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XXXXXX XX XXXXXX XXXXXXXXXXX
XXXXXXXXXX, X.X. 00000
FORM 10-K
(XXXX ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM: TO
DOCKET NO. 3088
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GLENDALE FEDERAL BANK,
FEDERAL SAVINGS BANK
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES OF AMERICA 00-0000000
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
000 XXXXX XXXXXXX XXXXXX, 00000
XXXXXXXX, XXXXXXXXXX (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (000) 000-0000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
Pacific Stock Exchange
Noncumulative Preferred Stock, New York Stock Exchange
Series E, $1 par value
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Warrants to Purchase Common Stock
Indicate by check xxxx whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check xxxx if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 3, 1996: $830,273,213.
Number of shares of Common Stock outstanding as of September 3, 1996:
47,161,877 shares
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DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on
October 22, 1996 are incorporated by reference into Part III hereof.
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GLENDALE FEDERAL BANK
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business........................................................ 1
General........................................................ 1
Operating Strategies........................................... 2
Loans Receivable............................................... 7
Real Estate Acquired in Settlement of Loans.................... 18
Mortgage-Backed Securities..................................... 19
Liquidity and Investments...................................... 22
Deposits....................................................... 23
Borrowings..................................................... 25
Asset and Liability Management................................. 26
Interest Rate Margin........................................... 28
Subsidiaries................................................... 29
Competition.................................................... 30
Employees...................................................... 30
Regulation..................................................... 31
Taxation....................................................... 37
Item 2. Properties...................................................... 37
Item 3. Legal Proceedings............................................... 38
Item 4. Submission of Matters to a Vote of Security Holders............. 39
Item 4a. Executive Officers.............................................. 40
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 43
Item 6. Selected Financial Data......................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 46
Overview...................................................... 46
Balance Sheet Analysis........................................ 48
Liquidity and Asset and Liability Management.................. 56
Results of Operations......................................... 59
Item 8. Financial Statements and Supplementary Data..................... 66
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 66
Item 11. Executive Compensation.......................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 66
Item 13. Certain Relationships and Related Transactions.................. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 67
Index to Financial Statements................................... 71
PART I
ITEM 1. BUSINESS
GENERAL
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal" or the
"Bank") is one of the largest savings institutions in the United States, with
total consolidated assets at June 30, 1996 of $14.5 billion. The Bank's
business consists primarily of attracting deposits from the public and
originating and purchasing loans secured by mortgages on residential real
estate. During fiscal 1996, the Bank implemented a strategic initiative to
convert its traditional savings and loan operations to those of a more broad-
based community bank by introducing a new line of community business banking
products and expanding its line of consumer banking products. See "Operating
Strategies", "Real Estate Lending" and "Deposits" below for additional
discussion. The Bank, through certain subsidiaries, also engages in general
insurance and securities brokerage services.
The Bank derives its income primarily from the interest it charges on real
estate and other types of loans and, to a lesser extent, from interest on
securities, fees received in connection with loans and the servicing thereof
and deposits, as well as other services. Its major expenses are the interest
it pays on deposits and on borrowings and general operating expenses. The
Bank's operations, like those of other savings institutions, are significantly
influenced by general economic conditions, by the strength of the real estate
market, by the monetary, fiscal and regulatory policies of the federal
government and by the policies of financial institution regulatory
authorities.
The Bank was chartered as a federal mutual savings and loan association in
1934 and converted from the mutual to the stock form of organization in 1983.
In May 0000, Xxxxxxxx Xxxxxxx amended its charter to change its name to
Glendale Federal Bank, Federal Savings Bank. In September 1993, in an effort
to raise the capital necessary to avoid seizure by the federal government, the
Bank completed a comprehensive recapitalization (the "Recapitalization") which
included, among other things, the merger of the Bank's former holding company,
GLENFED, Inc. ("GLENFED") into a subsidiary of the Bank. See Note 18 of the
Notes to Consolidated Financial Statements for additional discussion regarding
the Recapitalization. During fiscal 1995, the Bank sold its 60-branch
franchise in Florida and sold University Savings Bank ("University Savings"),
its 25-branch subsidiary headquartered in Seattle, Washington. It also
acquired deposits aggregating approximately $1 billion and certain assets in
transactions with two other thrift institutions. See Note 4 of the Notes to
Consolidated Financial Statements for additional discussion of these sale and
acquisition transactions.
On August 28, 1996, the Bank entered into an agreement to acquire OneCentral
Bank ("OneCentral") in a cash transaction valued at $11.4 million. The
agreement is subject to regulatory and other approvals and is expected to
close in early 1997. As of August 25, 1996, OneCentral had $67.5 million in
deposits, over 45% of which were in checking accounts. OneCentral is expected
to convert to a federal savings bank charter with its deposit accounts insured
by the Bank Insurance Fund ("BIF"). In the event that legislation is not
passed resolving the crisis relating to the Savings Association Insurance Fund
("SAIF"), which insures the deposits of Glendale Federal, OneCentral will
provide Glendale Federal with a vehicle for migrating deposits from the SAIF
to the BIF. For discussion of the insurance of deposits by the BIF and the
SAIF and the current related legislation, see "Regulation--Insurance of
Deposit Accounts" below.
Glendale Federal is headquartered in Glendale, California, and at June 30,
1996, operated 150 banking offices and 22 loan offices in California.
1
OPERATING STRATEGIES
During fiscal 1996, the Bank adopted its strategic initiative to transform
itself from a traditional savings and loan institution into a broad-based
community bank offering deposit, cash management and credit products and
services. This intended transformation reflects management's assessment of the
competitive financial services environment and the significant narrowing of
the savings industry's spread between the yield on single-family residential
mortgages and the cost of term deposits that are the primary asset and
liability products offered by savings institutions. Competition from the
federally-sponsored secondary mortgage market agencies, mortgage bankers and
commercial banks has driven the returns available from the housing finance
business to levels that require lower cost funding sources than the
certificate of deposit accounts that have traditionally been the principal
source of funds for savings institutions.
The community bank concept is expected to reduce the Bank's reliance on
mortgage lending and provide the Bank with a broader, higher yielding asset
base and a lower costing, transaction account deposit base. This broader mix
of assets and liabilities is intended to increase the Bank's net interest
margin and to build a fee income stream that will enhance the Bank's future
earnings. Implementation of the Bank's strategic initiative to transform
itself from a savings institution to a community banking organization has also
resulted in an increase in general and administrative expenses. These expenses
are expected to stabilize at the levels experienced during the fourth quarter
of fiscal 1996, but may increase in future periods as the Bank expands its
business lines and continues to maintain a higher level of marketing activity.
The targeted benefits of this transformation, increased net interest margin
and increased fee income, are expected to lag the increase in expenditures.
The Bank's mix of products and services includes three separate lines of
business: business banking, consumer banking and real estate lending. Business
banking was initiated in fiscal 1996 with a focus on attracting banking
relationships with small businesses having annual sales of $5 million or less.
In fiscal 1997, the Bank plans to expand the business banking program by
introducing a middle-market business banking program. The targeted customers
will be businesses with annual sales between $10 million and $150 million with
credit needs of up to $15 million. The Bank's focus in consumer banking has
been principally on its new "Infinity" account, a combined checking and
savings account, introduced in fiscal 1996, which allows customers greater
flexibility in managing their finances. The Bank also offers unsecured lines
of credit and home equity lines of credit that are accessible through the
customer's Infinity account. In fiscal 1997, the Bank intends to further
enhance the Infinity account to include asset management features and to
expand the products and services offered to consumers. Real estate lending is
principally focused on traditional single-family residential loans. Each of
the Bank's lines of business is discussed separately below.
Asset generation from the Bank's new business lines was modest during fiscal
1996, as compared to the growth in transaction-based deposit accounts. This
was due to the fact that the business and consumer lending programs were in
their initial implementation phases in fiscal 1996 and to the competition from
California's existing commercial banks. The Bank's objective by the end of the
next three to five year period is to originate equal amounts of business,
consumer, and real estate loans.
BUSINESS BANKING
In July 1995, the Bank introduced a line of community business banking
products and services. This program focuses on small businesses, primarily
professionals, retailers and light manufacturers with annual sales of up to $5
million, located in the markets served by the Bank's retail banking offices.
The Bank offers business checking account programs, account analysis, payroll
services, electronic banking and merchant draft servicing. To meet the credit
needs of its business customers, the Bank offers revolving lines of credit and
term loans (primarily secured) with maturities of up to five years and with
prime-based adjustable interest rates. The maximum loan offered is $1 million.
2
In fiscal 1997, the Bank plans to introduce a middle-market business banking
program which will focus primarily on businesses with annual sales between $10
million to $75 million, but will also accommodate businesses with annual sales
of up to $150 million. The Bank will offer business checking accounts, zero
balance accounts, sweep capabilities into money market mutual funds, standby
and commercial letters of credit, revolving lines of credit and term loans
with a maximum limit of $15 million. Specific loan terms will be determined
based upon the financial strength of the borrower, the amount of credit
granted, and the type and quality of collateral available.
In contrast to the asset-based lending previously engaged in by the Bank's
subsidiaries, Glendale Federal intends that the commercial loans originated
through its new business banking programs will be cash flow and credit based,
with collateral being taken for the purpose of providing additional security
for repayment. In this respect, this activity more closely resembles
traditional community business banking rather than the commercial finance
company activities formerly conducted by the Bank's subsidiaries. In
implementing the new middle-market business banking program, the Bank is
taking a phased-in approach that will enable management to evaluate the market
acceptance and credit risk of this program.
CONSUMER BANKING
The goal of consumer banking is to increase the number and balance of low-
cost demand deposit accounts as well as the number and balance of higher-
yielding consumer lending products. The focus of consumer banking in fiscal
1996, and into fiscal 1997, has been on the Bank's new Infinity account. This
account, patterned after cash management accounts used by many financial
services companies, will allow customers to manage their finances, including
checking, money market, savings, certificates of deposit, borrowings and
investments, through the use of a single statement. The customer will have the
ability to transfer funds to and from checking or money market accounts or
transfer funds to and from a GLENFED Brokerage account for investment in
stocks, bonds or mutual funds.
The Infinity account is expected to increase the Bank's demand deposit and
money market accounts, which carry a lower interest cost to the Bank than the
certificate of deposit account that has been the traditional source of deposit
funding for thrifts. On the lending side, the Infinity account is expected to
encourage the use of secured and unsecured lines of credit that carry higher
yields than single-family loans. These line of credit products include a home
equity line of credit, a line of credit secured by a savings deposit, and an
unsecured line of credit.
REAL ESTATE LENDING
Currently, the Bank's principal lending activity is the purchase or
origination of loans secured by single-family residential real estate. Before
fiscal 1992, the Bank originated significant amounts of income property loans
(loans secured by multi-family residential and non-residential properties),
construction loans, a variety of consumer loan products and commercial loans
on the security of business inventories, receivables and other types of assets
("asset-based" lending) through its commercial finance subsidiaries. Income
property and asset-based lending activities have been discontinued with
lending currently restricted to refinancing existing loans, loans made to
finance the disposition of real estate acquired in settlement of loans ("REO")
or to fulfill existing commitments under lines of credit.
The largest portion of the Bank's loans are made to homeowners on the
security of single-family residences for the purpose of enabling them to
purchase or refinance such property. The Bank's real estate loans are
predominantly "conventional" loans, which means that they are not insured or
guaranteed by any government-associated entity. Most of the Bank's single-
family residential permanent loan contracts provide for amortization of
principal over 30 years. These loans, however, have remained outstanding for
much shorter periods because the original loans have been refinanced or the
borrowers have repaid the loans in full upon sale of the properties securing
the loans, or the underlying collateral has been acquired in settlement of the
loan.
3
The Bank has generally limited the types of loans originated or purchased
for its own portfolio to adjustable-rate mortgage loans ("ARMs") (loans
bearing interest rates that adjust periodically with reference to an index),
call-date loans (short-term, fixed-rate loans, the payments on which do not
fully amortize the initial principal amount of the loans) and loans with rates
that are fixed for up to five years and then convert to adjustable rates for
the remainder of the loan term. In the past, fixed-rate loans were primarily
originated for sale in the secondary market. However, beginning in the fourth
quarter of fiscal 1994 as part of the Bank's business and asset and liability
management strategies, Glendale Federal originated and purchased for its own
portfolio fixed-rate loans which met certain yield and other guidelines. The
Bank may continue to originate and/or purchase such loans for its own
portfolio in fiscal 1997 if the loans meet certain yield and other guidelines.
The ARM programs offered by the Bank provide for interest rates that adjust
either monthly, semi-annually or annually, beginning three, six or twelve
months from the inception of the loan, based primarily on changes in the
average weekly yield on specified maturities of U.S. Treasury securities or on
changes in the monthly weighted average cost of funds for savings institutions
in the Eleventh District of the Federal Home Loan Bank System ("COFI").
Adjustments to the required monthly payment of principal and interest on such
loans occur either monthly, semi-annually or annually, depending on the loan
program selected by the borrower. The Bank has placed greater emphasis on the
origination of loans whose rates are tied to U.S. Treasury securities since
this index is more sensitive to changes in market rates. The Bank also offers
several programs that provide for interest rates that are fixed for up to five
years and then convert to adjustable rates tied to the same Treasury indices
as certain of the Bank's other ARM products. In August 1996, the Bank
introduced a new ARM product whose terms allow for negative amortization and
provide for an index tied to one-month London Interbank Offered Rates
("LIBOR"), which index adjusts monthly, and monthly payments which adjust
annually. This product was introduced because of its favorable repricing
characteristics and because it represents a product which management believes
will be competitive with other lenders' offerings.
While ARMs have the advantage of reducing an institution's sensitivity to
interest rate fluctuations, they present certain risks not associated with
traditional fixed-rate mortgages. These include: (1) the risk that the
borrower, having qualified for the loan based upon interest rates prevailing
at the time of origination, may be unable to make the higher payments required
under the ARM when increases in the applicable index rates increase the rate
payable on the loan; and (2) the risk that "negative amortization" of
principal (that is, addition of a portion of monthly interest accruals to the
principal amount of the loan) may occur in those ARMs which provide for limits
in the monthly payment increase and do not correspondingly limit the rate
increase. The Bank attempts to mitigate these risks by the use of underwriting
standards that include analyzing the financial impact to the borrower
resulting from payment adjustments, and which require borrowers to qualify at
the greater of the initial interest rate plus the first annual adjustment or
at a predetermined interest rate based on loan-to-value ("LTV").
Loans with an LTV in excess of 80% require private mortgage insurance or, if
they meet certain criteria, can be made without mortgage insurance at higher
interest rates and fees at the option of the loan applicant. These loans are
priced higher in rate, fee and margin than those for which mortgage insurance
is obtained to recognize the increased credit risk assumed by the Bank. This
option is available only on loans with a maximum loan amount of $300,000 and
an LTV ratio of no more than 90%, where the purpose of the loan is to
purchase, or to refinance an existing Glendale Federal loan secured by a one-
unit, single-family residence. This alternative is only available on loans
that do not have negative amortization features.
As of June 30, 1996 and 1995, the balances of loans owned by the Bank that
were subject to negative amortization totaled approximately $3.5 billion and
$3.9 billion, respectively, including cumulative negative amortization at such
dates of approximately $1.4 million and $4.7 million, respectively.
Approximately 75% of such loans are secured by multi-family or non-residential
real estate.
4
Effective in April 1994, Glendale Federal implemented a correspondent
lending program in which the Bank purchased loans originated by unaffiliated
mortgage lenders and brokers. Loans originated by these lenders and brokers
are subject to the same underwriting standards as those used by the Bank in
its own lending and are accepted for purchase by the Bank only after approval
by Glendale Federal's underwriters. The Bank began phasing out this program
during fiscal 1996 and the program has been discontinued for fiscal 1997.
Loans purchased by the Bank under this program totaled $52.8 million, $195.5
million and $12.1 million in fiscal 1996, 1995 and 1994, respectively.
In fiscal 0000, Xxxxxxxx Xxxxxxx implemented a wholesale lending program in
which the Bank originates mortgage loans through approved independent mortgage
loan brokers. Loans submitted to the Bank by mortgage loan brokers are
accepted for funding by the Bank only after approval by the Bank's loan
underwriters using the Bank's normal underwriting standards. Loans originated
by the Bank under this program totaled $61.6 million in fiscal 1996 and $8.6
million in fiscal 1995.
Loan applications and related information are forwarded by the branch
personnel or loan agents to a loan processing center where loan processing
personnel complete the underwriting and documentation process and where
lending decisions are made by the Bank's underwriters. The Bank's loan
approval process is intended to assess the applicant's ability to repay the
loan and the underlying security. Loan underwriters analyze the loan
application and the property involved and approve or deny the requested loan
or, depending on the amount of the loan, submit the loan for approval to
designated senior levels of authority. As part of the real estate loan
application process for most of its products, the Bank obtains information
concerning the income, financial condition, employment and credit history of
the applicant while qualified staff appraisers, and in certain circumstances
independent appraisers, inspect and appraise the security property. Appraisals
necessarily entail assumptions and subjective judgments regarding a variety of
matters. Accordingly, qualified appraisal professionals, including those
employed by regulatory authorities, can and do reach different conclusions as
to the value of the same or similar properties. The conclusions as to value
reached in such appraisals are subject to the effects of changes in relevant
real estate markets, the economy in general and other factors beyond the
Bank's control. To assure the quality of its appraisals, the Bank utilizes an
appraisal review process that includes procedures pursuant to which a
substantial portion of the appraisal reports prepared are reviewed for
accuracy of calculations and reasonableness of estimates by an experienced
review appraiser.
For all first trust deed and second trust deed term loans secured by real
estate, the Bank requires title insurance insuring the priority of its lien,
fire and extended coverage casualty insurance, and may also require flood
insurance if appropriate in order to protect the Bank's interest in the
security property. Substantially all fixed-rate loans in the Bank's loan
portfolio contain a "due on sale" clause providing that the Bank may declare
the unpaid principal amount due and payable upon the sale of the property
securing the loan. While the enforceability of due on sale clauses in certain
mortgage instruments has been restricted in some states, including California,
federal law generally pre-empts certain of these state restrictions. Although
the ARMs in the Bank's portfolio contain a "due on sale" clause, an ARM is
generally transferable to a purchaser of the security property if the
purchaser meets the Bank's underwriting standards.
Loan Purchase Activity
The Bank purchases whole single-family residential real estate loans
primarily in the secondary mortgage market to supplement its retail loan
originations. The servicing rights for these whole loans are typically
retained by the seller. The Bank pays a fee to the servicer, generally from
0.25% to 0.50% per year on the unpaid principal balances of the mortgages, as
the mortgage payments are collected by the servicer. The Bank determines the
timing and amount of its whole loan purchases based on available liquidity,
current asset yields and the interest rate risk management policy adopted by
the
5
Bank. The Bank's investment and underwriting policies governing purchased
loans are the same as the policies for originated single-family residential
loans. Whole loans are purchased by the Bank only after the Bank's loan
underwriting staff performs a review of a representative sample of the loan
pools.
The Bank's portfolio of mortgage loans serviced by other institutions (the
"LSBO Portfolio") is managed separately from the portfolio of loans owned and
serviced by the Bank. To reduce the Bank's loss exposure, Glendale Federal has
implemented procedures designed to monitor and analyze the LSBO Portfolio and
to ensure the servicer's compliance with the servicing agreement. A majority
of the loans in this portfolio were originated during the last three years. At
June 30, 1996, 98% of the LSBO Portfolio was secured by single-family
residential real estate.
The following tables set forth the composition of the Bank's LSBO Portfolio
by note type and by state as of the dates indicated (dollars in thousands):
JUNE 30
--------------------------------
1996 1995 1994
---------- ---------- --------
Adjustable-rate.............................. $2,058,956 $ 371,884 $151,555
Fixed-rate................................... 1,068,635 1,358,107 486,685
Fixed-rate converting to adjustable-rate..... 16,256 20,194 --
---------- ---------- --------
$3,143,847 $1,750,185 $638,240
========== ========== ========
Weighted average rate on portfolio at end
of period................................. 7.37% 7.74% 7.07%
========== ========== ========
JUNE 30
--------------------------------
1996 1995 1994
---------- ---------- --------
California................................... $1,442,451 $ 581,305 $243,417
New York..................................... 233,659 116,303 35,138
New Jersey................................... 137,311 98,215 34,493
Florida...................................... 123,122 112,798 83,062
Other (1).................................... 1,207,304 841,564 242,130
---------- ---------- --------
$3,143,847 $1,750,185 $638,240
========== ========== ========
--------
(1) The state with the largest balance in the "Other" category was Illinois
with $101,094 at June 30, 1996; Virginia with $81,814 at June 30, 1995;
and Massachusetts with $29,510 at June 30, 1994.
The loan products purchased by the Bank are determined by management's
assessment of the economic and interest rate environment, among other things.
The yield to the Bank on these purchased portfolios varies from the underlying
rate on the portfolios and includes amortization and accretion of purchase
discounts and premiums. In fiscal 1996, the Bank primarily purchased
adjustable-rate loans due to management's forecast of a rising short-term
interest rate environment. In fiscal 1995 and the second half of fiscal 1994,
management's forecast was for a stable interest rate environment and the
yields on fixed-rate mortgage loans were high enough to justify the purchase
and retention of these loans in the Bank's loan portfolio. The largest
concentration of loans purchased is secured by property in California, but
loan packages purchased also contain a diversified portfolio of loans that are
secured by property in other states.
6
LOANS RECEIVABLE
LOAN PORTFOLIO COMPOSITION
The following table summarizes the composition of Glendale Federal's loan
portfolio by property type as of the dates indicated (dollars in thousands):
JUNE 30
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Real estate loans:
Residential loans:
Existing structures:
1-4 units............. $ 7,535,048 $ 6,292,589 $ 5,481,781 $ 5,931,276 $ 6,897,651
5-36 units............ 1,559,097 1,666,032 1,895,203 2,131,565 2,232,788
37 or more units...... 400,415 478,803 556,440 678,308 792,091
Construction:
1-4 units............. 16,794 2,113 35,602 23,834 66,244
5-36 units............ 5,445 7,624 25,574 55,771 100,413
37 or more units...... -- -- 7,748 24,891 28,363
Land loans............. 18,250 36,251 40,888 90,553 135,126
Non-residential loans:
Existing structures... 1,338,975 1,593,839 1,749,988 1,977,828 2,098,915
Construction.......... -- 500 8,870 12,512 42,754
Home equity and
improvement loans..... 28,470 30,468 74,966 100,015 166,772
----------- ----------- ----------- ----------- -----------
Total real estate
loans.............. 10,902,494 10,108,219 9,877,060 11,026,553 12,561,117
----------- ----------- ----------- ----------- -----------
Non-real estate loans:
Consumer auto and
recreational
vehicle loans......... 17,588 24,739 37,855 64,424 121,983
Deposit account loans.. 17,113 17,571 20,383 27,071 32,772
Other consumer loans... 38,457 38,293 48,811 72,864 218,167
----------- ----------- ----------- ----------- -----------
Subtotal consumer
loans.............. 73,158 80,603 107,049 164,359 372,922
Commercial loans....... 10,391 22,844 47,212 84,910 217,366
----------- ----------- ----------- ----------- -----------
Total non-real
estate loans....... 83,549 103,447 154,261 249,269 590,288
----------- ----------- ----------- ----------- -----------
Total gross loans
receivable............. 10,986,043 10,211,666 10,031,321 11,275,822 13,151,405
Unearned discounts (net
of premiums)........... (34,772) (70,038) (50,407) (12,175) (16,443)
Undisbursed loan funds.. (12,160) (4,653) (22,215) (27,724) (48,789)
Deferred loan fees...... (24,446) (28,536) (42,205) (51,102) (63,716)
Allowance for loan loss-
es..................... (186,756) (209,142) (320,714) (334,782) (281,429)
----------- ----------- ----------- ----------- -----------
Loans receivable, net... $10,727,909 $ 9,899,297 $ 9,595,780 $10,850,039 $12,741,028
=========== =========== =========== =========== ===========
Weighted average yield
on
loan portfolio
at end of year......... 7.74% 7.91% 6.87% 7.08% 8.18%
=========== =========== =========== =========== ===========
7
The following table sets forth the changes in the composition of the Bank's
loan portfolio for the periods indicated (dollars in thousands):
YEARS ENDED JUNE 30
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- -----------
Loans originated(1)..... $ 713,857 $ 805,897 $ 1,747,519 $ 1,565,584 $ 2,331,073
Loans purchased(2)...... 2,107,509 1,549,955 521,357 111,423 91,034
Union Federal loans
acquired(3)............ -- 398,635 -- -- --
(Increase) decrease in
allowance for loan
losses................. 22,386 111,572 14,068 (53,353) (6,236)
Accretion of net
unearned discount(4)... 12,618 8,394 6,464 4,007 12,713
---------- ---------- ----------- ----------- -----------
Total additions..... 2,856,370 2,874,453 2,289,408 1,627,661 2,428,584
---------- ---------- ----------- ----------- -----------
Principal repayments.... 1,430,312 892,977 1,252,503 1,781,121 2,742,953
Loans sold.............. 275,428 156,494 348,838 388,568 1,244,489
University Savings loans
sold................... -- 815,406 -- -- --
Principal reductions due
to
foreclosures........... 186,157 294,822 328,022 387,808 299,147
Loans exchanged for
mortgage-backed
securities............. 145,826 268,436 1,470,844 882,908 1,676,873
Increase (decrease) in
loans in process....... 7,507 (11,073) (5,509) (21,065) (101,273)
Other changes........... (17,472) 153,874 148,969 99,310 253,437
---------- ---------- ----------- ----------- -----------
Total reductions.... 2,027,758 2,570,936 3,543,667 3,518,650 6,115,626
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in loans............... $ 828,612 $ 303,517 $(1,254,259) $(1,890,989) $(3,687,042)
========== ========== =========== =========== ===========
Weighted average yield
on loans originated
during the year........ 7.90% 8.08% 6.17% 6.93% 8.84%
========== ========== =========== =========== ===========
Weighted average yield
on loans purchased dur-
ing the year........... 6.78% 8.68% 8.69% 8.41% 10.08%
========== ========== =========== =========== ===========
--------
(1) Net of refinanced portion of the Bank's loans, which amounted to, in the
years ended June 30: 1996--$153,449; 1995--$61,553; 1994--$390,370; 1993--
$329,263; and 1992--$424,438.
(2) Includes loans purchased under the Bank's correspondent lending program
totaling $52,782, $195,465 and $12,063 in fiscal 1996, 1995 and 1994,
respectively.
(3) For information regarding the Union Federal transaction, see Note 4 of the
Notes to Consolidated Financial Statements. The weighted average yield of
these loans was 7.94%.
(4) Includes accretion of discount and amortization of premium on acquired
loans.
8
The following table summarizes Glendale Federal's loan originations,
including the refinanced portion of the Bank's loans, for the periods
indicated (in thousands):
YEARS ENDED JUNE 30
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ---------- ---------- ----------
Fixed........................ $371,611 $152,921 $ 655,341 $ 749,680 $1,459,541
Convertible/fixed............ 243,436 270,693 690,759 -- --
ARM.......................... 164,817 296,380 636,912 1,008,730 865,944
Call-date.................... 43,595 109,322 69,778 40,243 73,276
Construction/tract........... 21,957 19,337 66,279 70,074 128,494
-------- -------- ---------- ---------- ----------
Total real estate.......... 845,416 848,653 2,119,069 1,868,727 2,527,255
Consumer..................... 20,504 18,797 18,820 24,420 220,054
Commercial................... 1,386 -- -- 1,700 8,202
-------- -------- ---------- ---------- ----------
$867,306 $867,450 $2,137,889 $1,894,847 $2,755,511
======== ======== ========== ========== ==========
As of June 30, 1996, approximately $1.9 billion of fixed-rate loans and $8.9
billion of adjustable-rate loans were contractually due after one year. The
following table summarizes the remaining contractual maturities of the Bank's
gross loan portfolio as of June 30, 1996 (in thousands):
REAL ESTATE REAL ESTATE
MORTGAGE CONSTRUCTION CONSUMER COMMERCIAL
LOANS LOANS LOANS LOANS TOTAL
----------- ------------ -------- ---------- -----------
Due in year 1........... $ 147,578 $13,682 $33,421 $ 5,462 $ 200,143
Due in year 2........... 115,358 8,557 3,610 724 128,249
Due in year 3........... 124,116 -- 3,194 843 128,153
Due after year 3 through
year 5................. 221,052 -- 11,050 876 232,978
Due after year 5 through
year 10................ 772,118 -- 17,546 2,435 792,099
Due after year 10
through year 15........ 282,822 -- 3,929 -- 286,751
Due after year 15....... 9,217,211 -- 408 51 9,217,670
----------- ------- ------- ------- -----------
$10,880,255 $22,239 $73,158 $10,391 $10,986,043
=========== ======= ======= ======= ===========
Actual repayments may differ from contractual maturities as borrowers
generally have the right to prepay loans.
DELINQUENCIES
When a borrower fails to make a required payment on a loan and does not
promptly cure the delinquency, the loan is classified as delinquent. In this
event, the normal procedure followed by the Bank is to contact the borrower at
prescribed intervals in an effort to bring the loan to a current status. If a
delinquency is not cured by the use of this procedure, foreclosure proceedings
are typically instituted by the Bank by the ninetieth day of delinquency.
9
The following table presents the principal amount and percentage of the
Bank's loan delinquencies, in each case by property type, as of the dates
indicated (dollars in thousands):
% OF TYPE OF % OF TYPE OF % OF TYPE OF % OF TYPE OF % XX XXXX XX
XXXXX XXXXX XXXXX XXXXX XXXXX
JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS JUNE 30, LOANS
1996 RECEIVABLE 1995 RECEIVABLE 1994 RECEIVABLE 1993 RECEIVABLE 1992 RECEIVABLE
-------- ------------ -------- ------------ -------- ------------ -------- ------------ -------- ------------
Single-family 1-4
units:
31-60 Days...... $ 57,047 0.75% $ 57,979 0.92% $ 44,181 0.79% $ 66,279 1.09% $ 87,016 1.22%
61-90 Days...... 18,416 0.24 26,460 0.42 21,919 0.39 28,054 0.47 31,245 0.44
Over 90 Days.... 119,978 1.59 110,761 1.75 127,556 2.28 169,776 2.80 169,248 2.37
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
195,441 2.58 195,200 3.09 193,656 3.46 264,109 4.36 287,509 4.03
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Multi-family 5-36
units:
31-60 Days...... 9,528 0.61 19,249 1.15 59,663 3.11 50,198 2.29 43,719 1.87
61-90 Days...... 7,601 0.49 11,433 0.68 26,841 1.40 15,377 0.71 9,561 0.41
Over 90 Days.... 25,595 1.63 32,804 1.96 96,920 5.04 91,928 4.20 67,334 2.89
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
42,724 2.73 63,486 3.79 183,424 9.55 157,503 7.20 120,614 5.17
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Multi-family 37
or more units:
31-60 days...... 2,126 0.53 4,079 0.85 14,434 2.56 29,166 4.15 20,052 2.44
61-90 days...... -- -- 3,202 0.67 8,682 1.54 29,822 4.24 21,555 2.63
Over 90 days.... 14,461 3.61 13,371 2.79 66,254 11.74 62,175 8.84 59,523 7.26
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
16,587 4.14 20,652 4.31 89,370 15.84 121,163 17.23 101,130 12.33
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Non-residential:
31-60 Days...... 3,169 0.23 19,789 1.21 31,637 1.76 59,580 2.86 42,824 1.88
61-90 Days...... 2,762 0.20 6,409 0.39 25,767 1.43 10,393 0.50 7,800 0.34
Over 90 Days.... 17,907 1.33 39,588 2.43 152,415 8.47 192,645 9.26 143,618 6.31
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
23,838 1.76 65,786 4.03 209,819 11.66 262,618 12.62 194,242 8.53
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Commercial:
31-60 Days...... 38 0.37 -- -- 952 2.02 1,324 1.56 9,996 4.60
61-90 Days...... -- -- 90 0.39 -- -- -- -- 5,506 2.53
Over 90 Days.... -- -- -- -- 5,025 10.64 5,857 6.90 19,207 8.84
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
38 0.37 90 0.39 5,977 12.66 7,181 8.46 34,709 15.97
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Consumer:
31-60 Days...... 1,081 1.48 2,206 2.74 3,504 3.27 5,172 3.15 12,666 3.40
61-90 Days...... 612 0.84 941 1.17 1,040 0.97 2,245 1.37 4,389 1.17
Over 90 Days.... 1,001 1.36 906 1.12 1,711 1.60 4,477 2.72 11,563 3.10
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
2,694 3.68 4,053 5.03 6,255 5.84 11,894 7.24 28,618 7.67
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
Total:
31-60 Days...... 72,989 0.66 103,302 1.01 154,371 1.54 211,719 1.88 216,273 1.64
61-90 Days...... 29,391 0.27 48,535 0.48 84,249 0.84 85,891 0.76 80,056 0.61
Over 90 Days.... 178,942 1.63 197,430 1.93 449,881 4.48 526,858 4.67 470,493 3.58
-------- ---- -------- ---- -------- ----- -------- ----- -------- -----
$281,322 2.56% $349,267 3.42% $688,501 6.86% $824,468 7.31% $766,822 5.83%
======== ==== ======== ==== ======== ===== ======== ===== ======== =====
10
NON-ACCRUAL LOANS
All loans delinquent for more than 90 days are placed on non-accrual status.
Loans delinquent 90 days or less are placed on non-accrual status if the
borrower is deemed by management to be unable to continue performance. As of
June 30, 1996 and 1995, loans 90 days or less delinquent totaling $13.5
million and $46.8 million, respectively, had been placed on non-accrual
status. Placement of loans on non-accrual status does not necessarily mean the
outstanding loan principal will not be collected but rather that timely
collection of principal and interest is in question. When a loan is placed on
non-accrual status, interest accrued but not received is reversed.
A non-accrual loan may be restored to accrual status when principal and
interest payments are brought current or when brought to 90 days or less
delinquent and continuing payment of principal and interest is expected. The
amount of interest income which would have been recorded in fiscal 1996, 1995
and 1994 had the Bank's non-accrual loans been current in accordance with
their original terms was $16.3 million, $19.1 million and $37.9 million,
respectively. The amount of interest income on these loans that was included
in net earnings in fiscal 1996, 1995 and 1994 was $5.8 million, $5.5 million
and $10.1 million, respectively. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Balance Sheet
Analysis--Non-Performing Assets and Restructured Loans" for further discussion
of non-accrual loans.
The following table shows the Bank's non-accrual loans by property type as
of the dates indicated (in thousands):
JUNE 30
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Single-family 1-4 units............ $119,978 $111,881 $130,554 $177,294 $174,610
Multi-family:
5-36 units....................... 33,123 50,487 112,400 126,501 85,584
37 or more units................. 14,461 21,255 84,937 95,618 76,093
Non-residential.................... 23,860 59,430 172,897 227,874 148,731
-------- -------- -------- -------- --------
Total real estate................ 191,422 243,053 500,788 627,287 485,018
Commercial......................... 22 283 6,044 18,028 51,061
Consumer........................... 1,001 906 1,711 4,477 11,563
-------- -------- -------- -------- --------
$192,445 $244,242 $508,543 $649,792 $547,642
======== ======== ======== ======== ========
The following table further identifies the Bank's non-accrual loans by state
and by property type as of June 30, 1996 (in thousands):
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ --------
Single-family 1-4 units...................... $100,515 $13,305 $6,158 $119,978
Multi-family:
5-36 units................................. 33,123 -- -- 33,123
37 or more units........................... 13,943 518 -- 14,461
Non-residential:
Office buildings........................... 8,230 -- -- 8,230
Shopping centers........................... 6,635 1,330 -- 7,965
Industrial park............................ 1,886 -- -- 1,886
Land....................................... 2,709 -- -- 2,709
Commercial/industrial...................... 1,501 -- 1,569 3,070
-------- ------- ------ --------
Total non-residential...................... 20,961 1,330 1,569 23,860
Commercial................................... 22 -- -- 22
Consumer..................................... 1,001 -- -- 1,001
-------- ------- ------ --------
$169,565 $15,153 $7,727 $192,445
======== ======= ====== ========
11
RESTRUCTURED LOANS
The Bank has agreed to modifications in the form of interest rate and other
concessions on certain existing single-family, multi-family residential and
non-residential loans under terms not generally available in order to maximize
the recovery of its loans that are not performing under their original terms.
Interest income with respect to these restructured loans would have been
$0.9 million, $3.3 million and $2.4 million in fiscal 1996, 1995 and 1994,
respectively, under their original terms. Actual interest income recognized by
the Bank with respect to these restructured loans was $0.7 million, $2.6 million
and $2.1 million in fiscal 1996, 1995 and 1994, respectively. Restructured loans
are placed on non-accrual status if they become more than 90 days delinquent or
the borrower otherwise fails, or is not expected, to perform in accordance with
the restructure agreement. See Note 1 of the Notes to Consolidated Financial
Statements for additional discussion of the Bank's accounting policy with
respect to restructured loans.
The following table shows the Bank's restructured loans by property type as
of the dates indicated (in thousands):
JUNE 30
--------------------------------------
1996 1995 1994 1993 1992
------ ------- ------- ------- -------
Single-family 1-4 units.................. $3,222 $ 4,601 $ -- $ -- $ --
Multi-family:
5-36 units............................. 2,197 10,717 5,338 12,451 --
37 or more units....................... 2,251 7,462 14,456 25,053 20,445
Non-residential.......................... 1,524 15,762 14,424 45,873 52,313
------ ------- ------- ------- -------
$9,194 $38,542 $34,218 $83,377 $72,758
====== ======= ======= ======= =======
The following table further identifies the Bank's restructured loans by
state and property type as of June 30, 1996 (in thousands):
CALIFORNIA FLORIDA TOTAL
---------- ------- ------
Single-family 1-4 units............................... $2,950 $272 $3,222
Multi-family:
5-36 units.......................................... 2,197 -- 2,197
37 or more units.................................... 2,251 -- 2,251
Non-residential:
Office buildings.................................... 1,524 -- 1,524
------ ---- ------
$8,922 $272 $9,194
====== ==== ======
POTENTIAL PROBLEM ASSETS
Impaired Loans
Impaired loans are carried on the Bank's accounting records at either the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral securing the loan less selling costs. Impaired loans exclude
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment. For the Bank, loans collectively reviewed for
impairment include all single-family loans and performing multi-family and
non-residential real estate loans ("income property loans") having principal
balances of less than $1 million, excluding loans which have entered the
workout process.
The Bank considers a loan to be impaired when, based upon current
information and events, the Bank believes it is probable that it will be
unable to collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. The Bank's impaired loans include non-
accrual income property loans, non-accrual single-family loans or borrowing
relationships with unpaid balances greater
12
than $500,000, troubled debt restructurings, and certain performing loans.
While a loan is on non-accrual status, interest is recognized only as cash is
received and if no portion of the loan's balance is classified "Doubtful."
Impaired loans may be left on accrual status during the period the Bank is
pursuing repayment of the loan. Such loans are placed on non-accrual status at
the point either: (1) they become 90 days delinquent; or (2) the Bank
determines the borrower is incapable of, or has ceased efforts toward,
servicing the loan. The Bank carries these impaired loans on its books at the
fair value of the collateral properties securing the loans less selling costs.
Impairment losses are recognized through an increase in the allowance for loan
losses and a corresponding charge to the provision for loan losses.
Adjustments to impairment losses due to changes in the fair value of impaired
loans' collateral properties are included in the provision for loan losses.
When an impaired loan is either sold, transferred to REO or written down, any
related valuation allowance is charged-off against the allowance for loan
losses. At June 30, 1996 and 1995, the recorded investment in loans which have
been identified by the Bank as impaired totaled $158.8 million and $262.7
million, respectively, and the total specific allowance for loan losses
related to such loans was $26.5 million and $19.7 million, respectively. See
Note 7 of the Notes to Consolidated Financial Statements for additional
information regarding impaired loans.
