ITEM 1. BUSINESS
GENERAL DESCRIPTION
Great Western Financial Corporation ("GWFC" or "the Company"), with consolidated assets of approximately $38.3 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" or "the Bank") and Aristar, Inc. ("Aristar"). GWB is a federally chartered stock savings bank and conducts most of its retail banking through 440 offices located in California and Florida. Real estate lending operations are conducted directly by the Bank or by direct subsidiaries through 214 offices in 21 states with concentrations in California, Florida and Washington. Directly or through its subsidiaries, the Bank also engages in consumer finance, mortgage banking, and other related financial services. Aristar conducts consumer finance operations through 522 offices in 23 states, most of which operate principally under the names Blazer Financial Services or City Finance and provide direct installment loans and related credit insurance services and purchase retail installment contracts. For financial information concerning the Company's two principal lines of business, see Segment Data in "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. Dividends from Aristar are expected to be a greater source of revenue in future periods. Various statutory and regulatory restrictions and tax considerations, however, can limit, directly or indirectly, the amounts that may be paid by the Bank. For a discussion of dividend restrictions, see Regulation - Capital Requirements, Capital Distributions by GWB and Restrictions on Transactions with Affiliates.
The operations of savings institutions 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. Weakening real estate markets during the past three years have resulted in reduced loan originations of adjustable rate mortgages ("ARMs"). In addition there has been deterioration in collateral values supporting real estate loans which impacted the valuation of the Company's loans and real estate and caused increases in nonperforming assets in 1992 and 1991. In 1993, the Company's program to accelerate its disposition of distressed assets resulted in a significant decline in nonperforming assets.
ACQUISITIONS
Great Western Financial Corporation has grown in recent years through acquisitions. During 1993, the Company continued to acquire retail branches and deposits from the Resolution Trust Corporation ("RTC"). The transactions, which began in 1990, were primarily branch deposit acquisitions which complemented the California and Florida retail banking operations.
In December 1993, GWB purchased certain assets and assumed certain liabilities from the RTC of HomeFed Bank, F.A., San Diego, California. As a result of the transaction, GWB acquired 119 branches with retail deposits of $4.1 billion. The deposits were acquired for a premium of $151 million.
GWFC is frequently engaged in discussions with other financial institutions of various sizes in various locations throughout the United States and with governmental agencies regarding mergers or acquisitions. No assurance can be given that GWFC will complete any particular transaction.
Additional information on specific acquisitions is summarized in Note 2 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
INTEREST RATE MARGINS
GWFC's core operating results depend primarily on the margin between the income the Bank receives from interest earning assets and its cost of funds. The Bank now competes with commercial banks and other financial intermediaries for funds in a deregulated environment. For additional information see Lending and Customer Accounts below.
The composition of the interest rate margin is shown in "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The following table shows the components of the change in net interest income for the years ended December 31, 1993, 1992 and 1991 that are included in the Consolidated Statement of Operations in "Financial Statements and Supplementary Data".
For information about real estate loans and mortgage-backed securities ("mortgages") available for sale, mortgage sales and servicing income see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1, 4, 5 and 6 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
Federal savings institutions have consumer lending powers which permit the origination of unsecured as well as secured consumer loans for personal, family or household purposes, which together with investments in commercial paper and corporate debt securities, may not exceed 35 percent of the Bank's assets. The Bank makes unsecured consumer loans in the form of student educational loans, overdraft protection on checking accounts and other consumer loans. GWB also is actively involved in consumer finance through Great Western Financial Services, a division of the Bank. The Bank was well below the maximum allowable percentage. See discussion in Related Financial Services Activities following.
Federal savings institutions are authorized to invest up to 400 percent of their capital in loans secured by nonresidential real property. GWB's loans secured by nonresidential real property at December 31, 1993 represented approximately 71 percent of its capital. In addition, federal savings institutions may also make secured and unsecured loans for commercial, corporate, business or agricultural purposes in a total amount of not more than 10 percent of the institution's assets. The Bank does not engage in this type of lending.
LOAN IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") as of January 1, 1993. FAS 114 provides guidance on the measurement of impaired loans. GWFC measures impairment based primarily on the fair value of the loan's collateral.
The recorded investment in loans for which impairment has been recognized in accordance with FAS 114 and the reserve for estimated losses related to such loans 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.
NONPERFORMING ASSETS
There are certain risks and uncertainties in originating loans. These pertain to credit, appraisals and other underwriting factors occurring in the loan portfolio subsequent to origination. Market risk has become increasingly important in the recent recessionary environment. These risks may result in loans becoming nonperforming assets.
The increase in delinquencies and foreclosures of single-family properties has continued from 1991 into 1993. While delinquencies of single- family properties have declined during 1993, due in part to bulk asset sales, management expects increases in the earthquake affected areas in early 1994. Foreclosures continue to occur at historically high levels.
Information regarding nonperforming assets, valuation reserves and loss provisions is presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Notes 5 and 7 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
INVESTMENT ACTIVITIES
Income from securities and other short-term investments generally provides the largest source of interest income for GWFC after interest on mortgages and consumer loans. The Bank is required to maintain a specified minimum amount of liquid assets which may be invested in securities specified by regulations as qualifying liquidity. Liquidity in excess of legal requirements at December 31, 1993 was $429 million. Substantially all security investments are of investment grade.
Dividends on Federal Home Loan Bank ("FHLBank" or "FHLB") stock are included in income on securities in the Consolidated Statement of Operations (see Note 9 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data").
For information on the Company's securities portfolio, see Notes 1 and 3 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
CUSTOMER ACCOUNTS
Customer accounts have traditionally been an important source of the Bank's funds for use in lending and for other general business purposes. Inflows to customer accounts historically have been related to general economic conditions. Rates offered on new accounts are primarily based on yields on Treasury securities and rates offered by competing financial institutions.
For information on the Company's customer accounts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 11 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
BORROWINGS
GWFC issued debt totaling $375 million in 1993 to facilitate the transfer of Aristar to GWFC from GWB. GWB borrows funds from many sources, including the FHLBank of San Francisco. In addition, both GWB and Aristar have issued commercial paper, medium-term notes and have entered into various borrowing agreements. Securities sold under agreements to repurchase have been a source of short-term funds.
In February 1993, Standard and Poor's lowered its ratings on GWFC's senior debt to BBB+ and preferred depositary shares to BBB-, as a result of asset quality pressures from the continuing recession in California. Standard and Poor's also lowered GWB's ratings on senior debt to A-, subordinated debt to BBB+ and commercial paper to A-2. Although the debt ratings were downgraded by one level, the Company still enjoys the benefits of an investment grade rating.
For information on the Company's borrowings see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 12 and 13 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
RELATED FINANCIAL SERVICES ACTIVITIES
The principal non-depository business activities of GWFC are described below.
CONSUMER FINANCE GROUP 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. GWB also has industrial banks 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.
COMPETITION AND OTHER MATTERS
Competition for customer accounts comes principally from other savings institutions, commercial banks, money market funds, credit unions, corporations, governmental agencies and governmental debt securities, insurance companies, pension funds, and other investment media, 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 institutions, 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.
INFLATION
While inflation has declined significantly during the past few years, the Company recognizes the adverse effects that inflation could bring to its financial position and operations and consequently monitors its effects closely.
REGULATION
Holding Company Regulation
General The Company is a 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.
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 percent 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 are insured by the FDIC up to $100,000 and those institutions are regulated by the FDIC. GWB is a federally chartered institution 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 ("FDICIA"), however, insured state banks may not engage in activities not permissible for national banks unless the FDIC determines 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.
Qualified Thrift Lender FDICIA imposes revised requirements for qualification as a qualified thrift lender ("QTL"). The test requires that 65 percent of an association's "portfolio assets" (all assets except goodwill, intangibles, property used to conduct the thrift's business and certain liquid assets up to 20 percent 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, FHLBank stock, Federal Savings and Loan
Insurance Corporation ("FSLIC"), FDIC, and RTC obligations, Residential Funding Corporation obligations, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation stock, 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 percent of mortgages originated and sold within 90 days). At December 31, 1993, 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 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 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 owning such an association would be required to register as a bank holding company.
Deposit Insurance The FDIC maintains two separate 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.
Under FDICIA, the FDIC was required to establish a system of risk-based deposit insurance premiums for BIF and SAIF members by no later than January 1, 1994. The legislation requires the FDIC to establish maximum rates and assessments so as to achieve the target ratio (at least 1.25 percent of estimated insured deposits) for each fund within specified periods of time. In addition, FDICIA permits the FDIC to impose one or more emergency special assessments.
In September 1992, the FDIC adopted a transitional risk-related deposit insurance premium system which charges higher rates to those institutions which pose greater risks to the deposit insurance funds and lower rates to "well capitalized" institutions. The new system took effect on January 1, 1993 and contains premium increases that are intended to raise the reserves of the Bank Insurance Fund and the Savings Association Insurance Fund. Under the system a bank or thrift will pay within a range of .23 percent of domestic deposits to .31 percent of domestic deposits depending upon its risk classification. The current assessment rate for GWB is .26 percent of deposits for the first half of 1994. During 1993, the FDIC adopted a final rule to implement the permanent risk-based assessment system, effective January 1, 1994. The final rule uses the same assessment categories and rates as the transitional system.
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. FIRREA provides that, for a period of five years from August 9, 1989, SAIF-insured members, such as GWB, shall have no liability to the FDIC for assistance to or losses incurred as a result of a default by a BIF-insured subsidiary acquired by GWFC prior to August 9, 1989. A like exemption is provided the Company's BIF-insured subsidiaries for assistance to or losses incurred as a result of a default by GWB.
FIRREA generally imposes a five-year moratorium (from August 1989) on conversions from SAIF membership to BIF membership subject to certain exceptions. FDICIA, however, permits savings associations and banks to merge with each other with federal regulatory approval, so long as the resulting institution continues to pay proportionate assessments to each respective insurance fund until the moratorium expires. The legislation also permits a federal savings association to acquire or be acquired by any insured depository institution.
