<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4075
GREAT WESTERN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1913457
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9200 OAKDALE AVENUE, 91311
CHATSWORTH, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(818) 775-3411
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 July 1, 1997: 139,674,214.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
Part I. Financial Information
<C> <S> <C>
Item 1. Financial Statements......................................... 4
Consolidated Statement of Operations--Three months ended June 30,
1997, March 31, 1997 and June 30, 1996 and six months ended June
30, 1997 and June 30, 1996........................................ 4
Consolidated Statement of Financial Condition--June 30, 1997, March
31, 1997, December 31, 1996 and June 30, 1996..................... 5
Consolidated Statement of Changes in Stockholders' Equity--Three
months ended June 30, 1997, March 31, 1997, June 30, 1996 and six
months ended June 30, 1997 and June 30, 1996...................... 6
Consolidated Statement of Cash Flows--Three months and six months
ended June 30, 1997 and June 30, 1996............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months and six months
ended June 30, 1997 and June 30, 1996.......................... 9
Overview........................................................... 9
Highlights......................................................... 10
Merger Agreement with Washington Mutual, Inc....................... 11
Line of Business................................................... 12
Earnings Performance............................................... 15
Balance Sheet Analysis............................................. 24
Asset Liability Management......................................... 44
Liquidity Management............................................... 46
Parent Company Liquidity........................................... 46
Capital Adequacy................................................... 46
Impact of Recently Issued Accounting Standards..................... 49
Subsequent Events.................................................. 51
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.......... 52
Item 5. Other Information............................................ 53
Item 6. Exhibits and Reports on Form 8-K............................. 54
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
PERSONS FOR WHOM THE INFORMATION IS TO BE GIVEN
The accompanying financial information is filed for the Registrant, Great
Western Financial Corporation, and its subsidiaries comprising a savings bank
and companies engaged in consumer lending, mortgage banking, securities
operations and certain other financial services ("GWFC", "the Company" or
"Great Western").
PRESENTATION OF FINANCIAL INFORMATION
The financial information has been prepared in conformity with the
accounting principles or practices reflected in the financial statements
included in the Annual Report filed with the Commission for the year ended
December 31, 1996 with the exception of the implementation of Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). The
information further reflects all adjustments which are, in the opinion of
management, of a normal recurring nature and necessary for a fair presentation
of the results for the interim periods.
During 1996, the Company changed its methodology to record losses on loans
underlying mortgage-backed securities as a write-down on the security rather
than as a charge against the reserve for loan losses. On May 9, 1997 the
Company amended its 1996 Form 10-K to reflect the reclassification of these
prior period charge-offs against the reserve to write-downs on the mortgage
backed securities.
Certain line items have been reclassified to conform with Washington Mutual,
Inc.'s presentation of financial statements. (See "Part I. Financial
Information, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Merger Agreement with Washington Mutual,
Inc.")
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ ------------------------
JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1997 1997 1996 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)
INTEREST INCOME
Loans................. $ 629,829 $ 617,072 $ 612,581 $ 1,246,901 $ 1,238,431
Available-for-sale
securities........... 125,573 126,458 150,873 252,031 304,865
Held-to-maturity
securities........... 31,634 32,865 37,331 64,499 76,513
Cash equivalents...... 6,175 7,863 6,157 14,038 12,061
----------- ----------- ----------- ----------- -----------
Total interest
income.............. 793,211 784,258 806,942 1,577,469 1,631,870
INTEREST EXPENSE
Deposits.............. 284,635 279,776 290,454 564,411 593,458
Borrowings............ 181,943 166,318 164,540 348,261 334,178
----------- ----------- ----------- ----------- -----------
Total interest
expense............. 466,578 446,094 454,994 912,672 927,636
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME..... 326,633 338,164 351,948 664,797 704,234
Provision for loan
losses................. 36,072 40,390 32,566 76,462 68,587
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES............ 290,561 297,774 319,382 588,335 635,647
OTHER INCOME
Depositor fees........ 58,661 54,033 43,003 112,694 84,667
Securities and
insurance
commissions.......... 36,176 35,035 32,863 71,211 62,507
Loan servicing fees... 10,964 12,317 11,386 23,281 22,839
Other service fees.... 7,200 7,989 6,827 15,189 13,287
Other operating
income............... 5,815 2,522 3,339 8,337 3,526
Gain on sale of loans. 1,630 2,411 2,281 4,041 5,288
Gain/(loss) on sale of
other assets......... (3,917) 3,437 (7,803) (480) (14,114)
----------- ----------- ----------- ----------- -----------
Total other income... 116,529 117,744 91,896 234,273 178,000
OTHER EXPENSE
Salaries and employee
benefits............. 111,624 118,156 125,392 229,780 249,896
Occupancy and
equipment............ 44,407 47,720 48,483 92,127 97,839
Outside
telecommunications
and data processing
services............. 17,100 18,277 20,251 35,377 40,591
Regulatory
assessments.......... 4,525 4,577 16,028 9,102 32,174
Transaction-related
expenses............. 24,305 33,721 -- 58,026 --
Other operating
expense.............. 63,173 63,631 56,575 126,804 114,879
Amortization of
goodwill and other
intangible assets.... 8,976 8,975 9,430 17,951 18,859
Real estate owned
(REO) operations,
inclusive of write-
downs................ 2,068 5,758 4,548 7,826 10,044
----------- ----------- ----------- ----------- -----------
Total other expense.. 276,178 300,815 280,707 576,993 564,282
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES.................. 130,912 114,703 130,571 245,615 249,365
Income taxes.......... 58,579 49,000 51,300 107,579 98,800
----------- ----------- ----------- ----------- -----------
NET EARNINGS............ $ 72,333 $ 65,703 $ 79,271 $ 138,036 $ 150,565
=========== =========== =========== =========== ===========
Average common shares
outstanding............
Without dilution...... 141,615,106 141,305,122 139,041,758 141,026,856 138,984,442
Fully diluted......... 142,072,221 141,595,846 145,491,403 141,783,866 145,434,087
Earnings per share based
on average common
shares outstanding
Primary............... $ .49 $ .44 $ .52 $ .93 $ .99
Fully diluted......... .49 .44 .52 .93 .99
Cash dividend per common
share.................. .25 .25 .25 .50 .48
</TABLE>
Unaudited
4
<PAGE>
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1996 1996
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash....................... $ 424,357 $ 339,256 $ 534,192 $ 613,064
Cash equivalents........... 300,125 550,830 300,100 375,125
Available-for-sale
securities
Mortgage-backed
securities.............. 5,791,182 5,981,604 6,169,842 7,179,922
Investments (including
FHLB)................... 1,624,774 1,558,224 1,657,229 1,755,283
Held-to-maturity securities
Mortgage-backed
securities.............. 1,504,656 1,554,197 1,618,709 1,750,363
Loans held in portfolio.... 32,609,199 31,319,660 31,030,701 29,983,342
Loans held-for-sale........ 155,560 211,993 106,190 409,169
Reserve for loan losses.... (316,411) (320,800) (313,699) (330,321)
----------- ----------- ----------- -----------
Net Loans................ 32,448,348 31,210,853 30,823,192 30,062,190
Real estate owned.......... 86,343 78,257 119,772 167,359
Bank premises and
equipment................. 518,197 525,178 552,422 584,436
Goodwill and other
intangibles arising from
acquisitions.............. 268,041 277,016 285,991 304,854
Other assets............... 803,769 802,488 813,123 927,362
----------- ----------- ----------- -----------
Total assets........... $43,769,792 $42,877,903 $42,874,572 $43,719,958
=========== =========== =========== ===========
LIABILITIES
Deposits
Checking accounts........ $ 4,180,847 $ 4,383,937 $ 4,419,672 $ 4,515,344
Savings and money market
accounts................ 7,315,201 7,231,742 6,744,210 6,506,109
Time certificates........ 16,128,618 16,392,991 17,236,632 17,468,744
Wholesale................ 160,404 149,661 186,259 389,622
----------- ----------- ----------- -----------
Total deposits......... 27,785,070 28,158,331 28,586,773 28,879,819
Federal funds purchased and
commercial paper.......... 1,290,374 1,286,942 1,101,506 945,030
Securities sold under
agreements to repurchase.. 3,859,927 4,483,584 4,197,666 5,367,694
Advances from the FHLB..... 4,356,942 2,558,298 2,769,933 2,169,299
Guaranteed preferred
beneficial interest in
Company subordinated
notes..................... 400,000 400,000 100,000 100,000
Other borrowings........... 2,337,901 2,332,335 2,432,708 2,400,240
Other liabilities.......... 1,054,200 1,073,343 1,090,786 1,023,151
----------- ----------- ----------- -----------
Total liabilities...... 41,084,414 40,292,833 40,279,372 40,885,233
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value
$1.00 per share;
Authorized 10,000,000
shares; Cumulative
Convertible issued none,
none, none and 517,500,
Cumulative issued 660,000,
660,000, 660,000 and
660,000................... 165,000 165,000 165,000 294,035
Common stock, par value
$1.00 per share;
Authorized 200,000,000
shares; Issued
139,617,449, 137,885,310,
137,875,955, and
137,392,481............... 139,617 137,885 137,876 137,392
Capital surplus............ 730,241 677,250 680,428 715,297
Valuation reserve for
available-for-sale
securities................ 52,946 41,796 76,959 45,293
Retained earnings--
substantially restricted.. 1,597,574 1,563,139 1,535,264 1,644,997
Unearned compensation...... -- -- (327) (2,289)
----------- ----------- ----------- -----------
Total stockholders'
equity................ 2,685,378 2,585,070 2,595,200 2,834,725
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity.. $43,769,792 $42,877,903 $42,874,572 $43,719,958
=========== =========== =========== ===========
</TABLE>
Unaudited
5
<PAGE>
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ----------------------
JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1997 1997 1996 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
PREFERRED STOCK
Balance, beginning of
period............... $ 165,000 $ 165,000 $ 294,375 $ 165,000 $ 294,375
Preferred stock
converted to common
stock................ -- -- (340) -- (340)
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... 165,000 165,000 294,035 165,000 294,035
---------- ---------- ---------- ---------- ----------
COMMON STOCK
Balance, beginning of
period............... 137,885 137,876 137,205 137,876 137,279
Common stock converted
from preferred stock. -- -- 17 -- 17
Common stock issued
upon exercise of
options.............. 1,761 988 153 2,749 289
Common stock issued
under dividend
reinvestment plan.... -- 22 21 22 38
Common stock acquired. (8) (1,001) (1) (1,009) (224)
Restricted stock
awards granted, net
of cancellations..... (21) -- (3) (21) (7)
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... 139,617 137,885 137,392 139,617 137,392
---------- ---------- ---------- ---------- ----------
CAPITAL SURPLUS
Balance, beginning of
period............... 677,250 680,428 711,770 680,428 713,889
Common stock converted
from preferred stock. -- -- 323 -- 323
Common stock issued
upon exercise of
options.............. 52,991 27,004 2,819 79,995 5,373
Common stock issued
under dividend
reinvestment plan.... -- 825 460 825 840
Common stock acquired. -- (31,007) (9) (31,007) (5,005)
Restricted stock
awards granted, net
of cancellations..... -- -- (66) -- (123)
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... 730,241 677,250 715,297 730,241 715,297
---------- ---------- ---------- ---------- ----------
VALUATION RESERVE FOR
AVAILABLE-FOR-SALE
SECURITIES
Balance, beginning of
period............... 41,796 76,959 75,789 76,959 108,433
Change in unrealized
net gain, net of
taxes................ 11,150 (35,163) (30,496) (24,013) (63,140)
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... 52,946 41,796 45,293 52,946 45,293
---------- ---------- ---------- ---------- ----------
RETAINED EARNINGS--
SUBSTANTIALLY
RESTRICTED
Balance, beginning of
period............... 1,563,139 1,535,264 1,606,287 1,535,264 1,572,782
Net earnings.......... 72,333 65,703 79,271 138,036 150,565
Preferred stock
dividends............ (3,423) (3,424) (6,242) (6,847) (12,496)
Common stock
dividends............ (34,475) (34,404) (34,319) (68,879) (65,854)
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... 1,597,574 1,563,139 1,644,997 1,597,574 1,644,997
---------- ---------- ---------- ---------- ----------
UNEARNED COMPENSATION
Balance, beginning of
period............... -- (327) (3,294) (327) (4,282)
Amortization of
restricted stock..... -- 327 984 327 1,972
Restricted stock
awards granted, net
of cancellations..... -- -- 21 -- 21
---------- ---------- ---------- ---------- ----------
Balance, end of
period............... -- -- (2,289) -- (2,289)
---------- ---------- ---------- ---------- ----------
Total stockholders'
equity............. $2,685,378 $2,585,070 $2,834,725 $2,685,378 $2,834,725
========== ========== ========== ========== ==========
</TABLE>
Unaudited
6
<PAGE>
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------------
1997 1996 1997 1996
---------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings.................. $ 72,333 $ 79,271 $ 138,036 $ 150,565
Noncash adjustments to net
earnings:
Provision for loan losses... 36,072 32,566 76,462 68,587
Net (increase) decrease in
interest receivable........ (3,987) (8,404) 2,703 23,459
Net increase (decrease) in
interest payable........... 14,859 23,817 (15,778) 20,365
Depreciation and
amortization............... 16,893 19,226 35,964 38,551
Amortization of goodwill and
other intangibles.......... 8,975 9,430 17,951 18,859
FHLB stock dividend......... (5,613) (5,092) (11,697) (24,404)
Write-downs of mortgage-
backed securities.......... 4,500 6,734 8,700 12,813
Write-downs of real estate
owned...................... 808 -- 2,561 --
Loss on sale of mortgage-
backed securities
available-for-sale......... 5 1,395 15 1,961
Loss (gain) on sale of
leases..................... 5 (106) (711) (645)
(Gain) on sale of real
estate..................... (6,796) (5,095) (8,077) (7,336)
Loss on sale of loans held-
for-sale................... 5,173 2,830 7,431 4,376
Capitalized interest........ (13,988) (13,633) (27,977) (31,599)
Income taxes................ (25,838) (4,205) 69,905 (37,163)
Other....................... (44,676) 53,472 (125,132) 311,691
Sales and payments of loans
held-for-sale................ 676,205 391,354 1,107,633 817,935
Originations and purchases of
loans held-for-sale.......... (602,721) (312,987) (1,120,111) (731,855)
---------- --------- ----------- -----------
Net cash provided by operating
activities................... 132,209 270,573 157,878 636,160
---------- --------- ----------- -----------
FINANCING ACTIVITIES
(Decrease) in deposits........ (373,261) (461,911) (801,703) (355,109)
Borrowings
Net change in federal funds
purchased and commercial
paper...................... 3,432 (2,388) 188,868 (371,385)
Net change in securities
sold under agreements to
repurchase................. (623,657) (366,807) (337,739) (1,500,602)
Net change in advances from
the FHLB................... 1,798,644 666,188 1,587,009 1,314,219
Proceeds from issuance of
other borrowings........... 5,629 99,842 5,629 99,842
Repayments of other
borrowings................. (63) (5,216) (100,436) (5,445)
Proceeds from issuance of
Company subordinated notes. -- -- 300,000 --
Other financing activity......
