-----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, KGC81fRCppB2b5VHo90geCKL+X30Jar/vqxmBGQMInp8RE003QakypBj/YloTz6p KdB9rmGFi22ZV2cCwBUWCQ== 0000891020-97-000632.txt : 19970428 0000891020-97-000632.hdr.sgml : 19970428 ACCESSION NUMBER: 0000891020-97-000632 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970425 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON MUTUAL INC CENTRAL INDEX KEY: 0000933136 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911653725 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25188 FILM NUMBER: 97587665 BUSINESS ADDRESS: STREET 1: 1201 THIRD AVENUE CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064612000 MAIL ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: 1201 THIRD AVE CITY: SEATTLE STATE: WA ZIP: 98101 10-K/A 1 AMENDED 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20529 FORM 10-K/A ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1996 OR [X] 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 0-25188 WASHINGTON MUTUAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ WASHINGTON 91-1653725 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1201 THIRD AVENUE 98101 SEATTLE, WASHINGTON (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------------------------------------------------------------------------ Common Stock The Nasdaq Stock Market 9.12% Noncumulative Perpetual Preferred Stock, Series C The Nasdaq Stock Market 7.60% Noncumulative Perpetual Preferred Stock, Series E The Nasdaq Stock Market
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 last 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. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 1997: COMMON STOCK -- $5,625,829,311(1) (1) Does not include any value attributable to 8,000,000 shares that are held in escrow and not traded. The number of shares outstanding of the issuer's classes of common stock as of January 31, 1997: COMMON STOCK -- 126,272,191(2) (2) Includes the 8,000,000 shares held in escrow. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held April 15, 1997, are incorporated by reference into Part III. ================================================================================ 2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this report. GENERAL Washington Mutual is a regional financial services company committed to serving consumers and small and mid-sized businesses throughout the Western United States. The Company's banking subsidiaries accept deposits from the general public, make residential loans, consumer loans, limited types of commercial real estate loans (primarily loans secured by multi-family properties), and engage in certain commercial banking activities. Washington Mutual also underwrites and sells annuities, sells other insurance products, offers full service securities brokerage, and acts as the investment advisor to and the distributor of mutual funds. The Keystone Transaction. In December 1996, Keystone Holdings merged with and into Washington Mutual, and all of the subsidiaries of Keystone Holdings, including ASB, became subsidiaries of the Company. ASB will remain an operating subsidiary of the Company. The Keystone Transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated as if the respective companies had been combined for all periods presented. Accordingly, unless otherwise noted, all references to Washington Mutual or the Company refer to the combined entity, including Keystone Holdings. Keystone Holdings commenced operations in December 1988 as an indirect holding company for ASB. ASB was formed to effect the December 1988 acquisition (the "1988 Acquisition") of certain assets and liabilities of the failed savings and loan association subsidiary (the "Failed Association") of Financial Corporation of America. In connection with the 1988 Acquisition, the Federal Savings and Loan Insurance Corporation ("FSLIC") received warrants (the "Warrants") that represented the right to purchase capital stock of ASB's corporate parent, an intermediary holding company between Keystone Holdings and ASB. In addition, the 1988 Acquisition had a "good bank/bad bank" structure, with ASB, the "good bank," acquiring substantially all of the Failed Association's performing loans and fixed assets and assuming substantially all of its deposit liabilities. New West, the "bad bank," was formed to acquire the Failed Association's other assets (including nonperforming loans) and liabilities with a view toward their liquidation. New West was transferred to the FDIC as manager of the FRF, prior to consummation of the Keystone Transaction. New West was subsequently liquidated. The Company anticipates that it will consolidate certain head office functions and back office operations of ASB. The Company anticipates achieving certain cost savings from such consolidations. However, the Company expects the actual level of expenses to rise modestly as a result of anticipated growth in ASB's residential lending and other consumer banking activities. In addition, the Company will pursue opportunities to acquire other California operations. If successful, the Company anticipates a further rise in expenses. Other Acquisition Activity. In recent years, Washington Mutual has continued to expand its operations through business combinations with other financial institutions with locations in Washington, Oregon, Utah, and Montana. Beginning in 1995, Washington Mutual took steps to diversify its operations into commercial banking. In August 1995, the Company acquired Enterprise, a Seattle-area commercial bank, and in January 1996, acquired Western, a commercial bank with branch operations throughout Oregon. Each of these transactions was accounted for as a pooling-of-interests. RESULTS OF OPERATIONS Washington Mutual's 1996 net income of $114.3 million was down from $289.9 million in 1995 and $240.3 million in 1994. Earnings for 1996 were reduced by $294.6 million due to an after-tax charge of $209.8 million for transaction-related expenses resulting from the Keystone Transaction, and by a third quarter after-tax charge of $84.8 million representing the Company's portion of the one-time assessment paid by savings institutions and banks nationally to recapitalize the SAIF. Fully diluted earnings per share were $0.85 in 1996, compared with $2.42 in 1995 and $2.06 in 1994. Washington Mutual's return on average assets for 1996 equaled 0.27%, down from 0.73% in 1995 and 0.69% in 1994. Its return on common stockholders' 30 3 equity for 1996 was 4.39%, also down from 13.73% in 1995 and 12.95% in 1994. An increase of approximately 250 basis points in short-term market interest rates in 1994 led to a compression of the net interest margin and a corresponding pressure on net interest income in 1994 and 1995. Certain short-term interest rates decreased 25 basis points in mid-1995 and again in December 1995, resulting in an improved operating environment for the Company during 1996 and 1995 over 1994. Net Interest Income. Net interest income for 1996 of $1.2 billion increased 20% from $992.7 million in 1995, which in turn was 3% higher than the $960.1 million earned during 1994. The net interest margin (which measures the Company's net interest income as a percentage of average interest-earning assets) for 1996 was 2.89%, compared with 2.62% in 1995 and 2.90% in 1994. The 1996 increase in net interest income and margin reflected the effect of two primary factors. First, average interest-earning assets of $41.2 billion increased 9% from 1995. Second, the net interest spread (which is the difference between the Company's yield on interest-earning assets and its cost of funds) rose to 2.75% for 1996 from 2.53% during 1995. To a certain extent, the Company's net interest spread is affected by changes in the yield curve. Savings institutions generally have better financial results in a steep yield curve environment. During 1996, the difference between the yield on a three-month treasury bill and a 30-year bond was 155 basis points compared with 124 basis points a year earlier. This increased differential helped increase the Company's net interest spread. The net interest spread rose to 2.75% during 1996 from 2.53% for 1995. Although long-term interest rates were generally higher during 1996 when compared with 1995, the Company's yield on loans and investments dropped 6 basis points to 7.64% during 1996, compared with 7.70% for 1995. As part of a strategy initiated in late 1995 and continued in 1996 to restructure the Company's asset base, the Company purchased adjustable-rate assets while selling fixed-rate assets. See "-- Interest Rate Risk Management." The disposition of these higher yield fixed-rate assets and inclusion of more adjustable-rate assets more than offset the increased yields resulting from higher market interest rates. The decrease in market short-term interest rates during 1996 led to a decline in the Company's cost of funds to 4.89% for 1996, from 5.17% during 1995. In addition to the favorable interest rate environment, the Company's cost of funds was positively affected by a change in its deposit mix. Maturing time deposit accounts were replaced, in part, with lower interest-cost money market and checking accounts. The growth in net interest income in 1995 was due primarily to an increase in average interest-earning assets. Although average interest-earning assets increased 14% during 1995, a decline in the net interest spread from 2.82% in 1994 to 2.53% in 1995 limited the increase in net interest income. The full effect of the rise in short-term rates that began in late 1994 was felt in 1995 (mitigated somewhat by a subsequent lowering of short-term rates mid-year) increasing the cost of funds during 1995 to 5.17% from 4.11% during 1994. The yield on interest-earning assets during 1995 increased to only 7.70% from 6.93% during 1994 because long-term interest rates did not increase as much as short-term rates. The Company also was not in a position to take full advantage of the increase in long-term interest rates because a sizable portion of its earning assets were fixed rate during this period. The net interest spread declined to 2.53% for 1995 from 2.82% in 1994. Rising interest rates during 1994 and into 1995 also had a negative effect on the net interest spread due to the lag in repricing of the Company's ARMs, particularly its ARMs indexed to COFI. In both 1995 and 1994, the net interest spread was negatively affected by the lag between COFI and changes in the repricing of the Company's interest-bearing liabilities. However, during 1996, short-term interest rates, the main component of COFI, declined slightly with the result that the repricing lag provided a slight benefit to the net interest spread. See "-- Interest Rate Risk Management" and "Consolidated Financial Statements -- Note 17: Interest Rate Risk Management." 31 4 The following table sets forth information regarding the Company's consolidated average statements of financial condition, together with the total dollar amounts of interest income and expense and the weighted average interest rates for the periods presented.
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 --------------------------------- --------------------------------- --------------------------------- INTEREST INTEREST INTEREST INCOME INCOME INCOME AVERAGE OR AVERAGE OR AVERAGE OR BALANCE(1) RATE EXPENSE BALANCE(2) RATE EXPENSE BALANCE(2) RATE EXPENSE ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- (DOLLARS IN THOUSANDS) ASSETS Investments(3)........ $14,327,183 7.05% $1,009,723 $11,260,051 7.06% $ 795,444 $ 8,790,748 5.64% $ 495,556 New West Note......... 723,800 8.13 58,841 2,346,753 6.01 141,039 Loans(4).............. 26,903,243 7.95 2,139,513 25,877,673 7.97 2,061,801 21,987,836 7.54 1,658,818 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total interest-earning assets.......... 41,230,426 7.64 3,149,236 37,861,524 7.70 2,916,086 33,125,337 6.93 2,295,413 Other assets.......... 1,771,424 1,841,038 1,744,338 ----------- ----------- ----------- Total assets...... $43,001,850 $39,702,562 $34,869,675 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking accounts... $ 2,449,233 1.00 24,578 $ 2,389,793 1.20 28,672 $ 2,424,250 1.22 29,530 Savings and money market accounts... 7,115,008 3.40 242,023 6,648,539 3.94 261,958 6,107,997 2.74 167,091 Time deposits....... 14,482,419 5.48 794,222 15,242,445 5.54 844,188 14,557,602 4.51 656,045 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total deposits.... 24,046,660 4.41 1,060,823 24,280,777 4.67 1,134,818 23,089,849 3.69 852,666 Borrowings: Annuities........... 812,185 5.01 40,658 801,129 5.58 44,716 734,969 4.51 33,143 Federal funds purchased......... 847,690 5.46 46,269 305,468 5.30 16,188 -- -- -- Securities sold under agreements to repurchase..... 8,987,234 5.51 495,483 7,749,929 6.23 482,698 4,328,894 4.68 202,677 Advances from the FHLB.............. 4,655,111 5.57 259,243 3,482,200 5.81 202,422 3,962,913 5.38 213,259 Other interest-bearing liabilities....... 675,507 8.25 55,753 558,320 7.63 42,594 397,307 8.46 33,613 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total borrowings...... 15,977,727 5.62 897,406 12,897,046 6.11 788,618 9,424,083 5.12 482,692 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total interest-bearing liabilities..... 40,024,387 4.89 1,958,229 37,177,823 5.17 1,923,436 32,513,932 4.11 1,335,358 ---- ---------- ---- ---------- ---- ---------- Other liabilities..... 486,701 367,702 458,350 ----------- ----------- ----------- Total liabilities..... 40,511,088 37,545,525 32,972,282 Stockholders' equity.............. 2,490,762 2,157,037 1,897,393 ----------- ----------- ----------- Total liabilities and stockholders' equity.......... $43,001,850 $39,702,562 $34,869,675 =========== =========== =========== Net interest spread and net interest income.............. 2.75% $1,191,007 2.53% $ 992,650 2.82% $ 960,055 ==== ========== ==== ========== ==== ========== Net interest margin... 2.89% 2.62% 2.90%
- --------------- (1) Average balances were calculated on a monthly basis. Due to the relative consistency of the Company's asset and liability balances during 1996, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1996. (2) Average balances were calculated on a daily basis for Keystone Holdings and were calculated on a monthly basis for Washington Mutual. Due to the relative consistency of the Company's asset and liability balances during 1995 and 1994, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1995 and 1994. (3) The Company holds a small amount of tax exempt securities, but has chosen not to report the applicable interest income and yield on a tax equivalent basis. (4) Nonaccruing loans were included in the average loan amounts outstanding. 32 5 The following table presents certain information regarding changes in interest income and interest expense of the Company during the periods indicated. The dollar amounts of interest income and interest expense fluctuate depending upon changes in interest rates and upon changes in amounts (volume) of the Company's interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate) and (ii) changes in rate (changes in average interest rate multiplied by the prior period's volume). Changes in rate/volume (changes in rate times the change in volume) are allocated proportionately to the changes in volume and the changes in rate.
1996 VS. 1995 1995 VS. 1994 ------------------------------- ------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO -------------------- TOTAL -------------------- TOTAL VOLUME(1) RATE CHANGE VOLUME(2) RATE CHANGE --------- -------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST INCOME Investments....................... $216,155 $ (1,876) $214,279 $ 157,735 $142,153 $299,888 New West Note..................... (58,841) -- (58,841) (167,731) 85,533 (82,198) Loans(3).......................... 81,552 (3,840) 77,712 305,959 97,024 402,983 -------- -------- -------- --------- -------- -------- Total interest income........ 238,866 (5,716) 233,150 295,963 324,710 620,673 INTEREST EXPENSE Deposits: Checking accounts............... 734 (4,828) (4,094) (417) (441) (858) Savings and money market accounts..................... 21,029 (40,964) (19,935) 15,877 78,990 94,867 Time deposits................... (41,748) (8,218) (49,966) 32,067 156,076 188,143 -------- -------- -------- --------- -------- -------- Total deposit expense........ (19,985) (54,010) (73,995) 47,527 234,625 282,152 Borrowings: Annuities....................... 627 (4,685) (4,058) 3,178 8,395 11,573 Federal funds purchased......... 29,582 499 30,081 16,188 -- 16,188 Securities sold under agreements to repurchase................ 45,540 (32,755) 12,785 197,482 82,539 280,021 Advances from the FHLB.......... 64,912 (8,091) 56,821 (31,996) 21,159 (10,837) Other........................... 9,467 3,692 13,159 11,855 (2,874) 8,981 -------- -------- -------- --------- -------- -------- Total borrowing expense...... 150,128 (41,340) 108,788 196,707 109,219 305,926 -------- -------- -------- --------- -------- -------- Total interest expense....... 130,143 (95,350) 34,793 244,234 343,844 588,078 -------- -------- -------- --------- -------- -------- Net interest income............... $108,723 $ 89,634 $198,357 $ 51,729 $(19,134) $ 32,595 ======== ======== ======== ========= ======== ========
- --------------- (1) Average balances in 1996 were calculated on a monthly basis. Due to the relative consistency of the Company's asset and liability balances during 1996, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1996. (2) Average balances were calculated on a daily basis for Keystone Holdings and were calculated on a monthly basis for Washington Mutual. Due to the relative consistency of the Company's asset and liability balances during 1995 and 1994, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1995 and 1994. (3) Nonaccruing loans were included in the average loan amounts outstanding. 33 6 Other Income. Other income was $259.3 million in 1996, up from $208.3 million in 1995 and $220.8 million in 1994. Other income consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Depositor fees..................................... $102,597 $ 79,017 $ 45,255 Loan servicing fees................................ 41,303 29,315 23,247 Securities, annuities and other fees............... 53,350 49,679 65,248 Other operating income............................. 36,419 31,035 39,630 Gain on sale of loans.............................. 19,729 1,717 23,488 Gain (loss) on sale of other assets................ 5,866 (655) 23,926 Loss on sale of covered assets..................... -- (37,399) -- FDIC assistance on covered assets.................. -- 55,630 -- -------- -------- -------- Total other income............................... $259,264 $208,339 $220,794 ======== ======== ========
Depositor fees of $102.6 million in 1996 increased substantially from fees of $79.0 million in 1995 and $45.3 million in 1994. The increases reflected a revised fee structure on checks drawn on nonsufficient funds and overdraft fees combined with an aggressive marketing campaign that substantially increased the number of checking accounts. The number of retail checking accounts grew to 863,837 in 1996 from 743,852 in 1995 and 611,482 in 1994. The primary component of this growth was noninterest-bearing checking accounts, which management considers the core accounts of its consumer banking strategy. Checking accounts are an attractive means of providing low-cost deposits, producing added fee income and generating opportunities to sell the Company's other products and services. The growth in depositor fees has been tempered somewhat by an increase in the amount of deposit account-related losses (included in other operating expense) incurred by the Company resulting from the increased number of checking accounts. Management closely monitors the amount of losses incurred to assure the profitability of its revised fee structure. Loan servicing fees were $41.3 million in 1996, up from $29.3 million in 1995 and $23.2 million in 1994. Included in the 1996 increase was $1.4 million of additional loan servicing fees booked in September 1996 resulting from a change of accounting method related to the loan servicing system. The higher level of loan servicing fees recognized reflected the increase in the amount of loans serviced for others. The average balance of loans serviced for others during 1996 increased approximately 48% from 1995 due primarily to the securitization and sale of residential loans. Loans serviced for others totaled $23.0 billion at December 31, 1996. The increase in the portfolio of loans serviced for others to $21.4 billion at December 31, 1995, from $15.3 billion at the end of 1994 was due to the purchase of servicing rights on $4.2 billion of loans and loan securitizations. During 1994, the Company purchased the rights to service $3.9 billion of ARMs and sold servicing rights relating to $1.9 billion of its fixed-rate loan portfolio. Loan servicing fees consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Loan servicing income.............................. $ 71,918 $ 53,155 $ 43,665 Amortization of mortgage servicing rights.......... (30,615) (23,840) (20,418) -------- -------- -------- Loan servicing fees.............................. $ 41,303 $ 29,315 $ 23,247 ======== ======== ========
Securities, annuities and other fees were principally generated by the Company's nonbanking subsidiaries and totaled $53.4 million for 1996, compared with $49.7 million for 1995 and $65.2 million for 1994. During 1994, Mutual Travel Inc. ("Mutual Travel"), the Company's travel agency subsidiary, recorded $14.2 million of service fees. With the sale of Mutual Travel in March 1995, fees recorded by the company amounted to 34 7 only $3.6 million for 1995. The lower level of service fees during 1995 was also the result of lower than anticipated sales activity at Murphey Favre. Other operating income during 1996 was $36.4 million, compared with $31.0 million in 1995 and $39.6 million in 1994. The majority of other operating income was derived from loan-related fees. Gain on sale of loans totaled $19.7 million in 1996, compared with $1.7 million in 1995 and $23.5 million in 1994. Most of the gains recognized during 1996 were the result of selling $2.0 billion of fixed-rate loans as part of the Company's program of selling fixed-rate loan production with the objective of reducing the effect of future movements in interest rates. See below for further discussion of gain recognition under a new accounting pronouncement. During 1995 and 1994, Washington Mutual retained or securitized most of its loan production. During 1994, a $25.0 million gain was realized on the sale of the Company's credit card portfolio with a book value of $151.9 million. The balance of mortgage servicing rights increased to $140.7 million at December 31, 1996, from $104.5 million at the end of 1995 and $70.9 million at the end of 1994. The higher level of capitalized servicing rights reflected the increase in the amount of loans serviced for others and the implementation of SFAS No. 122, Accounting for Mortgage Servicing Rights by the Company in 1995. SFAS No. 122 eliminates the distinction between servicing rights that are purchased and those that are retained upon the sale or securitization of loans. The statement requires mortgage servicers to record the servicing rights on loans as separate assets, no matter what their origin. Banks that sell or securitize loans and retain the servicing rights are required to allocate the total cost of the loans between servicing rights and principal balance. Capitalizing the mortgage servicing rights on loans originated for sale effectively reduces the Company's cost basis in the loans and leads to higher gains on sale. As a result, gains on the sale of loans were $17.4 million more in 1996 than would have been recognized under prior accounting policies. Mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year......................... $104,495 $ 70,911 $ 66,031 Additions........................................ 74,398 58,306 38,385 Sales............................................ (5,395) -- (13,087) Amortization..................................... (30,615) (23,840) (20,418) Valuation allowance.............................. (2,158) (882) -- -------- -------- -------- Balance, end of year............................... $140,725 $104,495 $ 70,911 ======== ======== ========
Gain (loss) on sale of other assets consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Securities transactions............................... $(2,617) $ (400) $ 4,156 Mortgage servicing rights............................. 4,030 -- 20,396 Premises and equipment................................ (958) (1,458) (1,270) Recognition of deferred gain on sale of Mutual Travel.............................................. 4,100 -- -- Other................................................. 1,311 1,203 644 ------- ------- ------- Total gain (loss) on sale of assets................. $ 5,866 $ (655) $23,926 ======= ======= =======
Net gains on the sale of other assets of $5.9 million during 1996 included the recognition of a $4.1 million previously deferred gain on the March 1995 sale of Mutual Travel; a $4.0 million gain on the sale of mortgage servicing rights related to $586.8 million of loans serviced for others; and a $2.6 million net loss on securities transactions. The net loss on the sale of securities were incurred in connection with the Company's strategy to 35 8 reduce its exposure to movements in interest rates. See "-- Net Interest Income" and "-- Interest Rate Risk Management." During 1995, the net loss of $655,000 on the sale of other assets was primarily due to an $8.4 million write-down recorded due to credit quality deterioration on certain MBS partially offset by gains generated through the sale of fixed-rate MBS. Included in gains on the sale of other assets in 1994 of $23.9 million was the recognition of a $20.4 million gain on the sale of mortgage servicing rights related to $1.9 billion of loans serviced for others. During 1995, a loss of $37.4 million was recognized on the sale of certain assets by ASB. These assets, single-family residential loans, were acquired by ASB in the 1988 Acquisition and were designated by relevant agreements as covered assets. The loss on the sale of the covered assets was offset by a $55.6 million payment received during the same year from the FRF representing compensation, under the terms of the 1988 Acquisition, for the remaining value of such covered assets computed in accordance with the Assistance Agreement. Other Expense. Other expense in 1996 totaled $1.0 billion, compared with $700.5 million in 1995 and $695.5 million in 1994. Included in other expense in 1996 were transaction-related expenses of $158.1 million resulting from the Keystone Transaction and the one-time SAIF recapitalization assessment of $124.2 million. Other expense consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- --------- --------- (DOLLARS IN THOUSANDS) Salaries and employee benefits............................ $ 336,065 $ 313,304 $ 315,424 Occupancy and equipment................................... 124,278 110,981 102,403 Regulatory assessments.................................... 43,171 54,909 54,887 SAIF special assessment................................... 124,193 -- -- Data processing fees...................................... 40,733 36,538 33,862 Other operating expense................................... 159,541 143,794 146,463 Transaction-related expense............................... 158,121 2,000 -- Amortization of goodwill and other intangible assets...... 27,672 28,306 29,076 REO operations............................................ 11,530 10,682 13,402 ---------- -------- -------- Total other expense..................................... $ 1,025,304 $ 700,514 $ 695,517 ========== ======== ========