Capital Requirements 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. Until June 1994 a declining percentage (which was 75 percent until July 1992, 60 percent until July 1993, 40 percent until July 1994 and fully phased-in thereafter) of investments in and extensions of credit to subsidiaries which were engaged in activities not permissible for a national bank as of April 12, 1989 may be included in capital. However, on October 30, 1992, the OTS announced that it would allow savings institutions to apply to the OTS to receive an extension until July 1, 1994 on further deductions from regulatory capital for investments in subsidiaries. GWB filed an application with the OTS and received such an extension with respect to its property development subsidiaries until July 1, 1994, at which time the original phase-in schedule will be reinstituted until full phase-in as of July 1996. All or a portion of the assets and liabilities of each of a savings association's subsidiaries are generally consolidated with the capital and liabilities of the savings association for
capital purposes unless all of the savings association's investments in and extensions of credit to such subsidiary are deducted from capital. At December 31, 1993, GWB's investments in and extensions of credit to such subsidiaries aggregated $65 million, of which $32 million was included in capital at December 31, 1993. The Bank has filed notice with the OTS of its intent to dividend its property development subsidiary to GWFC.
The leverage ratio requirement requires a savings association to maintain "core capital" of not less than 3 percent of adjusted total assets. As mentioned below, it is expected that the OTS will adopt 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 percent and up to 5 percent depending upon their condition and the rating they have received from the applicable regulatory body. Under the current standard, "core capital" generally includes common equity, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, less certain intangible assets (including goodwill), plus qualifying supervisory goodwill and purchased mortgage servicing rights valued on a quarterly basis at not more than the lower of 90 percent of fair value, 90 percent of original cost or the current amortized book value. GWB's ratio at December 31, 1993 was 5.33 percent. GWB's fully phased-in ratio of "core capital" to adjusted total assets was 5.25 percent at December 31, 1993. Between January 1992 and January 1995, the amount of qualifying supervisory goodwill which may be included in core capital will be phased out. The Bank has no qualifying supervisory goodwill.
The tangible capital requirement requires a savings association to maintain "tangible capital" in an amount not less than 1.5 percent of adjusted total assets. "Tangible capital" means core capital less any intangible assets (including qualifying supervisory goodwill), plus purchased mortgage servicing rights, valued on a quarterly basis at not more than 90 percent of fair value. At December 31, 1993, GWB had a ratio of tangible capital to total adjusted assets of 5.33 percent. GWB's fully phased-in ratio of tangible capital to total adjusted assets was 5.25 percent at December 31, 1993.
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 percent of risk-weighted assets. A savings association's supplementary capital may be used to satisfy the risk-adjusted capital ratios only to the extent of that association's core capital. At December 31, 1993, GWB had a ratio of capital to risk-based assets of 11.88 percent. The fully phased-in ratio of capital to risk-based assets for GWB was 11.69 percent at December 31, 1993.
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. On August 31, 1993, the OTS amended its risk-based capital rules to incorporate interest-rate risk ("IRR") requirements. Effective January 1, 1994, a savings association is required to hold additional capital if it is projected to experience a 2 percent decline in "net portfolio value" in the event interest rates increase or decrease by two percentage points. Additional capital required is equal to one-half of the amount by which any decline in net portfolio value exceeds 2 percent of the savings association's total net portfolio value.
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 association's assets must be met with a commensurate increase in the 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 association. In addition, the OTS Director may issue a capital directive to such an association which may contain restrictions the OTS Director deems necessary or appropriate.
Pursuant to FDICIA, the federal banking agencies have adopted regulations which became effective on December 19, 1992, and which establish a system of progressive constraints as capital levels decline at banks and savings institutions. 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". 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. Pursuant to FDICIA, the OTS issued a final regulation effective December 19, 1992 under which a savings association is deemed to be "well capitalized" if it: (a) has a risk-based capital ratio of 10 percent or greater; (b) has a ratio of core capital to risk-adjusted assets of 6 percent or greater; (c) has a ratio of core capital to adjusted total assets of 5 percent or greater; and (d) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A savings association is deemed to be "adequately capitalized" if it is not "well capitalized" and: (a) has a risk-based capital ratio of 8 percent or greater;
(b) has a ratio of core capital to risk-adjusted assets of 4 percent or greater; and (c) has a ratio of core capital to adjusted total assets of 4 percent or greater (except that certain associations rated "composite 1" under the OTS's MACRO rating system may be adequately capitalized if their ratio of core capital to adjusted total assets is 3 percent or greater). GWB believes that it met the requirements to be "well capitalized" under the regulations in effect as of December 31, 1993.
FDICIA also 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. See Regulation - Capital Requirements.
Under FDICIA, a bank or savings institution 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 institution 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". The effect of this provision is to increase significantly the circumstances in which a conservator or receiver may be appointed for an institution. In addition, a bank or savings institution 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. An institution will be considered to be "critically undercapitalized" if the institution has a ratio of "tangible equity" to total assets that is equal to or less than 2 percent.
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 percent and up to 5 percent of total assets. Banks receiving the highest rating from the FDIC are permitted to maintain core capital of 3 percent of total assets, while less healthy banks are required to maintain core capital of 4 to 5 percent. A bank with core capital of less than 2 percent would be deemed to be in an unsafe and unsound condition. It is expected that the OTS will adopt a similar standard that will be applicable to savings associations.
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 percent 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 percent of risk-weighted assets. At December 31, 1993, the industrial banks exceeded the 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, 1993, the Bank had approximately $658 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 established 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 percent 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 percent 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 percent to 75 percent 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. 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 savings association to identify the communities it serves and the types of credit the association is prepared to extend within those communities. CRA also requires the OTS to assess the 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 assigns a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance". Based on the most recent examination conducted in 1993, the Bank received a rating of "outstanding". The OTS and other federal bank regulatory agencies recently proposed revisions to the rules governing CRA compliance. The proposed rules are intended to simplify CRA compliance evaluations by establishing performance-based criteria.
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 now apply to member banks. Such restrictions are also applicable to the industrial banks. In addition, a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. 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 an 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 percent of assets, provided investments in excess of 2 percent of assets serve certain community purposes. The service corporation investment limit (for institutions like GWB which meet net worth and certain other requirements) is exclusive of an amount not to exceed 50 percent of net worth which may be invested in "conforming" (i.e., otherwise authorized) loans to service corporations. At December 31, 1993, GWB's aggregate investment in service corporations (exclusive of conforming loans of $49 million) was approximately .2 percent of its assets.
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 institution 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 from engaging directly in such activity, even if it is an activity that is a 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 now apply to national banks. Thus, savings associations generally are not permitted to make loans to a single borrower in excess of 15 percent of the association's unimpaired capital and surplus. It is not expected that this limitation will have any significant effect upon GWB's activities as currently conducted.
Brokered Deposits A final 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.
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 percent 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) and borrowings payable on demand or in one year or less. This liquidity requirement may be changed from time to time by the OTS within the range of 4 percent to 10 percent. 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 percent of the average daily balance of its net withdrawable accounts plus such short-term debt during the preceding calendar month. At December 31, 1993, the liquidity ratio of GWB was 6.81 percent and its short-term liquidity ratio was 2.57 percent which was in compliance with these requirements.
Federal Home Loan Bank System GWB is a member of the FHLBank System, which consists of 12 regional Federal Home Loan Banks. It is required to acquire and hold shares of capital stock in the applicable FHLBank in an amount equal to the greater of 1 percent of the aggregate principal amount of its unpaid residential mortgages, one-twentieth of its outstanding advances and letters of credit from the FHLBanks or .3 percent 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.
FIRREA requires the FHLBanks to contribute a significant amount of their reserves and up to $300 million a year in annual earnings to fund the principal and a portion of the interest payable on bonds issued to fund the resolution of failed savings associations. In addition, the statute provides that each FHLBank must transfer a percentage of its annual net earnings to a specified affordable housing program. As a result of these requirements, it is anticipated that the FHLBanks will pay reduced dividends with respect to their stock and that GWB will receive reduced dividends on such stock in the foreseeable future. As of December 31, 1993, GWB held $307 million of FHLBank stock and received dividends in the amount of $12.2 million in 1993 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 savings 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, 1993, balances at GWB totaled $259 million. The effect of this reserve requirement is to decrease an institution's available investment funds. Effective April 2, 1992, the FRB cut the reserve requirement on transaction accounts to 10 percent from 12 percent. 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 issued a proposed rule on November 17, 1993 that prescribes certain "safety and soundness standards". The standards are intended to enable the OTS to address problems at savings associations before the problems cause significant deterioration in the financial condition of the association. The proposed regulation provides operational and managerial standards for internal controls and information systems, loan documentation, internal audit systems, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. The proposed regulation also requires a savings association to maintain a ratio of classified assets no greater than 100 percent of total capital and ineligible allowances. A minimum earnings standard is also included in the proposed regulation requiring earnings sufficient to absorb losses without impairing capital. Earnings are sufficient under the proposed regulation if the association meets applicable
capital requirements and would remain in capital compliance if its net income or loss over the last four quarters of earnings continued over the next four quarters of earnings. An association that fails to meet any of the standards must submit a compliance plan. Failure to submit an acceptable compliance plan or to implement the plan could result in an OTS order or other enforcement action against the association.
Real Estate Lending Standards The federal banking regulatory agencies, including the OTS, adopted final regulations, effective March 19, 1993, 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 percent); land development loans (75 percent); construction loans (80-85 percent); loans on owner-occupied 1-4 unit residential properties, including home equity loans (no specific required limit, but loans at or above 90 percent require private mortgage insurance or readily marketable collateral); and loans on other improved property (85 percent).
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 percent of total capital.
Classification of Assets Savings associations are required to classify their assets on a regular basis, to establish 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 "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 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 holds assets posing a risk to the association. A savings association must also establish liabilities for off- balance-sheet items, such as letters of credit, when loss becomes probable and estimable.
In August 1993, the OTS issued revised guidance for the classification of assets and a new policy on the classification of collateral-dependent loans (where proceeds from repayment can be expected to come only from the operation and sale of the collateral). With limited exceptions, effective September 30, 1993, for troubled collateral-dependent loans where it is probable that the lender will be unable to collect all amounts due, an 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 either the present value of expected future cash flows, the loans' observable market price or the fair value of the collateral.
On December 21, 1993, the federal banking agencies, including the OTS, 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 twelve 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 percent of the portfolio that is classified doubtful, (2) 15 percent 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 twelve 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.
