-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PT2C2shRjGhcsn8sIctPTfHzs+mhHOkPC8L4bghGnH/g5+pDF5K6fhgTHIzITRke HFnxzcLHg1dvVenogKs1vw== 0000898430-97-000896.txt : 19970311 0000898430-97-000896.hdr.sgml : 19970311 ACCESSION NUMBER: 0000898430-97-000896 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT WESTERN FINANCIAL CORP CENTRAL INDEX KEY: 0000043512 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 951913457 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04075 FILM NUMBER: 97553219 BUSINESS ADDRESS: STREET 1: 9200 OAKDALE AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187753411 MAIL ADDRESS: STREET 1: 9200 OAKDALE AVENUE CITY: CHATSWORTH STATE: CA ZIP: 91311 10-K405 1 FORM 10-K405 FOR PERIOD ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-4075 GREAT WESTERN FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1913457 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 9200 OAKDALE AVENUE, 91311-6519 CHATSWORTH, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (818) 775-3411 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $1 par value (and New York Stock Exchange accompanying Preferred Stock Pacific Stock Exchange Purchase Rights) London Stock Exchange 8.30% Cumulative Preferred Stock, New York Stock Exchange $1 par value 8 1/4% Trust Originated Preferred New York Stock Exchange Securities of Great Western Financial Trust I Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1997: $6,024,275,048. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of February 28, 1997: 137,563,165. DOCUMENTS INCORPORATED BY REFERENCE: THE INFORMATION REQUIRED TO BE DISCLOSED PURSUANT TO PART III OF THIS REPORT EITHER SHALL BE (I) DEEMED TO BE INCORPORATED BY REFERENCE FROM SELECTED PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR GREAT WESTERN FINANCIAL CORPORATION'S 1997 ANNUAL MEETING OF SHAREHOLDERS, IF SUCH PROXY STATEMENT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE CORPORATION'S MOST RECENTLY COMPLETED FISCAL YEAR, OR (II) INCLUDED IN AN AMENDMENT TO THIS REPORT FILED WITH THE COMMISSION ON FORM 10-K/A. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GREAT WESTERN FINANCIAL CORPORATION 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business............................................................................... 3 Item 2. Properties............................................................................. 17 Item 3. Legal Proceedings...................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders.................................... 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 17 Item 6. Selected Financial Data................................................................ 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 19 Item 8. Financial Statements and Supplementary Data............................................ 51 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 109 PART III Item 10. Directors and Executive Officers of the Registrant..................................... 110 Item 11. Executive Compensation................................................................. 110 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 110 Item 13. Certain Relationships and Related Transactions......................................... 110 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 111
2 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION Great Western Financial Corporation ("GWFC", "Great Western" or "the Company"), with consolidated assets of approximately $42.9 billion, is a savings and loan holding company organized in 1955 under the laws of the state of Delaware. The principal assets of the Company are the capital stock of Great Western Bank, a Federal Savings Bank ("GWB", "Great Western Bank" or "the Bank") and Aristar, Inc. ("Aristar"). GWB is a federally chartered stock savings bank and conducts most of its retail banking through 416 offices located in California and Florida. Real estate lending operations are conducted directly by the Bank or by direct subsidiaries through 220 offices in 27 states with concentration in California, Florida, Texas and Washington. Directly or through its subsidiaries, the Bank also engages in mortgage banking, and other related financial services. Aristar conducts consumer finance operations through 502 offices in 23 states, most of which operate principally under the names Blazer Financial Services or City Finance Company and provide direct installment loans and related credit insurance services and purchase retail installment contracts. For financial information concerning the Company's four principal lines of business, see "Line of Business" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company is a legal entity separate and distinct from the Bank. The principal source of the Company's revenues on an unconsolidated basis has been dividends, interest and management fees from GWB. Various statutory and regulatory restrictions and tax considerations, however, can limit, directly or indirectly, the amounts that may be paid by the Bank to GWFC. Dividends from Aristar continue to be a source of revenue to the Company. For a discussion of dividend restrictions, see "Regulation--Capital Requirements", "Capital Distributions by GWB" and "Restrictions on Transactions with Affiliates". The operations of savings associations are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulatory policies of financial institution regulatory authorities, including the Federal Reserve Board ("FRB"), the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. MERGER AGREEMENT WITH WASHINGTON MUTUAL, INC. On March 6, 1997, Great Western announced that it had entered into a strategic business combination with Washington Mutual, Inc. ("Washington Mutual"). The terms of the Agreement and Plan of merger dated as of March 5, 1997 (the "Merger Agreement") entered into by and between Great Western, Washington Mutual and New American Capital, Inc., ("NAC"), a wholly-owned subsidiary of Washington Mutual provide for a tax-free merger (the "Merger") of Great Western with and into NAC pursuant to which each outstanding share of Great Western common stock, par value $1.00 per share (the "Great Western Common Stock"), will be converted into 0.9 shares of Washington Mutual common stock, no par value ("Washington Mutual Common Stock"), with cash being paid in lieu of fractional shares. Each outstanding share of Great Western 8.30% Preferred Stock (the "Great Western Preferred Stock") will be converted into one share of Washington Mutual 8.30% Preferred Stock, Series F (the "Series F Preferred Stock"). The consummation of the Merger is subject to certain conditions, including approval by the stockholders of Great Western and Washington Mutual and applicable regulatory approvals. The parties expect that the Merger will be consummated in the third quarter of 1997. The description of the Merger Agreement above does not purport to be complete and is qualified in its entirety by reference to the text of the Merger Agreement, which is filed as an exhibit to this Form 10-K. 3 H. F. AHMANSON & COMPANY'S MERGER PROPOSAL On February 18, 1997, H. F. Ahmanson & Company ("Ahmanson") unilaterally announced a proposal for a merger between Ahmanson and Great Western pursuant to which each outstanding share of Great Western common stock, $1.00 par value per share (the "Great Western Common Stock") would be converted into 1.05 shares of Ahmanson common stock (the "Ahmanson Merger Proposal"). On March 3, 1997, Ahmanson commenced soliciting consents from Great Western stockholders (the "Ahmanson Consent Solicitation") in favor of (i) a non- binding advisory resolution urging the Great Western Board of Directors (the "Great Western Board") to consider any bona fide and concrete merger proposal received by Great Western by May 22, 1997 and, if no superior merger proposal is received by such date, to enter into a merger agreement with Ahmanson on the terms of the Ahmanson Merger Proposal, and (ii) four separate proposed By- law amendments that, if validly adopted, would (A) prohibit the Great Western Board from granting to any third party, without the prior consent of the Great Western stockholders, any break-up fees, stock options, "crown jewel" options or other lock-up fee arrangements in connection with a proposed merger of Great Western in excess of $100,000,000, (B) compel Great Western to hold its annual meeting of stockholders on the fourth Tuesday in April in each year or on a date within 14 days thereof, (C) prevent a stockholders' meeting at which a quorum is present from being adjourned unless all business properly brought before such meeting has been acted upon by the stockholders and (D) provide that any of the By-laws adopted pursuant to Ahmanson's Consent Statement may not be subsequently amended unless majority approval of the Great Western stockholders is obtained. Great Western has challenged the legality of Ahmanson's proposed By-law amendment described in clause (A) above as an improper intrusion into the statutory powers of the Board of Directors. Great Western has set March 13, 1997 as the record date for the Ahmanson Consent Solicitation. On March 4, 1997, Great Western disseminated to its stockholders a Revocation of Consent Statement (the "Great Western Revocation Statement") informing them that the Great Western Board unanimously opposes the Ahmanson Consent Solicitation, detailing the reasons for the Great Western Board's opposition to the Ahmanson Consent Statement and urging Great Western stockholders not to sign the consent cards sent to the stockholders by Ahmanson or to revoke any previously executed consent cards. Ahmanson has also indicated its intent to solicit proxies in connection with the 1997 Annual Meeting of Stockholders of Great Western (the "Ahmanson Proxy Solicitation"). In that proxy solicitation, Ahmanson intends to seek to elect three directors nominated by Ahmanson to the Great Western Board and to have additional amendments to the Great Western By-laws adopted. LITIGATION RELATING TO THE AHMANSON MERGER PROPOSAL On February 18, 1997, Ahmanson filed a Verified Complaint for Declaratory and Injunctive Relief against Great Western and its directors (the "Ahmanson Complaint") in the Court of Chancery of the State of Delaware. The Ahmanson Complaint alleges, among other things, that: (i) the defendants have breached their fiduciary duties with respect to the stockholder rights plan adopted by the Board in June 1986, as amended in June 1995 (the "Rights Plan"); (ii) the adoption of any defensive measure by the defendants which has the effect of impeding, thwarting, frustrating or interfering with the Ahmanson Merger Proposal would constitute a breach of the defendants' fiduciary duties; and (iii) the individual directors of Great Western have breached their fiduciary duties with respect to Section 203 (the "Delaware Business Combination Statute") of the Delaware General Corporation Law (the "DGCL"). Ahmanson seeks declaratory and injunctive relief as follows: (i) an order enjoining the defendants from adopting any defensive measure which has the effect of impeding, thwarting, frustrating or interfering with the Ahmanson Merger Proposal; (ii) an order compelling the defendants to redeem the rights associated with the Rights Plan or to amend the Rights Plan so as to make it inapplicable to the Ahmanson Merger Proposal; (iii) an order enjoining the defendants from taking any action pursuant to the Rights Plan that would dilute or interfere 4 with Ahmanson's voting rights or otherwise discriminate against Ahmanson; (iv) an order compelling the defendants to approve the Ahmanson Merger Proposal for the purposes of the Delaware Business Combination Statute; (v) an order enjoining the defendants from taking any action to enforce or apply the Delaware Business Combination Statute that would impede, thwart, frustrate or interfere with the Ahmanson Merger Proposal; and (vi) an order awarding Ahmanson its costs and expenses in the action. On February 26, 1996, Great Western filed its Answer, Affirmative Defenses and Counterclaim to the Ahmanson Complaint. In the Counterclaim, Great Western stated, among other things, that the proposed By-law amendment described herein as Proposal 2 would impermissibly limit the Board's power, granted under Delaware law and Great Western's Restated Certificate of Incorporation, to manage the business and affairs of Great Western. Great Western also stated that such By-law amendment is inequitable because it would impair the Board's ability to negotiate an alternative transaction to the Ahmanson Proposal should the Board choose to do so. Further, Great Western denied all of the material allegations raised by the Ahmanson Complaint and asserted affirmative defenses, including that: (i) the Ahmanson Complaint fails to state a claim on which relief can be granted; and (ii) Ahmanson is acting in its own self interest at the expense of Great Western and its stockholders and thus comes to Court with unclean hands. Great Western seeks declaratory and injunctive relief as to, among other matters, the following: (i) dismissal of the Ahmanson Complaint with prejudice and denial of the relief requested by Ahmanson; and (ii) an order declaring the proposed By-law amendment to be invalid, illegal and inequitable. On February 27, 1997, Vice-Chancellor Jacobs informed Great Western and Ahmanson that he would rule on the legality and validity of the proposed By-law amendment as soon as the issue becomes relevant. Between February 18, 1997 and February 26, 1997, six complaints (the "Complaints") were filed against Great Western and its directors in the Court of Chancery of the State of Delaware by Fred T. Isquith, Harry Lewis, Bernd Bildstein, Charles Uttenreither, Melvyn Zupnick and Emil Schachter. Each action was brought on behalf of the plaintiff, individually, and as a purported class action on behalf of all stockholders of Great Western. The Complaints allege, among other things, that the defendants are violating their fiduciary duties owed to the stockholders of Great Western with respect to the Ahmanson Merger Proposal. The plaintiffs generally seek: (i) an order declaring that the action may be maintained as a class action; (ii) an order preliminarily and permanently enjoining the defendants to consider and negotiate with respect to all bona fide offers or proposals for Great Western or its assets, in the best interests of Great Western stockholders; and (iii) compensatory damages, the costs and disbursements of the action and such other and further relief as may be just and proper. In addition, certain plaintiffs seek judgments ordering Great Western's directors, individually, to announce their intention with respect to certain matters relating to the Ahmanson Merger Proposal. The plaintiffs filed a Motion to Consolidate the Complaints on March 6, 1997. Great Western and its directors deny the operative allegations of the Complaints; however, answers have not yet been filed and discovery has not yet commenced. On March 3, 1997, Ahmanson filed a Complaint against Great Western (the "Ahmanson Section 220 Complaint") in the Court of Chancery of the State of Delaware. The Ahmanson Section 220 Complaint alleges, among other things, that: (i) Ahmanson is entitled, pursuant to Section 220 of the Delaware General Corporation Law, to inspect and copy certain books and records of Great Western and (ii) that Great Western has failed to make available for inspection and copying by Ahmanson a list of the stockholders of Great Western and other related information. Ahmanson requested that the Court enter an order directing Great Western to provide Ahmanson with the requested information. On March 6, 1997, Great Western provided Ahmanson with all of the information requested in the Ahmanson Section 220 Complaint. On March 7, 1997, Great Western mailed a letter to Ahmanson requesting that Ahmanson dismiss the Ahmanson Section 220 Complaint as mute. On March 7, 1997, Ahmanson filed a Motion for Leave to File Amended and Supplemental Complaint against Great Western and its directors (the "Ahmanson Supplemental Complaint") in the Court of Chancery of the State of Delaware. In addition to the allegations made in the Ahmanson Complaint, the Ahmanson Supplemental Complaint further alleges, among other things, that: (i) the defendants have failed to create a level 5 playing field by discriminatorily favoring other potential bidders to the exclusion of Ahmanson and by entering into the Merger Agreement; (ii) the defendants have actively and unlawfully sought to thwart its stockholders from exercising certain of their rights for the purpose of entrenchment; (iii) the defendants have failed to find the best value reasonably available; and (iv) the defendants have irreparably harmed Ahmanson by depriving it of the unique opportunity to acquire Great Western. Consequently, Ahmanson seeks additional declaratory and injunctive relief enjoining Great Western and the individual defendants from, among other things, discriminating against Ahmanson, delaying Great Western's annual meeting of stockholders, or taking steps to consummate the Merger or other transaction with Washington Mutual. Great Western and its directors intend to vigorously defend the claims in the Ahmanson Complaint, the Ahmanson Supplemental Complaint and the Complaints. ACQUISITIONS AND DISPOSITIONS GWFC is, from time to time, engaged in discussions with other financial institutions of various sizes in various locations throughout the United States and with governmental agencies regarding mergers, acquisitions or dispositions. No assurance can be given that GWFC will complete any particular transaction. Information on specific acquisitions and dispositions is summarized in Note 2 of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data". RELATED FINANCIAL SERVICES ACTIVITIES The principal non-depository business activities of GWFC and GWB are described below. Consumer Finance Group. The Consumer Finance Group is comprised of Aristar and the industrial banks listed below. Consumer finance activities are highly regulated by federal and state laws of both general and specific applicability. Federal regulations relate primarily to fair credit practice matters. State regulations may include certain licensing requirements, which vary from state to state and may require periodic examination to verify compliance with, among other restraints, state interest rate and loan size limits. The Company also has industrial bank subsidiaries, First Community Industrial Bank in Denver, Colorado and Great Western Thrift & Loan in Salt Lake City, Utah, which conduct activities similar to those of consumer finance operations. Other Activities. GWFC and its direct and indirect subsidiaries also engage in related service businesses, including investment company advisor and administration activities, insurance operations, real estate development and other lines of business. GWFC and its direct and indirect subsidiaries in the future may also pursue other business opportunities, although no assurances concerning the timing or nature of such activities can be given. INFLATION Inflation has not been a significant factor for the past several years. However, the Company recognizes the adverse effects that inflation could bring to its financial position and operations and consequently monitors its effects closely. CAUTIONARY STATEMENTS The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual results to differ materially from those expressed or implied in any forward looking statement made herein or elsewhere by the Company or its directors, officers or employees. The Company intends to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 6 ADEQUACY OF ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES The Company regularly reviews its assets to determine that each category is reasonably valued. In this review process, it monitors the loss exposure relating to nonperforming assets, assets adversely classified for regulatory purposes, delinquency trends and the market environment to identify potential problems. The Company assesses the status of loss reserves on real estate and consumer loans based upon expected future economic conditions and its current loss experience as applied to the loan portfolio, including loans that are delinquent or, in the case of real estate loans, adversely classified because of declining collateral values. The amount of the Company's loss reserve represents management's estimate of the amount of real estate loan losses likely to be incurred by the Company, based upon various assumptions as to future interest rate environments, economic trends and other conditions. As such, the loss reserve does not represent the amount of such losses that could be incurred under adverse conditions that management does not consider to be the most likely to arise. In addition, management's classification of assets and evaluation of the adequacy of the loss reserve is an ongoing process. Consequently, there can be no assurance that material additions to the Company's loss reserve will not be necessary, thereby adversely affecting earnings. ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREA The Company's business is subject to changes in local economic and business conditions. The economic environment in California has shown improvement in the past year. In particular, the real estate market has shown improvement throughout the state, though most notably in Northern California. As a result of the improving economy and the disposition of nonperforming loans and real estate through bulk sales, the Company's nonperforming assets have substantially declined. However, a worsening of economic conditions in the State could have an adverse effect on the Company's business, including reducing demand for new financing and increasing nonperforming assets and real estate. FLUCTUATIONS IN INTEREST RATES Prevailing economic conditions, particularly changes in market interest rates, as well as governmental policies and regulations concerning, among other things, monetary and fiscal affairs, significantly affect interest rates and a savings institution's net interest income. The results of operations of GWB depend to a large extent on net interest income, which is the differential between interest GWB receives from its loans, securities and other interest earning assets and the interest expense the Bank pays on its deposits and other interest bearing liabilities. GWB is subject to risk from fluctuations of interest rates to the extent its interest bearing liabilities mature or reprice at different times or on a different basis than its interest earning assets. SIGNIFICANT REGULATION The financial institutions industry, including the Company and GWB, is subject to significant regulation which has materially affected the financial institutions industry in the past and will likely do so in the future. Such regulations may be changed at any time, and the interpretation of the relevant law and regulation is also subject to change by the authorities who examine financial institutions and their holding companies and interpret those laws and regulations. There can be no assurance that any present or future changes in the laws or regulations or in their interpretation will not adversely affect the Company or GWB. RESTRICTIONS ON DISTRIBUTIONS OTS regulations impose certain limitations on capital distributions by savings institutions, including the payment of cash dividends. The regulations establish guidelines for categorizing institutions into three tiers for purposes of determining eligibility to make distributions. These tiers are based primarily on the institution's capital levels but also relate to an institution's supervisory status with the OTS. Under these guidelines, the ability to pay cash dividends is increasingly limited as an institution's capital position, earnings and supervisory status worsens. In addition, the OTS could prohibit a proposed capital distribution by any institution, which 7 would otherwise be permitted by the guidelines, if the OTS determines that such a distribution would constitute an unsafe or unsound practice. Also, certain tax considerations limit the amount of dividends GWB would otherwise be able to pay. See "Regulation--Capital Distributions by GWB." ENVIRONMENTAL RISKS Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous substances on, under or in such property. Pursuant to these laws and regulations, under certain circumstances, a lender may become liable for the environmental liabilities in connection with its borrower's properties if, among other things, it either forecloses or participates in the management of its borrower's operations or hazardous substance handling or disposal practices. If certain properties securing GWB loans and properties GWB has foreclosed upon are found to be environmentally contaminated or contain hazardous substances, including building materials containing asbestos or lead, GWB may be required to remove or remediate such contamination or hazardous substances. Although there can be no assurances that the costs of any required removal or remediation or related liabilities on these properties or any other properties would not be material and substantially exceed the value of the affected properties or the loans secured by the properties or that GWB's ability to sell any foreclosed property would not be adversely affected, management is not aware of any environmental liability relating to these properties that it believes would have a material adverse effect on its business or results of operations. COMPETITION Competition for deposits comes principally from other savings associations, commercial banks, credit unions, corporations, governmental agencies and governmental debt securities, insurance companies, pension funds, and other investment media including money markets and mutual funds, many of which can offer investment alternatives. Many of these institutions also have nationwide retail networks. Competition in residential lending activities comes principally from other savings associations, mortgage companies, commercial banks and, to a lesser degree, from finance companies, insurance companies, governmental agencies, pension funds and trusts, and sellers of properties. Competition in the provision of services being offered by GWFC and its subsidiaries and affiliates in consumer lending, investment company advisor and administration activities and other activities comes principally from the traditional providers of such services and from other financial institutions. REGULATION HOLDING COMPANY REGULATION General. The Company is a unitary savings and loan holding company as a result of its control of GWB. As such, it is subject to regulation, supervision, and examination by, and the reporting requirements of, the OTS and is governed by the savings and loan holding company provisions of the Home Owners' Loan Act, as amended. Restrictions on Activities. A savings and loan holding company is prohibited, directly or indirectly, from obtaining control of a savings association or savings and loan holding company without the prior approval of the OTS. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), permits the acquisition by a savings and loan holding company of up to 5% of the voting shares of a savings association or savings and loan holding company which is not one of its present affiliates. No director, officer, or controlling shareholder of the Company may, except with the prior approval of the OTS, acquire control of any savings association which is not a subsidiary of the Company. 8 FIRREA empowers the OTS to impose restrictions when it determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of a holding company's subsidiary savings association. Thus, FIRREA confers on the OTS oversight authority for all holding company affiliates, not just the savings association. Specifically, the OTS may (i) limit the payment of dividends by a savings association; (ii) limit transactions between a savings association, the holding company and the subsidiaries or affiliates of either; and (iii) limit any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Any such limits will be issued in the form of a directive having the effect of a cease and desist order. REGULATION OF SUBSIDIARIES General. Deposits in GWB and the Company's industrial banks, First Community Industrial Bank in Denver, Colorado and Great Western Thrift & Loan in Salt Lake City, Utah are separately insured by the FDIC up to $100,000 and those institutions are regulated by the FDIC. GWB is a federally chartered savings association which is also regulated by the OTS. The industrial banks are state chartered institutions which are regulated by state authorities in addition to being regulated by the FDIC. State laws specify the investments which these state institutions may make and the activities in which they may engage. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), however, insured state banks may not engage in activities not permissible for national banks unless the FDIC determines that the activity will pose no significant risk to the insurance fund and the bank complies with applicable capital standards. The Company's consumer finance subsidiaries are governed by state and federal laws. Federal laws relate primarily to fair credit practice matters. State laws set out applicable licensing requirements, provide for periodic examinations and establish maximum finance charges on credit extensions. The Company's insurance subsidiaries are governed by state law and the Company's securities brokerage and investment advisory subsidiaries are governed by federal and state laws relating to their operation, registration, capital and other matters. The Company's securities brokerage subsidiary is required to conduct its activities in compliance with the interagency guidelines of the federal bank and thrift regulators on retail sales of uninsured, nondeposit investment products by federally insured financial institutions. The interagency guidelines require that, among other things, customers are fully informed that investment products are not insured, are not deposits of or guaranteed by GWB and involve investment risk including the potential loss of principal. Qualified Thrift Lender. FDICIA imposes revised requirements for qualification as a qualified thrift lender ("QTL"). The test requires that 65% of a savings association's "portfolio assets" (all assets except goodwill, intangibles, property used to conduct the thrift's business and certain liquid assets up to 20% of assets) consist of "qualified thrift investments" (including, subject to certain limits, residential mortgage and construction loans, home improvement and repair loans, mortgage-backed securities, home equity loans, Federal Home Loan Bank ("FHLBank") stock, Federal Savings and Loan Insurance Corporation ("FSLIC"), FDIC, and Resolution Trust Corporation ("RTC") obligations, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation stock, education loans, credit card loans, consumer loans, certain small business loans and loans to construct or purchase or maintain churches, schools, nursing homes and hospitals, investments in residential housing-oriented service corporations, and 50% of mortgages originated and sold within 90 days). At December 31, 1996, the asset composition of GWB was substantially in excess of that required to qualify it to meet the QTL test. The following sanctions may apply as the result of failure of a savings association to remain a QTL: (i) required conversion of the savings association's charter to a national bank charter; (ii) limitations on new investments and activities to those permissible for national banks; (iii) imposition of branching restrictions applicable to national banks; (iv) prohibitions on new advances to the savings association from its regional FHLBank; and (v) imposition of dividend restrictions applicable to national banks. Three years after a savings association ceases to be a QTL, it would be required to divest all investments and cease all activities not 9 permissible for national banks and all FHLBank advances would have to be repaid in a prompt and prudent manner. In addition, a savings and loan holding company holding such a savings association would be required to register as a bank holding company. Deposit Insurance. The FDIC maintains two separate deposit insurance funds-- the Bank Insurance Fund ("BIF") which insures the deposits of the industrial banks (the "Company's BIF-insured institutions"), and the Savings Association Insurance Fund ("SAIF") which insures the deposits of GWB. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 ("Funds Act") which included provisions for the recapitalization of the SAIF through a one-time special assessment of 65.7 basis points of SAIF deposits held by savings associations as of March 31, 1995. GWB's special assessment of $188 million was reflected in expense in the third quarter of 1996. The current SAIF assessment schedule of premiums ranges from zero to 27 basis points of deposits, depending on risk classification. As authorized by the Funds Act, the FDIC will collect assessments against BIF and SAIF- assessable deposits to be paid to the Financing Corporation ("FICO") to service interest on FICO debt issued during the 1980s. Savings associations, in 1996, paid SAIF and BIF insurance premiums that covered approximately $780 million of interest on FICO debt. Beginning in 1997, such payments will drop to $460 million annually, and in the year 2000, to about $180 million annually or approximately two basis points of deposits. The Funds Act stipulates the rate of BIF-assessable deposits must equal one- fifth of the FICO assessment rate on SAIF-assessable deposits. GWB expects its FICO assessment will be approximately 6.48 basis points of deposits, while the FICO assessment of banks will be approximately 1.30 basis points through 1999. GWB expects to reduce its annual insurance premium from approximately $65 million in 1996 to approximately $18 million in each of the next three years. The Funds Act also requires the Treasury Department to conduct a survey of all issues considered to be relevant to the development of a common charter for all FDIC insured institutions and the abolition of separate and distinct charters for banks and savings associations. The law specifies that the BIF and SAIF are to be merged by 1999, if there are no savings associations in existence at that time. A merger of the deposit insurance funds could potentially occur prior to 1999 if certain conditions are met. FIRREA requires insured depository institutions to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of a commonly controlled insured depository institution or assistance provided to such an institution in danger of default. Capital Requirements. The capital standards applicable to savings associations consist of three components--a leverage ratio requirement, a tangible capital requirement and a risk-based capital requirement. All three components are required by FIRREA to be no less stringent than the corresponding requirements applicable to national banks, except that the risk- based capital requirement for savings associations may deviate to reflect interest-rate risk or other risks if such deviations do not, in the aggregate, result in materially lower levels of capital being required of savings associations than would be required under the risk-based capital standards applicable to national banks. The capital regulations contain special capital rules affecting savings associations with certain kinds of subsidiaries. For purposes of determining compliance with each of the capital standards, a savings association's investment in and extensions of credit to subsidiaries engaged in activities not permissible for a national bank are, with certain exceptions, deducted from the savings association's capital. At December 31, 1996, GWB's investments in and extensions of credit to such subsidiaries aggregated $23 million, all of which was deducted from capital at December 31, 1996. The leverage ratio requirement requires a savings association to maintain "core capital" of not less than 3% of adjusted total assets. As mentioned below, the OTS proposed, but has not yet adopted, a stricter standard 10 which has become applicable to banks and under which banks are required to maintain a core capital ratio of at least 3% and up to 5% depending upon their condition and the rating they have received from the applicable regulatory body. Under the current standard, "core capital" generally includes common stockholders' equity, (including retained earnings, but excluding net unrealized gain or loss on securities available-for-sale), noncumulative perpetual preferred stock and any related surplus, and minority interests in consolidated subsidiaries. Intangible assets (other than qualifying core deposit intangible assets, mortgage servicing rights and purchased credit card relationships) must be deducted from core capital. Certain deferred tax assets must also be deducted. Core capital includes core deposit intangible assets, mortgage servicing rights and purchased credit card relationships, subject to certain limitations. GWB has no qualifying core deposit intangible assets or purchased credit card relationships. At December 31, 1996, GWB had a core capital ratio of 5.85%. The tangible capital requirement requires a savings association to maintain "tangible capital" in an amount not less than 1.5% of adjusted total assets. "Tangible capital" means core capital less qualifying core deposit intangible assets and purchased credit card relationships. At December 31, 1996, GWB had a ratio of tangible capital to total adjusted assets of 5.85%. The risk-based capital requirements for savings associations are similar in many respects to the risk-based capital guidelines of the FRB, the Comptroller of the Currency and the FDIC. Among other things, the risk-based capital requirements provide that the capital ratio applicable to an asset will be adjusted to reflect the degree of credit risk associated with such asset and the asset base for computing a savings association's capital requirement will include off-balance-sheet assets. The regulations require savings associations to maintain capital equal to 8% of risk-weighted assets. A savings association's supplementary capital may be used to satisfy the risk-based capital ratios only to the extent of that association's core capital. At December 31, 1996, GWB had a ratio of capital to risk-weighted assets of 11.23%. FDICIA requires the federal regulatory agencies to review the risk-based capital standards to ensure that they adequately address interest-rate risk, concentration of credit risk and risks from nontraditional activities. The OTS amended its risk-based capital rules to incorporate interest-rate risk requirements which require a savings association to hold additional capital if it is projected to experience an excessive decline in "net portfolio value" in the event interest rates increase or decrease by two percentage points. The additional capital required is equal to one-half of the amount by which any decline in net portfolio value exceeds two percent of the savings association's estimated economic value of assets, as determined by the OTS. The OTS, however, has not implemented these capital standards relating to interest-rate risk, pending action of the bank regulatory agencies. As of December 31, 1996, GWB believes it would have no additional capital requirement for possible interest-rate risk. A savings association which fails to meet the capital standards must submit to the OTS Director a business plan which describes the manner in which it proposes to increase its capital and the activities in which it will engage. Any increase in the savings association's assets must be met with a commensurate increase in the savings association's tangible capital and risk- based capital. As part of the submission of a capital plan, a savings association will be required to certify that during the pendency of its application for approval of its capital plan, it will adhere to certain asset growth restrictions, and will not make any capital distributions or engage in certain other prohibited or restricted activities. The OTS Director must, with certain limited exceptions, limit the asset growth of any such savings association. In addition, the OTS Director may issue a capital directive to such a savings association which may contain restrictions the OTS Director deems necessary or appropriate under the circumstances. GWB is not subject to any capital directive at this time. In addition to the above regulatory capital requirements and pursuant to FDICIA, the federal banking agencies have adopted regulations which establish a system of progressive constraints as capital levels decline at banks and savings associations. The "prompt corrective action" rules classify banks and savings associations into one of five categories based upon capital adequacy, ranging from "well capitalized" to "critically 11 undercapitalized". Furthermore, FDICIA provides that under certain circumstances a federal banking agency may reclassify an institution to the next lower capital category based on supervisory information other than the capital levels of the institution. The FDIC regulations implementing the prompt corrective action provisions of FDICIA define the five capital categories as follows: (i) an institution is "well capitalized" if it has a total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based capital ratio (core capital to risk-weighted assets) of 6.00% or greater, has a core capital ratio of 5.00% or greater and is not subject to any written capital order or directive to meet a specific capital level or any capital measure; (ii) an institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.00% or greater, has a Tier 1 risk-based capital ratio of 4.00% or greater and has a core capital ratio of 4.00% or greater (3.00% for certain highly rated institutions); (iii) an institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8.00% or has either a Tier 1 risk-based or a core capital ratio that is less than 4.00%; (iv) an institution is "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.00%, or has either a Tier 1 risk-based or a core capital ratio that is less than 3.00%; and (v) an institution is "critically undercapitalized" if its "tangible equity" (defined in the prompt corrective action regulations to mean core capital plus cumulative perpetual preferred stock) is equal to or less than 2.00% of its total assets. The OTS also has authority, after an opportunity for a hearing, to downgrade an institution from "well capitalized" to "adequately capitalized", or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, for supervisory concerns. GWB believes that it met the requirements to be a "well capitalized" institution under the regulations as of December 31, 1996. FDICIA requires the appropriate federal banking agencies to take corrective action to restrict asset growth, acquisitions, branching and new business with respect to an "undercapitalized" institution and to take increasingly severe additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized". FDICIA also prohibits dividends and other capital distributions and the payment of management fees to a controlling person if, following such distribution or payment, the institution would fall within one of the three "undercapitalized" categories. FDICIA also requires an institution which is "undercapitalized" to submit a capital restoration plan for improving its capital to the appropriate federal banking agency. The holding company of such an institution must guarantee that the institution will meet its capital restoration plan, subject to certain limitations. If such a guarantee were deemed to be a commitment to maintain capital under the federal Bankruptcy Code, a claim under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party creditors of the holding company. As a condition of prior regulatory approval of certain transactions, the Company has provided federal regulators with a commitment to maintain the regulatory net worth of GWB at the minimum required amount and, if necessary, to infuse sufficient additional capital to maintain such level. Under FDICIA, a bank or savings association that is "significantly undercapitalized" is subject to severe restrictions on its activities, and may be required, among other things, to issue additional debt or stock, to sell assets or to be acquired by a depository institution holding company or combine with another depository institution if one or more grounds exist for appointing a conservator or receiver for the institution. A bank or savings association that is "critically undercapitalized" will be subject, with certain exceptions, to the mandatory appointment of a conservator or receiver by the appropriate federal banking agency within 90 days after such institution becomes "critically undercapitalized". In addition, a bank or savings association that is "critically undercapitalized" is subject to more severe restrictions on its activities and on payment of subordinated debt, and may be prohibited, among other things, from entering into material investment, expansion, acquisition or disposition transactions or paying interest on new or renewed liabilities at a rate that would significantly increase the institution's weighted average cost of funds. 12 The FDIC has adopted a minimum core capital standard under which state nonmember banks are required to hold core capital consisting generally of common equity, minority interests in equity accounts of consolidated subsidiaries, and qualifying perpetual preferred stock of at least 3% and up to 5% of total assets. Banks receiving the highest rating from the FDIC are permitted to maintain core capital of 3% of total assets, while less healthy banks are required to maintain core capital of 4 to 5%. A bank with core capital of less than 2% would be deemed to be in an unsafe and unsound condition. The OTS has proposed to amend its leverage ratio requirement for savings associations to adopt a similar standard. With respect to savings associations, the FDIC will use the core capital standard in determining whether to approve applications for deposit insurance, the right to exercise additional powers, or to merge or make acquisitions. The FDIC may also use the new standard in determining whether to take enforcement action against a savings association when an unsafe or unsound practice exists. The Company's BIF-insured institutions are required to have risk-based capital of 8% of risk-weighted assets, based on the credit risk deemed inherent in institutions' assets, including certain off-balance-sheet assets. In addition, core capital must be 4% of risk-weighted assets. At December 31, 1996, the BIF-insured industrial banks exceeded their required ratios. Capital Distributions by GWB. The Company is a legal entity separate and distinct from the Bank and the Company's other subsidiaries. The primary source of the Company's revenues on an unconsolidated basis has been dividends from GWB. Various regulatory and tax considerations, however, limit directly or indirectly the amount of dividends GWB can pay. Should GWB distribute dividends in excess of the amount of its available earnings and profits (as determined for federal income tax purposes), such excess would be subject to federal income tax. At December 31, 1996, the Bank had approximately $628 million of retained earnings available for the payment of dividends without adverse tax consequences. Dividend payments are further restricted by regulations as discussed below. The OTS regulations impose limitations upon "capital distributions" by savings associations, including cash dividends. The regulations establish a three-tiered system: Tier 1 includes savings associations with capital at least equal to their fully phased-in capital requirement which have not been notified that they are in need of more than normal supervision; Tier 2 includes savings associations with capital above their minimum capital requirement but less than their fully phased-in requirement; and Tier 3 includes savings associations with capital below their minimum capital requirement. Tier 1 associations may, after prior notice but without approval of the OTS, make capital distributions up to the higher of (1) 100% of their net income during the calendar year plus the amount that would reduce by one half their "surplus capital ratio" (the excess over their fully phased-in capital requirement) at the beginning of the calendar year or (2) 75% of their net income over the most recent four-quarter period. Tier 2 associations may, after prior notice but without approval of the OTS, make capital distributions of up to 25% to 75% of their net income over the most recent four-quarter period depending upon their current risk-based capital position. Tier 3 associations may not make any capital distributions without prior approval. The Company believes that GWB is a Tier 1 association as of December 31, 1996. Notwithstanding the foregoing, the regulatory authorities have broad discretion to prohibit any payment of dividends and could take other actions if they determine that the payment of such dividends would constitute an unsafe or unsound practice. In addition, FDICIA prohibits dividends and other capital distributions if, following such distribution, the savings association would fall within one of three "undercapitalized" categories. See "Regulation--Capital Requirements". Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires each bank or savings association to identify the communities it serves and the types of credit and other financial services the bank or savings association is prepared to extend to those communities. The CRA also requires the OTS to assess a savings association's record of helping to meet the credit needs of its community and to take such assessment into consideration when evaluating applications for mergers, acquisitions and other transactions. A less than satisfactory CRA rating may be the basis for denying such applications. 13 In connection with its assessment of CRA performance, the OTS and the bank regulatory agencies assign a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance". Based on the most recent CRA examination conducted in 1995, GWB received a rating of "outstanding." Restrictions on Transactions with Affiliates. FIRREA imposes on savings associations the affiliate transaction restrictions contained in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act in the same manner and to the same extent as such restrictions apply to member banks. Such restrictions are also applicable to the BIF-insured industrial banks. These restrictions, among other things, prohibit or limit an institution from extending credit to, or entering into, certain transactions with its affiliates and the principal shareholders, directors and executive officers of the institution under certain circumstances. Further, a savings association may not purchase or invest in securities issued by an affiliate other than a subsidiary. The OTS is authorized to impose more stringent restrictions on a savings association's affiliated transactions than those contained in Sections 23A and 23B. Subsidiary Investment Limits. The amount which a federal savings bank may invest in service corporations and subsidiaries (whether in equity or debt of such corporations) is limited to an amount equal to 3% of assets, provided investments in excess of 2% of assets serve certain primarily community purposes. The service corporation investment limit (for savings associations like GWB which meet net worth and certain other requirements) is exclusive of an amount which may be invested in "conforming" (i.e., otherwise authorized) loans to service corporations subject to applicable regulatory requirements. At December 31, 1996, GWB's aggregate investment in service corporations was approximately .3% of its assets, and there were no conforming loans. Notice of Certain Activities. FIRREA requires a savings association seeking to establish a new subsidiary, acquire control of an existing company (after which it would be a subsidiary), or conduct a new activity through a subsidiary, to provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in accordance with regulations and orders of the OTS. The OTS has the power to force a savings association to divest or terminate any activity that it determines is a serious threat to the financial safety, soundness or stability of such savings association or is otherwise inconsistent with sound banking practices. In addition, the FDIC is authorized to determine whether any specific investment activity poses a threat to the SAIF and to prohibit any SAIF member institution from engaging directly in such activity, even if it is an activity that is an otherwise permissible investment for a federal savings association. Loans-to-One Borrower Limitations. FIRREA conforms savings associations' loans-to-one borrower limitations to those applicable to national banks. The lending limits for national banks apply to all savings associations in the same manner and to the same extent as they apply to national banks. The basic lending limit is 15% of the amount of Tier 1 and Tier 2 capital actually included in risk-based capital, plus the allowance for loan and lease losses not included in Tier 2 capital. It is not expected that this limitation will have any significant effect upon GWB's lending activities as currently conducted. Brokered Deposits. A rule adopted by the FDIC permits only "well capitalized" institutions to obtain brokered deposits. "Adequately capitalized" institutions may obtain brokered deposits if they receive a waiver from the FDIC. The rule adopted by the FDIC also prohibits institutions which are not "well capitalized" from soliciting deposits at rates significantly higher than prevailing rates. GWB believes that it is a "well capitalized" institution at December 31, 1996. Liquidity. OTS regulations require savings associations to maintain for each calendar month an average daily balance of liquid assets (including cash and certain time deposits, bankers' acceptances, specified corporate obligations and specified United States government, state government and federal agency obligations) of not less than 5% of the average daily balance of its net withdrawable deposit accounts (the amount of all deposit accounts less the unpaid balance of all loans made on the security of such accounts) plus short- term debt (borrowings payable on demand or in one year or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS within the statutory range of 4% to 10%. OTS regulations also require 14 each savings association to maintain for each calendar month an average daily balance of short-term liquid assets (generally those having maturities of 12 months or less) at an amount not less than 1% of the average daily balance of its net withdrawable accounts plus such short-term debt during the preceding calendar month. For the year ended December 31, 1996, average liquidity and average short-term liquidity ratios of GWB were 5.48% and 3.06%, respectively. For the year ended December 31, 1995, average liquidity and average short-term liquidity ratios were 5.46% and 2.29%, respectively. Federal Home Loan Bank System. GWB is a member of the FHLBank System, which consists of 12 regional Federal Home Loan Banks. Members of the FHLBank system are required to own shares of capital stock in the applicable FHLBank in an amount equal to the greater of 1% of the aggregate principal amount of the member's unpaid residential mortgages, 5% of FHLBank advances to the member or .3% of total assets as of the close of each calendar year. The FHLBank serves as a reserve or central bank for the member institutions within its assigned region. It makes advances (i.e. loans) to members in accordance with its established policies and procedures. The maximum amount of credit which the FHLBank will extend for purposes other than meeting withdrawals varies from time to time in accordance with its policies. The FHLBank interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLBank and the purpose of the borrowing. As of December 31, 1996, GWB held $378 million of FHLBank stock and received dividends in the amount of $22.3 million in 1996 with respect to such stock. Federal Reserve Board Regulations. Pursuant to the Depository Institutions Deregulation and Monetary Control Act of 1980, the FRB adopted regulations that require depository institutions to maintain reserves against their transaction accounts and nonpersonal time deposits. In December 1990, the FRB eliminated the reserve requirement on nonpersonal time deposits. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. At December 31, 1996, GWB's balances with the FRB totaled $127 million. The effect of this reserve requirement is to decrease an institution's available investment funds. The current reserve requirement on transaction accounts is 10%. Savings associations have authority to use various FRB services and to borrow from the Federal Reserve Bank's "discount window", but FRB regulations require them to exhaust all FHLBank sources before borrowing from a Federal Reserve Bank. In addition, FDICIA restricts the period during which discount advances may be outstanding to "undercapitalized" depository institutions. As a creditor and a financial institution, GWB is subject to additional regulations promulgated by the FRB, including, without limitation, Regulation B (Equal Credit Opportunity Act), Regulation E (Electronic Funds Transfers Act), Regulation F (Interbank Liabilities), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds Availability Act) and Regulation DD (Truth in Savings Act). Safety and Soundness Standards. Pursuant to statutory requirements, the OTS has issued a rule that sets forth guidelines, rather than a regulation, in the areas of excessive compensation, internal controls, information systems, documentation, credit underwriting, interest risk exposure, asset growth and compliance with laws and regulations. Under the excessive compensation standard, the OTS will analyze a person's compensation history, post- employment benefits, the financial condition of the institution, compensation practices at comparable institutions and other relevant information. The final rule authorizes, rather than requires, the OTS to seek a compliance plan from institutions failing to meet the safety and soundness guidelines. In addition to the final rule on safety and soundness, the OTS has issued asset quality and earnings standards that require monitoring and reporting systems to the Board of Directors and management to identify emerging problems and corrective actions to resolve them. Real Estate Lending Standards. The federal banking regulatory agencies, including the OTS, adopted regulations which require institutions to adopt written real estate lending policies that, among other things, must be consistent with guidelines adopted by the agencies. Among the guidelines adopted by the OTS and the other agencies are maximum loan-to-value ratios for land loans (65%); land development loans (75%); construction loans (80-85%); loans on owner-occupied 1-4 unit residential properties, including home equity loans (no specific 15 required limit, but loans at or above 90% require private mortgage insurance or readily marketable collateral); and loans on other improved property (85%). The guidelines permit institutions to make loans in excess of the supervisory loan-to-value limits if such loans are supported by other credit factors, but the aggregate of such nonconforming loans should not exceed the institution's total capital, and the aggregate of nonconforming loans secured by real estate other than 1-4 unit residential properties should not exceed 30% of total capital. Institutions are required to review, and update as appropriate, their real estate lending policies on at least an annual basis. Classification of Assets. Savings associations are required to classify their assets on a regular basis, to establish adequate allowances for losses and report the results of such classification quarterly to the OTS. For additional information see Note 1 of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data". With respect to classified assets, if the OTS concludes that additional assets should be classified or that the valuation allowances established by the savings association are inadequate, the examiner may determine, subject to review by the savings association's OTS Regional Director, the need for and extent of additional classification or any increase necessary in the savings association's general or specific valuation allowances. A savings association is also required to set aside adequate valuation allowances to the extent that an affiliate or subsidiary holds assets posing a risk to the savings association. A savings association must also establish liabilities for off-balance-sheet items, such as letters of credit, when losses become both probable and reasonably estimable. The OTS has issued guidance for the classification of assets and a policy on the classification of collateral-dependent loans (where proceeds from repayment can be expected to come only from the operation and/or sale of the collateral). For troubled collateral-dependent loans where it is probable that the lender will be unable to collect all amounts due, a savings association must classify as "loss" any excess of the recorded investment in the loan over its "value", and classify the remainder as "substandard". The "value" of a loan is the fair value of the collateral less estimated costs to sell. The federal banking agencies, including the OTS, have issued an interagency policy statement on the allowance for loan and lease losses (the "Policy Statement"). The Policy Statement requires that federally-insured depository institutions maintain an allowance for loan and lease losses ("ALLL") adequate to absorb credit losses associated with the loan and lease portfolio, including all binding commitments to lend. Given the appropriate facts and circumstances as of the evaluation date, the Policy Statement defines an adequate ALLL as a level that is no less than the sum of (1) for loans and leases classified as substandard or doubtful, credit losses over the remaining effective lives of such loans and leases; (2) for loans and leases that are not classified, all estimated credit losses forecasted for the upcoming 12 months; and (3) amounts for estimated losses from transfer risk on international loans. Additionally, an adequate level of ALLL should reflect an additional margin for imprecision inherent in most estimates of expected credit losses. The Policy Statement also provides guidance to examiners in evaluating the adequacy of the ALLL. Among other things, the Policy Statement directs examiners to check the reasonableness of ALLL methodology by comparing the reported ALLL against the sum of (1) 50% of the portfolio that is classified doubtful, (2) 15% of the portfolio that is classified substandard; and (3) for the portions of the portfolio that have not been classified (including those loans and leases designated special mention), estimated credit losses over the upcoming 12 months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans and leases, adjusted for current conditions and trends). The Policy Statement specifies that the amount of ALLL determined by the sum of the amounts above is neither a floor nor a "safe harbor". However, it is expected that examiners will review a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered. 16 EMPLOYEES GWFC employed 13,028 persons at December 31, 1996. Employees are not represented by a union or collective bargaining group and GWFC considers its employee relations to be satisfactory. Employees are provided retirement, savings incentive and other benefits, including life, health and accident and hospital insurance. ITEM 2. PROPERTIES The executive offices of both GWFC and GWB are located in the home office building owned by GWB at 9200 Oakdale Avenue, Chatsworth, California. GWFC owns approximately 47% of the 6.3 million square feet in which its headquarters, administrative and branch offices are located throughout several states, including California and Florida. During 1996, a strategic review of the corporate headquarters facilities was completed to reduce the Company's premises costs. The restacking of the corporate headquarters campus will be implemented throughout 1997 and will include vacating three buildings which will improve the density of the remaining buildings. The restack initiatives will result in a reduction of 272,000 useable square feet or 27% of the campus. See Note 11 of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data", for information on properties, leases and property operations. ITEM 3. LEGAL PROCEEDINGS See Item 1, Business "Litigation Relating to the Ahmanson Merger Proposal". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data". (a) Market and market prices of the common stock--pages 107, 108 and 109 (b) Approximate number of common security holders--page 107 (c) Common stock dividend history and restrictions--pages 107, 108 and 109 (d) Common stock dividend policy--pages 13, 92 and 93 17 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SUMMARY
1996 1995 1994 1993 1992 ------------- ----------- ------------- ------------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) SUMMARY OF OPERATIONS Interest income $ 3,233,931 $ 3,238,711 $ 2,629,718 $ 2,680,784 $ 3,091,093 Interest expense 1,855,914 1,936,582 1,307,448 1,297,930 1,668,731 ------------- ----------- ------------- ------------- ----------- Net interest income 1,378,017 1,302,129 1,322,270 1,382,854 1,422,362 Provision for loan and lease losses 208,971 187,700 207,200 463,000 420,000 ------------- ----------- ------------- ------------- ----------- Net interest income af- ter provision for loan and lease losses 1,169,046 1,114,429 1,115,070 919,854 1,002,362 Noninterest income 331,825 327,668 367,897 327,855 282,131 Noninterest expense 1,314,249 1,019,975 1,076,433 1,155,662 1,188,981 ------------- ----------- ------------- ------------- ----------- Earnings before taxes on income 186,622 422,122 406,534 92,047 95,512 Federal and state taxes on income 70,800 161,100 155,300 30,000 41,600 Accounting changes -- -- -- -- 31,094 ------------- ----------- ------------- ------------- ----------- Net earnings $ 115,822 $ 261,022 $ 251,234 $ 62,047 $ 85,006 ============= =========== ============= ============= =========== SUMMARY OF FINANCIAL CONDITION Cash and cash equiva- lents $ 834,292 $ 1,094,417 $ 1,148,565 $ 975,706 $ 1,036,579 Securities available- for-sale 1,279,283 1,092,459 917,095 871,074 623,906 Loans 30,823,192 29,887,349 28,378,368 30,661,403 30,584,604 Mortgage-backed securi- ties 7,788,551 9,803,441 9,269,607 3,189,396 3,168,057 Real estate 159,997 217,112 256,967 434,077 1,153,383 Other assets 1,989,257 2,491,986 2,247,655 2,216,704 1,872,657 ------------- ----------- ------------- ------------- ----------- Total assets $ 42,874,572 $44,586,764 $ 42,218,257 $ 38,348,360 $38,439,186 ============= =========== ============= ============= =========== Deposits $ 28,586,773 $29,234,928 $ 28,700,947 $ 31,531,563 $30,908,665 Borrowings 10,501,813 11,345,634 10,120,660 3,479,341 4,151,052 Other liabilities 1,090,786 1,083,726 912,864 914,055 929,735 Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust 100,000 100,000 -- -- -- Stockholders' equity- substantially re- stricted 2,595,200 2,822,476 2,483,786 2,423,401 2,449,734 ------------- ----------- ------------- ------------- ----------- Total liabilities and equity $ 42,874,572 $44,586,764 $ 42,218,257 $ 38,348,360 $38,439,186 ============= =========== ============= ============= =========== PER COMMON SHARE DATA Fully diluted earnings $ .69 $ 1.71 $ 1.69 $ .28 $ .53 Dividends .98 .92 .92 .92 .91 Stock price range 31 1/8-21 1/8 27 1/8-16 20 7/8-15 3/8 20 3/8-15 5/8 19 3/4-13 Year-end closing price 29 25 3/8 16 20 17 1/2 Stockholders' equity 17.63 18.42 16.30 16.05 16.48 Tangible stockholders' equity 15.55 16.06 13.59 12.80 14.01 Price earnings ratio 42 15 9 71 33 Dividend rate of return 3.4% 3.6% 5.8% 4.6% 5.2% Dividend rate as a per- cent of earnings 142.0% 53.8% 54.4% 328.6% 171.7% AT YEAR END Average equity to aver- age assets 6.3% 5.9% 6.2% 6.5% 6.2% Return on average assets .27% .59% .65% .16% .22% Return on average equity 4.23% 10.03% 10.35% 2.53% 3.50% Number of common shares issued 137,875,955 137,279,331 134,315,592 132,616,172 130,814,018 Number of beneficial and record stockholders 49,124 51,178 52,633 55,469 42,332 Number of employees 13,028 14,393 15,644 17,029 16,016 Number of offices 1,138 1,207 1,210 1,180 1,101
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Great Western reported consolidated net earnings of $115.8 million, or $.69 per share, for 1996 compared to $261 million, or $1.71 per share for 1995 and $251.2 million, or $1.69 per share for 1994. The Company's net earnings for 1996 were reduced by a special one-time federal deposit insurance assessment imposed on the nation's thrift industry. Without this $188.4 million special insurance premium assessment and other nonrecurring charges taken in 1996, including a $68.3 million pre-tax restructuring charge primarily to reengineer the Company's loan origination operations and consolidate the Company's corporate headquarters and a $50 million provision for loan and lease losses on the bulk sale of nonperforming loans and real estate, annual earnings for 1996 would have been $310.7 million, or $2.09 per share. In 1994, the Company's pre-tax earnings included a $62 million gain on the sale of certain retail banking branches and a $12 million write-off of interstate banking access rights. Without the $62 million gain and the $12 million write-off, the annual earnings for 1994 would have been $220 million, or $1.65 per share. Provisions for losses on loans and leases in 1996 rose to $209 million, up from $187.7 million in 1995 and $207.2 million in 1994. The $209 million provision in 1996 included a charge of $50 million attributable to the bulk sale of $292.4 million of nonperforming loans and real estate associated primarily with loans made in 1989 through 1992. Excluding the bulk sale, the provision would have fallen to $159 million reflecting the improvement in the real estate market. Net charge-offs of 1-4 unit residential loans ("single- family" or "SFR") remained flat from 1995 to 1996. Excluding the charge-off of $58.4 million attributable to the bulk sale of nonperforming loans and real estate, charge-offs for SFR's declined from $195.4 million in 1994 to $137 million in 1996. Nonperforming assets were $546 million, or 1.27% of assets at December 31, 1996, $768.3 million, or 1.72% of assets at December 31, 1995 and $846 million, or 1.98% of assets at December 31, 1994. Net interest income was $1.38 billion for 1996 compared with $1.30 billion for 1995 and $1.32 billion in 1994. The interest spread for 1996 was 3.15% compared with 3.00% for 1995 and 3.50% for 1994. The Company's net interest margin was 3.33% for 1996 compared with 3.13% for 1995 and 3.60% for 1994. Noninterest income was $331.8 million in 1996, $327.7 in 1995 and $367.9 million in 1994. In 1996, banking fees increased $25.0 million and securities operations increased $9.1 million. These increases were offset in part by $17.9 million in write-downs of mortgage-backed securities, a $7.3 million provision for mortgages sold with recourse, and a $4.1 million loss on affordable housing investments. In 1996 a $22.5 million gain was recorded on the sale of the student loan business. This gain was offset by a decrease from 1995 to 1996 in gains on sale of mortgages and mortgage-backed securities of $5.1 million and a decrease in the gain on sale of leases of $14.1 million. Excluding the SAIF assessment and the restructuring expense, noninterest expense was $1.1 billion in 1996, $1 billion in 1995 and $1.1 billion in 1994. The increase of $37.6 million in 1996 was in part the result of increased professional fees of $22.2 million attributable to new initiatives and increased litigation fees and a $5.0 million decrease in telecommunications costs. LINE OF BUSINESS Great Western Financial Corporation is managed along four major lines of business: Consumer Finance, Real Estate Services, Retail Banking and Treasury. The financial performance of these business lines is measured by the Company's profitability reporting system. The system uses various management accounting principles to ensure each business line's financial results reflect the underlying economics of that business. To properly assess the profitability of each business unit, charges for funds employed and credits for funds generated are assigned on a matched maturity basis to minimize interest-rate risk in the business line and centralize that exposure in the Treasury unit where it is managed for the Company as a whole. Expenses incurred 19 in the Company's support units are assigned to business lines based on services provided to a particular business unit. Residual expenses, assets employed and other overhead costs are allocated based on the ratio of a business unit's noninterest expense to the Company total noninterest expense. Loss provision and capital are allocated based on management's assessment of the risk profile of each business line. Finally, loans originated in the Real Estate unit are purchased by the Treasury unit at a transfer price that reflects the risk-adjusted value of the loans. Since there is no authoritative guidance for management accounting principles, the organizational structure of the institution and the allocation methodologies it employs result in business line financial results that are not necessarily comparable across companies. As such, Great Western's business line performance may not be directly comparable with similar information from other financial institutions. Results by line of business for 1995 and 1996 are presented on the following pages. SELECTED FINANCIAL HIGHLIGHTS BY LINE OF BUSINESS Results of operations and financial highlights by line of business for 1996 and 1995 are presented below.