Classification of Assets
Savings institutions are required under applicable law and regulations to
review their assets on a regular basis and to classify them as "satisfactory",
"special mention", "substandard", "doubtful" or "loss". An asset which
possesses no apparent weakness or deficiency is designated "satisfactory". An
asset which possesses weaknesses or deficiencies deserving close attention is
designated as "special mention". An asset, or a portion thereof, is generally
classified as "substandard" if it possesses a well-defined weakness which
could jeopardize the timely liquidation of the asset or realization of the
collateral at the asset's book value. Thus, these assets are characterized by
the possibility that the institution will sustain some loss if the
deficiencies are not corrected. An asset, or portion thereof, is classified as
"doubtful" if a probable loss of principal and/or interest exists but the
amount of the loss, if any, is subject to the outcome of future events which
are undeterminable at the time of classification. If an asset, or portion
thereof, is classified as "loss", the Bank either establishes a specific
valuation allowance equal to the amount classified as loss or charges off such
amount. The Regional Director of the Office of Thrift Supervision ("OTS") has
the authority to approve, disapprove or modify any asset classification or any
amount established as an allowance pursuant to such classification. The Bank
monitors the level of assets within each of the asset classification
categories and utilizes this information along with a review of the underlying
collateral and other factors in determining the appropriate level of loss
allowances it maintains from period to period. See "Credit Loss Experience"
below for further information.
SIGNIFICANT LOAN CONCENTRATIONS
Most of the Bank's gross loan portfolio consists of loans with individual
balances of less than $1 million. At June 30, 1996 the Bank's largest borrower
had two loans outstanding totaling $31.0 million, both of which are performing
and are secured by an office building in Northern California. The second
largest borrower at that date had three loans outstanding totaling $21.2
million, all of which are performing and are secured by multi-family
residences. The third largest borrower at that date was an investor in multi-
family housing projects in Southern California with 18 loans outstanding
totaling $18.5 million, of which four loans totaling $3.4 million were non-
performing. The fourth largest borrower at that date had eight performing
loans secured by multi-family residential and non-residential properties with
a balance outstanding totaling $16.8 million. The fifth largest borrower at
that date had one performing loan secured by a shopping center in Southern
California with a balance outstanding of $16.7 million. The Bank had borrowing
relationships exceeding $10 million with each of seven other borrowers at June
30, 1996, all of which loans are performing.
13
The Bank's single-family residential and consumer loans are relatively
homogeneous and typically no single loan is individually significant in terms
of size or risk of loss. The Bank reviews most of its single-family
residential and consumer portfolios by analyzing the performance and the
composition of these portfolios as a whole. The Bank's monitoring process for
non-homogeneous multi-family residential, non-residential and commercial loans
encompasses a periodic review of the individual loans. The Bank reviews--
annually if rated "satisfactory" or quarterly if rated "special mention",
"substandard", "doubtful", or "loss"--any loan with an unpaid principal
balance of more than $1 million, and of any relationship with a single
borrower whose aggregate loan balances exceed $3 million. The Bank maintains
special departments with responsibility for resolving problem loans and
selling foreclosed real estate to facilitate these processes. The reviews are
based on information available and generally include analysis of operating
statements, occupancy levels, debt coverage, the condition and the appraised
value of the collateral, the borrower's financial strength and other factors.
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of lending. The allowance for
loan losses is established based on management's assessment of trends in the
homogeneous portfolio as well as the results of management's periodic review
of the loans in the non-homogeneous portfolio. Specific valuation allowances
are established for impaired loans at the difference between the loan amount
and the fair value of collateral less estimated selling costs. The general
allowance for loan losses is based upon a number of factors, including asset
classification, historical loss experience, loan portfolio composition,
industry experience, prevailing and forecasted economic and market conditions
and management's judgment. Since the factors on which the general allowance is
based are subject to change from time to time as a result of changes in
relevant conditions and management's knowledge thereof, no assurance can be
given that additional provisions for loss will not be required in future
periods as a result of changes in economic and market conditions, management's
assessments thereof or other factors. The OTS and the Federal Deposit
Insurance Corporation ("FDIC"), as part of their examination process, review
the Bank's allowances for estimated losses and may require the Bank to make
additions to such allowances based on their judgments of the information
available to them at the time of their examination.
14
A summary of activity in the allowance for loan losses during the periods
indicated is set forth below (dollars in thousands):
YEARS ENDED JUNE 30
----------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- --------- ---------
Balance at beginning of
period.................. $209,142 $ 320,714 $ 334,782 $ 281,429 $ 275,193
Provision for loan
losses.................. 40,350 66,150 139,726 251,261 314,437
-------- --------- --------- --------- ---------
249,492 386,864 474,508 532,690 589,630
-------- --------- --------- --------- ---------
Charge-offs:
Single-family 1-4
units................. (33,617) (37,194) (43,248) (44,467) (28,534)
Multi-family:
5-36 units............ (13,175) (54,314) (39,743) (24,555) (11,006)
37 or more units...... (7,923) (33,932) (28,149) (22,047) (19,671)
Non-residential........ (14,490) (73,602) (43,675) (86,761) (102,645)
-------- --------- --------- --------- ---------
Total real estate..... (69,205) (199,042) (154,815) (177,830) (161,856)
Commercial............. (974) (2,340) (6,353) (25,415) (115,981)
Consumer............... (2,842) (4,595) (6,904) (21,062) (40,722)
-------- --------- --------- --------- ---------
Total charge-offs.... (73,021) (205,977) (168,072) (224,307) (318,559)
-------- --------- --------- --------- ---------
Recoveries:
Single-family 1-4
units................. 149 334 1,013 2,744 1,986
Multi-family:
5-36 units............ 288 -- 440 93 265
37 or more units...... 231 800 878 1,785 980
Non-residential........ 2,929 9,572 2,339 3,251 2,063
-------- --------- --------- --------- ---------
Total real estate..... 3,597 10,706 4,670 7,873 5,294
Commercial............. 5,590 4,748 6,873 14,034 3,224
Consumer............... 1,098 1,840 2,735 4,492 1,840
-------- --------- --------- --------- ---------
Total recoveries..... 10,285 17,294 14,278 26,399 10,358
-------- --------- --------- --------- ---------
Net charge-offs...... (62,736) (188,683) (153,794) (197,908) (308,201)
-------- --------- --------- --------- ---------
University Savings (1):
Single-family 1-4
units................. -- (2,389) -- -- --
Multi-family:
5-36 units............ -- (1,282) -- -- --
37 or more units...... -- (401) -- -- --
Non-residential........ -- (2,127) -- -- --
-------- --------- --------- --------- ---------
Total real estate.... -- (6,199) -- -- --
Consumer............... -- (190) -- -- --
-------- --------- --------- --------- ---------
Total University
Savings............. -- (6,389) -- -- --
-------- --------- --------- --------- ---------
Union Federal (2):
Single-family 1-4
units................. -- 2,535 -- -- --
Non-residential........ -- 14,815 -- -- --
-------- --------- --------- --------- ---------
Total Union Federal.. -- 17,350 -- -- --
-------- --------- --------- --------- ---------
Balance at end of period. $186,756 $ 209,142 $ 320,714 $ 334,782 $ 281,429
======== ========= ========= ========= =========
--------
(1) Represents the reduction of the allowance for loan losses due to the sale
of University Savings.
(2) Represents the allowance for loan losses recorded in connection with the
acceptance of loans receivable as part of the consideration for assuming
the deposit liabilities of Union Federal. For additional information, see
Note 4 of the Notes to Consolidated Financial Statements.
15
The following table indicates the ratio of the Bank's charge-offs (net of
recoveries) to average gross loans by category for the periods indicated
(dollars in thousands):
YEARS ENDED JUNE 30
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Single-family 1-4 units:
Average gross loans... $ 6,952,741 $ 5,958,760 $ 5,823,737 $ 6,592,896 $ 8,033,247
Net charge-offs....... 33,468 36,860 42,235 41,723 26,548
Net charge-
offs/average gross
loans................ 0.48% 0.62% 0.73% 0.63% 0.33%
Multi-family 5-36 units:
Average gross loans... 1,619,099 1,797,216 2,054,056 2,260,268 2,449,870
Net charge-offs....... 12,887 54,314 39,303 24,462 10,741
Net charge-
offs/average gross
loans................ 0.80% 3.02% 1.91% 1.08% 0.44%
Multi-family 37 or more
units:
Average gross loans... 439,609 521,496 633,694 761,827 897,678
Net charge-offs....... 7,692 33,132 27,271 20,262 18,691
Net charge-
offs/average gross
loans................ 1.75% 6.35% 4.30% 2.66% 2.08%
Non-residential:
Average gross loans... 1,493,908 1,715,168 1,940,320 2,178,844 2,407,215
Net charge-offs....... 11,561 64,030 41,336 83,510 100,582
Net charge-
offs/average gross
loans................ 0.77% 3.73% 2.13% 3.83% 4.18%
Commercial:
Average gross loans... 16,618 35,028 66,061 151,138 394,010
Net charge-offs
(recoveries)......... (4,616) (2,408) (520) 11,381 112,757
Net charge-offs
(recoveries)/
average gross loans.. (27.78)% (6.87)% (0.79)% 7.53% 28.62%
Consumer:
Average gross loans... 76,880 93,826 135,704 268,641 874,004
Net charge-offs....... 1,744 2,755 4,169 16,570 38,882
Net charge-
offs/average gross
loans................ 2.27% 2.94% 3.07% 6.17% 4.45%
Total:
Average gross loans... $10,598,855 $10,121,494 $10,653,572 $12,213,614 $15,056,024
Net charge-offs....... 62,736 188,683 153,794 197,908 308,201
Net charge-
offs/average gross
loans................ 0.59% 1.86% 1.44% 1.62% 2.05%
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Balance Sheet Analysis--Allowance for Loan Losses" for
a discussion regarding charge-offs and the impact on such charge-offs
resulting from certain sales of non-performing and underperforming loans
during fiscal 1996 and 1995.
16
The following tables set forth the allocation of Glendale Federal's
allowance for loan losses by property type as of the dates indicated (dollars
in thousands):
JUNE 30, 1996 JUNE 30, 1995
------------------------------------------ ------------------------------------------
PERCENT PERCENT
PERCENT OF GROSS OF PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- --------- ---------- ----------- --------- ---------
Single-family
1-4 units.............. 69.00% $ 7,580,312 $ 56,833 0.75% 61.94% $ 6,325,170 $ 44,483 0.70%
Multi-family:
5-36 units............. 14.24 1,564,542 48,628 3.11 16.39 1,673,656 41,736 2.49
37 or more units....... 3.65 400,415 26,062 6.51 4.69 478,803 31,569 6.59
Non-residential......... 12.35 1,357,225 47,260 3.48 15.97 1,630,590 83,086 5.10
Commercial.............. 0.09 10,391 4,699 45.22 0.22 22,844 4,176 18.28
Consumer................ 0.67 73,158 3,274 4.48 0.79 80,603 4,092 5.08
------ ----------- -------- ------ ----------- --------
100.00% $10,986,043 $186,756 1.70% 100.00% $10,211,666 $209,142 2.05%
====== =========== ======== ====== =========== ========
JUNE 30, 1994 JUNE 30, 1993
------------------------------------------ ------------------------------------------
PERCENT PERCENT
PERCENT OF GROSS OF PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- --------- ---------- ----------- --------- ---------
Single-family
1-4 units.............. 55.75% $ 5,592,349 $ 44,667 0.80% 53.70% $ 6,055,125 $ 51,653 0.85%
Multi-family:
5-36 units............. 19.15 1,920,777 65,878 3.43 19.40 2,187,336 54,107 2.47
37 or more units....... 5.62 564,188 61,867 10.97 6.24 703,199 36,320 5.16
Non-residential......... 17.94 1,799,746 137,775 7.66 18.45 2,080,893 173,913 8.36
Commercial.............. 0.47 47,212 6,052 12.82 0.75 84,910 12,884 15.17
Consumer................ 1.07 107,049 4,475 4.18 1.46 164,359 5,905 3.59
------ ----------- -------- ------ ----------- --------
100.00% $10,031,321 $320,714 3.20% 100.00% $11,275,822 $334,782 2.97%
====== =========== ======== ====== =========== ========
JUNE 30, 1992
------------------------------------------
PERCENT
PERCENT OF GROSS OF
LOANS TO LOAN ALLOWANCE
TOTAL PORTFOLIO TO LOAN
LOANS BALANCE ALLOWANCE BALANCE
---------- ----------- --------- ---------
Single-family 1-4 units.............. 54.22% $ 7,130,667 $ 44,569 0.63%
Multi-family:
5-36 units.......................... 17.74 2,333,201 7,912 0.34
37 or more units.................... 6.24 820,454 24,575 3.00
Non-residential...................... 17.31 2,276,795 133,844 5.88
Commercial........................... 1.65 217,366 43,903 20.20
Consumer............................. 2.84 372,922 26,626 7.14
------ ----------- --------
100.00% $13,151,405 $281,429 2.14%
====== =========== ========
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
17
The following tables compare the Bank's gross loan portfolio balances,
allowance for loan losses, non-accrual loans and non-performing assets
("NPAs") by property type as of the dates indicated (dollars in thousands):
PERCENT OF
GROSS PERCENT OF NPAS TO PERCENT
LOAN NON- ALLOWANCE TO GROSS LOAN OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1996 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
------------- ----------- --------- -------- ------------ -------- ---------- ---------
Single-family 1-4 units. $ 7,580,312 $ 56,833 $119,978 47.37% $159,671 2.11% 35.59%
Multi-family:
5-36 units............. 1,564,542 48,628 33,123 146.81 44,791 2.86 108.57
37 or more units....... 400,415 26,062 14,461 180.22 19,288 4.82 135.12
Non-residential......... 1,357,225 47,260 23,860 198.07 49,753 3.67 94.99
Commercial.............. 10,391 4,699 22 N/A 22 0.21 N/A
Consumer................ 73,158 3,274 1,001 327.07 1,124 1.54 291.28
----------- -------- -------- --------
$10,986,043 $186,756 $192,445 97.04% $274,649 2.50% 68.00%
=========== ======== ======== ========
PERCENT OF
GROSS PERCENT OF NPAS TO PERCENT
LOAN NON- ALLOWANCE TO GROSS LOAN OF
PORTFOLIO ACCRUAL NON-ACCRUAL PORTFOLIO ALLOWANCE
JUNE 30, 1995 BALANCE ALLOWANCE LOANS LOANS NPAS(1) BALANCE TO NPAS
------------- ----------- --------- -------- ------------ -------- ---------- ---------
Single-family 1-4 units. $ 6,325,170 $ 44,483 $111,881 39.76% $149,197 2.36% 29.81%
Multi-family:
5-36 units............. 1,673,656 41,736 50,487 82.67 68,618 4.10 60.82
37 or more units....... 478,803 31,569 21,255 148.53 26,971 5.63 117.05
Non-residential......... 1,630,590 83,086 59,430 139.80 109,454 6.71 75.91
Commercial.............. 22,844 4,176 283 N/A 283 1.24 N/A
Consumer................ 80,603 4,092 906 451.66 999 1.24 409.61
----------- -------- -------- --------
$10,211,666 $209,142 $244,242 85.63% $355,522 3.48% 58.83%
=========== ======== ======== ========
--------
(1) Comprised of non-accrual loans and REO.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Allowance for Loan Losses" for discussion of the
allowance for loan losses at June 30, 1996.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
The procedures for foreclosure of the Bank's loans are governed by the laws
of the states in which the loan collateral is located. In California, the Bank
normally utilizes the non-judicial foreclosure sale procedures available under
applicable state law. In Florida, where the Bank formerly had offices and
where properties secured $943 million of its mortgage loans at June 30, 1996,
judicial foreclosure is normally required. The borrowers' rights of redemption
under the laws of the respective states are also different. In California, the
right to cure the default and reinstate the loan terminates five days before
the scheduled trustee sale under a deed of trust. In Florida, the borrower
generally may cure the default under a mortgage at any time during foreclosure
proceedings and until the certificate of title is issued, usually 10 days
after the sale, by making all delinquent payments and paying all charges,
including legal fees. Florida law permits a mortgage lender to seek a
deficiency judgment against a defaulted borrower when the proceeds of the
foreclosure sale are not sufficient to satisfy the loan balance. Such
judgments are ordinarily not permitted or are impractical in California. In
most foreclosure sales, the Bank acquires title to the property. REO is
recorded at the lower of the recorded investment in the loan or fair value of
the asset received less selling costs. The fair value of the asset received is
based on the current appraised value less estimated selling costs.
18
The following table shows the Bank's REO and other repossessed assets, net
of specific valuation allowances, by property type as of the dates indicated
(in thousands):
JUNE 30
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Single-family 1-4 units............ $ 39,693 $ 37,316 $ 43,231 $ 53,853 $ 54,516
Multi-family:
5-36 units....................... 11,668 18,131 27,180 23,803 20,567
37 or more units................. 4,827 5,716 2,792 18,423 39,831
Non-residential.................... 25,893 50,024 79,089 108,565 88,908
-------- -------- -------- -------- --------
Total real estate................ 82,081 111,187 152,292 204,644 203,822
Other repossessed assets........... 123 93 127 414 2,910
-------- -------- -------- -------- --------
$ 82,204 $111,280 $152,419 $205,058 $206,732
======== ======== ======== ======== ========
The following table further identifies the Bank's REO and other repossessed
assets by state and property type as of June 30, 1996 (in thousands):
CALIFORNIA FLORIDA OTHER TOTAL
---------- ------- ------ -------
Single-family 1-4 units....................... $34,461 $ 5,232 $ -- $39,693
Multi-family:
5-36 units.................................. 11,668 -- -- 11,668
37 or more units............................ 4,827 -- -- 4,827
Non-residential:
Office buildings............................ 8,165 59 -- 8,224
Shopping centers............................ 786 -- -- 786
Land........................................ 573 14,052 433 15,058
Commercial/Industrial....................... 1,183 -- 642 1,825
------- ------- ------ -------
Total non-residential....................... 10,707 14,111 1,075 25,893
------- ------- ------ -------
Total real estate......................... 61,663 19,343 1,075 82,081
Other repossessed assets...................... 123 -- -- 123
------- ------- ------ -------
$61,786 $19,343 $1,075 $82,204
======= ======= ====== =======
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Balance Sheet Analysis--Non-Performing Assets and
Restructured Loans" and Note 8 of the Notes to Consolidated Financial
Statements for additional discussion regarding REO activity for fiscal 1996.
MORTGAGE-BACKED SECURITIES
The Bank has purchased mortgage-backed securities from time to time to meet
balance sheet size objectives, to use such securities for collateral purposes,
and when necessary, to augment loan originations and purchases and to replace
loan portfolio run-off. Such purchases decreased significantly during fiscal
1996 and 1995 as the Bank used its excess liquidity to purchase whole loans in
the secondary market and to reduce borrowings. The Bank's primary choice of
securities for this purpose has been highly-rated mortgage pass-through
securities issued by private parties that are backed by pools of adjustable-
rate, single-family mortgage loans. The Bank's portfolio of mortgage-backed
securities at June 30, 1996 and 1995 included $961 million and $1.5 billion of
such securities, respectively.
The Bank acquires mortgage pass-through securities that are issued or
guaranteed by certain agencies including the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC").
19
These securities are backed by pools of single-family mortgage loans and are
obtained either through cash purchase or through securitization of the Bank's
single-family mortgage loans. The Bank has used these securities to
collateralize borrowings, to secure public agency deposits, to reduce the
Bank's credit risk exposure through the agency guarantees of the securities
and to reduce its regulatory capital requirements. During fiscal 1994, the
Bank securitized a substantial volume of single-family loans with FNMA and
FHLMC to enhance the loans' liquidity in anticipation of funding the sale of
its Florida franchise. These agency related securities totaled $1.2 billion at
June 30, 1996 and 1995.
During fiscal 1994 and 1993, the Bank purchased collateralized mortgage
obligations ("CMOs"). These securities were backed by pools of whole, fixed-
rate, single-family mortgage loans and were purchased because the yields
offered at that time on these securities were higher than other available
alternatives and because of their short expected duration. The Bank limited
its purchase of CMOs primarily to first tranche securities with expected
durations of two to three years that were AAA-rated and that met the criteria
of the Federal Financial Institutions Examination Council in order not to be
considered "high-risk mortgage securities" at the time of purchase. These CMOs
totaled $1.9 billion at June 30, 1995.
During fiscal 1996, the Bank sold $1.7 billion of CMO investments. The
Bank's decision to sell most of its CMO portfolio was part of a strategic
realignment of the Bank's mortgage-backed securities portfolio in which $2.8
billion of mortgage-backed securities were reclassified from "held to
maturity" to "available for sale" during the quarter ended December 31, 1995,
in compliance with implementation guidance for Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). The reclassification included the Bank's $1.8
billion fixed-rate CMO portfolio and $1.0 billion of its adjustable-rate pass-
through securities portfolio.
The Bank recorded a pre-tax loss of $28.2 million on the sale of CMOs during
fiscal 1996. As of June 30, 1996, the market value of CMOs and pass-through
securities classified as available for sale totaled $58 million and $712
million, respectively. In accordance with SFAS 115, the Bank recorded an
unrealized loss in its stockholders' equity accounts at June 30, 1996 of $11.4
million, net of tax, on the available for sale portfolio. The Bank has no
immediate plans to sell the remaining CMOs or the pass-through portfolio.
Further adjustments to the unrealized loss amount will be made in future
periods to reflect changes in the market value of the available for sale
portfolio. The realignment of the Bank's mortgage-backed securities portfolio
and the Bank's use of the CMO sale proceeds to reduce wholesale borrowings
improved the Bank's funding mix of deposits and borrowings, increased its
interest rate spread, reduced its interest-rate risk exposure and made
additional capital available for merger and acquisition or other reinvestment
strategies. Further information with respect to mortgage-backed securities is
provided in Notes 1 and 6 of the Notes to Consolidated Financial Statements.
20
The following table summarizes the composition of Glendale Federal's
mortgage-backed securities portfolio by security type as of the dates indicated
(dollars in thousands):
JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
FHLMC................... $ 298,232 $ 329,242 $ 210,014 $ 432,921 $ 237,383
GNMA.................... 386,871 326,865 417,013 189,733 1,167,605
FNMA.................... 489,947 579,518 665,670 259,146 210,548
---------- ---------- ---------- ---------- ----------
Subtotal............... 1,175,050 1,235,625 1,292,697 881,800 1,615,536
Highly rated pass-
through
securities............. 961,367 1,499,337 1,900,613 1,143,934 524,903
Highly rated CMOs....... 58,357 1,878,117 2,037,867 1,885,899 383,462
Subordinations.......... 25,855 31,909 36,720 49,265 66,460
CMO residuals........... 277 4,760 7,043 16,050 20,906
---------- ---------- ---------- ---------- ----------
Total gross mortgage-
backed
securities............. 2,220,906 4,649,748 5,274,940 3,976,948 2,611,267
Unrealized gain (loss)
on mortgage-backed se-
curities
available for sale..... (16,076) 53 (4,765) -- --
Valuation allowance to
xxxx
mortgage-backed securi-
ties
to market value........ -- -- -- -- (12,016)
Unamortized premiums.... 39,001 77,333 96,978 71,117 7,358
Deferred loan origina-
tion fees.............. (3,041) (3,677) (3,374) (3,321) (1,909)
---------- ---------- ---------- ---------- ----------
Mortgage-backed securi-
ties, net.............. $2,240,790 $4,723,457 $5,363,779 $4,044,744 $2,604,700
========== ========== ========== ========== ==========
Weighted average yield
on
mortgage-backed securi-
ties portfolio at end
of period.............. 6.26% 6.30% 5.28% 5.88% 7.49%
========== ========== ========== ========== ==========
21
The following table sets forth the changes in the composition of the Bank's
mortgage-backed securities portfolio for the periods indicated (in thousands):
YEARS ENDED JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
----------- --------- ---------- ---------- ----------
Mortgage-backed securi-
ties
purchased.............. $ 115,595 $ 958 $3,524,460 $3,002,959 $3,271,592
Loans exchanged for
mortgage-
backed securities...... 145,826 268,436 1,470,844 882,908 1,676,873
Union Federal mortgage-
backed
securities acquired(2). -- 23,963 -- -- --
----------- --------- ---------- ---------- ----------
Total additions....... 261,421 293,357 4,995,304 3,885,867 4,948,465
----------- --------- ---------- ---------- ----------
Mortgage-backed securi-
ties sold(1)........... 1,838,289 12,099 1,223,167 1,762,649 3,679,003
Principal repayments.... 851,974 711,881 2,474,146 750,032 299,812
Amortization of unearned
premium................ 20,810 19,786 58,316 25,658 4,317
Other changes........... 33,015 3,214 (79,360) (92,516) 11,322
University Savings xxxx-
xxxx-backed securities
sold(2)................ -- 186,699 -- -- --
----------- --------- ---------- ---------- ----------
Total reductions...... 2,744,088 933,679 3,676,269 2,445,823 3,994,454
----------- --------- ---------- ---------- ----------
Net increase (decrease)
in mortgage-backed
securities............. $(2,482,667) $(640,322) $1,319,035 $1,440,044 $ 954,011
=========== ========= ========== ========== ==========
--------
(1) Includes loans originated by the Bank and converted to mortgage-backed
securities.
(2) For information regarding the Union Federal and University Savings
transactions, see Note 4 of the Notes to Consolidated Financial
Statements.
LIQUIDITY AND INVESTMENTS
The Bank is required by federal regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified types of securities
and is also permitted to make certain other securities investments. The
balance of securities investments maintained by the Bank in excess of
regulatory requirements reflects management's objective of maintaining
liquidity at a level necessary to meet operating requirements, taking into
account anticipated cash flows and available sources of credit, to afford
future flexibility to meet withdrawal requests and loan commitments or to make
other investments. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations", for discussion of the Bank's
current investing strategies.
The OTS currently requires savings institutions to maintain eligible liquid
assets as defined by federal regulations in an amount equal to or greater than
5% of average deposits and borrowings. This liquidity requirement may be
changed from time to time by the OTS Director to any amount within the range
of 4% to 10% and the OTS Director has the authority to prescribe different
liquidity requirements for different classes of savings institutions, which
classes may be determined in accordance with criteria selected by the OTS
Director. See "Regulation" below. The Bank's qualified regulatory liquidity
percentage of 5.4% and 5.2% for the months of June 1996 and 1995,
respectively, exceeded the regulatory requirement applicable during each of
those months.
22
The following table summarizes Glendale Federal's cash and short-term,
highly liquid securities by type at the dates indicated (in thousands):
JUNE 30
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ---------- --------
Federal funds sold.............. $ 33,000 $ 16,000 $ 45,961 $ 267,767 $ 72,370
Securities purchased under
resale agreements.............. 375,000 280,000 270,000 575,000 80,000
Whole loans purchased under
resale agreements.............. 25,000 -- -- -- --
-------- -------- -------- ---------- --------
433,000 296,000 315,961 842,767 152,370
Cash and amounts due from banks. 153,608 139,697 164,576 217,689 297,681
-------- -------- -------- ---------- --------
$586,608 $435,697 $480,537 $1,060,456 $450,051
======== ======== ======== ========== ========
The following table summarizes Glendale Federal's other debt securities by
type at the dates indicated (in thousands):
JUNE 30
----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ---------- --------
Certificates of deposit......... $ 10,786 $ 10,059 $ 13,716 $ 24,779 $ 3,116
U.S. Government and Federal
agency obligations............. 8,086 17,354 148,056 402,440 48,659
Other debt securities........... 5 14,913 1,995 2,712 7,201
FHLB Deposits................... -- -- 1,668 92,486 135,663
Mortgage-backed collateralized
notes.......................... -- -- 605 1,308 2,057
-------- -------- -------- ---------- --------
$ 18,877 $ 42,326 $166,040 $ 523,725 $196,696
======== ======== ======== ========== ========
Shown below are the carrying values, market values and weighted average
rates of other debt securities at June 30, 1996, with related remaining terms
to maturity (dollars in thousands):
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE RATE
-------- ------- --------
Certificates of deposit maturing within 1 year........ $10,786 $10,786 5.36%
U.S. Government and Federal agency obligations
maturing within 1 year............................... 8,086 8,086 4.80%
Other securities:
Maturing after 10 years............................. 5 49 --
------- -------
$18,877 $18,921 5.12%
======= =======
Maturity Totals:
Maturing within 1 year.............................. $18,872 $18,872 5.12%
Maturing after 10 years............................. 5 49 --
------- -------
$18,877 $18,921 5.12%
======= =======
DEPOSITS
The Bank's deposits are obtained primarily in California, where its branch
offices are located. The Bank attracts daily access accounts as well as short-
term and long-term certificate accounts from the general public by providing a
wide assortment of accounts and rates. The Bank offers a variety of customer
deposit accounts including passbook accounts, checking accounts and money
market savings accounts, certificates of deposit with fixed terms ranging from
three months to five years and negotiated rate $95,000 and over "jumbo"
certificates with maturities ranging from 14 days to five years. Included
among these savings programs are individual retirement accounts and Xxxxx
23
retirement accounts. Jumbo certificates are obtained from a diverse customer
base which includes state and local governments, private individuals,
corporations and non-profit organizations.
The following table sets forth information relating to the Bank's deposit
flows during the periods indicated (in thousands):
YEARS ENDED JUNE 30
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ----------- ----------- -----------
Total deposits at
beginning of year...... $8,734,880 $10,919,806 $11,615,529 $13,720,874 $15,864,815
Interest credited....... 432,992 398,861 423,132 539,541 834,598
Net retail deposits
increase (decrease).... (373,516) 634,613 (1,079,132) (2,592,591) (2,785,848)
Net brokered deposits
decrease............... (70,380) (26,196) (39,723) (52,295) (192,691)
Sale of Florida
franchise.............. -- (3,281,049) -- -- --
Sale of University
Savings................ -- (918,126) -- -- --
Purchase of Independence
One deposits........... -- 194,146 -- -- --
Purchase of Union
Federal deposits....... -- 812,825 -- -- --
---------- ----------- ----------- ----------- -----------
Total net decrease in
deposits............... (10,904) (2,184,926) (695,723) (2,105,345) (2,143,941)
---------- ----------- ----------- ----------- -----------
Total deposits at end of
year................... $8,723,976 $ 8,734,880 $10,919,806 $11,615,529 $13,720,874
========== =========== =========== =========== ===========
The following table sets forth information regarding the amounts of deposits
in the various types of deposit programs offered by the Bank as of the dates
indicated (dollars in thousands):
JUNE 30
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- -----------
Daily access accounts:
Checking/NOW accounts. $ 778,980 $ 661,853 $ 850,112 $ 816,536 $ 719,898
Passbook accounts..... 492,777 551,905 1,236,446 1,422,005 1,122,207
Money-market
checking/savings..... 1,719,319 1,272,012 1,038,944 796,666 1,963,717
---------- ---------- ----------- ----------- -----------
Total daily access
accounts........... 2,991,076 2,485,770 3,125,502 3,035,207 3,805,822
---------- ---------- ----------- ----------- -----------
Certificate accounts
with original
maturities of:
6 months and under.... 955,203 870,733 1,426,838 1,336,028 2,973,040
Over 6 months to 18
months............... 2,797,297 2,758,070 3,428,317 4,362,533 3,375,802
Over 18 months to 30
months............... 961,912 1,345,524 1,288,984 1,183,939 1,215,895
Over 30 months........ 770,786 737,891 1,088,872 1,059,738 1,123,013
Jumbo certificates.... 247,702 536,892 561,293 638,084 1,227,302
---------- ---------- ----------- ----------- -----------
Total certificate
accounts........... 5,732,900 6,249,110 7,794,304 8,580,322 9,915,052
---------- ---------- ----------- ----------- -----------
$8,723,976 $8,734,880 $10,919,806 $11,615,529 $13,720,874
========== ========== =========== =========== ===========
Weighted average
interest rate on
deposits at end of
year................... 4.62% 5.13% 3.94% 4.34% 4.78%
========== ========== =========== =========== ===========
24
The following table sets forth information regarding the remaining
contractual maturities of deposits as of June 30, 1996 (dollars in thousands):
WEIGHTED
AVERAGE TOTAL 3 MONTHS 4-6 7-12 13-24 25-36 OVER 36
RATE BALANCE OR LESS MONTHS MONTHS MONTHS MONTHS MONTHS
-------- ---------- ---------- ---------- ---------- -------- -------- --------
Checking/NOW accounts... 0.56% $ 778,980 $ 778,980 $ -- $ -- $ -- $ -- $ --
Passbook accounts....... 2.15 492,777 492,777 -- -- -- -- --
Money-market
checking/savings....... 4.37 1,719,319 1,719,319 -- -- -- -- --
Certificate accounts:
5.00% and lower........ 4.79 1,790,616 667,388 438,151 494,552 162,512 19,549 8,464
5.01%-6.00%............ 5.48 3,085,829 823,716 1,042,111 366,153 609,311 191,206 53,332
6.01%-7.00%............ 6.43 638,282 213,507 115,728 162,263 41,183 63,425 42,176
7.01%-8.00%............ 7.28 182,292 86,820 33,660 29,816 7,610 3,878 20,508
8.01%-9.00%............ 8.23 2,396 155 382 357 701 801 --
9.01%-10.00%........... 9.45 259 10 6 -- 119 124 --
10.01% and over........ 11.55 33,226 -- 1,257 31,969 -- -- --
---------- ---------- ---------- ---------- -------- -------- --------
Total certificate
accounts............. 5.46% 5,732,900 1,791,596 1,631,295 1,085,110 821,436 278,983 124,480
---------- ---------- ---------- ---------- -------- -------- --------
4.62% $8,723,976 $4,782,672 $1,631,295 $1,085,110 $821,436 $278,983 $124,480
========== ========== ========== ========== ======== ======== ========
For additional information with respect to deposits, see "Operating
Strategies" above and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Balance Sheet Analysis--
Deposits" and Notes 4 and 12 of the Notes to Consolidated Financial
Statements.
BORROWINGS
The Federal Home Loan Bank System functions in a reserve credit capacity for
savings institutions and certain other home financing institutions. As a
member, the Bank is required to own capital stock in the Federal Home Loan
Bank of San Francisco ("FHLB") and is authorized to apply for advances from
the FHLB on the security of such stock and certain of its home mortgage loans
and other assets. Such borrowings may be made pursuant to several different
credit programs offered from time to time by the FHLB. Each credit program has
its own interest rate and range of maturities, and the FHLB prescribes the
acceptable uses to which the advances pursuant to each program may be put as
well as limitations on the size of the advances. Depending upon the credit
program used, FHLB advances bear interest at fixed rates or at adjustable
rates tied to various indices. When the Bank utilizes adjustable-rate
programs, it generally obtains advances tied to LIBOR.
The FHLB offers a full range of maturities up to ten years at generally
competitive rates. A prepayment penalty is normally imposed for early
repayment of FHLB advances. The Bank had a line of credit with the FHLB
totaling $5.7 billion at June 30, 1996. The Bank had borrowings outstanding
from the FHLB at June 30, 1996 and 1995 of $3.8 billion and $3.5 billion,
respectively. All advances from the FHLB are collateralized with mortgage
loans, mortgage-backed securities and FHLB stock. The Bank is also a member of
the Federal Reserve System and may borrow from the Federal Reserve Bank of San
Francisco. Savings institutions are required to exhaust their FHLB borrowing
capacity before borrowing from the Federal Reserve Bank. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Asset and Liability Management" for further
information on the Bank's liquidity.
The Bank also enters into sales of securities under "reverse repurchase
agreements" with securities dealers and the FHLB. Reverse repurchase
agreements consist of sales of securities to securities dealers with a
commitment by the Bank to repurchase such securities for a predetermined
25
price at a future date, typically ranging from one to 120 days after the date
of initial sale. The proceeds are used to provide investment funds. Reverse
repurchase transactions are treated as borrowings with the repurchase
obligations being reflected as a liability under the caption "Securities sold
under agreements to repurchase" in the Consolidated Statements of Financial
Condition, and the related interest expense being included in "Interest
expense: Short-term borrowings" in the Consolidated Statements of Operations.
The securities and loans collateralizing the reverse repurchase agreements are
included in the respective line items in the Consolidated Statements of
Financial Condition.
In the past, the Bank has utilized other sources of funds to supplement
retail deposits. These sources included the issuance by the Bank of
subordinated debentures, collateralized notes, subordinated capital notes,
commercial paper, medium-term notes and other short-term debt and the use by
the Bank's subsidiaries of commercial paper, lines of credit with banks and
other notes payable.
The following table summarizes Glendale Federal's consolidated borrowings by
type at the dates indicated (dollars in thousands):
JUNE 30
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Securities sold under
agreements to
repurchase............. $ 758,050 $2,695,176 $2,306,274 $3,064,995 $ 579,069
Borrowings from FHLB.... 3,838,000 3,495,000 2,443,428 2,192,272 2,228,295
Subordinated debentures. 10,506 14,227 14,280 63,363 96,556
Notes payable........... 93 1,177 1,440 98 33,331
Collateralized notes.... -- 13,479 81,170 78,510 130,908
Subordinated capital
notes.................. -- -- -- -- 105,000
Bank notes, revolving
lines of credit and
other short-term
borrowings............. -- -- -- -- 16,876
---------- ---------- ---------- ---------- ----------
$4,606,649 $6,219,059 $4,846,592 $5,399,238 $3,190,035
========== ========== ========== ========== ==========
Weighted average
interest rate on total
borrowings at end of
period................. 5.87% 6.18% 4.65% 4.11% 6.16%
========== ========== ========== ========== ==========
ASSET AND LIABILITY MANAGEMENT
Glendale Federal's earnings depend primarily on its net interest income,
which is the difference between the amounts it receives from interest earned
on its loans and securities investments (its "interest-earning assets") and
the amounts it pays in interest on its deposit accounts and borrowings (its
"interest-bearing liabilities"). Net interest income is affected by (i) the
difference (the "interest rate spread" as applied to a specified date and the
"yield-cost spread" as applied to a specified period) between rates of
interest earned on its interest-earning assets and rates paid on its interest-
bearing liabilities and (ii) the relative amounts of its interest-earning
assets and interest-bearing liabilities. At June 30, 1996 and 1995, Glendale
Federal's interest-earning assets exceeded its interest-bearing liabilities by
$646 million and $567 million, respectively.
26
The following table sets forth the maturity and rate sensitivity of Glendale
Federal's interest-earning assets and interest-bearing liabilities as of June
30, 1996. "GAP", as reflected in the table, represents the estimated
difference between the amount of interest-earning assets and interest-bearing
liabilities repricing during future periods as adjusted for interest rate
swaps and based on certain assumptions, including those stated in the notes to
the table. The interest rate sensitivity of the Bank's assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used. See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Asset and Liability Management--Asset
and Liability Management" for further discussion.
MATURITY/RATE SENSITIVITY
---------------------------------
TOTAL % OF WITHIN 1-5 6-10 OVER 10
BALANCE TOTAL 1 YEAR YEARS YEARS YEARS
------- ----- ------- ------- ----- -------
(DOLLARS IN MILLIONS)
Interest-earning Assets(1):
Loans receivable:
Single-family 1-4
units(2)(3)................ $ 7,580 54.2% $ 5,516 $ 1,230 $424 $410
Multi-family and non-resi-
dential(2)(3).............. 3,310 23.7 3,037 119 78 76
Other(3).................... 84 0.6 57 25 2 --
Mortgage-backed securi-
ties(2)(3)................... 2,205 15.8 1,749 357 57 42
Investment securities(4)...... 452 3.2 452 -- -- --
Other assets(5)............... 346 2.5 193 -- -- 153
------- ----- ------- ------- ---- ----
Total interest-earning as-
sets..................... 13,977 100.0% 11,004 1,731 561 681
===== ------- ------- ---- ----
Non-interest-earning assets.... 480
-------
Total assets................... $14,457
=======
Interest-bearing Liabilities:
Deposits:
Checking/NOW accounts(6).... 779 5.8% 133 339 186 121
Passbook accounts(6)........ 493 3.7 69 192 123 109
Money-market accounts(6).... 1,719 12.9 550 919 214 36
Certificate accounts(4)..... 5,733 43.0 4,508 1,224 1 --
Borrowings:
FHLB(4)..................... 3,838 28.8 1,938 1,900 -- --
Other(4).................... 769 5.8 758 11 -- --
------- ----- ------- ------- ---- ----
Total interest-bearing liabili-
ties.......................... 13,331 100.0% 7,956 4,585 524 266
===== ------- ------- ---- ----
Non-interest-bearing liabili-
ties.......................... 168
-------
Total liabilities.............. 13,499
Stockholders' equity........... 958
-------
Total liabilities and stock-
holders' equity............... $14,457
=======
Maturity GAP................... 3,048 (2,854) 37 415
Impact of interest rate
swaps(7)...................... -- -- -- --
------- ------- ---- ----
Adjusted GAP................... $ 3,048 $(2,854) $ 37 $415
Cumulative GAP................. $ 3,048 $ 194 $231 $646
As % of total assets........... 21.1% 1.3% 1.6% 4.5%
June 30, 1995 Cumulative GAP... $ 97 $ (90) $128 $567
As % of total assets........... 0.6% (0.5)% 0.8% 3.5%
--------
(1) Asset balances are net of loans in process.
(2) ARM loans are predominantly included in the "within 1 year" category, as
they are subject to an interest adjustment every month, six months or
twelve months, depending upon terms of the applicable note.
(3) Maturity/rate sensitivity is based upon contractual maturity, projected
repayments and prepayments of principal. The prepayment experience
reflected herein is based on the Bank's historical experience. The actual
maturity and rate sensitivity of these assets could vary substantially if
future prepayments differ from the Bank's historical experience.
(4) Based on the contractual maturity of the instrument.
(5) Includes cash and demand deposits and FHLB stock, the latter earning a
rate of return that varies quarterly.
(6) In accordance with standard industry practice and the Bank's own
historical experience, decay factors have been applied to these deposits.
(7) There is no impact for interest rate swaps because they mature within one
year.
27
INTEREST RATE MARGIN
The following table provides information on net interest income for the past
three fiscal years, setting forth average balances of interest-earning assets
and interest-bearing liabilities, the income earned and expense recorded
thereon and the resulting average yield-cost ratios (dollars in thousands):
YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30, 1995 YEAR ENDED JUNE 30, 1994
------------------------------ ------------------------------ ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES INCOME/ YIELD/ BALANCES INCOME/ YIELD/ BALANCES INCOME/ YIELD/
(1) EXPENSE COST (1) EXPENSE COST (1) EXPENSE COST
----------- ---------- ------- ----------- ---------- ------- ----------- -------- -------
Interest-earning Assets:
Loans receivable,
net(2)................ $10,268,121 $ 803,432 7.82% $ 9,713,502 $ 721,003 7.42% $10,179,997 $684,143 6.72%
Mortgage-backed
securities, net....... 3,423,747 216,812 6.33 5,070,658 303,587 5.99 5,404,315 255,525 4.73
----------- ---------- ----------- ---------- ----------- --------
Total loans and
mortgage-backed
securities........... 13,691,868 1,020,244 7.45 14,784,160 1,024,590 6.93 15,584,312 939,668 6.03
Federal funds sold and
securities purchased
under resale
agreements............ 674,159 39,347 5.84 668,984 38,142 5.70 792,419 27,871 3.52
U.S. Government and
other investment
securities(3)......... 208,057 20,444 9.83 279,097 23,926 8.57 345,554 22,406 6.48
----------- ---------- ----------- ---------- ----------- --------
Total investments..... 882,216 59,791 6.78 948,081 62,068 6.55 1,137,973 50,277 4.42
----------- ---------- ----------- ---------- ----------- --------
Total interest-earning
assets............... 14,574,084 1,080,035 7.41 15,732,241 1,086,658 6.91 16,722,285 989,945 5.92
----------- ---------- ----------- ---------- ----------- --------
All other assets........ 578,912 717,954 867,870
----------- ----------- -----------
Total assets.......... $15,152,996 $16,450,195 $17,590,155
=========== =========== ===========
Interest-bearing
Liabilities:
Deposits--daily
access(4)............. $ 2,746,615 $ 84,928 3.09 $ 2,658,959 $ 69,132 2.60 $ 3,062,088 $ 63,381 2.07
Deposits--certificates. 6,085,586 348,906 5.73 6,698,055 343,762 5.13 8,134,281 390,093 4.80
----------- ---------- ----------- ---------- ----------- --------
Total deposits........ 8,832,201 433,834 4.91 9,357,014 412,894 4.41 11,196,369 453,474 4.05
Securities sold under
agreements to
repurchase and other
short-term borrowings. 1,869,194 108,839 5.82 2,927,313 165,681 5.66 3,050,780 111,089 3.64
Borrowings from FHLB... 3,332,272 202,258 6.07 3,034,373 180,558 5.95 2,195,406 104,094 4.74
Other borrowings....... 43,784 2,039 4.66 104,529 9,806 9.38 101,775 10,007 9.83
----------- ---------- ----------- ---------- ----------- --------
Total borrowings...... 5,245,250 313,136 5.97 6,066,215 356,045 5.87 5,347,961 225,190 4.21
----------- ---------- ----------- ---------- ----------- --------
Total interest-bearing
liabilities.......... 14,077,451 746,970 5.31 15,423,229 768,939 4.99 16,544,330 678,664 4.10
----------- ---------- ----------- ---------- ----------- --------
All other liabilities... 130,297 118,641 105,698
Stockholders' equity.... 945,248 908,325 940,127
----------- ----------- -----------
Total liabilities and
stockholders' equity. $15,152,996 $16,450,195 $17,590,155
=========== =========== ===========
Difference between
average interest-
earning assets and
interest-bearing
liabilities............ $ 496,633 $ 309,012 $ 177,955
=========== =========== ===========
Yield-cost spread....... $ 333,065 2.10% $ 317,719 1.92% $311,281 1.82%
========== ========== ========
Effective net spread(5). 2.29% 2.02% 1.86%
-------
(1) Average balances are primarily computed on daily balances during the
period. When such balances are not available, averages are computed on a
monthly basis. Average balances include the effect of discounts and
premiums on loans, investment securities, deposits and borrowings acquired
in acquisitions, as well as deferred loan fees and the effects of hedging
transactions.
(2) Non-accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded in computing the average
yields for the periods.
(3) Includes investment in capital stock of FHLB.
(4) Daily access includes average balances and weighted average costs of
passbook deposits for the years ended June 30, 1996, 1995 and 1994 of
$520,129 and 2.19%, $824,067 and 2.25%, and $1,377,191 and 2.43%,
respectively. Daily access also includes average balances and weighted
average costs of interest-bearing demand deposits, which include money
market accounts, for the years ended June 30, 1996, 1995 and 1994 of
$1,910,682 and 3.85%, $1,612,899 and 3.14%, and $1,503,901 and 1.99%,
respectively.
(5) The effective net spread for a period is net interest income divided by
average interest-earning assets.
28
The following table provides information concerning the interest rate spread
at the end of each of the past three fiscal years:
JUNE 30
------------------
1996 1995 1994
---- ----- -----
Weighted average rate:
Loans receivable, net.................................... 7.74% 7.91% 6.87%
Mortgage-backed securities, net.......................... 6.26 6.30 5.28
Total loans and mortgage-backed securities............. 7.49 7.40 6.31
Federal funds sold and securities purchased under resale
agreements.............................................. 5.69 6.43 4.64
U.S. Government and other investment securities.......... 9.58 9.05 6.87
Total investments...................................... 6.99 7.58 5.75
Total loans, mortgage-backed securities and invest-
ments................................................. 7.46 7.40 6.29
Weighted average rate:
Deposits--daily access................................... 3.02 3.06 2.12
Deposits--certificates................................... 5.46 5.95 4.67
Total deposits......................................... 4.62 5.13 3.94
Securities sold under agreements to repurchase and other
short-term borrowings................................... 5.50 6.15 4.25
Borrowings from FHLB..................................... 5.94 6.18 4.76
Other borrowings......................................... 7.76 10.63 11.26
Total borrowings....................................... 5.87 6.18 4.65
Total deposits and borrowings.......................... 5.05 5.57 4.16
Interest rate spread....................................... 2.41% 1.83% 2.13%
Adjusted interest rate spread.............................. 2.59% 1.98% 2.17%
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Net Interest Income" for an
analysis of changes in interest income and interest expense and their effect
on the results of the Bank's operations.
SUBSIDIARIES
The Bank conducts various business activities through its subsidiaries.
Applicable regulations provide that federally chartered institutions such as
the Bank may invest up to 2% of their assets in capital stock and secured and
unsecured loans to subsidiary service corporations and an additional 1% of
assets when the additional funds are used for community development and inner-
city purposes. An institution that meets its regulatory capital requirements
is also generally permitted to make conforming loans to service corporations
(and certain joint ventures of service corporations) in which the institution
owns or holds more than 10% of the capital stock in an aggregate amount of up
to 50% of its regulatory capital. At June 30, 1996 the Bank's permissible
investment limit was $790.5 million and the Bank's aggregate investment for
regulatory purposes related to this limitation was $305.2 million.
The Bank has been actively disposing of, through liquidation or phase-out of
operations, most of its subsidiary activities including real estate
development and commercial (asset-based) lending. Subsidiaries of the Bank
whose operations are on-going include GLENFED Brokerage Service ("GBS") and
GLENFED Insurance Services, Inc. ("GIS"). GBS markets investments such as
mutual funds and annuity products and provides discount securities brokerage
services. GBS recorded total revenues and pre-tax earnings of $8.7 million and
$4.4 million, respectively, for fiscal 1996 and had
29
total assets of $8.9 million at June 30, 1996. GIS provides general insurance
agency services. GIS recorded total revenues and pre-tax earnings of $4.4
million and $1.0 million, respectively, for fiscal 1996 and had total assets
of $1.5 million at June 30, 1996. While these subsidiaries conduct their
activities separate from those of the Bank, their principal sources of
customers are referrals from the Bank's retail branch offices. These
subsidiaries have contributed to the Bank's non-interest income and, as such,
continue to be a part of the Bank's core operations.
OTS regulations authorize federally chartered savings institutions to engage
in real estate activities through subsidiaries but not through direct
investment by an institution itself. FIRREA, however, required that following
a five-year phase-in period that expired on June 30, 1994, an institution's
aggregate investment in and loans to subsidiaries engaged in real estate
development must be excluded from the institution's regulatory capital. Under
regulations promulgated by the OTS, the Bank was granted an extension of this
phase-in schedule through June 30, 1996. Accordingly, Glendale Federal is
phasing-out its investments in these subsidiaries. The Bank's investments in
and extensions of credit to its real estate development subsidiaries totaled
$4.7 million and $1.2 million as of June 30, 1996 and 1995, respectively.
COMPETITION
Savings institutions such as the Bank face intense competition in attracting
retail deposits and in making real estate and other loans. The most direct
competition for savings deposits comes from other savings institutions,
commercial banks, credit unions, thrift and loan associations, short-term
money market securities, including, in particular, money-market funds, and
from other corporate and government securities. The principal basis of
competition for funds is the interest rate paid.
In addition to interest rate competition, the principal methods used by the
Bank to attract retail deposits include convenient office locations,
advertising, automated teller machines and customer service. Competition for
retail deposits in California is particularly strong from large commercial
banks because they provide a broader range of consumer services and have
extensive branch networks.
Competition in making real estate loans comes principally from other savings
institutions, commercial banks, mortgage banking companies and insurance
companies. These institutions compete for loans primarily through the interest
rates and loan fees charged and the efficiency, convenience and quality of
services they provided to borrowers, home builders and real estate brokers.
Many of the nation's largest savings institutions, commercial banks and
mortgage banking companies operate in the same areas in which the Bank
competes and consequently the Bank has had to market and price its own
products aggressively.
EMPLOYEES
As of June 30, 1996, Glendale Federal had a total of 2,455 full-time
equivalent employees. None of its employees are represented by any collective
bargaining group. The Bank provides its full-time employees with a
comprehensive program of benefits, most of which are on a contributory basis,
including medical insurance, dental insurance, life insurance, accidental
death and dismemberment insurance, long-term disability coverage, a pension
plan and a 401(k) plan. Management considers the Bank's employee relations to
be stable with a work force which maintains an overall commitment to the
mission and strategic goals of the Bank.
30
REGULATION
GENERAL
As a federally chartered and insured savings bank (referred to generally in
applicable statutes as a "savings association"), Glendale Federal is subject
to examination and supervision by the OTS and the FDIC and to federal statutes
and regulations governing such matters as capital standards, business
combinations, establishment of branch offices, lending, deposit taking and
borrowing authority, permitted subsidiary investments and activities and
general investment authority. Glendale Federal is also subject to various
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") concerning non-interest-bearing reserves required to
be maintained against customer deposits and certain consumer protection laws
and other regulations.
The descriptions of the statutes and regulations that are applicable to
Glendale Federal and its subsidiaries set forth herein do not purport to be
complete descriptions of such statutes and regulations and their effects. Such
descriptions also do not purport to identify every statute and regulation that
may apply to Glendale Federal or its subsidiaries.
The enforcement authority of the OTS over savings institutions includes the
ability to impose penalties for and to seek correction of violations of laws
or regulations or unsafe or unsound practices by assessing civil money
penalties, issuing cease and desist or removal and prohibition orders against
an institution, its directors, officers or employees and other persons or
initiating injunctive actions. In general, such enforcement actions may be
initiated in response to violations of laws, regulations and cease and desist
orders or to address unsafe or unsound conditions or practices.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order, or any condition imposed in writing by the FDIC. It may
also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
RESTRICTIONS ON ACQUISITIONS AND CHANGES IN CONTROL
Applicable federal law and regulations require the prior approval of the OTS
for acquisitions of control of savings institutions and savings and loan
holding companies. Control is conclusively presumed to exist for this purpose
if, among other things, a person acquires more than 25% of any class of voting
stock of the institution or holding company or controls in any manner the
election of a majority of the directors of the insured institution or the
holding company. Control is also presumed to exist, but subject to rebuttal,
if, among other things, a person acquires more than 10% of any class of voting
stock (or 25% of any class of stock) and is subject to any of certain
specified "control factors," which include the percentage of the debt and
equity of the institution or holding company owned by the person, agreements
giving the person influence over a material aspect of the operations of the
institution or holding company and the number of seats on the board of
directors of the institution or holding company held by the person or
designees of the person.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose limitations on "capital distributions" by savings
institutions, including cash dividends, payments to repurchase or otherwise
acquire an institution's shares, payments to shareholders in a "cash-out"
merger and other distributions charged against capital. An institution that
exceeds its minimum capital requirements is permitted to make capital
distributions in specified amounts based on its regulatory capital levels
without prior OTS approval unless it is deemed to be "in need of more than
normal supervision", in which case OTS approval of the distribution may be
31
required. The OTS retains the authority in all cases, however, to prohibit any
capital distribution that would otherwise be authorized under its regulations
if the OTS determines that the capital distribution would constitute an unsafe
or unsound practice and in each case requires prior notification of any
proposed dividend or other capital distribution.
Glendale Federal does not expect to pay cash dividends on its common stock
in the foreseeable future and the Bank does not expect to make other capital
distributions, other than preferred stock dividends, under its current
organizational structure. However, future circumstances could arise which
might result in a capital distribution by the Bank.
FEDERAL HOME LOAN BANK SYSTEM
The FHLB System provides a central credit facility for member institutions.
Glendale Federal is subject to certain regulations of the Federal Housing
Finance Board and is required to own capital stock in its regional FHLB, the
FHLB of San Francisco, in an amount at least equal to the greater of 1% of the
aggregate outstanding balance of its loans secured by home mortgages, home
purchase contracts and similar obligations at the end of each calendar year,
or 5% of its FHLB advances. As of June 30, 1996, Glendale Federal was in
compliance with this requirement with an investment in FHLB stock of $192.8
million. Institutions not satisfying certain "qualified thrift lender"
requirements are subject to limitations on their ability to borrow from their
FHLB. See "Qualified Thrift Lender Test", below.
LIQUIDITY
Current federal regulations require savings institutions to maintain an
average daily balance each month of liquid assets (as defined in the
applicable regulations) equal to not less than a specified percentage
(currently 5%) of the average daily balance during the previous month of net
withdrawable customer accounts and borrowings payable on demand or in one year
or less (the "liquidity ratio"). The required liquidity ratio may be changed
by the OTS within the range of 4% to 10% of an institution's net withdrawable
accounts and short-term borrowings, depending upon economic conditions and the
deposit flows of member institutions. Savings institutions must also maintain
an average daily balance each month of short-term liquid assets equal to at
least 1% of the average daily balance for the preceding calendar month of net
withdrawable customer accounts plus borrowings payable on demand or in one
year or less. The liquidity and short-term liquidity ratios of Glendale
Federal for the month of June 1996 were 5.41% and 4.87%, respectively.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC administers two separate deposit insurance funds. The Bank
Insurance Fund (the "BIF") is the insurance fund responsible for insuring the
deposits of commercial banks and other institutions the deposits of which were
insured by the FDIC prior to the enactment of FIRREA. The Savings Association
Insurance Fund (the "SAIF") is the insurance fund responsible for insuring the
deposits of institutions the deposits of which were formerly insured by the
Federal Savings and Loan Insurance Corporation. Glendale Federal is a member
of the SAIF.
FDIC insurance premiums are assessed pursuant to a risk-based system under
which institutions are classified on the basis of capital ratios, supervisory
evaluation by the institutions' primary federal regulatory agency and other
information deemed relevant by the FDIC. The deposit insurance premium
assessment rate for SAIF-insured institutions currently ranges from 0.23% to
0.31%. The Bank's premium assessment rate for the first half of fiscal 1997
will be $0.26 per $100 of deposits.
32
The FDIC is authorized to increase deposit insurance premiums payable by
institutions of either fund if it determines that such increases are
appropriate to maintain the reserves of that fund or to pay the costs of
administration of the FDIC. Under current law, the FDIC is required to attain
and thereafter maintain the reserves of both the BIF and SAIF to 1.25% of
insured deposits. The BIF has reached the required reserve level, whereas the
SAIF reserves are well below the required level. As a result, BIF deposit
insurance premiums range from 0 cents (subject to a statutory minimum of
$2,000 in annual assessments) to 27 cents per $100 of deposits. The premium
assessment rate differential between BIF and SAIF creates a significant
competitive disadvantage for SAIF-insured institutions.
The FDIC's reduction of BIF premiums has precipitated a broad public debate
on the subject of deposit insurance reform. Congress proposed, as part of the
budget reconciliation xxxx submitted to and vetoed by the President in
December 1995, a one-time, special assessment on all savings institutions to
recapitalize the SAIF. The proposal would have required SAIF-insured
institutions to pay a one-time special assessment on January 1, 1996
(estimated to be approximately $0.80 for every $100 in deposits held as of
March 31, 1995, or approximately $47 million as applied to Glendale Federal on
an after-tax basis) and would have provided for a pro rata sharing by all
federally insured institutions of the obligation, now borne entirely by SAIF-
insured institutions, to pay the interest on bonds issued by a specially
created government entity ("FICO"), the proceeds of which were applied toward
resolution of the thrift industry crisis in the 1980s. Efforts to include such
provisions in subsequent legislation have thus far failed. It is anticipated
that Congress will take up the BIF/SAIF legislation upon its return from the
August recess. The FDIC now estimates that the one-time assessment needed to
bring the SAIF to 1.25% of insured deposits is expected to be 68 basis points
or $0.68 for every $100 in deposits. It is estimated that the reduced
assessment rate would result in a lower assessment for the Bank; however, the
amount of the assessment cannot be determined until final resolution by
Congress and the FDIC. The significant disparity in deposit insurance premium
costs between BIF- and SAIF-member institutions has resulted in efforts by
some SAIF-insured institutions to shift customer deposits to affiliated BIF-
insured institutions or to take other actions that would have the effect of
reducing the deposit base on which the SAIF's deposit insurance premium
revenue depends. Continuation of this situation for any extended period of
time would seriously jeopardize the financial viability of the SAIF and
thereby adversely affect its member institutions, and could also result in
default in the payment of interest on the FICO bonds. The proposal described
above represents only one of many different proposals for resolution of the
BIF/SAIF premium disparity and recapitalization of the SAIF. Some of the other
proposals contemplate elimination of the separate thrift charter and merger of
the thrift and commercial banking industries. Management cannot predict
whether or in what form any legislative resolution of these issues may be
enacted or the impact thereof on the business of the Bank but believes that
failure to resolve the problem will adversely affect SAIF-member institutions,
including the Bank.
Subject to certain limitations, a savings institution may convert to a
commercial bank charter if the resulting bank remains a member of the SAIF.
Federal laws and regulations relating to deposit insurance now permit SAIF-
insured savings institutions to merge with BIF-insured commercial banks, with
the resulting merged institution being subject to proportionate assessments by
the BIF and the SAIF. Upon payment of so-called entrance and exit fees to the
relevant FDIC insurance funds and compliance with certain other requirements,
transfers of deposit insurance from the SAIF to the BIF will also be permitted
on a whole institution basis at such time as the SAIF attains a reserve to
insured deposits ratio of 1.25% or under certain other circumstances.
33
CAPITAL REQUIREMENTS
Federal Law and the capital regulations promulgated thereunder establish a
"leverage limit" (also commonly referred to as the "core capital ratio"), a
"tangible capital requirement" and a "risk-based capital requirement" for
savings institutions subject to OTS supervision.
The leverage limit currently requires a savings institution to maintain
"core capital" of not less than 3% of adjusted total assets. "Core capital"
generally includes common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and any related surplus, and minority
interests in the equity accounts of fully consolidated subsidiaries.
Intangible assets (with certain exceptions for purchased and originated
mortgage servicing rights ("MSRs"), purchased credit card relationships, and
certain grandfathered core deposit intangibles) must generally be deducted
from core capital. Up to 50% of core capital may be comprised of MSRs, with
MSRs being valued for this purpose at the lowest of 90% of fair market value,
90% of original cost, or amortized book value as determined under generally
accepted accounting principles.
Under the tangible capital requirement a savings institution must maintain
"tangible capital" in an amount not less than 1.5% of adjusted total assets.
"Tangible capital" is defined as core capital less any intangible assets other
than readily marketable mortgage servicing rights which are included in core
capital, and investments in certain subsidiaries engaged in activities not
permissible for national banks.
Under the risk-based capital requirement, a savings institution must
maintain "total capital" (defined below) in an amount at least equal to 8% of
its risk-weighted assets. Each asset held by a savings institution is assigned
to one of four risk-weighting categories, based upon the degree of credit risk
associated with the type of asset involved and ranging from 0% for low-risk
assets such as U.S. Treasury securities and GNMA securities to 100% for
various types of loans and other assets deemed to be of higher risk. Single
family mortgage loans having loan-to-value ratios not exceeding 80% and
meeting certain additional criteria, as well as multi-family residential
property loans meeting certain criteria, qualify for the 50% risk-weighting.
The book value of each asset is multiplied by the risk-weighting applicable to
the asset category, and the sum of the products of this calculation equals
total risk-weighted assets. Off-balance sheet items are also included in the
calculation of total risk-weighted assets through a formula intended to
reflect the relative likelihood that a credit obligation would result from the
off-balance sheet item.
For purposes of the risk-based capital requirement, "total capital" means
core capital (as described above) plus "supplementary capital" (as defined
below), provided that the amount of supplementary capital may not exceed the
amount of core capital, less certain assets. Supplementary capital includes
(i) certain types of cumulative perpetual preferred stock and other perpetual
preferred stock, mandatory convertible subordinated debt and perpetual
subordinated debt, (ii) "maturing capital instruments" such as mandatory
redeemable preferred stock, intermediate-term preferred stock, commitment
notes and subordinated debt meeting certain criteria, and (iii) general
valuation loan and lease loss allowances, up to a maximum of 1.25% of risk-
weighted assets. Under the risk-based capital requirements, assets excluded
from total capital include equity investments (including certain direct
investments in real estate) and that portion of land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio.
The Federal banking laws require each federal banking agency to monitor and
to revise its risk-based capital standards as appropriate to ensure that such
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of "nontraditional activities," and to ensure that such
standards reflect the "actual performance and expected risk of loss of multi-
family mortgages".
In addition to the above regulatory capital requirements, the Federal
banking laws contain so-called "prompt corrective action" ("PCA") provisions
pursuant to which banks and savings institutions
34
are to be classified into one of five categories based primarily upon capital
adequacy, ranging from "well capitalized" to "critically undercapitalized,"
and which require, subject to certain exceptions, the appropriate federal
banking agency to take prompt corrective action with respect to an institution
which becomes "undercapitalized" and to take additional actions if the
institution becomes "significantly undercapitalized" or "critically
undercapitalized." These provisions expand the powers and duties of the OTS
and the FDIC and expressly authorize, or in many cases direct, regulatory
intervention at an earlier date than was previously the case.
The OTS regulations implementing the PCA provisions of FDICIA define the
five capital categories as follows: (i) an institution is "well capitalized"
if it has a total risk-based capital ratio of 10.00% or greater, has a Tier 1
risk-based capital ratio (Tier 1 capital to total assets) of 6.00% or greater,
has a core capital ratio of 5.00% or greater and is not subject to any written
capital order or directive to meet a specific capital level or any capital
measure; (ii) an institution is "adequately capitalized" if it has a total
risk-based capital ratio of 8.00% or greater, has a Tier 1 risk-based capital
ratio of 4.00% or greater and has a core capital ratio of 4.00% or greater
(3.00% for certain highly rated institutions); (iii) an institution is
"undercapitalized" if it has a total risk-based capital ratio of less than
8.00% or has either a Tier 1 risk-based or a core capital ratio that is less
than 4.00%; (iv) an institution is "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.00%, or has either a Tier
1 risk-based or a core capital ratio that is less than 3.00%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" (defined
in the prompt corrective action regulations to mean core capital plus
cumulative perpetual preferred stock) is equal to or less than 2.00% of its
total assets. The OTS also has authority, after an opportunity for a hearing,
to downgrade an institution from "well capitalized" to "adequately
capitalized", or to subject an "adequately capitalized" or "undercapitalized"
institution to the supervisory actions applicable to the next lower category,
for supervisory concerns.
At June 30, 1996, the Bank's regulatory capital ratios were significantly
above the 5.00% core capital, 6.00% Tier 1 risk-based capital and 10.00% risk-
based capital levels required by federal regulators for "well-capitalized"
institutions. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Capital" and Note 17 of the
Notes to Consolidated Financial Statements for further information regarding
the Bank's regulatory capital ratios.
LOANS TO ONE BORROWER
Savings institutions are generally subject to the loans-to-one borrower
limitations that are applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution may lend to one
borrower (including certain related entities of such borrower) is an amount
equal to 15% of the savings institution's unimpaired capital and unimpaired
capital surplus, plus an additional 10% for loans fully secured by readily
marketable collateral. Real estate is not included within the definition of
"readily marketable collateral" for this purpose. Pursuant to recent
regulatory amendments, the definition of the term "unimpaired capital and
unimpaired surplus" has been changed to refer now generally to an
institution's regulatory capital, and also to include in the basic 15% of
capital lending limit, that portion of an institution's general valuation
allowance that is not includable in regulatory capital as calculated for other
regulatory purposes. At June 30, 1996, the maximum amount which Glendale
Federal could have loaned to any one borrower (and related entities) was
$160.5 million. At that date, the largest balance of loans which Glendale
Federal had outstanding to any one borrower and related entities was $31.0
million.
QUALIFIED THRIFT LENDER TEST
Under the qualified thrift lender ("QTL") test provisions of applicable
Federal law, savings institutions must maintain at least 65% of its portfolio
assets in qualified thrift investments on a
35
specified monthly average basis. In general, qualified thrift investments
include loans, securities and other investments that are related to housing
or, to a more limited extent, consumer lending and community service purposes.
Portfolio assets are defined as an institution's total assets less goodwill
and other intangible assets, the institution's business property and a limited
amount of the institution's liquid assets.
A savings institution's failure to remain a QTL may result in: (1)
limitations on new investments and activities; (2) imposition of branching
restrictions; (3) loss of FHLB borrowing privileges; and (4) limitations on
the payments of dividends. If a savings institution that is a subsidiary of a
savings and loan holding company fails to regain QTL status within one year of
its loss of such status, the holding company must register as and will be
deemed to be a bank holding company subject to, among other things, the
business activity restrictions of the BHCA.
Glendale Federal's qualified thrift investments comprised 88.7% of its
portfolio assets as of June 30, 1996.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as commercial banks and other lenders, to identify the communities served
by the institution's offices and to identify the types of credit the
institution is prepared to extend within such communities. The CRA also
requires the OTS to assess, as part of its examination of a savings
institution, the performance of the institution in meeting the credit needs of
its community and to take such assessments into consideration in reviewing
applications for mergers, acquisitions and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application. In
connection with the assessment of a savings institution's CRA performance, the
OTS will assign a rating of "outstanding", "satisfactory", "needs to improve"
or "substantial noncompliance". Based on an examination conducted in 1996,
Glendale Federal's CRA performance was rated "satisfactory".
REAL ESTATE LENDING STANDARDS
FDICIA requires the federal banking agencies to adopt uniform real estate
lending standards. In response to this requirement, the OTS and the other
federal banking agencies have jointly adopted uniform rules on real estate
lending and related Interagency Guidelines for Real Estate Lending Policies
(the "Guidelines"). The uniform rules require that institutions adopt and
maintain comprehensive written policies for real estate lending. The policies
must reflect consideration of the Guidelines and must address relevant lending
procedures, such as loan to value limitations, loan administration procedures,
portfolio diversification standards and documentation, approval and reporting
requirements. Although the final rule did not impose specific maximum loan to
value ratios, the related Guidelines state that such ratio limits established
by individual institutions' boards of directors should not exceed levels set
forth in the Guidelines, which range from a maximum of 65% for loans secured
by raw land to 85% for improved property. No limit is set for single family
residence loans, but the Guidelines state that such loans exceeding a 90% loan
to value ratio should have private mortgage insurance or some form of credit
enhancement. The Guidelines further permit a limited amount of loans that do
not conform to these criteria. The Bank has adopted limits in accordance with
the Guidelines.
36
TAXATION
For taxable years beginning prior to January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was
permitted to establish reserves for bad debts and to claim annual tax
deductions for additions to such reserves. A qualifying savings institution
was permitted to make annual additions to such reserves under a method based
on the institution's loss experience. Alternatively, a qualifying savings
institution could elect, on an annual basis, to use the "percentage of taxable
income" method to compute its allowable addition to its bad debt reserve on
qualifying real property loans (generally, loans secured by an interest in
improved real estate). The percentage of taxable income method permitted the
institution to deduct a specified percentage of its taxable income before such
deduction, regardless of the institution's actual bad debt experience, subject
to certain limitations. Since 1988, Glendale Federal has claimed bad debt
deductions under the experience method because that method produced a greater
deduction than did the percentage of taxable income method.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. One provision of the Act repeals the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995 and provides for recapture of a portion of the
reserves existing at the close of the last taxable year beginning before
January 1, 1996. See Note 14 of the Notes to Consolidated Financial Statements
for a discussion of the effect of this legislation on the Bank. For its tax
years beginning on or after January 1, 1996, the Bank will be required to
account for its bad debts under the specific charge-off method. Under this
method, deductions may be claimed only as and to the extent that loans become
wholly or partially worthless.
In addition to the regular corporate income tax, corporations, including
qualifying savings institutions, are subject to an alternative minimum tax.
The 20% tax is computed on Alternative Minimum Taxable Income ("AMTI") and
applies if it exceeds the regular tax liability. AMTI is the regular taxable
income with certain adjustments. For taxable years beginning after 1989, AMTI
includes an adjustment for 75% of the excess of "adjusted current earnings"
over regular taxable income. Net operating loss carrybacks and carryforwards
are permitted to offset only 90% of AMTI.
The California franchise tax applicable to Glendale Federal is a variable
rate tax, computed under a formula which results in a rate higher than the
rate applicable to non-financial corporations because it reflects an amount
"in lieu" of local personal property and business license taxes paid by such
corporations (but not generally paid by banks or financial corporations such
as Glendale Federal). For 1993 and 1994, the rates were 11.107% and 11.470%,
respectively. For 1995 and 1996, the rate is set at 11.3%. For 1997, the rate
will be 10.84%. Under California law and regulations, financial corporations
are permitted to claim a bad debt deduction by using a reserve method, with
the reserve level being determined by past experience or current facts and
circumstances. California franchise taxes are deductible for federal income
tax purposes.
Glendale Federal's tax returns have been audited by the Internal Revenue
Service through December 31, 1988, and by the California Franchise Tax Board
("CFTB") through December 31, 1990.
For additional information regarding taxation, see Note 14 of the Notes to
Consolidated Financial Statements.
ITEM 2. PROPERTIES
At June 30, 1996, Glendale Federal's business was conducted through the
Bank's 150 banking offices and 22 loan offices in California. The executive
offices of the Bank are located at 000 Xxxxx Xxxxxxx Xxxxxx, Xxxxxxxx,
Xxxxxxxxxx. The Bank owns its executive offices and 83 of its banking offices,
37
as well as 6 other properties in which service centers and other facilities
are located, and leases the premises for 67 of its banking offices, as well as
21 other properties in which service centers and other facilities are located.
The net book value of all offices at June 30, 1996 was $79.7 million and
included $11.6 million of leasehold improvements. Expirations of leases for
facilities range from September 1996 to April 2034. During fiscal 1996, the
Bank sold its former headquarters facility for approximately $30 million and
recorded a pre-tax loss on the sale of $2.5 million. See Notes 4 and 10 of the
Notes to Consolidated Financial Statements for further information.
The Bank evaluates the suitability and adequacy of all its facilities on a
continuing basis, including branch offices, support buildings and service
centers, and has an active program of relocating, remodeling or closing such
facilities as necessary to maintain efficient and attractive facilities. The
Bank believes its present facilities are adequate for its operating purposes.
ITEM 3. LEGAL PROCEEDINGS
GOODWILL LITIGATION AGAINST THE GOVERNMENT
Following the adoption of FIRREA, the Bank sued the United States Government
(the "Government") contending that FIRREA's treatment of supervisory goodwill
constituted a breach by the Government of its 1981 contract with the Bank,
under which the Bank merged with a Florida thrift and the Bank was permitted
to include the goodwill resulting from the merger in the Bank's regulatory
capital (Glendale Federal Bank, F.S.B. v. United States, No. 90-772C, in the
United States Court of Federal Claims, filed August 15, 1990). In July 1992,
the U.S. Court of Federal Claims (the "Claims Court") found in favor of the
Bank's position, ruling that the Government breached its express contractual
commitment to permit the Bank to include supervisory goodwill in its
regulatory capital and that the Bank is entitled to seek financial
compensation.
On May 25, 1993, a three-judge panel of the U.S. Court of Appeals for the
Federal Circuit (the "Federal Circuit") reversed the Claims Court's July 1992
judgment in favor of the Bank, ruling that the Government was not liable for
breach of contract, and remanded the case for trial of the Bank's
constitutional and other claims. On August 18, 1993, the Federal Circuit
granted the Bank's request for rehearing en banc and vacated the panel
decision reversing the Claims Court's July 1992 judgment. On August 30, 1995
the Federal Circuit, by a 9 to 2 decision, affirmed the judgment of the Claims
Court in favor of the Bank.
The Government subsequently appealed this decision to the United States
Supreme Court and on July 1, 1996, the Supreme Court, by a vote of 7 to 2,
ruled that the Government had breached its contract with the Bank. On August
1, 1996, the Claims Court scheduled January 13, 1997 as the starting date for
the trial to determine damages. Management believes that the Bank will be able
to establish damages in an amount in excess of $1.5 billion.
SHAREHOLDER CLASS ACTION LITIGATION
A wholly-owned subsidiary of the Bank, as the successor by merger to the
Bank's former parent corporation, GLENFED, Inc., is a defendant in
consolidated class actions pending in the United States District Court for the
Central District of California (the "District Court"), entitled In Re GLENFED
Inc. Securities Litigation, Civil No. 91-0818 WJR, originally filed on January
18, 1991. The original consolidated complaint was dismissed by the Court on
July 15, 1991, with leave to amend, for failure to allege with specificity the
securities law and common law fraud claims asserted in the complaint. The
complaint alleged, among other things, that various misrepresentations were
made concerning the financial condition and operations of GLENFED and the Bank
prior to GLENFED's announcement of a $140 million loss on or about
January 16, 1991.
38
After dismissal of the complaint, the plaintiffs filed an amended complaint
which was dismissed by the District Court, which then entered judgment in
favor of GLENFED and the individual officer and director defendants.
Plaintiffs appealed this dismissal and on September 15, 1993, the United
States Court of Appeals for the Ninth Circuit (the "Appeals Court") affirmed
the judgment dismissing the complaint. On December 9, 1994, the Appeals Court,
sitting en banc, reversed the decision of the three-judge panel which had
found in favor of GLENFED on only one of the alternative grounds on which the
District Court had based its opinion. Since the three-judge panel had not
ruled on all the grounds which formed the basis of the District Court's
opinion, the en banc court remanded the case to the three-judge appellate
panel for a ruling on the remaining grounds. On July 13, 1995, the three-judge
panel of the Appeals Court entered an order affirming the dismissal by the
District Court of the outside directors and remanded the remainder of the case
to the District Court for further proceedings. The defendants are now
conducting a vigorous defense to the claims asserted.
Certain of the former officers and directors of GLENFED were also named
defendants in a California state court derivative action (entitled Xxxxxx X.
Xxxxxxxxxxx, et al. v. Xxxxxx X. Xxxxxxx, et al. and GLENFED, Inc., as a
nominal defendant, Case No. BC021028, filed February 8, 1991 in Los Angeles
County, California Superior Court) which charges those persons who were
directors of GLENFED during the period covered by the plaintiff's allegations
with breach of fiduciary duty and mismanagement in connection with past write-
downs and loss provisions for real estate loans and investments. Since the
litigation is derivative in nature, the subsidiary of the Bank which is the
successor to GLENFED would be a recipient of any judgment and has no exposure
to damages. On October 8, 1991, the Court sustained the defendant's demurrer
to the second amended complaint in this action and entered judgment in favor
of GLENFED and the individual officer defendants. The plaintiffs filed an
appeal, and on September 1, 1993, the Court of Appeals reversed the decision
of the lower Court. The defendants are now conducting a vigorous defense to
the claims asserted.
OTHER LITIGATION
In addition to the matters described above, Glendale Federal or its
subsidiaries are involved as plaintiff or defendant in various legal actions
incidental to their business, none of which is believed by management to be
material to the financial condition or results of operations of Glendale
Federal and its subsidiaries on a consolidated basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
39
ITEM 4A. EXECUTIVE OFFICERS
The following table sets forth certain information concerning executive
officers of Glendale Federal. Each executive officer below serves at the
discretion of the Board of Directors. The business experience of each during
the last five years is set forth in the paragraphs following the table.
NAME AGE POSITION(S) HELD
---- --- ----------------
Xxxxx X. Xxxx, Xx. 49 Senior Vice President and Chief Auditor
Xxxxxxx X. Xxxxxx 36 Executive Vice President and Director,
Loan Sales/Operations/Corporate Development
Xxxxxxx X. Xxxxx 48 Executive Vice President and Manager,
Retail Banking
Xxxxx X. Xxxxx, Xx. 49 Corporate Counsel and Secretary
Xxxxxx X. Xxxxxxxx 45 Executive Vice President and General
Counsel
Xxxxxxx X. Xxxx 56 Senior Executive Vice President and
Chief Credit Officer and Director
Xxxx X. Xxxxxx 51 Executive Vice President, Chief Financial
Officer
Xxxxxxx X. Xxxxxx 36 Senior Vice President and Chief Accounting
Officer
Xxxxx X. Xxxx 49 Executive Vice President and Director,
Community Business Banking
Xxxxxxx X. Xxxxxxxx 37 Senior Vice President and Director,
Corporate Relations
Xxxxxxx X. Xxxxxx 39 Executive Vice President and Treasurer
Xxxxxxx X. Xxxxxxx 50 Chairman of the Board, Chief Executive
Officer and President
Xxxxxx X. Xxxxxxxx 45 Executive Vice President and Director,
Franchise Management and Marketing
Xxxxxx X. Xxxxxxx 44 Senior Vice President and Director,
Corporate Human Resources
Xxxxx X. Xxxx, Xx. has been Senior Vice President and Chief Auditor since
1991. From 1990 to 1991, Xx. Xxxx was Senior Vice President and Corporate
Controller.
Xxxxxxx X. Xxxxxx has been Executive Vice President and Director, Loan
Sales/Operations/ Corporate Development, of Glendale Federal since February
1996. From April 1990 until May 1992, Xx. Xxxxxx was Vice President, Strategic
Risk Management. He was appointed Senior Vice President, Strategic Risk
Management in May 1992; Senior Vice President and Director, Lending
Operations, in December 1992; Senior Vice President and Director, Retail Bank
Operations, in June 1994; Executive Vice President and Director, Retail Bank
Operations, in October 1994; and Executive Vice President and Director, Bank
and Lending Operations, in January 1995.
Xxxxxxx X. Xxxxx has been Executive Vice President and Manager, Retail
Banking, of Glendale Federal since 1992. From 1988 until 1992 he was Senior
Vice President, Corporate Administrative Services. During 1992 Xx. Xxxxx was
Executive Vice President, Bank Operations.
40
Xxxxx X. Xxxxx, Xx. has been Corporate Counsel and Secretary of Glendale
Federal since 1992. From 1991 until 1992 he was Vice President, Associate
Counsel and Assistant Secretary of Security Pacific National Bank.
Xxxxxx X. Xxxxxxxx has been General Counsel of Glendale Federal since April
1993 and Executive Vice President since April 1994. From 1989 until 1993 he
was Senior Vice President/ Counsel and California Legal Staff Manager.
Xxxxxxx X. Xxxx has been Senior Executive Vice President and a Director of
Glendale Federal since May 1992. He served as Chief Legal Officer from May
1992 until April 1994; Director, Corporate Development, from April 1994 until
February 1996; and as Chief Credit Officer since February 1996. From 1980
until May 1992, he was a partner in the law firm of XxXxxxx & Fitting and was
actively involved in advising the Bank with respect to legal and regulatory
matters. On March 31, 1993 a state court receiver was appointed for XxXxxxx &
Fitting.
Xxxx X. Xxxxxx has been Executive Vice President and Chief Financial Officer
of Glendale Federal since April 1992 and was Chief Information Officer from
January 1995 until August 1996. From March 1990 until June 1991 he was Senior
Vice President and Manager, Reporting and Forecasting. In June 1991, he was
appointed Senior Vice President and Corporate Controller and in September 1991
he was promoted to Senior Vice President and Chief Accounting Officer. He
served as Chief Accounting Officer until March 1993.
Xxxxxxx X. Xxxxxx has been Senior Vice President and Chief Accounting
Officer since March 1993. From March 1990 until February 1991, he was Vice
President and Manager, Product Profitability, Cost Analysis and Budgets. From
February 1991 until March 1993 he was Vice President and Manager, Technical
Accounting.
Xxxxx X. Xxxx has been Executive Vice President and Director, Community
Business Banking, of Glendale Federal since July 1995. Xx. Xxxx became
Executive Vice President and Manager of the Special Asset Department of
Glendale Federal in December 1990. Xx. Xxxx was Chief Credit Officer of
Glendale Federal from June 1991 until July 1995.
Xxxxxxx X. Xxxxxxxx has been Senior Vice President and Director, Corporate
Relations, of Glendale Federal since August 1994. Xx. Xxxxxxxx was Senior Vice
President and Director, Investor Relations and Financial Reporting, from March
1993 until August 1994. From September 1990 until March 1993 Xx. Xxxxxxxx was
Vice President and Manager, Financial Reporting.
Xxxxxxx X. Xxxxxx has been Executive Vice President and Treasurer of
Glendale Federal since February 1996. From October 1990 until January 1991,
she was Senior Vice President and Manager of Budgeting and Financial Planning.
She was Senior Vice President and Treasurer from January 1991 until November
1992; Executive Vice President and Treasurer from November 1992 until July
1995; and Executive Vice President, Asset and Liability Risk Management, and
Treasurer from July 1995 until February 1996.
Xxxxxxx X. Xxxxxxx has been Chairman of the Board, Chief Executive Officer
and President of Glendale Federal Bank since April 1992. Xx. Xxxxxxx joined
Glendale Federal in July 1990 as Senior Executive Vice President and Chief
Financial Officer and served as such until April 1992. He has served as a
Director since June 1991. From June 1991 until April 1992 he was Vice Chairman
of the Board.
Xxxxxx X. Xxxxxxxx has been Executive Vice President and Director, Franchise
Management and Marketing, since February 1996. From 1989 until July 1992 he
was Senior Vice President and Manager, Branch Development/Promotion and Market
Research. From July 1992 until December 1992
41
Xx. Xxxxxxxx was Senior Vice President and Director of Marketing; from
December 1992 until June 1994 he was Senior Vice President and Manager of
Marketing, Customer Service Quality; from June 1994 until October 1994 he was
Senior Vice President and Director, Franchise Management; and from October
1994 until February 1996 he was Executive Vice President and Director,
Franchise Management.
Xxxxxx X. Xxxxxxx has been Senior Vice President and Director, Corporate
Human Resources since August 1994. From 1987 until she joined Glendale Federal
in May 1991 Xx. Xxxxxxx was Human Resources Manager of Navcom Defense
Manufacturing. From May 1991 until November 1991 she was an Assistant Vice
President. From November 1991 until May 1992 she was Vice President and Human
Resources Compliance Officer. From May 1992 until August 1994 she was Vice
President and Manager, Staffing/Management Development/Employee Relations and
Compliance of Glendale Federal.
42
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF THE REGISTRANT'S COMMON STOCK
The Bank's common stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "GLN" and is also listed on the Pacific Stock Exchange
("PSE"). The following table sets forth, for the periods indicated, the range
of high and low sale prices of the Bank's common stock:
HIGH LOW
------- -------
Year Ended June 30, 1996
First Quarter........................................... $17 $12 1/8
Second Quarter.......................................... 18 14 5/8
Third Quarter........................................... 19 1/8 15 1/2
Fourth Quarter.......................................... 19 1/8 16
Year Ended June 30, 1995
First Quarter........................................... $13 1/2 $10 3/8
Second Quarter.......................................... 11 3/4 7 3/8
Third Quarter........................................... 10 7/8 8 3/4
Fourth Quarter.......................................... 14 10
At the close of business on September 3, 1996, the Bank's common stock price
was $17 5/8.
The Bank has not paid any cash dividends on its common stock in the last
three fiscal years. Refer to Item 1. "Business--Regulation," and Note 18 of
the Notes to Consolidated Financial Statements for information with respect to
current restrictions on the Bank's ability to pay dividends.
NUMBER OF HOLDERS OF COMMON STOCK
At September 3, 1996, 47,161,877 shares of Bank common stock were
outstanding and held by approximately 8,665 holders of record.
43
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize the Bank's financial condition and its
operating results for the past five fiscal years. See Notes 4 and 18 of the
Notes to Consolidated Financial Statements for discussion of acquisitions and
dispositions in fiscal 1995 and the Bank's recapitalization in fiscal 1994
which affect the comparability of the information provided in the tables
below.
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SUMMARY OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- ---------- -----------
Interest income......... $1,080,035 $1,086,658 $ 989,945 $1,134,310 $ 1,641,764
Interest expense........ (746,970) (768,939) (678,664) (774,997) (1,137,917)
---------- ---------- --------- ---------- -----------
Net interest income be-
fore provision for loan
losses................. 333,065 317,719 311,281 359,313 503,847
Provision for loan loss-
es..................... (40,350) (66,150) (139,726) (251,261) (314,437)
---------- ---------- --------- ---------- -----------
Net interest income..... 292,715 251,569 171,555 108,052 189,410
Other income:
Fee income............ 69,977 69,311 60,513 58,051 74,709
Gain (loss) on sale of
loans, net........... (690) 146 665 3,147 24,129
Gain (loss) on sale of
mortgage-backed secu-
rities, net.......... (34,222) (11,725) 1,099 29,258 76,710
Gain on sale of bank-
ing operations....... -- 73,713 -- -- --
Other income (loss),
net.................. (707) 3,001 (1,936) (3,461) (22,081)
---------- ---------- --------- ---------- -----------
Total other income.. 34,358 134,446 60,341 86,995 153,467
Other expenses:
Compensation and em-
ployee benefits...... (101,502) (105,218) (126,037) (123,388) (125,674)
Occupancy expense,
net.................. (29,698) (31,433) (37,691) (39,535) (41,402)
Regulatory insurance.. (27,491) (29,077) (38,233) (34,881) (38,299)
Advertising and promo-
tion................. (24,798) (18,855) (16,285) (11,078) (7,968)
Furniture, fixtures
and equipment........ (11,605) (14,559) (24,793) (29,585) (31,804)
Stationery, supplies
and postage.......... (10,158) (9,065) (11,174) (11,221) (12,553)
Other general and ad-
ministrative ex-
penses............... (43,612) (35,634) (37,753) (31,965) (33,506)
---------- ---------- --------- ---------- -----------
Total general and
administrative ex-
penses............. (248,864) (243,841) (291,966) (281,653) (291,206)
Operations of real
estate held for sale
or investment........ (1,242) 31 (2,690) (31,488) (105,689)
Operations of real
estate acquired in
settlement of loans.. (8,426) (15,034) (24,089) (44,367) (55,967)
Amortization of
goodwill and other
intangible assets.... (5,147) (1,724) (9,764) (16,028) (17,131)
---------- ---------- --------- ---------- -----------
Total other ex-
penses............. (263,679) (260,568) (328,509) (373,536) (469,993)
---------- ---------- --------- ---------- -----------
Write-off of assets held
for Florida disposi-
tion................... -- -- (136,209) -- --
Income tax (provision)
benefit................ (21,342) (52,146) 10,171 39,299 6,210
Extraordinary items,
net.................... -- 1,755 14,092 58,344 --
---------- ---------- --------- ---------- -----------
Net earnings (loss)... 42,052 75,056 (208,559) (80,846) (120,906)
Dividends declared on
preferred stock........ (16,156) (17,668) (13,759) -- --
Premium on exchange of
Series E preferred
stock for common stock. (9,443) -- -- -- --
---------- ---------- --------- ---------- -----------
Earnings (loss) avail-
able for common share-
holders................ $ 16,453 $ 57,388 $(222,318) $ (80,846) $ (120,906)
========== ========== ========= ========== ===========
Earnings (loss) per
share:
Primary:
Earnings (loss) be-
fore extraordinary
items............... $ 0.36 $ 1.28 $ (6.48) N/A N/A
Net earnings (loss).. 0.36 1.32 (6.10) N/A N/A
Fully diluted:
Earnings (loss) be-
fore extraordinary
items............... 0.35 1.16 (6.48) N/A N/A
Net earnings (loss).. 0.35 1.19 (6.10) N/A N/A
Return on average as-
sets................... 0.28% 0.46% (1.20)% (0.45)% (0.61)%
Return on average equi-
ty..................... 4.43 8.25 (27.11) (11.86) (15.83)
Average equity to aver-
age assets............. 6.23 5.54 4.43 3.81 3.88
Efficiency ratio (1).... 61.75 63.00 78.53 67.48 50.33
Number of full service
customer facilities.... 150 148 217 215 214
--------
(1) Defined as total general and administrative expenses divided by the sum of
net interest income before provision for loan losses plus fee income.
44
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SUMMARY OF FINANCIAL CONDITION
(IN THOUSANDS)
JUNE 30
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
ASSETS
Cash and amounts due
from banks............. $ 153,608 $ 139,697 $ 164,576 $ 217,689 $ 297,681
Federal funds sold and
securities purchased
under resale
agreements............. 433,000 296,000 315,961 842,767 152,370
Other debt securities... 18,877 42,326 166,040 523,725 196,696
Loans receivable, net... 10,727,909 9,899,297 9,595,780 10,850,039 12,741,028
Mortgage-backed
securities, net........ 2,240,790 4,723,457 5,363,779 4,044,744 2,604,700
Real estate held for
sale or investment..... 12,072 13,303 16,995 48,040 133,509
Real estate acquired in
settlement of loans.... 78,249 105,730 146,835 194,187 201,819
Investment in capital
stock of Federal Home
Loan Bank, at cost..... 192,842 185,799 139,678 126,390 138,540
Goodwill and other in-
tangible assets........ 59,216 63,538 47,781 385,754 401,782
Assets held for Florida
disposition, net....... -- -- 257,363 -- --
Other assets............ 540,001 575,099 588,243 675,498 1,031,495
----------- ----------- ----------- ----------- -----------
$14,456,564 $16,044,246 $16,803,031 $17,908,833 $17,899,620
=========== =========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits................ $ 8,723,976 $ 8,734,880 $10,919,806 $11,615,529 $13,720,874
Securities sold under
agreements to repur-
chase.................. 758,050 2,695,176 2,306,274 3,064,995 579,069
Borrowings from the
FHLB................... 3,838,000 3,495,000 2,443,428 2,192,272 2,228,295
Other borrowings........ 10,599 28,883 96,890 141,971 382,671
Other liabilities....... 168,488 148,460 158,419 233,779 285,196
Stockholders' equity.... 957,451 941,847 878,214 660,287 703,515
----------- ----------- ----------- ----------- -----------
$14,456,564 $16,044,246 $16,803,031 $17,908,833 $17,899,620
=========== =========== =========== =========== ===========
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
EARNINGS PERFORMANCE
The Bank recorded net earnings of $42.1 million in fiscal 1996, compared to
net earnings of $75.1 million in fiscal 1995 and a net loss of $208.6 million
in fiscal 1994. The primary and fully diluted earnings per share amounts for
fiscal 1996 were $0.36 and $0.35, respectively, compared to $1.32 and $1.19,
respectively, for fiscal 1995, and a primary and fully diluted loss per share
of $6.10 for fiscal 1994.
Excluding premium adjustments on the exchange of certain of its
Noncumulative Preferred Stock, Series E (the "Series E Preferred Stock") to
common stock and the other non-recurring items noted below, earnings would
have been $63.5 million, or $0.97 per fully diluted share, for the fiscal year
ended June 30, 1996. On the same basis, earnings in fiscal 1995 would have
been $41.3 million, or $0.57 per fully diluted share, compared to a net loss
of $96.6 million, or $3.03 per fully diluted share, in fiscal 1994.
Net earnings for fiscal 1996 include an after-tax loss of $19.7 million on
the sale of $1.7 billion of CMOs. See "Sale of CMO Investment Portfolio" below
for additional information. Also included in results of operations for the
current period is an after-tax loss of $1.7 million on the sale of the Bank's
former headquarters facility.
During fiscal 1996, the Bank entered into separately negotiated agreements
with certain holders of its Series E Preferred Stock providing, in the
aggregate, for exchanges of 2.2 million shares of the Series E Preferred Stock
for 5.9 million shares of Bank common stock. The exchanges were made at
premiums above the stated conversion rate of 2.404 shares of Bank common stock
for each share of the Series E Preferred Stock. In accordance with applicable
accounting guidance, the excess of the fair value of Glendale Federal common
stock transferred by the Bank to the holders of the Series E Preferred Stock
over the fair value of Glendale Federal common stock issuable pursuant to the
original conversion terms, has been subtracted from net earnings to arrive at
the earnings available to common shareholders in the calculation of earnings
per share. The Bank has made additional exchanges of Glendale Federal common
stock for Series E Preferred Stock since June 30, 1996 and may enter into
further exchange agreements in the future.
Included in net earnings for fiscal 1995 is a gain of $29.7 million (net of
income tax expense of $21.0 million) resulting from the sale of University
Savings, a gain of $2.3 million (net of income tax expense of $20.7 million)
resulting from the sale of the Bank's Florida franchise and an extraordinary
net gain of $1.8 million resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the FHLB.
Included in the net loss for fiscal 1994 was a write-off of goodwill and
other assets associated with the sale of the Bank's Florida franchise totaling
$136.2 million, an extraordinary net gain of $14.1 million resulting from the
exchange of $49.1 million of GLENFED's convertible subordinated debentures for
common stock of the Bank in connection with the Recapitalization, and tax
benefits of $10.2 million.
The improvement in earnings, exclusive of the non-recurring items noted
above, in fiscal 1996, compared to fiscal 1995, reflects higher net interest
income before provision for loan losses, lower credit-related costs and an
increase in other fees and service charges, partially offset by reduced loan
46
servicing income and an increase in general and administrative expenses. The
change in earnings in fiscal 1995 compared to the loss recorded in fiscal
1994, exclusive of the non-recurring items noted above, was primarily due to a
lower provision for loan losses, an increase in fee income and a reduction in
both general and administrative expenses and goodwill amortization. See
"Results of Operations" for a further discussion of factors affecting the
Bank's earnings performance.
The Bank's interest rate spread was 2.41% at June 30, 1996, as compared with
1.83% and 2.13% at June 30, 1995 and 1994, respectively. The rise in overall
interest rates during calendar 1994 significantly increased the cost of retail
deposits and borrowings, adversely impacting the Bank's cost of funds and its
interest rate spread. The funding of the sale of the Bank's Florida operations
in December 1994, resulted in a significant increase in the amount of short-
term borrowings, which had a weighted average interest rate higher than the
weighted average interest rate of the deposits sold. As a result, the Bank's
interest rate spread was 1.50% at December 31, 1994. The Bank's interest rate
spread improved in the second half of fiscal 1995 as higher costing short-term
borrowings were replaced with cash proceeds and lower costing deposits
obtained in the Union Federal and Independence One acquisitions described in
Note 4 of the Notes to Consolidated Financial Statements, which resulted in a
decrease in the Bank's cost of funds. The Bank's interest rate spread
continued to improve in fiscal 1996 due to further declines in the Bank's cost
of funds and an increase in the yield on interest-earning assets. The increase
in the earning-asset yield was primarily due to increases in rates borne by
adjustable-rate loans and mortgage-backed securities, the sale of the Bank's
lower yielding fixed-rate CMO portfolio and the partial reinvestment of the
proceeds from that sale into higher yielding adjustable-rate loans. The
decrease in the cost of funds reflects the reduced level of higher-cost
borrowings resulting from the repayment of such borrowings with a portion of
the proceeds of the CMO sales, a decrease in overall interest rates and a
decline in deposit costs.
See "Results of Operations--Net Interest Income" for additional discussion
of the Bank's interest rate spread and the impact possible future interest
rate changes could have on the Bank's net interest income.
The Bank continues to experience growth in its new business lines, which
were introduced early in fiscal 1996. During the year, the number of checking
accounts increased by 52,000, and the dollar balances of checking accounts
increased by 18%. As anticipated, asset generation from the Bank's new
business lines has been modest during fiscal 1996, as compared to the growth
in transaction-based deposit accounts. This was due to the fact that the new
business lending programs were in their initial implementation phases in
fiscal 1996 and to competition from other lenders in these business lines. See
the loan origination table below under "Balance Sheet Analysis--Loans
Receivable" for additional information.
Implementation of the Bank's strategic decision to transform itself from a
savings institution to a community banking organization has resulted in an
increase in general and administrative expenses. These expenses are expected
to stabilize at the levels experienced during the fourth quarter of fiscal
1996, but may increase in future periods as the Bank expands its business
lines and continues to maintain a higher level of marketing activity. The
targeted benefits sought from this transformation--increased net interest
margin resulting from investment in business and consumer loans with higher
yields than single-family mortgage loans, greater amounts of lower costing
demand deposit accounts and increased fee income--are expected to lag the
increase in expenditures.
The ability of the Bank to achieve its planned transformation into a
community banking organization and realize its intended benefits, is subject
to an increasingly intense level of competition from California's existing
commercial banks, particularly the state's two largest banks. In addition, the
level of interest-earning assets has decreased, primarily as a result of the
sale of the CMO portfolio. This will adversely impact the level of net
interest income until such time as the Bank can reinvest the proceeds through
the origination or purchase of interest-earning assets. The Bank's ability to
sustain the earnings growth experienced over the past seven quarters and its
ability to successfully complete its transformation to a commercial bank will
be impacted by the above factors.
47
SALE OF CMO INVESTMENT PORTFOLIO
During fiscal 1996, the Bank sold $1.7 billion of its fixed-rate CMO
investments (the "CMO Sale"). The Bank's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Bank's mortgage-backed
securities portfolio in which $2.8 billion of mortgage-backed securities were
reclassified from "held to maturity" to "available for sale" during the
quarter ended December 31, 1995, in compliance with the implementation
guidance for SFAS 115. The reclassification included the Bank's $1.8 billion
fixed-rate CMO portfolio and $1.0 billion of its adjustable-rate pass-through
securities portfolio.
The Bank recorded a pre-tax loss of $28.2 million on the CMO Sale during
fiscal 1996. As of June 30, 1996, the market value of CMOs and pass-through
securities classified as available for sale totaled $58 million and $712
million, respectively. In accordance with SFAS 115, the Bank recorded an
unrealized loss in its stockholders' equity at June 30, 1996 of $11.4 million,
net of tax, on the available for sale portfolio. The Bank has no immediate
plans to sell the remaining CMOs or the pass-through portfolio. Further
adjustments to the unrealized loss amount will be made in future periods to
reflect changes in the market value of the available for sale portfolio. The
realignment of the Bank's mortgage-backed securities portfolio and the Bank's
use of proceeds from the CMO Sale to reduce wholesale borrowings improved the
Bank's funding mix of deposits and borrowings, increased its interest rate
spread, reduced its interest-rate risk exposure and made additional capital
available for merger and acquisition or other reinvestment strategies.
CAPITAL
At June 30, 1996, the Bank's tangible book value was $16.11 per common
share, or $14.18 per common share on a fully diluted basis. At June 30, 1995,
the Bank's tangible book value was $16.63 per common share, or $14.03 per
common share on a fully diluted basis. The Bank's core capital, risk-based
capital and Tier 1 risk-based capital ratios at June 30, 1996 were 6.29%,
11.93% and 10.79%, respectively, placing the Bank in the "well-capitalized"
category as defined by federal regulations, which require 5% core, 10% risk-
based capital and 6% Tier 1 risk-based capital to qualify for that
designation. At June 30, 1995, the Bank's core capital, and risk-based capital
and Tier 1 risk-based capital ratios were 5.44%, 11.15% and 10.02%,
respectively.
The Bank's capital ratios could decrease in future periods due to, among
other things, deposit insurance reform, acquisition activity and balance sheet
growth.
BALANCE SHEET ANALYSIS
Consolidated assets of the Bank totaled $14.5 billion at June 30, 1996,
compared to $16.0 billion at June 30, 1995. Asset size and composition have
been determined principally by seeking to balance regulatory capital
requirements, liquidity, yield and risk. Loans and mortgage-backed securities
decreased by a combined $1.7 billion in fiscal 1996, primarily due to the CMO
Sale, principal payments on loans and mortgage-backed securities totaling $2.3
billion and the sale in August 1995, of $176 million of non-performing and
classified real estate loans and REO (the "August 1995 Loan Sale"). These
decreases were partially offset by loan purchases and originations during the
fiscal year totaling $2.1 billion and $867 million, respectively.
Proceeds from both the August 1995 Loan Sale and the CMO Sale, together with
principal payments on loans and mortgage-backed securities, were used in part
to reduce total borrowings by $1.6 billion during fiscal 1996. It is the
Bank's intention to increase consolidated assets by approximately $1 billion
to $2 billion during fiscal 1997 primarily through the purchase of single-
family residential loans in the secondary market. However, such growth is
dependent upon a number of factors, such as the availability of loans and the
interest rate and economic environment. If such conditions are not favorable,
the Bank may be unable to purchase or originate sufficient assets to meet this
growth objective, and may experience further decreases in total assets due to
loan repayments and prepayments.
48
CASH AND SHORT-TERM INVESTMENT SECURITIES
Cash and short-term investment securities increased from their June 30, 1995
level by $150.9 million, to $586.6 million at June 30, 1996, principally due
to the CMO Sale during fiscal 1996 as well as principal payments on loans.
MORTGAGE-BACKED AND OTHER DEBT SECURITIES
Mortgage-backed securities held to maturity decreased by $3.4 billion in
fiscal 1996 to $1.4 billion at June 30, 1996, primarily due to the previously
discussed reclassification of $2.8 billion of mortgage-backed securities from
"held to maturity" to "available for sale" as well as principal payments
received on mortgage-backed securities of $496.0 million.
Mortgage-backed securities available for sale increased by $882.5 million in
fiscal 1996 to $884.6 million at June 30, 1996, primarily due to the $2.8
billion reclassification noted above, partially offset by the CMO Sale and
principal payments received on mortgage-backed securities of $356.0 million.
Other debt securities held to maturity decreased by $23.4 million in fiscal
1996 to $18.9 million at June 30, 1996, primarily due to maturities of $29.1
million, partially offset by purchases of $9.8 million.
LOANS RECEIVABLE
Loans receivable held for investment increased by $953.5 million in fiscal
1996 to $10.7 billion at June 30, 1996. The increase was primarily due to
loans originated for investment, net of refinances, of $449.6 million and
loans purchased for investment totaling $2.1 billion, partially offset by
principal payments of $1.4 billion and loans transferred to REO of $186.2
million. The loans purchased include $2.0 billion of single-family
residential, adjustable-rate mortgage loans purchased in the secondary market
to replace asset sales and run-off, resulting primarily from the CMO Sale and
principal payments.
Loans receivable held for sale decreased by $124.9 million in fiscal 1996 to
$33.3 million at June 30, 1996, primarily due to completion of the August 1995
Loan Sale, securitization of loans for mortgage-backed securities in the
amount of $145.8 million, and other loan sales totaling $116.3 million.
Partially offsetting these decreases was $264.2 million in fixed-rate loans
originated for resale in the secondary mortgage market and transfers of loans
from the held for investment category totaling $19.3 million.
As of June 30, 1996, commitments of the Bank to purchase and originate loans
totaled $307.4 million and $43.9 million, respectively. At that date,
commitments of the Bank to sell loans totaled $380,000 and commitments of the
Bank to sell mortgage-backed securities, comprised of fixed-rate loans
originated and securitized by the Bank, totaled $17.5 million.
49
Loan originations by property type (including the refinanced portion of the
Bank's loans) and loans purchased under the Bank's correspondent lending
program and in the secondary market are summarized as follows (dollars in
millions):
YEARS ENDED JUNE 30
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
Originations:
Permanent Loans:
Single-family 1-4 units. $ 778 26.4% $ 691 29.5% $1,847 70.9%
Multi-family 5-36 units. 26 0.9 65 2.8 83 3.2
Multi-family 37 or more
units.................. 6 0.2 24 1.1 38 1.5
Non-residential......... 13 0.4 42 1.8 70 2.7
Land.................... 1 -- 7 0.3 18 0.7
Construction Loans:
Single-family 1-4 units. 16 0.6 12 0.5 36 1.4
Multi-family 5-36 units. 5 0.2 7 0.3 15 0.6
Multi-family 37 or more
units.................. -- -- -- -- 2 --
Non-residential......... -- -- -- -- 10 0.4
Commercial loans......... 1 -- -- -- -- --
Consumer loans........... 21 0.7 19 0.8 19 0.7
------ ----- ------ ----- ------ -----
Total Originations....... 867 29.4 867 37.1 2,138 82.1
Purchases:
Secondary market (1-4
units)................. 2,024 68.8 1,278 54.6 454 17.4
Correspondent lending
(1-4 units)............ 53 1.8 195 8.3 12 0.5
------ ----- ------ ----- ------ -----
$2,944 100.0% $2,340 100.0% $2,604 100.0%
====== ===== ====== ===== ====== =====
Loan originations for fiscal 1996 remained unchanged compared to fiscal
1995, which included originations for the first six months of that year
related to the Bank's former Washington and Florida operations. Compensating
for the loss of originations from the Bank's former Washington and Florida
operations in fiscal 1996 was an increase in fixed-rate lending attributable
to an overall decline in interest rates, partially offset by a decrease in
loans to facilitate the sale of major REO properties.
Loan originations for fiscal 1995 declined as compared to fiscal 1994 due
primarily to the sales of University Savings and the Bank's Florida franchise,
to the significant increase in mortgage interest rates, which resulted in a
sharp decline in refinancing activity, to a decline in home purchase activity
in California and to the decision by the Bank not to compete for the deeply
discounted, negatively amortizing COFI-based loan made by many of the Bank's
competitors. The COFI-based loan was the dominant loan product in the
California markets during most of 1994 and 1995. The Bank's decision not to
make these loans was based on management's belief that origination of these
loans would adversely affect net interest income for an extended period.
Loans originated by University Savings and the Florida franchise totaled
$132 million and $18 million in fiscal 1995, respectively, and $329 million
and $299 million in fiscal 1994, respectively.
Multi-family residential and non-residential real estate loans have
primarily been made to finance the disposition of REO and real estate held for
sale or investment ("REI") properties or to refinance maturing loans. The
single-family residential and multi-family residential construction loans
originated in the current fiscal year are part of the construction lending
program that was reintroduced in the first quarter of fiscal 1996. This
program has been terminated for fiscal 1997.
The Bank has purchased whole loans in the secondary market primarily to
supplement its retail loan originations and to replace asset sales and run-
off. During the fourth quarter of fiscal 1994, the
50
Bank purchased $454 million of fixed-rate, single-family residential whole
loans in the secondary market. In fiscal 1995, the Bank purchased fixed-rate
whole loans totaling $904 million and adjustable-rate whole loans totaling
$374 million. In fiscal 1996, the Bank purchased $2.0 billion of single-family
residential, adjustable-rate mortgage loans, primarily to replace $1.7 billion
of fixed-rate CMOs sold by the Bank and to replace loan run-off resulting from
principal payments that exceeded the rate of the Bank's loan originations.
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
The following table summarizes the Bank's NPAs and restructured loans at the
dates indicated (dollars in thousands):
JUNE 30
-------------------------------
1996 1995
--------------- ---------------
% OF % OF
DOLLAR TOTAL DOLLAR TOTAL
AMOUNT ASSETS AMOUNT ASSETS
-------- ------ -------- ------
Non-accrual loans............................... $192,445 1.33% $244,242 1.52%
REO and other assets............................ 82,204 0.57 111,280 0.70
-------- ---- -------- ----
Total NPAs...................................... $274,649 1.90% $355,522 2.22%
======== ==== ======== ====
Restructured loans.............................. $ 9,194 0.06% $ 38,542 0.24%
======== ==== ======== ====
51
The following table summarizes NPA and restructured loan activity in fiscal
1996 (in thousands):
JUNE 30, PAYOFFS/ JUNE 30,
1995 FORE- WRITE- SALES/ 1996
BALANCE ADDITIONS CLOSURES DOWNS OTHER BALANCE
-------- --------- --------- -------- --------- --------
Non-Accrual Loans:
Single-family 1-4
units................. $111,881 $255,464 $(122,565) $ -- $(124,802) $119,978
Multi-family 5-36
units................. 50,487 76,367 (34,697) (2,963) (56,071) 33,123
Multi-family 37 or
more units............ 21,255 23,060 (12,031) (2,055) (15,768) 14,461
Non-residential........ 59,430 37,406 (14,822) (6,571) (51,583) 23,860
Commercial............. 283 -- -- -- (261) 22
Consumer............... 906 958 -- -- (863) 1,001
-------- -------- --------- -------- --------- --------
Total................ $244,242 $393,255 $(184,115) $(11,589) $(249,348) $192,445
======== ======== ========= ======== ========= ========
REO and Other Assets:
Single-family 1-4
units................. $ 37,316 $ 16,603 $ 84,585 $ (7,242) $ (91,569) $ 39,693
Multi-family 5-36
units................. 18,131 1,100 30,063 (2,066) (35,560) 11,668
Multi-family 37 or
more units............ 5,716 -- 10,169 (641) (10,417) 4,827
Non-residential........ 50,024 2,190 13,969 (2,334) (37,956) 25,893
Consumer............... 93 -- -- -- 30 123
-------- -------- --------- -------- --------- --------
Total................ $111,280 $ 19,893 $ 138,786 $(12,283) $(175,472) $ 82,204
======== ======== ========= ======== ========= ========
Total NPAs:
Single-family 1-4
units................. $149,197 $272,067 $ (37,980) $ (7,242) $(216,371) $159,671
Multi-family 5-36
units................. 68,618 77,467 (4,634) (5,029) (91,631) 44,791
Multi-family 37 or
more units............ 26,971 23,060 (1,862) (2,696) (26,185) 19,288
Non-residential........ 109,454 39,596 (853) (8,905) (89,539) 49,753
Commercial............. 283 -- -- -- (261) 22
Consumer............... 999 958 -- -- (833) 1,124
-------- -------- --------- -------- --------- --------
Total................ $355,522 $413,148 $ (45,329) $(23,872) $(424,820) $274,649
======== ======== ========= ======== ========= ========
Restructured Loans:
Single-family 1-4
units................. $ 4,601 $ 2,575 $ -- $ -- $ (3,954) $ 3,222
Multi-family 5-36
units................. 10,717 320 -- -- (8,840) 2,197
Multi-family 37 or
more units............ 7,462 -- -- -- (5,211) 2,251
Non-residential........ 15,762 1,535 -- -- (15,773) 1,524
-------- -------- --------- -------- --------- --------
Total................ $ 38,542 $ 4,430 $ -- $ -- $ (33,778) $ 9,194
======== ======== ========= ======== ========= ========
The $80.9 million decrease in NPAs in fiscal 1996 reflects the August 1995
Loan Sale which resulted in a $34 million reduction in NPAs and the continuing
sales of REO through the Bank's regular problem asset workout process. REO
reductions due to sales and write-downs exceeded REO additions and
foreclosures during the current fiscal year, resulting in a net reduction of
$29.1 million in REO and other assets. The sale of one property in July 1995
accounted for $10.7 million of this net reduction in REO.
For the fiscal year ended June 30, 1996, 66% of NPA additions were loans and
REO that were secured by single-family residences, compared to 34% last year.
NPAs in the multi-family residential and non-residential portfolios declined
by $31.5 million and $59.7 million, to $64.1 million and $49.8 million,
respectively, in fiscal 1996. These declines were partially offset by an
increase in NPAs in the single-family residential portfolio during the same
period, from $149.2 million, or 42% of total NPAs, to $159.7 million, or 58%
of total NPAs. During the current fiscal year, NPAs in the multi-family
residential and non-residential portfolios, as a percentage of total NPAs,
declined from 27% and 31%, respectively, at June 30, 1995, to 23% and 18%,
respectively, at June 30, 1996.
The $29.3 million decrease in restructured loans in fiscal 1996 was
primarily due to the August 1995 Loan Sale, which resulted in a $15 million
reduction in restructured loans, and to $20.7 million of restructured loans
being transferred to performing status, partially offset by $5.6 million of
new restructured loans transferred from non-accrual status.
52
Total delinquent loans decreased by $67.9 million in fiscal 1996 to $281.3
million at June 30, 1996. This decrease was attributable to the multi-family
residential and non-residential portfolios which declined by $24.8 million and
$41.9 million, to $59.3 million and $23.8 million, respectively, during the
year, primarily due to the August 1995 Loan Sale and an improving California
economy. Delinquent loans in the single-family portfolio were $195.4 million
at June 30, 1996 and remained unchanged compared to the balance at June 30,
1995. Single-family delinquent loans increased as a percentage of total
delinquent loans from 56% at June 30, 1995 to 69% at June 30, 1996. See Item
1. "Business--Loans Receivable--Delinquencies" for a five-year trend of
delinquent loans.
If the recent economic improvements in the Bank's principal market areas do
not continue or if California experiences an economic downturn, resulting in a
significant decline in property values or a significant increase in
unemployment, the level of NPAs and delinquent loans could increase.
ALLOWANCE FOR LOAN LOSSES
Glendale Federal uses an internal asset review system to identify problem
assets. The Bank's asset classification process, in accordance with applicable
regulations, provides for the classification of assets as satisfactory,
special mention, substandard, doubtful or loss. The Bank's determination of
the level and the allocation of the allowance for loan losses and,
correspondingly, the provisions for such losses, is based on various judgments
and assumptions regarding a number of factors, including, but not limited to,
asset classifications, current and forecasted economic and market conditions,
loan portfolio composition, historical loan loss experience and industry
experience. The allowance for loan losses is adjusted quarterly to reflect
management's current assessment of the effect of these factors on estimated
inherent loan losses. While management uses all information available to it to
estimate losses on loans, future changes to the allowance may become necessary
based on changes in economic and market conditions. In addition, various
regulatory agencies, as part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
make changes to the allowance based on their judgments and the information
available to them at the time of their examination.
The following table sets forth the allocation of Glendale Federal's
allowance for loan losses at June 30, 1996 and 1995 by property type (dollars
in thousands):
JUNE 30, 1996 JUNE 30, 1995
------------------------------- -------------------------------
PERCENT PERCENT
GROSS OF GROSS OF
LOAN ALLOWANCE LOAN ALLOWANCE
PORTFOLIO TO LOAN PORTFOLIO TO LOAN
ALLOWANCE BALANCE BALANCE ALLOWANCE BALANCE BALANCE
--------- ----------- --------- --------- ----------- ---------
Single-family 1-4 units. $ 56,833 $ 7,580,312 0.75% $ 44,483 $ 6,325,170 0.70%
Multi-family:
5-36 units............ 48,628 1,564,542 3.11 41,736 1,673,656 2.49
37 or more units...... 26,062 400,415 6.51 31,569 478,803 6.59
Non-residential......... 47,260 1,357,225 3.48 83,086 1,630,590 5.10
Commercial.............. 4,699 10,391 45.22 4,176 22,844 18.28
Consumer................ 3,274 73,158 4.48 4,092 80,603 5.08
-------- ----------- -------- -----------
$186,756 $10,986,043 1.70% $209,142 $10,211,666 2.05%
======== =========== ======== ===========
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
Specific valuation allowances of $26.5 million and $19.7 million have been
established for impaired loans, which totaled $158.8 million and $262.7
million at June 30, 1996 and June 30, 1995, respectively, and are included in
the allowance for loan losses. The decrease in impaired loans during
53
fiscal 1996 is primarily due to the August 1995 Loan Sale. Specific valuation
allowances are provided when management determines that, for a specific loan,
default appears probable and the amount of the expected loss is measurable.
The balances of impaired loans with related specific valuation allowances at
June 30, 1996 and 1995 totaled $106.5 million and $91.8 million, respectively.
Those impaired loans without related specific valuation allowances at June 30,
1996 and 1995 totaled $52.3 million and $170.9 million, respectively.
The allowance for loan losses declined by $22.4 million, to $186.8 million,
in fiscal 1996. The decrease in the allowance during this period reflects
improving NPA and delinquency trends in the multi-family and non-residential
loan portfolios, a reduced number of high-risk, large, and multiple loan
borrower relationships, an overall improvement in the multi-family residential
and non-residential loan portfolios and a reduced level of charge-offs.
Although single-family NPAs and delinquent loans have increased as a
percentage of total NPAs and total delinquent loans, respectively, during
fiscal 1996, such loans have a lower historical loss experience than those
secured by multi-family and non-residential properties, and generally result
in lower charge-offs. The Bank would, therefore, require proportionally lower
levels of allowance for loan losses. The ratios of allowance to non-accrual
loans and total gross loans at June 30, 1996 were 97.0% and 1.7%,
respectively, compared to 85.6% and 2.0%, respectively, at June 30, 1995.
A summary of activity in the allowance for loan losses by property type
during fiscal 1996 is as follows (in thousands):
BALANCE BALANCE
JUNE 30, CHARGE- JUNE 30,
1995 ADDITIONS OFFS RECOVERIES 1996
-------- --------- -------- ---------- --------
Single-family 1-4 units........ $ 44,483 $ 45,818 $(33,617) $ 149 $ 56,833
Multi-family:
5-36 units................... 41,736 19,779 (13,175) 288 48,628
37 or more units............. 31,569 2,185 (7,923) 231 26,062
Non-residential................ 83,086 (24,265) (14,490) 2,929 47,260
Commercial..................... 4,176 (4,093) (974) 5,590 4,699
Consumer....................... 4,092 926 (2,842) 1,098 3,274
-------- -------- -------- ------- --------
$209,142 $ 40,350 $(73,021) $10,285 $186,756
======== ======== ======== ======= ========
A summary of activity in the allowance for loan losses by property type
during fiscal 1995 is as follows (in thousands):
BALANCE BALANCE
JUNE 30, CHARGE- UNION UNIVERSITY JUNE 30,
1994 ADDITIONS OFFS RECOVERIES FEDERAL SAVINGS 1995
-------- --------- --------- ---------- ------- ---------- --------
Single-family 1-4 units. $ 44,667 $36,530 $ (37,194) $ 334 $ 2,535 $(2,389) $ 44,483
Multi-family:
5-36 units............ 65,878 31,454 (54,314) -- -- (1,282) 41,736
37 or more units...... 61,867 3,235 (33,932) 800 -- (401) 31,569
Non-residential......... 137,775 (3,347) (73,602) 9,572 14,815 (2,127) 83,086
Commercial.............. 6,052 (4,284) (2,340) 4,748 -- -- 4,176
Consumer................ 4,475 2,562 (4,595) 1,840 -- (190) 4,092
-------- ------- --------- ------- ------- ------- --------
$320,714 $66,150 $(205,977) $17,294 $17,350 $(6,389) $209,142
======== ======= ========= ======= ======= ======= ========
Additions to the allowance for loan losses declined by $25.8 million, to
$40.4 million, in fiscal 1996 compared to last year, reflecting management's
assessment that there is a decreased risk of loss inherent in the loan
portfolio, as evidenced by lower charge-offs and decreases in NPAs and
delinquent multi-family residential and non-residential loans. These factors
were partially offset,
54
however, by increases in single-family NPAs and delinquent loans. The negative
balances shown in the "Additions" column in the above tables represent the
reallocation of the allowance among the different portfolios and reflects
management's current assessment of the shifting of the relative risks of loss
inherent in the different portfolios.