TAXATION
Under the Internal Revenue Code, chartered savings institutions that meet certain definitional tests and conditions are allowed federal income tax deductions for additions to bad debt reserves. Such additions may be determined under the experience method or the percentage of taxable income method. In order to retain the special bad debt reserve treatment, savings associations must maintain 60 percent or more of their assets in certain qualifying assets, consisting of some of the same assets as in the QTL test, as well as other assets. GWB has met all tests for all applicable years.
If in some future year the Bank either fails the QTL test and converts to a bank charter or fails to meet the tax asset test, it would be ineligible to obtain a bad debt deduction under the reserve method and may be required to recapture its existing tax bad debt reserves.
In 1993, GWB paid dividends totaling $501 million to GWFC, which included the book value of Aristar of $369 million. Future dividends by GWB are subject to certain tax restrictions in addition to regulatory and other considerations. Retained earnings that have not been subject to federal income tax, because of the above bad debt deduction, are not available for dividends or any other distribution, including one made on dissolution or liquidation, without the payment of federal income taxes. Further, at December 31, 1993, GWB's limitations on capital distributions would have restricted the payment of dividends before untaxed retained earnings were reached.
Notes 1, 14, and 16 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data", present the accounting implications for income taxes.
EMPLOYEES
GWFC employed 17,029 persons at December 31, 1993. 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 45 percent of the 6.1 million square feet in which its headquarters, administrative and branch offices are located throughout several states, including California and Florida.
See Note 10 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data", for information on properties, leases and property operations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
GWFC and its subsidiaries are parties from time to time in litigation arising in the normal course of business.
In the opinion of the management of GWFC, after consultation with various law firms representing it and its subsidiaries in such matters, the outcome of currently pending actions in which it or any of its subsidiaries is a party will not have a material effect on its consolidated financial position or results of operations.
ITEM 4.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information appears in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data".
(a) Market and market prices of the common stock - pages 122, 123 and
(b) Approximate number of common security holders - pages 122, 123 and 124
(c) Common stock dividend history and restrictions - pages 122, 123 and 124
(d) Common stock dividend policy - pages 49, 103, 104 and 105
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following summarizes the contribution to net earnings from the principal business units:
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan". FAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment should be recorded through a valuation allowance.
As of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Investments in debt and equity securities for which the Company has the positive intent and ability to hold to maturity are recorded at amortized cost. All other investments are classified as available for sale and recorded at fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of stockholders' equity. The Company has no trading portfolio as defined by FAS 115.
The presentation of this information is included below and in the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data".
INTEREST EARNING ASSETS
Interest earning assets primarily comprise real estate loans and mortgage-backed securities, consumer finance loans and marketable securities. Average interest earning assets declined 1 percent in 1993 after decreases of 3 percent in 1992 and 1 percent in 1991.
ARMs on residential property continue to be the primary lending product. The demand for this product is a primary factor governing asset growth. As a result of the recession, the real estate lending market continued to decline for property sales throughout the past three years, but it was supported by heavier refinance activity during 1992 and 1993. The low interest-rate environment kept adjustable rate lending under extreme pressure. ARMs comprised 62 percent of real estate loans originated in 1993 compared with 54 percent in 1992 and 68 percent in 1991. Loans originated at fixed rates, which comprised the remainder of the volume, were sold to others to minimize portfolio interest-rate risk; however, this limited asset growth. Much of the fixed-rate lending resulted from the active refinance market. Refinance activity comprised 64 percent of real estate lending in 1993 compared with 65 percent in 1992 and 51 percent in 1991.
The mix of interest earning assets continued to reflect a rising concentration of single-family loans. The SFR portfolio represented 72 percent of total interest earning assets at year-end 1993 compared with 71 percent at year-end 1992 and 70 percent at year-end 1991. This trend is the result of Great Western's decision, in 1987, to discontinue commercial real estate lending except to finance the sale of foreclosed properties. The increase in the percentage of single-family loans should continue in 1994. The following table shows the shift in the composition of interest earning assets:
The following table summarizes the real estate loan portfolio as of December 31, 1993 by security type and year of origination:
The tables on pages 112, 117, and 118 in "Financial Statements and Supplementary Data" present additional data on the interest earning asset portfolio.
INTEREST BEARING LIABILITIES
Interest bearing liabilities comprise retail and wholesale customer accounts and borrowings.
Customer account growth totaled $623 million in 1993, or 2 percent of the beginning balance, compared with $338 million, or 1 percent, in 1992 and $921 million, or 3 percent, in 1991. The 1993, 1992 and 1991 increases included approximately $4.4 billion, $2.2 billion and $2.9 billion, respectively, in retail deposits from several acquisitions, primarily from the RTC. Since 1990, Great Western has concentrated on increasing transaction account balances while certificates of deposit declined and were not renewed in many instances because of lower interest rates. The following table shows the shift in interest bearing liabilities:
Transaction account growth is a principal objective of deposit activity. In 1993, transaction accounts declined $197 million after increases of $2.1 billion in 1992 and $1.9 billion in 1991. The low rates offered on money market accounts in 1993 have prompted customers to seek alternative investments with higher yields. Transaction accounts now comprise 43 percent of total customer deposits compared with 42 percent at year-end 1992 and 32 percent at year-end 1991. These balances include 21 percent, 23 percent and 18 percent, respectively, in money market accounts which were more popular with customers than certificates of deposit in 1993, 1992 and 1991.
Certificates of deposit have declined over the last three years due to the low interest rates offered on such accounts. A portion of the 1993 decrease in certificates of deposit was the withdrawal of $1.6 billion of deferred compensation accounts, which included $1.3 billion from the State of California. The Company chose to reduce the interest rate offered on these accounts due to other funding opportunities, which reduced the overall cost of funds, thereby increasing the net interest spread, net interest income and net income.
Wholesale accounts, which are able to be used as an alternative source of lendable funds, totaled $588 million at December 31, 1993 and have continued to run off during the past three years. The balance of wholesale accounts at year-end 1993 comprised 1.9 percent of total deposits. Wholesale accounts totaled $683 million at year-end 1992 and $1 billion at year-end 1991. Wholesale account activity will fluctuate depending upon the need for funding sources for asset growth.
Borrowings, other than customer accounts, totaled $3.5 billion at December 31, 1993 compared with $4.2 billion at December 31, 1992 and $5.6 billion at December 31, 1991. Borrowings have not been a significant factor in funding new lending during the past three years as a result of customer deposit acquisitions. At December 31, 1993, customer accounts comprised 90 percent of interest bearing liabilities, compared with 88 percent and 85 percent at year-ends 1992 and 1991, respectively.
The tables on pages 113, 114 and 115 in "Financial Statements and Supplementary Data" present a detailed composition of borrowings and customer accounts.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was $1.38 billion in 1993 compared with $1.42 billion in 1992 and $1.27 billion in 1991. For the year 1993, the average net interest margin was 3.79 percent compared with 3.89 percent for 1992 and 3.33 percent for 1991. Net interest income and net interest margin are the two primary measures of core earnings strength. The average net interest margin contracted in 1993 as market rates generally stabilized and the Company's margin was less affected by the ARM repricing lag.
Great Western offers two primary adjustable rate mortgage products: one is tied to the Federal Cost of Funds Index ("FCOFI"), and the other is tied to the 11th District Federal Home Loan Bank's ("FHLB") Cost of Funds Index ("COFI"). The FCOFI is tied to two components of the federal government's cost of funds - the monthly average interest rate on all marketable Treasury
bills and the monthly average interest rate on all marketable Treasury notes. Customer acceptance of either product depends upon the relationship of the index and initial offering rates. The interest differential over the appropriate index is approximately 20 to 25 basis points lower for FCOFI loans than COFI loans. The COFI ARM was the primary mortgage instrument in 1993 and the FCOFI ARM was the product of choice by the customer in 1992.
The cost of funds of GWB relative to COFI and FCOFI is shown as follows:
Both FCOFI and COFI ARMs lag changes in market rates by approximately two months. In a rising rate environment, the cost of short-term liabilities will increase ahead of the ARMs; whereas, in a declining rate environment, net interest income and net interest margins increase during the lag period. The repricing lag in the declining rate environment added approximately eight basis points in 1993, 24 basis points in 1992 and 23 basis points in 1991 to the effective net interest margin. With the ARM, there is little of the long-term interest-rate risk that is associated with fixed-rate lending.
The Company currently originates ARMs for its own portfolio and originates fixed-rate residential loans for sale in the secondary market. In 1991, Great Western commenced a short-term hedge contract program for the fixed-rate commitment period to protect against rate fluctuations on the commitments to fund fixed-rate loans. Hedge contracts are recorded at cost. Fixed-rate lending totaled $3.4 billion in 1993, $4.2 billion in 1992 and $2.5 billion in 1991. Sales of these mortgages totaled $3.1 billion in 1993, $4.1 billion in 1992 and $2.1 billion in 1991. Total mortgage sales in 1993
were $3.6 billion, which included $473 million of distressed asset bulk sales, compared with $4.2 billion in 1992 and $2.5 billion in 1991. Nearly all mortgage sales, excluding bulk sales, were loans originated for sale or held as available for sale. At December 31, 1993, the Company serviced for others $12.3 billion in mortgages with a loan servicing spread of 42 basis points compared with $13.1 billion at December 31, 1992 with a loan servicing spread of 34 basis points and $12.8 billion at December 31, 1991 with a loan servicing spread of 48 basis points.
Loans available for sale are valued at the lower of cost or market. As of December 31, 1993, $320 million of real estate loans, primarily fixed- rate loans, were designated as available for sale. Gains of $23.7 million in the real estate loan portfolio were recognized. Unrecognized gains on real estate loans available for sale totaled $8 million at year end. Mortgage-backed securities and other securities available for sale are carried at fair value. At December 31, 1993, $2.6 billion in mortgage-backed securities, primarily ARM securitized products, were designated as available for sale. Sales of mortgage-backed securities available for sale in 1993 resulted in realized gains of $1.1 million and no realized losses. Gains and losses are calculated on the specific identification method. Securities available for sale at the end of 1993 had a fair value of $871 million. Gains recognized during the year totaled $254,000.
