===== ===== ===== ===== /TABLE Mortgage-backed securities with full credit risk have been included with SFRs for the calculation of net charge-offs to average portfolio until the third quarter of 1996. At September 30, 1996, the ALLL was $322 million, or 1.03% of total loans, compared with $379 million, or 1.02% at September 30, 1995. The provision for loan losses was $123 million for the nine month period ending September 30, 1996, down from $137 million in the comparable period in 1995. The reduction in the provision was primarily due to improvement in commercial real estate. Net charge-offs for single family residential real estate loans for the nine month period were $112 million or .51% compared with $145 million or .63% for the comparable period in 1995. SFR real estate loan charge-offs continue at a high level, although they are down from 1995. 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 reduction in the allowance for SFR loans from $172 million at September 30, 1995, or .55% of the SFR portfolio to $148 million at September 30, 1996, or .58% 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 FAS 114. The allowance for commercial real estate loans has decreased from $148 million at September 30, 1995, or 4.87% to $110 million at September 30, 1996, or 3.93%. 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, therefore continuing to reduce its allowance for commercial real estate loans. The provision for commercial real estate and apartment loans was reduced by $24.9 million in the third quarter of 1996, primarily as a result of the Company's review of required levels for the allowance on this portfolio. The Company also reduced the provision for losses on this portfolio in the third quarter of 1995 by $20 million. 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 $53 million at September 30, 1995, or 2.61% of the outstanding portfolio, to $59 million at September 30, 1996, or 2.77% of the outstanding portfolio, as a result of some deterioration in credit quality. The allowance for leases was $1 million at September 30, 1996, down from $3 million at September 30, 1995, or a decline of 67%. Provisions for losses on the leasing portfolio, included in other loan loss provisions, for the three and nine month periods ending September 30, 1996, decreased as a result of the reversal of $1.8 million of excess reserves. Provisions for losses on the leasing portfolio for the same period of 1995 decreased as a result of the reversal of a $6 million reserve originally established for expected losses which did not materialize. The general component includes management's judgmental determination 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 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 an internal staff that regularly reviews 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 Office of Thrift Supervision ("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 $322 million adequate to cover losses inherent in the loan and lease portfolio at September 30, 1996. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluation of the loan 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 losses. The Company's real estate loan portfolio included approximately $2.2 billion of uninsured single-family mortgage loans at September 30, 1996, compared with $2.8 billion a year ago, which were originated with terms where the LTV exceeded 80% (but not in excess of 90%). During the third quarter of 1996, losses on the higher LTV mortgages totaled $1.9 million, or .35% (annualized), compared with $6.9 million, or .84% (annualized) for the same period a year ago. For the year 1995, losses totaled $33.4 million, or 1.00% of such loans, compared with $24.3 million, or .59% for 1994. The Company began to purchase mortgage insurance on all new single-family residential mortgages originated with LTVs in excess of 80% in 1990. This portfolio of uninsured loans is becoming more seasoned and continues to decline. REAL ESTATE 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 September 30, 1996, foreclosed real estate properties totaling $2.9 million are operating profitably after consideration for interest and depreciation, and accordingly are classified as performing assets. In the third quarter of 1996, the Company determined that its real estate portfolio was appropriately valued at market and therefore the associated general reserve of $13.9 million was reversed. The geographic distribution of real estate and nonperforming real estate for September 30, 1996 follows:
Connecticut Massachusetts California Florida New York -------------------- -------------------- --------------------- Non- Non- Non- (Dollars in millions) Portfolio performing Portfolio performing Portfolio performing --------- ---------- --------- ---------- --------- ---------- Real estate Single family residential $ 114 $ 114 $ 4 $ 4 $ 3 $ 3 Apartments 15 14 3 3 - - Commercial Offices 5 5 - - - - Retail 3 1 - - - - Industrial 3 3 - - - - Property Development 39 - - - - - Other 14 7 1 1 - - ------------------ ----------------- ------------------ Total $ 193 $ 144 $ 8 $ 8 $ 3 $ 3 ------------------ ----------------- ------------------ Percent of total real estate 91.9% 3.8% 1.4% Nonperforming real estate as a % of total by state 74.6% 100% 100% /TABLE
Oregon Washington Other Total -------------------- -------------------- --------------------- Non- Non- Non- (Dollars in millions) Portfolio performing Portfolio performing Portfolio performing --------- ---------- --------- ---------- --------- ---------- Real estate Single family residential $ 1 $ 1 $ 5 $ 3 $ 127 $125 Apartments - - - - 18 17 Commercial Offices - - - - 5 5 Retail - - - - 3 1 Industrial - - - - 3 3 Property Development - - - - 39 - Other - - - - $ 15 8 ----------------- ----------------- ------------------- Total $ 1 $ 1 $ 5 $ 3 $ 210 $159 ----------------- ----------------- ------------------- Percent of total real estate 0.5% 2.4% 100% Nonperforming real estate as a % of total by state 100% 60.0% 75.7%
Total real estate as reported on the statement of financial condition is net of $932 thousand of general reserves. During the third quarter of 1996, real estate declined $28 million and nonperforming real estate declined $25 million. This decline is attributed to a lower foreclosure rate and higher sales volume compared with the first six months of 1996. A comparison of California real estate and nonperforming real estate by region as of September 30, 1996, follows:
Northern California Central California ------------------------ ------------------------ (Dollars in millions) Portfolio Nonperforming Portfolio Nonperforming --------- ------------- --------- ------------- Real estate Single-family residential $ 13 $ 13 $ 7 $ 7 Apartments 1 1 9 9 Commercial Offices - - - - Retail - - - - Property Development 14 - 12 - Industrial - - - - Other 4 4 - - ------- ---- ------ ---- Total by region $ 32 $ 18 $ 28 $ 16 ------- ---- ------ ---- Percentage of total California real estate 16.6 14.5% Nonperforming as a % of total by region 56.3% 57.1%
Southern California California ------------------------ ------------------------- (Dollars in millions) Portfolio Nonperforming Portfolio Nonperforming --------- ------------- --------- ------------- Real estate Single-family residential $ 94 $ 94 $ 114 $ 114 Apartments 5 4 15 14 Commercial Offices 5 5 5 5 Retail 3 1 3 1 Property Development 13 - 39 - Industrial 3 3 3 3 Other 10 3 14 7 ------ ------ ------- ------ Total by region $ 133 $ 110 $ 193 $ 144 ------ ------ ------- ------ Percentage of total California real estate 68.9% 100.0% Nonperforming as a % of total by region 82.7% 74.6% /TABLE In the third quarter of 1996, bulk sales of foreclosed single-family properties totaled $37.0 million compared with $45.8 million in the second quarter of 1996 and $47.8 million in the third quarter of 1995. Auction sales have also been utilized to accelerate the disposition of foreclosed properties. INTEREST BEARING LIABILITIES The composition of interest bearing liabilities at September 30, 1996 and September 30, 1995 follows:
September 30 ------------------------------- 1996 1995 ------------- ------------- (Dollars in millions) Amount % Amount % ------------- ------------- Deposits Checking $ 4,339 11 $ 4,377 11 Savings 1,688 4 1,820 5 Money Market 4,790 12 5,012 12 Term 17,796 45 17,675 43 Wholesale 240 1 548 1 ------ ---- ------ -- Total deposits 28,853 73 29,432 72 Borrowings Short-term borrowings from FHLB 1,678 4 - - Securities sold under agreements to repurchase 4,586 12 7,253 18 Short-term borrowings 1,351 3 1,905 4 Long-term borrowings 3,359 8 2,434 6 ------ ---- ------ ---- Total borrowings 10,974 27 11,592 28 ------ ---- ------ ---- Total interest bearing liabilities $39,827 100% $41,024 100% ------- --- ------- ---
The following table shows the components of the change in deposit balances:
Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 1996 1995 1996 1995 ---- ---- ---- ---- Checking $(176) $ 127 $(149) $ (196) Savings (88) (56) (76) (179) Money Market 60 52 (36) (429) Term 327 79 101 1,551 Wholesale (150) (17) (222) (16) ----- ---- ----- -------- $ (27) $ 185 $(382) $ 731 ----- ------ ----- --------