Charge-offs declined by $133.0 million, to $73.0 million, in fiscal 1996
compared to last year. Included in total charge-offs for fiscal 1995 are
charge-offs of $34.0 million and $18.8 million on loans secured by multi-
family residential properties and non-residential properties, respectively,
related to the $166 million loan sale completed in October 1994 and charge-
offs of $17.1 million and $20.3 million on such loans, respectively, related
to the August 1995 Loan Sale.
Recoveries in fiscal 1995 include the net recovery of $9.4 million realized
on the foreclosure and sale of a hotel located in the San Francisco airport
area which was, at the time of sale, the Bank's largest non-performing asset.
Included in the allowance for loan losses activity for fiscal 1995 is the
reduction of University Savings' allowance for loan losses, which totaled $6.4
million as of the January 6, 1995 effective date of the sale of University
Savings, and the establishment of an allowance for loan losses related to the
loans purchased in the Union Federal transaction.
If the recent economic improvements in the Bank's principal market areas do
not continue, the Bank's real estate portfolios could be adversely impacted
resulting in increases in NPAs and higher charge-offs. Such increases could
require a larger allowance for loan losses.
LIABILITY COMPOSITION
The Bank continues to emphasize the attraction of retail deposits,
especially low-cost demand deposit accounts. The Bank's ratio of deposits to
borrowings was 65%/35% at June 30, 1996 compared to a ratio of 58%/42% at June
30, 1995. The improvement in the ratio during fiscal 1996 reflects the paydown
of certain of the Bank's borrowings with proceeds from both the August 1995
Loan Sale and the CMO Sale and principal payments on loans and mortgage-backed
securities. The Bank expects to continue to replace borrowings with retail
deposits over time through a combination of retail sales efforts and
acquisitions of deposits.
DEPOSITS
The Bank uses retail deposits as its core source of funds for lending and
asset purchase purposes and as a customer base for providing additional
financial services. In fiscal 1996, the Bank's total deposits decreased by
$11.0 million, to $8.7 billion at June 30, 1996.
Glendale Federal's deposit composition at June 30, 1996 and 1995 was as
follows (dollars in millions):
JUNE 30
---------------------------
1996 1995
------------- -------------
% OF % OF
BALANCE TOTAL BALANCE TOTAL
------- ----- ------- -----
Checking/NOW accounts... $ 779 9% $ 662 8%
Passbook accounts....... 493 5 552 6
Money market
checking/savings....... 1,719 20 1,272 15
------ --- ------ ---
Total daily access...... 2,991 34 2,486 29
Short-term certificates
(1 year or less)....... 3,047 35 2,886 33
Long-term certificates
(over 1 year).......... 2,438 28 2,826 32
Branch and business de-
velopment jumbo certif-
icates................. 190 2 409 5
------ --- ------ ---
Total retail deposits... 8,666 99 8,607 99
Brokered certificates of
deposit................ 58 1 128 1
------ --- ------ ---
Total................... $8,724 100% $8,735 100%
====== === ====== ===
55
The $505 million increase in daily access deposits during fiscal 1996 was
primarily due to net inflows of $447 million and $117 million in money market
accounts and checking accounts, respectively, partially offset by net outflows
of $59 million in savings accounts. The overall increase in daily access
deposits and short-term certificate accounts during fiscal 1996 reflects the
Bank's aggressive branch marketing efforts and advertising campaign instituted
throughout California, as well as the maturation of long-term certificates of
deposit and the reinvestment of these funds in short-term certificate accounts
due to depositors' uncertainty as to the future direction of interest rates.
BORROWINGS
Total borrowings decreased by $1.6 billion during fiscal 1996, to $4.6
billion at June 30, 1996. Securities sold under agreements to repurchase
decreased by $1.9 billion, to $758 million, and FHLB borrowings increased by
$343 million during fiscal 1996, to $3.8 billion at June 30, 1996, as loan and
CMO Sale proceeds, and, to a lesser extent, principal payments on loans and
mortgage-backed securities were used to pay down such borrowings. During
fiscal 1996, the Bank extended $2.0 billion of FHLB borrowings into the two-
to five-year maturity range. Total borrowings as of June 30, 1996 included
$2.1 billion of borrowings due within one year. See "Liquidity and Asset and
Liability Management--Asset and Liability Management" below for additional
discussion of the lengthening of the Bank's borrowings structure.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $15.6 million during fiscal 1996, to
$957.5 million at June 30, 1996, primarily due to net earnings of $42.1
million, partially offset by the net unrealized loss of $11.4 million recorded
on the portfolio of mortgage-backed securities available for sale and
dividends declared of $16.2 million on the Bank's Series E Preferred Stock.
During fiscal 1996, the Bank issued 5.9 million shares of common stock in
exchange for 2.2 million shares of the Bank's Series E Preferred Stock. See
Note 18 of the Notes to Consolidated Financial Statements for additional
discussion regarding these transactions.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
LIQUIDITY
The Bank's primary sources of funds consist of retail deposits, borrowings
from the FHLB, principal repayments on loans and mortgage-backed securities
and sales of securities under agreements to repurchase. The Bank also obtains
funds from its operations. Each of the Bank's sources of liquidity is subject
to various uncertainties beyond the control of the Bank. Scheduled loan
payments are a relatively stable source of funds, while loan and mortgage-
backed security prepayments and deposit flows vary widely in reaction to
market conditions, primarily prevailing interest rates. As a measure of
protection against these uncertainties, the Bank generally has back-up sources
of funds available to it. At June 30, 1996, these available sources totaled
approximately $3.0 billion and consisted primarily of the repurchase agreement
markets.
During fiscal 1996, the Bank experienced a net cash inflow from investing
activities of $1.6 billion, consisting primarily of proceeds received from the
CMO Sale, principal payments on loans and mortgage-backed securities and
proceeds from the August 1995 Loan Sale, partially offset by loans purchased
and originated for investment. In addition, the Bank experienced positive cash
flows from operating activities during the period of $171.1 million. The
Bank's financing activities during the period resulted in a net cash outflow
of $1.6 billion, consisting principally of a net decrease in borrowings.
56
ASSET AND LIABILITY MANAGEMENT
Savings institutions are subject to interest rate risk to the degree that
their interest-bearing liabilities, consisting principally of deposits, FHLB
advances and other borrowings, mature or reprice at different frequencies, or
on different bases, than their interest-earning assets, which consist
predominantly of intermediate or long-term real estate loans and mortgage-
backed securities. Interest rate risk is increased by the difference in
aggregate amounts of interest-earning assets and interest-bearing liabilities.
One of the Bank's primary financial objectives is to manage the interest
rate risk inherent in its business. The one-year GAP represents the estimated
difference between the amounts of interest-earning assets and interest-bearing
liabilities maturing or repricing within one year, based on assumptions as to
the expected repayment of assets and liabilities. The interest rate
sensitivity of the Bank's assets and liabilities could vary substantially if
actual experience differs from the assumptions used. The Maturity and Rate
Sensitivity Analysis table in Item 1. "Business--Asset and Liability
Management" sets forth the projected maturities, based upon contractual
maturities as adjusted for projected prepayments and "repricing mechanisms"
(provisions for changes in the interest rates of assets and liabilities), of
the Bank's major asset and liability categories as of June 30, 1996.
The following table is a summary of Glendale Federal's one-year GAP at the
dates indicated (dollars in millions):
JUNE 30
----------------
1996 1995
------- -------
Interest-earning assets maturing or repricing within one
year........................................................ $11,004 $10,658
Interest-bearing liabilities maturing or repricing within one
year........................................................ 7,956 10,761
------- -------
One-year maturity GAP........................................ 3,048 (103)
Impact of interest rate swaps................................ -- 200
------- -------
Adjusted one-year GAP........................................ $ 3,048 $ 97
======= =======
Adjusted GAP as a percent of total assets.................... 21.1% 0.6%
======= =======
The increase in the one-year GAP in fiscal 1996 was primarily due to a $2.8
billion decrease in liabilities maturing within one year, resulting from the
extension of $2.0 billion of FHLB borrowings into the two to five year
maturity range, the extension of $500 million of maturing certificates of
deposit into maturities greater than one year and the repayment of short-term
borrowings. These factors were partially offset by $850 million of two-year
fixed-rate FHLB borrowings and approximately $750 million of two-year and
five-year certificates of deposit entering their final year prior to maturity
during the period. The increase in the one-year GAP was also attributable to
an increase in assets maturing or repricing within one year, primarily due to
the purchase of $2.0 billion of adjustable-rate mortgage loans in the
secondary market in fiscal 1996, partially offset by the impact of the CMO
Sale.
The Bank remains subject to possible interest rate spread compression, which
would adversely impact the Bank's net interest income, if interest rates
resume the trend of increases experienced during most of calendar 1994 and
early 1995. The amount of that compression would depend upon the frequency and
severity of such interest rate fluctuations. This adverse impact would be
attributable to the lag in the repricing of the indices to which the
adjustable-rate loans and mortgage-backed securities are tied as well as the
repricing frequencies and periodic interest rate caps on such adjustable-rate
loans and mortgage-backed securities and to an increase in the cost of the
Bank's liabilities which are subject to monthly repricing. Management has
mitigated the effect of such an increase through the extension of liabilities
discussed above. See "Results of Operations--Net Interest Income" for a
discussion of the adverse impact on the Bank's net interest income from the
rise in interest rates during 1994, the Florida franchise sale and the sale of
University Savings.
57
The Bank's Asset/Liability Management Committee ("ALCO") is responsible for
implementing the interest rate risk management policy adopted by the Bank.
Among other things, the Bank's policy statement sets forth the limits
established by the Board of Directors on acceptable changes in net interest
income and net portfolio value resulting from specified changes in interest
rates. ALCO reviews, among other things, economic conditions, the interest
rate outlook, the demand for loans, the availability of deposits and Glendale
Federal's current operating results, liquidity, capital and interest rate risk
exposure. Based on such reviews, ALCO formulates a strategy that is intended
to implement the objectives set forth in Glendale Federal's business plan
without exceeding the net interest income and net portfolio value limits set
forth in the interest rate risk management policy statement.
The following tables present the Bank's total gross loan and mortgage-backed
securities portfolios (before adjustment for the unrealized gain (loss) on
mortgage-backed securities available for sale) by note type and the
distribution of adjustable-rate loans and mortgage-backed securities among the
major underlying indices at the dates indicated (dollars in millions):
JUNE 30, 1996
----------------------------------
MORTGAGE- PERCENT
BACKED OF
LOANS SECURITIES TOTAL TOTAL
------- ---------- ------- -------
Adjustable:
6-month Treasury Bills.................... $ 428 $ 433 $ 861 7%
1-Year Treasury Bills..................... 3,568 982 4,550 00
00xx Xxxxxxxx Cost of Funds............... 3,936 154 4,090 31
Prime..................................... 63 12 75 1
Other..................................... 212 154 366 3
------- ------ ------- ---
8,207 1,735 9,942 76
Fixed for 3-5 Years Converting to Adjust-
able....................................... 782 259 1,041 8
Fixed:
Loans receivable.......................... 1,997 -- 1,997 15
Collateralized mortgage obligations....... -- 58 58 --
Other mortgage-backed securities.......... -- 169 169 1
------- ------ ------- ---
1,997 227 2,224 16
------- ------ ------- ---
Total....................................... $10,986 $2,221 $13,207 100%
======= ====== ======= ===
JUNE 30, 1995
----------------------------------
MORTGAGE- PERCENT
BACKED OF
LOANS SECURITIES TOTAL TOTAL
------- ---------- ------- -------
Adjustable:
6-month Treasury Bills.................... $ 456 $ 518 $ 974 6%
1-Year Treasury Bills..................... 2,212 1,322 3,534 00
00xx Xxxxxxxx Cost of Funds............... 4,373 185 4,558 31
Prime..................................... 74 20 94 1
Other..................................... 198 239 437 3
------- ------ ------- ---
7,313 2,284 9,597 65
Fixed for 3-5 Years Converting to Adjust-
able....................................... 581 279 860 6
Fixed:
Loans receivable.......................... 2,318 -- 2,318 16
Collateralized mortgage obligations....... -- 1,878 1,878 12
Other mortgage-backed securities.......... -- 209 209 1
------- ------ ------- ---
2,318 2,087 4,405 29
------- ------ ------- ---
Total....................................... $10,212 $4,650 $14,862 100%
======= ====== ======= ===
58
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income before provision for loan losses increased by $15.3
million, to $333.1 million, in fiscal 1996, compared to fiscal 1995, primarily
due to an improvement in the yield-cost spread and an increase in the amount
by which average interest-earning assets exceeded average interest-bearing
liabilities, partially offset by a reduced level of interest-earning assets
and the loss of $18.0 million of net interest income recorded by University
Savings in the first six months of fiscal 1995 prior to being sold.
The yield-cost spread increased by 18 basis points, to 2.10%, in fiscal
1996, compared to fiscal 1995. This improvement reflects the sale of $1.7
billion of lower yielding fixed-rate CMOs in the second and third quarters of
fiscal 1996 and the purchase of higher yielding whole loans in the secondary
market, consisting of $1.3 billion of predominantly fixed-rate loans yielding
8.89% that were purchased in fiscal 1995 and $2.0 billion of adjustable-rate
loans that were purchased in fiscal 1996. On the liability side, higher
costing borrowings incurred to fund the sale of the Bank's Florida operations
were replaced in part with lower costing deposits obtained through branch
acquisitions at the end of the fourth quarter of fiscal 1995 and were further
reduced with proceeds from the CMO Sale in fiscal 1996. In addition,
approximately $500 million of higher costing certificates of deposit matured
during the year and were replaced with lower costing daily access accounts.
Yields on loans and mortgage-backed securities increased by 52 basis points,
to 7.45%, in fiscal 1996, compared to fiscal 1995. The changes were primarily
due to the aforementioned sales of lower yielding CMOs during fiscal 1996 and
the purchase of higher yielding loans during fiscal 1996 and 1995. The
declining level of NPAs also had a positive impact on net interest income as
the Bank was able to reinvest the proceeds from liquidation of these assets
into interest-earning assets. The average balance of NPAs in fiscal 1996 and
1995 was $302.3 million and $472.5 million, respectively. The impact of non-
accrual assets on the yield on loans and mortgage-backed securities was a
decrease of 12 basis points in fiscal 1996 and a decrease of 14 basis points
in fiscal 1995.
The yield on the investment portfolio increased by 23 basis points, to
6.78%, in the current year, compared to last year, primarily due to a year-
over-year increase in short-term interest rates.
The Bank's cost of funds increased by 32 basis points, to 5.31%, in fiscal
1996, compared to fiscal 1995. This was primarily due to the level of interest
rates, on average, remaining higher during fiscal 1996 compared to the prior
year, despite the lowering of the federal funds rate as discussed below.
Contributing to the increase was the significant change in the composition,
cost and maturity of interest-bearing liabilities as a result of the sales of
the Bank's Florida and Washington operations. These factors were partially
offset by the acquisition of approximately $1 billion of retail deposits in
the fourth quarter of fiscal 1995 and the paydown of borrowings utilizing
excess liquidity and proceeds from the CMO Sale.
The excess of average interest-earning assets over average interest-bearing
liabilities grew by $188 million, to $497 million, for fiscal 1996, compared
to last year, and was primarily attributable to the sale of the Bank's Florida
operations in December 1994 and the resulting decrease of $3.3 billion in
deposits, partially offset by a decrease of $3.0 billion in interest-earning
assets.
Average interest-earning assets decreased by $1.2 billion, to $14.6 billion,
in fiscal 1996, compared to last year, while average interest-bearing
liabilities decreased by $1.3 billion, to $14.1 billion, for the same period.
The decrease in average interest-earning assets was primarily attributable to
the mortgage-backed securities portfolio, which declined due to the CMO Sale
in the current fiscal year, and to principal payments. Average balances of
mortgage-backed securities decreased by $1.6 billion, to
59
$3.4 billion, in fiscal 1996, compared to last year. The decrease in average
mortgage-backed securities was partially offset by an increase in the average
balance of the loan portfolio of $555 million, to $10.3 billion, in fiscal
1996, compared to fiscal 1995. The increase in the loan portfolio was
primarily attributable to purchases in the secondary market totaling $2.0
billion.
The decrease in average interest-bearing liabilities in fiscal 1996,
compared to fiscal 1995, was primarily due to the decrease in deposits related
to the sales of the Bank's Florida and Washington operations, partially offset
by an increase in deposits related to purchases of deposit liabilities from
Independence One and Union Federal. Contributing to the decrease in average
interest-bearing liabilities was the paydown of securities sold under
agreements to repurchase. Partially offsetting the decreases in average
deposits and securities sold under agreements to repurchase was an increase in
FHLB borrowings attributable to funding the sale of the Bank's Florida
operations and accomplishing the Bank's strategy of lengthening liabilities
through longer term, two to five year FHLB borrowings. Average deposits and
securities sold under agreements to repurchase decreased by $1.6 billion, to
$10.7 billion, in fiscal 1996, compared to last year, while average FHLB
borrowings increased by $298 million, to $3.3 billion, in the current year
over the prior year.
The Bank has, in the past, entered into interest rate exchange agreements
("swaps") to reduce the effect of rising interest rates on short-term deposits
and FHLB advances, and the effect thereof on interest expense. The Bank
predominantly pays fixed interest rates and receives variable interest rates
under its swap contracts. The impact of swaps for the year ended June 30, 1996
was to increase the total cost of funds by 2 basis points. The impact of swaps
for the year ended June 30, 1995 was to increase the total cost of funds by 3
basis points. At June 30, 1996, the Bank had $200 million in notional
principal amount of swaps maturing in April 1997, compared to the $307 million
in notional amount of swaps outstanding at June 30, 1995. Swaps with an
aggregate notional principal amount totaling $107 million matured during
fiscal 1996.
During fiscal 1996, the Federal Reserve Board lowered the federal funds rate
by a total of 0.75%, to 5.25%. The impact of this reduction has been a
decrease in the Bank's borrowing costs. Because adjustments to interest rates
on adjustable-rate loans and mortgage-backed securities tend to follow changes
in market rates, the impact of lower interest rates will be experienced in
yields for these assets more slowly than in the cost of the Bank's short-term
borrowings. In the current interest rate environment, the Bank would expect
its interest rate spread not to change significantly. However, future
increases in short-term interest rates could result in interest rate spread
compression. The amount of that compression would depend upon the timing and
magnitude of such interest rate movements.
During fiscal 1995, net interest income before provision for loan losses
increased by $6.4 million, to $317.7 million, compared to fiscal 1994. The
increase in fiscal 1995 was principally due to an increase in the yield-cost
spread during the first half of the fiscal year, partially offset by the
effect on the Bank's cost of funds of a generally rising interest rate
environment and the sales of the Florida franchise and University Savings. The
yield-cost spread increased by 10 basis points, to 1.92%, in fiscal 1995
compared to fiscal 1994 due to an increase of 99 basis points, to 6.91%, in
the yield on interest-earning assets, partially offset by an increase of 89
basis points, to 4.99%, in the cost of funds. Net interest income of
University Savings in fiscal 1995 and 1994 was $18.0 million (prior to its
sale in that year) and $34.2 million, respectively.
Yields on loans and mortgage-backed securities increased by 90 basis points,
to 6.93%, in fiscal 1995 compared to fiscal 1994. The change was primarily due
to the significant increase in interest rates in fiscal 1995 and the resulting
upward adjustments in the interest rate indices to which the Bank's
adjustable-rate loans and mortgage-backed securities are tied and the purchase
of higher yielding, fixed-rate and adjustable-rate whole loans. Because
management believed that the yields
60
available on fixed-rate mortgage loans were high enough to justify some
lengthening of the maturity structure of its assets, the Bank purchased $1.3
billion of predominantly fixed-rate loans in the secondary market in fiscal
1995, earning estimated yields ranging from 7.62% to 9.45% and averaging
8.89%. In fiscal 1994, the Bank operated in a declining interest rate
environment and experienced substantial prepayments of higher yielding loans
and mortgage-backed securities. The funds received from these prepayments were
reinvested in loans and mortgage-backed securities bearing interest at rates
lower than those investments which prepaid.
The declining level of NPAs also had a positive impact on net interest
income as the Bank was able to reinvest the proceeds from liquidation of these
assets into interest-earning assets. The average balance of NPAs in fiscal
1995 and 1994 was $472.5 million and $833.5 million, respectively. The impact
of non-accrual assets on the yield on loans and mortgage-backed securities was
a decrease of 14 basis points in fiscal 1995 and a decrease of 28 basis points
in fiscal 1994.
Yields on the investment portfolio increased by 213 basis points, to 6.55%,
in fiscal 1995 as compared to fiscal 1994, primarily due to the increase in
short-term interest rates and to an increase in the dividend rate on FHLB
stock in the current year compared to the prior year.
The Bank's cost of funds increased during fiscal 1995 due to the rise in
interest rates and the resulting increases in rates on the Bank's short-term
liabilities, the lengthening of the maturities of both retail deposits and
FHLB advances and the significant change in the composition of interest-
bearing liabilities resulting from the Florida franchise sale. The cost of
deposits increased by 36 basis points, to 4.41%, in fiscal 1995 compared to
fiscal 1994. The cost of borrowings increased by 166 basis points, to 5.87%,
in fiscal 1995 compared to fiscal 1994. However, as interest rates began to
stabilize during the fourth quarter of fiscal 1995, the repricing of the
Bank's earning adjustable-rate assets began to outpace upward movement in the
Bank's cost of funds. Also during the second half of fiscal 1995, borrowings
obtained to fund the sale of the Florida franchise were reduced by nearly $1.6
billion, principally through the addition of lower-cost deposits obtained in
two deposit purchase transactions.
During the declining interest rate environment that existed during fiscal
1994, swaps had a negative impact on the Bank's net interest margin by
increasing the Bank's effective cost of funds by 13 basis points.
61
The table in Item 1. "Business--Interest Rate Margin" depicts the average
balances of interest-earning assets and interest-bearing liabilities, the
income earned and expense recorded thereon and the resulting yield-cost
spread. The following rate/volume analysis depicts the increase (decrease) in
net interest income attributable to interest rate fluctuations (change in rate
multiplied by prior period average balance) and volume fluctuations (change in
average balance multiplied by prior period rate) when compared to the prior
year (in thousands):
YEARS ENDED JUNE 30
----------------------------------------------------------
1996 VERSUS 1995 1995 VERSUS 1994
CHANGES DUE TO CHANGES DUE TO
---------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- ------- -------- -------- -------- --------
Interest income:
Loans receivable, net.. $ 42,399 $40,030 $ 82,429 $(32,279) $ 69,139 $ 36,860
Mortgage-backed secu-
rities, net........... (103,216) 16,441 (86,775) (16,580) 64,642 48,062
--------- ------- -------- -------- -------- --------
Total loans and xxxx-
xxxx-backed securi-
ties................ (60,817) 56,471 (4,346) (48,859) 133,781 84,922
Federal funds sold and
securities purchased
under resale agree-
ments................. 290 915 1,205 (4,877) 15,148 10,271
U.S. Government and
other investment
securities............ (6,676) 3,194 (3,482) (4,826) 6,346 1,520
--------- ------- -------- -------- -------- --------
Total investments.... (6,386) 4,109 (2,277) (9,703) 21,494 11,791
--------- ------- -------- -------- -------- --------
Total interest in-
come................ (67,203) 60,580 (6,623) (58,562) 155,275 96,713
Interest expense:
Deposits--daily ac-
cess.................. 2,351 13,445 15,796 (9,068) 14,819 5,751
Deposits--certifi-
xxxxx................. (33,105) 38,249 5,144 (71,986) 25,655 (46,331)
--------- ------- -------- -------- -------- --------
Total deposits....... (30,754) 51,694 20,940 (81,054) 40,474 (40,580)
Securities sold under
agreements to repur-
chase
and other short-term
borrowings............ (61,430) 4,588 (56,842) (4,665) 59,257 54,592
Borrowings from FHLB... 18,002 3,698 21,700 45,842 30,622 76,464
Other borrowings....... (4,163) (3,604) (7,767) 266 (467) (201)
--------- ------- -------- -------- -------- --------
Total borrowings..... (47,591) 4,682 (42,909) 41,443 89,412 130,855
--------- ------- -------- -------- -------- --------
Total interest ex-
pense............... (78,345) 56,376 (21,969) (39,611) 129,886 90,275
--------- ------- -------- -------- -------- --------
Net interest income..... $ 11,142 $ 4,204 $ 15,346 $(18,951) $ 25,389 $ 6,438
========= ======= ======== ======== ======== ========
--------
Note: Non-accrual loans are included in the average balances for the periods;
however, interest on such loans has been excluded from interest income for
the periods. The change in interest not due solely to volume or rate has
been allocated in proportion to the absolute dollar amounts of the change
in each.
PROVISION FOR LOAN LOSSES
Provisions for loan losses totaled $40.4 million, $66.2 million and $139.7
million in fiscal 1996, 1995 and 1994, respectively. The reduction in the
provision was primarily due to declining NPAs and delinquent loans in the
multi-family residential and non-residential portfolios, lower overall charge-
offs and management's assessment that there is a decreased risk of loss
inherent in these portfolios. NPAs at June 30, 1996 totaled $274.6 million,
which represents a 23% decline from the $355.5 million of NPAs recorded at
June 30, 1995 and a 58% decline from the $661.0 million recorded at June 30,
1994. The allowance for loan losses is determined based on the application to
the loan portfolios of factors used in the Bank's allowance for loan loss
evaluation process. The application of these factors is discussed in "Balance
Sheet Analysis--Allowance for Loan Losses".
LOAN SERVICING INCOME, NET
Loan servicing income, net, decreased by $6.3 million, to $24.2 million, in
fiscal 1996, compared to fiscal 1995, primarily due to adjustments made in the
September 1995 quarter to the value of the
62
Bank's servicing assets. In the September 1995 quarter, an adjustment totaling
$3.7 million was made to purchased mortgage servicing rights due to an
increase in prepayment expectations. In the same quarter, an adjustment of
$2.2 million was made to the carrying value of the Bank's capitalized
servicing fees receivable due to changes in the underlying assumptions
relating to that asset. If prepayment expectations increase from the levels as
of June 30, 1996, further adjustments to the value of the Bank's servicing
assets may be necessary depending upon the frequency and magnitude of such
increases. During fiscal 1996, the Bank purchased servicing rights relating to
$3.7 billion of loans for $50.8 million.
Loan servicing income, net, increased by $13.0 million, to $30.5 million, in
fiscal 1995, compared to fiscal 1994. This increase was due to reduced levels
of amortization of the Bank's capitalized servicing fees receivable in fiscal
1995 compared to fiscal 1994 resulting from a reduced level of loan
prepayments. The increase in loan servicing income was also attributable to
increased servicing fees earned, partially offset by increased amortization,
related to the Bank's purchases of $2.2 billion of loan servicing rights in
the fourth quarter of fiscal 1994 and $2.8 billion of loan servicing rights
purchased in fiscal 1995.
The Bank's portfolio of loans serviced for others totaled $14.1 billion at
June 30, 1996, and included $1.9 billion of loans sub-serviced by a third
party which will be transferred to the Bank's principal loan servicing system
in the first quarter of fiscal 1997. Loans serviced for others at June 30,
1995 and 1994 totaled $11.7 billion and $7.8 billion, respectively.
OTHER FEES AND SERVICE CHARGES
Other fees and service charges increased by $6.9 million, to $45.8 million,
in fiscal 1996 compared to fiscal 1995, which included six months of the
Bank's Florida and Washington operations. This increase primarily reflects an
increase in deposit fee income of $4.4 million related to growth in the number
of transaction accounts and an increase in commissions and broker fees of $2.3
million related to higher sales from the Bank's securities brokerage
subsidiary.
Other fees and service charges decreased by $4.2 million, to $38.9 million,
in fiscal 1995 compared to fiscal 1994 due primarily to the decrease in
customer accounts held by the Bank's brokerage subsidiary resulting from the
sale of the Bank's Florida franchise and to an overall decrease in brokerage
activity.
GAIN (LOSS) ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES, NET
Loss on sale of loans and mortgage-backed securities in fiscal 1996 was
$34.9 million and reflects primarily the previously discussed $28.2 million
loss on the CMO Sale and $6.6 million of recourse related losses, including
fees for recourse removal transactions. See "Overview--Sale of CMO Investment
Portfolio" for additional discussion regarding the CMO Sale.
Loss on sale of loans and mortgage-backed securities in fiscal 1995 was
$11.6 million and consisted primarily of provisions for loss related to loans
sold in prior years subject to recourse obligations and fees for recourse
removal transactions. Loans and mortgage-backed securities sales resulted in a
net gain of $1.8 million in fiscal 1994. The net gain was primarily due to a
$19.6 million gain on the sale of $783 million of mortgage-backed securities
which were sold as part of the funding strategy for the Florida franchise
sale, offset by $19.2 million in provision for losses on loans sold with
recourse obligations and fees for recourse removal transactions.
GAIN ON SALE OF BANKING OPERATIONS
The gain on sale of banking operations totaling $73.7 million in fiscal
1995, resulted from the sales of University Savings and the Bank's Florida
franchise. The Bank recorded gains of $50.7 million and $23.0 million on the
sales of University Savings and the Florida franchise, respectively. The
recorded
63
gains of $50.7 million and $23.0 million were offset by $21.0 million and
$20.7 million, respectively, in income tax expense related to the sales. The
Florida franchise sale gain does not reflect a provision for market value
adjustment on the sale of the Florida banking offices of approximately $136
million that was recorded in fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $5.0 million, to $248.9
million, in fiscal 1996 compared to fiscal 1995. The increase reflects costs
associated with new business lines, increased advertising and legal expenses,
and the operation of 18 banking offices acquired in the fourth quarter of
fiscal 1995. The current year increase was partially offset by the sales of
the Bank's Florida and Washington operations in fiscal 1995. General and
administrative expenses attributable to the Bank's Washington operations were
$6.6 million in fiscal 1995 prior to the sale of those operations. General and
administrative expenses are expected to stabilize at the levels experienced
during the fourth quarter of fiscal 1996, but may increase in future periods
as the Bank expands its business lines and continues to maintain a higher
level of marketing activity. Management expects that the new business lines
will result in additional fee income, higher yielding loans and lower costing
deposits, but these benefits are expected to lag the increase in expenditures.
General and administrative expenses decreased by $48.1 million, to $243.8
million, in fiscal 1995 compared to fiscal 1994. The decrease reflects the
sales of University Savings and the Bank's Florida operations, as well as the
Bank's efforts to reduce general and administrative expenses through
outsourcing of functions and further consolidation of back-office operations,
partially offset by an increase in advertising and promotion expense incurred
to support the Bank's lending and deposit products. University Savings
incurred $6.6 million and $13.6 million of general and administrative expenses
during fiscal 1995 and 1994, respectively.
OPERATIONS OF REO
Operations of REO resulted in losses of $8.4 million, $15.0 million and
$24.1 million in fiscal 1996, 1995 and 1994, respectively. Losses in fiscal
1996 were primarily due to $12.1 million in provisions to adjust the REO
portfolio to current fair value and $7.2 million of operating expenses. These
current period expenses were partially offset by gains realized on the sale of
REO (after market valuation adjustments) of $10.9 million, of which $2.1
million was recognized in the September 1995 quarter in connection with the
August 1995 sale of loans and REO mentioned earlier. Losses in fiscal 1995
were primarily due to $16.8 million in provisions to adjust the REO portfolio
to current fair value, and $10.6 million of operating expenses. These current
period expenses were partially offset by gains realized on the sale of REO
(after market valuation adjustments) of $12.4 million, which included a $2.3
million gain recorded in December 1994 by University Savings. Losses in fiscal
1994 were primarily due to $26.4 million in provisions to adjust the REO
portfolio to current market value, and $18.0 million in operating expenses,
offset by gains realized on the sale of REO properties (after market valuation
adjustments) of $20.0 million.
The decline in losses for the current year, compared to the prior year,
reflects a decrease in the level of new REOs and a shift in the composition of
the inventory from multi-family residential and non-residential properties to
smaller balance single-family residential properties. Total REO decreased by
$27.5 million, to $78.2 million as of June 30, 1996, compared to $105.7
million at June 30, 1995, while the percentage of single-family residential
properties to total REO increased to 48% as of June 30, 1996, compared to 34%
at June 30, 1995. Foreclosures of single-family residences represented 61% of
the total dollar amount of foreclosures for fiscal 1996, compared to 31% for
fiscal 1995.
64
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill totaled $5.1 million, $1.7 million and $9.8 million
in fiscal 1996, 1995 and 1994, respectively. The current year increase, as
compared to the prior year, reflects the amortization of the premium recorded
in the purchases of deposits in the fourth quarter of fiscal 1995, partially
offset by the decrease in goodwill amortization resulting from the fiscal 1995
sale of the Bank's Washington operations. The decrease in fiscal 1995,
compared to fiscal 1994, reflects the sales of University Savings and the
Bank's Florida franchise in fiscal 1995, the write-off of $136.2 million of
goodwill and other assets associated with the Florida franchise in fiscal 1994
and the concurrent reclassification of the remaining $192 million of
unamortized Florida goodwill as "held for sale" in the Bank's Consolidated
Statement of Financial Condition.
INCOME TAX PROVISION (BENEFIT)
The Bank recorded income tax provisions before extraordinary items of $21.3
million and $52.1 million in fiscal 1996 and 1995, respectively, and an income
tax benefit before extraordinary items of $10.2 million in fiscal 1994. The
effective tax rates in those fiscal years were 33.7%, 41.6% and (4.4%),
respectively. Changes in the effective rates are discussed in Note 14 of the
Notes to Consolidated Financial Statements.
The extraordinary items recorded in fiscal 1994 permitted the Bank to
recognize tax benefits on a portion of its previously unbenefited book net
operating loss carryover from 1993. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), the
tax benefit of $10.2 million from this source was recognized in loss before
extraordinary items in fiscal 1994. The Bank utilized its remaining net
operating loss carryforwards to offset the gains from the sales of the Florida
franchise and University Savings in fiscal 1995. The goodwill associated with
the Florida franchise was included in the book basis of the assets sold but
was not included in the tax basis of these assets. The tax gain was greater
than the book gain from the sale, primarily by the amount of the goodwill.
As of June 30, 1996, the Bank had no net operating loss carryforwards and
had utilized nearly all of its alternative minimum tax credit carryforwards to
reduce its deferred tax liability. As a result, earnings for fiscal 1997 are
expected to be taxable at the combined federal and state statutory rate of
42%.
EXTRAORDINARY ITEMS, NET
Extraordinary items, net for fiscal 1995 consisted of a $1.8 million gain
(net of income taxes of $1.3 million) resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the Federal Home Loan Bank
of Seattle.
Extraordinary items, net for fiscal 1994 consisted of a $14.1 million gain
(net of income taxes of $9.6 million) resulting from the exchange of $49.1
million of GLENFED's convertible subordinated debentures for common stock of
the Bank in the Recapitalization.
FORWARD-LOOKING INFORMATION
The discussions contained above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 1. "Business" are
intended to provide information to facilitate the understanding and assessment
of the consolidated financial condition of Glendale Federal as reflected in
the accompanying consolidated financial statements and footnotes and should be
read and considered in conjunction therewith. These discussions include
forward-looking statements within the meaning of Section 21E of the Exchange
Act regarding management's beliefs, estimates,
65
projections, and assumptions with respect to future operations. All forward-
looking statements herein are subject to risks and uncertainties, including
the risks and uncertainties detailed herein and from time to time in Glendale
Federal's OTS reports and filings. Actual results and operations for any
future period may vary materially from those projected herein and from past
results discussed herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page 71 and Financial Statements
beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
That portion of Glendale Federal's definitive Proxy Statement filed with the
OTS pursuant to Regulation 14A for use in connection with Glendale Federal's
Annual Meeting of Shareholders to be held on October 22, 1996 ("Proxy
Statement") appearing under the caption "Election of Directors" is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
That portion of Glendale Federal's Proxy Statement appearing under the
caption "Executive Compensation and Other Information" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
That portion of Glendale Federal's Proxy Statement appearing under the
caption "Beneficial Ownership of Glendale Federal's Securities" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of Glendale Federal's Proxy Statement appearing under the
caption "Executive Compensation and Other Information--Certain Relationships
and Related Transactions" is incorporated herein by reference.
66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER
-------
3.1(b) Amended and Restated Charter of the Bank. (3.1)
3.2(c) Amended and Restated Bylaws of the Bank. (3.2)
4.1(b) Section 5 of the Amended and Restated Charter of the Bank. (Included
in Exhibit 3.1)
4.3(b) Supplementary Charter Section to Section 5(C) of the Amended and
Restated Charter of the Bank dated August 23, 1993, regarding
Noncumulative Preferred Stock, Series E. (Included in Exhibit 3.1)
4.4(a) Warrant Agreement dated as of February 23, 1993 between the Bank and
Chemical
Trust Company of California. (4.5)
4.5(b) Warrant Agreement dated as of August 15, 1993 between the Bank and
Chemical Trust Company of California. (4.5)
4.9(a) Indenture dated as of March 15, 1986 between GLENFED and
Manufacturers Hanover Trust Company, with respect to $75,000,000 in
aggregate principal amount of 7.75% Convertible Subordinated
Debentures Due 2001 ("Indenture"). (4.2)
4.10(b) First Supplemental Indenture dated as of August 26, 1993 among
GLENFED, the Bank, Glendale Investment Corporation and Chemical Bank
to Indenture. (4.10)
10.3(c) Amended and Restated 1993 Stock Option and Long-Term Performance
Incentive Plan. (10.3)
10.4 Sheltered Pay Plan.
10.6 Board of Directors Retirement Plan, as amended.
10.7 Employment Agreement entered into by Glendale Federal with Xxxxxxx
X. Xxxxxxx, as
amended.
10.8(d) Form of severance agreement. Executed agreements are with Xxxxxxx X.
Xxxxxx,
Xxxxxxx X. Xxxxx, Xxxxxx X. Xxxxxxxx, Xxxxxxx X. Xxxx, Xxxx X.
Xxxxxx, Xxxxx X. Xxxx, Xxxxxxx X. Xxxxxx and Xxxxxx X. Xxxxxxxx.
(10.8)
11.1 Statement Regarding Computation of Per Share Earnings (Loss).
22.1 List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP.
--------
(a) Exhibits previously filed with Glendale Federal Bank Form OC, dated June
15, 1993 under the Exhibit Numbers indicated in parentheses and
incorporated herein by reference.
(b) Exhibits previously filed with Glendale Federal 10-K, dated June 30, 1993
under the Exhibit Numbers indicated.
(c) Exhibit previously filed with Glendale Federal 10-K, dated June 30, 1994
under the Exhibit Numbers indicated.
(d) Exhibit previously filed with Glendale Federal 10-K, dated June 30, 1995
under the Exhibit Number indicated.
67
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Financial Statements on page 71, and Financial Statements
commencing on page F-1. Financial Statement Schedules have been omitted because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED JUNE 30, 1996
None
68
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK
Date: September 13, 1996
By: /s/ Xxxxxxx X. Xxxxxxx
-------------------------------
Xxxxxxx X. Xxxxxxx
Chairman of The Board, Chief
Executive Officer and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND ON
THE DATE INDICATED:
/s/ Xxxxxxx X. Xxxxxxx
----------------------------- Date: September 13, 1996
Xxxxxxx X. Xxxxxxx
Chairman of The Board, Chief
Executive Officer and President
(Principal Executive Officer)
/s/ Xxxx X. Xxxxxx
----------------------------- Date: September 13, 1996
Xxxx X. Xxxxxx
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Xxxxxxx X. Xxxxxx
----------------------------- Date: September 13, 1996
Xxxxxxx X. Xxxxxx
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Xxxx X. Xxxxxx
------------------------------ Date: September 13, 1996
Xxxx X. Xxxxxx, Director
/s/ Xxxxx X. Xxxxx
------------------------------ Date: September 13, 1996
Xxxxx X. Xxxxx, Director
------------------------------
Xxxxxxx X. Xxxxxx, Director
/s/ Xxxxx X. Xxxxxxx
------------------------------- Date: September 13, 1996
Xxxxx X. Xxxxxxx, Director
/s/ Xxxxxxx X. Xxxx
------------------------------- Date: September 13, 1996
Xxxxxxx X. Xxxx, Director
/s/ Xxxx X. Xxxx
------------------------------- Date: September 13, 1996
Xxxx X. Xxxx, Director
69
/s/ Xxxx X. Xxxxxx
------------------------------- Date: September 13, 1996
Xxxx X. Xxxxxx, Director
-------------------------------
Xxxx X. Xxxxxx, Director
/s/ Xxxxxxx X. Xxxxxxx
-------------------------------- Date: September 13, 1996
Xxxxxxx X. Xxxxxxx, Director
/s/ X. Xxx Xxxxxxxx, Xx.
-------------------------------- Date: September 13, 1996
X. Xxx Xxxxxxxx, Xx., Director
70
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Annual Financial Statements
Report of Management.................................................... F-1
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Condition as of June 30, 1996 and
1995................................................................... F-3
Consolidated Statements of Operations for years ended June 30, 1996,
1995 and 1994.......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for years
ended June 30, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Cash Flows for years ended June 30, 1996,
1995 and 1994.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
71
GLENDALE FEDERAL BANK, FSB
REPORT OF MANAGEMENT
The management of Glendale Federal Bank, Federal Savings Bank (the "Bank")
has responsibility for the preparation, integrity, and reliability of the
consolidated financial statements and related financial information of the
Bank and its subsidiaries contained in this report. The financial statements
were prepared in accordance with generally accepted accounting principles
appropriate in the circumstances and necessarily included judgments and
estimates by management.
Management has established and is responsible for maintaining a system of
internal controls designed to provide reasonable assurance as to the integrity
and reliability of the financial statements and the protection of assets from
unauthorized use or disposition. The system of internal controls includes: an
effective financial accounting structure; a comprehensive internal audit
function; an independent audit committee (the "Committee") of the Board of
Directors; and financial and operating policies and procedures. The Bank's
management also fosters standards of business ethics as documented by the
Bank's employee handbook and management guide, appropriate levels of
management authority and responsibility, an effective corporate organizational
structure, and appropriate selection and training of personnel.
The Board of Directors, primarily through the Committee, oversees the
adequacy of the Bank's system of internal controls. The Committee, whose
members are neither officers nor employees of the Bank, meets at least
quarterly with management, internal auditors, and the independent auditors to
review the functioning of each and to ensure that each is properly discharging
its responsibilities.
The Bank's financial statements are audited by KPMG Peat Marwick LLP, the
Bank's independent auditors, whose audit is made in accordance with generally
accepted auditing standards and includes such audit procedures as they
consider necessary to express the opinion in their report that follows.
Management recognizes and cautions that there are inherent limitations in
the effectiveness of any internal control environment. However, management
believes that, as of June 30, 1996, the Bank's system of internal controls, as
described above, provided reasonable assurance as to the integrity and
reliability of the financial statements and related financial information and
the safeguarding of assets.
/s/ Xxxxxxx X. Xxxxxxx July 23, 1996
------------------------------- ----------------
Xxxxxxx X. Xxxxxxx Date
Chairman of the Board,
Chief Executive Officer and President
/s/ Xxxx X. Xxxxxx July 23, 1996
------------------------------- ----------------
Xxxx X. Xxxxxx Date
Executive Vice President and
Chief Financial Officer
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Glendale Federal Bank, Federal Savings Bank
We have audited the accompanying consolidated statements of financial
condition of Glendale Federal Bank, Federal Savings Bank and subsidiaries (the
Bank) as of June 30, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1996. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Glendale
Federal Bank, Federal Savings Bank and subsidiaries as of June 30, 1996 and
1995 and the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 23, 1996
F-2
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30
------------------------
1996 1995
----------- -----------
ASSETS
Cash and amounts due from banks...................... $ 153,608 $ 139,697
Federal funds sold and securities purchased under re-
sale agreements..................................... 433,000 296,000
Other debt securities held to maturity, at amortized
cost (fair value: $18,921 in 1996 and $42,406 in
1995)............................................... 18,877 42,326
Mortgage-backed securities held to maturity, net
(fair value: $1,351,344 in 1996 and $4,632,615 in
1995)............................................... 1,356,235 4,721,407
Mortgage-backed securities available for sale, at
fair value.......................................... 884,555 2,050
Loans receivable, net of allowance for loan losses of
$186,756 in 1996 and $209,142 in 1995............... 10,694,594 9,741,096
Loans held for sale, at lower of cost or market...... 33,315 158,201
Real estate held for sale or investment.............. 12,072 13,303
Real estate acquired in settlement of loans.......... 78,249 105,730
Interest receivable.................................. 89,237 96,395
Investment in capital stock of Federal Home Loan
Bank, at cost....................................... 192,842 185,799
Premises and equipment, at cost, less accumulated de-
preciation.......................................... 126,368 163,116
Mortgage servicing rights............................ 93,970 55,962
Capitalized servicing fees receivable................ 33,429 43,160
Goodwill and other intangible assets, less accumu-
lated amortization ($16,580 in 1996 and $11,433 in
1995)............................................... 59,216 63,538
Other assets......................................... 196,997 216,466
----------- -----------
$14,456,564 $16,044,246
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................. $ 8,723,976 $ 8,734,880
Securities sold under agreements to repurchase....... 758,050 2,695,176
Borrowings from the Federal Home Loan Bank........... 3,838,000 3,495,000
Other borrowings..................................... 10,599 28,883
Other liabilities and accrued expenses............... 131,224 121,844
Income taxes payable................................. 37,264 26,616
----------- -----------
Total liabilities................................. 13,499,113 15,102,399
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series E, $1.00 par value per share
and $25.00 liquidation preference per share
(8,050,000 shares authorized; 5,823,882 shares
issued and outstanding at June 30,1996; 8,050,000
shares issued and outstanding at June 30, 1995)..... 5,824 8,050
Common stock, $1.00 par value per share (100,000,000
shares authorized; 46,729,698 shares issued and out-
standing at June 30, 1996; 40,719,718 shares issued
and outstanding at June 30, 1995)................... 46,730 40,720
Additional paid-in capital........................... 790,724 793,372
Net unrealized holding gain (loss) on mortgage-backed
and other debt securities available for sale........ (11,391) 37
Retained earnings--substantially restricted.......... 125,564 99,668
----------- -----------
Total stockholders' equity........................ 957,451 941,847
----------- -----------
$14,456,564 $16,044,246
=========== ===========
See accompanying Notes to Consolidated Financial Statements
F-3
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30
---------------------------------
1996 1995 1994
---------- ---------- ---------
Interest income:
Loans receivable.......................... $ 803,432 $ 721,003 $ 684,143
Mortgage-backed securities................ 216,812 303,587 255,525
Investments............................... 59,791 62,068 50,277
---------- ---------- ---------
Total interest income.................... 1,080,035 1,086,658 989,945
Interest expense:
Deposits.................................. 433,834 412,894 453,474
Short-term borrowings..................... 108,839 165,681 111,089
Other borrowings.......................... 204,297 190,364 114,101
---------- ---------- ---------
Total interest expense................... 746,970 768,939 678,664
---------- ---------- ---------
Net interest income before provision for
loan losses............................. 333,065 317,719 311,281
Provision for loan losses................... 40,350 66,150 139,726
---------- ---------- ---------
Net interest income...................... 292,715 251,569 171,555
Other income:
Loan servicing income, net................ 24,208 30,460 17,491
Other fees and service charges............ 45,769 38,851 43,022
Gain (loss) on sale of loans and mortgage-
backed securities, net................... (34,912) (11,579) 1,764
Gain on sale of banking operations........ -- 73,713 --
Other income (loss), net.................. (707) 3,001 (1,936)
---------- ---------- ---------
Total other income....................... 34,358 134,446 60,341
Other expenses:
Compensation and employee benefits........ 101,502 105,218 126,037
Occupancy expense, net.................... 29,698 31,433 37,691
Regulatory insurance...................... 27,491 29,077 38,233
Advertising and promotion................. 24,798 18,855 16,285
Furniture, fixtures and equipment......... 11,605 14,559 24,793
Stationery, supplies and postage.......... 10,158 9,065 11,174
Other general and administrative expenses. 43,612 35,634 37,753
---------- ---------- ---------
Total general and administrative ex-
penses.................................. 248,864 243,841 291,966
Operations of real estate held for sale or
investment............................... 1,242 (31) 2,690
Operations of real estate acquired in set-
tlement of loans......................... 8,426 15,034 24,089
Amortization of goodwill and other intan-
gible assets............................. 5,147 1,724 9,764
Write-off of assets held for Florida dis-
position................................. -- -- 136,209
---------- ---------- ---------
Total other expenses..................... 263,679 260,568 464,718
---------- ---------- ---------
Earnings (loss) before income tax provision
(benefit) and extraordinary items.......... 63,394 125,447 (232,822)
Income tax provision (benefit).............. 21,342 52,146 (10,171)
---------- ---------- ---------
Earnings (loss) before extraordinary items.. 42,052 73,301 (222,651)
Extraordinary items, net.................... -- 1,755 14,092
---------- ---------- ---------
Net earnings (loss)..................... 42,052 75,056 (208,559)
Dividends declared on preferred stock....... 16,156 17,668 13,759
Premium on exchange of Series E Preferred
Stock for common stock..................... 9,443 -- --
---------- ---------- ---------
Earnings (loss) available for common share-
holders.................................... $ 16,453 $ 57,388 $(222,318)
========== ========== =========
Earnings (loss) per share:
Primary:
Earnings (loss) before extraordinary
items................................... $ 0.36 $ 1.28 $ (6.48)
Net earnings (loss)...................... $ 0.36 $ 1.32 $ (6.10)
Fully diluted:
Earnings (loss) before extraordinary
items................................... $ 0.35 $ 1.16 $ (6.48)
Net earnings (loss)...................... $ 0.35 $ 1.19 $ (6.10)
See accompanying Notes to Consolidated Financial Statements
F-4
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES B AND C SERIES D SERIES E COMMON STOCK ADDITIONAL
--------------------- ------------------- ------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- -------- ---------- ------- ---------- ------- ---------- ------- ----------
Balance, June
30, 1993........ 13,844,183 $ 13,844 -- $ -- -- $ -- 1,366,092 $ 1,366 $380,479
Issuance of Se-
xxxx D Preferred
Stock for
Series B and C
Preferred Stock. (13,844,183) (13,844) 8,889,350 8,889 -- -- -- -- 2,254
Issuance of Se-
xxxx E Preferred
Stock........... -- -- -- -- 8,050,000 8,050 -- -- 182,770
Issuance of com-
mon stock of the
Bank............ -- -- -- -- -- -- 27,902,511 27,903 207,386
Issuance of
common stock of
the Bank in
exchange for
GLENFED
debentures...... -- -- -- -- -- -- 2,505,259 2,505 20,042
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- (5,961,697) (5,961) -- -- 5,961,697 5,961 --
Net unrealized
holding loss on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
Stock options
exercised....... -- -- -- -- -- -- 1,875 2 15
Dividends de-
clared on pre-
ferred stock
($0.069 per
share, Series D
and $1.677 per
share, Series
E).............. -- -- -- -- -- -- -- -- --
Net loss........
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1994........ -- -- 2,927,653 2,928 8,050,000 8,050 37,737,434 37,737 792,946
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- (2,927,653) (2,928) -- -- 2,927,653 2,928 --
Net unrealized
holding gain on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
Stock options
exercised....... 52,500 53 426
5-year warrants
exercised....... -- -- -- -- -- -- 2,131 2 --
Dividends de-
clared on pre-
ferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. -- -- -- -- -- -- -- -- --
Net earnings.... -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1995........ -- -- -- -- 8,050,000 8,050 40,719,718 40,720 793,372
Exchange of Se-
xxxx E Preferred
Stock for common
stock........... -- -- -- -- (2,226,118) (2,226) 5,901,771 5,902 (3,676)
Net unrealized
holding loss on
debt securities
available for
sale............ -- -- -- -- -- -- -- -- --
Stock options
exercised....... -- -- -- -- -- -- 106,000 106 1,028
5-year warrants
exercised....... -- -- -- -- -- -- 2,209 2 --
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... -- -- -- -- -- -- -- -- --
Net earnings.... -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- ---------- ------- ---------- ------- --------
Balance, June
30, 1996........ -- $ -- -- $ -- 5,823,882 $ 5,824 46,729,698 $46,730 $790,724
=========== ======== ========== ======= ========== ======= ========== ======= ========
NET UNREALIZED
HOLDING GAIN
(LOSS) ON
MORTGAGE-BACKED
AND OTHER TOTAL
DEBT SECURITIES RETAINED STOCKHOLDERS'
AVAILABLE FOR SALE EARNINGS* EQUITY
------------------ ---------- -------------
Balance, June
30, 1993........ $ -- $ 264,598 $ 660,287
Issuance of Se-
xxxx D Preferred
Stock for
Series B and C
Preferred Stock. -- -- (2,701)
Issuance of Se-
xxxx E Preferred
Stock........... -- -- 190,820
Issuance of com-
mon stock of the
Bank............ -- -- 235,289
Issuance of
common stock of
the Bank in
exchange for
GLENFED
debentures...... -- -- 22,547
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- --
Net unrealized
holding loss on
debt securities
available for
sale............ (5,727) -- (5,727)
Stock options
exercised....... -- -- 17
Dividends de-
clared on pre-
ferred stock
($0.069 per
share, Series D
and $1.677 per
share, Series
E).............. -- (13,759) (13,759)
Net loss........ (208,559) (208,559)
------------------ ---------- -------------
Balance, June
30, 1994........ (5,727) 42,280 878,214
Conversion of
Series D Pre-
ferred Stock
into common
stock........... -- -- --
Net unrealized
holding gain on
debt securities
available for
sale............ 5,764 -- 5,764
Stock options
exercised....... -- -- 479
5-year warrants
exercised....... -- -- 2
Dividends de-
clared on pre-
ferred stock
($0.022 per
share, Series D
and $2.188 per
share, Series
E).............. -- (17,668) (17,668)
Net earnings.... -- 75,056 75,056
------------------ ---------- -------------
Balance, June
30, 1995........ 37 99,668 941,847
Exchange of Se-
xxxx E Preferred
Stock for common
stock........... -- -- --
Net unrealized
holding loss on
debt securities
available for
sale............ (11,428) -- (11,428)
Stock options
exercised....... -- -- 1,134
5-year warrants
exercised....... -- -- 2
Dividends de-
clared on Series
E preferred
stock ($2.188
per share)...... -- (16,156) (16,156)
Net earnings.... -- 42,052 42,052
------------------ ---------- -------------
Balance, June
30, 1996........ $(11,391) $ 125,564 $ 957,451
================== ========== =============
-----
*substantially restricted
See accompanying Notes to Consolidated Financial Statements
F-5
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30
-------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................... $ 42,052 $ 75,056 $ (208,559)
Adjustments to reconcile net earnings
(loss) to net cash provided by operat-
ing activities:
Amortization of discounts and premi-
ums, net............................. 8,054 13,709 55,412
Amortization of deferred loan fees.... (5,546) (9,740) (13,108)
Provision for loan losses............. 40,350 66,150 139,726
(Gain) loss on sale of loans and xxxx-
xxxx-backed securities, net.......... 34,912 11,579 (1,764)
Gain on sale of University Savings
Bank................................. -- (50,713) --
Gain on sale of Florida banking opera-
tions................................ -- (23,000) --
Depreciation and amortization......... 38,674 35,998 47,651
Provision for losses on real estate... 11,610 16,323 28,777
Gain on sale of real estate........... (10,880) (10,310) (20,040)
Amortization of goodwill and other in-
tangible assets...................... 5,147 1,724 9,764
Write-off of assets held for Florida
disposition.......................... -- -- 136,209
Provision for deferred income taxes... 19,132 23,873 6,294
Extraordinary items, net.............. -- (1,755) (14,092)
Net change in loans and mortgage-
backed securities originated or pur-
chased for resale.................... (2,649) (10,232) 54,225
(Increase) decrease in interest re-
ceivable............................. 7,158 (11,324) 6,585
FHLB stock dividend received.......... (9,612) (8,259) (5,671)
(Increase) decrease in other assets... 20,298 (6,881) (17,710)
Decrease in other liabilities......... (3,341) (41,332) (84,125)
Other items, net...................... (24,286) 7,613 29,973
----------- ----------- -----------
Total adjustments..................... 129,021 3,423 358,106
----------- ----------- -----------
Net cash provided by operating activi-
ties.................................. 171,073 78,479 149,547
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in other debt securities
with original maturities of 3 months
or less............................... 4,241 7,583 458,056
Proceeds from sale of Florida banking
operations............................ -- 243,005 --
Proceeds from sale of University Sav-
ings Bank............................. -- 205,147 --
Purchase of other debt securities held
to maturity........................... (9,800) (20,607) (69,592)
Proceeds from maturities of other debt
securities held to maturity........... 29,145 14,685 27,492
Purchase of other debt securities
available for sale.................... -- -- (68,918)
Proceeds from maturities of other debt
securities available for sale......... -- 21,000 10,000
Purchase of mortgage-backed securities
held to maturity...................... (2,982) (1,286) (3,514,038)
Principal payments on mortgage-backed
securities held to maturity........... 495,999 697,046 2,411,437
Proceeds from sale of mortgage-backed
securities held to maturity........... -- -- 771,595
Purchase of mortgage-backed securities
available for sale.................... (113,218) -- (94,600)
Principal payments on mortgage-backed
securities available for sale......... 355,975 14,835 62,709
Proceeds from sale of mortgage-backed
securities available for sale......... 1,671,934 -- 52,030
Loans originated (net of refinances)
for investment........................ (364,471) (631,545) (1,041,996)
Loans purchased for investment......... (2,107,509) (1,549,955) (521,357)
Net change in undisbursed loan funds... 7,507 (11,073) (5,509)
Principal payments on loans held for
investment............................ 1,428,501 892,846 1,251,881
Proceeds from sale of loans held for
investment............................ 159,079 143,943 244,460
Cash invested in real estate........... (16,115) (22,046) (44,337)
Cash received from real estate invest-
ments and sale of real estate acquired
in settlement of loans................ 108,482 174,004 170,229
Purchase of FHLB stock................. (17,187) (52,603) (15,733)
Redemption of FHLB stock............... 19,756 2,882 8,116
Net (increase) decrease in premises and
equipment............................. 20,559 52,251 (20,712)
Purchase of mortgage servicing rights.. (50,836) (51,537) (11,330)
Premiums paid on deposits purchased.... -- (11,297) --
----------- ----------- -----------
Net cash provided by investing activi-
ties.................................. 1,619,060 117,278 59,883
----------- ----------- -----------
Statement continued on next page
F-6
GLENDALE FEDERAL BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
YEARS ENDED JUNE 30
-------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits................ (10,904) (1,730,040) (695,723)
Net change in short-term borrowings with
original maturities of 3 months or
less................................... (1,937,126) 1,710,120 (1,664,817)
Proceeds from funding of securities sold
under agreements to repurchase......... -- 815,902 1,794,861
Repayment of securities sold under
agreements to repurchase............... -- (2,013,340) (971,783)
Proceeds from fundings of FHLB advances. 2,988,000 2,300,000 2,274,100
Repayments of FHLB advances............. (2,645,000) (1,197,000) (1,940,000)
Sale of FHLB advances................... -- (39,057) --
Repayment of other borrowings........... (18,284) (69,917) --
Proceeds from issuance of Series E Pre-
ferred Stock........................... -- -- 201,250
Proceeds from issuance of Common Stock.. 1,136 481 250,025
Payment of dividends on preferred stock. (17,044) (17,746) (9,279)
Payment of offering costs............... -- -- (27,983)
----------- ----------- -----------
Net cash used by financing activities... (1,639,222) (240,597) (789,349)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 150,911 (44,840) (579,919)
Cash and cash equivalents at beginning
of year................................ 435,697 480,537 1,060,456
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 586,608 $ 435,697 $ 480,537
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
F-7
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Glendale
Federal Bank, Federal Savings Bank and its subsidiaries ("Glendale Federal" or
the "Bank") which, before August 26, 1993, was a subsidiary of GLENFED, Inc.
("GLENFED"), a savings and loan holding company. The Bank's business consists
primarily of attracting deposits from the public and originating and
purchasing loans secured by mortgages on residential real estate. The Bank's
subsidiaries are engaged primarily in general insurance agency services and
discount securities brokerage. All significant intercompany balances and
transactions have been eliminated in consolidation, including 200,686 Bank
common shares held by a subsidiary of the Bank at June 30, 1996. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the June 30, 1996 presentation.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Bank encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Bank is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets. Credit risk is the risk of default on the Bank's
loan portfolio that results from the borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable, the valuation of real estate
held by the Bank, and the valuation of loans held for sale, mortgage-backed
securities available for sale, purchased mortgage servicing rights, and
capitalized servicing fees receivable.
The Bank is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Bank
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
dates of the balance sheets and revenues and expenses for the periods covered.
Actual results could differ significantly from those estimates and
assumptions.
SHORT-TERM HIGHLY LIQUID INVESTMENTS
The Bank's short-term highly liquid investments consist of federal funds
sold, certificates of deposit and securities purchased under agreements to
resell. The Bank invests in these assets to maximize its return on liquid
funds.
Glendale Federal is required by the Federal Reserve System to maintain non-
interest earning cash reserves against certain of its transaction accounts and
term deposit accounts. At June 30, 1996 and 1995, the required reserves
totaled $60,944,000 and $45,862,000, respectively. Actual reserves totaled
$63,491,000 and $47,012,000 at June 30, 1996 and 1995, respectively.
X-0
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
INVESTMENTS IN DEBT SECURITIES
The Bank's investment in debt securities principally consists of U.S.
Treasury securities and mortgage-backed securities purchased by the Bank or
created when the Bank exchanges pools of loans for mortgage-backed securities
("securitized loans"). The Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of July 1, 1993. In accordance with SFAS 115, the
Bank classifies its investment in debt securities as held to maturity
securities, trading securities and available for sale securities as
applicable. The Bank did not hold any trading securities at June 30, 1996 or
1995.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report as an aid in understanding and implementing SFAS 115.
The Special Report included guidance that caused the Bank to reassess the
appropriateness of the classifications of all securities held and account for
any resulting reclassifications at fair value in accordance with SFAS 115.
During the second quarter of fiscal 1996, the Bank, in accordance with the
Special Report, reclassified $2.8 billion of mortgage-backed securities from
held to maturity to available for sale. See Note 6--Mortgage-Backed Securities
for additional information.
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of any
related premiums or the accretion of any related discounts into interest
income using the interest method over the estimated remaining period until
maturity. Unrealized losses on held to maturity securities, reflecting a
decline in value judged by the Bank to be other than temporary, are charged to
income and reported under the caption "Gain (loss) on sale of loans and
mortgage-backed securities, net" in the Consolidated Statements of Operations.
The Bank classifies securities as available for sale when at the time of
purchase it determines that such securities may be sold at a future date or if
the Bank does not have the positive intent or ability to hold such securities
to maturity. Securities designated as available for sale are recorded at fair
value. Changes in the fair value of debt securities available for sale are
included in shareholders' equity as unrealized holding gains or losses net of
the related tax effect. Unrealized losses on available for sale securities
reflecting a decline in value judged to be other than temporary, are charged
to income in the Consolidated Statement of Operations. Realized gains or
losses on available for sale securities are computed on the specific
identification basis.
LOANS RECEIVABLE HELD FOR SALE
The Bank may designate certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, the Bank considers
whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank had previously designated substantially all originations of
fixed-rate residential 1-4 unit loans as being held for sale. The Bank also
originates and/or purchases fixed-rate loans for its own portfolio, which are
designated as such at the time of origination or purchase based on a specific
identification method, that meet certain yield and other guidelines. Fixed-
rate loans that do not meet such guidelines are designated as held for sale.
Loans held for sale are recorded at the lower of aggregate cost or market
value. Unrealized losses are recorded as a reduction in earnings and are
included under the caption "Gain (loss) on sale of loans and mortgage-backed
securities, net" in the Consolidated Statement of Operations. Realized gains
and losses from the sale of loans receivable are computed under the specific
identification method.
F-9
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
GAINS AND LOSSES FROM SALE OF LOANS
The Bank sells whole loans and participations in mortgage loans to
institutional and private investors. Gains and losses resulting from the sales
of loans are determined on the specific identification method and reflect the
extent that the sales proceeds exceed or are less than the Bank's investment
in the loans (which includes the unpaid principal balance of the loans,
unearned discounts, premiums and deferred fees and costs at the time of sale).
To the extent sales of loans involve the sale of part of a loan or a pool of
loans with disproportionate credit and prepayment risks, the cost basis is
allocated based upon the relative fair market value of the portion sold and
the portion retained on the date such loans were acquired or, if that is not
determinable, the date of sale.
In most cases, the Bank sells loans and continues to service such loans for
the investor. In these cases, the Bank includes in its recognition of gain or
loss on the loan sale, an amount measured by the present value of the
difference between the yield on the loans and the yield to be paid to the
buyer, reduced by the normal servicing fees applicable to comparable servicing
arrangements, over the estimated remaining lives of those loans using market
prepayment and discount rate assumptions. The resulting deferred discount or
premium ("capitalized servicing fees receivable") is amortized as an addition
to or deduction from loan servicing income using the interest method, adjusted
for actual prepayments. The Bank periodically reviews the remaining premium to
ensure that it does not exceed the present value of the estimated future
servicing fees, using estimates of prepayments based on trends in actual
prepayment experience. In the event that actual prepayments exceed the
assumptions used in determining the gain or loss, the deferred premium is
adjusted through a charge to loan servicing income.
If loans are sold with recourse, the estimated liability under the recourse
provision is provided for in the computation of the gain or loss. The amount
of recourse liability recorded by the Bank was $14.2 million and $12.8 million
at June 30, 1996 and 1995, respectively. Such amounts were included in "Other
liabilities and accrued expenses" on the Consolidated Statements of Financial
Condition.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated losses. The allowance for loan losses is
established based on management's assessment of trends in the homogeneous
portfolio as well as the results of management's periodic review of the loans
in the non-homogeneous portfolio. In determining the allowance for loan losses
to be maintained, management evaluates many factors, including management's
judgment as to appropriate asset classifications, prevailing and forecasted
economic and market conditions, industry experience, historical loss
experience, loan portfolio composition, management's assessment of the
borrowers' ability to repay and repayment performance, and the fair value of
the underlying collateral.
The determination of the allowance for loan losses is based on estimates
that are particularly susceptible to changes in the economic environment and
market conditions. Management believes that, as of June 30, 1996 and 1995, the
allowance for loan losses is adequate based on information currently available
to it. If recent improvements in the economies of the Bank's principal market
areas do not continue, the Bank's loan portfolios could be adversely impacted
and higher charge-offs and increases in non-performing assets could result.
Such an adverse impact could also require a larger allowance for loan losses.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. The Bank's impaired loans include loans
identified as impaired through review of the non-homogeneous portfolio and
troubled debt restructurings. Specific valuation allowances are established
for impaired loans at the difference between the loan amount and the fair
value of collateral less estimated selling costs. Impaired loans may be left
on accrual status during the period the Bank is pursuing repayment of the
loan. Such loans are placed on non-accrual status at the point either: (1)
they become 90 days delinquent; or (2) the Bank determines the borrower is
incapable of, or has ceased efforts toward, continuing performance under the
terms of the loan. Impairment losses are recognized through an increase in the
allowance for loan losses and a corresponding charge to the provision for loan
losses. Adjustments to impairment losses due to changes in the fair value of
the collateral properties for impaired loans are included in provision for
loan losses. When an impaired loan is either sold, transferred to REO or
written down, any related valuation allowance is charged off.
Increases to the general allowance are charged to the provision for loan
losses. Specific valuation allowances are provided for when management
identifies a loan or a portion thereof as to which default is deemed probable.
Charge-offs to the allowance are made when all, or a portion, of the loan is
confirmed as a loss based upon management's review of the loan or through
repossession of the underlying security or through a troubled debt
restructuring transaction. Recoveries are credited to the allowance.
TROUBLED DEBT RESTRUCTURINGS
Loans whose terms are modified due to borrower difficulties in repaying
amounts owed under the loan's original terms are classified as Troubled Debt
Restructurings ("TDRs"). During fiscal 1995, the Bank adopted Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" ("SFAS 118"). SFAS
118 requires that TDRs be reported as such based on whether the restructuring
was made at an interest rate equal to or greater than the rate that the Bank
was willing to accept at the time of the restructuring for a loan of
comparable risk and whether the loan is impaired based on the terms of the
restructuring agreement. Loans that are restructured at rates greater than or
equal to the rate the Bank was willing to accept at the time of restructuring
and that are not impaired based on the terms of the restructuring are reported
as TDRs only in the year of the restructuring. All other TDRs are reported in
years following the restructuring until repaid.
INTEREST INCOME RECOGNITION--LOANS RECEIVABLE
Interest income is accrued as it is earned. Loans are placed on non-accrual
status after being delinquent more than 90 days, or earlier if the borrower is
deemed by management to be unable to continue performance. When a loan is
placed on non-accrual status, interest accrued but not received is reversed.
While a loan is on non-accrual status, interest is recognized only as cash is
received and if no portion of the loan's balance is classified "Doubtful".
Loans are returned to accrual status only when the loan is reinstated and
ultimate collectibility of current interest is no longer in doubt. Interest
income on impaired loans is recognized based on the loan's accrual and
classification status as discussed above.
F-11
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Loan origination fees and direct origination costs are deferred at
origination and the net amounts deferred are accreted or amortized to interest
income over the contractual lives of the loans. Accretion of discounts and
amortization of premiums and deferred origination fees and costs is
discontinued when loans are placed on non-accrual status.
LOAN SERVICING AND MORTGAGE SERVICING RIGHTS
The Bank services mortgage loans for investors. Fees earned for servicing
loans owned by investors are reported as income when the related mortgage loan
payments are due. Accrued servicing fees relating to loans past due more than
90 days are reversed. Loan servicing costs are charged to expense as incurred.
These loans are not included with loans receivable or any other asset in the
accompanying consolidated statements of financial condition.
The Bank from time-to-time enters into transactions to acquire the rights to
service pools of loans for others and collect the servicing and related fees.
The amount paid by the Bank for these rights is capitalized as Mortgage
Servicing Rights ("MSR"). MSR is amortized in proportion to, and over the
period the servicing rights generate net servicing fee income. The Bank
periodically updates the assumptions underlying future net servicing fee
income estimates and re-evaluates the present value of the servicing asset. If
the revised assumptions reflect a reduction in the asset's value, the asset is
written down through a charge to expense, which is included in "Loan servicing
income, net" in the Consolidated Statements of Operations.
ACCOUNTING FOR REAL ESTATE
Real estate acquired in settlement of loans ("REO") is recorded at the lower
of fair value or the recorded investment in the loan at the time of
foreclosure generally as determined by recent appraisals. Specific valuation
allowances on REO are recorded through a charge to operations for estimated
costs to sell and if there is a further deterioration in fair value. The Bank
also provides a general allowance for inherent losses on REO recorded through
a charge to operations.
Real estate held for sale or investment ("REI") is carried at the lower of
cost or fair value less estimated costs to sell. Joint ventures and
partnership investments are carried on the equity method of accounting.
Acquisition, development and construction loans are included in REI when the
risk characteristics of such loans are substantially similar to ownership of
real estate.
Changes in estimated selling and disposal costs, declines in fair values,
and net gains or losses on disposal of REO and REI are charged to operations
as incurred.
Gains on real estate sales financed by the Bank are recognized only when the
transactions meet the down-payment and continuing investment criteria of
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." Losses are recognized when identified.
PREMISES AND EQUIPMENT AND DEPRECIATION
Maintenance and repairs on premises and equipment are charged to expense as
incurred. Renewals and material improvements are capitalized. Depreciation and
amortization of premises is included in "Occupancy expense, net" and
depreciation and amortization of equipment is included in "Other general and
administrative expenses" in the Consolidated Statements of Operations.
F-12
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Depreciation and amortization of premises and equipment is computed using the
straight-line method over the estimated useful lives of the assets. The cost
of leasehold improvements is amortized using the straight-line method over the
lesser of the life of the asset or the remaining term of the related lease.
GOODWILL AND OTHER INTANGIBLE ASSETS
With the exception of the merger with Guarantee Financial Corporation of
California, which was accounted for as a pooling-of-interests, the Bank's
acquisitions since 1981 have been accounted for under the purchase method of
accounting. Assets acquired and liabilities assumed in each acquisition were
recorded at their fair value as of the date of the acquisition and the excess
cost over fair value of the net assets acquired was classified as goodwill and
is being amortized over periods ranging from 10 to 40 years on a straight-line
basis. The purchase accounting discount or premium resulting from the
acquisition is accreted or amortized into interest income using the interest
method, adjusted for actual prepayments. At June 30, 1996, goodwill totaled
$19.8 million and had a weighted average remaining life of 26 years.
In fiscal 1995, the Bank completed its acquisition of $194 million in
deposits of Independence One Bank of California, Federal Savings Bank
("Independence One") and $812 million in deposits of Union Federal Bank
("Union Federal"). The Bank paid a purchase premium of $4.4 million for the
Independence One deposits and a purchase premium of $6.9 million for the Union
Federal deposits. The Bank accepted as part of the consideration for assuming
Union Federal's deposit liabilities certain of Union Federal's assets at their
existing gross book values. These purchase premiums, together with an
adjustment to record the assets acquired from Union Federal at fair value,
totaled $42.9 million, and are reflected under the caption "Goodwill and other
intangible assets" in the Consolidated Statements of Financial Condition.
These intangible assets are being amortized over 10 years. At June 30, 1996,
these intangible assets totaled $39.4 million with a remaining life of nine
years.
Periodically, the Bank evaluates the recoverability of its deposit purchase
premium assets based upon the rate of attrition of deposit relationships
acquired. Goodwill is evaluated for impairment on the basis of the estimated
undiscounted cash flows of the acquired franchise.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank uses various strategies to minimize interest rate risk, including
interest rate futures contracts. The Bank's accounting policy relating to
interest rate futures contracts is to amortize deferred gains and losses on
futures contracts into interest income or expense over the expected remaining
life of the hedged asset or liability. The Bank also uses interest rate
exchange agreements ("swaps") to reduce the interest rate fluctuation risk
related to certain assets and liabilities. The notional amounts of interest
rate swaps are not reflected in the Consolidated Statements of Financial
Condition, but are disclosed in the Notes to Consolidated Financial
Statements. Any gains or losses from selling the swaps simultaneously with the
underlying assets or liabilities are currently recognized. Any gains or losses
from selling only the swap, without the assets or liabilities, are deferred
and amortized over the life of the assets or liabilities. Net interest income
(expense) resulting from the differential between exchanging floating rate and
fixed rate interest payments is recorded on a current basis and is included
with the interest income or expense of the related asset in the Consolidated
Statements of Operations. The Bank does not hold any derivative financial
instruments for trading purposes.
F-13
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of securities under agreements to repurchase
("reverse repurchase agreements") only with selected primary dealers. These
reverse repurchase agreements are treated as financings, and the obligations
to repurchase securities sold are reflected as liabilities in the Consolidated
Statements of Financial Condition. The dollar amount of securities underlying
the agreements remains in the asset accounts.
CURRENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" ("SFAS 121"). This statement establishes
accounting standards for the recognition of impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of.
Under SFAS 121, an entity shall review for impairment its long-lived assets
and certain identifiable intangibles to be held and used whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing this review, the entity shall estimate the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment loss is recognized, measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset, as
a component of income from continuing operations before income taxes.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively.
Long-lived assets and identifiable intangibles held by the Bank consists of
premises and equipment, REO, REI and goodwill. Given the Bank's current
accounting policies for recording and measuring its long-lived assets and
identifiable intangibles as discussed previously, this standard, which was
adopted by the Bank as of July 1, 1996, is not expected to have a material
impact on the Bank's operations or financial position.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). This statement
amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities" ("SFAS 65"), to require that an
institution engaged in mortgage banking activities recognize as separate
assets, rights to service mortgage loans for others, however those servicing
rights are acquired. Under SFAS 122, an institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and the sale or securitization of those loans with servicing rights retained
is required to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based
on their relative fair values, if it is practicable to estimate those fair
values, and to capitalize the amount attributed to the mortgage servicing
rights in the Statement of Financial Condition.
SFAS 122 also requires that an institution engaged in mortgage banking
activities assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. Impairment is to be recognized
through a valuation allowance.
SFAS 122 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 and is required to be adopted prospectively
to transactions in which an institution sells or
F-14
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of SFAS 122. This standard, which was
adopted by the Bank as of July 1, 1996, is not expected to have a material
impact on the Bank's operations or financial position. SFAS 122 will be
superseded by Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125"), described below, effective January 1, 1997.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which defines
a fair value based method of accounting for employee stock options or similar
equity instruments granted after December 31, 1994. SFAS 123 is effective for
the Bank beginning the fiscal year ending June 30, 1997. However, SFAS 123
also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), provided pro forma disclosures of net income and
earnings per share are made as if the fair value based method of accounting
defined by SFAS 123 had been applied. The Bank anticipates electing to
continue to measure compensation cost related to employee stock purchase
options using APB 25, and will provide pro forma disclosures as required in
the 1997 financial statements.
In June 1996, the FASB issued SFAS 125 which establishes the accounting for
transfers and servicing of financial assets and extinguishment of liabilities.
This statement specifies when financial assets and liabilities are to be
removed from an entity's financial statements, specifies the accounting for
servicing assets and liabilities, and specifies the accounting for assets that
can be contractually prepaid in such a way that the holder would not recover
substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, derecognizes assets only when control has been surrendered,
and derecognizes liabilities only when they have been extinguished. SFAS 125
requires that the selling entity continue to carry retained interests,
including servicing assets, relating to assets it has derecognized. Such
retained interests are based on the relative fair values of the retained
interests and derecognized assets at the date of transfer. Transfers not
meeting the criteria for sale recognition are accounted for as a secured
borrowing with pledge of collateral. Under SFAS 125 certain collateralized
borrowings may result in asset derecognition when the assets provided as
collateral may be derecognized based on whether the secured party takes
control over the collateral and whether the secured party is: (1) permitted to
repledge or sell the collateral; and (2) the debtor does not have the right to
redeem the collateral on short notice. Extinguishments of liabilities are
recognized only when the debtor pays the creditor and is relieved of its
obligation for the liability or when the debtor is legally released from being
the primary obligor under the liability, either judicially, or by the
creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets, that are retained in a transfer of assets, in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can contractually be prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment, to
require their classification as available for sale or as trading securities.
Interest-only strips and retained interests are to be recorded at market
value. Changes in market value are included in operations if
F-15
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
classified as trading securities, or in shareholders' equity as unrealized
holding gains or losses, net of the related tax effect, if classified as
available for sale.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. The Bank enters into many transactions
covered by SFAS 125, including securitization and sales of loans with
servicing rights retained, sales of securities under agreements to repurchase,
collateralized borrowings from the Federal Home Loan Bank and others.
Implementation of SFAS 125 will require the Bank to transfer its capitalized
servicing fees receivable as available for sale interest-only strips. The Bank
does not anticipate a material impact, other than the transfer of capitalized
servicing fees receivable to available for sale, on transactions covered by
SFAS 125.
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purpose of the statement of cash flows, cash and cash equivalents
include "Cash and amounts due from banks" and "Federal funds sold and
securities purchased under resale agreements".