Great Western monitors asset and liability maturities and reviews exposure to interest-rate risk, giving consideration to interest-rate trends and funding requirements. The following table shows that the portfolio of short-term assets exceeded liabilities maturing or subject to interest adjustment within one year by $3.1 billion at December 31, 1993. This compared with $5.1 billion and $2.9 billion at December 31, 1992 and 1991, respectively.
The following table shows the year-end interest-rate margins and the components used in the margin calculation, reflecting the trends during the past five years:
Because the effective yield is subject to varying interest rates during the year and also is affected by the loss of interest on nonaccrual loans, the following table on net interest income shows the average monthly balances, interest income and interest expense, and effective average rates by asset and liability component. This table also reflects the yield which results because of the benefit of interest earning assets exceeding interest bearing liabilities.
While delinquencies in the 30-to-89-day categories have declined during 1993, management expects increases in the earthquake affected areas in early 1994. Foreclosures continue to occur at historically high levels.
Loans delinquent over 30 days, together with restructured loans, have been included in the process to determine estimated losses. The effects of various loan characteristics such as geographic concentrations, loan purpose, negative amortization and LTV ratios are considered in this review process.
The following table shows the trend in single-family residential portfolio and delinquency (two or more payments delinquent) over the past three years:
The level of nonperforming assets declined 44 percent in 1993 after increases of 24 percent and 37 percent in 1992 and 1991, respectively. In the second half of 1993, the Company completed four bulk asset sales which totaled $659 million, in an effort to reduce nonperforming assets. The Company completed two sales totaling $330 million of single-family real estate loans and real estate and the sale of $115 million of single-family owned real estate. Nonperforming SFR loans have fallen to $522 million at December 31, 1993 compared with $782 million and $481 million at year-end 1992 and 1991, respectively. A sale of $214 million of income property loans, some of which were performing assets, was also completed in 1993.
The loss exposure on the SFR portfolio increased in 1993, due in part to the Company's accelerated disposition program. Net charge-offs in the SFR portfolio increased to $252 million, or .98 percent of the SFR portfolio, in 1993 from $53 million, or .21 percent, in 1992 and $32 million, or .13 percent, in 1991. At December 31, 1993, the Company's real estate loan portfolio included $3.5 billion in uninsured residential mortgage loans that were originated with terms on which the LTV exceeded 80 percent (but not in excess of 90 percent). This balance represents a decline from the level of $4.5 billion a year ago. For the year 1993, losses totaled $44.8 million, or .81 percent of this portfolio, compared with $10.1 million, or .15 percent, in 1992 and $4.4 million, or .06 percent, in 1991. Since November 1, 1990, the Company has purchased mortgage insurance on all new single- family residential mortgages originated with LTVs in excess of 80 percent.
Certain loans (where GWB works with borrowers encountering economic difficulty) meet the criteria of, and are classified as, troubled debt restructurings ("TDRs") because of modification to loan terms. In the second quarter of 1993, Federal Banking Regulators issued a joint release regarding credit availability, which allowed some nonperforming loans to be returned to performing status. As a result, TDRs which meet certain conditions of repayment and performance have not been included in nonperforming assets. At December 31, 1993, $81.6 million of TDRs were classified as performing assets.
As a result of the adoption of FAS 114, impaired loans for which foreclosure is probable have been reclassified from real estate available for sale or development to loans receivable on the Consolidated Statement of Financial Condition, and are included in delinquent loans or troubled debt restructurings, as appropriate. The recorded investment in loans for which impairment has been recognized in accordance with FAS 114 totaled $348 million at December 31, 1993. The reserves for estimated losses related to such loans were $40.6 million at December 31, 1993. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses.
Real estate acquired through foreclosure is classified as performing when it meets certain criteria of operating profitability. As of December 31, 1993, such assets totaled $43 million.
The following table presents nonperforming assets together with related ratios to total assets:
The table on page 117 in "Financial Statements and Supplementary Data" presents nonperforming assets together with related ratios to total assets, and the table on pages 119 in "Financial Statements and Supplementary Data" presents nonperforming real estate assets by state and by security type.
Provisions for loan losses totaled $463 million in 1993 compared with $420 million in 1992 and $150 million in 1991. Provisions in 1993 included $125 million related to three bulk loan sales of $544 million and $20 million for the continued accelerated disposition of single-family real estate in 1994. The California real estate market requires continued review. At December 31, 1993, real estate owned had been written down to 70 percent of the previous loan balances. At December 31, 1992, loans carried as in- substance foreclosures and real estate owned had been written down to 67 percent of the previous loan balances. Loan loss reserves were 60 percent of nonperforming or restructured loans as of December 31, 1993, compared with 43 percent a year earlier.
The Company recorded provisions for real estate losses of $92 million, $220 million and $21 million for 1993, 1992 and 1991, respectively, on its real estate available for sale or development. Loss provisions in 1993 included $31 million for single-family real estate developments located in Southern California and $25 million related to the $115 million SFR bulk real estate sale. The 1992 provision was primarily for commercial and apartment real estate.
The Company's provision for loan losses, charge-off experience, and reserve for estimated losses for the last five years is presented in the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data" on page 78.
The Company has not experienced a need for loss reserves on security investments, which are of investment grade. Security investments available for sale are carried at fair value.
OPERATIONS
Net interest income declined in 1993 due to lower net interest earning assets and net interest margin. Other interest income totaled $39 million in 1993. This compared with $35 million in 1992 and $62 million in 1991. Other interest income included interest on settlements with the IRS, dividends on FHLB stock and interest on short-term investments.
Real estate services net losses were $12 million in 1993 and $101 million in 1992 compared with income of $104 million in 1991. The 1993 and 1992 losses were primarily attributable to the $92 million in 1993 and $220 million in 1992 of loss provisions on real estate as previously discussed. Mortgage servicing income totaled $51.2 million in 1993 compared with $52.7 million in 1992 and $68.4 million in 1991. The 1992 decline reflects a declining net loan servicing spread. Gain on mortgage sales was $24.8 million, $32.8 million and $29.6 million for the years 1993, 1992 and 1991, respectively. The gain as a percent of mortgage-banking sales, primarily fixed-rate mortgages, was .80 percent in 1993 compared with .79 percent in 1992 and 1.19 percent in 1991. Real estate servicing and origination related
fee income was $37.9 million in 1993 compared with $33.1 million in 1992 and $29.9 million in 1991. Real estate operations included $45.9 million in operating losses and holding costs in 1993, compared with $6.6 million in 1992 and $6.2 million in 1991. The 1993 increase was due in part to an increased volume of new foreclosures and a decision by the Company to expense acquisition and refurbishment costs as incurred. In 1992 and 1991, these costs were added to the carrying value of the asset.
Retail banking fee income increased in 1993 to $113 million from $92.4 million in 1992 and $71.5 million in 1991. The growth in this income is attributable to higher balances in transaction accounts and to the growth in deposits as a result of acquisitions. The Company has also expanded mutual fund activity and now manages mutual funds with assets aggregating $3.2 billion compared with $2.2 billion at December 31, 1992. Net revenue from these operations, which comprises commissions and other income from mutual fund operations, totaled $38 million in 1993 compared with $36.7 million in 1992 and $18.5 million in 1991.
The Company sold its $219 million bank card portfolio because it was not expected to achieve the economies of scale that are increasingly necessary in the bank card business, resulting in a net gain of $22.9 million. The following is a summary of gains and losses on the Company's securities and investments:
Other income totaled $7 million in 1993 and 1992 compared with $8.9 million in 1991.
The growth in operating and administrative expenses during the past three years was primarily the result of significant branch acquisitions. The Company has acquired 399 branches in California and Florida from the RTC and other sources since 1990 when it began its program to increase transaction accounts. Nearly half of these branches were consolidated with existing facilities. Expenses totaled $1.03 billion in 1993 compared with $970 million in 1992 and $844 million in 1991. Operating expenses in 1993 included restructuring charges of $30 million, primarily severance benefits
associated with the cost-reduction program at the Company's administrative headquarters. The Company expects to eliminate approximately 1,000 jobs by the end of 1994, or 25 percent of the administrative work force. Approximately 500 of these reductions have been realized by year-end 1993 from a job-hiring freeze imposed in late summer of 1993. The cost-reduction program, which will eliminate unnecessary tasks and improve efficiency, will be phased in throughout 1994. Reductions in nonpersonnel related costs will also contribute to the overall savings through renegotiation of existing vendor contracts and elimination of other administrative expenses. Anticipated savings in 1995 and beyond will exceed $100 million, a portion of which will be realized in 1994.
The January 17, 1994 Northridge Earthquake caused damage at the Company's administrative headquarters, however, earthquake insurance will limit the Company's exposure.
Operating expenses increased by 6.2 percent during the past year compared with 14.9 percent in 1992. The overhead ratios are as follows:
Revenue is defined as net interest income and other operating income.
The Company's effective tax rate for 1993 was 32.6 percent compared with 43.6 percent in 1992 and 41 percent in 1991. The decrease in the effective tax rate in 1993 is mainly due to the favorable settlement of tax issues and the reversal of certain tax liabilities no longer required. The Company also reflected applicable changes pursuant to the Omnibus Budget Reconciliation Act of 1993 including the 1 percent federal corporate tax rate increase. The 1992 rate increase was due in part to the amortization of intangibles, which was only partially deductible for income taxes. In 1992, with the adoption of FAS 109, the Company began to provide a tax benefit for the general loss reserves.
CAPITAL RESOURCES AND LIQUIDITY
Stockholders' equity ("capital") totaled $2.4 billion at year-end 1993 compared with $2.4 billion at year-end 1992 and $2.3 billion at year-end 1991. In 1992, the Company issued $165 million of 8.30 percent cumulative preferred stock. In 1991, the Company issued $129 million of 8.75 percent cumulative convertible preferred stock. The ratio of capital to total assets was 6.3 percent, 6.4 percent and 5.9 percent at December 31, 1993, 1992 and 1991, respectively.
The Company's primary subsidiary, GWB, is subject to certain capital requirements under the regulations of the Federal Deposit Insurance Corporation and the Office of Thrift Supervision and meets all such requirements. At December 31, 1993, GWB's capital was $2.7 billion, including subordinated notes of $429 million.