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. Term deposits increased $327 million primarily as a result of a certificate of deposit promotion in the third quarter of 1996. This promotion resulted in an inflow to term deposits of approximately $675 million. A summary of term deposits by interest rate and maturity as of September 30, 1996 follows:
90 Days 180 Days One Year Two Years (Dollars in Within to to to to Three Years September 30 December 31 September 30 millions) 90 Days 180 Days One Year Two Years Three Years and Over 1996 1995 1995 ------- -------- -------- --------- ----------- ----------- ------------ ----------- ------------ Under 4% $ 68 $ 24 $ 9 $ 2 $ 8 $ - $ 111 $ 199 $ 332 4 to 6% 3,402 3,978 5,018 2,322 259 425 15,404 12,825 11,175 6 to 8% 309 948 460 145 35 446 2,343 4,763 6,305 Over 8% - - 1 1 4 1 7 197 206 ------ ------ ------ ------ ---- ---- ------- ------- ------- $3,779 $4,950 $5,488 $2,470 $306 $872 $17,865 $17,984 $18,018 ====== ====== ====== ====== ==== ==== ======= ======= ======= $100,000 accounts included above $ 821 $ 904 $1,073 $ 250 $ 53 $196 $ 3,298 $ 3,502 $ 3,160
Included in wholesale deposits are term accounts of $69 million at September 30, 1996, $288 million at December 31, 1995 and $343 million at September 30, 1995. Total borrowings at September 30, 1996 decreased $618 million compared with the same period last year. The level of borrowings is influenced by customer account activity and changes in assets, primarily the run-off in mortgage-backed securities that was greater than the increase in SFR real estate loans. ASSET LIABILITY MANAGEMENT The following table shows that the portfolio of short-term assets exceeded liabilities maturing or subject to interest adjustment within one year by $3.3 billion, or 8.0% of earning assets at September 30, 1996 compared with $3.6 billion, or 8.7% of earning assets at December 31, 1995 and $4.5 billion, or 10.7% of earning assets at September 30, 1995. The Company is better protected against rising rates with an excess of interest earning assets maturing or repricing within one year.
Maturity/Rate Sensitivity --------------------------------------------------------- September 30, 1996 Within Over % of (Dollars in millions) 1 Year 1-5 Years 5-15 Years 15 Years Total Total ------ --------- ---------- -------- ----- ----- Earning Assets Securities $ 1,504 $ - $ - $ - $ 1,504 4 Mortgage-backed securities 8,422 79 73 19 8,593 21 Loans Real estate Adjustable rate 24,997 2,651 - - 27,648 66 Fixed-rate Short-term 18 14 32 358 422 1 Long-term 45 56 103 182 386 1 Total real estate loans 25,060 2,721 135 540 28,456 68 ------ ----- --- --- ------ -- Consumer Finance 183 1,528 306 98 2,115 5 Other 513 58 2 4 577 1 ------- ------- ----- ------ ------- --- Total loans 25,756 4,307 443 642 31,148 74 Investment in FHLB stock - - - 371 371 1 ------- ------- ----- ------ ------- --- Total earning assets 35,682 4,386 516 1,032 41,616 100 ------- ------- ----- ------ ------- --- Interest Bearing Liabilities Deposits Checking 4,339 - - - 4,339 11 Savings 1,688 - - - 1,688 4 Money Market 4,790 - - - 4,790 12 Term accounts 14,148 3,632 16 - 17,796 45 Wholesale 240 - - - 240 1 ------- ------- ----- ------ ------- --- Total deposits 25,205 3,632 16 - 28,853 73 Borrowings Short-term borrowings from FHLB 1,678 - - - 1,678 4 Securities sold under agreement to repurchase 3,993 593 - - 4,586 12 Short-term borrowings 1,351 - - - 1,351 3 Long-term borrowings 252 2,762 199 46 3,259 8 Company-obligated preferred securities - - - 100 100 - Impact of interest-rate swaps (109) 109 - - - - ------ ----- ----- ----- ------- --- Total borrowings 7,165 3,464 199 146 10,974 27 Total interest bearing liabilities 32,370 7,096 215 146 39,827 100 ------ ----- ----- ----- ------- --- Excess of earning assets over interest bearing liabilities at September 30, 1996 $ 3,312 $(2,710) $ 301 $ 886 $ 1,789 ======= ======= ===== ====== =======
EARNINGS PERFORMANCE Net Interest Income Net interest income was $339 million in the third quarter of 1996 compared with $352 million in the second quarter of 1996. Net interest income was $334 million in the third quarter of 1995. The interest spread for the third quarter of 1996 was 3.10% compared with 3.23% in the first and second quarters of 1996 and 3.01% in the third quarter of 1995. The repricing lag on COFI, FCOFI and LAMA ARMs decreased the interest spread by approximately 1 basis point in the third quarter of 1996 and increased it approximately 6 basis points in the second quarter of 1996. For the third quarter of 1995, the repricing lag accounted for an increase of approximately 2 basis points to the interest spread. 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 3.27% for the three months ended September 30, 1996 compared with 3.15% for the same period a year ago. The Company's net interest margin was 3.35% for the nine months ended September 30, 1996 compared with 3.06% for the same period a year ago. The following table of net interest income displays the average monthly balances, interest income and expense and average rates by asset and liability component for the periods indicated:
Three Months Ended September 30 ------------------------------------------------------- 1996 1995 -------------------------- -------------------------- (Dollars in millions) Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- Earning Assets Securities $ 1,944 $ 30 6.09% $ 1,594 $ 27 6.79% Mortgage-backed securities 8,762 157 7.14 10,735 197 7.33 Loans Real estate 28,140 512 7.28 27,424 513 7.49 Consumer Finance 2,089 91 17.51 2,012 91 18.16 Other 546 11 8.24 485 11 8.80 ------ --- ----- ------ ------- ----- Total earning assets 41,481 801 7.72 42,250 839 7.94 Other assets 2,255 2,353 Total assets $43,736 $44,603 ======= ======= Interest Bearing Liabilities Deposits Checking $ 4,483 8 .73 $ 4,328 9 .81 Savings 1,734 9 1.97 1,849 9 1.98 Money Market 4,772 40 3.35 4,983 39 3.14 Term 17,665 235 5.31 17,677 256 5.77 Wholesale 286 1 2.04 550 4 3.22 ------- ---- ---- ------- ---- ---- Total deposits 28,940 293 4.05 29,387 317 4.31 Borrowings Short-term borrowings from FHLB 1,912 30 6.33 - - - Securities sold under repurchase agreements 4,878 66 5.40 7,220 106 5.90 Short-term 1,273 16 4.91 1,969 31 6.33 Long-term borrowings 2,962 57 7.72 2,414 51 8.67 ------- ---- ---- ------- ---- ---- Total borrowings 11,025 169 6.13 11,603 188 6.51 ------- ---- ---- ------- ---- Total interest bearing liabilities 39,965 462 4.62 40,990 505 4.93 Other liabilities 1,063 992 Stockholders' equity 2,708 - 2,621 - ------- ---- ------- ---- Total liabilities and equity $43,736 462 $44,603 505 ======= ======= Interest spread $339 3.10% $334 3.01% ==== ===== ==== ==== Effective yield summary Interest income/total earning assets $41,481 $801 7.72% $42,250 $839 7.94% Interest expense/total earning assets 41,481 462 4.45 42,250 505 4.79 ---- ----- ---- ---- Net interest income/net interest margin $339 3.27% $334 3.15 ---- ----- ---- ---- /TABLE
Nine Months Ended September 30 ------------------------------------------------------- 1996 1995 -------------------------- -------------------------- Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- Earning Assets Securities $ 1,805 $ 84 6.23% $ 1,527 $ 72 6.31% Mortgage-backed securities 9,173 495 7.20 10,576 564 7.10 Loans Real estate 27,869 1,544 7.39 26,899 1,470 7.28 Consumer 2,090 276 17.63 1,995 270 18.06 Other 536 33 8.08 471 28 8.05 ------ ----- ----- ------ ----- Total earning assets 41,473 2,432 7.82 41,468 2,404 7.73 Other assets 2,336 2,335 ------- ------- Total assets $43,809 $43,803 ------- ------- Interest Bearing Liabilities Deposits Checking $ 4,459 25 .75 $ 4,339 27 .81 Savings 1,758 26 1.96 1,897 28 1.98 Money Market 4,763 115 3.23 5,058 111 2.93 Term 17,689 712 5.36 17,335 721 5.54 Wholesale 375 8 2.98 561 16 3.91 ------- ------ ---- ------- ----- ---- Total deposits 29,044 886 4.07 29,190 903 4.13 Borrowings Short-term borrowings from FHLB 1,476 65 5.86 - - - Securities sold under repurchase agreements 5,574 227 5.44 7,028 315 5.98 Short-term borrowings 1,191 46 5.18 1,572 75 6.32 Long-term borrowings 2,697 165 8.14 2,490 160 8.54 ------- ------ ---- ------- ----- ---- Total borrowings 10,938 503 6.13 11,090 550 6.60 ------- ------ ---- ------- ----- ---- Total interest bearing liabilities 39,982 1,389 4.63 40,280 1,453 4.81 Other liabilities 1,063 957 Stockholders' equity 2,708 - 2,566 - ------- ------ ------- ------ Total liabilities and equity $43,753 1,389 $43,803 1,453 ------- ------ ------- ------ Interest spread $1,043 3.19% $ 951 2.92% ------ ---- ----- ----- Effective yield summary Interest income/total earning assets $41,473 $2,432 7.82% $41,468 $2,404 7.73% Interest expense/total earning assets $41,473 1,389 4.47 41,468 1,453 4.67 ------ ---- ------ ----- Net interest income/net interest margin $1,043 3.35% $ 951 3.06% ------ ---- ------ -----
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 increased to $12.8 million for the quarter ended September 30, 1996 compared with $10 million for the quarter ended September 30, 1995. For the first nine months of 1996 and 1995, nonaccrual interest was $29.5 million and $29.3 million, respectively. The following table shows the components of the changes in net interest income between periods:
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------- (Dollars in millions) 1996 vs 1995 1995 vs 1994 1996 vs 1995 1995 vs 1994 ------------ ------------ ------------ ------------ Securities and investments Rate (1) $ (3) $ 2 $ (1) $ 8 Volume (2) 6 8 13 18 Rate/Volume (3) - - - 3 ---- ---- ---- ---- 3 10 12 29 ---- ---- ---- ---- Mortgage-backed securities Rate (1) (5) 18 7 38 Volume (2) (36) 92 (75) 302 Rate/Volume (3) 1 32 (1) 80 ---- ---- ---- ---- (40) 142 (69) 420 ---- ---- ---- ---- Real estate loans Rate (1) (14) 59 21 139 Volume (2) 13 (38) 53 (118) Rate/Volume (3) - (5) - (11) ---- ---- ---- ---- (1) 16 74 10 ---- ---- ---- ---- Consumer loans Rate (1) (5) - (8) (8) Volume (2) 6 10 19 29 Rate/Volume (3) (1) - - (1) ---- ---- ---- ---- - 10 11 20 ---- ---- ---- ---- Interest earning assets Rate (27) 79 19 177 Volume (11) 72 10 231 Rate/Volume - 27 (1) 71 ---- ---- ---- ---- (38) 178 28 479 ---- ---- ---- ---- Deposits Rate (1) (19) 87 (13) 246 Volume (2) (5) (4) (4) (30) Rate/Volume (3) 1 (1) - (10) ---- ---- ---- ---- (23) 82 (17) 206 Borrowings ---- ---- ---- ---- Rate (1) (11) 3 (39) (6) Volume (2) (9) 77 (7) 340 Rate/Volume (3) - 13 - (9) ---- ---- ---- ---- (20) 93 (46) 325 ---- ---- ---- ---- Interest bearing liabilities Rate (30) 90 (52) 240 Volume (14) 73 (11) 310 Rate/Volume 1 12 - (19) ---- ---- ---- ---- (43) 175 (63) 531 ---- ---- ---- ---- Change in net interest income $ 5 $ 3 $ 91 $(52) ----- ----- ---- ----
(1) The rate variance reflects the change in the average rate multiplied by the average balance outstanding during the prior period. (2) The volume variance reflects the change in the average balance outstanding multiplied by the average rate during the prior period. (3) The rate/volume variance reflects the change in the average rate multiplied by the change in the average balance outstanding. (4) Nonaccrual loans and amortized deferred loan fees are included in the interest income calculations NONINTEREST INCOME Retail banking fee income increased to $129 million in the nine months ended September 30, 1996 from $114 million in the nine months ended September 30, 1995, an increase of 13%. The increase was due primarily to checking account transaction fees which include fees for NSF, ATM, check printing, overdraft usage and stop payments. Servicing fees totaled $32.4 million for the nine months ended September 30, 1996 compared with $40.9 million for the nine months ended September 30, 1995. The decrease in income was primarily the result of adjustment to the carrying value of capitalized mortgage servicing rights. At September 30, 1996, the servicing spread was 41 basis points on the $11.0 billion servicing portfolio compared with a servicing spread of 42 basis points on a $10.8 billion portfolio at September 30, 1995. The portfolio of loans serviced for others is expected to decrease if the level of fixed-rate loan originations and sales decrease. Income from mutual fund and securities brokerage operations has increased as a result of increased sales of mutual funds and decreased redemptions. Net revenue from these operations totaled $22.1 million in the nine months ended September 30, 1996 compared with $13.4 million in the same period of 1995. The Company managed mutual funds with assets aggregating $3.4 billion at September 30, 1996 compared with $3.2 billion at September 30, 1995. Real estate fees were $20.8 million in the first nine months of 1996 compared with $17.9 million for the same period of 1995. For the third quarter of 1996, real estate fees were $7.5 million compared with $6.0 million for the third quarter of 1995. Loan prepayment fees were $653,000 in the third quarter of this year compared with $649,000 in the second quarter of 1996 and $146,000 in the third quarter last year. As a result of the Company's implementation of a new reserve methodology, $7.7 million was recorded against the gain on mortgage sales in the third quarter of 1996 to reflect the credit risk inherent in the portfolio of loans sold with recourse. Excluding the $7.7 million adjustment, mortgage sales in the first nine months of 1996, primarily fixed-rate, totaled $1.0 billion at a gain of .74% of the portfolio sold, compared to $606 million in the first nine months of last year at a gain of .72% of the portfolio sold. As a result of the adoption of FAS 122, the amount of servicing capitalized in 1996 and included in gain on mortgage sales was $1.7 million and $7.1 million for the third quarter and nine months of 1996, respectively. In the third quarter of 1996, the Company sold the servicing rights on $31.1 million of loans at a gain of $431,000. For the nine months ended September 30, 1996, the Company sold the servicing rights on $84 million of loans at a gain of $1.4 million. Net loss on securities and investments totaled $7.1 million and $7.8 million for the three and nine months ended September 30, 1996, respectively. For the three and nine months ended September 30, 1995, the Company had a net gain on securities and investments of $1.9 million and $4.7 million, respectively. The loss in the third quarter of 1996 was a result of the recording of charge-offs on the loans underlying the mortgage- backed securities where the Company has full credit risk. Net insurance operations and other income was $24.3 million for the nine months ended September 30, 1996 compared with $26.0 million for the same period a year ago. NONINTEREST EXPENSE Noninterest expenses were as follows:
Three Months Ended Nine Months Ended (Dollars in millions) September 30 September 30 ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Salaries and benefits $106 $106 $340 $338 SAIF special assessment 188 - 188 - Premises and occupancy 44 44 135 136 FDIC insurance premiums 16 17 49 50 Outside data processing 14 17 42 47 Communications 11 11 29 35 Amortization of intangibles 9 11 28 30 Advertising and promotion 7 9 26 26 Branch losses 6 6 20 14 Office supplies 5 5 16 13 Postage 3 3 11 10 Insurance 2 3 7 8 Net real estate operations (13) 2 (5) (1) Other 31 16 71 61 ---- ---- ---- ---- $429 $250 $957 $767 ==== ==== ==== ====
Total noninterest expense, excluding the SAIF special assessment, for the 1996 third quarter was $241 million, down from $250 million in the third quarter of 1995, or 3.6%. On September 30, 1996, the President signed into law an omnibus spending bill which included provisions for the recapitalization of the Savings Association Insurance Fund ("SAIF") through a one-time special assessment of approximately 65.7 basis points of SAIF deposits held by savings associations as of March 31, 1995. GWB's special assessment of $188 million has been reflected in the Bank's third quarter results. The recapitalization will reduce the severe disparity between the deposit insurance premiums paid by savings associations and those paid by banks beginning in 1997. GWB expects that its deposit insurance premiums will be approximately 6.4 basis points of deposits while the deposit insurance premiums of most banks will be approximately 1.3 basis points through 1999. Thereafter, the deposit insurance premiums of most banks and savings associations are expected to be approximately two basis points of deposits. The new law also requires the Treasury Department to conduct a study of all issues considered to be relevant to the development of a common charter for all insured institutions and the abolition of separate and distinct charters for banks and savings associations. The law specifies that the Bank Insurance Fund and the Savings Association Insurance Fund are to be merged by 1999, if there are no savings associations in existence at that time. Included in other operating expenses for the nine months of 1996 is a $7.4 million recovery for fraudulently over-billed marketing costs which had occurred over a number of years. The Company is implementing new processes and technologies in its banking and lending operations in 1996 and 1997 in order to reduce costs and remain competitive in today's marketplace. As a result, a restructuring charge will be recorded in the fourth quarter of 1996 to include severance costs of displaced employees, the write-off of obsolete technology (equipment) and charges to close and consolidate facilities. The Company is taking a vigorous look at all of its businesses and has decided to begin a process of exploring several options for its mutual fund subsidiary, Sierra Capital Management Corporation, ranging from a joint venture partnership to sale of the company. There can be no assurance that any transaction will result. Sierra Capital Management Corporation has $3.4 billion in assets under management and markets a family of 15 mutual funds through a separate broker-dealer subsidiary of the Company and through other national and regional securities brokerages. The Company is committed to participation in the securities business through its broker-dealer, Great Western Financial Securities Corporation, which is currently the focus of expansion plans. The Company may sell other assets or segments that are not strategic to its business. These are currently being evaluated and should be identified in the fourth quarter of 1996. INCOME TAX The Company's effective tax rate was 38.9% in the first nine