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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4075
GREAT WESTERN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1913457
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9200 OAKDALE AVENUE, 91311-6519
CHATSWORTH, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(818) 775-3411
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1 par value (and New York Stock Exchange
accompanying Preferred Stock Pacific Stock Exchange
Purchase Rights) London Stock Exchange
8.30% Cumulative Preferred Stock, New York Stock Exchange
$1 par value
8 1/4% Trust Originated Preferred New York Stock Exchange
Securities of Great Western
Financial Trust I
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark 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 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]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of February 28, 1997: $6,024,275,048.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 28, 1997: 137,563,165.
DOCUMENTS INCORPORATED BY REFERENCE:
THE INFORMATION REQUIRED TO BE DISCLOSED PURSUANT TO PART III OF THIS REPORT
EITHER SHALL BE (I) DEEMED TO BE INCORPORATED BY REFERENCE FROM SELECTED
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR GREAT WESTERN FINANCIAL
CORPORATION'S 1997 ANNUAL MEETING OF SHAREHOLDERS, IF SUCH PROXY STATEMENT IS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
NOT LATER THAN 120 DAYS AFTER THE END OF THE CORPORATION'S MOST RECENTLY
COMPLETED FISCAL YEAR, OR (II) INCLUDED IN AN AMENDMENT TO THIS REPORT FILED
WITH THE COMMISSION ON FORM 10-K/A.
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GREAT WESTERN FINANCIAL CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 17
Item 3. Legal Proceedings...................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................... 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 17
Item 6. Selected Financial Data................................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 19
Item 8. Financial Statements and Supplementary Data............................................ 51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 109
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 110
Item 11. Executive Compensation................................................................. 110
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 110
Item 13. Certain Relationships and Related Transactions......................................... 110
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 111
2
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Great Western Financial Corporation ("GWFC", "Great Western" or "the
Company"), with consolidated assets of approximately $42.9 billion, is a
savings and loan holding company organized in 1955 under the laws of the state
of Delaware. The principal assets of the Company are the capital stock of
Great Western Bank, a Federal Savings Bank ("GWB", "Great Western Bank" or
"the Bank") and Aristar, Inc. ("Aristar"). GWB is a federally chartered stock
savings bank and conducts most of its retail banking through 416 offices
located in California and Florida. Real estate lending operations are
conducted directly by the Bank or by direct subsidiaries through 220 offices
in 27 states with concentration in California, Florida, Texas and Washington.
Directly or through its subsidiaries, the Bank also engages in mortgage
banking, and other related financial services. Aristar conducts consumer
finance operations through 502 offices in 23 states, most of which operate
principally under the names Blazer Financial Services or City Finance Company
and provide direct installment loans and related credit insurance services and
purchase retail installment contracts. For financial information concerning
the Company's four principal lines of business, see "Line of Business" in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The Company is a legal entity separate and distinct from the Bank. The
principal source of the Company's revenues on an unconsolidated basis has been
dividends, interest and management fees from GWB. Various statutory and
regulatory restrictions and tax considerations, however, can limit, directly
or indirectly, the amounts that may be paid by the Bank to GWFC. Dividends
from Aristar continue to be a source of revenue to the Company. For a
discussion of dividend restrictions, see "Regulation--Capital Requirements",
"Capital Distributions by GWB" and "Restrictions on Transactions with
Affiliates".
The operations of savings associations are significantly influenced by
general economic conditions, by the related monetary and fiscal policies of
the federal government, and by the regulatory policies of financial
institution regulatory authorities, including the Federal Reserve Board
("FRB"), the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). Deposit flows and cost of funds are influenced
by interest rates on competing investments and general market rates of
interest. Lending and other investment activities are affected by the demand
for mortgage financing and consumer and other types of loans, which in turn
are affected by the interest rates at which such financing may be offered and
other factors affecting the supply of housing and the availability of funds.
MERGER AGREEMENT WITH WASHINGTON MUTUAL, INC.
On March 6, 1997, Great Western announced that it had entered into a
strategic business combination with Washington Mutual, Inc. ("Washington
Mutual"). The terms of the Agreement and Plan of merger dated as of March 5,
1997 (the "Merger Agreement") entered into by and between Great Western,
Washington Mutual and New American Capital, Inc., ("NAC"), a wholly-owned
subsidiary of Washington Mutual provide for a tax-free merger (the "Merger")
of Great Western with and into NAC pursuant to which each outstanding share of
Great Western common stock, par value $1.00 per share (the "Great Western
Common Stock"), will be converted into 0.9 shares of Washington Mutual common
stock, no par value ("Washington Mutual Common Stock"), with cash being paid
in lieu of fractional shares. Each outstanding share of Great Western 8.30%
Preferred Stock (the "Great Western Preferred Stock") will be converted into
one share of Washington Mutual 8.30% Preferred Stock, Series F (the "Series F
Preferred Stock").
The consummation of the Merger is subject to certain conditions, including
approval by the stockholders of Great Western and Washington Mutual and
applicable regulatory approvals. The parties expect that the Merger will be
consummated in the third quarter of 1997.
The description of the Merger Agreement above does not purport to be
complete and is qualified in its entirety by reference to the text of the
Merger Agreement, which is filed as an exhibit to this Form 10-K.
3
H. F. AHMANSON & COMPANY'S MERGER PROPOSAL
On February 18, 1997, H. F. Ahmanson & Company ("Ahmanson") unilaterally
announced a proposal for a merger between Ahmanson and Great Western pursuant
to which each outstanding share of Great Western common stock, $1.00 par value
per share (the "Great Western Common Stock") would be converted into
1.05 shares of Ahmanson common stock (the "Ahmanson Merger Proposal").
On March 3, 1997, Ahmanson commenced soliciting consents from Great Western
stockholders (the "Ahmanson Consent Solicitation") in favor of (i) a non-
binding advisory resolution urging the Great Western Board of Directors (the
"Great Western Board") to consider any bona fide and concrete merger proposal
received by Great Western by May 22, 1997 and, if no superior merger proposal
is received by such date, to enter into a merger agreement with Ahmanson on
the terms of the Ahmanson Merger Proposal, and (ii) four separate proposed By-
law amendments that, if validly adopted, would (A) prohibit the Great Western
Board from granting to any third party, without the prior consent of the Great
Western stockholders, any break-up fees, stock options, "crown jewel" options
or other lock-up fee arrangements in connection with a proposed merger of
Great Western in excess of $100,000,000, (B) compel Great Western to hold its
annual meeting of stockholders on the fourth Tuesday in April in each year or
on a date within 14 days thereof, (C) prevent a stockholders' meeting at which
a quorum is present from being adjourned unless all business properly brought
before such meeting has been acted upon by the stockholders and (D) provide
that any of the By-laws adopted pursuant to Ahmanson's Consent Statement may
not be subsequently amended unless majority approval of the Great Western
stockholders is obtained. Great Western has challenged the legality of
Ahmanson's proposed By-law amendment described in clause (A) above as an
improper intrusion into the statutory powers of the Board of Directors. Great
Western has set March 13, 1997 as the record date for the Ahmanson Consent
Solicitation.
On March 4, 1997, Great Western disseminated to its stockholders a
Revocation of Consent Statement (the "Great Western Revocation Statement")
informing them that the Great Western Board unanimously opposes the Ahmanson
Consent Solicitation, detailing the reasons for the Great Western Board's
opposition to the Ahmanson Consent Statement and urging Great Western
stockholders not to sign the consent cards sent to the stockholders by
Ahmanson or to revoke any previously executed consent cards.
Ahmanson has also indicated its intent to solicit proxies in connection with
the 1997 Annual Meeting of Stockholders of Great Western (the "Ahmanson Proxy
Solicitation"). In that proxy solicitation, Ahmanson intends to seek to elect
three directors nominated by Ahmanson to the Great Western Board and to have
additional amendments to the Great Western By-laws adopted.
LITIGATION RELATING TO THE AHMANSON MERGER PROPOSAL
On February 18, 1997, Ahmanson filed a Verified Complaint for Declaratory
and Injunctive Relief against Great Western and its directors (the "Ahmanson
Complaint") in the Court of Chancery of the State of Delaware. The Ahmanson
Complaint alleges, among other things, that: (i) the defendants have breached
their fiduciary duties with respect to the stockholder rights plan adopted by
the Board in June 1986, as amended in June 1995 (the "Rights Plan"); (ii) the
adoption of any defensive measure by the defendants which has the effect of
impeding, thwarting, frustrating or interfering with the Ahmanson Merger
Proposal would constitute a breach of the defendants' fiduciary duties; and
(iii) the individual directors of Great Western have breached their fiduciary
duties with respect to Section 203 (the "Delaware Business Combination
Statute") of the Delaware General Corporation Law (the "DGCL").
Ahmanson seeks declaratory and injunctive relief as follows: (i) an order
enjoining the defendants from adopting any defensive measure which has the
effect of impeding, thwarting, frustrating or interfering with the Ahmanson
Merger Proposal; (ii) an order compelling the defendants to redeem the rights
associated with the Rights Plan or to amend the Rights Plan so as to make it
inapplicable to the Ahmanson Merger Proposal; (iii) an order enjoining the
defendants from taking any action pursuant to the Rights Plan that would
dilute or interfere
4
with Ahmanson's voting rights or otherwise discriminate against Ahmanson; (iv)
an order compelling the defendants to approve the Ahmanson Merger Proposal for
the purposes of the Delaware Business Combination Statute; (v) an order
enjoining the defendants from taking any action to enforce or apply the
Delaware Business Combination Statute that would impede, thwart, frustrate or
interfere with the Ahmanson Merger Proposal; and (vi) an order awarding
Ahmanson its costs and expenses in the action.
On February 26, 1996, Great Western filed its Answer, Affirmative Defenses
and Counterclaim to the Ahmanson Complaint. In the Counterclaim, Great Western
stated, among other things, that the proposed By-law amendment described
herein as Proposal 2 would impermissibly limit the Board's power, granted
under Delaware law and Great Western's Restated Certificate of Incorporation,
to manage the business and affairs of Great Western. Great Western also stated
that such By-law amendment is inequitable because it would impair the Board's
ability to negotiate an alternative transaction to the Ahmanson Proposal
should the Board choose to do so. Further, Great Western denied all of the
material allegations raised by the Ahmanson Complaint and asserted affirmative
defenses, including that: (i) the Ahmanson Complaint fails to state a claim on
which relief can be granted; and (ii) Ahmanson is acting in its own self
interest at the expense of Great Western and its stockholders and thus comes
to Court with unclean hands.
Great Western seeks declaratory and injunctive relief as to, among other
matters, the following: (i) dismissal of the Ahmanson Complaint with prejudice
and denial of the relief requested by Ahmanson; and (ii) an order declaring
the proposed By-law amendment to be invalid, illegal and inequitable. On
February 27, 1997, Vice-Chancellor Jacobs informed Great Western and Ahmanson
that he would rule on the legality and validity of the proposed By-law
amendment as soon as the issue becomes relevant.
Between February 18, 1997 and February 26, 1997, six complaints (the
"Complaints") were filed against Great Western and its directors in the Court
of Chancery of the State of Delaware by Fred T. Isquith, Harry Lewis, Bernd
Bildstein, Charles Uttenreither, Melvyn Zupnick and Emil Schachter. Each
action was brought on behalf of the plaintiff, individually, and as a
purported class action on behalf of all stockholders of Great Western. The
Complaints allege, among other things, that the defendants are violating their
fiduciary duties owed to the stockholders of Great Western with respect to the
Ahmanson Merger Proposal. The plaintiffs generally seek: (i) an order
declaring that the action may be maintained as a class action; (ii) an order
preliminarily and permanently enjoining the defendants to consider and
negotiate with respect to all bona fide offers or proposals for Great Western
or its assets, in the best interests of Great Western stockholders; and
(iii) compensatory damages, the costs and disbursements of the action and such
other and further relief as may be just and proper. In addition, certain
plaintiffs seek judgments ordering Great Western's directors, individually, to
announce their intention with respect to certain matters relating to the
Ahmanson Merger Proposal. The plaintiffs filed a Motion to Consolidate the
Complaints on March 6, 1997. Great Western and its directors deny the
operative allegations of the Complaints; however, answers have not yet been
filed and discovery has not yet commenced.
On March 3, 1997, Ahmanson filed a Complaint against Great Western (the
"Ahmanson Section 220 Complaint") in the Court of Chancery of the State of
Delaware. The Ahmanson Section 220 Complaint alleges, among other things,
that: (i) Ahmanson is entitled, pursuant to Section 220 of the Delaware
General Corporation Law, to inspect and copy certain books and records of
Great Western and (ii) that Great Western has failed to make available for
inspection and copying by Ahmanson a list of the stockholders of Great Western
and other related information. Ahmanson requested that the Court enter an
order directing Great Western to provide Ahmanson with the requested
information. On March 6, 1997, Great Western provided Ahmanson with all of the
information requested in the Ahmanson Section 220 Complaint. On March 7, 1997,
Great Western mailed a letter to Ahmanson requesting that Ahmanson dismiss the
Ahmanson Section 220 Complaint as mute.
On March 7, 1997, Ahmanson filed a Motion for Leave to File Amended and
Supplemental Complaint against Great Western and its directors (the "Ahmanson
Supplemental Complaint") in the Court of Chancery of the State of Delaware. In
addition to the allegations made in the Ahmanson Complaint, the Ahmanson
Supplemental Complaint further alleges, among other things, that: (i) the
defendants have failed to create a level
5
playing field by discriminatorily favoring other potential bidders to the
exclusion of Ahmanson and by entering into the Merger Agreement; (ii) the
defendants have actively and unlawfully sought to thwart its stockholders from
exercising certain of their rights for the purpose of entrenchment; (iii) the
defendants have failed to find the best value reasonably available; and (iv)
the defendants have irreparably harmed Ahmanson by depriving it of the unique
opportunity to acquire Great Western. Consequently, Ahmanson seeks additional
declaratory and injunctive relief enjoining Great Western and the individual
defendants from, among other things, discriminating against Ahmanson, delaying
Great Western's annual meeting of stockholders, or taking steps to consummate
the Merger or other transaction with Washington Mutual.
Great Western and its directors intend to vigorously defend the claims in
the Ahmanson Complaint, the Ahmanson Supplemental Complaint and the
Complaints.
ACQUISITIONS AND DISPOSITIONS
GWFC is, from time to time, engaged in discussions with other financial
institutions of various sizes in various locations throughout the United
States and with governmental agencies regarding mergers, acquisitions or
dispositions. No assurance can be given that GWFC will complete any particular
transaction.
Information on specific acquisitions and dispositions is summarized in Note
2 of the Notes to Consolidated Financial Statements in Item 8, "Financial
Statements and Supplementary Data".
RELATED FINANCIAL SERVICES ACTIVITIES
The principal non-depository business activities of GWFC and GWB are
described below.
Consumer Finance Group. The Consumer Finance Group is comprised of Aristar
and the industrial banks listed below. Consumer finance activities are highly
regulated by federal and state laws of both general and specific
applicability. Federal regulations relate primarily to fair credit practice
matters. State regulations may include certain licensing requirements, which
vary from state to state and may require periodic examination to verify
compliance with, among other restraints, state interest rate and loan size
limits. The Company also has industrial bank subsidiaries, First Community
Industrial Bank in Denver, Colorado and Great Western Thrift & Loan in Salt
Lake City, Utah, which conduct activities similar to those of consumer finance
operations.
Other Activities. GWFC and its direct and indirect subsidiaries also engage
in related service businesses, including investment company advisor and
administration activities, insurance operations, real estate development and
other lines of business. GWFC and its direct and indirect subsidiaries in the
future may also pursue other business opportunities, although no assurances
concerning the timing or nature of such activities can be given.
INFLATION
Inflation has not been a significant factor for the past several years.
However, the Company recognizes the adverse effects that inflation could bring
to its financial position and operations and consequently monitors its effects
closely.
CAUTIONARY STATEMENTS
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results to
differ materially from those expressed or implied in any forward looking
statement made herein or elsewhere by the Company or its directors, officers
or employees. The Company intends to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
6
ADEQUACY OF ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
The Company regularly reviews its assets to determine that each category is
reasonably valued. In this review process, it monitors the loss exposure
relating to nonperforming assets, assets adversely classified for regulatory
purposes, delinquency trends and the market environment to identify potential
problems.
The Company assesses the status of loss reserves on real estate and consumer
loans based upon expected future economic conditions and its current loss
experience as applied to the loan portfolio, including loans that are
delinquent or, in the case of real estate loans, adversely classified because
of declining collateral values. The amount of the Company's loss reserve
represents management's estimate of the amount of real estate loan losses
likely to be incurred by the Company, based upon various assumptions as to
future interest rate environments, economic trends and other conditions. As
such, the loss reserve does not represent the amount of such losses that could
be incurred under adverse conditions that management does not consider to be
the most likely to arise. In addition, management's classification of assets
and evaluation of the adequacy of the loss reserve is an ongoing process.
Consequently, there can be no assurance that material additions to the
Company's loss reserve will not be necessary, thereby adversely affecting
earnings.
ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREA
The Company's business is subject to changes in local economic and business
conditions. The economic environment in California has shown improvement in
the past year. In particular, the real estate market has shown improvement
throughout the state, though most notably in Northern California. As a result
of the improving economy and the disposition of nonperforming loans and real
estate through bulk sales, the Company's nonperforming assets have
substantially declined. However, a worsening of economic conditions in the
State could have an adverse effect on the Company's business, including
reducing demand for new financing and increasing nonperforming assets and real
estate.
FLUCTUATIONS IN INTEREST RATES
Prevailing economic conditions, particularly changes in market interest
rates, as well as governmental policies and regulations concerning, among
other things, monetary and fiscal affairs, significantly affect interest rates
and a savings institution's net interest income. The results of operations of
GWB depend to a large extent on net interest income, which is the differential
between interest GWB receives from its loans, securities and other interest
earning assets and the interest expense the Bank pays on its deposits and
other interest bearing liabilities. GWB is subject to risk from fluctuations
of interest rates to the extent its interest bearing liabilities mature or
reprice at different times or on a different basis than its interest earning
assets.
SIGNIFICANT REGULATION
The financial institutions industry, including the Company and GWB, is
subject to significant regulation which has materially affected the financial
institutions industry in the past and will likely do so in the future. Such
regulations may be changed at any time, and the interpretation of the relevant
law and regulation is also subject to change by the authorities who examine
financial institutions and their holding companies and interpret those laws
and regulations. There can be no assurance that any present or future changes
in the laws or regulations or in their interpretation will not adversely
affect the Company or GWB.
RESTRICTIONS ON DISTRIBUTIONS
OTS regulations impose certain limitations on capital distributions by
savings institutions, including the payment of cash dividends. The regulations
establish guidelines for categorizing institutions into three tiers for
purposes of determining eligibility to make distributions. These tiers are
based primarily on the institution's capital levels but also relate to an
institution's supervisory status with the OTS. Under these guidelines, the
ability to pay cash dividends is increasingly limited as an institution's
capital position, earnings and supervisory status worsens. In addition, the
OTS could prohibit a proposed capital distribution by any institution, which
7
would otherwise be permitted by the guidelines, if the OTS determines that
such a distribution would constitute an unsafe or unsound practice. Also,
certain tax considerations limit the amount of dividends GWB would otherwise
be able to pay. See "Regulation--Capital Distributions by GWB."
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous substances on, under or in such
property. Pursuant to these laws and regulations, under certain circumstances,
a lender may become liable for the environmental liabilities in connection
with its borrower's properties if, among other things, it either forecloses or
participates in the management of its borrower's operations or hazardous
substance handling or disposal practices.
If certain properties securing GWB loans and properties GWB has foreclosed
upon are found to be environmentally contaminated or contain hazardous
substances, including building materials containing asbestos or lead, GWB may
be required to remove or remediate such contamination or hazardous substances.
Although there can be no assurances that the costs of any required removal or
remediation or related liabilities on these properties or any other properties
would not be material and substantially exceed the value of the affected
properties or the loans secured by the properties or that GWB's ability to
sell any foreclosed property would not be adversely affected, management is
not aware of any environmental liability relating to these properties that it
believes would have a material adverse effect on its business or results of
operations.
COMPETITION
Competition for deposits comes principally from other savings associations,
commercial banks, credit unions, corporations, governmental agencies and
governmental debt securities, insurance companies, pension funds, and other
investment media including money markets and mutual funds, many of which can
offer investment alternatives. Many of these institutions also have nationwide
retail networks.
Competition in residential lending activities comes principally from other
savings associations, mortgage companies, commercial banks and, to a lesser
degree, from finance companies, insurance companies, governmental agencies,
pension funds and trusts, and sellers of properties.
Competition in the provision of services being offered by GWFC and its
subsidiaries and affiliates in consumer lending, investment company advisor
and administration activities and other activities comes principally from the
traditional providers of such services and from other financial institutions.
REGULATION
HOLDING COMPANY REGULATION
General. The Company is a unitary savings and loan holding company as a
result of its control of GWB. As such, it is subject to regulation,
supervision, and examination by, and the reporting requirements of, the OTS
and is governed by the savings and loan holding company provisions of the Home
Owners' Loan Act, as amended.
Restrictions on Activities. A savings and loan holding company is
prohibited, directly or indirectly, from obtaining control of a savings
association or savings and loan holding company without the prior approval of
the OTS. The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), permits the acquisition by a savings and loan holding company
of up to 5% of the voting shares of a savings association or savings and loan
holding company which is not one of its present affiliates. No director,
officer, or controlling shareholder of the Company may, except with the prior
approval of the OTS, acquire control of any savings association which is not a
subsidiary of the Company.
8
FIRREA empowers the OTS to impose restrictions when it determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of any particular activity constitutes a serious risk to the
financial safety, soundness, or stability of a holding company's subsidiary
savings association. Thus, FIRREA confers on the OTS oversight authority for
all holding company affiliates, not just the savings association.
Specifically, the OTS may (i) limit the payment of dividends by a savings
association; (ii) limit transactions between a savings association, the
holding company and the subsidiaries or affiliates of either; and (iii) limit
any activities of the savings association that might create a serious risk
that the liabilities of the holding company and its affiliates may be imposed
on the savings association. Any such limits will be issued in the form of a
directive having the effect of a cease and desist order.
REGULATION OF SUBSIDIARIES
General. Deposits in GWB and the Company's industrial banks, First Community
Industrial Bank in Denver, Colorado and Great Western Thrift & Loan in Salt
Lake City, Utah are separately insured by the FDIC up to $100,000 and those
institutions are regulated by the FDIC. GWB is a federally chartered savings
association which is also regulated by the OTS. The industrial banks are state
chartered institutions which are regulated by state authorities in addition to
being regulated by the FDIC. State laws specify the investments which these
state institutions may make and the activities in which they may engage. Under
the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended
("FDICIA"), however, insured state banks may not engage in activities not
permissible for national banks unless the FDIC determines that the activity
will pose no significant risk to the insurance fund and the bank complies with
applicable capital standards.
The Company's consumer finance subsidiaries are governed by state and
federal laws. Federal laws relate primarily to fair credit practice matters.
State laws set out applicable licensing requirements, provide for periodic
examinations and establish maximum finance charges on credit extensions.
The Company's insurance subsidiaries are governed by state law and the
Company's securities brokerage and investment advisory subsidiaries are
governed by federal and state laws relating to their operation, registration,
capital and other matters. The Company's securities brokerage subsidiary is
required to conduct its activities in compliance with the interagency
guidelines of the federal bank and thrift regulators on retail sales of
uninsured, nondeposit investment products by federally insured financial
institutions. The interagency guidelines require that, among other things,
customers are fully informed that investment products are not insured, are not
deposits of or guaranteed by GWB and involve investment risk including the
potential loss of principal.
Qualified Thrift Lender. FDICIA imposes revised requirements for
qualification as a qualified thrift lender ("QTL"). The test requires that 65%
of a savings association's "portfolio assets" (all assets except goodwill,
intangibles, property used to conduct the thrift's business and certain liquid
assets up to 20% of assets) consist of "qualified thrift investments"
(including, subject to certain limits, residential mortgage and construction
loans, home improvement and repair loans, mortgage-backed securities, home
equity loans, Federal Home Loan Bank ("FHLBank") stock, Federal Savings and
Loan Insurance Corporation ("FSLIC"), FDIC, and Resolution Trust Corporation
("RTC") obligations, Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation stock, education loans, credit card loans, consumer
loans, certain small business loans and loans to construct or purchase or
maintain churches, schools, nursing homes and hospitals, investments in
residential housing-oriented service corporations, and 50% of mortgages
originated and sold within 90 days). At December 31, 1996, the asset
composition of GWB was substantially in excess of that required to qualify it
to meet the QTL test.
The following sanctions may apply as the result of failure of a savings
association to remain a QTL: (i) required conversion of the savings
association's charter to a national bank charter; (ii) limitations on new
investments and activities to those permissible for national banks; (iii)
imposition of branching restrictions applicable to national banks; (iv)
prohibitions on new advances to the savings association from its regional
FHLBank; and (v) imposition of dividend restrictions applicable to national
banks. Three years after a savings association ceases to be a QTL, it would be
required to divest all investments and cease all activities not
9
permissible for national banks and all FHLBank advances would have to be
repaid in a prompt and prudent manner. In addition, a savings and loan holding
company holding such a savings association would be required to register as a
bank holding company.
Deposit Insurance. The FDIC maintains two separate deposit insurance funds--
the Bank Insurance Fund ("BIF") which insures the deposits of the industrial
banks (the "Company's BIF-insured institutions"), and the Savings Association
Insurance Fund ("SAIF") which insures the deposits of GWB.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 ("Funds Act") which included provisions for the
recapitalization of the SAIF through a one-time special assessment of 65.7
basis points of SAIF deposits held by savings associations as of March 31,
1995. GWB's special assessment of $188 million was reflected in expense in the
third quarter of 1996.
The current SAIF assessment schedule of premiums ranges from zero to 27
basis points of deposits, depending on risk classification. As authorized by
the Funds Act, the FDIC will collect assessments against BIF and SAIF-
assessable deposits to be paid to the Financing Corporation ("FICO") to
service interest on FICO debt issued during the 1980s. Savings associations,
in 1996, paid SAIF and BIF insurance premiums that covered approximately $780
million of interest on FICO debt. Beginning in 1997, such payments will drop
to $460 million annually, and in the year 2000, to about $180 million annually
or approximately two basis points of deposits.
The Funds Act stipulates the rate of BIF-assessable deposits must equal one-
fifth of the FICO assessment rate on SAIF-assessable deposits. GWB expects its
FICO assessment will be approximately 6.48 basis points of deposits, while the
FICO assessment of banks will be approximately 1.30 basis points through 1999.
GWB expects to reduce its annual insurance premium from approximately $65
million in 1996 to approximately $18 million in each of the next three years.
The Funds Act also requires the Treasury Department to conduct a survey of
all issues considered to be relevant to the development of a common charter
for all FDIC insured institutions and the abolition of separate and distinct
charters for banks and savings associations. The law specifies that the BIF
and SAIF are to be merged by 1999, if there are no savings associations in
existence at that time. A merger of the deposit insurance funds could
potentially occur prior to 1999 if certain conditions are met.
FIRREA requires insured depository institutions to reimburse the FDIC for
any loss or anticipated loss to the FDIC that arises from a default of a
commonly controlled insured depository institution or assistance provided to
such an institution in danger of default.
Capital Requirements. The capital standards applicable to savings
associations consist of three components--a leverage ratio requirement, a
tangible capital requirement and a risk-based capital requirement. All three
components are required by FIRREA to be no less stringent than the
corresponding requirements applicable to national banks, except that the risk-
based capital requirement for savings associations may deviate to reflect
interest-rate risk or other risks if such deviations do not, in the aggregate,
result in materially lower levels of capital being required of savings
associations than would be required under the risk-based capital standards
applicable to national banks.
The capital regulations contain special capital rules affecting savings
associations with certain kinds of subsidiaries. For purposes of determining
compliance with each of the capital standards, a savings association's
investment in and extensions of credit to subsidiaries engaged in activities
not permissible for a national bank are, with certain exceptions, deducted
from the savings association's capital. At December 31, 1996, GWB's
investments in and extensions of credit to such subsidiaries aggregated $23
million, all of which was deducted from capital at December 31, 1996.
The leverage ratio requirement requires a savings association to maintain
"core capital" of not less than 3% of adjusted total assets. As mentioned
below, the OTS proposed, but has not yet adopted, a stricter standard
10
which has become applicable to banks and under which banks are required to
maintain a core capital ratio of at least 3% and up to 5% depending upon their
condition and the rating they have received from the applicable regulatory
body.
Under the current standard, "core capital" generally includes common
stockholders' equity, (including retained earnings, but excluding net
unrealized gain or loss on securities available-for-sale), noncumulative
perpetual preferred stock and any related surplus, and minority interests in
consolidated subsidiaries. Intangible assets (other than qualifying core
deposit intangible assets, mortgage servicing rights and purchased credit card
relationships) must be deducted from core capital. Certain deferred tax assets
must also be deducted. Core capital includes core deposit intangible assets,
mortgage servicing rights and purchased credit card relationships, subject to
certain limitations. GWB has no qualifying core deposit intangible assets or
purchased credit card relationships. At December 31, 1996, GWB had a core
capital ratio of 5.85%.
The tangible capital requirement requires a savings association to maintain
"tangible capital" in an amount not less than 1.5% of adjusted total assets.
"Tangible capital" means core capital less qualifying core deposit intangible
assets and purchased credit card relationships. At December 31, 1996, GWB had
a ratio of tangible capital to total adjusted assets of 5.85%.
The risk-based capital requirements for savings associations are similar in
many respects to the risk-based capital guidelines of the FRB, the Comptroller
of the Currency and the FDIC. Among other things, the risk-based capital
requirements provide that the capital ratio applicable to an asset will be
adjusted to reflect the degree of credit risk associated with such asset and
the asset base for computing a savings association's capital requirement will
include off-balance-sheet assets. The regulations require savings associations
to maintain capital equal to 8% of risk-weighted assets. A savings
association's supplementary capital may be used to satisfy the risk-based
capital ratios only to the extent of that association's core capital. At
December 31, 1996, GWB had a ratio of capital to risk-weighted assets of
11.23%.
FDICIA requires the federal regulatory agencies to review the risk-based
capital standards to ensure that they adequately address interest-rate risk,
concentration of credit risk and risks from nontraditional activities. The OTS
amended its risk-based capital rules to incorporate interest-rate risk
requirements which require a savings association to hold additional capital if
it is projected to experience an excessive decline in "net portfolio value" in
the event interest rates increase or decrease by two percentage points. The
additional capital required is equal to one-half of the amount by which any
decline in net portfolio value exceeds two percent of the savings
association's estimated economic value of assets, as determined by the OTS.
The OTS, however, has not implemented these capital standards relating to
interest-rate risk, pending action of the bank regulatory agencies. As of
December 31, 1996, GWB believes it would have no additional capital
requirement for possible interest-rate risk.
A savings association which fails to meet the capital standards must submit
to the OTS Director a business plan which describes the manner in which it
proposes to increase its capital and the activities in which it will engage.
Any increase in the savings association's assets must be met with a
commensurate increase in the savings association's tangible capital and risk-
based capital. As part of the submission of a capital plan, a savings
association will be required to certify that during the pendency of its
application for approval of its capital plan, it will adhere to certain asset
growth restrictions, and will not make any capital distributions or engage in
certain other prohibited or restricted activities. The OTS Director must, with
certain limited exceptions, limit the asset growth of any such savings
association. In addition, the OTS Director may issue a capital directive to
such a savings association which may contain restrictions the OTS Director
deems necessary or appropriate under the circumstances. GWB is not subject to
any capital directive at this time.
In addition to the above regulatory capital requirements and pursuant to
FDICIA, the federal banking agencies have adopted regulations which establish
a system of progressive constraints as capital levels decline at banks and
savings associations. The "prompt corrective action" rules classify banks and
savings associations into one of five categories based upon capital adequacy,
ranging from "well capitalized" to "critically
11
undercapitalized". Furthermore, FDICIA provides that under certain
circumstances a federal banking agency may reclassify an institution to the
next lower capital category based on supervisory information other than the
capital levels of the institution.
The FDIC regulations implementing the prompt corrective action 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 (core capital to risk-weighted
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.
GWB believes that it met the requirements to be a "well capitalized"
institution under the regulations as of December 31, 1996.
FDICIA requires the appropriate federal banking agencies to take corrective
action to restrict asset growth, acquisitions, branching and new business with
respect to an "undercapitalized" institution and to take increasingly severe
additional actions if the institution becomes "significantly undercapitalized"
or "critically undercapitalized". FDICIA also prohibits dividends and other
capital distributions and the payment of management fees to a controlling
person if, following such distribution or payment, the institution would fall
within one of the three "undercapitalized" categories.
FDICIA also requires an institution which is "undercapitalized" to submit a
capital restoration plan for improving its capital to the appropriate federal
banking agency. The holding company of such an institution must guarantee that
the institution will meet its capital restoration plan, subject to certain
limitations. If such a guarantee were deemed to be a commitment to maintain
capital under the federal Bankruptcy Code, a claim under such guarantee in a
bankruptcy proceeding involving the holding company would be entitled to a
priority over third party creditors of the holding company.
As a condition of prior regulatory approval of certain transactions, the
Company has provided federal regulators with a commitment to maintain the
regulatory net worth of GWB at the minimum required amount and, if necessary,
to infuse sufficient additional capital to maintain such level.
Under FDICIA, a bank or savings association that is "significantly
undercapitalized" is subject to severe restrictions on its activities, and may
be required, among other things, to issue additional debt or stock, to sell
assets or to be acquired by a depository institution holding company or
combine with another depository institution if one or more grounds exist for
appointing a conservator or receiver for the institution. A bank or savings
association that is "critically undercapitalized" will be subject, with
certain exceptions, to the mandatory appointment of a conservator or receiver
by the appropriate federal banking agency within 90 days after such
institution becomes "critically undercapitalized". In addition, a bank or
savings association that is "critically undercapitalized" is subject to more
severe restrictions on its activities and on payment of subordinated debt, and
may be prohibited, among other things, from entering into material investment,
expansion, acquisition or disposition transactions or paying interest on new
or renewed liabilities at a rate that would significantly increase the
institution's weighted average cost of funds.
12
The FDIC has adopted a minimum core capital standard under which state
nonmember banks are required to hold core capital consisting generally of
common equity, minority interests in equity accounts of consolidated
subsidiaries, and qualifying perpetual preferred stock of at least 3% and up
to 5% of total assets. Banks receiving the highest rating from the FDIC are
permitted to maintain core capital of 3% of total assets, while less healthy
banks are required to maintain core capital of 4 to 5%. A bank with core
capital of less than 2% would be deemed to be in an unsafe and unsound
condition. The OTS has proposed to amend its leverage ratio requirement for
savings associations to adopt a similar standard.
With respect to savings associations, the FDIC will use the core capital
standard in determining whether to approve applications for deposit insurance,
the right to exercise additional powers, or to merge or make acquisitions. The
FDIC may also use the new standard in determining whether to take enforcement
action against a savings association when an unsafe or unsound practice
exists.
The Company's BIF-insured institutions are required to have risk-based
capital of 8% of risk-weighted assets, based on the credit risk deemed
inherent in institutions' assets, including certain off-balance-sheet assets.
In addition, core capital must be 4% of risk-weighted assets. At December 31,
1996, the BIF-insured industrial banks exceeded their required ratios.
