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.
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
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
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.
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
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.
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
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
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
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.
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.
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
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
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.
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.

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.

ITEM 3. LEGAL PROCEEDINGS
See Item 1, Business "Litigation Relating to the Ahmanson Merger Proposal".
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

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
(b) Approximate number of common security holders--page 107
(c) Common stock dividend history and restrictions--pages 107, 108 and
(d) Common stock dividend policy--pages 13, 92 and 93
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
ITEM 7.

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
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.
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.
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%.
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:
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.
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."
- -------- (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.
NONINTEREST INCOME
Income from noninterest sources for 1996, 1995 and 1994 were as follows:
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.
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.
NONINTEREST EXPENSE
Noninterest expenses were as follows:
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.
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:
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".
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.
BALANCE SHEET ANALYSIS
EARNING ASSETS
The composition of earning assets for the five year period 1992 through 1996 is as follows:
- -------- * 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.
The composition of mortgage-backed securities for the five year period 1992 through 1996 is as follows:
- -------- *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.
Loans
The composition of real estate, Consumer Finance and other loans for the five years 1992 through 1996 is as follows:
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
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.
The geographic distribution of the real estate loan portfolio and nonaccrual and restructured loans at December 31, 1996 follows:
A comparison of California real estate loans and nonaccrual real estate loans by region as of December 31, 1996 follows:
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:
- -------- *Less than one percent
The composition of Consumer Finance loans receivable at December 31, 1996 and 1995 was as follows:
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.
Nonperforming Assets
The following table summarizes nonaccrual and restructured loans and nonperforming real estate for the five year period 1992 to 1996:
- -------- * 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
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:
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.
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
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.
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:
A comparison of the California real estate portfolio and nonperforming real estate by region as of December 31, 1996 follows:
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.
INTEREST BEARING LIABILITIES
Deposits by product for the five year period 1992 through 1996 is summarized in the tables below:
Deposits
- -------- * 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:
- -------- * 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.
The following summarizes borrowings by date of maturity as of December 31, 1996:
- -------- * 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:
To accomplish its objectives, the Company stabilizes its balance sheet primarily by matching various characteristics of the assets purchased with the liabilities incurred. It also sells the low margin fixed rate loans
and ARMs it originates into the secondary market while retaining more profitable ARMs. When necessary, off-balance sheet instruments allow the Company to pursue marketing strategies consistent with customer needs while compensating for the risk these strategies create. The most frequently used instruments are various types of interest rate swaps, caps, floors, and futures.
To protect against rate fluctuations for items before they are put on the balance sheet, items such as commitments to fund fixed-rate loans originated for sale, the Company from time to time uses off balance sheet instruments including interest rate forwards, caps, floors, and future contracts as asset/liability management tools. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between asset yields and the rates on their funding sources.
To evaluate the Company's current interest-rate position, it is necessary to analyze the amount and proportionate share of each of its major earning assets, including each major type of short-term or long-term real estate loan, and the amount and proportionate share of each major category of short-term or long-term deposits and borrowings. The Company utilizes a variety of analytical tools including static gap, duration gap, risk point reports, net interest income simulation and market value of equity sensitivity analysis. The standard static gap report appears below.
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.
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.
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.
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:
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:
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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
See Notes to Consolidated Financial Statements
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
See Notes to Consolidated Financial Statements
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
See Notes to Consolidated Financial Statements
GREAT WESTERN FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
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.
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.
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.
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.
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.
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:
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.
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconciliation of restructuring reserve activity during 1996:
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:
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:
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.
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:
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
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:
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.
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage-backed securities available-for-sale consisted of the following:
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.
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:
The contractual maturities of mortgage-backed securities as of December 31, 1996 follow:
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:
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:
The contractual maturities of loans as of December 31, 1996 follow:
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.
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:
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.
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:
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.
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:
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.
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.
NOTE 7: MORTGAGE BANKING
The following summarizes the sale of loans and mortgage-backed securities by type:
The following table summarizes the average loans serviced for others and the related loan servicing spread:
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.
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:
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:
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:
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.
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gain on sales of loans and mortgage-backed securities were comprised of:
Mortgage banking servicing income consisted of:
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:
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.
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:
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:
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:
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: INTEREST RECEIVABLE
Following is a summary of interest receivable:
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:
Unamortized software was $33,496,000 and $29,615,000 at December 31, 1996 and 1995, respectively.
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:
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.
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:
- -------- (1)This includes wholesale term accounts of $28 at December 31, 1996 and $289 at December 31, 1995.
The following is a summary of interest expense on deposits:
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.
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:
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.
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-term borrowings are summarized as follows:
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:
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has the following senior and subordinated debt outstanding:
During 1996, Aristar issued the following senior debt:
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:
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.
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:
The following table reconciles the statutory income tax rate to the consolidated effective income tax rate:
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities (assets) are comprised of the following:
Taxes on income included the following:
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.
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:
Assumptions used in determining the net periodic pension cost were:
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.
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accumulated plan benefit information and the funded status of the plan follow:
The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 were:
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:
Pension expense for these plans totaled $4,333,000 in 1996, $4,231,000 in 1995 and $4,590,000 in 1994.
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.
The net postretirement medical and life insurance costs follow:
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
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.
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:
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:
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:
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:
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.
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):
- -------- (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.
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.
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:
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:
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.
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:
STATEMENT OF OPERATIONS
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
Following is a summary of the parent company long-term debt by maturity:
GREAT WESTERN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
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:
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
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,
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.
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)
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:
- -------- (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.
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.
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
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
QUARTERLY FINANCIAL DATA (UNAUDITED)
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."
QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See General Note to Part III.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
See General Note to Part III.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See General Note to Part III.
ITEM 13.

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.
PART IV
ITEM 14.

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).
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).
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).
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).
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.
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.
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
INDEX OF ADDITIONAL FINANCIAL DATA
DECEMBER 31, 1995
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