months of 1996 and 39.5% in the same period of 1995. Under the Internal Revenue Code, GWB, as a qualified thrift institution, is allowed deductions for bad debts under the reserve method, which is more favorable than bad debt deduction methods allowed to other taxpayers. If GWB converted to a commercial bank, or otherwise lost its tax status as a qualified thrift institution, it would be ineligible for this reserve method and its existing tax bad debt reserve of $724,488,000 would possibly be subject to federal income tax. Under provisions of the Small Business Job Protection Act of 1996, GWB lost its eligibility for the bad debt reserve method beginning in 1996; however, the existing reserve balance is no longer subject to federal income tax now or if, in the future, the Bank converts to a commercial bank status or otherwise loses its tax status as a qualified thrift institution. The existing reserve balance will continue to be subject to tax upon certain occurrences, including its distribution to shareholders, none of which are currently contemplated. CAPITAL ADEQUACY AND LIQUIDITY Capital (stockholders' equity) was $2.6 billion at September 30, 1996 and $2.7 billion at September 30, 1995. At the end of the 1996 third quarter, the ratio of capital to total assets was 6.0% compared with 5.9% a year ago. At September 30, 1996 preferred stock totaled $165 million compared with $294 million at June 30, 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. 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 September 30, 1996. The repurchases may be made from time to time through mid-1997 in the open market or through privately negotiated transactions. In July 1996, 6.5 million shares were repurchased pursuant to this program. The shares were repurchased at a price of approximately $23 per share, which will be adjusted over a 95-day trading period. The adjustment can be settled in cash or securities at the Company's discretion. Funds for this repurchase were provided by a $75 million dividend from the Company's subsidiary, Aristar, and other short-term liquidity sources. GWB is subject to certain capital requirements under applicable regulations and meets all such requirements. GWB's capital was $2.9 billion, including eligible subordinated notes of $288 million at September 30, 1996 and $2.8 billion, including eligible subordinated notes of $373 million at September 30, 1995. The following ratios compare GWB with the capital requirements under regulations issued by the OTS:
September 30, 1996 -------------------------------- Actual OTS Benchmark -------------- ------------- (Dollars in millions) Amount % Amount % ------ --- ------ --- Leverage/tangible ratio $2,386 5.85 $1,224 3.00 Tier 1 risk-based ratio 2,381 9.91 961 4.00 Total risk-based ratio 2,863 11.91 1,922 8.00
The OTS amended its risk-based capital rules to incorporate interest- rate risk ("IRR") requirements to require a savings association to hold additional capital if it is projected to experience an excessive decline in "net portfolio value" in the event interest rates increase or decrease by two percentage points. The additional capital required is equal to one-half of the amount by which any decline in net portfolio value exceeds 2% of the savings association's total net portfolio value. The standards are not yet in effect. However, GWB does not expect the interest-rate risk requirements to have a material impact on its required capital levels. The OTS 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 CAMEL 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. As of September 30, 1996, real estate loan commitments totaled $909 million compared with $717 million at December 31, 1995 and $894 million at September 30, 1995. These commitments included $816 million of ARMs and $96 million at fixed-rates at September 30, 1996. The Company has several sources for raising funds for lending, among which are mortgage repayments, mortgage sales, customer deposits, Federal Home Loan Bank borrowings and other borrowings. The following table presents the debt ratings of the Company and GWB at September 30, 1996:
Moody's Investors Standard & Poor's Service Fitch ----------------- ----------------- ----------- GWFC GWB GWFC GWB GWFC GWB ---- --- ---- --- ---- --- Unsecured short-term debt A-2 A-2 P-2 P-1 F-1 Senior term debt BBB+ A- Baa1 A-2 A- A Subordinated term debt BBB+ A-3 A- Preferred stock BBB- Baa2 BBB