Common stock issued......... 54,752 3,453 83,591 6,540
Common stock repurchased.... (29) (79) (32,037) (5,359)
Payment of cash dividends on
common stock............... (34,475) (34,319) (68,879) (65,854)
Payment of cash dividends on
preferred stock............ (3,423) (6,242) (6,847) (12,496)
---------- --------- ----------- -----------
Net cash provided by (used in)
financing activities......... 827,549 (107,479) 817,456 (895,649)
---------- --------- ----------- -----------
</TABLE>
Unaudited
7
<PAGE>
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INVESTING ACTIVITIES
Available-for-sale
securities (including
FHLB)
Proceeds from sales and
redemptions............. $ 753,512 $ 430,446 $ 1,602,495 $ 823,292
Purchases................ (811,541) (675,731) (1,561,062) (1,131,836)
Mortgage-backed securities
available-for-sale
Proceeds................. 1,001 3,722 1,998 3,722
Purchases................ (5,828) (21,856) (79,695) (30,367)
Payments received........ 181,318 317,185 349,277 605,664
Mortgage-backed securities
held-to-maturity
Payments received........ 49,299 77,284 113,939 148,198
Loans held in portfolio
Real estate loans
Payments received...... 832,819 812,869 1,574,622 1,523,995
Loans originated for
investment............ (2,027,125) (1,186,816) (3,067,308) (1,924,935)
Repurchases............ (12,322) (15,695) (24,954) (29,655)
Consumer Finance and
other loans
Loans originated for
investment............ (711,756) (567,279) (1,263,570) (1,022,873)
Proceeds from sales.... (5) 472 2,211 1,587
Payments received...... 566,979 540,428 1,107,058 1,041,477
Other investing activity
Purchases and sales of
bank premises and
equipment, net.......... (10,966) (11,388) (3,462) (20,591)
Proceeds from sale of
real estate owned....... 55,579 86,704 133,564 170,968
Other.................... 13,674 4,207 29,743 (5,385)
----------- ----------- ----------- -----------
Net cash (used in) provided
by investing activities.... (1,125,362) (205,448) (1,085,144) 153,261
----------- ----------- ----------- -----------
Net (decrease) in cash and
cash equivalents........... (165,604) (42,354) (109,810) (106,228)
Cash and cash equivalents
at beginning of period..... 890,086 1,030,543 834,292 1,094,417
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period........... $ 724,482 $ 988,189 $ 724,482 $ 988,189
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
DISCLOSURE
Cash paid for
Interest on deposits..... $ 285,904 $ 279,209 $ 567,617 $ 578,348
Interest on borrowings... 166,739 153,117 362,682 340,501
Income taxes............. 60,912 50,749 61,503 96,552
Noncash investing
activities
Loans transferred to real
estate owned............ 75,755 107,357 133,579 221,424
Loans originated to
finance the sale of real
estate owned............ 15,585 17,433 25,498 35,081
Loans originated to
refinance existing
loans................... 136,308 84,300 237,321 191,956
Loans exchanged for
mortgage-backed
securities.............. 1,004 -- 2,006 --
</TABLE>
Unaudited
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Great Western reported consolidated net earnings of $72.3 million, or $.49
per share, for the second quarter of 1997 compared to $79.3 million, or $.52
per share for the second quarter of 1996 and $65.7 million, or $.44 per share
for the first quarter of 1997. For the six months ended June 30, 1997 net
earnings were $138 million or $.93 per share, compared with $150.6 million or
$.99 per share, for the same period a year ago. The Company's earnings for the
second quarter of 1997 were reduced by $24.3 million in transaction-related
expenses. Without these transaction-related expenses, operating earnings for
the three months ended June 30, 1997 and the six months ended June 30, 1997
would have been $92.7 million, or $.62 per share and $181.3 million or $1.23
per share respectively.
The provision for loan losses in the second quarter of 1997 declined to
$36.1 million, down from $40.4 million in the first quarter of 1997 and up
from $32.6 million in the second quarter of 1996. The decrease from the first
quarter of 1997 was due to reduced credit costs as a result of lower levels of
nonperforming assets. Nonperforming assets were $502.6 million, or 1.15% of
assets at June 30, 1997, $770.3 million, or 1.76% of assets at June 30, 1996
and $547.8 million, or 1.28% of assets at March 31, 1997. Provisions for loan
losses during the first six months of 1997 and 1996 were $76.5 million and
$68.6 million, respectively.
Net interest income was $326.6 million for the second quarter of 1997
compared with $351.9 million for the second quarter of 1996 and $338.2 million
for the first quarter of 1997. The interest spread for the second quarter of
1997 was 2.97% compared with 3.23% for the second quarter of 1996 and 3.13%
for the first quarter of 1997. The Company's net interest margin was 3.17% for
the second quarter of 1997 compared with 3.41% for the second quarter of 1996
and 3.32% for the first quarter of 1997. Net interest income during the first
six months of 1997 and 1996 was $664.8 million and $704.2 million,
respectively.
Other income was $116.5 million in the second quarter of 1997, $91.9 million
in the second quarter of 1996 and $117.7 million in the first quarter of 1997.
In the second quarter of 1997, depositor fees increased $15.7 million,
securities and insurance commissions increased $3.3 million, write-downs of
mortgage-backed securities declined $2.2 million and losses on mortgage-backed
securities declined $1.4 million from the year ago second quarter. Other
income during the first six months of 1997 and 1996 was $234.3 million and
$178 million, respectively.
Excluding the impact of the transaction-related expenses, other expense in
the second quarter of 1997 totaled $251.9 million, compared with $280.7
million in the second quarter of 1996. Other expense for the first quarter of
1997, excluding the impact of transaction-related expenses, was $267.1
million. The decrease of $28.8 million from the second quarter of 1996 was due
primarily to a decrease in salaries and employee benefits of $14.6 million and
a decrease in regulatory assessments of $11.5 million.
9
<PAGE>
HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
-------------------------------------
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Net interest income..................... $ 326,633 $ 338,164 $ 351,948
Net earnings............................ 72,333 65,703 79,271
Fully diluted earnings per common share. .49 .44 .52
New loan volume......................... 3,493,496 2,220,312 2,168,815
Real estate loans sold.................. 676,221 419,715 382,613
Return on average assets (annualized)... .67% .61% .73%
Return on average equity (annualized)... 10.70% 10.06% 11.28%
Interest spread
Yield on interest earning assets...... 7.68% 7.69% 7.81%
Cost of interest bearing liabilities.. 4.71 4.56 4.58
----------- ----------- -----------
Interest spread....................... 2.97% 3.13% 3.23%
=========== =========== ===========
Total assets............................ $43,769,792 $42,877,903 $43,719,958
Stockholders' equity.................... 2,685,378 2,585,070 2,834,725
Stockholders' equity per common share... 18.05 17.55 18.49
Tangible stockholders' equity per common
share.................................. 16.13 15.54 16.27
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C>
Net interest income.................................. 664,797 704,234
Net earnings......................................... 138,036 150,565
Fully diluted earnings per common share.............. 0.93 0.99
New loan volume...................................... 5,713,808 3,906,700
Real estate loans sold............................... 1,095,936 798,363
Return on average assets (annualized)................ .64% .69%
Return on average equity (annualized)................ 10.39% 10.70%
Interest spread
Yield on interest earning assets................... 7.70% 7.87%
Cost of interest bearing liabilities............... 4.65% 4.64%
--------- ---------
Interest spread.................................... 3.05% 3.23%
========= =========
</TABLE>
10
<PAGE>
MERGER AGREEMENT WITH WASHINGTON MUTUAL, INC.
On February 18, 1997, H.F. Ahmanson & Company ("Ahmanson") unilaterally
announced a proposal for a merger between Ahmanson and Great Western pursuant
to which each outstanding share of Common Stock would be converted into 1.05
shares of Ahmanson common stock.
On March 6, 1997, Great Western announced that it had entered into a
strategic business combination with Washington Mutual, Inc. ("Washington
Mutual"). The terms of the Agreement and Plan of Merger dated as of March 5,
1997 (the "Merger Agreement") entered into by and between Great Western,
Washington Mutual and New American Capital, Inc., ("NACI"), a wholly-owned
subsidiary of Washington Mutual provided for a tax-free merger (the "Merger")
of Great Western with and into NACI pursuant to which each outstanding share
of Great Western common stock, par value $1.00 per share (the "Common Stock"),
would be converted into 0.9 shares of Washington Mutual common stock, no par
value, with cash being paid in lieu of fractional shares. Each outstanding
share of GWFC 8.30% Preferred Stock would be converted into one share of
Washington Mutual 8.30% Preferred Stock, Series F.
The consummation of the Merger was subject to certain conditions, including
approval by the stockholders of Great Western and Washington Mutual and the
receipt of applicable regulatory approvals. The Board of Directors of Great
Western ("the Board") fixed June 13, 1997 as the date for the special meeting
of stockholders to vote on the approval and adoption of the Merger Agreement.
On June 4, 1997, Ahmanson announced that it had withdrawn its February 18,
1997, unsolicited proposal to acquire GWFC.
On June 13, 1997, the stockholders of GWFC approved and adopted the Merger
Agreement with Washington Mutual, Inc. The Merger was consummated on July 1,
1997.
The description of the Merger Agreement above does not purport to be
complete and is qualified in its entirety by reference to the text of the
Merger Agreement, which is filed as an exhibit to the Company's Annual Report
on Form 10-K.
11
<PAGE>
LINE OF BUSINESS
Great Western Financial Corporation is managed along four major lines of
business: Consumer Finance, Real Estate Services, Retail Banking and Treasury.
The financial performance of these business lines is measured by the Company's
profitability reporting system. The system uses various management accounting
principles to ensure each business line's financial results reflect the
underlying economics of that business.
To properly assess the profitability of each business unit, charges for
funds employed and credits for funds generated are assigned on a matched
maturity basis to minimize interest-rate risk in the business line and
centralize that exposure in the Treasury unit where it is managed for the
Company as a whole. Expenses incurred in the Company's support units are
assigned to business lines based on services provided to a particular business
unit. Residual expenses, assets employed and other overhead costs are
allocated in a manner consistent with the corporate management fee. Management
fees are distributed to business lines based on service usage. Loss provision
and capital are allocated based on management's assessment of the risk profile
of each business line. Loans originated in the Real Estate unit are purchased
by the Treasury unit at a transfer price that reflects the risk-adjusted value
of the loans.
Certain undistributed items have been allocated to business lines for
presentation purposes. Included in this distribution are merger transaction-
related expenses totaling $24.3 million for the three months ended June 30,
1997 and $58 million for the six months ended June 30, 1997. These expenses
are distributed to business lines in a manner consistent with other overhead
expenses that are distributed as part of the corporate management fee. As
discussed above, management fees are distributed to business lines based on
service usage. Adjusted ratios are provided in the tables below which exclude
transaction-related expenses.
Since there is no authoritative guidance for management accounting
principles, the organizational structure of the institution and the allocation
methodologies it employs result in business line financial results that are
not necessarily comparable across companies. As such, Great Western's business
line performance may not be directly comparable with similar information from
other financial institutions.
12
<PAGE>
SELECTED FINANCIAL HIGHLIGHTS BY LINE OF BUSINESS
Results of line of business for the three months ended June 30, 1997 and June
30, 1996 are presented below.
<TABLE>
<CAPTION>
REAL ESTATE
CONSUMER FINANCE SERVICES RETAIL BANKING TREASURY CONSOLIDATED
------------------ -------------- -------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Income Statement:
Net interest income.... $ 62.3 $ 64.9 $ 10.0 $ 12.8 $ 155.7 $ 154.5 $ 98.6 $ 119.8 $ 326.6 $ 352.0
Provision for loan
losses................ 15.6 13.6 -- -- .5 .7 20.0 18.3 36.1 32.6
Net interest income
after provision....... 46.7 51.3 10.0 12.8 155.2 153.8 78.6 101.5 290.5 319.4
Other income........... 7.0 6.5 99.8 80.5 93.0 71.0 (83.3) (66.1) 116.5 91.9
Other expense.......... 32.3 25.7 40.5 65.1 176.0 191.8 3.0 (1.9) 251.8 280.7
Transaction-related
expenses.............. -- -- 7.2 -- 15.8 -- 1.3 -- 24.3 --
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Income before tax...... 21.4 32.1 62.1 28.2 56.4 33.0 (9.0) 37.3 130.9 130.6
Tax.................... 8.5 12.8 28.4 11.0 25.9 12.9 (4.2) 14.6 58.6 51.3
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Net income........... $ 12.9 $ 19.3 $ 33.7 $ 17.2 $ 30.5 $ 20.1 $ (4.8) $ 22.7 $ 72.3 $ 79.3
======== ======== ====== ====== ========= ========= ========= ========= ========= =========
Average Balance Sheet
Data:
Real estate loans...... $ -- $ -- $ -- $ -- $ -- $ -- $29,597.1 $27,707.1 $29,598.1 $28,066.9
Consumer loans......... 2,161.2 2,072.6 -- -- 296.7 555.7 -- -- 2,457.0 2,268.5
Net loans and leases... 2,161.2 2,072.6 -- -- 296.7 555.7 29,597.1 27,707.1 32,055.1 30,335.4
Assets................. 2,350.8 2,266.9 331.0 250.7 1,305.1 1,697.0 39,320.9 39,393.9 43,307.8 43,608.5
Deposits............... 144.0 157.9 -- -- 27,885.6 28,675.6 5.7 142.8 28,035.3 28,976.3
Equity................. 374.5 466.7 636.0 639.8 1,099.9 1,106.4 593.3 596.9 2,703.7 2,809.8
Performance Metrics
Return on average
equity................ 13.76% 16.51% 21.22% 10.72% 11.14% 7.28% -3.33% 15.23% 10.70% 11.28%
Efficiency ratio....... 46.59% 36.03% 43.44% 69.83% 77.16% 85.02% 27.97% -3.54% 62.32% 63.24%
Performance Metrics
(excluding transaction-
related expenses of
$24.3 million)
Return on average
equity................ -- -- 26.09% -- 15.71% -- -3.13% -- 13.73% --
Efficiency ratio....... -- -- 36.87% -- 70.82% -- 19.28% -- 56.84% --
</TABLE>
13
<PAGE>
Results of line of business for the six months ended June 30, 1997 and June
30, 1996 are presented below.
<TABLE>
<CAPTION>
REAL ESTATE
CONSUMER FINANCE SERVICES RETAIL BANKING TREASURY CONSOLIDATED
------------------ -------------- -------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement:
Net interest income.... $ 124.1 $ 132.1 $ 21.1 $ 24.6 $ 309.8 $ 306.2 $ 209.8 $ 241.3 $ 664.8 $ 704.2
Provision for loan
losses................ 31.0 28.1 -- -- .6 1.3 44.9 39.2 76.5 68.6
Net interest income
after provision....... 93.1 104.0 21.1 24.6 309.2 304.9 164.9 202.1 588.3 635.6
Other income........... 13.0 13.1 164.9 138.5 185.8 134.3 (129.4) (107.9) 234.3 178.0
Other expense.......... 66.9 61.8 92.2 126.0 353.7 375.4 6.2 1.0 519.0 564.2
Transaction-related
expenses.............. -- -- 17.2 -- 37.6 -- 3.2 -- 58.0 --
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Income before tax...... 39.2 55.3 76.6 37.1 103.7 63.8 26.1 93.2 245.6 249.4
Tax.................... 15.6 22.0 34.1 14.7 46.3 25.2 11.6 36.9 107.6 98.8
-------- -------- ------ ------ --------- --------- --------- --------- --------- ---------
Net income............. $ 23.6 $ 33.3 $ 42.5 $ 22.4 $ 57.4 $ 38.6 $ 14.5 $ 56.3 $ 138.0 $ 150.6
======== ======== ====== ====== ========= ========= ========= ========= ========= =========
<CAPTION>
Average Balance Sheet
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans...... $ -- $ -- $ -- $ -- $ -- $ -- $29,211.1 $27,695.5 $29,216.8 $28,048.8
Consumer loans......... 2,168.1 2,090.1 -- -- 269.3 546.9 -- -- 2,431.7 2,283.7
Net loans and leases... 2,168.1 2,090.1 -- -- 269.3 546.9 29,211.1 27,695.5 31,648.5 30,332.5
Assets................. 2,399.2 2,302.0 339.2 274.9 1,297.0 1,815.7 39,045.6 39,445.9 43,081.0 43,838.5
Deposits............... 169.7 159.3 -- -- 27,980.3 28,774.9 13.3 145.5 28,163.3 29,079.7
Equity................. 379.6 482.4 614.2 628.6 1,064.9 1,089.9 598.8 612.8 2,657.5 2,813.7
Performance Metrics....
Return on average
equity................ 12.44% 13.80% 13.83% 7.14% 10.79% 7.06% 4.83% 18.40% 10.39% 10.70%
Efficiency ratio....... 48.80% 42.55% 58.80% 77.25% 78.96% 85.25% 11.73% 0.72% 64.18% 63.96%
Performance Metrics
(excluding transaction-
related expenses of
$58 million)
Return on average
equity................ -- -- 18.28% -- 15.87% -- 5.85% -- 13.67% --
Efficiency ratio....... -- -- 49.54% -- 71.36% -- 7.77% -- 57.72% --
</TABLE>
CONSUMER FINANCE
The Consumer Finance line of business is made up of Blazer Financial
Services, City Finance Company, First Community Industrial Bank and Great
Western Thrift & Loan. These companies offer retail installment financing
primarily in the Southeast and Southwest areas of the United States.
REAL ESTATE SERVICES
The Real Estate Services line of business houses the Company's residential
mortgage origination and loan servicing businesses. Loans are originated in
Great Western's nationwide retail lending offices and through the Company's
wholesale origination function. Fixed rate loans are typically sold in the
secondary market and adjustable loans are primarily transferred to the
Treasury line of business for portfolio investment.
RETAIL BANKING
The Retail Banking line of business includes Great Western's branch banking
franchise, direct banking business and diversified retail businesses including
Sierra Capital Management and Great Western Financial Securities Corporation.
Also in this business unit are Great Western's business banking and consumer
lending functions which figure prominently in the Company's evolution into a
full service bank.
TREASURY
The Treasury line of business houses the Company's mortgage loan and
investment securities portfolios and meets the wholesale funding needs of the
Company. Additionally, the Treasury function is responsible for hedging the
Company's interest rate risk and as such, houses the funds transfer pricing
mismatch unit. The mismatch unit is counterparty to the internal charges and
credits for funds received by each of the other business lines.