REAL ESTATE CONSUMER FINANCE SERVICES RETAIL BANKING TREASURY CONSOLIDATED ------------------ --------------- -------------------- --------------------- -------------------- 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 -------- -------- ------ ------- --------- --------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) SUMMARY INCOME STATEMENT Net interest income $ 258.7 $ 258.0 $ 17.8 $ 21.5 $ 657.8 $ 741.2 $ 443.7 $ 281.4 $ 1,378.0 $ 1,302.1 Provision for loan and lease losses 58.8 48.5 -- -- 3.2 2.6 147.0 136.6 209.0 187.7 Noninterest income 27.2 29.2 151.6 93.3 251.7 205.7 (98.7) (0.6) 331.8 327.6 Noninterest expense excluding nonrecurring items 128.4 132.1 120.9 135.1 700.2 654.3 108.0 98.4 1,057.5 1,019.9 Restructuring expense -- -- 37.3 -- 29.8 -- 1.2 -- 68.3 -- SAIF special assessment -- -- -- -- -- -- 188.4 -- 188.4 -- -------- -------- ------ ------- --------- --------- --------- --------- --------- --------- Total noninterest expense 128.4 132.1 158.2 135.1 730.0 654.3 297.6 98.4 1,314.2 1,019.9 -------- -------- ------ ------- --------- --------- --------- --------- --------- --------- Earnings before tax 98.7 106.6 11.2 (20.3) 176.3 290.0 (99.6) 45.8 186.6 422.1 Income tax expense 37.0 42.3 4.5 (8.1) 70.5 116.0 (41.2) 10.9 70.8 161.1 -------- -------- ------ ------- --------- --------- --------- --------- --------- --------- Net earnings $ 61.7 $ 64.3 $ 6.7 $ (12.2) $ 105.8 $ 174.0 $ (58.4) $ 34.9 $ 115.8 $ 261.0 ======== ======== ====== ======= ========= ========= ========= ========= ========= ========= AVERAGE BALANCE SHEET DATA Real estate loans $ -- $ -- $ -- $ -- $ -- $ -- $28,066.0 $27,055.0 $28,066.0 $27,055.0 Consumer loans 2,105.0 2,016.0 -- -- 533.3 497.3 0.7 0.7 2,639.0 2,514.0 Assets 2,419.1 2,365.1 137.3 150.8 1,308.9 1,533.2 39,809.7 39,928.9 43,675.0 43,978.0 Deposits 153.9 146.0 -- -- 28,751.0 28,856.6 74.1 208.4 28,979.0 29,211.0 Equity 430.8 450.9 328.9 329.4 1,632.9 1,627.9 347.4 193.8 2,740.0 2,602.0 PERFORMANCE METRICS Return on average equity 14.33% 14.26% 2.05% (3.71)% 6.48% 10.69% (16.81)% 18.03 % 4.23% 10.03% Efficiency ratio 44.91% 46.01% 93.36% 117.72 % 80.27% 69.10% 86.26 % 35.01 % 76.86% 62.58% PERFORMANCE METRICS (EXCLUDING NONRECURRING ITEMS) Return on average equity 14.33% 14.26% 8.85% (3.71)% 7.57% 10.69% 15.92 % 18.03 % 9.85% 10.03% Efficiency ratio 44.91% 46.01% 71.36% 117.72 % 76.99% 69.10% 31.33 % 35.01 % 61.85% 62.58%
In 1995, the Company began managing and measuring the performance of its lines of business under a new methodology. In 1996, the Company refined its allocation methodologies. Results from 1994 are not available under the revised methodologies. 20 CONSUMER FINANCE The Consumer Finance line of business is made up of Blazer Financial Services, City Finance Company, First Community Industrial Bank and Great Western Thrift & Loan. These companies offer retail installment financing primarily in the Southeast and Southwest areas of the United States. During 1996, the Consumer Finance line of business had net income of $61.7 million. Despite growth in the loan portfolio, credit quality for the market served by this line of business deteriorated in 1996 as evidenced by the year over year increase in loan loss provision of $10.3 million. Efforts are underway at the Consumer Finance group to aggressively pursue a more diversified customer base through specialized training for sales staff, broadened product offerings and increased use of technology. With return on assets of more than 2.5% and return on equity of more than 14%, the 1996 financial performance of the Consumer Finance line of business once again demonstrated the value of this business unit to the Company. REAL ESTATE SERVICES The Real Estate Services line of business houses the Company's residential mortgage origination and loan servicing businesses. Loans are originated in Great Western's nationwide retail lending offices and through the Company's wholesale origination function. Fixed rate loans are sold in the secondary market and adjustable rate loans are primarily transferred to the Treasury line of business for portfolio investment. In 1996, this business unit embarked on a series of major re-engineering efforts designed to improve efficiency, reduce cost and increase production volume. These efforts will continue throughout 1997. Benefits of the re- engineering are already being realized as noninterest expense in the Real Estate line of business dropped 11%, or $14.2 million, during the year. RETAIL BANKING The Retail Banking line of business includes Great Western's branch banking franchise, direct banking business and diversified retail businesses including Sierra Capital Management and Great Western Financial Securities Corporation. Also in this business unit are Great Western's business banking and consumer lending functions which figure prominently in the Company's evolution into a full service bank. In 1996, the Retail Banking business line added $105.8 million to the Company's net income. While net interest income declined, the internal credit for funds generated was less in 1996 than in 1995 and the Retail Banking unit realized significant growth in fee income. Broadened product offerings, focus on reducing fee waivers and the introduction of various fee-generating programs contributed to the 22% increase in noninterest income in the Retail Banking unit over 1995 levels. The Retail Banking business line was allocated $29.8 million of the restructuring charge for branch closures and its portion of the restacking of the corporate headquarters facilities. TREASURY The Treasury line of business houses the Company's mortgage loan and investment securities portfolios and meets the wholesale funding needs of the Company. Additionally, the Treasury function is responsible for hedging the Company's interest-rate risk and as such, houses the funds transfer pricing mismatch unit. The mismatch unit is counterparty to the internal charges and credits for funds received by each of the other business lines. As noted in the Retail Banking discussion, the credit for funds generated declined from 1995 to 1996. The mismatch unit benefits from such cycles in the internal transfer pricing environment as evidenced by the increase in net interest income in the Treasury unit in 1996 compared to 1995. Also contributing to the net interest income increase in 1996 over 1995 is the increase in real estate loans outstanding. Excluding the $188.4 million one-time SAIF assessment, the Treasury line of business contributed $56.7 million to the Company's net income. Further excluding Treasury's share of the Company's fourth quarter restructuring charge, this business unit generated a return on allocated equity of 15.9%. 21 EARNINGS PERFORMANCE NET INTEREST INCOME In 1996, net interest income rose to $1.38 billion from $1.30 billion in 1995 and $1.32 billion in 1994. The increase in net interest income of $75.9 million in 1996 was attributed to an increased interest rate spread. The interest spread for 1996 was 3.15% compared with 3.00% for 1995 and 3.50% for 1994. The Company's net interest margin was 3.33% for 1996 compared with 3.13% for 1995 and 3.60% for 1994. The increase in the spread was due to a decrease in the cost of funds in the second and third quarters of 1996 and a slight overall increase in the annual rate received on loans and investments. The decrease in the cost of funds was a result of an overall decrease of 13 basis points in the rate of interest paid and a decrease of $482 million in the total amount of interest-bearing liabilities. The decrease in interest income in 1996 was due to a $196.1 million decrease in average earning assets from 1995, partially offset by a 2 basis point increase in the overall rate. The interest spread contracted in 1994 and the first half of 1995 as interest rates rose sharply and the Company's margin was affected by the ARM repricing lag. During the second half of 1995, the interest spread began to benefit from declining interest rates. The following tables of net interest income display the average monthly balances, interest income and expense and average rates by asset and liability component for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ------------------------ ------------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ------- ------- -------- ------- ------- -------- ------- (DOLLARS IN MILLIONS) Earning Assets Certificates of deposit, repurchase agreements and federal funds and securities available- for-sale $ 1,824 $ 114 6.24% $ 1,545 $ 98 6.36% $ 1,121 $ 61 5.44% Mortgage-backed securities 8,875 638 7.19 10,486 753 7.18 4,763 276 5.79 Loans Real estate 28,066 2,066 7.36 27,055 1,983 7.33 28,482 1,911 6.71 Consumer Finance 2,105 370 17.59 2,016 364 18.07 1,868 342 18.31 Other 534 46 8.62 498 41 8.13 418 39 9.33 ------- ------ ----- ------- ------ ----- ------- ------ ----- Total earning assets 41,404 3,234 7.81 41,600 3,239 7.79 36,652 2,629 7.17 Other assets 2,271 2,378 2,289 ------- ------- ------- Total assets 43,675 43,978 38,941 ======= ======= ======= Interest Bearing Liabilities Deposits Checking 4,449 33 0.74 4,355 35 0.81 4,566 40 0.88 Money market and other savings 6,555 193 2.94 6,893 188 2.73 8,519 198 2.32 Term 17,640 945 5.36 17,420 973 5.58 16,623 699 4.21 Wholesale 336 9 2.68 543 21 3.92 478 13 2.72 ------- ------ ----- ------- ------ ----- ------- ------ ----- Total deposits 28,980 1,180 4.07 29,211 1,217 4.17 30,186 950 3.15 Borrowings Short-term borrowings from FHLB 1,493 82 5.49 15 1 5.67 80 4 5.00 Securities sold under repurchase agreements 5,373 295 5.48 7,051 422 5.99 1,985 98 4.94 Short-term borrowings 1,193 64 5.36 1,593 101 6.36 741 35 4.72 Long-term borrowings 2,830 235 8.30 2,481 196 7.87 2,591 221 8.53 ------- ------ ----- ------- ------ ----- ------- ------ ----- Total borrowings 10,889 676 6.21 11,140 720 6.46 5,397 358 6.63 ------- ------ ----- ------- ------ ----- ------- ------ ----- Total interest bearing liabilities 39,869 1,856 4.66 40,351 1,937 4.79 35,582 1,308 3.67 ------- ------ ----- ------- ------ ----- ------- ------ ----- Other liabilities 1,066 1,025 931 Stockholders' equity 2,740 2,602 2,428 ------- ------- ------- Total liabilities and equity $43,675 $43,978 $38,941 ======= ======= ======= Interest spread 3.15% 3.00% 3.50% ===== ===== ===== Effective yield summary Interest income/total earning assets $41,404 $3,234 7.81% $41,600 $3,239 7.79% $36,652 $2,630 7.17% Interest expense/total earning assets 41,404 1,856 4.48 41,600 1,937 4.66 36,652 1,308 3.57 ------ ----- ------ ----- ------ ----- Net interest income/net interest margin $1,378 3.33% $1,302 3.13% $1,322 3.60% ====== ===== ====== ===== ====== =====
The average balance of loans above includes nonaccrual loans and therefore the interest income and average rate, as presented, are affected by the loss of interest on such loans. Interest foregone on nonaccrual loans was $38.4 million for the year ended December 31, 1996, compared with $38.1 million for the year ended December 31, 1995 and $46.9 million for the year ended December 31, 1994. 22 The following table shows the components of the change in net interest income for the years ended December 31, 1996, 1995 and 1994 that are included in the Consolidated Statement of Operations in Item 8, "Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31 ----------------------------------------- 1996 VS. 1995 1995 VS. 1994 1994 VS. 1993 ------------- ------------- ------------- (DOLLARS IN MILLIONS) Certificates of deposits, repurchase agreements and federal funds and securities available-for-sale Rate (1) $ (2) $ 10 $ (18) Volume (2) 18 23 17 Rate/Volume (3) -- 4 (5) ----- ----- ----- 16 37 (6) ----- ----- ----- Mortgage-backed securities Rate (1) 2 65 (14) Volume (2) (116) 332 113 Rate/Volume (3) -- 79 (8) ----- ----- ----- (114) 476 91 ----- ----- ----- Real estate loans Rate (1) 8 177 (66) Volume (2) 74 (96) (67) Rate/Volume (3) -- (9) 2 ----- ----- ----- 82 72 (131) ----- ----- ----- Consumer Finance and other loans Rate (1) (10) (5) (17) Volume (2) 16 27 27 Rate/Volume (3) (1) -- (1) ----- ----- ----- 5 22 9 ----- ----- ----- Other assets Rate (1) 3 (4) (3) Volume (2) 3 7 (11) Rate/Volume (3) -- (1) -- ----- ----- ----- 6 2 (14) ----- ----- ----- Interest earning assets Rate 1 243 (118) Volume (5) 293 79 Rate/Volume (1) 73 (12) ----- ----- ----- (5) 609 (51) ----- ----- ----- Deposits Rate (1) (35) 266 (23) Volume (2) (4) (4) 35 Rate/Volume (3) 1 5 (1) ----- ----- ----- (38) 267 11 ----- ----- ----- Borrowings Rate (1) (55) 17 8 Volume (2) (14) 276 (9) Rate/Volume (3) 26 69 -- ----- ----- ----- (43) 362 (1) ----- ----- ----- Interest bearing liabilities Rate (90) 283 (15) Volume (18) 272 26 Rate/Volume 27 74 (1) ----- ----- ----- (81) 629 10 ----- ----- ----- Change in net interest income $ 76 $ (20) $ (61) ----- ----- -----
- -------- (1) The rate variance reflects the change in the average rate multiplied by the average balance outstanding during the prior period. (2) The volume variance reflects the change in the average balance outstanding multiplied by the average rate during the prior period. (3) The rate/volume variance reflects the change in the average rate multiplied by the change in the average balance outstanding. (4) Nonaccrual loans are included in their respective loan categories. Amortized net deferred loan fees are included in the interest income calculations. The amortization of net deferred loan fees was $25.9 million in 1996, $33.5 million in 1995 and $53.4 million in 1994. 23 NONINTEREST INCOME Income from noninterest sources for 1996, 1995 and 1994 were as follows:
YEAR ENDED DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Retail banking fees NSF and overdraft protection $ 74,319 $ 57,140 $ 54,127 Service charges-checking accounts 38,417 36,216 35,058 ATM transaction fees 27,905 25,220 17,866 Other banking fees 39,230 36,286 33,652 -------- -------- -------- Total banking fees 179,871 154,862 140,703 -------- -------- -------- Servicing fees 45,684 55,159 50,853 Securities operations Brokerage 19,135 11,037 23,555 Mutual fund asset management 11,040 10,055 16,347 -------- -------- -------- Total securities operations 30,175 21,092 39,902 -------- -------- -------- Net insurance operations 29,570 28,861 27,636 Real estate fees 29,105 24,208 29,385 Net gain on sale of student loans 23,388 495 1,673 Net gain on sale of mortgages 8,562 8,824 5,339 Gain on sale of mortgage-backed securities 8,790 13,585 -- Writedowns on mortgage-backed securities (17,906) -- -- Provision for mortgages sold with recourse (7,300) -- -- Net gain on sale of securities -- -- 398 Loss on affordable housing investment (4,052) (7,611) -- Gain on sale of leases 811 14,909 1,507 Gain on sale of branches -- -- 62,337 Other 5,127 13,284 8,164 -------- -------- -------- $331,825 $327,668 $367,897 ======== ======== ========
Retail banking fee income increased to $179.9 million in 1996 from $154.9 million in 1995 and $140.7 million in 1994, an increase of 16% and 28% over 1995 and 1994, respectively. NSF and overdraft protection fees for 1996 increased 30% over 1995. The customer overdraft product, added late in 1996, is expected to sustain the 1996 growth rate in banking fees in 1997. Servicing fees totaled $45.7 million for 1996 compared with $55.2 million for 1995 and $50.9 million in 1994. The servicing spread for 1996 was 41 basis points on the $11.2 billion average servicing portfolio compared with a servicing spread of 51 basis points on a $10.8 billion average servicing portfolio in 1995 and 43 basis points on an $11.7 billion average servicing portfolio in 1994. Income from brokerage operations was $19.1 million in 1996 compared to $11 million in 1995 and $23.6 million in 1994. The $8.1 million increase in income in 1996 resulted primarily from the addition of non-proprietary mutual funds which improved the product mix resulting in increased revenues. Income from mutual fund asset management was $11 million in 1996, compared to $10.1 million in 1995 and $16.3 million in 1994. The Company managed mutual funds with average assets aggregating $3.4 billion in 1996 compared with $3.1 billion in 1995 and $3.2 billion in 1994. The reduction in income in 1995 is a result of reduced fees realized on funds management. 24 Real estate fees were $29.1 million in 1996 compared with $24.2 million for 1995 and $29.4 million in 1994. Loan prepayment fees, included in real estate fees, were $2.4 million for 1996 compared with $532,000 in 1995, and $342,000 in 1994. During 1996, the Company sold its student loan business to Crestar Bank for $386.6 million. The Company sold a portfolio of $356.6 million of loans and after expenses and costs, realized a gain of $22.5 million on the sale. At December 31, 1996, there was a balance of student loans remaining of $21.5 million. These loans are being aggressively marketed. At February 28, 1997, approximately $6.8 million of student loans remain to be sold. The net gain on sale of mortgages was $8.6 million in 1996, $8.8 million in 1995, and $5.3 million in 1994. Mortgage sales in 1996, primarily fixed-rate, totaled $1.5 billion at a gain of .58% of the portfolio sold, compared to $1.1 billion in 1995 at a gain of .79% of the portfolio sold and $1.2 billion in 1994 at a gain of .48% of the portfolio sold. In conjunction with the sales of mortgages, capitalized servicing rights of $8.2 million were recorded in 1996, $4.7 million in 1995 and $604,000 in 1994. Gain on sale of mortgage-backed securities was $8.8 million in 1996 compared to $13.6 million in 1995. Sales of mortgage-backed securities were $561.4 million in 1996 and $498.1 million in 1995. There were no mortgage-backed securities sold in 1994. In conjunction with the sales of mortgage-backed securities, capitalized servicing rights of $13.5 million were recorded in 1996 and $3.5 million in 1995. Prior to July, 1996, the Company recorded impairment on mortgage-backed securities through charge-offs to the allowance for loan and lease losses. Subsequent to July, 1996, impairment is recorded as a charge to earnings. There were charges to the allowance for loan and lease losses of $12.8 million for the first six months of 1996, $11 million for the year ended December 31, 1995 and $1 million for the year ended December 31, 1994. For the second half of 1996, $17.9 million was recorded to reflect impairment in the mortgage- backed securities portfolio. As a result of the loss experience on loans sold with recourse, an increase to the contingent liability for losses on loans sold with recourse of $7.3 million was required and recorded in 1996. The outstanding balance of loans sold with recourse at December 31, 1996 was $1.2 billion, and $1.4 billion at both December 31, 1995 and 1994. The gain on sale of leases was $811,000 in 1996 compared with $14.9 million in 1995 and $1.5 million in 1994. The gain on the sale of leases is the result of dispositions throughout the year of Great Western Capital Corporation's fast food leasing portfolio. In 1995, the majority of the portfolio was sold. 25 NONINTEREST EXPENSE Noninterest expenses were as follows:
YEAR ENDED DECEMBER 31 ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Salaries and benefits Salaries $ 369,350 $ 365,758 $ 381,036 Taxes, benefits and other 69,254 75,608 88,079 ---------- ---------- ---------- Total salaries and benefits 438,604 441,366 469,115 SAIF special assessment 188,359 -- -- Premises and occupancy 179,617 179,654 199,048 Restructure expense 68,293 -- -- FDIC insurance premium 65,100 66,365 77,451 Outside data processing 57,292 60,847 32,512 Professional fees 40,165 17,942 16,679 Communications 39,810 44,783 38,856 Amortization of intangibles 37,722 40,286 58,689 Advertising and promotion 32,961 35,661 36,573 Operating losses and settlements 25,212 22,553 14,674 Retirement of subordinated debt 21,406 -- -- Office supplies 20,718 17,943 16,386 Postage 13,982 13,508 17,476 Insurance 11,413 10,286 11,946 Real estate operations Net (gain) on sale of real estate (15,619) (21,709) (6,437) Interest recognized on advances (5,981) (2,337) (1,341) Provisions for losses (12,775) 1,500 12,000 Writedowns 2,254 -- -- Operating expenses 32,847 28,151 27,632 ---------- ---------- ---------- Total real estate operations 726 5,605 31,854 Other 72,869 63,176 55,174 ---------- ---------- ---------- $1,314,249 $1,019,975 $1,076,433 ========== ========== ==========
Total noninterest expense for 1996, excluding the SAIF special assessment of $188.4 million and the restructuring expense of $68.3 million was $1.1 billion. The Company employed 13,028 persons at December 31, 1996, a number of which worked part-time. The full-time equivalent of employees at that date was 9,367. At December 31, 1995, the Company employed 14,393 persons and had 10,266 full-time equivalent employees. Total salaries and benefits were $438.6 million, $441.4 million and $469.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. The decrease from 1995 to 1996 of $2.8 million is due to reductions in pension expense offset by an increase in earnings on the company-owned life insurance. The decrease from 1994 to 1995 of $27.7 million was due to a workforce reduction of approximately 1,300 positions in 1995. On September 30, 1996, the President signed into law an omnibus spending bill which included provisions for the recapitalization of the SAIF through a one-time special assessment of approximately 65.7 cents per $100 of SAIF deposits held by savings associations as of March 31, 1995. GWB's special assessment of $188.4 million was reflected in the Bank's third quarter results. 26 The Company's results of operations reflect a $68.3 million restructuring charge. The restructuring initiatives are designed to improve the Company's competitive position, accelerate expense reduction and enhance future revenue growth by streamlining operations, making efficient use of premises and modernizing GWFC's systems platform. The components of the restructuring charge involve severance and write-off of premises and equipment. The estimated cost savings for GWFC as a result of implementing the restructuring initiatives is $39.5 million and $41.5 million in 1997 and 1998, respectively. The Company's plans to streamline operations, reconfigure the retail branch network and improve information systems support and other back office functions will result in the reduction of approximately 1,200 employees and a charge to restructure expense of $17.0 million. As of December 31, 1996, 630 employee separations have occurred and the related severance expense of $4.6 million was applied against the 1996 restructure liability. Employee separations related to the restructuring are planned to be completed by the end of 1997. The Company's corporate headquarters campus was identified for consolidation to make optimum use of building space. As a result, three buildings at the corporate campus will be vacated freeing up 272,000 square feet to sublet to third party tenants. Additionally, seven retail branch and 109 loan offices were identified for closure or consolidation. The total effect of vacating these premises is $29.5 million. Premises identified under the restructuring initiatives are planned to be vacated by December, 1997. In order to meet GWFC's goal to modernize and replace its current systems platform, certain computer hardware and software equipment were considered obsolete or abandoned and written off. The upgrade and replacement of equipment will allow the Company to increase operational efficiency, improve processing capacity and establish a common user workstation environment. As of December 31, 1996, $18.4 million of equipment was written off and applied against the restructure liability. The balance of $3.4 million of equipment will be retired in 1997 and applied against the restructure liability. Following is a reconciliation of restructuring reserve activity during 1996:
1996 BALANCE RESTRUCTURING 1996 DECEMBER 31, CHARGE ACTIVITY 1996 ------------- -------- ------------ (DOLLARS IN MILLIONS) Severance $ 17.0 $ 4.6 $ 12.4 Premises 29.5 -- 29.5 Equipment 21.8 18.4 3.4 ------ ------ ------ Total $ 68.3 $ 23.0 $ 45.3 ====== ====== ======
In 1996, professional fees increased to $40.2 million from $17.9 million in 1995 and $16.7 million in 1994. The $22.2 million increase in 1996 was primarily a result of an aggressive plan to increase income, improve strategies and operations and reduce costs. Outside legal fees increased $4.4 million in 1996 mainly as a result of the increased level of securities litigation. The net loss from real estate operations has decreased from $31.9 million in 1994 to $5.6 million in 1995 to $726,000 in 1996. The reversal of $13.5 million to the provision for losses in 1996 is a result of the reduction in non-performing real estate assets and improving prospects for the remainder of the portfolio. Included in other operating expenses for 1996 is an $8 million recovery for fraudulently over-billed marketing costs at Aristar which had occurred over a number of years. In the fourth quarter of 1996, the Company examined its businesses and began exploring several options for its mutual fund subsidiary, Sierra Capital Management Corporation, ranging from a joint venture partnership to a sale. Due to the announced merger between Washington Mutual and the Company, any transaction involving this or any other subsidiary is being reexamined, see Item 1. Business "Merger Agreement with Washington Mutual, Inc.", "H. F. Ahmanson & Company's Merger Proposal" and "Litigation Relating to the Ahmanson Merger Proposal". 27 INCOME TAX The Company's effective tax rate was 37.9% in 1996 and 38.2% in 1995 and 1994. Under the Internal Revenue Code, GWB, as a qualified thrift institution, had been allowed to claim deductions for bad debts under the reserve method, which is more favorable than bad debt deduction methods allowed to claim by other taxpayers. Under provisions of the Small Business Job Protection Act of 1996, GWB lost the use of the bad debt reserve method beginning in 1996. Since the reserve balance at December 31, 1996 of $724.5 million arose prior to 1988, it is not currently subject to federal income tax and would not be if GWB were to convert to a commercial bank or otherwise lose its tax status as a qualified thrift institution. However, it will be subject to such tax upon certain occurrences (including its distribution to shareholders), none of which are currently contemplated. 28 BALANCE SHEET ANALYSIS EARNING ASSETS The composition of earning assets for the five year period 1992 through 1996 is as follows:
DECEMBER 31 --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- (DOLLARS IN MILLIONS) Certificates of deposit, repurchase agreements and federal funds and securities available- for-sale* $ 1,517 3.71 $ 1,286 3.08 $ 1,027 2.60 $ 1,027 2.86 $ 915 2.57 Mortgage-backed securities 7,789 19.06 9,803 23.47 9,286 23.49 3,196 8.91 3,177 8.92 Loans Real estate Single-family residential 26,079 63.81 24,697 59.13 23,365 59.10 25,682 71.64 25,333 71.14 Apartments 1,490 3.64 1,615 3.87 1,712 4.33 1,814 5.06 1,939 5.45 Commercial 1,192 2.92 1,374 3.29 1,393 3.52 1,589 4.43 1,553 4.36 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total real estate loans 28,761 70.37 27,686 66.29 26,470 66.95 29,085 81.13 28,825 80.95 Consumer Finance 2,186 5.35 2,136 5.11 1,999 5.06 1,831 5.11 1,723 4.84 Other loans 240 .59 517 1.23 449 1.13 405 1.13 657 1.84 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans 31,187 76.31 30,339 72.59 28,918 73.14 31,321 87.37 31,205 87.63 Investment in FHLB stock 378 .92 341 .82 306 .77 307 .86 314 .88 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total earning assets $40,871 100 $41,769 100 $39,537 100 $35,851 100 $35,611 100 ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------- * Securities exclude $62 million of securities held by the Company's life insurance subsidiary at December 31, 1996, $63 million at December 31, 1995, $57 million at December 31, 1994, $59 million at December 31, 1993 and $59 million at December 31, 1992. Earning assets decreased $897 million from $41.8 billion in 1995 to $40.9 billion in 1996. The Company's investment in mortgage-backed securities decreased by $2 billion in 1996 and was offset by a $1.1 billion increase in real estate loans. Proceeds from payments and sales of mortgage-backed securities were invested into ARM ("Adjustable Rate Mortgages") SFR loans and other securities. The increase in single-family residential real estate loans is due to customer demand for adjustable rate mortgage lending rather than fixed-rate loans, which are sold shortly after origination. Securities Available-For-Sale Securities available-for-sale are carried at fair value. Marketable securities available-for-sale at December 31, 1996 had both an amortized cost and a fair value of $1.3 billion. See Note 4 of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." In determining which security to invest in, the Company considers among other factors, relative rates, liquidity and credit quality. At December 31, 1996, there were no investment securities issued by a single issuer (excluding the U.S. Government and its agencies and corporations) that exceeded 10% of stockholders' equity. Mortgage-Backed Securities Mortgage-backed securities consist largely of single-family residential loans swapped for mortgage-backed securities in 1994 and 1995 to provide collateral for borrowings. Underlying these securities are loans that were originated by Great Western Bank. Mortgage-backed securities totaled $7.8 billion at December 31, 1996 compared with $9.8 billion at December 31, 1995. Because the Company retained the credit risk on the loans underlying these securities, delinquent loans totaling $145.6 million and $73.2 million in 1996 and 1995, respectively, were repurchased. 29 The composition of mortgage-backed securities for the five year period 1992 through 1996 is as follows:
DECEMBER 31 ------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------ --- ------ --- ------ --- ------ --- ------ --- (DOLLARS IN MILLIONS) Adjustable Rate COFI $6,073 78 $7,619 78 $6,712 72 $2,084 65 $1,969 62 FCOFI 1,335 17 1,565 16 1,752 19 -- -- -- -- Other 91 1 90 1 89 1 84 3 -- -- ------ --- ------ --- ------ --- ------ --- ------ --- Total adjustable rate mortgage-backed securities 7,499 96 9,274 95 8,553 92 2,168 68 1,969 62 ------ --- ------ --- ------ --- ------ --- ------ --- Fixed-rate Long-term 217 3 473 5 669 7 931 29 1,173 37 Short-term 73 1 56 * 64 1 97 3 35 1 ------ --- ------ --- ------ --- ------ --- ------ --- Total fixed-rate mortgage-backed securities 290 4 529 5 733 8 1,028 32 1,208 38 ------ --- ------ --- ------ --- ------ --- ------ --- Total mortgage-backed securities $7,789 100 $9,803 100 $9,286 100 $3,196 100 $3,177 100 ====== === ====== === ====== === ====== === ====== ===
- -------- *Less than one percent At December 31, 1996, approximately 78% of mortgage-backed securities in the portfolio were indexed to the Cost of Funds Index for financial institutions comprising the 11th District Federal Home Loan Bank of San Francisco ("FHLB") Cost of Funds Index ("COFI"). The Company has also swapped products which are indexed to the Federal Cost of Funds Index ("FCOFI"). The FCOFI is a combination of the average interest rate on the combined marketable Treasury bills and the average interest rate on the combined marketable Treasury notes. At December 31, 1996, adjustable rate mortgage-backed securities comprised 96% of the mortgage-backed securities portfolio compared with 95% in 1995 and 92% in 1994. Mortgage-backed securities available-for-sale are carried at fair value. At December 31, 1996, mortgage-backed securities available-for-sale of $6.2 billion included $96.2 million of fixed-rate securities and $6.1 billion of adjustable rate securities. 30 Loans The composition of real estate, Consumer Finance and other loans for the five years 1992 through 1996 is as follows:
DECEMBER 31 --------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS) Real Estate $28,761 $27,686 $26,470 $29,085 $28,825 Consumer Finance 2,186 2,136 1,999 1,831 1,723 Other loans 240 517 449 405 657 ------- ------- ------- ------- ------- $31,187 $30,339 $28,918 $31,321 $31,205 ======= ======= ======= ======= =======
DECEMBER 31 ------------------------------------------------------------ 1996 % 1995 % 1994 % 1993 % 1992 % -------- --- ------- --- ------- --- ------- --- ------- --- (DOLLARS IN MILLIONS) REAL ESTATE ARM COFI $ 20,803 72 $20,961 75 $19,901 75 $20,160 69 $20,353 71 FCOFI 2,005 7 2,429 9 1,986 8 4,324 15 4,776 17 LAMA 3,318 12 1,668 6 -- -- -- -- -- -- Other 1,816 6 1,618 6 3,551 13 3,151 11 2,168 7 -------- --- ------- --- ------- --- ------- --- ------- --- Total ARM loans 27,942 97 26,676 96 25,438 96 27,635 95 27,297 95 -------- --- ------- --- ------- --- ------- --- ------- --- Fixed-rate Long-term 411 2 525 2 582 2 903 3 1,043 3 Short-term 408 1 485 2 450 2 547 2 485 2 -------- --- ------- --- ------- --- ------- --- ------- --- Total fixed-rate loans 819 3 1,010 4 1,032 4 1,450 5 1,528 5 -------- --- ------- --- ------- --- ------- --- ------- --- Total real estate loans $ 28,761 100 $27,686 100 $26,470 100 $29,085 100 $28,825 100 ======== === ======= === ======= === ======= === ======= === Single-family $ 26,079 91 $24,697 89 $23,365 88 $25,682 88 $25,333 88 Apartments 1,490 5 1,615 6 1,712 7 1,814 6 1,939 7 Commercial properties 1,192 4 1,374 5 1,393 5 1,589 6 1,553 5 -------- --- ------- --- ------- --- ------- --- ------- --- $ 28,761 100 $27,686 100 $26,470 100 $29,085 100 $28,825 100 ======== === ======= === ======= === ======= === ======= === Number of real estate loans 347,530 351,782 370,835 427,659 464,862 CONSUMER FINANCE $ 2,186 100 $ 2,136 100 $ 1,999 100 $ 1,831 100 $ 1,723 100 ======== === ======= === ======= === ======= === ======= === OTHER LOANS Lease financing $ 71 30 $ 78 15 $ 101 22 $ 100 25 $ 105 16 Checking overdraft 62 26 37 7 26 6 28 6 19 3 Savings account 52 22 56 11 60 13 69 17 72 11 Student loans 21 9 327 63 239 53 180 44 165 25 Mobile home loans 14 6 18 3 22 5 26 7 34 5 Small business lines of credit 13 5 -- -- -- -- -- -- -- -- Bank cards -- -- -- -- -- -- -- -- 256 39 Other 7 3 1 -- 1 -- 2 -- 6 1 -------- --- ------- --- ------- --- ------- --- ------- --- Total Other Loans $ 240 100 $ 517 100 $ 449 100 $ 405 100 $ 657 100 ======== === ======= === ======= === ======= === ======= ===
The origination and sale of real estate loans is dependent upon general market conditions. In an active real estate market, loan originations may increase. In such periods, mortgage sales are usually increased to fund a portion of originations and to control asset growth. However, in some periods mortgage sales occur to fund customer account outflows and repay borrowings which result in asset shrinkage. Mortgage sales also occur to limit interest- rate risk and for restructuring purposes. The ARM for single-family residential properties is the primary lending product held for investment. At December 31, 1996, ARMs comprised 97% of the real estate loan portfolio compared with 96% in the comparable period in 1995. At December 31, 1996, approximately 72% of real estate loans in the portfolio were 31 indexed to COFI. The Company also originates ARM products which are indexed to one-year Treasury bills, the prime rate and FCOFI. In March 1995, the Company introduced a new product, the London Interbank Offered Rate ("LIBOR") Annual Monthly Average ("LAMA") ARM. The LAMA ARM is indexed to a 12 month average of the Federal National Mortgage Association ("FNMA") One Month LIBOR. The FCOFI and LAMA ARMs are similar to the COFI ARM product with respect to interest- rate caps and payment changes. Fixed-rate lending tends to increase during periods of relatively low interest rates. Such loans are originated primarily for sale. The Company sells loans forward into the secondary market and purchases short-term hedge contracts for the commitment period to protect against rate fluctuations on its commitments to fund fixed-rate loans originated for sale. Hedge contracts are recorded at cost. At December 31, 1996, there were no open hedge contracts in the pipeline due to the relatively low level of fixed-rate commitments. Commercial real estate loans continued to decrease as a result of the Company's decision in 1987 to discontinue commercial real estate lending except to finance the sale of foreclosed properties, or to refinance existing loans in the normal course of business. As of December 31, 1996, net real estate loans available-for-sale, primarily fixed-rate loans, were $84.4 million compared to $159 million on December 31, 1995. Unrealized holding gains on real estate loans available-for-sale totaled $462,000 at December 31, 1996, compared to $1.4 million on December 31, 1995. The California real estate market requires continued review. There appear to be regional differences in economic performance within California and among property types which are attributable to differing recovery rates for the wide range of economic activities within California. On a regional basis, the economic factors affecting the single-family market appear to be somewhat more favorable in Northern California than in Southern California. In particular, the median metropolitan area sales price of existing single-family homes in the San Jose area increased from the third quarter of 1995 to the third quarter of 1996 by 3%. During the same period, the median sales price for the Los Angeles area declined 3% while the median sales price for the San Diego area increased by approximately 1%. In the office space market, regional differences exist between Northern and Southern California. In the San Francisco area, the vacancy rate declined to 7% at December 31, 1996 from 8% a year earlier. In the Los Angeles area, the vacancy rate of the office space market was 18% at December 31, 1996 compared with 19% at December 31, 1995. In San Diego County, the vacancy rate was 13% at December 31, 1996 and 18% at December 31, 1995. In the industrial space market, Northern and Southern California vacancy rates have been more comparable. In the San Francisco area, the vacancy rate decreased to 8% at December 31, 1996, from 9% a year earlier. In the Los Angeles area, the vacancy rate of the industrial space market was 7% at December 31, 1996 and 8% at December 31, 1995. San Diego County's industrial space market had a vacancy rate of 5% at December 31, 1996 compared with 4% at December 31, 1995. 32 The geographic distribution of the real estate loan portfolio and nonaccrual and restructured loans at December 31, 1996 follows:
CONNECTICUT MASSACHUSETTS CALIFORNIA FLORIDA NEW YORK ---------------------- ---------------------- ---------------------- RESTRUCTURED RESTRUCTURED RESTRUCTURED AND AND AND PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL --------- ------------ --------- ------------ --------- ------------ (DOLLARS IN MILLIONS) Real estate loans Single-family residential $15,891 $231 $1,899 $18 $ 1,855 $ 17 Apartments 1,260 30 54 -- -- -- Commercial Offices 337 12 14 -- -- -- Retail 184 2 13 -- -- -- Hotel/Motel 98 14 5 -- -- -- Industrial 228 10 11 -- -- -- Other 116 1 10 1 -- -- ------- ---- ------ --- ------- ---- Total $18,114 $300 $2,006 $19 $ 1,855 $ 17 ------- ---- ------ --- ------- ---- Percent of total loans 63.0% 7.0% 6.4% Nonaccrual as a % of total by state 1.7% 0.9% 0.9% OREGON WASHINGTON OTHER TOTAL ---------------------- ---------------------- ---------------------- RESTRUCTURED RESTRUCTURED RESTRUCTURED AND AND AND PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL --------- ------------ --------- ------------ --------- ------------ (DOLLARS IN MILLIONS) Real estate loans Single-family residential $ 1,576 $ 7 $4,858 $27 $26,079 $300 Apartments 7 1 169 7 1,490 38 Commercial Offices 16 -- 15 -- 382 12 Retail 4 -- 10 -- 211 2 Hotel/Motel -- -- 76 -- 179 14 Industrial 1 -- 25 -- 265 10 Other 3 -- 26 1 155 3 ------- ---- ------ --- ------- ---- Total $ 1,607 $ 8 $5,179 $35 $28,761 $379 ------- ---- ------ --- ------- ---- Percent of total loans 5.6% 18.0% 100% Nonaccrual as a % of total by state 0.5% 0.7% 1.3%
33 A comparison of California real estate loans and nonaccrual real estate loans by region as of December 31, 1996 follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA ---------------------- ---------------------- RESTRUCTURED RESTRUCTURED AND AND PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL --------- ------------ --------- ------------ (DOLLARS IN MILLIONS) Real estate loans Single-family residential $ 5,024 $ 52 $ 1,337 $ 12 Apartments 153 1 225 5 Commercial Offices 73 8 38 -- Retail 44 1 25 -- Hotel/Motel 34 -- 19 2 Industrial 30 1 13 1 Other 37 -- 17 -- ------- ---- ------- ---- Total by region $ 5,395 $ 63 $ 1,674 $ 20 ------- ---- ------- ---- % of total California loans 29.8% 9.2% Nonaccrual as a % of total by region 1.2% 1.2% SOUTHERN CALIFORNIA CALIFORNIA ---------------------- ---------------------- RESTRUCTURED RESTRUCTURED AND AND PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL --------- ------------ --------- ------------ (DOLLARS IN MILLIONS) Real estate loans Single-family residential $ 9,530 $167 $15,891 $231 Apartments 882 24 1,260 30 Commercial Offices 226 4 337 12 Retail 115 1 184 2 Hotel/Motel 45 12 98 14 Industrial 185 8 228 10 Other 62 1 116 1 ------- ---- ------- ---- Total by region $11,045 $217 $18,114 $300 ------- ---- ------- ---- Percent of total California loans 61.0% 100% Nonaccrual as a % of total by region 2.0% 1.7%
34 The following table summarizes the Company's loan volume with real estate loan volume composition by security type, purpose and loan type for the five year period 1992 to 1996:
YEAR ENDED DECEMBER 31 -------------------------------------------------------------------- 1996 % 1995 % 1994 % 1993 % 1992 % ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- (DOLLARS IN MILLIONS) LOAN VOLUME Real estate loans $ 6,146 72% $ 7,281 75% $ 7,921 77% $ 8,788 79% $ 9,216 81% Consumer Finance 1,996 24 2,124 22 2,046 20 1,843 17 1,648 14 Other 348 4 283 3 262 3 450 4 593 5 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total new loan volume $ 8,490 100% $ 9,688 100% $10,229 100% $11,081 100% $11,457 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== SECURITY TYPE Single-family $ 6,074 99 $ 7,162 98 $ 7,807 98 $ 8,623 98 $ 9,098 98 Apartments 44 1 43 1 51 1 52 1 68 1 Commercial properties 28 * 76 1 63 1 113 1 50 1 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== PURPOSE Purchase of property $ 3,403 55 $ 4,546 63 $ 4,421 56 $ 3,152 36 $ 3,205 35 Refinance 2,739 45 2,710 37 3,479 44 5,607 64 6,005 65 Construction 4 * 25 * 21 * 29 * 6 * ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== LOAN TYPE Long-term--essentially 30-40 years ARM $ 4,769 78 $ 5,922 81 $ 6,868 87 $ 5,243 60 $ 4,734 51 Fixed 833 13 893 12 603 7 2,102 24 2,688 29 Short-term--essentially 15 years or less ARM 140 2 116 2 130 2 185 2 253 3 Fixed 404 7 350 5 320 4 1,258 14 1,541 17 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $ 6,146 100% $ 7,281 100% $ 7,921 100% $ 8,788 100% $ 9,216 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== Average new loan rate 6.58% 6.78% 5.89% 7.05% 8.25% Average ARM differential 2.64% 2.62% 2.59% 2.47% 2.25%
- -------- *Less than one percent The composition of Consumer Finance loans receivable at December 31, 1996 and 1995 was as follows:
DECEMBER 31 -------------- 1996 1995 ------ ------ (DOLLARS IN THOUSANDS) Real estate secured loans $ 994 $ 892 Installment loans 1,109 1,183 Retail installment contracts 401 399 Deferred fees (318) (338) ------ ------ $2,186 $2,136 ====== ======
Consumer finance loans have maximum terms of 360 months, while retail installment contracts have maximum terms of 60 months. The majority of loans provide for a fixed rate of interest over the contractual life of the loan. 35 Nonperforming Assets The following table summarizes nonaccrual and restructured loans and nonperforming real estate for the five year period 1992 to 1996:
DECEMBER 31 -------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ------ ------ (DOLLARS IN MILLIONS) Nonaccrual loans Real estate Single-family residential $285 $432 $490 $ 521 $ 782 Apartments 12 13 40 40 31 Commercial 8 14 12 43 37 ---- ---- ---- ------ ------ Total nonaccrual real estate loans 305 459 542 604 850 Consumer Finance 46 25 21 20 22 Other 1 2 2 2 8 ---- ---- ---- ------ ------ Total nonaccrual loans 352 486 565 626 880 Restructured loans Single-family residential 15 13 19 1 0 Apartments 26 28 28 30 72 Commercial 33 67 78 182 89 ---- ---- ---- ------ ------ Total restructured loans 74 108 125 213 161 ---- ---- ---- ------ ------ Nonaccrual and restructured loans 426 594 690 839 1,041 As a percentage of total loans 1.38% 1.99% 2.43% 2.74% 3.41% Nonperforming real estate* 120 174 156 293 970 ---- ---- ---- ------ ------ Total nonperforming assets $546 $768 $846 $1,132 $2,011 ==== ==== ==== ====== ====== As a percentage of total assets 1.27% 1.72% 1.98% 2.90% 5.12%
- -------- * In 1992, includes insubstance-foreclosed loans, the reporting of which has been subsequently discontinued. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Loans are placed on nonaccrual status when they become more than 90 days past due. Nonperforming real estate includes foreclosed and investment properties which do not generate sufficient income to meet return on investment criteria. Certain loans (where the Company works with borrowers encountering economic difficulty) meet the criteria of, and are classified as, troubled debt restructurings ("TDRs") because of modification to loan terms. TDRs totaled $74.2 million at December 31, 1996 compared with $108.4 million at December 31, 1995. In addition to the ongoing monthly bulk sales of foreclosed properties, the Company disposed of $292.4 million of nonperforming loans and real estate in 1996. The loans and properties were primarily associated with loans made between 1989 and 1992. Impaired Loans For information on the recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and the reserve for estimated losses related to such loans. See Note 6 of the Notes to Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data." The impaired loan portfolio decreased from $268.4 million at December 31, 1995 to $210.1 million at December 31, 1996. The decrease was primarily the result of the bulk sale of $274.9 million on nonperforming loans. Single- family residential mortgage loans are generally evaluated for impairment as homogeneous pools of 36 loans. Certain situations may arise leading to single-family residential mortgage loans being evaluated for impairment on an individual basis. The Company's policy for recognizing income on impaired loans is to accrue earnings until a loan becomes nonaccrual, at which time the accrued earnings are reversed. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses. Delinquent Assets The Company continuously reviews the trends of loans and mortgage-backed securities with full credit risk. The following summarizes the three year trends in real estate loans, Consumer Finance and other loans and mortgage- backed securities which are over 30 to 90 days delinquent:
DECEMBER 31 ------------------- 1996 1995 1994 ----- ----- ----- (DOLLARS IN MILLIONS) REAL ESTATE LOANS Single-family residential Over 30 to 60 days delinquent $ 263 $ 194 $ 159 Over 60 to 90 days delinquent 99 87 86 Other Over 30 to 60 days delinquent 9 9 24 Over 60 to 90 days delinquent 8 6 7 ----- ----- ----- Total $ 379 $ 296 $ 276 ===== ===== ===== Percentage of related portfolio 1.32% 1.07% 1.04% CONSUMER FINANCE LOANS Over 30 to 60 days delinquent $ 44 $ 43 $ 38 Over 60 to 90 days delinquent 18 17 13 ----- ----- ----- Total $ 62 $ 60 $ 51 ===== ===== ===== Percentage to related portfolio 2.84% 2.81% 2.55% OTHER LOANS Over 30 to 60 days delinquent $ 2 $ 5 $ 2 Over 60 to 90 days delinquent 1 3 2 ----- ----- ----- Total $ 3 $ 8 $ 4 ===== ===== ===== Percentage to related portfolio 1.25% 1.55% .89% TOTAL LOANS Over 30 to 60 days delinquent $ 318 $ 251 $ 223 Over 60 to 90 days delinquent 126 113 108 ----- ----- ----- Total $ 444 $ 364 $ 331 ===== ===== ===== Percentage to related portfolio 1.42% 1.20% 1.14% MORTGAGE-BACKED SECURITIES Over 30 to 60 days delinquent $ 47 $ 25 $ 9 Over 60 to 90 days delinquent 17 11 4 ----- ----- ----- Total $ 64 $ 36 $ 13 ===== ===== ===== Percentage to related portfolio .82% .37% .14%
37 The increase in over 30 to 60 day delinquencies at December 31, 1996 compared with December 31, 1995 is partially due to a change in collection processing as a result of the re-engineering of loan servicing and the related installation of a new loan servicing system in 1996. In addition, borrower performance continues to be weak on a portion of loans originated during the late 1980's and early 1990's. Allowance for Loan and Lease Losses Summarized below are loan balances by type, their reserve for estimated losses and the percentage the reserve balance bears to the loan balance for the periods ended December 31, 1996 and 1995. The loan balances and percentage of reserves to the respective loan balances for December 1995 have been restated to exclude mortgage-backed securities with credit recourse for comparative purposes to conform to the 1996 presentation.
1996 1995 ------------------------- ------------------------- AMOUNT ALLL % AMOUNT ALLL % ----------- -------- ---- ----------- -------- ---- (DOLLARS IN THOUSANDS) Real estate loans SFR $26,078,926 $147,908 .57 $24,696,485 $156,016 .63 Commercial and other 2,682,082 90,867 3.39 2,989,420 145,149 4.86 ----------- -------- ---- ----------- -------- ---- Total real estate loans 28,761,008 238,775 .83 27,685,905 301,165 1.09 Consumer Finance 2,185,903 70,045 3.20 2,136,022 55,568 2.60 Other Loans 240,535 4,879 2.03 516,837 6,116 1.18 ----------- -------- ---- ----------- -------- ---- Total loans $31,187,446 $313,699 1.01 $30,338,764 $362,849 1.20 =========== ======== ==== =========== ======== ====
At December 31, 1996, the ALLL was $313.7 million, or 1.01% of total loans, compared with $362.8 million, or 1.2% at December 31, 1995. The provision for loan losses was $209 million for the year ended December 31, 1996, up from $187.7 million in 1995 due to the one-time addition of $50 million attributable to the bulk sale of loans. Net charge-offs for single family residential real estate loans for 1996 were $195.5 million or .68% compared with $193.1 million or .63% for 1995. The Company has a process to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in its portfolio. The process provides an allowance consisting of two components, general and specific. The specific component reflects inherent losses resulting from an analysis of individual loans. Beginning in the third quarter of 1996, the Company stratified the SFR portfolio based on such items as borrower performance, current credit scores and estimated current loan to value ratios ("LTV"). The purpose of the stratification was to assist the Company in its quarterly assessment of the allowance for possible loan losses. In addition, the Company modified its practice for recording charge-offs associated with full credit risk mortgage- backed securities. Charge-offs related to credit risk on the Company's mortgage-backed securities held as investments are reflected as a writedown of the mortgage-backed security. Charge-offs related to loans and securities sold with recourse are reflected in the related liability account. In addition, the Company evaluated the current economic conditions, concentrations within the portfolio and other subjective factors in assessing the adequacy of its allowance for loan losses. The change in the allowance for SFR loans from $156 million at December 31, 1995, or .63% of the SFR portfolio to $147.9 million at December 31, 1996, or .57% reflects the Company's assessment of the SFR portfolio and the current economic conditions impacting the SFR portfolio. The allowance for commercial loans is developed through specific credit allocations applying historical loss experience and loan category based on asset quality for individual loans, including impaired loans subject to SFAS 114. The allowance for commercial real estate loans has decreased from $145.1 million at December 31, 1995, or 4.86% to $90.9 million at December 31, 1996, or 3.39%. The reserve for commercial real estate and apartment loans was reduced by a $40 million credit to the provision for loan and lease losses in 1996, primarily as a result of the Company's review of required levels for the allowance of this portfolio. The commercial real 38 estate loan portfolio has continued to decrease as a result of a decision in 1987 to discontinue commercial real estate lending except to finance the sale of foreclosed properties or to refinance existing loans in the normal course of business. The quality of the commercial real estate loan portfolio continues to improve as a result of the recovery in the commercial real estate markets nationwide and particularly in California. There has been a substantial amount of liquidity that has returned to the real estate markets. This liquidity has contributed significantly to the Company's progress in reducing this portfolio. The Company expects this portfolio to continue to decline and improve in quality. The allowance for Consumer Finance loans is based upon a percentage of loans outstanding in relation to the loss experience within the loan categories generally stratified by delinquency. The allowance for Consumer Finance loans increased from $55.6 million at December 31, 1995, or 2.60% of the outstanding portfolio, to $70 million at December 31, 1996, or 3.20% of the outstanding portfolio, as a result of some deterioration in credit quality. The allowance for leases was $1 million at December 31, 1996, down from $3 million at December 31, 1995, or a decline of 67%. Provisions for losses on the leasing portfolio for 1996, included in other loan loss provisions, decreased as a result of the reversal of $1.8 million of excess reserves. Provisions for losses on the leasing portfolio for 1995 decreased as a result of the reversal of a $6 million reserve originally established for expected losses which did not materialize. The general component includes management's judgment of the amounts necessary for concentrations, economic uncertainties and other subjective factors. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. The Company's determination of the level of the allowance and, correspondingly, the provision for loan and lease losses rests upon various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience and the Company's ongoing examination process and that of its regulators. The Company has an Internal Asset Review Committee ("IARC") that reports to the Board of Directors and continuously reviews loan quality. The Company also has internal staff regularly review the classification of commercial loans and also reports to the IARC. Such reviews also assist management in establishing the level of the allowance. The Bank is examined by its primary regulator, the OTS. These examinations generally occur annually and target various activities of the Bank, including specific segments of the loan portfolio. In addition to the Bank being examined by the OTS, Great Western Financial Corporation and the nonbank subsidiaries are also subject to OTS examination. The Company considers the allowance for loan and lease losses of $313.7 million adequate to cover losses inherent in the loan and lease portfolio at December 31, 1996. However, no assurance can be given that the Company will not, in any particular period, sustain loan and lease losses that are sizable in relation to the amount reserved, or that subsequent evaluation of the loan and lease portfolio, in light of the factors then prevailing, including economic conditions and the Company's ongoing examination process and that of its regulators, will not require significant increases in the allowances for loan and lease losses. See Item 1, Business "Cautionary Statements." At December 31, 1996, the Company had $1.2 billion of loans sold with recourse and a contingent liability of $9.4 million. The Company considers the contingent liability for loans sold with recourse to be adequate to cover losses in this portfolio. All of the loans sold in 1996 were without recourse. The Company has not sold loans with recourse since February, 1995. 39 Real Estate Real estate available-for-sale or development was $160.8 million on December 31, 1996 compared to $238.9 million in 1995. The $78.1 million reduction was primarily the result of the bulk sale of real estate properties completed in 1996. Real estate available-for-sale or development is recorded at the lower of cost or fair value and is included in a periodic review of assets to determine whether, in management's judgment, there has been any deterioration in value. In 1996, the Company determined that its real estate portfolio was appropriately valued at market and therefore the associated general reserve of $13.5 million was reversed. The geographic distribution of real estate and nonperforming real estate at December 31, 1996 follows:
CONNECTICUT MASSACHUSETTS CALIFORNIA FLORIDA NEW YORK ----------------------- ----------------------- ----------------------- PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING --------- ------------- --------- ------------- --------- ------------- (DOLLARS IN MILLIONS) Real estate Single-family residential $ 75 $ 75 $ 1 $ 1 $ 2 $ 2 Apartments 9 8 3 3 -- -- Commercial Offices 4 4 -- -- -- -- Retail 14 13 2 2 -- -- Industrial 3 -- -- -- -- -- Property development 36 -- -- -- -- -- Other 7 7 -- -- -- -- ----- ----- --- --- --- --- Total $ 148 $ 107 $ 6 $ 6 $ 2 $ 2 ----- ----- --- --- --- --- Percent of total real estate 91.9% 3.7% 1.3% Real estate as a % of total by state 72.3% 100% 100%
OREGON WASHINGTON OTHER TOTAL ----------------------- ----------------------- ----------------------- PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING --------- ------------- --------- ------------- --------- ------------- (DOLLARS IN MILLIONS) Real estate Single-family residential $ 1 $ 1 $ 4 $ 4 $ 83 $ 83 Apartments -- -- -- -- 12 11 Commercial Offices -- -- -- -- 4 4 Retail -- -- -- -- 16 15 Industrial -- -- -- -- 3 -- Property development -- -- -- -- 36 -- Other -- -- -- -- 7 7 --- --- --- --- ----- ---- Total $ 1 $ 1 $ 4 $ 4 $ 161 $120 --- --- --- --- ----- ---- Percent of total real estate .6% 2.5% 100% Real estate as a % of total by state 100% 100% 74.5%
40 A comparison of the California real estate portfolio and nonperforming real estate by region as of December 31, 1996 follows:
NORTHERN CALIFORNIA CENTRAL CALIFORNIA ----------------------- ----------------------- PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING --------- ------------- --------- ------------- (DOLLARS IN MILLIONS) Real estate Single-family residential $ 8 $ 8 $ 3 $ 3 Apartments -- -- 4 4 Commercial Offices -- -- -- -- Retail -- -- -- -- Industrial -- -- -- -- Property development 11 -- 12 -- Other 4 4 -- -- ---- ---- ---- ---- Total by region $ 23 $ 12 $ 19 $ 7 ---- ---- ---- ---- Percentage of total California real estate 15.5% 12.8% Nonperforming as a % of total by region 52.2% 36.8%
SOUTHERN CALIFORNIA CALIFORNIA ----------------------- ----------------------- PORTFOLIO NONPERFORMING PORTFOLIO NONPERFORMING --------- ------------- --------- ------------- (DOLLARS IN MILLIONS) Real estate Single-family residential $ 64 $ 64 $ 75 $ 75 Apartments 5 4 9 8 Commercial Offices 4 4 4 4 Retail 14 13 14 13 Industrial 3 -- 3 -- Property development 13 -- 36 -- Other 3 3 7 7 ---- ---- ---- ---- Total by region $106 $ 88 $148 $107 ---- ---- ---- ---- Percentage of total California real estate 71.7% 100% Nonperforming as a % of total by region 83.0% 72.3%
In 1996, bulk sales of foreclosed single-family properties totaled $190 million compared with $230 million in 1995. Auction sales have also been utilized to accelerate the disposition of foreclosed properties. 41 INTEREST BEARING LIABILITIES Deposits by product for the five year period 1992 through 1996 is summarized in the tables below: Deposits
DECEMBER 31 ----------------------------------------------------------- 1996 % 1995 % 1994 % 1993 % 1992 % ------- --- ------- --- ------- --- ------- --- ------- --- (DOLLARS IN MILLIONS) BY PRODUCT Checking accounts $ 4,420 15 $ 4,365 15 $ 4,416 15 $ 4,341 14 $ 3,691 12 Money market and other savings 6,633 23 6,594 22 7,439 26 8,845 28 8,802 28 Wholesale transaction 158 1 174 1 158 1 173 * 197 1 Public funds 28 -- 288 1 403 1 411 1 457 1 Brokered accounts -- -- -- -- 4 * 4 * 28 -- Tax-deferred accounts Deferred compensation 1,197 4 1,361 5 1,372 5 1,349 5 2,974 10 IRA/Keogh 2,570 9 2,766 9 2,712 10 2,894 9 2,825 9 Consumer term accounts 13,581 48 13,687 47 12,197 42 13,515 43 11,935 39 ------- --- ------- --- ------- --- ------- --- ------- --- $28,587 100 $29,235 100 $28,701 100 $31,532 100 $30,909 100 ======= === ======= === ======= === ======= === ======= ===
- -------- * Less than one percent The Company concentrates its retail deposit-gathering activity in two states: California and Florida. The total decrease in deposits reflects the competitive environment of banking institutions and the wide array of investment opportunities available to consumers. Borrowings The following summarizes borrowings for the five year period 1992 through 1996:
DECEMBER 31 ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------ ------------ AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- (DOLLARS IN MILLIONS) Short-term borrowings from FHLB $ 2,012 18.98 $ 740 6.47 $ 72 0.71% $ 119 3.42% $ 118 2.84% Securities sold under agreements to repurchase 4,198 39.60 6,868 60.00 6,299 62.26 -- -- 717 17.27 Short-term borrowings 1,101 10.38 1,316 11.50 1,211 11.97 676 19.43 487 11.77 Long-term borrowings* 3,291 31.04 2,522 22.03 2,539 25.09 2,684 77.15 2,829 68.15 ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- Total borrowings* $10,602 100% $11,446 100% $10,121 100% $3,479 100% $4,151 100% ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- Average interest rate on borrowings at year end 6.03% 6.27% 6.42% 7.34% 7.60%
- -------- * Includes $100 million of Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust in 1995 and 1996. At December 31, 1996, short-term borrowings from FHLB of $2 billion increased by $1.3 billion over 1995. Other short-term borrowings at December 31, 1996 of $1.1 billion decreased by $215 million from 1995. At December 31, 1996, securities sold under agreements to repurchase of $4.2 billion, decreased by $2.7 billion from 1995. Long-term borrowings at December 31, 1996 of $3.3 billion (including $100 million of Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust), increased by $769.8 million over 1995. 42 The following summarizes borrowings by date of maturity as of December 31, 1996:
LESS THAN 1-2 2-5 5-10 AFTER 10 TOTAL ONE YEAR YEARS YEARS YEARS YEARS ------- --------- ------ ------ ----- -------- (DOLLARS IN MILLIONS) Short-term borrowings from FHLB $ 2,012 $2,012 $ -- $ -- $ -- $ -- Securities sold under agreements to repurchase 4,198 3,704 192 302 -- -- Short-term borrowings 1,101 1,101 -- -- -- -- Long-term borrowings from FHLB 758 -- 554 204 -- -- Senior debt* 2,533 352 500 1,336 199 146 ------- ------ ------ ------ ---- ---- Total borrowings* 10,602 7,169 1,246 1,842 199 146 ======= ====== ====== ====== ==== ==== Average interest rate on borrowings by maturity 6.03% 5.60% 6.16% 7.11% 8.67% 8.92%
- -------- * Includes $100 million of Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust in 1995 and 1996. Total borrowings decreased $844 million from $11.4 billion at December 31, 1995 to $10.6 billion in 1996. The Company reduced its percentage of total borrowings from securities sold under agreements to repurchase by 20.4%, from 60% to 39.6%, and increased its short-term borrowings from the FHLB, as a percentage to total borrowings, to 19% and its long-term borrowings to 31%. Short-term borrowings from the FHLB increased from $72 million in 1994 to $740 million in 1995 to $2 billion in 1996. Borrowings from securities sold under agreements to repurchase decreased from $6.9 billion in 1995 to $4.2 billion in 1996 down from $6.3 billion in 1994. Short-term borrowings in 1996, other than from the FHLB, decreased $215 million while long-term borrowings increased $769 million. ASSET LIABILITY MANAGEMENT The Company's principal ongoing objectives in managing its assets and liabilities are to maintain and increase the spread that exists between the return received on its interest-earning assets and the price paid on liabilities to fund such assets, to reduce the volatility caused by changes in interest rates, to ensure risk-taking is calculated and not excessive, and to provide sufficient liquidity at all times. The Company employs numerous strategies and strict policies to accomplish and maintain these objectives. As the Company's main earning assets are loans and mortgage-backed securities, it primarily makes or invests in ARM loans or securities. In so doing, it reduces the extreme volatility and loss in value that would result by owning low fixed-rate loans during a period of rapidly rising interest rates. Although it costs the Company during the "lag" that exists between the time loan rates rise and when loan rates are adjusted upwards, the Company benefits in the same measure from the lag when rates fall. Other financial risks exist in the Company's operation and balance sheet. These main risks, including basis, repricing, options, and yield curve twists, are more difficult to quantify and manage. The cost of funds for GWB, relative to COFI, FCOFI and LAMA is shown as follows:
GWB COST OF GWB FUNDS LESS THAN COST OF ------------------ FUNDS COFI FCOFI LAMA COFI FCOFI LAMA ------- ----- ----- ----- ---- ----- ----- December 31, 1996 4.416% 4.842% 5.940% 5.442% .426% 1.524% 1.026% September 30, 1996 4.468 4.834 5.991 5.512 .366 1.523 1.044 June 30, 1996 4.396 4.809 5.935 5.636 .413 1.539 1.240 March 31, 1996 4.463 4.874 5.957 5.766 .411 1.494 1.303 December 31, 1995 4.658 5.059 6.152 5.940 .401 1.494 1.282 December 31, 1994 4.019 4.589 5.971 -- .570 1.952 --
To accomplish its objectives, the Company stabilizes its balance sheet primarily by matching various characteristics of the assets purchased with the liabilities incurred. It also sells the low margin fixed rate loans 43 and ARMs it originates into the secondary market while retaining more profitable ARMs. When necessary, off-balance sheet instruments allow the Company to pursue marketing strategies consistent with customer needs while compensating for the risk these strategies create. The most frequently used instruments are various types of interest rate swaps, caps, floors, and futures. To protect against rate fluctuations for items before they are put on the balance sheet, items such as commitments to fund fixed-rate loans originated for sale, the Company from time to time uses off balance sheet instruments including interest rate forwards, caps, floors, and future contracts as asset/liability management tools. They are used to reduce the Company's exposure to interest rate fluctuations and provide more stable spreads between asset yields and the rates on their funding sources. To evaluate the Company's current interest-rate position, it is necessary to analyze the amount and proportionate share of each of its major earning assets, including each major type of short-term or long-term real estate loan, and the amount and proportionate share of each major category of short-term or long-term deposits and borrowings. The Company utilizes a variety of analytical tools including static gap, duration gap, risk point reports, net interest income simulation and market value of equity sensitivity analysis. The standard static gap report appears below. 44 The following table shows that the portfolio of short-term assets exceeded liabilities maturing or subject to interest adjustment within one year by $2.3 billion, or 6.6% of earning assets at December 31, 1996 compared with $3.6 billion, or 8.7% total of earning assets at December 31, 1995. The Company is better protected against rising rates with an excess of interest earning assets maturing or repricing within one year.