The origination and sale of real estate loans is dependent upon general market conditions. In an active real estate market, loan originations 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. As presented in the Consolidated Condensed Statement of Cash Flows, the sources of liquidity vary between quarters. The primary source of funds in the third quarter of 1996 was principal payments on mortgage-backed securities and loans held for investment of $1.5 billion. New loans originated for investment required $2.0 billion in the third quarter of 1996. Operating activities provided $230 million in the current quarter. The Company continued to maintain liquidity balances each period in excess of funding and legal requirements. Cash and securities totaled $2.0 billion at September 30, 1996 and $2.2 billion at September 30, 1995. DIVIDENDS Quarterly cash dividends have been paid since 1977. At its April 1996 meeting, the Board of Directors increased the quarterly cash dividend from $.23 to $.25 per common share. The quarterly cash dividend of $.23 per common share had previously been paid at that level since the second quarter of 1992. The dividend increase was due to the Company's improved earnings and strong capital position. In the third quarter of 1996 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, Inc ("Aristar"). In the third quarter of 1996, cash dividends received from GWB and Aristar totaled $37.8 million and $82 million, respectively. In the first nine months of 1996, cash dividends received include $113.5 million from GWB, $109.8 million from Aristar and $4.9 million from other subsidiaries. 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 September 30, 1996, GWB's dividend limitation for 1996 is approximately $574 million. Therefore, after taking into consideration dividends declared for the 9 months ending September 30, 1996, GWB may declare dividends or make other capital distributions of approximately $460.5 million without obtaining prior approval. 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:
Nine Months Ended Twelve Months Ended Nine Months Ended (Dollars in thousands) September 30, 1996 December 31, 1995 September 30, 1995 ------------------ ------------------- ------------------ Earnings - -------- Net earnings $ 110,690 $ 261,022 $ 162,455 Taxes on income 70,400 161,100 106,100 ---------- ---------- ---------- Earnings before taxes $ 181,090 $ 422,122 $ 268,555 ========== ========== ========== Interest expense - ---------------- Deposits $ 886,293 $1,217,085 $ 903,312 Borrowings 516,070 734,670 563,869 ---------- ---------- ---------- Total $1,402,363 $1,951,755 $1,467,181 ========== ========== ========== Rent expense - ------------ Total $ 47,996 $ 46,433 $ 41,191 1/3 thereof 15,999 15,478 13,730 Capitalized interest $ 29 $ - $ - - -------------------- Preferred stock dividends $ 16,871 $ 25,015 $ 18,761 - ------------------------- Ratio of earnings to fixed charges - ---------------------------------- and preferred stock dividends ----------------------------- Excluding deposits ------------------ Earnings before fixed charges $ 713,159 $1,172,270 $ 846,154 Fixed charges 559,699 790,602 608,613 Ratio 1.27 1.48 1.39 Including deposits ------------------ Earnings before fixed charges $1,599,452 $2,389,355 $1,749,466 Fixed charges 1,445,992 2,007,687 1,511,925 Ratio 1.11 1.19 1.16 Ratio of earnings to fixed charges - ---------------------------------- Excluding deposits ------------------ Earnings before fixed charges $ 713,159 $1,172,270 $ 846,154 Fixed charges 532,098 750,148 577,599 Ratio 1.34 1.56 1.46 Including deposits ------------------ Earnings before fixed charges $1,599,452 $2,389,355 $1,749,466 Fixed charges 1,418,391 1,967,233 1,480,911 Ratio 1.13 1.21 1.18 /TABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a. Exhibits -------- 4.1 The Company has outstanding certain long-term debt as set forth in Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. The Company agrees to furnish copies of the instruments representing its long-term debt to the Securities and Exchange Commission (the "SEC") upon request. 11.1 Statement re computation of per share earnings. 27.1 Financial Data Schedule b. Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GREAT WESTERN FINANCIAL CORPORATION - ----------------------------------- Registrant /s/ Carl F. Geuther - ---------------------------------- Carl F. Geuther Vice Chairman and Chief Financial Officer /s/ Barry R. Barkley - ----------------------------------- Barry R. Barkley Senior Vice President and Controller DATE: November 13, 1996 GREAT WESTERN FINANCIAL CORPORATION EXHIBIT INDEX September 30, 1996 Exhibit Page Number Number - ------- ------ 11.1 Statement re computation of per share earnings 46 27.1 Financial Data Schedule 47 -----END PRIVACY-ENHANCED MESSAGE-----