14
<PAGE>
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income was $326.6 million in the second quarter of 1997
compared with $351.9 million in the second quarter of 1996 and $338.2 million
in the first quarter of 1997. The interest spread decreased in the second
quarter of 1997 due to higher rates paid on deposits and borrowings compared
with the first quarter of 1997. During the three months ended March 31, 1997
the interest spread was reduced primarily due to higher rates on borrowings
and lower yields on real estate and Consumer Finance loans compared with the
prior quarter. For the three months ended June 30, 1996, the interest spread
benefited by approximately 6 basis points from the interest rate lag on ARM
loans. The interest spread decreases in an increasing interest-rate
environment as increases in COFI, to which most interest earning assets are
tied, lag behind deposit and borrowing rate increases. The Company's net
interest margin was 3.17% for the three months ended June 30, 1997 compared
with 3.41% for the same period a year ago. The Company's net interest margin
was 3.32% for the three months ended March 31, 1997.
The following tables of net interest income displays the average balances,
interest income and expense and average rates by asset and liability component
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Cash equivalents........ $ 434,133 $ 6,175 5.63% $ 396,179 $ 6,157 6.22%
Available-for-sale
securities............. 1,526,934 23,250 6.09 1,481,697 23,597 6.37
Mortgage-backed
securities............. 7,300,156 133,957 7.34 9,136,376 164,607 7.21
----------- -------- ----- ----------- -------- -----
Total securities..... 9,261,223 163,382 7.05 11,014,252 194,361 7.06
Loans
Loans held in
portfolio............. 29,410,816 528,057 7.18 27,605,456 508,753 7.37
Loans held-for-sale.... 187,290 3,657 7.81 461,432 8,918 7.73
Consumer Finance....... 2,161,213 91,316 16.95 2,072,595 91,013 17.56
Other.................. 295,761 6,799 9.22 195,951 3,897 7.96
----------- -------- ----- ----------- -------- -----
Total loans.......... 32,055,080 629,829 7.86 30,335,434 612,581 8.08
----------- -------- ----- ----------- -------- -----
Total earning assets. 41,316,303 793,211 7.68 41,349,686 806,942 7.81
Other assets............ 1,991,505 2,258,804
----------- -----------
Total assets......... 43,307,808 43,608,490
=========== ===========
INTEREST BEARING
LIABILITIES
Deposits
Checking accounts...... 4,231,622 6,464 0.61 4,486,693 8,312 0.74
Savings and money
market accounts....... 7,173,344 60,326 3.37 6,510,187 48,368 2.97
Time certificates...... 16,442,610 217,777 5.31 17,571,181 230,605 5.25
Wholesale accounts..... 187,745 68 0.14 408,234 3,169 3.11
----------- -------- ----- ----------- -------- -----
Total deposits....... 28,035,321 284,635 4.07 28,976,295 290,454 4.01
Borrowings
Federal funds purchased
and commercial paper.. 1,416,279 19,819 5.54 1,022,196 13,463 5.27
Securities sold under
agreements to
repurchase............ 4,239,074 60,203 5.62 5,639,865 76,852 5.45
Advances from FHLB..... 3,150,861 44,864 5.63 1,701,000 21,729 5.11
Guaranteed preferred
beneficial interest in
Company subordinated
notes................. 400,000 8,217 8.22 100,000 2,063 8.25
Other borrowings....... 2,334,391 48,840 8.37 2,328,006 50,433 8.67
----------- -------- ----- ----------- -------- -----
Total borrowings..... 11,540,605 181,943 6.26 10,791,067 164,540 6.10
----------- -------- ----- ----------- -------- -----
Total interest
bearing liabilities. 39,575,926 466,578 4.71 39,767,362 454,994 4.58
Other liabilities....... 1,028,217 1,031,294
Stockholders' equity.... 2,703,665 2,809,834
----------- -----------
Total liabilities and
equity.............. 43,307,808 43,608,490
=========== ===========
Interest spread......... 2.97% 3.23%
===== =====
Effective yield
Interest income/total
earning assets........ $41,316,303 $793,211 7.68% $41,349,686 $806,942 7.81%
Interest expense/total
earning assets........ 41,316,303 466,578 4.51% 41,349,686 454,994 4.40%
-------- ----- -------- -----
Net interest income/net
interest margin........ $326,633 3.17% $351,948 3.41%
======== ===== ======== =====
</TABLE>
The average balance of loans above includes nonaccrual loans and therefore
the interest income and average rate, as presented, are affected by the loss
of interest on such loans. Interest foregone on nonaccrual loans decreased to
$5.6 million for the quarter ended June 30, 1997 compared with $7.8 million
for the quarter ended June 30, 1996.
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- -------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Cash equivalents........ $ 580,311 $ 7,863 5.42% $ 335,346 $ 5,904 7.04%
Available-for-sale
securities............. 1,364,454 20,746 6.16 1,299,885 19,148 5.89
Mortgage-backed
securities............. 7,624,849 138,577 7.27 9,610,728 174,026 7.24
----------- -------- ----- ----------- -------- -----
Total securities..... 9,551,614 167,186 7.00 11,245,959 199,078 7.08
Loans
Loans held in
portfolio............. 28,703,770 519,106 7.23 27,489,905 517,803 7.53
Loans held-for-sale.... 130,810 1,422 4.30 521,345 10,388 7.97
Consumer Finance....... 2,171,358 91,205 16.80 2,102,546 93,888 17.86
Other.................. 232,334 5,339 9.32 191,542 3,771 7.88
----------- -------- ----- ----------- -------- -----
Total loans.......... 31,238,272 617,072 7.90 30,305,338 625,850 8.26
----------- -------- ----- ----------- -------- -----
Total earning assets. 40,789,886 784,258 7.69 41,551,297 824,928 7.94
Other assets............ 2,060,102 2,498,365
----------- -----------
Total assets......... 42,849,988 44,049,662
=========== ===========
INTEREST BEARING
LIABILITIES
Deposits
Checking accounts...... 4,276,095 6,613 0.62 4,457,642 8,522 0.76
Savings and money
market accounts....... 7,103,560 56,723 3.19 6,553,877 46,542 2.84
Time certificates...... 16,685,904 216,139 5.18 17,790,521 244,175 5.49
Wholesale accounts..... 222,059 301 0.54 446,566 3,765 3.37
----------- -------- ----- ----------- -------- -----
Total deposits....... 28,287,618 279,776 3.96 29,248,606 303,004 4.14
Borrowings
Federal funds purchased
and commercial paper.. 1,186,580 15,905 5.36 1,155,897 17,168 5.94
Securities sold under
agreements to
repurchase............ 4,713,046 64,078 5.44 6,193,162 84,558 5.46
Advances from FHLB..... 2,214,225 30,453 5.50 1,167,974 15,957 5.46
Guaranteed preferred
beneficial interest in
Company subordinated
notes................. 316,129 6,439 8.15 100,000 2,063 8.25
Other borrowings....... 2,387,320 49,443 8.25 2,305,769 49,892 8.66
----------- -------- ----- ----------- -------- -----
Total borrowings..... 10,817,300 166,318 6.15 10,922,802 169,638 6.21
----------- -------- ----- ----------- -------- -----
Total interest
bearing liabilities. 39,104,918 446,094 4.56 40,171,408 472,642 4.71
Other liabilities....... 1,133,372 1,058,560
Stockholders' equity.... 2,611,698 2,819,694
----------- -----------
Total liabilities and
equity.............. 42,849,988 44,049,662
=========== ===========
Interest spread......... 3.13% 3.23%
===== =====
Effective yield.........
Interest income/total
earning assets........ $40,789,886 $784,258 7.69% $41,551,297 $824,928 7.94%
Interest expense/total
earning assets........ 40,789,886 446,094 4.37% 41,551,297 472,642 4.55%
-------- ----- -------- -----
Net interest income/net
interest margin........ $338,164 3.32% $352,286 3.39%
======== ===== ======== =====
</TABLE>
The average balance of loans above includes nonaccrual loans and therefore
the interest income and average rate, as presented, are affected by the loss of
interest on such loans. Interest foregone on nonaccrual loans decreased to $7.3
million for the quarter ended March 31, 1997 compared with $8.9 million for the
quarter ended March 31, 1996.
16
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Cash equivalents........ $ 507,444 $ 14,038 5.50% $ 370,663 $ 12,061 6.51%
Available-for-sale
securities............. 1,434,435 43,996 6.13 1,392,845 42,745 6.14
Mortgage-backed
securities............. 7,408,695 272,534 7.36 9,373,090 338,633 7.23
----------- ---------- ----- ----------- ---------- -----
Total securities..... 9,350,574 330,568 7.07 11,136,598 393,439 7.07
Loans
Loans held in
portfolio............. 29,065,660 1,047,162 7.21 27,562,971 1,026,557 7.45
Loans held-for-sale.... 151,138 5,079 6.37 485,860 19,306 7.95
Consumer Finance....... 2,168,122 182,522 16.98 2,090,098 184,901 17.69
Other.................. 263,606 12,138 9.29 193,601 7,667 7.92
----------- ---------- ----- ----------- ---------- -----
Total loans.......... 31,648,526 1,246,901 7.89 30,332,530 1,238,431 8.17
----------- ---------- ----- ----------- ---------- -----
Total earning assets. 40,999,100 1,577,469 7.70 41,469,128 1,631,870 7.87
Other assets............ 2,081,881 2,369,426
----------- -----------
Total assets......... 43,080,981 43,838,554
=========== ===========
INTEREST BEARING
LIABILITIES
Deposits
Checking accounts...... 4,255,697 13,077 0.62 4,453,180 16,834 0.76
Savings and money
market accounts....... 7,138,453 117,049 3.31 6,526,837 97,228 2.98
Time certificates...... 16,564,268 433,917 5.28 17,671,537 472,462 5.35
Wholesale accounts..... 204,902 368 0.36 428,142 6,934 3.24
----------- ---------- ----- ----------- ---------- -----
Total deposits....... 28,163,320 564,411 4.04 29,079,696 593,458 4.08
Borrowings
Federal funds purchased
and commercial paper.. 1,298,209 35,725 5.47 1,109,280 30,631 5.52
Securities sold under
agreements to
repurchase............ 4,476,060 124,281 5.52 5,942,515 161,410 5.43
Advances from FHLB..... 2,683,264 75,317 5.58 1,424,683 37,687 5.29
Guaranteed preferred
beneficial interest in
Company subordinated
notes................. 358,065 14,656 8.19 100,000 4,125 8.25
Other borrowings....... 2,368,756 98,282 8.30 2,318,498 100,325 8.65
----------- ---------- ----- ----------- ---------- -----
Total borrowings..... 11,184,354 348,261 6.20 10,894,976 334,178 6.13
----------- ---------- ----- ----------- ---------- -----
Total interest
bearing liabilities. 39,347,674 912,672 4.65 39,974,672 927,636 4.64
Other liabilities....... 1,075,822 1,050,170
Stockholders' equity.... 2,657,485 2,813,712
----------- -----------
Total liabilities and
equity.............. 43,080,981 43,838,554
=========== ===========
Interest spread......... 3.05% 3.23%
===== =====
Effective yield
Interest income/total
earning assets........ $40,999,100 $1,577,469 7.70% $41,469,128 $1,631,870 7.87%
Interest expense/total
earning assets........ 40,999,100 912,672 4.47% 41,469,128 927,636 4.47%
---------- ----- ---------- -----
Net interest income/net
interest margin........ $ 664,797 3.23% $ 704,234 3.40%
========== ===== ========== =====
</TABLE>
The average balance of loans above includes nonaccrual loans and therefore
the interest income and average rate, as presented, are affected by the loss of
interest on such loans. Interest foregone on nonaccrual loans decreased to
$12.8 million for the six months ended June 30, 1997 compared with $16.7
million for the six months ended June 30, 1996.
17
<PAGE>
The following table shows the components of the change in net interest income
for the quarters ended June 30, 1997, 1996 and 1995, March 31, 1997 and 1996
and the six months ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
THREE MONTHS ENDED JUNE 30, MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------ -------------------------
1997 VS 1996 1996 VS 1995 1997 VS 1996 1997 VS 1996 1996 VS 1995
------------- ------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Cash equivalents
Rate(1)............... $ (1) $ -- $ (1) $ (2) $ 1
Volume(2)............. 1 1 4 4 (1)
Rate/Volume(3)........ -- -- (1) (1) --
------------- ------------- ---- ---- ---
-- 1 2 1 --
------------- ------------- ---- ---- ---
Available-for-sale
securities
Rate(1)............... (1) 2 1 -- 1
Volume(2)............. 1 4 1 1 9
Rate/Volume(3)........ -- 1 -- -- --
------------- ------------- ---- ---- ---
-- 7 2 1 10
------------- ------------- ---- ---- ---
Mortgage-backed
securities
Rate(1)............... 3 3 1 6 13
Volume(2)............. (33) (33) (36) (71) (40)
Rate/Volume(3)........ (1) (1) -- (1) (2)
------------- ------------- ---- ---- ---
(31) (31) (35) (66) (29)
------------- ------------- ---- ---- ---
Real estate loans
Rate(1)............... (13) 4 (20) (33) 36
Volume(2)............. 34 16 22 57 38
Rate/Volume(3)........ (1) -- (1) (2) 2
------------- ------------- ---- ---- ---
20 20 1 22 76
------------- ------------- ---- ---- ---
Consumer Finance
Rate(1)............... (3) (3) (6) (8) (3)
Volume(2)............. 4 4 3 7 9
Rate/Volume(3)........ -- -- -- -- --
------------- ------------- ---- ---- ---
1 1 (3) (1) 6
------------- ------------- ---- ---- ---
Other loans
Rate(1)............... 2 -- (2) -- 1
Volume(2)............. (5) 1 (6) (11) 3
Rate/Volume(3)........ (1) -- 1 -- --
------------- ------------- ---- ---- ---
(4) 1 (7) (11) 4
------------- ------------- ---- ---- ---
Total interest earning
assets
Rate.................. (13) 6 (27) (37) 49
Volume................ 2 (7) (12) (13) 18
Rate/Volume........... (3) -- (1) (4) --
------------- ------------- ---- ---- ---
(14) (1) (40) (54) 67
------------- ------------- ---- ---- ---
Deposits
Rate(1)............... 4 (14) (13) (9) 3
Volume(2)............. (12) (3) (13) (25) 4
Rate/Volume(3)........ 2 -- 3 5 --
------------- ------------- ---- ---- ---
(6) (17) (23) (29) 7
------------- ------------- ---- ---- ---
Borrowings
Rate(1)............... 2 (16) (7) (4) (26)
Volume(2)............. 16 (33) 6 22 (39)
Rate/Volume(3)........ (1) 24 (2) (4) 39
------------- ------------- ---- ---- ---
17 (25) (3) 14 (26)
------------- ------------- ---- ---- ---
Total interest bearing
liabilities
Rate.................. 6 (30) (20) (13) (23)
Volume................ 4 (36) (7) (3) (35)
Rate/Volume........... 1 24 1 1 39
------------- ------------- ---- ---- ---
11 (42) (26) (15) (19)
------------- ------------- ---- ---- ---
Change in net interest
income................. $ (25) $ 41 $(14) $(39) $86
============= ============= ==== ==== ===
</TABLE>
- -------
(1) The rate variance reflects the change in the average rate multiplied by the
average balance outstanding during the prior period.
(2) The volume variance reflects the change in the average balance outstanding
multiplied by the average rate during the prior period.
(3) The rate/volume variance reflects the change in the average rate multiplied
by the change in the average balance outstanding.
(4) Nonaccrual loans are included in their respective loan categories.
Amortized net deferred loan fees are included in the interest income
calculations. The amortization of net deferred loan fees was $3 million,
$6.1 million and $9.3 million for the three months ended June 30, 1997,
June 30, 1996 and June 30 1995, respectively, $4 million and $6.1 million
for the three months ended March 31, 1997, and March 31, 1996,
respectively, and $7 million, $12.1 million and $20.1 million for the six
months ended June 30, 1997, June 30, 1996 and June 30, 1995, respectively.