Supplemental disclosure of cash flow information is as follows (in
thousands):
YEARS ENDED JUNE 30
--------------------------------------
1996 1995 1994
---------- -------- ----------
Cash paid for:
Interest...................................................... $ 738,407 $777,914 $ 687,993
Income taxes.................................................. 12,623 16,018 --
Non-cash investing and financing activities:
Net assets acquired for Union Federal deposits................ -- 463,240 --
Principal reductions to loans due to foreclosures............. 186,157 294,822 328,022
Loans exchanged for mortgage-backed securities................ 145,826 268,436 1,470,844
Loans made to facilitate the sale of real estate
held for investment and real estate acquired
in settlement of loans....................................... 85,157 139,522 234,546
Net transfers of loans from held for investment
to held for sale............................................. 19,932 263,334 (26,660)
Exchange of GLENFED debentures for common
stock of the bank............................................ -- -- 49,065
Issuance of common stock of the Bank in
exchange for GLENFED debentures.............................. -- -- 22,547
Issuance of Series D preferred stock upon reclassification
of Series B and C preferred stock............................ -- -- 34,892
Conversion of Series D preferred stock into
common stock................................................. -- 2,928 5,961
Exchange of Series E preferred stock for common stock......... 2,226 -- --
Issuance of common stock in exchange for Series E
preferred stock.............................................. 5,902 -- --
Transfer of mortgage-backed and other debt
securities to available for sale............................. 2,818,831 -- 1,013,306
During fiscal 1996, 1995 and 1994, the Bank received income tax refunds of
$6,630,000, $323,000 and $346,000, respectively.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 3: NET EARNINGS (LOSS) PER SHARE INFORMATION
For the purpose of calculating net earnings (loss) per share, the Bank used
the following numbers of shares for the periods presented (in thousands):
YEARS ENDED JUNE 30
--------------------
1996 1995 1994
------ ------ ------
Primary net earnings (loss) per share................... 47,593 46,038 36,469
Fully diluted net earnings (loss) per share............. 47,593 65,389 36,469
No adjustments were made to the weighted average number of common shares
outstanding at June 30, 1994 for primary or fully-diluted calculations as
their effect would be anti-dilutive. The weighted average number of common
shares outstanding for fiscal 1996, 1995 and 1994, excludes 200,686 shares
held by a subsidiary of the Bank. Such shares are eliminated in consolidation.
NOTE 4: ACQUISITIONS AND DISPOSITIONS
On December 15, 1994, the Bank sold its 60-branch Florida franchise,
including deposits, banking offices, furniture and equipment, to Xxxxxxx
Xxxxx, Inc. ("Xxxxxxx") for $243 million, or 7.40% of the $3.3 billion in
deposits transferred to Xxxxxxx. The Bank funded the sale at the time of
closing with FHLB advances and reverse repurchase agreements totaling $3.0
billion, substantially all of which repriced monthly. The Bank's use of
borrowings from the FHLB and reverse repurchase agreements to fund the Florida
franchise sale transaction was part of an overall strategy which included the
sale of non-performing and underperforming loans and the sale of securities,
the proceeds of which were used, along with excess liquidity, to retire then
outstanding reverse repurchase agreements, which released the encumbrances on
the assets subject to these agreements. These assets, along with additional
loans and mortgage-backed securities, were used as collateral for the $3.0
billion of reverse repurchase agreements and FHLB borrowings used to fund the
transaction at the time of closing. The Bank recorded a gain at the time of
closing of $2.3 million, net of $20.7 million in income tax expense associated
with the sale. In connection with this sale, the Bank wrote off in March 1994,
$136.2 million of unamortized goodwill and other assets associated with the
Florida franchise and eliminated the remaining $192 million of such goodwill
at the closing of the sale in December 1994.
On January 6, 1995, the Bank sold University Savings to First Interstate
Bank of Washington N.A. ("First Interstate") for $205.1 million in cash, which
equaled 1.42 times University Savings' book value at December 31, 1994 and
1.72 times its tangible book value at that date. The Bank received cash in
exchange for all of the stock of University Savings, which had $1.2 billion in
assets as of December 31, 1994. Included in the sale of University Savings as
of January 6, 1995 were deposit liabilities totaling $918.1 million and a
gross loan portfolio totaling $826.7 million. The Bank recorded a gain of
$29.7 million, net of $21.0 million in income tax expense associated with the
sale.
University Savings' net earnings totaled $11.7 million in fiscal 1995
through January 6, 1995. University Savings' net earnings totaled $13.5
million in fiscal 1994.
In May 1995, the Bank purchased $194 million in deposits of Independence
One. The Bank paid a purchase premium of 2.27% of deposits, or $4.4 million.
The acquisition also added three bank offices to the Bank's franchise network.
F-17
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
In June 1995, the Bank purchased 13 of the 14 branch offices of Union
Federal, including deposits totaling approximately $812 million and with a
weighted average cost of 4.9%. The Bank paid a purchase premium of $6.9
million and accepted as part of the consideration for assuming Union Federal's
deposit liabilities certain of Union Federal's assets including Union
Federal's entire portfolio of single-family residential loans with unpaid
principal amounts totaling approximately $181 million, a $220 million
portfolio of performing multi-family residential and commercial real estate
loans, $3 million of REO and $24 million of mortgage-backed securities.
The purchase premiums paid by the Bank, together with an adjustment to
record the assets acquired from Union Federal at fair value, totaled $42.9
million and are reflected under the caption "Goodwill and other intangible
assets" in the Consolidated Statements of Financial Condition.
NOTE 5: SHORT-TERM HIGHLY LIQUID INVESTMENTS AND OTHER DEBT SECURITIES
Federal funds sold and securities and whole loans purchased under resale
agreements at the dates indicated are summarized below at cost, which
approximates market (in thousands):
JUNE 30
-----------------
1996 1995
-------- --------
Federal funds sold..................................... $ 33,000 $ 16,000
Securities purchased under resale agreements........... 375,000 280,000
Whole loans purchased under resale agreements.......... 25,000 --
-------- --------
$433,000 $296,000
======== ========
The following table further summarizes information with respect to
securities purchased under resale agreements at June 30, 1996 (in thousands):
JUNE 30,
1996
--------
Balance at year end............................................. $375,000
Average amount outstanding during the year...................... 559,202
Maximum amount outstanding at any month-end..................... 641,000
Amounts outstanding with individual brokers at June 30, 1996 which exceeded
ten percent of stockholders' equity were (in thousands):
BOOK
VALUE MARKET
INCLUDING WEIGHTED VALUE OF
ACCRUED AVERAGE UNDERLYING
BROKER INTEREST MATURITY SECURITIES
------ --------- -------- ----------
CS First Boston............................. $150,072 3 days $153,001
======== ========
Xxxxxx Xxxxxxx.............................. $100,047 3 days $100,000
======== ========
Securities purchased under resale agreements are collateralized by certain
mortgage-backed securities at June 30, 1996 and 1995. At June 30, 1996 and
1995, the Bank held only securities purchased under agreements to resell
identical securities. The securities underlying the agreements are held in the
custodial accounts of a third party trustee for the Bank until the maturities
of the agreements.
F-18
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following tables summarize the Bank's other debt securities held to
maturity with related remaining maturity data as of the dates indicated (in
thousands):
JUNE 30, 1996
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Held to maturity:
U.S. Treasury securities:
Maturing within 1 year............. $ 8,086 $-- $-- $ 8,086
------- ---- ---- -------
Other securities:
Maturing within 1 year............. 10,786 -- -- 10,786
Maturing after 10 years............ 5 44 -- 49
------- ---- ---- -------
10,791 44 -- 10,835
------- ---- ---- -------
$18,877 $ 44 $-- $18,921
======= ==== ==== =======
JUNE 30, 1995
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
Held to maturity:
U.S. Treasury securities:
Maturing within 1 year............. $17,354 $-- $ (2) $17,352
------- ---- ---- -------
Other securities:
Maturing within 1 year............. 24,967 -- (2) 24,965
Maturing after 10 years............ 5 84 -- 89
------- ---- ---- -------
24,972 84 (2) 25,054
------- ---- ---- -------
$42,326 $ 84 $ (4) $42,406
======= ==== ==== =======
Fair values at June 30, 1996 and 1995 were based upon quotations for similar
or identical securities.
The weighted average interest rate on federal funds sold, securities
purchased under resale agreements and other debt securities was 7.62% and
9.25% at June 30, 1996 and 1995, respectively. Accrued interest receivable on
these securities was $302,000 and $248,000 at June 30, 1996 and 1995,
respectively, and is included in "Interest receivable" in the accompanying
Consolidated Statements of Financial Condition.
There were no sales of other debt securities held to maturity or other debt
securities available for sale during fiscal 1996, 1995 or 1994.
Other debt securities include net discounts amounting to $148,000 at June
30, 1995.
There were no other debt securities pledged as collateral for securities
sold under agreements to repurchase and various other borrowings at June 30,
1996 and 1995.
F-19
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 6: MORTGAGE-BACKED SECURITIES
The following tables summarize the Bank's mortgage-backed securities held to
maturity and available for sale as of the dates indicated (in thousands):
JUNE 30, 1996
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Held to maturity:
FNMA............................. $ 490,138 $ 7,857 $ (2,730) $ 495,265
FHLMC............................ 296,641 1,151 (2,012) 295,780
GNMA............................. 284,023 480 (3,711) 280,792
AA-rated pass-through securities. 258,796 2,168 (3,967) 256,997
Residual collateralized mortgage
obligations..................... 277 -- (277) --
Other............................ 26,360 121 (3,971) 22,510
---------- ------- -------- ----------
$1,356,235 $11,777 $(16,668) $1,351,344
========== ======= ======== ==========
Available for sale:
AA-rated pass-through securities. $ 728,438 $ 292 $(16,447) $ 712,283
AAA-rated collateralized mortgage
obligations..................... 58,095 208 (143) 58,160
GNMA............................. 113,928 13 -- 113,941
FHLMC............................ 142 1 -- 143
FNMA............................. 28 -- -- 28
---------- ------- -------- ----------
$ 900,631 $ 514 $(16,590) $ 884,555
========== ======= ======== ==========
JUNE 30, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
Held to maturity:
AAA-rated collateralized mortgage
obligations..................... $1,900,169 $ -- $(58,439) $1,841,730
AA-rated pass-through securities. 1,539,129 4,060 (31,095) 1,512,094
FNMA............................. 580,044 9,365 (4,609) 584,800
GNMA............................. 337,944 595 (6,685) 331,854
FHLMC............................ 327,481 3,389 (668) 330,202
Residual collateralized mortgage
obligations..................... 4,095 747 (599) 4,243
Other............................ 32,545 56 (4,909) 27,692
---------- ------- --------- ----------
$4,721,407 $18,212 $(107,004) $4,632,615
========== ======= ========= ==========
Available for sale:
GNMA............................. $ 1,805 $ 50 $ -- $ 1,855
FHLMC............................ 160 3 -- 163
FNMA............................. 32 -- -- 32
---------- ------- --------- ----------
$ 1,997 $ 53 $ -- $ 2,050
========== ======= ========= ==========
F-20
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
During fiscal 1996, the Bank sold $1.7 billion of its collateralized
mortgage obligations ("CMOs"). The Bank's decision to sell most of its CMO
portfolio was part of a strategic realignment of the Bank's mortgage-backed
securities portfolio in which $2.8 billion of mortgage-backed securities were
reclassified from "held to maturity" to "available for sale" during the
quarter ended December 31, 1995, in compliance with implementation guidance
for SFAS 115. The reclassification included the Bank's $1.8 billion fixed-rate
CMO portfolio and $1.0 billion of its adjustable-rate pass-through securities
portfolio.
The bank recorded a pre-tax loss of $28.2 million on the sale of CMOs during
fiscal 1996. As of June 30, 1996, CMOs totaling $58.2 million were classified
as available for sale. In accordance with SFAS 115, the Bank recorded in its
stockholders' equity accounts an unrealized loss at June 30, 1996 of $11.4
million, net of tax, on the available for sale portfolio. The Bank has no
immediate plans to sell the remaining CMOs or the pass-through portfolio.
The carrying values of mortgage-backed securities as of June 30, 1996 and
1995 were net of unamortized premiums of $39,001,000, and $77,333,000,
respectively, and deferred loan origination fees, net of deferred loan
origination costs, on securitized loans of the Bank of $3,041,000 and
$3,677,000 at June 30, 1996 and 1995, respectively.
The weighted average interest rates of mortgage-backed securities were 6.26%
and 6.30% at June 30, 1996 and 1995, respectively. Interest receivable related
to mortgage-backed securities outstanding at June 30, 1996 and 1995 totaled
$15,146,800 and $26,449,000, respectively. The Bank uses mortgage-backed
securities as collateral for various borrowings. At June 30, 1996 and 1995,
$784 million and $2.9 billion, respectively, of mortgage-backed securities
were pledged as collateral for various borrowings.
The following table presents proceeds from the sale of mortgage-backed
securities and gross realized gains and losses for the periods indicated (in
thousands):
YEARS ENDED JUNE 30
--------------------------------
1996 1995 1994
---------- -------- ----------
Proceeds from sales..................... $1,816,876 $ 12,006 $1,244,049
========== ======== ==========
Gross realized gains.................... $ 7,821 $ 151 $ 30,169
Gross realized losses................... (42,043) (11,876) (29,070)
---------- -------- ----------
Net gain (loss)......................... $ (34,222) $(11,725) $ 1,099
========== ======== ==========
In fiscal 1994, the Bank sold mortgage-backed securities that were
designated as held to maturity. The circumstance leading to the decision to
sell these held-to-maturity securities was a major disposition of operations
in the form of the Florida franchise sale. The sale agreement called for the
Bank to deliver cash in an amount that, together with the value of the banking
offices and related furniture and equipment, equaled the deposit liabilities
less the agreed upon purchase price.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The net gain (loss) on sale of mortgage-backed securities includes the
following components for the periods indicated (in thousands):
YEARS ENDED JUNE 30
----------------------------
1996 1995 1994
-------- -------- --------
Cash gain (loss)............................ $(29,095) $ (93) $ 22,231
Deferred fees recognized on sale............ 1,402 142 5,760
Recourse provision and fees................. (6,568) (11,679) (23,714)
Other items................................. 39 (95) (3,178)
-------- -------- --------
$(34,222) $(11,725) $ 1,099
======== ======== ========
See Note 7--"Loans Receivable" for a discussion of loans sold with recourse.
NOTE 7: LOANS RECEIVABLE
COMPOSITION
Loans receivable held for investment at the dates indicated are summarized
as follows (in thousands):
JUNE 30
------------------------
1996 1995
----------- -----------
Residential loans:
Existing structures:
1-4 units........................................... $ 7,501,733 $ 6,284,092
5-36 units.......................................... 1,559,097 1,626,696
37 or more units.................................... 400,415 455,783
Construction:
1-4 units........................................... 16,794 2,113
5-36 units.......................................... 5,445 7,624
Land loans............................................ 18,250 36,251
Non-residential loans:
Existing structures................................. 1,338,975 1,506,491
Construction........................................ -- 500
Home equity and improvement loans..................... 28,470 30,468
----------- -----------
Total real estate loans............................ 10,869,179 9,950,018
Commercial loans...................................... 10,391 22,844
Consumer auto and recreational vehicle loans.......... 17,588 24,739
Other consumer loans (secured)........................ 33,782 38,264
Other consumer loans (unsecured)...................... 21,788 17,600
----------- -----------
Total gross loans.................................. 10,952,728 10,053,465
Less:
Unearned discounts on loans purchased............... (34,772) (70,038)
Undisbursed loan funds.............................. (12,160) (4,653)
Deferred loan fees.................................. (24,446) (28,536)
Allowance for loan losses........................... (186,756) (209,142)
----------- -----------
Loans receivable, net.............................. $10,694,594 $ 9,741,096
=========== ===========
F-22
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Bank had residential real estate loans held for sale totaling $33.3
million as of June 30, 1996. As of June 30, 1995, the Bank had loans held for
sale totaling $158.2 million, consisting primarily of $83.9 million of non-
residential real estate loans and $62.4 million of multi-family residential
loans related to the August 1995 sale of $176 million of non-performing and
classified real estate loans and REO.
The weighted average interest rate of loans receivable (including those
classified as held for sale), giving effect to accretion of discounts and
deferred loan fees, was 7.74% and 7.91% at June 30, 1996 and 1995,
respectively. These rates were reduced by the effect of non-accrual loans,
which resulted in a decrease of the weighted average interest rate on loans of
0.15% and 0.18% at June 30, 1996 and 1995, respectively. Interest receivable
on loans receivable (including interest on loans classified as held for sale)
was $70,539,000 and $67,361,000 at June 30, 1996 and 1995, respectively, and
is included in "Interest receivable" in the accompanying Consolidated
Statements of Financial Condition.
The carrying value of loans pledged to secure certain deposits and
borrowings was $4.4 billion and $4.0 billion at June 30, 1996 and 1995,
respectively.
CREDIT RISK AND CONCENTRATION
A summary of activity in the allowance for loan losses during fiscal 1996,
1995 and 1994 is as follows (dollars in thousands):
REAL ESTATE CONSUMER COMMERCIAL
LOANS LOANS LOANS TOTAL
----------- -------- ---------- ---------
Balance--June 30, 1993.............. $ 315,993 $ 5,905 $12,884 $ 334,782
Provision for loan losses........... 144,339 2,739 (7,352) 139,726
Charge-offs......................... (154,815) (6,904) (6,353) (168,072)
Recoveries.......................... 4,670 2,735 6,873 14,278
--------- ------- ------- ---------
Balance--June 30, 1994.............. 310,187 4,475 6,052 320,714
Provision for loan losses........... 67,872 2,562 (4,284) 66,150
Charge-offs......................... (199,042) (4,595) (2,340) (205,977)
Recoveries.......................... 10,706 1,840 4,748 17,294
Acquisition of Union Federal loans.. 17,350 -- -- 17,350
Sale of University Savings.......... (6,199) (190) -- (6,389)
--------- ------- ------- ---------
Balance--June 30, 1995.............. 200,874 4,092 4,176 209,142
Provision for loan losses........... 43,517 926 (4,093) 40,350
Charge-offs......................... (69,205) (2,842) (974) (73,021)
Recoveries.......................... 3,597 1,098 5,590 10,285
--------- ------- ------- ---------
Balance--June 30, 1996.............. $ 178,783 $ 3,274 $ 4,699 $ 186,756
========= ======= ======= =========
Percent of type of gross loans re-
ceivable........................... 1.64% 4.48% 45.22% 1.70%
========= ======= ======= =========
Included in the allowance for loan losses activity for fiscal 1995 is the
reversal of University Savings' allowance for loan losses which totaled $6.4
million as of January 6, 1995, the effective date of the sale, and the
establishment of an allowance for loan losses which totaled $17.4 million
related to the loans purchased in the Union Federal transaction. Included in
total charge-offs for fiscal 1995 are charge-offs of $34.0 million and $18.8
million on loans secured by multi-family residential
F-23
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
properties and non-residential properties, respectively, related to the $166
million loan sale completed in October 1994 and charge-offs of $17.0 million
and $20.3 million on such loans, respectively, related to the August 1995 $176
million loan sale.
Included in fiscal 1994 charge-offs of $168.1 million are charge-offs of
$21.1 million and $19.0 million on loans secured by multi-family residential
properties and non-residential properties, respectively, related to the $244
million sale of non-performing and under-performing loans.
Net charge-offs represented 0.59%, 1.86% and 1.44% of average gross loans
receivable for fiscal 1996, 1995, and 1994, respectively.
The following is a summary of non-accrual loans, troubled debt
restructurings and other impaired loans (in thousands):
JUNE 30
--------------------------
1996 1995 1994
-------- -------- --------
Non-accrual loans................................... $192,445 $244,242 $508,543
Troubled debt restructurings........................ 9,194 38,542 34,218
Recorded investment in other impaired loans......... 70,289 83,137 141,431
-------- -------- --------
$271,928 $365,921 $684,192
======== ======== ========
At June 30, 1996 and 1995, impaired loans and the related specific loan loss
allowances were as follows (in thousands):
JUNE 30
---------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
ALLOWANCE ALLOWANCE
RECORDED FOR NET RECORDED FOR NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
---------- --------- ---------- ---------- --------- ----------
Non-accrual loans:
With specific allow-
ances................ $ 42,575 $11,344 $ 31,231 $ 42,054 $10,706 $ 31,348
Without specific
allowances........... 36,782 -- 36,782 98,930 -- 98,930
-------- ------- -------- -------- ------- --------
79,357 11,344 68,013 140,984 10,706 130,278
-------- ------- -------- -------- ------- --------
TDRs:
Without specific
allowances........... 9,194 -- 9,194 38,542 -- 38,542
-------- ------- -------- -------- ------- --------
Other impaired loans:
With specific allow-
ances................ 63,987 15,118 48,869 49,747 8,958 40,789
Without specific
allowances........... 6,302 -- 6,302 33,390 -- 33,390
-------- ------- -------- -------- ------- --------
70,289 15,118 55,171 83,137 8,958 74,179
-------- ------- -------- -------- ------- --------
$158,840 $26,462 $132,378 $262,663 $19,664 $242,999
======== ======= ======== ======== ======= ========
Other impaired loans without specific allowances totaling $6.3 million and
$33.4 million as of June 30, 1996 and 1995, respectively, in the table above,
include loans for which a portion of the loan balance has been charged-off.
F-24
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The average net recorded investment in impaired loans for the years ended
June 30, 1996, 1995 and 1994 was $175 million, $353 million and $694 million,
respectively. Interest income of $7.8 million, $11.0 million and $15.5 million
for fiscal 1996, 1995 and 1994, respectively, was recognized on impaired loans
during the period of impairment.
Loans in non-accrual status as of June 30, 1996, 1995 and 1994 had interest
due but not recognized of approximately $10.5 million, $13.6 million and $27.8
million, respectively. The amount of interest income on these loans that was
included in net earnings in fiscal 1996, 1995 and 1994 was $5.8 million, $5.5
million and $10.1 million, respectively. Net interest forgone related to
troubled debt restructurings totaled $0.2 million, $0.7 million and $0.3
million in 1996, 1995 and 1994, respectively. Interest income recorded on
troubled debt restructurings for fiscal 1996, 1995 and 1994 was $0.7 million,
$2.6 million and $2.1 million, respectively. The Bank has no commitments to
lend additional funds to borrowers whose loans were classified as non-
performing or troubled debt restructurings.
The following table summarizes the Bank's non-accrual and restructured loans
by state as of the dates indicated (dollars in thousands):
JUNE 30, 1996 JUNE 30, 1995
-------------------------- ---------------------------
NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED
------------ ------------ ------------ -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- --- ------------ -------- --- -------- ----
California............ $169,565 88% $ 8,922 97% $226,422 93% $ 37,081 96%
Florida............... 15,153 8 272 3 14,205 6 1,461 4
Other................. 7,727 4 -- -- 3,615 1 -- --
-------- --- ------- ---- -------- --- -------- ----
$192,445 100% $ 9,194 100% $244,242 100% $ 38,542 100%
======== === ======= ==== ======== === ======== ====
At June 30, 1996 and 1995, outstanding commitments to originate loans
receivable totaled $44 million and $40 million, respectively.
In previous years, the Bank sold certain loans with limited recourse
requirements. These provisions require the Bank to repurchase loans on which
the borrower has defaulted. The present value of all future estimated loan
losses are provided for at the time of such sales. Subsequent adjustments to
estimates of future losses are charged to gain or loss on sale of mortgage-
backed securities. In fiscal 1991, the Bank entered into certain transactions
whereby its recourse obligations were reduced in order to reduce risk-based
capital requirements (the "recourse reduction transactions"). In each
transaction, the Bank retained the risk of first loss up to a specified level
for which the Bank maintains a liability for recourse obligations. The
remainder of the Bank's recourse obligations were transferred to an
independent third party. In fiscal 1996, for certain recourse reduction
transactions, the recourse reduction agreements expired or were cancelled by
the Bank and the full amount of the recourse obligations reverted back to the
Bank from the independent third party. There were no sales of loans and
mortgage-backed securities with recourse provisions in fiscal 1996 or 1995.
The Bank had recourse obligations for approximately $1.3 billion of loans sold
with recourse at June 30, 1996 for which the Bank is contingently liable for
up to $636 million in future losses. The Bank's estimate of its liability
under these obligations was $14.2 million and $12.8 million at June 30, 1996
and 1995, respectively, and is included in "Other liabilities and accrued
expenses" in the accompanying Consolidated Statements of Financial Condition.
F-25
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
A summary of the balance of loans sold with recourse at the dates indicated
is as follows (in thousands):
JUNE 30
---------------------
1996 1995
---------- ----------
Loans with original loan-to-value ("LTV") ratios
less than or equal to 80%........................ $ 781,943 $ 359,949
Loans with original LTV ratios greater than 80%:
With Private Mortgage Insurance ("PMI")......... 106,191 36,466
Without PMI..................................... 83,698 35,072
---------- ----------
971,832 431,487
Recourse reduction transactions................... 285,848 1,053,889
---------- ----------
$1,257,680 $1,485,376
========== ==========
Recorded liability for recourse................... $ 14,238 $ 12,773
========== ==========
The following table summarizes the Bank's gross loan portfolio, including
loans held for sale, by state and by property type as of June 30, 1996 (in
thousands):
CALIFORNIA FLORIDA OTHER(1) TOTAL
---------- -------- ---------- -----------
Single-family 1-4 units.............. $5,298,058 $642,447 $1,639,807 $ 7,580,312
Multi-family:
5-36 units......................... 1,530,080 34,175 287 1,564,542
37 or more units................... 308,501 82,068 9,846 400,415
Non-residential:
Office buildings................... 407,582 46,232 7,002 460,816
Shopping centers................... 347,200 36,640 11,127 394,967
Warehouse/storage.................. 89,677 18,554 -- 108,231
Hotels/motels...................... 10,764 14,082 20,300 45,146
Industrial parks................... 99,268 2,503 -- 101,771
Land............................... 14,573 3,000 000 00,250
Mobile home parks.................. 22,119 10,384 5,013 37,516
Commercial/industrial.............. 135,946 52,061 2,521 190,528
---------- -------- ---------- -----------
Total non-residential............ 1,127,129 183,925 46,171 1,357,225
Commercial........................... 4,959 -- 5,432 10,391
Consumer............................. 69,185 3,929 44 73,158
---------- -------- ---------- -----------
$8,337,912 $946,544 $1,701,587 $10,986,043
========== ======== ========== ===========
--------
(1) The state with the largest loan balance in this category is New York with
$236 million, substantially all of which is single-family.
The Bank's collateral requirements are the same, regardless of the region in
which the loans are originated. Loans originated and purchased are secured by
real estate with a principal amount of generally no more than 80% of the
appraised value. Loans with LTV ratios in excess of 80% require private
mortgage insurance, or if they meet certain criteria, can be made at higher
interest rates and fees at the option of the loan applicant. These loans are
priced higher in rate, fee and margin than those for which mortgage insurance
is obtained to recognize the increased credit risk assumed by the
F-26
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Bank. This option is available only on loans with a maximum loan amount of
$300,000 and an LTV ratio of no more than 90% without negative amortization
features, where the purpose of the loan is to purchase, or to refinance an
existing Glendale Federal loan secured by, a one-unit, single-family
residence.
The following table summarizes the Bank's first trust deed real estate loan
portfolio by original loan-to-value ratio, including those classified as held
for sale, at the dates indicated (dollars in thousands):
JUNE 30
---------------------------------------
1996 1995
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
Loans with LTV ratio less than or equal
to 80%................................ $ 9,196,477 85% $ 8,497,613 85%
Loans with LTV ratio greater than 80%:
With PMI............................. 694,365 6 601,912 6
Without PMI.......................... 957,255 9 954,745 9
----------- --- ----------- ---
$10,848,097 100% $10,054,270 100%
=========== === =========== ===
NOTE 8: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
A summary of REO, net of specific valuation allowances, by property type is
as follows (in thousands):
JUNE 30
-----------------
1996 1995
------- --------
Single-family............................................. $39,693 $ 37,316
Multi-family.............................................. 16,495 23,847
Non-residential........................................... 10,835 34,237
Land...................................................... 15,058 15,787
------- --------
82,081 111,187
General allowance......................................... (3,832) (5,457)
------- --------
$78,249 $105,730
======= ========
A summary of the activity in the allowance for losses on REO, including
specific and general allowances, is as follows (in thousands):
YEARS ENDED JUNE 30
----------------------------
1996 1995 1994
-------- -------- --------
Beginning balance.............................. $ 30,719 $ 35,227 $ 55,715
Provision for losses........................... 12,110 16,846 26,421
Charge-offs.................................... (16,141) (21,354) (46,909)
-------- -------- --------
Ending balance................................. $ 26,688 $ 30,719 $ 35,227
======== ======== ========
F-27
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the Bank's concentration of REO by state
(dollars in thousands):
JUNE 30, 1996 JUNE 30, 1995
--------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- -------
California.................................. $61,663 75% $ 79,776 72%
Florida..................................... 19,343 24 20,092 18
Other....................................... 1,075 1 11,319 10
------- --- -------- ---
$82,081 100% $111,187 100%
======= === ======== ===
Operations of REO are summarized as follows (in thousands):
YEARS ENDED JUNE 30
----------------------------
1996 1995 1994
-------- -------- --------
Gain on sale of REO............................ $ 10,880 $ 12,376 $ 20,048
Provision for losses........................... (12,110) (16,846) (26,421)
Net operating expenses......................... (7,196) (10,564) (17,716)
-------- -------- --------
$ (8,426) $(15,034) $(24,089)
======== ======== ========
NOTE 9: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB")
The Bank's investment in capital stock of FHLB, at cost, totaled
$192,842,000 and $185,799,000 at June 30, 1996 and 1995, respectively. The
Bank earned 5.4%, 5.3% and 4.6% from dividends received during fiscal 1996,
1995 and 1994, respectively. Dividends receivable on FHLB stock totaled
$2,498,300 and $2,072,300 at June 30, 1996 and 1995, respectively, and is
included in "Interest receivable" in the accompanying Consolidated Statements
of Financial Condition. As a member of the FHLB system, the Bank is required
to maintain an investment in the capital stock of the FHLB in an amount at
least equal to the greater of 1% of residential mortgage assets, or 5% of
outstanding borrowings (advances) from the FHLB, or 0.3% of total assets. FHLB
capital stock is pledged to secure FHLB advances.
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment at the dates indicated are summarized as follows (in
thousands):
JUNE 30
--------------------
1996 1995
--------- ---------
Buildings and leasehold improvements................... $ 155,227 $ 206,330
Furniture, fixtures and equipment...................... 88,205 101,924
Land................................................... 22,171 24,170
--------- ---------
265,603 332,424
Less accumulated depreciation and amortization......... (139,235) (169,308)
--------- ---------
$ 126,368 $ 163,116
========= =========
In fiscal 1996, the Bank sold its former headquarters facility for
approximately $30 million. The Bank recorded a pre-tax loss on this sale of
$2.5 million during fiscal 1996, which is included in "Other income (loss),
net" in the Consolidated Statements of Operations.
F-28
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Operating expenses include provisions for depreciation and amortization of
$15,755,000, $16,854,000 and $21,669,000 for fiscal 1996, 1995 and 1994,
respectively.
The Bank leases certain of its office buildings and branch offices, as well
as certain equipment, under non-cancelable operating leases. Rental expense
incurred in fiscal 1996, 1995 and 1994 was $15,140,000, $20,126,000, and
$24,738,000, respectively. Minimum future lease payments on building and
equipment leases at June 30, 1996, were as follows (in thousands):
Due in one year...................................................... $14,589
Due in two years..................................................... 10,779
Due in three years................................................... 8,885
Due in four years.................................................... 7,645
Due in five years.................................................... 5,917
Due thereafter....................................................... 50,160
-------
$97,975
=======
NOTE 11: MORTGAGE SERVICING ASSETS
The Bank's portfolio of loans serviced for others totaled $14.1 billion at
June 30, 1996 and included $1.9 billion of loans sub-serviced by a third party
which will be transferred to the Bank's principal loan servicing system in the
first quarter of fiscal 1997. Loans serviced for others at June 30, 1995 and
1994 totaled $11.7 billion and $7.8 billion, respectively.
MORTGAGE SERVICING RIGHTS
The following table summarizes the activity in mortgage servicing rights for
the periods indicated (in thousands):
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- ------- -------
Beginning balance................................... $ 55,962 $14,394 $ 5,757
Purchases........................................... 50,836 51,537 11,330
Amortization........................................ (12,828) (7,966) (2,693)
Decrease due to sale of University Savings.......... -- (2,003) --
-------- ------- -------
Ending balance...................................... $ 93,970 $55,962 $14,394
======== ======= =======
Periodically, the Bank evaluates the recoverability of purchased mortgage
servicing rights based on the projected value of future net servicing income.
Future prepayment rates are estimated based on current interest rates and
various portfolio characteristics, including loan type, interest rate, and
market prepayment estimates. If the estimated recovery is lower than the
current amount of purchased mortgage servicing rights, a reduction to
purchased mortgage servicing rights is charged to loan servicing income.
CAPITALIZED SERVICING FEES RECEIVABLE
Capitalized servicing fees receivable are amortized using the interest
method adjusted for prepayment expectations and experience. The decrease in
amortization in fiscal 1995 reflects a decrease in prepayment activity
experienced by the Bank in fiscal 1995.
F-29
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the activity in capitalized servicing fees
receivable for the periods indicated (in thousands):
YEARS ENDED JUNE 30
---------------------------
1996 1995 1994
------- -------- --------
Beginning balance................................. $43,160 $ 54,325 $ 77,460
Additions from sales of loans and mortgage-
backed securities.............................. -- -- 2,022
Amortization.................................... (9,731) (11,165) (25,157)
------- -------- --------
Ending balance.................................... $33,429 $ 43,160 $ 54,325
======= ======== ========
Periodically, the Bank evaluates the recoverability of capitalized servicing
fees receivable based on the present value of the difference between its
retained servicing spread and the normal servicing fee rate applicable to
comparable servicing arrangements. In the event the estimated recovery is
lower than the current amount of capitalized servicing fees receivable, a
reduction to capitalized servicing fees receivable is charged to loan
servicing income.
NOTE 12: DEPOSITS
Deposits at the dates indicated are summarized as follows (dollars in
thousands):
JUNE 30
---------------------------------------------------------
1996 1995
---------------------------- ----------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ---------- -------- -------- ---------- --------
Checking/NOW accounts... 0.56% $ 778,980 8.9% 0.67% $ 661,853 7.6%
Passbook accounts....... 2.15 492,777 5.7 2.23 551,905 6.3
Money market
checking/savings....... 4.37 1,719,319 19.7 4.64 1,272,012 14.6
Certificate accounts:
5.00% and lower........ 4.79 1,790,616 20.5 4.54 1,097,791 12.6
5.01%--6.00%........... 5.48 3,085,829 35.4 5.62 2,439,085 27.9
6.01%--7.00%........... 6.43 638,282 7.3 6.68 2,297,924 26.3
7.01%--8.00%........... 7.28 182,292 2.1 7.31 364,838 4.2
8.01%--9.00%........... 8.23 2,396 0.0 8.49 6,834 0.1
9.01%--10.00%.......... 9.45 259 0.0 9.50 919 0.0
10.01%--11.00%......... 0.00 -- 0.0 10.60 12,119 0.1
11.01% and over........ 11.55 33,226 0.4 11.55 29,600 0.3
---------- ----- ---------- -----
Total certificate ac-
counts............... 5.46 5,732,900 65.7 5.95 6,249,110 71.5
---------- ----- ---------- -----
4.62% $8,723,976 100.0% 5.13% $8,734,880 100.0%
========== ===== ========== =====
The average interest rate is based upon stated interest rates without giving
consideration to daily compounding of interest or forfeiture of interest
because of premature withdrawal.The cost of interest rate swaps which adjust
the rate on deposits is reflected in the weighted average interest rate.
F-30
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Included in deposits are $57,426,000 and $127,806,000 of brokered
certificates of deposit at June 30, 1996 and 1995, respectively.
Accrued interest payable on deposits at June 30, 1996 and 1995 was
$3,092,000 and $6,707,000, respectively, which is included in "Other
liabilities and accrued expenses" in the Consolidated Statements of Financial
Condition.
The aggregate remaining maturities of deposits at June 30, 1996 are as
follows (in thousands):
No stated maturity.................................................. $2,991,076
Maturing within one year:
1st quarter....................................................... 1,791,596
2nd quarter....................................................... 1,631,295
3rd quarter....................................................... 587,423
4th quarter....................................................... 497,687
Maturing within two years........................................... 821,436
Maturing within three years......................................... 278,983
Maturing within four years.......................................... 74,759
Maturing within five years.......................................... 48,263
Maturing thereafter................................................. 1,458
----------
$8,723,976
==========
Deposits of $100,000 or more included in the above tables had the following
remaining maturities at June 30, 1996 (in thousands):
3 months and under.................................................. $1,001,634
Over 3 months to 6 months........................................... 313,192
Over 6 months to 12 months.......................................... 193,026
Over 12 months...................................................... 213,166
----------
$1,721,018
==========
Interest expense on deposits by type is summarized as follows (in
thousands):
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- -------- --------
Checking/NOW accounts............................... $ 4,115 $ 5,867 $ 9,371
Passbook accounts................................... 11,381 18,525 33,499
Money market checking and savings................... 69,432 44,740 20,511
Certificate accounts................................ 348,906 343,762 390,093
-------- -------- --------
$433,834 $412,894 $453,474
======== ======== ========
At June 30, 1996 and 1995, the Bank had approximately $76,524,000 and
$47,753,000, respectively, of its real estate loans and mortgage-backed
securities pledged as collateral for certain public deposits.
F-31
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 13: BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows
(dollars in thousands):
YEARS ENDED JUNE 30
----------------------------------
1996 1995 1994
---------- ---------- ----------
Balance at year end........................ $ 758,050 $2,695,176 $2,306,274
Average amount outstanding during the year. 1,869,194 2,927,313 3,038,734
Maximum amount outstanding at any month-
end....................................... 2,987,948 4,172,953 3,709,650
Weighted average interest rate during the
year...................................... 5.82% 5.66% 3.63%
Weighted average interest rate on year-end
balances.................................. 5.50% 6.15% 4.25%
The Bank incurred interest expense on securities sold under agreements to
repurchase of $109 million, $166 million, and $111 million for fiscal 1996,
1995 and 1994, respectively.
Mortgage-backed securities were sold under agreements to repurchase at June
30, 1996 and are contractually due July 1996. These agreements require the
Bank to repurchase identical securities to those which were sold. The
securities underlying the agreements were delivered to the dealers who
arranged the transactions.
Amounts outstanding with individual brokers at June 30, 1996 which exceeded
ten percent of stockholders' equity were (dollars in thousands):
BOOK VALUE
INCLUDING WEIGHTED MARKET VALUE
ACCRUED AVERAGE OF PLEDGED
BROKER INTEREST MATURITY SECURITIES
------ ---------- -------- ------------
Xxxxxxx Xxxxx & Co. ........................ $415,326 6 days $420,894
Nomura Securities International, Inc........ 255,953 17 days 262,753
Securities sold under agreements to repurchase are collateralized as follows
(in thousands):
JUNE 30
---------------------------------------------
1996 1995
----------------------- ---------------------
BOOK VALUE BOOK VALUE
INCLUDING INCLUDING
ACCRUED ACCRUED MARKET
INTEREST MARKET VALUE INTEREST VALUE
---------- ------------ ---------- ----------
Mortgage-backed securities; book
value
includes accrued interest of
$5,827 in 1996
and $15,434 in 1995............ $790,086 $772,755 $2,895,878 $2,831,174
FEDERAL HOME LOAN BANK
The Bank has a line of credit with the Federal Home Loan Bank ("FHLB") of
San Francisco in the amount of $5,650,000,000 and $5,651,603,000 at June 30,
1996 and 1995, respectively. All advances under this FHLB line of credit are
collateralized with mortgages and FHLB stock.
F-32
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
FHLB advances are summarized as follows (dollars in thousands):
WEIGHTED WEIGHTED
BALANCE AT AVERAGE BALANCE AT AVERAGE
JUNE 30, 1996 RATE JUNE 30, 1995 RATE
------------- -------- ------------- --------
Fixed-rate, fixed-term............ $3,250,000 6.03% $2,095,000 6.12%
Variable-rate, fixed-term......... 588,000 5.46 1,400,000 6.35
---------- ----------
$3,838,000 5.94% $3,495,000 6.18%
========== ==========
The Bank incurred interest expense on FHLB advances of $202 million, $181
million, and $104 million for fiscal 1996, 1995, and 1994, respectively.
These advances are secured by the investment in stock of the FHLB totaling
$192.8 million and $185.8 million at June 30, 1996 and 1995, respectively, as
well as certain mortgage loans and mortgage-backed and other debt securities
aggregating $4.3 billion and $3.9 billion at June 30, 1996 and 1995,
respectively.
The maturities of FHLB advances with corresponding weighted average interest
rates at June 30, 1996 are as follows (dollars in thousands):
WEIGHTED
AVERAGE
AMOUNT RATE
---------- --------
Maturing in one year................................... $1,350,000 6.43%
Maturing in two years.................................. 1,088,000 5.63
Maturing in three years................................ 500,000 5.64
Maturing in five years................................. 900,000 5.77
----------
$3,838,000 5.94%
==========
At June 30, 1996, interest rates, both fixed and variable, ranged from 5.37%
to 8.08%. At June 30, 1995, the range was 4.21% to 11.18%.
OTHER BORROWINGS
Other borrowings are summarized as follows (dollars in thousands):
JUNE 30
---------------
1996 1995
------- -------
Convertible subordinated debentures due March 2001 with inter-
est at 7.75%................................................. $10,506 $10,856
Notes payable with weighted average interest rates of 8.75%
and 12.75% at June 30, 1996 and 1995, respectively........... 93 1,177
Collateralized notes; weighted average interest rate of
11.61%....................................................... -- 13,479
Subordinated notes with interest at 14.88%.................... -- 3,371
------- -------
$10,599 $28,883
======= =======
F-33
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Convertible Subordinated Debentures
In March 1986, GLENFED issued $75,000,000 of 7.75% Convertible Subordinated
Debentures in the European market. In fiscal 0000, XXXXXXX xxxxxxxxxxx
$15,064,000 of the debentures. During fiscal 1994, $49,065,000 of the
debentures were exchanged for common stock of Glendale Federal as part of a
comprehensive recapitalization of the Bank and the payment obligations with
respect to the remaining debentures were assumed by a wholly-owned subsidiary
of the Bank. The balances outstanding at June 30, 1996 and 1995 were
$10,506,000 and $10,856,000, respectively. The debentures, which mature on
March 15, 2001, became convertible at the option of the holder into common
stock of the Bank at the rate of $706.25 per share subsequent to the
recapitalization. Prior to the recapitalization, the debentures were
convertible into common stock of GLENFED at the rate of $28.25 per share.
Collateralized Notes
The Bank received proceeds of $41,798,000 from the issuance of Swiss bonds
during fiscal 1986 yielding 11.61%. The Swiss bonds were collateralized by
real estate whole loans, mortgage-backed securities and marketable securities.
Due to redemptions in previous years, the outstanding balance of the Swiss
bonds at June 30, 1995 totaled $13,479,000. The bonds matured and were repaid
in full on August 25, 1995.
Subordinated Notes
During 1985, the Bank issued $57,500,000 in 14.88% capital notes due 1997
(less unamortized discount of $250,000). In prior years, the Bank had
purchased $21,850,000 of the notes in the open market. In fiscal 1993, the
Bank completed an exchange offer with holders of 90.6% of the subordinated
notes then outstanding for 12% non-cumulative perpetual preferred stock. The
Bank recorded a gain on this extinguishment. See Note 20 "Extraordinary items,
net" for additional information. The outstanding balance of the notes at June
30, 1995 was $3,371,000. Original terms of the notes required a mandatory
redemption payment on the remaining notes equal to 25% of the original face
amount plus accrued interest which was due on August 15, 1995. These notes
were paid in full in September 1995.
The Bank incurred interest expense on other borrowings of $2 million, $10
million and $10 million for fiscal 1996, 1995 and 1994, respectively.
There was no collateral pledged for other borrowings at June 30, 1996. The
total amount of collateral pledged for other borrowings, consisting of real
estate loans, mortgage-backed securities and marketable securities, was
$40,711,000 at June 30, 1995. The amount pledged at June 30, 1995 included
$14,907,000 of commercial paper placed with a broker in anticipation of the
payoff of principal and interest on the Swiss bonds mentioned above.
The aggregate contractual maturities for other borrowings at June 30, 1996
are as follows (in thousands):
Maturing in five years............................................ $10,506
Maturing thereafter............................................... 93
-------
$10,599
=======
F-34
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 14: INCOME TAXES
The following is a summary of the income tax provision (benefit) (in
thousands):
YEARS ENDED JUNE 30
------------------------
1996 1995 1994
------- ------- --------
Current taxes:
Federal............................................ $ 2,210 $28,273 $(16,465)
------- ------- --------
Deferred taxes:
Federal............................................ 12,755 13,285 6,294
State.............................................. 6,377 10,588 --
------- ------- --------
19,132 23,873 6,294
------- ------- --------
Income tax provision (benefit) before extraordinary
items............................................... 21,342 52,146 (10,171)
Income tax expense on extraordinary items............ -- 1,289 9,598
------- ------- --------
$21,342 $53,435 $ (573)
======= ======= ========
The following is a summary of the income tax liability (in thousands):
JUNE 30
---------------
1996 1995
------- -------
Current taxes.............................................. $ 6,352 $10,135
Deferred taxes............................................. 30,912 16,481
------- -------
$37,264 $26,616
======= =======
A reconciliation from the statutory Federal income tax provision (benefit)
rate to the consolidated effective income tax provision (benefit) rate follows:
YEARS ENDED JUNE
30
-------------------
1996 1995 1994
----- ----- -----
Statutory Federal income tax rate........................ 35.0% 35.0% (35.0)%
Increases (reductions) in taxes resulting from:
State franchise tax rate, net of Federal income tax ef-
fect.................................................. 6.6 5.6 --
Amortization of goodwill............................... 0.4 0.5 21.9
Valuation allowance on deferred tax assets............. (12.5) (60.6) 8.7
Excess of book over tax basis of assets sold........... -- 54.3 --
Other.................................................. 4.2 6.8 --
----- ----- -----
Consolidated effective income tax rate................... 33.7% 41.6% (4.4)%
===== ===== =====
F-35
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The components of the net deferred tax liability are as follows (in
thousands):
JUNE 30
------------------
1996 1995
-------- --------
Deferred tax liabilities:
Loan fees.............................................. $ 51,765 $ 42,361
Income recognized for tax purposes on the cash basis... 3,331 4,871
Capitalized interest................................... 2,249 1,555
Gains on sales of real estate.......................... 369 381
Settlement of pension obligations...................... 7,890 5,372
FHLB stock dividends................................... 28,485 26,674
Gains on sales of loans................................ 8,298 15,024
Depreciation........................................... 405 1,960
Other.................................................. 4,173 12,976
-------- --------
Gross deferred tax liabilities........................... 106,965 111,174
-------- --------
Deferred tax assets:
State franchise tax.................................... 6,058 3,535
Net operating loss and tax credit carryovers........... 17,556 16,475
Provision for losses on real estate.................... 5,225 4,386
Provision for losses on loans.......................... 27,545 55,888
Accretion of discount on notes......................... 1,602 1,771
Earnings from partnerships and joint ventures.......... 995 3,746
Net unrealized holding loss............................ 4,685 --
Other.................................................. 12,488 16,913
-------- --------
Gross deferred tax assets................................ 76,154 102,714
Valuation allowance...................................... (101) (8,021)
-------- --------
Net deferred tax assets.................................. 76,053 94,693
-------- --------
Net deferred tax liability............................... $ 30,912 $ 16,481
======== ========
Prior to March 10, 1993, the Bank filed a consolidated federal income tax
return with GLENFED. Under the tax sharing policy then in effect, the Bank
computed the income tax provision for itself and its subsidiaries and paid
taxes as if they were filing a consolidated return separate and apart from
GLENFED. On March 10, 1993, the Bank issued new preferred stock in exchange
for outstanding subordinated debentures and capital notes. The issuance of
this stock made the Bank ineligible to file a consolidated Federal income tax
return with GLENFED. Therefore, for the periods subsequent to that date, the
Bank has computed its federal income tax provision on the basis of the tax
return it actually files with the Internal Revenue Service. The Bank and its
subsidiaries continued to file a combined California Franchise Tax return with
GLENFED through August 26, 1993, but computed their tax provisions as if they
were filing separately.
On August 26, 1993, GLENFED was merged into a subsidiary of the Bank, which
is a member of the Bank group filing a federal consolidated income tax return
and a combined California Franchise Tax return. Therefore, for periods
subsequent to the merger, the Bank has computed its tax provisions and has
paid taxes on the basis of those returns. The intercompany liability or
receivable between the Bank and each of its subsidiaries, including the
subsidiary into which GLENFED was merged, continues to be computed as if each
subsidiary were filing a separate tax return.
F-36
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
For taxable years beginning prior to January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was
permitted to establish reserves for bad debts, and make annual additions
thereto under the experience method. Alternatively, a qualifying savings
institution could elect, on an annual basis, to use the percentage of taxable
income method to compute its allowable addition to its bad debt reserve on
qualifying real property loans (generally loans secured by an interest in
improved real estate). The applicable percentage was 8% for tax periods after
1987. The Bank utilized the experience method in these years.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. One provision of the Act repeals the reserve method
of accounting for bad debts for savings institutions effective for taxable
years beginning after 1995. The Bank, therefore, will be required to use the
specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank will be required to recapture its "applicable excess
reserves", which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank will
include one-sixth of its applicable excess reserves in taxable income in each
year from 1996 through 2001. As of December 31, 1995, the Bank had
approximately $68 million of applicable excess reserves. As of June 30, 1996,
the Bank had fully provided for the tax related to this recapture. The base
year reserves will continue to be subject to recapture and the Bank could be
required to recognize a tax liability if: (1) the Bank fails to qualify as a
"bank" for federal income tax purposes; (2) certain distributions are made
with respect to the stock of the Bank; (3) the bad debt reserves are used for
any purpose other than to absorb bad debt losses; or (4) there is a change in
federal tax law. The enactment of this legislation is expected to have no
material impact on the Bank's operations or financial position.
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," a deferred tax liability has not been
recognized for the tax bad debt base year reserves of the Bank. The base year
reserves are generally the balance of reserves as of December 31, 1987 reduced
proportionately for reductions in the Bank's loan portfolio since that date.
At June 30, 1996 and 1995, the amount of those reserves was approximately $150
million and $158 million, respectively. The amount of the unrecognized
deferred tax liability at June 30, 1996 and 1995 was approximately $53 million
and $55 million, respectively. This deferred tax liability could be recognized
in the future under the conditions described in the preceding paragraph.
In August 1993 the Internal Revenue Service completed its examination of the
Bank's federal income tax returns through 1988. In April 1995, the Bank
resolved all disputed issues related to the examination and paid a deficiency
of $562,000 plus interest.
In July 1993 the Bank received notices from the California Franchise Tax
Board proposing to assess taxes for the years 1988, 1989 and 1990 in the
amount of $5.3 million. The Bank has protested the proposed taxes and believes
there will not be a material adverse impact on the Bank's consolidated
financial position.
NOTE 15: FINANCIAL INSTRUMENTS
RISK MANAGEMENT
The Bank does not hold or issue financial instruments for trading purposes.
Derivative financial instruments are utilized by the Bank to minimize the
effect of future fluctuations in the interest rates of specifically identified
assets or liabilities. The Bank has entered into interest rate swaps with
other
F-37
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
financial institutions under terms that provide mutual payment of interest on
the notional amount of the swap. In accordance with these arrangements, one
party pays interest at a fixed rate and the other party pays interest at rates
that vary according to a specified index. The Bank has not entered into any
swaps as an intermediary. The Bank had interest rate swaps totaling $200
million and $307 million at June 30, 1996 and 1995, respectively, which
constituted the Bank's only involvement in these agreements. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
the agreement is mitigated by the Bank's credit policies in making the
agreement.
The Bank generally is not required to give collateral or other securities to
support the interest rate exchange agreements. However, collateral totaling
$10.0 million and $21.3 million of mortgage-backed securities was given for
certain agreements as of June 30, 1996 and 1995, respectively.
The following tables present the Bank's interest rate exchange agreements at
June 30, 1996 and 1995 (dollars in thousands):
JUNE 30, 1996
-----------------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE TERMS TO MATURITY
---- --------- ---------------- -------------------------
Paid--Fixed.............. $(200,000) 7.23% April 1997
Received--Variable....... 200,000 5.46
JUNE 30, 1995
-----------------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE TERMS TO MATURITY
---- --------- ---------------- -------------------------
Paid--Fixed.............. $(215,000) 7.52% July 1995 to April 1997
Received--Variable....... 215,000 6.28
Paid--Variable........... (92,000) 6.35 August 1995 to March 1996
Received--Fixed.......... 92,000 9.65
Futures contracts provide another means of managing the risks of changing
interest rates. These contracts primarily represent commitments to purchase or
sell securities at a future date and at a specified price or yield. As of June
30, 1996 and 1995, the Bank had no futures positions outstanding.
At June 30, 1996 and 1995, $6,776,000 of call options were outstanding to
hedge the Bank's market indexed certificates of deposit product against market
fluctuations. The balance of market indexed certificates of deposits was
$6,555,000 and $6,855,000 at June 30, 1996 and 1995, respectively. At June 30,
1996 and 1995 there were no put options outstanding. Net deferred losses on
closed positions totaled $399,000 at June 30, 1995.
FAIR VALUE
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Bank's financial
instruments. The Bank does not hold or issue financial instruments for trading
purposes.
F-38
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
Short-Term Investments and Debt Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer-term investments and mortgage-backed
securities is estimated based on bid prices published in financial newspapers
or bid quotations received from securities dealers.
The following table represents the carrying value and estimated fair value
of investments and mortgage-backed securities at June 30, 1996 and 1995 (in
thousands):
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Short-term investments............ $ 443,791 $ 446,836 $ 320,972 $ 325,574
U.S. Government and Federal agency
obligations:
Due in one year or less......... $ 8,086 $ 8,086 $ 17,354 $ 17,352
Mortgage-backed securities:
Adjustable...................... $2,006,840 $2,001,375 $2,604,644 $2,573,298
Fixed........................... $ 233,950 $ 234,524 $2,118,813 $2,061,367
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family
residential mortgage, multi-family, non-residential, commercial and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and non-performing categories.
The fair value of performing loans is calculated by discounting cash flows
through their estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, adjusted to
reflect differences in servicing costs. The estimate of maturity is based on
market prepayment estimates for each loan classification.
Fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined by using available market
information.
F-39
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table presents information for loans, including loans held for
sale and net of allowance for loan losses as of June 30, 1996 and 1995 (in
thousands):
JUNE 30, 1996 JUNE 30, 1995
------------------------ -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ----------
Single-family 1-4 units....... $ 7,523,479 $ 7,546,118 $ 6,280,687 $6,310,682
Multi-family:
5-36 units.................. 1,515,914 1,429,324 1,631,920 1,582,738
37 or more units............ 374,353 353,177 447,234 431,469
Non-residential............... 1,309,965 1,246,136 1,547,504 1,499,803
Consumer...................... 69,884 69,562 76,511 77,690
Commercial.................... 5,692 5,687 18,668 18,601
----------- ----------- ----------- ----------
10,799,287 10,650,004 10,002,524 9,920,983
Less unearned discounts,
undisbursed loan funds and
deferred loan fees........... (71,378) -- (103,227) --
----------- ----------- ----------- ----------
$10,727,909 $10,650,004 $ 9,899,297 $9,920,983
=========== =========== =========== ==========
Deposit Liabilities
Under SFAS 107, the fair value of deposits with no stated maturity, such as
passbook accounts, checking and NOW accounts, and money market
checking/savings accounts, is equal to the amount payable on demand as of June
30, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using estimated market rates that
reflect certificates of deposit with similar terms and maturities.
The following table presents information for deposit liabilities (in
thousands):
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Checking/NOW accounts............. $ 778,980 $ 778,980 $ 661,853 $ 661,853
Passbook accounts................. 492,777 492,777 551,905 551,905
Money market checking/savings..... 1,719,319 1,719,319 1,272,012 1,272,012
Certificates of deposit with re-
maining maturities:
In six months or less........... 3,422,891 3,422,446 2,614,617 2,620,671
Between six months and one year. 1,085,110 1,083,607 2,191,627 2,195,848
Between one and three years..... 1,100,419 1,091,786 1,282,163 1,291,808
Beyond three years.............. 124,480 122,731 160,703 161,137
---------- ---------- ---------- ----------
$8,723,976 $8,711,646 $8,734,880 $8,755,234
========== ========== ========== ==========
Borrowings
The estimate of the fair value of the Bank's borrowings was based on the
discounted value of the future cash flows expected to be paid on such
borrowings using estimated market discount rates that reflect borrowings with
similar terms and maturities.
F-40
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table represents the carrying value and estimated fair value
of the Bank's borrowings at June 30, 1996 and 1995 (in thousands):
JUNE 30, 1996 JUNE 30, 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Securities sold under agreements to
repurchase........................ $ 758,050 $ 756,995 $2,695,176 $2,684,073
Borrowings from the FHLB........... 3,838,000 3,780,378 3,495,000 3,509,904
Subordinated debt.................. 10,506 11,880 14,227 13,084
Notes payable...................... 93 93 1,177 1,177
Collateralized notes payable....... -- -- 13,479 13,605
---------- ---------- ---------- ----------
$4,606,649 $4,549,346 $6,219,059 $6,221,843
========== ========== ========== ==========
Other Financial Instruments
Financial instruments of the Bank, as included in the Consolidated
Statements of Financial Condition, for which fair value approximates the
carrying amount at June 30, 1996 and 1995 include "Cash and amounts due from
banks", "Interest receivable," "Investment in capital stock of Federal Home
Loan Bank", and accounts payable and accrued expenses.
Interest Rate Swap Agreements
The fair value of interest rate swap agreements was obtained from dealer
quotes. This value represents the estimated amount the Bank would pay to
terminate the agreements, taking into account current interest rates and, when
appropriate, the current creditworthiness of the counterparties.
As of June 30, 1996 and 1995, the Bank had entered into interest rate swap
agreements with certain financial institutions having notional principal
amounts totaling $200,000,000 and $307,000,000, respectively. At June 30, 1996
and 1995 the estimated fair value of the interest rate swap agreements was a
net payable of $2,740,000 and a net receivable of $237,000, respectively.
Commitments
As discussed further in Note 16, the Bank had various commitments
outstanding as of June 30, 1996 and 1995 which are not reflected in the
accompanying consolidated financial statements. The fair value of the
commitments is estimated to approximate the fees currently charged or paid to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
uncertainty involving the attempt to determine the likelihood, as well as the
timing of a commitment being drawn upon, coupled with the lack of established
markets and the diversity of fee structures that exist, would not result in
what the Bank believes to be a meaningful estimate of fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial
F-41
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
instrument. Fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
NOTE 16: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding various commitments
and contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities (in thousands):
JUNE 30
----------------
1996 1995
-------- -------
Commitments to sell loans and mortgage-backed securities... $ 17,880 $24,288
Standby letters of credit and unused lines of credit
provided
consumers................................................. 134,499 93,100
Commitments to originate loans receivable:
Variable.................................................. 33,962 27,613
Fixed..................................................... 9,939 12,762
Commitments to purchase loans receivable:
Variable.................................................. 135,396 8,242
Fixed..................................................... 172,000 680
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank applies the same credit standards
used in the lending process when extending these commitments, and periodically
reassesses the customers' credit worthiness through ongoing credit reviews.
Additional risks associated with providing these commitments arise when these
commitments are drawn upon, such as the demands on liquidity that the Bank
would experience if a significant portion were drawn down at once. However,
this is considered unlikely, as many commitments expire without having been
drawn upon.
Upon approval of a loan application, the Bank normally gives the applicant a
commitment that the Bank will make the approved loan within a specified time
period, normally 10 to 45 days, at a rate of interest and on other terms
determined on the basis of market conditions as of the date of the commitment.
On February 1, 1994, the Bank entered into a five year contract for the
outsourcing of its data processing and item processing operations. The
contract is based on certain volume levels. If the contract is terminated
prior to its expiration, a termination charge would be incurred, the amount of
which would be dependent upon the nature of the termination and the time
remaining on the contract.
F-42
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Bank and certain of its subsidiaries are involved in litigation arising
in the normal course of business. Although the legal responsibility and
financial impact with respect to such litigation cannot presently be
ascertained, the Bank does not anticipate that the final resolution of these
matters will result in the payment of monetary damages that would be material
in relation to the consolidated financial condition or results of operations
of the Bank.
NOTE 17: REGULATORY CAPITAL
FIRREA and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to
Office of Thrift Supervision ("OTS") supervision. The Bank must follow
specific capital guidelines stipulated by the OTS which involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to
a capital directive and certain restrictions on its operations. At June 30,
1996, the minimum regulatory capital requirements were:
. Tangible and core capital of 1.5 percent and 3 percent, respectively,
consisting principally of stockholders' equity, but excluding most
intangible assets such as goodwill and any net unrealized holding gains or
losses on debt securities available for sale.
. Risk-based capital consisting of core capital plus certain subordinated debt
and other capital instruments and, subject to certain limitations, general
valuation allowances on loans receivable, equal to 8 percent of the value of
risk-weighted assets.
At June 30, 1996, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To
be categorized as "well capitalized", the Bank must maintain minimum core
capital, Tier I risk-based capital and risk-based capital ratios as set forth
in the table below. The Bank's capital amounts and classification are subject
to review by federal regulators about components, risk-weightings and other
factors. There are no conditions or events since June 30, 1996 that management
believes have changed the institution's category.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table summarizes the Bank's actual capital and required
capital as of June 30, 1996 and 1995 (dollars in thousands):
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
JUNE 30, 1996
Actual capital:
Amount........................... $906,796 $906,796 $906,796 $1,001,666
Ratio............................ 6.29% 6.29% 10.79% 11.93%
FIRREA minimum required capital:
Amount........................... $216,154 $432,307 N/A $ 675,515
Ratio............................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required
capital:
Amount........................... N/A $720,512 $509,692 $ 841,338
Ratio............................ N/A 5.00% 6.00% 10.00%
JUNE 30, 1995
Actual capital:
Amount........................... $868,703 $868,703 $868,703 $ 962,491
Ratio............................ 5.44% 5.44% 10.02% 11.15%
FIRREA minimum required capital:
Amount........................... $239,565 $479,131 N/A $ 700,666
Ratio............................ 1.50% 3.00% N/A 8.00%
FDICIA well capitalized required
capital:
Amount........................... N/A $798,551 $534,635 $ 866,697
Ratio............................ N/A 5.00% 6.00% 10.00%
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital as of June 30, 1996 and 1995 (in thousands):
JUNE 30
--------------------
1996 1995
---------- --------
Capital in accordance with GAAP.......................... $ 957,451 $941,847
Adjustments for tangible and core capital:
Goodwill and other intangible assets................... (59,216) (63,538)
Investments in and advances to non-permissible subsidi-
aries................................................. (2,830) (43)
Net unrealized holding loss (gain) on debt securities
available for sale.................................... 11,391 (37)
Purchased mortgage servicing rights in excess of 90% of
fair value............................................ -- (9,526)
---------- --------
Total tangible capital................................... 906,796 868,703
Adjustments for core capital............................. -- --
---------- --------
Total core capital....................................... 906,796 868,703
Adjustments for risk-based capital:
Allowance for general loan losses(1)................... 104,339 104,786
Equity risk investments required to be deducted........ (9,469) (10,998)
---------- --------
Total risk-based capital................................. $1,001,666 $962,491
========== ========
--------
(1) Limited to 1.25% of risk-weighted assets.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 18: STOCKHOLDERS' EQUITY
On September 17, 1993, the Bank completed a comprehensive recapitalization
(the "Recapitalization") which included, among other things, the merger of the
Bank's former holding company, GLENFED, into a subsidiary of the Bank, the
exchange of common stock of the Bank and rights to purchase Bank common stock
for $49,065,000 in principal amount of GLENFED's 7.75% convertible
subordinated debentures, the reclassification of the previously outstanding
Series B and Series C Preferred Stock of the Bank into a new Noncumulative
Convertible Preferred Stock, Series D (the "Series D Preferred Stock") all of
which was subsequently converted to common stock of the Bank, the issuance of
$201 million of a new Noncumulative Preferred Stock, Series E (the "Series E
Preferred Stock") and the issuance of $250 million of Bank common stock
through a rights offering to the former holders of GLENFED common stock,
GLENFED convertible subordinated debentures, the Series B and Series C
Preferred Stock of the Bank and certain standby purchasers.
DESCRIPTION OF BANK SECURITIES
Common Stock
The Recapitalization resulted in the issuance of 31.7 million shares of the
Bank's common stock. The Bank's Charter authorizes the issuance of 100 million
shares of common stock with a par value of $1.00 per share. Holders of common
stock are entitled to receive dividends when, as and if declared by the Board
of Directors of the Bank out of assets of the Bank legally available for
payment, subject to the superior rights of the holders of any series of
preferred stock that may be issued.
Preferred Stock
Two new series of preferred stock were issued in the Recapitalization: 8.9
million shares of Series D Preferred Stock and 8.0 million shares of Series E
Preferred Stock. All of the Series D Preferred Stock remaining outstanding at
August 27, 1994 was mandatorily converted into common stock on a share-for-
share basis on that date.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Series E Preferred Stock has a par value of $1.00 per share and a
liquidation preference of $25 per share. The Series E Preferred Stock provides
for noncumulative dividends, when, as and if declared, at an annual rate of
8.75% of its liquidation preference and is convertible, at the option of the
holders thereof, into common stock at any time at a conversion price of $10.40
per share, and will also be subject to adjustment in certain events. Subject
to applicable laws and regulations, the Series E Preferred Stock will be
redeemable, in whole or in part, at the option of the Bank, on 20 to 45 days
notice, from time to time at any time after October 1, 1998 at the following
per share redemption prices, plus in each case an amount equal to any
dividends that have been declared thereon but remain unpaid as of the date of
redemption, if redeemed during the twelve-month period beginning October 1 of
each of the following years:
REDEMPTION PRICE
PER SHARE OF SERIES E
CONVERTIBLE PREFERRED
YEAR STOCK
---- ---------------------
1998............................................... $26.09375
1999............................................... 25.87500
2000............................................... 25.65625
2001............................................... 25.43750
2002............................................... 25.21875
2003 and thereafter................................ 25.00000
The redemption of Series E Preferred Stock will be subject to certain
limitations imposed by OTS regulations of general application.
During fiscal 1996, the Bank entered into separately negotiated agreements
with certain holders of its Series E Preferred Stock providing, in the
aggregate, for exchanges of 2,226,118 shares of the Series E Preferred Stock
for 5,901,771 shares of Bank common stock. The exchanges were made at premiums
above the stated conversion rate of 2.404 shares of Bank common stock for each
share of the Series E Preferred Stock. In accordance with applicable
accounting guidance for calculating per share earnings results, the excess of
the fair value of Bank common stock transferred by the Bank to the holders of
the Series E Preferred Stock over the fair value of Bank common stock issuable
pursuant to the original conversion terms has been subtracted from net
earnings to arrive at the earnings available to common shareholders in the
calculation of earnings per share. The Bank has made additional exchanges of
Bank common stock for Series E Preferred Stock since June 30, 1996 and may
enter into further exchange agreements in the future.
Warrants
The Bank has a class of common stock purchase warrants outstanding (the
"Warrants") totaling 19,674 at June 30, 1996 that were issued in March 1993 in
connection with an exchange of preferred stock for outstanding subordinated
debentures and capital notes. Each Warrant entitles the registered holder
thereof to receive from the Bank one share of common stock for ten Warrants
for no additional consideration at any time until the expiration of the
Warrants on March 10, 1999. The number of shares of common stock for which a
Warrant may be exercised is subject to adjustment from time to time upon the
occurrence of certain events. Registered holders exercised a total of 22,090
Warrants in fiscal 1996.
F-46
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
In the Recapitalization, standby purchasers received an aggregate of
approximately 10.85 million transferable Standby Warrants, none of which had
been exercised as of June 30, 1996. Each Standby Warrant entitles the holder
thereof to purchase one share of common stock for a purchase price of $12.00 per
share. The Standby Warrants are exercisable at any time through August 21, 2000.
RESTRICTION ON STOCKHOLDERS' EQUITY AND DIVIDENDS
Dividends on the Bank's common stock may not be paid unless full cash
dividends on the Bank's Series E Preferred Stock have been declared and paid
or set aside for payment for the immediately preceding dividend period. OTS
regulations limit a savings institution's ability to make capital
distributions, which include the payment of dividends, based on the
institution's capital position. The rule establishes "safe-harbor" amounts of
capital distributions that institutions can make after providing notice to the
OTS, but without needing prior approval. Institutions can distribute amounts
in excess of the safe harbor only with the prior approval of the OTS.
An institution that exceeds its minimum capital requirements is permitted to
make capital distributions in specified amounts based on its regulatory
capital levels without prior OTS approval unless it is deemed to be "in need
of more than normal supervision," in which case OTS approval of the
distribution may be required. The OTS retains the authority in all cases,
however, to prohibit any capital distribution that would otherwise be
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice and in each case
requires prior notification of any proposed dividend or other capital
distribution. The Bank does not currently expect to pay cash dividends on its
common stock or make other capital distributions, other than preferred stock
dividends, in the foreseeable future. The OTS has granted approval to the Bank
to pay dividends on its Series E Preferred Stock, subject to the limitation
that after making such payments the Bank's core and risk-based capital ratios
remain above 4.0% and 8.0%, respectively.
Retained earnings at June 30, 1996 and 1995 include approximately $45
million and $53 million, respectively, for which no provision for Federal
income tax has been made. These amounts represent allocations of earnings to
bad debt reserves for tax purposes and are a restriction upon retained
earnings. If, in the future, this portion of retained earnings and an
additional approximately $105 million of similar tax basis reserves from
acquired associations are reduced for any purpose other than tax bad debt
losses, Federal income taxes may be imposed at the then applicable rates.
NOTE 19: EMPLOYEE BENEFIT PLAN
The Bank has several pension plans (collectively, the "Plan") covering
substantially all of its employees. The benefits are based on years of service
and the employees' average earnings in the five highest consecutive Plan years
for the last 10 years of employment.
The Bank uses, for financial reporting purposes, the projected unit credit
method and continues to base its funding policy on the individual entry age
normal method.
F-47
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following table sets forth the Plan's funded status as of March 31, 1996
and 1995 and amounts recognized in the Bank's statements of financial
condition at June 30, 1996 and 1995 (in thousands):
JUNE 30
----------------
1996 1995
------- -------
Actuarial present value of benefit obligations:
Vested accumulated benefits............................................. $44,159 $38,497
Non-vested accumulated benefits......................................... 1,543 1,753
------- -------
Total accumulated benefits............................................ $45,702 $40,250
======= =======
Projected benefit obligation for service rendered to date................. $54,292 $49,276
Plan assets at fair value; primarily listed stocks, U. S.
Government obligations and savings certificates of the Bank.............. 79,873 69,879
------- -------
Funded status--Plan assets in excess of projected benefit obligation...... 25,581 20,603
Items not yet recognized in earnings:
Unrecognized net gain................................................... (8,613) (4,483)
Prior service cost not yet recognized in net periodic pension cost...... 210 227
Unrecognized net asset at June 30, 1996 and 1995 being recognized
over approximately 12 years......................................... (339) (790)
------- -------
Prepaid pension cost included in "Other assets" at end of period.......... $16,839 $15,557
======= =======
Net periodic pension income for fiscal 1996, 1995 and 1994 included the
following components (in thousands):
YEARS ENDED JUNE 30
--------------------------
1996 1995 1994
-------- ------- -------
Service cost-benefits earned during the period...... $ 2,246 $ 2,950 $ 3,137
Interest cost on projected benefit obligation....... 4,306 3,932 3,669
Actual return on Plan assets........................ (11,566) (4,494) (2,221)
Net amortization and deferral....................... 3,732 (2,477) (4,586)
-------- ------- -------
Net periodic pension income......................... $ (1,282) $ (89) $ (1)
======== ======= =======
The following table presents certain significant assumptions used in
determining plan obligations and net pension expense at the dates indicated:
YEARS ENDED
JUNE 30
----------------
1996 1995 1994
---- ---- ----
Weighted average discount rate used to calculate benefit
obligations................................................ 8.00% 8.50% 8.25%
Assumed rate of increase in future compensation.............. 4.50% 4.50% 5.00%
Expected long-term rate of return on plan assets............. 9.50% 9.50% 9.50%
The Bank has established a Savings Plan for its employees which allows
participants to make contributions by salary deduction equal to 15% or less of
their salary pursuant to section 401(k) of the Internal Revenue Code.
Employees' contributions vest immediately; the Bank's partial matching
contributions vest over five years. The Bank's contributions to the plan in
fiscal 1996, 1995 and 1994 were $739,000, $851,000 and $942,000, respectively.
X-00
XXXXXXXX XXXXXXX BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
KEY EXECUTIVE RETIREMENT SUPPLEMENT PLANS
During fiscal 1992, GLENFED substantially terminated two non-qualified post-
retirement pension supplement plans previously maintained for certain senior
executive officers of GLENFED, as well as one other such plan assumed by the
Bank in its acquisition of another association. Participants fully vested at
the time of such substantial termination (as well as one officer scheduled to
vest within four months of such date) were offered the opportunity to receive
a lump-sum settlement in lieu of the contractual benefits under the plans.
Three non-vested participants will receive no benefits under the plans. During
fiscal 1996, five vested participants were receiving benefits under the plans.
DIRECTORS' RETIREMENT PLANS
The Bank maintains directors' retirement plans for non-employee directors
who serve on its Board of Directors (the "Directors' Plan"). The Directors'
Plan provides that a non-employee director shall, after termination of Board
membership, be entitled to receive a monthly payment equal to: (1) the monthly
Board retainer in effect at the time of termination; plus (2) the fee paid at
such time for attending a Board meeting, for the number of years equal to the
number of years of Board service, but not to exceed fifteen years. Payments of
such amounts normally commence at the later of the director's termination date
or the director's attainment of age 65.
NOTE 20: EXTRAORDINARY ITEMS, NET
Extraordinary items, net for fiscal 1995 consisted of a $1.8 million gain
(net of income taxes of $1.3 million) resulting from University Savings' early
extinguishment of $42.1 million of borrowings from the Federal Home Loan Bank
of Seattle.
Extraordinary items, net for fiscal 1994 consisted of a $14.1 million gain
(net of income taxes of $9.6 million) resulting from the exchange of $49.1
million of GLENFED's convertible subordinated debentures for common stock of
the Bank in the Recapitalization.
NOTE 21: STOCK OPTION PLAN
The Board of Directors of the Bank adopted a stock option plan (the "New
Plan") for the Bank in replacement of the then existing stock option plans of
GLENFED, which plans, including options granted thereunder, terminated upon
completion of the Recapitalization. The New Plan has a term of five years and
covers an aggregate of 4.7 million shares of common stock. Options granted
generally have terms of ten years each. All options granted will become
exercisable upon a change in control of the Bank.
In October 1994, the Bank's shareholders approved amendments to the New Plan
which, among other things, (1) provide for annual grants of options to acquire
5,000 shares to each non-employee Director and (2) provides for equitable
adjustments of the exercise or purchase price and the number or class of
shares covered by outstanding awards to preserve the benefit of such awards in
the event of payment of a dividend or distribution to shareholders of the Bank
in property or cash in an amount in excess of the Bank's normal dividend or
distribution policy in effect at the time. Grants to directors are made on the
first day following each annual meeting of the Bank's shareholders with an
exercise price equal to the closing price on the New York Stock Exchange of
the Bank's common stock on such date and vest on the date of the next
succeeding annual meeting.
F-49
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following is a summary of transactions under the stock option plan
described above:
NUMBER OF RANGE OF
SHARES OPTION PRICES
--------- --------------
Balance, June 30, 1993......................... -- $ --
Granted........................................ 1,650,000 6.375-9.00
Cancelled or expired........................... (38,125) 9.00
Exercised...................................... (1,875) 9.00
--------- --------------
Balance, June 30, 1994......................... 1,610,000 6.375-9.00
Granted........................................ 1,825,000 9.75-12.625
Cancelled or expired........................... (66,250) 9.00-12.625
Exercised...................................... (52,500) 9.00-12.625
--------- --------------
Balance, June 30, 1995......................... 3,316,250 6.375-12.625
Granted........................................ 750,750 9.00-16.125
Cancelled or expired........................... (82,500) 9.00-14.50
Exercised...................................... (106,000) 6.375-14.50
--------- --------------
Balance, June 30, 1996......................... 3,878,500 $6.375-$16.125
========= ==============
At June 30, 1996, 2,244,293 options were exercisable, with 661,125 shares
available for future grants. The weighted average option price for shares under
option and exercisable was $10.78 and $9.76, respectively, at June 30, 1996.
F-50
GLENDALE FEDERAL BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED
------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1995 1995
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income.................... $ 256,367 $ 260,666 $ 276,569 $ 286,433
Interest expense................... (168,908) (173,944) (195,622) (208,496)
--------- --------- --------- ---------
Net interest income before
provision for loan losses......... 87,459 86,722 80,947 77,937
Provision for loan losses.......... (10,411) (10,376) (10,394) (9,169)
--------- --------- --------- ---------
Net interest income................ 77,048 76,346 70,553 68,768
Gain (loss) on sale of CMOs........ -- 5,722 (33,933) --
Other income....................... 19,133 17,336 14,901 11,199
General and administrative
expenses.......................... (66,514) (64,252) (60,196) (57,902)
Other expense...................... (3,164) (5,707) (4,006) (1,938)
--------- --------- --------- ---------
Earnings (loss) before income tax
(provision) benefit............... 26,503 29,445 (12,681) 20,127
Income tax (provision) benefit..... (8,007) (9,047) 2,028 (6,316)
--------- --------- --------- ---------
Net earnings (loss)................ $ 18,496 $ 20,398 $ (10,653) $ 13,811
========= ========= ========= =========
Earnings (loss) per share:
Primary........................... $ 0.22 $ 0.24 $ (0.37) $ 0.21
Fully diluted..................... 0.22 0.23 (0.37) 0.21
Dividends per common share declared
and paid.......................... -- -- -- --
Common stock price range:
High.............................. $ 19 1/8 $ 19 1/8 $ 18 $ 17
Low............................... $ 16 $ 15 1/2 $ 14 5/8 $ 12 1/8
QUARTERS ENDED
------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1995 1995 1994 1994
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income.................... $ 279,014 $ 274,316 $ 269,554 $ 263,774
Interest expense................... (205,610) (199,637) (188,203) (175,489)
--------- --------- --------- ---------
Net interest income before
provision for loan losses......... 73,404 74,679 81,351 88,285
Provision for loan losses.......... (10,452) (15,442) (21,434) (18,822)
--------- --------- --------- ---------
Net interest income................ 62,952 59,237 59,917 69,463
Gain on sale of banking operations. -- 50,713 23,000 --
Other income....................... 11,999 13,944 17,242 17,548
General and administrative
expenses.......................... (53,521) (53,496) (65,888) (70,936)
Other expense...................... (3,784) (3,608) (2,629) (6,706)
--------- --------- --------- ---------
Earnings before income tax
provision and
extraordinary items............... 17,646 66,790 31,642 9,369
Income tax provision............... (5,544) (25,871) (20,731)
Extraordinary items, net........... -- -- 1,755 --
--------- --------- --------- ---------
Net earnings....................... $ 12,102 $ 40,919 $ 12,666 $ 9,369
========= ========= ========= =========
Earnings per share:
Primary:
Earnings before extraordinary
items........................... $ 0.18 $ 0.81 $ 0.16 $ 0.12
Net earnings..................... 0.18 0.81 0.20 0.12
Fully diluted:
Earnings before extraordinary
items........................... 0.18 0.64 0.16 0.12
Net earnings..................... 0.18 0.64 0.20 0.12
Dividends per common share declared
and paid.......................... -- -- -- --
Common stock price range:
High.............................. $ 14 $ 10 7/8 $ 11 3/4 $ 13 1/2
Low............................... $ 10 $ 8 3/4 $ 7 3/8 $ 10 3/8
F-51