INTEREST/RATE SENSITIVITY DECEMBER 31, 1996 ---------------------------------------------------- WITHIN OVER % OF 1 YEAR 1-5 YEARS 5-15 YEARS 15 YEARS TOTAL TOTAL ------- --------- ---------- -------- ------- ----- (DOLLARS IN MILLIONS) EARNING ASSETS Certificates of deposit, repurchase agreements and federal funds and securities available- for-sale $ 1,517 $ -- $ -- $ -- $ 1,517 4% Mortgage-backed securities 7,622 63 72 32 7,789 19 Loans Real estate Adjustable rate 25,578 2,364 -- -- 27,942 68 Fixed-rate Short-term 26 13 30 339 408 1 Long-term 78 55 101 177 411 1 ------- ------ ------ ------ ------- --- Total real estate loans 25,682 2,432 131 516 28,761 70 Consumer Finance 184 1,584 304 114 2,186 5 Other loans 178 57 1 4 240 1 ------- ------ ------ ------ ------- --- Total loans 26,044 4,073 436 634 31,187 76 Investment in FHLB stock -- -- -- 378 378 1 ------- ------ ------ ------ ------- --- Total earning assets 35,183 4,136 508 1,044 40,871 100 ------- ------ ------ ------ ------- --- INTEREST BEARING LIABILITIES Deposits Checking 4,420 -- -- -- 4,420 11 Money market and other savings 6,744 -- -- -- 6,744 17 Term accounts 14,843 2,393 1 -- 17,237 44 Wholesale 186 -- -- -- 186 1 ------- ------ ------ ------ ------- --- Total deposits 26,193 2,393 1 -- 28,587 73 Borrowings Short-term borrowings from FHLB 2,012 -- -- -- 2,012 5 Securities sold under agreement to repurchase 3,704 494 -- -- 4,198 11 Short-term borrowings 1,101 -- -- -- 1,101 3 Long-term borrowings -- 2,127 1,019 45 3,191 8 Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust -- -- -- 100 100 -- Impact of interest-rate swaps (109) 109 -- -- -- -- ------- ------ ------ ------ ------- --- Total borrowings 6,708 2,730 1,019 145 10,602 27 ------- ------ ------ ------ ------- --- Total interest bearing liabilities 32,901 5,123 1,020 145 39,189 100% ------- ------ ------ ------ ------- --- Excess of earning assets over interest bearing liabilities at December 31, 1996 $ 2,282 $ (987) $ (512) $ 899 $ 1,682 ======= ====== ====== ====== =======
LIQUIDITY MANAGEMENT Liquidity refers to the capability of a company to fund its operations and meet its obligations and commitments on both a timely and cost-effective basis out of its cash flow. Customer deposits provide the Company with a sizeable source of stable low- cost funds. Customer deposits and stockholders' equity funded 72.6% and 72.3% of its average total assets in 1996 and 1995, respectively. The remaining funding is provided by a combination of wholesale short-term funding sources including reverse repurchase agreements and intermediate-term sources including senior debt. 45 The Company's real estate loans totaled $28.8 billion at December 31, 1996. Of this amount, $552 million matures within one year and $2.9 billion matures within one to five years on a contractual basis. GWB, at December 31, 1996, had excess borrowing capacity at the FHLB of approximately $10 billion which includes a $200 million overnight federal funds line. Other sources of liquidity include extending maturities on short- term borrowings and the sale of assets. As presented in the Consolidated Condensed Statement of Cash Flows, the sources of liquidity vary between years. The primary sources of funds in 1996 were sales and principal payments on mortgage-backed securities and loans held for investment of $7.2 billion. New loans originated for investment required $6.9 billion in 1996. Operating activities provided $1.2 billion in 1996. The Bank maintains liquidity balances each period in excess of funding and legal requirements. Cash, certificates of deposit, repurchase agreements and federal funds and securities available for sale totaled $1.9 billion at December 31, 1996 and $1.9 billion at December 31, 1995. GWB had funds in excess of required liquidity levels. The amounts over those required for regulatory purposes will fluctuate between periods and are a source of short- term funding. PARENT COMPANY LIQUIDITY GWFC, the parent company, derives substantially all of its cash income from dividends received from its subsidiaries. During 1996, it received cash dividends in the amount of $274.8 million. Of that amount, $151.3 million was received from GWB, $116.8 million was received from Aristar and $6.7 million from other subsidiaries. In July, 1996, GWFC renewed its July, 1994 $200 million syndicated multi- year credit facility with 21 banks. This is a revolving line of credit which is a contingent source of liquidity. This line is used to backup commercial paper for the Company's issuances. To date, there have been no borrowings under this agreement. Short-term liquidity can also be generated by the Company's ability to raise funds in a number of capital and money markets as well as by liquidating short-term investments. CAPITAL ADEQUACY Capital (stockholders' equity) was $2.6 billion at December 31, 1996 and $2.8 billion at December 31, 1995. At the end of calendar year 1996, the ratio of capital to total assets was 6.1% compared with 6.3% a year ago. In September 1996, the Company called for the redemption of its $129 million, 8.75% Cumulative Convertible Preferred Stock. These shares were issued in May 1991. The holders had the option to redeem their shares or convert them into shares of the Company's common stock. In the third quarter, 2,561,642 depositary shares or 512,328 shares were converted to 6,278,421 shares of common stock with a conversion price of $20.40 per share while 19,058 depositary shares or 3,812 shares were redeemed for cash at $994,589 or $260.94 per share. In the second quarter of 1996, 6,800 depositary shares or 1,360 shares were converted to 16,666 shares of common stock at $340,000 or $20.40 per share. On July 23, 1996, the Board of Directors authorized the repurchase of up to 7.5 million shares of outstanding common stock, representing approximately 5% of the total number of shares outstanding as of June 30, 1996. On July 29, 1996, 6.5 million shares were repurchased at a weighted average price of $26.85 per share. By February 20, 1997, the remaining balance of 1.0 million shares had been repurchased at a weighted average price of $31.91 per share. 46 On January 28, 1997, the Board of Directors authorized the repurchase of up to 5 million shares of outstanding common stock, representing approximately 3.6% of the total number of outstanding shares at December 31, 1996. As of February 28, 1997, there had been no repurchases under this program. On March 5, 1997 the Board of Directors voted to discontinue the repurchase program. GWB is subject to certain capital requirements under applicable regulations and meets all such requirements. GWB's total risk-based capital was $2.7 billion, including eligible subordinated notes of $157.7 million at December 31, 1996 and $3.0 billion, including eligible subordinated notes of $373.5 million at December 31, 1995. The decrease in eligible subordinated notes is due primarily to partial early redemptions of two issues in the fourth quarter of 1996. The following ratios compare GWB with the capital requirements under regulations issued by the OTS:
DECEMBER 31, 1996 DECEMBER 31, 1995 -------------------------- -------------------------- ACTUAL OTS BENCHMARK ACTUAL OTS BENCHMARK ------------ ------------- ------------ ------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------ ----- ------ ------ ------ ----- ------ ------ (DOLLARS IN MILLIONS) Leverage/tangible ratio $2,327 5.85 $ 1,192 3.00 $2,366 5.66 $ 1,254 3.00 Tier 1 risk-based ratio 2,322 9.77 950 4.00 2,361 9.40 1,004 4.00 Total risk-based ratio 2,669 11.23 1,901 8.00 2,966 11.81 2,008 8.00
The OTS previously proposed to amend its capital rule on the leverage ratio requirement to reflect amendments made by the Office of the Comptroller of the Currency ("OCC") to the capital requirements for national banks. The proposal would establish a 3% leverage ratio (defined as the ratio of core capital to adjusted total assets) for savings associations in the strongest financial and managerial condition. All other savings associations would be required to maintain leverage ratios of at least 4%. Only savings associations rated composite 1 under the OTS CAMELS rating system will be permitted to operate at or near the regulatory minimum leverage ratio of 3%. For all other savings associations, the minimum core capital leverage ratio will be 3% plus an additional 100 to 200 basis points. In determining the amount of additional capital, the OTS will assess both the quality of risk management systems and the level of overall risk in each individual savings association through the supervisory process on a case-by- case basis. The OTS' supervisory judgment on a savings association's capital adequacy, both in terms of risk-based capital and the minimum leverage ratio, will continue to be based upon an assessment of the relevant factors present in each institution. Savings associations that do not pass the minimum capital standards established under the new core capital leverage ratio requirements will be required to submit capital plans detailing steps to be taken to reach compliance. GWB currently meets these proposed requirements. The following table presents the debt ratings of the Company and GWB at December 31, 1996:
MOODY'S INVESTORS STANDARD & POOR'S SERVICE FITCH ----------------- ---------- -------- GWFC GWB GWFC GWB GWFC GWB -------- -------- ----- ---- ---- --- Unsecured short-term debt A-2 A-2 P-2 P-1 F-1 Senior term debt BBB+ A- Baa1 A2 A- A Subordinated term debt BBB+ A3 A- Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust BBB- Baa2 BBB Preferred stock BBB- Baa2 BBB
47 DIVIDENDS Quarterly cash dividends have been paid since 1977. At its April 1996 meeting, the Board of Directors increased the quarterly cash dividend from $.23 to $.25 per common share. The quarterly cash dividend of $.23 per common share had previously been paid at that level since the second quarter of 1992. The dividend increase in April was due to the Company's improved earnings outlook. The principal source of operating income of the Company on an unconsolidated basis is dividends from GWB and Aristar. In 1996, cash dividends received from GWB and Aristar totaled $151.3 million and $116.8 million, respectively. GWB is subject to the regulations of the OTS and FDIC. The OTS regulations impose limitations upon "capital distributions" by savings associations, including cash dividends. The regulations establish a three-tiered system: Tier 1 includes savings associations with capital at least equal to their fully phased-in capital requirement which have not been notified that they are in need of more than normal supervision; Tier 2 includes savings associations with capital above their minimum capital requirement but less than their fully phased-in requirement; and Tier 3 includes savings associations with capital below their minimum capital requirement. Tier 1 associations may, after prior notice but without approval of the OTS, make capital distributions up to the higher of (1) 100% of their net income during the calendar year plus the amount that would reduce by one half their "surplus capital ratio" (the excess over their fully phased-in capital requirement) at the beginning of the calendar year or (2) 75% of their net income over the most recent four-quarter period. Tier 2 associations may, after prior notice but without approval of the OTS, make capital distributions of up to 75% of their net income over the most recent four-quarter period depending upon their current risk-based capital position. Tier 3 associations may not make capital distributions without prior approval. An association subject to more stringent restrictions imposed by agreement may apply to remove the more stringent restrictions. The Company believes that GWB is a Tier 1 association. Notwithstanding the foregoing, the regulatory authorities have broad discretion to prohibit any payment of dividends and take other actions if they determine that the payment of such dividends would constitute an unsafe or unsound practice. Among the circumstances posing such risk would be a capital distribution by a Tier 1 or Tier 2 association whose capital is decreasing because of substantial losses. At January 1, 1997, GWB could declare dividends or make other capital distributions of approximately $384 million, without obtaining prior regulatory approval. Thereafter, the limitation in 1997 will increase by year- to-date net income less dividends paid to date. ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1996, the Company adopted disclosure requirements for stock-based compensation plans required by the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company continues to apply Accounting Principles Board Opinion 25 ("APB 25") in measuring stock compensation but has provided the footnote disclosures required by SFAS 123. See Note 19 of the Notes to Consolidated Financial Statements in Item 8 "Financial Statements and Supplementary Data." The Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") as of April 1, 1995. SFAS 122, an amendment to Statement of Financial Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain Mortgage Banking Activities," requires an entity that originates or purchases loans with the intent of selling or securitizing such loans to capitalize the mortgage servicing rights. The value of these servicing rights is based on the assumption that a normal servicing fee will be received for the estimated life of the loans. SFAS 122 also requires that all capitalized mortgage servicing rights be measured for impairment. Impairment is measured by stratifying the underlying loans based on one or more predominant risk 48 characteristics, including interest rate, product type and geographic area. Impairment is recognized through a valuation allowance. In 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles. The adoption of SFAS 121 did not have a material impact on the Company's financial statements. As a result of SFAS 121, real estate available for development is recorded at the lower of cost or fair value. Real estate available for development was previously recorded at the lower of cost or net realizable value. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS 125"). The Statement provides consistent accounting and reporting standards for the (1) transfers and servicing of financial assets and (2) extinguishment of liabilities. The Company will adopt SFAS 125 effective January 1, 1997 and does not expect the adoption of SFAS 125 to have a material impact on its financial statements. SUBSEQUENT EVENTS On January 27, 1997, Great Western Financial Trust II (the "subsidiary trust"), a wholly-owned subsidiary of Great Western Financial Corporation, issued $300 million of 8.206% Trust Originated Preferred Securities (the "preferred securities"). In connection with the subsidiary trust's issuance of the preferred securities, Great Western Financial Corporation issued to the subsidiary trust $309 million principal amount of its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated notes"). The sole assets of the subsidiary trust are and will be the subordinated notes. Great Western Financial Corporation's obligations under the subordinated notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary trust's obligations under the preferred securities. On February 3, 1997, the Company received preliminary approval in Federal Court of a $17.2 million settlement reached with plaintiffs in connection with the sale of uninsured investment products. Final approval of the settlement is set for April 14, 1997. Effective February 25, 1997, GWFC's Board of Directors approved a Broad Based Plan (the Plan) for eligible employees who are not covered by an existing severance plan and are not offered a comparable position by an acquiring company or whose employment is terminated within 12 months of a change in control, as defined by the Plan. The minimum pay will equate to six months with the maximum of 18 months obtainable under the Plan. As a result of the adoption of this Plan, the Company will record an increase to the restructuring liability in the first quarter of 1997 of approximately $10,000,000. On January 28, 1997, the Board of Directors authorized the repurchase of up to 5 million shares of outstanding common stock, representing approximately 3.6% of the total number of outstanding shares at December 31, 1996. As of February 28, 1997, there had been no repurchases under this program. On March 5, 1997 the Board of Directors voted to discontinue the repurchase program. On March 5, 1997, the Company entered into an Agreement and Plan of Merger with Washington Mutual, Inc. (Washington Mutual), and New American Capital, Inc., an indirect wholly-owned subsidiary of Washington Mutual. Washington Mutual is a regional financial services company headquartered in Seattle, Washington. With consolidated assets of $44.6 billion at December 31, 1996, this Washington corporation operates through its principal subsidiaries, Washington Mutual Bank, American Savings Bank, F.A., and Washington Mutual Bank 49 fsb. Under the Agreement and Plan of Merger, the Company will merge with and into New American Capital, Inc. in a tax-free exchange, pursuant to which, among other things, each outstanding share of common stock of the Company will be converted into .9 shares of common stock of Washington Mutual. Based upon the closing price of Washington Mutual's common stock on March 5, 1997, stockholders of the Company would receive shares of Washington Mutual common stock with a value of $47.93 per share of common stock of the Company. This transaction has been approved by the boards of directors of both companies. It is anticipated that this transaction will be accounted for as a pooling of interests. The Company expects the merger to be completed during the third quarter of 1997, pending the receipt of regulatory approval from the OTS and the approval of the stockholders of both companies. For additional information on the proposed merger, see Item 1. Business "Merger Agreement with Washington Mutual, Inc.", "H. F. Ahmanson & Company's Merger Proposal" and "Litigation Relating to the Ahmanson Merger Proposal" in Part I of this Form 10-K. 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Statement of Operations for the three years ended December 31, 1996, 1995 and 1994................................................. 52 Consolidated Statement of Financial Condition at December 31, 1996 and 1995.................................................................... 53 Consolidated Statement of Cash Flows for the three years ended December 31, 1996, 1995 and 1994................................................. 54 Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996, 1995 and 1994............................ 56 Notes to Consolidated Financial Statements............................... 57 Report of Independent Accountants........................................ 105 Management's Commentary on Financial Statements.......................... 106 Quarterly Financial Data................................................. 107
51 GREAT WESTERN FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) INTEREST INCOME Securities available-for-sale $ 66,360 $ 53,972 $ 28,774 Mortgage-backed securities 638,424 752,524 276,112 Loans Real estate 2,066,854 1,985,346 1,913,602 Consumer Finance 370,314 364,161 342,329 Other 44,472 38,430 35,953 ------------ ------------ ------------ Total loan interest income 2,481,640 2,387,937 2,291,884 Other 47,507 44,278 32,948 ------------ ------------ ------------ Total interest income 3,233,931 3,238,711 2,629,718 INTEREST EXPENSE Deposits 1,179,479 1,217,085 950,299 Borrowings Short-term borrowings 440,887 523,366 135,988 Long-term borrowings 235,548 196,131 221,161 ------------ ------------ ------------ Total interest expense 1,855,914 1,936,582 1,307,448 ------------ ------------ ------------ NET INTEREST INCOME 1,378,017 1,302,129 1,322,270 Provision for loan and lease losses 208,971 187,700 207,200 ------------ ------------ ------------ Net interest income after provision for loan and lease losses 1,169,046 1,114,429 1,115,070 Noninterest Income Retail banking fees 179,871 154,862 140,703 Servicing fees 45,684 55,159 50,853 Securities operations 30,175 21,092 39,902 Net insurance operations 29,570 28,861 27,636 Real estate fees 29,105 24,208 29,385 Net gain on sale of student loans 23,388 495 1,673 Net gain on sale of mortgages 8,562 8,824 5,339 Gain on sale of mortgage-backed securities 8,790 13,585 -- Write-downs of mortgage-backed securities (17,906) -- -- Provision for mortgages sold with recourse (7,300) -- -- Net gain on sale of securities -- -- 398 Loss on affordable housing investment (4,052) (7,611) -- Gain on sale of leases 811 14,909 1,507 Gain on sale of branches -- -- 62,337 Other 5,127 13,284 8,164 ------------ ------------ ------------ Total noninterest income 331,825 327,668 367,897 Noninterest Expense Salaries and benefits 438,604 441,366 469,115 SAIF special assessment 188,359 -- -- Premises and occupancy 179,617 179,654 199,048 Restructure expense 68,293 -- -- FDIC insurance premium 65,100 66,365 77,451 Outside data processing 57,292 60,847 32,512 Professional fees 40,165 17,942 16,679 Communications 39,810 44,783 38,856 Amortization of intangibles 37,722 40,286 58,689 Advertising and promotion 32,961 35,661 36,573 Operating losses and settlements 25,212 22,553 14,674 Retirement of subordinated debt 21,406 -- -- Office supplies 20,718 17,943 16,386 Postage 13,982 13,508 17,476 Insurance 11,413 10,286 11,946 Net real estate operations 726 5,605 31,854 Other 72,869 63,176 55,174 ------------ ------------ ------------ Total noninterest expense 1,314,249 1,019,975 1,076,433 ------------ ------------ ------------ EARNINGS BEFORE TAXES 186,622 422,122 406,534 Income tax expense 70,800 161,100 155,300 ------------ ------------ ------------ NET EARNINGS $ 115,822 $ 261,022 $ 251,234 ============ ============ ============ Average common shares outstanding Without dilution 138,505,046 137,111,074 133,769,724 Fully diluted 139,250,206 137,951,442 133,769,724 Earnings per share based on average common shares outstanding Primary $ .69 $ 1.72 $ 1.69 Fully diluted .69 1.71 1.69 Cash dividends per common share .98 .92 .92
See Notes to Consolidated Financial Statements 52 GREAT WESTERN FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31 ------------------------ 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) ASSETS Cash $ 534,192 $ 837,292 Certificates of deposit, repurchase agreements and federal funds 300,100 257,125 Securities available-for-sale 1,279,283 1,092,459 Mortgage-backed securities held-to-maturity (fair value $1,622,573 and $1,941,918) 1,618,709 1,886,736 Mortgage-backed securities available-for-sale 6,169,842 7,916,705 ----------- ----------- 7,788,551 9,803,441 Loans receivable, net of allowance for loan and lease losses 30,717,320 29,401,644 Loans available-for-sale 105,872 485,705 ----------- ----------- Net loans 30,823,192 29,887,349 Investment in FHLB 377,946 341,102 Real estate available-for-sale or development, net 159,997 217,112 Interest receivable 245,539 298,640 Premises and equipment, net 552,422 604,672 Intangibles arising from acquisitions 285,991 323,713 Other assets 527,359 923,859 ----------- ----------- Total assets $42,874,572 $44,586,764 =========== =========== LIABILITIES Deposits $28,586,773 $29,234,928 Short-term borrowings from FHLB 2,011,733 740,080 Securities sold under agreements to repurchase 4,197,666 6,868,296 Short-term borrowings 1,101,506 1,316,413 Long-term borrowings 3,190,908 2,420,845 Accrued interest payable 172,324 104,607 Taxes on income, principally deferred 226,075 378,381 Other liabilities and accrued expenses 692,387 600,738 ----------- ----------- Total liabilities 40,179,372 41,664,288 ----------- ----------- Company-obligated manditorily redeemable preferred securities of the Company's subsidiary trust, holding solely $103,092,800 aggregate principal amount of 8.25% subordinated deferrable interest notes, due 2025, of the Company 100,000 100,000 STOCKHOLDERS' EQUITY Preferred stock, par value $1.00 per share; Authorized 10,000,000 shares; Cumulative Convertible issued none and 517,500; Cumulative issued 660,000 and 660,000 165,000 294,375 Common stock, par value $1.00 per share; Authorized 200,000,000 shares; Issued 137,875,955 and 137,279,331 137,876 137,279 Additional paid-in-capital 680,428 713,889 Retained earnings-substantially restricted 1,535,264 1,572,782 Unearned compensation (327) (4,282) Securities valuation allowance 76,959 108,433 ----------- ----------- Total stockholders' equity 2,595,200 2,822,476 ----------- ----------- Total liabilities and stockholders' equity $42,874,572 $44,586,764 =========== ===========
See Notes to Consolidated Financial Statements 53 GREAT WESTERN FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------------ 1996 1995 1994 ----------- ----------- ---------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net earnings $ 115,822 $ 261,022 $ 251,234 Noncash adjustments to net earnings: Provisions for loan and lease losses 208,971 187,700 207,200 Net decrease (increase) in interest receivable 53,101 (67,715) (15,970) Net increase in interest payable 67,717 6 29,829 Depreciation and amortization 87,350 74,245 88,439 Amortization of intangibles 37,722 40,286 58,689 Retirement of subordinated debt 21,406 -- -- Writedowns of mortgage-backed securities 17,906 -- -- Writedowns of real estate available- for-sale 2,254 -- -- Net gain on sale of securities -- -- (398) Gain on sale of branches -- -- (62,337) (Gain) loss on sale of mortgage-backed securities 925 (8,926) -- Gain on sale of leases (811) (14,909) (1,507) Provisions for real estate losses (12,775) 1,500 12,000 Gain on sale of real estate (15,619) (21,709) (6,437) (Gain) loss on sale of loans available-for-sale (16,413) 597 1,414 Capitalized interest (55,625) (61,746) (8,431) Income taxes (136,828) 72,445 65,441 Other 438,870 (235,960) (166,977) Sales and repayments of loans available- for-sale 1,616,630 1,189,955 1,203,636 Originations and purchases of loans available-for-sale (1,191,263) (1,234,399) (894,870) ----------- ----------- ---------- Net cash provided by operating activities 1,239,340 182,392 760,955 ----------- ----------- ---------- FINANCING ACTIVITIES (Decrease) increase in deposits (648,155) 533,981 (1,849,091) Disposition of deposits, net -- -- (981,525) Proceeds from issuance of long-term borrowings 1,098,577 199,906 1,174,643 Repayments of long-term borrowings (349,920) (290,205) (1,366,357) Net change in securities sold under agreements to repurchase (2,670,630) 569,241 6,299,055 Net change in short-term borrowings from FHLB 1,271,653 740,080 -- Net change in short-term borrowings (214,907) 105,952 533,978 Other financing activity Common stock repurchased (176,732) -- -- Common stock issued 24,452 60,195 29,842 Redemption of preferred stock (998) -- -- Payment of cash dividends on common stock (133,045) (124,673) (122,524) Payment of cash dividends on preferred stock (20,295) (25,015) (25,015) ----------- ----------- ---------- Net cash (used in) provided by financing activities (1,820,000) 1,769,462 3,693,006 ----------- ----------- ----------
See Notes to Consolidated Financial Statements 54 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31 ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) INVESTING ACTIVITIES Securities available-for-sale Proceeds from sales and maturities $ 2,080,781 $ 1,436,303 $ 1,147,471 Purchases of securities available-for- sale (2,272,801) (1,585,030) (1,218,586) Mortgage-backed securities available- for-sale Proceeds from sales and repayments 1,851,496 1,712,178 829,416 Purchases of mortgage-backed securities (39,669) -- (1,539,349) Real estate loans Payments received on loans 2,970,406 2,240,941 3,202,021 Proceeds from sale of loans 292,472 -- 55,243 Loans originated for investment (4,655,316) (5,816,535) (6,506,744) Repurchases (44,118) (116,547) (547,674) Consumer Finance and other loans Loans originated for investment (2,229,945) (2,284,775) (2,168,029) Proceeds from sale of loans 2,430 34,997 6,438 Dispositions (acquisitions), net -- -- 2,094 Payments received on loans 2,104,004 2,097,401 1,966,211 Other investing activity Purchases and sales of premises and equipment, net (36,856) (86,094) (82,559) Proceeds from sale of real estate 376,325 390,807 468,304 Acquisition and disposition of retail banking assets, net -- -- 74,159 Net change in investment in FHLB (36,844) (35,061) 1,311 Other (41,830) 5,413 29,171 ----------- ----------- ----------- Net cash provided by (used in) investing activities 320,535 (2,006,002) (4,281,102) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (260,125) (54,148) 172,859 Cash and cash equivalents at beginning of period 1,094,417 1,148,565 975,706 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 834,292 $ 1,094,417 $ 1,148,565 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid for Interest on deposits $ 1,147,510 $ 1,214,881 $ 951,140 Interest on borrowings 656,164 721,695 326,479 Income taxes 157,952 86,338 111,656 Noncash financing activities Conversion of preferred stock to common stock 128,377 -- -- Noncash investing activities Loans transferred to real estate available-for-sale 418,398 420,973 504,585 Loans originated to finance the sale of real estate available-for-sale 76,320 86,366 92,586 Loans originated to refinance existing loans 337,396 266,135 567,119 Loans exchanged for mortgage-backed securities -- 1,997,585 5,502,401
See Notes to Consolidated Financial Statements 55 GREAT WESTERN FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) PREFERRED STOCK Balance, beginning of period $ 294,375 $ 294,375 $ 294,375 Preferred stock redeemed (953) -- -- Preferred stock converted to common stock (128,422) -- -- ---------- ---------- ---------- Balance, end of period 165,000 294,375 294,375 ---------- ---------- ---------- COMMON STOCK Balance, beginning of period 137,279 134,316 132,616 Common stock converted from preferred stock 6,295 -- -- Common stock issued upon exercise of options 1,047 704 282 Common stock issued under dividend reinvestment plan 102 2,283 1,418 Common stock acquired (340) -- -- Restricted stock awards granted, net of cancellations (7) (24) -- Common stock repurchased under repurchase plan (6,500) -- -- ---------- ---------- ---------- Balance, end of period 137,876 137,279 134,316 ---------- ---------- ---------- ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 713,889 656,644 627,717 Common stock converted from preferred stock 122,082 -- -- Common stock issued upon exercise of options 20,858 12,341 4,576 Common stock issued under dividend reinvestment plan 2,445 44,867 23,566 Common stock acquired (8,491) -- -- Restricted stock awards granted, net of cancellations (123) (350) -- Tax benefit of restricted stock awards -- 387 785 Common stock repurchased under repurchase plan (170,232) -- -- ---------- ---------- ---------- Balance, end of period 680,428 713,889 656,644 ---------- ---------- ---------- RETAINED EARNINGS Balance, beginning of period 1,572,782 1,461,448 1,357,753 Net earnings 115,822 261,022 251,234 Preferred stock dividends (20,295) (25,015) (25,015) Common stock dividends (133,045) (124,673) (122,524) ---------- ---------- ---------- Balance, end of period 1,535,264 1,572,782 1,461,448 ---------- ---------- ---------- UNEARNED COMPENSATION Balance, beginning of period (4,282) (7,913) (11,711) Amortization of restricted stock 3,934 3,257 3,798 Restricted stock awards granted, net of cancellations 21 374 -- ---------- ---------- ---------- Balance, end of period (327) (4,282) (7,913) ---------- ---------- ---------- SECURITIES VALUATION ALLOWANCE Balance, beginning of period 108,433 (55,084) 22,651 Change in unrealized net gain (loss), net of taxes (31,474) 163,517 (77,735) ---------- ---------- ---------- Balance, end of period 76,959 108,433 (55,084) ---------- ---------- ---------- Total stockholders' equity $2,595,200 $2,822,476 $2,483,786 ========== ========== ==========
See Notes to Consolidated Financial Statements 56 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: STATEMENT OF ACCOUNTING POLICIES PRINCIPLES OF ACCOUNTING AND CONSOLIDATION The accounts of Great Western Financial Corporation and its wholly-owned subsidiaries, Great Western Bank, Aristar, a consumer finance holding company, and companies operating in related fields, are included in the accompanying consolidated financial statements and are referred to collectively as the Company. Significant intercompany items have been eliminated. Certain prior- year amounts have been reclassified to conform with the 1996 presentation. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In 1996, the Company adopted disclosure requirements for stock-based compensation plans required by SFAS 123. SFAS 123 allows for two methods of valuing stock based compensation. The first method allows for the continuing application of APB 25 in measuring stock compensation, while complying with the disclosure requirements of SFAS 123. The second method uses an option pricing model to value stock compensation and record as such within the financial statements. The Company will comply with the former and continue to apply APB 25 while complying with SFAS 123 disclosure requirements. See Note 19. The Company adopted SFAS 122 as of April 1, 1995. SFAS 122 requires an entity that originates or purchases loans with the intent of selling or securitizing such loans to capitalize the mortgage servicing rights. SFAS 122 also requires that all capitalized mortgage servicing rights be measured for impairment. In 1995, the Company adopted SFAS 121 which establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles. The adoption of these accounting standards did not materially affect comparability of the financial statements. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," ("SFAS 125"). The Statement provides consistent accounting and reporting standards for the (1) transfers and servicing of financial assets and (2) extinguishment of liabilities. Beginning in 1997, SFAS 125 supersedes Statement of Financial Accounting Standard No. 76, "Extinguishment of Debt," ("SFAS 76"), Statement of Financial Accounting Standards No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse," ("SFAS 77"), SFAS 122, and several Technical Bulletins and amends Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and both amends and extends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"). The Company will adopt SFAS 125 effective January 1, 1997 and does not expect the adoption of SFAS 125 to have a material impact on its financial statements. 57 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FAIR VALUE DISCLOSURE Quoted market prices are used, where available, to estimate the fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company's financial instruments, fair value is estimated using comparable market prices for similar instruments or using management's estimates of discounted cash flows for the underlying asset or liability. A change in management's assumptions could significantly affect these estimates and, accordingly, fair value is not necessarily indicative of the value which would be realized upon disposition of the financial instruments. CASH AND CASH EQUIVALENTS For the Consolidated Statement of Cash Flows, cash and cash equivalents include cash, certificates of deposit, federal funds and repurchase agreements. Certificates of deposit, federal funds and repurchase agreements purchased with an original maturity of three months or less are considered to be cash equivalents. Cash includes cash on hand and cash in banks. SECURITIES AVAILABLE-FOR-SALE Securities available-for-sale, which are securities that may be sold prior to maturity, are carried at fair value with any valuation adjustments reported in a separate component of stockholders' equity, net of deferred income taxes. The estimated fair value of investments is based on current quotations where available. Where current quotations are not available, the estimated fair value is based primarily on the present value of the future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. MORTGAGE-BACKED SECURITIES The Company's mortgage-backed securities ("MBS") portfolio consists of real estate loan receivables originated by the Bank and subsequently securitized primarily through the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association. Loans are also securitized for sale directly in the public market. The Company purchases, for investment and liquidity purposes, FNMA and FHLMC securities, Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"). In 1994 and 1995, the Company swapped single-family residential ARMs for mortgage-backed securities to provide collateral for borrowings. These securities are subject to full credit recourse and the swaps can be unwound at the option of the Company. Certain ARMs swapped in 1994 and 1995, REMICs and GWB-originated pass-through certificates are held-to-maturity based on management's positive intent and ability to hold these securities until maturity and are recorded at amortized cost as adjusted for permanent impairment. All other mortgage-backed securities are available-for-sale and recorded at fair value with any valuation adjustments reported in a separate component of stockholders' equity, net of deferred income taxes. Fair value is generally determined on the aggregate method giving effect to servicing rights and estimated losses from credit recourse. Discounts or premiums on mortgage- backed securities recorded at cost are amortized using the interest method. Gains and losses on mortgage-backed securities are calculated on the specific identification method. LOANS Real Estate Loans The Company's real estate loan portfolio consists primarily of long-term loans secured by first trust deeds on single-family residences, other residential property, commercial property and land. The ARM is the Bank's primary loan investment. Real estate loans available-for-sale, primarily fixed rate, are valued at the lower of cost or fair value. 58 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Fees are charged for originating loans at the time the loan is granted. Loan origination fees, partially offset by the deferral of certain expenses associated with such loans originated, are amortized to interest income over the life of the loan using the interest method. ARMs with a lower rate during the introductory period (usually three months) will reflect the amortization of a substantial portion of the net deferred fee as a yield adjustment during the introductory period. Amortization is discontinued for nonperforming loans and loans available-for-sale and is realized upon the ultimate disposition of the assets. Loan fee income represents income from the prepayment of loans, delinquent payments or miscellaneous loan services and is recorded when collected. Interest receivable represents, for the most part, the current month's interest which will be included as a part of the borrower's next monthly loan payment. Interest receivable is accrued only if deemed collectible. Loan payments generally are deemed to be in nonaccrual status when they become more than 90 days past due. When a loan is designated as nonaccrual, previously accrued interest is reversed. Below-market-rate loans are made to facilitate the sale of certain foreclosed real estate. These transactions reduce the gain on sale and provide a loan discount which is amortized on the interest method resulting in a market yield on the new loan. Consumer Finance Loans The Company makes direct consumer installment loans and purchases retail installment contracts from local retail establishments. These consumer credit transactions are primarily for personal, family or household purposes. Loan fees and directly related lending costs are deferred and amortized using the interest method over the contractual life of the related loans. Allowance for Loan and Lease Losses The Company continually evaluates numerous factors in estimating the amount of the allowance for loan and lease losses. Specific factors, unique to individual loans, such as borrower performance, credit scores and loan to value ratio are considered, as well as general factors, including general economic conditions, prior loan loss experience and composition of the loan portfolio. The Company also maintains an ongoing examination process to periodically evaluate the allowance, as do its regulators. Loans made by consumer finance subsidiaries are also reviewed on a systematic basis. In evaluating the adequacy of the allowance, consideration is given to recent loan loss experience and such other factors which, in management's judgment, deserve current recognition in estimating losses. Non- real estate secured accounts are charged off based on the number of days contractually delinquent (180 days for substantially all loans). The Company's determination of the level of the allowance for loan and lease losses rests upon various judgments and assumptions, including general economic conditions, loan and lease portfolio composition, prior loan and lease loss experience, evaluation of credit risk related to certain individual borrowers and the Company's ongoing examination process and that of its regulators. The Company considers the allowance for loan and lease losses adequate to cover losses inherent in loans and leases. 59 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MORTGAGE BANKING ACTIVITIES Real estate loans are originated principally for investment. Since the Company is primarily an ARM portfolio lender for its own investment, most other products are originated and available-for-sale. As of December 31, 1996 the following loans were designated as available- for-sale and were carried at the lower of cost or fair value: 1. Single-family, fixed-rate product in the portfolio originated subsequent to January 1, 1989. 2. Single-family, adjustable rate product designated as available-for- sale. 3. Loans other than single-family which have been designated at the date of origination. The Company sells loans or participating interests in loans to generate servicing income, to limit interest-rate risk and to provide funds for additional investment. Under the servicing agreements, the Company continues to service the loans and the investor is paid its share of principal collections together with interest at an agreed upon rate, which generally differs from the loan's contractual interest rate. Such difference results in a "loan servicing spread". Gains or losses on sales of loans are recognized at the time of sale and are generally determined by: 1) the difference between the net sales proceeds and the book value of the loans sold; 2) recognition of deferred loan fees; 3) an adjustment, if necessary, to increase or decrease the loan servicing spread in order to provide for normal servicing; and 4) the capitalization of mortgage servicing rights. REAL ESTATE AVAILABLE-FOR-SALE OR DEVELOPMENT Real estate available-for-sale or development comprises both purchased and foreclosed properties. Foreclosed properties are carried at cost at acquisition, which is the lower of the net loan value on the property or the fair value of the property, less estimated costs to sell, at the date of foreclosure. Thereafter, specific valuation allowances have been established for changes in the fair value of real estate. Acquisition costs are generally expensed when incurred. Certain costs which represent a structural change or significant refurbishment which enhances the value of property are capitalized. Other real estate available-for-sale is carried at the lower of cost or fair value. Property development projects, carried at the lower of cost or fair value, are accounted for on the equity method. Gains on the sale of real estate financed by the Company are recognized giving consideration to down payment and other investment criteria. Losses are recognized when identified. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. The Company capitalizes expenditures for improvements and major refurbishments and charges ordinary maintenance and repairs to earnings as incurred. Depreciation and amortization are computed principally on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 30 years for buildings, 4 to 10 years for furniture, fixtures and equipment, 3 to 7 years for software and the lesser of the lease term or useful life of the property for leasehold improvements. INTANGIBLES ARISING FROM ACQUISITIONS Because of the earnings power or other identifiable values of certain purchased companies or businesses, the Company paid amounts in excess of identifiable fair value for businesses, core deposits and tangible assets acquired. Generally, such amounts are being amortized by systematic charges to income (primarily for periods from six to 25 years) over a period no greater than the estimated remaining life of the assets acquired or not exceeding the estimated average remaining life of the existing deposit base assumed. The Company periodically reviews intangibles to assess recoverability and impairment is recognized in operations if permanent loss of value occurs. 60 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DEPOSITS Deposits comprise primarily the Bank's checking, money market and other savings, term and wholesale accounts. Deposits vary as to terms, with the major differences being minimum balance required, maturity, interest rates and the provisions for payment of interest. The Bank's customer accounts are insured by the FDIC, through either the BIF or the SAIF for up to an aggregate amount of $100,000 per customer. The Bank may offer large denomination negotiable certificates of deposit. The negotiable certificates of deposit are primarily sold through brokers and may subsequently be traded on the open market. Interest is accrued and either paid to the customer or added to the customer's account on a periodic basis. On term accounts, the forfeiture of interest (because of withdrawal prior to maturity) is offset as of the date of withdrawal against interest expense. FEDERAL AND STATE INCOME TAXES Taxes are provided on substantially all income and expense items included in earnings, regardless of the period in which such items are recognized for tax purposes. Tax benefits are recognized for general loss reserve additions. Taxes on income are determined by using the liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, consideration is given to expected future events other than enactments of changes in the tax law or rates. EARNINGS PER COMMON SHARE Income for the calculation of primary earnings per common share is based on net income less preferred stock dividend requirements. Fully diluted earnings per common share give effect to the dilutive effect of stock options and assume the conversion of convertible securities into common stock at the later of the beginning of the year or the date of issuance (unless antidilutive). DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate derivative financial instruments (forward sales contracts and swaps) primarily to hedge mismatches in the rate maturity of deposits and short-term borrowings and their uses of funds. Amounts payable or receivable for swaps are accrued with the passage of time, the effect of which is included in interest expense reported on the liability hedged; fees on these financial contracts are amortized over their contractual life as a component of the interest reported on the liability hedged. 61 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2: ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING In December 1994, GWB completed the sale of $1 billion of deposits and 31 branches in West Florida to First Union National Bank. The deposits were sold for a net pretax gain of $62,300,000, which included the write-off of intangibles related to the sold branches of $10,000,000 and other sale related expenses of $2,200,000. In October 1994, GWB purchased the deposits of six branches located in San Diego County from Citibank, F.S.A., totaling $52,000,000. The deposits were acquired for a premium of $1,000,000. Intangibles arising from acquisitions as shown on the Consolidated Statement of Financial Condition consisted of the following:
DECEMBER 31 ------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at acquisition $ 575,603 $ 575,603 $ 575,603 Accumulated amortization (289,612) (251,890) (211,604) --------- --------- --------- $ 285,991 $ 323,713 $ 363,999 ========= ========= =========
The results of operations in 1996 reflect a $68,300,000 restructuring charge. The restructuring initiatives are designed to improve the Company's competitive position, accelerate expense reduction and enhance future revenue growth by streamlining operations, making efficient use of premises and modernizing the Company's systems platform. The components of the restructuring charge involve severance and write-off of premises and equipment. The Company's plans to streamline operations, reconfigure the retail branch network and improve information systems support and other back office functions will result in the reduction of approximately 1,200 employees and a charge to restructure expense of $17,000,000. As of December 31, 1996, 630 employee separations have occurred and the related severance expense of $4,600,000 was applied against the 1996 restructure liability. Employee separations related to the restructuring are planned to be completed by the end of 1997. The Company's corporate headquarters campus was identified for consolidation to make optimum use of building space. As a result, three buildings at the corporate campus will be vacated freeing up 272,000 square feet to sublet to third party tenants. Additionally, seven retail branch and 109 loan offices were identified for closure or consolidation. The total effect of vacating these premises is $29,500,000. Premises identified under the restructuring initiatives are planned to be vacated by December, 1997. In order to meet the Company's goal to modernize and replace its current systems platform, certain computer hardware and software equipment were considered obsolete or abandoned and written off. The upgrade and replacement of equipment will allow the Company to increase operational efficiency, improve processing capacity and establish a common user workstation environment. As of December 31, 1996, $18,400,000 of equipment was written off and applied against the restructure liability. The balance of $3,400,000 of equipment will be retired in 1997 and applied against the restructure liability. 62 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Following is a reconciliation of restructuring reserve activity during 1996:
1996 BALANCE RESTRUCTURING 1996 DECEMBER 31, CHARGE ACTIVITY 1996 ------------- -------- ------------ (DOLLARS IN MILLIONS) Severance $ 17.0 $ 4.6 $ 12.4 Premises 29.5 -- 29.5 Equipment 21.8 18.4 3.4 ------ ------ ------ Total $ 68.3 $ 23.0 $ 45.3 ====== ====== ======
NOTE 3: CASH, CERTIFICATES OF DEPOSIT, REPURCHASE AGREEMENTS AND FEDERAL FUNDS An analysis of cash, certificates of deposit, repurchase agreements and federal funds at December 31, 1996, 1995, 1994, 1993 and 1992 follows:
RATE AT DECEMBER 31 DECEMBER 31, -------------------------------------------- 1996 1996 1995 1994 1993 1992 ------------ -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Cash -- $534,192 $837,292 $983,440 $758,581 $686,028 ======== ======== ======== ======== ======== Repurchase agreements 6.37% 250,000 257,000 115,000 210,000 345,000 Federal Funds 5.44 50,000 -- 50,000 -- -- Certificates of Deposit 5.10 100 125 125 7,125 5,349 -------- -------- -------- -------- -------- Total $300,100 $257,125 $165,125 $217,125 $350,349 ======== ======== ======== ======== ========
The Company purchases securities under agreements to resell ("repurchase agreements") having terms of up to 90 days; however, they are typically overnight investments. The Company generally takes possession of collateral supporting securities sold under agreements to resell. Repurchase agreements outstanding at December 31, 1996, 1995 and 1994 were:
DECEMBER 31, ---------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD (DOLLARS IN THOUSANDS) -------- ----- -------- ----- -------- ----- Morgan Stanley and Company, Inc. $150,000 7.00% $125,000 5.88% $ -- --% J. P. Morgan 50,000 5.42 -- -- 65,000 6.08 Merrill Lynch Government Securities, Inc. 50,000 5.43 -- -- -- -- Smith Barney, Inc. -- -- 50,000 5.87 -- -- Goldman Sachs and Company -- -- 37,000 5.76 -- -- CS First Boston Corporation -- -- 25,000 5.67 50,000 5.78 CS First Boston Corporation -- -- 20,000 5.57 -- -- -------- -------- -------- $250,000 $257,000 $115,000 ======== ======== ========
The repurchase agreements were collateralized by federal agency securities with market values at least two percent above the face amounts of the repurchase agreements. The highest month-end balances outstanding were $375,000,000 in 1996, $337,000,000 in 1995 and $350,000,000 in 1994. The average balances outstanding were $275,769,000 at a rate of 6.14% in 1996, $236,308,000 at a rate of 6.65% in 1995 and $207,308,000 at 5.16% in 1994. 63 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) GWB is required to maintain certain minimum reserve balances with the FRB. Included in cash were deposits at the FRB of $126,802,000 at December 31, 1996, $152,893,000 at December 31, 1995 and $328,809,000 at December 31, 1994. NOTE 4: SECURITIES An analysis of securities available-for-sale by type, maturity (fair value) and maturity (amortized cost) and weighted average yield at December 31, 1996, 1995, 1994, 1993, and 1992 follows:
RATE AT DECEMBER 31 DECEMBER 31, ---------------------------------------------------- 1996 1996 1995 1994 1993 1992 ------------ ---------- ---------- -------- -------- -------- (DOLLARS IN THOUSANDS) Type (Fair value) U.S. government securities 5.88% $ 10,525 $ 10,874 $ 9,828 $335,625 $ 3,902 Federal agency securities 6.26 595,258 605,794 514,579 41,565 49,550 Corporate debt securities 5.97 638,854 445,314 364,254 432,780 459,870 Other securities 5.99 34,646 30,477 28,434 61,104 119,349 ---------- ---------- -------- -------- -------- Total $1,279,283 $1,092,459 $917,095 $871,074 $632,671 ========== ========== ======== ======== ======== Yield to maturity on interest-earning securities at year end, excluding insurance subsidiary 6.10% 6.34% 6.33% 5.02% 6.35%
1-LESS 5-LESS 10 YEARS LESS THAN THAN THAN AND ONE YEAR 5 YEARS 10 YEARS AFTER TOTAL --------- -------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Maturity (Fair Value) U.S. government securities $ 1,145 6.35% $ 5,927 5.81% $ 3,453 5.87% $ -- -- % $ 10,525 5.88% Federal agency securities 257,377 6.47 329,733 6.09 6,072 6.84 2,076 7.02 595,258 6.26 Corporate debt securities 321,382 5.67 237,068 6.01 61,759 7.21 18,645 6.34 638,854 5.97 Other securities 17,982 5.51 8,077 6.18 5,032 6.60 3,555 7.10 34,646 5.99 -------- ---- -------- ---- ------- ---- ------- ---- ---------- ---- $597,886 6.01% $580,805 6.05% $76,316 7.08% $24,276 6.51% $1,279,283 6.10% ======== ==== ======== ==== ======= ==== ======= ==== ========== ==== Maturity (Amortized Cost) U.S. government securities $ 1,139 $ 5,949 $ 3,435 $ -- $ 10,523 Federal agency securities 256,745 328,722 6,050 2,076 593,593 Corporate debt securities 321,308 236,598 60,947 18,567 637,420 Other securities 18,106 8,063 4,879 3,555 34,603 -------- -------- ------- ------- ---------- $597,298 $579,332 $75,311 $24,198 $1,276,139 ======== ======== ======= ======= ==========
64 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GROSS WEIGHTED UNREALIZED AVERAGE AMORTIZED -------------- FAIR YIELD COST GAINS LOSSES VALUE -------- ---------- ------ ------- ---------- DECEMBER 31, 1996 --------------------------------------------- (DOLLARS IN THOUSANDS) U.S. government securities 5.88% $ 10,523 $ 38 $ 36 $ 10,525 Federal agency securities 6.26 593,593 1,923 258 595,258 Corporate debt securities 5.97 637,420 2,203 769 638,854 Other securities 5.99 34,603 175 132 34,646 ---- ---------- ------ ------- ---------- 6.10% $1,276,139 $4,339 $ 1,195 $1,279,283 ==== ========== ====== ======= ========== DECEMBER 31, 1995 --------------------------------------------- U.S. government securities 5.55% $ 10,810 $ 84 $ 20 $ 10,874 Federal agency securities 6.43 599,940 6,237 383 605,794 Corporate debt securities 6.19 442,943 2,564 193 445,314 Other securities 6.10 30,425 170 118 30,477 ---- ---------- ------ ------- ---------- 6.32% $1,084,118 $9,055 $ 714 $1,092,459 ==== ========== ====== ======= ========== DECEMBER 31, 1994 --------------------------------------------- U.S. government securities 6.89% $ 10,580 $ 3 $ 755 $ 9,828 Federal agency securities 6.40 523,211 59 8,691 514,579 Corporate debt securities 6.44 372,013 267 8,026 364,254 Other securities 5.67 29,587 50 1,203 28,434 ---- ---------- ------ ------- ---------- 6.40% $ 935,391 $ 379 $18,675 $ 917,095 ==== ========== ====== ======= ==========
The Company purchases only investment grade or higher rated securities. In order to determine impairment, these ratings are reviewed quarterly. At December 31, 1996, 1995 and 1994, there were no securities held-to- maturity. Realized gains and losses on the available-for-sale portfolio are calculated on the specific identification method. Realized gains and losses on sales of securities were $457,000 and $59,000, respectively, in 1994. There were no sales of securities available-for-sale in 1996 or 1995. The unrealized net gains (losses) on securities available-for-sale, net of income taxes (securities valuation allowance), included as a component of stockholders' equity, were as follows:
YEAR ENDED DECEMBER 31 -------------------------- 1996 1995 1994 ------- ------- -------- (DOLLARS IN MILLIONS) Balance at beginning of period $ 4,952 $(9,235) $ 4,262 Change in unrealized net gains (losses), net of taxes (2,929) 14,187 (13,497) ------- ------- -------- Balance at end of period $ 2,023 $ 4,952 $ (9,235) ======= ======= ========
65 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5: MORTGAGE-BACKED SECURITIES Mortgage-backed securities held-to-maturity consisted of the following:
GROSS WEIGHTED UNREALIZED AVERAGE AMORTIZED ---------------- FAIR YIELD COST GAINS LOSSES VALUE -------- ---------- ------- -------- ---------- DECEMBER 31, 1996 ----------------------------------------------- (DOLLARS IN THOUSANDS) FNMA 7.97% $ 34,971 $ 176 $ 167 $ 34,980 FHLMC 8.10 1,469,488 20,257 7,566 1,482,179 Other 5.78 114,250 23 8,859 105,414 ---- ---------- ------- -------- ---------- 7.93% $1,618,709 $20,456 $ 16,592 $1,622,573 ==== ========== ======= ======== ========== DECEMBER 31, 1995 ----------------------------------------------- FNMA 9.87% $ 39,967 $ 5,427 $ -- $ 45,394 FHLMC 8.50 1,735,016 56,765 -- 1,791,781 Other 5.91 111,753 38 7,048 104,743 ---- ---------- ------- -------- ---------- 8.38% $1,886,736 $62,230 $ 7,048 $1,941,918 ==== ========== ======= ======== ========== DECEMBER 31, 1994 ----------------------------------------------- FNMA 6.57% $2,385,128 $ -- $ 38,640 $2,346,488 FHLMC 6.79 3,288,789 -- 50,101 3,238,688 REMIC 5.24 387,126 3 12,535 374,594 Other 5.80 274,061 -- 22,100 251,961 ---- ---------- ------- -------- ---------- 6.57% $6,335,104 $ 3 $123,376 $6,211,731 ==== ========== ======= ======== ==========
Prior to July, 1996 the Company recorded impairment on mortgage-backed securities through charge-offs to the allowance for loan and lease losses. Subsequent to July, impairment is recorded as a charge to earnings. There were charges to the allowance for loan and lease losses of $12,800,000 for the first six months of 1996, $11,000,000 for the year ended December 31, 1995, and $1,000,000 for the year ended December 31, 1994. For the second half of 1996, $17,906,000 was recorded to reflect impairment in the mortgage-backed securities portfolio. 66 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Mortgage-backed securities available-for-sale consisted of the following:
GROSS WEIGHTED UNREALIZED AVERAGE AMORTIZED ---------------- FAIR YIELD COST GAINS LOSSES VALUE -------- ---------- -------- ------- ---------- DECEMBER 31, 1996 ----------------------------------------------- (DOLLARS IN THOUSANDS) FNMA 6.75% $2,297,611 $ 51,812 $ 2,846 $2,346,577 FHLMC 6.81 3,297,051 94,183 17,569 3,373,665 REMIC 5.26 33,546 -- 286 33,260 RTC 6.57 159,461 -- 1,688 157,773 Other 6.75 263,728 -- 5,161 258,567 ---- ---------- -------- ------- ---------- 6.77% $6,051,397 $145,995 $27,550 $6,169,842 ==== ========== ======== ======= ========== DECEMBER 31, 1995 ----------------------------------------------- FNMA 7.33% $2,585,802 $ 66,326 $ -- $2,652,128 FHLMC 7.11 4,356,331 112,203 -- 4,468,534 REMIC 4.96 226,305 10 1,366 224,949 RTC 6.72 228,180 -- 5,387 222,793 Other 6.66 352,217 290 4,206 348,301 ---- ---------- -------- ------- ---------- 7.09% $7,748,835 $178,829 $10,959 $7,916,705 ==== ========== ======== ======= ========== DECEMBER 31, 1994 ----------------------------------------------- FNMA 6.02% $1,055,152 $ 416 $19,125 $1,036,443 FHLMC 6.83 1,379,856 114 40,991 1,338,979 RTC 6.62 186,028 -- 7,743 178,285 Other 6.66 390,750 -- 9,954 380,796 ---- ---------- -------- ------- ---------- 6.51% $3,011,786 $ 530 $77,813 $2,934,503 ==== ========== ======== ======= ==========
Proceeds from the sales of mortgage-backed securities were $555,719,000 in 1996 and $507,018,000 in 1995. There were no mortgage-backed securities sold in 1994. Net realized gains on the sale of mortgage-backed securities were $8,790,000 in 1996 and $13,585,000 in 1995. There were no realized losses on the sale of mortgage-backed securities in 1996 and 1995. 67 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The unrealized net gains (losses) on mortgage-backed securities, net of income taxes (securities valuation allowance), included as a component of stockholders' equity, were as follows:
YEAR ENDED DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN MILLIONS) Balance at beginning of period $103,481 $(45,849) $ 18,389 Change in unrealized net gains (losses), net of taxes (28,545) 149,330 (64,238) -------- -------- -------- Balance at end of period $ 74,936 $103,481 $(45,849) ======== ======== ========
The contractual maturities of mortgage-backed securities as of December 31, 1996 follow:
DECEMBER 31, 1996 ----------------------- ADJUSTABLE FIXED RATE RATE TOTAL ---------- ----- ------ (DOLLARS IN MILLIONS) One year or less $ 109 $ 86 $ 195 Over one to two years 116 30 146 Over two to three years 124 21 145 Over three to five years 265 35 300 Over five to ten years 796 80 876 Over ten to fifteen years 1,065 29 1,094 Over fifteen years 5,024 9 5,033 ------ ---- ------ $7,499 $290 $7,789 ====== ==== ======
At December 31, 1995, certain mortgage-backed securities were reclassified in accordance with the guide to implementing SFAS 115 issued by the FASB. The following table presents the effect of the reclassification:
UNREALIZED HELD-TO- AVAILABLE- GAINS/(LOSSES) MATURITY FOR-SALE TOTAL NET OF TAXES -------- ---------- ------ -------------- (DOLLARS IN MILLIONS) Balance prior to reclassification $7,563 $2,097 $9,660 $ 24 Reclassified from held-to- maturity to available-for-sale (5,920) 5,920 -- -- Reclassified from available-for- sale to held-to-maturity 244 (244) -- -- Unrealized gains -- 143 143 143 Tax effect of unrealized gains -- -- -- (59) ------ ------ ------ ---- Balance at December 31, 1995 $1,887 $7,916 $9,803 $108 ====== ====== ====== ====
68 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6: LOANS The composition of real estate and Consumer Finance and other loans for the five years 1992 through 1996 is included in the table on page 31. The following comprised loans receivable:
DECEMBER 31 ------------------------ 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Loans receivable Real estate Held-for-investment $28,675,327 $27,525,966 Available-for-sale 85,681 159,939 Consumer Finance 2,185,903 2,136,022 Other loans Held-for-investment 219,044 189,442 Available-for-sale 21,491 327,395 ----------- ----------- 31,187,446 30,338,764 ----------- ----------- Loans in process 10,371 (487) Unearned income (60,926) (88,079) Allowance for loan and lease losses (313,699) (362,849) ----------- ----------- (364,254) (451,415) ----------- ----------- $30,823,192 $29,887,349 =========== ===========
The contractual maturities of loans as of December 31, 1996 follow:
DECEMBER 31, 1996 -------------------------------------------- REAL ESTATE LOANS --------------------- FIXED CONSUMER TOTAL ARM RATE TOTAL FINANCE OTHER LOANS ------- ----- ------- -------- ----- ------- (DOLLARS IN MILLIONS) One year or less $ 520 $ 32 $ 552 $ 723 $144 $ 1,419 Over one to two years 767 44 811 587 8 1,406 Over two to three years 714 39 753 418 6 1,177 Over three to five years 1,168 148 1,316 165 5 1,486 Over five to ten years 3,608 285 3,893 200 19 4,112 Over ten to fifteen years 4,560 93 4,653 91 58 4,802 Over fifteen years 16,605 178 16,783 2 -- 16,785 ------- ---- ------- ------ ---- ------- Total $27,942 $819 $28,761 $2,186 $240 $31,187 ======= ==== ======= ====== ==== =======
In accordance with SFAS 114, a loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment based on the fair value of the loan's collateral. A change in the fair value of an impaired loan is reported as an increase or reduction to the provision for loan losses. Charge-offs occur upon modification of the loan terms or in the event of foreclosure. The Company's policy for recognizing income on impaired loans is to accrue earnings unless a loan is in foreclosure or becomes nonperforming, at which time the accrued earnings are reversed. Cash receipts for impaired loans are allocated to principal and interest in accordance with the contractual terms of the loan. 69 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The recorded investment in loans for which impairment has been recognized and the related reserves for estimated losses follows:
IMPAIRED LOANS --------------------------------------------------------------- HAVING HAVING RELATED RESERVES FOR NET WITH NO RELATED RESERVES ESTIMATED RESERVES RESERVES FOR NET OF RESERVES FOR LOSSES LOSSES FOR LOSSES LOSSES FOR LOSSES ---------- ------------ ---------- ------------ --------------- DECEMBER 31, 1996 --------------------------------------------------------------- (DOLLARS IN THOUSANDS) Real estate loans Residential Single-family $ 42,310 $ 9,281 $ 33,029 $39,666 $ 72,695 Apartments 67,936 13,080 54,856 8,002 62,858 Commercial Offices 29,202 9,570 19,632 3,364 22,996 Retail 11,863 3,173 8,690 759 9,449 Hotel/motel 34,082 9,032 25,050 -- 25,050 Industrial 16,633 4,210 12,423 1,170 13,593 Other 1,451 -- 1,451 2,017 3,468 -------- ------- -------- ------- -------- $203,477 $48,346 $155,131 $54,978 $210,109 ======== ======= ======== ======= ======== DECEMBER 31, 1995 --------------------------------------------------------------- (DOLLARS IN THOUSANDS) Real estate loans Residential Single-family $ 52,189 $11,889 $ 40,300 $31,690 $ 71,990 Apartments 81,222 18,797 62,425 25,595 88,020 Commercial Offices 24,196 8,958 15,238 9,793 25,031 Retail 31,758 6,812 24,946 5,875 30,821 Hotel/motel 38,727 9,292 29,435 -- 29,435 Industrial 22,509 5,515 16,994 3,004 19,998 Other 1,836 526 1,310 1,823 3,133 -------- ------- -------- ------- -------- $252,437 $61,789 $190,648 $77,780 $268,428 ======== ======= ======== ======= ======== DECEMBER 31, 1994 --------------------------------------------------------------- (DOLLARS IN THOUSANDS) Real estate loans Residential Single-family $ 31,011 $ 6,456 $ 24,555 $17,063 $ 41,618 Apartments 77,934 16,418 61,516 28,395 89,911 Commercial Offices 26,698 9,303 17,395 5,426 22,821 Retail 25,916 5,547 20,369 3,902 24,271 Hotel/motel 19,659 3,194 16,465 2,207 18,672 Industrial 12,646 3,018 9,628 1,728 11,356 Other 4,671 1,090 3,581 329 3,910 -------- ------- -------- ------- -------- $198,535 $45,026 $153,509 $59,050 $212,559 ======== ======= ======== ======= ========
Single-family residential mortgage loans are generally evaluated for impairment as homogeneous pools of loans. Certain situations may arise leading to single-family residential mortgage loans being evaluated for impairment on an individual basis. 70 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The average recorded investment in impaired loans and the related amount of interest income recognized during the period of impairment follows:
YEAR ENDED DECEMBER 31 -------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Average recorded investment in impaired loans $256,650 $243,079 $298,315 Interest income recognized 21,271 17,809 24,733 Interest income recognized on cash-basis 21,410 17,758 25,061
Loans receivable totaling $8,008,384,000 at December 31, 1996 were pledged to secure FHLB borrowings, certain deposits, securities sold under agreements to repurchase and other obligations and accounts. Gross unrealized gains on real estate loans available-for-sale totaled $462,000 at December 31, 1996 and $1,443,000 at December 31, 1995. A significant portion of the ARM portfolio is subject to lifetime interest- rate caps and floors as well as periodic interest-rate caps. Each loan is priced separately with a maximum cap and a minimum floor. The weighted-average cap was 12.92% and the weighted-average floor was 4.81% at December 31, 1996. At December 31, 1996, $459,299,000 of ARMs with an average yield of 7.31% had reached their periodic cap rate. Without the cap, the average yield on those ARMs would have been 7.64%. Periodic interest-rate caps are generally in effect for three years. The loss to interest income from real estate loans which have reached their ceiling interest rate was approximately $2,098,000 in 1996. At December 31, 1996, $417,467,000 of ARMs with an average yield of 7.76% had reached their floor rate. Without the floor, the average yield on those ARMs would have been 7.36%. The benefit to interest income from real estate loans which have reached their floor interest rate was approximately $1,675,000 in 1996 compared with $3,152,000 in 1995. The contract amount on ARMs subject to interest-rate caps and floors does not represent the exposure to market loss. The amortization of deferred loan fees included in interest income totaled $25,866,000 in 1996, $33,493,000 in 1995 and $53,378,000 in 1994. Certain loans meet the criteria of TDRs. TDRs totaled $74,196,000 at December 31, 1996. This compared with $126,147,000 at the end of 1995 and $148,244,000 at the end of 1994. There were no additional funds committed at December 31, 1996. Interest on nonaccrual loans totaled $38,426,000 for the year ended December 31, 1996 compared with $38,058,000 for the year ended December 31, 1995 and $46,909,000 for the year ended December 31, 1994. 71 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Following is a summary of the reserve for estimated losses and charge-off experience for loans receivable:
REAL ESTATE LOANS CONSUMER LOANS -------------------- ------------------ CONSUMER BANK OTHER SFR OTHER FINANCE CARD LOANS TOTAL --------- --------- -------- -------- ------- --------- (DOLLARS IN THOUSANDS) BALANCE AT DECEMBER 31, 1991 $ 100,353 $ 87,641 $ 45,416 $ 21,173 $ 8,467 $ 263,050 Provision for losses 113,408 228,492 41,900 30,254 5,946 420,000 Charge-offs (53,031) (117,611) (55,436) (28,150) (8,497) (262,725) Recoveries 212 5,008 14,661 2,022 2,669 24,572 --------- --------- -------- -------- ------- --------- BALANCE AT DECEMBER 31, 1992 160,942 203,530 46,541 25,299 8,585 444,897 Adoption of SFAS 114 3,153 44,821 -- -- -- 47,974 --------- --------- -------- -------- ------- --------- BALANCE AT JANUARY 1, 1993 164,095 248,351 46,541 25,299 8,585 492,871 Provision for losses 299,485 123,468 37,900 (6,533) 8,680 463,000 Charge-offs (253,686) (151,700) (50,174) (20,794) (2,300) (478,654) Recoveries 2,025 4,273 15,523 2,028 1,203 25,052 --------- --------- -------- -------- ------- --------- BALANCE AT DECEMBER 31, 1993 211,919 224,392 49,790 -- 16,168 502,269 Provision for losses 166,649 693 41,900 -- (2,042) 207,200 Charge-offs (191,290) (42,981) (54,041) -- (3,762) (292,074) Recoveries 1,420 2,924 15,568 -- 744 20,656 --------- --------- -------- -------- ------- --------- BALANCE AT DECEMBER 31, 1994 188,698 185,028 53,217 -- 11,108 438,051 Provision for losses 160,425 (18,000) 48,500 -- (3,225) 187,700 Charge-offs (194,605) (22,739) (62,206) -- (2,017) (281,567) Recoveries 1,498 860 16,057 -- 250 18,665 --------- --------- -------- -------- ------- --------- BALANCE AT DECEMBER 31, 1995 156,016 145,149 55,568 -- 6,116 362,849 Provision for losses 187,344 (39,908) 58,800 -- 2,735 208,971 Charge-offs (196,708) (14,602) (60,520) -- (4,488) (276,318) Recoveries 1,256 228 16,197 -- 516 18,197 --------- --------- -------- -------- ------- --------- BALANCE AT DECEMBER 31, 1996 $ 147,908 $ 90,867 $ 70,045 $ -- $ 4,879 $ 313,699 ========= ========= ======== ======== ======= =========
As a result of the Company's review of reserve levels which showed an excess of commercial and apartment loan reserves, the Company reallocated $40,000,000 of commercial real estate loan reserves, which is included in the other real estate loan provisions for losses, to SFR in 1996. Provisions for losses on the leasing portfolio, included in other loan loss provisions, were reduced by $1,800,000 in 1996 and $6,000,000 in 1995 as a result of the reversal of provisions originally established for expected losses which did not materialize. The following table presents the Company's ALLL as a percent of the respective loans receivable portfolios. The loan balances and percentage of reserves to the respective loan balances for December 1995 have been restated to exclude mortgage-backed securities with credit recourse for comparative purposes to conform to the 1996 presentation.
REAL ESTATE LOANS CONSUMER LOANS ------------------- ------------------ CONSUMER BANK OTHER SFR OTHER FINANCE CARD LOANS TOTAL -------- --------- --------- ------- ----- ----- December 31, 1996 .57% 3.39% 3.20% --% 2.03% 1.01% 1995 .63 4.86 2.60 -- 1.18 1.20 1994 .66 5.96 2.66 -- 2.47 1.28 1993 .83 6.59 2.72 -- 3.99 1.60 1992 .63 5.83 2.70 9.88 2.14 1.43
72 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The average loan receivable balances and the ratio of net charge-offs to the respective average loan receivable portfolios are presented in the table below.
DECEMBER 31 ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS) Average balance Real estate loans SFR $25,212 $23,980 $25,227 $25,689 $25,321 Other 2,854 3,075 3,255 3,719 3,686 Consumer Finance 2,105 2,016 1,868 1,728 1,686 Bank card -- -- -- 180 272 Other loans 534 498 418 386 423 Ratio of net charge-offs to average loans Real estate loans SFR .72% .76% .75% .98% .21% Other .50 .71 1.23 3.96 3.07 Consumer Finance 2.11 2.29 2.06 2.01 2.42 Bank card -- -- -- 10.44 9.62 Other loans .74 .35 .72 .27 1.38
NOTE 7: MORTGAGE BANKING The following summarizes the sale of loans and mortgage-backed securities by type:
YEAR ENDED DECEMBER 31 -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Loans sold Adjustable rate $ -- $ -- $ 55,243 Fixed-rate 1,478,008 1,113,259 1,115,751 Mortgage-backed securities sold Adjustable rate 561,400 498,099 -- ---------- ---------- ---------- $2,039,408 $1,611,358 $1,170,994 ========== ========== ==========
The following table summarizes the average loans serviced for others and the related loan servicing spread:
YEAR ENDED DECEMBER 31 ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Average loans serviced for others $11,152,957 $10,807,163 $11,723,525 Loan servicing spread .41% .51% .43%
Loan servicing spread represents net servicing income as a percentage of the average portfolio serviced. Custodial balances maintained in connection with the foregoing loan servicing are included in wholesale transaction accounts and totaled $157,954,000 at December 31, 1996 and $173,856,000 at December 31, 1995. At December 31, 1996 GWB serviced loans for GWFC and Aristar of $27,166,000 and $14,801,000, respectively. At December 31, 1995, GWB serviced loans for GWFC and Aristar of $23,292,000 and $12,252,000, respectively. 73 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The present value of retained yield on loans sold is amortized using the interest method adjusted quarterly for actual prepayment experience. Following is a summary of capitalized excess and short servicing included in other assets and other liabilities, respectively:
DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Excess servicing $ 28,241 $ 24,830 $ 25,934 Short servicing (20,714) (21,214) (25,356) -------- -------- -------- Capitalized servicing, net $ 7,527 $ 3,616 $ 578 ======== ======== ========
An impairment adjustment was recorded to short servicing of $1,643,000 in 1996. Following is a summary of the net unamortized balance of excess and short servicing on loans sold:
YEAR ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ------- ------ ------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 3,616 $ 578 $ 9,160 Additions from sales 9,445 994 604 Amortization of excess and short servicing, net (5,534) 2,044 (9,186) ------- ------ ------- Balance at end of year $ 7,527 $3,616 $ 578 ======= ====== =======
The value of servicing rights is based on the assumption that a normal servicing fee will be received for the estimated life of the loans. The following is a summary of capitalized mortgage servicing rights:
YEAR ENDED DECEMBER 31 --------------- 1996 1995 ------- ------ (DOLLARS IN THOUSANDS) Balance at beginning of year $ 7,034 $ -- Originated mortgage servicing rights capitalized 12,323 7,248 Amortization (2,339) (214) ------- ------ Balance at end of year $17,018 $7,034 ======= ======
Capitalized mortgage servicing rights are analyzed for impairment by stratifying the underlying loans based on the predominant risk characteristics of rate, geographic area and product type on a pool by pool basis. A valuation allowance is provided for identified impairment. There was no impairment identified in 1996 and 1995. 74 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Gain on sales of loans and mortgage-backed securities were comprised of:
YEAR ENDED DECEMBER 31 ----------------------------------------------- 1996 1995 1994 ----------------- ----------------- --------- MORTGAGES MBS MORTGAGES MBS MORTGAGES --------- ------- --------- ------- --------- (DOLLARS IN THOUSANDS) Mortgage servicing spread Gains $ 8,240 $13,530 $4,730 $ 3,512 $ 1,922 Losses -- -- -- -- (1,318) ------- ------- ------ ------- ------- Net 8,240 13,530 4,730 3,512 604 Premiums (discounts), net (6,130) (1,390) (992) 12,264 (4,628) Deferred loan fees 6,346 (3,815) 4,736 1,147 8,879 Gain on servicing 1,888 -- -- -- -- Adjust to lower of cost or market (937) -- 450 -- (1,057) Net hedging gains -- -- -- -- 1,472 Miscellaneous fees (845) 465 (100) (3,338) 69 ------- ------- ------ ------- ------- $ 8,562 $ 8,790 $8,824 $13,585 $ 5,339 ======= ======= ====== ======= =======
Mortgage banking servicing income consisted of:
YEAR ENDED DECEMBER 31 ------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Collections $61,144 $61,980 $68,968 Guarantee fees (7,587) (8,651) (8,929) Amortization of mortgage servicing rights (7,873) 1,830 (9,186) ------- ------- ------- $45,684 $55,159 $50,853 ======= ======= =======
GWB, as seller and servicer, issued mortgage pass-through certificates comprised of Class A certificates and Class B certificates. The Class B certificates, which GWB retained, and classified as mortgage-backed securities, are subordinated to the rights of the Class A certificate holders. GWB also sold loans to FNMA and FHLMC whereby a portion or all of the credit risk was retained. Following are data related to loans sold with credit enhancements and the accompanying exposure related thereto:
DECEMBER 31 -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Loans sold with credit enhancements outstanding $1,188,717 $1,397,411 $1,409,631 Maximum exposure under credit enhancements 660,048 779,902 778,705
To facilitate the servicing of delinquent loans under these commitments and to minimize losses to the Company, loans in the amount of $180,337,000 in 1996, $115,636,000 in 1995 and $71,400,000 in 1994 have been repurchased from investors. Repurchased loans are included in the Company's periodic analysis of the adequacy of ALLL. Delinquent interest of approximately $4,914,000 in 1996, $2,939,000 in 1995 and $1,669,000 in 1994 was repurchased and subsequently written off. Periodically, the Company repurchases, for investment, loans which were previously sold. The Company repurchased $6,410,000 in 1996, $1,061,000 in 1995 and $476,274,000 in 1994. The reserve for the contingent liability for loans sold with recourse was $9,358,000 at December 31, 1996 and $6,000,000 at December 31, 1995. 75 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8: REAL ESTATE AVAILABLE-FOR-SALE OR DEVELOPMENT, NET Real estate available-for-sale or development, net, consisted of:
DECEMBER 31 ------------------ 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Real estate available-for-sale Real estate acquired through foreclosure net of reserves of $1,861 and $26,850, respectively $119,780 $161,953 Other, net of reserves of $2,744 and $1,210, respectively 8,741 21,806 Accumulated depreciation (3,634) (6,081) -------- -------- 124,887 177,678 Property development, net of reserves of $18,623 and $29,002, respectively 35,110 39,434 -------- -------- $159,997 $217,112 ======== ========
Interest capitalized on property development totaled $3,073,000 at December 31, 1996, $4,088,000 at December 31, 1995 and $4,581,000 at December 31, 1994. Net real estate operations are summarized below:
YEAR ENDED DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Net (gain) on sales of real estate $(15,619) $(21,709) $ (6,437) Interest recognized on advances (5,981) (2,337) (1,341) Provision for losses (12,775) 1,500 12,000 Write-downs 2,254 -- -- Net operating losses and holding costs 32,847 28,151 27,632 -------- -------- -------- $ 726 $ 5,605 $ 31,854 ======== ======== ========
In the third quarter of 1996, the Company determined that its real estate portfolio was appropriately valued at market. As a result of this determination, reserves of $13,504,000 were reversed. Following is a summary of the reserve for estimated losses:
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 57,062 $ 77,025 $123,551 $185,204 $ 6,862 Adoption of SFAS 114 -- -- -- (66,102) -- -------- -------- -------- -------- -------- Adjusted balance at beginning of year 57,062 77,025 123,551 119,102 6,862 Provision for losses (12,775) 1,500 12,000 92,000 220,000 Charge-offs (21,223) (21,469) (65,769) (87,673) (41,658) Recoveries 164 6 7,243 122 -- -------- -------- -------- -------- -------- Balance at end of year $ 23,228 $ 57,062 $ 77,025 $123,551 $185,204 ======== ======== ======== ======== ========
76 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9: INTEREST RECEIVABLE Following is a summary of interest receivable:
DECEMBER 31 ----------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Real estate loans $149,593 $147,758 Mortgage-backed securities 65,764 88,628 Securities available-for-sale 15,398 15,411 Other loans 11,838 19,473 Consumer Finance 2,161 2,327 Interest rate swaps 785 846 Taxes -- 24,197 -------- -------- $245,539 $298,640 ======== ========
There was no accrued interest for taxes at December 31, 1996. NOTE 10: INVESTMENT IN FHLB The investment in FHLB consisted of capital stock, at cost, totaling $377,946,000 at December 31, 1996 and $341,102,000 at December 31, 1995. The Company earned 6.11% in 1996, 4.93% in 1995 and 5.18% in 1994 from dividends on its investment in FHLB stock. FHLB capital stock is pledged to secure FHLB borrowings. Earnings on FHLB stock will presumably continue to be restricted due to the funding requirements imposed on the Federal Home Loan Banks for affordable housing programs and the Resolution Funding Corporation. NOTE 11: PREMISES AND EQUIPMENT, NET Premises and equipment, net, consisted of the following:
DECEMBER 31 ---------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Land $ 88,837 $ 89,044 Buildings and leasehold improvements 453,462 435,204 Furniture, fixtures and equipment 498,841 554,256 Software 41,968 31,060 Construction in progress 13,151 13,218 ---------- ---------- 1,096,259 1,122,782 Accumulated depreciation and amortization (543,837) (518,110) ---------- ---------- $ 552,422 $ 604,672 ========== ==========
Unamortized software was $33,496,000 and $29,615,000 at December 31, 1996 and 1995, respectively. 77 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company leases various branch offices under capital and noncancellable operating leases which expire at various dates through 2043. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five-to-10 year periods. Future minimum lease payments under all noncancellable leases at December 31, 1996 were as follows:
OPERATING CAPITAL LEASES LEASES --------- -------- (DOLLARS IN THOUSANDS) Year ending December 31, 1997 $ 47,744 $ 8,034 1998 40,968 8,034 1999 32,648 8,034 2000 27,261 8,034 2001 24,442 8,034 Thereafter 116,600 78,729 -------- -------- Total minimum lease payments $289,663 118,899 ======== Amount representing interest 78,131 -------- Present value of minimum lease payments $ 40,768 ========
Rental expense charged to earnings was $59,005,000 in the year ended December 31, 1996, $60,279,000 in the year ended December 31, 1995 and $55,011,000 in the year ended December 31, 1994. Rental sublease income was $8,007,000, $8,111,000 and $7,027,000 in the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 12: DEPOSITS The following summarizes deposit balances at December 31, 1996 and 1995.