18
<PAGE>
OTHER INCOME
Other income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ------------------
MARCH JUNE
JUNE 30, 31, 30, JUNE 30, JUNE 30,
1997 1997 1996 1997 1996
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Depositor fees
NSF and overdraft
protection................. $ 26,905 $ 27,686 $16,894 $ 54,591 $ 32,228
Service charges-checking
accounts................... 14,806 11,079 8,807 25,885 17,814
ATM transaction fees........ 7,043 7,808 6,851 14,851 13,887
Other banking fees.......... 9,907 7,460 10,451 17,367 20,738
-------- -------- ------- -------- --------
Total depositor fees...... 58,661 54,033 43,003 112,694 84,667
Securities and insurance
commissions
Securities.................. 23,731 23,523 20,521 47,254 38,657
Insurance................... 12,445 11,512 12,342 23,957 23,850
-------- -------- ------- -------- --------
Total securities and
insurance commissions.... 36,176 35,035 32,863 71,211 62,507
Loan servicing fees........... 10,964 12,317 11,386 23,281 22,839
Other service fees............ 7,200 7,989 6,827 15,189 13,287
Other operating income
Income/(loss) on affordable
housing investment......... 542 (605) (822) (63) (1,787)
Real estate held for
investment income.......... 3,448 1,999 3,065 5,447 3,471
Other....................... 1,825 1,128 1,096 2,953 1,842
-------- -------- ------- -------- --------
Total other operating
income................... 5,815 2,522 3,339 8,337 3,526
Gain on sale of loans
Net gain on sale of
mortgages.................. 1,559 1,742 2,006 3,301 4,904
Net gain on sale of student
loans...................... 71 669 275 740 384
-------- -------- ------- -------- --------
Total gain on sale of
loans.................... 1,630 2,411 2,281 4,041 5,288
Gain/(loss) on sale of other
assets
Net gain on sale of
available-for-sale
securities................. 41 -- -- 41 --
Gain on sale of bank
premises and equipment..... 552 6,931 220 7,483 15
Loss on sale of mortgage-
backed securities.......... (5) (10) (1,395) (15) (1,961)
Write-downs of mortgage-
backed securities.......... (4,500) (4,200) (6,734) (8,700) (12,813)
(Loss)/gain on sale of
leases..................... (5) 716 106 711 645
-------- -------- ------- -------- --------
Total gain/(loss) on sale
of other assets.......... (3,917) 3,437 (7,803) (480) (14,114)
-------- -------- ------- -------- --------
Total other income...... $116,529 $117,744 $91,896 $234,273 $178,000
======== ======== ======= ======== ========
</TABLE>
Depositor fee income increased to $58.7 million in the three months ended
June 30, 1997 from $43 million in the three months ended June 30, 1996, an
increase of 36.4%. The increase was due to a $10 million increase in NSF and
overdraft protection and due to expanded use of fee-based products and more
active management of fee collection. For the six months ended June 30, 1997,
depositor fee income increased $28 million from the six months ended June 30,
1996, an increase of 33.1%.
Income from securities operations was $23.7 million during the second
quarter of 1997 compared to $20.5 million in the second quarter of 1996 and
$23.5 million in the first quarter of 1997. The $3.2 million increase from the
second quarter of 1996 was due to increased sales volume in non-proprietary
annuities and mutual funds, offset by lower underwriter fee income due to the
sale of Sierra's front-end mutual fund and variable annuity products. The
Company managed mutual funds with assets aggregating $3.1 billion at June 30,
1997 compared with $3.4 billion at June 30, 1996.
19
<PAGE>
Loan servicing fees totaled $11 million for the three months ended June 30,
1997 compared with $11.4 million for the three months ended June 30, 1996. At
June 30, 1997, the servicing spread was 36 basis points on the $11.7 billion
average servicing portfolio compared with a servicing spread of 43 basis
points on an $11.1 billion average servicing portfolio at June 30, 1996. As a
result of the implementation of SFAS 125 during the first quarter of 1997, the
Company identified and recorded impairment on the mortgage servicing asset and
liability in the amount of $28,000 and $1.1 million, respectively. During the
second quarter of 1997, the Company identified and recorded a $12,000
adjustment to impairment on the mortgage servicing asset. No impairment was
identified or recorded on the mortgage servicing liability in the second
quarter of 1997.
Other service fees were $7.2 million in the first three months of 1997
compared with $6.8 million for the same period of 1996 and $8 million in the
first quarter of 1997. Loan prepayment fees included in other service fees
were $1.1 million in the second quarter of this year compared with $649,000 in
the second quarter of 1996 and $777,000 in the first quarter of 1997.
Gain on sale of bank premises and equipment was $552,000 in the second
quarter of 1997, $220,000 in the second quarter of 1996 and $6.9 million in
the first quarter of 1997. The gain during the first quarter of 1997 included
a $4.2 million gain on sale of corporate property and a $2.7 million gain on
sale of equipment.
During 1996, the Company changed its methodology to record losses on loans
underlying mortgage-backed securities as a write-down on the security rather
than as a charge against the reserve for loan losses. On May 9, 1997, the
Company amended its 1996 Form 10-K to reflect the reclassification of these
prior period charge-offs against the reserve to write-downs on the mortgage-
backed securities. For the second quarter of 1997, $4.5 million was recorded
to reflect impairment in the mortgage-backed securities portfolio, $6.7
million in the second quarter of 1996 and $4.2 million in the first quarter of
1997.
During the fourth quarter of 1996, the Company sold its student loan
business to Crestar Bank for $386.6 million. The Company sold a portfolio of
$356.6 million of loans and, after expenses and costs, realized a gain of
$22.5 million on the sale. At December 31, 1996, there was a balance of
student loans remaining of $21.5 million. These loans have been aggressively
marketed for sale, and as of June 30, 1997 the remaining balance in this
portfolio was $170,000.
Gain (loss) on sales of mortgages and mortgage-backed available-for-sale
securities were comprised of:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------
JUNE 30, 1997 MARCH 31, 1997 JUNE 30, 1996
------------- -------------- -----------------
MORTGAGES MBS MORTGAGES MBS MORTGAGES MBS
--------- --- --------- ---- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage servicing spread. $ 6,919 $-- $ 4,800 $ -- $ 2,397 $ --
Premiums (discounts), net. (7,642) (5) (2,942) (10) (3,105) (1,395)
Deferred loan fees........ (260) -- (57) -- 2,066 --
Gain on servicing......... 1,758 -- 1,082 -- 569 --
Adjust to lower of cost or
market................... 1,313 -- (1,156) -- 154 --
Net hedging gain (loss)... (280) -- 125 -- -- --
Miscellaneous fees........ (249) -- (110) -- (75) --
------- --- ------- ---- ------- -------
$ 1,559 $(5) $ 1,742 $(10) $ 2,006 $(1,395)
======= === ======= ==== ======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------------
JUNE 30, 1997 JUNE 30, 1996
--------------- -----------------
MORTGAGES MBS MORTGAGES MBS
--------- ---- --------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage servicing spread............... $ 11,719 $ -- $ 5,345 $ --
Premiums (discounts), net............... (10,584) (15) (4,696) (1,395)
Deferred loan fees...................... (317) -- 4,207 --
Gain on servicing....................... 2,840 -- 1,001 --
Adjust to lower of cost or market....... 157 -- (776) --
Net hedging gain (loss)................. (155) -- -- --
Miscellaneous fees...................... (359) -- (177) --
Other................................... -- -- -- (566)
-------- ---- ------- -------
$ 3,301 $(15) $ 4,904 $(1,961)
======== ==== ======= =======
</TABLE>
The net gain on sale of mortgages was $1.6 million in the second quarter of
1997, $2 million in the second quarter of 1996 and $1.7 million in the first
quarter of 1997. Mortgage sales during the second quarter of 1997, primarily
fixed-rate, totaled $676.2 million at a gain of .23% of the portfolio sold,
compared to $382.6 million in the second quarter of 1996 at a gain of .52% of
the portfolio sold and $419.7 million in the first quarter of 1997 at a gain
of .42% of the portfolio sold. The decline in the gain as a percentage of the
portfolio sold is due to the prevailing market conditions at the time of the
sale. In conjunction with the sales of mortgages, capitalized servicing rights
of $6.9 million were recorded in the second quarter of 1997, $2.4 million in
the second quarter of 1996, and $4.8 million in the first quarter of 1997.
Loss on sale of mortgage-backed available-for-sale securities was $5,000 in
the second quarter of 1997 compared to a $1.4 million loss in the second
quarter of 1996 and a $10,000 loss in the first quarter of 1997. Sales of
mortgage-backed securities available-for-sale were $1 million in the second
quarter of 1997 compared with $3.7 million in the second quarter of 1996 and
$997,000 in the first quarter of 1997.
21
<PAGE>
OTHER EXPENSE
Other expenses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -----------------
MARCH
JUNE 30, 31, JUNE 30, JUNE 30, JUNE 30,
1997 1997 1996 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Salaries and employee benefits
Salaries........................ $ 97,994 $ 99,720 $106,352 $197,714 $208,656
Taxes, employee benefits and
other.......................... 13,630 18,436 19,040 32,066 41,240
-------- -------- -------- -------- --------
Total salaries and employee
benefits..................... 111,624 118,156 125,392 229,780 249,896
Occupancy and equipment
Premises and occupancy.......... 28,550 30,383 30,715 58,933 62,558
Data processing................. 15,857 17,337 17,768 33,194 35,281
-------- -------- -------- -------- --------
Total occupancy and equipment. 44,407 47,720 48,483 92,127 97,839
Outside telecommunications and
data processing services......... 17,100 18,277 20,251 35,377 40,591
Regulatory assessments............ 4,525 4,577 16,028 9,102 32,174
Transaction-related expenses...... 24,305 33,721 -- 58,026 --
Other operating expense
Operating losses and
settlements.................... 6,441 9,837 652 16,278 7,825
Professional fees............... 8,453 9,162 8,170 17,615 14,293
Postage......................... 6,237 6,772 4,628 13,009 9,433
Advertising and promotion....... 11,819 5,094 9,540 16,913 18,699
Office supplies................. 3,810 4,306 5,340 8,116 9,693
Insurance....................... 2,033 2,164 2,273 4,197 4,506
Real estate held for investment
expense........................ 509 240 1,106 749 1,717
Other........................... 23,871 26,056 24,866 49,927 48,713
-------- -------- -------- -------- --------
Total other operating expense. 63,173 63,631 56,575 126,804 114,879
Amortization of goodwill and other
intangible assets................ 8,976 8,975 9,430 17,951 18,859
Real estate owned (REO)
operations....................... 2,068 5,758 4,548 7,826 10,044
-------- -------- -------- -------- --------
Total other expense........... $276,178 $300,815 $280,707 $576,993 $564,282
======== ======== ======== ======== ========
</TABLE>
Total other expense for the quarter ended June 30, 1997, excluding
transaction-related costs of $24.3 million, was $251.9 million. Total other
expense for the quarter ended June 30, 1996 was $280.7 million. Total other
expense for the quarter ended March 31, 1997, excluding transaction costs of
$33.7 million, was $267.1 million.
The Company's results of operations reflect transaction-related expenses of
$24.3 million in the second quarter of 1997 compared to $33.7 million in the
first quarter of 1997. These transaction-related expenses include investment
banking, legal and consulting fees and additional severance costs related to
merger activities.
The Company employed 12,582 persons at June 30, 1997, a number of which
worked part-time. The full-time equivalent of employees at that date was
11,382. The Company employed 12,719 persons and 11,646 full-time equivalents
at March 31, 1997 and 13,971 persons and 12,825 full-time equivalents at June
30, 1996.
Salaries and employee benefits decreased $13.8 million from $125.4 million
in the second quarter of 1996 to $111.6 million in the second quarter of 1997.
The decrease was the result of the realization of the benefits of the
comprehensive program to reengineer the Company's mortgage business and other
efficiency initiatives.
Regulatory assessments were $4.5 million in the second quarter of 1997
compared with $16 million in the second quarter of 1996 and $4.6 million in
the first quarter of 1997. The reduction of $11.5 million from the second
quarter of 1996 was due to the enactment of the Deposit Insurance Funds Act of
1996.
22
<PAGE>
Operating losses and settlements were $6.4 million for the second quarter of
1997 compared to $652,000 in the second quarter of 1996 and $9.8 million for
the first quarter of 1997. The increase from the second quarter of 1996 was
primarily due to a $7.4 million recovery for fraudulently over-billed
marketing costs recorded in the second quarter of 1996.
The Company implemented a corporate wide restructure plan in 1996 to improve
competitive position, accelerate expense reduction and enhance future revenue
growth by streamlining operations, making efficient use of premises and
modernizing the systems platform.
Due to merger activities with Washington Mutual, Inc., some of the Company's
planned restructure activities have been suspended. Consolidation of campus
premises originally planned for June 1997 has been temporarily suspended, as
well as $3 million related to the standardization of the Company's distributed
systems platform. Reserves related to these activities have not been reversed.
During the quarter ended June 30, 1997, approximately 100 additional
employee separations have occurred. Severance benefits of $2.7 million were
applied against the restructure liability. As of June 30, 1997, approximately
661 employees are receiving or will be eligible to receive $15.5 million in
severance benefits.
Additional severance costs were triggered effective February 25, 1997 upon
the adoption of a broad-based, change-in-control severance plan. At March 31,
1997, the Company accrued an additional $7 million for severance benefits
expected to be paid to approximately 475 employees affected by the
restructuring plan and change-in-control benefits program. This increase to
the fourth quarter 1996 restructuring accrual is for incremental severance
charges which employees terminated after February 24, 1997 are entitled to
receive under provisions of the change-in-control severance plan adopted on
that date.
The amount written off against the restructure liability representing
premises was $4.5 million in the second quarter of 1997. This was due to the
consolidation of the Company's corporate headquarters and loan origination and
processing network. To date, seven regional processing centers, 102 district
sales offices and one building at the corporate headquarters have been
vacated.
Following is an analysis of restructure reserve activity during the quarters
ended June 30, 1997 and March 31, 1997:
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
DECEMBER 31, CHANGE IN MARCH 31, JUNE 30,
1996 ACTIVITY CONTROL 1997 ACTIVITY 1997
------------ -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Severance............... $14.2 $(3.0) $7.0 $18.2 $(2.7) $15.5
Premises................ 29.5 (2.7) -- 26.8 (4.5) 22.3
Equipment............... 3.4 (.1) -- 3.3 (.1) 3.2
----- ----- ---- ----- ----- -----
Total................. $47.1 $(5.8) $7.0 $48.3 $(7.3) $41.0
===== ===== ==== ===== ===== =====
</TABLE>
The company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors, potentially arising from calculations using the Year 2000
date, are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems. At this time, the Company has not yet determined the cost
which will be expensed as incurred of evaluating its computer software or
databases or of making any modifications required to correct any "Year 2000"
problems.
23
<PAGE>
INCOME TAX
The Company's effective tax rate increased 4.18% from 39.62% in the second
quarter of 1996 to 43.80% in the second quarter of 1997. This increase was
primarily due to the nondeductibility of certain merger related transaction
costs.
Under provisions of the Small Business Job Protection Act of 1996, Great
Western Bank, ("GWB" or "the Bank"), lost the use of the bad debt reserve
method beginning in 1996. Since the reserve balance at June 30, 1997 of $724.5
million arose prior to 1988, it is not currently subject to federal income tax
and would not be if GWB were to convert to a commercial bank or otherwise lose
its tax status as a qualified thrift institution. However, it will be subject
to such tax upon certain occurrences (including its distribution to
shareholders), none of which are currently contemplated. Consequently, in
accordance with Financial Accounting Standard No. 109 "Accounting for Income
Taxes," a federal deferred tax liability of $253.6 million has not been
recognized for the temporary differences relating to the tax bad debt reserve
of GWB.
BALANCE SHEET ANALYSIS
EARNING ASSETS
Average earning assets increased $526.4 million during the second quarter of
1997 compared with a decrease of $33.4 million from the second quarter of
1996.
Available-for-sale Securities
Available-for-sale securities are carried at fair value. Marketable
securities available-for-sale at June 30, 1997 had both an amortized cost and
a fair value of $1.6 billion. There were no significant gains realized during
the quarters ended June 30, 1997, June 30, 1996 and March 31, 1997 and during
the six months ended June 30, 1997 and 1996. In determining which security to
invest in, the Company considers among other factors, relative rates,
liquidity and credit quality. At June 30, 1997, June 30, 1996 and March 31,
1997 there were no investment securities issued by a single issuer (excluding
the U.S. Government and its agencies) that exceeded 10% of stockholders'
equity.
The unrealized net gains (losses) on available-for-sale securities, net of
income taxes (valuation reserve for available-for-sale securities), included
as a component of stockholders' equity, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -----------------
JUNE JUNE JUNE
30, MARCH 31, 30, JUNE 30, 30,
1997 1997 1996 1997 1996
------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period... $(1,188) $ 2,023 $ 2,749 $ 2,023 $ 4,952
Change in unrealized net gains
(losses), net of taxes.......... 1,808 (3,211) (4,203) (1,403) (6,406)
------- ------- ------- ------- -------
Balance at end of period......... $ 620 $(1,188) $(1,454) $ 620 $(1,454)
======= ======= ======= ======= =======
</TABLE>
Mortgage-Backed Securities
Mortgage-backed securities consist largely of single-family residential
loans swapped for mortgage-backed securities in 1994 and 1995 to provide
collateral for borrowings. Underlying these securities are loans that were
originated by Great Western Bank. Mortgage-backed securities totaled $7.3
billion at June 30, 1997, compared with $8.9 billion at June 30, 1996 and $7.5
billion at March 31, 1997. Because the Company retained the credit risk on the
loans underlying these securities, delinquent loans totaling $31 million for
the quarter ended June 30, 1997, $33.3 million for the quarter ended June 30,
1996 and $40.4 million for the quarter ended March 31, 1997 were repurchased.