Total dividends per share were $.92 in 1993, $.91 in 1992 and $.87 in 1991. The Company increased its quarterly dividend on its common stock to $.23 per share in April 1992. Payment of dividends by the Company is subject to restrictions on the receipt of dividends from GWB. Payment of dividends to the Company by GWB is linked by federal regulation to the Bank's capital. The Bank's level of capital exceeds the requirements for the payment of dividends. Should this level decline below the fully phased-in requirements, limitations on the dividend distributions to a percentage of net income could be imposed.
Liquidity used in financing activities was $164 million in 1993 compared with $1.1 billion in 1992 and $13 million in 1991. Liquidity used in financing activities was decreased commensurate with funds used in investing activities due to the lack of asset growth in the previous three years. GWB acquired $4.1 billion, $2.3 billion and $3.8 billion in 1993, 1992 and 1991, respectively, in deposits from acquisitions. Planned withdrawals of repriced wholesale accounts totaled $95 million in 1993, $366 million in 1992 and $2.2 billion in 1991. The retail branch network experienced net customer account outflows of $3.4 billion in 1993 compared with $1.6 billion in 1992 and $733 million in 1991, primarily certificate of deposit accounts being repriced downward. In the same three years, repayment of borrowings totaled $672 million, $1.4 billion and $947 million.
Funds used in investing activities were $238 million in 1993 and $507 million in 1991 compared with funds provided by investing activities of $518 million in 1992. Real estate loans originated for investment were $5.4 billion in 1993, $5 billion in 1992 and $5.1 billion in 1991. Mortgage payments in 1993 were $5.6 billion, $6.1 billion in 1992 and $4.8 billion in 1991. Mortgage payments fluctuate for various reasons including the level of refinancings. Consumer loans declined $98.6 million in 1993 compared with $5.9 million in 1992 and a $408 million increase in 1991.
Funds provided by operating activities were $341 million in 1993 compared with $862 million in 1992 and $374 million in 1991. Net change in assets available for sale decreased cash $102 million in 1993 compared with cash provided of $68 million in 1992 and a decline of $47 million in cash in 1991. Cash provided from earnings totaled $442 million in 1993 compared with $793 million and $421 million in 1992 and 1991, respectively.
The Company has several sources for raising funds for lending among which are customer deposits, mortgage sales, FHLB borrowings and public debt offerings. The following table presents the debt ratings of the Company and GWB at December 31, 1993:
Cash and securities totaled $1.8 billion at December 31, 1993. The balance was $1.7 billion at December 31, 1992 and $1.4 billion at December 31, 1991. GWB is in excess of required liquidity levels. The excess balances in the above amounts over those required for regulatory purposes will fluctuate between periods and are a source of short-term funding.
SEGMENT DATA
The business segment information is presented in the accompanying table.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
Consolidated Statement of Stockholders' Equity
See Notes to Consolidated Financial Statements.
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, a Federal Savings Bank, Aristar, Inc., 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 1993 presentation.
Adoption of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") as of January 1, 1993. FAS 114 provides guidance on the measurement and recognition of loan impairment.
FAS 114 requires that impaired loans for which foreclosure is probable continue to be accounted for as loans. Those loans have been reclassified from real estate available for sale or development to loans receivable on the Consolidated Statement of Financial Condition. Impaired loans recorded in accordance with FAS 114 are included in delinquent loans or in troubled debt restructurings, as appropriate. The Company had previously measured loan impairment pursuant to the methods prescribed in FAS 114. As a result, no additional reserves were required by early adoption of the pronouncement.
The effect of the adoption of FAS 114 on the Consolidated Statement of Financial Condition follows:
The decrease in nonperforming assets represents performing loans which were previously classified as loans in-substance foreclosed.
The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") as of December 31, 1993. FAS 115 requires that investments in debt securities and certain equity securities be reported at fair value unless the Company has the positive intent and ability to hold such securities to maturity. Investments held to maturity are to be reported at amortized cost. Unrealized holding gains and losses on securities available for sale, net of income taxes, are reported as a separate component of stockholders' equity.
The adoption of these accounting standards did not materially affect the comparability of the financial statements.
Accounting Changes
The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") as of January 1, 1992. FAS 106 requires that the expected cost of postretirement benefits be charged to expense during the period that eligible employees render such service.
The unfunded benefit obligation as of January 1, 1992, reflected in other liabilities on the Consolidated Statement of Financial Condition and shown as an accounting change on the Consolidated Statement of Operations follows:
In 1992, the Company also adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") which supersedes Statement No. 96, "Accounting for Income Taxes" which was adopted by the Company in 1987. FAS 109 required the Company to record previously unrecognized tax benefits totaling $61 million as of January 1, 1992 for its general loss reserves.
The Company elected to give cumulative effect to the changes in the first quarter of 1992.
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 economic 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 Securities
Liquid assets consist principally of cash, certificates of deposit, federal funds, U.S. government, corporate and other securities approved for investment by regulations. Certificates of deposit and federal funds purchased with a maturity of three months or less are considered to be cash equivalents. Other securities, readily convertible into cash, are available for sale and are recorded at fair value. Fair value is generally determined on the aggregate method. Certain securities are designated as held for investment based on management's positive intent and ability to hold those securities to maturity. Securities held for investment are recorded at amortized cost. Discounts or premiums on securities recorded at cost are amortized using the interest method. For the Consolidated Statement of Cash Flows, cash includes cash on hand, cash in banks and cash equivalents.
Mortgage-backed Securities
The Company's mortgage-backed securities 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 ("FNMA"). Loans are also securitized for sale directly in the public market. The Company also purchases commercial mortgage pass-through certificates from the RTC. In addition, the Company purchases, for liquidity purposes, investments in Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"). REMICs and GWB-originated pass-through certificates are held for investment based on management's positive intent and ability to hold these securities until maturity and recorded at amortized cost. All other mortgage-backed securities are available for sale and recorded at fair value. Fair value is generally determined on the aggregate method. Discounts or premiums on mortgage-backed securities recorded at cost are amortized using the interest method.
Loans Receivable 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 adjustable rate mortgage is the Bank's primary loan investment.
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 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 90 days past due. When a loan is designated as nonaccrual, all 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 Loans
The Bank's consumer loans include student educational loans insured by the U.S. government or the state of California, fully secured loans made to holders of customer accounts and checking overdraft loans. Consumer loans made by the consumer finance subsidiaries of Aristar have maximum terms of 180 months. The weighted average contractual term of all loans written by the consumer finance subsidiaries in 1993 was 41 months. Experience, however, has shown that a majority of consumer loans will be renewed prior to maturity. Finance charges included in consumer loans receivable are deferred and amortized into income over the term of the loan with appropriate limitation for delinquent installments for which collection is not reasonably assured. Student educational loans are available for sale and are recorded at the lower of cost or fair value. Fair value is determined on the aggregate method. All other consumer loans are held to maturity.
Reserve for Estimated Loan Losses
It is the policy of the Company to provide for estimated losses on real estate loans when any significant and permanent decline in value is identified. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses. Periodic reviews are made of major loans and major lending areas in an attempt to identify potential problems at an early date. Various factors will affect the level of reserves, including economic conditions, trends and previous loss experience. Major properties are reviewed individually and are classified as "satisfactory, special mention, substandard, doubtful or loss." Based upon the classification, an appropriate reserve is established. Loans transferred to foreclosed real estate are transferred at the lower of the net loan value or the fair value of the collateral, less estimated costs to sell.
General loan loss reserves are provided on classified assets. The doubtful, substandard and special mention asset classifications used by the Company for major loans form the basis from which to analyze the possible loss exposure. Consideration is given to the Company's historical experience of losses on loans so classified and to current economic conditions and trends.
The single-family residential loan portfolio is reviewed based upon the delinquency and loss experience of the portfolio. The portfolio also is reviewed by geographic area. Based upon the current loss experience and the losses and delinquencies within each lending area, a general loss reserve is provided on the portfolio giving consideration to current economic conditions and trends.
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 contractual delinquency of 120 days on closed-end accounts and 180 days on open-end accounts.
Similar reviews are made for retail banking consumer loan operations, where provisions are based upon recent loss experience.
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, 1993, the following loans were designated as available for sale and were carried at the lower of cost or fair value:
1. All 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.
Fair value on fixed-rate product is generally determined on the specific identification method. An aggregate method is used on adjustable rate products.
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 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; and 3) an adjustment, if necessary, to increase or decrease the loan servicing spread in order to provide for normal servicing. In sales involving credit enhancements, fair value is used in calculating the gain or loss.
The Company 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.
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, with the implementation of American Institute of Certified Public Accountants' Statement of Position ("SOP") 92-3, "Accounting for Foreclosed Assets" in July 1992, specific valuation allowances have been established for changes in the fair value of real estate. Prior to the implementation of this SOP, all such valuation adjustments were directly charged against the asset. 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 net realizable value, are accounted for on the equity method.
Premises and Equipment
The Company has followed the policy of capitalizing expenditures for improvements and major refurbishments and has charged ordinary maintenance and repairs to earnings as incurred. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives as follows:
Buildings 30 to 60 years
Leasehold improvements Lesser of term of lease or useful life of property
Furniture, fixtures and equipment 3 to 12 years
Intangibles Arising rom Acquisition
Because of the earning power or other special values of certain purchased companies or businesses, the Company paid amounts in excess of 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.
Customer Accounts
Customer accounts comprise primarily the Bank's savings and checking accounts. Customer accounts 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 Bank Insurance Fund ("BIF") or Savings Association Insurance Fund ("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.
Financial Instruments with Off-balance-sheet Risk and Concentrations of Credit Risk
The Company is a party to financial instruments with off-balance-sheet risk 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. 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 and cash-flow swap agreements. Purchased put options and forward sales are used as a hedge of fixed-rate commitments. 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, purchased put options and forward sales, the contract or notional amounts do not represent exposure to risk of loss.
The Company's 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.
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. 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 extends credit and requires collateral for loans sold with credit enhancements under the same lending policies as for all other real estate loans.
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.
Federal and State Taxes on Income
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. As of January 1, 1992, tax benefits are recognized for general loss reserve additions.
Beginning in 1992, taxes on income are determined by using the liability method as prescribed by FAS 109. 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, FAS 109 requires the consideration of all 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. The average common shares and common share equivalents outstanding, based upon amounts used in the calculation of primary earnings per common share, were 132,007,559 in 1993, 130,735,867 in 1992 and 129,131,472 in 1991. Fully diluted earnings per common share give effect to the dilutive effect of stock options and assume the conversion of all convertible securities into common stock at the later of the beginning of the year or the date of issuance (unless antidilutive).