DECEMBER 31 ---------------- 1996 1995 (DOLLARS IN MILLIONS) ------- ------- Checking $ 4,420 $ 4,488 Money market and other savings 6,744 6,589 Term 17,237 17,696 Wholesale 186 462 ------- ------- $28,587 $29,235 ======= ======= The following table shows the change in deposit balances at December 31, 1996 and 1995: DECEMBER 31 ---------------- 1996 1995 (DOLLARS IN MILLIONS) ------- ------- Checking $ (68) $ (85) Money market and other savings 155 (851) Term (459) 1,572 Wholesale (276) (102) ------- ------- $ (648) $ 534 ======= =======
78 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The average interest rate is based upon stated interest rates without giving consideration to daily compounding of interest or forfeiture of interest because of premature withdrawals. Noninterest bearing checking accounts represented 6.07% of total deposits at December 31, 1996 and 5.40% at December 31, 1995. Accrued but unpaid interest on deposits included in other liabilities totaled $44,060,000 at December 31, 1996 and $12,091,000 at December 31, 1995. An analysis of term deposits by interest rate and maturity at December 31, 1996 is presented below:
OVER OVER OVER OVER 3 MONTHS 6 MONTHS 12 MONTHS 24 MONTHS DECEMBER 31 3 MONTHS BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER ------------------ OR LESS 6 MONTHS 12 MONTHS 24 MONTHS 36 MONTHS 36 MONTHS 1996 1995 -------- ---------- ---------- ---------- ---------- --------- ------- ------- (DOLLARS IN MILLIONS) DECEMBER 31, 1996 INTEREST RATE Under 3% $ 38 $ -- $ -- $ -- $ -- $ -- $ 38 $ 52 3 to 3.99% 75 19 9 3 6 -- 112 147 4 to 4.99% 3,129 1,735 928 87 33 32 5,944 3,704 5 to 5.99% 2,155 1,693 3,617 907 222 492 9,086 9,121 6 to 6.99% 363 272 173 121 142 297 1,368 3,697 7 to 7.99% 615 14 34 16 12 19 710 1,066 8 to 8.99% -- 1 1 1 1 1 5 8 9 to 9.99% -- -- -- -- -- -- -- 184 Over 10% -- -- -- -- 2 -- 2 5 ------ ------ ------ ------ ----- ----- ------- ------- Total $6,375 $3,734 $4,762 $1,135 $ 418 $ 841 $17,265(1) $17,984(1) ====== ====== ====== ====== ===== ===== ======= ======= $100,000 accounts included above $1,876 $ 713 $ 923 $ 227 $ 104 $ 175 $ 4,018 $ 3,502
- -------- (1)This includes wholesale term accounts of $28 at December 31, 1996 and $289 at December 31, 1995.
NO WITHIN MATURITY ONE YEAR 1998 1999 2000 2001 AFTER 2001 TOTAL -------- -------- ---- ---- ---- ---- ---------- ----- (DOLLARS IN MILLIONS) YEAR-END BY MATURITY Balances $11,322 $14,871 $1,135 $418 $365 $475 $ 1 $28,587 Average coupon rate 2.12% 5.38% 5.73% 5.75% 6.29% 5.63% 4.89% 4.13%
The following is a summary of interest expense on deposits:
YEAR ENDED DECEMBER 31 ------------------------------ 1996 1995 1994 ---------- ---------- -------- (DOLLARS IN THOUSANDS) Checking $ 32,871 $ 35,286 $ 40,034 Money market and other savings 192,668 187,855 197,451 Term 944,924 972,691 699,424 Wholesale 9,016 21,253 13,390 ---------- ---------- -------- $1,179,479 $1,217,085 $950,299 ========== ========== ========
79 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase generally represent borrowings of less than one year. The book value of these agreements approximates fair value. Agreements to repurchase are secured by mortgage loans and securities held by the Company.
DECEMBER 31 ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Securities sold under agreements to re- purchase Balance at year end $4,197,666 $6,868,296 $6,299,055 Maximum outstanding at any month end 6,116,426 7,536,524 6,299,055 Average balance during the year 5,373,218 7,050,882 1,984,652 Weighted average rate during the year 5.48% 5.99% 4.93% Weighted average rate at year end 5.48 5.78 5.80 The collateral supporting securities sold under agreements to repurchase is as follows: DECEMBER 31 ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Mortgage-backed securities Book value $4,368,296 $7,041,492 $6,719,178 Fair value 4,356,046 7,102,655 6,481,469
Securities sold by the Company under agreements to repurchase are generally short-term obligations. On December 31, 1996, the Company had $3,703,578,000 of obligations contracted for 120 days or less with an average maturity of 86 days. The remaining $494,088,000 of the repurchase obligations contractually matures from one to three years. NOTE 14: SHORT-TERM BORROWINGS The following is a summary of short-term borrowings:
DECEMBER 31 --------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Commercial paper $ 472,506 $1,036,413 Federal funds 629,000 280,000 ---------- ---------- $1,101,506 $1,316,413 ========== ==========
Commercial paper has original maturities of less than 270 days, and at December 31, 1996, the average maturity was 34 days. Federal funds have maturities of periods of up to 12 months and at December 31, 1996 the average maturity was 71 days. 80 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Short-term borrowings are summarized as follows:
DECEMBER 31 ------------------------------ 1996 1995 1994 -------- ---------- -------- (DOLLARS IN THOUSANDS) Commercial paper Balance at year end $472,506 $1,036,413 $745,461 Maximum outstanding at any month end 967,962 1,551,200 887,514 Average balance during the year 699,409 1,142,851 431,021 Weighted average rate during the year 5.38% 6.39% 4.56% Weighted average rate at year end 5.70 5.88 6.06 Federal funds Balance at year end $629,000 $ 280,000 $465,000 Maximum outstanding at any month end 768,000 727,000 540,000 Average balance during the year 493,538 450,154 328,383 Weighted average rate during the year 5.34% 6.27% 4.18% Weighted average rate at year end 5.44 5.85 6.29
NOTE 15: LONG TERM BORROWINGS Debt issue costs are amortized on the interest method over the term of the debt. The following is a summary of long term borrowings:
DECEMBER 31 --------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Senior and subordinated debt $2,432,708 $2,305,845 FHLB long-term borrowings 758,200 115,000 ---------- ---------- $3,190,908 $2,420,845 ========== ==========
81 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has the following senior and subordinated debt outstanding:
DECEMBER 31 MATURITY INTEREST --------------------- DATE RATE 1996 1995 -------------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) SENIOR GWFC: June, 1998 6.125% $ 149,845 $ 149,746 December, 1998 8.625 99,961 99,943 July, 2000 6.375 224,166 223,960 February, 2002 8.600 199,410 199,321 ---------- ---------- 673,382 672,970 ---------- ---------- GWB: July, 1997 9.500 152,323 152,179 ---------- ---------- Aristar: July, 1996 6.250 -- 99,995 May, 1996 8.750 -- 5,000 February, 1997 7.375 99,997 99,974 December, 1997 8.125 99,909 99,812 July, 1998 5.750 149,922 149,875 February, 1999 7.875 99,904 99,864 May, 1999 6.750 99,986 -- July, 2000 6.300 99,930 99,913 December, 2000 6.125 149,610 -- June, 2001 7.750 149,930 149,917 June, 2001 7.250 99,857 -- August, 2001 6.750 99,917 -- ---------- ---------- 1,148,962 804,350 ---------- ---------- Obligations of subsidiaries: 7.6-10.7 45,473 47,428 ---------- ---------- Total Senior Debt 2,020,141 1,676,927 ========== ========== SUBORDINATED GWB: February, 1999 10.500 38,172 129,801 March, 1999 10.250 25,081 150,000 June, 2001 9.875 149,708 149,658 ---------- ---------- 212,961 429,459 ---------- ---------- Aristar: August, 1998 8.875 99,948 99,920 July, 1999 7.500 99,659 99,539 ---------- ---------- 199,607 199,459 ---------- ---------- Total Subordinated Debt 412,568 628,918 ========== ========== Total Senior and Subordinated Debt $2,432,708 $2,305,845 ========== ==========
During 1996, Aristar issued the following senior debt:
MONTH OF INTEREST DATE OF ISSUE AMOUNT RATE MATURITY -------- ------------ -------- ---------------- May $100,000,000 6.75% May 15, 1999 June 100,000,000 7.25 June 15, 2001 August 100,000,000 6.75 August 15, 2001 December 150,000,000 6.125 December 1, 2000
82 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 16: FHLB BORROWINGS An analysis of borrowings by maturity is included in the table on page 43. The maximum amount of credit which the FHLB will extend for purposes other than meeting withdrawals varies from time to time in accordance with its policies. The FHLB interest rates charged for advances vary depending upon maturity, the cost of funds in the FHLB and the purpose of borrowing. FHLB borrowings are secured by pledges of real estate loans and the capital stock of the FHLB. FHLB borrowings are summarized below:
DECEMBER 31 ------------------- 1996 1995 ---------- -------- (DOLLARS IN THOUSANDS) Short-term borrowings $2,011,733 $740,080 Long-term borrowings 758,200 115,000 ---------- -------- $2,769,933 $855,080 ========== ========
1996 1995 1994 ---------- -------- -------- Balance at year end $2,769,933 $855,080 $187,000 Maximum outstanding at any month end 2,769,933 855,080 862,000 Average balance during year 1,854,786 186,698 306,431 Weighted average interest rate during the year 5.45% 5.39% 5.63% Weighted average interest rate at year end 5.52 5.60 5.47
GWB has various borrowing alternatives with the FHLB, with capacity of approximately $10 billion, inclusive of a $200 million facility for overnight advances. NOTE 17: COMPANY-OBLIGATED MANDITORILY REDEEMABLE PREFERRED SECURITIES OF THE COMPANY'S SUBSIDIARY TRUST, HOLDING SOLELY $103,092,800 AGGREGATE PRINCIPAL AMOUNT OF 8.25% SUBORDINATED DEFERRABLE INTEREST NOTES, DUE 2025, OF THE COMPANY In December 1995, Great Western Financial Trust I (the "subsidiary trust"), a wholly-owned subsidiary of Great Western Financial Corporation, issued $100,000,000 of 8.25% Trust Originated Preferred Securities (the "preferred securities"). In connection with the subsidiary trust's issuance of the preferred securities, Great Western Financial Corporation issued to the subsidiary trust $103,092,800 principal amount of its 8.25% subordinated deferrable interest notes, due 2025 (the "subordinated notes"). The sole assets of the subsidiary trust are and will be the subordinated notes. Great Western Financial Corporation's obligations under the subordinated notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary trust's obligations under the preferred securities.
DECEMBER 31 ----------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Company-obligated manditorily redeemable preferred securities of the Company's subsidiary trust, holding solely $103,092,800 aggregate principal amount of 8.25% subordinated deferrable interest notes, due 2025, of the Company $100,000 $100,000 ======== ========
83 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 18: FEDERAL AND STATE TAXES ON INCOME Following is a summary of the provision for taxes on income:
YEAR ENDED DECEMBER 31 -------------------------- 1996 1995 1994 ------- -------- -------- (DOLLARS IN THOUSANDS) Current tax expense Federal $58,400 $ 80,800 $120,100 State 11,700 24,400 32,500 ------- -------- -------- 70,100 105,200 152,600 ------- -------- -------- Deferred tax expense (benefit) Federal (1,900) 51,400 900 State 2,600 4,500 1,800 ------- -------- -------- 700 55,900 2,700 ------- -------- -------- $70,800 $161,100 $155,300 ======= ======== ========
The following table reconciles the statutory income tax rate to the consolidated effective income tax rate:
YEAR ENDED DECEMBER 31 ------------------------- 1996 1995 1994 ------- ------- ------- Federal income tax rate 35.0% 35.0% 35.0% State franchise tax rate, net of federal income tax effect 6.5 6.1 6.0 ------- ------- ------- Statutory income tax rate 41.5 41.1 41.0 Increase (reduction) in tax rate resulting from: Amortization of intangibles .8 .9 1.3 Reversal of taxes previously provided -- (.6) (2.9) Low income housing -- (1.2) -- Adjustment of deferred tax rate (1.2) .1 (.2) Other items, net (3.2) (2.1) (1.0) ------- ------- ------- 37.9% 38.2% 38.2% ======= ======= =======
84 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred tax liabilities (assets) are comprised of the following:
DECEMBER 31 -------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Deferred tax liabilities Loan fees and interest income $ 188,122 $ 202,816 FHLB dividends 86,728 63,050 Financial leases 70,035 74,772 Depreciation 49,441 42,303 Unrealized holding gains on securities 48,311 72,619 Amortization of intangibles 22,616 23,872 Accrued interest income 16,439 16,919 Cash method of accounting for income tax reporting 8,131 8,325 Election to reduce basis 5,843 6,186 Sales of unearned interest income 2,488 2,488 Other deferred income items 56,994 65,554 --------- --------- 555,148 578,904 --------- --------- Deferred tax assets Loss reserves (104,244) (117,504) State taxes (32,581) (31,761) Postemployment benefits (24,908) (27,433) Deferred compensation (17,370) (11,456) Unearned insurance commission (10,285) (11,084) Partnership income (3,230) 1,871 Gain (loss) on mortgage sales 271 (6,615) Other deferred deduction items (110,006) (98,560) --------- --------- (302,353) (302,542) Deferred tax assets valuation allowance -- -- --------- --------- Net deferred tax liabilities $ 252,795 $ 276,362 ========= =========
Taxes on income included the following:
DECEMBER 31 ------------------ 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Net deferred liability Federal income tax $172,990 $193,588 State franchise tax 79,805 82,774 -------- -------- 252,795 276,362 Taxes payable (receivable) (26,720) 102,019 -------- -------- $226,075 $378,381 ======== ========
Under the Internal Revenue Code, GWB, as a qualified thrift institution, had been allowed to claim deductions for bad debts under the reserve method, which is more favorable than bad debt deduction methods allowed to other taxpayers. 85 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under provisions of the Small Business Job Protection Act of 1996, GWB lost the use of the bad debt reserve method beginning in 1996. Since the reserve balance at the end of 1996 of $724,488,000 arose prior to 1988, it is not currently subject to federal income tax and would not be if GWB were to convert to a commercial bank or otherwise lose its tax status as a qualified thrift institution. However, it will be subject to such tax upon certain occurrences (including its distribution to shareholders), none of which are currently contemplated. Consequently, in accordance with Financial Accounting Standards No. 109 "Accounting for Income Taxes," a federal deferred tax liability of $253,571,000 has not been recognized for the temporary differences relating to the tax bad debt reserve of GWB. The Company's tax returns have been examined by the Internal Revenue Service through December 31, 1987 and by the California Franchise Tax Board through December 31, 1991. NOTE 19: EMPLOYEE BENEFIT PLANS Pension Plans The Great Western Retirement Plan ("the plan") covers a majority of employees. In 1996, the plan was converted from a final average pay plan to a cash balance plan, under which participants' accounts are credited with pay- related contributions and interest. The Company's general funding policy is to contribute the maximum amount deductible for federal income tax purposes. The net periodic pension cost is computed as follows:
YEAR ENDED DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Return on plan assets: Actual return $(42,002) $(37,162) $ 1,877 Expected return lower (higher) than actual return 22,439 21,459 (17,559) -------- -------- -------- Expected return (19,563) (15,703) (15,682) Service cost 8,211 9,360 11,400 Interest cost 13,781 14,266 13,981 Net amortization of initial unrecognized net (asset) as of January 1, 1987 -- (676) (676) Net amortization and deferral (1,989) 530 1,398 Amortization of unrecognized prior service cost -- (185) (185) -------- -------- -------- $ 440 $ 7,592 $ 10,236 ======== ======== ========
Assumptions used in determining the net periodic pension cost were:
YEAR ENDED DECEMBER 31 ------------------------- 1996 1995 1994 ------- ------- ------- Weighted average discount rate 7.81% 8.25% 7.75% Rate of increase in future compensation levels 5.25 5.50 5.50 Expected long-term rate of return on plan assets 9.00 9.00 9.00
Although the actual return on plan assets is shown, the expected long-term rate of return is used in determining net periodic pension cost. The difference between the actual return and expected return is included in net amortization and deferral. 86 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accumulated plan benefit information and the funded status of the plan follow:
DECEMBER 31 ------------------ 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Accumulated benefit obligation Vested $170,028 $165,016 Nonvested 9,393 4,516 -------- -------- $179,421 $169,532 ======== ======== Projected benefit obligation $179,421 $201,421 Fair value of plan assets 241,345 212,084 -------- -------- Plan assets in excess of benefit obligation 61,924 10,663 Unrecognized prior service costs (28,869) -- Unrecognized net loss 10,103 20,467 -------- -------- Prepaid pension cost included in other assets $ 43,158 $ 31,130 ======== ========
The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 were:
DECEMBER 31 ---------------- 1996 1995 1994 ---- ---- ---- Weighted average discount rate 7.50% 7.50% 8.25% Rate of increase in future compensation levels 5.25 5.25 5.50 Expected long-term rate of return on plan assets 9.00 9.00 9.00 Interest crediting rate on participant accounts 5.50 -- -- Annuity conversion rate 6.75 -- --
Assumptions for interest crediting and annuity conversion rates are not presented for December 31, 1995 and 1994, because they are not applicable to a final average pay plan. Plan assets include equity securities, mutual funds, mortgage-backed securities and other fixed-income securities. The Company has unfunded retirement restoration plans for employees whose benefits under the principal funded plan are reduced because of compensation deferral elections or limitations under federal tax laws. Pension expense for these plans totaled $587,000 in 1996, $945,000 in 1995 and $213,000 in 1994. At December 31, 1996, the projected benefit obligation for these plans was $3,695,000. The Company also sponsors a nonqualified, unfunded, supplemental executive retirement plan for certain senior officers and a nonqualified unfunded directors' retirement plan. Data related to these plans follow:
DECEMBER 31 --------------- 1996 1995 ------- ------- (DOLLARS IN THOUSANDS) Projected benefit obligation $34,267 $28,074 Unrecognized net obligation 2,773 3,280
Pension expense for these plans totaled $4,333,000 in 1996, $4,231,000 in 1995 and $4,590,000 in 1994. 87 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company provides an optional deferred compensation plan for certain employees. Eligible employees can defer a portion of their compensation and the Company agrees to pay interest on the balance of funds deferred. An enhanced rate is paid on funds deferred over three years. The Company has purchased cost recovery life insurance, primarily with one carrier, on the lives of the participants of the supplemental executive retirement plan, directors' retirement plan and deferred compensation plan and it is sole owner and beneficiary of said policies. The amount of coverage is designed to provide sufficient revenues to fund said plans. The net cash surrender value of this life insurance, recorded in other assets, was $180,319,000 at December 31, 1996 and $163,736,000 at December 31, 1995, and net premium income related to insurance purchased was $8,359,000 in 1996, $6,846,000 in 1995 and $2,646,000 in 1994. POSTRETIREMENT PLANS The Company sponsors unfunded defined benefit postretirement plans that provide medical and life insurance coverage to eligible employees and dependents based on age and length of service. Medical coverage options are the same as available to active employees. The cost of plan coverage for retirees and their qualifying dependents is based upon a point system that combines age and years of service which results, generally, in lower costs to retirees in conjunction with higher accumulated points within limits. The following table shows the plan's status reconciled to the accrued postretirement benefit cost included in other liabilities on the Consolidated Statement of Financial Condition.
DECEMBER 31 --------------- 1996 1995 ------- ------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation Retirees $25,700 $29,000 Fully eligible active employees 4,100 4,300 Other active employees 22,300 19,700 ------- ------- 52,100 53,000 Unrecognized net gain 4,746 728 ------- ------- Accrued postretirement benefit $56,846 $53,728 ======= =======
The net postretirement medical and life insurance costs follow:
YEAR ENDED DECEMBER 31 ------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Service cost $ 2,196 $ 2,307 $ 2,349 Interest cost of accumulated postretirement benefit obligation 3,614 3,896 3,730 Curtailment gain (580) (570) -- ------- ------- ------- $ 5,230 $ 5,633 $ 6,079 ======= ======= =======
During 1996 and 1995, the Company recognized curtailment gains as a result of ongoing work force reductions. For measurement purposes, the cost of medical benefits was projected to increase at a rate of 9.00% in 1996, and 8.00% in 1997 thereafter decreasing 1% per year until a stable 5.00% medical inflation rate is reached in 2000. Increasing the assumed health care cost trend by 1% in each year would increase the accumulated postretirement benefit obligation at December 31, 1996 by approximately $3,500,000 and the aggregate of the 88 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) service and interest components of net periodic postretirement benefit cost for the year ended December 31, 1996 by $700,000. The present value of the accumulated benefit obligation assumed a 7.50% discount rate compounded annually at December 31, 1996 and December 31, 1995. Stock-based Compensation Plans The Company currently has a stock option plan in effect: the 1988 Stock Option and Incentive Plan ("stock option plan"). Options are granted at the market value of the common stock on the date of grant. The stock option plan consists of two separate plans: the Key Employee Program under which options (both incentive and nonqualified), stock appreciation rights, dividend equivalents and certain other performance and incentive awards may be granted to officers, key employees and certain other individuals; and the Non-employee Director Program under which non-qualified options will be automatically granted to non-employee directors under certain circumstances. The Company has set aside 12,500,000 shares of common stock to be delivered pursuant to the stock option plan, of which a maximum of 750,000 may be delivered under the Non-employee Director Program. Options may be exercised either by payment of cash, or the optionee may deliver GWFC common stock of an equivalent market value at the date of exercise. The exercise price of each option equals the market price of the Company's stock on the date of grant, and an option's maximum term is 10 years. Depending upon the year of grant, options become exercisable in equal installments over a four or five year period, beginning one year from the date of grant. Proceeds from the exercise of stock options are credited to common stock for the aggregate par value of shares issued, and the excess is credited to additional capital. The Company has granted performance-based restricted stock awards to encourage and reward high levels of performance of the Company as measured by returns to shareholders. The shares will fully vest 10 years after the award date, and prior to such time, they are subject to accelerated vesting based on the Company's performance. At December 31, 1996, a total of 1,115,244 shares with a value of $20,709,000 had been granted. The unearned compensation is recorded as a separate reduction of stockholders' equity and is being amortized to expense over 60 months. The total amount of compensation expense related to restricted stock awards, recorded in accordance with APB 25, was $3,825,000 in 1996, $3,257,000 in 1995 and $3,798,000 in 1994. Stock appreciation rights ("SAR") may be granted in conjunction with certain options previously granted or with future options. A SAR entitles the holder, at the discretion of the Company, to receive cash or shares of GWFC common stock, or a combination thereof, at a value equal to the excess of the fair market value on the date of exercise over the option price. Exercise of an option or companion SAR automatically cancels the related option or right. 89 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the Company's stock option plan as of December 31, 1996, 1995 and 1994, and changes during the years then ended is as follows:
WEIGHTED- OPTION OPTION AVERAGE SHARES PRICE RANGE EXERCISE PRICE ---------- ------------- -------------- 1994 Outstanding at beginning of year 5,316,595 $ 7.70-$22.15 $16.33 Granted 2,287,806 16.63- 20.25 17.22 Forfeited (209,860) 14.75- 18.88 18.08 Exercised (282,300) 10.38- 18.88 15.33 ---------- ------------- ------ Outstanding at end of year 7,112,241 7.70- 22.15 16.66 ---------- ------------- ------ 1995 Granted 451,548 16.00- 21.38 20.36 Exercised (704,985) 7.70- 20.50 16.15 Forfeited (254,960) 10.38- 18.88 17.71 ---------- ------------- ------ Outstanding at end of year 6,603,844 7.70- 22.15 16.86 ---------- ------------- ------ 1996 Granted 3,752,599 21.13- 30.88 26.83 Exercised (1,048,777) 7.70- 22.15 17.35 Forfeited (157,595) 14.75- 23.38 19.17 ---------- ------------- ------ Outstanding at end of year 9,150,071 $10.38-$30.88 $20.85 ========== ============= ======
The number of options exercisable at December 31, 1996 and 1995 was 4,023,247 and 4,236,288, respectively. The weighted-average fair value of options granted during 1996 and 1995 was $8.18 and $5.75, respectively. Information about stock options outstanding at December 31, 1996 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------- ----------------------------------- WTD. AVG. WEIGHTED WEIGHTED- REMAINING AVERAGE RANGE OF AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE PRICES EXERCISABLE PRICE - --------------- ----------- ----------- -------- ------------- ----------- --------- $10.38-$14.88 971,950 2.3 years $13.44 $10.38-$14.88 971,950 $13.44 15.25- 19.38 3,919,554 6.0 17.01 15.25- 19.38 2,821,535 16.86 20.25- 24.88 2,487,236 8.7 22.77 20.25- 24.88 229,762 20.78 25.13- 30.88 1,771,331 9.9 30.70 25.13- 30.88 -- -- --------- --------- $10.38-$30.88 9,150,071 7.1 $20.85 $10.38-$30.88 4,023,247 $16.26 ========= =========
90 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company applies APB Opinion 25 and related interpretations in accounting for its stock-based compensation plans, which are described above. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the stock option plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ------------ ------------ Net income As reported $115,822,000 $261,022,000 Pro forma 113,622,000 260,790,000 Primary earnings per share As reported $.69 $1.72 Pro forma .68 1.72 Fully diluted earnings per share As reported .69 1.71 Pro forma .67 1.71
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1996 1995 ------- ------- Dividend yield 3% 3% Expected volatility 21-44 21-24 Risk-free interest rate 5.5-6.9 6.3-7.9 Expected life of option 7 years 7 years
During the initial phase-in period, the effects of applying SFAS 123 for these pro forma disclosures are not likely to be representative of the effects on pro forma disclosures for future years because options vest over several years and additional awards are generally made each year. Savings Plans The Company has an Employee Savings Incentive Plan which grants to all eligible employees the opportunity to invest up to 14% of their earnings in certain investment alternatives. For investments by employees of up to 6% of their earnings, the Company is obligated to and has contributed an amount equal to one-half thereof for credit to the employees' accounts. Further, the board of directors, at its discretion, may increase the Company's contribution to match up to 100% of the Company's obligated contribution. In 1996, 1995 and 1994 discretionary awards were made. The Company contributed approximately $7,742,000, $7,342,000, and $7,886,000 in 1996, 1995, and 1994, respectively, including a discretionary addition of $1,811,000, $1,794,000, and $1,877,000 in 1996, 1995 and 1994, respectively. 91 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 20: PREFERRED STOCK The following is a summary of Preferred Stock (Convertible and Nonconvertible):
SHARES ISSUED AND OUTSTANDING CARRYING AMOUNT DIVIDENDS DECLARED DECEMBER 31 DECEMBER 31 YEAR ENDED DECEMBER 31 ----------------- ----------------- ----------------------- 1996 1995 1996 1995 1996 1995 1994 (DOLLARS IN THOUSANDS) ------- --------- -------- -------- ------- ------- ------- 8.30% Cumulative Nonconvertible (Liquidation preference $250) 660,000 660,000 $165,000 $165,000 $13,695 $13,695 $13,695 8.75% Cumulative Convertible (Liquidation preference $260.94) (1) -- 517,500 -- 129,375 6,600 11,320 11,320 ------- --------- -------- -------- ------- ------- ------- 660,000 1,177,500 $165,000 $294,375 $20,295 $25,015 $25,015 ======= ========= ======== ======== ======= ======= =======
- -------- (1) In September 1996, the Company redeemed all $129 million of its 8.75% Cumulative Convertible Preferred Stock. In September 1996, the Company called for the redemption of its $129 million, 8.75% Cumulative Convertible Preferred Stock. These shares were issued in May 1991 (see discussion below). The holders had the option to redeem their shares or convert them into shares of the Company's common stock. In the third quarter, 2,561,642 depositary shares, or 512,328 shares, were converted to 6,278,421 shares of common stock with a conversion price of $20.40 per share while 19,058 depositary shares, or 3,812 shares, were redeemed for cash totaling $994,589 or $260.94 per share. In the second quarter of 1996, 6,800 depositary shares, or 1,360 shares, were converted to 16,666 shares of common stock totaling $340,000, or $20.40 per share. In September 1992, the Company issued 6,600,000 depositary shares, each representing a one-tenth interest in a share of 8.30% cumulative preferred stock. The preferred stock has a liquidation value of $250 per share. The preferred stock will not be redeemable prior to November 1, 1997. Each share of preferred stock, $1.00 par value, will be redeemable at the option of the Company on or after November 1, 1997 at $250 per share, plus accrued and unpaid dividends. Dividends are cumulative from the date of issue and are payable quarterly. In May 1991, the Company issued 2,587,500 depositary shares, each representing a one-fifth interest in a share of 8.75% cumulative convertible preferred stock. The preferred stock had a liquidation value of $250 per share. The preferred stock was redeemable prior to May 1, 1996. Each share of preferred stock, $1.00 par value, will be redeemable for cash at the option of the Company, in whole or in part, at prices declining to $250 per share on or after May 1, 2001, from $260.94 per share on or after May 1, 1996, plus accrued and unpaid dividends. Each share of preferred stock will be convertible at the option of the holder into shares of common stock of the Company at a conversion price of $20.40 per share of common stock, subject to adjustment in certain events. Dividends are cumulative from the date of issue and are payable quarterly. Of the 10,000,000 shares authorized, shares of preferred stock issued and outstanding at December 31, 1996 and December 31, 1995 were 660,000 and 1,177,500, respectively. NOTE 21: STOCKHOLDERS' EQUITY Authorized but unissued shares of common stock reserved for stock options were 10,529,369 at December 31, 1996 and 11,562,521 at December 31, 1995. In addition, 4,143,928 shares of common stock had been reserved for the Dividend Reinvestment Plan. Parent company equity in retained earnings of subsidiaries was $1,230,221,000 at December 31, 1996 and $1,377,535,000 at December 31, 1995. The payment of dividends to the parent company from its subsidiaries is subject to certain regulatory requirements, restrictions imposed by lenders and federal income tax consequences. 92 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Thrift institutions that met certain tests prescribed by the Internal Revenue Code were allowed a bad debt deduction for federal income tax purposes. Because of such deductions, only $628,000,000 of retained earnings of the Bank at December 31, 1996 were available for use without adverse tax consequences. This amount represents the earnings and profits of the Bank which, in accordance with the Internal Revenue Code, are available for the payment of dividends. If retained earnings in excess of earnings and profits are subsequently used by the Bank for purposes other than to absorb loan losses, including distributions in liquidation, the amounts used will be subject to federal income taxes at the then prevailing corporate tax rates. It is not contemplated that retained earnings will be used in a manner which will create federal income tax liabilities even in the event the Bank was to convert its charter. Rights Plan On June 27, 1995, the Board of Directors of the Company declared a dividend distribution of one Right (each a "Right") for each outstanding share of common stock to stockholders of record at the close of business on July 14, 1996, which was the expiration date of the rights issued under the rights plan adopted by the Board of Directors of the Company on June 24, 1986. Each Right will initially entitle the holder to purchase from the Company a unit of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, at a purchase price of $80.00 per unit, subject to adjustment. The Rights will expire July 14, 2006. The Rights may not be exercised and will not detach or trade separately from the common stock except as described below. The Rights will detach from the common stock and may be exercised only if a person or group becomes the beneficial owner of 15% or more of the common stock (a "Stock Acquisition"). If a Stock Acquisition occurs (except pursuant to an offer for all outstanding shares of the common stock which the Company's independent directors determine is fair to and otherwise in the best interest of the Company and its stockholders), the Rights flip-in and each Right not owned by such person will entitle the holder to purchase, at the Right's then current exercise price, common stock (or, if the number of shares of authorized common stock is insufficient to permit the full exercise of the Rights, cash, property or other securities of the Company) having a formula value equal to twice the Right's exercise price. In addition, if at any time following a Stock Acquisition, (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation (other than a merger which follows an offer at the same price and for the same consideration as the offer approved by the Board of Directors of the Company as described in the immediately preceding sentence), or (ii) 50% or more of the Company's assets or earnings power is sold or transferred, the Rights flip-over and each unexercised Right will entitle its holder to purchase, at the Right's then current exercise price, common shares of the other person having a formula value equal to twice the Right's exercise price. The Rights may be redeemed by the Company at any time prior to ten days following the date of a Stock Acquisition (which period may be extended by the Company's Board of Directors at any time while the Rights are still redeemable). Upon the occurrence of a flip-in or flip-over event, if the Rights are not redeemed, the Rights would result in substantial dilution to any person who has acquired 15% or more of the outstanding common stock or who attempts to merge or consolidate with the Company. As a result, the Rights may deter potential attempts to acquire control of the Company without the approval of the Company's board of directors. NOTE 22: CAPITAL REQUIREMENTS GWB is subject to minimum capital requirements as set forth by the OTS. The capital standards applicable to savings associations consist of three components--a leverage ratio requirement, a tangible capital requirement, and a risk-based capital requirement. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators, including asset growth restrictions and capital distribution limitations. As of December 31, 1996 and 1995, the Company believes GWB meets all minimum capital requirements to which it is subject. 93 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition to the minimum capital requirements, GWB is subject to federal banking agency regulations which establish a system of progressive constraints as capital levels decline at banks and savings associations. The "prompt corrective action" rules classify banks and savings institutions into one of five categories based upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized." The OTS has authority, after an opportunity for a hearing, to downgrade an institution to a lower category, based on supervisory concerns. Institutions which are "undercapitalized" (i.e., not "well capitalized" or "adequately capitalized") are subject to restrictions on asset growth, acquisitions, branching and new business, and are subject to increasingly severe additional actions if they become "significantly undercapitalized" or "critically undercapitalized." As of December 31, 1996, the most recent notification from the OTS categorized GWB as well capitalized under the prompt corrective action rules. To be well capitalized, GWB must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the table below. There are no conditions or events since that notification that the Company believes have changed GWB's category. The following table summarizes GWB's actual capital and required capital as of December 31, 1996 and 1995:
MINIMUM REQUIRED AMOUNT REQUIRED FOR CAPITAL TO BE WELL ACTUAL ADEQUACY CAPITALIZED ------------ ---------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- -------- ------- -------- ------- (DOLLARS IN MILLIONS) December 31, 1996 Leverage/tangible ratio $2,327 5.85% $1,192 3.00% $1,987 5.00% Tier 1 risk-based ratio 2,322 9.77 950 4.00 1,426 6.00 Total risk-based ratio 2,669 11.23 1,901 8.00 2,377 10.00 December 31, 1995 Leverage/tangible ratio 2,366 5.66 1,254 3.00 2,090 5.00 Tier 1 risk-based ratio 2,361 9.40 1,004 4.00 1,506 6.00 Total risk-based ratio 2,966 11.81 2,008 8.00 2,510 10.00
94 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table reconciles GWB's capital in accordance with generally accepted accounting principles ("GAAP") to GWB's tangible, core and risk-based capital as of December 31, 1996 and 1995:
DECEMBER 31 ---------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Tangible capital Capital in accordance with GAAP $2,609,015 $2,717,788 Less: Goodwill (182,758) (214,367) Investments in and advances to non- permissible subsidiaries (22,524) (29,810) Unrealized net gain on available-for sale investment securities carried at fair value (76,497) (107,640) ---------- ---------- Total tangible capital 2,327,236 2,365,971 Adjustments for core capital -- -- ---------- ---------- Total core capital 2,327,236 2,365,971 Less: Fully capitalized items (limited recourse liability on loans sold with recourse) (4,772) (5,357) ---------- ---------- Total Tier 1 risk-based capital 2,322,464 2,360,614 Qualifying subordinated debt 157,718 373,499 Allowance for loan and lease losses 193,897 256,851 Less assets required to be deducted: Real estate held for investment (5,115) (22,356) Certain loans secured by land (249) (2,784) ---------- ---------- Total risk-based capital $2,668,715 $2,965,824 ========== ==========
NOTE 23: CONTINGENCIES In the normal course of its business, the Company is named a defendant in various legal proceedings and claims. In the opinion of management, after consultation with outside legal counsel representing the Company in these lawsuits, their outcomes will not have a material effect on the Company's financial position, liquidity or results of operations. See Note 28. The operations of the Company are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulatory policies of financial institution regulatory authorities. Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. 95 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 24: PARENT COMPANY FINANCIAL INFORMATION Effective December 31, 1996, Blazer Financial Corporation ("BFC"), became a wholly-owned indirect subsidiary of the Company. This realignment was in the form of a dividend from GWB to GWFC in the amount of BFC's book value of $34,830,000 and the subsequent sale of BFC to Aristar. Effective March 31, 1994, Bryant Financial Corporation ("Bryant"), a property development subsidiary, became a wholly-owned direct subsidiary of the Company. This realignment was in the form of a dividend from GWB to GWFC in the amount of Bryant's book value of $38,442,000. The following summarizes dividends received by GWFC from GWB:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 -------- ------- -------- (DOLLARS IN THOUSANDS) Cash dividends $151,320 $71,320 $101,322 Noncash dividends 34,830 -- 38,442 -------- ------- -------- $186,150 $71,320 $139,764 ======== ======= ========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31 ----------------------------- 1996 1995 1994 --------- -------- -------- (DOLLARS IN THOUSANDS) INCOME Dividends from Great Western Bank $ 186,150 $ 71,320 $139,764 Dividends from Aristar 116,800 22,500 25,000 Dividends from other nonbanking subsidiaries 6,700 5,000 4,500 Management fees and interest charged to sub- sidiaries 7,986 6,814 6,959 Income from securities and investments 6,296 8,895 8,188 Other 1,219 1,136 1,848 --------- -------- -------- 325,151 115,665 186,259 --------- -------- -------- EXPENSES Interest expense on borrowings 67,983 59,125 56,567 Noninterest expense 31,491 18,036 21,703 Federal and state taxes (credits) on income (37,484) (26,008) (24,294) --------- -------- -------- 61,990 51,153 53,976 --------- -------- -------- Earnings before undistributed net earnings of subsidiaries 263,161 64,512 132,283 Undistributed (overdistributed) net earnings of subsidiaries (147,339) 196,510 118,951 --------- -------- -------- $ 115,822 $261,022 $251,234 ========= ======== ========
96 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The parent company joins with its subsidiaries in filing a consolidated federal income tax return. In the return, the parent company's taxable income or loss is consolidated with the taxable income or loss of its subsidiaries. The parent company's share of income taxes is generally based on the amount of tax which would be payable if separate returns were filed, adjusted for some deficits or benefits arising from consolidation. Therefore, the parent company's equity in net earnings of subsidiaries is excluded from its computation of the provision for taxes on income for financial statement purposes. Taxes receivable consist primarily of amounts due from subsidiaries for taxes paid on their behalf. STATEMENT OF FINANCIAL CONDITION
DECEMBER 31 --------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash $ 1,927 $ 831 Certificates of deposit and federal funds -- 82,000 Securities available-for-sale 47,482 57,913 Investment in subsidiaries at cost plus equity in un- distributed earnings Great Western Bank 2,608,989 2,717,788 Aristar 390,358 451,570 Other nonbanking subsidiaries 98,945 97,882 Company owned life insurance 179,685 163,354 Advances to subsidiaries 140,133 96,741 Taxes receivable 45,733 38,433 Other assets 127,201 104,223 ---------- ---------- $3,640,453 $3,810,735 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 194,278 $ 162,467 Commercial paper 74,500 49,729 Fixed-rate notes 673,382 672,970 Subordinated notes 103,093 103,093 ---------- ---------- 1,045,253 988,259 Stockholders' equity-substantially restricted (see Consolidated Statement of Financial Condition) 2,595,200 2,822,476 ---------- ---------- $3,640,453 $3,810,735 ========== ==========
Following is a summary of the parent company long-term debt by maturity:
DECEMBER 31, 1996 ----------------- (DOLLARS IN THOUSANDS) 1998 $249,806 2000 224,166 2001 and thereafter 302,503 -------- $776,475 ========
97 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Operating Activities Net earnings $ 115,822 $ 261,022 $ 251,234 Noncash adjustments to net earnings Overdistributed (undistributed) net earnings of subsidiaries 147,339 (196,510) (118,951) Noncash dividends from subsidiaries (33,768) -- (38,380) Income taxes (16,016) (8,303) 31,528 Other (46,653) (2,432) (40,044) --------- --------- --------- Net cash provided by operating activities 166,724 53,777 85,387 --------- --------- --------- Financing Activities Common stock repurchased (176,732) -- -- Common stock issued 24,452 60,195 29,842 Redemption of preferred stock (998) -- -- Payment of cash dividends on common stock (133,045) (124,673) (122,524) Payment of cash dividends on preferred stock (20,295) (25,015) (25,015) --------- --------- --------- (306,618) (89,493) (117,697) --------- --------- --------- Proceeds from issuance of long-term borrowings -- 103,093 -- Repayments of long-term borrowings -- (28,250) -- Net change in short-term borrowings 24,771 36,298 13,431 --------- --------- --------- 24,771 111,141 13,431 --------- --------- --------- Net cash (used in) provided by financing activities (281,847) 21,648 (104,266) --------- --------- --------- Investing Activities Proceeds from maturities 58,073 49,852 24,863 Purchases of securities available-for-sale (47,922) (19,532) (87,754) Investment in subsidiaries 24,068 (139,847) (11,797) --------- --------- --------- Net cash provided by (used in) investing activities 34,219 (109,527) (74,688) --------- --------- --------- Net (decrease) in cash and cash equivalents (80,904) (34,102) (93,567) Cash and cash equivalents at beginning of year 82,831 116,933 210,500 --------- --------- --------- Cash and cash equivalents at end of year $ 1,927 $ 82,831 $ 116,933 ========= ========= ========= Supplemental cash flow disclosure Cash paid (received) for Interest on borrowings $ 68,035 $ 59,195 $ 56,300 Income taxes (21,353) (17,937) (54,594) Noncash financing activities Conversion of preferred stock to common stock 128,377 -- --
98 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 25: FAIR VALUE OF FINANCIAL INSTRUMENTS The following summarizes the Company's financial instruments as defined by SFAS 107:
DECEMBER 31 -------------------------------------------------- 1996 1995 ------------------------ ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) FINANCIAL ASSETS Cash $ 534,192 $ 534,192 $ 837,292 $ 837,292 Certificates of deposit, repurchase agreements and federal funds 300,100 300,100 257,125 257,125 Securities available for sale 1,279,283 1,279,283 1,092,459 1,092,459 Mortgage-backed securities 7,788,551 7,688,846 9,803,441 9,858,623 Loans receivable Real estate 28,471,678 28,680,595 27,296,174 27,304,438 Consumer Finance and other Term 1,731,796 1,794,761 2,064,555 2,052,536 Nonterm 549,969 441,388 451,848 457,237 Originated mortgage servicing rights 17,018 28,260 7,034 7,034 Excess/short servicing rights 7,527 15,678 3,616 6,286 FINANCIAL LIABILITIES Deposits Term $17,236,632 $17,232,603 $17,983,752 $18,022,943 Nonterm 11,321,836 11,321,836 11,251,176 11,251,176 Short-term borrowings from FHLB 2,011,733 2,011,733 740,080 740,080 Securities sold under repurchase agreements 4,197,666 4,197,666 6,868,296 6,868,296 Short-term borrowings 1,101,506 1,101,506 1,316,413 1,316,413 Long-term borrowings 3,190,908 3,357,772 2,420,845 2,603,936 Company-obligated mandatorily redeemable preferred securities of subsidiary trust 100,000 99,520 100,000 101,520 DERIVATIVE FINANCIAL INSTRUMENTS Loan commitments Fixed $ -- $ (267) $ -- $ (76) Variable -- 8,000 -- 13,164 Forward sales contracts -- 83 -- 384 Standby letters of credit -- (42) -- (62) Interest rate swaps 52 739 113 320 Cash flow swaps (498) 9,835 (796) 9,672
See the accompanying text for a discussion on items presented above. The Company is a party to financial instruments with off-balance-sheet risk and other derivative financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. All financial instruments are held or issued for purposes other than trading. These financial instruments include commitments to extend credit, at both fixed and variable rates, loans sold with credit enhancements, standby letters of credit, interest-rate caps and floors written, and interest-rate 99 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and cash flow swap agreements. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. For interest-rate caps, floors, swap transactions, loans sold with credit enhancements, purchased put options and forward sales, the contract or notional amounts do not represent exposure to risk of loss. The Company extends credit and requires collateral for loans sold with credit enhancements under the same lending policies as for other real estate loans. INTEREST RATE RISKS The Company uses derivative financial instruments to manage its exposure to interest rate changes related to its portfolio of loans and borrowings. The Company's objective is to manage the impact of interest rate changes on earnings. The Company, from time to time, uses purchased put options to hedge its exposure to increasing interest rates with respect to its fixed-rate loan commitments. Put options grant the Company, for a premium payment, the right to sell to the writer a specified financial instrument at a predetermined price for a predetermined period of time. The cost is recorded in other assets and amortized to gains and losses on loan sales over the life of the hedged assets. Realized gains from option contracts are recorded at the time the hedged instrument expires. The Company's credit risk exposure in the event of nonperformance by a counterparty is the loss of potential gains on the exercise of the option. The Company's exposure to risk of accounting loss is limited to the premium paid for the option. The Company uses forward sales contracts to hedge its exposure to increasing interest rates with respect to its fixed-rate commitments. The notional amount of forward sales contract was $8,003,000 and $60,700,000 at December 31, 1996 and 1995, respectively. Forward sales contracts are used to sell specific financial instruments (fixed-rate loans) at a future date for a specified price. Gains or losses are recognized at the time the contracts mature and are recorded as a component of gain on mortgages. The Company uses interest-rate swaps to manage interest-rate risk and reduce interest expense by improving the execution of borrowings to which the interest-rate swap is tied. At December 31, 1996 and 1995, the Company had outstanding $109,000,000 of interest-rate swaps related to FHLB borrowings in which the Company paid a fixed rate and received a rate tied to three month LIBOR. At December 31, 1996, the rate paid was 5.26% and the rate received was 5.52%. Interest receivable on these swaps is recorded in interest receivable and interest payable is recorded in other liabilities. The income and expense related to these interest-rate swaps was recorded as a decrease or increase to interest expense on borrowings. The net benefit of interest-rate swap agreements was $369,000 for the year ended December 31, 1996, compared to a net benefit of $953,000 for the year ended December 31, 1995 and a net cost of $775,000 for the year ended December 31, 1994. The Company's current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Company. The Company manages the potential credit exposure through careful evaluation of counterparty credit standing. The Company uses cash flow swap agreements to reduce its interest-rate exposure with regard to its Investor CD, an insured account which is indexed to the Standard and Poor's (S&P) 500 performance. The Company agreed to pay a fixed or variable rate in exchange for the customer receiving a return tied to the S&P 500. The notional amount of cash flow swaps was $119,481,000 and $180,711,000 at December 31, 1996 and 1995, 100 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) respectively. The average interest rate paid by GWB was 4.85% at December 31, 1996 and 5.13% at December 31, 1995. The monthly payment is recorded in interest expense on customer accounts and the amount received is passed to the customer as the yield on the Investor CD. The exposure to accounting loss on the cash flow swap agreements in the event of the failure of a counterparty to perform according to the terms of the contract would approximate the amount of interest to be paid to the Bank's customers on the Investor CD portfolio. CREDIT COMMITMENTS The Company enters into commitments to fund real estate loans to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Fees received in connection with loan commitments are deferred in other liabilities until the loan is advanced and are then recognized over the term of the loan as an adjustment of the yield. Fees on commitments that expire unused are recognized in loan fees at expiration. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. The value of the property as security for a mortgage loan is determined by qualified real estate appraisers. The Company had outstanding commitments to fund real estate loans of $791,564,000 at December 31, 1996 which consisted of $102,497,000 fixed-rate and $689,067,000 adjustable rate and $716,924,000 at December 31, 1995 which consisted of $144,587,000 fixed-rate and $572,337,000 adjustable rate. The Company has issued standby letters of credit from time to time to meet the credit needs of its customers. The letters of credit outstanding are generally performance guarantees supporting certain property development projects and totaled $6,970,000 at December 31, 1996 and $10,410,000 at December 31, 1995. The notional value of letters of credit does not necessarily represent future cash requirements. The Company's maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. CONCENTRATIONS OF CREDIT RISK The Company primarily originates real estate loans of which a substantial portion of the portfolio is secured by real estate located in California and Florida. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates and the methods and assumptions used to determine the fair value of the Company's financial instruments follow: SHORT-TERM INVESTMENTS AND DEBT SECURITIES The carrying amount of short-term instruments is a reasonable estimate of their fair value. The fair value of securities available-for-sale and mortgage-backed securities is principally based on quoted market prices from various sources. For securities which have no quoted market price and are short-term in nature, the fair value is determined to be the book value at the reporting date. 101 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) LOANS RECEIVABLE The fair value of loans is predominantly based on discounted future cash flows. The discount rate is based upon a projected treasury yield curve adjusted for various risk factors depending on the type of loan. The fair value of the portfolio will fluctuate with changes in interest rates. MORTGAGE SERVICING RIGHTS The fair value of mortgage servicing rights, which includes excess/short servicing fees and originated mortgage servicing rights, is determined by recalculation of the discounted cash flows at market rates. DEPOSITS Term deposits are stratified by remaining maturity, and fair value is calculated based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve. Fair value includes the effects of compounding where applicable. The fair value of nonterm deposits has been determined to be the amount payable on demand at the reporting date. Nonterm deposits include all deposits without defined maturities, such as checking, money market savings and regular savings. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM BORROWINGS Because of the short-term nature of these borrowings, fair value approximates book value. LONG-TERM BORROWINGS Long-term borrowings are stratified by remaining maturity, and fair value is calculated based on discounted future cash flows. The discount rate used was based upon a projected treasury yield curve. The maturity used in the present value calculation of long-term, variable-rate borrowings is the date at which the borrowing would next be repriced. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The fair value of forward sales contracts, interest rate swaps, cash flow swaps, put options purchased as a hedge of fixed-rate commitments and commitments to fund real estate loans is estimated using current market prices adjusted for various risk factors and market volatility. The fair value of letters of credit is based on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of outstanding interest-rate swaps is based on expected remaining net cash flows discounted at three-month LIBOR. The carrying value of off-balance-sheet financial instruments represents accruals or deferred income arising from those financial instruments. NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial operating data are included in "Stockholder Data and Quarterly Information (Unaudited)" on pages 107 through 109 of this annual report on Form 10-K. Fourth quarter 1996 earnings included a $22.5 million gain ($14 million, or $.10 per share after tax) on the sale of the $356.6 million portfolio of student loans, which is the greater portion of the student loan business, in December. The fourth quarter also included a $68.3 million charge ($42.4 million, or $.31 per share after tax) 102 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for restructuring, a $50 million provision ($31 million, or $.22 per share after tax) relating to the bulk sale of nonperforming assets in the real estate loan portfolio, a $21.4 million charge ($13.3 million, or $.10 per share after tax) for the early extinguishment of a portion of two issues of the Bank's subordinated notes and an $8.4 million charge ($5.2 million, or $.04 per share after tax) for litigation. The third quarter 1996 loss included a $188.4 million charge ($115 million, or $.83 per share after tax) to recapitalize the Savings Association Insurance Fund ("SAIF"). Fourth quarter 1994 earnings included a $62.3 million pretax gain ($37.1 million, or $.28 per share after tax) on the sale of 31 Florida West Coast retail banking branches sold in December. In addition, the Company wrote off approximately $11.7 million ($7.5 million, or $.06 per share, after tax) of intangibles related to interstate banking access rights. NOTE 27: BUSINESS SEGMENTS Information on the Company's business segments follows:
REAL CONSUMER ESTATE RETAIL (DOLLARS IN FINANCE SERVICES BANKING TREASURY CONSOLIDATED THOUSANDS) ---------- -------- ---------- ----------- ------------ 1996 Revenue(1) $ 285,900 $169,300 $ 909,500 $ 345,100 $ 1,709,800 Earnings before taxes 98,700 11,200 176,300 (99,600) 186,600 Average assets 2,419,100 137,300 1,308,900 39,809,700 43,675,000 Depreciation and amortization 9,400 30,000 83,400 2,300 125,100 Capital expenditures 3,000 17,800 29,600 11,300 61,700 1995 Revenue(1) 287,200 114,800 946,900 280,800 1,629,700 Earnings before taxes 106,600 (20,300) 290,000 45,800 422,100 Average assets 2,365,100 150,800 1,533,200 39,928,900 43,978,000 Depreciation and amortization 10,600 25,300 76,700 1,900 114,500 Capital expenditure 500 5,200 38,900 42,500 87,100
- -------- (1) Revenue is comprised of net interest income and total non-interest income. The Treasury segment is being separately reported for 1996. For consistency, the 1995 disclosure has been restated to conform with this presentation. During 1995, the Company underwent a fundamental change in the way it manages and measures its lines of business. The mortgage bank and retail bank segments were separately reported for 1995. Segment data along these lines is not available for 1994. NOTE 28: SUBSEQUENT EVENTS On January 27, 1997, Great Western Financial Trust II (the "subsidiary trust"), a wholly-owned subsidiary of Great Western Financial Corporation, issued $300 million of 8.206% Trust Originated Preferred Securities (the "preferred securities"). In connection with the subsidiary trust's issuance of the preferred securities, Great Western Financial Corporation issued to the subsidiary trust $309 million principal amount of its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated notes"). The sole assets of the subsidiary trust are and will be the subordinated notes. Great Western Financial Corporation's obligations under the subordinated notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary trust's obligations under the preferred securities. On February 3, 1997, the Company received preliminary approval in Federal Court of a $17.2 million settlement reached with plaintiffs in connection with the sale of uninsured investment products. Final approval of the settlement is set for April 14, 1997. 103 GREAT WESTERN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective February 25, 1997, GWFC's Board of Directors approved a Broad Based Plan (the Plan) for eligible employees who are not covered by an existing severance plan and are not offered a comparable position by an acquiring company or whose employment is terminated within 12 months of a change in control, as defined by the Plan. The minimum pay will equate to six months with the maximum of 18 months obtainable under the Plan. As a result of the adoption of this Plan, the Company will record an increase to the restructuring liability in the first quarter of 1997 of approximately $10,000,000. On January 28, 1997, the Board of Directors authorized the repurchase of up to 5 million shares of outstanding common stock, representing approximately 3.6% of the total number of outstanding shares at December 31, 1996. As of February 28, 1997, there had been no repurchases under this program. On March 5, 1997 the Board of Directors voted to discontinue the repurchase program. On March 5, 1997, the Company entered into an Agreement and Plan of Merger with Washington Mutual, Inc. (Washington Mutual), and New American Capital, Inc., an indirect wholly-owned subsidiary of Washington Mutual. Washington Mutual is a regional financial services company headquartered in Seattle, Washington. With consolidated assets of $44.6 billion at December 31, 1996, this Washington corporation operates through its principal subsidiaries, Washington Mutual Bank, American Savings Bank, F.A., and Washington Mutual Bank fsb. Under the Agreement and Plan of Merger, the Company will merge with and into New American Capital, Inc. in a tax-free exchange, pursuant to which, among other things, each outstanding share of common stock of the Company will be converted into .9 shares of common stock of Washington Mutual. Based upon the closing price of Washington Mutual's common stock on March 5, 1997, stockholders of the Company would receive shares of Washington Mutual common stock with a value of $47.93 per share of common stock of the Company. This transaction has been approved by the boards of directors of both companies. It is anticipated that this transaction will be accounted for as a pooling of interests. The Company expects the merger to be completed during the third quarter of 1997, pending the receipt of regulatory approval from the OTS and the approval of the stockholders of both companies. For additional information on the proposed merger and other related activities, see Item 1. Business "Merger Agreement with Washington Mutual, Inc.," "H. F. Ahmanson & Company's Merger Proposal" and "Litigation Relating to the Ahmanson Merger Proposal" in Part I of this Form 10-K. 104 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Great Western Financial Corporation In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Great Western Financial Corporation and its subsidiaries ("the Company") at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Company adopted accounting standards that changed its methods of accounting for mortgage servicing rights and long lived assets in 1995. Los Angeles, California January 22, 1997, except as to Note 28, which is as of March 7, 1997 105 MANAGEMENT'S COMMENTARY ON FINANCIAL STATEMENTS Management is responsible for the integrity and objectivity of the financial statements and other information in this report. The statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances. They meet the requirements of the Securities and Exchange Commission. The financial statements reflect management's judgment and estimates relating to events not concluded by year end. The Company's code of conduct, communicated to all officers and employees, requires adherence to high ethical standards in the conduct of the Company's business. Management is responsible for maintaining a system of internal control and has established a system of internal accounting control designed to provide reasonable assurance that transactions are recorded properly to permit preparation of financial statements, that transactions are executed in accordance with management's authorizations and that assets are safeguarded from significant loss or unauthorized use. Management supports an extensive program of internal audits to evaluate the adequacy of internal controls as well as to monitor compliance with management's directives and regulatory agencies' requirements. The audit committee of the board of directors is composed of nine outside directors, none of whom is an officer or employee of the Company. The audit committee meets with the internal and external auditors to review the scope of audits, findings and actions to be taken by management. Carl F. Geuther Vice Chairman and Chief Financial Officer January 22, 1997 106 QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 ------------------------------------------------ FOURTH THIRD SECOND FIRST TOTAL QUARTER QUARTER QUARTER QUARTER ---------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) Interest income $3,233,931 $801,547 $ 800,514 $806,942 $824,928 Interest expense 1,855,914 466,536 461,742 454,994 472,642 ---------- -------- --------- -------- -------- Net interest income 1,378,017 335,011 338,772 351,948 352,286 Noninterest income 331,825 114,096 63,713 78,103 75,913 Provision for loan losses 208,971 85,900 41,671 39,300 42,100 Noninterest expense 1,314,249 357,675 429,089 260,180 267,305 ---------- -------- --------- -------- -------- Earnings (loss) before taxes 186,622 5,532 (68,275) 130,571 118,794 Taxes (benefit) on income 70,800 400 (28,400) 51,300 47,500 ---------- -------- --------- -------- -------- Net earnings (loss) $ 115,822 $ 5,132 $ (39,875) $ 79,271 $ 71,294 ========== ======== ========= ======== ======== Per common share: Primary earnings (loss) $ .69 $ .01 $ (.31) $ .52 $ .47 Fully diluted earnings (loss) .69 .01 (.31) .52 .47 Dividends .98 .25 .25 .25 .23 Stock price: High $ 31 1/8 $26 3/4 $ 24 1/2 $ 26 1/8 Low 27 21 1/8 21 3/4 22 1/2 End of period 29 26 1/2 23 7/8 24 1/8 Per preferred depositary share: Dividends Cumulative convertible $ 2.552 $ -- $ .36450 $1.09375 $1.09375 Cumulative 2.075 .51875 .51875 .51875 .51875 Stock price Cumulative convertible High $62 1/4 $ 61 3/8 $ 65 1/4 Low 56 3/8 56 1/4 58 Cumulative High $ 26 $25 57/64 $ 26 $ 26 1/8 Low 25 3/8 25 1/4 25 1/8 25 3/8
Exchange Listings: New York Stock Exchange, Pacific Stock Exchange and London Stock Exchange. Approximate number of common stockholders of record at December 31, 1996: 9,724. Under regulations, retained earnings are subject to substantial restrictions for the payment of dividends. See Note 21 in Item 8, "Financial Statements and Supplementary Data." 107 QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
1995 ----------------------------------------------- FOURTH THIRD SECOND FIRST TOTAL QUARTER QUARTER QUARTER QUARTER ---------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) Interest income $3,238,711 $834,887 $ 839,097 $807,661 $757,066 Interest expense 1,936,582 484,046 505,498 497,064 449,974 ---------- -------- --------- -------- -------- Net interest income 1,302,129 350,841 333,599 310,597 307,092 Noninterest income 327,668 106,471 76,159 74,857 70,181 Provision for loan losses 187,700 50,300 46,600 43,200 47,600 Noninterest expense 1,019,975 253,445 249,823 259,018 257,689 ---------- -------- --------- -------- -------- Earnings (loss) before taxes 422,122 153,567 113,335 83,236 71,984 Taxes (benefit) on income 161,100 55,000 44,800 32,800 28,500 ---------- -------- --------- -------- -------- Net earnings (loss) $ 261,022 $ 98,567 $ 68,535 $ 50,436 $ 43,484 ========== ======== ========= ======== ======== Per common share: Primary earnings (loss) $ 1.72 $ .67 $ .45 $ .32 $ .28 Fully diluted earnings (loss) 1.71 .66 .45 .32 .28 Dividends .92 .23 .23 .23 .23 Stock price: High $ 27 1/8 $23 3/4 $ 22 1/2 $ 18 7/8 Low 22 5/8 20 1/4 18 7/8 16 End of period 25 3/8 23 3/4 20 5/8 18 5/8 Per preferred depositary share: Dividends Cumulative convertible $ 4.375 $1.09375 $ 1.09375 $1.09375 $1.09375 Cumulative 2.075 .51875 .51875 .51875 .51875 Stock price Cumulative convertible High $ 67 7/8 $62 3/4 $ 60 3/8 $ 55 5/8 Low 58 1/4 57 1/2 55 1/2 50 3/8 Cumulative High $ 26 1/8 $26 13/64 $ 25 7/8 $ 24 7/8 Low 25 3/8 25 1/4 24 3/8 22 3/4
108 QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
1994 ---------------------------------------------- FOURTH THIRD SECOND FIRST TOTAL QUARTER QUARTER QUARTER QUARTER ---------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) Interest income $2,629,718 $704,611 $661,312 $633,803 $629,992 Interest expense 1,307,448 385,076 330,544 296,080 295,748 ---------- -------- -------- -------- -------- Net interest income 1,322,270 319,535 330,768 337,723 334,244 Noninterest income 367,897 134,331 74,723 81,378 77,465 Provision for loan losses 207,200 52,800 49,700 52,900 51,800 Noninterest expense 1,076,433 265,192 264,361 271,146 275,734 ---------- -------- -------- -------- -------- Earnings (loss) before taxes 406,534 135,874 91,430 95,055 84,175 Taxes (benefit) on income 155,300 47,200 34,200 39,200 34,700 ---------- -------- -------- -------- -------- Net earnings (loss) $ 251,234 $ 88,674 $ 57,230 $ 55,855 $ 49,475 ========== ======== ======== ======== ======== Per common share: Primary earnings (loss) $ 1.69 $ .61 $ .38 $ .38 $ .32 Fully diluted earnings (loss) 1.69 .61 .38 .38 .32 Dividends .92 .23 .23 .23 .23 Stock price: High $ 19 $ 20 7/8 $ 19 3/8 $ 20 1/2 Low 15 3/4 18 3/8 15 3/8 16 1/8 End of period 16 19 1/4 18 3/8 16 1/8 Per preferred depositary share: Dividends Cumulative convertible $ 4.375 $1.09375 $1.09375 $1.09375 $1.09375 Cumulative 2.075 .51875 .51875 .51875 .51875 Stock price Cumulative convertible High $ 56 5/8 $ 59 1/8 $ 58 1/4 $ 62 5/8 Low 50 1/8 55 1/4 53 3/4 55 3/4 Cumulative High $ 24 3/8 $ 25 1/8 $ 25 $ 26 7/8 Low 22 1/8 24 23 24 1/8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 109 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See General Note to Part III. ITEM 11. EXECUTIVE COMPENSATION See General Note to Part III. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See General Note to Part III. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See General Note to Part III. GENERAL NOTE TO PART III Pursuant to General Instruction G to Form 10-K, the other information required by Part III (Items 10, 11, 12 and 13) of Form 10-K not disclosed above will be either (i) incorporated by reference to the Definitive Proxy Statement for Great Western Financial Corporation's 1997 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission not later than April 30, 1997, or (ii) included in an amendment to this report filed with the Commission on Form 10-K/A. 110 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements See index to Item 8, "Financial Statements and Supplementary Data" on page 51. 2. Financial Statement Schedules No financial statement schedules are required because they are not applicable or the required information is shown in the financial statements or notes thereto included in Item 8, "Financial Statements and Supplementary Data". 3. Executive Compensation Plans and Arrangements indicated by asterisk in next section. 4. Exhibits Required by Securities and Exchange Commission Regulations S-K 3.1 Restated Certificate of Incorporation of GWFC, as in effect on the date of this report (filed as an exhibit to GWFC's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). 3.2 Certificate of Designations of GWFC's 8.30% Cumulative Preferred Stock (filed as an exhibit to GWFC's Current Report on Form 8-K dated September 9, 1992, event date September 2, 1992, and incorporated herein by reference). 3.3 By-laws of GWFC as in effect on the date of this report (filed as an exhibit to GWFC's Current Report on Form 8-K dated June 30, 1995, event date June 27, 1995, and incorporated herein by reference). 3.4 Amendments to By-laws of GWFC (filed as an exhibit to GWFC's current report on Form 8-K dated February 20, 1997, event date February 20, 1997, and incorporated herein by reference). 4.1 GWFC agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of GWFC and its consolidated subsidiaries. 4.2 Indenture dated as of May 31, 1988, as amended and supplemented as of June 14, 1988 and October 31, 1988, between GWB and Morgan Guaranty Trust Company of New York (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 10.1 Rights Agreement dated as of June 27, 1995, between GWFC and First Chicago Trust Company of New York (filed as an exhibit to the Company's Current Report on Form 8-K dated June 30, 1995, event date June 27, 1995, and incorporated herein by reference). 10.2 Consulting Agreement between GWFC and James F. Montgomery dated April 25, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 10.3* Employment Agreement between GWFC and John F. Maher dated December 19, 1989 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 10.4* Amendment to Employment Agreement between GWFC and John F. Maher effective December 10, 1996. 10.5* Employment Agreement between GWFC and Carl F. Geuther dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10- K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 111 10.6* Amendment No. 1 to Employment Agreement between GWFC and Carl F. Geuther effective December 10, 1996. 10.7* Employment Agreement between GWFC and Michael M. Pappas dated as of March 1, 1988 (filed as an exhibit to GFWC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 10.8* Amendment No. 1 to Employment Agreement between GWFC and Michael M. Pappas effective December 10, 1996. 10.9* Employment Agreement between GWFC and A. William Schenck III dated as of July 31, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10- Q for the quarter ended September 30, 1995, and incorporated herein by reference). 10.10* Amendment No. 1 to Employment Agreement between GWFC and A. William Schenck, III effective December 10, 1996. 10.11* Employment Agreement between GWFC and J. Lance Erikson dated as of March 1, 1988 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 10.12* Amendment No. 1 to Employment Agreement between GWFC and J. Lance Erikson effective December 10, 1996. 10.13* Employment Agreement between GWFC and Jaynie M. Studenmund dated as of April 15, 1996 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference). 10.14* Amendment No. 1 to Employment Agreement between GWFC and Jaynie M. Studenmund effective December 10, 1996. 10.15* Employment Agreement between GWFC and Ray W. Sims dated as of January 6, 1997. 10.16* Supplemental Executive Retirement Plan as amended through July 25, 1995 (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference). 10.17* Amendment No. 1996-1 to GWFC Supplemental Executive Retirement Plan 1988 Restatement (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) 10.18* Amendment No. 1996-2 to GWFC Supplemental Executive Retirement Plan effective December 10, 1996. 10.19* 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan as amended (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference). 10.20* Addendum to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). 10.21* Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 20, 1982 to April 22, 1986 (filed as an exhibit to Post- Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S-8, and incorporated herein by reference). 112 10.22* Form of Non-Qualified Stock Option Agreement relating to the 1979 Incentive and Nonstatutory Stock Option and Appreciation Plan utilized from April 22, 1986 through 1988 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 2-67233 on Form S- 8, and incorporated herein by reference). 10.23* The 1988 Stock Option and Incentive Plan (as amended effective July 26, 1994), (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference). 10.24* Amendment No. 1996-1 to the 1988 Stock Option and Incentive Plan, effective December 10, 1996. 10.25* Form of Director Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference). 10.26* Form of Director Stock Option Agreement effective January 3, 1994, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). 10.27* Form of Employee Non-Qualified Stock Option Agreement (filed as an exhibit to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference). 10.28* Revised Form of Non-Qualified Stock Option Agreement effective January 28, 1992 (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S-8 pertaining to GWFC's 1988 Stock Option and Incentive Plan and incorporated herein by reference). 10.29* Revised Form of Non-Qualified Stock Option Agreement effective January 25, 1994, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). 10.30* Form of Non-Qualified Stock Option Agreement (Early Vesting Provisions), (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). 10.31* Revised Form of Non-Qualified Stock Option Agreement effective December 12, 1994, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.32* Form of Great Western Financial Corporation Employee Nonqualified Stock Option Agreement, effective December 10, 1996. 10.33* Amendment No. 1996-1 to Form of Nonqualified Stock Option Agreement, effective December 10, 1996. 10.34* Form of Great Western Financial Corporation Senior Officer's Non- Qualified Stock Option Agreement effective January 23, 1996, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). 10.35* Form of Great Western Financial Corporation Senior Officer's Nonqualified Stock Option Agreement, effective December 10, 1996. 10.36* Special Non-Qualified Stock Option Agreement dated as of April 25, 1995 and amendments to Non-Qualified Stock Option Agreements dated February 26, 1991, January 25, 1994, and December 12, 1994 with James F. Montgomery (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 113 10.37* Form of Restricted Stock Award Agreement and General Provisions Applicable to Restricted Stock Awards Granted Under the 1988 Stock Option and Incentive Plan (filed as an exhibit to Post-Effective Amendment No. 3 to GWFC's Registration Statement No. 33-21469 on Form S- 8, and incorporated herein by reference). 10.38* General Provisions applicable to Performance Restricted Stock Awards granted under the Great Western Financial Corporation 1988 Stock Option and Incentive Plan, as amended (March 1994) (filed as an exhibit to GWFC's quarterly report on Form 10-Q for the quarter ended March 31, 1994 and incorporated herein by reference). 10.39* General Provisions applicable to Performance Restricted Stock Award granted to James F. Montgomery, as amended effective December 28, 1995 (filed as an exhibit to GWFC's quarterly report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 10.40 Amendment No. 1996-1 to General Provisions Applicable to Performance Restricted Stock Awards Granted Under 1988 Stock Option and Incentive Plan, effective December 10, 1996. 10.41* GWFC Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference). 10.42* Amendment No. 2 to GWFC Deferred Compensation Plan 1992 Restatement (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10.43* Amendment No. 1996-2 to GWFC Deferred Compensation Plan, dated December 10, 1996. 10.44* GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference). 10.45* Amendment No. 2 to Senior Officer's Deferred Compensation Plan 1992 Restatement (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10.46* Amendment No. 1996-2 to Senior Officer's Deferred Compensation Plan, dated December 10, 1996. 10.47* GWFC Directors' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference). 10.48* Amendment to GWFC Directors', Senior Officers' and basic Deferred Compensation Plans (1992 Restatement) (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference). 10.49* Amendment No. 2 to Directors' Deferred Compensation Plan 1992 Restatement. (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10.50* Amendment No. 1996-2 to Directors' Deferred Compensation Plan, dated December 10, 1996. 10.51* GWFC Umbrella Trust for Senior Officers (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference). 10.52* Amendment to GWFC Umbrella Trust for Senior Officers effective October 25, 1994 (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference). 114 10.53* Amendment No. 1996-1 to Umbrella Trust for Senior Officers, effective December 10, 1996. 10.54* GWFC Umbrella Trust for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, and incorporated herein by reference). 10.55 Amendment No. 1996-1 to Umbrella Trust for Directors, dated December 10, 1996. 10.56 Omnibus Amendment 1995-1 to the Supplemental Executive Retirement Plan, Deferred Compensation Plans, Retirement Restoration Plan, and Umbrella Trusts replacing the Finance Committee of the Board of Directors with the Compensation Committee of the Board of Directors as administrator of the plans (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference). 10.57* Restated Retirement Plan for Directors (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10.58* Summary of certain additional executive benefits (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference). 10.59* Employee Home Loan Program (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference). 10.60* Amendment No. 1996-1 to Employee Home Loan Program, effective December 10, 1996. 10.61* GWFC Annual Incentive Compensation Plan for Executive Officers, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference). 10.62* Amendment no. 1996-1 to Annual Incentive Compensation Plan for Executive Officers, effective December 10, 1996. 10.63* GWFC Retirement Restoration Plan effective January 1, 1994, (filed as an exhibit to GWFC's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.64* Amendment 1996-1 to GWFC Retirement Restoration Plan (filed as an exhibit to GWFC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10.65* Amendment No. 1996-2 to Retirement Restoration Plan effective December 10, 1996. 10.66 Special Severance Plan adopted December 10, 1996. 10.67 Broad Based Plan adopted February 24, 1997. 10.68 Omnibus Amendment 1997-1 amending the definition of change in control in the Employment Agreements, amended and restated as of December 10, 1996 between GWFC and John Maher, J. Lance Erikson, Carl F. Geuther, Michael M. Pappas, A. William Schenck III, and Jaynie M. Studenmund, the Employment Agreement between GWFC and Ray W. Sims, effective January 6, 1997, the GWFC 1988 Stock Option and Incentive Plan, as amended December 10, 1996, the GWFC Annual Incentive Compensation Plan for Executive Officers, as amended December 9, 1996, the GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996, the GWFC Directors' Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996, the GWFC Supplemental Executive Retirement Plan (1988 Restatement), as amended December 10, 1996, the Great Western Retirement Restoration Plan, as amended December 10, 1996, the GWFC Umbrella Trust for Senior Officers, as amended December 10, 1996 and Umbrella Trust for Directors, as amended December 10, 1996, the Employee Home Loan Program (revised and restated as of April 27, 1993), as amended December 10, 1996, the GWFC Special Severance Plan, effective December 10, 1996, approved and adopted by the Board of Directors on February 20, 1997. 115 10.69 Agreement and Plan of Merger By and Among Washington Mutual, Inc., New American Capital, Inc., and Great Western Financial Corporation, dated as of March 5, 1997. 11.1 Statement re Computation of Per Share Earnings. 12.1 Computation of Ratios of Earnings to Fixed Charges. 21.1 Subsidiaries. 23.1 Consent of Price Waterhouse LLP included on page 119 of this Form 10- K. 24.1 Power of Attorney included on page 117 of this Form 10-K. 27.1 Financial Data Schedule. Exhibits will be supplied to any such stockholder at a charge equal to the Company's cost of copying, postage and handling. Written requests should be directed to: CORPORATE SECRETARY GREAT WESTERN FINANCIAL CORPORATION 9200 OAKDALE AVENUE CHATSWORTH, CALIFORNIA 91311-6519 (b) Reports on Form 8-K A Current Report on Form 8-K dated February 20, 1997 was filed with the SEC reporting the adoption of an amendment to Great Western Financial Corporation's Bylaws. A Current Report on Form 8-K dated January 27, 1997, included exhibits relating to the 8.206% Capital Securities, Series A, of the Great Western Financial Trust II. A Current Report on Form 8-K dated January 22, 1997, reporting the Company's earnings for the fourth quarter of 1996 and annual earnings for 1996. A Current Report on Form 8-K dated December 2, 1996 reported that the Company would take a pre-tax restructuring charge of between $65 and $70 million in the fourth quarter of 1996. 116 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Great Western Financial Corporation March 5, 1997 /s/ John F. Maher ________________ By: _________________________________ DATE JOHN F. MAHER, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature appears below hereby authorizes John F. Maher, Carl F. Geuther and Barry R. Barkley, and each of them or any of them, as attorney-in-fact to sign on his or her behalf as an individual and in every capacity stated below, and to file all amendments to the registrant's Form 10- K, and the registrant hereby confers like authority to sign and file in its behalf. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 5, 1997, by the following persons on behalf of the registrant and in the capacities indicated. /s/ John F. Maher - ------------------------------------- JOHN F. MAHER, PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) /s/ Carl F. Geuther - ------------------------------------- CARL F. GEUTHER, VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) /s/ Barry R. Barkley - ------------------------------------- BARRY R. BARKLEY, SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) /s/ James F. Montgomery - ------------------------------------- JAMES F. MONTGOMERY, DIRECTOR AND CHAIRMAN OF THE BOARD /s/ Dr. David Alexander /s/ Enrique Hernandez, Jr - ------------------------------------- ------------------------------------- DR. DAVID ALEXANDER, DIRECTOR ENRIQUE HERNANDEZ, JR., DIRECTOR /s/ Charles D. Miller - ------------------------------------- ------------------------------------- H. FREDERICK CHRISTIE, DIRECTOR CHARLES D. MILLER, DIRECTOR /s/ Stephen E. Frank /s/ Dr. Alberta E. Siegel - ------------------------------------- ------------------------------------- STEPHEN E. FRANK, DIRECTOR DR. ALBERTA E. SIEGEL, DIRECTOR /s/ John V. Giovenco /s/ Willis B. Wood, Jr. - ------------------------------------- ------------------------------------- JOHN V. GIOVENCO, DIRECTOR WILLIS B. WOOD, JR., DIRECTOR /s/ Firmin A. Gryp - ------------------------------------- FIRMIN A. GRYP, DIRECTOR 117 INDEX OF ADDITIONAL FINANCIAL DATA DECEMBER 31, 1995
PAGES ----- Consent of Independent Accountants........................................ 119