Salaries and employee benefits increased to $336.1 million during 1996 from $313.3 million during 1995 and $315.4 million during 1994 due primarily to increases in staffing levels in commercial banking, consumer financial centers and loan administration. Full-time equivalent employees were 8,322 at December 31, 1996, up from 7,903 at year-end 1995. The increase in full-time equivalent employees was moderated by the sale of the Company's item processing operation and outsourcing of functions in the information systems and property management departments during 1996. The number of full-time equivalent employees at the end of 1995 was virtually unchanged from 7,915 at the end of 1994. The increase in occupancy and equipment expense to $124.3 million in 1996 from $111.0 million in 1995 and $102.4 million in 1994 was primarily due to the growth in the number of consumer financial centers, an expansion of head office facilities and technology upgrades. Regulatory assessments (excluding the one-time SAIF recapitalization assessment) decreased to $43.2 million from $54.9 million in both 1995 and 1994, reflecting a reduction in the assessment rate on the portion of the Company's deposits insured through the BIF. Although total deposits outstanding increased in 1995, the increase in deposit balances was offset by a reduction in the premium rate for BIF-insured deposits. On September 30, 1996, President Clinton signed legislation intended in part to recapitalize the SAIF and to reduce the gap between SAIF premiums and BIF premiums. The legislation provided for a special one-time assessment on SAIF-insured deposits that were held as of March 31, 1995, including certain deposits acquired after that date. The assessment was designed to bring the SAIF's reserve ratio to the legally required level of $1.25 for every $100 in insured deposits. Prior to this legislation, deposits of Washington Mutual 36 9 subsidiaries insured through the SAIF were subject to regular FDIC assessments of 23 cents per $100 of insured deposits per year. Beginning in January 1997, deposits of well-capitalized institutions insured through the SAIF are subject to regular FDIC assessments of 6.48 cents per $100 per year, while deposits of well-capitalized institutions insured through the BIF are subject to regular FDIC assessments of 1.30 cents per $100 per year. Washington Mutual's special assessment on deposits held by WMB, ASB and WMBfsb resulted in a pretax charge of $124.2 million, which was taken in the quarter ended September 30, 1996. Based on current levels of deposits, Washington Mutual estimates that the reduction in the regular assessment on its SAIF deposits beginning in 1997 should result in annual savings of approximately $31 million. Data processing fees in 1996 were $40.7 million, compared with $36.5 million in 1995 and $33.9 million in 1994. The year-to-year increase reflected the continued use of outsourced data processing services. Other operating expense increased to $159.5 million in 1996 from $143.8 million in 1995 and $146.5 million (inclusive of a $5.0 million expense for a legal settlement) in 1994. See "-- Nonbanking Subsidiary Operations." Increases in 1996 were due in part to higher telecommunications expenses and professional fees associated with process reengineering projects. In general, other operating expense tends to rise with the increased size of the Company. Transaction-related expenses in 1996 associated with the Keystone Transaction were related to severance and management payments, payments related to a tax settlement between Keystone Holdings and the FRF, write-downs on software and equipment, premiums paid on redemption of debt securities of a Keystone Holdings subsidiary, professional fees and investment banking fees. As part of the merger with Olympus Capital Corporation in 1995, the Company recorded transaction-related expenses of $2.0 million. Goodwill and other intangible assets have resulted from business combinations accounted for as purchase transactions. Goodwill and other intangible assets are amortized using the straight-line method over the period that is expected to be benefited. The acquisition of Pacific First Bank, A Federal Savings Bank in the second quarter of 1993 was the most significant of such business combinations and resulted in the creation of $178.2 million in goodwill and other intangible assets to be amortized over 10 years. The amortization of goodwill and other intangible assets was $27.7 million in 1996, compared with $28.3 million in 1995 and $29.1 million in 1994. The expense from REO operations included provisions for REO losses of $7.1 million in 1996, $10.5 million in 1995 and $15.5 million in 1994. The provision for REO losses mostly reflected credit problems in California. See "-- Asset Quality -- Provision for Loan Losses and Reserve for Loan Losses." In general, REO operations in California resulted in net operating expenses, as opposed to net operating income in Washington. Taxation. Income taxes include federal income taxes and applicable state income taxes. See "Business -- Taxation." In connection with the 1988 Acquisition, the Internal Revenue Service entered into a closing agreement (the "Closing Agreement") with respect to the federal income tax consequences of the 1988 Acquisition and certain aspects of the taxation of Keystone Holdings and certain of its affiliates. The Closing Agreement contains provisions that are intended to ensure that losses generated by New West would be available to offset income of ASB for federal income tax purposes. In connection with the 1988 Acquisition, Keystone Holdings and certain of its affiliates entered into a number of continuing agreements with the predecessor to the FRF, which agreements were designed, in part, to provide that over time 75% of most of the federal income tax savings and 19.5% of most of the California tax savings (in each case computed in accordance with specific provisions contained in the Assistance Agreement) attributable to the utilization of certain tax loss carryforwards of New West are paid ultimately to the FRF. The provision for such payments is reflected in the financial statements as "payments in lieu of taxes." Due to the above arrangements, the Company's effective tax rate (including payments in lieu of taxes) for the two years ended December 31, 1995 has ranged from approximately 28% to 30%, compared to a normal corporate tax rate of 35%. 37 10 The provision for income taxes of $95.6 million for 1996 represented an effective tax rate of 43%. The 1996 provision included a $25.2 million provision for payments in lieu of taxes. In 1996, the benefit for use of net operating loss carryover decreased due to the change of control as of December 20, 1996. 1996 was also the first year in which New West's current losses were not included in ASB's taxable income. In addition, ASB realized in 1995 and 1994 benefits from increases to tax base year bad debt reserves which were not realized in 1996. See "Consolidated Financial Statements -- Note 19: Income Taxes." Due to Section 382 of the Code, most of the value of the net operating loss carryforward deductions of Keystone Holdings and its subsidiaries was eliminated due to the Keystone Transaction. Accordingly, the future tax savings attributable to such net operating loss carryforward deductions (other than amounts used to offset bad debt reserve deduction recapture for ASB) will be greatly reduced. Nonbanking Subsidiary Operations. For a description of the Company's principal nonbanking subsidiaries, see "Business -- Washington Mutual's Operating Subsidiaries." Nonbanking subsidiary results of operations were as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) WM Life................................................... $16,269 $14,292 $12,482 ASB Financial............................................. 12,616 10,599 11,245 Composite Research........................................ 3,364 2,967 2,854 ASB Insurance............................................. 1,690 1,100 -- Murphey Favre............................................. 1,461 437 (2,249) Mutual Travel............................................. -- 229 1,178 Other..................................................... 4,520 (644) (23) ------- ------- ------- Net income before amortization of goodwill and other intangible assets, elimination of intercompany transactions, and income taxes ("pretax operating income")................................................ 39,920 28,980 25,487 Amortization of goodwill and other intangible assets...... 106 932 1,501 ------- ------- ------- Net income before elimination of intercompany transactions and income taxes........................................ $39,814 $28,048 $23,986 ======= ======= =======
Pretax operating income for 1996 was $39.9 million, compared with $29.0 million in 1995 and $25.5 million in 1994. WM Life improved its pretax operating income to $16.3 million during 1996 from $14.3 million in 1995 and $12.5 million in 1994. Most of the increase during 1996 was due to higher net interest income resulting from growth in net interest-earning assets funded in part by $79.3 million in advances from the FHLB outstanding at the end of 1996. The improvement in earnings in 1995 primarily reflected asset growth funded by annuity sales. Annuities outstanding at year-end 1995 were up 7% to $855.5 million from $799.2 million at the end of 1994 due to a high level of surrenders of annuity contracts. Annuities rose a modest 3% during 1996 to end the year at $878.1 million. ASB Financial had pretax operating income of $12.6 million in 1996, an increase of 19%, compared with $10.6 million during 1995, primarily as a result of greater securities sales. Higher sales commissions and salary expense, related to higher securities commission revenues, resulted in a decrease in pretax operating income in 1995 from $11.2 million in 1994. Composite Research's pretax operating income improved slightly to $3.4 million during 1996 from $3.0 million during 1995 and $2.9 million during 1994. Assets of the Composite Group of mutual funds, managed by Composite Research, were $1.4 billion at December 31, 1996, $1.3 billion at year-end 1995 and $1.1 billion at December 31, 1994. The differences in asset balances are primarily due to fluctuations in market valuation of the mutual fund assets. 38 11 Pretax operating income for ASB Insurance for 1996 totaled $1.7 million, compared with $1.1 million for 1995. ASB Insurance began operations in 1995. Murphey Favre posted pretax operating income of $1.5 million during 1996, compared with $437,000 during 1995. During 1996, Murphey Favre recorded a $1.7 million charge resulting from a legal settlement. Lower sales reduced pretax operating income to $437,000 in 1995. The pretax net loss of $2.2 million in 1994 resulted primarily from the $5.0 million expense of a legal settlement. The results of operations during 1996 for other nonbanking subsidiaries included the recognition of a previously deferred gain of $4.1 million on the 1995 sale of Mutual Travel. In March 1995, Washington Mutual sold Mutual Travel to a company whose principal shareholders were Mutual Travel's management team. The sales price resulted in a pretax gain of $4.1 million, which was recognized in 1996. REVIEW OF FINANCIAL POSITION Assets. At December 31, 1996, the Company's assets were $44.6 billion, an increase of 6% from $42.0 billion at December 31, 1995. During 1995, total assets grew $4.5 billion. Most of the growth during 1996 and 1995 resulted from retaining originated loans (either as part of the loan portfolio or as MBS). Investment Activities. Washington Mutual's investment portfolio of $12.0 billion at December 31, 1996 declined 22% from the December 31, 1995 balance of $15.4 billion. Contributing to the decline were paydowns of investment securities and the Company's decision to continue the restructuring of its investment portfolio by selling fixed-rate securities and replacing them with adjustable-rate loans and securities. This portfolio restructuring was intended to reduce Washington Mutual's sensitivity to changes in market interest rates. As noted above, however, the portfolio restructuring also negatively affected the yield on interest-earning investment securities. See "-- Net Interest Income." At December 31, 1996, the Company's investment portfolio included $9.1 billion of available-for-sale securities, $2.9 billion of held-to-maturity securities (with a fair value of $2.9 billion), and $1.6 million of trading account securities. MBS constituted $10.5 billion or 87% of the total investment portfolio. The Company's investment portfolio increased 76% to $15.4 billion at December 31, 1995 from $8.7 billion a year earlier, primarily due to the Company's retention of $6.6 billion of loans which it securitized. Also in 1995, Washington Mutual leveraged its capital through purchases of investment securities. These purchases were funded mostly through borrowings. By leveraging the balance sheet through the use of these wholesale activities, Washington Mutual generated additional net interest income. At December 31, 1995, the Company's investment portfolio included $12.2 billion of available-for-sale securities, $3.2 billion of held-to-maturity securities (with a fair value of $3.3 billion), and $238,000 of trading account securities. During 1995, the Financial Accounting Standards Board ("FASB") issued a report entitled A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers which allowed companies a one-time reassessment and related reclassification from the held-to-maturity category to the available-for-sale category without adverse accounting consequences for the remainder of the portfolio. Pursuant to the FASB report, Washington Mutual reclassified $4.9 billion of its held-to-maturity securities into the available-for-sale category on December 1, 1995. Of the securities transferred, over half were fixed-rate securities. See "Business -- Asset and Liability Management." Loans. Total loans outstanding at December 31, 1996 were $30.3 billion, up from $24.2 billion at December 31, 1995. Changes in the loan balances are primarily driven by originations of new loans, prepayments of existing loans, scheduled repayments of principal, and loan securitizations. 39 12 Loans, exclusive of reserve for loan losses, consisted of the following:
DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans: Residential................... $22,660,715 $17,303,305 $17,766,215 $13,828,459 $11,734,594 Residential construction...... 723,645 615,814 549,271 430,215 366,808 Commercial real estate........ 3,810,968 3,487,574 4,699,220 4,515,449 3,194,184 Manufactured housing, second mortgage and other consumer................... 3,158,741 2,841,854 2,573,327 2,403,169 1,431,834 Commercial business........... 340,149 179,568 129,048 131,468 118,717 ----------- ----------- ----------- ----------- ----------- Total loans................ $30,694,218 $24,428,115 $25,717,081 $21,308,760 $16,846,137 ========== ========== ========== ========== ========== Loans as a percentage of total loans: Residential................... 74% 71% 69% 65% 70% Residential construction...... 2 2 2 2 2 Commercial real estate........ 13 14 18 21 19 Manufactured housing, second mortgage and other consumer................... 10 12 10 11 8 Commercial business........... 1 1 1 1 1 --- --- --- --- --- Total loans................ 100% 100% 100% 100% 100% === === === === ===
Loans originated were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Real estate: Residential (1-4 family units): Fixed rate........................................... $ 3,708,874 $2,365,603 $1,040,035 Adjustable rate...................................... 6,240,190 4,455,740 5,288,231 Residential construction: Custom............................................... 779,698 583,658 705,655 Speculative.......................................... 510,047 352,169 328,521 Apartment buildings..................................... 504,531 348,942 618,201 Other commercial real estate............................ 267,043 166,987 136,749 ----------- ---------- ---------- Total real estate loans.............................. 12,010,383 8,273,099 8,117,392 Consumer: Second mortgage and other consumer...................... 953,952 722,871 776,176 Manufactured housing.................................... 334,721 274,115 277,358 ----------- ---------- ---------- Total consumer loans................................. 1,288,673 996,986 1,053,534 Commercial business....................................... 348,400 167,830 128,539 ----------- ---------- ---------- Total loans originated............................... $13,647,456 $9,437,915 $9,299,465 =========== ========== ========== Residential refinances to total residential originations............................................ 38.71% 42.14% 48.31%
The strong housing market, attractive interest rates, and an increased number of distribution outlets led to record lending volumes during 1996. In early 1994, the Company's originations included significant refinancing activity that was generated by low market interest rates. The onset of higher interest rates later in 1994 curtailed refinancing activity for the year and resulted in an increase in residential adjustable-rate originations compared to residential fixed-rate originations. While refinancings increased again during the second half of 1995 and during 1996 as market interest rates declined, they were overshadowed by the rise in loans to purchase homes. Loans to purchase homes accounted for $6.0 billion of residential originations during 1996 40 13 while refinancing activity produced $3.9 billion of loans, compared with the previous year's $3.9 billion of loans to purchase homes and $2.9 billion of refinance activity. In addition, of the total residential loans originated in 1996, 63% were adjustable rate -- about the same as in 1995. The decline in apartment building originations from 1994 to 1995 was due to a management decision at ASB to reduce lending volumes in that product line. Deposits. Total deposits were $24.1 billion at December 31, 1996, compared with $24.5 billion at the end of 1995. Deposits consisted of the following:
DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing...................................... $ 2,138,782 $ 2,111,124 $ 2,342,407 Noninterest bearing................................... 841,180 665,205 499,282 ----------- ----------- ----------- 2,979,962 2,776,329 2,841,689 Savings accounts........................................ 1,660,376 1,905,659 2,224,784 MMDAs................................................... 5,181,685 4,667,884 3,502,981 Time deposit accounts: Due within one year................................... 12,159,123 12,696,186 10,496,491 After one but within two years........................ 1,011,934 1,410,809 2,780,944 After two but within three years...................... 647,988 409,580 765,219 After three but within four years..................... 333,234 243,541 293,167 After four but within five years...................... 102,681 258,415 293,522 After five years...................................... 3,158 94,557 145,209 ----------- ----------- ----------- 14,258,118 15,113,088 14,774,552 ----------- ----------- ----------- Total deposits..................................... $24,080,141 $24,462,960 $23,344,006 =========== =========== ===========
Time deposits decreased during 1996 because management chose not to be aggressive in their repricing. Partially offsetting the $855.0 million decline in time deposits were increases in the level of money market and checking accounts. Both of these products have the benefit of lower interest costs, although there may be a less predictable timeframe for the availability of these funds. While money market and checking accounts are demand accounts, these accounts are considered by the Company to be the core relationship with its customers. In the aggregate, the Company views these core accounts to be a more stable source of long-term funding. While the vast majority of its deposits are retail in nature, the Company does engage in certain wholesale activities -- primarily accepting time deposits from political subdivisions and public agencies. The Company considers wholesale deposits to be an alternative borrowing source rather than a customer relationship, and as such, their levels are determined by management's decisions as to the most economic funding sources. Financial data pertaining to deposits were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Decrease due to deposit outflow..................... $(1,550,305) $ (432,942) $(1,236,514) Increase due to acquired deposits................... 106,663 417,078 211,537 Increase due to interest credited................... 1,060,823 1,134,818 852,666 ----------- ----------- ----------- (Decrease) increase in total deposits.......... $ (382,819) $ 1,118,954 $ (172,311) =========== =========== =========== Total deposits at end of period..................... $24,080,141 $24,462,960 $23,344,006 Weighted average rate for the period................ 4.41% 4.69% 3.69%
41 14 Borrowings and Annuities. Washington Mutual's borrowings primarily take the form of federal funds purchased, securities sold under agreements to repurchase and advances from the FHLBs of Seattle and San Francisco. See "Business -- Sources of Funds -- Borrowings and Annuities." The exact mix at any given time is dependent upon the market pricing of the individual borrowing sources. The increase in the level of borrowings in 1996 was used to fund the Company's asset growth. Borrowings and annuities consisted of the following:
DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Annuities....................................... $ 878,057 $ 855,503 $ 799,178 Federal funds purchased......................... 1,052,000 433,420 -- Securities sold under agreements to repurchase.................................... 7,835,453 7,984,756 6,637,346 Advances from the FHLB.......................... 7,241,492 4,715,739 4,128,977 Other borrowings................................ 676,986 590,217 381,066 ----------- ----------- ----------- Total borrowings.............................. $17,683,988 $14,579,635 $11,946,567 =========== =========== ===========
In August 1995, the Company filed a registration statement with the SEC for the offering, on a delayed or continuous basis, of up to $250.0 million of debt securities, of which $100.0 million remains available. In December 1996, Washington Mutual entered into two Facilities: a $100.0 million 364-day facility and a $100.0 million 4-year facility. At December 31, 1996, no monies had been drawn. However, in January 1997, $150.0 million was drawn for the redemption of debt securities of a Keystone Holdings' subsidiary and in February 1997, another $20.0 million was drawn. The remaining proceeds of the Facilities are available for general corporate purposes, including providing capital at a subsidiary level. SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and established, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. As issued, Statement No. 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. In general, SFAS No. 127 defers for one year the effective date of SFAS No. 125. The Company will implement SFAS No. 125, as amended by SFAS No. 127 as required. The adoption is not anticipated to have a material impact on the results of operations or financial position of the Company. ASSET QUALITY Provision for Loan Losses and Reserve for Loan Losses. The provision for loan losses is based upon management's estimate of the amount necessary to maintain adequate reserves for losses inherent in the Company's loan portfolio. The estimate of inherent losses is developed by management considering a number of factors, including matters pertinent to the underlying quality of the loan portfolio and management's policies, practices and intentions with respect to credit administration and asset management. The provision for loan losses during 1996 was $201.5 million, which included a $125.0 million addition to the reserve for loan losses at the date of the merger with Keystone Holdings. The additional reserve for loan losses was provided principally because a number of Washington Mutual's credit administration and asset management philosophies and procedures differed from those of ASB. Those differences consisted principally of the following: (i) Washington Mutual is more proactive in dealing with emerging credit problems and tends to prefer foreclosure actions to induce borrowers to correct defaults, whereas ASB was not as proactive and tended to prefer workouts in lieu of a more aggressive foreclosure stance; and (ii) ASB considered the risk characteristics of its portfolio of loans secured by apartment buildings of less than $1.0 million to be similar to its single-family residential portfolio; Washington Mutual, on the other hand, considers the risk characteristics of that portfolio to be more closely aligned with its commercial real estate loan portfolio, which tends to have a higher incidence of loan losses than the single-family residential portfolio. Washington Mutual is conforming 42 15 ASB's asset management practices, administration, philosophies and procedures to those of WMB and WMBfsb. The plan of realization of troubled loans differed between the companies and therefore resulted in different levels of loss reserves. The addition to the reserve for loan losses was to a lesser degree provided because Washington Mutual believed that, while there had been an increase in the value of residential real estate in certain California markets, a decline in collateral values for some portions of the California real estate market occurred in 1996. Management of the Company has individually reviewed ASB's large performing and nonperforming loans and performed a review of its other loan portfolios and is developing appropriate strategies for such credits. As a result, Washington Mutual allocated approximately 43% of the additional $125.0 million provision to loans in the commercial real estate loan portfolio. The remainder was attributed to ASB's various residential loan portfolios, for which specific reserve allocations were not recorded. In addition to the $125.0 million discussed above, the provision for loan losses for 1996 included $76.5 million of charges, which was substantially unchanged from the $75.0 million in 1995, reflecting the fact that the dollar amounts of nonperforming assets were substantially the same in both periods. The balance of the reserve for loan losses was $363.4 million or 110.29% of nonperforming assets at December 31, 1996, compared with $235.3 million or 69.42% of nonperforming assets at December 31, 1995. The provision for loan losses during 1995 was $75.0 million, compared with $122.0 million in 1994 and $158.7 million in 1993. The 1995 provision reflected a decline in the level of nonperforming assets, particularly California residential and apartment building real estate loans. The 1994 provision reflected a significant decline in the levels of certain nonperforming assets, but was increased from levels otherwise indicated by $12.5 million related to losses resulting from the Northridge, California earthquake in January 1994. The provision for loan losses of $158.7 million during 1993 was virtually unchanged from 1992's level of $158.5 million. During 1991, California's general economic indicators, including employment, consumer confidence and the value of residential real estate, began to deteriorate. These trends continued through 1992 and 1993. In response to these trends, the Company increased its reserve for loan losses through the provision for loan losses during those years and tightened underwriting standards at ASB. Management believes that the stricter underwriting standards initiated at ASB in the latter part of 1991 and 1992 have helped to alleviate the level of loan delinquencies, despite the recessionary conditions that existed in California. The delinquency experience of loans originated by ASB subsequent to 1992 has been significantly less than that of those originated prior to 1992. Management believes that the high rate of delinquencies in prior years' originations can be attributed to a subsequently discontinued limited documentation program offered by ASB during 1989 and 1990, as well as the general decline in the value of residential real estate that resulted in the deterioration of many borrowers' equity. The loan loss provision in 1992 and 1993 was also affected by the increase in the size of the loan portfolio, and in 1993, caution about the quality of the loans acquired from Pacific First. Integral to determining the level of the provision for loan losses in any given year is an analysis of actual loss experience and plans for problem loan administration and resolution. Loan charge-offs, net of recoveries for 1996 totaled $74.4 million, which was less than the level of net charge-offs of $90.1 million in 1995, $123.0 million in 1994, $139.3 million in 1993, and $114.7 million in 1992. The downward trend in residential charge-offs over the past several years resulted in declines in the overall provision for loan losses. Charge-offs on loans secured by commercial real estate in 1996 were lower, compared with the previous three years. Although charge-offs had been higher, commercial real estate delinquencies as a percentage of the total commercial real estate loan portfolio had declined significantly, contributing to the lower overall provision for loan losses. At year-end 1992, commercial credits, which consisted primarily of high-yield bonds, declined to $14.0 million from $22.2 million at the end of the previous year. This decline was mostly due to $6.6 million in sales during the year. However, by the end of 1992, nonperforming assets in this portfolio had increased to $8.5 million from $360,000 one year earlier. This increase in nonperforming credits was anticipated by management. 43 16 Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year.............. $235,275 $244,989 $245,062 $179,612 $130,423 Provision for loan losses............... 201,512 74,987 122,009 158,728 158,537 Reserves added through business combinations.......................... 1,077 5,372 921 46,000 5,321 Loans charged-off: Residential........................... (53,993) (57,147) (89,637) (93,799) (77,815) Residential construction.............. (16) (125) (190) (297) (937) Commercial real estate................ (21,752) (33,149) (26,835) (26,967) (19,377) Manufactured housing, second mortgage and other consumer................. (6,639) (6,888) (10,544) (16,964) (17,017) Commercial business/credits........... (435) (813) (2,065) (3,065) (1,321) -------- -------- -------- -------- -------- (82,835) (98,122) (129,271) (141,092) (116,467) Recoveries of loans previously charged-off: Residential........................... 4,437 2,393 2,522 45 17 Residential construction.............. -- 47 -- -- -- Commercial real estate................ 3,197 4,426 2,186 889 571 Manufactured housing, second mortgage and other consumer................. 705 701 1,117 768 313 Commercial business/credits........... 74 482 443 112 897 -------- -------- -------- -------- -------- 8,413 8,049 6,268 1,814 1,798 -------- -------- -------- -------- -------- Net charge-offs......................... (74,422) (90,073) (123,003) (139,278) (114,669) -------- -------- -------- -------- -------- Balance, end of year.................... $363,442 $235,275 $244,989 $245,062 $179,612 ======== ======== ======== ======== ======== Net charge-offs as a percentage of average loans......................... 0.28% 0.35% 0.56% 0.70% 0.69%
As part of the process of determining the adequacy of the reserve for loan losses, management reviews the loan portfolio for specific weaknesses. A portion of the reserve is then allocated to reflect the identified loss exposure. Residential real estate and consumer loans are not individually analyzed for impairment and loss exposure because of the significant number of loans and their relatively small individual balances. Residential construction, commercial real estate and commercial business loans were evaluated individually for impairment. Allocated reserves at the end of 1996 increased significantly to $78.3 million. During 1996, the Company's review of ASB's loan portfolio resulted in approximately 43% of the additional $125.0 million provision being allocated to loans in the commercial real estate loan portfolio. Unallocated reserves are established for loss exposure that may exist in the remainder of the loan portfolio but has yet to be identified. In determining the adequacy of unallocated reserves, management considers changes in the size and composition of the loan portfolio, historical loan loss experience, current and anticipated economic conditions, and the Company's credit administration and asset management philosophies and procedures. 44 17 An analysis of the reserve for loan losses was as follows:
DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Allocated reserves: Commercial real estate............ $ 77,054 $ 16,488 $ 20,025 $ 22,833 $ 22,496 Residential construction.......... -- 158 1,327 1,503 1,219 Commercial business/credits....... 1,285 -- -- 1,718 5,597 -------- -------- -------- -------- -------- Total allocated reserves....... 78,339 16,646 21,352 26,054 29,312 Unallocated reserves................ 285,103 218,629 223,637 219,008 150,300 -------- -------- -------- -------- -------- Total loan loss reserves....... $363,442 $235,275 $244,989 $245,062 $179,612 ======== ======== ======== ======== ======== Total reserve for loan losses as a percentage of: Nonperforming loans............... 160.52% 110.04% 87.22% 72.74% 54.58% Nonperforming assets.............. 110.29 69.42 58.52 46.91 31.98
A reserve for REO losses is maintained for any subsequent decline in the value of foreclosed property. The reserve for REO losses was $7.1 million at December 31, 1996, compared with $10.1 million at December 31, 1995. The level is based upon a routine review of the REO portfolio and the strength of national and local economies. Classified Assets. The following table sets forth the Company's classified assets, which consist of nonaccrual loans, loans under foreclosure, REO and performing loans (including substandard troubled debt restructurings) and securities that exhibit credit quality weaknesses. When and if loans sold on a recourse basis are nonperforming, they are included in nonaccrual loans. See "Consolidated Financial Statements -- Note 1: Summary of Significant Accounting Policies."
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure........................... $226,412 $213,802 REO.................................................................... 103,111 125,101 -------- -------- Total nonperforming assets........................................... 329,523 338,903 Troubled debt restructurings (classified as substandard)............... 82,048 85,483 Other classified assets................................................ 136,442 129,264 -------- -------- Total classified assets.............................................. $548,013 $553,650 ======== ========
Nonperforming assets decreased to 0.74% of total assets at December 31, 1996 or $329.5 million, compared with $338.9 million or 0.81% of total assets at December 31, 1995. Nonperforming assets decreased 19% to $338.9 million at the end of 1995, from $418.7 million at the end of 1994. At December 31, 1996, nonperforming assets in California accounted for 63% of total nonperforming assets, down from 75% and 83% at the ends of 1995 and 1994. The decline in nonperforming assets since 1992 was largely a result of a tightening of underwriting standards at ASB beginning in mid-1991. Declining market rents and occupancy rates in certain areas of Los Angeles that were negatively affected by the economic environment during the three years ended December 31, 1995, as well as the Los Angeles riots in 1992 and the Northridge earthquake in January 1994, contributed to higher charge-offs in the apartment loan portfolio in 1994 and 1995, thereby reducing the level of nonperforming apartment loans. See " -- Provision for Loan Losses and Reserve for Loan Losses." 45 18 Nonperforming assets and troubled debt restructurings consisted of the following:
DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure: Real estate loans: Residential............................ $180,438 $158,040 $172,136 $233,618 $253,888 Residential construction............... 9,235 9,550 4,640 8,527 5,856 Apartment buildings.................... 7,642 23,300 70,944 53,474 37,059 Other commercial real estate........... 6,555 12,663 23,549 20,516 14,883 -------- -------- -------- -------- -------- Total real estate loans.............. 203,870 203,553 271,269 316,135 311,686 Second mortgage and other consumer loans.................................. 13,199 7,502 6,969 14,783 7,218 Manufactured housing loans................ 8,275 1,923 1,643 2,207 1,571 Commercial business loans/credits......... 1,068 824 1,018 3,785 8,580 -------- -------- -------- -------- -------- Total nonperforming loans............ 226,412 213,802 280,899 336,910 329,055 REO, net of REO reserves.................... 103,111 125,101 137,767 185,492 232,568 -------- -------- -------- -------- -------- Total nonperforming assets........... $329,523 $338,903 $418,666 $522,402 $561,623 ======== ======== ======== ======== ======== Troubled debt restructurings................ $112,287 $ 90,623 $ 54,583 $ 68,670 $104,538 Nonperforming assets as a percentage of total assets.............................. 0.74% 0.81% 1.12% 1.55% 2.03%
Nonperforming assets by geographic concentration were as follows:
DECEMBER 31, 1996 ------------------------------------------------------------------------- OTHER CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL ---------- ---------- ------- ------ ------- -------- (DOLLARS IN THOUSANDS) Real estate loans: Residential............... $ 119,524 $ 42,119 $ 9,516 $1,908 $ 7,371 $180,438 Residential construction........... -- 5,823 2,143 1,130 139 9,235 Apartment buildings....... 5,840 1,759 -- -- 43 7,642 Other commercial real estate................. 1,979 1,718 227 -- 2,631 6,555 -------- ------- ------- ------ ------- -------- Total real estate loans................ 127,343 51,419 11,886 3,038 10,184 203,870 Second mortgage and other consumer loans............ 1,605 5,514 3,010 278 2,792 13,199 Manufactured housing loans..................... -- 3,893 1,818 330 2,234 8,275 Commercial business loans... -- 193 691 -- 184 1,068 -------- ------- ------- ------ ------- -------- Total nonperforming loans................ 128,948 61,019 17,405 3,646 15,394 226,412 REO......................... 82,862 25,019 461 160 1,753 110,255 REO reserves................ (7,144) -------- ------- ------- ------ ------- -------- Total nonperforming assets............... $ 211,810 $ 86,038 $17,866 $3,806 $17,147 $329,523 ======== ======= ======= ====== ======= ======== Nonperforming assets by state as a percentage of total nonperforming assets.................... 63% 26% 5% 1% 5% 100%
Impaired Loans. On January 1, 1995, the Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan as modified by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. It is applicable to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Loans collectively evaluated for impairment include residential real estate and consumer loans. All residential construction, commercial real estate and commercial business loans are individually evaluated for impairment. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral, and current economic conditions. SFAS No. 114 also applies to all loans that are 46 19 restructured in a troubled debt restructuring, subsequent to the adoption of SFAS No. 114, as defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. A troubled debt restructuring is a restructuring in which the creditor grants a concession to the borrower that it would not otherwise consider. At December 31, 1996, the Company had $112.3 million of restructured loans of which $82.0 million, though performing, were considered to be impaired. Troubled debt restructurings that were not considered to be impaired were restructured prior to 1995 and have been performing according to the terms of the restructure in the year subsequent to the restructure. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all loans on nonaccrual, any substandard loan, whether or not performing, with an allocated reserve and certain troubled debt restructurings. SFAS No. 114 requires that impairment of loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company bases the measurement of loan impairment on the fair value of the loan's underlying collateral. The amount by which the recorded investment in the loan exceeds the value of the impaired loan's collateral is included in the Company's allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off. At December 31, 1996, loans totaling $317.3 million were impaired, of which $260.7 million had allocated reserves of $42.9 million. The remaining $56.6 million were either nonperforming or previously written down and had no reserves allocated to them. Of the $317.3 million of impaired loans, $22.7 million were on nonaccrual status or under foreclosure. The average balance of impaired loans during 1996 was $302.6 million and the Company recognized $14.6 million of related interest income. Interest income is normally recognized on an accrual basis; however, if the impaired loan is nonperforming, interest income is then recorded on the receipt of cash. The rise in the level of impaired loans during 1996 reflected, for the most part, the Company's review of large commercial real estate loans at ASB. Of the $125.0 million addition to the reserve for loan losses, $18.9 million was allocated to $110.3 million of commercial real estate loans that management deemed to be impaired. The amount of impaired loans based upon the fair value of the underlying collateral and the related allocated reserve for loan losses were as follows:
DECEMBER 31, 1996 ------------------------------------------------------ GROSS LOAN PRINCIPAL NET LOAN ALLOCATED AMOUNT CHARGED-OFF AMOUNT RESERVES ---------- ----------- -------- ---------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure: With allocated reserves...................... $ 10,909 $ 400 $ 10,509 $ 3,079 Without allocated reserves................... 15,792 3,552 12,240 -- -------- ------ -------- ------- 26,701 3,952 22,749 3,079 Troubled debt restructurings: With allocated reserves...................... 45,248 -- 45,248 7,960 Without allocated reserves................... 37,368 569 36,799 -- -------- ------ -------- ------- 82,616 569 82,047 7,960 Other impaired loans: With allocated reserves...................... 205,563 645 204,918 31,851 Without allocated reserves................... 12,437 4,833 7,604 -- -------- ------ -------- ------- 218,000 5,478 212,522 31,851 -------- ------ -------- ------- Total impaired loans...................... $327,317 $ 9,999 $317,318 $ 42,890 ======== ====== ======== =======
At December 31, 1995, loans totaling $169.1 million were impaired, of which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4 million were either nonperforming or previously written down and had no reserves allocated to them. Of the $169.1 million of impaired loans, $26.7 million were on 47 20 nonaccrual status or under foreclosure, and $142.3 million (including $57.1 million of troubled debt restructurings) were performing but judged to be impaired. The amount of impaired loans based upon the fair value of the underlying collateral and the related allocated reserve for loan losses were as follows:
DECEMBER 31, 1995 ------------------------------------------------------ GROSS LOAN PRINCIPAL NET LOAN ALLOCATED AMOUNT CHARGED-OFF AMOUNT RESERVES ---------- ----------- -------- ---------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure: With allocated reserves...................... $ 9,853 $ 1,224 $ 8,629 $ 2,192 Without allocated reserves................... 19,226 1,113 18,113 -- -------- ------- -------- ------- 29,079 2,337 26,742 2,192 Troubled debt restructurings: With allocated reserves...................... 16,917 -- 16,917 3,115 Without allocated reserves................... 40,733 516 40,217 -- -------- ------- -------- ------- 57,650 516 57,134 3,115 Other impaired loans: With allocated reserves...................... 66,161 33 66,128 11,339 Without allocated reserves................... 25,665 6,600 19,065 -- -------- ------- -------- ------- 91,826 6,633 85,193 11,339 -------- ------- -------- ------- Total impaired loans...................... $178,555 $ 9,486 $169,069 $ 16,646 ======== ======= ======== =======
INTEREST RATE RISK MANAGEMENT Washington Mutual engages in a comprehensive asset and liability management program that attempts to reduce the risk of significant decreases in net interest income caused by interest rate changes. One of the Company's strategies to reduce the effect of future movements in interest rates is to increase the percentage of adjustable-rate assets in its portfolio. During 1996, the Company securitized and then sold the majority of the fixed-rate loans it originated, while retaining nearly all of its adjustable-rate loan production. In addition, as part of the restructuring strategy initiated in late 1995, the Company purchased adjustable-rate assets and sold fixed-rate mortgage-backed securities. The Company still, however, has short-term volatility of net interest income because of the effect of the COFI lag. Management plans to reduce this short-term volatility in part by increasing production of non-COFI adjustable-rate products and short-term fixed-rate products such as consumer loans. The implementation of strategies to reduce interest rate risk, however, generally has a negative effect on earnings. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates; nevertheless, rising interest rates or a flat yield curve adversely affect the Company's operations. Management tries to balance these two factors in administering its interest rate risk program. As part of its asset and liability management program, the Company actively manages asset and liability maturities and at various times uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, to reduce the negative effect that rising rates could have on net interest income. Derivative instruments, if not used appropriately, can subject a company to unintended financial exposure. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial condition. The contract or notional amount of these instruments reflects the extent of involvement the Company has in particular classes of financial instruments. For interest rate exchange agreements and interest rate cap agreements, the notional amount does not represent exposure to credit loss. The amount potentially subject to credit loss is limited to the net difference between the calculated payable and receivable amounts on each transaction, which is generally netted and paid or received quarterly, and the net market or settlement value of the agreement. The Company is subject to credit loss only in event of 48 21 nonperformance by counterparties to the agreements. Based on management's credit analysis and collateral requirements, however, the Company does not anticipate any credit losses on these agreements. The Company's interest rate exchange agreements and interest rate cap agreements are generally transacted with other financial institutions such as major banks and broker-dealers, with no single institution handling a disproportionate amount of the transactions. Management, in conjunction with the Company's Board of Directors, has established strict policies and guidelines for the use of derivative instruments. Moreover, Washington Mutual has used these instruments for many years to mitigate interest rate risk. These instruments generally are not intended to be used as techniques to generate earnings by speculating on the movements of interest rates, nor does the Company act as a dealer of these instruments. See "Consolidated Financial Statements -- Note 17: Interest Rate Risk Management." A conventional measure of interest rate sensitivity for savings institutions is the one-year gap, which is calculated by dividing the difference between assets maturing or repricing within one year and total liabilities maturing or repricing within one year by total assets. The Company's assets and liabilities that mature or reprice within one year were as follows:
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Interest-sensitive assets......................................... $30,613,301 $27,732,380 Derivative instruments designated against assets.................. 1,150,000 1,825,000 Interest-sensitive liabilities.................................... (34,984,865) (31,469,960) Derivative instruments designated against liabilities............. 1,598,400 832,000 ----------- ----------- Net liability sensitivity....................................... $(1,623,164) $(1,080,580) =========== =========== One-year gap...................................................... (3.64)% (2.57)%
At the end of 1996, Washington Mutual's one-year gap was a negative 3.64%, compared with a negative 2.57% at the end of 1995. While the Company's consolidated one-year gap at December 31, 1996 was fairly neutral, WMB's and ASB's one-year gap positions were quite different. WMB's one-year gap was a negative 18.19% at the end of 1996 due in large part to the preference of its customers for fixed-rate loan products. Management can compensate for this preference by selling fixed-rate loans, purchasing adjustable-rate assets, and strategically using hedging instruments, all of which were done during 1996. Since the vast majority of interest-earning assets at ASB were COFI ARM products, its one-year gap at the end of 1996 was a positive 12.85%. At December 31, 1996, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $9.1 billion. Without these instruments, the Company's one-year gap at December 31, 1996, would have been a negative 9.81% as opposed to a negative 3.64%. See "Consolidated Financial Statements -- Note 17: Interest Rate Risk Management" for a discussion of the use of derivative instruments. 49 22 Interest sensitivity analysis by maturity or repricing period was as follows:
DECEMBER 31, 1996 ---------------------------------------------------------------------------------------------- AFTER DUE WITHIN DUE WITHIN AFTER ONE AFTER TWO AFTER FIVE 10 YEARS OR 0-3 4-12 BUT WITHIN BUT WITHIN BUT WITHIN NONINTEREST MONTHS MONTHS TWO YEARS FIVE YEARS 10 YEARS SENSITIVE TOTAL ----------- ----------- ----------- ---------- ---------- ------------ ----------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS Cash, cash equivalents and trading account securities..... $ 831,063 $ -- $ -- $ 1,647 $ -- $ -- $ 832,710 Available-for-sale securities.... 4,528,217 2,276,537 176,759 712,406 586,049 831,306 9,111,274 Held-to-maturity securities...... 2,673,283 1,445 12,144 35,495 51,698 86,282 2,860,347 Loans: Real estate.................... 15,533,194 3,674,232 1,524,297 3,918,552 2,280,039 2,561,670 29,491,984 Manufactured housing, second mortgage and other consumer..................... 335,209 215,226 137,456 154,309 82,017 35,200 959,417 Commercial business............ 259,559 26,872 11,549 19,733 2,832 -- 320,545 Loan loss reserve and deferred fees......................... -- -- -- -- -- (441,170) (441,170) ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total loans................ 16,127,962 3,916,330 1,673,302 4,092,594 2,364,888 2,155,700 30,330,776 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total interest-earning assets................... 24,160,525 6,194,312 1,862,205 4,842,142 3,002,635 3,073,288 43,135,107 Other assets..................... 258,464 -- -- -- -- 1,158,354 1,416,818 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total assets............... 24,418,989 6,194,312 1,862,205 4,842,142 3,002,635 4,231,642 44,551,925 Derivative instruments affecting interest sensitivity: Interest rate exchange agreements: Designated against available-for-sale securities................... 500,000 -- (300,000) (200,000) -- -- -- Interest rate cap agreements: Designated against available-for-sale securities................... 1,050,000 (400,000) (650,000) -- -- -- -- ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total effect of derivative instruments.............. 1,550,000 (400,000) (950,000) (200,000) -- -- -- ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total assets and derivative instruments.............. 25,968,989 5,794,312 912,205 4,642,142 3,002,635 4,231,642 44,551,925 INTEREST-BEARING LIABILITIES Deposits: Checking accounts.............. 418,979 -- -- -- -- 2,560,983 2,979,962 Savings and money market accounts..................... 5,912,490 -- -- -- -- 929,571 6,842,061 Time deposits.................. 4,059,401 8,071,838 1,390,843 653,931 77,810 4,295 14,258,118 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total deposits............. 10,390,870 8,071,838 1,390,843 653,931 77,810 3,494,849 24,080,141 Annuities........................ 87,806 263,417 263,417 263,417 -- -- 878,057 Federal funds purchased.......... 1,052,000 -- -- -- -- -- 1,052,000 Securities sold under agreements to repurchase.................. 7,513,466 321,987 -- -- -- -- 7,835,453 Advances from the FHLB........... 5,639,504 1,296,546 153,509 104,710 5,306 41,917 7,241,492 Other interest-bearing liabilities.................... 346,549 882 73,314 7,726 248,223 292 676,986 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total interest-bearing liabilities.............. 25,030,195 9,954,670 1,881,083 1,029,784 331,339 3,537,058 41,764,129 Other liabilities and stockholders' equity........... -- -- -- -- -- 2,787,796 2,787,796 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total liabilities and stockholders' equity..... 25,030,195 9,954,670 1,881,083 1,029,784 331,339 6,324,854 44,551,925 Derivative instruments affecting interest sensitivity: Interest rate exchange agreements: Designated against deposits and short-term borrowings........ (1,269,400) 286,500 337,500 636,200 9,200 -- -- Interest rate cap agreements: Designated against deposits and short-term borrowings........ (615,500) -- 254,000 361,500 -- -- -- ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total effect of derivative instruments.............. (1,884,900) 286,500 591,500 997,700 9,200 -- -- ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total liabilities, stockholders' equity and derivative instruments... 23,145,295 10,241,170 2,472,583 2,027,484 340,539 6,324,854 44,551,925 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Net asset (liability) sensitivity.............. $ 2,823,694 $(4,446,858) $(1,560,378) $2,614,658 $2,662,096 $ (2,093,212) $ -- =========== =========== =========== ========== ========== ========== =========== Net asset (liability) sensitivity as a percentage of total assets................... 6.34% (9.98)% (3.50)% 5.86% 5.98% (4.70)% 0.00% Cumulative net asset (liability) sensitivity $ 2,823,694 $(1,623,164) $(3,183,542) $ (568,884) $2,093,212 $ -- $ -- Cumulative net asset (liability) sensitivity as a percentage of total assets................... 6.34% (3.64)% (7.14)% (1.28)% 4.70% 0.00% 0.00%
50 23 While the one-year gap helps provide some information about a financial institution's interest sensitivity, it does not predict the trend of future earnings. For this reason, Washington Mutual uses financial modeling to forecast earnings under different interest rate projections. Although this modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates, loan origination volumes and liability funding sources that may prove to be inaccurate. Washington Mutual adopted, as required, SFAS No. 115. This statement requires investment and equity securities to be segregated into three categories: trading, held-to-maturity and available-for-sale. The available-for-sale portfolio is maintained as a source of investment income as well as potential liquidity should it be necessary for the Company to raise cash or reduce its asset size. Because the available-for-sale portfolio is required to be carried at fair value, its carrying value fluctuates with changes in market factors, primarily interest rates. This portfolio is substantially composed of MBS, of which 84% have adjustable rates and the remainder have fixed rates. In an attempt to modify the interest flows on these securities, as well as protect against market value changes, certain interest rate exchange agreements and interest rate cap agreements have been designated to the available-for-sale portfolio. The effect of such agreements in a rising interest rate environment is to shorten the effective repricing period of the underlying assets. Specifically, as short-term interest rates increase, the overall yield of the portfolio rises. However, the yield is constrained by periodic and lifetime interest rate adjustment limits or caps on the underlying adjustable-rate assets and also by the very nature of the fixed-rate assets in the portfolio. The Company, therefore, seeks to shorten the repricing period by entering into interest rate cap agreements that are intended to provide an additional layer of interest rate protection against the effect of the periodic and lifetime interest rate adjustment limits or caps and fixed-rate securities in the portfolio. Through the use of specific interest rate cap agreements, management attempts to reduce the repricing ceiling of the portfolio and to effectively shorten the repricing period. Thus, the Company has a degree of interest rate protection when interest rates increase because the interest rate cap agreements provide a mechanism for repricing the investment portfolio generally on pace with current market rates. In a similar way, interest rate exchange agreements are utilized to provide protection in an increasing rate environment, but also result in sensitivity in a downward market. There can be no assurance that interest rate exchange agreements and interest rate cap agreements will provide the Company with protection in all scenarios or to the full extent of the Company's exposure. The following table presents the effect interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of securities in the available-for-sale portfolio in an increasing interest rate environment (up 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1996 -------------------------------------------------------------------- DUE WITHIN AFTER ONE DUE WITHIN 4-12 BUT WITHIN AFTER 0-3 MONTHS MONTHS TWO YEARS TWO YEARS TOTAL ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Principal amount of securities.................... $4,528,217 $2,276,537 $ 176,759 $2,064,802 $9,046,315 Effect of derivative instruments................... 2,225,000 -- (159,126) (2,065,874) -- ---------- ---------- --------- ---------- ---------- Principal amount of securities after effect of derivative instruments................... $6,753,217 $2,276,537 $ 17,633 $ (1,072) $9,046,315 ========== ========== ========= ========== ==========
51 24 The following table presents the effect interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of securities in the available-for-sale portfolio in a decreasing interest rate environment (down 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1996 -------------------------------------------------------------------- DUE WITHIN AFTER ONE DUE WITHIN 4-12 BUT WITHIN AFTER 0-3 MONTHS MONTHS TWO YEARS TWO YEARS TOTAL ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Principal amount of securities.................... $4,528,217 $2,276,537 $ 176,759 $2,064,802 $9,046,315 Effect of derivative instruments................... 700,000 -- -- (700,000) -- ---------- ---------- -------- ---------- ---------- Principal amount of securities after effect of derivative instruments................... $5,228,217 $2,276,537 $ 176,759 $1,364,802 $9,046,315 ========== ========== ======== ========== ==========
Management actively manages the liability maturities and at various times uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, to reduce the negative effect that rising rates could have on net interest income. The Company seeks to lengthen the repricing period of its deposits and borrowings by entering into interest rate cap agreements to provide an additional layer of interest rate protection should interest rates on deposits and borrowings rise. Through the use of these agreements, management attempts to offset increases in interest expense related to these deposits and borrowings and effectively lengthen the repricing period. Thus, the Company has a degree of interest rate protection when interest rates increase because the interest rate cap agreements provide a mechanism for repricing the deposits and borrowings generally on pace with current market rates. In a similar way, interest rate exchange agreements are utilized to provide protection in an increasing rate environment, but also result in sensitivity in a downward market. There can be no assurance that interest rate exchange agreements and interest rate cap agreements will provide the Company with protection in all scenarios or to the full extent of the Company's exposure. The following table presents the effect interest rate exchange and interest rate cap agreements would have had on the repricing period of deposits and borrowings currently (as of December 31, 1996) or in an increasing rate environment (up 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1996 ----------------------------------------------------------------- AFTER ONE DUE WITHIN DUE WITHIN BUT WITHIN AFTER 0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL ----------- ----------- ---------- ---------- ----------- (DOLLARS IN THOUSANDS) Amount of deposits and borrowings...................... $25,030,195 $ 9,954,670 $2,074,149 $4,703,521 $41,762,535 Effect of derivative instruments..................... (6,897,400) 3,460,500 963,000 2,473,900 -- ----------- ----------- ---------- ---------- ----------- Amount of deposits and borrowings after effect of derivative instruments..................... $18,132,795 $13,415,170 $3,037,149 $7,177,421 $41,762,535 =========== =========== ========== ========== ===========
The following table presents the effect interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of deposits and borrowings currently (as of December 31, 1996) or in a decreasing interest rate environment (down 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1996 ----------------------------------------------------------------- AFTER ONE DUE WITHIN DUE WITHIN BUT WITHIN AFTER 0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL ----------- ----------- ---------- ---------- ----------- (DOLLARS IN THOUSANDS) Amount of deposits and borrowings...................... $25,030,195 $ 9,954,670 $2,074,149 $4,703,521 $41,762,535 Effect of derivative instruments..................... (1,642,400) 459,500 397,500 785,400 -- ----------- ----------- ---------- ---------- ----------- Amount of deposits and borrowings after effect of derivative instruments..................... $23,387,795 $10,414,170 $2,471,649 $5,488,921 $41,762,535 =========== =========== ========== ========== ===========
52 25 LIQUIDITY Liquidity management focuses on the need to meet both short-term funding requirements and long-term growth objectives. The long-term growth objectives of the Company are to attract and retain stable consumer deposit relationships and to maintain stable sources of wholesale funds. Because the low interest rate environment of recent years inhibited consumer deposits, Washington Mutual has supported its growth through business combinations with other financial institutions and by increasing its use of wholesale borrowings. Should the Company not be able to increase deposits either internally or through acquisitions, its ability to grow would be dependent upon, and to a certain extent limited by, its borrowing capacity. Washington Mutual monitors its ability to meet short-term cash requirements using guidelines established by its Board of Directors. The operating liquidity ratio is used to ensure that normal short-term secured borrowing capacity is sufficient to satisfy unanticipated cash needs. The volatile dependency ratio measures the degree to which the Company depends on wholesale funds maturing within one year weighted by the dependability of the source. At December 31, 1996, the Company had substantial liquidity compared with its established guidelines. The Company also computes ratios promulgated by the FDIC to monitor the liquidity position of WMB. The regulatory liquidity ratio measures WMB's ability to use liquid assets to meet unusual cash demands. The regulatory dependency ratio measures WMB's reliance upon potentially volatile liabilities to fund long-term assets. WMB manages both ratios to remain within the acceptable ranges and, at December 31, 1996, met the established FDIC guidelines. Regulations promulgated by the OTS require that ASB and WMBfsb maintain for each calendar month an average daily balance of liquid assets at least equal to 5.00 percent of the prior month's average daily balance of net withdrawable deposits plus borrowings due within one year. At December 31, 1996, the liquidity ratio for ASB was 5.04% and for WMBfsb it was 8.29%. As presented in the Consolidated Statements of Cash Flows, the sources of liquidity vary between years. The statement of cash flows includes operating, investing and financing categories. Cash flows from operating activities included net income for 1996 of $114.3 million, $252.5 million for noncash items and $129.8 million of other net cash flows from operating activities. Cash flows from investing activities consisted mainly of both proceeds from and purchases of securities, and the impact of loans made and principal collected on loans. In 1996, cash flows from investing activities included sales and principal payments on available-for-sale securities and loans held for investment totaling $9.7 billion. New loans originated and purchased for investment required $11.4 billion, and $1.8 billion was used for the purchase of available-for-sale securities. Cash flows from financing activities consisted of the net change in the Company's deposit accounts and short-term borrowings, the proceeds and repayments from both securities sold under long-term agreements to repurchase and FHLB advances, and also the issuance of long-term debt. In 1996, the above mentioned financing activities increased cash and cash equivalents by $2.7 billion on a net basis. Cash and cash equivalents were $831.1 million at December 31, 1996. See "Consolidated Financial Statements -- Consolidated Statements of Cash Flows." At December 31, 1996, the Company was in position to obtain an additional $9.7 billion through the use of collateralized borrowings using unpledged mortgage-backed securities and other wholesale sources. The ability of the Company's banking subsidiaries to make dividends to the Company is influenced by legal, regulatory and economic restrictions. 53 26 CAPITAL REQUIREMENTS At December 31, 1996, Washington Mutual's banking subsidiaries exceeded all current regulatory capital requirements and were categorized as well capitalized, the highest regulatory standard. The regulatory capital ratios of WMB, ASB and WMBfsb and minimum regulatory requirements to be categorized as well capitalized were as follows:
DECEMBER 31, 1996 WELL- ---------------------- CAPITALIZED WMB ASB WMBFSB MINIMUM ----- ----- ------ ----------- Capital ratios: Leverage................................................... 5.76% 5.17% 6.90% 5.00% Tier 1 risk-based.......................................... 10.28 8.90 10.50 6.00 Total risk-based........................................... 11.09 10.92 11.58 10.00
In addition, ASB and WMBfsb are required by OTS regulations to maintain core capital of at least 3.00% of assets and tangible capital of at least 1.50% of assets. Both ASB and WMBfsb satisfied this requirement at December 31, 1996. See "Business -- Regulation and Supervision." WM Life is subject to risk-based capital requirements developed by the National Association of Insurance Commissioners. This measure uses four major categories of risk to calculate an appropriate level of capital to support an insurance company's overall business operations. The four risk categories are asset risk, insurance risk, interest rate risk and business risk. At December 31, 1996, WM Life's capital was 663% of its required regulatory risk-based level. The Company's securities subsidiaries are also subject to capital requirements. At December 31, 1996, all of Washington Mutual's securities subsidiaries were in compliance with their applicable capital requirements. 54 27 SIGNATURES BY REGISTRANT Pursuant to the requirements of the Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 22, 1997. WASHINGTON MUTUAL, INC. /s/ KERRY K. KILLINGER -------------------------------------- Kerry K. Killinger President and Chief Executive Officer 55 28 CONSOLIDATED FINANCIAL STATEMENTS OF WASHINGTON MUTUAL, INC. AND SUBSIDIARIES INDEX
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996, 1995 AND 1994 Independent Auditors' Report........................................................ 57 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994............................................................................. 59 Consolidated Statements of Financial Position as of December 31, 1996 and 1995...... 60 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994.............................................................. 61 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994......................................................................... 62 Notes to Consolidated Financial Statements.......................................... 64
56 29 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF WASHINGTON MUTUAL, INC.: We have audited the accompanying consolidated statements of financial position of Washington Mutual, Inc. and subsidiaries ("the Company") as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These consolidated 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. The consolidated financial statements give retroactive effect to the merger of Washington Mutual, Inc. and Keystone Holdings, Inc., which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the consolidated balance sheet of Keystone Holdings, Inc. and subsidiaries as of December 31, 1995, or the related consolidated statements of earnings, stockholder's equity, and cash flows for the years ended December 31, 1995 and 1994, which statements reflect total assets constituting 47% of consolidated total assets as of December 31, 1995, and total net income constituting 31% and 25% for the years ended December 31, 1995 and 1994, respectively. Those statements were audited by other auditors whose report, dated, January 26, 1996 (except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996) has been furnished to us, and our opinion, insofar as it relates to the amounts included for Keystone Holdings, Inc. and subsidiaries for 1995 and 1994, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Washington Mutual, Inc. and subsidiaries as of 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. As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, on September 30, 1995. deloitte & touche sig Deloitte & Touche LLP February 14, 1997 Seattle, Washington 57 30 INDEPENDENT AUDITORS' REPORT The Board of Directors Keystone Holdings, Inc.: We have audited the consolidated balance sheet of Keystone Holdings, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of earnings, stockholder's equity, and cash flows for each of the years in the two-year period ended December 31, 1995 (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keystone Holdings, Inc. and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California January 26, 1996, except as to note 27 to the consolidated financial statements, which is as of February 8, 1996 58 31 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) INTEREST INCOME Loans.............................................. $2,139,513 $2,061,801 $1,658,818 Note receivable.................................... -- 58,841 141,039 Available-for-sale securities...................... 782,737 381,633 258,678 Held-to-maturity securities........................ 220,673 409,063 235,709 Cash equivalents................................... 6,313 4,748 1,169 ------- ------- ------- Total interest income............................ 3,149,236 2,916,086 2,295,413 INTEREST EXPENSE Deposits........................................... 1,060,823 1,134,818 852,666 Borrowings......................................... 897,406 788,618 482,692 ------- ------- ------- Total interest expense........................... 1,958,229 1,923,436 1,335,358 ------- ------- ------- Net interest income........................... 1,191,007 992,650 960,055 Provision for loan losses.......................... 201,512 74,987 122,009 ------- ------- ------- Net interest income after provision for loan losses...................................... 989,495 917,663 838,046 OTHER INCOME Depositor fees..................................... 102,597 79,017 45,255 Loan servicing fees................................ 41,303 29,315 23,247 Securities, annuities and other fees............... 53,350 49,679 65,248 Other operating income............................. 36,419 31,035 39,630 Gain on sale of loans.............................. 19,729 1,717 23,488 Gain (loss) on sale of other assets................ 5,866 (655) 23,926 Loss on sale of covered assets..................... -- (37,399) -- Federal Deposit Insurance Corporation ("FDIC") assistance on covered assets..................... -- 55,630 -- ------- ------- ------- Total other income............................ 259,264 208,339 220,794 OTHER EXPENSE Salaries and employee benefits..................... 336,065 313,304 315,424 Occupancy and equipment............................ 124,278 110,981 102,403 Regulatory assessments............................. 43,171 54,909 54,887 SAIF special assessment............................ 124,193 -- -- Data processing fees............................... 40,733 36,538 33,862 Other operating expense............................ 159,541 143,794 146,463 Transaction-related expense........................ 158,121 2,000 -- Amortization of goodwill and other intangible assets........................................... 27,672 28,306 29,076 Real estate owned ("REO") operations............... 11,530 10,682 13,402 ------- ------- ------- Total other expense........................... 1,025,304 700,514 695,517 ------- ------- ------- Income before income taxes and minority interest.................................... 223,455 425,488 363,323 Income taxes....................................... 70,420 111,906 109,880 Provision (benefit) for payments in lieu of taxes............................................ 25,187 7,887 (824) ------- ------- ------- Income before minority interest............... 127,848 305,695 254,267 Minority interest in earnings of consolidated subsidiaries..................................... 13,570 15,793 13,992 ------- ------- ------- Net Income......................................... $ 114,278 $ 289,902 $ 240,275 ======= ======= ======= Net Income Attributable to Common Stock............ $ 95,859 $ 271,318 $ 221,691 ======= ======= ======= Net income per common share: Primary.......................................... $0.85 $2.47 $2.09 Fully diluted.................................... 0.85 2.42 2.06
See Notes to Consolidated Financial Statements 59 32 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents......................................... $ 831,063 $ 983,833 Trading account securities........................................ 1,647 238 Available-for-sale securities, amortized cost $9,050,960 and $11,919,009..................................................... 9,111,274 12,154,725 Held-to-maturity securities, fair value $2,922,552 and $3,262,850...................................................... 2,860,347 3,197,720 Loans, net of reserve for loan losses............................. 30,103,386 24,109,136 Loans held for sale............................................... 227,390 83,704 REO............................................................... 103,111 125,101 Premises and equipment............................................ 482,391 452,743 Goodwill and other intangible assets.............................. 133,509 161,127 Other assets...................................................... 697,807 758,295 ----------- ----------- Total assets................................................. $44,551,925 $42,026,622 =========== =========== LIABILITIES Deposits: Checking accounts............................................... $ 2,979,962 $ 2,776,329 Savings and money market deposit accounts....................... 6,842,061 6,573,543 Time deposit accounts........................................... 14,258,118 15,113,088 ----------- ----------- Total deposits............................................... 24,080,141 24,462,960 Annuities......................................................... 878,057 855,503 Federal funds purchased........................................... 1,052,000 433,420 Securities sold under agreements to repurchase.................... 7,835,453 7,984,756 Advances from the Federal Home Loan Bank ("FHLB")................. 7,241,492 4,715,739 Other borrowings.................................................. 676,986 590,217 Other liabilities................................................. 389,908 362,323 ----------- ----------- Total liabilities............................................ 42,154,037 39,404,918 Minority interest................................................. -- 80,000 Contingencies (Note 26)........................................... -- -- STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 6,122,500 shares issued and outstanding..................................................... -- -- Common stock, no par value: 350,000,000 shares authorized -- 126,142,285 and 119,687,860 shares issued and outstanding..................................................... -- -- Capital surplus................................................... 952,747 920,406 Valuation reserve for available-for-sale securities............... 41,666 188,715 Retained earnings................................................. 1,403,475 1,432,583 ----------- ----------- Total stockholders' equity................................... 2,397,888 2,541,704 ----------- ----------- Total liabilities, minority interest and stockholders' equity...................................................... $44,551,925 $42,026,622 =========== ===========
See Notes to Consolidated Financial Statements 60 33 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL NUMBER OF SHARES SURPLUS VALUATION ------------------- OFFSET AGAINST RESERVE TOTAL PREFERRED COMMON CAPITAL NOTE RETAINED FOR AFS STOCKHOLDERS' STOCK STOCK SURPLUS RECEIVABLE EARNINGS SECURITIES EQUITY --------- ------- -------- -------------- ---------- --------- ------------ (IN THOUSANDS) BALANCE AT JANUARY 1, 1994.............. 6,200 113,457 $862,949 $ (167,000) $1,039,954 $ 29,657 $1,765,560 Establishment of valuation reserve for available-for-sale securities -- Washington Mutual, Inc................................... -- -- -- -- -- 13,836 13,836 Net income.............................. -- -- -- -- 240,275 -- 240,275 Miscellaneous stock transactions........ -- 384 7,762 -- (7,774) -- (12) Cash dividends paid on preferred stock................................. -- -- -- -- (18,584) -- (18,584) Cash dividends paid on common stock..... -- -- -- -- (67,835) -- (67,835) Adjustments in valuation reserve for available-for-sale securities......... -- -- -- -- -- (104,742) (104,742) Common stock issued through stock options and employee stock plans...... -- 426 10,038 -- -- -- 10,038 Immaterial business combination accounted for as a pooling-of-interests.................. -- 1,454 9,595 -- 6,705 -- 16,300 ------ ------- -------- --------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1994............ 6,200 115,721 890,344 (167,000) 1,192,741 (61,249) 1,854,836 Net income.............................. -- -- -- -- 289,902 -- 289,902 Miscellaneous stock transactions........ -- (1) (13) -- -- -- (13) Cash dividends paid on preferred stock................................. -- -- -- -- (18,584) -- (18,584) Cash dividends paid on common stock..... -- -- -- -- (57,997) -- (57,997) Adjustments in valuation reserve for available-for-sale securities......... -- -- -- -- -- 249,964 249,964 Common stock issued through stock options and employee stock plans...... -- 539 8,379 -- -- -- 8,379 Capital surplus previously offset against note receivable............... -- -- -- 167,000 -- -- 167,000 Repurchase of Series C and Series E preferred stock....................... (77) -- (1,866) -- (124) -- (1,990) Immaterial business combination accounted for as a pooling-of-interests.................. -- 3,429 23,562 -- 26,645 -- 50,207 ------ ------- -------- --------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1995............ 6,123 119,688 920,406 -- 1,432,583 188,715 2,541,704 Net income.............................. -- -- -- -- 114,278 -- 114,278 Cash dividends paid on preferred stock................................. -- -- -- -- (18,418) -- (18,418) Cash dividends paid on common stock..... -- -- -- -- (124,968) -- (124,968) Adjustments in valuation reserve for available-for-sale securities......... -- -- -- -- -- (147,049) (147,049) Common stock issued through stock options and employee stock plans...... -- 692 20,604 -- -- -- 20,604 Redemption/conversion of Series D preferred stock....................... (1,400) 5,415 (107) -- -- -- (107) Immaterial business combination accounted for as a pooling-of-interests.................. -- 347 11,844 -- -- -- 11,844 ------ ------- -------- --------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1996............ 4,723 126,142 $952,747 $ -- $1,403,475 $ 41,666 $2,397,888 ====== ======= ======== ========= ========== ========= ==========
See Notes to Consolidated Financial Statements 61 34 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................ $ 114,278 $ 289,902 $ 240,275 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses........................... 201,512 74,987 122,009 (Gain) on sale of loans............................. (19,729) (1,717) (23,488) (Gain) loss on sale of other assets................. (5,866) 655 (23,926) Loss on sale of covered assets...................... -- 37,399 -- FDIC assistance on covered assets................... -- (55,630) -- REO operations...................................... 11,530 10,682 13,402 Depreciation and amortization....................... 85,741 54,361 58,939 FHLB stock dividend................................. (34,744) (23,155) (22,108) (Increase) decrease in trading account securities... (1,404) 749 691 Origination of loans held for sale.................. (1,964,072) (822,025) (263,055) Sales of loans held for sale........................ 2,005,610 1,127,076 764,710 (Increase) in interest receivable................... (9,881) (58,902) (28,800) (Decrease) increase in interest payable............. (4,767) 31,027 22,159 (Decrease) increase in income taxes payable......... (10,575) 38,683 40,205 Decrease (increase) in other assets................. 91,563 (88,951) 10,757 Increase (decrease) in other liabilities............ 37,394 (23,527) (65,641) ---------- ---------- ---------- Net cash provided by operating activities........ 496,590 591,614 846,129 CASH FLOWS FROM INVESTING ACTIVITIES Sales of available-for-sale securities................ 4,370,458 1,673,853 499,719 Purchases of available-for-sale securities............ (1,817,811) (2,312,072) (1,480,421) Principal payments and maturities of available-for-sale securities....................... 1,339,910 817,048 545,753 Purchases of held-to-maturity securities.............. (3,414,473) (697,470) (1,931,537) Principal payments and maturities of held-to-maturity securities.......................................... 3,744,147 885,205 1,109,796 Sales of loans........................................ 55,188 84,197 221,069 Principal payments of loans........................... 3,972,002 3,067,145 3,332,483 Origination and purchases of loans.................... (11,446,810) (8,562,080) (8,666,382) Payments received on New West Federal Savings and Loan Association ("New West") Note....................... -- 1,682,040 1,569,018 Sales and operations of REO........................... 142,404 150,530 201,138 Sales of premises and equipment....................... 2,064 4,871 2,211 Purchase of premises and equipment.................... (84,985) (102,877) (58,396) Purchase of mortgage servicing rights................. (16,243) (38,270) (37,605) Cash acquired through acquisitions.................... 3,506 68,358 40,679 ---------- ---------- ---------- Net cash (used) by investing activities.......... (3,150,643) (3,279,522) (4,652,475)
62 35 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in deposits....................... $ (480,059) $ 707,375 $ (380,297) Increase in annuities................................. 22,554 56,325 85,795 Increase in federal funds purchased................... 622,000 433,420 -- (Decrease) increase in securities sold under short-term agreements to repurchase................. (1,475,122) (186,833) 2,289,611 Proceeds from securities sold under long-term agreements to repurchase............................ 2,497,407 2,872,557 1,391,682 Repurchase of securities sold under long-term agreements to repurchase............................ (1,175,008) (1,408,127) (260,713) Proceeds from FHLB advances........................... 14,332,232 4,710,333 8,209,790 Repayments of FHLB advances........................... (11,804,037) (4,123,336) (7,698,071) Proceeds (repayments) of other borrowings............. 179,230 210,397 (3,488) Repayments to minority interest....................... (95,372) -- -- Other capital transactions, net....................... 20,844 (1,298) 14,742 Cash dividends paid................................... (143,386) (76,581) (96,419) ---------- ---------- ---------- Net cash provided by financing activities........ 2,501,283 3,194,232 3,552,632 ---------- ---------- ---------- (Decrease) increase in cash and cash equivalents.................................... (152,770) 506,324 (253,714) Cash and cash equivalents at beginning of year... 983,833 477,509 731,223 ---------- ---------- ---------- Cash and cash equivalents at end of year......... $ 831,063 $ 983,833 $ 477,509 ========== ========== ========== NONCASH INVESTING ACTIVITIES Loans exchanged for mortgage-backed securities........ $ 896,976 $6,588,124 $ 183,269 Implementation of new accounting standard -- reclass to available-for-sale portfolio..................... -- -- 2,127,890 Transfer of securities to the available-for-sale portfolio........................................... -- 4,924,168 -- Real estate acquired through foreclosure.............. 231,681 255,028 334,499 Loans originated to facilitate the sale of REO........ 68,995 65,693 92,415 Loans transferred to loans held for sale.............. 214,991 621,267 -- CASH PAID DURING THE YEAR FOR Interest on deposits.................................. 1,068,198 1,125,226 851,546 Interest on borrowings................................ 893,190 762,000 458,033 Income taxes.......................................... 111,948 73,130 92,172 DIVIDENDS DECLARED AND PAYABLE IN DIFFERENT YEARS Common stock dividends................................ -- -- (10,000)
See Notes to Consolidated Financial Statements 63 36 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Washington Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the "Company"). WMI was formed in August 1994 by the Company's predecessor, Washington Mutual Savings Bank ("WMSB"), a Washington state-chartered savings bank, in connection with the reorganization of WMSB into a holding company structure. The reorganization was completed in November 1994 through the merger of WMSB into Washington Mutual Bank ("WMB"), the Company's Washington state-chartered savings bank subsidiary, with WMB as the surviving entity. WMB continued as a wholly owned subsidiary of WMI. On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings") merged with and into Washington Mutual, and all of the subsidiaries of Keystone Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company (the "Keystone Transaction"). The financial statements reflect the accounting for the merger as a pooling-of-interests and are presented as if the companies were merged as of the earliest period shown. Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. All significant intercompany transactions and balances have been eliminated. Results of operations of companies acquired and accounted for as purchases are included from the dates of acquisition. When Washington Mutual acquires a company through a material pooling-of-interests, current and prior-period financial statements are restated to include the accounts of merged companies. Previously reported balances of the merged companies have been reclassified to conform to the Company's presentation and restated to give effect to the combinations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements. Lines of Business Washington Mutual provides a broad range of financial services to consumers and small and mid-sized businesses throughout the Western United States through its subsidiary operations. Financial services of the Company include accepting deposits from the general public and making residential loans, consumer loans, limited types of commercial real estate loans (primarily loans secured by multi-family properties), and commercial business loans which are offered principally through WMB, ASB and Washington Mutual Bank fsb ("WMBfsb"). Washington Mutual, through other subsidiaries, also issues and markets annuity contracts and is the investment advisor to and distributor of mutual funds. Washington Mutual diversified its business mix by merging WMB with Enterprise Bank of Bellevue, Washington ("Enterprise"), a Seattle-area commercial bank in 1995 and Western Bank of Coos Bay, Oregon ("Western"), Oregon's largest community-based commercial bank in 1996. Derivative Instruments The Company uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, forward sales of financial instruments, financial futures and options to reduce its exposure to interest rate risk. Interest rate exchange agreements and interest rate cap agreements are used only if they 64 37 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) have the effect of changing the interest rate characteristics of the assets or liabilities to which they are designated. Such effect is measured either through ongoing correlation or effectiveness tests. Interest rate exchange agreements and interest rate cap agreements are designated either against the available-for-sale portfolio or against deposits and borrowings. Agreements designated against available-for-sale securities are included at fair value in the available-for-sale portfolio and any mark-to-market adjustments are reported with the change in value of the available-for-sale portfolio. Interest rate exchange agreements and interest rate cap agreements designated against deposits and borrowings are reported at historic cost. The interest differential paid or received on interest rate exchange agreements is recorded as an adjustment to interest income or interest expense. The purchase premium of interest rate cap agreements is capitalized and amortized and included as a component of interest income or interest expense over the original term of the interest rate cap agreement. No purchase premiums are paid at the time interest rate exchange agreements are entered into. From time to time, the Company terminates interest rate exchange agreements and interest rate cap agreements prior to maturity. Such circumstances arise if, in the judgment of management, such instruments no longer cost effectively meet policy objectives. Often such instruments are within one year of maturity. Gains and losses from terminated interest rate exchange agreements and interest rate cap agreements are recognized, consistent with the gain or loss on the asset or liability designated against the agreement. When the asset or liability is not sold or paid off, the gains or losses are deferred and amortized on a straight-line basis as additional interest income or interest expense over the original terms of the agreements or the remaining life of the designated asset or liability, whichever is less. When the asset or liability is sold or paid off, the gains or losses are recognized in the current period as an adjustment to the gain or loss recognized on the corresponding asset or liability. From time to time, the Company redesignates interest rate exchange agreements and interest rate cap agreements between available-for-sale securities and deposits and borrowings. Such redesignations are recorded at fair value at the time of transfer. The Company may also buy put or call options on mortgage instruments. The purpose and criteria for the purchase of options are to manage the interest rate risk inherent in secondary marketing activities. The costs of such options are capitalized and amortized on a straight-line basis as a reduction of other income over the original terms of the options. The fair value of options matched against closed loans are included in the lower of cost or market analysis. Changes in the fair value of options designated against the Company's loan pipeline are deferred to the extent they qualify as hedges, otherwise they are carried at fair value with the corresponding gain or loss recognized in other income. The Company may write covered call options on its available-for-sale portfolio. If the option is exercised, the option fee is an adjustment to the gain or loss on the sale of the security. If the option is not exercised, it is recognized as fee income. Covered call options are carried at fair value. Additionally, to lock in prices on sales of loans originated for mortgage banking activities, the Company uses forward sales of financial instruments to lock in prices on similar types and coupons of financial instruments and thereby limit market risk until these financial instruments are sold. In the event that any of the derivative instruments fail to meet the above established criteria, they are marked to market with the corresponding gain or loss recognized in income. Investment Securities The Company accounts for investment and equity securities in the following three categories: trading, held-to-maturity and available-for-sale. 65 38 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Trading Securities Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Their unrealized gains and losses are included in earnings. Held-To-Maturity Securities Investments classified as held-to-maturity are accounted for at amortized cost, but a company must have both the positive intent and the ability to hold those securities to maturity. There are limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category. Other than temporary declines in fair value are recognized as a reduction to current earnings. The Company holds a small amount of tax exempt securities, but has chosen not to report the applicable interest income and yield on a tax equivalent basis. Available-For-Sale Securities Securities not classified as either trading or held-to-maturity are considered to be available-for-sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported (net of tax) as a net amount in a separate component of stockholders' equity until realized. The available-for-sale portfolio contains some private-issue securities. Private-issue securities include mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMOs") that expose the Company to certain risks that are not inherent in agency securities, primarily credit risk and liquidity risk. Because of this added risk, private-issue securities have historically paid a greater rate of interest than agency securities, enhancing the overall yield of the portfolio. Such securities are not guaranteed by the U.S. government or one of its agencies because the loan size, underwriting or underlying collateral of these securities often does not meet industry standards. Consequently, there is the possibility of loss of the principal investment. For this reason, it is possible that the Company will not receive an enhanced overall yield on the portfolio and, in fact, could incur a loss. Additionally, the Company may not be able to sell such securities in certain market conditions as the number of interested buyers may be limited at that time. Furthermore, the complex structure of certain CMOs in the Company's portfolio increases the difficulty in assessing the portfolio's risk and its fair value. Examples of some of the more complex structures include certain CMOs where the Company holds subordinated tranches, certain CMOs that have been "resecuritized," and certain securities that contain a significant number of jumbo, nonconforming loans. In 1996, in an effort to reduce the aforementioned risks, the Company instituted a policy of performing a credit review on each individual security prior to purchase. Such a review includes consideration of the collateral characteristics, borrower payment histories and information concerning loan delinquencies and losses of the underlying collateral. After a security is purchased, similar information is monitored on a periodic basis. Furthermore, the Company has established internal guidelines limiting the geographic concentration of the underlying collateral. Loans Loans held for investment are stated at the principal amount outstanding, net of deferred loan fees and any discounts or premiums on purchased loans. The deferred fees, discounts and premiums are amortized using the interest method over the estimated life of the loan. The Company sells residential fixed-rate loans in the secondary market. At the date of origination, the loans so designated and meeting secondary market guidelines are identified as loans held for sale and carried at the lower of net cost or fair value on an aggregate basis, net of their related hedge gains and losses. 66 39 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management ceases to accrue interest income on any loan that becomes 90 days or more delinquent and reverses all interest accrued up to that time. Thereafter, interest income is accrued only if and when, in management's opinion, projected cash proceeds are deemed sufficient to repay both principal and interest. All loans for which interest is not being accrued are referred to as loans on nonaccrual status. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan as modified by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. This standard is applicable to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Loans that are collectively evaluated for impairment by Washington Mutual include residential real estate and consumer loans. Residential construction, commercial real estate and commercial business loans are individually evaluated for impairment. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral, and current economic conditions. SFAS No. 114 also applies to all loans that are restructured in a troubled debt restructuring subsequent to the adoption of SFAS No. 114, as defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. A troubled debt restructuring is a restructuring in which the creditor grants a concession to the borrower that it would not otherwise consider. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the terms of the loan agreement. SFAS No. 114 requires that the valuation of impaired loans be based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company bases the measurement of loan impairment on the fair value of the loan's underlying collateral. The amount by which the recorded investment in the loan exceeds the value of the impaired loan's collateral is included in the Company's allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged-off. The adoption of SFAS No. 114 had no material impact on the results of operations or financial position of the Company. The Company has full recourse on certain loans that have been securitized or sold. Securitized MBS may or may not be held as part of the Company's investment portfolio. Reserve for Loan Losses The reserve for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The reserve is based on management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, loan loss experience, current and anticipated economic conditions, and detailed analysis of individual loans and credits for which full collectibility may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The appropriate reserve level is estimated based upon factors and trends identified by management at the time financial statements are prepared. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged-off against the reserve for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; or the fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. 67 40 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Commercial real estate loans are considered by the Company to have somewhat greater risk of uncollectibility than residential real estate loans due to the dependency on income production or future development of the real estate. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control. These factors may result in losses or recoveries differing significantly from those provided in the financial statements. REO REO includes properties acquired through foreclosure that are transferred to REO at the lower of cost or fair value, less estimated selling costs, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in the REO reserve for losses. The amount the Company ultimately recovers from REO may differ substantially from the net carrying value of these assets because of future market factors beyond the Company's control or because of changes in the Company's strategy for sale or development of the property. Commercial REO that is managed and operated by the Company is depreciated using the straight-line method over the property's estimated useful life. Mortgage Servicing Rights In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 122, Accounting for Mortgage Servicing Rights. The statement eliminates the distinction between servicing rights that are purchased and those that are retained upon the sale or securitization of loans. The statement requires mortgage servicers to recognize the servicing rights on loans as separate assets, no matter how acquired. Banks that sell or securitize loans and retain the servicing rights are required to allocate the total cost of the loans between servicing rights and loans based on relative fair values if their values can be estimated. In September 1995, the Company elected early adoption of SFAS No. 122, as permitted by the Statement, and implemented it as of January 1, 1995. Purchased servicing rights represents the cost of acquiring the right to service mortgage loans. Originated servicing rights are recorded when mortgage loans are originated and subsequently sold or securitized with the servicing rights retained. The total cost of the mortgage loans is allocated to the servicing rights and the loans (without the servicing rights) based on relative fair values. The cost relating to purchased and originated servicing is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses impairment of the capitalized servicing rights based on the fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. For purposes of measuring impairment, the servicing rights are stratified based on the following predominant risk characteristics of the underlying loans: fixed-rate mortgage loans by coupon (less than 6%, 1% increments between 6% and 12% and greater than 12%); and adjustable-rate mortgage loans ("ARMs") by index, such as the 11th District Cost of Funds Index ("COFI"), Treasury, or the London Interbank Offering Rate ("LIBOR"). The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. In order to determine the fair value of the servicing rights, the Company primarily uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. The prepayment speeds are determined from market sources for fixed-rate mortgages with similar coupons, and prepayment reports for comparable ARMs. In addition, the Company uses market comparables for estimates of the cost of servicing per loan, an inflation rate, ancillary income per loan, and default rates. 68 41 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Premises and Equipment Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. Annuity and Insurance Accounting WM Life Insurance, Inc. ("WM Life") is an Arizona-domiciled life insurance company. WM Life is authorized under state law to issue annuities in seven states. In addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed under state law to issue annuities in 28 states. WM Life currently issues fixed and variable flexible premium deferred annuities, single premium fixed deferred annuities and single premium immediate annuities. Empire currently issues fixed flexible premium deferred annuities and single premium immediate annuities. Both companies conduct business through licensed independent agents. The majority of such agents are employees of affiliates of the Company and operate in the Company's financial centers. Currently, annuities are primarily issued in Washington and Oregon. The Company defers certain costs, such as commissions and the expenses of underwriting and issuing policies, that are involved in acquiring new annuity and life insurance business. These costs, which are included in other assets in the accompanying Consolidated Statements of Financial Position, are amortized over the lives of the policies in relation to the estimated gross profit. Annuities equal the policy value as defined in the policy contract as of the balance sheet date. Securities Sold Under Agreements to Repurchase The Company enters into sales of securities under agreements to repurchase the same ("reverse repurchase agreements") or similar ("dollar repurchase agreements") securities. Reverse repurchase agreements and dollar repurchase agreements are accounted for as financing arrangements, with the obligation to repurchase securities sold reflected as a liability in the Consolidated Statements of Financial Position. The dollar amount of securities underlying the agreements remain in the respective asset accounts. Trust Assets Assets held by the Company in fiduciary or agency capacity for customers are not included in the Consolidated Statements of Financial Position as such items are not assets of the Company. Assets totaling $85.8 million and $67.3 million as of December 31, 1996 and 1995 were held by the Company in fiduciary or agency capacity. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in the Company's income tax returns. The deferred tax provision for the year is equal to the change in the deferred tax liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company reports income and expenses using the accrual method of accounting and files a consolidated tax return that includes all of its subsidiaries excluding Keystone Holdings and its subsidiaries. Keystone Holdings and its subsidiaries filed a separate consolidated tax return for periods prior to December 20, 1996. The Keystone Holdings returns included losses of ASB's nominee, New West, incurred through October 24, 1995. Net operating losses of New West incurred prior to that date are available for 69 42 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) carryforward by ASB and have been included in the schedule of net operating loss carryforwards presented in Note 19. For periods subsequent to the merger with Keystone Holdings, the Company will file a consolidated tax return that includes all of its subsidiaries. For California franchise tax purposes, ASB joins in the filing of a combined return with its subsidiaries and with ASB Real Estate Group, Inc. ("AREG"). AREG formerly managed certain real estate related assets of New West and is now inactive as a result of a restructuring transaction in 1993. NOTE 2: BUSINESS COMBINATIONS On April 28, 1995, Washington Mutual merged with Olympus Capital Corporation of Salt Lake City, Utah ("Olympus"), the holding company of Olympus Bank, a Federal Savings Bank ("Olympus Bank"). At the merger date, Olympus (on a consolidated basis) had assets of $391.4 million, deposits of $278.6 million and stockholders' equity of $37.2 million. Olympus Bank operated 11 branches in Utah and Montana. Under the terms of the transaction, Olympus Bank merged into WMBfsb. The merger was treated as a pooling-of-interests. Due to the immaterial nature of the transaction, prior-period information has not been restated as if the companies had been combined. On August 31, 1995, Washington Mutual acquired Enterprise through a merger of Enterprise with and into WMB. Enterprise, a Seattle-based commercial bank specializing in lending to small and mid-size businesses, had assets of $153.8 million, deposits of $138.5 million and stockholders' equity of $14.0 million on August 31, 1995. The merger was treated as a pooling-of-interests. Due to the immaterial nature of the transaction, prior-period information has not been restated as if the companies had been combined. On January 31, 1996, the Company acquired Western through a merger of Western with and into WMB. At the time of the merger, Western had 42 offices in 35 communities and was Oregon's largest community-based commercial bank. At January 31, 1996 Western had assets of $776.3 million, deposits of $696.4 million and stockholders' equity of $69.5 million. The Company issued 5,865,235 shares of common stock to complete the merger with Western. The merger was treated as a pooling-of-interests. The financial information presented in this document reflects the pooling-of-interests method of accounting for the merger of Western into the Company. Accordingly, under generally accepted accounting principles, the assets, liabilities and stockholders' equity of Western were recorded on the books of the resulting institution at their values as reported on the books of Western immediately prior to the consummation of the merger with Western. No goodwill was created in the merger with Western. This presentation required the restatement of prior periods as if the companies had been combined for all years presented. 70 43 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following information represents the results of operations of the Company and Western for 1995 and 1994 on an individual as well as a combined basis. This information does not necessarily indicate the results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The supplemental results of operations were as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual: Total revenue..................................... $1,625,451 $1,315,651 ---------- ---------- Net income........................................ $ 190,624 $ 172,304 ========== ========== Net income per common share: Primary........................................... $2.68 $2.54 Fully diluted..................................... 2.59 2.46
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 ------- ------- (DOLLARS IN THOUSANDS) Western: Total revenue..................................... $71,383 $61,401 ------- ------- Net income........................................ $ 9,177 $ 9,018 ======= =======
The restated results of operations were as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual and Western: Total revenue..................................... $1,696,834 $1,377,052 ---------- ---------- Net income........................................ $ 199,801 $ 181,322 ========== ========== Net income per common share: Primary........................................... $2.59 $2.45 Fully diluted..................................... 2.51 2.38
On November 30, 1996, WMI merged with Utah Federal Savings Bank ("Utah FSB") by merging Utah FSB with and into WMBfsb. At November 30, 1996, Utah FSB, which was an Ogden-based institution, had assets of $122.1 million, deposits of $106.7 million and stockholders' equity of $12.0 million. The merger was accounted for as a pooling-of-interests. Due to the immaterial nature of the transaction, the Company has not restated prior-period information as if the companies had been combined. On December 20, 1996, WMI merged with Keystone Holdings. Keystone Holdings was the indirect parent of ASB, a California-based federally chartered savings bank. At November 30, 1996, Keystone Holdings had assets of $21.9 billion, deposits of $12.8 billion and stockholder's equity of $808.6 million. The Company issued 47,883,333 shares of common stock to complete the merger with Keystone Holdings. The merger was treated as a pooling-of-interests. The financial information presented in this document reflects the pooling-of-interests method of accounting for the merger of Keystone Holdings into the Company. Accordingly, under generally accepted accounting principles, the assets, liabilities and stockholders' equity of Keystone Holdings were recorded on the books of the resulting institution at their values as reported on the books of Keystone Holdings immediately prior to the consummation of the merger with Keystone Holdings. No goodwill was created in the merger with Keystone Holdings. This presentation required the restatement of 71 44 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) prior periods as if the companies had been combined for all years presented. Certain amounts in Keystone Holdings' financial statements have been restated to conform to WMI's presentation. The following information represents the results of operations of the Company and Keystone Holdings for 1996, 1995 and 1994 on an individual as well as a combined basis. This information does not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The pro forma results of Keystone Holdings have been adjusted to (i) eliminate earnings attributable to the warrant holders and (ii) reflect the preferred stock dividends to related parties as minority interest. The supplemental results of operations were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual: Total revenue........................ $1,845,777 $1,696,834 $1,377,052 ---------- ---------- ---------- Net income........................... $ 223,761 $ 199,801 $ 181,322 ========== ========== ========== Net income per common share: Primary.............................. $2.82 $2.59 $2.45 Fully diluted........................ 2.73 2.51 2.38
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Keystone Holdings: Total revenue........................ $1,562,723 $1,427,591 $1,139,155 ---------- ---------- ---------- Net income........................... $ (109,656) $ 90,101 $ 58,953 ========== ========== ==========
The restated results of operations were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual and Keystone Holdings: Total revenue........................ $3,408,500 $3,124,425 $2,516,207 ---------- ---------- ---------- Net income........................... $ 114,278 $ 289,902 $ 240,275 ========== ========== ========== Net income per common share: Primary.............................. $0.85 $2.47 $2.09 Fully diluted........................ 0.85 2.42 2.06
On January 15, 1997, Washington Mutual acquired United Western Financial Group, Inc. ("United Western") of Salt Lake City and its United Savings Bank and Western Mortgage Loan Corporation subsidiaries for $79.5 million in cash. At January 15, 1997, United Western had assets of $404.1 million, deposits of $299.9 million, and stockholders' equity of $53.7 million. The acquisition of United Western was treated as a purchase for accounting purposes. Accordingly on January 15, 1997, under generally accepted accounting principles, the assets and liabilities of United Western were recorded on the books of the Company at their respective fair market values at the time of the consummation of the acquisition of United Western. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities, including indentified intangible assets, was recorded at $4.2 million. 72 45 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of goodwill over a 10-year period will result in a charge to earnings of approximately $420,000 per year. NOTE 3: CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Cash and demand deposits............................... $781,185 $689,258 Cash equivalents: Overnight investments................................ 48,031 293,000 Time deposits........................................ 1,847 1,575 -------- -------- 49,878 294,575 -------- -------- $831,063 $983,833 ======== ========
For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight investments and time deposits. Generally, time deposits are short term, with an original maturity of three months or less. Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. Included in cash and demand deposits were required deposits at the Federal Reserve of $22.9 million and $107.9 million at December 31, 1996 and 1995. 73 46 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4: AVAILABLE-FOR-SALE SECURITIES Available-for-sale securities classified by type and contractual maturity date consisted of the following:
DECEMBER 31, 1996 --------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- ----- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due after one but within five years..... $ 271,426 $ 58 $ (1,680) $ 269,804 6.62% After five but within 10 years.......... 2,042 107 (2) 2,147 8.15 After 10 years.......................... 595 14 -- 609 6.58 ---------- -------- -------- ---------- ---- 274,063 179 (1,682) 272,560 6.63 Corporate debt obligations: Due after one but within five years..... 129,469 3,164 (283) 132,350 7.54 After five but within 10 years.......... 167,294 2,764 (2,229) 167,829 7.12 After 10 years.......................... 98,693 3,354 (1,832) 100,215 7.64 ---------- -------- -------- ---------- ---- 395,456 9,282 (4,344) 400,394 7.39 Equity securities: Preferred stock......................... 171,029 4,012 (831) 174,210 6.88 FHLB stock(2)........................... 465,056 -- -- 465,056 7.06 Other stock............................. 18 3 -- 21 -- ---------- -------- -------- ---------- ---- 636,103 4,015 (831) 639,287 7.01 ---------- -------- -------- ---------- ---- 1,305,622 13,476 (6,857) 1,312,241 7.05 Mortgage-backed securities: U.S. government agency: Due within one year..................... 308 -- (2) 306 4.89 After one but within five years......... 390,317 7,899 (817) 397,399 7.20 After five but within 10 years.......... 161,475 5,118 (2) 166,591 7.35 After 10 years.......................... 6,361,044 72,337 (31,890) 6,401,491 6.98 ---------- -------- -------- ---------- ---- 6,913,144 85,354 (32,711) 6,965,787 7.00 Private issue/corporate: Due after five but within 10 years...... 24,175 791 (97) 24,869 7.59 After 10 years.......................... 803,374 7,581 (4,392) 806,563 7.73 ---------- -------- -------- ---------- ---- 827,549 8,372 (4,489) 831,432 7.73 ---------- -------- -------- ---------- ---- 7,740,693 93,726 (37,200) 7,797,219 7.08 Derivative instruments: Interest rate exchange agreements.......... -- 265 (911) (646) -- Interest rate cap agreements............... 4,645 271 (2,456) 2,460 -- ---------- -------- -------- ---------- ---- 4,645 536 (3,367) 1,814 -- ---------- -------- -------- ---------- ---- $9,050,960 $107,738 $(47,424) $9,111,274 7.08% ========== ======== ======== ========== ====
- --------------- (1) Weighted average yield at end of year. (2) FHLB stock is carried at cost and is evaluated by the Company for impairment. 74 47 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 ----------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ----------- ---------- ---------- ----------- ----- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year................... $ 65,120 $ -- $ (64) $ 65,056 4.72% After one but within five years....... 184,837 526 (29) 185,334 6.48 After five but within 10 years........ 9,755 41 (125) 9,671 7.23 After 10 years........................ 59,813 121 (770) 59,164 7.02 ----------- -------- -------- ----------- ---- 319,525 688 (988) 319,225 6.24 Corporate debt obligations: Due within one year................... 1,502 10 -- 1,512 8.27 After one but within five years....... 136,447 7,492 (205) 143,734 8.70 After five but within 10 years........ 181,038 8,237 (819) 188,456 7.02 After 10 years........................ 97,755 6,626 (98) 104,283 7.50 ----------- -------- -------- ----------- ---- 416,742 22,365 (1,122) 437,985 7.69 Equity securities: Preferred stock....................... 110,532 2,535 (2,311) 110,756 7.21 FHLB stock(2)......................... 414,389 -- -- 414,389 6.74 Other stock........................... 5 3 -- 8 -- ----------- -------- -------- ----------- ---- 524,926 2,538 (2,311) 525,153 6.84 ----------- -------- -------- ----------- ---- 1,261,193 25,591 (4,421) 1,282,363 6.98 Mortgage-backed securities: U.S. government agency: Due within one year................... 5 -- -- 5 9.23 After one but within five years....... 467,226 14,883 (497) 481,612 7.64 After five but within 10 years........ 236,497 14,338 (86) 250,749 7.84 After 10 years........................ 8,713,086 226,286 (19,214) 8,920,158 6.93 ----------- -------- -------- ----------- ---- 9,416,814 255,507 (19,797) 9,652,524 6.99 Private issue/corporate: Due after five but within 10 years.... 18,614 901 (258) 19,257 7.14 After 10 years........................ 1,211,290 8,739 (17,016) 1,203,013 7.37 ----------- -------- -------- ----------- ---- 1,229,904 9,640 (17,274) 1,222,270 7.37 ----------- -------- -------- ----------- ---- 10,646,718 265,147 (37,071) 10,874,794 7.03 Derivative instruments: Interest rate exchange agreements........ (848) 2,225 (13,224) (11,847) -- Interest rate cap agreements............. 11,946 -- (2,531) 9,415 -- ----------- -------- -------- ----------- ---- 11,098 2,225 (15,755) (2,432) -- ----------- -------- -------- ----------- ---- $11,919,009 $ 292,963 $ (57,247) $12,154,725 7.03% =========== ======== ======== =========== ====
- --------------- (1) Weighted average yield at end of year. (2) FHLB stock is carried at cost and is evaluated by the Company for impairment. Proceeds from sales of investment securities in the available-for-sale portfolio during 1996 and 1995 were $139.1 million and $626.2 million. The Company realized $1.9 million in gains and $799,000 in losses on these sales during 1996. Similarly, the Company realized $4.0 million in gains and $2.2 million in losses on sales during 1995. Proceeds from sales of MBS in the available-for-sale portfolio during 1996 and 1995 were 75 48 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $3.9 billion and $1.0 billion. The Company realized $31.4 million in gains and $35.1 million in losses on these sales during 1996 and $13.5 million in gains and $16.2 million in losses on these sales during 1995. Available-for-sale MBS with an amortized cost of $6.0 billion and a fair value of $6.0 billion at December 31, 1996 were pledged to secure public deposits, securities sold under agreements to repurchase, other borrowings, interest rate exchange agreements, and access to the Federal Reserve discount window. During 1995, FASB issued a report entitled A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers that allowed companies a one-time reassessment and related reclassification from the held-to-maturity category to the available-for-sale category without adverse accounting consequences for the remainder of the portfolio. During the fourth quarter of 1995, the Company elected to take advantage of this opportunity and reclassified held-to-maturity securities with an amortized cost of $4.9 billion and gross unrealized gains of $82.6 million and gross unrealized losses of $28.2 million. No transfers between the held-to-maturity and available-for-sale categories were made during 1996. At December 31, 1996, net unrealized gains on the available-for-sale portfolio were $63.1 million and unrealized losses on the derivative instruments designated against this portfolio were $2.8 million, resulting in a combined net unrealized gain included as a separate component of stockholders' equity (on an after-tax basis) of $41.7 million. At December 31, 1995, net unrealized gains on the available-for-sale portfolio were $249.2 million and unrealized losses on the derivative instruments designated against this portfolio were $13.5 million, resulting in a combined net unrealized gain included as a separate component of stockholders' equity (on an after-tax basis) of $188.7 million. On December 31, 1996, the Company held $831.4 million of private-issue MBS and CMOs. Of that amount, 20% were of the highest investment grade (AAA), 66% were rated investment grade (AA or A), 9% were rated lowest investment grade (BBB) and 5% were rated below investment grade (BB or below). During 1996, the Company recognized $2.4 million in losses on securities in the below investment grade portfolio. On December 31, 1995, the Company held $1.2 billion of private-issue MBS and CMOs. Of that amount, 33% were of the highest investment grade (AAA), 55% were rated investment grade (AA or A), 8% were rated lowest investment grade (BBB) and 4% were rated below investment grade (BB or below). During 1995, the Company recognized $8.4 million in losses on securities in the below investment grade portfolio. As of December 31, 1996, the Company had MBS with an amortized cost of $249.7 million and a fair value of $249.6 million from a single issuer, the Resolution Trust Corporation. 76 49 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5: HELD-TO-MATURITY SECURITIES Held-to-maturity securities classified by type and contractual maturity date consisted of the following:
DECEMBER 31, 1996 --------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- ----- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due after five but within 10 years...... $ 6,629 $ 559 $ -- $ 7,188 8.25% Corporate debt obligations: Due within one year..................... 6,607 2 -- 6,609 5.02 After one but within five years......... 41,486 2,432 (5) 43,913 8.90 After five but within 10 years.......... 14,618 919 (23) 15,514 8.68 After 10 years.......................... 15,282 1,862 -- 17,144 9.19 ---------- ------- ----- ---------- ---- 77,993 5,215 (28) 83,180 8.61 Municipal obligations(2): Due after one but within five years..... 7,096 205 -- 7,301 6.24 After five but within 10 years.......... 30,176 1,385 -- 31,561 6.70 After 10 years.......................... 70,801 2,028 (237) 72,592 6.02 ---------- ------- ----- ---------- ---- 108,073 3,618 (237) 111,454 6.23 ---------- ------- ----- ---------- ---- 192,695 9,392 (265) 201,822 7.28 Mortgage-backed securities U.S. government agency: Due after 10 years...................... 2,667,652 53,078 -- 2,720,730 7.33 ---------- ------- ----- ---------- ---- $2,860,347 $ 62,470 $ (265) $2,922,552 7.33% ========== ======= ===== ========== ====
- --------------- (1) Weighted average yield at end of year. (2) The Company holds a small amount of tax exempt securities, but has chosen not to report the applicable interest income and yield on a tax equivalent basis. 77 50 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 --------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- ----- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year..................... $ 19,693 $ -- $ -- $ 19,693 5.24% After five but within 10 years.......... 6,592 906 -- 7,498 8.09 ---------- ------- ----- ---------- ---- 26,285 906 -- 27,191 6.03 Corporate debt obligations: Due within one year..................... 98,969 -- (9) 98,960 5.70 After one but within five years......... 31,173 2,895 (2) 34,066 8.66 After five but within 10 years.......... 22,586 2,472 (3) 25,055 8.37 After 10 years.......................... 17,162 2,310 (9) 19,463 8.91 ---------- ------- ----- ---------- ---- 169,890 7,677 (23) 177,544 7.00 Municipal obligations(2): Due within one year..................... 1,090 1 -- 1,091 6.85 After one but within five years......... 1,658 89 -- 1,747 7.44 After five but within 10 years.......... 36,202 2,083 -- 38,285 6.88 After 10 years.......................... 53,371 2,908 -- 56,279 6.37 ---------- ------- ----- ---------- ---- 92,321 5,081 -- 97,402 6.60 ---------- ------- ----- ---------- ---- 288,496 13,664 (23) 302,137 6.78 Mortgage-backed securities U.S. government agency: Due after 10 years...................... 2,909,224 54,833 (3,344) 2,960,713 7.44 ---------- ------- ----- ---------- ---- $3,197,720 $ 68,497 $ (3,367) $3,262,850 7.38% ========== ======= ===== ========== ====
- --------------- (1) Weighted average yield at end of year. (2) The Company holds a small amount of tax exempt securities, but has chosen not to report the applicable interest income and yield on a tax equivalent basis. Held-to-maturity MBS with an amortized cost of $2.7 billion and a fair value of $2.7 billion at December 31, 1996 were pledged to secure public deposits, securities sold under agreements to repurchase, other borrowings, interest rate exchange agreements and access to the Federal Reserve discount window. There were no sales out of the held-to-maturity portfolio during 1996 and 1995. 78 51 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6: LOANS Loans consisted of the following:
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Real Estate: Residential..................................... $22,660,715 $17,303,305 Residential construction........................ 723,645 615,814 Commercial real estate.......................... 3,810,968 3,487,574 ----------- ----------- 27,195,328 21,406,693 Second mortgage and other consumer................ 2,144,942 1,974,673 Manufactured housing.............................. 1,013,799 867,181 Commercial business............................... 340,149 179,568 Reserve for loan losses........................... (363,442) (235,275) ----------- ----------- $30,330,776 $24,192,840 =========== ===========
Included in the table above are loans held for sale of $227.4 million and $83.7 million at December 31, 1996 and 1995. Nonaccrual loans totaled $226.4 million and $213.8 million at December 31, 1996 and 1995. If interest on these loans had been recognized, such income would have been $15.0 million in 1996 and $10.8 million for 1995. At December 31, 1996 and 1995, the Company had troubled debt restructurings of $112.3 million and $90.6 million. During 1996 and 1995, these troubled debt restructurings returned a yield of 8.83% and 8.13%, thereby contributing $9.0 million and $5.9 million to interest income. Had these loans not been restructured and interest accrued at their original rates, the additional interest income would not have been material. At December 31, 1996, loans totaling $317.3 million were impaired, of which $260.7 million had allocated reserves of $42.9 million. The remaining $56.6 million were previously written down and had no reserves allocated to them. Of the $317.3 million of impaired loans, $22.7 million were on nonaccrual status and $294.6 million (including $82.0 million of troubled debt restructurings) were performing but judged to be impaired. Similarly, at December 31, 1995, loans totaling $169.1 million were impaired, of which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4 million were previously written down and had no reserves allocated to them. Of the $169.1 million of impaired loans, $26.7 million were on nonaccrual status and $142.3 million (including $57.1 million of troubled debt restructurings) were performing but judged to be impaired. The average balance of impaired loans during 1996 and 1995 was $302.6 million and $177.6 million and the Company recognized $14.6 million and $12.4 million of related interest income. Interest income on impaired loans is normally recognized on the accrual basis, unless the loan is more than 90 days past due, in which case interest income is recorded on the cash basis. An immaterial amount of interest income was recorded on the cash basis during 1996 and 1995. 79 52 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loans, exclusive of reserve for loan losses, by geographic concentration were as follows:
DECEMBER 31, 1996 ---------------------------------------------------------------- CALIFORNIA WASHINGTON OREGON OTHER TOTAL ----------- ---------- ---------- ---------- ----------- (DOLLARS IN THOUSANDS) Real estate: Residential..................... $13,154,086 $6,601,428 $1,890,021 $1,015,180 $22,660,715 Residential construction........ -- 374,653 256,637 92,355 723,645 Apartment buildings............. 1,617,747 558,412 272,060 110,552 2,558,771 Other commercial real estate.... 366,062 683,205 94,295 108,635 1,252,197 ----------- ---------- ---------- ---------- ----------- 15,137,895 8,217,698 2,513,013 1,326,722 27,195,328 Second mortgage and other consumer........................ 96,992 1,178,797 551,165 317,988 2,144,942 Manufactured housing.............. 104,022 458,175 236,247 215,355 1,013,799 Commercial business............... -- 126,841 212,112 1,196 340,149 ----------- ---------- ---------- ---------- ----------- $15,338,909 $9,981,511 $3,512,537 $1,861,261 $30,694,218 =========== ========== ========== ========== ===========
Loans in California included $5.2 billion of loans in the Los Angeles area, $5.0 billion of loans in the San Francisco Bay area, $1.7 billion of loans in Orange County, and $3.4 billion of loans in other California areas. Loans, exclusive of reserve for loan losses, deferred loan fees and premiums and discounts, by maturity or repricing date were as follows:
DECEMBER 31, 1996 --------------------- (DOLLARS IN THOUSANDS) Adjustable-rate loans: Due within one year................................... $18,637,483 After one but within five years....................... 2,710,891 After five but within 10 years........................ 122,360 After 10 years........................................ 25,428 ----------- 21,496,162 Fixed-rate loans: Due within one year................................... 1,406,809 After one but within five years....................... 3,055,005 After five but within 10 years........................ 2,242,817 After 10 years........................................ 2,571,153 ----------- 9,275,784 ----------- $30,771,946 ===========
In addition to loans the Company serviced for its own portfolio, it serviced loans of $23.0 billion and $21.4 billion at December 31, 1996 and 1995 for U.S. government agencies, institutions and private investors. Loans of $9.8 billion at December 31, 1996 were pledged to secure advances from the FHLB. Unamortized deferred loan fees were $101.1 million and $75.1 million at December 31, 1996 and 1995. At December 31, 1996, the Company had $488.4 million in fixed-rate mortgage loan commitments, $570.9 million in adjustable-rate mortgage loan commitments, $650.6 million in residential construction loan commitments, $114.1 million in commercial real estate loan commitments, $169.1 million in commercial business loan commitments and $681.8 million in undisbursed lines of credit. 80 53 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7: RESERVE FOR LOAN LOSSES Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year................. $235,275 $244,989 $245,062 Provision for loan losses.................. 201,512 74,987 122,009 Reserves added through business combinations............................. 1,077 5,372 921 Loans charged-off: Residential.............................. (53,993) (57,147) (89,637) Residential construction................. (16) (125) (190) Commercial real estate................... (21,752) (33,149) (26,835) Manufactured housing, second mortgage and other consumer........................ (6,639) (6,888) (10,544) Commercial business...................... (435) (813) (2,065) -------- -------- -------- (82,835) (98,122) (129,271) Recoveries of loans previously charged-off: Residential.............................. 4,437 2,393 2,522 Residential construction................. -- 47 -- Commercial real estate................... 3,197 4,426 2,186 Manufactured housing, second mortgage and other consumer........................ 705 701 1,117 Commercial business...................... 74 482 443 -------- -------- -------- 8,413 8,049 6,268 -------- -------- -------- Net charge-offs............................ (74,422) (90,073) (123,003) -------- -------- -------- Balance, end of year....................... $363,442 $235,275 $244,989 ======== ======== ========
The Company provided an additional $125.0 million in loan loss provision with the merger of Keystone Holdings. This additional loan loss provision was provided principally because a number of Washington Mutual (prior to the business combination with Keystone Holdings) credit administration and asset management philosophies and procedures differed from those of ASB. As part of the ongoing process to determine the adequacy of the reserve for loan losses, the Company reviews the components of its loan portfolio for specific risk of principal loss. 81 54 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) An analysis of the reserve for loan losses was as follows:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Allocated reserves: Commercial real estate............................... $ 77,054 $ 16,488 Residential construction............................. -- 158 Commercial business.................................. 1,285 -- -------- -------- 78,339 16,646 Unallocated reserves................................... 285,103 218,629 -------- -------- $363,442 $235,275 ======== ======== Total reserve for loan losses as a percentage of: Nonperforming loans.................................. 160.52% 110.04% Nonperforming assets................................. 110.29 69.42
NOTE 8: REO REO consisted of the following:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Real estate acquired through foreclosure............... $107,604 $134,195 Other repossessed assets............................... 2,651 1,018 Reserve for losses..................................... (7,144) (10,112) -------- -------- $103,111 $125,101 ======== ========
Changes in the REO reserve for losses were as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 -------- ------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................. $ 10,112 $ 8,135 $ 13,330 Provision for REO losses.................... 7,125 10,523 15,491 Reserves charged-off, net of recoveries..... (10,093) (8,546) (20,686) -------- -------- -------- $ 7,144 $10,112 $ 8,135 ======== ======== ========
REO operations were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Operating expense.......................... $ (6,043) $ (3,457) $ (2,977) Net gain on sale of REO.................... 1,638 3,298 5,066 Provision for REO losses................... (7,125) (10,523) (15,491) -------- -------- -------- $(11,530) $(10,682) $(13,402) ======== ======== ========
82 55 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9: PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Furniture and equipment................................ $246,954 $243,527 Buildings.............................................. 331,988 363,894 Leasehold improvements................................. 59,812 54,683 Construction in progress............................... 4,052 8,080 -------- -------- 642,806 670,184 Accumulated depreciation............................... (241,360) (296,779) -------- -------- 401,446 373,405 Land................................................... 80,945 79,338 -------- -------- $482,391 $452,743 ======== ========
In January 1995, a wholly owned service corporation subsidiary of ASB purchased from a related limited partnership the Irvine Plaza building structures and adjoining land currently utilized for ASB's executive offices and various departments. The total cash purchase price paid for the property was $45.2 million. Depreciation expense for 1996, 1995 and 1994 was $42.3 million, $41.3 million and $38.4 million. The Company has noncancelable operating leases for financial centers, office facilities and equipment. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $43.4 million, $40.4 million and $44.5 million in 1996, 1995 and 1994. Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
DECEMBER 31, 1996 -------------------------- LAND & FURNITURE & BUILDINGS EQUIPMENT ---------- ----------- (DOLLARS IN THOUSANDS) Due within one year................................. $ 32,787 $ 7,401 After one but within two years...................... 30,318 5,465 After two but within three years.................... 27,752 4,139 After three but within four years................... 25,741 878 After four but within five years.................... 20,112 644 After five years.................................... 83,201 -- -------- ------- $ 219,911 $18,527 ======== =======
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement establishes accounting standards for the impairment of long-lived assets that either will be held and used in operations or that will be disposed of. Effective January 1, 1996, the Company adopted SFAS No. 121. The Company periodically evaluates long-lived assets for impairment. 83 56 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10: GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consisted of the following:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Washington Mutual Bank, net of amortization of $125,542 and $98,654.......................................... $132,425 $159,259 Murphey Favre, Inc. and Composite Research & Management Co., net of amortization of $10,125 and $9,389....... 732 1,468 Other, net of amortization of $133 and $85............. 352 400 -------- -------- $133,509 $161,127 ======== ========
Goodwill and other intangible assets result from business combinations accounted for as a purchase of assets and an assumption of liabilities. Other intangible assets primarily consist of core deposit intangibles and covenants not-to-compete resulting from acquisitions of thrift branch systems. Goodwill and other intangible assets are amortized using the straight-line method over the period that is expected to be benefited, which ranges from three to 10 years. The average remaining amortization period at December 31, 1996 was approximately five years. The Company periodically evaluates goodwill and other intangible assets for impairment. NOTE 11: MORTGAGE SERVICING RIGHTS Mortgage servicing rights are included in other assets and consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year................. $104,495 $ 70,911 $ 66,031 Additions................................ 74,398 58,306 38,385 Sales.................................... (5,395) -- (13,087) Amortization............................. (30,615) (23,840) (20,418) Impairment valuation allowance........... (2,158) (882) -- -------- -------- -------- Balance, end of year....................... $140,725 $104,495 $ 70,911 ======== ======== ========
With the adoption of SFAS No. 122, the Company provided a valuation allowance for impairment of mortgage servicing rights. No write-downs were recorded in 1996, 1995 and 1994. 84 57 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12: DEPOSITS Deposits consisted of the following:
DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing................................ $ 2,138,782 $ 2,111,124 Noninterest bearing............................. 841,180 665,205 ----------- ----------- 2,979,962 2,776,329 Savings accounts.................................. 1,660,376 1,905,659 Money market deposit accounts..................... 5,181,685 4,667,884 Time deposit accounts: Due within one year............................. 12,131,239 12,696,186 After one but within two years.................. 1,390,843 1,410,809 After two but within three years................ 295,005 409,580 After three but within four years............... 266,922 243,541 After four but within five years................ 92,004 258,415 After five years................................ 82,105 94,557 ----------- ----------- 14,258,118 15,113,088 ----------- ----------- $24,080,141 $24,462,960 =========== ===========
Time deposit accounts in amounts of $100,000 or more totaled $3.1 billion at both December 31, 1996 and 1995. At December 31, 1996, $506.3 million of these deposits mature within three months, $211.2 million mature in three to six months, $1.4 billion mature in six months to one year, and $1.0 billion mature after one year. Financial data pertaining to the weighted average cost of deposits were as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ----- ----- ----- Weighted daily average interest rate during the year............................................. 4.41% 4.69% 3.69%
NOTE 13: FEDERAL FUNDS PURCHASED The Company purchased federal funds from a variety of counterparties during 1996 and 1995. All federal funds purchased had maturities of 30 days or less, with the majority maturing in one day. As of December 31, 1996 and 1995, the balance of federal funds purchased was $1.1 billion and $433.4 million. Financial data pertaining to federal funds purchased were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- -------- ---- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year....................................... 5.99% 5.83% --% Weighted daily average interest rate during the year................................... 5.39 5.98 -- Daily average balance of federal funds purchased.................................. $ 857,889 $270,861 $ -- Maximum amount of federal funds purchased at any month end.............................. 1,474,000 998,000 -- Interest expense during the year............. 46,269 16,188 --
85 58 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase consisted of the following:
DECEMBER 31, ------------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Reverse repurchase agreements....................... $7,591,658 $7,592,841 Dollar repurchase agreements........................ 243,795 391,915 ---------- ---------- $7,835,453 $7,984,756 ========== ==========
The Company sold, under agreements to repurchase, specific securities of the U.S. government and its agencies and other approved investments to broker-dealers and customers. Securities underlying the agreements with broker-dealers were delivered to the dealer who arranged the transaction or were held by a safekeeping agent for the Company's account. Securities delivered to broker-dealers may be loaned out in the ordinary course of operations. Securities underlying agreements with customers were held in a segregated account by a safekeeping agent for the Company. Scheduled maturities or repricing of securities sold under agreements to repurchase were as follows:
DECEMBER 31, ------------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Due within 30 days.................................. $3,202,302 $5,225,817 After 30 but within 90 days......................... 4,311,164 1,764,074 After 90 but within 180 days........................ 321,987 490,361 After one year...................................... -- 504,504 ---------- ---------- $7,835,453 $7,984,756 ========== ==========
Financial data pertaining to securities sold under agreements to repurchase were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year..................................... 5.53% 5.92% 5.94% Weighted daily average interest rate during the year................................. 5.53 6.14 4.69 Daily average of securities sold under agreements to repurchase................. $8,960,288 $7,859,948 $4,318,592 Maximum securities sold under agreements to repurchase at any month end.............. 9,453,202 8,647,814 6,637,346 Interest expense during the year........... 495,483 482,698 202,677
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and established, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. As issued, Statement No. 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. In general, SFAS No. 127 defers for one year the effective date of SFAS No. 125. The Company will implement SFAS No. 125, as amended by SFAS No. 127 as required. The adoption is not anticipated to have a material impact on the results of operations or financial position of the Company. 86 59 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15: ADVANCES FROM THE FHLB As members of the FHLB, WMB, WM Life, WMBfsb, and ASB maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. As members of the FHLB of Seattle, WMB's, WM Life's and WMBfsb's advances are collateralized in aggregate by all FHLB stock owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and securities of the U.S. government and agencies thereof. As a member of the FHLB of San Francisco, ASB's advances are collateralized by all FHLB stock owned and certain mortgages and deeds of trust. Scheduled maturities of advances from the FHLB were as follows:
DECEMBER 31, ----------------------------------------------------- 1996 1995 ------------------------ ------------------------ RANGES OF RANGES OF INTEREST INTEREST AMOUNT RATES AMOUNT RATES ---------- ----------- ---------- ----------- (DOLLARS IN THOUSANDS) Due within one year...................... $5,376,850 4.38%-8.45% $2,545,594 4.74%-8.54% After one but within two years........... 1,144,891 5.30 -8.50 1,331,000 4.38 -8.45 After two but within three years......... 67,889 6.45 -8.53 545,642 5.59 -8.50 After three but within four years........ 55,197 6.25 -9.34 57,000 8.50 -8.63 After four but within five years......... 450,000 5.40 -5.51 55,137 6.25 -9.34 After five years......................... 146,665 2.80 -8.65 181,366 2.80 -8.65 ---------- ---------- $7,241,492 $4,715,739 ========== ==========
Financial data pertaining to FHLB advances were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year.............................. 5.51% 5.76% 5.72% Weighted daily average interest rate during the year...................... 5.57 5.72 5.38 Daily average of FHLB advances......... $4,651,883 $3,539,006 $3,966,494 Maximum FHLB advances at any month end.................................. 7,241,492 4,715,739 4,560,891 Interest expense during the year....... 259,243 202,422 213,259
87 60 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16: OTHER BORROWINGS Other borrowings consisted of the following:
DECEMBER 31, ------------------------------------------------ 1996 1995 ----------------------- ----------------------- AMOUNT INTEREST RATE AMOUNT INTEREST RATE -------- ------------- -------- ------------- (DOLLARS IN THOUSANDS) Series C Floating Rate Notes, due 2000............................ $175,000 6.91% $175,000 7.31% Series B 9.60% Notes, due 1999.... 169,000 9.60 169,000 9.60 Senior notes, due 2005............ 148,007 7.25 147,845 7.25 Subordinated notes, due 2006...... 98,650 6.63 -- -- Notes payable, due 1998........... 74,111 8.16 74,482 8.16 Subordinated notes, due 1998...... 10,000 8.41 20,500 8.81 Other............................. 2,218 -- 3,390 -- -------- -------- $676,986 $590,217 ======== ========
In March 1995, the Company completed the private placement of $175.0 million of its Series C Floating Rate Notes ("Series C Notes"). Interest on the Series C Notes accrued at the three-month LIBOR plus 1.375%, reset on a quarterly basis. The Series C Notes were redeemed in January 1997. In January 1992, the Company completed the private placement of $169.0 million of its Series B 9.60% Notes ("Series B Notes"). The Series B Notes were redeemed in January 1997. In August 1995, the Company filed a registration statement with the Securities and Exchange Commission for the offering, on a delayed or continuous basis, of up to $250.0 million of debt securities, of which $100.0 million remains available. In August 1995, the Company issued $150.0 million of senior notes bearing an interest rate of 7.25%. The notes may not be redeemed prior to maturity. In February 1996, the Company issued $100.0 million of subordinated notes bearing an interest rate of 6.625%. In 1993, the Company assumed a $75.0 million note payable bearing an interest rate of 8.16% to the City of Tampa. The City of Tampa issued capital improvement revenue bonds in 1988 and invested a portion of the receipts with Pacific First Bank, A Federal Savings Bank ("Pacific First"). The note is subject to periodic withdrawals. In October 1993, the Company issued $20.5 million of subordinated notes. The subordinated notes accrued interest at a rate equal to the three-month LIBOR plus 2.875%. In December 1996, $10.5 million of the notes were redeemed and the remaining $10.0 million were redeemed in January 1997. In December 1996, Washington Mutual entered into two Revolving Credit Facilities (the "Facilities"): a $100.0 million 364-day facility and a $100.0 million four-year facility. Chase Manhattan Bank is the administrative agent for the Facilities. At December 31, 1996, no monies had been drawn. However, in January 1997, $150.0 million was drawn for the redemption of debt securities mentioned above and in February 1997, another $20.0 million was drawn. The remaining proceeds of the Facilities are available for general corporate purposes, including providing capital at a subsidiary level. NOTE 17: INTEREST RATE RISK MANAGEMENT From time to time, the following strategies may be used by the Company to reduce its exposure to interest rate risk: the origination and purchase of ARMs and the purchase of adjustable-rate MBS; the sale of 88 61 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fixed-rate residential mortgage loan production or fixed-rate MBS; and the use of derivative instruments, such as interest rate exchange agreements and interest rate cap agreements. As of December 31, 1996, interest-sensitive assets of $31.8 billion and interest-sensitive liabilities of $33.4 billion were scheduled to mature or reprice within one year. At December 31, 1996, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $9.1 billion. Without these instruments the Company's one-year gap at December 31, 1996 would have been a negative 9.81% as opposed to a negative 3.64%. Interest rate exchange agreements and interest rate cap agreements expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. The Company controls the credit risk associated with its interest rate exchange agreements and interest rate cap agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company's use of derivative instruments reduces the negative effect that changing interest rates may have on net interest income. The Company uses such instruments to reduce the volatility of net interest income over an interest rate cycle. The Company does not invest in leveraged derivative instruments. These types of instruments are riskier than the derivatives used by the Company in that they have significant embedded options that enhance the performance in certain circumstances but dramatically reduce the performance in other circumstances. During 1995, the Company terminated an interest rate exchange agreement with a notional value of $75.0 million and recorded a deferred gain of $845,000. There were no other terminations of interest rate exchange agreements or interest rate cap agreements in 1995. During 1994, the Company terminated interest rate exchange agreements with a notional value of $370.0 million for deferred gains of $1.4 million and deferred losses of $4.8 million. During 1994, the Company terminated interest rate cap agreements with a notional value of $375.0 million and deferred gains of $860,000 were recorded. During 1996, the Company did not terminate any interest rate exchange agreements or interest rate cap agreements. Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1996 ------------------------------------------------------------------- NOTIONAL SHORT-TERM LONG-TERM CARRYING AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE FAIR VALUE ---------- --------------- ------------ -------- ---------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year.................. $ 200,000 5.56% 6.83% $ (799) $ (799) After one but within two years....... 300,000 5.60 6.05 (112) (112) After two but within three........... 200,000 5.87 6.09 265 265 Designated against deposits and borrowings: Due within one year.................. 459,500 5.71 6.60 -- (2,908) After one but within two years....... 397,500 5.43 6.25 -- (2,581) After two but within three years..... 282,600 5.43 7.79 -- (11,255) After three years.................... 502,800 5.72 5.45 -- 18,066 ---------- ---- ---- ------ --------- $2,342,400 5.62% 6.34% $ (646) $ 676 ========== ==== ==== ====== =========
- --------------- (1) The terms of each agreement have specific LIBOR reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. 89 62 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 ------------------------------------------------------------------ NOTIONAL SHORT-TERM LONG-TERM CARRYING AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE FAIR VALUE ---------- --------------- ------------ -------- ---------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year.................. $ 465,000 5.13% 5.92% $ 1,528 $ 1,528 After one but within two years....... 200,000 6.83 5.88 (4,144) (4,144) After two but within three........... 300,000 6.05 5.92 (5,244) (5,244) After three years.................... 200,000 6.88 5.88 (3,987) (3,987) Designated against deposits and borrowings: Due within one year.................. 495,000 6.95 6.08 -- 2,385 After one but within two years....... 484,500 5.96 6.62 -- (8,461) After two but within three years..... 276,000 6.04 6.75 -- (8,746) After three years.................... 261,000 7.10 8.27 -- (7,793) ---------- ---- ---- -------- -------- $2,681,500 6.26% 6.38% $(11,847) $ (34,462) ========== ==== ==== ======== ========
- --------------- (1) The terms of each agreement have specific LIBOR reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1996 ------------------------------------------------------------- NOTIONAL STRIKE SHORT-TERM CARRYING AMOUNT RATE RECEIPT RATE(1) VALUE FAIR VALUE ---------- ------ --------------- -------- ---------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year(2)................... $ 875,000 5.85% 5.89% $ 499 $ 499 After one but within two years(3)........ 650,000 6.17 5.60 1,961 1,961 Designated against deposits and borrowings: Due within one year(4)................... 3,001,000 6.12 5.61 707 2 After one but within two years(5)........ 565,500 7.89 5.49 1,881 798 After two but within three years(6)...... 855,750 7.17 5.16 5,814 1,396 After three years(7)..................... 832,750 8.06 5.04 9,131 1,215 ---------- ---- ---- -------- ------ $6,780,000 6.61% 5.51% $ 19,993 $5,871 ========== ==== ==== ======== ======
- --------------- (1) The terms of each agreement have specific LIBOR or COFI reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. (2) Includes $600.0 million notional amount with a weighted average cap ceiling of 7.75%. (3) Includes $650.0 million notional amount with a weighted average cap ceiling of 7.56%. (4) Includes $45.0 million notional amount with a weighted average cap ceiling of 9.50%. (5) Includes $240.0 million notional amount with a weighted average cap ceiling of 7.83% and $150.0 million notional amount with a weighted average floor of 5.50%. (6) Includes $839.8 million notional amount with a weighted average cap ceiling of 8.77%. (7) Includes $571.8 million notional amount with a weighted average cap ceiling of 9.49%. 90 63 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 --------------------------------------------------------------- NOTIONAL STRIKE SHORT-TERM CARRYING FAIR AMOUNT RATE RECEIPT RATE(1) VALUE VALUE ---------- ---- --------------- ------- ------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year(2)............. $1,425,000 5.34% 5.90% $ 4,484 $ 4,484 After one but within two years(3)........................ 875,000 5.85 5.83 3,799 3,799 After two but within three years(4)........................ 250,000 6.05 5.90 1,132 1,132 Designated against deposits and borrowings: Due within one year(5)............. 5,193,000 7.43 5.63 151 (1,775) After one but within two years(6)........................ 386,000 9.18 5.60 1,241 2 After two but within three years(7)........................ 286,000 8.81 5.49 1,177 42 After three years(8)............... 1,359,000 8.05 5.27 15,122 1,101 ---------- ---- ---- ------- ------- $9,774,000 7.14% 5.64% $27,106 $ 8,785 ========== ==== ==== ======= =======
- --------------- (1) The terms of each agreement have specific LIBOR or COFI reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. (2) Includes $425.0 million notional amount with a weighted average cap ceiling of 8.06%. (3) Includes $600.0 million notional amount with a weighted average cap ceiling of 7.75%. (4) Includes $250.0 million notional amount with a weighted average cap ceiling of 7.65%. (5) Includes $30.0 million notional amount with a weighted average cap ceiling of 9.50% and $5.0 billion notional amount with a weighted average floor of 4.85%. (6) Includes $45.0 million notional amount with a weighted average cap ceiling of 9.50%. (7) Includes $40.0 million notional amount with a weighted average cap ceiling of 9.50%. (8) Includes $1.1 billion notional amount with a weighted average cap ceiling of 9.50%. Changes in interest rate exchange agreements and interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, 1996 ----------------------------- INTEREST INTEREST RATE RATE EXCHANGE CAP AGREEMENTS AGREEMENTS ----------- ----------- (DOLLARS IN THOUSANDS) Notional balance, beginning of year............. $ 2,681,500 $ 9,774,000 Purchases..................................... 668,400 3,805,500 Maturities.................................... (1,007,500) (6,799,500) ----------- ----------- Notional balance, end of year................... $ 2,342,400 $ 6,780,000 =========== ===========
The unamortized balance of prepaid fees and deferred gains and losses from terminated interest rate exchange agreements and interest rate cap agreements are scheduled to be amortized into interest expense as follows:
DECEMBER 31, 1996 ------------------------------------ LOSS ON AVAILABLE- LOSS ON FOR-SALE DEPOSITS AND SECURITIES BORROWINGS LOSS ------- ------------ ------- (DOLLARS IN THOUSANDS) 1997........................................ $(3,612) $ (1,663) $(5,275) 1998........................................ (1,033) (1,237) (2,270) 1999........................................ -- (51) (51) ------- ------- ------- Unamortized deferred loss................. $(4,645) $ (2,951) $(7,596) ======= ======= =======
91 64 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial data pertaining to interest rate exchange agreements were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average net effective cost at end of year..... 0.73% 0.12% 0.42% Weighted average net effective cost during the year.... 0.28 -- 1.44 Monthly average notional amount of interest rate exchange agreements.................................. $2,598,250 $2,749,167 $2,803,750 Maximum notional amount of interest rate exchange agreements at any month end.......................... 3,146,400 2,901,500 3,058,500 Net cost included with interest expense on deposits during the year...................................... (70) 3,540 13,286 Net cost included with interest expense on borrowings during the year...................................... 10,320 6,842 28,426 Net (benefit) included with interest income on available-for-sale securities during the year........ (2,984) (10,495) (1,316)
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Monthly average notional amount of interest rate cap agreements.......................................... $10,433,750.. $6,363,000 $2,557,625 Maximum notional amount of interest rate cap agreements at any month end.................................... 12,514,500.. 9,774,000 3,584,000 Net cost included with interest expense on deposits during the year............................................ 6,206 7,875 2,257 Net cost included with interest expense on borrowings during the year..................................... 2,162 415 565 Net (benefit) cost included with interest income on available-for-sale securities during the year....... (4,686) (5,340) 1,365
NOTE 18: GAIN (LOSS) ON SALE OF OTHER ASSETS Gain (loss) on sale of other assets consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Trading account securities.................... $ 31 $ 529 $ 45 Available-for-sale securities................. (2,648) (929) 4,111 Mortgage servicing rights..................... 4,030 -- 20,396 Premises and equipment........................ (958) (1,458) (1,270) Recognition of deferred gain on sale of travel subsidiary.................................. 4,100 -- -- Other......................................... 1,311 1,203 644 ------ ------ ------- $ 5,866 $ (655) $23,926 ====== ====== =======
92 65 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 19: INCOME TAXES The provision for income taxes from continuing operations consisted of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ------- -------- -------- (DOLLARS IN THOUSANDS) Current income tax expense.................. $96,613 $ 92,315 $ 94,452 Deferred income tax (benefit) expense....... (26,193) 19,591 15,428 ------- -------- -------- $70,420 $111,906 $109,880 ======= ======== ========
In determining taxable income for years prior to 1996, savings banks were allowed bad debt deductions based on a percentage of taxable income or on actual experience. Each year, savings banks selected whichever method resulted in the most tax savings. The Company primarily used the percentage method in 1995 and 1994. Effective with the adoption of SFAS No. 109, Accounting for Income Taxes, this bad debt deduction is no longer treated as a permanent difference. The recently enacted Small Business Job Protection Act of 1996 (the "Job Protection Act") requires that qualified thrift institutions, such as WMB, ASB and WMBfsb, generally recapture, for federal income tax purposes, that portion of the balance of their tax bad debt reserves that exceeds the December 31, 1987 balance, with certain adjustments. Such recaptured amounts are to be generally taken into ordinary income ratably over a six-year period beginning in 1997. Accordingly, Washington Mutual will have to pay approximately $4.2 million (based upon current federal income tax rates) in additional federal income taxes each year of the six-year period due to the Job Protection Act. The Job Protection Act also repeals the reserve method of accounting for tax bad debt deductions and, thus, requires thrifts to calculate the tax bad debt deduction based on actual current loan losses. In addition, the Company will also be required to recapture its post-1987 additions to its tax bad debt reserves, whether such additions were made pursuant to the percentage of taxable income method or the experience method. As of December 31, 1995, these additions were $151.3 million which, pursuant to the Job Protection Act, will be included in taxable income ratably over a six-taxable-year period beginning with the year ending December 31, 1997. The recapture of the post-1987 additions to tax basis bad debt reserves will not result in a charge to earnings as these amounts are included in the deferred tax liability at December 31, 1996. 93 66 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the Company's net deferred tax asset (liability) were as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards................ $ 1,269,124 $ 1,632,230 Book loan loss reserves......................... 173,116 106,828 Purchase accounting adjustments................. 20,153 41,343 Deferred losses................................. 41,757 -- Other........................................... 55,892 59,468 ---------- ---------- 1,560,042 1,839,869 Valuation allowance............................... (1,192,676) (1,150,206) ---------- ---------- Deferred tax asset, net of valuation allowance.... 367,366 689,663 Deferred tax liabilities: Tax bad debt reserves........................... 63,193 467,125 FHLB stock dividends............................ 68,901 60,636 Deferred loan fees.............................. 41,416 32,958 Deferred gains.................................. 52,365 50,947 Purchase accounting adjustments................. 18,098 26,644 Other........................................... 83,925 63,546 ---------- ---------- 327,898 701,856 ---------- ---------- Net deferred tax asset (liability)................ $ 39,468 $ (12,193) ========== ==========
The valuation allowances of $1.2 billion at December 31, 1996 and 1995 included $45.8 million and $130.6 million related to payments in lieu of taxes which are expected to arise from the realization of the net deferred tax asset. These valuation allowances represented the excess of the gross deferred tax asset over the sum of the taxes and the payments in lieu of taxes related to: (i) projected future taxable income; (ii) reversing taxable temporary differences; and (iii) tax planning strategies. The increase in the valuation allowance of $42.5 million during the year ended December 31, 1996 was due primarily to adjustments for anticipated use of net operating losses and a change in state tax rates. As of December 31, 1996, the Company's net deferred tax asset was $39.5 million. In order to fully realize the net deferred tax asset, ASB will need to generate future taxable income of approximately $342.1 million prior to the expiration of its tax net operating losses, which begin to expire in 1999. Due to Section 382 of the Code, most of the value of the net operating loss carryforward deductions of Keystone Holdings and its subsidiaries was eliminated due to the Keystone Transaction. Accordingly, the future tax savings attributable to such net operating loss carryforward deductions (other than amounts used to offset bad debt reserve deduction recapture for ASB) will be greatly reduced. In August 1996, Keystone Holdings amended prior-year federal tax returns to reduce tax bad debt deductions and to make other amendments. As a result, the net operating loss carryforwards for federal tax purposes were reduced by approximately $756 million. In September 1996, ASB amended prior-year state tax returns to reduce tax bad debt deductions. The result was to decrease state net operating loss carryovers by approximately $545 million. The decrease in the gross deferred tax asset as a result of the amendments which reduced the federal and state net operating loss carryforwards was offset by an equal decrease in the valuation allowance for the deferred tax asset. 94 67 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Federal and state income tax net operating loss carryforwards due to expire under current law during the years indicated were as follows:
DECEMBER 31, 1996 ------------------------- FEDERAL STATE ---------- ---------- (DOLLARS IN THOUSANDS) 1999................................... $ -- $ 140 2000................................... 1,497 613,382 2001................................... 140 599,241 2002................................... 278 557,803 2003................................... 1,544,396 -- 2004................................... 784,195 -- 2005................................... 700,619 -- 2007................................... 12,780 -- 2008................................... 37,460 -- ---------- ---------- $3,081,365 $1,770,566 ========== ==========
In April 1994, revenue procedures were issued allowing the Company to change its method of accounting for loan fees, effective for 1993. The change allowed most members of the Company's consolidated filing group to defer the recognition of loan fees for income tax purposes. Under SFAS No. 115, where actual benefits or liabilities are expected to be realized, the net realizable tax effects of unrealized gains and losses on available-for-sale securities at December 31, 1996 and 1995 were included in the deferred tax liabilities and assets. The tax effect was made directly to stockholders' equity and was not included in the provision for income taxes. The change in the net deferred tax asset (liability) was as follows:
YEAR ENDED DECEMBER 31, 1996 ---------------------- (DOLLARS IN THOUSANDS) Deferred tax (liability), beginning of year............... $(12,193) Tax effect of valuation adjustment on available-for-sale securities........................................... 23,211 Deferred income tax benefit............................. 26,193 Other adjustments....................................... 2,257 -------- Deferred tax asset, end of year........................... $ 39,468 ========
95 68 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations between income taxes computed at statutory rates and income taxes included in the Consolidated Statements of Income were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Income taxes computed at statutory rates........... $ 78,209 $148,920 $127,163 Tax effect of: Utilization of tax losses of New West (nominee of ASB)..................................... (31,200) (17,482) (55,100) Amortization of goodwill and other intangible assets...................................... 6,372 6,631 6,688 State franchise tax, net of federal tax benefit..................................... (38,616) 3,899 (2,890) Increase in base year reserve amount.......... (706) (16,318) (11,605) Valuation allowance change from prior year.... 42,470 (7,114) 48,241 Dividends received deduction.................. (2,460) (987) (506) Tax exempt income............................. (2,309) (1,973) (1,680) Restructuring adjustments..................... 9,321 -- -- Other......................................... 9,339 (3,670) (431) ------- -------- -------- Income taxes included in the Consolidated Statements of Income............................. $ 70,420 $111,906 $109,880 ======= ======== ========
NOTE 20: PAYMENTS IN LIEU OF TAXES Keystone Holdings and certain of its affiliates are parties to a tax related agreement (the "Assistance Agreement") with a predecessor of the FSLIC Resolution Fund ("FRF") which generally provides that 75.0% of most of the federal tax savings and approximately 19.5% of most of the California tax savings (as computed in accordance with the Assistance Agreement) attributable to ASB's utilization of any current tax losses or tax loss carryovers of New West are to be paid by the Company for the benefit of the FRF. The Assistance Agreement sets forth certain special adjustments to federal taxable income to arrive at "FSLIC taxable income." The principal adjustments effectively permit ASB to (i) recognize loan fees ratably over seven years adjusted for loan dispositions, (ii) treat the income and expenses of N.A. Capital Holdings and New American Capital, Inc., subsidiaries of Keystone Holdings, as income and expenses of ASB, and (iii) for years ending on or before December 31, 1994, to recognize approximately 36.0% of the amortization of the mark-to-market adjustment attributable to the acquired loan portfolio. The provision (benefit) for payments in lieu of taxes consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- ------ ----- (DOLLARS IN THOUSANDS) Federal........................................ $ 4,006 $3,450 $(137) State.......................................... 21,181 4,437 (687) ------- ------ ----- $25,187 $7,887 $(824) ======= ====== =====
96 69 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 21: STOCKHOLDERS' EQUITY Common Stock Cash dividends paid per share were as follows:
YEAR ENDED DECEMBER 31,(1) ------------------------- 1996 1995 1994 ----- ----- ----- First quarter....................................... $0.21 $0.19 $0.16 Second quarter...................................... 0.22 0.19 0.17 Third quarter....................................... 0.23 0.19 0.18 Fourth quarter...................................... 0.24 0.20 0.19
- --------------- (1) Does not include amounts paid by acquired companies prior to business combinations. Prior to the business combination with Washington Mutual, acquired companies paid total common cash dividends of $60.0 million, $8.9 million and $25.6 million in 1996, 1995 and 1994. In addition to being influenced by legal, regulatory and economic restrictions, Washington Mutual's ability to pay dividends is also predicated on the ability of its subsidiaries to declare and pay dividends to WMI. These subsidiaries are subject to legal and regulatory restrictions on their ability to pay dividends. Retained earnings of the Company at December 31, 1996 included a pre-1988 thrift bad debt reserve for tax purposes of $450.0 million for which no federal income taxes had been provided. In the future, if this thrift bad debt reserve is used for any purpose other than to absorb bad debt losses or if any of the banking subsidiaries no longer qualifies as a bank, the Company will incur a federal income tax liability, at the then prevailing corporate tax rate, to the extent of such subsidiary's pre-1988 thrift bad debt reserve. On October 16, 1990, the Company's Board of Directors adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of common stock to shareholders of record on October 31, 1990. The rights have certain anti-takeover effects. They are intended to discourage coercive or unfair takeover tactics and to encourage any potential acquirer to negotiate a price fair to all shareholders. The rights may cause substantial dilution to an acquiring party that attempts to acquire the Company on terms not approved by the Board of Directors, but they will not interfere with any friendly merger or other business combination. The plan was not adopted in response to any specific effort to acquire control of the Company. As part of the business combination with Keystone Holdings, 8,000,000 shares of common stock, with an assigned value of $42.75 per share, were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF. Shares will be released from the Litigation Escrow, if and only to, the extent that Washington Mutual receives net cash proceeds from certain litigation that Keystone Holdings and certain of its subsidiaries were pursuing against the United States, which litigation became an asset of the Company in the Keystone Transaction. Preferred Stock In December 1992, the Company issued 2,800,000 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), at $25 per share for net proceeds of $67.4 million. The Series C Preferred Stock has a liquidation preference of $25 per share plus dividends accrued and unpaid for the then current dividend period. Dividends, if and when declared by Washington Mutual's Board of Directors, are at an annual rate of $2.28 per share. Dividends have been declared and paid in all quarters since issuance. The Company may redeem the Series C Preferred Stock on or after December 31, 1997 at the redemption price of $25 per share plus unpaid dividends, whether or not declared, for the then current dividend period up to the date fixed for redemption. In November 1995, the Company purchased and retired 47,500 shares of the Series C Preferred Stock. 97 70 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Also in December 1992, the Company issued 1,400,000 shares of $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D ("Series D Preferred Stock"), at $100 per share for net proceeds of $136.4 million. The Series D Preferred Stock had a liquidation preference of $100 per share plus dividends accrued and unpaid for the then current dividend period. The Series D Preferred Stock was convertible at a rate of 3.870891 shares of common stock per share of Series D Preferred Stock. Dividends were at an annual rate of $6.00 per share. Prior to December 31, 1996, substantially all of the Series D Preferred Stock was converted into shares of common stock and the Company redeemed the remaining shares. In September 1993, the Company issued 2,000,000 shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E ("Series E Preferred Stock"), at $25 per share for net proceeds of $48.2 million. The Series E Preferred Stock has a liquidation preference of $25 per share plus dividends accrued and unpaid for the then current dividend period. Dividends, if and when declared by Washington Mutual's Board of Directors, are at an annual rate of $1.90 per share. Dividends have been declared and paid in all quarters since issuance. The Company may redeem the Series E Preferred Stock on or after September 15, 1998, at the redemption price of $25 per share plus unpaid dividends, whether or not declared, for the then current dividend period up to the date fixed for redemption. In November 1995, the Company purchased and retired 30,000 shares of the Series E Preferred Stock. In December 1988, New Capital issued $80.0 million of Cumulative Redeemable Preferred Stock. The Cumulative Redeemable Preferred Stock was presented as a minority interest in the Company's Consolidated Financial Statements at December 30, 1995. The Cumulative Redeemable Preferred Stock was redeemed on December 20, 1996. The Series C Preferred Stock and Series E Preferred Stock are senior to common stock as to dividends and liquidation, but they do not confer general voting rights. 98 71 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 22: EARNINGS PER COMMON SHARE Primary earnings per common share have been calculated by dividing net income, after deducting dividends on preferred stock, by the weighted average number of shares outstanding for the period. Fully diluted earnings per common share assume conversion of any outstanding convertible preferred stock. Information used to calculate earnings per share was as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Net income.............................................. $114,278 $289,902 $240,275 Preferred stock dividends: Series C Preferred Stock.............................. (6,276) (6,384) (6,384) Series E Preferred Stock.............................. (3,743) (3,800) (3,800) Series D Preferred Stock.............................. (8,400) (8,400) (8,400) -------- -------- -------- Net income attributable to primary common stock......... $ 95,859 $271,318 $221,691 ======== ======== ======== Net income.............................................. $114,278 $289,902 $240,275 Preferred stock dividends: Series C Preferred Stock.............................. (6,276) (6,384) (6,384) Series E Preferred Stock.............................. (3,743) (3,800) (3,800) Series D Preferred Stock.............................. (8,400)(1) -- -- -------- -------- -------- Net income attributable to fully diluted common stock... $ 95,859 $279,718 $230,091 ======== ======== ======== Average common shares used to calculate earnings per share(2)(3): Primary............................................... 112,858,781 109,944,477 106,245,127 Fully diluted......................................... 113,138,724 115,363,724 111,664,374
- --------------- (1) In 1996, for purposes of calculating fully diluted earnings per share, the assumed conversion of the Series D Preferred Stock was anti-dilutive. (2) As part of the business combination with Keystone Holdings, 8,000,000 shares of common stock, with a assigned value of $42.75 per share, were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF and their transferees. The Company will use the treasury stock method to determine the effect of the shares upon the Company's financial statements. At December 31, 1996, the dilutive effect of the 8,000,000 shares of common stock on primary and fully diluted earnings per share was minimal. (3) If the conversion of the Series D Preferred Stock had taken place on January 1, 1996, primary earnings per common share for 1996 would have been $0.88. NOTE 23: REGULATORY CAPITAL REQUIREMENTS WMI is not subject to any regulatory capital requirements. However, each of its subsidiary depository and insurance institutions is subject to various capital requirements. WMB is subject to the FDIC capital requirements while ASB and WMBfsb are subject to the Office of Thrift Supervision ("OTS") capital requirements. WM Life is subject to National Association of Insurance Commissioners ("NAIC") capital requirements. The capital adequacy requirements are quantitative measures established by regulation that require WMB, ASB and WMBfsb to maintain minimum amounts and ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1 and total capital to risk-weighted assets as well as Tier 1 capital to average assets. The OTS requires ASB and WMBfsb to maintain minimum ratios of total capital to risk-weighted assets, as well as ratios of core capital and tangible capital to total assets. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") created a statutory framework that increased the importance of meeting applicable capital requirements. For WMB, ASB and 99 72 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) WMBfsb, FDICIA established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure, and certain other factors. The federal banking agencies (including the FDIC and the OTS) have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10.00% or more, its ratio of core capital to risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted total assets is 5.00% or more and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a leverage ratio of not less than 4.00%. Any institution which is neither well capitalized nor adequately capitalized will be considered undercapitalized. Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by WMB, ASB or WMBfsb to comply with applicable capital requirements would, if unremedied, result in restrictions on their activities and lead to enforcement actions against WMB by the FDIC or against ASB or WMBfsb by the OTS, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels. FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, FDIC or OTS approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. 100 73 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The actual regulatory capital ratios calculated for WMB, ASB and WMBfsb, along with the minimum capital amounts and ratios for capital adequacy purposes and to be categorized as well capitalized under the regulatory framework for prompt corrective action were as follows:
MINIMUM TO BE CATEGORIZED AS MINIMUM WELL CAPITALIZED FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES(1) PROVISIONS ------------------- ----------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- --------- ---- ---------- ----- (DOLLARS IN THOUSANDS) DECEMBER 31, 1996: WMB Total capital to risk-weighted assets......................... $1,320,577 11.09% $ 952,810 8.00% $1,191,013 10.00% Tier I capital to risk-weighted assets......................... 1,224,620 10.28 476,405 4.00 714,608 6.00 Tier I capital to average assets......................... 1,224,620 5.76 850,027 4.00 1,062,533 5.00 ASB Total capital to risk-weighted assets(2)...................... 1,395,814 10.92 1,022,484 8.00 1,278,105 10.00 Tier I capital to risk-weighted assets......................... 1,137,311 8.90 n.a. n.a. 766,863 6.00 Tier I leverage capital to average assets......................... 1,137,311 5.17 n.a. n.a. 1,099,506 5.00 Core capital to total assets...... 1,137,311 5.17 659,704 3.00 n.a. n.a. Tangible capital to total assets......................... 1,136,202 5.17 329,835 1.50 n.a. n.a. WMBfsb Total capital to risk-weighted assets(2)...................... 71,327 11.58 49,285 8.00 61,607 10.00 Tier I capital to risk-weighted assets......................... 64,707 10.50 n.a. n.a. 36,964 6.00 Tier I leverage capital to average assets......................... 64,707 6.90 n.a. n.a. 46,923 5.00 Core capital to total assets...... 64,707 6.90 28,154 3.00 n.a. n.a. Tangible capital to total assets......................... 64,707 6.90 14,077 1.50 n.a. n.a. DECEMBER 31, 1995: WMB Total capital to risk-weighted assets......................... 1,280,948 11.58 885,259 8.00 1,106,573 10.00 Tier I capital to risk-weighted assets......................... 1,184,144 10.70 442,629 4.00 663,944 6.00 Tier I capital to average assets......................... 1,184,144 5.72 828,789 4.00 1,035,987 5.00 ASB Total capital to risk-weighted assets(2)...................... 1,131,295 10.12 894,190 8.00 1,117,738 10.00 Tier I capital to risk-weighted assets......................... 1,049,987 9.39 n.a. n.a. 670,643 6.00 Tier I leverage capital to average assets......................... 1,049,987 5.41 n.a. n.a. 970,949 5.00 Core capital to total assets...... 1,049,987 5.41 582,569 3.00 n.a. n.a. Tangible capital to total assets......................... 1,046,658 5.39 291,235 1.50 n.a. n.a. WMBfsb Total capital to risk-weighted assets(2)...................... 49,620 12.64 31,401 8.00 39,252 10.00 Tier I capital to risk-weighted assets......................... 44,696 11.39 n.a. n.a. 23,551 6.00 Tier I leverage capital to average assets......................... 44,696 6.76 n.a. n.a. 33,065 5.00 Core capital to total assets...... 44,696 6.76 19,839 3.00 n.a. n.a. Tangible capital to total assets......................... 44,696 6.76 9,920 1.50 n.a. n.a.
- --------------- (1) Regulatory requirements listed under this column are not the same as capital adequacy requirements under prompt corrective action provisions. (2) The OTS requires institutions to maintain Tier 1 capital of not less than one-half of total capital. 101 74 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management believes, as of December 31, 1996, that WMB, ASB and WMBfsb individually met all capital adequacy requirements to which they were subject. Additionally, as of December 31, 1996, the most recent notification from the FDIC (for WMB) and the OTS (for ASB and WMBfsb) individually categorized WMB, ASB and WMBfsb as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table above. There are no conditions or events since that notification that management believes have changed WMB's, ASB's and WMBfsb's category. Federal law requires that the federal banking agencies' risk-based capital guidelines take into account various factors including interest rate risk, concentration of credit risk, risks associated with nontraditional activities, and the actual performance and expected risk of loss of multi-family mortgages. In 1994, the federal banking agencies jointly revised their capital standards to specify that concentration of credit and nontraditional activities are among the factors that the agencies will consider in evaluating capital adequacy. In that year, the OTS and FDIC amended their risk-based capital standards with respect to the risk weighting of loans made to finance the purchase or construction of multi-family residences. The OTS adopted final regulations adding an interest rate risk component to the risk-based capital requirements for savings associations (such as ASB and WMBfsb), although implementation of the regulation has been delayed. Management believes that the effect of including such an interest rate risk component in the calculation of risk-adjusted capital will not cause ASB or WMBfsb to cease to be well capitalized. In June 1996, the FDIC and certain other federal banking agencies (not including the OTS) issued a joint policy statement providing guidance on prudent interest rate risk management principles. The agencies stated that they would determine banks' interest rate risk on a case-by-case basis, and would not adopt a standardized measure or establish an explicit minimum capital charge for interest rate risk. WM Life is subject to risk-based capital requirements developed by the NAIC. The NAIC measure uses four major categories of risk to calculate an appropriate level of capital to support an insurance company's overall business operations. The four risk categories are asset risk, insurance risk, interest rate risk and business risk. At December 31, 1996, WM Life's actual capital was 663% of its required regulatory risk-based level. NOTE 24: STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN On March 8, 1984, the Company's stockholders approved the adoption of the 1983 incentive stock option plan, providing for the award of incentive stock options or nonqualified stock options to certain officers of the Company at the discretion of the Board of Directors. On April 19, 1994, the Company's stockholders' approved the adoption of the 1994 stock option plan in which the right to purchase common stock of the Company may be granted to employees, directors, consultants and advisers of the Company. The 1994 plan is generally similar to the 1983 plan, which terminated according to its terms in 1993. Consistent with the Company's practice under the 1983 plan, it is anticipated that the majority of options available under the plan will be granted to the most senior management of the Company. The 1994 plan does not affect any options granted under the 1983 plan. Under the 1994 stock option plan, on the date of the grant, the exercise price of the option must at least equal the market value per share of the Company's common stock. The 1994 plan provides for the granting of options for a maximum of 4,000,000 common shares. Stock options are generally exercisable on a phased-in schedule over three years and expire 10 years from the grant date. At December 31, 1996, options to purchase 884,464 shares were fully exercisable. 102 75 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock options granted, exercised, surrendered or terminated were as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE OF NUMBER OF EXERCISE PRICE OPTION SHARES OPTION SHARES OF OPTION SHARES GRANTED ------------- ---------------- ---------------- Outstanding January 1, 1994.................. 1,140,340 $11.24 Granted in 1994............................ 191,631 22.27 Exercised in 1994.......................... (106,399) 7.96 --------- ------ Outstanding December 31, 1994................ 1,225,572 13.17 Granted in 1995............................ 416,618 17.47 $ 4.87 Exercised in 1995.......................... (290,981) 13.60 Terminated in 1995......................... (49,848) 22.07 --------- ------ Outstanding December 31, 1995................ 1,301,361 14.71 Granted in 1996............................ 1,029,000 36.94 9.13 Exercised in 1996.......................... (212,222) 12.69 Surrendered in 1996........................ (6,750) 5.86 Terminated in 1996......................... (47,166) 27.08 --------- ------ Outstanding December 31, 1996................ 2,064,223 $25.85 ========= ======
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1996 - --------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF OF RANGES OF NUMBER OF REMAINING EXERCISE PRICE EXERCISABLE EXERCISABLE EXERCISE PRICES OPTION SHARES CONTRACTUAL LIFE OF OPTION SHARES OPTION SHARES OPTION SHARES - ---------------- ------------- ---------------- ---------------- ------------- ------------- $ 6.03 - $ 8.44 404,375 3.7 years $ 8.07 404,375 $ 8.07 12.33 - 17.29 144,929 5.3 12.95 144,929 12.95 20.19 - 22.75 524,419 7.3 21.50 335,160 21.76 27.75 - 30.00 327,500 9.1 27.82 -- -- 30.94 - 42.75 663,000 10.0 41.98 -- -- --------- ---------- ------ ------- ------ 2,064,223 7.6 years $25.85 884,464 $ 14.06 ========= ========== ====== ======= ======
Under the terms of the employee stock purchase plan, an employee can purchase WMI common stock at a 15% discount without paying brokerage fees or commissions on purchases. The Company pays for the program's administrative expenses. The plan is open to all employees who are at least 18 years old, have completed at least one year of service, and work at least 20 hours per week. Participation can be by either payroll deduction or lump sum payments with a maximum annual contribution of 10% of employees previous year's eligible cash compensation. Under the employee stock purchase plan, dividends are automatically reinvested. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation. The statement requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) application of the fair value recognition provisions in the statement. SFAS No. 123 does not rescind or interpret the existing accounting rules for employee stock-based arrangements. Companies may continue following those rules to recognize and measure compensation as outlined in Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued to Employees but they are now required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value recognition provisions of SFAS No. 123. Effective January 1, 1996, the Company adopted the disclosure requirements of SFAS No. 123, but has determined 103 76 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that it will continue to measure its employee stock-based compensation arrangements under the provisions of APB Opinion 25. Accordingly, no compensation cost has been recognized for its stock option plan and its employee stock purchase plan. Had compensation cost for the Company's compensation plans been determined consistent with SFAS 123, the Company's net income available to fully diluted common stock and fully diluted earning per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 ------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income attributable to common stock: Primary: As reported.................................... $95,859 $271,318 Pro forma...................................... 93,241 270,728 Fully diluted: As reported.................................... $95,859 $279,718 Pro forma...................................... 93,241 279,128 Net income per common share: Primary: As reported.................................... $0.85 $2.47 Pro forma...................................... 0.83 2.46 Fully diluted: As reported.................................... $0.85 $2.42 Pro forma...................................... 0.83 2.41
The compensation expense included in the pro forma net income attributable to fully diluted common stock and fully diluted earnings per share is not likely to be representative of the effect on reported net income for future years because options vest over several years and additional awards generally are made each year. The fair value of options granted under the Company's stock option plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: annual dividend yield of 2.5% for both years; expected volatility of 23.99% for 1996 and 24.71% for 1995; risk-free interest rates of 5.78% for 1996 and 7.28% for 1995; and expected lives of five years for both years. NOTE 25: EMPLOYEE BENEFITS PROGRAMS Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for substantially all eligible employees. ASB provided a substantially similar plan (the "ASB Plan") which was terminated effective June 30, 1995. Benefits earned for each year of service are based primarily on the level of compensation in that year plus a stipulated rate of return on the benefit balance. It is the Company's policy to fund the Pension Plan on a current basis to the extent deductible under federal income tax regulations. The combined net periodic pension cost for the Pension Plan and the ASB Plan was $2.1 million, $2.0 million and $1.3 million for 1996, 1995 and 1994; the weighted average discount rate was 7.25% for 1996 and 1995 and 8.00% for 1994: the long-term rate of return on assets was 8.00% for 1996, 1995 and 1994; and the assumed rate of increase in future compensation levels was 6.00% for all years presented. The Pension Plan's assets consist primarily of listed common stocks, U.S. government obligations, corporate debt obligations, and annuity contracts. At the termination date of the ASB plan, all participants' accrued benefits became fully vested. The net assets of the plan were allocated as prescribed by the Employee Retirement Income Security Act of 1974 and 104 77 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Pension Benefit Guaranty Corporation and their related regulations. All participants received full benefits. The termination resulted in a settlement under SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. ASB recognized a gain of $1.7 million as a result of the settlement. The benefit obligation was settled in 1996. The Pension Plan's funded status and amounts recognized in the Company's financial statements were as follows:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Benefit obligations: Vested benefits...................................................... $(44,659) $(46,628) Nonvested benefits................................................... (3,178) (2,367) -------- -------- Accumulated benefit obligation......................................... (47,837) (48,995) Effect of future compensation increases................................ (1,168) (1,598) -------- -------- Projected benefit obligation........................................... (49,005) (50,593) Plan assets at fair value.............................................. 65,823 61,722 -------- -------- Plan assets in excess of projected benefit obligation.................. 16,818 11,129 Unrecognized (gain) loss due to past experience different from assumptions.......................................................... (7,800) (2,103) Unrecognized prior service cost........................................ (352) 2,093 Unrecognized net asset at transition being recognized over 18.6 years................................................................ (2,918) (3,300) -------- -------- Prepaid pension asset................................................ $ 5,748 $ 7,819 ======== ========
The combined net periodic pension expense included the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 ------- -------- ------- (DOLLARS IN THOUSANDS) Service cost -- benefits earned during the period................. $ 4,083 $ 3,240 $ 2,952 Interest cost on projected benefit obligation..................... 3,172 3,930 3,383 Actual (gain) loss on plan assets................................. (7,690) (12,831) 615 Amortization and deferral, net.................................... 2,506 7,679 (5,675) ------- -------- ------- $ 2,071 $ 2,018 $ 1,275 ======= ======== =======
During 1994, the defined benefit pension plan acquired in the acquisition of Pacific First was merged into the Company's Pension Plan. The fair value of the Pacific First plan assets exceeded the projected benefit obligation, and the accrued pension cost was reduced by $10.8 million. In addition, the Company currently provides eligible retired employees with access to medical coverage on the same basis as active employees and provides certain other health care insurance benefits to a limited number of retired employees. Postretirement benefits, such as retiree health benefits, are accrued during the years an employee provides services. 105 78 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of these benefits were as follows:
DECEMBER 31, ------------------- 1996 1995 ------- ------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation............. $(5,736) $(5,484) Unrecognized transition obligation........................ 2,356 2,503 Unrecognized (gain)....................................... (36) (36) ------- ------- Prepaid postretirement liability........................ $(3,416) $(3,017) ======= =======
Net periodic postretirement expense included the following:
DECEMBER 31, ---------------------- 1996 1995 1994 ---- ---- ---- (DOLLARS IN THOUSANDS) Service cost........................................... $249 $206 $220 Interest cost.......................................... 384 344 322 Amortization of transition obligation.................. 147 147 147 ---- ---- ---- $780 $697 $689 ==== ==== ====
Net periodic postretirement expense was calculated using the following assumptions: the weighted average discount rate was 7.25% for 1996 and 1995 and 8.00% for 1994; and the medical trend rate was 13.00% for 1993 and declines steadily to 6.00% by the year 2000. The effect of a 1.00% increase in the trend rates is not significant. Washington Mutual maintains a retirement savings and investment plan for substantially all eligible employees that allows participants to make contributions by salary deduction equal to 15.00% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. ASB maintains a substantially similar plan. Employees' contributions vest immediately. The Company's partial matching contributions vest over five years. ASB implemented a Supplemental Executive Retirement Plan ("SERP") in 1990. The SERP is a nonqualified, noncontributory defined benefit plan where benefits are paid to certain officers using a target percentage which is based upon the number of years of service with ASB. This percentage is applied to the participant's average annual earnings for the highest three out of the final ten years of employment. These benefits are reduced to the extent a participant receives benefits from the ASB Plan. In 1990, ASB implemented a Phantom Share Plan (the "PSP") for the benefit of certain of its officers. As a result of the Keystone Transaction, the phantom shares became immediately exercisable and ASB incurred an expense of $12.0 million in December 1996. ASB established a Short-Term Incentive Plan ("STI") for the benefit of certain of its executives. The STI provides a short-term incentive to its participants based upon the achievement of both overall company and individual goals. Washington Mutual uses grants of restricted stock as a component of compensation to provide a long-term incentive for creation of shareholder value and to encourage the recipient to remain at Washington Mutual. 106 79 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total employee benefit plan expense was as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Net periodic pension expense.................. $ 2,071 $ 2,018 $ 1,275 Net periodic postretirement expense........... 780 697 689 Company's contributions to savings plan....... 12,381 10,027 12,374 SERP expense.................................. 2,161 1,590 1,900 STI expense................................... 3,609 3,247 2,219 Restricted stock expense...................... 911 701 1,046 ------- ------- ------- $21,913 $18,280 $19,503 ======= ======= =======
NOTE 26: CONTINGENCIES The Company has certain litigation and negotiations in progress resulting from activities arising from normal operations. In the opinion of management, none of these matters is likely to have a material adverse effect on the Company's financial position. As part of the administration and oversight of the Assistance Agreement and other agreements among ASB, certain of its affiliates and the FDIC, the FDIC has a variety of review and audit rights, including the right to review and audit computations of payments in lieu of taxes. ASB and certain of its affiliates have entered into settlement agreements with the FDIC for all periods through June 30, 1994, pursuant to which ASB, its affiliates and the FDIC have mutually settled and released various claims in consideration of certain nominal payments. The Office of Inspector General has completed its audit of transactions and payments under the Assistance Agreement and other agreements occurring during the period beginning July 1, 1994 and ending June 30, 1996. Keystone Holdings has received no notice of any issues involving more than nominal amounts arising after June 30, 1994. As part of the Keystone Transaction, 8,000,000 shares of common stock, with an assigned value of $42.75 per share (the "Litigation Escrow Shares"), were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF and their transferees (the "Litigation Escrow"). Shares will be released from the Litigation Escrow if and only to the extent that Washington Mutual receives net cash proceeds from certain litigation that Keystone Holdings and certain of its subsidiaries are pursuing against the United States (the "Case"), which litigation became an asset of the Company in the Keystone Transaction. Upon Washington Mutual's receipt of net cash proceeds from a judgment or settlement of the Case, if any ("Case Proceeds"), all or part of the Litigation Escrow Shares will be released, 64.9% to the general and limited partners of Keystone Holdings and 35.1% to the FRF. The number of Litigation Escrow Shares released will be equal to the Case Proceeds, reduced by certain tax and litigation-related expenses, divided by $42.75. If not all of the Litigation Escrow Shares are distributed prior to the expiration of the Litigation Escrow, any remaining Litigation Escrow Shares will be returned to Washington Mutual for cancellation. The Litigation Escrow expires the earlier of the date that is the sixth anniversary of the Keystone Transaction or that the Litigation Escrow Shares are released. In general, the Litigation Escrow will be automatically extended to 10 years if, prior to the sixth anniversary of the Keystone Transaction, there has been any judgment or final settlement in the Case granted or entered in favor of Washington Mutual or any of its subsidiaries. 107 80 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 27: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations on a quarterly basis have been restated to give effect to the business combination with Keystone Holdings. Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER -------------------------------- -------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income..................... $415,420 $349,202 $764,622 $418,751 $357,518 $776,269 Interest expense.................... 244,425 233,195 477,620 240,607 235,901 476,508 -------- -------- -------- -------- -------- -------- Net interest income................. 170,995 116,007 287,002 178,144 121,617 299,761 Provision for loan losses........... 2,912 17,977 20,889 2,913 17,203 20,116 Other income........................ 36,762 20,248 57,010 36,752 21,872 58,624 Other expense....................... 110,092 71,002 181,094 114,687 71,364 186,051 -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest................. 94,753 47,276 142,029 97,296 54,922 152,218 Income taxes........................ 35,224 14,471 49,695 35,937 13,214 49,151 Minority interest in earnings of consolidated subsidiary........... -- 3,527 3,527 -- 3,450 3,450 -------- -------- -------- -------- -------- -------- Net income.......................... $ 59,529 $ 29,278 $ 88,807 $ 61,359 $ 38,258 $ 99,617 ======== ======== ======== ======== ======== ======== Net income attributable to common stock............................. $ 54,924 $ 29,278 $ 84,202 $ 56,755 $ 38,258 $ 95,013 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................... $0.76 $0.75 $0.79 $0.84 Fully diluted..................... 0.74 0.74 0.76 0.83
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------- THIRD QUARTER FOURTH QUARTER -------------------------------- -------------- WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED WMI ---------- -------- -------- -------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income...................................... $424,086 $373,608 $797,694 $810,651 Interest expense..................................... 244,707 256,367 501,074 503,027 -------- -------- -------- -------- Net interest income.................................. 179,379 117,241 296,620 307,624 Provision for loan losses............................ 2,913 14,220 17,133 143,374 Other income......................................... 42,792 25,396 68,188 75,442 Other expense........................................ 154,630 162,767 317,397 340,762 -------- -------- -------- -------- Income before income taxes and minority interest..... 64,628 (34,350) 30,278 (101,070) Income taxes......................................... 24,454 (11,491) 12,963 (16,202) Minority interest in earnings of consolidated subsidiary......................................... -- 3,527 3,527 3,066 -------- -------- -------- -------- Net income........................................... $ 40,174 $(26,386) $ 13,788 $(87,934) ======== ======== ======== ======== Net income attributable to common stock.............. $ 35,569 $(26,386) $ 9,183 $(92,539) ======== ======== ======== ======== Net income per common share: Primary............................................ $0.49 $0.08 $(0.81) Fully diluted...................................... 0.49 0.08 (0.81)
108 81 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER -------------------------------- --------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income...................... $367,447 $305,735 $673,182 $390,016 $ 330,727 $720,743 Interest expense..................... 218,374 228,270 446,644 240,585 242,493 483,078 -------- -------- -------- -------- -------- -------- Net interest income.................. 149,073 77,465 226,538 149,431 88,234 237,665 Provision for loan losses............ 2,800 18,869 21,669 2,850 15,664 18,514 Other income......................... 28,855 29,188 58,043 29,554 18,315 47,869 Other expense........................ 103,081 71,496 174,577 106,332 73,101 179,433 -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest.................. 72,047 16,288 88,335 69,803 17,784 87,587 Income taxes......................... 26,797 (6,081) 20,716 22,030 642 22,672 Minority interest in earnings of consolidated subsidiary............ -- 3,948 3,948 -- 3,948 3,948 -------- -------- -------- -------- -------- -------- Net income........................... $ 45,250 $ 18,421 $ 63,671 $ 47,773 $ 13,194 $ 60,967 ======== ======== ======== ======== ======== ======== Net income attributable to common stock.............................. $ 40,604 $ 18,421 $ 59,025 $ 43,127 $ 13,194 $ 56,321 ======== ======== ======== ======== ======== ======== Net income per common share: Primary............................ $0.60 $0.55 $0.62 $0.51 Fully diluted...................... 0.58 0.54 0.60 0.51
YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------- THIRD QUARTER FOURTH QUARTER -------------------------------- --------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income..................... $405,638 $346,343 $751,981 $415,859 $ 354,321 $770,180 Interest expense.................... 248,844 246,712 495,556 252,921 245,237 498,158 -------- -------- -------- -------- -------- -------- Net interest income................. 156,794 99,631 256,425 162,938 109,084 272,022 Provision for loan losses........... 2,800 14,557 17,357 2,700 14,747 17,447 Other income........................ 28,280 18,033 46,313 31,185 24,929 56,114 Other expense....................... 102,530 68,484 171,014 105,712 69,778 175,490 -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest................. 79,744 34,623 114,367 85,711 49,488 135,199 Income taxes........................ 28,056 5,023 33,079 30,621 12,705 43,326 Minority interest in earnings of consolidated subsidiary........... -- 3,948 3,948 -- 3,949 3,949 -------- -------- -------- -------- -------- -------- Net income.......................... $ 51,688 $ 25,652 $ 77,340 $ 55,090 $ 32,834 $ 87,924 ======== ======== ======== ======== ======== ======== Net income attributable to common stock............................. $ 47,042 $ 25,652 $ 72,694 $ 50,444 $ 32,834 $ 83,278 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................... $0.66 $0.66 $0.71 $0.75 Fully diluted..................... 0.64 0.64 0.69 0.73
NOTE 28: FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are 109 82 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value of financial instruments were as follows:
DECEMBER 31, ----------------------------------------------------- 1996 1995 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents................. $ 831,063 $ 831,063 $ 983,833 $ 983,833 Trading account securities................ 1,647 1,647 238 238 Available-for-sale securities............. 9,109,460 9,109,460 12,157,157 12,157,157 Held-to-maturity securities............... 2,860,347 2,922,552 3,197,720 3,262,850 Mortgage servicing rights................. 140,725 169,183 104,495 109,950 Loans, exclusive of reserve for loan losses................................. 30,786,473 30,932,973 24,428,115 24,788,750 ----------- ----------- ----------- ----------- 43,729,715 43,966,878 40,871,558 41,302,778 Financial liabilities: Deposits.................................. 24,080,141 24,225,124 24,462,960 24,624,673 Annuities................................. 878,057 878,057 855,503 855,503 Federal funds purchased................... 1,052,000 1,052,000 433,420 433,493 Securities sold under agreements to repurchase............................. 7,835,453 7,852,852 7,984,756 7,985,202 Advances from the FHLB.................... 7,241,492 7,256,785 4,715,739 4,732,366 Other borrowings.......................... 676,985 688,579 590,217 612,240 ----------- ----------- ----------- ----------- 41,764,128 41,953,397 39,042,595 39,243,477 Derivative instruments(1): Interest rate exchange agreements: Designated against available-for-sale securities........................... (646) (646) (11,847) (11,847) Designated against deposits and borrowings........................... -- 1,322 -- (22,615) Interest rate cap agreements: Designated against available-for-sale securities........................... 2,460 2,460 9,415 9,415 Designated against deposits and borrowings........................... 17,533 3,411 17,691 (630) ----------- ----------- ----------- ----------- 19,347 6,547 15,259 (25,677) Off-balance sheet loan commitments.......... -- (19) -- 3,595 ----------- ----------- ----------- ----------- Net financial instruments................... $ 1,984,934 $ 2,020,009 $ 1,844,222 $ 2,037,219 =========== =========== =========== ===========
- --------------- (1) See Note 17: Interest Rate Risk Management. The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of December 31, 1996 and 1995: Cash and cash equivalents -- The carrying amount represented fair value. Trading account securities -- Fair values were based on quoted market prices. 110 83 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Available-for-sale securities -- Fair values were based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Held-to-maturity securities -- Fair values were based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Loans -- Loans were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Mortgage servicing rights -- The fair value of mortgage servicing rights is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate. Deposits -- The fair value of checking accounts, savings accounts and money market accounts was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Core deposit intangibles are not included. Annuities -- The carrying amount represented fair value. Federal funds purchased -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Securities sold under agreements to repurchase -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Advances from the FHLB -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Other borrowings -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Derivative instruments -- The fair value for interest rate exchange agreements was determined using dealer quotations, when available, or the discounted cash flow method. The market prices for similar instruments were used to value interest rate cap agreements. Off-balance sheet loan commitments -- Loan commitments are commitments the Company made to borrowers at locked-in rates. The fair value of loan commitments was estimated based on current levels of interest rates versus the committed interest rates. The balance shown represents the differential between committed value and fair value. NOTE 29: FINANCIAL INFORMATION -- WMI WMI was formed August 17, 1994. The following WMI (parent company only) financial information should be read in conjunction with the other notes to the consolidated financial statements. 111 84 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF INCOME
PERIOD OF YEAR ENDED DECEMBER AUGUST 17, 1994 31, (INCEPTION) TO --------------------- DECEMBER 31, 1996 1995 1994 -------- -------- --------------- (DOLLARS IN THOUSANDS) INTEREST INCOME Available-for-sale securities........................... $ 6,777 $ 8,033 $ 1,641 Cash equivalents........................................ 5,378 471 44 -------- -------- -------- Total interest income................................. 12,155 8,504 1,685 INTEREST EXPENSE Deposits................................................ (683) -- -- Borrowings.............................................. 15,079 9,072 884 -------- -------- -------- Total interest expense................................ 14,396 9,072 884 -------- -------- -------- Net interest (expense) income...................... (2,241) (568) 801 OTHER INCOME Equity in net earnings of subsidiaries(1)............... 132,301 293,630 13,103 Other operating income.................................. 122 8 -- (Loss) on sale of other assets.......................... -- (171) -- -------- -------- -------- Total other income.................................... 132,423 293,467 13,103 OTHER EXPENSE Salaries and employee benefits.......................... 3,561 2,716 -- Occupancy and equipment................................. 11 1 -- Other operating expense................................. 18,013 3,289 228 Amortization of goodwill................................ 629 -- -- -------- -------- -------- Total other expense................................... 22,214 6,006 228 -------- -------- -------- Income before income taxes......................... 107,968 286,893 13,676 Income tax (benefit) expenses........................... (8,105) (865) 201 -------- -------- -------- Net income(1)........................................... $116,073 $287,758 $13,475 ======== ======== ========
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. 112 85 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents............................................. $ 109,356 $ 90,096 Available-for-sale securities......................................... 82,033 99,932 Loans................................................................. 92,083 147,867 Investment in subsidiaries(1)......................................... 2,344,959 2,451,956 Other assets.......................................................... 12,917 929 ---------- ---------- Total assets........................................................ $2,641,348 $2,790,780 ========== ========== LIABILITIES Securities sold under agreements to repurchase........................ $ 68,326 $ 82,481 Other borrowings...................................................... 148,007 147,845 Other liabilities..................................................... 12,230 5,647 ---------- ---------- Total liabilities................................................... 228,563 235,973 STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 6,122,500 shares issued and outstanding......................................................... -- -- Common stock, no par value: 350,000,000 shares authorized -- 126,255,891 and 119,801,466 outstanding............... -- -- Capital surplus(1).................................................... 1,061,890 1,029,549 Valuation reserve for available-for-sale securities................... 1,156 2,390 Valuation reserve for available-for-sale securities -- subsidiaries... 40,510 186,325 Retained earnings(1).................................................. 1,309,229 1,336,543 ---------- ---------- Total stockholders' equity.......................................... 2,412,785 2,554,807 ---------- ---------- Total liabilities and stockholders' equity.......................... $2,641,348 $2,790,780 ========== ==========
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. 113 86 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER PERIOD OF 31, AUGUST 17, 1994 --------------------- (INCEPTION) TO 1996 1995 DECEMBER 31, 1994 --------- --------- ----------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income(1)....................................... $ 116,073 $ 287,758 $ 13,475 Adjustments to reconcile net income to net cash (used) provided by operating activities: (Increase) decrease in interest receivable........ (69) 80 (693) Increase in interest payable...................... 530 3,167 884 (Decrease) in income taxes payable................ (8,105) (865) (1,151) Equity in undistributed earnings of subsidiaries................................... (132,301) (293,630) (13,103) (Increase) decrease in other assets............... (16,619) 9,910 39 Increase in other liabilities..................... 14,867 720 252 --------- --------- --------- Net cash (used) provided by operating activities................................... (195,624) 7,140 (297) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities.......... -- -- (111,984) Principal payments of available-for-sale securities........................................ 16,118 12,594 4,486 Principal payments of loans......................... 147,867 -- -- Origination and purchases of loans.................. (92,083) (147,867) -- Investment in subsidiary............................ (170,000) -- -- Dividends received from subsidiaries................ 280,026 136,521 -- Acquisition of wholly owned subsidiary(1)........... -- -- (82,877) --------- --------- --------- Net cash provided (used) by investing activities................................... 351,928 1,248 (190,375) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in securities sold under agreements to repurchase.......................... (14,155) (1,848) 84,329 Proceeds of other borrowings........................ -- 147,845 -- Issuance of common stock through stock options and employee stock plans.............................. 20,604 8,379 994 Repurchase of preferred stock....................... -- (1,990) -- Conversion of preferred stock to common stock....... (107) -- -- Cash dividends paid................................. (143,386) (76,581) -- Contribution from wholly owned subsidiaries(1)...... -- -- 111,252 --------- --------- --------- Net cash (used) provided by financing activities................................... (137,044) 75,805 196,575 --------- --------- --------- Increase in cash and cash equivalents.......... 19,260 84,193 5,903 Cash and cash equivalents at beginning of year......................................... 90,096 5,903 -- --------- --------- --------- Cash and cash equivalents at end of year....... $ 109,356 $ 90,096 $ 5,903 ========= ========= =========
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. 114 87 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO. ----------- --------------------------------------------------------------- ---------------- 2.1* Agreement for Reorganization between the Registrant and Washington Mutual, dated October 19, 1994. 3.1 Restated Articles of Incorporation of the Registrant, as amended (the "Articles"). 3.2 Bylaws of the Registrant (Incorporated by reference to the Washington Mutual, Inc. Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. File No. 0-25188). 4.1* Article II, Sections D(2), D(3), and D(4) of the Articles, which define the rights of holders of the Series C Preferred Stock and the Series E Preferred Stock (filed together with Exhibit 3.1 hereto). 4.2* Rights Agreement, dated October 16, 1990. 4.3* Amendment No. 1 to Rights Agreement, dated October 31, 1994. 4.4* Supplement to Rights Agreement, dated November 29, 1994. 4.5 Form of Indenture between the Registrant and Harris Trust and Savings Bank, as Trustee for the Debt Securities (Incorporated by reference to Washington Mutual, Inc. Registration Statement on Form S-3, registration no. 33-93850). 4.6 First Supplemental Indenture dated November 26, 1996 and Second Supplemental Indenture dated January 6, 1997 to the Indenture between Washington Mutual, Inc. and Harris Trust and Savings Bank, as Trustee, dated August 25, 1995, affecting the rights of the holders of the Registrant's Senior Notes. 10.1* Washington Mutual 1994 Stock Option Plan. 10.2* Amended and Restated Incentive Stock Option Plan. 10.3* Amended and Restated Washington Mutual Restricted Stock Plan (1986). 10.4* Washington Mutual Employees' Stock Purchase Program. 10.5* Washington Mutual Retirement Savings and Investment Plan. 10.6* Washington Mutual Employee Service Award Plan. 10.7 Supplemental Employee's Retirement Plan for Salaried Employees of Washington Mutual. 10.8 Washington Mutual Supplemental Executive Retirement Accumulation Plan. 10.9 Deferred Compensation Plan for Directors and Certain Highly Compensated Employees. 10.10 Deferred Compensation Plan for Certain Highly Compensated Employees. 10.11 Employment Contract of Kerry K. Killinger. 10.12 Employment Contract for Executive Officers. 10.13* Lease Agreement between Third and University Limited Partnership and Washington Mutual Savings Bank, dated September 1, 1988.
115 -----END PRIVACY-ENHANCED MESSAGE-----