Note 2: Acquisitions and Dispositions
In December 1993, GWB purchased certain assets and assumed certain liabilities from the RTC of HomeFed Bank, F.A., San Diego, California. As a result of the transaction, GWB acquired 119 branches with retail deposits of $4.1 billion. The deposits were acquired for a premium of $151 million.
During the first quarter 1993, the Company exchanged 12 of its branches located in the State of Washington, with deposits aggregating $327 million, with Pacific First Bank, a Federal Savings Bank for seven branches located in Southern California with deposits aggregating $360 million.
In March 1992, GWB acquired from the RTC 53 branches of the former AmeriFirst Federal Savings Bank in Florida with retail customer accounts totaling $1.8 billion. These branches were acquired at a premium of $27.5 million. Also in March, GWB acquired five California branches of Republic Federal Savings and Loan Association and assumed deposits totaling $469 million at a premium of $4.7 million.
In December 1991, Aristar acquired assets of $149 million from Capitol Finance Group, a subsidiary of First Union Corporation of Charlotte, North Carolina, for a premium of $21.8 million.
In October 1991, GWB consummated the acquisition from the RTC of 23 branches and assumption of certain assets of The First, F.A. in Orlando, Florida. The deposit base assumed totaled $938 million for which a premium of $23.4 million was paid. Consumer loans of approximately $150 million were added to GWB's portfolio. A portion of the assets were sold at a gain resulting in a reduction of the premium paid to $3.3 million.
In March 1991, GWB consummated the acquisition and assumption from the RTC of approximately 28 California branches of Lincoln Savings with retail deposits totaling $1 billion and 33 Florida branches of Pioneer Savings with deposits totaling $931 million. An aggregate premium of $17.4 million was paid.
Intangibles arising from acquisitions as shown on the Consolidated Statement of Financial Condition consisted of the following:
Note 3: Cash and Securities
An analysis of cash and securities by investment type at December 31, 1993 and December 31, 1992 and by maturity at December 31, 1993 is included in the table on page 112 under the caption "By Type" and "Year-end 1993 by Maturity."
Following is a summary of the amortized cost and fair values of the Company's securities portfolio available for sale:
At December 31, 1993 and 1992, there were no securities held for investment.
The fair value of 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 market value is determined to be the book value at the reporting date.
Realized gains and losses on the available for sale portfolio are calculated on the specific identification method and were as follows:
The Company purchases securities under agreements to resell (repurchase agreements) having terms of up to 90 days; however, they are typically overnight investments. Repurchase agreements outstanding were $210,000,000 at 3.36 percent at December 31, 1993, sold by CS First Boston Corporation; and $345,000,000 at 3.37 percent at December 31, 1992, sold by Morgan Stanley & Co. Incorporated. The repurchase agreements were collateralized by federal agency issues with market values at least 2 percent above the repurchase agreements. The highest month-end balances outstanding were $210,000,000 in 1993 and $345,000,000 in 1992. The average balances outstanding were $60,000,000 at a rate of 3.34 percent in 1993 and $78,846,000 at 3.69 percent in 1992.
GWB is required to maintain certain minimum reserve balances with the FRB. Included in cash were deposits at the FRB of $258,672,000 at December 31, 1993 and $198,708,000 at December 31, 1992.
Note 4: Mortgage-backed Securities
An analysis of the mortgage-backed securities portfolio by loan type at December 31, 1993 and December 31, 1992 is included in the table on page 117 under the caption "Mortgage-backed Securities by Type."
Mortgage-backed securities available for sale consisted of the following:
Mortgage-backed securities held to maturity consisted of the following:
At December 31, 1992 there were no mortgage-backed securities held to maturity.
The fair value of mortgage-backed securities is principally based on quoted market prices.
Gross realized gains and gross realized losses on mortgage-backed securities, which are included in gain on mortgage sales on the Consolidated Statement of Operations, were as follows:
Gains and losses on mortgage-backed securities are calculated on the specific identification method.
Note 5: Loans Receivable
An analysis of the loan portfolio by type at December 31, 1993 and December 31, 1992 is included in the table on page 117 under the caption "Loan Portfolio by Type." An analysis of the real estate loan portfolio by security type and state at December 31, 1993 is included in the table on page 118 titled "Real Estate Loans and Real Estate by State." An analysis of the California real estate loan portfolio and nonperforming loans by region at December 31, 1993 is included in the table on pages 120 and 121 under the caption "California Real Estate Loans and Foreclosed Real Estate."
The following comprised loans receivable:
As a result of the adoption of FAS 114, loans previously classified as in-substance foreclosed and reported in real estate are included in loans receivable as of January 1, 1993. The recorded investment in loans for which impairment has been recognized in accordance with FAS 114 totaled $347,755,000 at December 31, 1993. The reserves for estimated losses related to such loans were $40,567,000 at December 31, 1993.
An analysis of the fair value of loans receivable follows:
The fair value of single-family real estate loans is principally based on readily available market prices, adjusted for excess yields and various risk factors. Fair value of commercial and apartment loans is determined by computing discounted cash flows on various segments of the loan portfolio. Recent national commitment rates were used as a guide in establishing regional discount rates for commercial and apartment loans. Because the Company's primary asset, SFR ARMs, sells at a premium in the secondary market, the fair value was $790,393,000 higher than the book value at year end. The difference between fair value and book value is not expected to vary significantly in the future. The fair value of income-producing real estate loans, fixed-rate SFRs and second trust deed ARMs held for investment was $1,562,000 higher than book value. The fair value of these portfolios will fluctuate with changes in interest rates.
Fair value of consumer loans is based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve adjusted for various risk factors depending on the type of loan. The fair value of nonterm consumer loans is the book value at the reporting date. These loans include checking overdraft, installment loans and other miscellaneous consumer loan related accounts.
Loans receivable totaling $5,821,415,000 at December 31, 1993, 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 $8,245,000 at December 31, 1993 and $9,266,000 at December 31, 1992.
The Company had outstanding commitments to fund real estate loans of $776,574,000 at December 31, 1993 which consisted of $196,472,000 fixed-rate and $580,102,000 adjustable rate. At December 31, 1993, fixed-rate commitments had a fair value of $344,000. Fair value is estimated using current market prices adjusted for various risk factors and market volatility. At December 31, 1993, standby letters of credit totaled $14,272,000.
The Company purchases put options as a hedge of fixed-rate commitments. At December 31, 1993, the options had a notional value of $100,000,000 and a fair value of $272,000. Fair value is estimated using current market prices adjusted for various risk factors and market volatility.
The Company had outstanding commitments to sell fixed-rate real estate loans of $140,445,000 at December 31, 1993.
A significant portion of the ARM portfolio is subject to lifetime interest-rate caps and floors. Each loan is priced separately with a maximum cap and a minimum floor. The weighted-average cap was 13.66 percent and the weighted-average floor was 5.72 percent at December 31, 1993. At December 31, 1993, $8,758,905,000 of ARM loans with an average yield of 7.03 percent had reached their floor rate. Without the floor, the average yield on those loans would have been 6.32 percent. 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 $50,339,000 in 1993, $51,507,000 in 1992 and $57,239,000 in 1991.
Certain loans meet the criteria of troubled debt restructurings ("TDRs"). TDRs totaled $294,772,000 at December 31, 1993. This compared with $160,513,000 at the end of 1992 and $151,609,000 at the end of 1991. There were no additional funds committed at December 31, 1993.
The Company provides a reserve for uncollected interest, which is essentially based upon loans in foreclosure or delinquent 90 days or more. These loans are considered in "nonaccrual" status. Interest not accrued on all loans that were nonperforming totaled $79,588,000 for the year ended December 31, 1993 compared with $73,230,000 for the year ended December 31, 1992 and $51,160,000 for the year ended December 31, 1991.
Following is a summary of the reserve for estimated losses and charge- off experience for loans receivable:
The ratio of net charge-offs to average loans follows:
Note 6: Mortgage Banking
Data pertaining to mortgage banking operations follow:
Loan servicing spread represents net servicing income as a percentage of the average portfolio serviced.
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 the net unamortized balance of excess servicing on loans sold included in other assets:
The fair value of excess/short servicing fees at December 31, 1993 was $17,307,000 and $29,434,000 at December 31, 1992, as determined by recalculation of the discounted cash flows at market rates.
Gains on mortgage sales were derived from:
GWB, as seller and servicer, issued mortgage pass-through certificates comprised of Class A certificates and Class B certificates. The Class B certificate, which GWB retained, are subordinated to the rights of the Class A certificate holders. GWB also sold loans to FNMA and FHLMC whereby a portion 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 $185,825,000 in 1993, $91,263,000 in 1992 and $66,531,000 in 1991 have been repurchased from investors. Repurchased loans are included in the Company's periodic analysis of the adequacy of valuation reserves. Delinquent interest of approximately $8,339,000 in 1993, $6,397,000 in 1992 and $3,453,000 in 1991 was repurchased and subsequently written off.
Note 7: Real Estate
An analysis of the real estate portfolio and nonperforming real estate by state at December 31, 1993 is included in the tables on pages 118 and 119 titled "Real Estate Loans and Real Estate by State." An analysis of California foreclosed real estate and nonperforming real estate by region at December 31, 1993 is included in the table on pages 120 and 121 titled "California Real Estate Loans and Foreclosed Real Estate."
Real estate available for sale or development consisted of:
Real estate available for sale was reduced in 1993 by the adoption of FAS 114, which resulted in the reclassification of loans in-substance foreclosed to loans receivable.
Interest capitalized on property development totaled $7,484,000 at December 31, 1993 and $6,957,000 at December 31, 1992.
Real estate operations are summarized below:
Following is a summary of the reserve for estimated losses:
Note 8: Interest Receivable
Following is a summary of interest receivable:
Other includes interest receivable on property development advances and interest-rate swaps.
Note 9: Investment in the Federal Home Loan Bank System
The investment in the Federal Home Loan Banks consisted of capital stock, at cost, totaling $307,352,000 at December 31, 1993 and $314,373,000 at December 31, 1992.