118 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-19884, 33-63535, 33-60206 and 333-19711), on Form S-4 (Nos. 33-15135 and 33-17705) and on Form S-8 (Nos. 2-67233, 2-90750, 33-6174, 33-21469 and 333-12655) of Great Western Financial Corporation of our report dated January 22, 1997, except as to Note 28, which is as of March 7, 1997, appearing on page 105 of this Form 10-K. /s/ Price Waterhouse LLP Los Angeles, California March 10, 1997 119 EX-10.4 2 AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.4 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment is made to that certain Employment Agreement (the "1989 Agreement"), dated as of December 19, 1989, between Great Western Financial Corporation ("Employer") and John F. Maher ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the 1989 Agreement. WHEREAS, the 1989 Agreement provides, among other things, that Officer would hold the offices of President and Chief Operating officer of the Company; WHEREAS, effective as of December 28, 1995, Officer was appointed to the office of Chief Executive Officer of the Company; and WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement to reflect Officer's appointment as Chief Executive Officer and to make certain additional changes as set forth herein, and Officer agrees to continue to serve Employer pursuant to the terms of the 1989 Agreement, as amended hereby; NOW THEREFORE, the Employer and Officer agree that the 1989 Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. Section 1 of the 1989 Agreement is amended by deleting from the first sentence thereof the date "December 31, 1994" and inserting in lieu thereof the date "December 31, 1999" and by deleting from the second sentence thereof the date "December 31, 1991" and inserting in lieu thereof the date "December 31, 1996". 2. The first sentence of Section 2 of the 1989 Agreement is amended in its entirety to read as follows: Employer and Officer hereby agree that, subject to the provisions of this Agreement, Employer shall employ Officer, and Officer shall serve Employer, as Chief Executive Officer of Employer (effective as of December 28, 1995) and member of the Executive Management Committee of the Employer and the Bank. 3. The third sentence of Section 3 of the 1989 Agreement is amended to delete therefrom the phrase "the rank of Chief Operating Officer" and inserting in lieu thereof the phrase "the rank of Chief Executive Officer". 4. The first sentence of Section 4 of the 1989 Agreement is amended in its entirety to read as follows: Effective as of January 1, 1997, Employer shall pay Officer an annual salary at the rate of $860,000, which shall be payable in semi- monthly or bi-weekly installments in conformity with Employer's policy relating to salaried employees. 5. The first sentence of the second paragraph of Section 4 of the 1989 Agreement is amended in its entirety to read as follows: Notwithstanding anything to the contrary in this Agreement, Employer and Officer acknowledge that the Additional Benefits include without limitation Officer's entitlements under Employer's supplemental executive retirement plan (the "SERP"), as such entitlements are supplemented pursuant to the provisions hereof. 6. Section 4 of the 1989 Agreement is amended by inserting immediately following subparagraph (c) thereof the following new paragraph, to be effective as of January 1, 1997: Employer agrees that (i) for purposes of computing Officer's "average annual compensation" under the SERP, Employer shall disregard compensation earned by Officer with respect to all years prior to and including 1996 and (ii) Officer's 2 "average annual compensation", determined as of any date in 1997, shall be $1,462,000; Officer's average annual compensation, determined as of any date in 1998, shall be based upon his actual compensation for 1997 (including, but not limited to, Officer's salary and all bonuses, whether paid pursuant to the Company's Annual Incentive Plan (as defined in Section 8(a)(iii) hereof) or pursuant to discretionary bonuses); Officer's average annual compensation, determined as of any date in 1999, shall be based upon his average compensation for 1997 and 1998; and Officer's average annual compensation, determined as of any date after 1999, shall be based upon the definition of "average monthly compensation" set forth in the SERP. The preceding sentence shall not constitute an amendment to the SERP, but rather shall evidence Employer's obligation to supplement the benefits otherwise payable to or in respect of Officer under the SERP. Any supplemental retirement benefits to which Officer is entitled by reason of application of the second preceding sentence shall be paid at the same time and in the same form as benefits payable to or in respect of Officer under the SERP, and shall otherwise be subject to the terms and conditions of the SERP as if such benefits were payable thereunder. 7. The final paragraph of Section 4 of the 1989 Agreement is amended by deleting from the final sentence thereof the phrase "thirty-five percent (35%)" and inserting in lieu thereof the phrase "fifty percent (50%)". 8. The final sentence of Section 5 of the 1989 Agreement is amended by deleting therefrom the phrase "the 1987 Agreement" and inserting in lieu thereof the phrase "all prior employment agreements with Employer". 3 9. Section 6(b) of the 1989 Agreement is amended in its entirety as follows: (b) concurrently with the receipt of bonuses by Employer's other senior executives with respect to the year in which such election occurs, a bonus, prorated on an actual day basis for the year in which such election occurs if such election shall occur within the first six (6) months of such year but otherwise not prorated, in an amount not less than the percentage of Officer's salary, at the rate in effect immediately prior to such election, to which he would otherwise have been entitled in respect of such year under the Annual Incentive Plan (as defined in Section 8(a)(iii) hereof) and any other short-term cash bonus plan or arrangement of the Company, absent such election, or 4 10. Section 6(c) of the 1989 Agreement is amended in its entirety to read as follows: (c) for what would have been the remaining term of this Agreement absent such termination, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non- qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have otherwise been entitled if such prohibition did not pertain) and (2) the SERP (including the supplemental benefits thereto described in Section 4 hereof), but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; 11. The 1989 Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(h) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the term of this Agreement, Officer is not 5 required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that -------- ------- Employer's obligation to provide welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insurance, shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 12. The first sentence of Section 7(a) of the 1989 Agreement is amended (1) by deleting clause (i)(B) and inserting in lieu thereof the following: (B) the greater of (x) the average annual bonus received by him under the Annual Incentive Plan (as defined in Section 8(a)(iii) hereof) or pursuant to discretionary bonuses for services rendered in the immediately preceding three (3) full calendar years or (y) if termination shall occur (1) in 1997, $602,000, (2) in 1998, the actual bonus received by Officer for 1997 under the Annual Incentive Plan or pursuant to discretionary bonuses, or (3) in 1999, the average of the actual bonuses so received for 1997 and 1998, minus and (2) by inserting immediately following the phrase "and to continue accrual of years of service under Employer's Retirement Plan, and under any supplemental employee retirement plan" the following: or arrangement (including the applicable provisions of Section 4 hereof) 6 13. Section 8(a) of the 1989 Agreement is amended in its entirety to read as follows: (a) If there should occur a Change in Control (as defined below), and if thereafter during the term of this Agreement, in the good- faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum payment equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus 7 (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers or any successor or replacement plan thereto (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, -------- ------- that, if the termination of Officer's employment occurs under the circumstances entitling him to benefits under Section 8(g) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such termination of -------- ------- employment occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. 14. Section 8(e) of the 1989 Agreement is amended (1) by renumbering said Section as Section 8(f); and (2) by deleting all references therein to "change in control of the Employer" (or similar phrase) and replacing such references with "Change in Control". 8 15. Section 8(b) of the 1989 Agreement is amended (1) by deleting all references to "change in control of the Employer" (or similar phrase) and replacing such references with "Change in Control"; (2) by deleting subparagraph (v) thereof; and (3) by renumbering subparagraph (vi) thereof as a new Section 8(e)(as such new Section 8(e) is amended below). 16. Section 8(c) of the Agreement is amended in its entirety to read as follows: (c) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds 9 (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which 10 the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(c), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. 17. Section 8(d) of the 1989 Agreement is amended in its entirety to read as follows: (d) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(b) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional 11 amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's 12 residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administra- tive or judicial proceedings concerning the existence or amount of liability for 13 Excise Tax with respect to the Total Payments. 18. New Section 8(e) is amended (1) by deleting therefrom the phrase "Notwithstanding Officer's entitlements as set forth in this Section 8(b)" and inserting in lieu thereof the following: Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for in Section 8(a) hereof and as modified by any operation of clause (v) of this Section 8(b), and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(e) shall be performed by the Auditor in accordance with the principles set forth in Section 8(d) hereof. 14 19. The 1989 Agreement is amended by adding the following as a new Section 8(g): (g) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the good-faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in 15 the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 20. The 1989 Agreement is amended by adding the following as a new Section 8(h): (h) Notwithstanding the provisions of Section 11(f) hereof, Employer shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer may require. 21. Section 11(b) of the 1989 Agreement is amended by changing the Employer's address for purposes of service of notice to: 9200 Oakdale Avenue, Chatsworth, California 91311. 16 Except as herein modified, the 1989 Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ John F. Maher ----------------- APPROVED: By:/s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 17 EX-10.6 3 AM. NO. 1 TO GEUTHER EMPLOYMENT AGREEMENT EXHIBIT 10.6 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 is made to that certain Employment Agreement (the "Agreement"), dated as of __________, 19__, between Great Western Financial Corporation ("Employer") and Carl F. Geuther ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; NOW THEREFORE, Employer and Officer agree that the Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. The first sentence of the second paragraph of Section 4 of the Agreement is amended (1) by deleting therefrom the phrase "Subject to any limitations arising elsewhere in this Agreement," and (2) by deleting from clause (i) the phrase "other than limitations arising under Section 8(c) hereof". 2. Section 6(c) of the Agreement is amended in its entirety to read as follows: (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non- qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non- qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; and 3. Section 6 of the Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(d) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that -------- ------- Employer's obligation to provide welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insurance, 2 shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 4. The first sentence immediately following clause (iv) of Section 8(a) of the Agreement is renumbered as a new Section 8(d), which Section 8(d) is amended as set forth in paragraph 6 below, and the remainder of Section 8(a) of the Agreement is amended in its entirety to read as follows: 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, in the reasonable good faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the 3 performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers or any successor or replacement thereto (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, -------- however, that, if the termination of Officer's employment occurs under ------- the circumstances entitling him to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro- Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, 4 the numerator of which shall be the number of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such -------- ------- termination of employment occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). 5. Sections 8(b) and 8(c) of the Agreement are amended in their entirety as follows: (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any 5 Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indi- 6 rectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering 7 of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the 8 "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following 9 the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6. New Section 8(d) of the Agreement is amended (1) by deleting therefrom the phrase "Notwithstanding Officer's entitlements as set forth in this paragraph" and inserting in lieu thereof the following: 10 Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for in the next succeeding sentence, and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. 7. The Agreement is amended by inserting the following as a new Section 8(e): (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the reasonable good faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control 11 Period) fails to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12 (f) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. 8. Section 11(b) of the Agreement is amended by changing the Employer's address for purposes of service of notice to: 9200 Oakdale Avenue, Chatsworth, California 91311. The effective date of this Amendment No. 1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. 13 IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ Carl F. Geuther ------------------- APPROVED: By:/s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 14 EX-10.8 4 AM. NO. 1 TO PAPPAS EMPLOYMENT AGREEMENT EXHIBIT 10.8 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 is made to that certain Employment Agreement (the "Agreement"), dated as of __________, 19__, between Great Western Financial Corporation ("Employer") and Michael M. Pappas ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; NOW THEREFORE, Employer and Officer agree that the Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. The first sentence of the second paragraph of Section 4 of the Agreement is amended (1) by deleting therefrom the phrase "Subject to any limitations arising elsewhere in this Agreement," and (2) by deleting from clause (i) the phrase "other than limitations arising under Section 8(c) hereof". 2. Section 6(c) of the Agreement is amended in its entirety to read as follows: (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; and 3. Section 6 of the Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(d) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that Employer's obligation to -------- ------- provide welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insur- 2 ance, shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 4. The first sentence immediately following clause (iv) of Section 8(a) of the Agreement is renumbered as a new Section 8(d), which Section 8(d) is amended as set forth in paragraph 6 below, and the remainder of Section 8(a) of the Agreement is amended in its entirety to read as follows: 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, in the good-faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the 3 performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers or any successor or replacement plan thereto (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, that, if the termination of Officer's -------- ------- employment occurs under the circumstances entitling him to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number 4 of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such -------- ------- termination of employment occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). 5. Sections 8(b) and 8(c) of the Agreement are amended in their entirety as follows: (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner 5 in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not in- 6 cluding in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation 7 owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in 8 whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction 9 in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6. New Section 8(d) of the Agreement is amended (1) by deleting therefrom the phrase "Notwithstanding Officer's entitlements as set forth in this paragraph" and inserting in lieu thereof the following: 10 Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for in the next succeeding sentence, and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. 7. The Agreement is amended by inserting the following as a new Section 8(e): (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the good-faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails 11 to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12 (f) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. 8. Section 11(b) of the Agreement is amended by changing the Employer's address for purposes of service of notice to: 9200 Oakdale Avenue, Chatsworth, California 91311. The effective date of this Amendment No. 1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. 13 IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ Michael M. Pappas ----------------------- APPROVED: By:/s/ Willis B. Wood, Jr. ------------------------ Chairman, Compensation Committee of the Board of Directors 14 EX-10.10 5 AM. NO. 1 TO SCHENCK EMPLOYMENT AGREEMENT AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 is made to that certain Employment Agreement (the "Agreement"), dated as of July 31, 1995, between Great Western Financial Corporation ("Employer") and A. William Schenck III ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; NOW THEREFORE, Employer and Officer agree that the Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. Section 6(c) of the Agreement is amended in its entirety to read as follows: (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non- qualified supplemental pen- sion to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; and 2. Section 6 of the Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(d) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that Employer's obligation to provide -------- ------- welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insurance, shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 3. The first sentence immediately following clause (iv) of Section 8(a) of the Agreement is renumbered as a new Section 8(d), which Section 8(d) is amended as set forth in paragraph 6 below, and the remainder 2 of Section 8(a) of the Agreement is amended in its entirety to read as follows: 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, 3 Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers 4 (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, that if the -------- ------- 5 termination of Officer's employment occurs under the circumstances entitling him to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such termination of -------- ------- employment occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). 6 4. Sections 8(b) and 8(c) of the Agreement are amended in their entirety as follows: (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 7 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have 8 occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross- 9 Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with 10 the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculat- 11 ing the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 5. New Section 8(d) of the Agreement is amended (1) by deleting therefrom the phrase "Notwithstanding Officer's entitlements as set forth in this paragraph" and inserting in lieu thereof the following: Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for in the next succeeding sentence, and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. 12 6. The Agreement is amended by inserting the following as a new Section 8(e): (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: 13 (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 14 (f) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. The effective date of this Amendment No. 1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. 15 IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ A. William Schenck, III --------------------------- APPROVED: By:/s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 16 EX-10.12 6 AM. NO. 1 TO ERIKSON EMPLOYMENT AGREEMENT EXHIBIT 10.12 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 is made to that certain Employment Agreement (the "Agreement"), dated as of March 1, 1988, between Great Western Financial Corporation ("Employer") and J. Lance Erikson ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; NOW THEREFORE, Employer and Officer agree that the Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. The first sentence of the second paragraph of Section 4 of the Agreement is amended (1) by deleting therefrom the phrase "Subject to any limitations arising elsewhere in this Agreement," and (2) by deleting from clause (i) the phrase "other than limitations arising under Section 8(c) hereof". 2. Section 6(c) of the Agreement is amended in its entirety to read as follows: (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; and 3. Section 6 of the Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(d) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that Employer's obligation to provide -------- ------- welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insur- 2 ance, shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 4. The first sentence immediately following clause (iv) of Section 8(a) of the Agreement is renumbered as a new Section 8(d), which Section 8(d) is amended as set forth in paragraph 6 below, and the remainder of Section 8(a) of the Agreement is amended in its entirety to read as follows: 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, in the good-faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the 3 performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers or any successor or replacement thereto (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, that, if the -------- ------- termination of Officer's employment occurs under the circumstances entitling him to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number 4 of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such termination of employment occurs -------- ------- during the same year in which the Change in Control occurs, the Pro- Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). 5. Sections 8(b) and 8(c) of the Agreement are amended in their entirety as follows: (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner 5 in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not in- 6 cluding in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation 7 owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in 8 whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction 9 in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6. New Section 8(d) of the Agreement is amended (1) by deleting therefrom the phrase "Notwithstanding Officer's entitlements as set forth in this paragraph" and inserting in lieu thereof the following: 10 Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for in the next succeeding sentence, and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. 7. The Agreement is amended by inserting the following as a new Section 8(e): (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the good-faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails 11 to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12 (f) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. 8. Section 11(b) of the Agreement is amended by changing the Employer's address for purposes of service of notice to: 9200 Oakdale Avenue, Chatsworth, California 91311. The effective date of this Amendment No. 1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. 13 IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ J. Lance Erikson -------------------- APPROVED: By:/s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 14 EX-10.14 7 AM. NO. 1 TO STUDENMUND EMPLOYMENT AGREEMENT EXHIBIT 10.14 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 is made to that certain Employment Agreement (the "Agreement"), dated as of april 1996, between Great Western Financial Corporation ("Employer") and Jaynie M. Studenmund ("Officer"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, Employer has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; NOW THEREFORE, Employer and Officer agree that the Agreement shall be amended as follows, effective as of December 10, 1996, unless otherwise provided: 1. The third paragraph of Section 4 of the Agreement is amended by deleting therefrom the phrase "upon a 'change in control' as provided elsewhere in this Agreement" and inserting in lieu thereof the phrase "upon a 'Change in Control' (as defined in Section 8(b) hereof). 2. Section 6(c) of the Agreement is amended in its entirety to read as follows: (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which she would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which she would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which she was entitled immediately prior to such election; and 3. Section 6 of the Agreement is amended by deleting the unnumbered paragraph immediately following Section 6(d) and inserting in lieu thereof the following: Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that Employer's obligation to provide -------- ------- welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insurance, shall be reduced to the extent simi- 2 lar benefits are provided (at no cost to Officer) by a subsequent employer. 4. The first sentence immediately following clause (iv) of Section 8(a) of the Agreement is renumbered as a new Section 8(d), which Section 8(d) is amended as set forth in paragraph 6 below, and the remainder of Section 8(a) of the Agreement is amended in its entirety to read as follows: 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, in the good-faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights she may have hereunder, may, within one (1) year after she first has knowledge of such breach, elect to terminate her employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the 3 performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, -------- however, that if the termination of Officer's employment occurs under ------- the circumstances entitling her to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number 4 of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, however, that if such termination of -------- ------- employment occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). 5. Sections 8(b) and 8(c) of the Agreement are amended in their entirety as follows: (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner 5 in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not in- 6 cluding in the securities beneficially owned by such Person any securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportion ate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation 7 owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in 8 whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction 9 in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6. New Section 8(d) of the Agreement is amended (1) by deleting therefrom the phrase "Notwithstanding officer's entitlements as set forth in this paragraph" and inserting in lieu thereof the following: 10 Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person (2) by deleting therefrom the following: , after giving effect to Employer's right of offset as provided for the next succeeding sentence, and (3) by inserting at the end thereof the following: All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. 7. The Agreement is amended by inserting the following as a new Section 8(e): (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the good-faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails 11 to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates her employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 12 (f) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. The effective date of this Amendment No. 1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. 13 IN WITNESS WHEREOF, Employer and Officer have executed this Amendment as of the date first set forth above. GREAT WESTERN FINANCIAL CORPORATION /s/ Jaynie M. Studenmund ------------------------ APPROVED: By:/s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 14 EX-10.15 8 EMPLOYMENT AGREEMENT BETWEEN GWFC AND R. SIMS EXHIBIT 10.15 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is entered into as of January 6, 1997, by and between GREAT WESTERN FINANCIAL CORPORATION, a Delaware corporation ("Employer"), and Ray W. Sims ("Officer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Employer desires to obtain the benefit of services by Officer, and Officer desires to render services to Employer; and WHEREAS, the Board of Directors of Employer (the "Board") has determined that it is in Employer's best interest and that of its stockholders to recognize the substantial contribution that Officer is expected to make to the business of Employer and its subsidiary, Great Western Bank, a Federal Savings Bank (the "Bank") (together, the "Company") and to retain his services in the future; and WHEREAS, Employer and Officer desire to set forth in this Agreement the terms and conditions of Officer's employment with Employer; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Term. Employer shall employ Officer, and Officer shall serve ---- Employer, in accordance with the terms hereof, for a term of three (3) years ending January 5, 2000 (the "Term"), unless such employment is earlier terminated in accordance with the provisions hereof. Notwithstanding the foregoing, if Officer's employment shall not have been terminated in accordance with the provisions hereof effective on or before the first anniversary of the effective date hereof, the remaining Term shall be extended such that at each and every moment of time thereafter the remaining Term shall be two (2) years (but in no event shall the remaining Term extend beyond Officer's sixty-fifth (65th) birthday). 2. Specific Position; Duties and Responsibilities. Subject to the ---------------------------------------------- provisions of this Agreement, Employer shall employ Officer, and Officer shall serve Employer, as Executive Vice President, Director of Real Estate, of Employer and member of the Executive Management Committee. Officer's principal business address shall during such period be at 2 Employer's principal executive offices in Southern California or in such other place as with Officer's consent such offices are relocated. Officer's duties hereunder shall be the usual and customary duties of the office in which he shall serve, and shall not be inconsistent with the provisions of the charter documents of Employer (or applicable subsidiary) or applicable law. Officer shall have such executive power and authority as shall reasonably be required to enable him to discharge his duties in the office which he may hold. All compensation paid to Officer by Employer or any of its subsidiaries, and all benefits and perquisites received by Officer from Employer or any of its subsidiaries, in accordance with the provisions hereof shall be aggregated in determining whether Officer has been paid the compensation and received the benefits and perquisites provided for herein. 3. Services and Exclusivity of Services. During his employment ------------------------------------ hereunder, Officer shall devote his full business time and energy to the business, affairs and interests of Employer and its subsidiaries, and matters related thereto, and shall use his best efforts and abilities to promote Employer's and its subsidiaries' interests. Officer shall 3 diligently endeavor to promote the business, affairs and interests of Employer and its subsidiaries and perform services contemplated hereby in accordance with the policies established by the Board. Officer shall serve without additional remuneration in such senior executive capacity for one or more (direct or indirect) subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitations under applicable law. Officer's failure to discharge an order or perform a function because Officer reasonably and in good faith believes such would violate a law or regulation or be dishonest shall not be deemed a breach by him of his obligations or duties hereunder and shall not entitle Employer to terminate Officer's employment hereunder, including without limitation pursuant to Section 7(c) hereof. Officer may serve as a director or in any other capacity of any business enterprise, including an enterprise whose activities may involve or relate to the business of the Company, provided that such service is expressly approved by the Board. Officer may make and manage personal business investments of his choice and serve in any capacity with any 4 civic, educational or charitable organization, or any governmental entity or trade association, without seeking or obtaining approval by the Board, provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder. Employer hereby recognizes and acknowledges that Officer is, as of the effective date of this Agreement, a shareholder and member of the board of directors of ConsumersBest.com and that Officer's interests in and service with such entity shall not themselves constitute a breach of this Agreement; provided, however, that Employer may determine during -------- ------- the Term that such interests and/or service constitute a conflict of interest with Employer and, upon making such determination, Employer may require Officer to resolve such conflict by divesting himself of his interest in, and/or resigning his directorship of, such entity. 4. Salary and Other Benefits. ------------------------- (a) Commencing as of the effective date of this Agreement, Employer shall pay Officer an annual salary at the rate of $340,000, which shall be payable in semi-monthly or bi-weekly installments in conformity with Employer's policy relating to salaried employees. 5 (b) Subject to the provisions of this Section 4, Officer shall also be entitled during his employment hereunder to all rights and benefits for which he is otherwise eligible under any bonus plan, stock option plan, stock purchase plan, participation or extra compensation plan, pension plan, profit-sharing plan, life and medical insurance policy or other plans or benefits which Employer or its subsidiaries may provide for him or, provided he is eligible to participate therein, for senior officers generally or for employees generally including, without limitation, beginning in December, 1997, participation in the annual award of stock options to Employer's executive officers, which awards are subject to the discretion and approval of Employer's compensation committee. In addition, the Company shall pay the annual premiums and become the irrevocable beneficiary of the $10,000,000 life insurance policy currently held by Knudsen Mortgage (as more particularly provided in a separate letter agreement between Officer and Employer), which policy shall be assignable by the Employer in the event that the Officer's employment with the Employer is terminated (the benefits referred to in this para- 6 graph may be hereinafter referred to as "Additional Benefits"). The Board shall review Officer's salary and Additional Benefits then being paid and provided to him not less frequently than annually in the light of Officer's services for the preceding period, the responsibilities which attend his office and duties hereunder, the profitability and progress of Employer and its subsidiaries and current salaries and benefits then being paid to others holding similar positions. Following such review, Employer may increase the salary and/or Additional Benefits, but may not decrease the salary or any of the Additional Benefits from the then existing levels; provided, however, that Employer shall have the right to reduce Officer's salary in conjunction with a pro rata salary reduction applicable to all of Employer's officers and to reduce one or more Additional Benefits in conjunction with a reduction of such benefits applicable to all of Employer's officers. Employer shall not single Officer out and discriminate against Officer in its provisions of benefits to senior officers or full-time employees of Employer for so long as Officer remains eligible under the terms of plans from time 7 to time offered by Employer, but this provision shall not require the provision of any specific benefit to Officer. If Officer's employment is terminated hereunder, pursuant to Section 6 hereof or pursuant to Section 7(a), 7(b) or 8 hereof, and Officer is entitled to but is no longer eligible for Additional Benefits because of such termination, Officer (or in the event of his death, his designated Beneficiary (as defined in Section 7(b) hereof)) shall be entitled to and Employer shall provide, to the extent provided in this Agreement, benefits substantially equivalent to the Additional Benefits to which Officer was entitled immediately prior to such termination and shall do so for the period during which he remains entitled to receive such Additional Benefits as provided in this Agreement. (c) For each calendar year during the Term, Officer shall be awarded a target bonus in an amount equal to sixty percent (60%) of Officer's annual salary, subject to the terms of the Company's Annual Incentive Compensation Plan for Executive Officers, as the same may from time to time be amended (the "Incentive Plan"). 8 (d) As of the effective date of this Agreement, Employer shall award to Officer the following: (i) a nonqualified stock option to purchase 50,000 shares of Common Stock at an exercise price per share equal to the fair market value per share of Common Stock on the effective date of this Agreement; and (ii) a sign-on bonus equal to $50,000. The stock option awarded pursuant to this Section 4(d) shall be awarded in accordance with the terms and conditions of Employer's 1988 Stock Option and Incentive Plan and the related form of Nonqualified Stock Option Agreement, attached hereto as Exhibits A and B and incorporated herein by reference. (e) Officer shall participate in Employer's Supplemental Executive Retirement Plan, as amended (the "SERP"), with normal retirement benefits equal to sixty percent (60%) of Officer's Average Monthly Compensation (as defined therein), subject to the terms and conditions of the SERP, as amended. (f) This Agreement shall not affect the provisions of any other compensation, retirement or other benefit program or plan of the Company. 9 5. Perquisites; Reimbursements; Vacation. ------------------------------------- (a) Commencing as of the effective date of this Agreement, Officer shall be entitled to perquisites of a kind and quality provided to other Executive Vice Presidents of Employer. 10 (b) During his employment hereunder, Officer shall be entitled to vacation in accordance with Employer's standard practice for senior executives but in no event to less than four (4) weeks paid vacation during each calendar year of employment, prorated for any period which is less than one calendar year. Vacation time shall accrue during each calendar year (but at no time shall the aggregate of accrued but unused vacation time exceed eight (8) weeks), and, upon termination of his employment for any reason and in addition to any other rights granted to Officer by this Agreement, Officer shall be entitled to be paid an amount based upon his salary at the rate applicable immediately prior to such termination for any accrued but unused vacation time. 6. Termination By Employer Without "Cause"; ---------------------------------------- 11 Termination By Officer. Employer shall have the right, at its election to be - ---------------------- made in writing and delivered to Officer within sixty (60) days prior to the effective date thereof, to terminate Officer's employment hereunder without "cause" (as defined in Section 7(c) below). Officer shall have the right, at his election to be made in writing and delivered to Employer within sixty (60) days after such event, to terminate his employment hereunder if a material breach of this Agreement by Employer occurs which Employer fails to cure within fifteen (15) days after receipt of notice of such breach. In the event of a termination for either of the reasons enumerated in this paragraph, Officer shall be entitled to the following: (a) for the remaining Term, salary at the rate applicable immediately prior to such election; (b) concurrently with the receipt of bonuses by Employer's other senior executives with respect to the year in which such termination occurs, a bonus, prorated on an actual day basis for the year in which such termination occurs if such termination shall occur within the first six (6) months of such year but otherwise not prorated, in an amount not less than a percentage of Officer's salary, at the rate of salary 12 applicable immediately prior to such election, equal to the percentage of the aggregate salaries of the Executive Management Committee members during such year, other than Officer, Employer's Chief Executive Officer, Employer's Chief Operating Officer and any Executive Management Committee members whose employment by Employer is terminated during such year, received in the aggregate by such members as bonuses. (c) for the remaining Term, health and welfare type Additional Benefits (including without limitation hospital, surgical, major medical, life and disability insurance), qualified pension benefits (or, if prohibited under then applicable tax law, a specially designed non-qualified supplemental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and non-qualified supplemental pension benefits to which Officer may be entitled pursuant to Section 4 hereof as the same shall exist immediately prior to such election (including continued accrual of years of service and age under (1) Employer's Retirement Plan as in effect immediately prior to such election (or, if prohibited under then applicable tax law, a specially designed non-qualified supple- 13 mental pension to provide Officer with benefits equivalent to those to which he would have been entitled if such prohibition did not pertain) and (2) the SERP, but excluding (3) Employer matching contributions under Employer's 401(k) plan or any successor plan thereto), each such benefit to be continued in a manner no less favorable to Officer than the benefit to which he was entitled immediately prior to such election; and (d) for a one-year period commencing with the effective date of such termination, a continuation at Employer's expense of the use of any automobile provided by Employer immediately prior to such election to facilitate the performance of Officer's duties and responsibilities hereunder, subject to Officer's right at any time during such one-year period to purchase such automobile at the higher of its depreciated book value or its wholesale cash value. Employer agrees that, if Officer's employment with Employer terminates during the Term, Officer is not required to seek other employment or to attempt in any way to reduce any amounts payable to Officer by Employer pursuant to Section 6, 7(a) or 8 hereof. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by 14 any compensation earned by Officer as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by Officer to Employer, or otherwise; provided, however, that Employer's -------- ------- obligation to provide welfare-type Additional Benefits, including without limitation hospital, surgical, major medical, life and disability insurance, shall be reduced to the extent similar benefits are provided (at no cost to Officer) by a subsequent employer. 7. Other Events of Termination. Other than a termination pursuant to --------------------------- Section 6 or 8 hereof, Officer's employment hereunder shall be terminated only as provided for below in this Section 7: (a) Disability. In the event that Officer shall fail, because of ---------- illness, injury or similar incapacity ("disability"), to render for six (6) consecutive calendar months, or for shorter periods aggregating one hundred thirty (130) or more business days in any twelve (12)-month period, services contemplated by this Agreement, Officer's employment hereunder may be terminated, by written notice of termination from Employer to Officer; thereafter, Employer shall continue, 15 until Officer's death, or until Officer's sixty-fifth (65th) birthday, whichever first occurs, but in no event for longer than ten (10) years, to pay compensation to Officer at a rate and in an amount (payable at the times and in the manner theretofore applicable to Officer's salary) equal to (i) 50% of the sum of (A) the rate of annual salary payable to him immediately prior to such termination and (B) the average annual bonus received by him for services rendered in the immediately preceding three (3) full calendar years or such lesser number of full calendar years that Officer has been employed by Employer (provided, that, in the event Officer incurs such a disability during the first full year of employment hereunder, such bonus amount shall be Officer's target bonus under the Annual Incentive Plan), minus (ii) the amount of any cash payments to which he would have been entitled under the terms of Employer's disability insurance plan upon the assumption that he had elected the fifty percent (50%) "normal" benefits under Employer's Plus Pay Plan; to afford all of the medical, dental and life insurance benefits to which he is entitled pursuant to Section 4 hereof at the times and in the manner otherwise afforded hereunder; and to contin- 16 ue accrual of years of service under Employer's Retirement Plan as in effect at the time of such disability. (b) Death. Officer's employment hereunder shall be terminated upon ----- Officer's death. One hundred percent (100%) of Officer's salary at the rate of such salary in effect immediately prior to Officer's death (or, if Officer's death occurs while he is receiving payments under Section 7(a) hereof, at the rate of such salary in effect immediately prior to Officer's disability) shall be paid until the first anniversary of Officer's death at the times and in the manner otherwise payable hereunder, to such person or persons as Officer shall have directed in writing or, in the absence of a designation, to his estate (the "Beneficiary"). In addition to the Beneficiary's rights hereunder to be paid Officer's salary, hospital, surgical, major medical and dental benefits to which members of Officer's family were entitled immediately prior to Officer's death shall be continued to the same extent after Officer's death until the first anniversary of Officer's death. This Agreement in all other respects shall terminate upon the death of Officer. 17 (c) For Cause. Officer's employment hereunder shall be terminated and --------- all of his rights to receive salary, bonus, Additional Benefits (subject to the terms of any plans relating thereto) and perquisites shall terminate upon the occurrence of (i) a material breach of this Agreement by Officer, (ii) Officer's conviction by a court of competent jurisdiction of a felony or (iii) entry of an order duly issued by the Office of Thrift Supervision removing Officer from the office of Employer or the Bank or permanently prohibiting him from participating in the conduct of the affairs of Employer or the Bank. Notwithstanding the foregoing, Officer's employment hereunder shall not be subject to termination under subsection (c)(i) hereof without (A) reasonable notice to Officer setting forth the reasons for Employer's intention to terminate, (B) an opportunity for Officer to cure any such breach within fifteen (15) days after receipt of such notice and (C) delivery to Officer of a notice of termination stating that a majority of the authorized number of Employer's directors has found that Officer was guilty of the conduct set forth above and specifying the particulars thereof in detail. If Officer shall be suspended from office and/or temporarily 18 prohibited from participating in the conduct of Employer's or the Bank's affairs by any regulatory authority having jurisdiction in the premises, Employer's obligations shall be automatically suspended, subject to reinstatement in full if the charges resulting in such suspension or prohibition are finally dismissed. Such reinstatement shall provide Officer with the salary, other benefits and perquisites to which he would have been entitled absent such suspension or prohibition to the same effect and extent as though such suspension or prohibition had not occurred, including without limitation reinstatement in full of vesting and years of service accruals, where applicable, for the suspension period and accrued interest at the rate then payable on judgments on all amounts thereupon paid to Officer and attributable to the suspension period. In the event of any termination or suspension by Employer pursuant to any of the provisions of Section 7(a) or 7(c) hereof, Employer shall immediately so notify Officer. 8. Change in Control. ----------------- (a) If there should occur a Change in Control (as defined below), and if thereafter during the Term, in the 19 reasonable good-faith determination of Officer, Employer materially breaches this Agreement and Employer fails to cure such breach within fifteen (15) days after receipt of notice thereof, then, Officer, without limitation on any other rights he may have hereunder, may, within one (1) year after he first has knowledge of such breach, elect to terminate his employment hereunder and to treat such termination as a termination pursuant to Section 6 hereof, subject, however, to the following additional benefits and modifications to Officer's rights as set forth in said Section 6 (any one or more of which modifications Officer may elect to waive): (i) Employer shall not be entitled to reduce Officer's salary or any Additional Benefits to which Officer shall thereafter be entitled. (ii) Officer's pro-rata entitlement to an award under any then existing long-term incentive performance plan shall be calculated upon the assumption that the performance under such plan is then "on plan." (iii) In lieu of the severance benefits described in Sections 6(a) and (b) hereof, within five (5) business days of the effective date of such termination of employ- 20 ment, Company shall pay to Officer a cash lump sum in an amount equal to the product of (A) the sum of (1) Officer's annual base salary in effect immediately prior to the termination of Officer's employment (or prior to a reduction in salary giving rise to a breach of this Agreement), plus (2) the target bonus ("Target Bonus") under the Employer's Annual Incentive Plan for Executive Officers (the "Annual Incentive Plan") in respect of the year in which such termination of employment occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, that -------- ------- if the termination of Officer's employment occurs under the circumstances entitling him to benefits under Section 8(e) hereof, the Target Bonus shall be in respect of the year in which such termination of employment occurs), and (B) the number three. (iv) Within five (5) days following such termination of employment, Employer shall pay to Officer a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (A) the target bonus to which Officer would have been entitled under the Annual Incentive Plan in respect 21 of the year in which such termination occurs (assuming for this purpose that performance under the Annual Incentive Plan is "on plan" for such year) and (B) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the fiscal year during which such termination occurs to the date on which such termination occurs, and the denominator of which shall be twelve (12); provided, -------- however, that if such termination of employment occurs during the same year ------- in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (v) The remaining Term shall be deemed to be three (3) years (but in no event shall the remaining Term be deemed to extend beyond Officer's sixty-fifth (65th) birthday). (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: 22 (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Employer) whose appointment or election by the Board or nomination for election by 23 Employer's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of Employer with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Employer or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Employer (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any 24 securities acquired directly from Employer or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; or (iv) the stockholders of Employer approve a plan of complete liquidation or dissolution of Employer or there is consummated an agreement for the sale or disposition by Employer of all or substantially all of Employer's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Employer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Employer immediately following such transaction or series of transactions. For purposes of this Section 8(b), "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, 25 as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Employer or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Employer or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Employer in substantially the same proportions as their ownership of stock of Employer. (c) Whether or not Officer becomes entitled to severance and other benefits under Section 8(a) or 8(e) hereof, if any of the payments or benefits received or to be received by Officer in connection with a Change in Control or Officer's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any Person whose actions result in a Change in Control or any Person affiliated with Employer or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), Employer shall pay 26 to Officer an additional amount (the "Gross-Up Payment") such that the net amount retained by Officer, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Officer and selected by the accounting firm which was, immediately prior to the Change in Control, Employer's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the 27 Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Officer's residence on the date of termination of employment (or if there is no such date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 8), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Officer shall repay to Employer, within five (5) business days following the time that the amount of such reduction in the Excise Tax is 28 finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Officer), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Officer's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Employer shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Officer with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Officer and Employer shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings 29 concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. (d) Notwithstanding Officer's entitlements as set forth in this Section 8 or any other plan, arrangement or agreement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer or such Person, if the value of those of such aggregate entitlements constituting "parachute payments" under Section 28OG of the Code is less than the maximum amount Officer is entitled to receive without incurring a liability under Section 28OG of the Code for any reason, including that some or all of such entitlements constitute reasonable compensation for services rendered or to be rendered (and do not, therefore, constitute "parachute payments"), then, in such event, Officer shall be entitled to receive such maximum amount. All calculations with respect to this Section 8(d) shall be performed by the Auditor in accordance with the principles set forth in Section 8(c) hereof. (e) For purposes of this Agreement, Officer's employment shall be deemed to have been terminated following a Change in Control in accordance with Section 8(a) hereof if, 30 during the pendency of a Potential Change in Control (as defined below) or within six (6) months following the date on which such Potential Change in Control ceases to exist (such periods being hereinafter referred to collectively as the "Potential Change in Control Period"), in either case whether or not a Change in Control subsequently occurs, (i) Officer's employment is terminated by Employer without Cause or (ii) in the good-faith determination of Officer, Employer materially breaches this Agreement and thereafter (whether or not during the Potential Change in Control Period) fails to cure such breach within fifteen (15) days after receipt of notice thereof and within one (1) year after Officer first has knowledge of such breach Officer terminates his employment. A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) Employer enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; 31 (B) Employer or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of Employer (not including in the securities beneficially owned by such Person any securities acquired directly from Employer or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Employer or the combined voting power of Employer's then outstanding securities; (D) the filing with the Office of Thrift Supervision and/or Federal Deposit Insurance Corporation or their successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 32 (a) Notwithstanding the provisions of Section 11(f) hereof, Employer also shall pay to Officer all reasonable legal fees and expenses incurred by Officer in disputing (through litigation or arbitration) in good faith any issue hereunder relating to the termination (or deemed termination) of Officer's employment following a Change in Control or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of Officer's written requests for payment accompanied with such evidence of fees and expenses incurred as Employer reasonably may require. 33 9. Reimbursement of Business Expenses. During Officer's employment ---------------------------------- hereunder, to the extent that such expenditures are substantiated by Officer as required by the policies of Employer, Employer shall reimburse Officer promptly for all expenditures (including travel, entertainment, parking, business meetings and the monthly costs (including dues) of maintaining memberships at appropriate clubs) made in accordance with rules and policies established from time to time by the Board in pursuance and furtherance of Employer's business and goodwill. 34 10. Indemnity. To the extent permitted by applicable law and the --------- By-Laws of Employer (as from time to time in effect) and without in any way impairing or affecting any rights to indemnification that Officer has by reason of any agreement to which he is party as of the date hereof, Employer shall indemnify Officer and hold him harmless for any acts or decisions made by him in good faith while performing services for Employer, and shall use reasonable efforts to obtain coverage for him under liability insurance policies now in force or hereafter obtained during his employment hereunder covering the other officers or directors of Employer. To the same extent, Employer shall pay all expenses, including reasonable attorneys' fees and the amounts of court approved settlements, actually incurred by Officer in connection with the defense of any action, suit or proceeding, and in connection with any appeal thereon, which has been and/or may be brought against Officer by reason of Officer's services as an officer or agent of Employer or of a subsidiary of Employer. 11. Miscellaneous. ------------- 35 (a) Succession. This Agreement shall inure to the benefit of and shall ---------- be binding upon Employer, its successors and assigns, but without the prior written consent of Officer this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of the Company or similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of the Company hereunder (including without limitation those in Section 8 hereof). The obligations and duties of Officer hereunder shall be personal and not assignable. (b) Notices. Any notices provided for in this Agreement shall be sent ------- to Employer at 9200 Oakdale Avenue, Chatsworth, California 91311, Attention: Executive Vice President--Legal, with a copy to the Chairman of the Compensation Committee of the Board at the same address, or to such other address as Employer may from time to time in writing designate, and to Officer at such address as he may from time to time in writing designate (or his business address of record in the absence of such designation), with a copy to The AYCO Corporation, Suite 840, 2010 Main Street, Irvine, Cali- 36 fornia 92714-7213, Attention: Bradley E. Comp. All notices shall be deemed to have been given two (2) business days after they have been deposited as certified mail, return receipt requested, postage paid, or one (1) business day after they have been deposited as overnight mail, in either event properly addressed to the designated address of the party to receive the notice, or shall be deemed to have been given at the time receipt is acknowledged if given by any form of electronic communication. (c) Entire Agreement. This instrument contains the entire agreement of ---------------- the parties relating to the subject matter hereof, and it replaces and supersedes any prior agreements between the parties relating to said subject matter. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. (d) Waiver. The waiver of the breach of any term or of any condition ------ of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 37 (e) California Law. This Agreement shall be construed and interpreted -------------- in accordance with the laws of California, to the extent controllable by stipulation of the parties. (f) Attorneys' Fees in Action on Contract. If any litigation or ------------------------------------- arbitration shall occur between the Officer and Employer, which litigation or arbitration arises out of or as a result of this Agreement or the acts of the parties hereto pursuant to this Agreement, or which seeks an interpretation of this Agreement, the prevailing party in such litigation or arbitration, in addition to any other judgment or award, shall be entitled to receive such sums as the court or arbitrator(s) hearing the matter shall find to be reasonable as and for the attorneys' fees of the prevailing party. (g) Confidentiality and Competition. Officer shall not divulge or ------------------------------- otherwise disclose, directly or indirectly, any trade secret or other confidential information concerning the business or policies of the Company or any of its affiliates which he may have learned as a result of his employment hereunder or prior thereto as an employee, officer or director of the Company or any of its affiliates, except to the extent such use or disclosure is (i) necessary to the performance of 38 this Agreement and in furtherance of the Company's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other sources or (iv) authorized by the Company. The provisions of this subsection shall survive the suspension or termination, for any reason, of Officer's employment hereunder. During the course of Officer's employment hereunder, Officer shall not compete, directly or indirectly, with the Company in the businesses then conducted by the Company. (h) Remedies of Employer. Officer acknowledges that the services he is -------------------- obligated to render under the provisions of this Agreement are of a special, unique, unusual, extraordinary and intellectual character, which gives this Agreement peculiar value to Employer, and that the loss of these services cannot be reasonably or adequately compensated in damages in an action at law and it would be difficult (if not impossible) to replace such services. By reason thereof, if Officer violates any of the material provisions of this Agreement, Employer, in addition to any other rights and remedies available under this Agreement or under applicable law, shall be entitled to seek injunctive relief, from a 39 tribunal of competent jurisdiction, restraining Officer from committing or continuing any violation of this Agreement, or from the performance of services to any other business entity, or both. (i) Severability. If this Agreement shall for any reason be or become ------------ unenforceable by either party, this Agreement shall thereupon terminate and become unenforceable by the other party as well. In all other respects, if any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and, if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 40 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. OFFICER /s/ Ray W. Sims --------------- APPROVED: By: /s/ Willis B. Wood, Jr. ----------------------- Chairman, Compensation Committee of the Board of Directors 41 EX-10.18 9 AM. NO. 1996-2 TO SUPP. EXEC. RET. PLAN EXHIBIT 10.18 AMENDMENT NO. 1996-2 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This Amendment No. 1996-2 is made to the Great Western Supplemental Executive Retirement Plan (as amended) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Great Western Financial Corporation (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Section 1.3 of the Plan is amended by deleting the definition of "Change in Control" and inserting in lieu thereof the following: A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: a. Any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transac- tion described in clause (i) of paragraph c. below; or b. The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or c. There is consummated a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merg- 2 er or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or d. The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 3 2. Section 1.3 of the Plan is amended by deleting therefrom the definition of "Eligible Employee" and inserting in lieu thereof the following: "Eligible Employee" means each employee of the Company or a Subsidiary who is both (1) a participant in the Retirement Plan and (2) an individual specifically listed on Appendix I as a Participant in this Plan. Appendix I, which may also list former Participants, may be amended by the Board of Directors or the Committee. 3. Section 1.3 of the Plan is amended by inserting immediately following the definition of "Participant" the following: "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of Company. 4 4. Section 1.3 of the Plan is amended by inserting immediately following the definition of "Plan Year" the following: A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; (iv) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (v) the Board of Directors adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. 5 A "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall end six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors of the Company or otherwise). 5. Section 1.3 of the Plan is amended by adding at the end thereof the following: For A. William Schenck III, his Years of Service shall also include his years of service (26 years and two months) as an employee of PNC Bank Corp. For Jaynie M. Studenmund, her Years of Service shall also include her years of service (11 years) as an employee of First Interstate Bancorp. 6. Section 2.1 of the Plan is amended in its entirety to read as follows: 2.1 - Eligibility Requirements. ------------------------ Any executive who is an Eligible Employee shall be a Participant. 7. Sections 4.1(c) and (d) are amended in their entirety to read as follows: (c) the monthly benefit payment which is payable in the form of a single life annuity under the Retirement Plan (in the form of a Qualified Joint and Survivor Annuity under the Retirement Plan, in the case of a married Employee with an Employment Date on or after January 1, 1989); and 6 (d) for A. William Schenck III, less the aggregate monthly benefit payments which are payable in the form of a single life annuity (if single) or a joint and 50% survivor annuity with his spouse as beneficiary (if married), upon attainment of age 62, under the following plans: PNC Bank Corp. Pension Plan, PNC Bank Corp. ERISA Excess Pension Plan and PNC Bank Corp. Supplemental Executive Retirement Income and Disability Plan. 8. Section 4.1 of the Plan is amended by adding the following as a new Section 4.1(e): (e) for Jaynie M. Studenmund, less the aggregate monthly benefit payments which are payable in the form of a single life annuity (if single) or a joint and survivor annuity with her spouse as beneficiary (if married), upon attainment of age 62, under the Retirement Plan for Employees of First Interstate Bancorp and its Affiliates, and related excess plan. 9. Section 4.3 of the Plan is amended in its entirety to read as follows: 4.3 - Change in Control. ----------------- If a Change in Control occurs and, within 24 months after such Change in Control a Participant's employment with the Company is terminated by the Company without cause or if a Participant terminates his employment with the Company under circumstances that would entitle such Participant to receive Change-in-Control-related severance and other benefits under an employment agreement with the Company, a monthly retirement benefit 7 shall be payable to such Participant as follows: (a) If the Participant's employment is terminated on or after attainment of age 55, such Participant's monthly retirement benefit, payable commencing the first day of the month after termination of employment and continuing for the period benefits are payable under the Retirement Plan will be such Participant's Normal Retirement Benefit computed by crediting all Years of Service to such Participant's Normal Retirement Date with no reduction to be made for commencement of benefits before Normal Retirement Date. (b) If a Participant's employment is terminated prior to attainment of age 55, such Participant shall be 100% in such Participant's Accrued Benefit as of the date of termination of employment and such Participant's benefit shall be payable upon the date which would have been such Participant's Early Retirement Date if such Participant had continued employment, with the benefit payable unreduced for commencement before Normal Retirement Date. For purposes of this Plan, a Participant's employment shall be deemed to have been terminated within 24 months following a Change in Control in accordance with this Section 4.3 if, during a Potential Change in Control Period, whether or not a Change in Control subsequently occurs, such Participant's employment with the Company is terminated by the Company without cause or if such Participant terminates employment with the Company under circumstances that would entitle him to receive Change 8 in Control-related severance and other benefits under an employment agreement with the Company. 10. The Plan is amended by deleting in its entirety Section 4.4 thereof and by renumbering Sections 4.5 through 4.10 (and references thereto) as Sections 4.4 through 4.9, respectively. 11. Section 6.1 of the Plan is amended in its entirety to read as follows: 6.1 - Amendments and Termination. -------------------------- The Company shall have the right to terminate or amend this Plan at any time by resolution of the Board of Directors; provided, -------- however, that during a Potential Change in Control Period and during ------- the twenty-four (24) month period following a Change in Control, this Plan may not be terminated nor may this Plan amended without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996, if such amendment would be adverse to the interests of such Participants or Beneficiaries (including, without limitation, any reduction of payments already due or being paid under this Plan). Any such amendment shall be stated in an instrument in writing, executed by the Company in the same manner as this Plan. 12. The second sentence of Section 6.2 of the Plan is amended in its entirety to read as follows: In addition to the limitations on the termination or amendment of this Plan set forth in Section 6.1 hereof, no such termination or amendment shall result in the 9 forfeiture of (i) any augmentation of Retirement Plan benefits pursuant to Section 4.5 hereof or (ii) an Accrued Benefit to which John F. Maher had already become entitled pursuant to Section 4.2 hereof or (ii) an Accrued Benefit (including a Spouse's Death Benefit) which any Participant who has attained age 55 would have been entitled to receive if he had terminated employment immediately prior to the effective date of such amendment or termination. 13. The Plan is amended by adding the following as a new Appendix I: APPENDIX I LIST OF PARTICIPANTS Clifford A. Miller James F. Montgomery John F. Maher J. Lance Erikson Carl F. Geuther Edward R. Hoffman Anthony C. La Scala Michael M. Pappas A. William Schenck III Jaynie M. Studenmund Curtis J. Crivelli Eugene A. Crane Joe M. Jackson 14. Effective as of January 6, 1997, Appendix I of the Plan is amended by adding Ray W. Sims to the list of Participants in the Plan. Except for Amendment number 14, which shall be effective as of January 6, 1997, the effective date of this Amendment No. 1996-2 shall be December 10, 1996. 10 Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 11 EX-10.24 10 AM. NO. 1996-1 STOCK OPTION & INCEN. PLAN EXHIBIT 10.24 AMENDMENT NO. 1996-1 TO 1988 STOCK OPTION AND INCENTIVE PLAN This Amendment No. 1996-1 is made to the Great Western Financial Corporation 1988 Stock Option and Incentive Plan, as amended effective July 26, 1994 (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Great Western Financial Corporation (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Section 5.8 of the Plan is amended in its entirety to read as follows: 5.8 Acceleration upon a Change in Control. ------------------------------------- Upon the occurrence of a Change in Control (as defined in Section 7.9 hereof), each Option granted under Section 5.2 hereof shall become exercisable in full and that portion of any Option granted under Section 5.3 hereof equal to that percentage of the calendar year that the holder served as a director shall become exercisable. 2. Section 6.3 of the Plan is amended in its entirety to read as follows: 6.3 Acceleration of Awards. ---------------------- 6.3.1. Upon the occurrence of a Change in Control (as defined in Section 7.9 hereof), (i) each Option and Stock Appreciation Right under the Key Employee Program shall become exercisable in full, (ii) Restricted Stock delivered under the Key Employee Program shall immediately vest free of restrictions, and (iii) each other Award outstanding under the Key Employee Program shall be fully vested and exercisable. 6.3.2. If, during a Potential Change in Control Period (as defined in Section 7.36 hereof), an Employee Participant's employment with the Corporation is terminated by the Corporation without cause or by the Employee Participant under circumstances that would entitle such individual to terminate his or her employment and receive severance benefits under the Company's Special Severance Plan, whether or not such Employee Participant is a participant in such Plan, (i) each Option and Stock Appreciation Right held by such Employee Participant shall become exercisable in full, (ii) Restricted Stock held by such Employee Participant shall immediately vest free of restrictions, and (iii) each other Award held by such Employee Participant shall be fully vested and exercisable. 3. The Plan is amended by deleting Section 7.19 and by renumbering Sections 7.9 through 7.18 as Sections 7.10 through 7.19, respectively. 4. Section 7 of the Plan is amended by adding the following as a new Section 7.9: 7.9 A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: 2 (i) any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such 3 merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which 4 owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. 5. Section 7 of the Plan is amended by renumbering Sections 7.32 and 7.33 as Sections 7.33 and 7.34, respectively, and by renumbering Sections 7.34 through 7.38 as Sections 7.37 through 7.41, respectively. 6. Section 7 of the Plan is amended by adding the following as a new Section 7.32: 7.32 "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Corporation or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of Corporation. 7. Section 7 of the Plan is amended by adding the following as a new Section 7.35: 7.35 A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; 5 (ii) the Corporation or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) any Person becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities; (iv) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (v) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 8. Section 7 of the Plan is amended by adding the following as a new Section 7.36: 7.36 "Potential Change in Control Period" shall mean a period commencing upon the occurrence of an event constituting a Potential Change in Control and ending on the date six months following the date on which such Potential Change in Control ceases to exist (whether by Board resolution or otherwise). 6 The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By: /s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 7 EX-10.32 11 NONQUALIFIED STOCK OPTION AGREEMENT Exhibit 10.32 GREAT WESTERN FINANCIAL CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS AGREEMENT dated as of the __ day of ___________, 19__, between GREAT WESTERN FINANCIAL CORPORATION, a Delaware corporation (the "Corporation"), and (the "Employee"). W I T N E S S E T H ------------------- WHEREAS, pursuant to the 1988 Stock Option and Incentive Plan, as amended (the "Plan"), the Corporation has granted to the Employee as of the ___ day of _______, 19__ (the "Award Date") a nonqualified stock option to purchase all or any part of __________ authorized but unissued or treasury shares of Common Stock, $1.00 par value, of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise ------------- defined herein shall have the meaning assigned to such terms in the Plan. 2. Grant of Option. This Agreement evidences the Corporation's grant --------------- to the Employee of the right and option to purchase, on the terms and conditions set forth herein and, to the extent expressly herein provided, in the Plan, all or any part of an aggregate of ________ shares of the Common Stock of the Corporation at the price of $____ per share (the "Option"), exercisable from time to time, subject to the provisions of this Agreement, prior to the close of business on the day before the tenth anniversary of the Award Date (the "Expiration Date"). Such price equals the Fair Market Value of the Corporation's Common Stock as of the Award Date. 3. Exercisability of Option. Except as provided in Sections 6 and 8 ------------------------ hereof, no shares may be purchased by exercise of the Option until the expiration of one year after the Award Date. The Option shall become exercisable in installments as to 25% of the aggregate number of shares set forth in Section 2 hereof (subject to adjustment) on and after the first anniversary of the Award Date and as to an additional 25% of the aggregate number of such shares (subject to adjustment) on each of the second, third and fourth anniversaries of the Award Date. To the extent the Employee does not in any year purchase all or any part of the shares to which the Employee is entitled, the Employee has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. No fewer than 25 shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the Option. 4. Method of Exercise of Option. The Option shall be exercisable by ---------------------------- the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment in (i) cash or by check payable to the order of the Corporation for the full purchase price of the shares to be purchased, (ii) at the discretion of the Administrator and pursuant to such conditions and restrictions as the Committee may establish by the exchange of shares of Common Stock of the Corporation then owned by the Employee having a Fair Market Value equal to such purchase price, (iii) at the discretion of the Administrator, by the payment and exchange of part cash and part stock with the sum of the cash and Fair Market Value of the stock equal to such purchase price, or (iv) by the payment of such other form of legal consideration as may be approved by the Board of Directors and the Administrator. In addition, the Employee (or the Employee's Beneficiary or Personal Representative) shall furnish any written statements required pursuant to Section 10 below. 2 5. Continuance of Employment. As a condition of the Option, the ------------------------- Employee hereby agrees to remain in the employ of the Corporation or one of its Subsidiaries for a period of one year after the Award Date. Nothing contained in this Agreement or in the Plan shall confer upon the Employee any right with respect to the continuation of his or her employment by the Corporation or any Subsidiary or interfere in any way with the right of the Corporation or of any Subsidiary at any time to terminate such employment or to increase or decrease the compensation of the Employee from the rate in existence at any time. 6. Effect of Termination of Employment or Death. The Option and all -------------------------------------------- other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Employee ceases to be employed by either the Corporation or any Subsidiary, except that (a) if the Employee's employment terminates (other than (i) as a result of death, (ii) after having attained 55 years of age with five (5) years of vesting service under the Great Western Retirement Plan (as in effect as of January 1, 1997) (the "Retirement Plan") (such termination hereinafter referred to as being the result of "Retirement") or (iii) at the request of the Corporation or any Subsidiary as determined by the Administrator in its sole discretion), the Employee may at any time within a period of three months after such termination exercise the Option to the extent the Option was exercisable at the date of such termination; (b) if the Employee's employment terminates as a result of Retirement, the Employee may at any time within a period of two years after such Retirement exercise the Option to the extent the Option was exercisable at the date of such retirement; provided, that, for purposes of the Option, an Employee shall be deemed to have terminated as a result of Retirement if, following the date on which the Employee has attained 55 years of age, during a 3 Potential Change in Control Period or during the two (2)-year period following a Change in Control, such Employee's employment is terminated under the circumstances described in subsection (d) of this Section 6); (c) if the Employee dies while in the employ of the Corporation or any Subsidiary, or within three months after a termination described in subsection (a) of this Section 6 (excluding a termination described in the parenthetical clause thereof), or within two years after termination as a result of Retirement as described in subsection (b) of this Section 6, then the Option, to the extent that the Employee was entitled to exercise the Option on the date of his or her death (or such earlier termination), may be exercised within a period of one year after the date of death by the Employee's Beneficiary; and (d) if, during a Potential Change in Control Period (whether or not a Change in Control subsequently occurs), the Employee's employment is terminated by the Corporation or a Subsidiary without cause or by the Employee under circumstances that would entitle such individual to terminate employment and receive severance and other benefits (i) if the Employee is a member of the Executive Management Committee, under his or her employment agreement or (ii) if the Employee is not a member of the Executive Management Committee, under the Company's Special Severance Plan (whether or not such Employee is a participant in such Plan), then any portion of the Option that was not then exercisable shall become fully exercisable; provided, however, that in no event may the Option be exercised by anyone under this Section or otherwise after the Expiration Date. If the Employee is employed by an entity which ceases to be a Subsidiary, other than by merger with or liquidation into another Subsidiary, such event shall be deemed for purposes of this Section 6 to 4 be a termination of the Employee's employment described in subsection (a). 7. Non-Transferability of Option. During the Employee's lifetime, ----------------------------- the Option and any other rights hereunder may be exercised only by the Employee, except as otherwise expressly provided in Section 6.1.3 of, or pursuant to, the Plan. 8. Adjustments and Other Effects (including Termination) upon Certain ------------------------------------------------------------------ Events. If the outstanding shares of the Corporation's Common Stock are changed - ------ into or exchanged for cash or a different number or kind of shares or securities of the Corporation, or if additional shares or new or different shares or securities are distributed with respect to the outstanding shares of the Corporation's Common Stock, through a reorganization or merger in which the Corporation is the surviving entity or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate proportionate equitable adjustment shall be made in the number and kind of shares or other consideration that is subject to or may be delivered pursuant to the Option. A corresponding adjustment to the consideration payable with respect to the Option shall also be made as appropriate. In addition, the Option and rights of the Employee hereunder are subject to adjustment, modification and termination in certain other circumstances and upon occurrence of certain other events, as set forth in the provisions of Article II, Sections 6.3 and 6.4, and the last sentence of Section 6.2 of the Plan, to the extent applicable to Options granted under the Key Employee Program. 9. Limitation of Employee's Rights. Neither the Employee nor any ------------------------------- other person entitled to exercise the Option shall have any of the rights or privileges of a stockholder of the Corporation in respect of any shares deliverable upon exercise of the Option unless and until a certificate representing such shares shall have been issued in the name of the Employee or such person. 5 10. Representations of the Employee. The Employee agrees that the ------------------------------- Corporation shall not be required to deliver shares upon the exercise of the Option if prevented or prohibited from doing so under applicable law. If the shares are not registered with the Securities and Exchange Commission at the time of such exercise, the Employee shall be required to deliver an investment letter in form acceptable to the Corporation and all certificates representing shares issued shall bear appropriate legends reflecting restrictions on transfer under applicable laws. The Employee agrees by acceptance of the Option and, in such letter, the Employee shall represent that he or she will acquire the shares issuable upon such exercise for his or her own account, for the purpose of investment, and not with a view to or for sale in connection with any distribution, and that he or she will not offer, sell or otherwise transfer or dispose of such shares or any interest therein except in compliance with all securities laws applicable to such action. The Corporation may impose stop transfer instructions to implement such limitations, if applicable. Any person or persons entitled to exercise the Option under the provisions of Section 7 hereof shall be bound by and obligated under the provisions of this Section 10 to the same extent as is the Employee. 11. Tax Withholding. The Corporation shall be entitled to require --------------- deduction from other compensation payable to the Employee any sums required by federal, state or local tax law to be withheld with respect to the exercise of the Option, but, in the alternative, (i) the Corporation may require the Employee or other person exercising the Option to advance such sums in cash, or (ii) if the Employee or other person exercising the Option elects, the Corporation may withhold shares of the Corporation's Common Stock having a Fair Market Value equal to the sums required to be withheld. If the Employee or other person exercising the Option elects to advance such sums directly, written notice of that election shall be delivered prior to such exercise and, whether pursuant to such election or pursuant to a re- 6 quirement imposed by the Corporation, payment in cash or by check of such sums for taxes shall be delivered within ten days after the date of exercise. If the Employee or other person exercising the Option elects to have the Corporation withhold shares of the Corporation's Common Stock having a Fair Market Value equal to the sums required to be withheld, the value of the shares of the Corporation's Common Stock to be withheld will be equal to the Fair Market Value of such shares on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). Elections by the Employee to have shares of the Corporation's Common Stock withheld for this purpose will be subject to the following restrictions: (w) the election must be made prior to the Tax Date, (x) the election must be irrevocable, (y) the election will be subject to the approval or disapproval (as the case may be) of the Administrator, and (z) if the Employee is an officer of the Corporation within the meaning of Section 16 of the Exchange Act, the election, in addition, may not be made within six months of the grant of the Option (except that this limitation will not apply in the event that the death or Disability of the Employee occurs prior to the expiration of the six month period) and either must be made at least six months prior to the Tax Date or in one of the periods beginning on the third business day following the date of release of the Corporation's quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. The Corporation shall not be obligated to issue shares and/or distribute cash to the Employee or other person exercising the Option upon exercise of the Option until such payment has been received or shares have been so withheld, unless withholding as of or prior to the date of such exercise is sufficient to cover all such sums due or which may be due with respect to such exercise. 12. Employment by Subsidiaries. Employment by any Subsidiary shall -------------------------- be considered as the equivalent of employment by the Corporation for all purposes of this Agreement, unless the Board otherwise determines. 