24
<PAGE>
A summary of the Company's mortgage-backed securities portfolio follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Adjustable Rate
COFI........................................ $5,498 76 $5,666 75 $6,828 77
FCOFI....................................... 1,244 17 1,281 17 1,439 16
Other....................................... 238 3 251 3 287 3
------ --- ------ --- ------ ---
Total adjustable rate mortgage-backed se-
curities................................. 6,980 96 7,198 95 8,554 96
Fixed-rate
Long-term................................... 178 2 197 3 305 3
Short-term.................................. 138 2 141 2 71 1
------ --- ------ --- ------ ---
Total fixed rate mortgage-backed
securities............................... 316 4 338 5 376 4
------ --- ------ --- ------ ---
Total mortgage-backed securities.......... $7,296 100 $7,536 100 $8,930 100
====== === ====== === ====== ===
</TABLE>
At June 30, 1997, approximately 76% 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 June 30, 1997, adjustable rate mortgage-backed securities comprised 96% of
the mortgage-backed securities portfolio compared with 96% in the comparable
period in 1996 and 95% at March 31, 1997.
Mortgage-backed securities available-for-sale are carried at fair value. At
June 30, 1997, mortgage-backed securities available-for-sale of $5.8 billion
included $146.6 million of fixed-rate securities and $5.6 billion of
adjustable rate securities.
The contractual maturities of all mortgage-backed securities as of June 30,
1997 follow:
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES
----------------------------
ADJUSTABLE
RATE FIXED RATE TOTAL
---------- ---------- ------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
One year or less............................. $ 102 $ 82 $ 184
Over one to two years........................ 108 46 154
Over two to three years...................... 115 40 155
Over three to five years..................... 247 43 290
Over five to ten years....................... 740 71 811
Over ten to fifteen years.................... 991 26 1,017
Over fifteen years........................... 4,677 8 4,685
------ ---- ------
$6,980 $316 $7,296
====== ==== ======
</TABLE>
25
<PAGE>
The Company securitized and sold $1 million of mortgage-backed securities in
both the first and second quarter of 1997.
The unrealized net gains on mortgage-backed securities, net of income taxes
(valuation reserve for available-for-sale securities), included as a component
of stockholders' equity, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ------------------
JUNE
30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1997 1997 1996 1997 1996
------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period. $42,984 $ 74,936 $ 73,040 $ 74,936 $103,481
Change in unrealized net gains,
net of taxes.................. 9,342 (31,952) (26,293) (22,610) (56,734)
------- -------- -------- -------- --------
Balance at end of period....... $52,326 $ 42,984 $ 46,747 $ 52,326 $ 46,747
======= ======== ======== ======== ========
</TABLE>
26
<PAGE>
Loans
The composition of real estate, Consumer Finance and other loans at June 30,
1997, March 31, 1997 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
JUNE JUNE
30, MARCH 31, 30,
1997 1997 1996
------- --------- -------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Real estate...................................... $30,262 $29,172 $27,838
Consumer Finance................................. 2,173 2,153 2,082
Other loans...................................... 357 248 552
------- ------- -------
$32,792 $31,573 $30,472
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Real Estate
Single-family....................... $27,744 91 $26,600 91 $24,987 90
Apartments.......................... 1,424 5 1,447 5 1,554 5
Commercial properties............... 1,094 4 1,125 4 1,297 5
------- --- ------- --- ------- ---
Total real estate loans........... 30,262 100 29,172 100 27,838 100
------- --- ------- --- ------- ---
Consumer Finance
Real estate secured loans........... 935 43 902 42 823 39
Installment loans................... 904 42 909 42 909 44
Retail installment contracts........ 334 15 342 16 350 17
------- --- ------- --- ------- ---
Total Consumer Finance loans...... 2,173 100 2,153 100 2,082 100
------- --- ------- --- ------- ---
Other Loans
Lease financing..................... 68 19 69 28 72 13
Checking overdraft.................. 66 19 65 26 48 9
Savings account..................... 41 11 48 19 59 11
Small business loans................ 46 13 29 12 -- --
Home equity......................... 118 33 19 8 -- --
Mobile home loans................... 13 4 13 5 16 3
Student loans....................... -- -- 2 1 356 64
Other............................... 5 1 3 1 1 *
------- --- ------- --- ------- ---
Total other loans................. 357 100 248 100 552 100
------- --- ------- --- ------- ---
Total loans....................... 32,792 31,573 30,472
------- ------- -------
Reserve for loan losses............. (316) (321) (330)
Unearned income and other........... (33) (43) (80)
Loans in process.................... 5 2 --
------- ------- -------
Total............................. (344) (362) (410)
------- ------- -------
Net loans receivable.............. $32,448 $31,211 $30,062
======= ======= =======
</TABLE>
- --------
* Less than one percent
27
<PAGE>
A summary of the Company's real estate loan portfolio by product type
follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Real Estate
ARM
COFI................................. $21,233 70 $20,706 71 $20,566 74
FCOFI................................ 1,856 6 1,942 7 2,229 8
LAMA................................. 4,177 14 3,744 13 2,513 9
Other................................ 2,160 7 1,877 6 1,619 6
------- --- ------- --- ------- ---
Total ARM loans.................... 29,426 97 28,269 97 26,927 97
Fixed-rate
Long-term............................ 421 2 486 2 461 2
Short-term........................... 415 1 417 1 450 1
------- --- ------- --- ------- ---
Total fixed-rate loans............. 836 3 903 3 911 3
------- --- ------- --- ------- ---
Total real estate loans............ $30,262 100 $29,172 100 $27,838 100
======= === ======= === ======= ===
Number of real estate loans.............. 328,552 328,076 330,291
</TABLE>
The origination and sale of real estate loans is dependent upon general
market conditions. In an active real estate market, loan originations may
increase. In such periods, mortgage sales are usually increased to fund a
portion of originations and to control asset growth. However, in some periods
mortgage sales occur to fund customer account outflows and repay borrowings
which result in asset shrinkage. Mortgage sales also occur to limit interest-
rate risk and for restructuring purposes.
The ARM for single-family residential properties is the primary lending
product held for investment. ARMs comprised 97% of the real estate loan
portfolio at June 30, 1997, June 30, 1996 and March 31, 1997. At June 30,
1997, approximately 70% 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.
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.
28
<PAGE>
Real estate loans held-for-sale are valued at the lower of cost or fair
value. Real estate loans held-for-sale are primarily fixed-rate loans. Gains
from sales of this portfolio totaled $1.6 million for the quarter ended
June 30, 1997, compared to $2 million and $1.7 million, for the quarters ended
June 30, 1996 and March 31, 1997, respectively. Included in the gains on real
estate loan sales were gains on the sale of servicing rights of $1.8 million
for the quarter ended June 30, 1997, and $569,000 and $1.1 million for the
quarters ended June 30, 1996 and March 31, 1997, respectively. Unrealized
gains on real estate loans held-for-sale totaled $2.7 million at June 30,
1997, compared to $703,000 and $1.5 million at June 30, 1996 and March 31,
1997, respectively.
Commercial real estate loans continued to decrease as a result of the
Company's decision in 1987 to discontinue commercial real estate lending
except to finance the sale of foreclosed properties, or to refinance existing
loans in the normal course of business.
The composition of the loans held-for-sale portfolio at June 30, 1997, March
31, 1997 and June 30, 1996 follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
-------- --------- --------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Loans held-for-sale
Real estate loans............................ $156 $210 $ 53
Student loans................................ -- 2 356
---- ---- ----
Total loans held-for-sale.................. $156 $212 $409
==== ==== ====
</TABLE>
The contractual maturities of loans as of June 30, 1997 follow:
<TABLE>
<CAPTION>
REAL ESTATE
LOANS
-------------
FIXED CONSUMER TOTAL
ARM RATE TOTAL FINANCE OTHER LOANS
------- ----- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
One year or less................ $ 421 $ 39 $ 460 $ 719 $221 $ 1,400
Over one to two years........... 684 36 720 584 11 1,315
Over two to three years......... 741 52 793 416 5 1,214
Over three to five years........ 1,135 144 1,279 164 20 1,463
Over five to ten years.......... 3,723 252 3,975 198 15 4,188
Over ten to fifteen years....... 4,998 95 5,093 91 78 5,262
Over fifteen years.............. 17,724 218 17,942 1 7 17,950
------- ---- ------- ------ ---- -------
Total......................... $29,426 $836 $30,262 $2,173 $357 $32,792
======= ==== ======= ====== ==== =======
</TABLE>
29
<PAGE>
The following table summarizes the Company's loan volume with real estate
loan volume composition by security type, purpose and loan type for the three
months ended June 30, 1997, March 31, 1997 and June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
LOAN VOLUME
Real estate................................ $2,781 79 $1,665 75 $1,589 73
Consumer Finance........................... 513 15 464 21 510 24
Other loans................................ 199 6 91 4 70 3
------ --- ------ --- ------ ---
Total new loan volume.................... $3,493 100 $2,220 100 $2,169 100
====== === ====== === ====== ===
REAL ESTATE LOAN VOLUME
Security Type
Single-family.............................. $2,766 100 $1,658 100 $1,559 98
Apartments................................. 8 * 5 * 26 2
Commercial properties...................... 7 * 2 * 4 *
------ --- ------ --- ------ ---
Total real estate by security type....... $2,781 100 $1,665 100 $1,589 100
====== === ====== === ====== ===
Purpose
Purchase of property....................... $1,443 52 $ 804 48 $ 899 57
Refinance.................................. 1,338 48 861 52 690 43
------ --- ------ --- ------ ---
Total real estate by purpose............. $2,781 100 $1,665 100 $1,589 100
====== === ====== === ====== ===
Loan Type
Long-term--essentially 30-40 years
ARM....................................... $2,098 76 $1,079 65 $1,216 77
Fixed..................................... 452 16 382 23 223 14
Short-term--essentially 15 years or less
ARM....................................... 30 1 30 2 38 2
Fixed..................................... 201 7 174 10 112 7
------ --- ------ --- ------ ---
Total real estate by loan type........... $2,781 100 $1,665 100 $1,589 100
====== === ====== === ====== ===
Average new loan rate...................... 6.23% 6.46% 6.86%
Average ARM differential on new ARMs....... 2.65% 2.66% 2.68%
Average ARM differential on total ARM
portfolio.................................. 2.54% 2.54% 2.51%
</TABLE>
- --------
* Less than one percent
For the second quarter of 1997, third party originations were $1.6 billion
or 57.5% of new real estate loans, compared with $530.9 million or 33.4% and
$843.1 million or 50.6% for the quarters ended June 30, 1996 and March 31,
1997, respectively.
The California real estate market has shown signs of continued improvement.
There appear to be regional differences in economic performance within
California and among property types which are attributable to differing
recovery rates for the wide range of economic activities within California.
On a regional basis, the economic factors affecting the single-family market
appear to be somewhat more favorable in Northern California than in Southern
California. In particular, the median metropolitan area sales price of
existing single-family homes in the San Jose area increased from the first
quarter of 1996 to the first quarter of 1997 by approximately 9%. 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 2%.
The Company repurchases delinquent loans which were sold with recourse.
Repurchased loans totaled $7.8 million in the three months ended June 30, 1997
compared with $9 million and $8.4 million in the three
30
<PAGE>
months ended June 30, 1996 and March 31, 1997, respectively. The balance of
loans sold with recourse totaled $1.1 billion at June 30, 1997 and $1.3 billion
and $1.2 billion at June 30, 1996 and March 31, 1997, respectively.
The geographic distribution of the real estate loan portfolio and nonaccrual
and restructured loans at June 30, 1997 follows:
<TABLE>
<CAPTION>
CONNECTICUT
MASSACHUSETTS
CALIFORNIA FLORIDA NEW YORK
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Single-family
residential.......... $16,343 $240 $1,986 $20 $2,070 $16
Apartments............ 1,219 18 53 -- -- --
Commercial
Offices............. 322 6 13 -- -- --
Industrial.......... 215 3 7 -- -- --
Retail.............. 173 1 11 1 -- --
Hotel/motel......... 85 12 5 -- -- --
Other............... 110 2 10 1 -- --
------- ---- ------ --- ------ ---
Total............. $18,467 $282 $2,085 $22 $2,070 $16
======= ==== ====== === ====== ===
Percent of total loans.. 61.0% 6.9% 6.9%
Nonaccrual and
restructured as a % of
total by state......... 1.5% 1.1% 0.8%
</TABLE>
<TABLE>
<CAPTION>
OREGON
WASHINGTON OTHER TOTAL
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
Single-family
residential.......... $1,676 $ 9 $5,669 $32 $27,744 $317
Apartments............ 6 1 146 6 1,424 25
Commercial
Offices............. 16 -- 13 -- 364 6
Industrial.......... 1 -- 19 -- 242 3
Retail.............. 4 -- 11 -- 199 2
Hotel/motel......... -- -- 54 -- 144 12
Other............... 3 -- 22 1 145 4
------ --- ------ --- ------- ----
Total............. $1,706 $10 $5,934 $39 $30,262 $369
====== === ====== === ======= ====
Percent of total loans.. 5.6% 19.6% 100%
Nonaccrual and
restructured as a % of
total by state......... 0.6% 0.7% 1.2%
</TABLE>
31
<PAGE>
A comparison of the California real estate loan portfolio and nonaccrual and
restructured real estate loans by region as of June 30, 1997 follows:
<TABLE>
<CAPTION>
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
---------------------- ----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans
Single-family residential...... $4,967 $50 $1,283 $12
Apartments..................... 147 -- 216 6
Commercial
Offices...................... 68 4 34 --
Industrial................... 29 -- 12 1
Retail....................... 47 1 19 --
Hotel/motel.................. 12 -- 20 2
Other........................ 31 -- 18 --
------ --- ------ ---
Total by region............ $5,301 $55 $1,602 $21
====== === ====== ===
Percent of total loans........... 28.7% 8.7%
Nonaccrual and restructured as a
% of total by region............ 1.0% 1.3%
</TABLE>
<TABLE>
<CAPTION>
SOUTHERN CALIFORNIA CALIFORNIA
---------------------- ----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans
Single-family residential...... $10,093 $178 $16,343 $240
Apartments..................... 856 12 1,219 18
Commercial.....................
Offices...................... 220 2 322 6
Industrial................... 174 2 215 3
Retail....................... 107 -- 173 1
Hotel/motel.................. 53 10 85 12
Other........................ 61 2 110 2
------- ---- ------- ----
Total by region............ $11,564 $206 $18,467 $282
======= ==== ======= ====
Percent of total loans........... 62.6% 100%
Nonaccrual and restructured as a
% of total by region............ 1.8% 1.5%
</TABLE>
32
<PAGE>
Nonperforming Assets
The following table summarizes nonaccrual and restructured loans and real
estate:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
-------- --------- --------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Nonaccrual loans
Real estate
Single-family residential....................... $316 $352 $424
Apartments...................................... 12 18 11
Commercial...................................... 7 7 10
---- ---- ----
Total nonaccrual real estate loans............ 335 377 445
Consumer Finance.................................. 45 45 27
Other............................................. 1 2 1
---- ---- ----
Total nonaccrual loans.......................... 381 424 473
Restructured loans
Single-family residential....................... 1 1 19
Apartments...................................... 13 15 32
Commercial...................................... 20 31 62
---- ---- ----
Total restructured loans...................... 34 47 113
---- ---- ----
Nonaccrual and restructured loans................... 415 471 586
As a percentage of total loans...................... 1.28% 1.51% 1.95%
Nonperforming real estate........................... 88 77 184
---- ---- ----
Total nonperforming assets.......................... $503 $548 $770
==== ==== ====
As a percentage of total assets..................... 1.15% 1.28% 1.76%
</TABLE>
Management's classification of a loan as nonaccrual or restructured does not
necessarily indicate that the principal of the loan is uncollectible in whole
or in part. Loans are placed on nonaccrual status when they become more than
90 days past due. Nonperforming real estate includes foreclosed and investment
properties which do not generate sufficient income to meet return on
investment criteria.
Nonaccrual real estate loans were $335 million at June 30, 1997, a decrease
of $110 million from $445 million at June 30, 1996 and a decrease of $42
million from $377 million at March 31, 1997. The decrease during the second
quarter of 1997 is primarily due to improved liquidity in the California real
estate market and improved collection procedures.
33
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Nonaccrual Loans
With allocated reserves..................................... $ 3 $ 46
Without allocated reserves.................................. 115 166
---- ----
118 212
---- ----
TDRs
With allocated reserves..................................... $ 15 $ 34
Without allocated reserves.................................. 19 79
---- ----
34 113
---- ----
Other Impaired Loans
With allocated reserves..................................... $ 82 $104
Without allocated reserves.................................. 42 40
---- ----
124 144
---- ----
Total Impaired............................................ $276 $469
==== ====
</TABLE>
The significant drop in impaired loans from June 1996 to June 1997 was
primarily due to a $274.9 million bulk sale of TDRs and other nonperforming
real estate loans in December 1996. In addition, $22.6 million of TDRs were
determined to be performing and removed from TDR status in December 1996 and
$22.4 million in March 1997. All real estate loans are evaluated for
impairment on an individual loan basis.
34
<PAGE>
Delinquent Assets
The Company continuously reviews the trends of loans and mortgage-backed
securities with full credit risk. The following summarizes delinquent assets at
June 30, 1997, March 31, 1997 and June 30, 1996 for real estate, Consumer
Finance, other loans and mortgage-backed securities which are over thirty to
ninety days delinquent:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
-------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REAL ESTATE LOANS
Single-family residential
Over 30 to 60 days delinquent..................... $231 $228 $216
Over 60 to 90 days delinquent..................... 76 91 90
Other
Over 30 to 60 days delinquent..................... 15 10 10
Over 60 to 90 days delinquent..................... 5 9 14
---- ---- ----
Total........................................... $327 $338 $330
==== ==== ====
Percentage of related portfolio................. 1.08% 1.16% 1.19%
CONSUMER FINANCE LOANS
Over 30 to 60 days delinquent..................... $ 42 $ 40 $ 41
Over 60 to 90 days delinquent..................... 18 17 17
---- ---- ----
Total........................................... $ 60 $ 57 $ 58
==== ==== ====
Percentage to related portfolio................. 2.76% 2.64% 2.79%
OTHER LOANS
Over 30 to 60 days delinquent..................... $ 2 $ 1 $ 7
Over 60 to 90 days delinquent..................... 2 1 3
---- ---- ----
Total........................................... $ 4 $ 2 $ 10
==== ==== ====
Percentage to related portfolio................. 1.18% .89% 1.81%
TOTAL LOANS
Over 30 to 60 days delinquent..................... $290 $279 $274
Over 60 to 90 days delinquent..................... 101 118 124
---- ---- ----
Total........................................... $391 $397 $398
==== ==== ====
Percentage to related portfolio................. 1.19% 1.26% 1.31%
MORTGAGE-BACKED SECURITIES
Over 30 to 60 days delinquent..................... $ 40 $ 40 $ 27
Over 60 to 90 days delinquent..................... 12 13 12
---- ---- ----
Total........................................... $ 52 $ 53 $ 39
==== ==== ====
Percentage to related portfolio................. .71% .70% .44%
</TABLE>
35
<PAGE>
Reserve for Loan Losses
Summarized below are loan balances by type, their reserve for estimated
losses and the percentage the reserve balance bears to the loan balance for
the periods ended June 30, 1997, March 31, 1997 and June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997 JUNE 30, 1996
------------------------- ------------------------- -------------------------
AMOUNT RESERVE % AMOUNT RESERVE % AMOUNT RESERVE %
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans
SFR.................... $27,743,776 $166,009 .60 $26,599,820 $167,561 .63 $24,987,450 $130,208 .52
Commercial and other... 2,517,926 73,036 2.90 2,571,979 78,347 3.05 2,851,085 137,781 4.83
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total real estate
loans............... 30,261,702 239,045 .79 29,171,799 245,908 .84 27,838,535 267,989 .96
Consumer Finance........ 2,173,322 70,853 3.26 2,153,429 70,345 3.27 2,081,803 57,587 2.77
Other loans............. 357,221 6,513 1.82 248,260 4,547 1.83 551,900 4,745 .86
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total loans............. $32,792,245 $316,411 .96 $31,573,488 $320,800 1.02 $30,472,238 $330,321 1.08
=========== ======== ==== =========== ======== ==== =========== ======== ====
</TABLE>
At June 30, 1997, the reserve for loan losses was $316.4 million, or .96% of
total loans, compared with $330.3 million, or 1.08% at June 30, 1996 and
$320.8 million, or 1.02% at March 31, 1997. The provision for loan losses was
$36.1 million for the quarter ended June 30, 1997, up from $32.6 million in
the second quarter of 1996. Net charge-offs for single family residential real
estate loans for the second quarter of 1997 were $20.4 million or .30%
compared with $31.7 million or .51% for the second quarter of 1996 and $14.1
million or .21% for the first quarter of 1997.
The Company has a process to determine the adequacy of the reserve for loan
losses that assesses the risks and losses inherent in its portfolio. The
process provides a reserve 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
reserve 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 write-down
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 reserve for loan losses. The change in the reserve for SFR
loans from $130.2 million at June 30, 1996, or .52% of the SFR portfolio to
$166 million at June 30, 1997, or .60% reflects the Company's assessment of
the SFR portfolio and the current economic conditions impacting the SFR
portfolio.
The reserve for commercial loans is developed through specific credit
allocations applying historical loss experience and loan category based on
asset quality for individual loans, including impaired loans subject to SFAS
114. The reserve for commercial real estate loans has decreased from $137.8
million at June 30, 1996, or 4.83% to $73 million at June 30, 1997, or 2.90%.
The reserve for commercial real estate and apartment loans was reduced by a
$1.4 million credit to the provision for loan losses during the second quarter
of 1997, in addition to a $9.4 million credit in the first quarter of 1997 and
a $40 million credit in 1996. These reductions were primarily a result of the
Company's review of required levels for the reserve of this portfolio. The
commercial real estate loan portfolio has continued to decrease as a result of
a decision in 1987 to discontinue commercial real estate lending except to
finance the sale of foreclosed properties or to refinance existing loans in
the normal course of business. The quality of the commercial real estate loan
portfolio continues to improve as a result of the recovery in the commercial
real estate markets nationwide and particularly in California. There has been
a substantial amount of liquidity that has returned to the real estate
markets. This liquidity has contributed significantly to the Company's
progress in reducing this portfolio. The Company expects this portfolio to
continue to decline and improve in quality.
36
<PAGE>
The reserve 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 reserve for Consumer Finance loans
increased from $57.6 million at June 30, 1996, or 2.77% of the outstanding
portfolio, to $70.9 million at June 30, 1997, or 3.26% of the outstanding
portfolio, as a result of a fourth quarter 1996 policy change increasing the
number of days contractually delinquent from 120 to 180, before a loan is
charged-off in addition to some deterioration in credit quality.
The reserve for leases, shown in other loans, was $1.3 million at June 30,
1997, unchanged from June 30, 1996.
The general component includes management's judgment of the amounts
necessary for concentrations, economic uncertainties and other subjective
factors. Although management has allocated the reserve to specific loan
categories, the adequacy of the reserve must be considered in its entirety.
The Company's determination of the level of the reserve 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 internal staff regularly review the
classification of commercial loans and also reports to the IARC. Such reviews
also assist management in establishing the level of the reserve. The Bank is
examined by its primary regulator, the OTS. These examinations generally occur
annually and target various activities of the Bank, including specific
segments of the loan portfolio. In addition to the Bank being examined by the
OTS, the Company and the nonbank subsidiaries are also subject to OTS
examination.
The Company considers the reserve for loan losses of $316.4 million adequate
to cover losses inherent in the loan and lease portfolio at June 30, 1997.
However, no assurance can be given that the Company will not, in any
particular period, sustain loan and lease losses that are sizable in relation
to the amount reserved, or that subsequent evaluation of the loan and lease
portfolio, in light of the factors then prevailing, including economic
conditions and the Company's ongoing examination process and that of its
regulators, will not require significant increases in the reserve for loan
losses.
At June 30, 1997, the Company had $1.1 billion of loans sold with recourse
and a contingent liability of $8.5 million. The Company considers the
contingent liability for loans sold with recourse to be adequate to cover
losses in this portfolio. All of the loans sold in the second quarter of 1997
were without recourse. The Company has not sold loans with recourse since
February, 1995.
37
<PAGE>
An analysis of the changes in the reserve for loan losses including charge-
offs and recoveries by loan category is presented in the following table:
<TABLE>
<CAPTION>
REAL ESTATE LOANS
--------------------
COMMERCIAL CONSUMER OTHER
SFR AND OTHER FINANCE LOANS TOTAL
-------- ---------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996. $142,123 $142,341 $ 56,615 $ 6,499 $347,578
Provision for losses...... 19,766 -- 13,600 (800) 32,566
Charge-offs............... (32,079) (4,726) (16,862) (1,036) (54,703)
Recoveries................ 398 166 4,234 82 4,880
-------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1996.. 130,208 137,781 57,587 4,745 330,321
Provision for losses...... 50,036 (24,915) 15,300 1,250 41,671
Charge-offs............... (32,877) (2,637) (18,290) (972) (54,776)
Recoveries................ 251 30 3,988 145 4,414
-------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30,
1996...................... 147,618 110,259 58,585 5,168 321,630
Provision for losses...... 83,876 (14,993) 15,400 1,617 85,900
Charge-offs............... (84,027) (4,421) (7,768) (2,122) (98,338)
Recoveries................ 441 22 3,828 216 4,507
-------- -------- -------- ------- --------
BALANCE AT DECEMBER 31,
1996...................... 147,908 90,867 70,045 4,879 313,699
Provision for losses...... 33,710 (10,184) 15,400 1,464 40,390
Charge-offs............... (14,319) (2,768) (18,934) (1,950) (37,971)
Recoveries................ 262 432 3,834 154 4,682
-------- -------- -------- ------- --------
BALANCE AT MARCH 31, 1997. 167,561 78,347 70,345 4,547 320,800
Provision for losses...... 18,820 (939) 15,600 2,591 36,072
Charge-offs............... (20,589) (4,403) (18,881) (1,848) (45,721)
Recoveries................ 217 31 3,789 1,223 5,260
-------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1997.. $166,009 $ 73,036 $ 70,853 $ 6,513 $316,411
======== ======== ======== ======= ========
</TABLE>
38
<PAGE>
The average balances and related charge-off percentages for the three months
ended June 30, 1997, March 31, 1997 and June 30, 1996 and for the six months
ended June 30, 1997 and June 30, 1996 follow:
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
---------------------------
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Average balance
Real estate loans
SFR........................................... $27,051 $26,212 $24,816
Other......................................... 2,546 2,613 2,891
Consumer Finance................................ 2,161 2,171 2,073
Other loans..................................... 297 242 555
------- ------- -------
$32,055 $31,238 $30,335
======= ======= =======
Ratio of net charge-offs (annualized) to average
loans
Real estate loans
SFR........................................... 0.30% 0.21% 0.51%
Other......................................... 0.69 0.36 0.63
Consumer Finance................................ 2.79 2.78 2.44
Other loans..................................... 0.84 2.97 0.69
------- ------- -------
0.50% 0.43% 0.66%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
-----------------
JUNE 30, JUNE 30,
1997 1996
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Average balance
Real estate loans
SFR................................................... $26,630 $24,766
Other................................................. 2,581 2,930
Consumer Finance........................................ 2,168 2,090
Other loans............................................. 269 547
------- -------
$31,648 $30,333
======= =======
Ratio of net charge-offs (annualized) to average loans
Real estate loans
SFR................................................... 0.26% 0.54%
Other................................................. 0.52 0.50
Consumer Finance........................................ 2.79 2.50
Other loans............................................. 1.80 0.45
------- -------
0.47% 0.67%
======= =======
</TABLE>
39
<PAGE>
Real Estate
Real estate available-for-sale or development was $117.1 million on June 30,
1997 compared to $221.5 million June 30, 1996 and $115.9 million on March 31,
1997.
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 June 1997, foreclosed real estate
properties totaling $30 million are classified as performing assets.
The geographic distribution of real estate and nonperforming real estate for
June 30, 1997 follows:
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate
Single family residential.......... $ 65 $ 65 $ 2 $ 2
Apartments......................... 7 7 -- --
Commercial
Property Development............. 30 -- -- --
Retail........................... 1 1 2 2
Offices.......................... 4 4 -- --
Other............................ 1 1 -- --
---- ---- --- ---
Total.......................... $108 $ 78 $ 4 $ 4
==== ==== === ===
Percent of total real estate......... 91.5% 3.4%
Nonperforming real estate as a % of
total by state...................... 72.2% 100%
</TABLE>
<TABLE>
<CAPTION>
CONNECTICUT
MASSACHUSETTS
NEW YORK OTHER TOTAL
-------------------- -------------------- --------------------
NON- NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate
Single family
residential.......... $ 1 $ 1 $ 4 $ 4 $ 72 $ 72
Apartments............ -- -- -- -- 7 7
Commercial
Property
Development........ -- -- -- -- 30 --
Retail.............. -- -- -- -- 3 3
Offices............. -- -- -- -- 4 4
Other............... 1 1 -- -- 2 2
--- --- --- --- ---- ----
Total............. $ 2 $ 2 $ 4 $ 4 $118 $ 88
=== === === === ==== ====
Percent of total real
estate................. 1.7% 3.4% 100%
Nonperforming real
estate as a % of total
by state............... 100% 100% 74.6%
</TABLE>
40
<PAGE>
A comparison of California real estate and nonperforming real estate by
region as of June 30, 1997, follows:
<TABLE>
<CAPTION>
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate
Single-family residential.......... $ 7 $ 7 $ 3 $ 3
Apartments......................... -- -- 4 4
Commercial
Property Development............. 7 -- 14 --
Retail........................... -- -- -- --
Offices.......................... 1 1 -- --
Other............................ -- -- -- --
---- ---- ---- ----
Total by region................ $ 15 $ 8 $ 21 $ 7
==== ==== ==== ====
Percent of total California real
estate.............................. 13.9% 19.4%
Nonperforming as a % of total by
region.............................. 53.3% 33.3%
<CAPTION>
SOUTHERN CALIFORNIA CALIFORNIA
-------------------- --------------------
NON- NON-
PORTFOLIO PERFORMING PORTFOLIO PERFORMING
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate
Single-family residential.......... $ 55 $ 55 $ 65 $ 65
Apartments......................... 3 3 7 7
Commercial
Property Development............. 9 -- 30 --
Retail........................... 1 1 1 1
Offices.......................... 3 3 4 4
Other............................ 1 1 1 1
---- ---- ---- ----
Total by region................ $ 72 $ 63 $108 $ 78
==== ==== ==== ====
Percent of total California real
estate.............................. 66.7% 100%
Nonperforming as a % of total by
region.............................. 87.5% 72.2%
</TABLE>
In the second quarter of 1997, bulk sales of foreclosed single-family
properties totaled $12.7 million compared with $45.8 million in the second
quarter of 1996 and $40.5 million in the first quarter of 1997. Auction sales
have also been utilized to accelerate the disposition of foreclosed
properties.
As a result of the improving economy, it was determined that better pricing
could be obtained using retail sales channels. Therefore, bulk sales of
foreclosed single-family properties were discontinued effective July 10, 1997.
41
<PAGE>
INTEREST BEARING LIABILITIES
Deposits
Deposits by product at June 30, 1997, March 31, 1997 and June 30, 1996
follow:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
----------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
By Product
Checking accounts......................... $ 4,181 15 $ 4,384 15 $ 4,516 16
Money market and other savings............ 7,203 26 7,114 25 6,392 22
Wholesale transaction..................... 158 1 142 1 172 1
Public funds.............................. 2 * 8 * 217 1
Tax-deferred accounts
Deferred compensation................... 961 3 1,190 4 1,161 4
IRA/Keogh(1)............................ 2,408 9 2,445 9 2,686 9
Customer term accounts.................... 12,872 46 12,875 46 13,736 47
------- --- ------- --- ------- ---
$27,785 100 $28,158 100 $28,880 100
======= === ======= === ======= ===
</TABLE>
- --------
(1) Included in IRA/Keogh are money market accounts of $113 million at June
30, 1997, $117 million at March 31, 1997 and $114 million at June 30,
1996.
*Less than one percent
The Company concentrates its retail deposit-gathering activity in two
states: California and Florida. The total decrease in deposits reflects the
competitive environment of banking institutions and the wide array of
investment opportunities available to consumers.
An analysis of term deposits by interest rate and maturity at June 30, 1997
is presented below:
<TABLE>
<CAPTION>
3 OVER OVER OVER OVER
MONTHS 3 MONTHS 6 MONTHS 12 MONTHS 24 MONTHS JUNE 30,
OR BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER ---------------
LESS 6 MONTHS 12 MONTHS 24 MONTHS 36 MONTHS 36 MONTHS 1997 1996
------ ---------- ---------- ---------- ---------- --------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE
Under 3%................ $ 36 $ -- $ -- $ -- $ -- $ -- $ 36 $ 91
3 to 3.99%.............. 53 18 12 6 -- -- 89 97
4 to 4.99%.............. 1,999 550 546 72 3 24 3,194 8,222
5 to 5.99%.............. 3,783 2,765 3,465 1,014 227 556 11,810 6,162
6 to 6.99%.............. 169 39 117 129 349 111 914 2,242
7 to 7.99%.............. 30 4 16 4 25 -- 79 863
8 to 8.99%.............. 1 -- 1 1 -- 1 4 6
9 to 9.99%.............. -- -- -- 1 -- -- 1 1
Over 10%................ -- -- -- 2 1 -- 3 2
------ ------ ------ ------ ---- ---- ------- -------
Total................. $6,071 $3,376 $4,157 $1,229 $605 $692 $16,130 $17,686
====== ====== ====== ====== ==== ==== ======= =======
$100,000 accounts
included above(1)...... $1,015 $ 605 $ 867 $ 263 $154 $158 $ 3,062 $ 3,400
</TABLE>
- --------
(1) Includes wholesale term accounts of $2 million at June 30, 1997 and $217
million at June 30, 1996.
42
<PAGE>
Borrowings
The following summarizes borrowings at June 30, 1997, March 31, 1997 and
June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, JUNE 30,
1997 1997 1996
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased and
commercial paper.................... $ 1,290 11% $ 1,287 12% $ 945 8%
Securities sold under agreements to
repurchase.......................... 3,860 32 4,484 40 5,368 49
Advances from the FHLB............... 4,357 35 2,558 23 2,169 20
Guaranteed preferred beneficial
interest in Company subordinated
notes............................... 400 3 400 4 100 1
Other borrowings..................... 2,338 19 2,332 21 2,400 22
------- ---- ------- ---- ------- ----
Total borrowings..................... $12,245 100% $11,061 100% $10,982 100%
======= ==== ======= ==== ======= ====
Interest rate on borrowings at
quarter end......................... 6.15% 6.13% 6.00%
</TABLE>
The following summarizes borrowings by date of maturity as of June 30, 1997:
<TABLE>
<CAPTION>
LESS THAN 1-2 2-5 5-10 AFTER 10
TOTAL ONE YEAR YEARS YEARS YEARS YEARS
------- --------- ----- ------ ----- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased and
commercial paper.............. $ 1,290 $1,290 $ -- $ -- $ -- $ --
Securities sold under
agreements to repurchase...... 3,860 3,366 192 302 -- --
Advances from the FHLB......... 4,357 4,129 -- 228 -- --
Guaranteed preferred beneficial
interest in Company
subordinated notes............ 400 -- -- -- -- 400
Other borrowings............... 2,338 402 713 1,173 -- 50
------- ------ ---- ------ ---- ----
Total borrowings............... $12,245 $9,187 $905 $1,703 $ -- $450
======= ====== ==== ====== ==== ====
Average interest rate on
borrowings by maturity........ 6.15% 5.75% 7.36% 7.09% --% 8.49%
</TABLE>
Total borrowings increased $1.1 billion from $11.1 billion at March 31, 1997
and $1.2 billion from $11 billion at June 30, 1996 to $12.2 billion at June
30, 1997. The Company reduced its percentage of total borrowings from
securities sold under agreements to repurchase by 17% from 49% at June 30,
1996 to 32% at June 30, 1997, and increased its advances from FHLB, as a
percentage of total borrowings to 35% at June 30, 1997.
Advances from the FHLB increased to $4.4 billion at June 30, 1997 from $2.6
billion at March 31, 1997 and increased from $2.2 billion at June 30, 1996.
Borrowings from securities sold under agreements to repurchase decreased to
$3.9 billion at June 30, 1997 from $4.5 billion at March 31, 1997 and
decreased from $5.4 billion at June 30, 1996. Federal funds purchased and
commercial paper increased $3 million from $1.3 billion at March 31, 1997 and
$345 million from $945 million at June 30, 1996 to $1.3 billion at June 30,
1997. Guaranteed preferred beneficial interest in company subordinated notes
increased $300 million from $100 million at June 30, 1996 to $400 million at
June 30, 1997. Other borrowings increased $6 million from $2.3 billion at
March 31, 1997 and decreased $62 million from $2.4 billion at June 30, 1996 to
$2.3 billion at June 30, 1997.
On January 27, 1997, Great Western Financial Trust II (the "subsidiary trust
II"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$300 million of 8.206% Trust Originated Preferred Securities (the "preferred
securities II"). In connection with subsidiary trust II's issuance of the
preferred securities II, Great Western Financial Corporation issued to
subsidiary trust II $309 million principal amount of its 8.206% subordinated
deferrable interest notes, due 2027 (the "subordinated notes II"). The sole
assets of subsidiary trust II are and will be the subordinated notes II. Great
Western Financial Corporation's obligations under the subordinated notes II
and related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust II's obligations under the
preferred securities II.
43
<PAGE>
In December 1995, Great Western Financial Trust I (the "subsidiary trust
I"), a wholly-owned subsidiary of Great Western Financial Corporation, issued
$100 million of 8.25% Trust Originated Preferred Securities (the "preferred
securities I"). In connection with subsidiary trust I's issuance of the
preferred securities I, Great Western Financial Corporation issued to
subsidiary trust I $103 million principal amount of its 8.25% subordinated
deferrable interest notes, due 2025 (the "subordinated notes I"). The sole
assets of subsidiary trust I are and will be the subordinated notes I. Great
Western Financial Corporation's obligations under subordinated notes I and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of subsidiary trust I's obligations under the
preferred securities I.
ASSET LIABILITY MANAGEMENT
The Company's principal ongoing objectives in managing its assets and
liabilities are to maintain and increase the spread that exists between the
return received on its interest-earning assets and the price paid on
liabilities to fund such assets, to reduce the volatility caused by changes in
interest rates, to ensure risk-taking is calculated and not excessive, and to
provide sufficient liquidity at all times.
The Company employs numerous strategies and strict policies to accomplish
and maintain these objectives. As the Company's main earning assets are loans
and mortgage-backed securities, it primarily makes or invests in ARM loans or
securities. In so doing, it reduces the extreme volatility and loss in value
that would result by owning low fixed-rate loans during a period of rapidly
rising interest rates.
Although it costs the Company during the "lag" that exists between the time
loan rates rise and when loan rates are adjusted upwards, the Company benefits
in the same measure from the lag when rates fall. Other financial risks exist
in the Company's operation and balance sheet. These main risks, including
basis, repricing, options, and yield curve twists, are more difficult to
quantify and manage.
The cost of funds for GWB, relative to COFI, FCOFI and LAMA is shown as
follows:
<TABLE>
<CAPTION>
GWB COST OF
GWB FUNDS LESS THAN
COST OF ------------------
FUNDS COFI FCOFI LAMA COFI FCOFI LAMA
------- ----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997............... 4.538% 4.853% 5.984% 5.551% .315% 1.446% 1.013%
March 31, 1997.............. 4.387% 4.780% 5.943% 5.495% .393% 1.556% 1.108%
June 30, 1996............... 4.396% 4.809% 5.935% 5.636% .413% 1.539% 1.240%
</TABLE>
To accomplish its objectives, the Company stabilizes its balance sheet
primarily by matching various characteristics of the assets purchased with the
liabilities incurred. It also sells the low margin fixed rate loans and ARMs
it originates into the secondary market while retaining more profitable ARMs.
When necessary, off-balance sheet instruments allow the Company to pursue
marketing strategies consistent with customer needs while compensating for the
risk these strategies create. The most frequently used instruments are various
types of interest rate swaps, caps, floors, and futures.
To protect against rate fluctuations for items before they are put on the
balance sheet, items such as commitments to fund fixed-rate loans originated
for sale, the Company from time to time uses off balance sheet instruments
including interest rate forwards, caps, floors, and future contracts as
asset/liability management tools. They are used to reduce the Company's
exposure to interest rate fluctuations and provide more stable spreads between
asset yields and the rates on their funding sources.
To evaluate the Company's current interest-rate position, it is necessary to
analyze the amount and proportionate share of each of its major earning
assets, including each major type of short-term or long-term real estate loan,
and the amount and proportionate share of each major category of short-term or
long-term deposits and borrowings. The Company utilizes a variety of
analytical tools including static gap, duration gap, risk point reports, net
interest income simulation and market value of equity sensitivity analysis.
The standard static gap report appears below.
44
<PAGE>
The following table shows that the portfolio of short-term assets exceeded
liabilities maturing or subject to interest adjustment within one year by $2.5
billion, or 6.1% of total earning assets at June 30, 1997 compared with $2.3
billion, or 5.5% of total earning assets at March 31, 1997 and $2 billion, or
4.7% of total earning assets at June 30, 1996. The Company is better protected
against rising rates with an excess of interest earning assets maturing or
repricing within one year.
<TABLE>
<CAPTION>
INTEREST/RATE SENSITIVITY
-------------------------------------------
JUNE 30, 1997
-------------------------------------------
OVER
WITHIN 1-5 5-15 15 % OF
1 YEAR YEARS YEARS YEARS TOTAL TOTAL
------- ------- ----- ----- ------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Cash equivalents................... $ 300 $ -- $ -- $ -- $ 300 1%
Available-for-sale securities......
Mortgage-backed securities....... 5,791 -- -- -- 5,791 14
Investments(including FHLB)...... 1,208 -- -- 355 1,563 4
Held to maturity securities
Mortgage-backed securities....... 1,353 54 65 33 1,505 3
Loans
Loans held in portfolio.......... 27,049 2,455 119 483 30,106 72
Loans held-for-sale.............. 156 -- -- -- 156 *
Consumer Finance................. 719 1,164 289 1 2,173 5
Other............................ 297 55 1 4 357 1
------- ------- ---- ---- ------- ---
Total loans.................... 28,221 3,674 409 488 32,792 78
------- ------- ---- ---- ------- ---
Total earning assets......... 36,873 3,728 474 876 41,951 100%
INTEREST BEARING LIABILITIES
Deposits
Checking accounts................ 4,181 -- -- -- 4,181 10
Savings and money market
accounts........................ 7,316 -- -- -- 7,316 18
Time certificates................ 13,602 2,512 14 -- 16,128 40
Wholesale accounts............... 160 -- -- -- 160 1
------- ------- ---- ---- ------- ---
Total deposits................. 25,259 2,512 14 -- 27,785 69
Borrowings
Federal funds purchased and
commercial paper................ 1,290 -- -- -- 1,290 3
Securities sold under agreement
to repurchase................... 3,366 494 -- -- 3,860 10
Advances from Federal Home Loan
Banks........................... 4,129 228 -- -- 4,357 11
Guaranteed preferred beneficial
interest in
Company subordinated notes...... -- -- -- 400 400 1
Other borrowings................... 402 1,886 -- 50 2,338 6
Impact of interest-rate swaps.... (109) 109 -- -- -- --
------- ------- ---- ---- ------- ---
Total borrowings............... 9,078 2,717 -- 450 12,245 31
------- ------- ---- ---- ------- ---
Total interest bearing
liabilities................. 34,337 5,229 14 450 40,030 100%
------- ------- ---- ---- ------- ===
Earning assets over (under)
interest bearing liabilities at
June 30, 1997..................... $ 2,536 $(1,501) $460 $426 $ 1,921
======= ======= ==== ==== =======
</TABLE>
- --------
* Less than one percent
45
<PAGE>
LIQUIDITY MANAGEMENT
Liquidity refers to the capability of a company to fund its operations and
meet its obligations and commitments on both a timely and cost-effective basis
out of its cash flow.
Customer deposits provide the Company with a sizable source of stable low-
cost funds. Customer deposits and stockholders' equity funded 71.0% and 72.9%
of its average total assets in the second quarter of 1997 and the second
quarter of 1996, respectively. The remaining funding is provided by a
combination of wholesale short-term funding sources including reverse
repurchase agreements and intermediate-term sources including senior debt.
The Company's real estate loans totaled $30.3 billion at June 30, 1997. Of
this amount, $460 million matures within one year and $2.8 billion matures
within one to five years on a contractual basis.
GWB, at June 30, 1997 had excess borrowing capacity at the FHLB of
approximately $8 billion which includes overnight borrowing capacity. Other
sources of liquidity include federal funds, commercial paper and reverse
repurchase agreements and/or the sale of assets.
As presented in the Consolidated Statement of Cash Flows, the sources of
liquidity vary between years. The primary sources of funds in the second
quarter were sales and principal payments on mortgage-backed securities and
loans held for investment of $1.6 billion. New loans originated for investment
required $2.7 billion in the second quarter of 1997. Operating activities
provided $132.2 million in the second quarter.
GWB maintains liquidity balances each period in excess of funding and legal
requirements. Cash, certificates of deposit, repurchase agreements, federal
funds and available-for-sale securities totaled $2 billion at June 30, 1997
and $2.4 billion at June 30, 1996. GWB had funds in excess of required
liquidity levels. The amounts over those required for regulatory purposes will
fluctuate between periods and are a source of short-term funding.
PARENT COMPANY LIQUIDITY
GWFC, the parent company, derives substantially all of its cash income from
dividends received from its subsidiaries. During the second quarter, it
received cash dividends in the amount of $46.3 million. Of that amount, $37.8
million was received from GWB, $6.5 million was received from Aristar and $2
million from other subsidiaries.
In July, 1996, GWFC renewed its July, 1994 $200 million syndicated multi-
year credit facility with 21 banks. This is a revolving line of credit which
is a contingent source of liquidity. This line is used to backup commercial
paper for the Company's issuances. To date, there have been no borrowings
under this agreement.
Short-term liquidity can also be generated by the Company's ability to raise
funds in a number of capital and money markets as well as by liquidating
short-term investments.
CAPITAL ADEQUACY
Capital (stockholders' equity) was $2.7 billion at June 30, 1997 and $2.8
billion at June 30, 1996. At June 30, 1997, the ratio of capital to total
assets was 6.1% compared with 6.5% a year ago.
On July 23, 1996, the Board of Directors authorized the repurchase of up to
7.5 million shares of outstanding common stock, representing approximately 5%
of the total number of shares outstanding as of June 30, 1996. On July 29,
1996, 6.5 million shares were repurchased at a weighted average price of
$26.85 per share. By February 20, 1997, the remaining balance of 1.0 million
shares had been repurchased at a weighted average price of $31.91 per share.
46
<PAGE>
On January 28, 1997, the Board of Directors authorized the repurchase of up
to 5 million shares of outstanding common stock, representing approximately
3.6% of the total number of outstanding shares at December 31, 1996. As of
February 28, 1997, there had been no repurchases under this program. On March
5, 1997 the Board of Directors voted to discontinue the repurchase program.
The Company's capital surplus increased by $53 million during the second
quarter of 1997 primarily as a result of stock options exercised.
At June 30, 1997 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
$340,000 were converted to common stock at the holder's option.
GWB is subject to certain capital requirements under applicable regulations
and meets all such requirements. GWB's total risk-based capital was $2.7
billion, including eligible subordinated notes of $115 million at June 30,
1997 and $2.9 billion, including eligible subordinated notes of $288 million
at June 30, 1996.
The following ratios compare GWB with the capital requirements under
regulations issued by the OTS:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------------- ---------------------------
ACTUAL OTS BENCHMARK ACTUAL OTS BENCHMARK
------------ ------------- ------------ -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------------- ------ ----- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage/tangible ratio. $2,439 6.00% $ 1,220 3.00% $2,453 6.00% $ 1,227 3.00%
Tier 1 risk-based ratio. 2,434 10.09 965 4.00 2,448 10.07 972 4.00
Total risk-based ratio.. 2,748 11.39 1,930 8.00 2,918 12.01 1,945 8.00
</TABLE>
The OTS previously proposed to amend its capital rule on the leverage ratio
requirement to reflect amendments made by the Office of the Comptroller of the
Currency ("OCC") to the capital requirements for national banks. The proposal
would establish a 3% leverage ratio (defined as the ratio of core capital to
adjusted total assets) for savings associations in the strongest financial and
managerial condition. All other savings associations would be required to
maintain leverage ratios of at least 4%. Only savings associations rated
composite 1 under the OTS CAMELS rating system will be permitted to operate at
or near the regulatory minimum leverage ratio of 3%. For all other savings
associations, the minimum core capital leverage ratio will be 3% plus an
additional 100 to 200 basis points.
In determining the amount of additional capital, the OTS will assess both
the quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-
case basis. The OTS' supervisory judgment on a savings association's capital
adequacy, both in terms of risk-based capital and the minimum leverage ratio,
will continue to be based upon an assessment of the relevant factors present
in each institution.
Savings associations that do not pass the minimum capital standards
established under the new core capital leverage ratio requirements will be
required to submit capital plans detailing steps to be taken to reach
compliance.
GWB currently meets these proposed requirements.
47
<PAGE>
The following table presents the debt ratings of the Company and GWB at June
30, 1997:
<TABLE>
<CAPTION>
MOODY'S
STANDARD INVESTORS
& POOR'S SERVICES FITCH
--------- ---------- --------
GWFC GWB GWFC GWB GWFC GWB
---- ---- ----- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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 second quarter of 1997 the regular quarterly dividend on the $165
million 8.3% cumulative preferred stock, issued in September 1992, was paid.
The principal source of operating income of the Company on an unconsolidated
basis is dividends from GWB and Aristar. In the second quarter of 1997,
dividends from GWB and Aristar totaled $37.8 million and $6.5 million,
respectively.
GWB is subject to the regulations of the OTS and FDIC. The OTS regulations
impose limitations upon "capital distributions" by savings associations,
including cash dividends. The regulations establish a three-tiered system:
Tier 1 includes savings associations with capital at least equal to their
fully phased-in capital requirement which have not been notified that they are
in need of more than normal supervision; Tier 2 includes savings associations
with capital above their minimum capital requirement but less than their fully
phased-in requirement; and Tier 3 includes savings associations with capital
below their minimum capital requirement. Tier 1 associations may, after prior
notice but without approval of the OTS, make capital distributions up to the
higher of (1) 100% of their net income during the calendar year plus the
amount that would reduce by one half their "surplus capital ratio" (the excess
over their fully phased-in capital requirement) at the beginning of the
calendar year or (2) 75% of their net income over the most recent four-quarter
period. Tier 2 associations may, after prior notice but without approval of
the OTS, make capital distributions of up to 75% of their net income over the
most recent four-quarter period depending upon their current risk-based
capital position. Tier 3 associations may not make capital distributions
without prior approval. An association subject to more stringent restrictions
imposed by agreement may apply to remove the more stringent restrictions.
The Company believes that GWB is a Tier 1 association. Notwithstanding the
foregoing, the regulatory authorities have broad discretion to prohibit any
payment of dividends and take other actions if they determine that the payment
of such dividends would constitute an unsafe or unsound practice. Among the
circumstances posing such risk would be a capital distribution by a Tier 1 or
Tier 2 association whose capital is decreasing because of substantial losses.
As of June 30, 1997, GWB's dividend limitation for 1997 is approximately
$561 million. Therefore, after taking into consideration dividends declared
and paid in the six months ending June 30, 1997, GWB may declare dividends or
make other capital distributions of approximately $485 million, without
obtaining prior regulatory approval. The limitation for 1997 will increase by
net income earned after June 30, 1997.
48
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 128
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share (EPS) by replacing the presentation of primary EPS with a
presentation of basic EPS. Primary EPS included common stock equivalents while
basic EPS excludes them. This change simplifies the computation of EPS, while
making the computation in the United States more compatible to the standards
of other countries and the International Accounting Standards Committee,
("IASC"). It also requires dual presentation of basic and fully diluted EPS on
the face of the income statement for all entities with complex capital
structures.
Washington Mutual, Inc. (see Part I. Financial Information, Item 2.
"Management's Discussion and Analysis of Financial Condition, Subsequent
Events"), will adopt SFAS 128 effective December 31, 1997. It is anticipated
that the adoption of SFAS 128 will not have a material impact on Washington
Mutual, Inc.'s financial statements.
SFAS 129
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," ("SFAS
129"). SFAS 129 establishes disclosure requirements regarding pertinent rights
and privileges of outstanding securities. Examples of disclosure items
regarding securities include items such as dividend and liquidation
preferences, participation rights, call prices and dates, conversion or
exercise prices and rates. The number of shares issued upon conversion,
exercise or satisfaction of required conditions during at least the most
recent annual fiscal period and any subsequent interim period must also be
disclosed.
Disclosure of liquidation preferences of preferred stock in the equity
section of the statement of financial condition is also required.
Issuers of redeemable stock must disclose the amount of redemption
requirements for all issues of capital stock that are redeemable at fixed or
determinable prices on fixed or determinable dates in each of the five years
following the date of the latest statement of financial position presented.
Washington Mutual, Inc. (see Part I. Financial Information, Item 2.
"Management's Discussion and Analysis of Financial Condition, Subsequent
Events"), will adopt SFAS 129 effective December 31, 1997. It is anticipated
that the adoption of SFAS 129 will not have a material impact on Washington
Mutual, Inc.'s financial statements.
SFAS 130
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130 establishes
standards for disclosure of comprehensive income and its components. Certain
transactions which result in changes in assets and liabilities, such as
unrecognized gains or losses in available-for-sale securities, have
historically bypassed the income statement and have been recorded directly as
a component of stockholders' equity, net of taxes.
The FASB has described comprehensive income as "the change in equity [net
assets] of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." SFAS 130 defines comprehensive income as the total
of all components of comprehensive income, including net income. It then
defines other comprehensive income to include revenues, gains and losses that
may be included in comprehensive income, but excluded from net income, e.g.
recorded directly as a component of stockholders' equity.
49
<PAGE>
SFAS 130 requires that the components of other comprehensive income be
included with an enterprise's financial statements. Other comprehensive income
may be disclosed either in a separate financial statement (two statement
approach) or after net income on the income statement (one statement approach)
or within the statement of changes in stockholders' equity.
Washington Mutual, Inc. (see Part I, Financial Information, Item 2,
"Management's Discussion and Analysis of Financial Condition, Subsequent
Events"), will adopt SFAS 130, effective January 1, 1998, and will restate
comparative periods as required by this pronouncement.
As SFAS 130 is specifically disclosure related, it is anticipated that the
adoption of this statement will not have a material impact on Washington
Mutual, Inc.'s financial position or results of operation.
SFAS 131
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement requires that registrants report results of
operations, and other reportable information, such as products and services,
geographic areas of operation and major customers of reportable operating
segments. This statement establishes a basis by which users of financial
statement may better understand an enterprise's performance, assess the
potential for future cash flows, and make more informed judgments about the
enterprise as a whole through analyzing key operating segments of the
organization.
In this statement, the FASB identifies an operating segment as a component
of an enterprise "that engages in business activities from which it may earn
revenues and incur expenses (including revenue and expenses relating to
transactions with other components of the same enterprise); whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance; and for which discrete financial information is
available."
Required disclosures for each reportable segment include, though are not
limited to, the following items:
Information About Profit or Loss and Assets
. profit or loss
. internal (e.g. intercompany) and external revenues and expenses
. interest income and expense
. depreciation, depletion and amortization expense
. unusual items
. equity in the net income of investees accounted for by the equity method
. income tax expense or benefit
. extraordinary items
. significant noncash items other than depreciation, depletion and
amortization expense
. asset volumes and measurement
. basis of accounting for transactions between reportable segments (i.e.
intercompany)
. expenditures for certain long-lived assets
50
<PAGE>
Other Information
. products and services
. distribution and production processes
. regulatory environment
. customer base
. amount of investment in equity method investees
. differences in measurements of reportable segments' profits, losses and
assets
. prior period measurement changes
. nature and effect of asymmetrical allocations to segments (e.g.
allocation of depreciation expense to a segment without related
assets(s))
The Company has historically provided information on its lines of business,
(see Line of Business under Part I, Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations. . . .")
Washington Mutual, Inc. (see Part I. Financial Information, Item 2.
"Management's Discussion and Analysis of Financial Condition, Subsequent
Events"), will adopt SFAS 131, effective January 1, 1998.
As SFAS 131 is specifically disclosure related, it is anticipated that the
adoption of this statement will not have a material impact on Washington
Mutual, Inc.'s financial position or results of operation.
SUBSEQUENT EVENTS
Pursuant to the Agreement and Plan of Merger dated March 5, 1997 by and
among the Company, NACI, and Washington Mutual, Inc., the Company merged with
and into NACI on July 1, 1997. NACI is a wholly owned subsidiary of Washington
Mutual, Inc.
As consideration for the Merger, holders of Great Western common stock
received in exchange for each share of Great Western common stock held the
right to receive 0.9 shares of the Washington Mutual common stock, with cash
being paid in lieu of fractional shares. Holders of Great Western's 8.30%
Cumulative Preferred Stock received in exchange for each share of Great
Western Preferred Stock one share of Washington Mutual's 8.30% Cumulative
Preferred Stock, Series F. The terms of the Series F Preferred Stock are
substantially the same as the terms of the Great Western Preferred Stock. As a
result of the Merger, Washington Mutual issued 125,649,551 shares of its
common stock and 660,000 shares of the Series F Preferred Stock.
As a result of the merger agreement and exchange of common stock, Washington
Mutual, Inc. filed Form 8-K with the Securities and Exchange Commission to
dismiss Price Waterhouse LLP as the independent auditors for Great Western and
to engage Deloitte & Touche LLP as its independent auditors for Great Western
effective July 1, 1997.
Washington Mutual, Inc. is anticipating the recording of restructuring
charges and severance related to the merger in the third quarter of 1997, a
portion of which may be recorded at Great Western Bank. This may impact the
Bank's payment of dividends to its parent.
51
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
CONSENT OF STOCKHOLDERS
Pursuant to a consent solicitation by H. F. Ahmanson & Company, the
following proposals were consented to by stockholders as of April 10, 1997:
<TABLE>
<CAPTION>
CONSENTING
----------
<C> <S> <C>
. A By-law amendment proposed by H. F. Ahmanson & Company
("Ahmanson") compelling the annual meeting of stockholders to
be held each year on the fourth Tuesday in April, or on a
date within 14 days thereof. 69,455,578
. A By-law amendment preventing the presiding officer from
adjourning any stockholder meeting at which quorum is present
unless all business properly brought before such meeting has
been acted upon by stockholders. 68,373,259
. A By-law amendment providing that any of the By-law
amendments pursuant to Ahmanson's Consent Solicitation may
not be subsequently amended without the majority approval of
Great Western's stockholders. 68,372,660
</TABLE>
SPECIAL MEETING OF STOCKHOLDERS
On June 13, 1997, the stockholders of GWFC approved the merger agreement
among Washington Mutual, Inc., New American Capital, Inc. and GWFC at the
Special Meeting of Stockholders. The vote was 103,519,142 for, 1,554,091
against and 215,956 withheld.
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders (the "Annual Meeting") of Great Western
Financial Corporation (the "Company") was held at the Company's Employee
Center at 19809 Prairie Street, Chatsworth, California 91311, on June 13,
1997, at 2:00 p.m., local time, to vote on the following:
<TABLE>
<CAPTION>
VOTES CAST
-------------------------------
FOR AGAINST WITHHELD
---------- ---------- ---------
<C> <S> <C> <C> <C>
. The election of four members to the
Board of Directors for a term of three
years
Bradford M. Freeman..................... 97,973,561 N/A 1,061,989
Firmin A. Gryp.......................... 97,935,681 N/A 1,099,869
James F. Montgomery..................... 97,976,561 N/A 1,058,989
Alberta E. Siegel....................... 97,968,066 N/A 1,067,484
. A non-binding advisory stockholder
resolution relating to the sale of
uninsured investment products by Great
Western Bank............................ 5,052,541 84,005,396 7,828,515
</TABLE>
52
<PAGE>
ITEM 5. OTHER INFORMATION
The calculation of the Company's ratio of earnings to fixed charges as of the
dates indicated follows:
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS SIX MONTHS
ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30,
1997 1996 1996
---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Earnings
Net earnings............................ $ 138,036 $ 115,822 $ 150,565
Taxes on income......................... 107,579 70,800 98,800
---------- ---------- ----------
Earnings before taxes................... $ 245,615 $ 186,622 $ 249,365
---------- ---------- ----------
Interest expense
Deposits................................ $ 564,411 $1,179,479 $ 593,458
Borrowings.............................. 362,433 688,134 345,370
---------- ---------- ----------
Total................................. $ 926,844 $1,867,613 $ 938,828
---------- ---------- ----------
Rent expense
Total................................... $ 26,794 $ 63,980 $ 31,961
1/3 thereof............................. 8,931 21,327 10,654
Capitalized interest...................... $ 2,187 $ 33 $ 20
Preferred stock dividends................. $ 6,847 $ 20,295 $ 12,496
Ratio of earnings to fixed charges and
preferred stock dividends
Excluding deposits......................
Earnings before fixed charges......... $ 616,979 $ 896,083 $ 605,389
Fixed charges......................... 385,734 742,195 376,740
Ratio................................. 1.60 1.21 1.61
Including deposits
Earnings before fixed charges......... $1,181,390 $2,075,562 $1,198,847
Fixed charges......................... 950,145 1,921,674 970,198
Ratio................................. 1.24 1.08 1.24
Ratio of earnings to fixed charges
Excluding deposits
Earnings before fixed charges......... $ 616,979 $ 896,083 $ 605,389
Fixed charges......................... 373,551 709,494 356,044
Ratio................................. 1.65 1.26 1.70
Including deposits
Earnings before fixed charges......... $1,181,390 $2,075,562 $1,198,847
Fixed charges......................... 937,962 1,888,973 949,502
Ratio................................. 1.26 1.10 1.26
</TABLE>
53
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<C> <S>
4.1 The Company has outstanding certain long-term debt as set forth in
Note 15 of the Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. The Company agrees to furnish copies of the
instruments representing its long-term debt to the Securities and
Exchange Commission (the "SEC") upon request.
10.1 Agreement and Plan of Merger By and Among Washington Mutual, Inc.,
New American Capital, Inc., and Great Western Financial Corporation,
dated as of March 5, 1997 (filed as an exhibit to GWFC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 and
incorporated herein by reference).
11.1 Statement re computation of per share earnings.
27.1 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
A Current Report on Form 8-K dated May 22, 1997 was filed with the SEC,
which contains as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated May 5, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 30, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 28, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 10, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K dated April 3, 1997 was filed with the SEC,
which contained as an exhibit materials used in presentations to the
investment analysts.
A Current Report on Form 8-K/A dated May 27, 1997 was filed with the SEC,
which contains as an exhibit a revised slide to the presentation to the
investment analysts filed with the Form 8-K filed on May 22, 1997.
54
<PAGE>
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.
New American Capital, Inc.
(Successor to Great Western
Financial Corporation)
Registrant
/s/ Kerry K. Killinger
By: _________________________________
Kerry K. Killinger
President
Chief Executive Officer
/s/ William A. Longbrake
By: _________________________________
William A. Longbrake
Senior Executive Vice President
Chief Financial Officer
DATE: August 13, 1997
55
<PAGE>
GREAT WESTERN FINANCIAL CORPORATION
Computation of Net Income Per Common
Primary and Fully Diluted
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------
June 30, March 31, June 30, June 30, June 30,
1997 1997 1996 1997 1996
---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net income $72,333 $65,703 $79,271 $138,036 $150,565
Preferred stock dividends - convertible
and nonconvertible (3,423) (3,424) (6,242) (6,847) (12,496)
-------- ------ ------- -------- --------
Net income for computing earnings per
Common share - primary 68,910 62,279 73,029 131,189 138,069
Preferred stock dividends - convertible - - 2,819 - 5,649
-------- ------ ------- -------- --------
Common share - fully diluted $68,910 $62,279 $75,848 $131,189 $143,718
======= ======= ======= ======== ========
<CAPTION>
Computation of Average Number of Common Shares
Outstanding on Primary and Fully Diluted Basis
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -----------------------
June 30, March 31, June 30, June 30, June 30,
1997 1997 1996 1997 1996
---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Average number of Common shares
outstanding during each period -
without dilution 138,292 137,715 137,306 138,004 137,249
Common share equivalents outstanding
at the end of each period 3,323 3,590 1,736 3,023 1,735
------- ------- ------- ------- -------
Average number of common shares and
Common share equivalents outstanding
during each period on a primary basis 141,615 141,305 139,042 141,027 138,984
Common share equivalents outstanding
at the end of each period on a fully
diluted basis 457 291 125 757 125
Addition from assumed conversion as of
the beginning of each period of the
convertible preferred stock outstanding
at the end of each period - - 6,324 - 6,325
------- ------ ------- ------- -------
Average number of Common shares
outstanding during each period on a fully
diluted basis 142,072 141,596 145,491 141,784 145,434
======= ======= ======= ======= =======
Net income per Common share
Primary $ 0.49 $ 0.44 $ 0.52 $ 0.93 $ 0.99
Fully diluted $ 0.49 $ 0.44 $ 0.52 $ 0.93 $ 0.99
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY THE REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 424,357
<INT-BEARING-DEPOSITS> 125
<FED-FUNDS-SOLD> 300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,415,956
<INVESTMENTS-CARRYING> 1,504,656
<INVESTMENTS-MARKET> 1,522,126
<LOANS> 32,764,759
<ALLOWANCE> 316,411
<TOTAL-ASSETS> 43,769,792
<DEPOSITS> 27,785,070
<SHORT-TERM> 8,725,743
<LIABILITIES-OTHER> 1,054,200
<LONG-TERM> 3,519,401
0
165,000
<COMMON> 139,617
<OTHER-SE> 2,380,761
<TOTAL-LIABILITIES-AND-EQUITY> 43,769,792
<INTEREST-LOAN> 637,029
<INTEREST-INVEST> 157,207
<INTEREST-OTHER> 6,175
<INTEREST-TOTAL> 800,411
<INTEREST-DEPOSIT> 284,635
<INTEREST-EXPENSE> 466,578
<INTEREST-INCOME-NET> 333,833
<LOAN-LOSSES> 36,072
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 276,178
<INCOME-PRETAX> 130,912
<INCOME-PRE-EXTRAORDINARY> 72,333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,333
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 3.01
<LOANS-NON> 381,161
<LOANS-PAST> 0
<LOANS-TROUBLED> 33,768
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 320,800
<CHARGE-OFFS> 45,721
<RECOVERIES> 5,260
<ALLOWANCE-CLOSE> 316,411
<ALLOWANCE-DOMESTIC> 316,411
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