The Company earned 3.93 percent in 1993, 1.88 percent in 1992 and 6.01 percent in 1991 from dividends on its investment in FHLB stock. FHLB capital stock is pledged to secure FHLB borrowings. The future earnings on FHLB stock will presumably be restricted due to the funding requirements imposed on the Federal Home Loan Banks for affordable housing programs and the Resolution Funding Corporation.
Note 10: Premises and Equipment
Premises and equipment consisted of the following:
The Company leases various branch offices under capital and noncancellable operating leases which expire at various dates through 2032. 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, 1993 were as follows:
Rental expense charged to earnings was $53,638,000 in the year ended December 31, 1993, $57,823,000 in the year ended December 31, 1992 and $51,440,000 in the year ended December 31, 1991.
Note 11: Customer Accounts
A summary of balances at December 31, 1993 and December 31, 1992 by type of account, and at December 31, 1993 by maturity of account is presented on pages 114 and 115, under the captions "By Type," "By Product" and "Year- end 1993 by Maturity." An analysis of term deposits by interest rate and maturity at December 31, 1993 and by interest rate at December 31, 1992 is presented under the caption "Year-end 1993 Term Accounts by Maturity by Interest Rate."
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 3.95 percent of total customer accounts at December 31, 1993 and 2.77 percent at December 31, 1992. Accrued but unpaid interest on customer accounts included in other liabilities totaled $10,685,000 at December 31, 1993 and $11,520,000 at December 31, 1992.
In 1993, GWB entered into a cash-flow swap agreement related to the Investor's CD, an insured account indexed to the Standard and Poor's ("S&P") 500 performance. GWB agreed to pay a monthly variable rate in exchange for the customer receiving the S&P 500 return. The swap balance outstanding was $60,864,000 and the average interest rate paid by GWB was 4.09 percent as of December 31, 1993.
The following is a summary of interest expense on customer accounts:
An analysis of the fair value of customer accounts follows:
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 plus 100 basis points. 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 customer accounts without defined maturities, such as checking, money market savings and regular savings.
Note 12: Short-term Borrowings
An analysis of borrowings by type at December 31, 1993 and December 31, 1992 and by maturity at December 31, 1993 is presented in the table titled "Borrowings" on page 113.
The following is a summary of short-term borrowings:
Because of the short-term nature of these borrowings, fair value approximates book value.
Securities sold under agreements to repurchase generally represent borrowings of less than 90 days, and book value approximates fair value. These agreements are secured by mortgage loans and securities held by the Company. The collateral is summarized as follows:
Commercial paper has maturities of less than 270 days, and at December 31, 1993, the average maturity was 27 days. In 1993, GWB syndicated a $1,000,000,000 Thrift Note program. These notes are sold through securities dealers to institutional investors and have maturities of less than 270 days. Other short-term borrowings mature in periods of up to 12 months.
GWB has a $220,705,000 financing agreement with the Student Loan Marketing Association ("Sallie Mae") and may request advances under the line at a margin over the most recent auction yield for the 91-day U.S. Treasury bill. The borrowings are fully secured by insured student loans made by GWB. The agreement expires March 31, 1994. Borrowings outstanding at December 31, 1993 totaled $177,025,000 at 3.66 percent.
Short-term borrowings are summarized as follows:
An analysis of the fair value of other borrowings follows:
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 plus 100 basis points. The maturity used in the present value calculations of long-term, variable- rate borrowings is the date at which the borrowing would next be repriced.
FHLB Borrowings
FHLB borrowings are secured by pledges of real estate loans and the capital stock of the FHLB. At December 31, 1993, interest rates, both fixed and variable, ranged from 3.35 percent to 12.27 percent. Average FHLB borrowings were $1,058,257,000 in 1993, $342,576,000 in 1992 and $612,233,000 in 1991. Based upon these balances, the weighted average interest rate was 4.59 percent in 1993, 9.05 percent in 1992 and 9.61 percent in 1991.
GWB has various borrowing alternatives with the FHLB, which include a $122,000,000 facility for overnight advances.
Senior Debt
The Company has the following senior debt outstanding:
In July 1993, GWFC issued $225,000,000 in senior debt with a coupon of 6.375 percent which matures on July 1, 2000.
Also in July 1993, Aristar issued $150,000,000 in senior debt with a coupon of 5.75 percent and a maturity of July 15, 1998.
In June 1993, GWFC issued $150,000,000 in senior debt with a coupon of 6.125 percent and a maturity of June 15, 1998.
In July 1992, Aristar issued $100,000,000 in senior debt with a coupon of 6.25 percent and a maturity of July 15, 1996. Also in July 1992, Aristar issued $100,000,000 of senior subordinated debt with a coupon of 7.50 percent and a maturity of July 1, 1999.
In February 1992, Aristar issued $100,000,000 in senior debt with a coupon of 7.375 percent and a maturity of February 15, 1997, and $100,000,000 in senior debt with a coupon of 7.875 percent and a maturity of February 15, 1999.
In February 1992, GWFC issued $200,000,000 in senior debt with a coupon of 8.60 percent and a maturity of February 1, 2002.
In 1993 and 1992, GWB did not have issues under its medium-term note program, and an additional $440,000,000 may be issued under existing shelf registrations.
Credit Facilities
In December 1993, Aristar syndicated a multi-year $120,000,000 International Credit Facility ("ICF") with eight banks. This agreement was done to provide for backup liquidity and general corporate purposes. This ICF provides for drawdowns at a spread to London Interbank Offered Rate ("LIBOR"). There were no borrowings under this agreement in 1993.
In July 1993, GWB syndicated a $175,000,000 ICF with seven international banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993.
Also, in July 1993, GWB syndicated a $340,000,000 Domestic Credit Facility ("DCF") with seven domestic banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993.
In January 1992, Aristar syndicated a multi-year $200,000,000 DCF with 10 domestic banks for backup liquidity and general corporate purposes. There were no borrowings under this facility in 1993 or 1992.
The Company is subject to various debt covenants and believes it is in compliance at December 31, 1993.
Interest-Rate Swaps
The Company had interest-rate swaps related to FHLB borrowings of $109,000,000 at December 31, 1993 which yielded a rate of 3.48 percent tied to three-month LIBOR, paid a rate of 5.26 percent and mature in 1998. The net cost of swap agreements was $3,825,000 for the year ended December 31, 1993, $11,045,000 for the year ended December 31, 1992 and $4,304,000 for the year ended December 31, 1991, which was charged to interest expense. The fair value of outstanding swaps at December 31, 1993 was a gain of $97,000 based on expected remaining net cash flows discounted at three-month LIBOR.
Note 14: Federal and State Taxes on Income
Following is a summary of the provision for taxes on income:
Deferred tax liabilities (assets) are comprised of the following:
The following table reconciles the statutory income tax rate to the consolidated effective income tax rate:
For 1991, tax benefits were not recognized for additions to general loss reserves in excess of available tax bad debt deductions of ($851,000). Fully diluted earnings per share would have been $2.23 in 1991 without the impact of the bad debt deduction. In 1992 and 1993, under FAS 109, tax benefits were recognized for additions to general loss reserves without regard to the available tax bad debt deductions.
Taxes on income included the following:
Thrift institutions that meet certain tests prescribed by the Internal Revenue Code are allowed a bad debt deduction for federal income tax purposes of either 8 percent of taxable income, or an amount determined from the thrift's loss experience. For 1993, 1992 and 1991 the Company used its loss experience to determine federal taxes payable.
In accordance with FAS 109, a deferred tax liability of $241,522,000 has not been recognized at December 31, 1993 for $690,064,000 of temporary differences relating to the tax bad debt reserves of the Bank that arose prior to 1988.
The Company's tax returns have been audited by the Internal Revenue Service through December 31, 1985 and by the California Franchise Tax Board through December 31, 1986.
Note 15: Employee Benefit Plans Pension Plans
The Great Western Retirement Plan ("the plan") covers a majority of employees. Benefits under this plan are generally based on years of service and the highest consecutive 60-months earnings during the last 120 months of credited service prior to retirement. The Company's general funding policy is to contribute the maximum amount deductible for federal income tax purposes. Total plan expense was $8,753,000 in 1993, $6,625,000 in 1992 and $5,620,000 in 1991.
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 shown as amortization of unrecognized net gain (loss).
Accumulated plan benefit information and the funded status of the plan follow:
Plan assets include certificates of deposit at GWB, equity securities, mutual funds, mortgage-backed securities and other fixed-income securities. Certificates of deposit at GWB totaled $24,850,000 at December 31, 1993 and $40,350,000 at December 31, 1992.
The Company also sponsors a non-qualified, 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 $4,420,000 for 1993, $3,631,000 for 1992 and $2,850,000 for 1991.
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 $143,069,000 at December 31, 1993 and $116,947,000 at December 31, 1992, and net premium income related to insurance purchased was $5,967,000 in 1993, $3,768,000 in 1992 and $396,000 in 1991.
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 funded 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:
The cost of these benefits, funded currently, was approximately $1,095,000 in 1991.
For measurement purposes, the cost of medical benefits was projected to increase at a rate of 13 percent in 1993, thereafter decreasing 1 percent per year until a stable 7 percent medical inflation rate is reached in 1999. Increasing the assumed health care cost trend by 1 percent in each year would increase the accumulated postretirement benefit obligation at December 31, 1993 by approximately $3,500,000 and the aggregate of the service and interest components of net periodic postretirement benefit cost for the year ended December 31, 1993 by $500,000. The present value of the accumulated benefit obligation assumed an 7.75 percent discount rate compounded annually.
Stock Option 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. 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.
In 1993 and 1992, the Company 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. The Company granted 7,500 shares in 1993, with a value of $122,000 and 1,086,200 shares in 1992, with value of $20,126,000. 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 was $3,693,000 in 1993 and $3,671,000 in 1992.
Stock appreciation rights ("SAR") may be granted in conjunction with certain options previously granted or with future options. An 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.
Information with respect to stock options follows:
Certain debt agreements of GWB and Aristar provide for the maintenance of minimum levels of equity. The federal income tax consequences arising from the payment of dividends by GWB are discussed below. Management believes, after taking into consideration all of the foregoing restrictions and requirements, that the Company will be able to continue to pay dividends to its stockholders without adverse tax consequences.