7 13. Notices. Any notice to be given under the terms of this ------- Agreement shall be in writing and addressed to the Corporation at its principal office in Chatsworth, California, to the attention of the Corporate Secretary and to the Employee at the address given beneath the Employee's signature hereto, or at such other address as either party may hereafter designate in writing to the other. 14. Laws Applicable to Construction. The Option has been granted, ------------------------------- executed and delivered at Chatsworth, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, except as otherwise provided in Section 6.8 of the Plan. 15. Plan. The Option is subject to, and the Employee agrees to be ---- bound by, all of the terms and conditions of the provisions of Articles I and II and Sections 4.2, 6.1, 6.3, 6.4, 6.5, 6.7 and 6.8 and the last sentence of Section 6.2 of the Plan. The Employee acknowledges receipt of a copy of the Plan, which, to the extent set forth in the preceding sentence, is made a part hereof by this reference. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Administrator do not (and shall not be deemed to) apply to the Option or create rights in the Employee unless such application or rights are expressly so conferred by appropriate action of the Administrator, in its sole discretion, under the Plan after the date hereof. 16. Successors. This Agreement shall be binding upon and inure to ---------- the benefit of the Company, its successors and assigns, and of the Employee and the Employee's Beneficiaries and Personal Representatives. 8 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Employee has hereunto set his or her hand. GREAT WESTERN FINANCIAL CORPORATION (a Delaware corporation) By ---------------------------------- Title ---------------------------- EMPLOYEE ---------------------------------- (Signature) ---------------------------------- (Print Name) ---------------------------------- (Address) ---------------------------------- (City, State, Zip Code) Executed: 9 CONSENT OF SPOUSE ----------------- In consideration of the execution of the foregoing Nonqualified Stock Option Agreement by Great Western Financial Corporation, I, , the spouse of the Employee herein named, do hereby join with my spouse in executing the foregoing Nonqualified Stock Option Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: __________, 19__. ___________________ Signature of Spouse EX-10.33 12 AM. NO. 1996-1 TO FORM OF NONQUAL. STOCK OPT. AGMT EXHIBIT 10.33 AMENDMENT NO. 1996-1 TO FORM OF NONQUALIFIED STOCK OPTION AGREEMENT This Amendment No. 1996-1 is made to that certain Nonqualified Stock Option Agreement (the "Agreement"), issued under the Great Western Financial Corporation 1988 Stock Option and Incentive Plan (the "Plan"), and entered into as of ___________, 19__ by and between Great Western Financial Corporation (the "Company") and ______________ (the "Employee"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Agreement as set forth herein; and WHEREAS, the Employee has agreed to amend the Agreement as provided herein; NOW, THEREFORE, the Agreement is amended as follows: 1. Each of Sections 6(a) and 6(b) of the Agreement is amended to read as follows: (a) if the Employee's employment terminates (other than (i) as a result of death, (ii) after having attained 55 years of age with five (5) years of vesting service under the Great Western Retirement Plan (as in effect as of January 1, 1997) (the "Retirement Plan") (such termination hereinafter referred to as being the result of "Retirement") or (iii) at the request of the Corporation or any Subsidiary as determined by the Administrator in its sole discretion), the Employee may at any time within a period of three months after such termination exercise the Option to the extent the Option was exercisable at the date of such termination; 1 (b) if the Employee's employment terminates as a result of Retirement, the Employee may at any time within a period of two years after such Retirement exercise the Option to the extent the Option was exercisable at the date of such retirement; provided, that, for purposes of the Option, an Employee shall be deemed to have terminated as a result of Retirement if, following the date on which the Em- ployee has attained 55 years of age, during a Potential Change in Control Period or during the two (2)-year period following a Change in Control, such Employee's employment is terminated under the circum- stances described in subsection (d) of this Section 6); 2. The Agreement is amended by (1) deleting from the end of Section 6(c) thereof the "." and inserting in lieu thereof "; and" and (3) inserting immediately following Section 6(c) thereof the following as a new Section 6(d): (d) if, during a Potential Change in Control Period (whether or not a Change in Control subsequently occurs), the Employee's employment is terminated by the Corporation or a Subsidiary without cause or by the Employee under circumstances that would entitle such individual to terminate employment and receive severance and other benefits (i) if the Employee is a member of the Executive Management Committee, under his or her employment agreement or (ii) if the Employee is not a member of the Executive Management Committee, under the Company's Special Severance Plan (whether or not the Employee is a participant in such Plan), then any portion of the Option that was not then exercisable shall become fully exercisable; 2 3. Section 16 of the Agreement is amended in its entirety to read as follows: 16. Successors. This Agreement shall be binding upon and inure ---------- to the benefit of the Company, its successors and assigns, and of the Employee and the Employees Beneficiaries and Personal Representatives. The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Agreement shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 3 EX-10.35 13 SENIOR OFFICER'S NONQUALIFIED STOCK OPTION AGMT. EXHIBIT 10.35 GREAT WESTERN FINANCIAL CORPORATION SENIOR OFFICER'S NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS AGREEMENT dated as of the __ day of _____________, 19__, between GREAT WESTERN FINANCIAL CORPORATION, a Delaware corporation (the "Corporation"), and (the "Employee"). W I T N E S S E T H ------------------- WHEREAS, pursuant to the 1988 Stock Option and Incentive Plan, as amended (the "Plan"), the Corporation has granted to the Employee as of the ___ day of _______, 19__ (the "Award Date") a nonqualified stock option to purchase all or any part of __________ authorized but unissued or treasury shares of Common Stock, $1.00 par value, of the Corporation upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise ------------- defined herein shall have the meaning assigned to such terms in the Plan. 2. Grant of Option. This Agreement evidences the Corporation's grant --------------- to the Employee of the right and option to purchase, on the terms and conditions set forth herein and, to the extent expressly herein provided, in the Plan, all or any part of an aggregate of ________ shares of the Common Stock of the Corporation at the price of $____ per share (the "Option"), exercisable from time to time, subject to the provisions of this Agreement, prior to the close of business on the day before the tenth anniversary of the Award Date (the "Expiration Date"). Such price equals the Fair Market Value of the Corporation's Common Stock as of the Award Date. 3. Exercisability of Option. Except as provided in Sections 6 and 8 ------------------------ hereof, no shares may be purchased by exercise of the Option until the expiration of one year after the Award Date. The Option shall become exercisable in installments as to 25% of the aggregate number of shares set forth in Section 2 hereof (subject to adjustment) on and after the first anniversary of the Award Date and as to an additional 25% of the aggregate number of such shares (subject to adjustment) on each of the second, third and fourth anniversaries of the Award Date. To the extent the Employee does not in any year purchase all or any part of the shares to which the Employee is entitled, the Employee has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. No fewer than 25 shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the Option. 4. Method of Exercise of Option. The Option shall be exercisable by ---------------------------- the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment in (i) cash or by check payable to the order of the Corporation for the full purchase price of the shares to be purchased, (ii) at the discretion of the Administrator and pursuant to such conditions and restrictions as the Committee may establish by the exchange of shares of Common Stock of the Corporation then owned by the Employee having a Fair Market Value equal to such purchase price, (iii) at the discretion of the Administrator, by the payment and exchange of part cash and part stock with the sum of the cash and Fair Market Value of the stock equal to such purchase price, or (iv) by the payment of such other form of legal consideration as may be approved by the Board of Directors and the Administrator. In addition, the Employee (or the Employee's Beneficiary or Personal Representative) shall furnish any written statements required pursuant to Section 10 below. 2 5. Continuance of Employment. As a condition of the Option, the ------------------------- Employee hereby agrees to remain in the employ of the Corporation or one of its Subsidiaries for a period of one year after the Award Date. Nothing contained in this Agreement or in the Plan shall confer upon the Employee any right with respect to the continuation of his or her employment by the Corporation or any Subsidiary or interfere in any way with the right of the Corporation or of any Subsidiary at any time to terminate such employment or to increase or decrease the compensation of the Employee from the rate in existence at any time. 6. Effect of Termination of Employment or Death. The Option and all -------------------------------------------- other rights hereunder, to the extent not exercised, shall terminate and become null and void at such time as the Employee ceases to be employed by either the Corporation or any Subsidiary, except that (a) if the Employee's employment terminates (other than (i) as a result of death, (ii) after having attained 55 years of age with five (5) years of vesting service under the Great Western Retirement Plan (as in effect as of January 1, 1997) (the "Retirement Plan") (such termination hereinafter referred to as being the result of "Retirement") or (iii) at the request of the Corporation or any Subsidiary as determined by the Administrator in its sole discretion), the Employee may at any time within a period of three months after such termination exercise the Option to the extent the Option was exercisable at the date of such termination; (b) if the Employee's employment terminates as a result of Retirement, the Employee may at any time within a period of two years after such Retirement exercise the Option to the extent the Option was exercisable at the date of such retirement; provided, that, for purposes of the Option, an Employee shall be deemed to have terminated as a result of Retirement if, following the date on which the Employee has attained 55 years of age, during a 3 Potential Change in Control Period or during the two (2)-year period following a Change in Control, such Employee's employment is terminated under the circumstances described in subsection (d) of this Section 6); (c) if the Employee dies while in the employ of the Corporation or any Subsidiary, or within three months after a termination described in subsection (a) of this Section 6 (excluding a termination described in the parenthetical clause thereof), or within two years after termination as a result of Retirement as described in subsection (b) of this Section 6, then the Option, to the extent that the Employee was entitled to exercise the Option on the date of his or her death (or such earlier termination), may be exercised within a period of one year after the date of death by the Employee's Beneficiary; and (d) if, during a Potential Change in Control Period (whether or not a Change in Control subsequently occurs), the Employee's employment is terminated by the Corporation or a Subsidiary without cause or by the Employee under circumstances that would entitle such individual to terminate employment and receive severance and other benefits (i) if the Employee is a member of the Executive Management Committee, under his or her employment agreement or (ii) if the Employee is not a member of the Executive Management Committee, under the Company's Special Severance Plan (whether or not such Employee is a participant in such Plan), then any portion of the Option that was not then exercisable shall become fully exercisable; provided, however, that in no event may the Option be exercised by anyone under this Section or otherwise after the Expiration Date. If the Employee is employed by an entity which ceases to be a Subsidiary, other than by merger with or liquidation into another Subsidiary, such event shall be deemed for purposes of this Section 6 to 4 be a termination of the Employee's employment described in subsection (a). 7. Non-Transferability of Option. During the Employee's lifetime, ----------------------------- the Option and any other rights hereunder may be exercised only by the Employee, except as otherwise expressly provided in Section 6.1.3 of, or pursuant to, the Plan. 8. Adjustments and Other Effects (including Termination) upon Certain ------------------------------------------------------------------ Events. If the outstanding shares of the Corporation's Common Stock are changed - ------ into or exchanged for cash or a different number or kind of shares or securities of the Corporation, or if additional shares or new or different shares or securities are distributed with respect to the outstanding shares of the Corporation's Common Stock, through a reorganization or merger in which the Corporation is the surviving entity or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate proportionate equitable adjustment shall be made in the number and kind of shares or other consideration that is subject to or may be delivered pursuant to the Option. A corresponding adjustment to the consideration payable with respect to the Option shall also be made as appropriate. In addition, the Option and rights of the Employee hereunder are subject to adjustment, modification and termination in certain other circumstances and upon occurrence of certain other events, as set forth in the provisions of Article II, Sections 6.3 and 6.4, and the last sentence of Section 6.2 of the Plan, to the extent applicable to Options granted under the Key Employee Program. 9. Limitation of Employee's Rights. Neither the Employee nor any ------------------------------- other person entitled to exercise the Option shall have any of the rights or privileges of a stockholder of the Corporation in respect of any shares deliverable upon exercise of the Option unless and until a certificate representing such shares shall have been issued in the name of the Employee or such person. 5 10. Representations of the Employee. ------------------------------- (a) The Employee agrees that the Corporation shall not be required to deliver shares upon the exercise of the Option if prevented or prohibited from doing so under applicable law. If the shares are not registered with the Securities and Exchange Commission at the time of such exercise, the Employee shall be required to deliver an investment letter in form acceptable to the Corporation and all certificates representing shares issued shall bear appropriate legends reflecting restrictions on transfer under applicable laws. The Employee agrees by acceptance of the Option and, in such letter, the Employee shall represent that he or she will acquire the shares issuable upon such exercise for his or her own account, for the purpose of investment, and not with a view to or for sale in connection with any distribution, and that he or she will not offer, sell or otherwise transfer or dispose of such shares or any interest therein except in compliance with all securities laws applicable to such action. The Corporation may impose stop transfer instructions to implement such limitations, if applicable. Any person or persons entitled to exercise the Option under the provisions of Section 7 hereof shall be bound by and obligated under the provisions of this Section 10 to the same extent as is the Employee. (b) Even if the shares are registered for sale under applicable securities laws, Employee agrees to retain on exercise of the Option, and for so long as may be necessary to comply with stock ownership guidelines of the Corporation from time to time in effect, at least one-half of the "net number" of shares received on exercise. The net number of shares of these purposes equals the number of shares as to which the Option is exercised, less a number of shares equal in Fair Market Value on the date of exercise to the sum of the exercise price and any applicable withholding and other taxes on exercise. To the extent permitted by applicable law, the Corporation may issue stop transfer instructions or impose legend conditions on certificates evidencing the net number of 6 shares to enforce these covenants and restrictions. The Administrator in its sole discretion may permit exceptions to the covenants and restrictions in this Section 10(b) on a case-by-case basis or otherwise. 11. Tax Withholding. The Corporation shall be entitled to require --------------- deduction from other compensation payable to the Employee any sums required by federal, state or local tax law to be withheld with respect to the exercise of the Option, but, in the alternative, (i) the Corporation may require the Employee or other person exercising the Option to advance such sums in cash, or (ii) if the Employee or other person exercising the Option elects, the Corporation may withhold shares of the Corporation's Common Stock having a Fair Market Value equal to the sums required to be withheld. If the Employee or other person exercising the Option elects to advance such sums directly, written notice of that election shall be delivered prior to such exercise and, whether pursuant to such election or pursuant to a requirement imposed by the Corporation, payment in cash or by check of such sums for taxes shall be delivered within ten days after the date of exercise. If the Employee or other person exercising the Option elects to have the Corporation withhold shares of the Corporation's Common Stock having a Fair Market Value equal to the sums required to be withheld, the value of the shares of the Corporation's Common Stock to be withheld will be equal to the Fair Market Value of such shares on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). Elections by the Employee to have shares of the Corporation's Common Stock withheld for this purpose will be subject to the following restrictions: (w) the election must be made prior to the Tax Date, (x) the election must be irrevocable, (y) the election will be subject to the approval or disapproval (as the case may be) of the Administrator, and (z) if the Employee is an officer of the Corporation within the meaning of Section 16 of the Exchange Act, the election, in addition, may not be made within six months of the grant of the Option (except that this limitation will not apply in the event that the death or Disability of the Employee occurs prior 7 to the expiration of the six month period) and either must be made at least six months prior to the Tax Date or in one of the periods beginning on the third business day following the date of release of the Corporation's quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. The Corporation shall not be obligated to issue shares and/or distribute cash to the Employee or other person exercising the Option upon exercise of the Option until such payment has been received or shares have been so withheld, unless withholding as of or prior to the date of such exercise is sufficient to cover all such sums due or which may be due with respect to such exercise. 12. Employment by Subsidiaries. Employment by any Subsidiary shall -------------------------- be considered as the equivalent of employment by the Corporation for all purposes of this Agreement, unless the Board otherwise determines. 13. Notices. Any notice to be given under the terms of this ------- Agreement shall be in writing and addressed to the Corporation at its principal office in Chatsworth, California, to the attention of the Corporate Secretary and to the Employee at the address given beneath the Employee's signature hereto, or at such other address as either party may hereafter designate in writing to the other. 14. Laws Applicable to Construction. The Option has been granted, ------------------------------- executed and delivered at Chatsworth, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, except as otherwise provided in Section 6.8 of the Plan. 15. Plan. The Option is subject to, and the Employee agrees to be ---- bound by, all of the terms and conditions of the provisions of Articles I and II and Sections 4.2, 6.1, 6.3, 6.4, 6.5, 6.7 and 6.8 and the last sentence of Section 6.2 of the Plan. The Employee acknowledges receipt of a copy of the Plan, which, to the 8 extent set forth in the preceding sentence, is made a part hereof by this reference. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Administrator do not (and shall not be deemed to) apply to the Option or create rights in the Employee unless such application or rights are expressly so conferred by appropriate action of the Administrator, in its sole discretion, under the Plan after the date hereof. 16. Successors. This Agreement shall be binding upon and inure to ---------- the benefit of the Company, its successors and assigns, and of the Employee and the Employee's Beneficiaries and Personal Representatives. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Employee has hereunto set his or her hand. GREAT WESTERN FINANCIAL CORPORATION (a Delaware corporation) By ------------------------------------------ Title ------------------------------- EMPLOYEE -------------------------------- (Signature) -------------------------------- (Print Name) -------------------------------- (Address) -------------------------------- (City, State, Zip Code) Executed: 9 CONSENT OF SPOUSE ----------------- In consideration of the execution of the foregoing Nonqualified Stock Option Agreement by Great Western Financial Corporation, I, , the spouse of the Employee herein named, do hereby join with my spouse in executing the foregoing Nonqualified Stock Option Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: __________, 19__. ___________________________________ Signature of Spouse 10 EX-10.40 14 PERFORMANCE RESTRICTED STOCK AWARDS EXHIBIT 10.40 AMENDMENT NO. 1996-1 TO GENERAL PROVISIONS APPLICABLE TO PERFORMANCE RESTRICTED STOCK AWARDS GRANTED UNDER 1988 STOCK OPTION AND INCENTIVE PLAN This Amendment No. 1996-1 is made to the General Provisions Applicable to Performance Restricted Stock Awards Granted Under the Great Western Financial Corporation 1988 Stock Option and Incentive Plan, as amended (the "General Provisions"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the General Provisions. WHEREAS, Great Western Financial Corporation (the "Company") has determined that it is in its best interest and that of its stockholders to amend the General Provisions as set forth herein; NOW, THEREFORE, the General Provisions are hereby amended as follows: 1. The first sentence of Section 2(a) of the General Provisions is amended by deleting therefrom the phrase "Section 10 (Compliance)" and inserting in lieu thereof "Section 9 (Compliance)". 2. The first sentence of Section 2(b) of the General Provisions is amended by deleting therefrom the phrase "Section 11 (Tax Withholding)" and inserting in lieu thereof "Section 10 (Tax Withholding)". 3. The second sentence of Section 2(b) of the General Provisions is amended by deleting therefrom the phrase "Section 10 (Compliance)" and inserting in place thereof "Section 9 (Compliance)". 4. Section 3(c) of the General Provisions is amended in its entirety to read as follows: (c) If, during a Potential Change in Control Period (as defined in the Plan), the Employee's employment is terminated by the Corporation without cause (whether or not a Change in Control subseqently occurs) or by the Employee under circumstances that would entitle such Employee to terminate his or her employment and receive severance and other benefits under (i) if the Employee is a member of the Executive Management Committee, his or her employment agreement or (ii) if the Employee is not a member of the Executive Management Committee, the Company's Special Severance Plan, whether or not such Employee is a participant in such Plan, then any portion of his or her Award that has not previously vested shall thereupon vest. 5. Each of the first and second sentences of Section 4 of the General Provisions is amended by deleting therefrom the phrase "(subject to the provisions of Section 9)". 6. The definition of "Peer Group" following Section 6(a) of the General Provisions is amended by deleting the phrase "Section 15" and inserting in place thereof the phrase "Section 14". 7. The second sentence of Section 8 of the General Provisions is amended by deleting therefrom the phrase "or an Event described in Section 7.19(ii) of the Plan shall occur and the shares of Restricted Stock are not fully vested upon such Event or prior thereto". 8. The General Provisions are amended by deleting therefrom Section 9, and by renumbering Sections 10 through 15 as Sections 9 through 14, respectively. 2 The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the General Provisions Document shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By: /s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 3 EX-10.43 15 AM. NO. 1996-2 TO DEFERRED COMP. PLAN EXHIBIT 10.43 AMENDMENT NO. 1996-2 TO DEFERRED COMPENSATION PLAN This Amendment No. 1996-2 is made to the Great Western Financial Corporation Deferred Compensation Plan (1992 Restatement) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW THEREFORE, the Plan is amended as follows: 1. Section 2.4 of the Plan is amended in its entirety as follows: 2.4 Change in Control. A "Change in Control" shall be deemed to ----------------- have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities 2 acquired directly from the Company or its subsidiaries)representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. For purposes of this Section 2.4, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, direct- 3 ly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2. Article II of the Plan is amended by inserting the following as a new Section 2.19: 2.19 A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or 4 (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 3. Article II of the Plan is amended by renumbering Sections 2.19 and 2.20 as Sections 2.21 and 2.22, respectively. 4. Article II of the Plan is amended by inserting the following as a new Section 2.20: 2.20 A "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall end six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board or otherwise). 5. Section 4.6(b) of the Plan is amended in its entirety to read as follows: (b) Matching Contributions. A Participant shall be vested in ---------------------- the Employer matching contributions credited to his Account pursuant to Section 4.4 to the same extent as his matching contribution account is vested under the Company's Savings Plan; provided, however, that -------- ------- upon the occurrence of a Change in Control, all such Employer matching contributions shall become fully vested; and provided, further, that -------- ------- all such Employer matching contributions shall become fully vested if, during a Potential Change in Control Period, such Participant's employment with the Company is terminated by the Company without cause or by the Participant under circumstances that would entitle such individual to terminate his or her employ- 5 ment and receive severance benefits under the Company's Special Severance Plan, whether or not such Participant is a participant in such Plan. Subject to the provisions of the immediately preceding sentence, any unvested portion of Employer matching contributions, and earnings thereon, shall be forefeited at the same time as the Participant's forfeiture occurs under the Savings Plan. Forfeitures under this Plan shall not be reallocated to other Participants. 6. Section 5.7 of the Plan is amended by renumbering Section 5.7(b) as Section 5.7(c) and by inserting the following as a new Section 5.7(b): (b) Election After a Change in Control. In the event of a ---------------------------------- Change in Control, a Participant, former Participant or Beneficiary with respect to whom the election provided for in Section 5.7(a) has not been made, may elect within a two (2) year period immediately following such Change in Control, that ninety-five percent (95%) of all of his or her Account balances, whether vested or unvested, shall be paid to him or her as soon as practicable following the filing of such election, and in the event such person makes such election pursuant to this Section 5.7(b), the remaining five percent (5%) of the Participant's entire Account balances shall be permanently forfeited and shall not be paid to, or in respect of, the Participant. 7. Section 9.3 of the Plan is amended in its entirety to read as follows: 9.3 Change in Control. During a Potential Change in Control ----------------- Period and for 6 the two (2) year period following the occurrence of a Change in Control, notwithstanding any other provisions of this Plan, the following provisions shall apply: (a) The Plan may not be terminated without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996. (b) The Plan may not be amended without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996, if such amendment would be adverse to the interests of such Participants or Beneficiaries (including, without limitation, any reduction of payments already due or being paid under the Plan). (c) If a Participant is receiving benefits under this Plan, is eligible for Retirement, is disabled, or dies prior to Retirement during such period, then no prospective change may be made that would reduce or delay his payments. (d) For all Participants not described in (c) above, if such Participant's employment with the Company is terminated by the Company without cause or by the Participant under circumstances that would entitle such Participant to terminate his employment and receive maximum severance and other benefits under the Company's Special Severance Plan, whether or not such Participant is a participant in such Plan, then such Participant shall be entitled but not required to complete 7 any Deferral Commitment, no change shall be made in Plan crediting rates, he shall be entitled to the enhanced rates provided in Section 5.1(a) regardless of years of participation and regardless of completion of Deferral Commitments, and he shall receive his benefit payments as elected, regardless of eligibility for retirement. The effective date of this Amendment No. 1996-2 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 8 EX-10.46 16 AM. NO. 1996-2 TO SENIOR OFF. DEFERRED COMP. PLAN EXHIBIT 10.46 AMENDMENT NO. 1996-2 TO SENIOR OFFICERS' DEFERRED COMPENSATION PLAN This Amendment No. 1996-2 is made to the Great Western Financial Corporation Senior Officers' Deferred Compensation Plan (1992 Restatement) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW THEREFORE, the Plan is amended as follows: 1. Section 2.4 of the Plan is amended in its entirety to read as follows: 2.4 Change in Control. A "Change in Control" shall be deemed to ----------------- have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securi- 2 ties acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. For purposes of this Section 2.4, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, direct- 3 ly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2. Article II of the Plan is amended by renumbering Sections 2.19 through 2.22 as Sections 2.21 through 2.23, respectively. 3. Article II of the Plan is amended by inserting the following as a new Section 2.19: 2.19 A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (B) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (C) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; (D) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their 4 successor of an application for Change in Control; or (E) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 4. Article II of the Plan is amended by inserting the following as a new Section 2.20: 2.20 A "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall end six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board or otherwise). 5. Section 4.6(b) of the Plan is amended in its entirety to read as follows: (b) Matching Contributions. A Participant shall be vested in ---------------------- the Employer matching contributions credited to his Account pursuant to Section 4.4 to the same extent as his matching contribution account is vested under the Company's Savings Plan; provided, however, that -------- ------- upon the occurrence of a Change in Control, all such Employer matching contributions shall become fully vested; and provided, further, that -------- ------- all such Employer matching contributions shall become fully vested if, during a Potential Change in Control Period, such Participant's employment with the Company is terminated by the Company without cause or by the Participant under circumstances that would entitle such individual to terminate his or her employment and receive severance benefits under 5 (i) if the Participant is a member of the Executive Management Committee, his or her employment agreement or (ii) if the Participant is not a member of the Executive Management Committee, the Company's Special Severance Plan, whether or not such Participant is party to such Plan. Subject to the provisions of the immediately preceding sentence, any unvested portion of Employer matching contributions, and earnings thereon, shall be forefeited at the same time as the Participant's forfeiture occurs under the Savings Plan. Forfeitures under this Plan shall not be reallocated to other Participants. 6. Section 9.3 of the Plan is amended in its entirety to read as follows: 9.3 Change in Control. During a Potential Change in Control ----------------- Period and for the two (2) year period following the occurrence of a Change in Control, not withstanding any other provisions of this Plan, the following provisions shall apply: (a) The Plan may not be terminated without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996. (b) The Plan may not be amended without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996, if such amendment would be adverse to the interests of such Participants or Beneficiaries (including, without limitation, any reduction of pay- 6 ments already due or being paid under the Plan). (c) If a Participant is receiving benefits under this plan, is eligible for Retirement, is disabled, or dies prior to Retirement during such period, then no prospective change may be made that would reduce or delay his payments. (d) For all Participants not described in (c) above, if such Participant's employment with the Company is terminated by the Company without cause or by the Participant under circumstances that would entitle such Participant to terminate his employment and receive severance and other benefits under (i) if the Participant is a member of the Executive Management Committe, his employment agreement or (ii) if the Participant is not a member of the Executive Management Committee, the Company's Special Severance Plan, whether or not such Participant is a participant in such Plan, then such Participant shall be entitled but not required to complete any Deferral Commitment, no change shall be made in Plan crediting rates, he shall be entitled to the enhanced rates provided in Section 5.1(a) regardless of years of participation and regardless of completion of Deferral Commitments, and he shall receive benefit payments as elected, regardless of eligibility for retirement. 7. The Plan is amended by deleting in its entirety Section 9.4 thereof. 7 The effective date of this Amendment No. 1996-2 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 8 EX-10.50 17 AM. NO. 1996-2 TO DIRECTOR DEFERRED COMP. PLAN EXHIBIT 10.50 AMENDMENT NO. 1996-2 TO DIRECTORS' DEFERRED COMPENSATION PLAN This Amendment No. 1996-2 is made to the Great Western Financial Corporation Dirctors' Deferred Compensation Plan (1992 Restatement) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW THEREFORE, the Plan is amended as follows: 1. Section 2.4 of the Plan is amended in its entirety as follows: 2.4 Change in Control. A "Change in Control" shall be deemed to ----------------- have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securi- 2 ties acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. For purposes of this Section 2.4, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, direct- 3 ly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. The effective date of this Amendment No. 1996-2 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 4 EX-10.53 18 AM. NO. 1996-1 TO UMBRELLA TRUST FOR SENIOR OFF. EXHIBIT 10.53 AMENDMENT NO. 1996-1 TO UMBRELLA TRUST FOR SENIOR OFFICERS This Amendment No. 1996-1 is made to the Great Western Financial Corporation Umbrella Trust for Senior Officers (as amended) (the "Trust"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Trust. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Trust as set forth herein; NOW THEREFORE, the Trust is amended as follows: 1. The introductory paragraph of the Trust is amended (a) by inserting following the phrase "for the benefit of eligible executive employees of the Company and its affiliates" the following: and for certain other individuals who are not employed by, but who perform services for, the Company and its affiliates and (b) by adding the following Plans: Great Western Financial Corporation Deferred Compensation Plan (1992 Restatement) Consulting Agreement with James Montgomery Employment Agreements between the Company and the following individuals: John F. Maher Michael M. Pappas A. William Schenck III Carl F. Geuther Jaynie M. Studenmund J. Lance Erikson Ray W. Sims 2. The first sentence of Section 1.01 of the Trust is amended by deleting the phrase "May 1, 1989" and inserting in lieu thereof the phrase "December 10, 1996". 3. Section 1.04-2 of the Trust is amended in its entirety as follows: 1.04-2 A Change in Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of 2 directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is 3 consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. For purposes of this Section 1.04-2, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 4. The Trust is amended by deleting all references therein to a "Triggering Event" and inserting in lieu thereof a "Potential Change in Control". 5. The first sentence of Section 2.01-2 of the Trust is amended by deleting the phrase "The Company may, at any time or upon the occurrence of any of the 4 Triggering Events described in 2.01-5, contribute to the trust the sum of the following:" and inserting in lieu thereof the following: The Company shall, as soon as possible but in no event later than 10 days following the occurrence of a Potential Change in Control (as defined in Section 2.01-5 hereof), contribute to the trust the sum of the following (the sum of the amounts described in clauses (a), (b) and (c), the "Required Funding Amount"): 6. Section 2.01-4 of the Trust is amended in its entirety as follows: 2.01-4 Following the expiration of a Potential Change in Control Period (as defined below) and if no Change in Control has occurred during such Potential Change in Control Period, the Required Funding Amount shall be returned to the Company within 10 days of the receipt of the Company's request therefor. For purposes of this Trust, a Potential Change in Control Period shall commence upon the occurrence of a Potential Change in Control (as defined in Section 2.01-5 hereof) and shall end on the date 6 months following the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors or otherwise). 7. Section 2.01-5 of the Trust is amended in its entirety as follows: 2.01-5 A Potential Change in Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) the Company enters into an agreement, the consummation of which would 5 result in the occurrence of a Change in Control; (b) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; (d) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (e) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 8. Section 2.01 of the Trust is amended by inserting the following as a new Section 2.01-7: 2.01-7 Within 30 days following the end of each calendar year that ends after a Change in Control has occurred, the Company shall be required to irrevocably contribute to the trust an additional amount that, when aggregated with the assets then held by the trust, at their fair market value, is equal to the Required Funding Amount (adjusted and calcu- 6 lated as of the close of such calendar year). 9. Section 2.02 of the Trust is amended by inserting the following as a new Section 2.02-6: 2.02-6 Following the occurrence of a Change in Control, the trust fund shall be invested in short-term fixed income securities or other liquid investments. 10. Section 7.02-1 of the Trust is amended in its entirety as follows: The Company and the Trustee may amend this trust at any time by a written instrument executed by both parties; provided, however, that following a Change in Control or during the pendency of a Potential Change in Control (or within 6 months thereafter), this trust may not be amended in a way adverse to the participants in the Plans covered hereby without the Written Consent of the Participants. The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Trust shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary WELLS FARGO & CO. By: ________________________ Title: 7 EX-10.55 19 AM. NO. 1996-1 TO UMBRELLA TRUST FOR DIRECTORS EXHIBIT 10.55 AMENDMENT NO. 1996-1 TO UMBRELLA TRUST FOR DIRECTORS This Amendment No. 1996-1 is made to the Great Western Financial Corporation Umbrella Trust for Directors (as amended) (the "Trust"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Trust. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Trust as set forth herein; NOW THEREFORE, the Trust is amended as follows: 1. The first sentence of Section 1.01 of the Trust is amended by deleting the phrase "May 1, 1989" and inserting in lieu thereof the phrase "December 10, 1996". 2. Section 1.04-2 of the Trust is amended in its entirety as follows: 1.04-2 A Change in Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person (as defined below) is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act")), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is 2 or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. For purposes of this Section 1.04-2, "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or 3 any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 3. The Trust is amended by deleting all references therein to a "Triggering Event" and inserting in lieu thereof a "Potential Change in Control". 4. The first sentence of Section 2.01-2 of the Trust is amended by deleting the phrase "The Company may, at any time or upon the occurrence of any of the Triggering Events described in 2.01-5, contribute to the trust the sum of the following:" and inserting in lieu thereof the following: The Company shall, as soon as possible but in no event later than 10 days following the occurrence of any of the Triggering Events described in 2.01-5, contribute to the trust the sum of the following (the sum of the amounts described in clauses (a), (b) and (c), the "Required Funding Amount"): 5. Section 2.01-4 of the Trust is amended in its entirety as follows: 2.01-4 Following the expiration of a Potential Change in Control Period (as defined below) and if no Change in Control has occurred during such Potential Change in Control Period, the Required Funding Amount shall be returned to the Company within 10 days of the receipt of the Company's request therefor. A Potential Change in Control Period shall commence 4 upon the occurrence of a Potential Change in Control (as defined in Section 2.01-5 hereof) and shall end on the date 6 months following the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors or otherwise). 6. Section 2.01-5 of the Trust is amended in its entirety as follows: 2.01-5 A Potential Change in Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (b) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; (d) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their 5 successor of an application for Change in Control; or (e) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 7. Section 2.01 of the Trust is amended by inserting the following as a new Section 2.01-7: 2.01-7 Within 30 days following the end of each calendar year that ends after a Change in Control has occurred, the Company shall be required to irrevocably contribute to the trust an additional amount that, when aggregated with the assets then held by the trust, at their fair market value, is equal to the Required Funding Amount (adjusted and calculated as of the close of such calendar year). 8. Section 2.02 of the Trust is amended by inserting the following as a new Section 2.02-6: 2.02-6 Following the occurrence of a Change in Control, the trust fund shall be invested in short-term fixed income securities or other liquid investments. 9. Section 7.02-1 of the Trust is amended in its entirety as follows: The Company and the Trustee may amend this trust at any time by a written instrument executed by both parties; provided, however, that following a Change in Control or during the pendency of a Potential Change in Control (or within 6 months thereafter), this trust may not be amended in a way adverse to the participants in the 6 Plans covered hereby without the Written Consent of the Participants. The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Trust shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary WELLS FARGO & CO. By: ________________________ Title: 7 EX-10.60 20 AM. NO. 1996-1 TO EMPLOYEE HOME LOAN PROGRAM EXHIBIT 10.60 AMENDMENT NO. 1996-1 TO EMPLOYEE HOME LOAN PROGRAM This Amendment No. 1996-1 is made to the Employee Home Loan Program of Great Western Financial Corporation (Revised and Restated as of April 27, 1993) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW THEREFORE, the Plan is amended as follows: 1. Section 9 of the Plan is amended in its entirety to read as follows: 9. Disqualification. Except as provided below, ---------------- employees will be disqualified if terminated or if work hours are reduced below twenty and one-half hours a week, or if assigned temporary or utility status, in which case the modification agreement setting forth the special employee home loan terms will be of no force and effect. Employees will not be disqualified if they are terminated without cause or if work hours are reduced below twenty and one-half hours a week if such termination or reduction in hours occurs (a) within 24 months following a Change in Control or (b) during a Potential Change in Control Period (as each term is defined in Section 14 hereof). Directors will be disqualified upon termination from the Board except upon retirement (after five years' service), as a result of being disabled, as a result of a Change in Control (as defined in Section 14 hereof), or as a result of being removed from the Board without cause within 24 months following a Change in Control (as defined in Section 14 hereof). 2. Section 11 of the Plan is amended in its entirety to read as follows: 11. Modification and Suspension. Great Western --------------------------- reserves the right to suspend or modify the provisions of the Employee Home Loan Program at any time. However, no such suspension or modification after a Change in Control or during a Potential Change in Control Period (as each term is defined in Section 14 hereof) shall detract from the benefit then available or increase the otherwise applicable interest rate under existing loans covered by the Employee Home Loan Program (the "Program"). 3. The Plan is amended by inserting the following as a new Section 14: 14. Definitions: For purposes of the ----------- Program, the following definitions apply: "Board of Directors" shall mean the Board of Directors of Great Western Financial Corporation. A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) Any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Great Western Financial Corporation (not including in the securities beneficially owned by such Person any 2 securities acquired directly from Great Western Financial Corporation or its affiliates) representing 25% or more of either the then outstanding shares of common stock of Great Western Financial Corporation or the combined voting power of Great Western Financial Corporation's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (i) of paragraph (c) below; or (b) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Great Western Financial Corporation) whose appointment or election by the Board of Directors or nomination for election by Great Western Financial Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (c) There is consummated a merger or consolidation of Great Western Financial Corporation with 3 any other corporation, other than (i) a merger or consolidation which would result in the voting securities of Great Western Financial Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Great Western Financial Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of Great Western Financial Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of Great Western Financial Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from Great Western Financial Corporation or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of Great Western Financial Corporation or the combined voting power of Great Western Financial Corporation's then outstanding securities; or (d) The stockholders of Great Western Financial Corporation approve a plan of complete liquidation or dissolution of Great Western Financial Corporation or there is consummated an agreement for the sale or 4 disposition by Great Western Financial Corporation of all or substantially all of Great Western Financial Corporation's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Great Western Financial Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Great Western Financial Corporation immediately following such transaction or series of transactions. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Person" has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Great Western Financial Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Great Western Financial Corporation or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Great Western Financial Corporation in substantially the same proportions as their ownership of stock of Company. 5 A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) Great Western Financial Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (b) Great Western Financial Corporation or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (c) any Person becomes the beneficial owner, directly or indirectly, of securities of Great Western Financial Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from Great Western Financial Corporation or its affiliates) representing 15% or more of either the then outstanding shares of common stock of Great Western Financial Corporation or the combined voting power of Great Western's then outstanding securities; (d) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (e) the Board of Directors adopts a resolution to the effect that, for purposes of this Program, a 6 Potential Change in Control has occurred. A "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall end six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors or otherwise). The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 7 EX-10.62 21 ANN. INCENTIVE COMP. PLAN FOR EXEC. OFF. EXHIBIT 10.62 AMENDMENT NO. 1996-1 TO ANNUAL INCENTIVE COMPENSATION PLAN FOR EXECUTIVE OFFICERS This Amendment No. 1996-1 is made to the Great Western Financial Corporation Annual Incentive Compensation Plan for Executive Officers (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan: WHEREAS, Great Western Financial Corporation has determined that it is in its best interest and that of its stockholders to amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 1 of the Plan is amended by inserting, immediately following the definition of "Beneficiary," the following: A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in 2 the securities beneficially owned by such Person any securities acquired directly from the Corporation or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. 2. Section 1 of the Plan is amended by inserting, immediately following the definition of "EPS Factor," the following: "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3. Section 1 of the Plan is amended by inserting, immediately following the definition of "Participant," the following: 3 "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Corporation or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of Corporation. 4. Section 1 of the Plan is amended by inserting, immediately following the definition of "Person," the following: A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Corporation or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) any Person becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned 4 by such Person any securities acquired directly from the Corporation or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Corporation or the combined voting power of the Corporation's then outstanding securities; (iv) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their successor of an application for Change in Control; or (v) the Board of Directors adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. 5. Section 11 of the Plan is amended by adding at the end thereof the following: Notwithstanding the foregoing, during the period (referred to herein as the "Potential Change in Control Period") commencing upon the occurrence of a Potential Change in Control and ending six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors of the Corporation or otherwise), the Plan may not be amended in a manner adverse to the Participants without the prior written consent of at least two-thirds (2/3) of the Participants. 6. Section 13.1 of the Plan is amended in its entirety to read as follows: (a) Within five (5) days following the occurrence of a Change in Control, the Company shall pay to each Participant a 5 cash lump sum in an amount equal to the product of (i) the Bonus to which such Participant would have been entitled under Section 6 hereof for the Year in which such Change in Control occurs (assuming for purpose of this calculation that both the EPS Factor and the SEBIT Factor are at "Target" for such Year) and (ii) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the Year during which such Change in Control occurs to the date on which such Change in Control occurs, and the denominator of which shall be twelve (12). A Participant shall be entitled to receive the payment described in the immediately preceding sentence if, during the Potential Change in Control Period (as defined in Section 11 hereof) such Participant's employment with the Company was terminated by the Company without cause or by the Participant under circumstances that would entitle such individual to terminate his or her employment and receive severance benefits under (x) if the Participant is a member of the Executive Management Committee, his or her employment agreement or (y) if the Participant is not a member of the Executive Management Committee, the Company's Special Severance Plan, whether or not such Participant is party to such Plan. 6 The effective date of this Amendment No. 1996-1 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 7 EX-10.65 22 AM. NO. 1996-2 TO RETIREMENT RESTORATION PLAN EXHIBIT 10.65 AMENDMENT NO. 1996-2 TO RETIREMENT RESTORATION PLAN This Amendment No. 1996-2 is made to the Great Western Retirement Restoration Plan (as amended) (the "Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW THEREFORE, the Plan is amended as follows: 1. Section 1.3 of the Plan is amended by inserting immediately following the definition of "Average Monthly Compensation the following: "Board of Directors" means the Board of Directors of the Company. A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) Any Person is or becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the com- bined voting power of the Company's then outstanding securities, excluding any Person who becomes such a beneficial owner in connection with a transaction described in clause (i) of paragraph (c) below; or (b) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 10, 1996, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996, or whose appointment, election or nomination for election was previously so approved; or (c) There is consummated a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstand- ing immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities benefi- 2 cially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (d) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transac- tions. 2. Section 1.3 of the Plan is amended by inserting immediately following the definition of "Participant" the following: "Person" has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or 3 any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of Company. 3. Section 1.3 of the Plan is amended by inserting immediately following the definition of "Plan Year" the following: A "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) any Person becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securi- ties; (iv) the filing with the Federal Home Loan Bank Board and/or the FSLIC or their 4 successor of an application for Change in Control; or (v) the Board of Directors adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. A "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall end six months following the earlier to occur of (i) a Change in Control and (ii) the date on which such Potential Change in Control ceases to exist (whether by resolution of the Board of Directors or otherwise). 4. Section 4.2 of the Plan is amended in its entirety as follows: 4.2 Change in Control. ----------------- A Participant's benefits under this Plan shall be fully vested if a Change in Control occurs and, within 24 months following such Change in Control or during a Potential Change in Control Period (whether or not a Change in Control subsequently occurs), a Participant's employment with the Company is terminated by the Company without cause or if a Participant terminates his employment with the Company under circumstances that would entitle such Participant to receive severance benefits under (a) if the Participant is a member of the Executive Management Committee, such Participant's employment agreement, or (b) if the Participant is not a member of the Executive Management Committee, the Company's Special Severance Plan, whether or not such Participant is a participant in such Plan. 5 5. Section 6.1 of the Plan is amended in its entirety to read as follows: 6.1 - Amendments and Termination. -------------------------- The Company shall have the right to terminate or amend this Plan by resolution of the Board of Directors and to amend or cancel any amendments; provided, however, that during a Potential Change in -------- ------- Control Period and during the two (2) year period period following a Change in Control, the Plan may not be terminated without the prior written consent of two-thirds (2/3) of those individuals who were Participants or Beneficiaries as of December 10, 1996, and may not be amended without the prior written consent of two-thirds (2/3 of such individuals if such amendment would be adverse to the interests of such Participants or Beneficiaries (including, without limitation, any reduction of payments already due or being paid under the Plan). Any such amendment shall be stated in an instrument in writing, executed by the Company in the same manner as this Plan. The effective date of this Amendment No. 1996-2 shall be December 10, 1996. Except as herein modified, the Plan shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By:/s/ J. Lance Erikson -------------------- Executive Vice President, General Counsel and Secretary 6 EX-10.66 23 SPECIAL SEVERANCE PLAN ADOPTED DECEMBER 10, 1996 EXHIBIT 10.66 GREAT WESTERN FINANCIAL CORPORATION SPECIAL SEVERANCE PLAN Great Western Financial Corporation has adopted this Special Severance Plan (the "Plan") as of December 10, 1996, for the benefit of certain employees of the Company, its affiliates and subsidiaries, on the terms and conditions hereinafter stated. The Plan, as set forth herein, is intended to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control. 1. Defined Terms. For purposes of the Plan, the following terms shall -------------- have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Annual Incentive Plan" shall have the meaning set forth in Section 4.1(A) hereof. (C) "Auditor" shall have the meaning set forth in Section 4.2(B) hereof. (D) "Base Amount" shall have the meaning set forth in Section 280G(b)(3) of the Code. (E) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (F) "Benefit Continuation Period" shall mean (i) with respect to a Participant who is a Senior Vice President (or who is deemed to be of equivalent rank), the twenty-four (24) month period immediately following the Date of Termination or (ii) with respect to a Participant who is a First Vice President (or who is deemed to be of equivalent rank), the eighteen (18) month period immediately following the Date of Termination. 1 (G) "Board" shall mean the Board of Directors of the Company. (H) "Cause" for termination by the Company of a Participant's employment shall mean (i) a Participant's conviction by a court of competent jurisdiction of a felony, (ii) entry of an order duly issued by the Office of Thrift Supervision removing a Participant from the office of the Company or permanently prohibiting him from participating in the conduct of the affairs of the Company, (iii) the willful and continued failure by a Participant to substantially perform the Participant's duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Participant pursuant to Section 5.1 hereof) after a written demand for substantial performance is delivered to the Participant by the Board, which demand specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant's duties, or (iv) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (iii) and (iv) of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's act, or failure to act, was in the best interest of the Company. (I) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving, individuals who, on December 10, 1996, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the 2 Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 10, 1996 or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have SUBSTANTIALLY THE SAME PROPORTIONATE OWNERSHIP IN AN ENTITY WHICH OWNS ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY IMMEDIATELY FOLLOWING SUCH TRANSACTION OR SERIES OF TRANSACTIONS. (J) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (K) "Committee" shall mean the Compensation Committee of the Board. 3 (L) "Company" shall mean Great Western Financial Corporation, a Delaware corporation, and, except in determining under Section 1(I) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Plan by operation of law, or otherwise. (M) "Date of Termination" shall have the meaning set forth in Section 5.2 hereof. (N) "Disability" shall be determined in accordance with the Company's long-term disability plan. (O) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (P) "Good Reason" for termination by a Participant of the Participant's employment shall mean the occurrence (without the Participant's express written consent) within two (2) years after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 4.1 hereof (treating all references in paragraphs (I) through (IV) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Participant of any duties inconsistent with the Participant's status as a Senior Vice President (or equivalent thereof) or First Vice President (or equivalent thereof) of the Company, as the case may be, or, in the good-faith determination of the Participant, a substantial adverse alteration in the nature or status of the Participant's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Participant's annual base salary or annual bonus opportunity as in effect on the date immediately prior to the occurrence of the Change in Control or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company; 4 (III) the relocation of the Participant's principal place of employment to a location more than fifty (50) miles from the Participant's principal place of employment immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the Participant's business travel obligations as in effect immediately prior to the Change in Control; or (IV) any purported termination of the Participant's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 5.1 hereof; for purposes of this Plan, no such purported termination shall be effective. A Participant's right to terminate the Participant's employment for Good Reason shall not be affected by the Participant's incapacity due to physical or mental illness. A Participant's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (Q) "Notice of Termination" shall have the meaning set forth in Section 5.1 hereof. (R) "Participants" shall mean the Senior Vice Presidents and First Vice Presidents of the Company and of Great Western Bank, a Federal Savings Bank, and each officer of equivalent rank with certain of the Company's other subsidiaries, which officers are listed on Exhibit 1 hereto, which is incorporated as part of the Plan. Exhibit 1 to the Plan may be supplemented by the Board in its discretion. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; 5 (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. (U) "Potential Change in Control Period" shall mean a period commencing upon the occurrence of an event constituting a Potential Change in Control and ending on the date six months following the date on which such Potential Change in Control ceases to exist (whether by Board resolution or otherwise). (V) "Severance Payments" shall have the meaning set forth in Section 4.1 hereof. (W) "Tax Counsel" shall have the meaning set forth in Section 4.2(B) hereof. (X) "Total Payments" shall mean those payments so described in Section 4.2(B) hereof. 2. Effective Date of Plan. The Effective Date of this Plan is December ---------------------- 10, 1996. The Plan shall be effective as of the Effective Date and shall remain in effect unless and until terminated by the Board pursuant to Section 10.3 hereof. 3. Administration. The Plan shall be interpreted, administered and -------------- operated by the Committee, which shall have complete authority, in its sole discretion subject to the express provisions of the Plan, to determine who shall be a Participant, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may delegate any of its duties hereunder to such person or persons from time to time as it may designate. 6 4. Severance Payments. ------------------- Subject to Section 4.2 hereof, if a Participant's employment is terminated within two (2) years following a Change in Control, other than (a) by the Company for Cause, (b) by reason of death or Disability, or (c) by the Participant without Good Reason, the Company shall pay the Participant the amounts, and provide the Participant the benefits, described in this Section 4.1 ("Severance Payments"). For purposes of this Plan, a Participant's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Participant with Good Reason if (i) the Participant's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Participant terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Participant's employment is terminated by the Company without Cause or by the Participant for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). (A) In lieu of any further salary payments to the Participant for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Participant (other than accrued vacation and similar benefits otherwise payable upon termination of employment pursuant to Company policies and programs), the Company shall pay to the Participant a lump sum severance payment, in cash, equal to the product of (i) the sum of (x) the Participant's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, plus (y) the target bonus ("Target Bonus") under the Company's annual incentive program for senior officers (the "Annual Incentive Program") in respect of the year in which such Date of Termination occurs or the year in which the Change in Control occurs, whichever is greater (provided, however, that, if the termination of the ----------------- Participant's employment occurs following the occurrence of a Potential Change in Control but prior to such Change in Control, the Target Bonus shall be in respect of the year in which such termination of employment occurs), multiplied by (ii) (a) in the case of a Senior Vice President, the number two (2) or (b) in the case of a First Vice President, the number one and one-half (1.5). 7 (B) During the Benefit Continuation Period, the Company shall provide the Participant and Participant's dependents with health and welfare type employee benefits (including without limitation hospital, surgical, major medical, life and disability insurance), each such benefit to be continued in a manner no less favorable to the Participant than the benefit to which Participant was entitled immediately prior to such Date of Termination (or, if applicable, the first occurrence of an event constituting Good Reason). Benefits otherwise receivable by the Participant pursuant to this Section 4.1(B) shall be reduced to the extent benefits of the same type are received by or made available by a subsequent employer to the Participant at no cost to the Participant during the Benefit Continuation Period (and any such benefits received by or made available to the Participant shall be reported to the Company by the Participant). (C) The Company shall pay to the Participant a lump sum cash amount (the "Pro-Rata Bonus") equal to the product of (i) the target bonus to which the Participant would have been entitled under the Annual Incentive Program in respect of the year in which the Date of Termination occurs (assuming for this purpose that performance under the Annual Incentive Program is "on plan" for such year) multiplied by (ii) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the fiscal year during which such Date of Termination occurs to such Date of Termination, and the denominator of which shall be twelve (12); provided, however, that if such Date of ----------------- Termination occurs during the same year in which the Change in Control occurs, the Pro-Rata Bonus shall be offset by any payments received under the Annual Incentive Program in connection with such Change in Control. 8 4.2 (A) Notwithstanding any other provision of this Plan, in the event that any payment or benefit received or to be received by the Participant in connection with a Change in Control or the termination of the Participant's employment (whether pursuant to the terms of this Plan or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would not be deductible (in whole or part), by the Company, an Affiliate of the Company or Person making such payment or providing such benefit as a result of section 280G of the Code, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), the cash Severance Payments shall first be reduced (if necessary, to zero), and all other Severance Payments shall thereafter be reduced (if necessary, to zero); provided, however, that the Participant may elect to have the noncash Severance - ----------------- Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. (B) For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Participant shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("Tax Counsel") selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions by reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. 9 (C) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Participant and the Company in applying the terms of this Section 4.2, the Total Payments paid to or for the Participant's benefit are in an amount that would result in any portion of such Total Payments being subject to the Excise Tax, then, if the repayment hereinafter described would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Participant's taxable income and wages for purposes of federal, state and local income and employment taxes, the Participant shall have an obligation to repay the Company upon demand an amount equal to the sum of (x) the excess of the Total Payments paid to or for the Participant's benefit over the Total Payments that could have been paid to or for the Participant's benefit without any portion of such Total Payments being subject to the Excise Tax; and (y) interest on the amount set forth in clause (x) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Participant's receipt of such excess until the date of such payment. 4.3 The payments provided in subsections (A) and (C) of Section 4.1 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments, and the ----------------- limitation on such payments set forth in Section 4.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Participant on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Participant is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Participant, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Plan, the Company shall provide the Participant with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 5. Termination Procedures. ----------------------- 10 5.1 Notice of Termination. Any purported termination of a Participant's --------------------- employment deemed to have occured following a Change in Control (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 8 hereof. For purposes of this Plan, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated. Further, no termination for Cause shall be effective without (i) reasonable notice to the Participant setting forth the reasons for the Company's intention to terminate, (ii) an opportunity for the Participant to cure any such breach within fifteen (15) days after receipt of such notice and (iii) delivery to the Participant of a Notice of Termination stating that a majority of the authorized number of the Company's directors has found that the Participant was guilty of the conduct constituting Cause and specifying the particulars thereof in detail. 5.2 Date of Termination. "Date of Termination," with respect to any ------------------- purported termination of a Participant's employment (other than by reason of the Participant's death), shall mean (i) if the Participant's employment is terminated for Disability, the date upon which a Notice of Termination is given, and (ii) if the Participant's employment is terminated for any other reason, the date specified in the Notice of Termination (which shall be within sixty (60) days from the date such Notice of Termination is given). 6. No Mitigation. The Company agrees that, if a Participant becomes -------------- eligible to receive the Severance Payments and other benefits described herein, the Participant is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Participant by the Company pursuant to Section 4 hereof. Further, the amount of any payment or benefit provided for in this Plan (other than Section 4.1(B) hereof) shall not be reduced by any compensation earned by the Participant as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise. 7. Successors; Binding Agreement. ------------------------------ 7.1 This Plan shall inure to the benefit of and shall be binding upon the Company, its successors and assigns, but without the prior written consent of the Participants this Plan may not be assigned other than in connection with the merger or sale of substantially all the assets of the Company or similar transaction in which the 11 successor or assignee assumes (whether by operation of law or express assumption) all obligations of the Company hereunder. 7.2 This Plan shall inure to the benefit of and be enforceable by the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees or other beneficiaries. If a Participant shall die while any amount would still be payable to such Participant hereunder (other than amounts which, by their terms, terminate upon the death of the Participant) if such Participant had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to the executors, personal representatives or administrators of such Participant's estate. 8. Notices. For the purpose of this Plan, notices and all other -------- communications provided for in the Plan shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to a Participant, to the address on file with the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: 9200 Oakdale Avenue Chatsworth, California 91311 Attention: Executive Vice President -- Legal 9. Claims Procedure; Arbitration. ----------------------------- 9.1 A Participant may file with the Committee a written claim for benefits under the Plan. The Committee shall, within a reasonable time not to exceed ninety (90) days, unless special circumstances require an extension of time of not more than an additional ninety (90) days (in which event a Participant will be notified of the delay during the first ninety (90) day period), provide adequate notice in writing to any Participant whose claim for benefits shall have been denied, setting forth the following in a manner calculated to be understood by the Participant: (A) the specific reason or reasons for the denial; (B) specific reference to the provision or provisions of the Plan on which the denial is based; 12 (C) a description of any additional material or information required to perfect the claim, and an explanation of why such material or information is necessary; and (D) information as to the steps to be taken in order that the denial of the claim may be reviewed. 9.2 If written notice of the denial of a claim has not been furnished to a Participant, and such claim has not been granted within the time prescribed in Section 9.1 hereof (including any applicable extension), the claim for benefits shall be deemed denied. 9.3 A Participant whose claim for benefits shall have been denied in whole or in part, may, within sixty (60) days from either the receipt of the denial of the claim or from the time the claim is deemed denied (unless the notice of denial grants a longer period within which to respond), appeal such denial to the Company. The Participant may, upon request, at this time review documents pertinent to his claim and may submit written issues and comments. 9.4 The Company shall notify a Participant of its decision within sixty (60) days after an appeal is received, unless special circumstances require an extension of time of not more than an additional sixty (60) days (in which event a Participant will be notified of the delay during the first sixty (60) day period). Such decision shall be given in writing in a manner calculated to be understood by the Participant and shall include the following: (A) specific reasons for the decision; and (B) specific reference to the provision or provisions of the Plan on which the decision is based. 9.5 Any dispute or controversy arising under or in connection with this Plan that cannot be settled through the procedure set forth in Sections 9.1 through 9.4 hereof shall be first submitted to mediation administered by the American Arbitration Association ("AAA"). In the event the dispute or controversy cannot be resolved through mediation, it shall be settled exclusively by arbitration in the state of residence of the Participant by three arbitrators in accordance with the rules of the AAA in effect at the time of submission to arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction. Each party shall pay its costs in connection with such arbitration procedure; provided, that a Participant that prevails -------- 13 in such arbitration shall be entitled to reimbursement for such Participant's reasonable attorneys' fees. 10. Miscellaneous. -------------- 10.1 Entire Plan. No waiver by either party hereto at any time of any ----------- breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Plan to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This instrument contains the entire agreement of the parties relating to the subject matter hereof. All other plans, policies and arrangements of the Company in which the Participant participates during the Term shall be interpreted so as to avoid the duplication of benefits paid hereunder. 10.2 No Right to Employment. Nothing contained in this Plan or any ---------------------- documents relating to the Plan shall (i) confer upon any Participant any right to continue as a Participant or in the employ of the Company or a subsidiary, (ii) constitute any contract or agreement of employment, or (iii) interfere in any way with the right of the Company or a subsidiary to reduce such Participant's compensation, to change the position held by such Participant, or terminate the employment of such Participant, with or without Cause. 10.3 Termination and Amendment of Plan. The Company shall have the right --------------------------------- to terminate or amend this Plan at any time by resolution of the Board of Directors and to amend or cancel any amendments: provided, however, that during ----------------- a Potential Change in Control Period and during the two (2) year period following a Change in Control, the Plan may not be terminated, nor may it be amended if such amendment would be adverse to the interests of the Participants. Notwithstanding the foregoing, this Plan shall terminate on the date following the second anniversary of a Change in Control; provided, however, that all ----------------- obligations accrued by Participants prior to such Plan termination must be satisfied in full in accordance with the terms hereof 10.4 Benefits not Assignable. Except as otherwise provided herein or by ----------------------- law, no right or interest of any Participant under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Participant under the Plan shall be liable for, or subject to, any obligation or liability of such Participant. When a payment is due under this Plan to a 14 Participant who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative. 10.5 California Law. This Plan shall be construed and interpreted in -------------- accordance with the laws of California, to the extent not preempted by federal law, which shall otherwise control. 10.6. Validity. The invalidity or unenforceability of any provision of -------- this Plan shall not affect the validity or enforceability of any other provision of this Plan, which shall remain in full force and effect. If this Plan shall for any reason be or become unenforceable by either party, this Plan shall thereupon terminate and become unenforceable by the other party as well. 15 EX-10.67 24 BROAD BASED PLAN ADOPTED FEBRUARY 24, 1997 EXHIBIT 10.67 GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM ---------------------------------------------------------------- PURPOSE The purpose of this document is to outline the details of the Great Western Change in Control Benefits Program. "Change in Control" is defined in Great Western's Benefit Plans Documents. The terms of this plan are effective February 25, 1997. ---------------------------------------------------------------- PROGRAM AT Eligible employees may receive: A GLANCE . 60 days non-working notice pay . One (1) month separation pay for every full year of service . Minimum of six (6) months and maximum of eighteen (18) months total combined notice and separation pay . Choice of regular paychecks or one lump sum payment . $1,000 educational assistance reimbursement . Career Transition Services . Enhanced Retirement Plan . Extended employee home loan program . All performance/production based incentive plans currently in place remain in effect throughout active employment ---------------------------------------------------------------- IMPORTANT Definitions of terms detailed in the plan include: DEFINITIONS
- -------------------------------------------------------------------------------- TERM DEFINITION =============================================================================== Announcement Notification that an employee's position will/may be eliminated. - -------------------------------------------------------------------------------- Comparable Job Any position offered to an employee that is similar in responsibility and scope, with no change in salary, work hours, or benefit eligibility, and is within 35 miles of the employee's current work location. - -------------------------------------------------------------------------------- Lump Sum Receiving all separation pay in one check instead of paid over time on regular paydays. - -------------------------------------------------------------------------------- Notice Pay Salary continuance paid to an employee during the first 60 days following their release date. - -------------------------------------------------------------------------------- Separation and Release A written agreement by which an employee gives Agreement up any claims he/she might ever have against Great Western in exchange for separation benefits which Great Western is not otherwise obligated to provide. - -------------------------------------------------------------------------------- Release Date The last day an employee reports to work. - -------------------------------------------------------------------------------- Separation Pay Salary based on years of service that is paid to an employee after 60 days of notice pay is exhausted. - -------------------------------------------------------------------------------- Termination Date The last day of pay. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1 GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM, CONTINUED ---------------------------------------------------------------- ELIGIBILITY Current and newly hired employees active as of the date the Change in Control is completed are eligible for the benefits outlined in this program. In addition, employees whose positions are eliminated between February 25, 1997 and the date of the Change in Control are covered by this program. Change in Control benefits are provided if no position is offered, or if a non-comparable job is offered by the acquiring company, or if an employee is terminated without cause within 12 months after the Change in Control date. Additional eligibility requirements for separation benefits include:
STATUS 60 DAYS SEPARATION PAY NOTICE PAY ----------------------------------------------------------------------------------- . Full-time employees X Eligible X Eligible ----------------------------------------------------------------------------------- . Part-time employees working AT LEAST X Eligible X Eligible 20.5 hours per week ----------------------------------------------------------------------------------- . Part-time employees working LESS X Eligible Not eligible THAN 20.5 hours per week ----------------------------------------------------------------------------------- . GWFSC Commissioned Employees X Eligible X Eligible (Base Only) (Base Only) ----------------------------------------------------------------------------------- . Temporary employees Not eligible Not eligible . On-Call employees . MLCs and other fully commissioned employees . Employees on LOA as of release date whose job guarantee period has expired -----------------------------------------------------------------------------------
* See pay examples on the following page for more information. ---------------------------------------------------------------- NOTICE PAY Notice Pay will begin the day after the employee's last day at work, and will continue for 60 calendar days. ----------------------------------------------------------------- SEPARATION PAY Separation Pay will begin after the 60 day notice pay ends, if the employee signs and returns a release agreement. This release agreement is given to employees on their last day at work, and must be signed and returned within 45 days. If an employee signs this agreement, they will receive ONE (1) MONTH of pay (at their current salary level) for each FULL YEAR of service with Great Western. There is no proration for partial years of service. For the purposes of calculating length of service, an employee's adjusted hire date will be used. Length of service will be calculated based on the employee's release date. Regardless of length of service, eligible employees will receive a MINIMUM of FOUR (4) MONTHS separation pay. The MAXIMUM separation pay an employee can receive is SIXTEEN (16) MONTHS. 2 GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM, CONTINUED ---------------------------------------------------------------- EXAMPLES Following are several examples of how notice and separation pay are calculated: EMPLOYEE A: ----------- Employee A is full-time, has been with the company for 8 1/2 years and signs her release agreement. EMPLOYEE B: ----------- Employee B is full-time, has been with the company for 20 years and signs his release agreement. Employee B will reach the maximum payout of 16 months of separation pay. EMPLOYEE C: ----------- Employee C is full-time, has been with the company for 2 years and signs her release agreement. Employee C will receive the minimum payout of 4 months of separation pay. EMPLOYEE D: ----------- Employee D is part-time working less than 20.5 hours per week.
NON-WORKING SEPARATION PAY TOTAL PAY NOTICE PAY ------------------------------------------------------------------- Employee A 60 days 8 months 10 months ------------------------------------------------------------------- Employee B 60 days 16 months 18 months ------------------------------------------------------------------- Employee C 60 days 4 months 6 months ------------------------------------------------------------------- Employee D 60 days 0 months 60 days -------------------------------------------------------------------
*PART-TIME EMPLOYEES WILL BE PAID BASED ON THEIR REGULARLY SCHEDULED HOURS OF WORK. ----------------------------------------------------------------- PAYMENT METHOD NOTICE PAY will be paid by a regular paycheck (or direct deposit) on the 15th and the last day of the month during the 60 day notice pay period. Employees may choose to receive their SEPARATION PAY in one of two ways: OPTION 1: SALARY CONTINUANCE ----------------------------- . Continue regular paychecks (or direct deposit) on the 15th and the last day of the month. . Termination date will be the last day payment is received. . Medical/Vision and Dental coverage cease at the end of the month following the termination date. 3 GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM, CONTINUED ------------------------------------------------------------ PAYMENT METHOD OPTION 2: A SINGLE LUMP SUM PAYMENT ------------------------------------ (CONTINUED) . Receive a single lump sum payment for the entire amount of separation pay. . Payment would be made after the end of the 60 day notice period. . Payment will be processed within 3 weeks following receipt of the lump sum payment request (but not before the end of the 60 day notice period). . Termination date will be the day the lump sum payment is made. . Medical/Vision and Dental coverage cease at the end of the month following the termination date. . Lump sum payments will be taxed at a Supplemental Rate. ------------------------------------------------------------ DEATH OF AN In the event of an employee's death after notice pay EMPLOYEE commences, any unpaid separation benefit will be made to a designated beneficiary or the employee's estate. ------------------------------------------------------------ CONTINUATION OF If employees begin another position with an employer OTHER SEPARATION BENEFITS THAN GREAT WESTERN OR THE ACQUIRING COMPANY after their UPON RE-EMPLOYMENT release date, they will receive their full notice and /or separation pay. If employees accept a position WITHIN GREAT WESTERN OR THE ACQUIRING COMPANY, after they have been released and have begun receiving notice or separation pay, their notice or separation pay will cease as of the date of transfer/re- employment. If a lump sum payment was made, the employee will repay the amount equal to the remainder of the separation benefit as if the employee had elected salary continuance. ------------------------------------------------------------ PLUSPAY Participation in group insurance plans (medical/vision and dental) will continue through the last day of the month in which the employee's termination date falls. NOTE: IF AN EMPLOYEE CHOOSES A LUMP SUM PAYMENT OF SEPARATION BENEFITS, THE TERMINATION DATE WILL BE THE DAY THE LUMP SUM PAYMENT IS MADE. After their termination date, employees may continue medical/vision and dental coverage through COBRA for up to 18 months at a cost of 102 percent of the full premium. Detailed information on COBRA may be found in the 1997 Employee Handbook. GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM, CONTINUED ------------------------------------------------------------ 4 VACATION Vacation will continue to accrue through the Notice Pay Period. Accrued vacation (up to the maximum) will be paid out at the end of Notice Pay. ----------------------------------------------------------- ESIP (401K) If an employee is a participant in the Employee Savings Incentive Plan (ESIP) they may continue to make contributions through the end of their NOTICE PAY. Information regarding payout of their benefit will be sent from the Benefits Department after their termination date. ------------------------------------------------------------ RETIREMENT If an employee is a participant in the Retirement Plan, BENEFITS they will continue to receive contribution credits under the Plan as though they were active employees through the end of their NOTICE PAY. Employees will have a vested benefit under the Plan if they have completed at least 5 years of service and are at least 21 years of age on their termination date. The Benefits Department will contact eligible employees with information on their benefit amounts, and the method of distribution after their termination dates. ------------------------------------------------------------ ENHANCED Enhanced retirement benefits will be provided to eligible RETIREMENT employees age 52 with 15 or more years of service, OR BENEFITS eligible employees with 25 or more years of service regardless of age, as of their release date. The enhanced retirement benefit adds three (3) years to an employee's service at termination for purposes of calculating their retirement benefit and medical plan eligibility and cost. ----------------------------------------------------------- EMPLOYEE If employees currently have an Employee Home Loan, and HOME LOANS sign the release agreement, the terms of their mortgages will be extended AS LONG AS THE EMPLOYEE RESIDES IN THE RESIDENCE. ------------------------------------------------------------ BRANCH Employees will continue to receive free branch services SERVICES through their termination dates. Regular fees/charges will apply following the termination date. ------------------------------------------------------------ EDUCATIONAL Full time and part-time employees working more than 20.5 REIMBURSEMENT hours per week who sign the release agreement, will be entitled to 100% educational reimbursement, to a MAXIMUM OF $1,000, for job-related courses started within six (6) months of their release date. ------------------------------------------------------------ 5 GREAT WESTERN CHANGE IN CONTROL BENEFITS PROGRAM, CONTINUED ----------------------------------------------------------- CAREER Career Transition assistance will be provided to all TRANSITION employees including job search workshops, self-study SERVICES materials, or career center access to employees based on their work locations. This material covers self-assessment, preparing your resume, assessing the job market, developing a job search strategy, interviewing, and successfully negotiating an offer. Department level managers will receive individual outplacement services for three (3) months. These services will begin following the employee's release date. ------------------------------------------------------------ EMPLOYEE Employees may continue to use the Employee Assistance ASSISTANCE Program (EAP) through their termination dates. During this PROGRAM period, they may participate in up to two (2) counseling sessions. ------------------------------------------------------------ UNEMPLOYMENT Employees may apply for unemployment insurance immediately INSURANCE following the Notice Pay Period. Employees should contact the unemployment insurance office in their state of residence for further advice regarding these benefits. ------------------------------------------------------------ IMPORTANT It is important to remember that this plan does not apply to NOTES employees terminated for cause. EMPLOYEES MUST CONTINUE TO PERFORM AT ACCEPTABLE LEVELS TO QUALIFY FOR ANY SEPARATION BENEFIT. ------------------------------------------------------------ QUESTIONS EMPLOYEES WITH QUESTIONS REGARDING THE GREAT WESTERN CHANGE IN CONTROL BENEFITS PLAN MAY CALL HUMAN RESOURCES AT (818) 775-3555 OR (800) 843-6093, BETWEEN THE HOURS OF: MONDAY - THURSDAY 7:00 A.M.- 6:00 P.M. (PACIFIC TIME) FRIDAY 7:00 A.M. - 3:00 P.M. (PACIFIC TIME) 6 EX-10.68 25 OMNIBUS AMENDMENT TO THE EMPLOYMENT AGREEMENTS Exhibit 10.68 OMNIBUS AMENDMENT 1997-1 WHEREAS, Great Western Financial Corporation ("GWFC") maintains the following plans, trusts and agreements for the benefit of its employees and/or directors (collectively, the "Plans"): . Employment Agreements, amended and restated as of December 10, 1996: . John F. Maher . J. Lance Erikson . Carl F. Geuther . Michael M. Pappas . A. William Schenck III . Jaynie M. Studenmund . Employment Agreement with Ray W. Sims, effective as of January 6, 1997 . GWFC 1988 Stock Option and Incentive Plan, as amended through December 10, 1996 . GWFC Annual Incentive Compensation Plan for Executive Officers, as amended December 9, 1996 (the "Annual Incentive Plan") . GWFC Senior Officers' Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996 . GWFC Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996 . GWFC Directors' Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996 . Great Western Supplemental Executive Retirement Plan (1988 Restatement), as amended through December 10, 1996 . Great Western Retirement Restoration Plan, as amended December 10, 1996 . GWFC Umbrella Trust for Senior Officers (as amended through December 10, 1996) and Umbrella Trust for Directors (as amended through December 10, 1996) . Employee Home Loan Program (revised and restated as of April 27, 1993), as amended December 10, 1996 . GWFC Special Severance Plan, effective December 10, 1996 WHEREAS, the Compensation Committee of the Board of Directors of GWFC has adopted this Omnibus Amendment 1997-1 with respect to the Annual Incentive Plan; and WHEREAS, the Board of Directors of GWFC has adopted this Omnibus Amendment 1997-1 with respect to all of the Plans other than the Annual Incentive Plan; NOW, THEREFORE, subject to the succeeding paragraph hereof, each of the Plans is amended to provide that the first clause of the third subparagraph of the definition of "Change in Control" contained therein is amended by deleting the phrase "at least 60%" and inserting in lieu thereof the phrase "at least 75%". The effective date of this Amendment shall be February 20, 1997; provided, however, that the amendment set forth herein shall be of no force and - -------- ------- effect with respect to any transaction that is intended to comply with "pooling of interest" accounting rules, if and to the extent such amendment would prevent the transaction from so complying. Except as herein modified, the Plans shall remain in full force and effect. GREAT WESTERN FINANCIAL CORPORATION By: /s/ J. LANCE ERIKSON -------------------- Executive Vice President, General Counsel and Secretary 2 EX-10.69 26 AGREEMENT AND PLAN OF MERGER EXHIBIT 10.69 AGREEMENT AND PLAN OF MERGER BY AND AMONG WASHINGTON MUTUAL, INC. NEW AMERICAN CAPITAL, INC. AND GREAT WESTERN FINANCIAL CORPORATION DATED AS OF MARCH 5, 1997 TABLE OF CONTENTS ARTICLE I THE MERGER
PAGE ---- 1.1 The Merger....................................................................... 1 1.2 Effective Time................................................................... 1 1.3 Effects of the Merger............................................................ 1 1.4 Conversion of Subject Company Common Stock, Subject Company 8.30% Preferred 1 Stock............................................................................ 1.5 Parent Common Stock; Parent Preferred Stock...................................... 3 1.6 Merger Sub Common Stock.......................................................... 3 1.7 Options.......................................................................... 3 1.8 Certificate of Incorporation; Articles of Amendment.............................. 3 1.9 Bylaws........................................................................... 3 1.10 Tax Consequences................................................................. 4 1.11 Board of Directors............................................................... 4 ARTICLE II EXCHANGE OF SHARES 2.1 Parent to Make Shares Available.................................................. 4 2.2 Exchange of Shares............................................................... 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SUBJECT COMPANY 3.1 Corporate Organization........................................................... 5 3.2 Capitalization................................................................... 6 3.3 Authority; No Violation.......................................................... 7 3.4 Consents and Approvals........................................................... 8 3.5 Reports.......................................................................... 8 3.6 Financial Statements............................................................. 9 3.7 Broker's Fees.................................................................... 9 3.8 Absence of Certain Changes or Events............................................. 9 3.9 Legal Proceedings................................................................ 10 3.10 Taxes............................................................................ 10 3.11 Employees........................................................................ 10 3.12 SEC Reports...................................................................... 11 3.13 Compliance with Applicable Law................................................... 12 3.14 Certain Contracts................................................................ 12 3.15 Agreements with Regulatory Agencies.............................................. 12 3.16 Undisclosed Liabilities.......................................................... 12 3.17 Rights Agreement; Anti-takeover Provisions....................................... 13 3.18 Subject Company Information...................................................... 13 3.19 Environmental Liability.......................................................... 13 3.20 Pooling of Interests............................................................. 13 3.21 Opinions of Financial Advisors................................................... 13 3.22 Patents, Trademarks, Etc......................................................... 13 3.23 Community Reinvestment Act Compliance............................................ 14
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PAGE ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT 4.1 Corporate Organization........................................................... 14 4.2 Capitalization................................................................... 14 4.3 Authority; No Violation.......................................................... 15 4.4 Consents and Approvals........................................................... 16 4.5 Reports.......................................................................... 16 4.6 Financial Statements............................................................. 16 4.7 Broker's Fees.................................................................... 17 4.8 Absence of Certain Changes or Events............................................. 17 4.9 Legal Proceedings................................................................ 17 4.10 Taxes............................................................................ 17 4.11 SEC Reports...................................................................... 17 4.12 Compliance with Applicable Law................................................... 18 4.13 Agreements with Regulatory Agencies.............................................. 18 4.14 Undisclosed Liabilities.......................................................... 18 4.15 Rights Agreement................................................................. 18 4.16 Parent Information............................................................... 18 4.17 Environmental Liability.......................................................... 18 4.18 Pooling of Interests............................................................. 19 4.19 Opinion of Financial Advisor..................................................... 19 4.20 Patents, Trademarks, Etc......................................................... 19 4.21 Community Reinvestment Act Compliance............................................ 19 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Businesses Prior to the Effective Time................................ 19 5.2 Forbearances..................................................................... 19 ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Regulatory Matters............................................................... 22 6.2 Access to Information............................................................ 23 6.3 Stockholders' Approvals.......................................................... 24 6.4 Legal Conditions to Merger....................................................... 24 6.5 Affiliates....................................................................... 24 6.6 Stock Exchange Listing........................................................... 24 6.7 Employee Benefit Plans........................................................... 24 6.8 Indemnification; Directors' and Officers' Insurance.............................. 25 6.9 Additional Agreements............................................................ 27 6.10 Advice of Changes................................................................ 27 6.11 Subsequent Interim and Annual Financial Statements............................... 27 ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger....................... 27 7.2 Conditions to Obligations of Parent.............................................. 28 7.3 Conditions to Obligations of Subject Company..................................... 29
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PAGE ---- ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination...................................................................... 30 8.2 Effect of Termination............................................................ 31 8.3 Amendment........................................................................ 32 8.4 Extension; Waiver................................................................ 32 ARTICLE IX GENERAL PROVISIONS 9.1 Closing.......................................................................... 32 9.2 Nonsurvival of Representations, Warranties and Agreements........................ 32 9.3 Expenses......................................................................... 32 9.4 Notices.......................................................................... 33 9.5 Interpretation................................................................... 33 9.6 Counterparts..................................................................... 34 9.7 Entire Agreement................................................................. 34 9.8 Governing Law.................................................................... 34 9.9 Severability..................................................................... 34 9.10 Publicity........................................................................ 34 9.11 Assignment; Third Party Beneficiaries............................................ 34
iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of March 5, 1997 (this "Agreement"), by and among Washington Mutual, Inc., a Washington corporation ("Parent"), New American Capital, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent ("Merger Sub"), and Great Western Financial Corporation, a Delaware corporation ("Subject Company"). WHEREAS, the Boards of Directors of Parent and Subject Company have each approved, and deem it advisable and in the best interests of their respective stockholders to consummate, the business combination transaction provided for herein; and WHEREAS, the Boards of Directors of Parent and Subject Company have each determined that the transactions provided for herein and contemplated hereby are consistent with, and in furtherance of, their respective business strategies and goals. NOW, THEREFORE, In consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Subject to the terms and conditions of this Agreement, in accordance with the Delaware General Corporation Law (the "DGCL") at the Effective Time (as defined in Section 1.2 hereof), Subject Company shall merge (the "Merger") with and into Merger Sub. Merger Sub shall be the surviving corporation (hereinafter sometimes called the "Surviving Corporation") in the Merger, and shall continue its corporate existence under the laws of the State of Delaware. The name of the Surviving Corporation shall be New American Capital, Inc. Upon consummation of the Merger, the separate corporate existence of Subject Company shall terminate. 1.2 Effective Time. The Merger shall become effective as set forth in the certificate of merger (the "Certificate of Merger") which shall be filed with the Secretary of State of the State of Delaware (the "Delaware Secretary") on the Closing Date (as defined in Section 9.1 hereof). The term "Effective Time" shall be the date and time when the Merger becomes effective, as set forth in the Certificate of Merger. 1.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the Section 253 of the DGCL. 1.4 Conversion of Subject Company Common Stock, Subject Company 8.30% Preferred Stock. At the Effective Time, subject to Section 2.2(e) hereof, by virtue of the Merger and without any action on the part of Parent, Merger Sub, Subject Company or the holder of any of the following securities: (a) Each share of the common stock, par value $1.00 per share, of Subject Company (the "Subject Company Common Stock") issued and outstanding immediately prior to the Effective Time (other than shares of Subject Company Common Stock held (x) in Subject Company's treasury or (y) directly or indirectly by Parent or Subject Company or any of their respective Subsidiaries (as defined below) (except for Trust Account Shares and DPC shares, as such terms are defined below)), together with the rights (the "Subject Company Rights") attached thereto issued pursuant to the Rights Agreement, dated as of June 27, 1995, between Subject Company and First Chicago Trust Company of New York, as Rights Agent (the "Subject Company Rights Agreement"), shall, subject to Section 1.4(c) hereof, be converted into the right to receive .90 shares (the "Common Exchange Ratio") of the common stock, no par value, of Parent ("Parent Common Stock"), together with the number of rights ("Parent Rights") issued pursuant to the Parent Rights Agreement (as defined in Section 4.2 hereof) associated therewith. (b) Each share of 8.30% Cumulative Preferred Stock, par value $1.00, of Subject Company (the "Subject Company 8.30% Preferred Stock") issued and outstanding immediately prior to the Effective 1 Time shall be converted into the right to receive one share of 8.30% Cumulative Preferred Stock of Parent (the "Parent New Preferred Stock"). The terms of the Parent New Preferred Stock shall be substantially the same as the terms of the Subject Company 8.30% Preferred Stock. For purposes of this Agreement (i) the Subject Company Common Stock and Subject Company Preferred Stock (as defined below) are referred to herein as the "Subject Company Capital Stock," and (ii) the Parent Common Stock and Parent Preferred Stock (as defined below) are collectively referred to as the "Parent Capital Stock." (c) All of the shares of Subject Company Common Stock converted into the right to receive Parent Common Stock pursuant to this Article I shall no longer be outstanding and shall automatically be cancelled and shall cease to exist as of the Effective Time, and each certificate (each a "Common Certificate") previously representing any such shares of Subject Company Common Stock shall thereafter represent the right to receive (i) a certificate representing the number of whole shares of Parent Common Stock and (ii) the cash in lieu of fractional shares into which the shares of Subject Company Common Stock represented by such Common Certificate have been converted pursuant to this Section 1.4 and Section 2.2(e) hereof. Common Certificates previously representing shares of Subject Company Common Stock shall be exchanged for certificates representing whole shares of Parent Common Stock and cash in lieu of fractional shares issued in consideration therefor upon the surrender of such Common Certificates in accordance with Section 2.2 hereof, without any interest thereon. If prior to the Effective Time the outstanding shares of Parent Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in Parent's capitalization, then an appropriate and proportionate adjustment shall be made to the Common Exchange Ratio. (d) All of the shares of Subject Company 8.30% Preferred Stock converted into the right to receive Parent New Preferred Stock pursuant to this Article I shall no longer be outstanding and shall automatically be cancelled and shall cease to exist as of the Effective Time, and each certificate (each a "Preferred Certificate," and collectively with the Common Certificates, the "Certificates") previously representing any such shares of Subject Company 8.30% Preferred Stock shall thereafter represent the right to receive a certificate representing the number of shares of corresponding Parent New Preferred Stock into which the shares of Subject Company 8.30% Preferred Stock represented by such Preferred Certificate have been converted pursuant to this Section 1.4. Preferred Certificates previously representing shares of Subject Company 8.30% Preferred Stock shall be exchanged for certificates representing shares of corresponding Parent New Preferred Stock issued in consideration therefor upon the surrender of such Preferred Certificates in accordance with Section 2.2 hereof, without any interest thereon. (e) At the Effective Time, all shares of Subject Company Capital Stock that are owned by Subject Company as treasury stock and all shares of Subject Company Capital Stock that are owned directly or indirectly by Parent or Subject Company or any of their respective Subsidiaries (other than shares of Subject Company Capital Stock held directly or indirectly in trust accounts, managed accounts and the like or otherwise held in a fiduciary or nominee capacity that are beneficially owned by third parties (any such shares, and shares of Parent Common Stock which are similarly held, whether held directly or indirectly by Parent or Subject Company or any of their respective Subsidiaries, as the case may be, being referred to herein as "Trust Account Shares") and other than any shares of Subject Company Capital Stock held by Parent or Subject Company or any of their respective Subsidiaries in respect of a debt previously contracted (any such shares of Subject Company Capital Stock, and shares of Parent Common Stock which are similarly held, whether held directly or indirectly by Parent or Subject Company or any of their respective Subsidiaries, being referred to herein as "DPC Shares")) shall be cancelled and shall cease to exist and no stock of Parent or other consideration shall be delivered in exchange therefor. All shares of Parent Common Stock that are owned by Subject Company or any of its Subsidiaries (other than Trust Account Shares and DPC Shares) shall become treasury stock of Parent. (f) At the Effective Time, Parent shall assume the obligations of Subject Company under the Deposit Agreement, dated as of September 2, 1992, between Subject Company and Harris Trust Co. of 2 California, as depositary (relating to the Subject Company 8.30% Preferred Stock). Parent shall instruct the applicable depositary to treat the shares of Parent New Preferred Stock received by such depositary in exchange for and upon conversion of the shares of Subject Company 8.30% Preferred Stock as new deposited securities under the deposit agreement. In accordance with the terms of the deposit agreement, the depositary receipts then outstanding shall thereafter represent the shares of Parent New Preferred Stock so received upon conversion and exchange for the shares of Subject Company 8.30% Preferred Stock. Parent shall request that such depositary call for the surrender of all outstanding receipts to be exchanged for new receipts (the "New Parent Depositary Shares") specifically describing the series of Parent New Preferred Stock. 1.5 Parent Common Stock; Parent Preferred Stock. At and after the Effective Time, each share of Parent Common Stock and each share of Parent Preferred Stock issued and outstanding immediately prior to the Effective Time shall remain an issued and outstanding share of common stock or preferred stock, as the case may be, of Parent and shall not be affected by the Merger. 1.6 Merger Sub Common Stock. Each of the issued and outstanding shares of the common stock of Merger Sub immediately prior to the Effective Time shall remain issued and outstanding after the Merger as shares of the Surviving Corporation, which shall thereafter constitute all of the issued and outstanding shares of common stock of the Surviving Corporation. No capital stock of Merger Sub will be issued or used in the Merger. 1.7 Options. At the Effective Time, each option granted by Subject Company to purchase shares of Subject Company Common Stock (each a "Subject Company Option") which is outstanding and unexercised immediately prior thereto shall cease to represent a right to acquire shares of Subject Company Common Stock and shall be converted automatically into an option to purchase shares of Parent Common Stock in an amount and at an exercise price determined as provided below (and otherwise subject to the terms of the Subject Company 1979 Stock Option and Incentive Plan and the Subject Company 1988 Stock Option and Incentive Plan, each as amended to date (together, the "Subject Company Stock Option Plans"), and the agreements evidencing grants thereunder, including, but not limited to, the accelerated vesting of such options which shall occur in connection with and by virtue of the consummation of the Merger as and to the extent required by such plans and agreements): (1) the number of shares of Parent Common Stock to be subject to the new option shall be equal to the product of the number of shares of Subject Company Common Stock subject to the original option and the Common Exchange Ratio, provided that any fractional shares of Parent Common Stock resulting from such multiplication shall be rounded down to the nearest share; and (2) the exercise price per share of Parent Common Stock under the new option shall be equal to the exercise price per share of Subject Company Common Stock under the original option divided by the Common Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent. In the case of any options which are "incentive stock options" (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")), the exercise price, the number of shares purchasable pursuant to such options and the terms and conditions of exercise of such options shall be determined in order to comply with Section 424(a) of the Code. The duration and other terms of the new option shall be the same as the original option (subject to Section 6.7(b) hereof) except that all references to Subject Company shall be deemed to be references to Parent. 1.8 Certificate of Incorporation; Articles of Amendment. At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect at the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation. At or prior to the Effective Time, Parent shall duly execute and file with the Secretary of State of the State of Washington (the "Washington Secretary") articles of amendment (the "Preferred Stock Articles of Amendment") establishing the Parent New Preferred Stock. 1.9 Bylaws. At the Effective Time, the Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law. 3 1.10 Tax Consequences. It is intended that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Code, and that this Agreement shall constitute a "plan of reorganization" for purposes of the Code. 1.11 Board of Directors. At the Effective Time, Parent shall take all action necessary to appoint four representatives of Subject Company, mutually agreeable to Parent and Subject Company, to Parent's Board of Directors. ARTICLE II EXCHANGE OF SHARES 2.1 Parent to Make Shares Available. At or prior to the Effective Time, Parent shall deposit, or shall cause to be deposited, with a bank or trust company which may be a Subsidiary of Parent or the Parent's transfer agent (the "Exchange Agent"), for the benefit of the holders of Certificates, for exchange in accordance with this Article II, certificates representing the shares of Parent Common Stock and Parent New Preferred Stock and an estimated amount of cash in lieu of any fractional shares (the cash payable in lieu of fractional shares of Parent Common Stock and certificates for shares of Parent Common Stock and Parent New Preferred Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section 1.4 and paid pursuant to Section 2.2(a) in exchange for outstanding shares of Subject Company Capital Stock. 2.2 Exchange of Shares. (a) As soon as practicable after the Effective Time, and in no event later than ten business days thereafter, the Exchange Agent shall mail to each holder of record of a Certificate or Certificates a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates in exchange for certificates representing, as the case may be, the shares of Parent Common Stock or Parent New Preferred Stock and the cash in lieu of fractional shares of Parent Common Stock, if any, into which the shares of Subject Company Capital Stock represented by such Certificate or Certificates shall have been converted pursuant to this Agreement. Upon proper surrender of a Certificate for exchange and cancellation to the Exchange Agent, together with such properly completed letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor, as applicable, (i) a certificate representing that number of shares of Parent Common Stock to which such holder of Subject Company Common Stock shall have become entitled pursuant to the provisions of Article I hereof, (ii) a certificate representing that number of shares of Parent New Preferred Stock to which such holder of Subject Company 8.30% Preferred Stock shall have become entitled pursuant to the provisions of Article I hereof and (iii) a check representing the amount of cash in lieu of fractional shares of Parent Common Stock, if any, which such holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of this Article II, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash in lieu of fractional shares and unpaid dividends and distributions, if any, payable to holders of Certificates. (b) No dividends or other distributions with a record date after the Effective Time with respect to Parent Common Stock or Parent New Preferred shall be paid to the holder of any unsurrendered Certificate until the holder thereof shall surrender such Certificate in accordance with this Article II. After the surrender of a Certificate in accordance with this Article II, the record holder thereof shall be entitled to receive any such dividends or other distributions, without any interest thereon, which theretofore had become payable with respect to shares of Parent Common Stock or Parent New Preferred Stock represented by such Certificate. (c) If any certificate representing shares of Parent Common Stock or Parent New Preferred Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the Certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer, and that the person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the issuance of a certificate representing shares of Parent Common Stock or Parent New 4 Preferred Stock in any name other than that of the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. (d) At or after the Effective Time, there shall be no transfers on the stock transfer books of Subject Company of the shares of Subject Company Capital Stock which were issued and outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented for transfer to the Exchange Agent, they shall be cancelled and exchanged for certificates representing shares of Parent Capital Stock as provided in this Article II. (e) Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Common Certificates, no dividend or distribution with respect to Parent Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a stockholder of Parent. In lieu of the issuance of any such fractional share, Parent shall pay to each former stockholder of Subject Company who otherwise would be entitled to receive such fractional share an amount in cash determined by multiplying (i) the average of the closing sale prices of Parent Common Stock on The Nasdaq Stock Market ("Nasdaq") as reported by The Wall Street Journal for the five trading days immediately preceding the date on which the Effective Time occurs by (ii) the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 1.4 hereto. For the purposes of determining any such fractional share interests, all shares of Subject Company Common Stock owned by any Subject Company stockholder shall be combined so as to calculate the maximum number of shares of Parent Company Common Stock issuable to such Subject Company Stockholder. (f) Any portion of the Exchange Fund that remains unclaimed by the stockholders of Subject Company for twelve months after the Effective Time shall be paid, at the request of Parent, to Parent. Any stockholders of Subject Company who have not theretofore complied with this Article II shall thereafter look only to Parent for payment of the shares of Parent Common Stock or Parent New Preferred Stock, cash in lieu of any fractional shares and unpaid dividends and distributions on the Parent Common Stock or Parent New Preferred Stock deliverable in respect of each share of Subject Company Common Stock or Subject Company 8.30% Preferred Stock, as the case may be, held by such stockholder at the Effective Time as determined pursuant to this Agreement, in each case, without any interest thereon. Notwithstanding anything to the contrary contained herein, none of Parent, Merger Sub, Subject Company, the Exchange Agent or any other person shall be liable to any former holder of shares of Subject Company Common Stock or Subject Company 8.30% Preferred Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such person of a bond in such amount as Parent may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock and cash in lieu of fractional shares or Parent New Preferred Stock, as the case may be, deliverable in respect thereof pursuant to this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SUBJECT COMPANY Subject Company hereby represents and warrants to Parent as follows: 3.1 Corporate Organization. (a) Subject Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Subject Company has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the 5 business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have nor reasonably be expected to have a Material Adverse Effect (as defined below) on Subject Company. As used in this Agreement, the term "Material Adverse Effect" means, with respect to Parent, Subject Company or the Surviving Corporation, as the case may be, a material adverse effect on the business, results of operations, financial condition or prospects of such party and its Subsidiaries taken as a whole or a material adverse effect on such party's ability to consummate the transactions contemplated hereby on a timely basis; provided, however, that in determining whether a Material Adverse Effect has occurred there shall be excluded any effect on the referenced party the cause of which is (i) any change in banking, savings association and similar laws, rules or regulations of general applicability or interpretations thereof by courts or governmental authorities, (ii) any change in generally accepted accounting principles ("GAAP") or regulatory accounting requirements applicable to banks, savings associations, or their holding companies generally, (iii) any action or omission of Subject Company or Parent or any Subsidiary of either of them taken with the prior written consent of Parent or Subject Company, as applicable, in contemplation of the Merger and (iv) any changes in general economic conditions affecting banks, savings associations, or their holding companies generally. As used in this Agreement, the word "Subsidiary" when used with respect to any party means any corporation, partnership or other organization, whether incorporated or unincorporated, which is consolidated with such party for financial reporting purposes. Subject Company is duly registered as a savings and loan holding company under the Home Owners' Loan Act, as amended ("HOLA"), and qualifies as a savings and loan holding company of the type described in Section 10(c)(3)(A) of HOLA. The copies of the Restated Certificate of Incorporation and Bylaws of Subject Company which have previously been made available to Parent are true, complete and correct copies of such documents as in effect as of the date of this Agreement. (b) Each Subject Company Subsidiary (i) is duly organized and validly existing as a corporation or partnership under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and is in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have or reasonably be expected to have a Material Adverse Effect on Subject Company, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. (c) Except for its ownership of Great Western Bank, a Federal Savings Bank ("Great Western Bank"), First Community Industrial Bank and Great Western Thrift and Loan, Subject Company does not own any stock of or equity interest in any depository institution (as defined in 12 U.S.C. sec. 1813(c)(1)). Great Western Bank is a qualified thrift lender pursuant to Section 10(m) of HOLA and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") through the Savings Association Insurance Fund ("SAIF") to the fullest extent permitted by law. Great Western Bank is a member in good standing of the Federal Home Loan Bank ("FHLB") of San Francisco. The deposits of each of First Community Industrial Bank and Great Western Thrift and Loan are insured by the FDIC through the Bank Insurance Fund ("BIF") to the fullest extent permitted by law. Each of First Community Industrial Bank and Great Western Thrift and Loan is an institution described in Section 2(c)(2)(H) of the Bank Holding Company Act of 1956, as amended. Neither Subject Company nor First Community Industrial Bank or Great Western Thrift and Loan has received a notice from either the Office of Thrift Supervision (the "OTS") or the FDIC to the effect that either regulator deems First Community Industrial Bank or Great Western Thrift and Loan a savings association under Section 10(a)(1) of HOLA or 12 CFR sec. 583.21. 3.2 Capitalization. (a) The authorized capital stock of Subject Company consists of 200,000,000 shares of Subject Company Common Stock and 10,000,000 shares of preferred stock, par value $1.00 per share (the "Subject Company Preferred Stock"). At the close of business on March 4, 1997, there were 137,574,634 shares of Subject Company Common Stock outstanding, 660,000 shares of Subject Company 8.30% Preferred Stock outstanding (evidenced by 6,600,000 Subject Company Depositary Shares, each of which represent a one-tenth interest in a share of Subject Company 8.30% Preferred Stock) and 437,639 shares of Subject Company Common Stock held in Subject Company's treasury. As of March 4, 1997, no 6 shares of Subject Company Common Stock or Subject Company Preferred Stock were reserved for issuance, except (i) 4,121,941 shares of Subject Company Common Stock were reserved for issuance pursuant to Subject Company's dividend reinvestment and stock purchase plans, (ii) 9,859,477 shares of Subject Company Common Stock were reserved for issuance upon the exercise of stock options pursuant to the Subject Company Stock Option Plans, (iii) 4,000,000 shares of the Subject Company Common Stock are reserved for issuance pursuant to the Subject Company Employee Savings Incentive Plan (the "ESIP") and (iv) the shares of Subject Company Preferred Stock reserved for issuance upon exercise of the Subject Company Rights distributed to holders of Subject Company Common Stock pursuant to the Subject Company Rights Agreement. All of the issued and outstanding shares of Subject Company Common Stock and Subject Company 8.30% Preferred Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except (i) as set forth in Section 3.2(a) of the disclosure schedule of Subject Company delivered to Parent concurrently herewith (the "Subject Company Disclosure Schedule"), (ii) for the Subject Company Rights Agreement (a true and correct copy of which, including all amendments thereto, has been made available to Parent) and (iii) as set forth elsewhere in this Section 3.2(a), Subject Company does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Subject Company Common Stock or Subject Company Preferred Stock or any other equity securities of Subject Company or any securities representing the right to purchase or otherwise receive any shares of Subject Company Common Stock or Subject Company Preferred Stock. Except as set forth in Section 3.2(a) of the Subject Company Disclosure Schedule, since March 4, 1997, Subject Company has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, other than pursuant to Subject Company's dividend reinvestment and stock purchase plans and the ESIP, the exercise of employee stock options granted prior to such date and as disclosed in Section 3.2(a) of the Subject Company Disclosure Schedule, and the issuance of Subject Company Rights pursuant to the Subject Company Rights Agreement. (b) Section 3.2(b) of the Subject Company Disclosure Schedule lists all "Significant Subsidiaries" of the Subject Company (as such term is defined in Rule 1-02 of Regulation S-X). Each Subsidiary in which Subject Company or any Subject Company Subsidiary beneficially owns or controls, directly or indirectly, more than 9.9% equity interest is a legal investment for a unitary savings and loan holding company and, for those owned by Great Western Bank, for a federal savings association. Except as set forth in Section 3.2(b) of the Subject Company Disclosure Schedule, Subject Company owns, directly or indirectly, all of the issued and outstanding shares of capital stock of or all other equity interests in each of the Subject Company Subsidiaries, free and clear of any liens, charges, encumbrances, adverse rights or claims and security interests whatsoever ("Liens"), and all of such shares are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. Neither Subject Company nor any Subject Company Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase, sale or issuance of any shares of capital stock or any other equity security of any Subsidiary of Subject Company or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of any such Subsidiary. 3.3 Authority; No Violation. (a) Subject Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Subject Company. The Board of Directors of Subject Company has directed that the agreement of merger (within the meaning of Section 251 of the DGCL) contained in this Agreement and the transactions contemplated hereby be submitted to Subject Company's stockholders for approval at a meeting of such stockholders and, except for the adoption of such agreement of merger by the affirmative vote of the holders of a majority of the outstanding shares of Subject Company Common Stock, no other corporate proceedings on the part of Subject Company are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Subject Company and (assuming due authorization, execution and delivery by Parent and Merger Sub) constitutes a valid and binding obligation of Subject Company, enforceable 7 against Subject Company in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. Subject Company acknowledges that Parent intends promptly after the Effective Time to cause the merger of Great Western Bank and one of Parent's wholly owned depository institution subsidiaries (the "Association Merger"); provided, however, that Parent agrees that the structure of the Association Merger shall not adversely affect the ability of the Merger to be treated as a reorganization within the meaning of Section 368(a) of the Code. Great Western Bank has full corporate power and authority to consummate the Association Merger. (b) Except as set forth in Section 3.3(b) of the Subject Company Disclosure Schedule, neither the execution and delivery of this Agreement by Subject Company nor the consummation by Subject Company of the transactions contemplated hereby nor the consummation of the Association Merger, nor compliance by Subject Company with any of the terms or provisions hereof, will (i) violate any provision of the Restated Certificate of Incorporation or Bylaws of Subject Company or any of the similar governing documents of any of its Subsidiaries or (ii) assuming that the consents and approvals referred to in Section 3.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Subject Company or any of its Subsidiaries or any of their respective properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of Subject Company or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Subject Company or any of its Subsidiaries is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults which, either individually or in the aggregate, will not have and would not reasonably be expected to have a Material Adverse Effect on Subject Company. 3.4 Consents and Approvals. Except for (i) the approval of the Merger and the Association Merger by the OTS, (ii) approval of the listing of the Parent Capital Stock to be issued in the Merger on Nasdaq, (iii) the filing with the Securities and Exchange Commission (the "SEC") of a joint proxy statement in definitive form relating to the meetings of Parent's and Subject Company's stockholders to be held in connection with this Agreement and the transactions contemplated hereby (the "Joint Proxy Statement") and the filing and declaration of effectiveness of the registration statement on Form S-4 (the "S-4") in which the Joint Proxy Statement will be included as a prospectus and any filings or approvals under applicable state securities laws, (iv) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL and the filing of the Preferred Stock Articles of Amendment with the Washington Secretary, (v) the adoption of the agreement of merger (within the meaning of Section 251 of the DGCL) contained in this Agreement by the requisite votes of the stockholders of Subject Company and the issuance of the shares of Parent Common Stock in the Merger by the stockholders of Parent, (vi) the consents and approvals set forth in Section 3.4 of the Subject Company Disclosure Schedule, and (vii) the consents and approvals of third parties which are not Governmental Entities (as defined below), the failure of which to obtain will not have and would not be reasonably expected to have a Material Adverse Effect, no consents or approvals of, or filings or registrations with, any court, administrative agency or commission or other governmental authority or instrumentality or self-regulatory organization (each a "Governmental Entity") or with any third party are necessary in connection with (A) the execution and delivery by Subject Company of this Agreement and (B) the consummation by Subject Company of the Merger and the other transactions contemplated hereby. 3.5 Reports. Subject Company and each of its Subsidiaries have timely filed all material reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1994 with any Governmental Entity and have paid all fees and assessments due and payable in connection therewith. Except for normal examinations conducted by a Governmental Entity in the regular course of the business of Subject Company and its Subsidiaries or as set forth in Section 3.5 of the Subject Company Disclosure Schedule, no Governmental Entity has initiated any 8 proceeding or, to the best knowledge of Subject Company, investigation into the business or operations of Subject Company or any of its Subsidiaries since January 1, 1994. Except as set forth in Section 3.5 of the Subject Company Disclosure Schedule, there is no material unresolved violation, criticism or exception by any Governmental Entity with respect to any report or statement relating to any examinations of Subject Company or any of its Subsidiaries. 3.6 Financial Statements. Subject Company has previously made available to Parent copies of (a) the consolidated balance sheets of Subject Company and its Subsidiaries, as of December 31, for the fiscal years 1994 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal years 1993 through 1995, inclusive, as reported in Subject Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case accompanied by the audit report of Price Waterhouse LLP, independent auditors with respect to Subject Company and (b) the unaudited consolidated balance sheets of Subject Company and its Subsidiaries as of September 30, 1995 and September 30, 1996 and the related unaudited consolidated statements of operations, shareholders' equity and cash flows for the periods then ended, as reported in Subject Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996 filed with the SEC under the Exchange Act. Each of the financial statements referred to in this Section 3.6 (including the related notes, where applicable) fairly present, and the financial statements referred to in Section 6.11 hereof will fairly present (subject, in the case of the unaudited statements, to normal recurring adjustments, none of which are expected to be material in nature or amount), the results of the consolidated operations and changes in stockholders' equity and consolidated financial position of Subject Company and its Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth. Each of such statements (including the related notes, where applicable) complies, and the financial statements referred to in Section 6.11 hereof will comply, in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto and each of such statements (including the related notes, where applicable) has been, and the financial statements referred to in Section 6.11 will be, prepared in accordance with GAAP consistently applied during the periods involved, except in each case as indicated in such statements or in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q. The books and records of Subject Company and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. 3.7 Broker's Fees. Except as set forth in Section 3.7 of the Subject Company Disclosure Schedule, neither Subject Company nor any Subject Company Subsidiary nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. Copies of all agreements with each broker or finder listed in Section 3.7 of the Subject Company Disclosure Schedule have previously been furnished to Parent. 3.8 Absence of Certain Changes or Events. (a) Except as publicly disclosed in Subject Company Reports (as defined in Section 3.12) filed prior to the date hereof, or as set forth in Section 3.8(a) of the Subject Company Disclosure Schedule, since September 30, 1996, no event has occurred which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Subject Company or the Surviving Corporation. (b) Except as set forth in Section 3.8(b) of the Subject Company Disclosure Schedule, since September 30, 1996, Subject Company and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course of business, and neither Subject Company nor any of its Subsidiaries has (i) except for normal increases in the ordinary course of business consistent with past practice and except as required by applicable law, increased the wages, salaries, compensation, pension or other fringe benefits or perquisites payable to any officer or director, other than persons newly hired for such position, from the amount thereof in effect as of September 30, 1996, or granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay, or paid any bonus, in each case to any such officer or director, other than pursuant to preexisting agreements or arrangements or (ii) suffered any strike, work stoppage, slow-down or other labor disturbance. 9 3.9 Legal Proceedings. (a) Except as set forth in Section 3.9 of the Subject Company Disclosure Schedule, neither Subject Company nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Subject Company's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Subject Company or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement as to which there is a significant possibility of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Subject Company. (b) There is no injunction, order, judgment, decree or regulatory restriction imposed upon Subject Company, any of its Subsidiaries or the assets of Subject Company or any of its Subsidiaries which has had, or would reasonably be expected to have, a Material Adverse Effect on Subject Company or the Surviving Corporation. 3.10 Taxes. (a) Except as set forth in Section 3.10(a) of Subject Company Disclosure Schedule or except to the extent of any failure to correctly file which results in aggregate Taxes of less than $20,000,000 or a reduction in net operating loss carryforward deductions of less than $60,000,000, each of Subject Company and its Subsidiaries has (i) duly and timely filed (including pursuant to applicable extensions granted without penalty) all Tax Returns (as hereinafter defined) required to be filed at or prior to the Effective Time, and such Tax Returns are to the best knowledge of Subject Company true, correct and complete in all respects, and (ii) paid in full or made adequate provision in the financial statements of Subject Company (in accordance with GAAP) for all Taxes (as hereinafter defined) related to such Tax Returns. Except as set forth in Section 3.10(a) of the Subject Company Disclosure Schedule or except to the extent the aggregate Taxes described in this sentence or otherwise described in this paragraph (a) (relating to undisclosed failures to file or pay taxes or the existence of undisclosed liens for Taxes) are less than $20,000,000, no deficiencies for any Taxes have been proposed, asserted or assessed against or with respect to Subject Company or any of its Subsidiaries. Except as set forth in Section 3.10(a) of the Subject Company Disclosure Schedule or except to the extent the aggregate Taxes described in this sentence or otherwise described in this paragraph (a) (relating to undisclosed failures to file or pay taxes on undisclosed proposed deficiencies for Taxes) are less than $20,000,000, to the best knowledge of Subject Company there are no liens for Taxes upon the assets of either Subject Company or its Subsidiaries except for statutory liens for current Taxes not yet due. (b) For purposes of this Agreement, "Taxes" shall mean all taxes, charges, fees, levies, penalties or other assessments imposed by any United States federal, state, local or foreign taxing authority, including, but not limited to income, excise, property, sales, transfer, franchise, payroll, withholding, social security or other similar taxes, including any interest or penalties attributable thereto. (c) For purposes of this Agreement, "Tax Return" shall mean any return, report, information return or other document (including any related or supporting information) with respect to Taxes. (d) Neither Subject Company nor any of its Subsidiaries has filed a consent to the application of Section 341(f) of the Code. 3.11 Employees. (a) Section 3.11(a) of the Subject Company Disclosure Schedule sets forth a true and complete list of each material employee benefit plan, arrangement or agreement and any amendments or modifications thereof (including, without limitation, all stock purchase, stock option, severance, employment, change-in-control, health/welfare and section 125 plans, fringe benefit, bonus, incentive, deferred compensation and other agreements, programs, policies and arrangements, whether or not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is maintained as of the date of this Agreement (the "Plans") by Subject Company or any of its Subsidiaries or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), all of which together with Subject Company would be deemed a "single employer" within the meaning of Section 4001 of ERISA. (b) Subject Company has previously made available to Parent true and complete copies of each of the Plans and all related documents, including but not limited to (i) the actuarial report for such Plan (if 10 applicable) for each of the last two years, and (ii) the most recent determination letter from the Internal Revenue Service (if applicable) for such Plan. (c) Except as set forth in Section 3.11(c) of the Subject Company Disclosure Schedule, (i) each of the Plans has been operated and administered in all material respects in accordance with applicable laws, including but not limited to ERISA and the Code, (ii) each of the Plans intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified, (iii) with respect to each Plan which is subject to Title IV of ERISA, the present value of accrued benefits under such Plan, based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared by such Plan's actuary with respect to such Plan, did not, as of its latest valuation date, exceed the then current value of the assets of such Plan allocable to such accrued benefits, (iv) no Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of Subject Company, its Subsidiaries or any ERISA Affiliate beyond their retirement or other termination of service, other than (w) coverage mandated by applicable law, (x) death benefits or retirement benefits under any "employee pension plan," as that term is defined in Section 3(2) of ERISA, (y) deferred compensation benefits accrued as liabilities on the books of Subject Company, its Subsidiaries or the ERISA Affiliates or (z) benefits the full cost of which is borne by the current or former employee (or his beneficiary), (v) no liability under Title IV of ERISA has been incurred by Subject Company, its Subsidiaries or any ERISA Affiliate that has not been satisfied in full (other than payment of premiums to the Pension Benefit Guaranty Corporation (the "PBGC")), and no condition exists that presents a material risk to Subject Company, its Subsidiaries or any ERISA Affiliate of incurring a material liability thereunder, (vi) no Plan is a "multiemployer pension plan," as such term is defined in Section 3(37) of ERISA, (vii) all contributions or other amounts payable by Subject Company or its Subsidiaries as of the Effective Time with respect to each Plan in respect of current or prior plan years have been paid or accrued in accordance with generally accepted accounting practices and Section 412 of the Code, (viii) neither Subject Company, its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in connection with which Subject Company, its Subsidiaries or any ERISA Affiliate could be subject to either a material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of the Code, and (ix) to the best knowledge of Subject Company there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Plans or any trusts related thereto which would, individually or in the aggregate, have or be reasonably expected to have a Material Adverse Effect on Subject Company. (d) Except as set forth in Section 3.11(d) of the Subject Company Disclosure Schedule, no Plan exists which provides for or could result in the payment to any Subject Company employee of any money or other property or rights or accelerate the vesting or payment of such amounts or rights to any Subject Company employee as a result of the transactions contemplated by this Agreement, including the Merger and the Association Merger, whether or not such payment or acceleration would constitute a parachute payment within the meaning of Code Section 280G. Since December 31, 1996, neither Subject Company nor any of its Subsidiaries has taken any action that would result in the payment of any amounts, or the accelerated vesting of any rights or benefits, under the Plans set forth in Section 3.11(d) of the Subject Company Disclosure Schedule. 3.12 SEC Reports. Subject Company has previously made available to Parent an accurate and complete copy of each final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1994 and prior to the date hereof by Subject Company with the SEC pursuant to the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act (the "Subject Company Reports"), and no such registration statement, prospectus, report, schedule or proxy statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. Subject Company has timely filed all Subject Company Reports and other documents required to be filed by it under the Securities Act and the Exchange Act, and, as of their respective dates, all Subject Company Reports complied in all material respects with the published rules and regulations of the SEC with respect thereto. 3.13 Compliance with Applicable Law. Except as disclosed in Section 3.13 of the Subject Company Disclosure Schedule, Subject Company and each of its Subsidiaries hold, and have at all times held, all 11 material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to all, and have complied with and are not in default in any material respect under any, applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Subject Company or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default would not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Subject Company, and neither Subject Company nor any of its Subsidiaries knows of, or has received notice of, any violations of any of the above which, individually or in the aggregate, would have or would reasonably be expected to have a Material Adverse Effect on Subject Company. 3.14 Certain Contracts. (a) Except as set forth in Section 3.14(a) of the Subject Company Disclosure Schedule, neither Subject Company nor any of its Subsidiaries is a party to or is bound by any contract, arrangement, commitment or understanding (whether written or oral) (i) which is a material contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this Agreement, (ii) which limits the freedom of Subject Company or any of its Subsidiaries to compete in any line of business, in any geographic area or with any person, or (iii) with or to a labor union or guild (including any collective bargaining agreement). Each contract, arrangement, commitment or understanding of the type described in this Section 3.14(a), whether or not set forth in Section 3.14(a) of the Subject Company Disclosure Schedule, is referred to herein as a "Subject Company Contract," and neither Subject Company nor any of its Subsidiaries knows of, or has received notice of, any violation of the above by any of the other parties thereto which, individually or in the aggregate, would have or would reasonably be expected to have a Material Adverse Effect on Subject Company. Subject Company has made available or will make available within five days after the date hereof all contracts which involved payments by Subject Company or any of its Subsidiaries in 1996 of more than $1,000,000 or which could reasonably be expected to involve payments during 1997 of $1,000,000. (b) (i) Each Subject Company Contract is valid and binding and in full force and effect, (ii) Subject Company and each of its Subsidiaries has in all material respects performed all obligations required to be performed by it to date under each Subject Company Contract, and (iii) no event or condition exists which constitutes or, after notice or lapse of time or both, would constitute a material default on the part of Subject Company or any of its Subsidiaries under any such Subject Company Contract, except, in each case, where such invalidity, failure to be binding, failure to so perform or default, individually or in the aggregate, would not have or reasonably be expected to have a Material Adverse Effect on Subject Company. 3.15 Agreements with Regulatory Agencies. Except as set forth in Section 3.15 of the Subject Company Disclosure Schedule, neither Subject Company nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has adopted any board resolutions at the request of (each, whether or not set forth in Section 3.15 of the Subject Company Disclosure Schedule, a "Regulatory Agreement"), any Governmental Entity that restricts the conduct of its business or that in any manner relates to its capital adequacy, its credit policies, its management or its business, nor has Subject Company or any of its Subsidiaries been advised by any Governmental Entity that it is considering issuing or requesting any Regulatory Agreement. 3.16 Undisclosed Liabilities. Except (i) for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of Subject Company included in the Subject Company Form 10-Q for the quarter ended September 30, 1996 or (ii) for liabilities incurred in the ordinary course of business consistent with past practice since September 30, 1996, neither Subject Company nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued or contingent or otherwise and whether due or to become due) that, either alone or when combined with all similar liabilities, has had, or would be reasonably expected to have, a Material Adverse Effect on Subject Company. 3.17 Rights Agreement; Anti-takeover Provisions. Subject Company has taken all action so that the entering into of this Agreement and the consummation of the transactions contemplated hereby do not and will not result in the grant of any rights to any person under the Subject Company Rights Agreement or enable 12 or require the Subject Company Rights to be exercised, distributed or triggered. The Board of Directors of Subject Company has taken all necessary action so that the provisions of Section 203 of the DGCL (and any applicable provisions of the takeover laws of any other state) and any comparable provisions of Subject Company's Restated Certificate of Incorporation do not and will not apply to this Agreement, the Merger or the transactions contemplated hereby. 3.18 Subject Company Information. The information relating to Subject Company and its Subsidiaries to be provided by Subject Company for inclusion in the Joint Proxy Statement and the S-4, or in any other document filed with any other Governmental Entity in connection herewith, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The Joint Proxy Statement (except for such portions thereof as relate only to Parent or any of its Subsidiaries) will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. 3.19 Environmental Liability. Except as set forth in Section 3.19 of the Subject Company Disclosure Schedule, there are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that reasonably could be expected to result in the imposition, on Subject Company or any of its Subsidiaries of any liability or obligation arising under common law standards relating to environmental protection, human health or safety, or under any local, state or federal environmental statute, regulation or ordinance, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (collectively, the "Environmental Laws"), pending or, to the knowledge of Subject Company, threatened, against Subject Company or any of its Subsidiaries, which liability or obligation would have or would reasonably be expected to have a Material Adverse Effect on Subject Company. To the knowledge of Subject Company or any of its Subsidiaries, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that would have or would reasonably be expected to have a Material Adverse Effect on Subject Company. To the knowledge of Subject Company, during or prior to the period of (i) its or any of its Subsidiaries' ownership or operation of any of their respective current properties, (ii) its or any of its Subsidiaries' participation in the management of any property, or (iii) its or any of its Subsidiaries' holding of a security interest or other interest in any property, there were no releases or threatened releases of hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any such property which would reasonably be expected to have a Material Adverse Effect. Neither Subject Company nor any of its Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any material liability or obligation pursuant to or under any Environmental Law that would have or would reasonably be expected to have a Material Adverse Effect on Subject Company. 3.20 Pooling of Interests. As of the date of this Agreement, Subject Company has no reason to believe that the Merger will not qualify as a pooling of interests for accounting purposes. 3.21 Opinions of Financial Advisors. Subject Company has received the opinions of each of Goldman, Sachs & Co. and Merrill Lynch & Co., dated March 5, 1997, to the effect that, as of such date, the Common Exchange Ratio is fair from a financial point of view to the holders of Subject Company Common Stock. 3.22 Patents, Trademarks, Etc. Subject Company owns or possesses all legal rights to use all proprietary rights, including without limitation all trademarks, trade names, service marks and copyrights, that are material to the conduct of Subject Company's existing and proposed businesses. Except for the agreements listed on Section 3.22 of the Subject Company Disclosure Schedule, Subject Company is not bound by or a party to any options, licenses or agreements of any kind with respect to any trademarks, service marks or trade names which Subject Company claims to own. Subject Company has not received any communications alleging that it or its Subsidiaries has violated or would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. 3.23 Community Reinvestment Act Compliance. Great Western Bank is in substantial compliance with the applicable provisions of the Community Reinvestment Act of 1977 and the regulations promulgated 13 thereunder (collectively, "CRA") and has received a CRA rating of "outstanding" from the OTS in its most recent exam, and Subject Company has no knowledge of the existence of any fact or circumstance or set of facts or circumstances which could be reasonably expected to result in Great Western Bank failing to be in substantial compliance with such provisions or having its current rating lowered. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT Parent hereby represents and warrants to Subject Company as follows: 4.1 Corporate Organization. (a) Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Parent has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have or reasonably be expected to have a Material Adverse Effect on Parent. Parent is duly registered as a savings and loan holding company under HOLA and qualifies as a savings and loan holding company of the type described in Section 10(c)(3)(B) of HOLA. The copies of the Articles of Incorporation and Bylaws of Parent which have previously been made available to Subject Company are true, complete and correct copies of such documents as in effect as of the date of this Agreement. (b) Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Merger Sub will be a wholly owned direct subsidiary of Parent at least one day prior to, and as of, the Effective Time. Each Parent Subsidiary (i) is duly organized and validly existing as a bank, savings association, corporation or partnership under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have or reasonably be expected to have a Material Adverse Effect on Parent, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. (c) Except for its ownership of Washington Mutual Bank, Washington Mutual Bank fsb, American Savings Bank, F.A. and Family Savings Bank, FSB, Parent does not own any stock of or equity interest in any depository institution (as defined in 12 U.S.C. sec. 1813(c)(1)). Washington Mutual Bank is a qualified thrift lender pursuant to Section 10(m) of HOLA and its deposits are insured by the FDIC through the SAIF and the BIF to the fullest extent permitted by law. Washington Mutual Bank is a member in good standing of the FHLB of Seattle. Washington Mutual Bank fsb and American Savings Bank are each qualified thrift lenders pursuant to Section 10(m) of HOLA and their deposits are insured by the FDIC through the SAIF to the fullest extent permitted by law. Washington Mutual Bank fsb is a member in good standing of the FHLB of Seattle. American Savings Bank is a member in good standing of the FHLB of San Francisco. 4.2 Capitalization. (a) The authorized capital stock of Parent consists of 350,000,000 shares of Parent Common Stock and 10,000,000 shares of Preferred Stock, no par value ("Parent Preferred Stock"). At the close of business on December 31, 1996, there were 126,255,891 shares of Parent Common Stock outstanding, 2,752,500 shares of Parent Preferred Stock designated Series C issued and outstanding, and 1,970,000 shares of Parent Preferred Stock designated Series E issued and outstanding. On December 31, 1996, no shares of Parent Common Stock or Parent Preferred Stock were reserved for issuance. All of the issued and outstanding shares of Parent Common Stock and Parent Preferred Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. As of the date of this Agreement, except (i) as set forth in Section 4.2(a) of the Parent Disclosure Schedule (as defined below), (ii) the Rights Agreement, dated as of October 16, 1990, between Parent and First Interstate Bank of Washington (as amended and supplemented, the "Parent Rights Agreement"), and 14 (iii) as set forth elsewhere in this Section 4.2(a), Parent does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Parent Common Stock or Parent Preferred Stock or any other equity securities of Parent or any securities representing the right to purchase or otherwise receive any shares of Parent Common Stock or Parent Preferred Stock. Except (i) as set forth in Section 4.2(a) of the disclosure schedule of Parent delivered to Subject Company concurrently herewith (the "Parent Disclosure Schedule"), (ii) for options and restricted shares of Parent Common Stock permitted by this Agreement to be granted subsequent to the date of this Agreement, and (iii) for shares and other securities issued in connection with transactions permitted by Section 5.2, since December 31, 1996, Parent has not issued any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, other than pursuant to Parent's dividend reinvestment and employee stock purchase plans, the exercise of employee stock options granted prior to such date or thereafter as permitted by or disclosed in this Agreement, or as disclosed in Section 4.2(a) of the Parent Disclosure Schedule. The shares of Parent Capital Stock to be issued pursuant to the Merger will be duly authorized and validly issued and, at the Effective Time, all such shares will be fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. (b) Except as set forth in Section 4.2(b) of the Parent Disclosure Schedule, Parent owns, directly or indirectly, all of the issued and outstanding shares of capital stock of or all other equity interests in each of the Parent Subsidiaries, free and clear of any Liens, and all of such shares are duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. No Parent Subsidiary has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of capital stock or any other equity security of such Subsidiary or any securities representing the right to purchase or otherwise receive any shares of capital stock or any other equity security of such Subsidiary. 4.3 Authority; No Violation. (a) Parent has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Parent. The Board of Directors of Parent will direct that the issuance of shares of Parent Common Stock in the Merger be submitted to Parent's stockholders for approval at a meeting of such stockholders and, except for the approval of such issuance by the affirmative vote of the holders of a majority of the votes cast at such meeting, no other corporate proceedings on the part of Parent are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and (assuming due authorization, execution and delivery by Subject Company) constitutes a valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (b) Merger Sub has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby has been duly and validly approved by the Board of Directors of Merger Sub and will be duly and validly approved by the sole shareholder of Merger Sub, and, upon such approval, no other corporate proceedings on the part of Merger Sub will be necessary to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Merger Sub and (assuming due authorization, execution and delivery by the Subject Company) constitutes a valid and binding obligation of Merger Sub, enforceable against Merger Sub in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (c) Except as set forth in Section 4.3(c) of the Parent Disclosure Schedule, neither the execution and delivery of this Agreement by Parent or Merger Sub, nor the consummation by Parent of the transactions contemplated hereby, nor compliance by Parent with any of the terms or provisions hereof will (i) violate any provision of the Articles of Incorporation or Bylaws of Parent or any of the similar governing documents of any of its Subsidiaries or (ii) assuming that the consents and approvals referred to in Section 4.4 are duly 15 obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Parent or any of its Subsidiaries (including Merger Sub) or any of their respective properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of Parent or any of its Subsidiaries (including Merger Sub) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent or any of its Subsidiaries (including Merger Sub) is a party, or by which they or any of their respective properties or assets may be bound or affected, except (in the case of clause (y) above) for such violations, conflicts, breaches or defaults which either individually or in the aggregate will not have and would not reasonably be expected to have a Material Adverse Effect on Parent. 4.4 Consents and Approvals. Except for (i) the approval of the Merger and the Association Merger by the OTS, (ii) approval of the listing of the Parent Capital Stock to be issued in the Merger on Nasdaq, (iii) the filing with the SEC of the Joint Proxy Statement and the filing and declaration of effectiveness of the S-4 and any filings or approvals under applicable state securities laws, (iv) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the DGCL and the filing of the Preferred Stock Articles of Amendment with the Washington Secretary, (v) the adoption of the agreement of merger (within the meaning of Section 251 of the DGCL) contained in this Agreement by the requisite votes of the stockholders of Subject Company and the approval of the issuance of the shares of Parent Common Stock in the Merger by the stockholders of Parent as required by Nasdaq, (vi) the consents and approvals set forth in Section 4.4 of the Parent Disclosure Schedule, and (vii) the consents and approvals of third parties which are not Governmental Entities, the failure of which to obtain will not have and would not be reasonably expected to have a Material Adverse Effect, no consents or approvals of, or filings or registrations with, any Governmental Entity or any third party are necessary in connection with (A) the execution and delivery by Parent or Merger Sub of this Agreement and (B) the consummation by Parent and Merger Sub of the Merger and the other transactions contemplated hereby. 4.5 Reports. Parent and each of its Subsidiaries have timely filed all material reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 1994 with any Governmental Entities, and have paid all fees and assessments due and payable in connection therewith. Except as set forth in Section 4.5 of the Parent Disclosure Schedule and except for normal examinations conducted by a Governmental Entity in the regular course of the business of Parent and its Subsidiaries, no Governmental Entity has initiated any proceeding or, to the best knowledge of Parent, investigation into the business or operations of Parent or any of its Subsidiaries since January 1, 1994. There is no material unresolved violation, criticism, or exception by any Government Entity with respect to any report or statement relating to any examinations of Parent or any of its Subsidiaries. 4.6 Financial Statements. Parent has previously made available to Subject Company copies of (a) the consolidated balance sheets of Parent and its Subsidiaries, as of December 31, for the fiscal years 1994 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the fiscal years 1993 through 1995, inclusive, as reported in Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC under the Exchange Act, in each case accompanied by the audit report of Deloitte & Touche, LLP, independent public accountants with respect to Parent and (b) the unaudited consolidated balance sheets of Parent and its Subsidiaries as of September 30, 1995 and September 30, 1996 and the related unaudited consolidated statements of income, cash flows and changes in stockholders' equity for the periods then ended, as reported in Parent's Quarterly Report on Form 10-Q for the period ended September 30, 1996 filed with the SEC under the Exchange Act. Each of the financial statements referred to in this Section 4.6 (including the related notes, where applicable) fairly present, and the financial statements referred to in Section 6.11 hereof will fairly present (subject, in the case of the unaudited statements, to normal recurring adjustments, none of which are expected to be material in nature and amount), the results of the consolidated operations and changes in stockholders' equity and consolidated financial position of Parent and its Subsidiaries for the respective fiscal periods or as of the respective dates 16 therein set forth. Each of such statements (including the related notes, where applicable) complies, and the financial statements referred to in Section 6.11 hereof will comply, in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been, and the financial statements referred to in Section 6.11 will be, prepared in accordance with GAAP consistently applied during the periods involved, except in each case as indicated in such statements or in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q. The books and records of Parent and its Subsidiaries have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. 4.7 Broker's Fees. Except as set forth in Section 4.7 of the Parent Disclosure Schedule, neither Parent nor any Parent Subsidiary nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. Copies of all agreements with each broker or finder listed in Section 4.7 of the Parent Disclosure Schedule have previously been furnished to Subject Company. 4.8 Absence of Certain Changes or Events. Except as publicly disclosed in Parent Reports (as defined below) filed prior to the date hereof, since September 30, 1996, no event has occurred which has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Parent. 4.9 Legal Proceedings. (a) Neither Parent nor any of its Subsidiaries is a party to any, and there are no pending or, to the best of Parent's knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Parent or any of its Subsidiaries or challenging the validity or propriety of the transactions contemplated by this Agreement as to which there is a significant possibility of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Parent. (b) There is no injunction, order, judgment, decree, or regulatory restriction imposed upon Parent, any of its Subsidiaries or the assets of Parent or any of its Subsidiaries which has had, or would reasonably be expected to have, a Material Adverse Effect on Parent or the Surviving Corporation. 4.10 Taxes. Except as set forth in Section 4.10 of the Parent Disclosure Schedule, each of Parent and its Subsidiaries has (i) duly and timely filed (including pursuant to applicable extensions granted without penalty) all material Tax Returns required to be filed at or prior to the Effective Time, and such Tax Returns are to the best knowledge of the Parent true, correct and complete in all material respects, and (ii) paid in full or made adequate provision in the financial statements of Parent (in accordance with GAAP) for all Taxes related to such Tax Returns. Except as set forth in Section 4.10 of the Parent Disclosure Schedule, no material deficiencies for any Taxes have been proposed, asserted or assessed against or with respect to Parent or any of its Subsidiaries, and, to the best knowledge of Parent, there are no material liens for Taxes upon the assets of either Parent or its Subsidiaries except for statutory liens for current Taxes not yet due. 4.11 SEC Reports. Parent has previously made available to Subject Company an accurate and complete copy of each final registration statement, prospectus, report, schedule and definitive proxy statement filed since January 1, 1994 and prior to the date hereof by Parent with the SEC pursuant to the Securities Act or the Exchange Act (the "Parent Reports"), and no such registration statement, prospectus, report, schedule or proxy statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. Parent has timely filed all Parent Reports and other documents required to be filed by it under the Securities Act and the Exchange Act, and, as of their respective dates, all Parent Reports complied in all material respects with the published rules and regulations of the SEC with respect thereto. 4.12 Compliance with Applicable Law. Except as disclosed in Section 4.12 of the Parent Disclosure Schedule, Parent and each of its Subsidiaries hold, and have at all times held, all material licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses under and pursuant to all, and have complied with and are not in default in any material respect under any, applicable law, statute, 17 order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Parent or any of its Subsidiaries, except where the failure to hold such license, franchise, permit or authorization or such noncompliance or default would not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Parent, and neither Parent nor any of its Subsidiaries knows of, or has received notice of, any material violations of any of the above which, individually or in the aggregate, would have or reasonably be expected to have a Material Adverse Effect on Parent. 4.13 Agreements with Regulatory Agencies. Except as set forth in Section 4.13 of the Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has adopted any board resolutions at the request of (each, whether or not set forth in Section 4.13 of the Parent Disclosure Schedule, a "Parent Regulatory Agreement"), any Governmental Entity that restricts the conduct of its business or that in any manner relates to its capital adequacy, its credit policies, its management or its business, nor has Parent or any of its Subsidiaries been advised by any Governmental Entity that it is considering issuing or requesting any Regulatory Agreement. 4.14 Undisclosed Liabilities. Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of Parent included in the Parent Form 10-Q for the quarter ended September 30, 1996 or for liabilities incurred in the ordinary course of business consistent with past practice since September 30, 1996, neither Parent nor any of its Subsidiaries has incurred any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due) that, either alone or when combined with all similar liabilities, has had, or would reasonably be expected to have, a Material Adverse Effect on Parent. 4.15 Rights Agreement; Anti-takeover Provisions. Parent has taken all action (including, if required, redeeming all of the outstanding Rights issued pursuant to the Parent Company Rights Agreement or amending or terminating the Parent Rights Agreement) so that the entering into of this Agreement and the consummation of the transactions contemplated hereby do not and will not result in the grant of any rights to any person under the Parent Rights Agreement or enable or require the Parent Rights to be exercised, distributed or triggered. The Board of Directors of Parent has taken all necessary action so that the takeover laws of the Washington Business Corporation Act (and any applicable provisions of the takeover laws of any other state) and any comparable provisions of Parent's Articles of Incorporation do not and will not apply to this Agreement, the Merger or the transactions contemplated hereby. 4.16 Parent Information. The information relating to Parent and its Subsidiaries to be provided by Parent to be contained in the Joint Proxy Statement and the S-4, or in any other document filed with any other Governmental Entity in connection herewith, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The Joint Proxy Statement (except for such portions thereof that relate only to Subject Company or any of its Subsidiaries) will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. The S-4 will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder. 4.17 Environmental Liability. Except as set forth in Section 4.17 of the Parent Disclosure Schedule, there are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that reasonably would be expected to result in the imposition, on Parent or any of its Subsidiaries of any liability or obligation arising under any Environmental Law, pending or, to the knowledge of Parent, threatened, against Parent or any of its Subsidiaries, which liability or obligation would reasonably be expected to have a Material Adverse Effect on Parent. To the knowledge of Parent, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that would reasonably be expected to have a Material Adverse Effect on Parent. To the knowledge of Parent, during or prior to the period of (i) its or any of its Subsidiaries' ownership or operation of any of their respective current properties, (ii) its or any of its Subsidiaries' participation in the management of any 18 property, or (iii) its or any of its Subsidiaries' holding of a security interest or other interest in any property, there were no releases or threatened releases of hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any such property, which would reasonably be expected to have a Material Adverse Effect on Parent. Neither Parent nor any of its Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any material liability or obligation pursuant to or under any Environmental Law that would reasonably be expected to have a Material Adverse Effect on Parent. 4.18 Pooling of Interests. As of the date of this Agreement, Parent has no reason to believe that the Merger will not qualify as a pooling of interests for accounting purposes. 4.19 Opinion of Financial Advisor. Parent has received the opinion of Lehman Brothers Inc., to the effect that, as of the date of this Agreement, the Common Exchange Ratio is fair from a financial point of view to Parent. 4.20 Patents, Trademarks, Etc. Parent owns or possesses all legal rights to use all proprietary rights, including without limitation all trademarks, trade names, service marks and copyrights, that are material to the conduct of Parent's existing and proposed businesses. Except for the agreements listed on Section 4.20 of the Parent Disclosure Schedule, Parent is not bound by or a party to any options, licenses or agreements of any kind with respect to any trademarks, service marks or trade names which Parent claims to own. Parent has not received any communications alleging that it or its Subsidiaries has violated or would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. 4.21 Community Reinvestment Act Compliance. Each of Washington Mutual Bank and American Savings Bank, F.A. is in substantial compliance with the applicable provisions of the CRA and has received a CRA rating of "outstanding" from the OTS in its most recent exam, and Parent has no knowledge of the existence of any fact or circumstances or set of facts or circumstances which could be reasonably expected to result in Washington Mutual Bank or American Savings Bank, F.A. failing to be in substantial compliance with such provisions or having its current rating lowered. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Businesses Prior to the Effective Time. Except as set forth in the Subject Company Disclosure Schedule or the Parent Disclosure Schedule, as the case may be, as expressly contemplated or permitted by this Agreement, or as required by applicable law, rule or regulation, during the period from the date of this Agreement to the Effective Time, each of Parent and Subject Company shall, and shall cause each of their respective Subsidiaries to, (i) conduct its business in the usual, regular and ordinary course consistent with past practice, (ii) use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its officers and key employees and (iii) take no action which would reasonably be expected to adversely affect or delay the ability of either Parent or Subject Company to obtain any approvals of any Governmental Entity required to consummate the transactions contemplated hereby or to consummate the transactions contemplated hereby. 5.2 Forbearances. Except as set forth in Section 5.2 of the Subject Company Disclosure Schedule or Section 5.2 of the Parent Disclosure Schedule, as the case may be, as expressly contemplated or permitted by this Agreement, or as required by applicable law, rule or regulation, during the period from the date of this Agreement to the Effective Time, neither Parent nor Subject Company shall, and neither Parent nor Subject Company shall permit any of their respective Subsidiaries to, without the prior written consent of the other: (a) adjust, split, combine or reclassify any capital stock; set any record or payment dates for the payment of any dividends or distributions on its capital stock except in the ordinary and usual course of business consistent with past practice; make, declare or pay any dividend or make any other distribution 19 on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or except as otherwise permitted by this paragraph (a) grant any stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock (except for (i) regular quarterly cash dividends on Subject Company Common Stock and on Parent Common Stock at a rate equal to the rates paid by each of Subject Company and Parent, as the case may be, during the fiscal quarter immediately preceding the date hereof, as such rates may be increased, in the case of Parent only, in the ordinary course of business consistent with past practice; provided, however, that no dividend shall be paid by Subject Company on Subject Company Common Stock if Subject Company shall be required to borrow to do so; (ii) in the case of Subject Company 8.30% Preferred Stock and Parent Preferred Stock, for regular quarterly or semiannual cash dividends thereon at the rates set forth in the applicable certificate of incorporation or certificate of designation for such securities; (iii) dividends paid by any of the wholly owned Subsidiaries of each of Parent and Subject Company to Parent or Subject Company or any of their wholly owned Subsidiaries, respectively, provided that no such dividend shall cause Great Western Bank to cease to qualify as a "well capitalized" institution under 12 CFR Part 565; and (iv) in the case of Parent only, the issuance of employee stock options and restricted stock consistent with past practices); or issue any additional shares of capital stock except (A) pursuant to the exercise of stock options outstanding as of the date hereof or, in the case of Parent only, issued after the date hereof in a manner consistent with past practice, (B) in the case of Parent only, the award of restricted shares of Parent Common Stock in a manner consistent with past practice, (C) pursuant to the Subject Company Rights Agreement, (D) pursuant to the Parent Rights Agreement, (E) pursuant to contracts or agreements in force at the date of this Agreement and set out in Section 5.2 of the Subject Company Disclosure Schedule and Section 5.2 of the Parent Disclosure Schedule, as the case may be, and (F) in connection with acquisitions and investments permitted by paragraph (c) hereof; (b) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets to any individual, corporation or other entity (other than a direct or indirect wholly owned Subsidiary), or cancel, release or assign any indebtedness to any such person or any claims held by any such person, in each case that is material to such party, except (i) in the ordinary course of business consistent with past practice or (ii) pursuant to contracts or agreements in force at the date of this Agreement and set out in Section 5.2 of the Subject Company Disclosure Schedule or Section 5.2 of the Parent Disclosure Schedule, as the case may be; (c) except for transactions in the ordinary course of business consistent with past practice, make any material acquisition or investment either by purchase of stock or securities, merger or consolidation, contributions to capital, property transfers, or purchases of any property or assets of any other individual, corporation or other entity other than a wholly owned Subsidiary thereof; provided, however, that subject to clause (iii) of Section 5.1, Parent may enter into an agreement or agreements for, and may consummate, business combination transactions with other companies provided that the aggregate amount of assets of such companies does not exceed $5,000,000,000; provided, further, however that, notwithstanding anything to the contrary contained herein, Parent shall not make any acquisition that would require it to register as a bank holding company under the Bank Holding Company Act of 1956, as amended; (d) in the case of the Subject Company, only enter into, renew or terminate any contract or agreement, other than loans made in the ordinary course of business, that calls for aggregate annual payments of $500,000 and which is not either (i) terminable at will on 60 days or less notice without payment of a penalty or (ii) has a term of less than one year; or make any material change in any of its leases or contracts, other than renewals of contracts or leases for a term of one year or less without materially adverse changes to the terms thereof; (e) in the case of Subject Company only, other than general salary increases consistent with past practice, increase in any material respect the compensation or fringe benefits of any of its employees or pay any pension or retirement allowance not required by any existing plan or agreement to any such employees or become a party to, amend or commit itself to any pension, retirement, profit-sharing or 20 welfare benefit plan or agreement or employment agreement with or for the benefit of any employee or accelerate the vesting of any stock options or other stock-based compensation; (f) authorize or permit any of its officers, directors, employees, representatives or agents (collectively, "Representatives") to directly or indirectly solicit, initiate or encourage any inquiries relating to or that may reasonably be expected to lead to, or the making of any proposal which constitutes, a Takeover Proposal (as defined below), or recommend or endorse any Takeover Proposal, or participate in any discussions or negotiations, or provide third parties with any nonpublic information, relating to any such inquiry or proposal or otherwise facilitate any effort or attempt to make or implement a Takeover Proposal, provided, however, that, at any time prior to the time its stockholders shall have voted to approve this Agreement, each of Parent and Subject Company may, and may authorize and permit its Representatives to, provide third parties with nonpublic information, otherwise facilitate any effort or attempt by any third party to make or implement a Takeover Proposal, recommend or endorse any Takeover Proposal with or by any third party, and participate in discussions and negotiations with any third party relating to any Takeover Proposal, if such party's Board of Directors, after having consulted with and considered the advice of its financial advisers and outside counsel, has determined in good faith that the failure to do so would create a reasonable possibility of a breach of the fiduciary duties of such party's Board of Directors. Each of Parent and Subject Company shall (i) advise the other orally (within one day) and in writing (as promptly as practicable) of the receipt of any such inquiry or proposal by it or by any of its Subsidiaries or any of its Representatives and (ii) unless its Board of Directors, after consulting with, and considering the advice of, its outside counsel, has determined in good faith that such action would create a reasonable possibility of a breach of the fiduciary duties of such Board of Directors, inform the other party orally and in writing, as promptly as practicable after the receipt thereof, of the material terms and conditions of any such inquiries or proposals (including the identity of the party making such inquiry or proposal) and shall keep the other party informed of the status thereof. Subject Company shall not furnish any nonpublic information to any other party pursuant to this Section 5.2(f) except pursuant to the terms of a confidentiality agreement containing terms substantially identical to the terms contained in the Confidentiality Agreement (as defined in Section 6.2(b) hereof). Subject Company will immediately cease and cause to be terminated any activities, discussions or negotiations conducted prior to the date of this Agreement with any parties other than Parent with respect to any of the foregoing and require the return (or if permitted by the terms of the applicable confidentiality agreement, the certified destruction) of all confidential information previously provided to such parties. As used in this Agreement, "Takeover Proposal" shall mean, with respect to any Person, any tender or exchange offer, proposal for a merger, consolidation or other business combination involving Subject Company or Parent or any of their respective Subsidiaries or any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the assets of, Subject Company or Parent or any of their respective Subsidiaries, other than the transactions contemplated or permitted by this Agreement; provided, however, that any proposal or offer involving the acquisition by Parent of any equity interest in or assets of any person, whether by tender or exchange offer, merger, consolidation or otherwise, or the disposition by Parent of assets, deposits or Subsidiaries, which is permitted by the terms of Section 5.2 of this Agreement shall not constitute a Takeover Proposal; (g) in the case of Subject Company only, make any capital expenditures in excess of (A) $500,000 per project or related series of projects or (B) $3,000,000 in the aggregate, other than expenditures necessary to maintain existing assets in good repair; (h) in the case of Subject Company only, make application for the opening, relocation or closing of any, or open, relocate or close any, branch or loan production office; (i) in the case of Subject Company only, make or acquire any loan or issue a commitment for any loan except for loans and commitments that are made in the ordinary course of business consistent with past practice or issue or agree to issue any letters of credit or otherwise guarantee the obligations of any other persons except in the ordinary course of business in order to facilitate the sale of REO; 21 (j) except as otherwise permitted elsewhere in this Section 5.2, engage or participate in any material transaction or incur or sustain any material obligation not in the ordinary course of business; (k) in the case of Subject Company only, except as otherwise permitted hereby foreclose upon or otherwise acquire (whether by deed in lieu of foreclosure or otherwise) any real property (other than 1-to-4 family residential properties in the ordinary course of business); (l) in the case of Subject Company only, sell, transfer or otherwise convey or agree to sell, transfer or otherwise convey, Sierra Investment Management Corporation; (m) settle any claim, action or proceeding involving money damages which is material to Parent or Subject Company, as applicable, except in the ordinary course of business consistent with past practice; (n) take any action that would prevent or impede the Merger from qualifying (i) as a reorganization within the meaning of Section 368(a) of the Code or (ii) for pooling of interests accounting treatment; (o) amend its certificate of incorporation, bylaws or similar governing documents or the Subject Company Rights Agreement or the Parent Rights Agreement, as the case may be, in a manner that would materially and adversely affect either party's ability to consummate the Merger or the economic benefits of the Merger to either party; provided, however that prior to the meeting of Subject Company's stockholders held to vote on this Agreement, Subject Company shall not amend the Subject Company Rights Agreement without Parent's prior written consent; (p) in the case of Subject Company only, except in the ordinary course of business consistent with past practice or following prior consultation with Parent, materially change its investment securities portfolio policy, or the manner in which the portfolio is classified or reported; (q) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement, except, in every case, as may be required by applicable law; (r) make any changes in its accounting methods, except as may be required under law, rule, regulation or GAAP, in each case as concurred in by such party's independent public accountants; (s) in the case of Subject Company only, engage in the business of making or make any VA guaranteed or FHA insured mortgage loans; (t) in the case of Subject Company only, enter into any contracts or agreements or amendments or supplements thereto pertaining to any further development of specialized software for Subject Company or its Subsidiaries; or (u) agree to, or make any commitment to, take any of the actions prohibited by this Section 5.2. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Regulatory Matters. (a) Parent and Subject Company shall promptly prepare and file with the SEC a Joint Proxy Statement and Parent shall promptly prepare and file with the SEC the S-4, in which the Joint Proxy Statement will be included as a prospectus. Each of Parent and Subject Company shall use all reasonable efforts to have the S-4 declared effective under the Securities Act as promptly as practicable after such filing, and Parent and Subject Company shall thereafter mail the Joint Proxy Statement to their respective stockholders. (b) The parties hereto shall cooperate with each other and use reasonable best efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain 22 as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities which are necessary or advisable to consummate the transactions contemplated by this Agreement (including without limitation the Merger and the Association Merger) and to comply with the terms and conditions of all such permits, consents, approvals and authorizations of all such Governmental Entities. Parent and Subject Company shall have the right to review in advance and to the extent practicable each will consult the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Subject Company or Parent, as the case may be, and any of their respective Subsidiaries which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the transactions contemplated by this Agreement (including without limitation the Merger and the Association Merger) and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. (c) Parent and Subject Company shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Joint Proxy Statement, the S-4 or any other statement, filing, notice or application made by or on behalf of Parent, Subject Company or any of their respective Subsidiaries to any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement. (d) Parent and Subject Company shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any Requisite Regulatory Approval (as defined below) will not be obtained or that the receipt of any such approval will be materially delayed. 6.2 Access to Information. (a) Upon reasonable notice and subject to applicable laws relating to the exchange of information, each of Parent and Subject Company shall, and shall cause each of their respective Subsidiaries to, afford to the officers, employees, accountants, counsel and other representatives of the other party access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records, and to its officers, employees, accountants, counsel and other representatives and, during such period, each of Parent and Subject Company shall, and shall cause their respective Subsidiaries to, make available to the other party (i) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of Federal securities laws or Federal or state banking laws (other than reports or documents which Parent or Subject Company, as the case may be, is not permitted to disclose under applicable law) and (ii) all other information concerning its business, properties and personnel as such other party may reasonably request. Neither Parent nor Subject Company nor any of their respective Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of its customers, jeopardize the attorney-client privilege of the institution in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) Each of Parent and Subject Company shall hold all information furnished by the other party or any of such party's Subsidiaries or representatives pursuant to Section 6.2(a) in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement, dated February 21, 1997, between Parent and Subject Company (the "Confidentiality Agreement"). (c) No investigation by either of the parties or their respective representatives shall affect the representations, warranties, covenants or agreements of the other set forth herein. 23 6.3 Stockholders' Approvals. Each of Parent and Subject Company shall duly call, give notice of, convene and hold a meeting of its stockholders to be held as soon as practicable following the date hereof for the purpose of obtaining the requisite stockholder approvals required in connection with this Agreement and the Merger, and each shall use its best efforts to cause such meetings to occur on the same date. Subject Company shall, through its Board of Directors, recommend to its stockholders approval of the Merger and Parent shall, through its Board of Directors, recommend to its stockholders approval of the issuance of the shares of Parent Common Stock in the Merger as required by Nasdaq; provided, however, that this Section 6.3(a) shall not prohibit accurate disclosure by either party of information that is required in the S-4 or the Joint Proxy Statement or any other document required to be filed with the SEC (including without limitation a disclosure statement on Schedule 14D-9) or otherwise required by applicable law or regulation or the rules of the NYSE or Nasdaq to be publicly disclosed. 6.4 Legal Conditions to Merger. (a) Subject to the terms and conditions of this Agreement, each of Parent and Subject Company shall, and shall cause its Subsidiaries to, use their reasonable best efforts (i) to take, or cause to be taken, all actions necessary, proper or advisable to comply promptly with all legal requirements which may be imposed on such party or its Subsidiaries with respect to the Merger and the Association Merger and, subject to the conditions set forth in Article VII hereof, to consummate the transactions contemplated by this Agreement and (ii) to obtain (and to cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity and any other third party which is required to be obtained by Subject Company or Parent or any of their respective Subsidiaries in connection with the Merger and the Association Merger and the other transactions contemplated by this Agreement. (b) Subject to the terms and conditions of this Agreement, each of Parent and Subject Company agrees to use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective, as soon as practicable after the date of this Agreement, the transactions contemplated hereby, including, without limitation, using reasonable best efforts to (i) modify or amend any contracts, plans or arrangements to which Parent or Subject Company is a party (to the extent permitted by the terms thereof) if necessary in order to satisfy the conditions to Closing set forth in Article VII hereof, (ii) lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, and (iii) defend any litigation seeking to enjoin, prevent or delay the consummation of the transactions contemplated hereby or seeking material damages. 6.5 Affiliates. Each of Parent and Subject Company shall use its reasonable best efforts to cause each director, executive officer and other person who is an "affiliate" (for purposes of Rule 145 under the Securities Act, in the case of affiliates of Subject Company, and for purposes of qualifying the Merger for pooling of interests accounting treatment, in the case of affiliates of either Parent or Subject Company) of such party to deliver to the other party, as soon as practicable after the date of this Agreement, and in any event prior to the date of the stockholders meetings called by Parent and Subject Company pursuant to Section 6.3 hereof, a written agreement, in the form and substance reasonably satisfactory to Subject Company (in the case of affiliates of Parent) and Parent (in the case of affiliates of Subject Company). 6.6 Stock Exchange Listing. Parent shall use its best efforts to cause the shares of Parent Common Stock to be issued in the Merger and the New Parent Depositary Shares to be approved for listing on Nasdaq, subject to official notice of issuance, prior to the Effective Time. 6.7 Employee Benefit Plans. (a) Parent agrees that, for a period of at least one year from and after the Effective Time, it shall, and shall cause its Subsidiaries to, provide to employees of the Subject Company immediately prior to the Effective Time (such employees, the "Subject Company Employees") compensation and benefits on terms no less favorable in the aggregate than those provided to similarly situated employees of Parent and its Subsidiaries. For purposes of all employee benefit plans of Parent or its Subsidiaries in which Subject Company Employees participate from and after the Effective Time (including all policies and employee fringe benefit programs, including vacation policies, of Parent or its Subsidiaries but excluding Parent's Service Award plan) and under which an employee's benefit depends, in whole or in part, on length of 24 service, credit will be given to Subject Company Employees for service previously credited with the Subject Company or its Subsidiaries prior to the Effective Time to the extent that such crediting of service does not result in duplication of benefits; provided, however, that Parent shall determine each employee's length of service in a manner consistent with Parent's customary practice with respect to its employees. Parent shall also cause each employee benefit plan in which Subject Company Employees participate from and after the Effective Time to waive (i) any preexisting condition restriction which was waived under the terms of any analogous Plan immediately prior to the Effective Time or (ii) any waiting period limitation which would otherwise be applicable to a Subject Company Employee on or after the Effective Time to the extent such Subject Company Employee had satisfied any similar waiting period limitation under an analogous Plan prior to the Effective Time. Notwithstanding the generality of the foregoing, for a period of three (3) years, in the case of those beneficiaries who are entitled to participate in such Program pursuant to employment agreements, or two (2) years, in the case of those beneficiaries who are otherwise entitled to participate in such Program, commencing on the Effective Date, Parent agrees that it shall continue to maintain the Subject Company's Executive Medical Program, on terms no less favorable that those in effect as of the date hereof, for the benefit of those Subject Company Employees who are currently eligible to participate in such Program. (b) Notwithstanding the foregoing, Parent shall, and shall cause its Subsidiaries to, honor in accordance with their terms all Plans, each as amended to the date hereof, and other contracts, arrangements, commitments or understandings described in the Subject Company Disclosure Schedule; provided, however, that this paragraph (b) shall be subject to the provisions of paragraph (f) hereof. Parent and Subject Company hereby acknowledge that consummation of the Merger will constitute a "Change in Control" for purposes of all Plans, contracts, arrangements and commitments that contain change in control provisions and agree to abide by the provisions of any Plan, contract, arrangement or commitment which relate to a Change in Control, including, but not limited to, the accelerated vesting and/or payment of equity-based awards under the Subject Company Stock Option Plans. (c) Subject Company and its Subsidiaries shall take all action necessary to ensure that no further mortgage loans will be made to employees under the Great Western employee loan program and to amend the retiree medical plans so that no additional retirees shall become entitled to continuing medical insurance benefits thereunder. (d) Subject Company and its Subsidiaries agree to amend their 401(k) plan prior to Closing (as hereinafter defined) so that participant loans are no longer available, and may amend their 401(k) plan to allow partial repayment of existing loans thereunder. (e) Subject Company shall consult with Parent and, to the extent permitted by applicable law and the governing instrument of the respective trusts, obtain Parent's prior approval which shall not be unreasonably withheld regarding the investments used to fund the two umbrella trusts for the nonqualified plans for directors and officers. (f) Except as otherwise provided herein, nothing in this Section 6.7 shall be interpreted as preventing Parent or its Subsidiaries from amending, modifying or terminating any of the Plans, or other contracts, arrangements, commitments or understandings, in accordance with their terms and applicable law. 6.8 Indemnification; Directors' and Officers' Insurance. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which any person who is now, or has been at any time prior to the date of this Agreement, or who becomes prior to the Effective Time, a director, officer or employee of Subject Company or any of its Subsidiaries (the "Indemnified Parties") is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he is or was a director, officer or employee of Subject Company, any of the Subject Company Subsidiaries or any of their respective predecessors or was prior to the Effective Time serving at the request of any such party as a director, officer, employee, fiduciary or agent of another corporation, partnership, trust or other enterprise or (ii) this Agreement, or any of the transactions contemplated hereby and all actions taken by an Indemnified Party in connection herewith, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use their best efforts to defend 25 against and respond thereto to the extent set forth in the next sentence. It is understood and agreed that after the Effective Time, Parent shall indemnify and hold harmless, as and to the fullest extent permitted by the corporate governance documents of Subject Company or its Subsidiaries and the indemnification letters between the Subject Company and each of the directors and executive officers of Subject Company (the "Indemnification Letters") and by law, each such Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney's fees and expenses in advance of the final disposition of any claim, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by law upon receipt of an undertaking from such Indemnified Party to repay such advanced expenses if it is finally and unappealably determined that such Indemnified Party was not entitled to indemnification hereunder), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation, and in the event of any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time), the Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with Parent; provided, however, that (1) Parent shall have the right to assume the defense thereof and upon such assumption Parent shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by any Indemnified Party in connection with the defense thereof, except that if Parent elects not to assume such defense or counsel for the Indemnified Parties reasonably advises the Indemnified Parties that there are or may be (whether or not any have yet actually arisen) issues which raise conflicts of interest between Parent and the Indemnified Parties, the Indemnified Parties may retain counsel reasonably satisfactory to them, and Parent shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties, (2) Parent shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties, (3) Parent shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld) and (4) Parent shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by the corporate governance documents of Subject Company or its Subsidiaries, the Indemnification Letters or applicable law. Any Indemnified Party wishing to claim indemnification under this Section 6.8, upon learning of any such claim, action, suit, proceeding or investigation, shall notify Parent thereof, provided that the failure to so notify shall not affect the obligations of Parent under this Section 6.8 except (and only) to the extent such failure to notify materially prejudices Parent. Parent's obligations under this Section 6.8 shall continue in full force and effect for a period of six (6) years from the Effective Time; provided, however, that all rights to indemnification in respect of any claim (a "Claim") asserted or made within such period shall continue until the final disposition of such Claim. (b) Without limiting any of the obligations under paragraph (a) of this Section 6.8, Parent agrees that all rights to indemnification and all limitations of liability existing in favor of the Indemnified Parties as provided in Subject Company's Restated Certificate of Incorporation or ByLaws or in the similar governing documents of any of Subject Company's Subsidiaries as in effect as of the date of this Agreement or as provided in the Indemnification Letters of Subject Company with respect to matters occurring on or prior to the Effective Time shall survive the Merger and shall continue in full force and effect, without any amendment thereto, for a period of six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Claim asserted or made within such period shall continue until the final disposition of such Claim; provided, further, however, that nothing contained in this Section 6.8(b) shall be deemed to preclude the liquidation, consolidation or merger of Subject Company or any Subject Company Subsidiary, in which case all of such rights to indemnification and limitations on liability shall be deemed to so survive and continue notwithstanding any such liquidation, consolidation or merger and shall constitute rights which may be asserted against Parent. Nothing contained in this Section 6.8(b) shall be deemed to preclude any rights to indemnification or limitations on liability provided in Subject Company's Restated Certificate of Incorporation or Bylaws or the similar governing documents of any of Subject Company's Subsidiaries with respect to matters occurring subsequent to the Effective Time to the extent that the provisions establishing such rights or limitations are not otherwise amended to the contrary. (c) Parent shall use its best efforts to cause the persons serving as officers and directors of Subject Company immediately prior to the Effective Time to be covered for a period of six (6) years from the 26 Effective Time by the directors' and officers' liability insurance policy maintained by Subject Company (provided that Parent may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not less advantageous to such directors and officers of Subject Company than the terms and conditions of such existing policy) with respect to acts or omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such. (d) In the event Parent or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Parent shall assume the obligations set forth in this Section 6.8. (e) The provisions of this Section 6.8 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. 6.9 Additional Agreements. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement (including, without limitation, any merger between a Subsidiary of Parent and a Subsidiary of Subject Company) or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to the Merger, the proper officers and directors of each party to this Agreement and their respective Subsidiaries shall take all such necessary action as may be reasonably requested by, and at the sole expense of, Parent. 6.10 Advice of Changes. Parent and Subject Company shall promptly advise the other party of any change or event which, individually or in the aggregate with other such changes or events, has a Material Adverse Effect on it or which it believes would or would be reasonably likely to cause or constitute a material breach of any of its representations, warranties or covenants contained herein. 6.11 Subsequent Interim and Annual Financial Statements. As soon as reasonably available, but in no event more than 45 days after the end of each fiscal quarter (other than the fourth quarter of a fiscal year) or 90 days after December 31, 1996 or the end of each fiscal year ending after the date of this Agreement, each party will deliver to the other party its Quarterly Report on Form 10-Q or its Annual Report on Form 10-K, as the case may be, as filed with the SEC under the Exchange Act. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Stockholder Approval. The agreement of merger contained in this Agreement shall have been approved and adopted by the requisite affirmative vote of the holders of Subject Company Common Stock entitled to vote thereon and the issuance of shares of Parent Common Stock in the Merger shall have been approved by the requisite affirmative vote of the holders of Parent Common Stock entitled to vote thereon as required by Nasdaq. (b) Nasdaq Listing. The shares of Parent Common Stock which shall be issued to the stockholders of Subject Company upon consummation of the Merger and the New Parent Depositary Shares shall have been authorized for listing on Nasdaq, subject to official notice of issuance. (c) Other Approvals. All regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all such waiting periods being referred to herein as the "Requisite Regulatory Approvals"). 27 (d) S-4. The S-4 shall have become effective under the Securities Act, no stop order suspending the effectiveness of the S-4 shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) No Injunctions or Restraints; Illegality. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits or makes illegal the consummation of the Merger. (f) Pooling. Each of Parent and Subject Company shall have received a letter from its independent public accountants, dated the Closing Date, in form and substance reasonably satisfactory to Parent and Subject Company, respectively, to the effect that the Merger will qualify for "pooling of interests" accounting treatment. 7.2 Conditions to Obligations of Parent. The obligation of Parent to effect the Merger is also subject to the satisfaction or waiver by Parent at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Subject Company set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date; provided, however, that for purposes of determining the satisfaction of this condition, no effect shall be given to any exception in such representations and warranties relating to materiality or a Material Adverse Effect, and provided, further, however, that, for purposes of this condition, such representations and warranties (other than the representations and warranties contained in Section 3.2(a), which shall be true and correct in all material respects) shall be deemed to be true and correct in all respects unless the failure or failures of such representations and warranties to be so true and correct, individually or in the aggregate, results or would reasonably be expected to result in a Material Adverse Effect on Subject Company and its Subsidiaries taken as a whole. Parent shall have received a certificate signed on behalf of the Subject Company by the Chief Executive Officer and Chief Financial Officer of Subject Company to the foregoing effect. (b) Performance of Obligations of Subject Company. Subject Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of Subject Company by the Chief Executive Officer and the Chief Financial Officer of Subject Company to such effect. (c) Subject Company Rights Agreement. The rights issued pursuant to the Subject Company Rights Agreement shall not have become nonredeemable, exercisable, distributed or triggered pursuant to the terms of such agreement. (d) Federal Tax Opinion. Parent shall have received an opinion of Foster, Pepper & Shefelman, counsel to Parent ("Parent's Counsel"), in form and substance reasonably satisfactory to Parent, dated as of the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time, the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code and that, accordingly, for federal income tax purposes: (1) No gain or loss will be recognized by the shareholders of Subject Company who exchange (i) all of their Subject Company Common Stock solely for Parent Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Parent Common Stock) and (ii) all of their Subject Company 8.30% Preferred Stock solely for Parent New Preferred Stock pursuant to the Merger; and (2) The aggregate tax basis of (i) the Parent Common Stock received by shareholders who exchange all of their Subject Company Common Stock solely for Parent Common Stock pursuant to 28 the Merger will be the same as the aggregate tax basis of the Subject Company Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received) and (ii) the Parent New Preferred Stock received by shareholders who exchange all of their Subject Company 8.30% Preferred Stock solely for Parent New Preferred Stock pursuant to the Merger will be the same as the aggregate tax basis of the Subject Company 8.30% Preferred Stock surrendered in exchange therefor. In rendering such opinion, Parent's Counsel may require and rely upon representations and covenants contained in certificates of officers of Parent, Subject Company and others. 7.3 Conditions to Obligations of Subject Company. The obligation of Subject Company to effect the Merger is also subject to the satisfaction or waiver by Subject Company at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date; provided, however, that for purposes of determining the satisfaction of this condition, no effect shall be given to any exception in such representations and warranties relating to materiality or a Material Adverse Effect, and provided, further, however, that, for purposes of this condition, such representations and warranties shall be deemed to be true and correct in all respects unless the failure or failures of such representations and warranties to be so true and correct, individually or in the aggregate, results or would reasonably be expected to result in a Material Adverse Effect on Parent and its Subsidiaries taken as a whole. Subject Company shall have received a certificate signed on behalf of Parent by the Chief Executive Officer and the Chief Financial Officer of Parent to the foregoing effect. (b) Performance of Obligations of Parent. Parent shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Subject Company shall have received a certificate signed on behalf of Parent by the Chief Executive Officer and the Chief Financial Officer of Parent to such effect. (c) Parent Rights Agreement. The rights issued pursuant to the Parent Rights Agreement shall not have become nonredeemable, exercisable, distributed or triggered pursuant to the terms of such agreement. (d) Federal Tax Opinion. Subject Company shall have received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP ("Subject Company's Counsel"), in form and substance reasonably satisfactory to Subject Company, dated as of the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time, the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code and that, accordingly, for federal income tax purposes: (1) No gain or loss will be recognized by the shareholders of Subject Company who exchange (i) all of their Subject Company Common Stock solely for Parent Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Parent Common Stock) and (ii) all of their Subject Company 8.30% Preferred Stock solely for Parent New Preferred Stock pursuant to the Merger; and (2) The aggregate tax basis of (i) the Parent Common Stock received by shareholders who exchange all of their Subject Company Common Stock solely for Parent Common Stock pursuant to the Merger will be the same as the aggregate tax basis of the Subject Company Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received) and (ii) the Parent New Preferred Stock received by shareholders who exchange all of their Subject Company 8.30% Preferred Stock solely for Parent New Preferred Stock pursuant to the Merger will be the same as the aggregate tax basis of the Subject Company 8.30% Preferred Stock surrendered in exchange therefor. 29 In rendering such opinion, Subject Company's Counsel may require and rely upon representations and covenants contained in certificates of officers of Parent, Subject Company and others. ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time: (a) by mutual consent of Parent and Subject Company in a written instrument, if the Board of Directors of each so determines; (b) by either the Board of Directors of Parent or the Board of Directors of Subject Company if (i) any Governmental Entity which must grant a Requisite Regulatory Approval has denied approval of the Merger and such denial has become final and nonappealable or (ii) any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; (c) by either the Board of Directors of Parent or the Board of Directors of Subject Company if the Merger shall not have been consummated on or before March 31, 1998, unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein; (d) by either the Board of Directors of Parent or the Board of Directors of Subject Company (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if the other party shall have breached (i) any of the covenants or agreements made by such other party herein or (ii) any of the representations or warranties made by such other party herein, and in either case, such breach (x) is not cured within thirty (30) days following written notice to the party committing such breach, or which breach, by its nature, cannot be cured prior to the Closing and (y) would entitle the non-breaching party not to consummate the transactions contemplated hereby under Article VII hereof; (e) by either the Board of Directors of Parent or the Board of Directors of Subject Company if any approval of the stockholders of Parent or the Subject Company contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of stockholders or at any adjournment or postponement thereof; (f) by either the Board of Directors of Parent or the Board of Directors of Subject Company, if the Board of Directors of the other party shall have withdrawn, modified or changed in a manner adverse to the terminating party its approval or recommendation of this Agreement and the transactions contemplated hereby; and (g) by (i) the Board of Directors of Parent if a tender offer or exchange offer for 25% or more of the outstanding shares of Subject Company Common Stock is commenced (other than by Parent or a Parent Subsidiary), and the Board of Directors of the Subject Company recommends that the stockholders of Subject Company tender their shares in such tender or exchange offer or otherwise fails to recommend that such stockholders reject such tender offer or exchange offer within ten business days after the commencement thereof (which, in the case of an exchange offer, shall be the effective date of the registration statement relating to such exchange offer); or (ii) the Board of Directors of Subject Company if a tender offer or exchange offer for 25% or more of the outstanding shares of Parent Common Stock is commenced and the Board of Directors of Parent recommends that the stockholders of Parent tender their shares in such tender or exchange offer or otherwise fails to recommend that such stockholders reject such tender or exchange offer within ten business days after the commencement thereof (which, in the case of an exchange offer, shall be the effective date of the registration statement relating to such exchange offer). 30 8.2 Effect of Termination. (a) In the event of termination of this Agreement by either Parent or Subject Company as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Parent, Subject Company, any of their respective Subsidiaries or any of the officers or directors of any of them shall have any liability of any nature whatsoever hereunder, or in connection with the transactions contemplated hereby, except that (i) Sections 6.2(b), 8.2, and 9.3 shall survive any termination of this Agreement and (ii) notwithstanding anything to the contrary contained in this Agreement, neither Parent nor Subject Company shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. (b) If this Agreement is terminated (A) by Parent pursuant to Section 8.1(f) or (g)(i), (B) by Parent or Subject Company pursuant to Section 8.1(e) because of a failure to obtain the required approval of the stockholders of Subject Company after a Takeover Proposal for Subject Company shall have been publicly disclosed, or any person shall have publicly disclosed an intention (whether or not conditional) to make a Takeover Proposal (it being agreed and understood that the proposal made with respect to Subject Company prior to the date hereof by H.F. Ahmanson & Company ("Ahmanson"), if not unconditionally withdrawn prior to the mailing of the Joint Proxy Statement to Subject Company's stockholders, shall be deemed to be a Takeover Proposal within the meaning of this clause), or (C) by Parent pursuant to Section 8.1(d) if the breach giving rise to such termination was willful and, at or prior to such termination, a Takeover Proposal shall have been made known to Subject Company or any of its Subsidiaries or shall have been publicly disclosed to Subject Company's stockholders, or any person shall have made known to Subject Company or any of its Subsidiaries or otherwise publicly disclosed an intention (whether or not conditional) to make a Takeover Proposal, and regardless of whether such Takeover Proposal shall have been rejected by Subject Company or withdrawn prior to the time of such termination, then in any such case Subject Company shall pay to Parent a termination fee of $75 million and reimburse Parent for its documented reasonable out-of-pocket expenses incurred by it in connection with this Agreement and the transactions contemplated hereby (including fees and expenses of legal, financial and accounting advisors), up to a maximum of $20 million in the aggregate (collectively, the "Initial Subject Company Termination Fee"). In addition, if, within 18 months after any such termination described in the preceding sentence that gave rise to an obligation to pay the Initial Subject Company Termination Fee, Subject Company enters into a definitive agreement with respect to or consummates a transaction contemplated in any Takeover Proposal with any party, Subject Company shall pay to Parent an additional termination fee equal to $100 million (the "Subsequent Subject Company Termination Fee"). (c) Any Initial Subject Company Termination Fee that becomes payable pursuant to Section 8.1(b) shall be paid within one business day following the termination of this Agreement or the receipt of a request from Parent for such reimbursement, as the case may be. Any Subsequent Subject Company Termination Fee that becomes payable pursuant to Section 8.1(b) shall be paid within one business day following the earlier of the consummation of any such Takeover Proposal or the execution and delivery by Subject Company of a definitive agreement with respect to any such Takeover Proposal. Notwithstanding the foregoing, in no event shall Subject Company be obligated to pay any such fees to Parent if Parent was in material breach of its obligations under this Agreement immediately prior to the termination thereof. (d) Subject Company and Parent agree that the agreements contained in paragraph (b) above are an integral part of the transactions contemplated by this Agreement, that without such agreements Parent would not have entered into this Agreement, and that such amounts constitute liquidated damages and not a penalty. If Subject Company fails to pay Parent the amounts due under paragraph (b) within the time periods specified in paragraph (c), Subject Company shall pay the costs and expenses (including legal fees and expenses) incurred by Parent in connection with any action, including the filing of any lawsuit, taken to collect payment of such amounts, together with interest on the amount of any such unpaid amounts at the publicly announced prime rate of The Chase Manhattan Bank from the date such amounts were required to be paid. (e) For purposes of Section 8.2(b)(C), the proposal made prior to the date hereof by Ahmanson to enter into a business combination with Subject Company shall not be deemed to constitute a Takeover Proposal that has been publicly announced or otherwise made known to Subject Company; provided, however, that any Takeover Proposal made by Ahmanson after the date hereof, or any amendment or modification 31 made after the date hereof to the proposal made by Ahmanson prior to the date hereof, shall constitute a Takeover Proposal for purposes of Section 8.2(b)(C). 8.3 Amendment. Subject to compliance with applicable law, this Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Subject Company and Parent; provided, however, that after any approval of the transactions contemplated by this Agreement by Subject Company's stockholders, there may not be, without further approval of such stockholders, any amendment of this Agreement which reduces the amount or changes the form of the consideration to be delivered to the Subject Company stockholders hereunder other than as contemplated by this Agreement. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 8.4 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Board of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE IX GENERAL PROVISIONS 9.1 Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date to be specified by the parties, which shall be the first day which is (a) the tenth business day of a month and (b) at least two business days after the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII hereof, other than conditions which by their terms are to be satisfied at Closing, or such date or time as the parties may mutually agree (the "Closing Date"). 9.2 Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for those covenants and agreements contained herein and therein which by their terms apply in whole or in part after the Effective Time. 9.3 Expenses. Except as provided in Section 8.2 hereof, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense, provided, however, that (i) the costs and expenses of printing and mailing the Joint Proxy Statement, and all filing and other fees paid to the SEC in connection with the Merger, shall be borne equally by Parent and Subject Company and (ii) notwithstanding anything to the contrary contained in this Agreement, neither Parent nor Subject Company shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement. 9.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return 32 receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent, to: Washington Mutual, Inc. 1201 Third Avenue Seattle, WA 98101 Fax: (206) 554-2790 Attn: Marc R. Kittner Senior Vice President and Corporate Counsel with a copy to: Foster Pepper & Shefelman 1111 Third Avenue Suite 3400 Seattle, WA 98101 Attn: Fay L. Chapman, Esq. and Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Attn: Charles I. Cogut, Esq. Lee Meyerson, Esq. (b) if to Subject Company, to: Great Western Financial Corporation 9200 Oakdale Avenue Chatsworth, California 91311 Attn: John F. Maher, President and Chief Executive Officer and J. Lance Erickson, Esq. Executive Vice President and General Manager with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Fax: (212) 735-2000 Attn: Peter Allan Atkins, Esq. Fred B. White, III, Esq. 9.5 Interpretation. When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". No provision of this Agreement shall be construed to require Subject Company, Parent or any of 33 their respective Subsidiaries or affiliates to take any action which would violate or conflict with any applicable law (whether statutory or common), rule or regulation. 9.6 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 9.7 Entire Agreement. This Agreement (together with the documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement. 9.8 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. 9.9 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 9.10 Publicity. Parent and Subject Company shall consult with each other before issuing any press release with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement without the prior consent of the other party, which shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other party (but after prior consultation, to the extent practicable in the circumstances) issue such press release or make such public statement as may upon the advice of outside counsel be required by law or the rules and regulations of the NYSE (in the case of Subject Company) or Nasdaq (in the case of Parent). Without limiting the reach of the preceding sentence, Parent and Subject Company shall cooperate to develop all public announcement materials and (b) make appropriate management available at presentations related to the transactions contemplated by this Agreement as reasonably requested by the other party. In addition, Subject Company and its Subsidiaries shall (a) consult with Parent regarding communications with customers, shareholders, prospective investors and employees related to the transactions contemplated hereby, (b) provide Parent with shareholder lists of Subject Company and (c) allow and facilitate Parent contact with shareholders of Subject Company and other prospective investors. 9.11 Assignment; Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations of any party hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns. Except as otherwise specifically provided in Section 6.8 hereof, this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 34 IN WITNESS WHEREOF, Parent, Merger Sub and Subject Company have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. WASHINGTON MUTUAL, INC. By: /s/ CRAIG TALL ------------------------------------ Name: Craig Tall Title: Executive Vice President Corporate Development GREAT WESTERN FINANCIAL CORPORATION By: /s/ JOHN MAHER ------------------------------------ Name: John Maher Title: President and Chief Executive Officer NEW AMERICAN CAPITAL, INC. By: /s/ KERRY K. KILLINGER ------------------------------------ Name: Kerry K. Killinger Title: President and Chief Executive Officer 35 EX-11.1 27 COMPUTATION OF NET INCOME PER COMMON SHARE Exhibit 11.1 GREAT WESTERN FINANCIAL CORPORATION Computation of Net Income Per Common Share Primary and Fully Diluted
Year Ended December 31 ----------------------------------------------- (Dollars in thousands) 1996 1995 1994 ---- ---- ---- Net income $ 115,822 $ 261,022 $ 251,234 Preferred stock dividends - convertible and nonconvertible (20,295) (25,015) (25,015) ------------- ------------- ------------- Net Income for computing earnings per Common share - primary 95,527 236,007 226,219 Preferred stock dividends - convertible - - - ------------- ------------- ------------- Net income for computing earnings per Common share - fully diluted $ 95,527 $ 236,007 $ 226,219 ============= ============= =============
Computation of Average Number of Common Shares Outstanding on Primary and Fully Diluted Basis (In thousands, except per share amounts)
Year Ended December 31 ------------------------------------------------ 1996 1995 1994 ---- ---- ---- Average number of Common shares outstanding during each period - without dilution 136,568 135,735 133,307 Common share equivalents outstanding at the end of each period 1,937 1,376 463 ------------- ------------- ------------- Average number of Common shares and Common share equivalents outstanding during each period on a primary basis 138,505 137,111 133,770 Common share equivalents outstanding the end of each period on a fully diluted basis 745 840 - Addition from assumed conversion as of the beginning of each period of the convertible preferred stock outstanding at the end of each period - - - ------------- ------------- ------------- Average number of Common shares outstanding during each period on a fully diluted basis 139,250 137,951 133,770 ============= ============= ============= Net income per Common share Primary $ 0.69 $ 1.72 $ 1.69 Fully Diluted 0.69 1.71 1.69
EX-12.1 28 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12.1 GREAT WESTERN FINANCIAL CORPORATION COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Twelve Months Ended Twelve Months Ended Twelve Months Ended Twelve Months Ended Twelve Months Ended (Dollars in thousands) December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 ----------------- ----------------- ----------------- ----------------- ----------------- Earnings Net earnings $ 115,822 $ - $ 251,234 $ 62,047 $ 85,006 Accounting charges - - - - (31,094) Taxes on income 70,800 0 155,300 30,000 41,600 ----------------- ----------------- ----------------- ----------------- ----------------- Earnings before taxes $ 186,622 $ - $ 406,534 $ 92,047 $ 95,512 ================= ================= ================= ================= ================= Interest Expense Deposits $ 1,179,479 $ 1,217,085 $ 950,299 $ 939,081 $ 1,333,473 Borrowings 688,134 734,670 370,004 370,761 344,823 ----------------- ----------------- ----------------- ----------------- ----------------- Total $ 1,867,613 $ 1,951,755 $ 1,320,303 $ 1,309,842 $ 1,678,296 ================= ================= ================= ================= ================= Rent expenses Total $ 63,975 $ 61,180 $ 55,011 $ 53,638 $ 57,823 1/3 thereof 21,325 20,393 18,337 17,879 19,274 Capitalized interest $ 3 $ - $ 196 $ 777 $ 2,071 Preferred stock dividends $ 20,295 $ 25,015 $ 25,015 $ 25,015 $ 15,543 Ratio of earnings to fixed charges and preferred stock dividends Excluding deposits Earnings before fixed charges $ 896,081 $ 1,177,185 $ 794,875 $ 480,687 $ 459,609 Fixed charges 742,163 795,517 429,015 426,526 393,704 Ratio 1.21 1.48 1.85 1.13 1.17 Including deposits Earnings before fixed charges $ 2,075,560 $ 2,394,270 $ 1,745,174 $ 1,419,768 $ 1,793,082 Fixed charges 1,921,642 2,012,602 1,379,314 1,365,607 1,727,177 Ratio 1.08 1.19 1.27 1.04 1.04 Ratio of earnings to fixed charges Excluding deposits Earnings before fixed charges $ 896,081 $ 1,177,185 $ 794,875 $ 480,687 $ 459,609 Fixed charges 709,462 755,063 388,537 389,417 366,168 Ratio 1.26 1.56 2.05 1.23 1.26 Including deposits Earnings before fixed charges $ 2,075,560 $ 2,394,270 $ 1,745,174 $ 1,419,768 $ 1,793,082 Fixed charges 1,888,941 1,972,148 1,338,836 1,328,498 1,699,641 Ratio 1.10 1.21 1.30 1.07 1.05
EX-21.1 29 PARENT AND SUBSIDIARIES EXHIBIT 21.1 GREAT WESTERN FINANCIAL CORPORATION PARENT AND SUBSIDIARIES Great Western Financial Corporation is incorporated in the State of Delaware. Listed below are the significant subsidiaries of GWFC, which are included in the Consolidated Financial Statements. Percentage of Voting Securities State of Owned Incorporation ---------- ------------- Subsidiaries - ------------ Great Western Bank, A Federal Savings Bank 100% Federal Charter Aristar, Inc. 100% Delaware EX-27.1 30 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED STATEMENT OF CONDITION AND THE CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY THE REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 534,192 100 300,000 0 7,449,125 1,618,709 1,622,573 31,136,891 313,699 42,874,572 28,586,773 7,310,905 1,090,786 3,290,908 0 165,000 137,876 2,292,324 42,874,572 2,510,745 704,784 47,507 3,263,036 1,179,479 1,855,914 1,407,122 208,971 28,937 1,314,249 186,622 115,822 0 0 115,822 0.69 0.69 3.25 352,002 0 74,196 0 362,849 276,318 18,197 313,699 313,699 0 0
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