Capital Distributions by GWB. The Company is a legal entity separate and
distinct from the Bank and the Company's other subsidiaries. The primary
source of the Company's revenues on an unconsolidated basis has been dividends
from GWB. Various regulatory and tax considerations, however, limit directly
or indirectly the amount of dividends GWB can pay. Should GWB distribute
dividends in excess of the amount of its available earnings and profits (as
determined for federal income tax purposes), such excess would be subject to
federal income tax. At December 31, 1996, the Bank had approximately $628
million of retained earnings available for the payment of dividends without
adverse tax consequences. Dividend payments are further restricted by
regulations as discussed below.
The OTS regulations impose limitations upon "capital distributions" by
savings associations, including cash dividends. The regulations establish a
three-tiered system: Tier 1 includes savings associations with capital at
least equal to their fully phased-in capital requirement which have not been
notified that they are in need of more than normal supervision; Tier 2
includes savings associations with capital above their minimum capital
requirement but less than their fully phased-in requirement; and Tier 3
includes savings associations with capital below their minimum capital
requirement. Tier 1 associations may, after prior notice but without approval
of the OTS, make capital distributions up to the higher of (1) 100% of their
net income during the calendar year plus the amount that would reduce by one
half their "surplus capital ratio" (the excess over their fully phased-in
capital requirement) at the beginning of the calendar year or (2) 75% of their
net income over the most recent four-quarter period. Tier 2 associations may,
after prior notice but without approval of the OTS, make capital distributions
of up to 25% to 75% of their net income over the most recent four-quarter
period depending upon their current risk-based capital position. Tier 3
associations may not make any capital distributions without prior approval.
The Company believes that GWB is a Tier 1 association as of December 31, 1996.
Notwithstanding the foregoing, the regulatory authorities have broad
discretion to prohibit any payment of dividends and could take other actions
if they determine that the payment of such dividends would constitute an
unsafe or unsound practice. In addition, FDICIA prohibits dividends and other
capital distributions if, following such distribution, the savings association
would fall within one of three "undercapitalized" categories. See
"Regulation--Capital Requirements".
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each bank or savings association to identify the communities it serves and the
types of credit and other financial services the bank or savings association
is prepared to extend to those communities. The CRA also requires the OTS to
assess a savings association's record of helping to meet the credit needs of
its community and to take such assessment into consideration when evaluating
applications for mergers, acquisitions and other transactions. A less than
satisfactory CRA rating may be the basis for denying such applications.
13
In connection with its assessment of CRA performance, the OTS and the bank
regulatory agencies assign a rating of "outstanding", "satisfactory", "needs
to improve" or "substantial noncompliance". Based on the most recent CRA
examination conducted in 1995, GWB received a rating of "outstanding."
Restrictions on Transactions with Affiliates. FIRREA imposes on savings
associations the affiliate transaction restrictions contained in Sections 23A,
23B, 22(g) and 22(h) of the Federal Reserve Act in the same manner and to the
same extent as such restrictions apply to member banks. Such restrictions are
also applicable to the BIF-insured industrial banks. These restrictions, among
other things, prohibit or limit an institution from extending credit to, or
entering into, certain transactions with its affiliates and the principal
shareholders, directors and executive officers of the institution under
certain circumstances. Further, a savings association may not purchase or
invest in securities issued by an affiliate other than a subsidiary. The OTS
is authorized to impose more stringent restrictions on a savings association's
affiliated transactions than those contained in Sections 23A and 23B.
Subsidiary Investment Limits. The amount which a federal savings bank may
invest in service corporations and subsidiaries (whether in equity or debt of
such corporations) is limited to an amount equal to 3% of assets, provided
investments in excess of 2% of assets serve certain primarily community
purposes. The service corporation investment limit (for savings associations
like GWB which meet net worth and certain other requirements) is exclusive of
an amount which may be invested in "conforming" (i.e., otherwise authorized)
loans to service corporations subject to applicable regulatory requirements.
At December 31, 1996, GWB's aggregate investment in service corporations was
approximately .3% of its assets, and there were no conforming loans.
Notice of Certain Activities. FIRREA requires a savings association seeking
to establish a new subsidiary, acquire control of an existing company (after
which it would be a subsidiary), or conduct a new activity through a
subsidiary, to provide 30 days prior notice to the FDIC and the OTS and
conduct any activities of the subsidiary in accordance with regulations and
orders of the OTS. The OTS has the power to force a savings association to
divest or terminate any activity that it determines is a serious threat to the
financial safety, soundness or stability of such savings association or is
otherwise inconsistent with sound banking practices. In addition, the FDIC is
authorized to determine whether any specific investment activity poses a
threat to the SAIF and to prohibit any SAIF member institution from engaging
directly in such activity, even if it is an activity that is an otherwise
permissible investment for a federal savings association.
Loans-to-One Borrower Limitations. FIRREA conforms savings associations'
loans-to-one borrower limitations to those applicable to national banks. The
lending limits for national banks apply to all savings associations in the
same manner and to the same extent as they apply to national banks. The basic
lending limit is 15% of the amount of Tier 1 and Tier 2 capital actually
included in risk-based capital, plus the allowance for loan and lease losses
not included in Tier 2 capital. It is not expected that this limitation will
have any significant effect upon GWB's lending activities as currently
conducted.
Brokered Deposits. A rule adopted by the FDIC permits only "well
capitalized" institutions to obtain brokered deposits. "Adequately
capitalized" institutions may obtain brokered deposits if they receive a
waiver from the FDIC. The rule adopted by the FDIC also prohibits institutions
which are not "well capitalized" from soliciting deposits at rates
significantly higher than prevailing rates. GWB believes that it is a "well
capitalized" institution at December 31, 1996.
Liquidity. OTS regulations require savings associations to maintain for each
calendar month an average daily balance of liquid assets (including cash and
certain time deposits, bankers' acceptances, specified corporate obligations
and specified United States government, state government and federal agency
obligations) of not less than 5% of the average daily balance of its net
withdrawable deposit accounts (the amount of all deposit accounts less the
unpaid balance of all loans made on the security of such accounts) plus short-
term debt (borrowings payable on demand or in one year or less) during the
preceding calendar month. This liquidity requirement may be changed from time
to time by the OTS within the statutory range of 4% to 10%. OTS regulations
also require
14
each savings association to maintain for each calendar month an average daily
balance of short-term liquid assets (generally those having maturities of 12
months or less) at an amount not less than 1% of the average daily balance of
its net withdrawable accounts plus such short-term debt during the preceding
calendar month. For the year ended December 31, 1996, average liquidity and
average short-term liquidity ratios of GWB were 5.48% and 3.06%, respectively.
For the year ended December 31, 1995, average liquidity and average short-term
liquidity ratios were 5.46% and 2.29%, respectively.
Federal Home Loan Bank System. GWB is a member of the FHLBank System, which
consists of 12 regional Federal Home Loan Banks. Members of the FHLBank system
are required to own shares of capital stock in the applicable FHLBank in an
amount equal to the greater of 1% of the aggregate principal amount of the
member's unpaid residential mortgages, 5% of FHLBank advances to the member or
.3% of total assets as of the close of each calendar year.
The FHLBank serves as a reserve or central bank for the member institutions
within its assigned region. It makes advances (i.e. loans) to members in
accordance with its established policies and procedures. The maximum amount of
credit which the FHLBank will extend for purposes other than meeting
withdrawals varies from time to time in accordance with its policies. The
FHLBank interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLBank and the purpose of the borrowing.
As of December 31, 1996, GWB held $378 million of FHLBank stock and received
dividends in the amount of $22.3 million in 1996 with respect to such stock.
Federal Reserve Board Regulations. Pursuant to the Depository Institutions
Deregulation and Monetary Control Act of 1980, the FRB adopted regulations
that require depository institutions to maintain reserves against their
transaction accounts and nonpersonal time deposits. In December 1990, the FRB
eliminated the reserve requirement on nonpersonal time deposits. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. At December 31, 1996, GWB's
balances with the FRB totaled $127 million. The effect of this reserve
requirement is to decrease an institution's available investment funds. The
current reserve requirement on transaction accounts is 10%. Savings
associations have authority to use various FRB services and to borrow from the
Federal Reserve Bank's "discount window", but FRB regulations require them to
exhaust all FHLBank sources before borrowing from a Federal Reserve Bank. In
addition, FDICIA restricts the period during which discount advances may be
outstanding to "undercapitalized" depository institutions. As a creditor and a
financial institution, GWB is subject to additional regulations promulgated by
the FRB, including, without limitation, Regulation B (Equal Credit Opportunity
Act), Regulation E (Electronic Funds Transfers Act), Regulation F (Interbank
Liabilities), Regulation Z (Truth in Lending Act), Regulation CC (Expedited
Funds Availability Act) and Regulation DD (Truth in Savings Act).
Safety and Soundness Standards. Pursuant to statutory requirements, the OTS
has issued a rule that sets forth guidelines, rather than a regulation, in the
areas of excessive compensation, internal controls, information systems,
documentation, credit underwriting, interest risk exposure, asset growth and
compliance with laws and regulations. Under the excessive compensation
standard, the OTS will analyze a person's compensation history, post-
employment benefits, the financial condition of the institution, compensation
practices at comparable institutions and other relevant information. The final
rule authorizes, rather than requires, the OTS to seek a compliance plan from
institutions failing to meet the safety and soundness guidelines. In addition
to the final rule on safety and soundness, the OTS has issued asset quality
and earnings standards that require monitoring and reporting systems to the
Board of Directors and management to identify emerging problems and corrective
actions to resolve them.
Real Estate Lending Standards. The federal banking regulatory agencies,
including the OTS, adopted regulations which require institutions to adopt
written real estate lending policies that, among other things, must be
consistent with guidelines adopted by the agencies. Among the guidelines
adopted by the OTS and the other agencies are maximum loan-to-value ratios for
land loans (65%); land development loans (75%); construction loans (80-85%);
loans on owner-occupied 1-4 unit residential properties, including home equity
loans (no specific
15
required limit, but loans at or above 90% require private mortgage insurance
or readily marketable collateral); and loans on other improved property (85%).
The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's total capital, and the aggregate of nonconforming loans secured
by real estate other than 1-4 unit residential properties should not exceed
30% of total capital. Institutions are required to review, and update as
appropriate, their real estate lending policies on at least an annual basis.
Classification of Assets. Savings associations are required to classify
their assets on a regular basis, to establish adequate allowances for losses
and report the results of such classification quarterly to the OTS. For
additional information see Note 1 of the Notes to Consolidated Financial
Statements in Item 8, "Financial Statements and Supplementary Data".
With respect to classified assets, if the OTS concludes that additional
assets should be classified or that the valuation allowances established by
the savings association are inadequate, the examiner may determine, subject to
review by the savings association's OTS Regional Director, the need for and
extent of additional classification or any increase necessary in the savings
association's general or specific valuation allowances.
A savings association is also required to set aside adequate valuation
allowances to the extent that an affiliate or subsidiary holds assets posing a
risk to the savings association. A savings association must also establish
liabilities for off-balance-sheet items, such as letters of credit, when
losses become both probable and reasonably estimable.
The OTS has issued guidance for the classification of assets and a policy on
the classification of collateral-dependent loans (where proceeds from
repayment can be expected to come only from the operation and/or sale of the
collateral). For troubled collateral-dependent loans where it is probable that
the lender will be unable to collect all amounts due, a savings association
must classify as "loss" any excess of the recorded investment in the loan over
its "value", and classify the remainder as "substandard". The "value" of a
loan is the fair value of the collateral less estimated costs to sell.
The federal banking agencies, including the OTS, have issued an interagency
policy statement on the allowance for loan and lease losses (the "Policy
Statement"). The Policy Statement requires that federally-insured depository
institutions maintain an allowance for loan and lease losses ("ALLL") adequate
to absorb credit losses associated with the loan and lease portfolio,
including all binding commitments to lend. Given the appropriate facts and
circumstances as of the evaluation date, the Policy Statement defines an
adequate ALLL as a level that is no less than the sum of (1) for loans and
leases classified as substandard or doubtful, credit losses over the remaining
effective lives of such loans and leases; (2) for loans and leases that are
not classified, all estimated credit losses forecasted for the upcoming 12
months; and (3) amounts for estimated losses from transfer risk on
international loans. Additionally, an adequate level of ALLL should reflect an
additional margin for imprecision inherent in most estimates of expected
credit losses.
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of (1) 50% of the portfolio that is classified
doubtful, (2) 15% of the portfolio that is classified substandard; and (3) for
the portions of the portfolio that have not been classified (including those
loans and leases designated special mention), estimated credit losses over the
upcoming 12 months given the facts and circumstances as of the evaluation date
(based on the institution's average annual rate of net charge-offs experienced
over the previous two or three years on similar loans and leases, adjusted for
current conditions and trends).
The Policy Statement specifies that the amount of ALLL determined by the sum
of the amounts above is neither a floor nor a "safe harbor". However, it is
expected that examiners will review a shortfall relative to this amount as
indicating a need to more closely review management's analysis to determine
whether it is reasonable, supported by the weight of reliable evidence and
that all relevant factors have been appropriately considered.
16
EMPLOYEES
GWFC employed 13,028 persons at December 31, 1996. Employees are not
represented by a union or collective bargaining group and GWFC considers its
employee relations to be satisfactory. Employees are provided retirement,
savings incentive and other benefits, including life, health and accident and
hospital insurance.
ITEM 2. PROPERTIES
The executive offices of both GWFC and GWB are located in the home office
building owned by GWB at 9200 Oakdale Avenue, Chatsworth, California. GWFC
owns approximately 47% of the 6.3 million square feet in which its
headquarters, administrative and branch offices are located throughout several
states, including California and Florida.
During 1996, a strategic review of the corporate headquarters facilities was
completed to reduce the Company's premises costs. The restacking of the
corporate headquarters campus will be implemented throughout 1997 and will
include vacating three buildings which will improve the density of the
remaining buildings. The restack initiatives will result in a reduction of
272,000 useable square feet or 27% of the campus.
See Note 11 of the Notes to Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data", for information on properties,
leases and property operations.
ITEM 3. LEGAL PROCEEDINGS
See Item 1, Business "Litigation Relating to the Ahmanson Merger Proposal".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following information appears in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 8,
"Financial Statements and Supplementary Data".
(a) Market and market prices of the common stock--pages 107, 108 and
109
(b) Approximate number of common security holders--page 107
(c) Common stock dividend history and restrictions--pages 107, 108 and
109
(d) Common stock dividend policy--pages 13, 92 and 93
17
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
1996 1995 1994 1993 1992
------------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
SUMMARY OF OPERATIONS
Interest income $ 3,233,931 $ 3,238,711 $ 2,629,718 $ 2,680,784 $ 3,091,093
Interest expense 1,855,914 1,936,582 1,307,448 1,297,930 1,668,731
------------- ----------- ------------- ------------- -----------
Net interest income 1,378,017 1,302,129 1,322,270 1,382,854 1,422,362
Provision for loan and
lease losses 208,971 187,700 207,200 463,000 420,000
------------- ----------- ------------- ------------- -----------
Net interest income af-
ter provision for loan
and lease losses 1,169,046 1,114,429 1,115,070 919,854 1,002,362
Noninterest income 331,825 327,668 367,897 327,855 282,131
Noninterest expense 1,314,249 1,019,975 1,076,433 1,155,662 1,188,981
------------- ----------- ------------- ------------- -----------
Earnings before taxes on
income 186,622 422,122 406,534 92,047 95,512
Federal and state taxes
on income 70,800 161,100 155,300 30,000 41,600
Accounting changes -- -- -- -- 31,094
------------- ----------- ------------- ------------- -----------
Net earnings $ 115,822 $ 261,022 $ 251,234 $ 62,047 $ 85,006
============= =========== ============= ============= ===========
SUMMARY OF FINANCIAL
CONDITION
Cash and cash equiva-
lents $ 834,292 $ 1,094,417 $ 1,148,565 $ 975,706 $ 1,036,579
Securities available-
for-sale 1,279,283 1,092,459 917,095 871,074 623,906
Loans 30,823,192 29,887,349 28,378,368 30,661,403 30,584,604
Mortgage-backed securi-
ties 7,788,551 9,803,441 9,269,607 3,189,396 3,168,057
Real estate 159,997 217,112 256,967 434,077 1,153,383
Other assets 1,989,257 2,491,986 2,247,655 2,216,704 1,872,657
------------- ----------- ------------- ------------- -----------
Total assets $ 42,874,572 $44,586,764 $ 42,218,257 $ 38,348,360 $38,439,186
============= =========== ============= ============= ===========
Deposits $ 28,586,773 $29,234,928 $ 28,700,947 $ 31,531,563 $30,908,665
Borrowings 10,501,813 11,345,634 10,120,660 3,479,341 4,151,052
Other liabilities 1,090,786 1,083,726 912,864 914,055 929,735
Company-obligated
mandatorily redeemable
preferred securities of
the Company's
subsidiary trust 100,000 100,000 -- -- --
Stockholders' equity-
substantially re-
stricted 2,595,200 2,822,476 2,483,786 2,423,401 2,449,734
------------- ----------- ------------- ------------- -----------
Total liabilities and
equity $ 42,874,572 $44,586,764 $ 42,218,257 $ 38,348,360 $38,439,186
============= =========== ============= ============= ===========
PER COMMON SHARE DATA
Fully diluted earnings $ .69 $ 1.71 $ 1.69 $ .28 $ .53
Dividends .98 .92 .92 .92 .91
Stock price range 31 1/8-21 1/8 27 1/8-16 20 7/8-15 3/8 20 3/8-15 5/8 19 3/4-13
Year-end closing price 29 25 3/8 16 20 17 1/2
Stockholders' equity 17.63 18.42 16.30 16.05 16.48
Tangible stockholders'
equity 15.55 16.06 13.59 12.80 14.01
Price earnings ratio 42 15 9 71 33
Dividend rate of return 3.4% 3.6% 5.8% 4.6% 5.2%
Dividend rate as a per-
cent of earnings 142.0% 53.8% 54.4% 328.6% 171.7%
AT YEAR END
Average equity to aver-
age assets 6.3% 5.9% 6.2% 6.5% 6.2%
Return on average assets .27% .59% .65% .16% .22%
Return on average equity 4.23% 10.03% 10.35% 2.53% 3.50%
Number of common shares
issued 137,875,955 137,279,331 134,315,592 132,616,172 130,814,018
Number of beneficial and
record stockholders 49,124 51,178 52,633 55,469 42,332
Number of employees 13,028 14,393 15,644 17,029 16,016
Number of offices 1,138 1,207 1,210 1,180 1,101
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Great Western reported consolidated net earnings of $115.8 million, or $.69
per share, for 1996 compared to $261 million, or $1.71 per share for 1995 and
$251.2 million, or $1.69 per share for 1994. The Company's net earnings for
1996 were reduced by a special one-time federal deposit insurance assessment
imposed on the nation's thrift industry. Without this $188.4 million special
insurance premium assessment and other nonrecurring charges taken in 1996,
including a $68.3 million pre-tax restructuring charge primarily to reengineer
the Company's loan origination operations and consolidate the Company's
corporate headquarters and a $50 million provision for loan and lease losses
on the bulk sale of nonperforming loans and real estate, annual earnings for
1996 would have been $310.7 million, or $2.09 per share. In 1994, the
Company's pre-tax earnings included a $62 million gain on the sale of certain
retail banking branches and a $12 million write-off of interstate banking
access rights. Without the $62 million gain and the $12 million write-off, the
annual earnings for 1994 would have been $220 million, or $1.65 per share.
Provisions for losses on loans and leases in 1996 rose to $209 million, up
from $187.7 million in 1995 and $207.2 million in 1994. The $209 million
provision in 1996 included a charge of $50 million attributable to the bulk
sale of $292.4 million of nonperforming loans and real estate associated
primarily with loans made in 1989 through 1992. Excluding the bulk sale, the
provision would have fallen to $159 million reflecting the improvement in the
real estate market. Net charge-offs of 1-4 unit residential loans ("single-
family" or "SFR") remained flat from 1995 to 1996. Excluding the charge-off of
$58.4 million attributable to the bulk sale of nonperforming loans and real
estate, charge-offs for SFR's declined from $195.4 million in 1994 to $137
million in 1996. Nonperforming assets were $546 million, or 1.27% of assets at
December 31, 1996, $768.3 million, or 1.72% of assets at December 31, 1995 and
$846 million, or 1.98% of assets at December 31, 1994.
Net interest income was $1.38 billion for 1996 compared with $1.30 billion
for 1995 and $1.32 billion in 1994. The interest spread for 1996 was 3.15%
compared with 3.00% for 1995 and 3.50% for 1994. The Company's net interest
margin was 3.33% for 1996 compared with 3.13% for 1995 and 3.60% for 1994.
Noninterest income was $331.8 million in 1996, $327.7 in 1995 and $367.9
million in 1994. In 1996, banking fees increased $25.0 million and securities
operations increased $9.1 million. These increases were offset in part by
$17.9 million in write-downs of mortgage-backed securities, a $7.3 million
provision for mortgages sold with recourse, and a $4.1 million loss on
affordable housing investments. In 1996 a $22.5 million gain was recorded on
the sale of the student loan business. This gain was offset by a decrease from
1995 to 1996 in gains on sale of mortgages and mortgage-backed securities of
$5.1 million and a decrease in the gain on sale of leases of $14.1 million.
Excluding the SAIF assessment and the restructuring expense, noninterest
expense was $1.1 billion in 1996, $1 billion in 1995 and $1.1 billion in 1994.
The increase of $37.6 million in 1996 was in part the result of increased
professional fees of $22.2 million attributable to new initiatives and
increased litigation fees and a $5.0 million decrease in telecommunications
costs.
LINE OF BUSINESS
Great Western Financial Corporation is managed along four major lines of
business: Consumer Finance, Real Estate Services, Retail Banking and Treasury.
The financial performance of these business lines is measured by the Company's
profitability reporting system. The system uses various management accounting
principles to ensure each business line's financial results reflect the
underlying economics of that business.
To properly assess the profitability of each business unit, charges for
funds employed and credits for funds generated are assigned on a matched
maturity basis to minimize interest-rate risk in the business line and
centralize that exposure in the Treasury unit where it is managed for the
Company as a whole. Expenses incurred
19
in the Company's support units are assigned to business lines based on
services provided to a particular business unit. Residual expenses, assets
employed and other overhead costs are allocated based on the ratio of a
business unit's noninterest expense to the Company total noninterest expense.
Loss provision and capital are allocated based on management's assessment of
the risk profile of each business line. Finally, loans originated in the Real
Estate unit are purchased by the Treasury unit at a transfer price that
reflects the risk-adjusted value of the loans.
Since there is no authoritative guidance for management accounting
principles, the organizational structure of the institution and the allocation
methodologies it employs result in business line financial results that are
not necessarily comparable across companies. As such, Great Western's business
line performance may not be directly comparable with similar information from
other financial institutions. Results by line of business for 1995 and 1996
are presented on the following pages.
SELECTED FINANCIAL HIGHLIGHTS BY LINE OF BUSINESS
Results of operations and financial highlights by line of business for 1996
and 1995 are presented below.
REAL ESTATE
CONSUMER FINANCE SERVICES RETAIL BANKING TREASURY CONSOLIDATED
------------------ --------------- -------------------- --------------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- ------ ------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
SUMMARY INCOME
STATEMENT
Net interest income $ 258.7 $ 258.0 $ 17.8 $ 21.5 $ 657.8 $ 741.2 $ 443.7 $ 281.4 $ 1,378.0 $ 1,302.1
Provision for loan and
lease losses 58.8 48.5 -- -- 3.2 2.6 147.0 136.6 209.0 187.7
Noninterest income 27.2 29.2 151.6 93.3 251.7 205.7 (98.7) (0.6) 331.8 327.6
Noninterest expense
excluding nonrecurring
items 128.4 132.1 120.9 135.1 700.2 654.3 108.0 98.4 1,057.5 1,019.9
Restructuring expense -- -- 37.3 -- 29.8 -- 1.2 -- 68.3 --
SAIF special
assessment -- -- -- -- -- -- 188.4 -- 188.4 --
-------- -------- ------ ------- --------- --------- --------- --------- --------- ---------
Total noninterest
expense 128.4 132.1 158.2 135.1 730.0 654.3 297.6 98.4 1,314.2 1,019.9
-------- -------- ------ ------- --------- --------- --------- --------- --------- ---------
Earnings before tax 98.7 106.6 11.2 (20.3) 176.3 290.0 (99.6) 45.8 186.6 422.1
Income tax expense 37.0 42.3 4.5 (8.1) 70.5 116.0 (41.2) 10.9 70.8 161.1
-------- -------- ------ ------- --------- --------- --------- --------- --------- ---------
Net earnings $ 61.7 $ 64.3 $ 6.7 $ (12.2) $ 105.8 $ 174.0 $ (58.4) $ 34.9 $ 115.8 $ 261.0
======== ======== ====== ======= ========= ========= ========= ========= ========= =========
AVERAGE BALANCE SHEET
DATA
Real estate loans $ -- $ -- $ -- $ -- $ -- $ -- $28,066.0 $27,055.0 $28,066.0 $27,055.0
Consumer loans 2,105.0 2,016.0 -- -- 533.3 497.3 0.7 0.7 2,639.0 2,514.0
Assets 2,419.1 2,365.1 137.3 150.8 1,308.9 1,533.2 39,809.7 39,928.9 43,675.0 43,978.0
Deposits 153.9 146.0 -- -- 28,751.0 28,856.6 74.1 208.4 28,979.0 29,211.0
Equity 430.8 450.9 328.9 329.4 1,632.9 1,627.9 347.4 193.8 2,740.0 2,602.0
PERFORMANCE METRICS
Return on average
equity 14.33% 14.26% 2.05% (3.71)% 6.48% 10.69% (16.81)% 18.03 % 4.23% 10.03%
Efficiency ratio 44.91% 46.01% 93.36% 117.72 % 80.27% 69.10% 86.26 % 35.01 % 76.86% 62.58%
PERFORMANCE METRICS
(EXCLUDING
NONRECURRING ITEMS)
Return on average
equity 14.33% 14.26% 8.85% (3.71)% 7.57% 10.69% 15.92 % 18.03 % 9.85% 10.03%
Efficiency ratio 44.91% 46.01% 71.36% 117.72 % 76.99% 69.10% 31.33 % 35.01 % 61.85% 62.58%
In 1995, the Company began managing and measuring the performance of its
lines of business under a new methodology. In 1996, the Company refined its
allocation methodologies. Results from 1994 are not available under the
revised methodologies.
20
CONSUMER FINANCE
The Consumer Finance line of business is made up of Blazer Financial
Services, City Finance Company, First Community Industrial Bank and Great
Western Thrift & Loan. These companies offer retail installment financing
primarily in the Southeast and Southwest areas of the United States. During
1996, the Consumer Finance line of business had net income of $61.7 million.
Despite growth in the loan portfolio, credit quality for the market served by
this line of business deteriorated in 1996 as evidenced by the year over year
increase in loan loss provision of $10.3 million. Efforts are underway at the
Consumer Finance group to aggressively pursue a more diversified customer base
through specialized training for sales staff, broadened product offerings and
increased use of technology. With return on assets of more than 2.5% and
return on equity of more than 14%, the 1996 financial performance of the
Consumer Finance line of business once again demonstrated the value of this
business unit to the Company.
REAL ESTATE SERVICES
The Real Estate Services line of business houses the Company's residential
mortgage origination and loan servicing businesses. Loans are originated in
Great Western's nationwide retail lending offices and through the Company's
wholesale origination function. Fixed rate loans are sold in the secondary
market and adjustable rate loans are primarily transferred to the Treasury
line of business for portfolio investment.
In 1996, this business unit embarked on a series of major re-engineering
efforts designed to improve efficiency, reduce cost and increase production
volume. These efforts will continue throughout 1997. Benefits of the re-
engineering are already being realized as noninterest expense in the Real
Estate line of business dropped 11%, or $14.2 million, during the year.
RETAIL BANKING
The Retail Banking line of business includes Great Western's branch banking
franchise, direct banking business and diversified retail businesses including
Sierra Capital Management and Great Western Financial Securities Corporation.
Also in this business unit are Great Western's business banking and consumer
lending functions which figure prominently in the Company's evolution into a
full service bank.
In 1996, the Retail Banking business line added $105.8 million to the
Company's net income. While net interest income declined, the internal credit
for funds generated was less in 1996 than in 1995 and the Retail Banking unit
realized significant growth in fee income. Broadened product offerings, focus
on reducing fee waivers and the introduction of various fee-generating
programs contributed to the 22% increase in noninterest income in the Retail
Banking unit over 1995 levels. The Retail Banking business line was allocated
$29.8 million of the restructuring charge for branch closures and its portion
of the restacking of the corporate headquarters facilities.
TREASURY
The Treasury line of business houses the Company's mortgage loan and
investment securities portfolios and meets the wholesale funding needs of the
Company. Additionally, the Treasury function is responsible for hedging the
Company's interest-rate risk and as such, houses the funds transfer pricing
mismatch unit. The mismatch unit is counterparty to the internal charges and
credits for funds received by each of the other business lines. As noted in
the Retail Banking discussion, the credit for funds generated declined from
1995 to 1996. The mismatch unit benefits from such cycles in the internal
transfer pricing environment as evidenced by the increase in net interest
income in the Treasury unit in 1996 compared to 1995. Also contributing to the
net interest income increase in 1996 over 1995 is the increase in real estate
loans outstanding.
Excluding the $188.4 million one-time SAIF assessment, the Treasury line of
business contributed $56.7 million to the Company's net income. Further
excluding Treasury's share of the Company's fourth quarter restructuring
charge, this business unit generated a return on allocated equity of 15.9%.
21
EARNINGS PERFORMANCE
NET INTEREST INCOME
In 1996, net interest income rose to $1.38 billion from $1.30 billion in
1995 and $1.32 billion in 1994. The increase in net interest income of $75.9
million in 1996 was attributed to an increased interest rate spread. The
interest spread for 1996 was 3.15% compared with 3.00% for 1995 and 3.50% for
1994. The Company's net interest margin was 3.33% for 1996 compared with 3.13%
for 1995 and 3.60% for 1994. The increase in the spread was due to a decrease
in the cost of funds in the second and third quarters of 1996 and a slight
overall increase in the annual rate received on loans and investments. The
decrease in the cost of funds was a result of an overall decrease of 13 basis
points in the rate of interest paid and a decrease of $482 million in the
total amount of interest-bearing liabilities. The decrease in interest income
in 1996 was due to a $196.1 million decrease in average earning assets from
1995, partially offset by a 2 basis point increase in the overall rate. The
interest spread contracted in 1994 and the first half of 1995 as interest
rates rose sharply and the Company's margin was affected by the ARM repricing
lag. During the second half of 1995, the interest spread began to benefit from
declining interest rates.
The following tables of net interest income display the average monthly
balances, interest income and expense and average rates by asset and liability
component for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN MILLIONS)
Earning Assets
Certificates of deposit,
repurchase agreements
and federal funds and
securities available-
for-sale $ 1,824 $ 114 6.24% $ 1,545 $ 98 6.36% $ 1,121 $ 61 5.44%
Mortgage-backed
securities 8,875 638 7.19 10,486 753 7.18 4,763 276 5.79
Loans
Real estate 28,066 2,066 7.36 27,055 1,983 7.33 28,482 1,911 6.71
Consumer Finance 2,105 370 17.59 2,016 364 18.07 1,868 342 18.31
Other 534 46 8.62 498 41 8.13 418 39 9.33
------- ------ ----- ------- ------ ----- ------- ------ -----
Total earning assets 41,404 3,234 7.81 41,600 3,239 7.79 36,652 2,629 7.17
Other assets 2,271 2,378 2,289
------- ------- -------
Total assets 43,675 43,978 38,941
======= ======= =======
Interest Bearing
Liabilities
Deposits
Checking 4,449 33 0.74 4,355 35 0.81 4,566 40 0.88
Money market and other
savings 6,555 193 2.94 6,893 188 2.73 8,519 198 2.32
Term 17,640 945 5.36 17,420 973 5.58 16,623 699 4.21
Wholesale 336 9 2.68 543 21 3.92 478 13 2.72
------- ------ ----- ------- ------ ----- ------- ------ -----
Total deposits 28,980 1,180 4.07 29,211 1,217 4.17 30,186 950 3.15
Borrowings
Short-term borrowings
from FHLB 1,493 82 5.49 15 1 5.67 80 4 5.00
Securities sold under
repurchase agreements 5,373 295 5.48 7,051 422 5.99 1,985 98 4.94
Short-term borrowings 1,193 64 5.36 1,593 101 6.36 741 35 4.72
Long-term borrowings 2,830 235 8.30 2,481 196 7.87 2,591 221 8.53
------- ------ ----- ------- ------ ----- ------- ------ -----
Total borrowings 10,889 676 6.21 11,140 720 6.46 5,397 358 6.63
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest
bearing liabilities 39,869 1,856 4.66 40,351 1,937 4.79 35,582 1,308 3.67
------- ------ ----- ------- ------ ----- ------- ------ -----
Other liabilities 1,066 1,025 931
Stockholders' equity 2,740 2,602 2,428
------- ------- -------
Total liabilities and
equity $43,675 $43,978 $38,941
======= ======= =======
Interest spread 3.15% 3.00% 3.50%
===== ===== =====
Effective yield summary
Interest income/total
earning assets $41,404 $3,234 7.81% $41,600 $3,239 7.79% $36,652 $2,630 7.17%
Interest expense/total
earning assets 41,404 1,856 4.48 41,600 1,937 4.66 36,652 1,308 3.57
------ ----- ------ ----- ------ -----
Net interest income/net
interest margin $1,378 3.33% $1,302 3.13% $1,322 3.60%
====== ===== ====== ===== ====== =====
The average balance of loans above includes nonaccrual loans and therefore
the interest income and average rate, as presented, are affected by the loss
of interest on such loans. Interest foregone on nonaccrual loans was $38.4
million for the year ended December 31, 1996, compared with $38.1 million for
the year ended December 31, 1995 and $46.9 million for the year ended
December 31, 1994.
22
The following table shows the components of the change in net interest
income for the years ended December 31, 1996, 1995 and 1994 that are included
in the Consolidated Statement of Operations in Item 8, "Financial Statements
and Supplementary Data."
YEAR ENDED DECEMBER 31
-----------------------------------------
1996 VS. 1995 1995 VS. 1994 1994 VS. 1993
------------- ------------- -------------
(DOLLARS IN MILLIONS)
Certificates of deposits, repurchase
agreements and federal funds and
securities available-for-sale
Rate (1) $ (2) $ 10 $ (18)
Volume (2) 18 23 17
Rate/Volume (3) -- 4 (5)
----- ----- -----
16 37 (6)
----- ----- -----
Mortgage-backed securities
Rate (1) 2 65 (14)
Volume (2) (116) 332 113
Rate/Volume (3) -- 79 (8)
----- ----- -----
(114) 476 91
----- ----- -----
Real estate loans
Rate (1) 8 177 (66)
Volume (2) 74 (96) (67)
Rate/Volume (3) -- (9) 2
----- ----- -----
82 72 (131)
----- ----- -----
Consumer Finance and other loans
Rate (1) (10) (5) (17)
Volume (2) 16 27 27
Rate/Volume (3) (1) -- (1)
----- ----- -----
5 22 9
----- ----- -----
Other assets
Rate (1) 3 (4) (3)
Volume (2) 3 7 (11)
Rate/Volume (3) -- (1) --
----- ----- -----
6 2 (14)
----- ----- -----
Interest earning assets
Rate 1 243 (118)
Volume (5) 293 79
Rate/Volume (1) 73 (12)
----- ----- -----
(5) 609 (51)
----- ----- -----
Deposits
Rate (1) (35) 266 (23)
Volume (2) (4) (4) 35
Rate/Volume (3) 1 5 (1)
----- ----- -----
(38) 267 11
----- ----- -----
Borrowings
Rate (1) (55) 17 8
Volume (2) (14) 276 (9)
Rate/Volume (3) 26 69 --
----- ----- -----
(43) 362 (1)
----- ----- -----
Interest bearing liabilities
Rate (90) 283 (15)
Volume (18) 272 26
Rate/Volume 27 74 (1)
----- ----- -----
(81) 629 10
----- ----- -----
Change in net interest income $ 76 $ (20) $ (61)
----- ----- -----
- --------
(1) The rate variance reflects the change in the average rate multiplied by
the average balance outstanding during the prior period.
(2) The volume variance reflects the change in the average balance outstanding
multiplied by the average rate during the prior period.
(3) The rate/volume variance reflects the change in the average rate
multiplied by the change in the average balance outstanding.
(4) Nonaccrual loans are included in their respective loan categories.
Amortized net deferred loan fees are included in the interest income
calculations. The amortization of net deferred loan fees was $25.9 million
in 1996, $33.5 million in 1995 and $53.4 million in 1994.
23
NONINTEREST INCOME
Income from noninterest sources for 1996, 1995 and 1994 were as follows:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Retail banking fees
NSF and overdraft protection $ 74,319 $ 57,140 $ 54,127
Service charges-checking accounts 38,417 36,216 35,058
ATM transaction fees 27,905 25,220 17,866
Other banking fees 39,230 36,286 33,652
-------- -------- --------
Total banking fees 179,871 154,862 140,703
-------- -------- --------
Servicing fees 45,684 55,159 50,853
Securities operations
Brokerage 19,135 11,037 23,555
Mutual fund asset management 11,040 10,055 16,347
-------- -------- --------
Total securities operations 30,175 21,092 39,902
-------- -------- --------
Net insurance operations 29,570 28,861 27,636
Real estate fees 29,105 24,208 29,385
Net gain on sale of student loans 23,388 495 1,673
Net gain on sale of mortgages 8,562 8,824 5,339
Gain on sale of mortgage-backed securities 8,790 13,585 --
Writedowns on mortgage-backed securities (17,906) -- --
Provision for mortgages sold with recourse (7,300) -- --
Net gain on sale of securities -- -- 398
Loss on affordable housing investment (4,052) (7,611) --
Gain on sale of leases 811 14,909 1,507
Gain on sale of branches -- -- 62,337
Other 5,127 13,284 8,164
-------- -------- --------
$331,825 $327,668 $367,897
======== ======== ========
Retail banking fee income increased to $179.9 million in 1996 from $154.9
million in 1995 and $140.7 million in 1994, an increase of 16% and 28% over
1995 and 1994, respectively. NSF and overdraft protection fees for 1996
increased 30% over 1995. The customer overdraft product, added late in 1996,
is expected to sustain the 1996 growth rate in banking fees in 1997.
Servicing fees totaled $45.7 million for 1996 compared with $55.2 million
for 1995 and $50.9 million in 1994. The servicing spread for 1996 was 41 basis
points on the $11.2 billion average servicing portfolio compared with a
servicing spread of 51 basis points on a $10.8 billion average servicing
portfolio in 1995 and 43 basis points on an $11.7 billion average servicing
portfolio in 1994.
Income from brokerage operations was $19.1 million in 1996 compared to $11
million in 1995 and $23.6 million in 1994. The $8.1 million increase in income
in 1996 resulted primarily from the addition of non-proprietary mutual funds
which improved the product mix resulting in increased revenues.
Income from mutual fund asset management was $11 million in 1996, compared
to $10.1 million in 1995 and $16.3 million in 1994. The Company managed mutual
funds with average assets aggregating $3.4 billion in 1996 compared with $3.1
billion in 1995 and $3.2 billion in 1994. The reduction in income in 1995 is a
result of reduced fees realized on funds management.
24
Real estate fees were $29.1 million in 1996 compared with $24.2 million for
1995 and $29.4 million in 1994. Loan prepayment fees, included in real estate
fees, were $2.4 million for 1996 compared with $532,000 in 1995, and $342,000
in 1994.
During 1996, the Company sold its student loan business to Crestar Bank for
$386.6 million. The Company sold a portfolio of $356.6 million of loans and
after expenses and costs, realized a gain of $22.5 million on the sale. At
December 31, 1996, there was a balance of student loans remaining of $21.5
million. These loans are being aggressively marketed. At February 28, 1997,
approximately $6.8 million of student loans remain to be sold.
The net gain on sale of mortgages was $8.6 million in 1996, $8.8 million in
1995, and $5.3 million in 1994. Mortgage sales in 1996, primarily fixed-rate,
totaled $1.5 billion at a gain of .58% of the portfolio sold, compared to $1.1
billion in 1995 at a gain of .79% of the portfolio sold and $1.2 billion in
1994 at a gain of .48% of the portfolio sold. In conjunction with the sales of
mortgages, capitalized servicing rights of $8.2 million were recorded in 1996,
$4.7 million in 1995 and $604,000 in 1994.
Gain on sale of mortgage-backed securities was $8.8 million in 1996 compared
to $13.6 million in 1995. Sales of mortgage-backed securities were $561.4
million in 1996 and $498.1 million in 1995. There were no mortgage-backed
securities sold in 1994. In conjunction with the sales of mortgage-backed
securities, capitalized servicing rights of $13.5 million were recorded in
1996 and $3.5 million in 1995.
Prior to July, 1996, the Company recorded impairment on mortgage-backed
securities through charge-offs to the allowance for loan and lease losses.
Subsequent to July, 1996, impairment is recorded as a charge to earnings.
There were charges to the allowance for loan and lease losses of $12.8 million
for the first six months of 1996, $11 million for the year ended December 31,
1995 and $1 million for the year ended December 31, 1994. For the second half
of 1996, $17.9 million was recorded to reflect impairment in the mortgage-
backed securities portfolio.
As a result of the loss experience on loans sold with recourse, an increase
to the contingent liability for losses on loans sold with recourse of $7.3
million was required and recorded in 1996. The outstanding balance of loans
sold with recourse at December 31, 1996 was $1.2 billion, and $1.4 billion at
both December 31, 1995 and 1994.
The gain on sale of leases was $811,000 in 1996 compared with $14.9 million
in 1995 and $1.5 million in 1994. The gain on the sale of leases is the result
of dispositions throughout the year of Great Western Capital Corporation's
fast food leasing portfolio. In 1995, the majority of the portfolio was sold.
25
NONINTEREST EXPENSE
Noninterest expenses were as follows:
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Salaries and benefits
Salaries $ 369,350 $ 365,758 $ 381,036
Taxes, benefits and other 69,254 75,608 88,079
---------- ---------- ----------
Total salaries and benefits 438,604 441,366 469,115
SAIF special assessment 188,359 -- --
Premises and occupancy 179,617 179,654 199,048
Restructure expense 68,293 -- --
FDIC insurance premium 65,100 66,365 77,451
Outside data processing 57,292 60,847 32,512
Professional fees 40,165 17,942 16,679
Communications 39,810 44,783 38,856
Amortization of intangibles 37,722 40,286 58,689
Advertising and promotion 32,961 35,661 36,573
Operating losses and settlements 25,212 22,553 14,674
Retirement of subordinated debt 21,406 -- --
Office supplies 20,718 17,943 16,386
Postage 13,982 13,508 17,476
Insurance 11,413 10,286 11,946
Real estate operations
Net (gain) on sale of real estate (15,619) (21,709) (6,437)
Interest recognized on advances (5,981) (2,337) (1,341)
Provisions for losses (12,775) 1,500 12,000
Writedowns 2,254 -- --
Operating expenses 32,847 28,151 27,632
---------- ---------- ----------
Total real estate operations 726 5,605 31,854
Other 72,869 63,176 55,174
---------- ---------- ----------
$1,314,249 $1,019,975 $1,076,433
========== ========== ==========
Total noninterest expense for 1996, excluding the SAIF special assessment of
$188.4 million and the restructuring expense of $68.3 million was $1.1
billion.
The Company employed 13,028 persons at December 31, 1996, a number of which
worked part-time. The full-time equivalent of employees at that date was
9,367. At December 31, 1995, the Company employed 14,393 persons and had
10,266 full-time equivalent employees.
Total salaries and benefits were $438.6 million, $441.4 million and $469.1
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The decrease from 1995 to 1996 of $2.8 million is due to reductions in pension
expense offset by an increase in earnings on the company-owned life insurance.
The decrease from 1994 to 1995 of $27.7 million was due to a workforce
reduction of approximately 1,300 positions in 1995.
On September 30, 1996, the President signed into law an omnibus spending
bill which included provisions for the recapitalization of the SAIF through a
one-time special assessment of approximately 65.7 cents per $100 of SAIF
deposits held by savings associations as of March 31, 1995. GWB's special
assessment of $188.4 million was reflected in the Bank's third quarter
results.
26
The Company's results of operations reflect a $68.3 million restructuring
charge. The restructuring initiatives are designed to improve the Company's
competitive position, accelerate expense reduction and enhance future revenue
growth by streamlining operations, making efficient use of premises and
modernizing GWFC's systems platform. The components of the restructuring
charge involve severance and write-off of premises and equipment. The
estimated cost savings for GWFC as a result of implementing the restructuring
initiatives is $39.5 million and $41.5 million in 1997 and 1998, respectively.
The Company's plans to streamline operations, reconfigure the retail branch
network and improve information systems support and other back office
functions will result in the reduction of approximately 1,200 employees and a
charge to restructure expense of $17.0 million. As of December 31, 1996, 630
employee separations have occurred and the related severance expense of $4.6
million was applied against the 1996 restructure liability. Employee
separations related to the restructuring are planned to be completed by the
end of 1997.
The Company's corporate headquarters campus was identified for consolidation
to make optimum use of building space. As a result, three buildings at the
corporate campus will be vacated freeing up 272,000 square feet to sublet to
third party tenants. Additionally, seven retail branch and 109 loan offices
were identified for closure or consolidation. The total effect of vacating
these premises is $29.5 million. Premises identified under the restructuring
initiatives are planned to be vacated by December, 1997.
In order to meet GWFC's goal to modernize and replace its current systems
platform, certain computer hardware and software equipment were considered
obsolete or abandoned and written off. The upgrade and replacement of
equipment will allow the Company to increase operational efficiency, improve
processing capacity and establish a common user workstation environment. As of
December 31, 1996, $18.4 million of equipment was written off and applied
against the restructure liability. The balance of $3.4 million of equipment
will be retired in 1997 and applied against the restructure liability.
Following is a reconciliation of restructuring reserve activity during 1996:
1996 BALANCE
RESTRUCTURING 1996 DECEMBER 31,
CHARGE ACTIVITY 1996
------------- -------- ------------
(DOLLARS IN MILLIONS)
Severance $ 17.0 $ 4.6 $ 12.4
Premises 29.5 -- 29.5
Equipment 21.8 18.4 3.4
------ ------ ------
Total $ 68.3 $ 23.0 $ 45.3
====== ====== ======
In 1996, professional fees increased to $40.2 million from $17.9 million in
1995 and $16.7 million in 1994. The $22.2 million increase in 1996 was
primarily a result of an aggressive plan to increase income, improve
strategies and operations and reduce costs. Outside legal fees increased $4.4
million in 1996 mainly as a result of the increased level of securities
litigation.
The net loss from real estate operations has decreased from $31.9 million in
1994 to $5.6 million in 1995 to $726,000 in 1996. The reversal of
$13.5 million to the provision for losses in 1996 is a result of the reduction
in non-performing real estate assets and improving prospects for the remainder
of the portfolio.
Included in other operating expenses for 1996 is an $8 million recovery for
fraudulently over-billed marketing costs at Aristar which had occurred over a
number of years.
In the fourth quarter of 1996, the Company examined its businesses and began
exploring several options for its mutual fund subsidiary, Sierra Capital
Management Corporation, ranging from a joint venture partnership to a sale.
Due to the announced merger between Washington Mutual and the Company, any
transaction involving this or any other subsidiary is being reexamined, see
Item 1. Business "Merger Agreement with Washington Mutual, Inc.", "H. F.
Ahmanson & Company's Merger Proposal" and "Litigation Relating to the Ahmanson
Merger Proposal".
27
INCOME TAX
The Company's effective tax rate was 37.9% in 1996 and 38.2% in 1995 and
1994.
Under the Internal Revenue Code, GWB, as a qualified thrift institution, had
been allowed to claim deductions for bad debts under the reserve method, which
is more favorable than bad debt deduction methods allowed to claim by other
taxpayers.
Under provisions of the Small Business Job Protection Act of 1996, GWB lost
the use of the bad debt reserve method beginning in 1996. Since the reserve
balance at December 31, 1996 of $724.5 million arose prior to 1988, it is not
currently subject to federal income tax and would not be if GWB were to
convert to a commercial bank or otherwise lose its tax status as a qualified
thrift institution. However, it will be subject to such tax upon certain
occurrences (including its distribution to shareholders), none of which are
currently contemplated.
28
BALANCE SHEET ANALYSIS
EARNING ASSETS
The composition of earning assets for the five year period 1992 through 1996
is as follows:
DECEMBER 31
---------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN MILLIONS)
Certificates of deposit,
repurchase agreements
and federal funds and
securities available-
for-sale* $ 1,517 3.71 $ 1,286 3.08 $ 1,027 2.60 $ 1,027 2.86 $ 915 2.57
Mortgage-backed
securities 7,789 19.06 9,803 23.47 9,286 23.49 3,196 8.91 3,177 8.92
Loans
Real estate
Single-family
residential 26,079 63.81 24,697 59.13 23,365 59.10 25,682 71.64 25,333 71.14
Apartments 1,490 3.64 1,615 3.87 1,712 4.33 1,814 5.06 1,939 5.45
Commercial 1,192 2.92 1,374 3.29 1,393 3.52 1,589 4.43 1,553 4.36
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 28,761 70.37 27,686 66.29 26,470 66.95 29,085 81.13 28,825 80.95
Consumer Finance 2,186 5.35 2,136 5.11 1,999 5.06 1,831 5.11 1,723 4.84
Other loans 240 .59 517 1.23 449 1.13 405 1.13 657 1.84
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 31,187 76.31 30,339 72.59 28,918 73.14 31,321 87.37 31,205 87.63
Investment in FHLB stock 378 .92 341 .82 306 .77 307 .86 314 .88
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total earning assets $40,871 100 $41,769 100 $39,537 100 $35,851 100 $35,611 100
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- --------
* Securities exclude $62 million of securities held by the Company's life
insurance subsidiary at December 31, 1996, $63 million at December 31, 1995,
$57 million at December 31, 1994, $59 million at December 31, 1993 and $59
million at December 31, 1992.
Earning assets decreased $897 million from $41.8 billion in 1995 to $40.9
billion in 1996. The Company's investment in mortgage-backed securities
decreased by $2 billion in 1996 and was offset by a $1.1 billion increase in
real estate loans. Proceeds from payments and sales of mortgage-backed
securities were invested into ARM ("Adjustable Rate Mortgages") SFR loans and
other securities. The increase in single-family residential real estate loans
is due to customer demand for adjustable rate mortgage lending rather than
fixed-rate loans, which are sold shortly after origination.
Securities Available-For-Sale
Securities available-for-sale are carried at fair value. Marketable
securities available-for-sale at December 31, 1996 had both an amortized cost
and a fair value of $1.3 billion. See Note 4 of the Notes to Consolidated
Financial Statements in Item 8, "Financial Statements and Supplementary Data."
In determining which security to invest in, the Company considers among other
factors, relative rates, liquidity and credit quality. At December 31, 1996,
there were no investment securities issued by a single issuer (excluding the
U.S. Government and its agencies and corporations) that exceeded 10% of
stockholders' equity.
Mortgage-Backed Securities
Mortgage-backed securities consist largely of single-family residential
loans swapped for mortgage-backed securities in 1994 and 1995 to provide
collateral for borrowings. Underlying these securities are loans that were
originated by Great Western Bank. Mortgage-backed securities totaled $7.8
billion at December 31, 1996 compared with $9.8 billion at December 31, 1995.
Because the Company retained the credit risk on the loans underlying these
securities, delinquent loans totaling $145.6 million and $73.2 million in 1996
and 1995, respectively, were repurchased.
29
The composition of mortgage-backed securities for the five year period 1992
through 1996 is as follows:
DECEMBER 31
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
Adjustable Rate
COFI $6,073 78 $7,619 78 $6,712 72 $2,084 65 $1,969 62
FCOFI 1,335 17 1,565 16 1,752 19 -- -- -- --
Other 91 1 90 1 89 1 84 3 -- --
------ --- ------ --- ------ --- ------ --- ------ ---
Total adjustable rate
mortgage-backed
securities 7,499 96 9,274 95 8,553 92 2,168 68 1,969 62
------ --- ------ --- ------ --- ------ --- ------ ---
Fixed-rate
Long-term 217 3 473 5 669 7 931 29 1,173 37
Short-term 73 1 56 * 64 1 97 3 35 1
------ --- ------ --- ------ --- ------ --- ------ ---
Total fixed-rate
mortgage-backed
securities 290 4 529 5 733 8 1,028 32 1,208 38
------ --- ------ --- ------ --- ------ --- ------ ---
Total mortgage-backed
securities $7,789 100 $9,803 100 $9,286 100 $3,196 100 $3,177 100
====== === ====== === ====== === ====== === ====== ===
- --------
*Less than one percent
At December 31, 1996, approximately 78% of mortgage-backed securities in the
portfolio were indexed to the Cost of Funds Index for financial institutions
comprising the 11th District Federal Home Loan Bank of San Francisco ("FHLB")
Cost of Funds Index ("COFI"). The Company has also swapped products which are
indexed to the Federal Cost of Funds Index ("FCOFI"). The FCOFI is a
combination of the average interest rate on the combined marketable Treasury
bills and the average interest rate on the combined marketable Treasury notes.
At December 31, 1996, adjustable rate mortgage-backed securities comprised 96%
of the mortgage-backed securities portfolio compared with 95% in 1995 and 92%
in 1994.
Mortgage-backed securities available-for-sale are carried at fair value. At
December 31, 1996, mortgage-backed securities available-for-sale of $6.2
billion included $96.2 million of fixed-rate securities and $6.1 billion of
adjustable rate securities.
30
Loans
The composition of real estate, Consumer Finance and other loans for the
five years 1992 through 1996 is as follows:
DECEMBER 31
---------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Real Estate $28,761 $27,686 $26,470 $29,085 $28,825
Consumer Finance 2,186 2,136 1,999 1,831 1,723
Other loans 240 517 449 405 657
------- ------- ------- ------- -------
$31,187 $30,339 $28,918 $31,321 $31,205
======= ======= ======= ======= =======
DECEMBER 31
------------------------------------------------------------
1996 % 1995 % 1994 % 1993 % 1992 %
-------- --- ------- --- ------- --- ------- --- ------- ---
(DOLLARS IN MILLIONS)
REAL ESTATE
ARM
COFI $ 20,803 72 $20,961 75 $19,901 75 $20,160 69 $20,353 71
FCOFI 2,005 7 2,429 9 1,986 8 4,324 15 4,776 17
LAMA 3,318 12 1,668 6 -- -- -- -- -- --
Other 1,816 6 1,618 6 3,551 13 3,151 11 2,168 7
-------- --- ------- --- ------- --- ------- --- ------- ---
Total ARM loans 27,942 97 26,676 96 25,438 96 27,635 95 27,297 95
-------- --- ------- --- ------- --- ------- --- ------- ---
Fixed-rate
Long-term 411 2 525 2 582 2 903 3 1,043 3
Short-term 408 1 485 2 450 2 547 2 485 2
-------- --- ------- --- ------- --- ------- --- ------- ---
Total fixed-rate
loans 819 3 1,010 4 1,032 4 1,450 5 1,528 5
-------- --- ------- --- ------- --- ------- --- ------- ---
Total real estate
loans $ 28,761 100 $27,686 100 $26,470 100 $29,085 100 $28,825 100
======== === ======= === ======= === ======= === ======= ===
Single-family $ 26,079 91 $24,697 89 $23,365 88 $25,682 88 $25,333 88
Apartments 1,490 5 1,615 6 1,712 7 1,814 6 1,939 7
Commercial properties 1,192 4 1,374 5 1,393 5 1,589 6 1,553 5
-------- --- ------- --- ------- --- ------- --- ------- ---
$ 28,761 100 $27,686 100 $26,470 100 $29,085 100 $28,825 100
======== === ======= === ======= === ======= === ======= ===
Number of real estate
loans 347,530 351,782 370,835 427,659 464,862
CONSUMER FINANCE $ 2,186 100 $ 2,136 100 $ 1,999 100 $ 1,831 100 $ 1,723 100
======== === ======= === ======= === ======= === ======= ===
OTHER LOANS
Lease financing $ 71 30 $ 78 15 $ 101 22 $ 100 25 $ 105 16
Checking overdraft 62 26 37 7 26 6 28 6 19 3
Savings account 52 22 56 11 60 13 69 17 72 11
Student loans 21 9 327 63 239 53 180 44 165 25
Mobile home loans 14 6 18 3 22 5 26 7 34 5
Small business lines
of credit 13 5 -- -- -- -- -- -- -- --
Bank cards -- -- -- -- -- -- -- -- 256 39
Other 7 3 1 -- 1 -- 2 -- 6 1
-------- --- ------- --- ------- --- ------- --- ------- ---
Total Other Loans $ 240 100 $ 517 100 $ 449 100 $ 405 100 $ 657 100
======== === ======= === ======= === ======= === ======= ===
The origination and sale of real estate loans is dependent upon general
market conditions. In an active real estate market, loan originations may
increase. In such periods, mortgage sales are usually increased to fund a
portion of originations and to control asset growth. However, in some periods
mortgage sales occur to fund customer account outflows and repay borrowings
which result in asset shrinkage. Mortgage sales also occur to limit interest-
rate risk and for restructuring purposes.
The ARM for single-family residential properties is the primary lending
product held for investment. At December 31, 1996, ARMs comprised 97% of the
real estate loan portfolio compared with 96% in the comparable period in 1995.
At December 31, 1996, approximately 72% of real estate loans in the portfolio
were
31
indexed to COFI. The Company also originates ARM products which are indexed to
one-year Treasury bills, the prime rate and FCOFI. In March 1995, the Company
introduced a new product, the London Interbank Offered Rate ("LIBOR") Annual
Monthly Average ("LAMA") ARM. The LAMA ARM is indexed to a 12 month average of
the Federal National Mortgage Association ("FNMA") One Month LIBOR. The FCOFI
and LAMA ARMs are similar to the COFI ARM product with respect to interest-
rate caps and payment changes.
Fixed-rate lending tends to increase during periods of relatively low
interest rates. Such loans are originated primarily for sale. The Company
sells loans forward into the secondary market and purchases short-term hedge
contracts for the commitment period to protect against rate fluctuations on its
commitments to fund fixed-rate loans originated for sale. Hedge contracts are
recorded at cost. At December 31, 1996, there were no open hedge contracts in
the pipeline due to the relatively low level of fixed-rate commitments.
Commercial real estate loans continued to decrease as a result of the
Company's decision in 1987 to discontinue commercial real estate lending
except to finance the sale of foreclosed properties, or to refinance existing
loans in the normal course of business.
As of December 31, 1996, net real estate loans available-for-sale, primarily
fixed-rate loans, were $84.4 million compared to $159 million on December 31,
1995. Unrealized holding gains on real estate loans available-for-sale totaled
$462,000 at December 31, 1996, compared to $1.4 million on December 31, 1995.
The California real estate market requires continued review. There appear to
be regional differences in economic performance within California and among
property types which are attributable to differing recovery rates for the wide
range of economic activities within California.
On a regional basis, the economic factors affecting the single-family market
appear to be somewhat more favorable in Northern California than in Southern
California. In particular, the median metropolitan area sales price of
existing single-family homes in the San Jose area increased from the third
quarter of 1995 to the third quarter of 1996 by 3%. During the same period,
the median sales price for the Los Angeles area declined 3% while the median
sales price for the San Diego area increased by approximately 1%.
In the office space market, regional differences exist between Northern and
Southern California. In the San Francisco area, the vacancy rate declined to
7% at December 31, 1996 from 8% a year earlier. In the Los Angeles area, the
vacancy rate of the office space market was 18% at December 31, 1996 compared
with 19% at December 31, 1995. In San Diego County, the vacancy rate was 13%
at December 31, 1996 and 18% at December 31, 1995.
In the industrial space market, Northern and Southern California vacancy
rates have been more comparable. In the San Francisco area, the vacancy rate
decreased to 8% at December 31, 1996, from 9% a year earlier. In the Los
Angeles area, the vacancy rate of the industrial space market was 7% at
December 31, 1996 and 8% at December 31, 1995. San Diego County's industrial
space market had a vacancy rate of 5% at December 31, 1996 compared with 4% at
December 31, 1995.
32
The geographic distribution of the real estate loan portfolio and nonaccrual
and restructured loans at December 31, 1996 follows:
CONNECTICUT
MASSACHUSETTS
CALIFORNIA FLORIDA NEW YORK
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family
residential $15,891 $231 $1,899 $18 $ 1,855 $ 17
Apartments 1,260 30 54 -- -- --
Commercial
Offices 337 12 14 -- -- --
Retail 184 2 13 -- -- --
Hotel/Motel 98 14 5 -- -- --
Industrial 228 10 11 -- -- --
Other 116 1 10 1 -- --
------- ---- ------ --- ------- ----
Total $18,114 $300 $2,006 $19 $ 1,855 $ 17
------- ---- ------ --- ------- ----
Percent of total loans 63.0% 7.0% 6.4%
Nonaccrual as a % of
total by state 1.7% 0.9% 0.9%
OREGON
WASHINGTON OTHER TOTAL
---------------------- ---------------------- ----------------------
RESTRUCTURED RESTRUCTURED RESTRUCTURED
AND AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family
residential $ 1,576 $ 7 $4,858 $27 $26,079 $300
Apartments 7 1 169 7 1,490 38
Commercial
Offices 16 -- 15 -- 382 12
Retail 4 -- 10 -- 211 2
Hotel/Motel -- -- 76 -- 179 14
Industrial 1 -- 25 -- 265 10
Other 3 -- 26 1 155 3
------- ---- ------ --- ------- ----
Total $ 1,607 $ 8 $5,179 $35 $28,761 $379
------- ---- ------ --- ------- ----
Percent of total loans 5.6% 18.0% 100%
Nonaccrual as a % of
total by state 0.5% 0.7% 1.3%
33
A comparison of California real estate loans and nonaccrual real estate
loans by region as of December 31, 1996 follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
---------------------- ----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family residential $ 5,024 $ 52 $ 1,337 $ 12
Apartments 153 1 225 5
Commercial
Offices 73 8 38 --
Retail 44 1 25 --
Hotel/Motel 34 -- 19 2
Industrial 30 1 13 1
Other 37 -- 17 --
------- ---- ------- ----
Total by region $ 5,395 $ 63 $ 1,674 $ 20
------- ---- ------- ----
% of total California loans 29.8% 9.2%
Nonaccrual as a % of total by
region 1.2% 1.2%
SOUTHERN CALIFORNIA CALIFORNIA
---------------------- ----------------------
RESTRUCTURED RESTRUCTURED
AND AND
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
--------- ------------ --------- ------------
(DOLLARS IN MILLIONS)
Real estate loans
Single-family residential $ 9,530 $167 $15,891 $231
Apartments 882 24 1,260 30
Commercial
Offices 226 4 337 12
Retail 115 1 184 2
Hotel/Motel 45 12 98 14
Industrial 185 8 228 10
Other 62 1 116 1
------- ---- ------- ----
Total by region $11,045 $217 $18,114 $300
------- ---- ------- ----
Percent of total California
loans 61.0% 100%
Nonaccrual as a % of total by
region 2.0% 1.7%
34
The following table summarizes the Company's loan volume with real estate
loan volume composition by security type, purpose and loan type for the five
year period 1992 to 1996:
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 % 1995 % 1994 % 1993 % 1992 %
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
(DOLLARS IN MILLIONS)
LOAN VOLUME
Real estate loans $ 6,146 72% $ 7,281 75% $ 7,921 77% $ 8,788 79% $ 9,216 81%
Consumer Finance 1,996 24 2,124 22 2,046 20 1,843 17 1,648 14
Other 348 4 283 3 262 3 450 4 593 5
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total new loan volume $ 8,490 100% $ 9,688 100% $10,229 100% $11,081 100% $11,457 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
SECURITY TYPE
Single-family $ 6,074 99 $ 7,162 98 $ 7,807 98 $ 8,623 98 $ 9,098 98
Apartments 44 1 43 1 51 1 52 1 68 1
Commercial properties 28 * 76 1 63 1 113 1 50 1
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
PURPOSE
Purchase of property $ 3,403 55 $ 4,546 63 $ 4,421 56 $ 3,152 36 $ 3,205 35
Refinance 2,739 45 2,710 37 3,479 44 5,607 64 6,005 65
Construction 4 * 25 * 21 * 29 * 6 *
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
LOAN TYPE
Long-term--essentially
30-40 years
ARM $ 4,769 78 $ 5,922 81 $ 6,868 87 $ 5,243 60 $ 4,734 51
Fixed 833 13 893 12 603 7 2,102 24 2,688 29
Short-term--essentially
15 years or less
ARM 140 2 116 2 130 2 185 2 253 3
Fixed 404 7 350 5 320 4 1,258 14 1,541 17
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Average new loan rate 6.58% 6.78% 5.89% 7.05% 8.25%
Average ARM differential 2.64% 2.62% 2.59% 2.47% 2.25%
- --------
*Less than one percent
The composition of Consumer Finance loans receivable at December 31, 1996
and 1995 was as follows:
DECEMBER 31
--------------
1996 1995
------ ------
(DOLLARS IN THOUSANDS)
Real estate secured loans $ 994 $ 892
Installment loans 1,109 1,183
Retail installment contracts 401 399
Deferred fees (318) (338)
------ ------
$2,186 $2,136
====== ======
Consumer finance loans have maximum terms of 360 months, while retail
installment contracts have maximum terms of 60 months. The majority of loans
provide for a fixed rate of interest over the contractual life of the loan.
35
Nonperforming Assets
The following table summarizes nonaccrual and restructured loans and
nonperforming real estate for the five year period 1992 to 1996:
DECEMBER 31
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ------ ------
(DOLLARS IN MILLIONS)
Nonaccrual loans
Real estate
Single-family residential $285 $432 $490 $ 521 $ 782
Apartments 12 13 40 40 31
Commercial 8 14 12 43 37
---- ---- ---- ------ ------
Total nonaccrual real estate loans 305 459 542 604 850
Consumer Finance 46 25 21 20 22
Other 1 2 2 2 8
---- ---- ---- ------ ------
Total nonaccrual loans 352 486 565 626 880
Restructured loans
Single-family residential 15 13 19 1 0
Apartments 26 28 28 30 72
Commercial 33 67 78 182 89
---- ---- ---- ------ ------
Total restructured loans 74 108 125 213 161
---- ---- ---- ------ ------
Nonaccrual and restructured loans 426 594 690 839 1,041
As a percentage of total loans 1.38% 1.99% 2.43% 2.74% 3.41%
Nonperforming real estate* 120 174 156 293 970
---- ---- ---- ------ ------
Total nonperforming assets $546 $768 $846 $1,132 $2,011
==== ==== ==== ====== ======
As a percentage of total assets 1.27% 1.72% 1.98% 2.90% 5.12%
- --------
* In 1992, includes insubstance-foreclosed loans, the reporting of which has
been subsequently discontinued.
Management's classification of a loan as nonaccrual or restructured does not
necessarily indicate that the principal of the loan is uncollectible in whole
or in part. Loans are placed on nonaccrual status when they become more than
90 days past due. Nonperforming real estate includes foreclosed and investment
properties which do not generate sufficient income to meet return on
investment criteria.
Certain loans (where the Company works with borrowers encountering economic
difficulty) meet the criteria of, and are classified as, troubled debt
restructurings ("TDRs") because of modification to loan terms. TDRs totaled
$74.2 million at December 31, 1996 compared with $108.4 million at December
31, 1995.
In addition to the ongoing monthly bulk sales of foreclosed properties, the
Company disposed of $292.4 million of nonperforming loans and real estate in
1996. The loans and properties were primarily associated with loans made
between 1989 and 1992.
Impaired Loans
For information on the recorded investment in loans for which impairment has
been recognized in accordance with Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and the
reserve for estimated losses related to such loans. See Note 6 of the Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
The impaired loan portfolio decreased from $268.4 million at December 31,
1995 to $210.1 million at December 31, 1996. The decrease was primarily the
result of the bulk sale of $274.9 million on nonperforming loans. Single-
family residential mortgage loans are generally evaluated for impairment as
homogeneous pools of
36
loans. Certain situations may arise leading to single-family residential
mortgage loans being evaluated for impairment on an individual basis.
The Company's policy for recognizing income on impaired loans is to accrue
earnings until a loan becomes nonaccrual, at which time the accrued earnings
are reversed.
A change in the fair value of an impaired loan is reported as an increase or
reduction to the provision for loan losses.
Delinquent Assets
The Company continuously reviews the trends of loans and mortgage-backed
securities with full credit risk. The following summarizes the three year
trends in real estate loans, Consumer Finance and other loans and mortgage-
backed securities which are over 30 to 90 days delinquent:
DECEMBER 31
-------------------
1996 1995 1994
----- ----- -----
(DOLLARS IN MILLIONS)
REAL ESTATE LOANS
Single-family residential
Over 30 to 60 days delinquent $ 263 $ 194 $ 159
Over 60 to 90 days delinquent 99 87 86
Other
Over 30 to 60 days delinquent 9 9 24
Over 60 to 90 days delinquent 8 6 7
----- ----- -----
Total $ 379 $ 296 $ 276
===== ===== =====
Percentage of related portfolio 1.32% 1.07% 1.04%
CONSUMER FINANCE LOANS
Over 30 to 60 days delinquent $ 44 $ 43 $ 38
Over 60 to 90 days delinquent 18 17 13
----- ----- -----
Total $ 62 $ 60 $ 51
===== ===== =====
Percentage to related portfolio 2.84% 2.81% 2.55%
OTHER LOANS
Over 30 to 60 days delinquent $ 2 $ 5 $ 2
Over 60 to 90 days delinquent 1 3 2
----- ----- -----
Total $ 3 $ 8 $ 4
===== ===== =====
Percentage to related portfolio 1.25% 1.55% .89%
TOTAL LOANS
Over 30 to 60 days delinquent $ 318 $ 251 $ 223
Over 60 to 90 days delinquent 126 113 108
----- ----- -----
Total $ 444 $ 364 $ 331
===== ===== =====
Percentage to related portfolio 1.42% 1.20% 1.14%
MORTGAGE-BACKED SECURITIES
Over 30 to 60 days delinquent $ 47 $ 25 $ 9
Over 60 to 90 days delinquent 17 11 4
----- ----- -----
Total $ 64 $ 36 $ 13
===== ===== =====
Percentage to related portfolio .82% .37% .14%
37
The increase in over 30 to 60 day delinquencies at December 31, 1996
compared with December 31, 1995 is partially due to a change in collection
processing as a result of the re-engineering of loan servicing and the related
installation of a new loan servicing system in 1996. In addition, borrower
performance continues to be weak on a portion of loans originated during the
late 1980's and early 1990's.
Allowance for Loan and Lease Losses
Summarized below are loan balances by type, their reserve for estimated
losses and the percentage the reserve balance bears to the loan balance for
the periods ended December 31, 1996 and 1995. The loan balances and percentage
of reserves to the respective loan balances for December 1995 have been
restated to exclude mortgage-backed securities with credit recourse for
comparative purposes to conform to the 1996 presentation.
1996 1995
------------------------- -------------------------
AMOUNT ALLL % AMOUNT ALLL %
----------- -------- ---- ----------- -------- ----
(DOLLARS IN THOUSANDS)
Real estate loans
SFR $26,078,926 $147,908 .57 $24,696,485 $156,016 .63
Commercial and other 2,682,082 90,867 3.39 2,989,420 145,149 4.86
----------- -------- ---- ----------- -------- ----
Total real estate loans 28,761,008 238,775 .83 27,685,905 301,165 1.09
Consumer Finance 2,185,903 70,045 3.20 2,136,022 55,568 2.60
Other Loans 240,535 4,879 2.03 516,837 6,116 1.18
----------- -------- ---- ----------- -------- ----
Total loans $31,187,446 $313,699 1.01 $30,338,764 $362,849 1.20
=========== ======== ==== =========== ======== ====
At December 31, 1996, the ALLL was $313.7 million, or 1.01% of total loans,
compared with $362.8 million, or 1.2% at December 31, 1995. The provision for
loan losses was $209 million for the year ended December 31, 1996, up from
$187.7 million in 1995 due to the one-time addition of $50 million
attributable to the bulk sale of loans. Net charge-offs for single family
residential real estate loans for 1996 were $195.5 million or .68% compared
with $193.1 million or .63% for 1995.
The Company has a process to determine the adequacy of the allowance for
loan losses that assesses the risks and losses inherent in its portfolio. The
process provides an allowance consisting of two components, general and
specific. The specific component reflects inherent losses resulting from an
analysis of individual loans.
Beginning in the third quarter of 1996, the Company stratified the SFR
portfolio based on such items as borrower performance, current credit scores
and estimated current loan to value ratios ("LTV"). The purpose of the
stratification was to assist the Company in its quarterly assessment of the
allowance for possible loan losses. In addition, the Company modified its
practice for recording charge-offs associated with full credit risk mortgage-
backed securities. Charge-offs related to credit risk on the Company's
mortgage-backed securities held as investments are reflected as a writedown of
the mortgage-backed security. Charge-offs related to loans and securities sold
with recourse are reflected in the related liability account. In addition, the
Company evaluated the current economic conditions, concentrations within the
portfolio and other subjective factors in assessing the adequacy of its
allowance for loan losses. The change in the allowance for SFR loans from $156
million at December 31, 1995, or .63% of the SFR portfolio to $147.9 million
at December 31, 1996, or .57% reflects the Company's assessment of the SFR
portfolio and the current economic conditions impacting the SFR portfolio.
The allowance for commercial loans is developed through specific credit
allocations applying historical loss experience and loan category based on
asset quality for individual loans, including impaired loans subject to SFAS
114. The allowance for commercial real estate loans has decreased from $145.1
million at December 31, 1995, or 4.86% to $90.9 million at December 31, 1996,
or 3.39%. The reserve for commercial real estate and apartment loans was
reduced by a $40 million credit to the provision for loan and lease losses in
1996, primarily as a result of the Company's review of required levels for the
allowance of this portfolio. The commercial real
38
estate loan portfolio has continued to decrease as a result of a decision in
1987 to discontinue commercial real estate lending except to finance the sale
of foreclosed properties or to refinance existing loans in the normal course
of business. The quality of the commercial real estate loan portfolio
continues to improve as a result of the recovery in the commercial real estate
markets nationwide and particularly in California. There has been a
substantial amount of liquidity that has returned to the real estate markets.
This liquidity has contributed significantly to the Company's progress in
reducing this portfolio. The Company expects this portfolio to continue to
decline and improve in quality.
The allowance for Consumer Finance loans is based upon a percentage of loans
outstanding in relation to the loss experience within the loan categories
generally stratified by delinquency. The allowance for Consumer Finance loans
increased from $55.6 million at December 31, 1995, or 2.60% of the outstanding
portfolio, to $70 million at December 31, 1996, or 3.20% of the outstanding
portfolio, as a result of some deterioration in credit quality.
The allowance for leases was $1 million at December 31, 1996, down from $3
million at December 31, 1995, or a decline of 67%. Provisions for losses on
the leasing portfolio for 1996, included in other loan loss provisions,
decreased as a result of the reversal of $1.8 million of excess reserves.
Provisions for losses on the leasing portfolio for 1995 decreased as a result
of the reversal of a $6 million reserve originally established for expected
losses which did not materialize.
The general component includes management's judgment of the amounts
necessary for concentrations, economic uncertainties and other subjective
factors. Although management has allocated the allowance to specific loan
categories, the adequacy of the allowance must be considered in its entirety.
The Company's determination of the level of the allowance and,
correspondingly, the provision for loan and lease losses rests upon various
judgments and assumptions, including general economic conditions, loan
portfolio composition, prior loan loss experience and the Company's ongoing
examination process and that of its regulators. The Company has an Internal
Asset Review Committee ("IARC") that reports to the Board of Directors and
continuously reviews loan quality. The Company also has internal staff
regularly review the classification of commercial loans and also reports to
the IARC. Such reviews also assist management in establishing the level of the
allowance. The Bank is examined by its primary regulator, the OTS. These
examinations generally occur annually and target various activities of the
Bank, including specific segments of the loan portfolio. In addition to the
Bank being examined by the OTS, Great Western Financial Corporation and the
nonbank subsidiaries are also subject to OTS examination.
The Company considers the allowance for loan and lease losses of $313.7
million adequate to cover losses inherent in the loan and lease portfolio at
December 31, 1996. However, no assurance can be given that the Company will
not, in any particular period, sustain loan and lease losses that are sizable
in relation to the amount reserved, or that subsequent evaluation of the loan
and lease portfolio, in light of the factors then prevailing, including
economic conditions and the Company's ongoing examination process and that of
its regulators, will not require significant increases in the allowances for
loan and lease losses. See Item 1, Business "Cautionary Statements."
At December 31, 1996, the Company had $1.2 billion of loans sold with
recourse and a contingent liability of $9.4 million. The Company considers the
contingent liability for loans sold with recourse to be adequate to cover
losses in this portfolio. All of the loans sold in 1996 were without recourse.
The Company has not sold loans with recourse since February, 1995.
39
Real Estate
Real estate available-for-sale or development was $160.8 million on December
31, 1996 compared to $238.9 million in 1995. The $78.1 million reduction was
primarily the result of the bulk sale of real estate properties completed in
1996.
Real estate available-for-sale or development is recorded at the lower of
cost or fair value and is included in a periodic review of assets to determine
whether, in management's judgment, there has been any deterioration in value.
In 1996, the Company determined that its real estate portfolio was
appropriately valued at market and therefore the associated general reserve of
$13.5 million was reversed.
The geographic distribution of real estate and nonperforming real estate at
December 31, 1996 follows:
CONNECTICUT
MASSACHUSETTS
CALIFORNIA FLORIDA NEW YORK
----------------------- ----------------------- -----------------------
PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN MILLIONS)
Real estate
Single-family
residential $ 75 $ 75 $ 1 $ 1 $ 2 $ 2
Apartments 9 8 3 3 -- --
Commercial
Offices 4 4 -- -- -- --
Retail 14 13 2 2 -- --
Industrial 3 -- -- -- -- --
Property development 36 -- -- -- -- --
Other 7 7 -- -- -- --
----- ----- --- --- --- ---
Total $ 148 $ 107 $ 6 $ 6 $ 2 $ 2
----- ----- --- --- --- ---
Percent of total real
estate 91.9% 3.7% 1.3%
Real estate as a % of
total by state 72.3% 100% 100%
OREGON
WASHINGTON OTHER TOTAL
----------------------- ----------------------- -----------------------
PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN MILLIONS)
Real estate
Single-family
residential $ 1 $ 1 $ 4 $ 4 $ 83 $ 83
Apartments -- -- -- -- 12 11
Commercial
Offices -- -- -- -- 4 4
Retail -- -- -- -- 16 15
Industrial -- -- -- -- 3 --
Property development -- -- -- -- 36 --
Other -- -- -- -- 7 7
--- --- --- --- ----- ----
Total $ 1 $ 1 $ 4 $ 4 $ 161 $120
--- --- --- --- ----- ----
Percent of total real
estate .6% 2.5% 100%
Real estate as a % of
total by state 100% 100% 74.5%
40
A comparison of the California real estate portfolio and nonperforming real
estate by region as of December 31, 1996 follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA
----------------------- -----------------------
PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING
--------- ------------- --------- -------------
(DOLLARS IN MILLIONS)
Real estate
Single-family residential $ 8 $ 8 $ 3 $ 3
Apartments -- -- 4 4
Commercial
Offices -- -- -- --
Retail -- -- -- --
Industrial -- -- -- --
Property development 11 -- 12 --
Other 4 4 -- --
---- ---- ---- ----
Total by region $ 23 $ 12 $ 19 $ 7
---- ---- ---- ----
Percentage of total California
real estate 15.5% 12.8%
Nonperforming as a % of total
by region 52.2% 36.8%
SOUTHERN CALIFORNIA CALIFORNIA
----------------------- -----------------------
PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING
--------- ------------- --------- -------------
(DOLLARS IN MILLIONS)
Real estate
Single-family residential $ 64 $ 64 $ 75 $ 75
Apartments 5 4 9 8
Commercial
Offices 4 4 4 4
Retail 14 13 14 13
Industrial 3 -- 3 --
Property development 13 -- 36 --
Other 3 3 7 7
---- ---- ---- ----
Total by region $106 $ 88 $148 $107
---- ---- ---- ----
Percentage of total California
real estate 71.7% 100%
Nonperforming as a % of total
by region 83.0% 72.3%
In 1996, bulk sales of foreclosed single-family properties totaled $190
million compared with $230 million in 1995. Auction sales have also been
utilized to accelerate the disposition of foreclosed properties.
41
INTEREST BEARING LIABILITIES
Deposits by product for the five year period 1992 through 1996 is summarized
in the tables below:
Deposits
DECEMBER 31
-----------------------------------------------------------
1996 % 1995 % 1994 % 1993 % 1992 %
------- --- ------- --- ------- --- ------- --- ------- ---
(DOLLARS IN MILLIONS)
BY PRODUCT
Checking accounts $ 4,420 15 $ 4,365 15 $ 4,416 15 $ 4,341 14 $ 3,691 12
Money market and other
savings 6,633 23 6,594 22 7,439 26 8,845 28 8,802 28
Wholesale transaction 158 1 174 1 158 1 173 * 197 1
Public funds 28 -- 288 1 403 1 411 1 457 1
Brokered accounts -- -- -- -- 4 * 4 * 28 --
Tax-deferred accounts
Deferred compensation 1,197 4 1,361 5 1,372 5 1,349 5 2,974 10
IRA/Keogh 2,570 9 2,766 9 2,712 10 2,894 9 2,825 9
Consumer term accounts 13,581 48 13,687 47 12,197 42 13,515 43 11,935 39
------- --- ------- --- ------- --- ------- --- ------- ---
$28,587 100 $29,235 100 $28,701 100 $31,532 100 $30,909 100
======= === ======= === ======= === ======= === ======= ===
- --------
* Less than one percent
The Company concentrates its retail deposit-gathering activity in two
states: California and Florida. The total decrease in deposits reflects the
competitive environment of banking institutions and the wide array of
investment opportunities available to consumers.
Borrowings
The following summarizes borrowings for the five year period 1992 through
1996:
DECEMBER 31
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------ ------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
Short-term borrowings
from FHLB $ 2,012 18.98 $ 740 6.47 $ 72 0.71% $ 119 3.42% $ 118 2.84%
Securities sold under
agreements to
repurchase 4,198 39.60 6,868 60.00 6,299 62.26 -- -- 717 17.27
Short-term borrowings 1,101 10.38 1,316 11.50 1,211 11.97 676 19.43 487 11.77
Long-term borrowings* 3,291 31.04 2,522 22.03 2,539 25.09 2,684 77.15 2,829 68.15
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total borrowings* $10,602 100% $11,446 100% $10,121 100% $3,479 100% $4,151 100%
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Average interest rate on
borrowings at year end 6.03% 6.27% 6.42% 7.34% 7.60%
- --------
* Includes $100 million of Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust in 1995 and 1996.
At December 31, 1996, short-term borrowings from FHLB of $2 billion
increased by $1.3 billion over 1995. Other short-term borrowings at December
31, 1996 of $1.1 billion decreased by $215 million from 1995. At December 31,
1996, securities sold under agreements to repurchase of $4.2 billion,
decreased by $2.7 billion from 1995. Long-term borrowings at December 31, 1996
of $3.3 billion (including $100 million of Company-obligated mandatorily
redeemable preferred securities of the Company's subsidiary trust), increased
by $769.8 million over 1995.
42
The following summarizes borrowings by date of maturity as of December 31,
1996:
LESS THAN 1-2 2-5 5-10 AFTER 10
TOTAL ONE YEAR YEARS YEARS YEARS YEARS
------- --------- ------ ------ ----- --------
(DOLLARS IN MILLIONS)
Short-term borrowings from
FHLB $ 2,012 $2,012 $ -- $ -- $ -- $ --
Securities sold under
agreements to repurchase 4,198 3,704 192 302 -- --
Short-term borrowings 1,101 1,101 -- -- -- --
Long-term borrowings from
FHLB 758 -- 554 204 -- --
Senior debt* 2,533 352 500 1,336 199 146
------- ------ ------ ------ ---- ----
Total borrowings* 10,602 7,169 1,246 1,842 199 146
======= ====== ====== ====== ==== ====
Average interest rate on
borrowings by maturity 6.03% 5.60% 6.16% 7.11% 8.67% 8.92%
- --------
* Includes $100 million of Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust in 1995 and 1996.
Total borrowings decreased $844 million from $11.4 billion at December 31,
1995 to $10.6 billion in 1996. The Company reduced its percentage of total
borrowings from securities sold under agreements to repurchase by 20.4%, from
60% to 39.6%, and increased its short-term borrowings from the FHLB, as a
percentage to total borrowings, to 19% and its long-term borrowings to 31%.
Short-term borrowings from the FHLB increased from $72 million in 1994 to
$740 million in 1995 to $2 billion in 1996. Borrowings from securities sold
under agreements to repurchase decreased from $6.9 billion in 1995 to $4.2
billion in 1996 down from $6.3 billion in 1994. Short-term borrowings in 1996,
other than from the FHLB, decreased $215 million while long-term borrowings
increased $769 million.
ASSET LIABILITY MANAGEMENT
The Company's principal ongoing objectives in managing its assets and
liabilities are to maintain and increase the spread that exists between the
return received on its interest-earning assets and the price paid on
liabilities to fund such assets, to reduce the volatility caused by changes in
interest rates, to ensure risk-taking is calculated and not excessive, and to
provide sufficient liquidity at all times.
The Company employs numerous strategies and strict policies to accomplish
and maintain these objectives. As the Company's main earning assets are loans
and mortgage-backed securities, it primarily makes or invests in ARM loans or
securities. In so doing, it reduces the extreme volatility and loss in value
that would result by owning low fixed-rate loans during a period of rapidly
rising interest rates.
Although it costs the Company during the "lag" that exists between the time
loan rates rise and when loan rates are adjusted upwards, the Company benefits
in the same measure from the lag when rates fall. Other financial risks exist
in the Company's operation and balance sheet. These main risks, including
basis, repricing, options, and yield curve twists, are more difficult to
quantify and manage.
The cost of funds for GWB, relative to COFI, FCOFI and LAMA is shown as
follows:
GWB COST OF
GWB FUNDS LESS THAN
COST OF ------------------
FUNDS COFI FCOFI LAMA COFI FCOFI LAMA
------- ----- ----- ----- ---- ----- -----
December 31, 1996 4.416% 4.842% 5.940% 5.442% .426% 1.524% 1.026%
September 30, 1996 4.468 4.834 5.991 5.512 .366 1.523 1.044
June 30, 1996 4.396 4.809 5.935 5.636 .413 1.539 1.240
March 31, 1996 4.463 4.874 5.957 5.766 .411 1.494 1.303
December 31, 1995 4.658 5.059 6.152 5.940 .401 1.494 1.282
December 31, 1994 4.019 4.589 5.971 -- .570 1.952 --
To accomplish its objectives, the Company stabilizes its balance sheet
primarily by matching various characteristics of the assets purchased with the
liabilities incurred. It also sells the low margin fixed rate loans
43
and ARMs it originates into the secondary market while retaining more
profitable ARMs. When necessary, off-balance sheet instruments allow the
Company to pursue marketing strategies consistent with customer needs while
compensating for the risk these strategies create. The most frequently used
instruments are various types of interest rate swaps, caps, floors, and
futures.
To protect against rate fluctuations for items before they are put on the
balance sheet, items such as commitments to fund fixed-rate loans originated
for sale, the Company from time to time uses off balance sheet instruments
including interest rate forwards, caps, floors, and future contracts as
asset/liability management tools. They are used to reduce the Company's
exposure to interest rate fluctuations and provide more stable spreads between
asset yields and the rates on their funding sources.
To evaluate the Company's current interest-rate position, it is necessary to
analyze the amount and proportionate share of each of its major earning
assets, including each major type of short-term or long-term real estate loan,
and the amount and proportionate share of each major category of short-term or
long-term deposits and borrowings. The Company utilizes a variety of
analytical tools including static gap, duration gap, risk point reports, net
interest income simulation and market value of equity sensitivity analysis.
The standard static gap report appears below.
44
The following table shows that the portfolio of short-term assets exceeded
liabilities maturing or subject to interest adjustment within one year by $2.3
billion, or 6.6% of earning assets at December 31, 1996 compared with $3.6
billion, or 8.7% total of earning assets at December 31, 1995. The Company is
better protected against rising rates with an excess of interest earning
assets maturing or repricing within one year.
INTEREST/RATE SENSITIVITY
DECEMBER 31, 1996
----------------------------------------------------
WITHIN OVER % OF
1 YEAR 1-5 YEARS 5-15 YEARS 15 YEARS TOTAL TOTAL
------- --------- ---------- -------- ------- -----
(DOLLARS IN MILLIONS)
EARNING ASSETS
Certificates of deposit,
repurchase agreements and
federal funds
and securities available-
for-sale $ 1,517 $ -- $ -- $ -- $ 1,517 4%
Mortgage-backed securities 7,622 63 72 32 7,789 19
Loans
Real estate
Adjustable rate 25,578 2,364 -- -- 27,942 68
Fixed-rate
Short-term 26 13 30 339 408 1
Long-term 78 55 101 177 411 1
------- ------ ------ ------ ------- ---
Total real estate loans 25,682 2,432 131 516 28,761 70
Consumer Finance 184 1,584 304 114 2,186 5
Other loans 178 57 1 4 240 1
------- ------ ------ ------ ------- ---
Total loans 26,044 4,073 436 634 31,187 76
Investment in FHLB stock -- -- -- 378 378 1
------- ------ ------ ------ ------- ---
Total earning assets 35,183 4,136 508 1,044 40,871 100
------- ------ ------ ------ ------- ---
INTEREST BEARING
LIABILITIES
Deposits
Checking 4,420 -- -- -- 4,420 11
Money market and other
savings 6,744 -- -- -- 6,744 17
Term accounts 14,843 2,393 1 -- 17,237 44
Wholesale 186 -- -- -- 186 1
------- ------ ------ ------ ------- ---
Total deposits 26,193 2,393 1 -- 28,587 73
Borrowings
Short-term borrowings
from FHLB 2,012 -- -- -- 2,012 5
Securities sold under
agreement to repurchase 3,704 494 -- -- 4,198 11
Short-term borrowings 1,101 -- -- -- 1,101 3
Long-term borrowings -- 2,127 1,019 45 3,191 8
Company-obligated
mandatorily redeemable
preferred securities of
the Company's subsidiary
trust -- -- -- 100 100 --
Impact of interest-rate
swaps (109) 109 -- -- -- --
------- ------ ------ ------ ------- ---
Total borrowings 6,708 2,730 1,019 145 10,602 27
------- ------ ------ ------ ------- ---
Total interest bearing
liabilities 32,901 5,123 1,020 145 39,189 100%
------- ------ ------ ------ ------- ---
Excess of earning assets
over interest bearing
liabilities at
December 31, 1996 $ 2,282 $ (987) $ (512) $ 899 $ 1,682
======= ====== ====== ====== =======
LIQUIDITY MANAGEMENT
Liquidity refers to the capability of a company to fund its operations and
meet its obligations and commitments on both a timely and cost-effective basis
out of its cash flow.
Customer deposits provide the Company with a sizeable source of stable low-
cost funds. Customer deposits and stockholders' equity funded 72.6% and 72.3%
of its average total assets in 1996 and 1995, respectively. The remaining
funding is provided by a combination of wholesale short-term funding sources
including reverse repurchase agreements and intermediate-term sources
including senior debt.
45
The Company's real estate loans totaled $28.8 billion at December 31, 1996.
Of this amount, $552 million matures within one year and $2.9 billion matures
within one to five years on a contractual basis.
GWB, at December 31, 1996, had excess borrowing capacity at the FHLB of
approximately $10 billion which includes a $200 million overnight federal
funds line. Other sources of liquidity include extending maturities on short-
term borrowings and the sale of assets.
As presented in the Consolidated Condensed Statement of Cash Flows, the
sources of liquidity vary between years. The primary sources of funds in 1996
were sales and principal payments on mortgage-backed securities and loans held
for investment of $7.2 billion. New loans originated for investment required
$6.9 billion in 1996. Operating activities provided $1.2 billion in 1996.
The Bank maintains liquidity balances each period in excess of funding and
legal requirements. Cash, certificates of deposit, repurchase agreements and
federal funds and securities available for sale totaled $1.9 billion at
December 31, 1996 and $1.9 billion at December 31, 1995. GWB had funds in
excess of required liquidity levels. The amounts over those required for
regulatory purposes will fluctuate between periods and are a source of short-
term funding.
PARENT COMPANY LIQUIDITY
GWFC, the parent company, derives substantially all of its cash income from
dividends received from its subsidiaries. During 1996, it received cash
dividends in the amount of $274.8 million. Of that amount, $151.3 million was
received from GWB, $116.8 million was received from Aristar and $6.7 million
from other subsidiaries.
In July, 1996, GWFC renewed its July, 1994 $200 million syndicated multi-
year credit facility with 21 banks. This is a revolving line of credit which
is a contingent source of liquidity. This line is used to backup commercial
paper for the Company's issuances. To date, there have been no borrowings
under this agreement.
Short-term liquidity can also be generated by the Company's ability to raise
funds in a number of capital and money markets as well as by liquidating
short-term investments.
CAPITAL ADEQUACY
Capital (stockholders' equity) was $2.6 billion at December 31, 1996 and
$2.8 billion at December 31, 1995. At the end of calendar year 1996, the ratio
of capital to total assets was 6.1% compared with 6.3% a year ago.
In September 1996, the Company called for the redemption of its $129
million, 8.75% Cumulative Convertible Preferred Stock. These shares were
issued in May 1991. The holders had the option to redeem their shares or
convert them into shares of the Company's common stock. In the third quarter,
2,561,642 depositary shares or 512,328 shares were converted to 6,278,421
shares of common stock with a conversion price of $20.40 per share while
19,058 depositary shares or 3,812 shares were redeemed for cash at $994,589 or
$260.94 per share. In the second quarter of 1996, 6,800 depositary shares or
1,360 shares were converted to 16,666 shares of common stock at $340,000 or
$20.40 per share.
On July 23, 1996, the Board of Directors authorized the repurchase of up to
7.5 million shares of outstanding common stock, representing approximately 5%
of the total number of shares outstanding as of June 30, 1996. On July 29,
1996, 6.5 million shares were repurchased at a weighted average price of
$26.85 per share. By February 20, 1997, the remaining balance of 1.0 million
shares had been repurchased at a weighted average price of $31.91 per share.
46
On January 28, 1997, the Board of Directors authorized the repurchase of up
to 5 million shares of outstanding common stock, representing approximately
3.6% of the total number of outstanding shares at December 31, 1996. As of
February 28, 1997, there had been no repurchases under this program. On March
5, 1997 the Board of Directors voted to discontinue the repurchase program.
GWB is subject to certain capital requirements under applicable regulations
and meets all such requirements. GWB's total risk-based capital was $2.7
billion, including eligible subordinated notes of $157.7 million at December
31, 1996 and $3.0 billion, including eligible subordinated notes of $373.5
million at December 31, 1995. The decrease in eligible subordinated notes is
due primarily to partial early redemptions of two issues in the fourth quarter
of 1996.
The following ratios compare GWB with the capital requirements under
regulations issued by the OTS:
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
ACTUAL OTS BENCHMARK ACTUAL OTS BENCHMARK
------------ ------------- ------------ -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ------ ------ ----- ------ ------
(DOLLARS IN MILLIONS)
Leverage/tangible ratio $2,327 5.85 $ 1,192 3.00 $2,366 5.66 $ 1,254 3.00
Tier 1 risk-based ratio 2,322 9.77 950 4.00 2,361 9.40 1,004 4.00
Total risk-based ratio 2,669 11.23 1,901 8.00 2,966 11.81 2,008 8.00
The OTS previously proposed to amend its capital rule on the leverage ratio
requirement to reflect amendments made by the Office of the Comptroller of the
Currency ("OCC") to the capital requirements for national banks. The proposal
would establish a 3% leverage ratio (defined as the ratio of core capital to
adjusted total assets) for savings associations in the strongest financial and
managerial condition. All other savings associations would be required to
maintain leverage ratios of at least 4%. Only savings associations rated
composite 1 under the OTS CAMELS rating system will be permitted to operate at
or near the regulatory minimum leverage ratio of 3%. For all other savings
associations, the minimum core capital leverage ratio will be 3% plus an
additional 100 to 200 basis points.
In determining the amount of additional capital, the OTS will assess both
the quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-
case basis. The OTS' supervisory judgment on a savings association's capital
adequacy, both in terms of risk-based capital and the minimum leverage ratio,
will continue to be based upon an assessment of the relevant factors present
in each institution.
Savings associations that do not pass the minimum capital standards
established under the new core capital leverage ratio requirements will be
required to submit capital plans detailing steps to be taken to reach
compliance.
GWB currently meets these proposed requirements.
The following table presents the debt ratings of the Company and GWB at
December 31, 1996:
MOODY'S
INVESTORS
STANDARD & POOR'S SERVICE FITCH
----------------- ---------- --------
GWFC GWB GWFC GWB GWFC GWB
-------- -------- ----- ---- ---- ---
Unsecured short-term debt A-2 A-2 P-2 P-1 F-1
Senior term debt BBB+ A- Baa1 A2 A- A
Subordinated term debt BBB+ A3 A-
Company-obligated mandatorily redeemable
preferred securities of the Company's
subsidiary trust BBB- Baa2 BBB
Preferred stock BBB- Baa2 BBB
47
DIVIDENDS
Quarterly cash dividends have been paid since 1977. At its April 1996
meeting, the Board of Directors increased the quarterly cash dividend from
$.23 to $.25 per common share. The quarterly cash dividend of $.23 per common
share had previously been paid at that level since the second quarter of 1992.
The dividend increase in April was due to the Company's improved earnings
outlook.
The principal source of operating income of the Company on an unconsolidated
basis is dividends from GWB and Aristar. In 1996, cash dividends received from
GWB and Aristar totaled $151.3 million and $116.8 million, respectively.
GWB is subject to the regulations of the OTS and FDIC. The OTS regulations
impose limitations upon "capital distributions" by savings associations,
including cash dividends. The regulations establish a three-tiered system:
Tier 1 includes savings associations with capital at least equal to their
fully phased-in capital requirement which have not been notified that they are
in need of more than normal supervision; Tier 2 includes savings associations
with capital above their minimum capital requirement but less than their fully
phased-in requirement; and Tier 3 includes savings associations with capital
below their minimum capital requirement. Tier 1 associations may, after prior
notice but without approval of the OTS, make capital distributions up to the
higher of (1) 100% of their net income during the calendar year plus the
amount that would reduce by one half their "surplus capital ratio" (the excess
over their fully phased-in capital requirement) at the beginning of the
calendar year or (2) 75% of their net income over the most recent four-quarter
period. Tier 2 associations may, after prior notice but without approval of
the OTS, make capital distributions of up to 75% of their net income over the
most recent four-quarter period depending upon their current risk-based
capital position. Tier 3 associations may not make capital distributions
without prior approval. An association subject to more stringent restrictions
imposed by agreement may apply to remove the more stringent restrictions.
The Company believes that GWB is a Tier 1 association. Notwithstanding the
foregoing, the regulatory authorities have broad discretion to prohibit any
payment of dividends and take other actions if they determine that the payment
of such dividends would constitute an unsafe or unsound practice. Among the
circumstances posing such risk would be a capital distribution by a Tier 1 or
Tier 2 association whose capital is decreasing because of substantial losses.
At January 1, 1997, GWB could declare dividends or make other capital
distributions of approximately $384 million, without obtaining prior
regulatory approval. Thereafter, the limitation in 1997 will increase by year-
to-date net income less dividends paid to date.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996, the Company adopted disclosure requirements for stock-based
compensation plans required by the Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company
continues to apply Accounting Principles Board Opinion 25 ("APB 25") in
measuring stock compensation but has provided the footnote disclosures
required by SFAS 123. See Note 19 of the Notes to Consolidated Financial
Statements in Item 8 "Financial Statements and Supplementary Data."
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122") as of April 1, 1995.
SFAS 122, an amendment to Statement of Financial Accounting Standards No. 65
("SFAS 65"), "Accounting for Certain Mortgage Banking Activities," requires an
entity that originates or purchases loans with the intent of selling or
securitizing such loans to capitalize the mortgage servicing rights. The value
of these servicing rights is based on the assumption that a normal servicing
fee will be received for the estimated life of the loans.
SFAS 122 also requires that all capitalized mortgage servicing rights be
measured for impairment. Impairment is measured by stratifying the underlying
loans based on one or more predominant risk
48
characteristics, including interest rate, product type and geographic area.
Impairment is recognized through a valuation allowance.
In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles. The adoption of SFAS 121 did not have a material impact on the
Company's financial statements. As a result of SFAS 121, real estate available
for development is recorded at the lower of cost or fair value. Real estate
available for development was previously recorded at the lower of cost or net
realizable value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS
125"). The Statement provides consistent accounting and reporting standards
for the (1) transfers and servicing of financial assets and (2) extinguishment
of liabilities. The Company will adopt SFAS 125 effective January 1, 1997 and
does not expect the adoption of SFAS 125 to have a material impact on its
financial statements.
SUBSEQUENT EVENTS
On January 27, 1997, Great Western Financial Trust II (the "subsidiary
trust"), a wholly-owned subsidiary of Great Western Financial Corporation,
issued $300 million of 8.206% Trust Originated Preferred Securities (the
"preferred securities"). In connection with the subsidiary trust's issuance of
the preferred securities, Great Western Financial Corporation issued to the
subsidiary trust $309 million principal amount of its 8.206% subordinated
deferrable interest notes, due 2027 (the "subordinated notes"). The sole
assets of the subsidiary trust are and will be the subordinated notes. Great
Western Financial Corporation's obligations under the subordinated notes and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of the subsidiary trust's obligations under the
preferred securities.
On February 3, 1997, the Company received preliminary approval in Federal
Court of a $17.2 million settlement reached with plaintiffs in connection with
the sale of uninsured investment products. Final approval of the settlement is
set for April 14, 1997.
Effective February 25, 1997, GWFC's Board of Directors approved a Broad
Based Plan (the Plan) for eligible employees who are not covered by an
existing severance plan and are not offered a comparable position by an
acquiring company or whose employment is terminated within 12 months of a
change in control, as defined by the Plan. The minimum pay will equate to six
months with the maximum of 18 months obtainable under the Plan. As a result of
the adoption of this Plan, the Company will record an increase to the
restructuring liability in the first quarter of 1997 of approximately
$10,000,000.
On January 28, 1997, the Board of Directors authorized the repurchase of up
to 5 million shares of outstanding common stock, representing approximately
3.6% of the total number of outstanding shares at December 31, 1996. As of
February 28, 1997, there had been no repurchases under this program. On March
5, 1997 the Board of Directors voted to discontinue the repurchase program.
On March 5, 1997, the Company entered into an Agreement and Plan of Merger
with Washington Mutual, Inc. (Washington Mutual), and New American Capital,
Inc., an indirect wholly-owned subsidiary of Washington Mutual. Washington
Mutual is a regional financial services company headquartered in Seattle,
Washington. With consolidated assets of $44.6 billion at December 31, 1996,
this Washington corporation operates through its principal subsidiaries,
Washington Mutual Bank, American Savings Bank, F.A., and Washington Mutual
Bank
49
fsb. Under the Agreement and Plan of Merger, the Company will merge with and
into New American Capital, Inc. in a tax-free exchange, pursuant to which,
among other things, each outstanding share of common stock of the Company will
be converted into .9 shares of common stock of Washington Mutual. Based upon
the closing price of Washington Mutual's common stock on March 5, 1997,
stockholders of the Company would receive shares of Washington Mutual common
stock with a value of $47.93 per share of common stock of the Company. This
transaction has been approved by the boards of directors of both companies. It
is anticipated that this transaction will be accounted for as a pooling of
interests. The Company expects the merger to be completed during the third
quarter of 1997, pending the receipt of regulatory approval from the OTS and
the approval of the stockholders of both companies. For additional information
on the proposed merger, see Item 1. Business "Merger Agreement with Washington
Mutual, Inc.", "H. F. Ahmanson & Company's Merger Proposal" and "Litigation
Relating to the Ahmanson Merger Proposal" in Part I of this Form 10-K.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations for the three years ended December
31, 1996, 1995 and 1994................................................. 52
Consolidated Statement of Financial Condition at December 31, 1996 and
1995.................................................................... 53
Consolidated Statement of Cash Flows for the three years ended December
31, 1996, 1995 and 1994................................................. 54
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1996, 1995 and 1994............................ 56
Notes to Consolidated Financial Statements............................... 57
Report of Independent Accountants........................................ 105
Management's Commentary on Financial Statements.......................... 106
Quarterly Financial Data................................................. 107
51
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
INTEREST INCOME
Securities available-for-sale $ 66,360 $ 53,972 $ 28,774
Mortgage-backed securities 638,424 752,524 276,112
Loans
Real estate 2,066,854 1,985,346 1,913,602
Consumer Finance 370,314 364,161 342,329
Other 44,472 38,430 35,953
------------ ------------ ------------
Total loan interest income 2,481,640 2,387,937 2,291,884
Other 47,507 44,278 32,948
------------ ------------ ------------
Total interest income 3,233,931 3,238,711 2,629,718
INTEREST EXPENSE
Deposits 1,179,479 1,217,085 950,299
Borrowings
Short-term borrowings 440,887 523,366 135,988
Long-term borrowings 235,548 196,131 221,161
------------ ------------ ------------
Total interest expense 1,855,914 1,936,582 1,307,448
------------ ------------ ------------
NET INTEREST INCOME 1,378,017 1,302,129 1,322,270
Provision for loan and lease losses 208,971 187,700 207,200
------------ ------------ ------------
Net interest income after provision
for loan and lease losses 1,169,046 1,114,429 1,115,070
Noninterest Income
Retail banking fees 179,871 154,862 140,703
Servicing fees 45,684 55,159 50,853
Securities operations 30,175 21,092 39,902
Net insurance operations 29,570 28,861 27,636
Real estate fees 29,105 24,208 29,385
Net gain on sale of student loans 23,388 495 1,673
Net gain on sale of mortgages 8,562 8,824 5,339
Gain on sale of mortgage-backed
securities 8,790 13,585 --
Write-downs of mortgage-backed
securities (17,906) -- --
Provision for mortgages sold with
recourse (7,300) -- --
Net gain on sale of securities -- -- 398
Loss on affordable housing investment (4,052) (7,611) --
Gain on sale of leases 811 14,909 1,507
Gain on sale of branches -- -- 62,337
Other 5,127 13,284 8,164
------------ ------------ ------------
Total noninterest income 331,825 327,668 367,897
Noninterest Expense
Salaries and benefits 438,604 441,366 469,115
SAIF special assessment 188,359 -- --
Premises and occupancy 179,617 179,654 199,048
Restructure expense 68,293 -- --
FDIC insurance premium 65,100 66,365 77,451
Outside data processing 57,292 60,847 32,512
Professional fees 40,165 17,942 16,679
Communications 39,810 44,783 38,856
Amortization of intangibles 37,722 40,286 58,689
Advertising and promotion 32,961 35,661 36,573
Operating losses and settlements 25,212 22,553 14,674
Retirement of subordinated debt 21,406 -- --
Office supplies 20,718 17,943 16,386
Postage 13,982 13,508 17,476
Insurance 11,413 10,286 11,946
Net real estate operations 726 5,605 31,854
Other 72,869 63,176 55,174
------------ ------------ ------------
Total noninterest expense 1,314,249 1,019,975 1,076,433
------------ ------------ ------------
EARNINGS BEFORE TAXES 186,622 422,122 406,534
Income tax expense 70,800 161,100 155,300
------------ ------------ ------------
NET EARNINGS $ 115,822 $ 261,022 $ 251,234
============ ============ ============
Average common shares outstanding
Without dilution 138,505,046 137,111,074 133,769,724
Fully diluted 139,250,206 137,951,442 133,769,724
Earnings per share based on average
common shares outstanding
Primary $ .69 $ 1.72 $ 1.69
Fully diluted .69 1.71 1.69
Cash dividends per common share .98 .92 .92
See Notes to Consolidated Financial Statements
52
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
ASSETS
Cash $ 534,192 $ 837,292
Certificates of deposit, repurchase agreements and
federal funds 300,100 257,125
Securities available-for-sale 1,279,283 1,092,459
Mortgage-backed securities held-to-maturity (fair
value $1,622,573 and $1,941,918) 1,618,709 1,886,736
Mortgage-backed securities available-for-sale 6,169,842 7,916,705
----------- -----------
7,788,551 9,803,441
Loans receivable, net of allowance for loan and
lease losses 30,717,320 29,401,644
Loans available-for-sale 105,872 485,705
----------- -----------
Net loans 30,823,192 29,887,349
Investment in FHLB 377,946 341,102
Real estate available-for-sale or development, net 159,997 217,112
Interest receivable 245,539 298,640
Premises and equipment, net 552,422 604,672
Intangibles arising from acquisitions 285,991 323,713
Other assets 527,359 923,859
----------- -----------
Total assets $42,874,572 $44,586,764
=========== ===========
LIABILITIES
Deposits $28,586,773 $29,234,928
Short-term borrowings from FHLB 2,011,733 740,080
Securities sold under agreements to repurchase 4,197,666 6,868,296
Short-term borrowings 1,101,506 1,316,413
Long-term borrowings 3,190,908 2,420,845
Accrued interest payable 172,324 104,607
Taxes on income, principally deferred 226,075 378,381
Other liabilities and accrued expenses 692,387 600,738
----------- -----------
Total liabilities 40,179,372 41,664,288
----------- -----------
Company-obligated manditorily redeemable preferred
securities of the Company's subsidiary trust,
holding solely $103,092,800 aggregate principal
amount of 8.25% subordinated deferrable interest
notes, due 2025, of the Company 100,000 100,000
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share;
Authorized 10,000,000 shares; Cumulative
Convertible issued none and 517,500; Cumulative
issued 660,000 and 660,000 165,000 294,375
Common stock, par value $1.00 per share; Authorized
200,000,000 shares; Issued 137,875,955 and
137,279,331 137,876 137,279
Additional paid-in-capital 680,428 713,889
Retained earnings-substantially restricted 1,535,264 1,572,782
Unearned compensation (327) (4,282)
Securities valuation allowance 76,959 108,433
----------- -----------
Total stockholders' equity 2,595,200 2,822,476
----------- -----------
Total liabilities and stockholders' equity $42,874,572 $44,586,764
=========== ===========
See Notes to Consolidated Financial Statements
53
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net earnings $ 115,822 $ 261,022 $ 251,234
Noncash adjustments to net earnings:
Provisions for loan and lease losses 208,971 187,700 207,200
Net decrease (increase) in interest
receivable 53,101 (67,715) (15,970)
Net increase in interest payable 67,717 6 29,829
Depreciation and amortization 87,350 74,245 88,439
Amortization of intangibles 37,722 40,286 58,689
Retirement of subordinated debt 21,406 -- --
Writedowns of mortgage-backed
securities 17,906 -- --
Writedowns of real estate available-
for-sale 2,254 -- --
Net gain on sale of securities -- -- (398)
Gain on sale of branches -- -- (62,337)
(Gain) loss on sale of mortgage-backed
securities 925 (8,926) --
Gain on sale of leases (811) (14,909) (1,507)
Provisions for real estate losses (12,775) 1,500 12,000
Gain on sale of real estate (15,619) (21,709) (6,437)
(Gain) loss on sale of loans
available-for-sale (16,413) 597 1,414
Capitalized interest (55,625) (61,746) (8,431)
Income taxes (136,828) 72,445 65,441
Other 438,870 (235,960) (166,977)
Sales and repayments of loans available-
for-sale 1,616,630 1,189,955 1,203,636
Originations and purchases of loans
available-for-sale (1,191,263) (1,234,399) (894,870)
----------- ----------- ----------
Net cash provided by operating
activities 1,239,340 182,392 760,955
----------- ----------- ----------
FINANCING ACTIVITIES
(Decrease) increase in deposits (648,155) 533,981 (1,849,091)
Disposition of deposits, net -- -- (981,525)
Proceeds from issuance of long-term
borrowings 1,098,577 199,906 1,174,643
Repayments of long-term borrowings (349,920) (290,205) (1,366,357)
Net change in securities sold under
agreements to repurchase (2,670,630) 569,241 6,299,055
Net change in short-term borrowings from
FHLB 1,271,653 740,080 --
Net change in short-term borrowings (214,907) 105,952 533,978
Other financing activity
Common stock repurchased (176,732) -- --
Common stock issued 24,452 60,195 29,842
Redemption of preferred stock (998) -- --
Payment of cash dividends on common
stock (133,045) (124,673) (122,524)
Payment of cash dividends on preferred
stock (20,295) (25,015) (25,015)
----------- ----------- ----------
Net cash (used in) provided by financing
activities (1,820,000) 1,769,462 3,693,006
----------- ----------- ----------
See Notes to Consolidated Financial Statements
54
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
INVESTING ACTIVITIES
Securities available-for-sale
Proceeds from sales and maturities $ 2,080,781 $ 1,436,303 $ 1,147,471
Purchases of securities available-for-
sale (2,272,801) (1,585,030) (1,218,586)
Mortgage-backed securities available-
for-sale
Proceeds from sales and repayments 1,851,496 1,712,178 829,416
Purchases of mortgage-backed
securities (39,669) -- (1,539,349)
Real estate loans
Payments received on loans 2,970,406 2,240,941 3,202,021
Proceeds from sale of loans 292,472 -- 55,243
Loans originated for investment (4,655,316) (5,816,535) (6,506,744)
Repurchases (44,118) (116,547) (547,674)
Consumer Finance and other loans
Loans originated for investment (2,229,945) (2,284,775) (2,168,029)
Proceeds from sale of loans 2,430 34,997 6,438
Dispositions (acquisitions), net -- -- 2,094
Payments received on loans 2,104,004 2,097,401 1,966,211
Other investing activity
Purchases and sales of premises and
equipment, net (36,856) (86,094) (82,559)
Proceeds from sale of real estate 376,325 390,807 468,304
Acquisition and disposition of retail
banking assets, net -- -- 74,159
Net change in investment in FHLB (36,844) (35,061) 1,311
Other (41,830) 5,413 29,171
----------- ----------- -----------
Net cash provided by (used in) investing
activities 320,535 (2,006,002) (4,281,102)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (260,125) (54,148) 172,859
Cash and cash equivalents at beginning
of period 1,094,417 1,148,565 975,706
----------- ----------- -----------
Cash and cash equivalents at end of
period $ 834,292 $ 1,094,417 $ 1,148,565
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for
Interest on deposits $ 1,147,510 $ 1,214,881 $ 951,140
Interest on borrowings 656,164 721,695 326,479
Income taxes 157,952 86,338 111,656
Noncash financing activities
Conversion of preferred stock to
common stock 128,377 -- --
Noncash investing activities
Loans transferred to real estate
available-for-sale 418,398 420,973 504,585
Loans originated to finance the sale
of real estate available-for-sale 76,320 86,366 92,586
Loans originated to refinance existing
loans 337,396 266,135 567,119
Loans exchanged for mortgage-backed
securities -- 1,997,585 5,502,401
See Notes to Consolidated Financial Statements
55
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
PREFERRED STOCK
Balance, beginning of period $ 294,375 $ 294,375 $ 294,375
Preferred stock redeemed (953) -- --
Preferred stock converted to common stock (128,422) -- --
---------- ---------- ----------
Balance, end of period 165,000 294,375 294,375
---------- ---------- ----------
COMMON STOCK
Balance, beginning of period 137,279 134,316 132,616
Common stock converted from preferred
stock 6,295 -- --
Common stock issued upon exercise of
options 1,047 704 282
Common stock issued under dividend
reinvestment plan 102 2,283 1,418
Common stock acquired (340) -- --
Restricted stock awards granted, net of
cancellations (7) (24) --
Common stock repurchased under repurchase
plan (6,500) -- --
---------- ---------- ----------
Balance, end of period 137,876 137,279 134,316
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 713,889 656,644 627,717
Common stock converted from preferred
stock 122,082 -- --
Common stock issued upon exercise of
options 20,858 12,341 4,576
Common stock issued under dividend
reinvestment plan 2,445 44,867 23,566
Common stock acquired (8,491) -- --
Restricted stock awards granted, net of
cancellations (123) (350) --
Tax benefit of restricted stock awards -- 387 785
Common stock repurchased under repurchase
plan (170,232) -- --
---------- ---------- ----------
Balance, end of period 680,428 713,889 656,644
---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning of period 1,572,782 1,461,448 1,357,753
Net earnings 115,822 261,022 251,234
Preferred stock dividends (20,295) (25,015) (25,015)
Common stock dividends (133,045) (124,673) (122,524)
---------- ---------- ----------
Balance, end of period 1,535,264 1,572,782 1,461,448
---------- ---------- ----------
UNEARNED COMPENSATION
Balance, beginning of period (4,282) (7,913) (11,711)
Amortization of restricted stock 3,934 3,257 3,798
Restricted stock awards granted, net of
cancellations 21 374 --
---------- ---------- ----------
Balance, end of period (327) (4,282) (7,913)
---------- ---------- ----------
SECURITIES VALUATION ALLOWANCE
Balance, beginning of period 108,433 (55,084) 22,651
Change in unrealized net gain (loss), net
of taxes (31,474) 163,517 (77,735)
---------- ---------- ----------
Balance, end of period 76,959 108,433 (55,084)
---------- ---------- ----------
Total stockholders' equity $2,595,200 $2,822,476 $2,483,786
========== ========== ==========
See Notes to Consolidated Financial Statements
56
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: STATEMENT OF ACCOUNTING POLICIES
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION
The accounts of Great Western Financial Corporation and its wholly-owned
subsidiaries, Great Western Bank, Aristar, a consumer finance holding company,
and companies operating in related fields, are included in the accompanying
consolidated financial statements and are referred to collectively as the
Company. Significant intercompany items have been eliminated. Certain prior-
year amounts have been reclassified to conform with the 1996 presentation.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996, the Company adopted disclosure requirements for stock-based
compensation plans required by SFAS 123. SFAS 123 allows for two methods of
valuing stock based compensation. The first method allows for the continuing
application of APB 25 in measuring stock compensation, while complying with
the disclosure requirements of SFAS 123. The second method uses an option
pricing model to value stock compensation and record as such within the
financial statements. The Company will comply with the former and continue to
apply APB 25 while complying with SFAS 123 disclosure requirements. See Note
19.
The Company adopted SFAS 122 as of April 1, 1995. SFAS 122 requires an
entity that originates or purchases loans with the intent of selling or
securitizing such loans to capitalize the mortgage servicing rights. SFAS 122
also requires that all capitalized mortgage servicing rights be measured for
impairment.
In 1995, the Company adopted SFAS 121 which establishes accounting standards
for the impairment of long-lived assets and certain identifiable intangibles.
The adoption of these accounting standards did not materially affect
comparability of the financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS
125"). The Statement provides consistent accounting and reporting standards
for the (1) transfers and servicing of financial assets and (2) extinguishment
of liabilities.
Beginning in 1997, SFAS 125 supersedes Statement of Financial Accounting
Standard No. 76, "Extinguishment of Debt," ("SFAS 76"), Statement of Financial
Accounting Standards No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse," ("SFAS 77"), SFAS 122, and several Technical
Bulletins and amends Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115") and both amends and extends Statement of Financial Accounting Standards
No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"). The
Company will adopt SFAS 125 effective January 1, 1997 and does not expect the
adoption of SFAS 125 to have a material impact on its financial statements.
57
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE DISCLOSURE
Quoted market prices are used, where available, to estimate the fair value
of financial instruments. Because no quoted market prices exist for a
significant portion of the Company's financial instruments, fair value is
estimated using comparable market prices for similar instruments or using
management's estimates of discounted cash flows for the underlying asset or
liability. A change in management's assumptions could significantly affect
these estimates and, accordingly, fair value is not necessarily indicative of
the value which would be realized upon disposition of the financial
instruments.
CASH AND CASH EQUIVALENTS
For the Consolidated Statement of Cash Flows, cash and cash equivalents
include cash, certificates of deposit, federal funds and repurchase
agreements. Certificates of deposit, federal funds and repurchase agreements
purchased with an original maturity of three months or less are considered to
be cash equivalents. Cash includes cash on hand and cash in banks.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale, which are securities that may be sold prior
to maturity, are carried at fair value with any valuation adjustments reported
in a separate component of stockholders' equity, net of deferred income taxes.
The estimated fair value of investments is based on current quotations where
available. Where current quotations are not available, the estimated fair
value is based primarily on the present value of the future cash flows,
adjusted for the quality rating of the securities, prepayment assumptions and
other factors.
MORTGAGE-BACKED SECURITIES
The Company's mortgage-backed securities ("MBS") portfolio consists of real
estate loan receivables originated by the Bank and subsequently securitized
primarily through the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Federal National Mortgage Association. Loans are also securitized for sale
directly in the public market. The Company purchases, for investment and
liquidity purposes, FNMA and FHLMC securities, Collateralized Mortgage
Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs").
In 1994 and 1995, the Company swapped single-family residential ARMs for
mortgage-backed securities to provide collateral for borrowings. These
securities are subject to full credit recourse and the swaps can be unwound at
the option of the Company. Certain ARMs swapped in 1994 and 1995, REMICs and
GWB-originated pass-through certificates are held-to-maturity based on
management's positive intent and ability to hold these securities until
maturity and are recorded at amortized cost as adjusted for permanent
impairment. All other mortgage-backed securities are available-for-sale and
recorded at fair value with any valuation adjustments reported in a separate
component of stockholders' equity, net of deferred income taxes. Fair value is
generally determined on the aggregate method giving effect to servicing rights
and estimated losses from credit recourse. Discounts or premiums on mortgage-
backed securities recorded at cost are amortized using the interest method.
Gains and losses on mortgage-backed securities are calculated on the specific
identification method.
LOANS
Real Estate Loans
The Company's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The ARM is the Bank's
primary loan investment. Real estate loans available-for-sale, primarily fixed
rate, are valued at the lower of cost or fair value.
58
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fees are charged for originating loans at the time the loan is granted. Loan
origination fees, partially offset by the deferral of certain expenses
associated with such loans originated, are amortized to interest income over
the life of the loan using the interest method. ARMs with a lower rate during
the introductory period (usually three months) will reflect the amortization
of a substantial portion of the net deferred fee as a yield adjustment during
the introductory period. Amortization is discontinued for nonperforming loans
and loans available-for-sale and is realized upon the ultimate disposition of
the assets.
Loan fee income represents income from the prepayment of loans, delinquent
payments or miscellaneous loan services and is recorded when collected.
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loan
payments generally are deemed to be in nonaccrual status when they become more
than 90 days past due. When a loan is designated as nonaccrual, previously
accrued interest is reversed.
Below-market-rate loans are made to facilitate the sale of certain
foreclosed real estate. These transactions reduce the gain on sale and provide
a loan discount which is amortized on the interest method resulting in a
market yield on the new loan.
Consumer Finance Loans
The Company makes direct consumer installment loans and purchases retail
installment contracts from local retail establishments. These consumer credit
transactions are primarily for personal, family or household purposes. Loan
fees and directly related lending costs are deferred and amortized using the
interest method over the contractual life of the related loans.
Allowance for Loan and Lease Losses
The Company continually evaluates numerous factors in estimating the amount
of the allowance for loan and lease losses. Specific factors, unique to
individual loans, such as borrower performance, credit scores and loan to
value ratio are considered, as well as general factors, including general
economic conditions, prior loan loss experience and composition of the loan
portfolio. The Company also maintains an ongoing examination process to
periodically evaluate the allowance, as do its regulators.
Loans made by consumer finance subsidiaries are also reviewed on a
systematic basis. In evaluating the adequacy of the allowance, consideration
is given to recent loan loss experience and such other factors which, in
management's judgment, deserve current recognition in estimating losses. Non-
real estate secured accounts are charged off based on the number of days
contractually delinquent (180 days for substantially all loans).
The Company's determination of the level of the allowance for loan and lease
losses rests upon various judgments and assumptions, including general
economic conditions, loan and lease portfolio composition, prior loan and
lease loss experience, evaluation of credit risk related to certain individual
borrowers and the Company's ongoing examination process and that of its
regulators. The Company considers the allowance for loan and lease losses
adequate to cover losses inherent in loans and leases.
59
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGE BANKING ACTIVITIES
Real estate loans are originated principally for investment. Since the
Company is primarily an ARM portfolio lender for its own investment, most
other products are originated and available-for-sale.
As of December 31, 1996 the following loans were designated as available-
for-sale and were carried at the lower of cost or fair value:
1. Single-family, fixed-rate product in the portfolio originated
subsequent to January 1, 1989.
2. Single-family, adjustable rate product designated as available-for-
sale.
3. Loans other than single-family which have been designated at the date
of origination.
The Company sells loans or participating interests in loans to generate
servicing income, to limit interest-rate risk and to provide funds for
additional investment. Under the servicing agreements, the Company continues
to service the loans and the investor is paid its share of principal
collections together with interest at an agreed upon rate, which generally
differs from the loan's contractual interest rate. Such difference results in
a "loan servicing spread". Gains or losses on sales of loans are recognized at
the time of sale and are generally determined by: 1) the difference between
the net sales proceeds and the book value of the loans sold; 2) recognition of
deferred loan fees; 3) an adjustment, if necessary, to increase or decrease
the loan servicing spread in order to provide for normal servicing; and 4) the
capitalization of mortgage servicing rights.
REAL ESTATE AVAILABLE-FOR-SALE OR DEVELOPMENT
Real estate available-for-sale or development comprises both purchased and
foreclosed properties. Foreclosed properties are carried at cost at
acquisition, which is the lower of the net loan value on the property or the
fair value of the property, less estimated costs to sell, at the date of
foreclosure. Thereafter, specific valuation allowances have been established
for changes in the fair value of real estate. Acquisition costs are generally
expensed when incurred. Certain costs which represent a structural change or
significant refurbishment which enhances the value of property are
capitalized. Other real estate available-for-sale is carried at the lower of
cost or fair value. Property development projects, carried at the lower of
cost or fair value, are accounted for on the equity method. Gains on the sale
of real estate financed by the Company are recognized giving consideration to
down payment and other investment criteria. Losses are recognized when
identified.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. The Company capitalizes expenditures for improvements and major
refurbishments and charges ordinary maintenance and repairs to earnings as
incurred. Depreciation and amortization are computed principally on the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are 30 years for buildings, 4 to 10 years for furniture, fixtures
and equipment, 3 to 7 years for software and the lesser of the lease term or
useful life of the property for leasehold improvements.
INTANGIBLES ARISING FROM ACQUISITIONS
Because of the earnings power or other identifiable values of certain
purchased companies or businesses, the Company paid amounts in excess of
identifiable fair value for businesses, core deposits and tangible assets
acquired. Generally, such amounts are being amortized by systematic charges to
income (primarily for periods from six to 25 years) over a period no greater
than the estimated remaining life of the assets acquired or not exceeding the
estimated average remaining life of the existing deposit base assumed. The
Company periodically reviews intangibles to assess recoverability and
impairment is recognized in operations if permanent loss of value occurs.
60
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEPOSITS
Deposits comprise primarily the Bank's checking, money market and other
savings, term and wholesale accounts. Deposits vary as to terms, with the
major differences being minimum balance required, maturity, interest rates and
the provisions for payment of interest. The Bank's customer accounts are
insured by the FDIC, through either the BIF or the SAIF for up to an aggregate
amount of $100,000 per customer.
The Bank may offer large denomination negotiable certificates of deposit.
The negotiable certificates of deposit are primarily sold through brokers and
may subsequently be traded on the open market.
Interest is accrued and either paid to the customer or added to the
customer's account on a periodic basis. On term accounts, the forfeiture of
interest (because of withdrawal prior to maturity) is offset as of the date of
withdrawal against interest expense.
FEDERAL AND STATE INCOME TAXES
Taxes are provided on substantially all income and expense items included in
earnings, regardless of the period in which such items are recognized for tax
purposes. Tax benefits are recognized for general loss reserve additions.
Taxes on income are determined by using the liability method. This approach
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, consideration is given to expected future events other than
enactments of changes in the tax law or rates.
EARNINGS PER COMMON SHARE
Income for the calculation of primary earnings per common share is based on
net income less preferred stock dividend requirements. Fully diluted earnings
per common share give effect to the dilutive effect of stock options and
assume the conversion of convertible securities into common stock at the later
of the beginning of the year or the date of issuance (unless antidilutive).
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate derivative financial instruments (forward
sales contracts and swaps) primarily to hedge mismatches in the rate maturity
of deposits and short-term borrowings and their uses of funds. Amounts payable
or receivable for swaps are accrued with the passage of time, the effect of
which is included in interest expense reported on the liability hedged; fees
on these financial contracts are amortized over their contractual life as a
component of the interest reported on the liability hedged.
61
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING
In December 1994, GWB completed the sale of $1 billion of deposits and 31
branches in West Florida to First Union National Bank. The deposits were sold
for a net pretax gain of $62,300,000, which included the write-off of
intangibles related to the sold branches of $10,000,000 and other sale related
expenses of $2,200,000.
In October 1994, GWB purchased the deposits of six branches located in San
Diego County from Citibank, F.S.A., totaling $52,000,000. The deposits were
acquired for a premium of $1,000,000.
Intangibles arising from acquisitions as shown on the Consolidated Statement
of Financial Condition consisted of the following:
DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at acquisition $ 575,603 $ 575,603 $ 575,603
Accumulated amortization (289,612) (251,890) (211,604)
--------- --------- ---------
$ 285,991 $ 323,713 $ 363,999
========= ========= =========
The results of operations in 1996 reflect a $68,300,000 restructuring
charge. The restructuring initiatives are designed to improve the Company's
competitive position, accelerate expense reduction and enhance future revenue
growth by streamlining operations, making efficient use of premises and
modernizing the Company's systems platform. The components of the
restructuring charge involve severance and write-off of premises and
equipment.
The Company's plans to streamline operations, reconfigure the retail branch
network and improve information systems support and other back office
functions will result in the reduction of approximately 1,200 employees and a
charge to restructure expense of $17,000,000. As of December 31, 1996, 630
employee separations have occurred and the related severance expense of
$4,600,000 was applied against the 1996 restructure liability. Employee
separations related to the restructuring are planned to be completed by the
end of 1997.
The Company's corporate headquarters campus was identified for consolidation
to make optimum use of building space. As a result, three buildings at the
corporate campus will be vacated freeing up 272,000 square feet to sublet to
third party tenants. Additionally, seven retail branch and 109 loan offices
were identified for closure or consolidation. The total effect of vacating
these premises is $29,500,000. Premises identified under the restructuring
initiatives are planned to be vacated by December, 1997.
In order to meet the Company's goal to modernize and replace its current
systems platform, certain computer hardware and software equipment were
considered obsolete or abandoned and written off. The upgrade and replacement
of equipment will allow the Company to increase operational efficiency,
improve processing capacity and establish a common user workstation
environment. As of December 31, 1996, $18,400,000 of equipment was written off
and applied against the restructure liability. The balance of $3,400,000 of
equipment will be retired in 1997 and applied against the restructure
liability.
62
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconciliation of restructuring reserve activity during 1996:
1996 BALANCE
RESTRUCTURING 1996 DECEMBER 31,
CHARGE ACTIVITY 1996
------------- -------- ------------
(DOLLARS IN MILLIONS)
Severance $ 17.0 $ 4.6 $ 12.4
Premises 29.5 -- 29.5
Equipment 21.8 18.4 3.4
------ ------ ------
Total $ 68.3 $ 23.0 $ 45.3
====== ====== ======
NOTE 3: CASH, CERTIFICATES OF DEPOSIT, REPURCHASE AGREEMENTS AND FEDERAL FUNDS
An analysis of cash, certificates of deposit, repurchase agreements and
federal funds at December 31, 1996, 1995, 1994, 1993 and 1992 follows:
RATE AT DECEMBER 31
DECEMBER 31, --------------------------------------------
1996 1996 1995 1994 1993 1992
------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Cash -- $534,192 $837,292 $983,440 $758,581 $686,028
======== ======== ======== ======== ========
Repurchase agreements 6.37% 250,000 257,000 115,000 210,000 345,000
Federal Funds 5.44 50,000 -- 50,000 -- --
Certificates of Deposit 5.10 100 125 125 7,125 5,349
-------- -------- -------- -------- --------
Total $300,100 $257,125 $165,125 $217,125 $350,349
======== ======== ======== ======== ========
The Company purchases securities under agreements to resell ("repurchase
agreements") having terms of up to 90 days; however, they are typically
overnight investments. The Company generally takes possession of collateral
supporting securities sold under agreements to resell. Repurchase agreements
outstanding at December 31, 1996, 1995 and 1994 were:
DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- ----- -------- ----- -------- -----
Morgan Stanley and Company,
Inc. $150,000 7.00% $125,000 5.88% $ -- --%
J. P. Morgan 50,000 5.42 -- -- 65,000 6.08
Merrill Lynch Government
Securities, Inc. 50,000 5.43 -- -- -- --
Smith Barney, Inc. -- -- 50,000 5.87 -- --
Goldman Sachs and Company -- -- 37,000 5.76 -- --
CS First Boston Corporation -- -- 25,000 5.67 50,000 5.78
CS First Boston Corporation -- -- 20,000 5.57 -- --
-------- -------- --------
$250,000 $257,000 $115,000
======== ======== ========
The repurchase agreements were collateralized by federal agency securities
with market values at least two percent above the face amounts of the
repurchase agreements. The highest month-end balances outstanding were
$375,000,000 in 1996, $337,000,000 in 1995 and $350,000,000 in 1994. The
average balances outstanding were $275,769,000 at a rate of 6.14% in 1996,
$236,308,000 at a rate of 6.65% in 1995 and $207,308,000 at 5.16% in 1994.
63
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GWB is required to maintain certain minimum reserve balances with the FRB.
Included in cash were deposits at the FRB of $126,802,000 at December 31,
1996, $152,893,000 at December 31, 1995 and $328,809,000 at December 31, 1994.
NOTE 4: SECURITIES
An analysis of securities available-for-sale by type, maturity (fair value)
and maturity (amortized cost) and weighted average yield at December 31, 1996,
1995, 1994, 1993, and 1992 follows:
RATE AT DECEMBER 31
DECEMBER 31, ----------------------------------------------------
1996 1996 1995 1994 1993 1992
------------ ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Type (Fair value)
U.S. government
securities 5.88% $ 10,525 $ 10,874 $ 9,828 $335,625 $ 3,902
Federal agency
securities 6.26 595,258 605,794 514,579 41,565 49,550
Corporate debt
securities 5.97 638,854 445,314 364,254 432,780 459,870
Other securities 5.99 34,646 30,477 28,434 61,104 119,349
---------- ---------- -------- -------- --------
Total $1,279,283 $1,092,459 $917,095 $871,074 $632,671
========== ========== ======== ======== ========
Yield to maturity on
interest-earning
securities at year
end, excluding
insurance subsidiary 6.10% 6.34% 6.33% 5.02% 6.35%
1-LESS 5-LESS 10 YEARS
LESS THAN THAN THAN AND
ONE YEAR 5 YEARS 10 YEARS AFTER TOTAL
--------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Maturity (Fair Value)
U.S. government
securities $ 1,145 6.35% $ 5,927 5.81% $ 3,453 5.87% $ -- -- % $ 10,525 5.88%
Federal agency
securities 257,377 6.47 329,733 6.09 6,072 6.84 2,076 7.02 595,258 6.26
Corporate debt
securities 321,382 5.67 237,068 6.01 61,759 7.21 18,645 6.34 638,854 5.97
Other securities 17,982 5.51 8,077 6.18 5,032 6.60 3,555 7.10 34,646 5.99
-------- ---- -------- ---- ------- ---- ------- ---- ---------- ----
$597,886 6.01% $580,805 6.05% $76,316 7.08% $24,276 6.51% $1,279,283 6.10%
======== ==== ======== ==== ======= ==== ======= ==== ========== ====
Maturity (Amortized
Cost)
U.S. government
securities $ 1,139 $ 5,949 $ 3,435 $ -- $ 10,523
Federal agency
securities 256,745 328,722 6,050 2,076 593,593
Corporate debt
securities 321,308 236,598 60,947 18,567 637,420
Other securities 18,106 8,063 4,879 3,555 34,603
-------- -------- ------- ------- ----------
$597,298 $579,332 $75,311 $24,198 $1,276,139
======== ======== ======= ======= ==========
64
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GROSS
WEIGHTED UNREALIZED
AVERAGE AMORTIZED -------------- FAIR
YIELD COST GAINS LOSSES VALUE
-------- ---------- ------ ------- ----------
DECEMBER 31, 1996
---------------------------------------------
(DOLLARS IN THOUSANDS)
U.S. government securities 5.88% $ 10,523 $ 38 $ 36 $ 10,525
Federal agency securities 6.26 593,593 1,923 258 595,258
Corporate debt securities 5.97 637,420 2,203 769 638,854
Other securities 5.99 34,603 175 132 34,646
---- ---------- ------ ------- ----------
6.10% $1,276,139 $4,339 $ 1,195 $1,279,283
==== ========== ====== ======= ==========
DECEMBER 31, 1995
---------------------------------------------
U.S. government securities 5.55% $ 10,810 $ 84 $ 20 $ 10,874
Federal agency securities 6.43 599,940 6,237 383 605,794
Corporate debt securities 6.19 442,943 2,564 193 445,314
Other securities 6.10 30,425 170 118 30,477
---- ---------- ------ ------- ----------
6.32% $1,084,118 $9,055 $ 714 $1,092,459
==== ========== ====== ======= ==========
DECEMBER 31, 1994
---------------------------------------------
U.S. government securities 6.89% $ 10,580 $ 3 $ 755 $ 9,828
Federal agency securities 6.40 523,211 59 8,691 514,579
Corporate debt securities 6.44 372,013 267 8,026 364,254
Other securities 5.67 29,587 50 1,203 28,434
---- ---------- ------ ------- ----------
6.40% $ 935,391 $ 379 $18,675 $ 917,095
==== ========== ====== ======= ==========
The Company purchases only investment grade or higher rated securities. In
order to determine impairment, these ratings are reviewed quarterly.
At December 31, 1996, 1995 and 1994, there were no securities held-to-
maturity.
Realized gains and losses on the available-for-sale portfolio are calculated
on the specific identification method. Realized gains and losses on sales of
securities were $457,000 and $59,000, respectively, in 1994. There were no
sales of securities available-for-sale in 1996 or 1995.
The unrealized net gains (losses) on securities available-for-sale, net of
income taxes (securities valuation allowance), included as a component of
stockholders' equity, were as follows:
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
------- ------- --------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 4,952 $(9,235) $ 4,262
Change in unrealized net gains (losses), net of
taxes (2,929) 14,187 (13,497)
------- ------- --------
Balance at end of period $ 2,023 $ 4,952 $ (9,235)
======= ======= ========
65
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held-to-maturity consisted of the following:
GROSS
WEIGHTED UNREALIZED
AVERAGE AMORTIZED ---------------- FAIR
YIELD COST GAINS LOSSES VALUE
-------- ---------- ------- -------- ----------
DECEMBER 31, 1996
-----------------------------------------------
(DOLLARS IN THOUSANDS)
FNMA 7.97% $ 34,971 $ 176 $ 167 $ 34,980
FHLMC 8.10 1,469,488 20,257 7,566 1,482,179
Other 5.78 114,250 23 8,859 105,414
---- ---------- ------- -------- ----------
7.93% $1,618,709 $20,456 $ 16,592 $1,622,573
==== ========== ======= ======== ==========
DECEMBER 31, 1995
-----------------------------------------------
FNMA 9.87% $ 39,967 $ 5,427 $ -- $ 45,394
FHLMC 8.50 1,735,016 56,765 -- 1,791,781
Other 5.91 111,753 38 7,048 104,743
---- ---------- ------- -------- ----------
8.38% $1,886,736 $62,230 $ 7,048 $1,941,918
==== ========== ======= ======== ==========
DECEMBER 31, 1994
-----------------------------------------------
FNMA 6.57% $2,385,128 $ -- $ 38,640 $2,346,488
FHLMC 6.79 3,288,789 -- 50,101 3,238,688
REMIC 5.24 387,126 3 12,535 374,594
Other 5.80 274,061 -- 22,100 251,961
---- ---------- ------- -------- ----------
6.57% $6,335,104 $ 3 $123,376 $6,211,731
==== ========== ======= ======== ==========
Prior to July, 1996 the Company recorded impairment on mortgage-backed
securities through charge-offs to the allowance for loan and lease losses.
Subsequent to July, impairment is recorded as a charge to earnings. There were
charges to the allowance for loan and lease losses of $12,800,000 for the
first six months of 1996, $11,000,000 for the year ended December 31, 1995,
and $1,000,000 for the year ended December 31, 1994.
For the second half of 1996, $17,906,000 was recorded to reflect impairment
in the mortgage-backed securities portfolio.
66
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage-backed securities available-for-sale consisted of the following:
GROSS
WEIGHTED UNREALIZED
AVERAGE AMORTIZED ---------------- FAIR
YIELD COST GAINS LOSSES VALUE
-------- ---------- -------- ------- ----------
DECEMBER 31, 1996
-----------------------------------------------
(DOLLARS IN THOUSANDS)
FNMA 6.75% $2,297,611 $ 51,812 $ 2,846 $2,346,577
FHLMC 6.81 3,297,051 94,183 17,569 3,373,665
REMIC 5.26 33,546 -- 286 33,260
RTC 6.57 159,461 -- 1,688 157,773
Other 6.75 263,728 -- 5,161 258,567
---- ---------- -------- ------- ----------
6.77% $6,051,397 $145,995 $27,550 $6,169,842
==== ========== ======== ======= ==========
DECEMBER 31, 1995
-----------------------------------------------
FNMA 7.33% $2,585,802 $ 66,326 $ -- $2,652,128
FHLMC 7.11 4,356,331 112,203 -- 4,468,534
REMIC 4.96 226,305 10 1,366 224,949
RTC 6.72 228,180 -- 5,387 222,793
Other 6.66 352,217 290 4,206 348,301
---- ---------- -------- ------- ----------
7.09% $7,748,835 $178,829 $10,959 $7,916,705
==== ========== ======== ======= ==========
DECEMBER 31, 1994
-----------------------------------------------
FNMA 6.02% $1,055,152 $ 416 $19,125 $1,036,443
FHLMC 6.83 1,379,856 114 40,991 1,338,979
RTC 6.62 186,028 -- 7,743 178,285
Other 6.66 390,750 -- 9,954 380,796
---- ---------- -------- ------- ----------
6.51% $3,011,786 $ 530 $77,813 $2,934,503
==== ========== ======== ======= ==========
Proceeds from the sales of mortgage-backed securities were $555,719,000 in
1996 and $507,018,000 in 1995. There were no mortgage-backed securities sold
in 1994. Net realized gains on the sale of mortgage-backed securities were
$8,790,000 in 1996 and $13,585,000 in 1995. There were no realized losses on
the sale of mortgage-backed securities in 1996 and 1995.
67
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unrealized net gains (losses) on mortgage-backed securities, net of
income taxes (securities valuation allowance), included as a component of
stockholders' equity, were as follows:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
Balance at beginning of period $103,481 $(45,849) $ 18,389
Change in unrealized net gains (losses), net
of taxes (28,545) 149,330 (64,238)
-------- -------- --------
Balance at end of period $ 74,936 $103,481 $(45,849)
======== ======== ========
The contractual maturities of mortgage-backed securities as of December 31,
1996 follow:
DECEMBER 31, 1996
-----------------------
ADJUSTABLE FIXED
RATE RATE TOTAL
---------- ----- ------
(DOLLARS IN MILLIONS)
One year or less $ 109 $ 86 $ 195
Over one to two years 116 30 146
Over two to three years 124 21 145
Over three to five years 265 35 300
Over five to ten years 796 80 876
Over ten to fifteen years 1,065 29 1,094
Over fifteen years 5,024 9 5,033
------ ---- ------
$7,499 $290 $7,789
====== ==== ======
At December 31, 1995, certain mortgage-backed securities were reclassified
in accordance with the guide to implementing SFAS 115 issued by the FASB. The
following table presents the effect of the reclassification:
UNREALIZED
HELD-TO- AVAILABLE- GAINS/(LOSSES)
MATURITY FOR-SALE TOTAL NET OF TAXES
-------- ---------- ------ --------------
(DOLLARS IN MILLIONS)
Balance prior to reclassification $7,563 $2,097 $9,660 $ 24
Reclassified from held-to-
maturity to available-for-sale (5,920) 5,920 -- --
Reclassified from available-for-
sale to held-to-maturity 244 (244) -- --
Unrealized gains -- 143 143 143
Tax effect of unrealized gains -- -- -- (59)
------ ------ ------ ----
Balance at December 31, 1995 $1,887 $7,916 $9,803 $108
====== ====== ====== ====
68
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: LOANS
The composition of real estate and Consumer Finance and other loans for the
five years 1992 through 1996 is included in the table on page 31.
The following comprised loans receivable:
DECEMBER 31
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Loans receivable
Real estate
Held-for-investment $28,675,327 $27,525,966
Available-for-sale 85,681 159,939
Consumer Finance 2,185,903 2,136,022
Other loans
Held-for-investment 219,044 189,442
Available-for-sale 21,491 327,395
----------- -----------
31,187,446 30,338,764
----------- -----------
Loans in process 10,371 (487)
Unearned income (60,926) (88,079)
Allowance for loan and lease losses (313,699) (362,849)
----------- -----------
(364,254) (451,415)
----------- -----------
$30,823,192 $29,887,349
=========== ===========
The contractual maturities of loans as of December 31, 1996 follow:
DECEMBER 31, 1996
--------------------------------------------
REAL ESTATE LOANS
---------------------
FIXED CONSUMER TOTAL
ARM RATE TOTAL FINANCE OTHER LOANS
------- ----- ------- -------- ----- -------
(DOLLARS IN MILLIONS)
One year or less $ 520 $ 32 $ 552 $ 723 $144 $ 1,419
Over one to two years 767 44 811 587 8 1,406
Over two to three years 714 39 753 418 6 1,177
Over three to five years 1,168 148 1,316 165 5 1,486
Over five to ten years 3,608 285 3,893 200 19 4,112
Over ten to fifteen years 4,560 93 4,653 91 58 4,802
Over fifteen years 16,605 178 16,783 2 -- 16,785
------- ---- ------- ------ ---- -------
Total $27,942 $819 $28,761 $2,186 $240 $31,187
======= ==== ======= ====== ==== =======
In accordance with SFAS 114, a loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company measures impairment based on the fair value of the
loan's collateral. A change in the fair value of an impaired loan is reported
as an increase or reduction to the provision for loan losses. Charge-offs
occur upon modification of the loan terms or in the event of foreclosure. The
Company's policy for recognizing income on impaired loans is to accrue
earnings unless a loan is in foreclosure or becomes nonperforming, at which
time the accrued earnings are reversed. Cash receipts for impaired loans are
allocated to principal and interest in accordance with the contractual terms
of the loan.
69
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The recorded investment in loans for which impairment has been recognized
and the related reserves for estimated losses follows:
IMPAIRED LOANS
---------------------------------------------------------------
HAVING HAVING
RELATED RESERVES FOR NET WITH NO RELATED
RESERVES ESTIMATED RESERVES RESERVES FOR NET OF RESERVES
FOR LOSSES LOSSES FOR LOSSES LOSSES FOR LOSSES
---------- ------------ ---------- ------------ ---------------
DECEMBER 31, 1996
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate loans
Residential
Single-family $ 42,310 $ 9,281 $ 33,029 $39,666 $ 72,695
Apartments 67,936 13,080 54,856 8,002 62,858
Commercial
Offices 29,202 9,570 19,632 3,364 22,996
Retail 11,863 3,173 8,690 759 9,449
Hotel/motel 34,082 9,032 25,050 -- 25,050
Industrial 16,633 4,210 12,423 1,170 13,593
Other 1,451 -- 1,451 2,017 3,468
-------- ------- -------- ------- --------
$203,477 $48,346 $155,131 $54,978 $210,109
======== ======= ======== ======= ========
DECEMBER 31, 1995
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate loans
Residential
Single-family $ 52,189 $11,889 $ 40,300 $31,690 $ 71,990
Apartments 81,222 18,797 62,425 25,595 88,020
Commercial
Offices 24,196 8,958 15,238 9,793 25,031
Retail 31,758 6,812 24,946 5,875 30,821
Hotel/motel 38,727 9,292 29,435 -- 29,435
Industrial 22,509 5,515 16,994 3,004 19,998
Other 1,836 526 1,310 1,823 3,133
-------- ------- -------- ------- --------
$252,437 $61,789 $190,648 $77,780 $268,428
======== ======= ======== ======= ========
DECEMBER 31, 1994
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate loans
Residential
Single-family $ 31,011 $ 6,456 $ 24,555 $17,063 $ 41,618
Apartments 77,934 16,418 61,516 28,395 89,911
Commercial
Offices 26,698 9,303 17,395 5,426 22,821
Retail 25,916 5,547 20,369 3,902 24,271
Hotel/motel 19,659 3,194 16,465 2,207 18,672
Industrial 12,646 3,018 9,628 1,728 11,356
Other 4,671 1,090 3,581 329 3,910
-------- ------- -------- ------- --------
$198,535 $45,026 $153,509 $59,050 $212,559
======== ======= ======== ======= ========
Single-family residential mortgage loans are generally evaluated for
impairment as homogeneous pools of loans. Certain situations may arise leading
to single-family residential mortgage loans being evaluated for impairment on
an individual basis.
70
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The average recorded investment in impaired loans and the related amount of
interest income recognized during the period of impairment follows:
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Average recorded investment in impaired loans $256,650 $243,079 $298,315
Interest income recognized 21,271 17,809 24,733
Interest income recognized on cash-basis 21,410 17,758 25,061
Loans receivable totaling $8,008,384,000 at December 31, 1996 were pledged
to secure FHLB borrowings, certain deposits, securities sold under agreements
to repurchase and other obligations and accounts.
Gross unrealized gains on real estate loans available-for-sale totaled
$462,000 at December 31, 1996 and $1,443,000 at December 31, 1995.
A significant portion of the ARM portfolio is subject to lifetime interest-
rate caps and floors as well as periodic interest-rate caps. Each loan is
priced separately with a maximum cap and a minimum floor. The weighted-average
cap was 12.92% and the weighted-average floor was 4.81% at December 31, 1996.
At December 31, 1996, $459,299,000 of ARMs with an average yield of 7.31% had
reached their periodic cap rate. Without the cap, the average yield on those
ARMs would have been 7.64%. Periodic interest-rate caps are generally in
effect for three years. The loss to interest income from real estate loans
which have reached their ceiling interest rate was approximately $2,098,000 in
1996. At December 31, 1996, $417,467,000 of ARMs with an average yield of
7.76% had reached their floor rate. Without the floor, the average yield on
those ARMs would have been 7.36%. The benefit to interest income from real
estate loans which have reached their floor interest rate was approximately
$1,675,000 in 1996 compared with $3,152,000 in 1995. The contract amount on
ARMs subject to interest-rate caps and floors does not represent the exposure
to market loss.
The amortization of deferred loan fees included in interest income totaled
$25,866,000 in 1996, $33,493,000 in 1995 and $53,378,000 in 1994.
Certain loans meet the criteria of TDRs. TDRs totaled $74,196,000 at
December 31, 1996. This compared with $126,147,000 at the end of 1995 and
$148,244,000 at the end of 1994. There were no additional funds committed at
December 31, 1996.
Interest on nonaccrual loans totaled $38,426,000 for the year ended December
31, 1996 compared with $38,058,000 for the year ended December 31, 1995 and
$46,909,000 for the year ended December 31, 1994.
71
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the reserve for estimated losses and charge-off
experience for loans receivable:
REAL ESTATE LOANS CONSUMER LOANS
-------------------- ------------------
CONSUMER BANK OTHER
SFR OTHER FINANCE CARD LOANS TOTAL
--------- --------- -------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
BALANCE AT DECEMBER 31,
1991 $ 100,353 $ 87,641 $ 45,416 $ 21,173 $ 8,467 $ 263,050
Provision for losses 113,408 228,492 41,900 30,254 5,946 420,000
Charge-offs (53,031) (117,611) (55,436) (28,150) (8,497) (262,725)
Recoveries 212 5,008 14,661 2,022 2,669 24,572
--------- --------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31,
1992 160,942 203,530 46,541 25,299 8,585 444,897
Adoption of SFAS 114 3,153 44,821 -- -- -- 47,974
--------- --------- -------- -------- ------- ---------
BALANCE AT JANUARY 1,
1993 164,095 248,351 46,541 25,299 8,585 492,871
Provision for losses 299,485 123,468 37,900 (6,533) 8,680 463,000
Charge-offs (253,686) (151,700) (50,174) (20,794) (2,300) (478,654)
Recoveries 2,025 4,273 15,523 2,028 1,203 25,052
--------- --------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31,
1993 211,919 224,392 49,790 -- 16,168 502,269
Provision for losses 166,649 693 41,900 -- (2,042) 207,200
Charge-offs (191,290) (42,981) (54,041) -- (3,762) (292,074)
Recoveries 1,420 2,924 15,568 -- 744 20,656
--------- --------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31,
1994 188,698 185,028 53,217 -- 11,108 438,051
Provision for losses 160,425 (18,000) 48,500 -- (3,225) 187,700
Charge-offs (194,605) (22,739) (62,206) -- (2,017) (281,567)
Recoveries 1,498 860 16,057 -- 250 18,665
--------- --------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31,
1995 156,016 145,149 55,568 -- 6,116 362,849
Provision for losses 187,344 (39,908) 58,800 -- 2,735 208,971
Charge-offs (196,708) (14,602) (60,520) -- (4,488) (276,318)
Recoveries 1,256 228 16,197 -- 516 18,197
--------- --------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31,
1996 $ 147,908 $ 90,867 $ 70,045 $ -- $ 4,879 $ 313,699
========= ========= ======== ======== ======= =========
As a result of the Company's review of reserve levels which showed an excess
of commercial and apartment loan reserves, the Company reallocated $40,000,000
of commercial real estate loan reserves, which is included in the other real
estate loan provisions for losses, to SFR in 1996. Provisions for losses on
the leasing portfolio, included in other loan loss provisions, were reduced by
$1,800,000 in 1996 and $6,000,000 in 1995 as a result of the reversal of
provisions originally established for expected losses which did not
materialize.
The following table presents the Company's ALLL as a percent of the
respective loans receivable portfolios. The loan balances and percentage of
reserves to the respective loan balances for December 1995 have been restated
to exclude mortgage-backed securities with credit recourse for comparative
purposes to conform to the 1996 presentation.
REAL ESTATE LOANS CONSUMER LOANS
------------------- ------------------
CONSUMER BANK OTHER
SFR OTHER FINANCE CARD LOANS TOTAL
-------- --------- --------- ------- ----- -----
December 31,
1996 .57% 3.39% 3.20% --% 2.03% 1.01%
1995 .63 4.86 2.60 -- 1.18 1.20
1994 .66 5.96 2.66 -- 2.47 1.28
1993 .83 6.59 2.72 -- 3.99 1.60
1992 .63 5.83 2.70 9.88 2.14 1.43
72
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The average loan receivable balances and the ratio of net charge-offs to the
respective average loan receivable portfolios are presented in the table
below.
DECEMBER 31
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Average balance
Real estate loans
SFR $25,212 $23,980 $25,227 $25,689 $25,321
Other 2,854 3,075 3,255 3,719 3,686
Consumer Finance 2,105 2,016 1,868 1,728 1,686
Bank card -- -- -- 180 272
Other loans 534 498 418 386 423
Ratio of net charge-offs to
average loans
Real estate loans
SFR .72% .76% .75% .98% .21%
Other .50 .71 1.23 3.96 3.07
Consumer Finance 2.11 2.29 2.06 2.01 2.42
Bank card -- -- -- 10.44 9.62
Other loans .74 .35 .72 .27 1.38
NOTE 7: MORTGAGE BANKING
The following summarizes the sale of loans and mortgage-backed securities by
type:
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans sold
Adjustable rate $ -- $ -- $ 55,243
Fixed-rate 1,478,008 1,113,259 1,115,751
Mortgage-backed securities sold
Adjustable rate 561,400 498,099 --
---------- ---------- ----------
$2,039,408 $1,611,358 $1,170,994
========== ========== ==========
The following table summarizes the average loans serviced for others and the
related loan servicing spread:
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Average loans serviced for others $11,152,957 $10,807,163 $11,723,525
Loan servicing spread .41% .51% .43%
Loan servicing spread represents net servicing income as a percentage of the
average portfolio serviced.
Custodial balances maintained in connection with the foregoing loan
servicing are included in wholesale transaction accounts and totaled
$157,954,000 at December 31, 1996 and $173,856,000 at December 31, 1995.
At December 31, 1996 GWB serviced loans for GWFC and Aristar of $27,166,000
and $14,801,000, respectively. At December 31, 1995, GWB serviced loans for
GWFC and Aristar of $23,292,000 and $12,252,000, respectively.
73
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The present value of retained yield on loans sold is amortized using the
interest method adjusted quarterly for actual prepayment experience. Following
is a summary of capitalized excess and short servicing included in other
assets and other liabilities, respectively:
DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Excess servicing $ 28,241 $ 24,830 $ 25,934
Short servicing (20,714) (21,214) (25,356)
-------- -------- --------
Capitalized servicing, net $ 7,527 $ 3,616 $ 578
======== ======== ========
An impairment adjustment was recorded to short servicing of $1,643,000 in
1996.
Following is a summary of the net unamortized balance of excess and short
servicing on loans sold:
YEAR ENDED DECEMBER 31
-----------------------
1996 1995 1994
------- ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 3,616 $ 578 $ 9,160
Additions from sales 9,445 994 604
Amortization of excess and short servicing, net (5,534) 2,044 (9,186)
------- ------ -------
Balance at end of year $ 7,527 $3,616 $ 578
======= ====== =======
The value of servicing rights is based on the assumption that a normal
servicing fee will be received for the estimated life of the loans. The
following is a summary of capitalized mortgage servicing rights:
YEAR ENDED
DECEMBER 31
---------------
1996 1995
------- ------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 7,034 $ --
Originated mortgage servicing rights capitalized 12,323 7,248
Amortization (2,339) (214)
------- ------
Balance at end of year $17,018 $7,034
======= ======
Capitalized mortgage servicing rights are analyzed for impairment by
stratifying the underlying loans based on the predominant risk characteristics
of rate, geographic area and product type on a pool by pool basis. A valuation
allowance is provided for identified impairment. There was no impairment
identified in 1996 and 1995.
74
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gain on sales of loans and mortgage-backed securities were comprised of:
YEAR ENDED DECEMBER 31
-----------------------------------------------
1996 1995 1994
----------------- ----------------- ---------
MORTGAGES MBS MORTGAGES MBS MORTGAGES
--------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Mortgage servicing spread
Gains $ 8,240 $13,530 $4,730 $ 3,512 $ 1,922
Losses -- -- -- -- (1,318)
------- ------- ------ ------- -------
Net 8,240 13,530 4,730 3,512 604
Premiums (discounts), net (6,130) (1,390) (992) 12,264 (4,628)
Deferred loan fees 6,346 (3,815) 4,736 1,147 8,879
Gain on servicing 1,888 -- -- -- --
Adjust to lower of cost or
market (937) -- 450 -- (1,057)
Net hedging gains -- -- -- -- 1,472
Miscellaneous fees (845) 465 (100) (3,338) 69
------- ------- ------ ------- -------
$ 8,562 $ 8,790 $8,824 $13,585 $ 5,339
======= ======= ====== ======= =======
Mortgage banking servicing income consisted of:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Collections $61,144 $61,980 $68,968
Guarantee fees (7,587) (8,651) (8,929)
Amortization of mortgage servicing rights (7,873) 1,830 (9,186)
------- ------- -------
$45,684 $55,159 $50,853
======= ======= =======
GWB, as seller and servicer, issued mortgage pass-through certificates
comprised of Class A certificates and Class B certificates. The Class B
certificates, which GWB retained, and classified as mortgage-backed
securities, are subordinated to the rights of the Class A certificate holders.
GWB also sold loans to FNMA and FHLMC whereby a portion or all of the credit
risk was retained. Following are data related to loans sold with credit
enhancements and the accompanying exposure related thereto:
DECEMBER 31
--------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans sold with credit enhancements
outstanding $1,188,717 $1,397,411 $1,409,631
Maximum exposure under credit enhancements 660,048 779,902 778,705
To facilitate the servicing of delinquent loans under these commitments and
to minimize losses to the Company, loans in the amount of $180,337,000 in
1996, $115,636,000 in 1995 and $71,400,000 in 1994 have been repurchased from
investors. Repurchased loans are included in the Company's periodic analysis
of the adequacy of ALLL. Delinquent interest of approximately $4,914,000 in
1996, $2,939,000 in 1995 and $1,669,000 in 1994 was repurchased and
subsequently written off. Periodically, the Company repurchases, for
investment, loans which were previously sold. The Company repurchased
$6,410,000 in 1996, $1,061,000 in 1995 and $476,274,000 in 1994. The reserve
for the contingent liability for loans sold with recourse was $9,358,000 at
December 31, 1996 and $6,000,000 at December 31, 1995.
75
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: REAL ESTATE AVAILABLE-FOR-SALE OR DEVELOPMENT, NET
Real estate available-for-sale or development, net, consisted of:
DECEMBER 31
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Real estate available-for-sale
Real estate acquired through foreclosure net of reserves
of $1,861 and $26,850, respectively $119,780 $161,953
Other, net of reserves of $2,744 and $1,210, respectively 8,741 21,806
Accumulated depreciation (3,634) (6,081)
-------- --------
124,887 177,678
Property development, net of reserves of $18,623 and
$29,002, respectively 35,110 39,434
-------- --------
$159,997 $217,112
======== ========
Interest capitalized on property development totaled $3,073,000 at December
31, 1996, $4,088,000 at December 31, 1995 and $4,581,000 at December 31, 1994.
Net real estate operations are summarized below:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net (gain) on sales of real estate $(15,619) $(21,709) $ (6,437)
Interest recognized on advances (5,981) (2,337) (1,341)
Provision for losses (12,775) 1,500 12,000
Write-downs 2,254 -- --
Net operating losses and holding costs 32,847 28,151 27,632
-------- -------- --------
$ 726 $ 5,605 $ 31,854
======== ======== ========
In the third quarter of 1996, the Company determined that its real estate
portfolio was appropriately valued at market. As a result of this
determination, reserves of $13,504,000 were reversed.
Following is a summary of the reserve for estimated losses:
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 57,062 $ 77,025 $123,551 $185,204 $ 6,862
Adoption of SFAS 114 -- -- -- (66,102) --
-------- -------- -------- -------- --------
Adjusted balance at
beginning of year 57,062 77,025 123,551 119,102 6,862
Provision for losses (12,775) 1,500 12,000 92,000 220,000
Charge-offs (21,223) (21,469) (65,769) (87,673) (41,658)
Recoveries 164 6 7,243 122 --
-------- -------- -------- -------- --------
Balance at end of year $ 23,228 $ 57,062 $ 77,025 $123,551 $185,204
======== ======== ======== ======== ========
76
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: INTEREST RECEIVABLE
Following is a summary of interest receivable:
DECEMBER 31
-----------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Real estate loans $149,593 $147,758
Mortgage-backed securities 65,764 88,628
Securities available-for-sale 15,398 15,411
Other loans 11,838 19,473
Consumer Finance 2,161 2,327
Interest rate swaps 785 846
Taxes -- 24,197
-------- --------
$245,539 $298,640
======== ========
There was no accrued interest for taxes at December 31, 1996.
NOTE 10: INVESTMENT IN FHLB
The investment in FHLB consisted of capital stock, at cost, totaling
$377,946,000 at December 31, 1996 and $341,102,000 at December 31, 1995.
The Company earned 6.11% in 1996, 4.93% in 1995 and 5.18% in 1994 from
dividends on its investment in FHLB stock. FHLB capital stock is pledged to
secure FHLB borrowings. Earnings on FHLB stock will presumably continue to be
restricted due to the funding requirements imposed on the Federal Home Loan
Banks for affordable housing programs and the Resolution Funding Corporation.
NOTE 11: PREMISES AND EQUIPMENT, NET
Premises and equipment, net, consisted of the following:
DECEMBER 31
----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Land $ 88,837 $ 89,044
Buildings and leasehold improvements 453,462 435,204
Furniture, fixtures and equipment 498,841 554,256
Software 41,968 31,060
Construction in progress 13,151 13,218
---------- ----------
1,096,259 1,122,782
Accumulated depreciation and amortization (543,837) (518,110)
---------- ----------
$ 552,422 $ 604,672
========== ==========
Unamortized software was $33,496,000 and $29,615,000 at December 31, 1996
and 1995, respectively.
77
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company leases various branch offices under capital and noncancellable
operating leases which expire at various dates through 2043. Some leases
contain escalation provisions for adjustments in the consumer price index and
provide for renewal options for five-to-10 year periods. Future minimum lease
payments under all noncancellable leases at December 31, 1996 were as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
(DOLLARS IN THOUSANDS)
Year ending December 31,
1997 $ 47,744 $ 8,034
1998 40,968 8,034
1999 32,648 8,034
2000 27,261 8,034
2001 24,442 8,034
Thereafter 116,600 78,729
-------- --------
Total minimum lease payments $289,663 118,899
========
Amount representing interest 78,131
--------
Present value of minimum lease payments $ 40,768
========
Rental expense charged to earnings was $59,005,000 in the year ended
December 31, 1996, $60,279,000 in the year ended December 31, 1995 and
$55,011,000 in the year ended December 31, 1994. Rental sublease income was
$8,007,000, $8,111,000 and $7,027,000 in the years ended December 31, 1996,
1995 and 1994, respectively.
NOTE 12: DEPOSITS
The following summarizes deposit balances at December 31, 1996 and 1995.
DECEMBER 31
----------------
1996 1995
(DOLLARS IN MILLIONS) ------- -------
Checking $ 4,420 $ 4,488
Money market and other savings 6,744 6,589
Term 17,237 17,696
Wholesale 186 462
------- -------
$28,587 $29,235
======= =======
The following table shows the change in deposit balances at December 31,
1996 and 1995:
DECEMBER 31
----------------
1996 1995
(DOLLARS IN MILLIONS) ------- -------
Checking $ (68) $ (85)
Money market and other savings 155 (851)
Term (459) 1,572
Wholesale (276) (102)
------- -------
$ (648) $ 534
======= =======
78
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 withdrawals. Noninterest bearing checking accounts
represented 6.07% of total deposits at December 31, 1996 and 5.40% at December
31, 1995. Accrued but unpaid interest on deposits included in other
liabilities totaled $44,060,000 at December 31, 1996 and $12,091,000 at
December 31, 1995.
An analysis of term deposits by interest rate and maturity at December 31,
1996 is presented below:
OVER OVER OVER OVER
3 MONTHS 6 MONTHS 12 MONTHS 24 MONTHS DECEMBER 31
3 MONTHS BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER ------------------
OR LESS 6 MONTHS 12 MONTHS 24 MONTHS 36 MONTHS 36 MONTHS 1996 1995
-------- ---------- ---------- ---------- ---------- --------- ------- -------
(DOLLARS IN MILLIONS)
DECEMBER 31, 1996
INTEREST RATE
Under 3% $ 38 $ -- $ -- $ -- $ -- $ -- $ 38 $ 52
3 to 3.99% 75 19 9 3 6 -- 112 147
4 to 4.99% 3,129 1,735 928 87 33 32 5,944 3,704
5 to 5.99% 2,155 1,693 3,617 907 222 492 9,086 9,121
6 to 6.99% 363 272 173 121 142 297 1,368 3,697
7 to 7.99% 615 14 34 16 12 19 710 1,066
8 to 8.99% -- 1 1 1 1 1 5 8
9 to 9.99% -- -- -- -- -- -- -- 184
Over 10% -- -- -- -- 2 -- 2 5
------ ------ ------ ------ ----- ----- ------- -------
Total $6,375 $3,734 $4,762 $1,135 $ 418 $ 841 $17,265(1) $17,984(1)
====== ====== ====== ====== ===== ===== ======= =======
$100,000 accounts
included above $1,876 $ 713 $ 923 $ 227 $ 104 $ 175 $ 4,018 $ 3,502
- --------
(1)This includes wholesale term accounts of $28 at December 31, 1996 and $289
at December 31, 1995.
NO WITHIN
MATURITY ONE YEAR 1998 1999 2000 2001 AFTER 2001 TOTAL
-------- -------- ---- ---- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
YEAR-END BY MATURITY
Balances $11,322 $14,871 $1,135 $418 $365 $475 $ 1 $28,587
Average coupon rate 2.12% 5.38% 5.73% 5.75% 6.29% 5.63% 4.89% 4.13%
The following is a summary of interest expense on deposits:
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Checking $ 32,871 $ 35,286 $ 40,034
Money market and other savings 192,668 187,855 197,451
Term 944,924 972,691 699,424
Wholesale 9,016 21,253 13,390
---------- ---------- --------
$1,179,479 $1,217,085 $950,299
========== ========== ========
79
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally represent
borrowings of less than one year. The book value of these agreements
approximates fair value. Agreements to repurchase are secured by mortgage
loans and securities held by the Company.
DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities sold under agreements to re-
purchase
Balance at year end $4,197,666 $6,868,296 $6,299,055
Maximum outstanding at any month end 6,116,426 7,536,524 6,299,055
Average balance during the year 5,373,218 7,050,882 1,984,652
Weighted average rate during the year 5.48% 5.99% 4.93%
Weighted average rate at year end 5.48 5.78 5.80
The collateral supporting securities sold under agreements to repurchase is
as follows:
DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities
Book value $4,368,296 $7,041,492 $6,719,178
Fair value 4,356,046 7,102,655 6,481,469
Securities sold by the Company under agreements to repurchase are generally
short-term obligations. On December 31, 1996, the Company had $3,703,578,000
of obligations contracted for 120 days or less with an average maturity of 86
days. The remaining $494,088,000 of the repurchase obligations contractually
matures from one to three years.
NOTE 14: SHORT-TERM BORROWINGS
The following is a summary of short-term borrowings:
DECEMBER 31
---------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Commercial paper $ 472,506 $1,036,413
Federal funds 629,000 280,000
---------- ----------
$1,101,506 $1,316,413
========== ==========
Commercial paper has original maturities of less than 270 days, and at
December 31, 1996, the average maturity was 34 days. Federal funds have
maturities of periods of up to 12 months and at December 31, 1996 the average
maturity was 71 days.
80
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-term borrowings are summarized as follows:
DECEMBER 31
------------------------------
1996 1995 1994
-------- ---------- --------
(DOLLARS IN THOUSANDS)
Commercial paper
Balance at year end $472,506 $1,036,413 $745,461
Maximum outstanding at any month end 967,962 1,551,200 887,514
Average balance during the year 699,409 1,142,851 431,021
Weighted average rate during the year 5.38% 6.39% 4.56%
Weighted average rate at year end 5.70 5.88 6.06
Federal funds
Balance at year end $629,000 $ 280,000 $465,000
Maximum outstanding at any month end 768,000 727,000 540,000
Average balance during the year 493,538 450,154 328,383
Weighted average rate during the year 5.34% 6.27% 4.18%
Weighted average rate at year end 5.44 5.85 6.29
NOTE 15: LONG TERM BORROWINGS
Debt issue costs are amortized on the interest method over the term of the
debt.
The following is a summary of long term borrowings:
DECEMBER 31
---------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Senior and subordinated debt $2,432,708 $2,305,845
FHLB long-term borrowings 758,200 115,000
---------- ----------
$3,190,908 $2,420,845
========== ==========
81
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has the following senior and subordinated debt outstanding:
DECEMBER 31
MATURITY INTEREST ---------------------
DATE RATE 1996 1995
-------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
SENIOR
GWFC: June, 1998 6.125% $ 149,845 $ 149,746
December, 1998 8.625 99,961 99,943
July, 2000 6.375 224,166 223,960
February, 2002 8.600 199,410 199,321
---------- ----------
673,382 672,970
---------- ----------
GWB: July, 1997 9.500 152,323 152,179
---------- ----------
Aristar: July, 1996 6.250 -- 99,995
May, 1996 8.750 -- 5,000
February, 1997 7.375 99,997 99,974
December, 1997 8.125 99,909 99,812
July, 1998 5.750 149,922 149,875
February, 1999 7.875 99,904 99,864
May, 1999 6.750 99,986 --
July, 2000 6.300 99,930 99,913
December, 2000 6.125 149,610 --
June, 2001 7.750 149,930 149,917
June, 2001 7.250 99,857 --
August, 2001 6.750 99,917 --
---------- ----------
1,148,962 804,350
---------- ----------
Obligations of
subsidiaries: 7.6-10.7 45,473 47,428
---------- ----------
Total Senior Debt 2,020,141 1,676,927
========== ==========
SUBORDINATED
GWB: February, 1999 10.500 38,172 129,801
March, 1999 10.250 25,081 150,000
June, 2001 9.875 149,708 149,658
---------- ----------
212,961 429,459
---------- ----------
Aristar: August, 1998 8.875 99,948 99,920
July, 1999 7.500 99,659 99,539
---------- ----------
199,607 199,459
---------- ----------
Total Subordinated Debt 412,568 628,918
========== ==========
Total Senior and
Subordinated Debt $2,432,708 $2,305,845
========== ==========
During 1996, Aristar issued the following senior debt:
MONTH OF INTEREST DATE OF
ISSUE AMOUNT RATE MATURITY
-------- ------------ -------- ----------------
May $100,000,000 6.75% May 15, 1999
June 100,000,000 7.25 June 15, 2001
August 100,000,000 6.75 August 15, 2001
December 150,000,000 6.125 December 1, 2000
82
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16: FHLB BORROWINGS
An analysis of borrowings by maturity is included in the table on page 43.
The maximum amount of credit which the FHLB will extend for purposes other
than meeting withdrawals varies from time to time in accordance with its
policies. The FHLB interest rates charged for advances vary depending upon
maturity, the cost of funds in the FHLB and the purpose of borrowing.
FHLB borrowings are secured by pledges of real estate loans and the capital
stock of the FHLB. FHLB borrowings are summarized below:
DECEMBER 31
-------------------
1996 1995
---------- --------
(DOLLARS IN THOUSANDS)
Short-term borrowings $2,011,733 $740,080
Long-term borrowings 758,200 115,000
---------- --------
$2,769,933 $855,080
========== ========
1996 1995 1994
---------- -------- --------
Balance at year end $2,769,933 $855,080 $187,000
Maximum outstanding at any month end 2,769,933 855,080 862,000
Average balance during year 1,854,786 186,698 306,431
Weighted average interest rate during the
year 5.45% 5.39% 5.63%
Weighted average interest rate at year end 5.52 5.60 5.47
GWB has various borrowing alternatives with the FHLB, with capacity of
approximately $10 billion, inclusive of a $200 million facility for overnight
advances.
NOTE 17: COMPANY-OBLIGATED MANDITORILY REDEEMABLE PREFERRED SECURITIES OF THE
COMPANY'S SUBSIDIARY TRUST, HOLDING SOLELY $103,092,800 AGGREGATE
PRINCIPAL AMOUNT OF 8.25% SUBORDINATED DEFERRABLE INTEREST NOTES, DUE
2025, OF THE COMPANY
In December 1995, Great Western Financial Trust I (the "subsidiary trust"),
a wholly-owned subsidiary of Great Western Financial Corporation, issued
$100,000,000 of 8.25% Trust Originated Preferred Securities (the "preferred
securities"). In connection with the subsidiary trust's issuance of the
preferred securities, Great Western Financial Corporation issued to the
subsidiary trust $103,092,800 principal amount of its 8.25% subordinated
deferrable interest notes, due 2025 (the "subordinated notes"). The sole
assets of the subsidiary trust are and will be the subordinated notes. Great
Western Financial Corporation's obligations under the subordinated notes and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of the subsidiary trust's obligations under the
preferred securities.
DECEMBER 31
-----------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Company-obligated manditorily redeemable preferred
securities of the Company's subsidiary trust, holding
solely $103,092,800 aggregate principal amount of 8.25%
subordinated deferrable interest notes, due 2025, of
the Company $100,000 $100,000
======== ========
83
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18: FEDERAL AND STATE TAXES ON INCOME
Following is a summary of the provision for taxes on income:
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
------- -------- --------
(DOLLARS IN THOUSANDS)
Current tax expense
Federal $58,400 $ 80,800 $120,100
State 11,700 24,400 32,500
------- -------- --------
70,100 105,200 152,600
------- -------- --------
Deferred tax expense (benefit)
Federal (1,900) 51,400 900
State 2,600 4,500 1,800
------- -------- --------
700 55,900 2,700
------- -------- --------
$70,800 $161,100 $155,300
======= ======== ========
The following table reconciles the statutory income tax rate to the
consolidated effective income tax rate:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Federal income tax rate 35.0% 35.0% 35.0%
State franchise tax rate, net of federal income
tax effect 6.5 6.1 6.0
------- ------- -------
Statutory income tax rate 41.5 41.1 41.0
Increase (reduction) in tax rate resulting from:
Amortization of intangibles .8 .9 1.3
Reversal of taxes previously provided -- (.6) (2.9)
Low income housing -- (1.2) --
Adjustment of deferred tax rate (1.2) .1 (.2)
Other items, net (3.2) (2.1) (1.0)
------- ------- -------
37.9% 38.2% 38.2%
======= ======= =======
84
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31
--------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
Deferred tax liabilities
Loan fees and interest income $ 188,122 $ 202,816
FHLB dividends 86,728 63,050
Financial leases 70,035 74,772
Depreciation 49,441 42,303
Unrealized holding gains on securities 48,311 72,619
Amortization of intangibles 22,616 23,872
Accrued interest income 16,439 16,919
Cash method of accounting for income tax reporting 8,131 8,325
Election to reduce basis 5,843 6,186
Sales of unearned interest income 2,488 2,488
Other deferred income items 56,994 65,554
--------- ---------
555,148 578,904
--------- ---------
Deferred tax assets
Loss reserves (104,244) (117,504)
State taxes (32,581) (31,761)
Postemployment benefits (24,908) (27,433)
Deferred compensation (17,370) (11,456)
Unearned insurance commission (10,285) (11,084)
Partnership income (3,230) 1,871
Gain (loss) on mortgage sales 271 (6,615)
Other deferred deduction items (110,006) (98,560)
--------- ---------
(302,353) (302,542)
Deferred tax assets valuation allowance -- --
--------- ---------
Net deferred tax liabilities $ 252,795 $ 276,362
========= =========
Taxes on income included the following:
DECEMBER 31
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Net deferred liability
Federal income tax $172,990 $193,588
State franchise tax 79,805 82,774
-------- --------
252,795 276,362
Taxes payable (receivable) (26,720) 102,019
-------- --------
$226,075 $378,381
======== ========
Under the Internal Revenue Code, GWB, as a qualified thrift institution, had
been allowed to claim deductions for bad debts under the reserve method, which
is more favorable than bad debt deduction methods allowed to other taxpayers.
85
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under provisions of the Small Business Job Protection Act of 1996, GWB lost
the use of the bad debt reserve method beginning in 1996.
Since the reserve balance at the end of 1996 of $724,488,000 arose prior to
1988, it is not currently subject to federal income tax and would not be if
GWB were to convert to a commercial bank or otherwise lose its tax status as a
qualified thrift institution. However, it will be subject to such tax upon
certain occurrences (including its distribution to shareholders), none of
which are currently contemplated. Consequently, in accordance with Financial
Accounting Standards No. 109 "Accounting for Income Taxes," a federal deferred
tax liability of $253,571,000 has not been recognized for the temporary
differences relating to the tax bad debt reserve of GWB.
The Company's tax returns have been examined by the Internal Revenue Service
through December 31, 1987 and by the California Franchise Tax Board through
December 31, 1991.
NOTE 19: EMPLOYEE BENEFIT PLANS
Pension Plans
The Great Western Retirement Plan ("the plan") covers a majority of
employees. In 1996, the plan was converted from a final average pay plan to a
cash balance plan, under which participants' accounts are credited with pay-
related contributions and interest. The Company's general funding policy is to
contribute the maximum amount deductible for federal income tax purposes.
The net periodic pension cost is computed as follows:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Return on plan assets:
Actual return $(42,002) $(37,162) $ 1,877
Expected return lower (higher) than actual
return 22,439 21,459 (17,559)
-------- -------- --------
Expected return (19,563) (15,703) (15,682)
Service cost 8,211 9,360 11,400
Interest cost 13,781 14,266 13,981
Net amortization of initial unrecognized net
(asset) as of January 1, 1987 -- (676) (676)
Net amortization and deferral (1,989) 530 1,398
Amortization of unrecognized prior service
cost -- (185) (185)
-------- -------- --------
$ 440 $ 7,592 $ 10,236
======== ======== ========
Assumptions used in determining the net periodic pension cost were:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Weighted average discount rate 7.81% 8.25% 7.75%
Rate of increase in future compensation levels 5.25 5.50 5.50
Expected long-term rate of return on plan assets 9.00 9.00 9.00
Although the actual return on plan assets is shown, the expected long-term
rate of return is used in determining net periodic pension cost. The
difference between the actual return and expected return is included in net
amortization and deferral.
86
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accumulated plan benefit information and the funded status of the plan
follow:
DECEMBER 31
------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
Accumulated benefit obligation
Vested $170,028 $165,016
Nonvested 9,393 4,516
-------- --------
$179,421 $169,532
======== ========
Projected benefit obligation $179,421 $201,421
Fair value of plan assets 241,345 212,084
-------- --------
Plan assets in excess of benefit obligation 61,924 10,663
Unrecognized prior service costs (28,869) --
Unrecognized net loss 10,103 20,467
-------- --------
Prepaid pension cost included in other assets $ 43,158 $ 31,130
======== ========
The assumptions used in determining the actuarial present value of the
projected benefit obligation at December 31 were:
DECEMBER 31
----------------
1996 1995 1994
---- ---- ----
Weighted average discount rate 7.50% 7.50% 8.25%
Rate of increase in future compensation levels 5.25 5.25 5.50
Expected long-term rate of return on plan assets 9.00 9.00 9.00
Interest crediting rate on participant accounts 5.50 -- --
Annuity conversion rate 6.75 -- --
Assumptions for interest crediting and annuity conversion rates are not
presented for December 31, 1995 and 1994, because they are not applicable to a
final average pay plan.
Plan assets include equity securities, mutual funds, mortgage-backed
securities and other fixed-income securities.
The Company has unfunded retirement restoration plans for employees whose
benefits under the principal funded plan are reduced because of compensation
deferral elections or limitations under federal tax laws. Pension expense for
these plans totaled $587,000 in 1996, $945,000 in 1995 and $213,000 in 1994.
At December 31, 1996, the projected benefit obligation for these plans was
$3,695,000.
The Company also sponsors a nonqualified, unfunded, supplemental executive
retirement plan for certain senior officers and a nonqualified unfunded
directors' retirement plan. Data related to these plans follow:
DECEMBER 31
---------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
Projected benefit obligation $34,267 $28,074
Unrecognized net obligation 2,773 3,280
Pension expense for these plans totaled $4,333,000 in 1996, $4,231,000 in
1995 and $4,590,000 in 1994.
87
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company provides an optional deferred compensation plan for certain
employees. Eligible employees can defer a portion of their compensation and
the Company agrees to pay interest on the balance of funds deferred. An
enhanced rate is paid on funds deferred over three years.
The Company has purchased cost recovery life insurance, primarily with one
carrier, on the lives of the participants of the supplemental executive
retirement plan, directors' retirement plan and deferred compensation plan and
it is sole owner and beneficiary of said policies. The amount of coverage is
designed to provide sufficient revenues to fund said plans. The net cash
surrender value of this life insurance, recorded in other assets, was
$180,319,000 at December 31, 1996 and $163,736,000 at December 31, 1995, and
net premium income related to insurance purchased was $8,359,000 in 1996,
$6,846,000 in 1995 and $2,646,000 in 1994.
POSTRETIREMENT PLANS
The Company sponsors unfunded defined benefit postretirement plans that
provide medical and life insurance coverage to eligible employees and
dependents based on age and length of service. Medical coverage options are
the same as available to active employees. The cost of plan coverage for
retirees and their qualifying dependents is based upon a point system that
combines age and years of service which results, generally, in lower costs to
retirees in conjunction with higher accumulated points within limits.
The following table shows the plan's status reconciled to the accrued
postretirement benefit cost included in other liabilities on the Consolidated
Statement of Financial Condition.
DECEMBER 31
---------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
Accumulated postretirement benefit obligation
Retirees $25,700 $29,000
Fully eligible active employees 4,100 4,300
Other active employees 22,300 19,700
------- -------
52,100 53,000
Unrecognized net gain 4,746 728
------- -------
Accrued postretirement benefit $56,846 $53,728
======= =======
The net postretirement medical and life insurance costs follow:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Service cost $ 2,196 $ 2,307 $ 2,349
Interest cost of accumulated postretirement
benefit obligation 3,614 3,896 3,730
Curtailment gain (580) (570) --
------- ------- -------
$ 5,230 $ 5,633 $ 6,079
======= ======= =======
During 1996 and 1995, the Company recognized curtailment gains as a result
of ongoing work force reductions.
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 9.00% in 1996, and 8.00% in 1997 thereafter decreasing
1% per year until a stable 5.00% medical inflation rate is reached in 2000.
Increasing the assumed health care cost trend by 1% in each year would
increase the accumulated postretirement benefit obligation at December 31,
1996 by approximately $3,500,000 and the aggregate of the
88
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
service and interest components of net periodic postretirement benefit cost
for the year ended December 31, 1996 by $700,000. The present value of the
accumulated benefit obligation assumed a 7.50% discount rate compounded
annually at December 31, 1996 and December 31, 1995.
Stock-based Compensation Plans
The Company currently has a stock option plan in effect: the 1988 Stock
Option and Incentive Plan ("stock option plan"). Options are granted at the
market value of the common stock on the date of grant. The stock option plan
consists of two separate plans: the Key Employee Program under which options
(both incentive and nonqualified), stock appreciation rights, dividend
equivalents and certain other performance and incentive awards may be granted
to officers, key employees and certain other individuals; and the Non-employee
Director Program under which non-qualified options will be automatically
granted to non-employee directors under certain circumstances. The Company has
set aside 12,500,000 shares of common stock to be delivered pursuant to the
stock option plan, of which a maximum of 750,000 may be delivered under the
Non-employee Director Program. Options may be exercised either by payment of
cash, or the optionee may deliver GWFC common stock of an equivalent market
value at the date of exercise. The exercise price of each option equals the
market price of the Company's stock on the date of grant, and an option's
maximum term is 10 years. Depending upon the year of grant, options become
exercisable in equal installments over a four or five year period, beginning
one year from the date of grant. Proceeds from the exercise of stock options
are credited to common stock for the aggregate par value of shares issued, and
the excess is credited to additional capital.
The Company has granted performance-based restricted stock awards to
encourage and reward high levels of performance of the Company as measured by
returns to shareholders. The shares will fully vest 10 years after the award
date, and prior to such time, they are subject to accelerated vesting based on
the Company's performance. At December 31, 1996, a total of 1,115,244 shares
with a value of $20,709,000 had been granted. The unearned compensation is
recorded as a separate reduction of stockholders' equity and is being
amortized to expense over 60 months. The total amount of compensation expense
related to restricted stock awards, recorded in accordance with APB 25, was
$3,825,000 in 1996, $3,257,000 in 1995 and $3,798,000 in 1994.
Stock appreciation rights ("SAR") may be granted in conjunction with certain
options previously granted or with future options. A SAR entitles the holder,
at the discretion of the Company, to receive cash or shares of GWFC common
stock, or a combination thereof, at a value equal to the excess of the fair
market value on the date of exercise over the option price. Exercise of an
option or companion SAR automatically cancels the related option or right.
89
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option plan as of December 31, 1996, 1995
and 1994, and changes during the years then ended is as follows:
WEIGHTED-
OPTION OPTION AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
---------- ------------- --------------
1994
Outstanding at beginning of year 5,316,595 $ 7.70-$22.15 $16.33
Granted 2,287,806 16.63- 20.25 17.22
Forfeited (209,860) 14.75- 18.88 18.08
Exercised (282,300) 10.38- 18.88 15.33
---------- ------------- ------
Outstanding at end of year 7,112,241 7.70- 22.15 16.66
---------- ------------- ------
1995
Granted 451,548 16.00- 21.38 20.36
Exercised (704,985) 7.70- 20.50 16.15
Forfeited (254,960) 10.38- 18.88 17.71
---------- ------------- ------
Outstanding at end of year 6,603,844 7.70- 22.15 16.86
---------- ------------- ------
1996
Granted 3,752,599 21.13- 30.88 26.83
Exercised (1,048,777) 7.70- 22.15 17.35
Forfeited (157,595) 14.75- 23.38 19.17
---------- ------------- ------
Outstanding at end of year 9,150,071 $10.38-$30.88 $20.85
========== ============= ======
The number of options exercisable at December 31, 1996 and 1995 was
4,023,247 and 4,236,288, respectively. The weighted-average fair value of
options granted during 1996 and 1995 was $8.18 and $5.75, respectively.
Information about stock options outstanding at December 31, 1996 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------- -----------------------------------
WTD. AVG. WEIGHTED WEIGHTED-
REMAINING AVERAGE RANGE OF AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE PRICES EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ------------- ----------- ---------
$10.38-$14.88 971,950 2.3 years $13.44 $10.38-$14.88 971,950 $13.44
15.25- 19.38 3,919,554 6.0 17.01 15.25- 19.38 2,821,535 16.86
20.25- 24.88 2,487,236 8.7 22.77 20.25- 24.88 229,762 20.78
25.13- 30.88 1,771,331 9.9 30.70 25.13- 30.88 -- --
--------- ---------
$10.38-$30.88 9,150,071 7.1 $20.85 $10.38-$30.88 4,023,247 $16.26
========= =========
90
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock-based compensation plans, which are described above.
Accordingly, no compensation cost has been recognized for its stock option
plan. Had compensation cost for the stock option plan been determined based on
the fair value at the grant dates for awards under this plan consistent with
the method prescribed by SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1996 1995
------------ ------------
Net income
As reported $115,822,000 $261,022,000
Pro forma 113,622,000 260,790,000
Primary earnings per share
As reported $.69 $1.72
Pro forma .68 1.72
Fully diluted earnings per
share
As reported .69 1.71
Pro forma .67 1.71
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995
------- -------
Dividend yield 3% 3%
Expected volatility 21-44 21-24
Risk-free interest rate 5.5-6.9 6.3-7.9
Expected life of option 7 years 7 years
During the initial phase-in period, the effects of applying SFAS 123 for
these pro forma disclosures are not likely to be representative of the effects
on pro forma disclosures for future years because options vest over several
years and additional awards are generally made each year.
Savings Plans
The Company has an Employee Savings Incentive Plan which grants to all
eligible employees the opportunity to invest up to 14% of their earnings in
certain investment alternatives. For investments by employees of up to 6% of
their earnings, the Company is obligated to and has contributed an amount
equal to one-half thereof for credit to the employees' accounts. Further, the
board of directors, at its discretion, may increase the Company's contribution
to match up to 100% of the Company's obligated contribution. In 1996, 1995 and
1994 discretionary awards were made. The Company contributed approximately
$7,742,000, $7,342,000, and $7,886,000 in 1996, 1995, and 1994, respectively,
including a discretionary addition of $1,811,000, $1,794,000, and $1,877,000
in 1996, 1995 and 1994, respectively.
91
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20: PREFERRED STOCK
The following is a summary of Preferred Stock (Convertible and
Nonconvertible):
SHARES ISSUED
AND OUTSTANDING CARRYING AMOUNT DIVIDENDS DECLARED
DECEMBER 31 DECEMBER 31 YEAR ENDED DECEMBER 31
----------------- ----------------- -----------------------
1996 1995 1996 1995 1996 1995 1994
(DOLLARS IN THOUSANDS) ------- --------- -------- -------- ------- ------- -------
8.30% Cumulative
Nonconvertible
(Liquidation
preference $250) 660,000 660,000 $165,000 $165,000 $13,695 $13,695 $13,695
8.75% Cumulative
Convertible
(Liquidation
preference $260.94)
(1) -- 517,500 -- 129,375 6,600 11,320 11,320
------- --------- -------- -------- ------- ------- -------
660,000 1,177,500 $165,000 $294,375 $20,295 $25,015 $25,015
======= ========= ======== ======== ======= ======= =======
- --------
(1) In September 1996, the Company redeemed all $129 million of its 8.75%
Cumulative Convertible Preferred Stock.
In September 1996, the Company called for the redemption of its $129
million, 8.75% Cumulative Convertible Preferred Stock. These shares were
issued in May 1991 (see discussion below). The holders had the option to
redeem their shares or convert them into shares of the Company's common stock.
In the third quarter, 2,561,642 depositary shares, or 512,328 shares, were
converted to 6,278,421 shares of common stock with a conversion price of
$20.40 per share while 19,058 depositary shares, or 3,812 shares, were
redeemed for cash totaling $994,589 or $260.94 per share. In the second
quarter of 1996, 6,800 depositary shares, or 1,360 shares, were converted to
16,666 shares of common stock totaling $340,000, or $20.40 per share.
In September 1992, the Company issued 6,600,000 depositary shares, each
representing a one-tenth interest in a share of 8.30% cumulative preferred
stock. The preferred stock has a liquidation value of $250 per share. The
preferred stock will not be redeemable prior to November 1, 1997. Each share
of preferred stock, $1.00 par value, will be redeemable at the option of the
Company on or after November 1, 1997 at $250 per share, plus accrued and
unpaid dividends. Dividends are cumulative from the date of issue and are
payable quarterly.
In May 1991, the Company issued 2,587,500 depositary shares, each
representing a one-fifth interest in a share of 8.75% cumulative convertible
preferred stock. The preferred stock had a liquidation value of $250 per
share. The preferred stock was redeemable prior to May 1, 1996. Each share of
preferred stock, $1.00 par value, will be redeemable for cash at the option of
the Company, in whole or in part, at prices declining to $250 per share on or
after May 1, 2001, from $260.94 per share on or after May 1, 1996, plus
accrued and unpaid dividends. Each share of preferred stock will be
convertible at the option of the holder into shares of common stock of the
Company at a conversion price of $20.40 per share of common stock, subject to
adjustment in certain events. Dividends are cumulative from the date of issue
and are payable quarterly.
Of the 10,000,000 shares authorized, shares of preferred stock issued and
outstanding at December 31, 1996 and December 31, 1995 were 660,000 and
1,177,500, respectively.
NOTE 21: STOCKHOLDERS' EQUITY
Authorized but unissued shares of common stock reserved for stock options
were 10,529,369 at December 31, 1996 and 11,562,521 at December 31, 1995. In
addition, 4,143,928 shares of common stock had been reserved for the Dividend
Reinvestment Plan.
Parent company equity in retained earnings of subsidiaries was
$1,230,221,000 at December 31, 1996 and $1,377,535,000 at December 31, 1995.
The payment of dividends to the parent company from its subsidiaries is
subject to certain regulatory requirements, restrictions imposed by lenders
and federal income tax consequences.
92
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Thrift institutions that met certain tests prescribed by the Internal Revenue
Code were allowed a bad debt deduction for federal income tax purposes. Because
of such deductions, only $628,000,000 of retained earnings of the Bank at
December 31, 1996 were available for use without adverse tax consequences. This
amount represents the earnings and profits of the Bank which, in accordance
with the Internal Revenue Code, are available for the payment of dividends. If
retained earnings in excess of earnings and profits are subsequently used by
the Bank for purposes other than to absorb loan losses, including distributions
in liquidation, the amounts used will be subject to federal income taxes at the
then prevailing corporate tax rates. It is not contemplated that retained
earnings will be used in a manner which will create federal income tax
liabilities even in the event the Bank was to convert its charter.
Rights Plan
On June 27, 1995, the Board of Directors of the Company declared a dividend
distribution of one Right (each a "Right") for each outstanding share of common
stock to stockholders of record at the close of business on July 14, 1996,
which was the expiration date of the rights issued under the rights plan
adopted by the Board of Directors of the Company on June 24, 1986. Each Right
will initially entitle the holder to purchase from the Company a unit of one
one-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, at a purchase price of $80.00 per unit, subject to
adjustment. The Rights will expire July 14, 2006. The Rights may not be
exercised and will not detach or trade separately from the common stock except
as described below.
The Rights will detach from the common stock and may be exercised only if a
person or group becomes the beneficial owner of 15% or more of the common stock
(a "Stock Acquisition"). If a Stock Acquisition occurs (except pursuant to an
offer for all outstanding shares of the common stock which the Company's
independent directors determine is fair to and otherwise in the best interest
of the Company and its stockholders), the Rights flip-in and each Right not
owned by such person will entitle the holder to purchase, at the Right's then
current exercise price, common stock (or, if the number of shares of authorized
common stock is insufficient to permit the full exercise of the Rights, cash,
property or other securities of the Company) having a formula value equal to
twice the Right's exercise price. In addition, if at any time following a Stock
Acquisition, (i) the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving corporation
(other than a merger which follows an offer at the same price and for the same
consideration as the offer approved by the Board of Directors of the Company as
described in the immediately preceding sentence), or (ii) 50% or more of the
Company's assets or earnings power is sold or transferred, the Rights flip-over
and each unexercised Right will entitle its holder to purchase, at the Right's
then current exercise price, common shares of the other person having a formula
value equal to twice the Right's exercise price. The Rights may be redeemed by
the Company at any time prior to ten days following the date of a Stock
Acquisition (which period may be extended by the Company's Board of Directors
at any time while the Rights are still redeemable). Upon the occurrence of a
flip-in or flip-over event, if the Rights are not redeemed, the Rights would
result in substantial dilution to any person who has acquired 15% or more of
the outstanding common stock or who attempts to merge or consolidate with the
Company. As a result, the Rights may deter potential attempts to acquire
control of the Company without the approval of the Company's board of
directors.
NOTE 22: CAPITAL REQUIREMENTS
GWB is subject to minimum capital requirements as set forth by the OTS. The
capital standards applicable to savings associations consist of three
components--a leverage ratio requirement, a tangible capital requirement, and a
risk-based capital requirement. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators, including asset growth restrictions and capital distribution
limitations. As of December 31, 1996 and 1995, the Company believes GWB meets
all minimum capital requirements to which it is subject.
93
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the minimum capital requirements, GWB is subject to federal
banking agency regulations which establish a system of progressive constraints
as capital levels decline at banks and savings associations. The "prompt
corrective action" rules classify banks and savings institutions into one of
five categories based upon capital adequacy, ranging from "well capitalized"
to "critically undercapitalized." The OTS has authority, after an opportunity
for a hearing, to downgrade an institution to a lower category, based on
supervisory concerns. Institutions which are "undercapitalized" (i.e., not
"well capitalized" or "adequately capitalized") are subject to restrictions on
asset growth, acquisitions, branching and new business, and are subject to
increasingly severe additional actions if they become "significantly
undercapitalized" or "critically undercapitalized."
As of December 31, 1996, the most recent notification from the OTS
categorized GWB as well capitalized under the prompt corrective action rules.
To be well capitalized, GWB must maintain minimum Tier 1 leverage, Tier 1
risk-based and total risk-based capital ratios as set forth in the table
below. There are no conditions or events since that notification that the
Company believes have changed GWB's category.
The following table summarizes GWB's actual capital and required capital as
of December 31, 1996 and 1995:
MINIMUM REQUIRED AMOUNT REQUIRED
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY CAPITALIZED
------------ ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
December 31, 1996
Leverage/tangible ratio $2,327 5.85% $1,192 3.00% $1,987 5.00%
Tier 1 risk-based ratio 2,322 9.77 950 4.00 1,426 6.00
Total risk-based ratio 2,669 11.23 1,901 8.00 2,377 10.00
December 31, 1995
Leverage/tangible ratio 2,366 5.66 1,254 3.00 2,090 5.00
Tier 1 risk-based ratio 2,361 9.40 1,004 4.00 1,506 6.00
Total risk-based ratio 2,966 11.81 2,008 8.00 2,510 10.00
94
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles GWB's capital in accordance with generally
accepted accounting principles ("GAAP") to GWB's tangible, core and risk-based
capital as of December 31, 1996 and 1995:
DECEMBER 31
----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Tangible capital
Capital in accordance with GAAP $2,609,015 $2,717,788
Less:
Goodwill (182,758) (214,367)
Investments in and advances to non-
permissible subsidiaries (22,524) (29,810)
Unrealized net gain on available-for sale
investment securities carried at fair value (76,497) (107,640)
---------- ----------
Total tangible capital 2,327,236 2,365,971
Adjustments for core capital -- --
---------- ----------
Total core capital 2,327,236 2,365,971
Less:
Fully capitalized items (limited recourse
liability on loans sold with recourse) (4,772) (5,357)
---------- ----------
Total Tier 1 risk-based capital 2,322,464 2,360,614
Qualifying subordinated debt 157,718 373,499
Allowance for loan and lease losses 193,897 256,851
Less assets required to be deducted:
Real estate held for investment (5,115) (22,356)
Certain loans secured by land (249) (2,784)
---------- ----------
Total risk-based capital $2,668,715 $2,965,824
========== ==========
NOTE 23: CONTINGENCIES
In the normal course of its business, the Company is named a defendant in
various legal proceedings and claims. In the opinion of management, after
consultation with outside legal counsel representing the Company in these
lawsuits, their outcomes will not have a material effect on the Company's
financial position, liquidity or results of operations. See Note 28.
The operations of the Company are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the
federal government, and by the regulatory policies of financial institution
regulatory authorities. Deposit flows and cost of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending and other investment activities are affected by the demand for
mortgage financing and consumer and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and
other factors affecting the supply of housing and the availability of funds.
95
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24: PARENT COMPANY FINANCIAL INFORMATION
Effective December 31, 1996, Blazer Financial Corporation ("BFC"), became a
wholly-owned indirect subsidiary of the Company. This realignment was in the
form of a dividend from GWB to GWFC in the amount of BFC's book value of
$34,830,000 and the subsequent sale of BFC to Aristar.
Effective March 31, 1994, Bryant Financial Corporation ("Bryant"), a
property development subsidiary, became a wholly-owned direct subsidiary of
the Company. This realignment was in the form of a dividend from GWB to GWFC
in the amount of Bryant's book value of $38,442,000.
The following summarizes dividends received by GWFC from GWB:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- ------- --------
(DOLLARS IN THOUSANDS)
Cash dividends $151,320 $71,320 $101,322
Noncash dividends 34,830 -- 38,442
-------- ------- --------
$186,150 $71,320 $139,764
======== ======= ========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME
Dividends from Great Western Bank $ 186,150 $ 71,320 $139,764
Dividends from Aristar 116,800 22,500 25,000
Dividends from other nonbanking subsidiaries 6,700 5,000 4,500
Management fees and interest charged to sub-
sidiaries 7,986 6,814 6,959
Income from securities and investments 6,296 8,895 8,188
Other 1,219 1,136 1,848
--------- -------- --------
325,151 115,665 186,259
--------- -------- --------
EXPENSES
Interest expense on borrowings 67,983 59,125 56,567
Noninterest expense 31,491 18,036 21,703
Federal and state taxes (credits) on income (37,484) (26,008) (24,294)
--------- -------- --------
61,990 51,153 53,976
--------- -------- --------
Earnings before undistributed net earnings of
subsidiaries 263,161 64,512 132,283
Undistributed (overdistributed) net earnings
of subsidiaries (147,339) 196,510 118,951
--------- -------- --------
$ 115,822 $261,022 $251,234
========= ======== ========
96
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The parent company joins with its subsidiaries in filing a consolidated
federal income tax return. In the return, the parent company's taxable income
or loss is consolidated with the taxable income or loss of its subsidiaries.
The parent company's share of income taxes is generally based on the amount of
tax which would be payable if separate returns were filed, adjusted for some
deficits or benefits arising from consolidation. Therefore, the parent
company's equity in net earnings of subsidiaries is excluded from its
computation of the provision for taxes on income for financial statement
purposes. Taxes receivable consist primarily of amounts due from subsidiaries
for taxes paid on their behalf.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31
---------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash $ 1,927 $ 831
Certificates of deposit and federal funds -- 82,000
Securities available-for-sale 47,482 57,913
Investment in subsidiaries at cost plus equity in un-
distributed earnings
Great Western Bank 2,608,989 2,717,788
Aristar 390,358 451,570
Other nonbanking subsidiaries 98,945 97,882
Company owned life insurance 179,685 163,354
Advances to subsidiaries 140,133 96,741
Taxes receivable 45,733 38,433
Other assets 127,201 104,223
---------- ----------
$3,640,453 $3,810,735
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 194,278 $ 162,467
Commercial paper 74,500 49,729
Fixed-rate notes 673,382 672,970
Subordinated notes 103,093 103,093
---------- ----------
1,045,253 988,259
Stockholders' equity-substantially restricted (see
Consolidated Statement of Financial Condition) 2,595,200 2,822,476
---------- ----------
$3,640,453 $3,810,735
========== ==========
Following is a summary of the parent company long-term debt by maturity:
DECEMBER 31, 1996
-----------------
(DOLLARS IN THOUSANDS)
1998 $249,806
2000 224,166
2001 and thereafter 302,503
--------
$776,475
========
97
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Operating Activities
Net earnings $ 115,822 $ 261,022 $ 251,234
Noncash adjustments to net earnings
Overdistributed (undistributed) net earnings
of subsidiaries 147,339 (196,510) (118,951)
Noncash dividends from subsidiaries (33,768) -- (38,380)
Income taxes (16,016) (8,303) 31,528
Other (46,653) (2,432) (40,044)
--------- --------- ---------
Net cash provided by operating activities 166,724 53,777 85,387
--------- --------- ---------
Financing Activities
Common stock repurchased (176,732) -- --
Common stock issued 24,452 60,195 29,842
Redemption of preferred stock (998) -- --
Payment of cash dividends on common stock (133,045) (124,673) (122,524)
Payment of cash dividends on preferred stock (20,295) (25,015) (25,015)
--------- --------- ---------
(306,618) (89,493) (117,697)
--------- --------- ---------
Proceeds from issuance of long-term borrowings -- 103,093 --
Repayments of long-term borrowings -- (28,250) --
Net change in short-term borrowings 24,771 36,298 13,431
--------- --------- ---------
24,771 111,141 13,431
--------- --------- ---------
Net cash (used in) provided by financing
activities (281,847) 21,648 (104,266)
--------- --------- ---------
Investing Activities
Proceeds from maturities 58,073 49,852 24,863
Purchases of securities available-for-sale (47,922) (19,532) (87,754)
Investment in subsidiaries 24,068 (139,847) (11,797)
--------- --------- ---------
Net cash provided by (used in) investing
activities 34,219 (109,527) (74,688)
--------- --------- ---------
Net (decrease) in cash and cash equivalents (80,904) (34,102) (93,567)
Cash and cash equivalents at beginning of year 82,831 116,933 210,500
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,927 $ 82,831 $ 116,933
========= ========= =========
Supplemental cash flow disclosure
Cash paid (received) for
Interest on borrowings $ 68,035 $ 59,195 $ 56,300
Income taxes (21,353) (17,937) (54,594)
Noncash financing activities
Conversion of preferred stock to common stock 128,377 -- --
98
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 25: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the Company's financial instruments as defined by
SFAS 107:
DECEMBER 31
--------------------------------------------------
1996 1995
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS
Cash $ 534,192 $ 534,192 $ 837,292 $ 837,292
Certificates of deposit,
repurchase agreements and
federal funds 300,100 300,100 257,125 257,125
Securities available for
sale 1,279,283 1,279,283 1,092,459 1,092,459
Mortgage-backed securities 7,788,551 7,688,846 9,803,441 9,858,623
Loans receivable
Real estate 28,471,678 28,680,595 27,296,174 27,304,438
Consumer Finance and other
Term 1,731,796 1,794,761 2,064,555 2,052,536
Nonterm 549,969 441,388 451,848 457,237
Originated mortgage
servicing rights 17,018 28,260 7,034 7,034
Excess/short servicing
rights 7,527 15,678 3,616 6,286
FINANCIAL LIABILITIES
Deposits
Term $17,236,632 $17,232,603 $17,983,752 $18,022,943
Nonterm 11,321,836 11,321,836 11,251,176 11,251,176
Short-term borrowings from
FHLB 2,011,733 2,011,733 740,080 740,080
Securities sold under
repurchase agreements 4,197,666 4,197,666 6,868,296 6,868,296
Short-term borrowings 1,101,506 1,101,506 1,316,413 1,316,413
Long-term borrowings 3,190,908 3,357,772 2,420,845 2,603,936
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust 100,000 99,520 100,000 101,520
DERIVATIVE FINANCIAL
INSTRUMENTS
Loan commitments
Fixed $ -- $ (267) $ -- $ (76)
Variable -- 8,000 -- 13,164
Forward sales contracts -- 83 -- 384
Standby letters of credit -- (42) -- (62)
Interest rate swaps 52 739 113 320
Cash flow swaps (498) 9,835 (796) 9,672
See the accompanying text for a discussion on items presented above.
The Company is a party to financial instruments with off-balance-sheet risk
and other derivative financial instruments in the normal course of business to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. All financial instruments are held or issued
for purposes other than trading. These financial instruments include
commitments to extend credit, at both fixed and variable rates, loans sold
with credit enhancements, standby letters of credit, interest-rate caps and
floors written, and interest-rate
99
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and cash flow swap agreements. These instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized
in the Consolidated Statement of Financial Condition. The contract or notional
amounts of these instruments reflect the extent of involvement the Company has
in particular classes of financial instruments. For interest-rate caps,
floors, swap transactions, loans sold with credit enhancements, purchased put
options and forward sales, the contract or notional amounts do not represent
exposure to risk of loss.
The Company extends credit and requires collateral for loans sold with
credit enhancements under the same lending policies as for other real estate
loans.
INTEREST RATE RISKS
The Company uses derivative financial instruments to manage its exposure to
interest rate changes related to its portfolio of loans and borrowings. The
Company's objective is to manage the impact of interest rate changes on
earnings.
The Company, from time to time, uses purchased put options to hedge its
exposure to increasing interest rates with respect to its fixed-rate loan
commitments. Put options grant the Company, for a premium payment, the right
to sell to the writer a specified financial instrument at a predetermined
price for a predetermined period of time. The cost is recorded in other assets
and amortized to gains and losses on loan sales over the life of the hedged
assets. Realized gains from option contracts are recorded at the time the
hedged instrument expires.
The Company's credit risk exposure in the event of nonperformance by a
counterparty is the loss of potential gains on the exercise of the option. The
Company's exposure to risk of accounting loss is limited to the premium paid
for the option.
The Company uses forward sales contracts to hedge its exposure to increasing
interest rates with respect to its fixed-rate commitments. The notional amount
of forward sales contract was $8,003,000 and $60,700,000 at December 31, 1996
and 1995, respectively. Forward sales contracts are used to sell specific
financial instruments (fixed-rate loans) at a future date for a specified
price. Gains or losses are recognized at the time the contracts mature and are
recorded as a component of gain on mortgages.
The Company uses interest-rate swaps to manage interest-rate risk and reduce
interest expense by improving the execution of borrowings to which the
interest-rate swap is tied. At December 31, 1996 and 1995, the Company had
outstanding $109,000,000 of interest-rate swaps related to FHLB borrowings in
which the Company paid a fixed rate and received a rate tied to three month
LIBOR. At December 31, 1996, the rate paid was 5.26% and the rate received was
5.52%. Interest receivable on these swaps is recorded in interest receivable
and interest payable is recorded in other liabilities. The income and expense
related to these interest-rate swaps was recorded as a decrease or increase to
interest expense on borrowings. The net benefit of interest-rate swap
agreements was $369,000 for the year ended December 31, 1996, compared to a
net benefit of $953,000 for the year ended December 31, 1995 and a net cost of
$775,000 for the year ended December 31, 1994.
The Company's current credit exposure on swaps is limited to the value of
interest-rate swaps that have become favorable to the Company. The Company
manages the potential credit exposure through careful evaluation of
counterparty credit standing.
The Company uses cash flow swap agreements to reduce its interest-rate
exposure with regard to its Investor CD, an insured account which is indexed
to the Standard and Poor's (S&P) 500 performance. The Company agreed to pay a
fixed or variable rate in exchange for the customer receiving a return tied to
the S&P 500. The notional amount of cash flow swaps was $119,481,000 and
$180,711,000 at December 31, 1996 and 1995,
100
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. The average interest rate paid by GWB was 4.85% at December 31,
1996 and 5.13% at December 31, 1995. The monthly payment is recorded in
interest expense on customer accounts and the amount received is passed to the
customer as the yield on the Investor CD. The exposure to accounting loss on
the cash flow swap agreements in the event of the failure of a counterparty to
perform according to the terms of the contract would approximate the amount of
interest to be paid to the Bank's customers on the Investor CD portfolio.
CREDIT COMMITMENTS
The Company enters into commitments to fund real estate loans to meet the
financing needs of its customers. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Fees received
in connection with loan commitments are deferred in other liabilities until
the loan is advanced and are then recognized over the term of the loan as an
adjustment of the yield. Fees on commitments that expire unused are recognized
in loan fees at expiration. Since a portion of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management's credit evaluation of the
counterparty. The value of the property as security for a mortgage loan is
determined by qualified real estate appraisers.
The Company had outstanding commitments to fund real estate loans of
$791,564,000 at December 31, 1996 which consisted of $102,497,000 fixed-rate
and $689,067,000 adjustable rate and $716,924,000 at December 31, 1995 which
consisted of $144,587,000 fixed-rate and $572,337,000 adjustable rate.
The Company has issued standby letters of credit from time to time to meet
the credit needs of its customers. The letters of credit outstanding are
generally performance guarantees supporting certain property development
projects and totaled $6,970,000 at December 31, 1996 and $10,410,000 at
December 31, 1995. The notional value of letters of credit does not
necessarily represent future cash requirements.
The Company's maximum potential exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
CONCENTRATIONS OF CREDIT RISK
The Company primarily originates real estate loans of which a substantial
portion of the portfolio is secured by real estate located in California and
Florida.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates and the methods and assumptions used to determine the
fair value of the Company's financial instruments follow:
SHORT-TERM INVESTMENTS AND DEBT SECURITIES
The carrying amount of short-term instruments is a reasonable estimate of
their fair value. The fair value of securities available-for-sale and
mortgage-backed securities is principally based on quoted market prices from
various sources. For securities which have no quoted market price and are
short-term in nature, the fair value is determined to be the book value at the
reporting date.
101
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LOANS RECEIVABLE
The fair value of loans is predominantly based on discounted future cash
flows. The discount rate is based upon a projected treasury yield curve
adjusted for various risk factors depending on the type of loan. The fair
value of the portfolio will fluctuate with changes in interest rates.
MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights, which includes excess/short
servicing fees and originated mortgage servicing rights, is determined by
recalculation of the discounted cash flows at market rates.
DEPOSITS
Term deposits are stratified by remaining maturity, and fair value is
calculated based on discounted future cash flows. The discount rate used was
based upon a projected treasury yield curve. Fair value includes the effects
of compounding where applicable.
The fair value of nonterm deposits has been determined to be the amount
payable on demand at the reporting date. Nonterm deposits include all deposits
without defined maturities, such as checking, money market savings and regular
savings.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM BORROWINGS
Because of the short-term nature of these borrowings, fair value
approximates book value.
LONG-TERM BORROWINGS
Long-term borrowings are stratified by remaining maturity, and fair value is
calculated based on discounted future cash flows. The discount rate used was
based upon a projected treasury yield curve. The maturity used in the present
value calculation of long-term, variable-rate borrowings is the date at which
the borrowing would next be repriced.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The fair value of forward sales contracts, interest rate swaps, cash flow
swaps, put options purchased as a hedge of fixed-rate commitments and
commitments to fund real estate loans is estimated using current market prices
adjusted for various risk factors and market volatility. The fair value of
letters of credit is based on the estimated cost to terminate or otherwise
settle the obligations with the counterparties at the reporting date. The fair
value of outstanding interest-rate swaps is based on expected remaining net
cash flows discounted at three-month LIBOR.
The carrying value of off-balance-sheet financial instruments represents
accruals or deferred income arising from those financial instruments.
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial operating data are included in "Stockholder
Data and Quarterly Information (Unaudited)" on pages 107 through 109 of this
annual report on Form 10-K.
Fourth quarter 1996 earnings included a $22.5 million gain ($14 million, or
$.10 per share after tax) on the sale of the $356.6 million portfolio of
student loans, which is the greater portion of the student loan business, in
December. The fourth quarter also included a $68.3 million charge ($42.4
million, or $.31 per share after tax)
102
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for restructuring, a $50 million provision ($31 million, or $.22 per share
after tax) relating to the bulk sale of nonperforming assets in the real
estate loan portfolio, a $21.4 million charge ($13.3 million, or $.10 per
share after tax) for the early extinguishment of a portion of two issues of
the Bank's subordinated notes and an $8.4 million charge ($5.2 million, or
$.04 per share after tax) for litigation.
The third quarter 1996 loss included a $188.4 million charge ($115 million,
or $.83 per share after tax) to recapitalize the Savings Association Insurance
Fund ("SAIF").
Fourth quarter 1994 earnings included a $62.3 million pretax gain ($37.1
million, or $.28 per share after tax) on the sale of 31 Florida West Coast
retail banking branches sold in December. In addition, the Company wrote off
approximately $11.7 million ($7.5 million, or $.06 per share, after tax) of
intangibles related to interstate banking access rights.
NOTE 27: BUSINESS SEGMENTS
Information on the Company's business segments follows:
REAL
CONSUMER ESTATE RETAIL
(DOLLARS IN FINANCE SERVICES BANKING TREASURY CONSOLIDATED
THOUSANDS) ---------- -------- ---------- ----------- ------------
1996
Revenue(1) $ 285,900 $169,300 $ 909,500 $ 345,100 $ 1,709,800
Earnings before taxes 98,700 11,200 176,300 (99,600) 186,600
Average assets 2,419,100 137,300 1,308,900 39,809,700 43,675,000
Depreciation and
amortization 9,400 30,000 83,400 2,300 125,100
Capital expenditures 3,000 17,800 29,600 11,300 61,700
1995
Revenue(1) 287,200 114,800 946,900 280,800 1,629,700
Earnings before taxes 106,600 (20,300) 290,000 45,800 422,100
Average assets 2,365,100 150,800 1,533,200 39,928,900 43,978,000
Depreciation and
amortization 10,600 25,300 76,700 1,900 114,500
Capital expenditure 500 5,200 38,900 42,500 87,100
- --------
(1) Revenue is comprised of net interest income and total non-interest income.
The Treasury segment is being separately reported for 1996. For consistency,
the 1995 disclosure has been restated to conform with this presentation.
During 1995, the Company underwent a fundamental change in the way it manages
and measures its lines of business. The mortgage bank and retail bank segments
were separately reported for 1995. Segment data along these lines is not
available for 1994.
NOTE 28: SUBSEQUENT EVENTS
On January 27, 1997, Great Western Financial Trust II (the "subsidiary
trust"), a wholly-owned subsidiary of Great Western Financial Corporation,
issued $300 million of 8.206% Trust Originated Preferred Securities (the
"preferred securities"). In connection with the subsidiary trust's issuance of
the preferred securities, Great Western Financial Corporation issued to the
subsidiary trust $309 million principal amount of its 8.206% subordinated
deferrable interest notes, due 2027 (the "subordinated notes"). The sole
assets of the subsidiary trust are and will be the subordinated notes. Great
Western Financial Corporation's obligations under the subordinated notes and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of the subsidiary trust's obligations under the
preferred securities.
On February 3, 1997, the Company received preliminary approval in Federal
Court of a $17.2 million settlement reached with plaintiffs in connection with
the sale of uninsured investment products. Final approval of the settlement is
set for April 14, 1997.
103
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective February 25, 1997, GWFC's Board of Directors approved a Broad
Based Plan (the Plan) for eligible employees who are not covered by an
existing severance plan and are not offered a comparable position by an
acquiring company or whose employment is terminated within 12 months of a
change in control, as defined by the Plan. The minimum pay will equate to six
months with the maximum of 18 months obtainable under the Plan. As a result of
the adoption of this Plan, the Company will record an increase to the
restructuring liability in the first quarter of 1997 of approximately
$10,000,000.
On January 28, 1997, the Board of Directors authorized the repurchase of up
to 5 million shares of outstanding common stock, representing approximately
3.6% of the total number of outstanding shares at December 31, 1996. As of
February 28, 1997, there had been no repurchases under this program. On March
5, 1997 the Board of Directors voted to discontinue the repurchase program.
On March 5, 1997, the Company entered into an Agreement and Plan of Merger
with Washington Mutual, Inc. (Washington Mutual), and New American Capital,
Inc., an indirect wholly-owned subsidiary of Washington Mutual. Washington
Mutual is a regional financial services company headquartered in Seattle,
Washington. With consolidated assets of $44.6 billion at December 31, 1996,
this Washington corporation operates through its principal subsidiaries,
Washington Mutual Bank, American Savings Bank, F.A., and Washington Mutual
Bank fsb. Under the Agreement and Plan of Merger, the Company will merge with
and into New American Capital, Inc. in a tax-free exchange, pursuant to which,
among other things, each outstanding share of common stock of the Company will
be converted into .9 shares of common stock of Washington Mutual. Based upon
the closing price of Washington Mutual's common stock on March 5, 1997,
stockholders of the Company would receive shares of Washington Mutual common
stock with a value of $47.93 per share of common stock of the Company. This
transaction has been approved by the boards of directors of both companies. It
is anticipated that this transaction will be accounted for as a pooling of
interests. The Company expects the merger to be completed during the third
quarter of 1997, pending the receipt of regulatory approval from the OTS and
the approval of the stockholders of both companies. For additional information
on the proposed merger and other related activities, see Item 1. Business
"Merger Agreement with Washington Mutual, Inc.," "H. F. Ahmanson & Company's
Merger Proposal" and "Litigation Relating to the Ahmanson Merger Proposal" in
Part I of this Form 10-K.
104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Great Western Financial Corporation
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Great Western Financial Corporation and
its subsidiaries ("the Company") at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company adopted
accounting standards that changed its methods of accounting for mortgage
servicing rights and long lived assets in 1995.
Los Angeles, California
January 22, 1997, except as to Note 28,
which is as of March 7, 1997
105
MANAGEMENT'S COMMENTARY ON FINANCIAL STATEMENTS
Management is responsible for the integrity and objectivity of the financial
statements and other information in this report. The statements were prepared
in accordance with generally accepted accounting principles appropriate in the
circumstances. They meet the requirements of the Securities and Exchange
Commission. The financial statements reflect management's judgment and
estimates relating to events not concluded by year end.
The Company's code of conduct, communicated to all officers and employees,
requires adherence to high ethical standards in the conduct of the Company's
business.
Management is responsible for maintaining a system of internal control and
has established a system of internal accounting control designed to provide
reasonable assurance that transactions are recorded properly to permit
preparation of financial statements, that transactions are executed in
accordance with management's authorizations and that assets are safeguarded
from significant loss or unauthorized use.
Management supports an extensive program of internal audits to evaluate the
adequacy of internal controls as well as to monitor compliance with
management's directives and regulatory agencies' requirements. The audit
committee of the board of directors is composed of nine outside directors,
none of whom is an officer or employee of the Company. The audit committee
meets with the internal and external auditors to review the scope of audits,
findings and actions to be taken by management.
Carl F. Geuther
Vice Chairman and Chief Financial
Officer
January 22, 1997
106
QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
------------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER QUARTER QUARTER QUARTER
---------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Interest income $3,233,931 $801,547 $ 800,514 $806,942 $824,928
Interest expense 1,855,914 466,536 461,742 454,994 472,642
---------- -------- --------- -------- --------
Net interest income 1,378,017 335,011 338,772 351,948 352,286
Noninterest income 331,825 114,096 63,713 78,103 75,913
Provision for loan losses 208,971 85,900 41,671 39,300 42,100
Noninterest expense 1,314,249 357,675 429,089 260,180 267,305
---------- -------- --------- -------- --------
Earnings (loss) before taxes 186,622 5,532 (68,275) 130,571 118,794
Taxes (benefit) on income 70,800 400 (28,400) 51,300 47,500
---------- -------- --------- -------- --------
Net earnings (loss) $ 115,822 $ 5,132 $ (39,875) $ 79,271 $ 71,294
========== ======== ========= ======== ========
Per common share:
Primary earnings (loss) $ .69 $ .01 $ (.31) $ .52 $ .47
Fully diluted earnings (loss) .69 .01 (.31) .52 .47
Dividends .98 .25 .25 .25 .23
Stock price:
High $ 31 1/8 $26 3/4 $ 24 1/2 $ 26 1/8
Low 27 21 1/8 21 3/4 22 1/2
End of period 29 26 1/2 23 7/8 24 1/8
Per preferred depositary share:
Dividends
Cumulative convertible $ 2.552 $ -- $ .36450 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $62 1/4 $ 61 3/8 $ 65 1/4
Low 56 3/8 56 1/4 58
Cumulative
High $ 26 $25 57/64 $ 26 $ 26 1/8
Low 25 3/8 25 1/4 25 1/8 25 3/8
Exchange Listings: New York Stock Exchange, Pacific Stock Exchange and
London Stock Exchange. Approximate number of common stockholders of record at
December 31, 1996: 9,724.
Under regulations, retained earnings are subject to substantial restrictions
for the payment of dividends. See Note 21 in Item 8, "Financial Statements and
Supplementary Data."
107
QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
1995
-----------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER QUARTER QUARTER QUARTER
---------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Interest income $3,238,711 $834,887 $ 839,097 $807,661 $757,066
Interest expense 1,936,582 484,046 505,498 497,064 449,974
---------- -------- --------- -------- --------
Net interest income 1,302,129 350,841 333,599 310,597 307,092
Noninterest income 327,668 106,471 76,159 74,857 70,181
Provision for loan losses 187,700 50,300 46,600 43,200 47,600
Noninterest expense 1,019,975 253,445 249,823 259,018 257,689
---------- -------- --------- -------- --------
Earnings (loss) before taxes 422,122 153,567 113,335 83,236 71,984
Taxes (benefit) on income 161,100 55,000 44,800 32,800 28,500
---------- -------- --------- -------- --------
Net earnings (loss) $ 261,022 $ 98,567 $ 68,535 $ 50,436 $ 43,484
========== ======== ========= ======== ========
Per common share:
Primary earnings (loss) $ 1.72 $ .67 $ .45 $ .32 $ .28
Fully diluted earnings (loss) 1.71 .66 .45 .32 .28
Dividends .92 .23 .23 .23 .23
Stock price:
High $ 27 1/8 $23 3/4 $ 22 1/2 $ 18 7/8
Low 22 5/8 20 1/4 18 7/8 16
End of period 25 3/8 23 3/4 20 5/8 18 5/8
Per preferred depositary share:
Dividends
Cumulative convertible $ 4.375 $1.09375 $ 1.09375 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $ 67 7/8 $62 3/4 $ 60 3/8 $ 55 5/8
Low 58 1/4 57 1/2 55 1/2 50 3/8
Cumulative
High $ 26 1/8 $26 13/64 $ 25 7/8 $ 24 7/8
Low 25 3/8 25 1/4 24 3/8 22 3/4
108
QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
1994
----------------------------------------------
FOURTH THIRD SECOND FIRST
TOTAL QUARTER QUARTER QUARTER QUARTER
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Interest income $2,629,718 $704,611 $661,312 $633,803 $629,992
Interest expense 1,307,448 385,076 330,544 296,080 295,748
---------- -------- -------- -------- --------
Net interest income 1,322,270 319,535 330,768 337,723 334,244
Noninterest income 367,897 134,331 74,723 81,378 77,465
Provision for loan losses 207,200 52,800 49,700 52,900 51,800
Noninterest expense 1,076,433 265,192 264,361 271,146 275,734
---------- -------- -------- -------- --------
Earnings (loss) before taxes 406,534 135,874 91,430 95,055 84,175
Taxes (benefit) on income 155,300 47,200 34,200 39,200 34,700
---------- -------- -------- -------- --------
Net earnings (loss) $ 251,234 $ 88,674 $ 57,230 $ 55,855 $ 49,475
========== ======== ======== ======== ========
Per common share:
Primary earnings (loss) $ 1.69 $ .61 $ .38 $ .38 $ .32
Fully diluted earnings (loss) 1.69 .61 .38 .38 .32
Dividends .92 .23 .23 .23 .23
Stock price:
High $ 19 $ 20 7/8 $ 19 3/8 $ 20 1/2
Low 15 3/4 18 3/8 15 3/8 16 1/8
End of period 16 19 1/4 18 3/8 16 1/8
Per preferred depositary share:
Dividends
Cumulative convertible $ 4.375 $1.09375 $1.09375 $1.09375 $1.09375
Cumulative 2.075 .51875 .51875 .51875 .51875
Stock price
Cumulative convertible
High $ 56 5/8 $ 59 1/8 $ 58 1/4 $ 62 5/8
Low 50 1/8 55 1/4 53 3/4 55 3/4
Cumulative
High $ 24 3/8 $ 25 1/8 $ 25 $ 26 7/8
Low 22 1/8 24 23 24 1/8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
109
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See General Note to Part III.
ITEM 11. EXECUTIVE COMPENSATION
See General Note to Part III.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See General Note to Part III.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See General Note to Part III.
GENERAL NOTE TO PART III
Pursuant to General Instruction G to Form 10-K, the other information
required by Part III (Items 10, 11, 12 and 13) of Form 10-K not disclosed
above will be either (i) incorporated by reference to the Definitive Proxy
Statement for Great Western Financial Corporation's 1997 Annual Meeting of
Stockholders, filed with the Securities and Exchange Commission not later than
April 30, 1997, or (ii) included in an amendment to this report filed with the
Commission on Form 10-K/A.
110
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
See index to Item 8, "Financial Statements and Supplementary Data" on page
51.
2. Financial Statement Schedules
No financial statement schedules are required because they are not
applicable or the required information is shown in the financial statements or
notes thereto included in Item 8, "Financial Statements and Supplementary
Data".
3. Executive Compensation Plans and Arrangements indicated by asterisk in
next section.
4. Exhibits Required by Securities and Exchange Commission Regulations S-K
3.1 Restated Certificate of Incorporation of GWFC, as in effect on the date
of this report (filed as an exhibit to GWFC's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference).
3.2 Certificate of Designations of GWFC's 8.30% Cumulative Preferred Stock
(filed as an exhibit to GWFC's Current Report on Form 8-K dated September
9, 1992, event date September 2, 1992, and incorporated herein by
reference).
3.3 By-laws of GWFC as in effect on the date of this report (filed as an
exhibit to GWFC's Current Report on Form 8-K dated June 30, 1995, event
date June 27, 1995, and incorporated herein by reference).
3.4 Amendments to By-laws of GWFC (filed as an exhibit to GWFC's current
report on Form 8-K dated February 20, 1997, event date February 20,
1997, and incorporated herein by reference).
4.1 GWFC agrees to furnish the Securities and Exchange Commission, upon
request, with copies of all instruments defining rights of holders of
long-term debt of GWFC and its consolidated subsidiaries.
4.2 Indenture dated as of May 31, 1988, as amended and supplemented as of
June 14, 1988 and October 31, 1988, between GWB and Morgan Guaranty
Trust Company of New York (filed as an exhibit to GWFC's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989 and
incorporated herein by reference).
10.1 Rights Agreement dated as of June 27, 1995, between GWFC and First
Chicago Trust Company of New York (filed as an exhibit to the
Company's Current Report on Form 8-K dated June 30, 1995, event date
June 27, 1995, and incorporated herein by reference).
10.2 Consulting Agreement between GWFC and James F. Montgomery dated April
25, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, and incorporated herein by
reference).
10.3* Employment Agreement between GWFC and John F. Maher dated December 19,
1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and incorporated herein by
reference).
10.4* Amendment to Employment Agreement between GWFC and John F. Maher
effective December 10, 1996.
10.5* Employment Agreement between GWFC and Carl F. Geuther dated as of
March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-
K for the fiscal year ended December 31, 1989 and incorporated herein
by reference).
111
10.6* Amendment No. 1 to Employment Agreement between GWFC and Carl F.
Geuther effective December 10, 1996.
10.7* Employment Agreement between GWFC and Michael M. Pappas dated as of March
1, 1988 (filed as an exhibit to GFWC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and incorporated herein by
reference).
10.8* Amendment No. 1 to Employment Agreement between GWFC and Michael M.
Pappas effective December 10, 1996.
10.9* Employment Agreement between GWFC and A. William Schenck III dated as of
July 31, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1995, and incorporated herein by
reference).
10.10* Amendment No. 1 to Employment Agreement between GWFC and A. William
Schenck, III effective December 10, 1996.
10.11* Employment Agreement between GWFC and J. Lance Erikson dated as of March
1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989 and incorporated herein by
reference).
10.12* Amendment No. 1 to Employment Agreement between GWFC and J. Lance
Erikson effective December 10, 1996.
10.13* Employment Agreement between GWFC and Jaynie M. Studenmund dated as of
April 15, 1996 (filed as an exhibit to GWFC's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference).
10.14* Amendment No. 1 to Employment Agreement between GWFC and Jaynie M.
Studenmund effective December 10, 1996.
10.15* Employment Agreement between GWFC and Ray W. Sims dated as of January
6, 1997.
10.16* Supplemental Executive Retirement Plan as amended through July 25,
1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, and incorporated herein by
reference).
10.17* Amendment No. 1996-1 to GWFC Supplemental Executive Retirement Plan
1988 Restatement (filed as an exhibit to GWFC's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996)
10.18* Amendment No. 1996-2 to GWFC Supplemental Executive Retirement Plan
effective December 10, 1996.
10.19* 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as
amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, and incorporated herein by
reference).
10.20* Addendum to the 1979 Incentive and Nonstatutory Stock Option and
Appreciation Plan (filed as an exhibit to GWFC's Annual Report on Form
10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
10.21* Form of Non-Qualified Stock Option Agreement relating to the 1979
Incentive and Nonstatutory Stock Option and Appreciation Plan utilized
from April 20, 1982 to April 22, 1986 (filed as an exhibit to Post-
Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233
on Form S-8, and incorporated herein by reference).
112
10.22* Form of Non-Qualified Stock Option Agreement relating to the 1979
Incentive and Nonstatutory Stock Option and Appreciation Plan utilized
from April 22, 1986 through 1988 (filed as an exhibit to Post-Effective
Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-
8, and incorporated herein by reference).
10.23* The 1988 Stock Option and Incentive Plan (as amended effective July 26,
1994), (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994 and incorporated herein by
reference).
10.24* Amendment No. 1996-1 to the 1988 Stock Option and Incentive Plan,
effective December 10, 1996.
10.25* Form of Director Stock Option Agreement (filed as an exhibit to GWFC's
Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's
1988 Stock Option and Incentive Plan and incorporated herein by
reference).
10.26* Form of Director Stock Option Agreement effective January 3, 1994,
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.27* Form of Employee Non-Qualified Stock Option Agreement (filed as an
exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8
pertaining to GWFC's 1988 Stock Option and Incentive Plan and
incorporated herein by reference).
10.28* Revised Form of Non-Qualified Stock Option Agreement effective January
28, 1992 (filed as an exhibit to Post-Effective Amendment No. 3 to
GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to
GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by
reference).
10.29* Revised Form of Non-Qualified Stock Option Agreement effective January
25, 1994, (filed as an exhibit to GWFC's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.30* Form of Non-Qualified Stock Option Agreement (Early Vesting
Provisions), (filed as an exhibit to GWFC's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.31* Revised Form of Non-Qualified Stock Option Agreement effective
December 12, 1994, (filed as an exhibit to GWFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference).
10.32* Form of Great Western Financial Corporation Employee Nonqualified
Stock Option Agreement, effective December 10, 1996.
10.33* Amendment No. 1996-1 to Form of Nonqualified Stock Option Agreement,
effective December 10, 1996.
10.34* Form of Great Western Financial Corporation Senior Officer's Non-
Qualified Stock Option Agreement effective January 23, 1996, (filed as
an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference).
10.35* Form of Great Western Financial Corporation Senior Officer's
Nonqualified Stock Option Agreement, effective December 10, 1996.
10.36* Special Non-Qualified Stock Option Agreement dated as of April 25,
1995 and amendments to Non-Qualified Stock Option Agreements dated
February 26, 1991, January 25, 1994, and December 12, 1994 with James F.
Montgomery (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and incorporated herein by
reference).
113
10.37* Form of Restricted Stock Award Agreement and General Provisions
Applicable to Restricted Stock Awards Granted Under the 1988 Stock
Option and Incentive Plan (filed as an exhibit to Post-Effective
Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-
8, and incorporated herein by reference).
10.38* General Provisions applicable to Performance Restricted Stock Awards
granted under the Great Western Financial Corporation 1988 Stock Option
and Incentive Plan, as amended (March 1994) (filed as an exhibit to
GWFC's quarterly report on Form 10-Q for the quarter ended March 31,
1994 and incorporated herein by reference).
10.39* General Provisions applicable to Performance Restricted Stock Award
granted to James F. Montgomery, as amended effective December 28, 1995
(filed as an exhibit to GWFC's quarterly report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by reference).
10.40 Amendment No. 1996-1 to General Provisions Applicable to Performance
Restricted Stock Awards Granted Under 1988 Stock Option and Incentive
Plan, effective December 10, 1996.
10.41* GWFC Deferred Compensation Plan (1992 Restatement) (filed as an exhibit
to GWFC's Annual Report on Form 10-K for the fiscal year ended December
31, 1991, and incorporated herein by reference).
10.42* Amendment No. 2 to GWFC Deferred Compensation Plan 1992 Restatement
(filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
10.43* Amendment No. 1996-2 to GWFC Deferred Compensation Plan, dated
December 10, 1996.
10.44* GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement)
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, and incorporated herein by
reference).
10.45* Amendment No. 2 to Senior Officer's Deferred Compensation Plan 1992
Restatement (filed as an exhibit to GWFC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.46* Amendment No. 1996-2 to Senior Officer's Deferred Compensation Plan,
dated December 10, 1996.
10.47* GWFC Directors' Deferred Compensation Plan (1992 Restatement) (filed
as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, and incorporated herein by reference).
10.48* Amendment to GWFC Directors', Senior Officers' and basic Deferred
Compensation Plans (1992 Restatement) (filed as an exhibit to GWFC's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994, and incorporated herein by reference).
10.49* Amendment No. 2 to Directors' Deferred Compensation Plan 1992
Restatement. (filed as an exhibit to GWFC's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.50* Amendment No. 1996-2 to Directors' Deferred Compensation Plan, dated
December 10, 1996.
10.51* GWFC Umbrella Trust for Senior Officers (filed as an exhibit to
GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1989, and incorporated herein by reference).
10.52* Amendment to GWFC Umbrella Trust for Senior Officers effective October
25, 1994 (filed as an exhibit to GWFC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, and incorporated herein by
reference).
114
10.53* Amendment No. 1996-1 to Umbrella Trust for Senior Officers, effective
December 10, 1996.
10.54* GWFC Umbrella Trust for Directors (filed as an exhibit to GWFC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1989,
and incorporated herein by reference).
10.55 Amendment No. 1996-1 to Umbrella Trust for Directors, dated December
10, 1996.
10.56 Omnibus Amendment 1995-1 to the Supplemental Executive Retirement
Plan, Deferred Compensation Plans, Retirement Restoration Plan, and
Umbrella Trusts replacing the Finance Committee of the Board of
Directors with the Compensation Committee of the Board of Directors
as administrator of the plans (filed as an exhibit to GWFC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.57* Restated Retirement Plan for Directors (filed as an exhibit to GWFC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993,
and incorporated herein by reference).
10.58* Summary of certain additional executive benefits (filed as an exhibit
to GWFC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and incorporated herein by reference).
10.59* Employee Home Loan Program (filed as an exhibit to GWFC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993, and
incorporated herein by reference).
10.60* Amendment No. 1996-1 to Employee Home Loan Program, effective
December 10, 1996.
10.61* GWFC Annual Incentive Compensation Plan for Executive Officers,
(filed as an exhibit to GWFC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
10.62* Amendment no. 1996-1 to Annual Incentive Compensation Plan for
Executive Officers, effective December 10, 1996.
10.63* GWFC Retirement Restoration Plan effective January 1, 1994, (filed as
an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
10.64* Amendment 1996-1 to GWFC Retirement Restoration Plan (filed as an
exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
10.65* Amendment No. 1996-2 to Retirement Restoration Plan effective
December 10, 1996.
10.66 Special Severance Plan adopted December 10, 1996.
10.67 Broad Based Plan adopted February 24, 1997.
10.68 Omnibus Amendment 1997-1 amending the definition of change in control
in the Employment Agreements, amended and restated as of December 10,
1996 between GWFC and John Maher, J. Lance Erikson, Carl F. Geuther,
Michael M. Pappas, A. William Schenck III, and Jaynie M. Studenmund,
the Employment Agreement between GWFC and Ray W. Sims, effective
January 6, 1997, the GWFC 1988 Stock Option and Incentive Plan, as
amended December 10, 1996, the GWFC Annual Incentive Compensation
Plan for Executive Officers, as amended December 9, 1996, the GWFC
Senior Officers' Deferred Compensation Plan (1992 Restatement), as
amended December 10, 1996, the GWFC Directors' Deferred Compensation
Plan (1992 Restatement), as amended December 10, 1996, the GWFC
Supplemental Executive Retirement Plan (1988 Restatement), as amended
December 10, 1996, the Great Western Retirement Restoration Plan, as
amended December 10, 1996, the GWFC Umbrella Trust for Senior
Officers, as amended December 10, 1996 and Umbrella Trust for
Directors, as amended December 10, 1996, the Employee Home Loan
Program (revised and restated as of April 27, 1993), as amended
December 10, 1996, the GWFC Special Severance Plan, effective
December 10, 1996, approved and adopted by the Board of Directors on
February 20, 1997.
115
10.69 Agreement and Plan of Merger By and Among Washington Mutual, Inc.,
New American Capital, Inc., and Great Western Financial Corporation,
dated as of March 5, 1997.
11.1 Statement re Computation of Per Share Earnings.
12.1 Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries.
23.1 Consent of Price Waterhouse LLP included on page 119 of this Form 10-
K.
24.1 Power of Attorney included on page 117 of this Form 10-K.
27.1 Financial Data Schedule.
Exhibits will be supplied to any such stockholder at a charge equal to the
Company's cost of copying, postage and handling. Written requests should be
directed to:
CORPORATE SECRETARY
GREAT WESTERN FINANCIAL CORPORATION
9200 OAKDALE AVENUE
CHATSWORTH, CALIFORNIA 91311-6519
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 20, 1997 was filed with the
SEC reporting the adoption of an amendment to Great Western Financial
Corporation's Bylaws.
A Current Report on Form 8-K dated January 27, 1997, included exhibits
relating to the 8.206% Capital Securities, Series A, of the Great Western
Financial Trust II.
A Current Report on Form 8-K dated January 22, 1997, reporting the
Company's earnings for the fourth quarter of 1996 and annual earnings for
1996.
A Current Report on Form 8-K dated December 2, 1996 reported that the
Company would take a pre-tax restructuring charge of between $65 and $70
million in the fourth quarter of 1996.
116
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.
Great Western Financial Corporation
March 5, 1997 /s/ John F. Maher
________________ By: _________________________________
DATE JOHN F. MAHER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes John F. Maher,
Carl F. Geuther and Barry R. Barkley, and each of them or any of them, as
attorney-in-fact to sign on his or her behalf as an individual and in every
capacity stated below, and to file all amendments to the registrant's Form 10-
K, and the registrant hereby confers like authority to sign and file in its
behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 5, 1997, by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ John F. Maher
- -------------------------------------
JOHN F. MAHER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ Carl F. Geuther
- -------------------------------------
CARL F. GEUTHER, VICE CHAIRMAN AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
/s/ Barry R. Barkley
- -------------------------------------
BARRY R. BARKLEY, SENIOR VICE
PRESIDENT AND
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
/s/ James F. Montgomery
- -------------------------------------
JAMES F. MONTGOMERY, DIRECTOR AND
CHAIRMAN OF THE BOARD
/s/ Dr. David Alexander /s/ Enrique Hernandez, Jr
- ------------------------------------- -------------------------------------
DR. DAVID ALEXANDER, DIRECTOR ENRIQUE HERNANDEZ, JR., DIRECTOR
/s/ Charles D. Miller
- ------------------------------------- -------------------------------------
H. FREDERICK CHRISTIE, DIRECTOR CHARLES D. MILLER, DIRECTOR
/s/ Stephen E. Frank /s/ Dr. Alberta E. Siegel
- ------------------------------------- -------------------------------------
STEPHEN E. FRANK, DIRECTOR DR. ALBERTA E. SIEGEL, DIRECTOR
/s/ John V. Giovenco /s/ Willis B. Wood, Jr.
- ------------------------------------- -------------------------------------
JOHN V. GIOVENCO, DIRECTOR WILLIS B. WOOD, JR., DIRECTOR
/s/ Firmin A. Gryp
- -------------------------------------
FIRMIN A. GRYP, DIRECTOR
117
INDEX OF ADDITIONAL FINANCIAL DATA
DECEMBER 31, 1995
PAGES
-----
Consent of Independent Accountants........................................ 119
118
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-19884,
33-63535, 33-60206 and 333-19711), on Form S-4 (Nos. 33-15135 and 33-17705)
and on Form S-8 (Nos. 2-67233, 2-90750, 33-6174, 33-21469 and 333-12655) of
Great Western Financial Corporation of our report dated January 22, 1997,
except as to Note 28, which is as of March 7, 1997, appearing on page 105 of
this Form 10-K.
/s/ Price Waterhouse LLP
Los Angeles, California
March 10, 1997
119