Thrift institutions that meet certain tests prescribed by the Internal Revenue Code are allowed a bad debt deduction for federal income tax purposes. Because of such deductions, only $658,000,000 of retained earnings of the Bank at December 31, 1993 are 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.
Note 17: Contingent Liabilities
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 or results of operations.
Note 18: Parent Company Financial Information
Effective June 30, 1993, Aristar became a wholly-owned subsidiary of the Company. This realignment was in the form of a dividend from GWB to GWFC and a simultaneous cash capital contribution by GWFC to GWB of $369,473,000 which represented the dividended company's book value. Aristar is expected to be a source of operating income.
Statement of Operations
The parent company joins with its subsidiaries, other than the life insurance subsidiary, 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 based on the amount of tax which would be payable if separate returns were filed. 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 debt by maturity:
Note 19: Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial operating data are included in Stockholder Data and Quarterly Information (Unaudited) on pages 122, 123 and 124 of this annual report to stockholders.
Third quarter 1993 earnings were affected by an additional $150 million of provisions for losses on loans and real estate established for four separate bulk sales of distressed assets.
In the fourth quarter of 1992, $335 million was provided for losses on loans and real estate, which resulted primarily from the Company's efforts to accelerate disposition of problem loans and real estate.
In the third quarter of 1992, $129 million was provided for losses on loans and real estate, which resulted from continued weakness in real estate markets and an effort to accelerate the liquidation of nonperforming commercial real estate properties.
Note 20: Segment Data
The Company operates in the banking and consumer finance industries. The Bank operations are primarily one business segment, attracting customer deposits for real estate lending. However, ancillary activities related to real estate lending, mortgage banking and retail banking are also included. Consumer finance operations include installment loans to consumers and installment contracts purchased from retail merchants as well as home equity loans. A summary of business segments is included in the table within Segment Data in "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Report of Independent Accountants
To the Board of Directors and Stockholders Great Western Financial Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Great Western Financial Corporation and its subsidiaries ("the Company") at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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 postretirement benefits other than pensions and income taxes in 1992, and its methods of accounting for impairment of loans and certain debt and equity securities in 1993.
/s/Price Waterhouse
Los Angeles, California January 31, 1994
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 judgement 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.
/s/Carl F. Geuther
Carl F. Geuther Executive Vice President and Chief Financial Officer
January 31, 1994
STATISTICAL INFORMATION Cash and Securities Analysis
*Less than one percent
Year-end 1993 Term Accounts by Maturity by Interest Rate
Loan Analysis
*Less than one percent
*Less than one percent
Real Estate Loans and Real Estate by State
California Real Estate Loans and Foreclosed Real Estate
California Real Estate Loans and Foreclosed Real Estate (continued)
Exchange Listings: New York Stock Exchange, Pacific Stock Exchange and London Stock Exchange. Approximate number of common stockholders of record at December 31, 1993: 13,467 Under regulations, retained earnings are subject to substantial restrictions for the payment of dividends. See Note 16 to the Consolidated Financial Statements.
Stockholder Data and Quarterly Information (Unaudited)
Stockholder Data and Quarterly Information (Unaudited)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors, executive officers and principal shareholders appears on pages 5 through 11 and pages 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears on pages 11 through 15 and pages 19 through 25 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994, and is incorporated herein by reference, except as noted therein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management appears on pages 5, 10, 25 and 26 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference, except as noted therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions appears on pages 9, 11, 12, 13 and 19 of the Proxy Statement for the Annual Meeting of Stockholders, April 26, 1994 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See index to "Financial Statements and Supplementary Data" on page 52.
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 "Financial Statements and Supplementary Data".
3. Executive Compensation Plans and Arrangements
A. Employment Agreement between GWFC and James F. Montgomery dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.3.
B. Employment Agreement between GWFC and John F. Maher dated December 19, 1989 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.4.
C. Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.6.
D. Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.7.
E. Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 filed as an exhibit to Form 10-K for the year ended 1989 as Exhibit 10.8.
F. Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.11.
G. Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 filed as an exhibit to Form 10-K for the year ended 1988 as Exhibit 10.12.
H. Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.10.
I. Supplemental Executive Retirement Plan as amended, filed as Exhibit 10.11 to Form 10-K for the year ended December 31, 1992.
J. 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended, filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 1992.
K. Addendum to the 1979 Incentive and Non-Statutory Stock Option and Appreciation Plan filed as Exhibit 10.13.
L. 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 as Exhibit 15.7.
M. 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 as Exhibit 15.8.
N. The 1988 Stock Option and Incentive Plan (as amended and restated July 22, 1993) filed as Exhibit 10.16.
O. Employee Non-Qualified Stock Option Agreement filed as an exhibit to Post-Effective Amendment No. 1 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan as Exhibit 28.2.
P. 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 as Exhibit 28.3.
Q. Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994 filed as Exhibit 10.21.
R. Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions) filed as Exhibit 10.22.
S. 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 as Exhibit 28.4.
T. GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.21.
U. Great Western Supplemental Incentive Plan, effective December 1984 filed as an exhibit to Form 10-K for the year ended 1984 as Exhibit 19.1.
V. GWFC Umbrella Trust for Senior Officers filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.1.
W. Summary of certain additional executive benefits, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1992.
X. Employee Home Loan Program, filed as an exhibit to Form 10-Q for the quarter ended June 30, 1993.
Y. 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 as Exhibit 28.1.
Z. Form of Director Stock Option Agreement effective January 3, 1994 filed as Exhibit 10.18.
AA. GWFC Directors' Deferred Compensation Plan (1992 Restatement) filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.22.
BB. GWFC Umbrella Trust for Directors filed as an exhibit to Form 10-Q for the quarter ended March 31, 1989 as Exhibit 19.2.
CC. Restated Retirement Plan for Directors filed as an exhibit to Form 10-K for the year ended 1991 as Exhibit 10.27.
DD. GWFC Annual Incentive Compensation Plan for Executive Officers filed as exhibit 10.33.
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 percent 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.
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 (the "Rights Agreement") dated as of June 24, 1986, between GWFC and Morgan Guaranty Trust Company of New York (filed as Exhibit 1 to the Company's Report on Form 8-K dated July 3, 1986 and incorporated herein by reference).
10.2 First Amendment to Rights Agreement dated as of February 19, 1988, between GWFC and Morgan Shareholder Services Trust Company, successor to Morgan Guaranty Trust Company of New York as Rights agent (incorporated herein by reference to the Company's Report on Form 8-K (File No. 1-4075) dated February 24, 1988).
10.3 Employment Agreement between GWFC and James F. Montgomery 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 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).
10.5 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 Employment Agreement between GWFC and Michael M. Pappas 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).
10.7 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).
10.8 Employment Agreement between GWFC and E. A. Crane effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).
10.9 Employment Agreement between GWFC and Curtis J. Crivelli effective March 1, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference).
10.10 Employment Agreement between GWFC and Joe M. Jackson dated February 1, 1992 (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).
10.11 Supplemental Executive Retirement 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).
10.12 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).
10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.
10.14 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).
10.15 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).
10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).
10.17 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).
10.18 Form of Director Stock Option Agreement effective January 3, 1994.
10.19 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).
10.20 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).
10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.
10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 Great Western Supplemental Incentive Plan, effective December 1, 1984 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, and incorporated herein by reference).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 GWFC Annual Incentive Compensation Plan for Executive Officers.
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 included on page 135 of this Form 10-K.
24.1 Power of Attorney included on page 133 of this Form 10-K.
The 1993 Annual Report to Stockholders has already been furnished to each stockholder of record who is entitled to receive a copy thereof. A copy of the 1993 Annual Report to Stockholders will be furnished without charge upon specific request of any stockholder of record on February 28, 1994 and any beneficial owner of the Company's common stock on such date who has not previously received a copy and who represents such facts in good faith to the Company in writing direct to:
Corporate Secretary Great Western Financial Corporation 9200 Oakdale Avenue Chatsworth, California 91311-6519
Other exhibits will be supplied to any such stockholder at a charge equal to the Company's cost of copying, postage and handling.
(b) Reports on Form 8-K
A current report on Form 8-K dated December 14, 1993 (event date December 3, 1993) reported that Great Western Bank, a Federal Savings Bank, acquired certain assets and assumed certain liabilities of HomeFed Bank, F.A.
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
/s/ James F. Montgomery March 22, 1994 - ------------------------------ ------------------ James F. Montgomery, Chairman Date and Chief Executive
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes James F. Montgomery, Carl F. Geuther and Jesse L. King, 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 22, 1994, by the following persons on behalf of the registrant and in the capacities indicated.
/s/ James F. Montgomery - ------------------------------------------------------ James F. Montgomery, Chairman and Chief Executive (Principal Executive Officer)
/s/ Carl F. Geuther - ---------------------------------------------------------------------- Carl F. Geuther, Executive Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ Jesse L. King - ------------------------------------------------------------------ Jesse L. King, Senior Vice President and Controller (Principal Accounting Officer)
/s/ John F. Maher - ----------------------------------------------------------- John F. Maher, President and Chief Operating Officer
/s/ Dr. David Alexander /s/ Enrique Hernandez, Jr. - ---------------------------------- --------------------------------- Dr. David Alexander, Director Enrique Hernandez, Jr., Director
/s/ H. Frederick Christie - ---------------------------------- ---------------------------------- 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
Page
Consent of Independent Accountants S-2
S-2
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, 2-98811 and 33-60206), on Form S-4 (Nos. 33-15135 and 33-17705) and on Form S-8 (Nos. 2-67233, 2-90750, 33-6174 and 33-21469) of Great Western Financial Corporation of our report dated January 31, 1994 appearing on page 110 of this Form 10-K.
/s/ PRICE WATERHOUSE
Los Angeles, California March 22, 1994
GREAT WESTERN FINANCIAL CORPORATION
EXHIBITS INDEX
Exhibit Page Number Number - ------- ------
3.3 By-laws of Great Western Financial Corporation
10.13 Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan.
10.16 The 1988 Stock Option and Incentive Plan (as amended and restated effective July 22, 1993).
10.18 Form of Director Stock Option Agreement effective January 3, 1994.
10.21 Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994.
10.22 Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions).
10.33 Great Western Financial Corporation Annual Incentive Compensation Plan for Executive Officers.
11.1 Statement re Computation of Per Share Earnings.
12.1 Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries.