-----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, ISLYa6CupS+906irP08v33gKDC81BsfopqGXm/YHXjjtKUDJwyoTErmfhajuQt3O Z8cj7z4Thci5/5jRWqx4Qg== 0000891020-98-000348.txt : 19980319 0000891020-98-000348.hdr.sgml : 19980319 ACCESSION NUMBER: 0000891020-98-000348 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 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 SEC ACT: SEC FILE NUMBER: 033-86840 FILM NUMBER: 98568570 BUSINESS ADDRESS: STREET 1: 1201 THIRD AVENUE STREET 2: SUITE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064612000 MAIL ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: SUITE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20529 FORM 10-K ------------------------ (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, 1997 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 WHICH TITLE OF EACH CLASS REGISTERED ------------------- ------------------------------ Common Stock 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, 1998: COMMON STOCK -- $15,530,272,661(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, 1998: COMMON STOCK -- 257,781,511(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 21, 1998, are incorporated by reference into Part III. ================================================================================ 2 WASHINGTON MUTUAL, INC. 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I...................................................... 1 ITEM 1. BUSINESS.......................................... 1 Overview............................................... 1 Corporate Developments................................. 2 Integration of Operations.............................. 2 Lending Activities..................................... 5 Asset Quality.......................................... 8 Investing Activities................................... 10 Sources of Funds....................................... 10 Business Combinations.................................. 12 Employees.............................................. 12 Taxation of the Company................................ 12 Environmental Regulation............................... 13 Regulation and Supervision............................. 14 Competitive Environment................................ 20 Principal Officers..................................... 21 ITEM 2. PROPERTIES........................................ 22 ITEM 3. LEGAL PROCEEDINGS................................. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 23 PART II..................................................... 23 ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS........................ 23 Common Stock........................................... 23 Preferred Stock........................................ 23 Payment of Dividends and Policy........................ 24 ITEM 6. SELECTED FINANCIAL DATA........................... 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS..................... 27 General................................................ 27 Results of Operations.................................. 28 Review of Financial Position........................... 37 Asset Quality.......................................... 43 Market Risk and Asset/Liability Management............. 50 Liquidity.............................................. 56 Capital Adequacy....................................... 57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 57 PART III.................................................... 57 PART IV..................................................... 57 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................... 57
3 PART I ITEM 1. BUSINESS OVERVIEW With a history dating back to 1889, Washington Mutual Inc. ("Washington Mutual" or the "Company") is a financial services company committed to serving consumers and small to mid-sized businesses. The Company operates principally in California, Washington, Oregon, Florida and Utah, but has operations in a total of 36 states. At December 31, 1997, the Company had consolidated assets of $96.98 billion, deposits of $50.99 billion and stockholders' equity of $5.31 billion. Through its subsidiaries, the Company engages in the following activities: Mortgage Lending and Consumer Banking Activities The Company's primary line of business is mortgage lending and consumer banking, which it conducts through its principal banking subsidiaries, Washington Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB"), and Washington Mutual Bank fsb ("WMBfsb"). At December 31, 1997, the Company operated approximately 1,100 consumer financial centers and home loan centers offering a full complement of mortgage lending and consumer banking products and services. In the first 10 months of 1997, the Company's banking subsidiaries were the leading originators of one-to-four family residential mortgage ("SFR") loans in California, Washington and Oregon. Washington Mutual Bank, FA. WMBFA's principal areas of operation are California and Florida, where at December 31, 1997, it operated 568 consumer financial centers. WMBFA also operates home loan centers in California, Florida and 21 additional states. At December 31, 1997, WMBFA had assets of $67.21 billion and deposits of $39.14 billion. Its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") primarily through the Savings Association Insurance Fund ("SAIF"). Washington Mutual Bank. At December 31, 1997, WMB had assets of $26.02 billion and deposits of $11.47 billion. WMB operates in Washington, Oregon, Utah and Idaho, and at December 31, 1997, operated 250 consumer financial centers and 28 home loan centers. Its deposits are insured by the FDIC through the Bank Insurance Fund ("BIF") and the SAIF. Washington Mutual Bank fsb. At December 31, 1997, WMBfsb had assets of $1.06 billion and deposits of $454.5 million. WMBfsb operates in Utah, Idaho and Montana and, at December 31, 1997, operated 32 consumer financial centers and 4 home loan centers. WMBfsb's deposits are insured by the FDIC through the SAIF. Consumer Finance Activities Through Aristar, Inc. and its subsidiaries ("Aristar"), the Company makes direct consumer installment loans and purchases retail installment contracts from local retail establishments through a network of approximately 500 branch offices located in 22 states, primarily in the southeastern United States. It also accepts deposits through its industrial banks in Colorado and Utah. Aristar's business is generally conducted under the names Blazer, City Finance and First Community. At December 31, 1997, Aristar had assets of $2.54 billion and deposits of $163.2 million. Commercial Banking Activities At December 31, 1997, through Western Bank, the commercial banking division of WMB, the Company operated 47 Western financial centers and 23 business banking centers offering a range of commercial banking products and services to small to mid-sized businesses. WMB commenced its commercial banking activities through the acquisitions of Enterprise Bank ("Enterprise") in 1995 and Western Bank ("Western") in 1996. 1 4 Securities Activities Broker-Dealer Activities. Through WM Financial Services, Inc. ("WM Financial"), Great Western Financial Securities Corporation ("GWFSC"), Composite Funds Distributor, Inc. ("CFDI") and Sierra Investment Services Corporation ("SISC"), the Company offers a broad range of securities brokerage services, including distribution of mutual funds. WM Financial and GWFSC make their registered representatives available for consultation regularly or by appointment in many of the Company's financial centers. Investment Advisor Activities. Composite Research & Management Co. ("Composite Research"), Sierra Investment Advisors Corporation ("SIAC") and SISC are registered investment advisors. At December 31, 1997, Composite Research was the investment advisor to eight mutual funds, and SIAC and SISC between them were the investment advisor to 36 mutual funds. At December 31, 1997, Composite Research had a total of $1.72 billion in funds under management in the eight mutual funds and SIAC and SISC had a total of $3.01 billion in funds under management in their mutual funds. CORPORATE DEVELOPMENTS On December 20, 1996, Washington Mutual consummated the merger of Keystone Holdings, Inc. ("Keystone Holdings") with and into the Company and certain other transactions (the "Keystone Transaction") and thereby acquired American Savings Bank, F.A. ("ASB"). Washington Mutual issued 47,883,333 shares of common stock to complete the Keystone Transaction. On July 1, 1997, Washington Mutual consummated the merger of Great Western Financial Corporation ("GWFC") with and into a subsidiary of the Company (the "Great Western Merger"). All of GWFC's subsidiaries, including Great Western Bank, a Federal Savings Bank ("GWB") and Aristar, became subsidiaries of the Company. The Company issued 125,649,551 shares of common stock in the Great Western Merger. On October 1, 1997, GWB was merged with and into ASB. Simultaneously, the name of ASB was changed to Washington Mutual Bank, FA. The Company has announced that it intends to operate all of its former Great Western Bank and American Savings Bank consumer financial and home loan centers under the Washington Mutual name commencing in 1998. The above mentioned transactions were accounted for as poolings of interests. See "Consolidated Financial Statements -- Note 2: Business Combinations/Restructuring." On December 31, 1997, the Company and SAFECO Corporation ("SAFECO") completed the formation of a strategic alliance to distribute SAFECO and other annuities through the Company's consumer financial center network. As part of this alliance, SAFECO acquired the Company's insurance subsidiary, WM Life Insurance Co. ("WM Life"). INTEGRATION OF OPERATIONS This section contains forward-looking statements that have been prepared on the basis of the Company's best judgments and currently available information. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, there can be no assurance that the cost savings and revenue enhancements described herein will be achieved in the amounts or within the time periods currently estimated. See "Cautionary Statements" below for a discussion of factors that may cause such forward-looking statements to differ from actual results. The integration of ASB and its subsidiaries with the Company is substantially complete. All major back office functions and data processing systems were consolidated and the deposit and loan processing systems were converted to the Company's systems by the end of the third quarter of 1997. At the beginning of 1997, the Company introduced its "Free Checking" product into the ASB system, which resulted in approximately 2 5 83,000 net new checking accounts in 1997. The Company also introduced its full line of SFR loan products and standardized loan pricing throughout the ASB lending system. The integration of GWFC and its subsidiaries with the Company is proceeding on schedule. Administration of payroll, employee benefit plans, incentive compensation systems, and accounts payable were consolidated effective January 1, 1998. The conversion of the deposit and loan processing systems is scheduled for the second quarter of 1998. During the fourth quarter of 1997, the Company's "Free Checking" product was introduced at GWB consumer financial centers in California and Florida. This introduction resulted in approximately 79,000 net new accounts during that quarter, after having net account losses of approximately 134,000 during the first nine months of the year. The Company also introduced its full line of SFR loan products and standardized loan pricing throughout the GWB lending system. Prior to the Great Western Merger, the Company estimated that 100 ASB and GWB consumer financial centers would be consolidated as a result of the Great Western Merger. Also prior to the Great Western Merger, GWFC identified five consumer financial centers for closure. In November 1997, the Company identified an additional 85 consumer financial centers for closure. A total of 90 consumer financial center closures are expected to be completed in the third quarter of 1998. The Company estimated $334 million in revenue enhancements as a result of the Great Western Merger to be realized fully in 1999 with an approximately $173 million increase during 1998. For 1999, total fee increases of $88 million were projected with the remaining $246 million resulting from an incremental increase in net interest income. Based upon the success of the introduction of the "Free Checking" product in the GWB system, and the additional experience gained from operating the combined Company for six months, management believes the estimated fee enhancements are reasonable and will be realized as anticipated. The increase in net interest income was projected to result from the leveraging of the additional capital generated by the Great Western Merger. The rate of growth during the second half of 1997 was consistent with the projections presented at the time of the Great Western Merger. However, during the fourth quarter of 1997, the yield on a 10-year U.S. government note declined approximately 36 basis points while the yield on a three-month U.S. treasury bill increased 25 basis points. This change in the interest rate environment is expected to result in an increase in loan refinancing and prepayment of existing loans as well as in fixed-rate loans being more attractive to borrowers than adjustable-rate mortgage ("ARM") loans. Because it is the Company's practice to sell most conforming fixed-rate SFR loans, the persistence of lower interest rates and a narrow spread between short and long-term interest rates for an extended period of time will result in higher fixed-rate originations, making full realization of the net interest income revenue enhancements difficult. The Company expects that this will be partially mitigated by gains from the sale of an increased amount of conforming fixed-rate SFR loans. Annual cost savings before taxes of $340 million were projected as part of the benefits of the Great Western Merger. Approximately $208 million savings were originally anticipated for 1998, with the full benefit being realized in 1999. Realization of cost savings during 1998 may be negatively affected by an estimated $60 to $80 million in one-time incremental transaction costs to merge systems and provide customer support during the conversion period. These expenses are in addition to the transaction-related expenses accrued in the third quarter of 1997 and the transaction-related period costs incurred during 1997. The Company does not currently expect there to be significant transaction costs related to the Great Western Merger in 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Expense." Cautionary Statements Increased Origination of Loans May Not Be Achieved. Washington Mutual's business plan assumes that it will be able to increase net interest income by originating and retaining a greater volume of loans than either Washington Mutual or GWB would have on a stand-alone basis. To the extent that the Company is not able to generate a sufficient volume of new loans or retain such loans in its portfolio at the levels or of the types 3 6 assumed in the business plan and forward-looking statements, the estimates of future net income contained therein may differ materially from actual results. Cost Savings May Not Be Realized. No assurance can be given that the cost savings which are anticipated through the consolidation of consumer financial centers and home loan centers of WMBFA and of administrative functions of the Company will be achieved or will occur in the time periods anticipated. In addition, when consumer financial centers are consolidated or closed, financial institutions often lose customers and deposits as a result. To the extent that the Company loses customers or deposits significantly in excess of the amount anticipated, the operations of the Company could be materially adversely affected, particularly in the short term. The forward-looking statements assume, based on Washington Mutual's historical experience following acquisitions, that the deposit base of the Company will remain substantially intact during the period presented in the forward-looking statements. To the extent that the change in ownership of GWB, the consolidation of branches of WMBFA or other factors result in a significant temporary or long-term loss of deposits, actual results of operations may vary materially from the forward-looking information presented. Consumer Banking Expansion Risks. The forward-looking statements assume an increase in fee income from the Company's consumer banking operations. The sources of these fee increases include introduction of a debit card, a new pricing policy for checking account services in California and Florida revised policies for checking account services in accordance with Washington Mutual's programs, implementation of the Company's checking programs throughout the WMBFA system and improved revenues in financial services subsidiaries. Washington Mutual has relatively limited experience with the introduction of these business initiatives in California and Florida, where the greatest expansion of consumer banking activities is expected to occur. Accordingly, there can be no assurance that the Company's emphasis on consumer banking activities will be successful in the California or Florida markets or that any increase in fee income anticipated by the forward-looking statements will be achieved. Concentration of Operations in California. At December 31, 1997, 52% of Washington Mutual's loan portfolio was concentrated in California. In addition, at December 31, 1997, approximately three quarters of the Company's deposits were on deposit at consumer financial centers in California. As a result, the financial condition and results of operations of the Company will be subject to general economic conditions, and particularly the conditions in the single-family and multi-family residential markets, in California. If economic conditions generally, or in California in particular, worsen or if the market for residential real estate declines, the Company may suffer decreased net income or losses associated with higher default rates and decreased collateral values on its existing portfolio, and may not be able to originate the volume or type of loans or achieve the level of deposits and mutual fund assets currently anticipated. The forward-looking statements regarding the Company's results of operations assume that the California economy and real estate market will remain healthy. A worsening of current economic conditions or a significant decline in real estate values in California could cause actual results to vary materially from the forward-looking statements. Interest Rate Risk. Washington Mutual realizes its income principally from the differential between the interest earned on loans, investments and other assets and the interest paid on interest-bearing liabilities. Net interest spreads are affected by the difference between the repricing characteristics of interest-earning assets and deposits and other borrowings. Market interest rates have an impact on the volume and rates on loans, investments, deposits and borrowings. Significant fluctuations in interest rates and spreads may adversely affect net income. In addition, at the end of 1997, long-term interest rates declined dramatically and the yield curve became much flatter. In this type of interest rate environment, the Company's customers tend to prefer fixed-rate loans to ARMs, and thus, the Company's ability to grow its asset size by retaining ARMs in its portfolio could be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk and Asset/Liability Management." Competition. Washington Mutual faces significant competition both in attracting and retaining deposits and in making loans in all of its markets. The most direct competition has historically come from other savings institutions, credit unions, mortgage companies, insurance companies, commercial banks, and other institu- 4 7 tional lenders doing business in the Company's market areas of California, Washington, Oregon, Florida and Utah. Competition from commercial banks has been particularly strong due to their extensive distribution systems. As with all banking organizations, however, the Company has experienced increasing competition from nonbanking sources, including mutual funds, securities brokerage companies and government-sponsored enterprises ("GSEs") such as the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), and the Government National Mortgage Association ("GNMA"). Some of these competitors have significantly greater financial resources, larger market share and greater name recognition than the Company. There can be no assurance that competition from such sources will not increase in the future and adversely affect the Company's ability to achieve its financial goals. In addition, the Company's lending activities are heavily influenced by competitive factors such as the lower cost structure of less regulated originators and the influence of GSEs in establishing rates. LENDING ACTIVITIES General The Company's principal lending activities are carried on through its banking subsidiaries, WMBFA, WMB and WMBfsb, and through Aristar. At December 31, 1997, the Company's total loan portfolio of $67.81 billion (exclusive of reserve for loan losses) included $53.43 billion of SFR loans; $877.4 million of SFR construction loans; $6.61 billion of mortgage loans secured by commercial real estate such as apartment buildings, office buildings, warehouses and shopping centers; $1.08 billion of loans secured by manufactured housing; $2.73 billion of consumer loans; $2.31 billion of consumer finance loans; and $772.5 million of commercial business loans. For a discussion of the fair value of the loan portfolio, see "Consolidated Financial Statements -- Note 28: Fair Value of Financial Instruments." Washington state law gives state-chartered savings banks such as WMB broad lending powers, subject to certain statutory restrictions on total investment in different types of loans. WMB may make loans secured by residential and commercial real estate, secured and unsecured consumer loans, and secured and unsecured commercial loans. WMBFA and WMBfsb, as federally chartered institutions, have somewhat narrower lending authority but can make loans secured by residential and commercial real estate, certain secured and unsecured consumer loans, and a limited amount of secured and unsecured commercial loans. SFR and SFR Construction Loans General. The bulk of the Company's residential loan portfolio is in California, Washington, Oregon, Florida and Utah. All of the Company's residential mortgage lending is subject to nondiscriminatory underwriting standards. All loans are subject to underwriting review and approval by various levels of Company personnel, depending on the size and characteristics of the loan. The Company requires title insurance on all first liens on real property securing loans and also requires that fire and casualty insurance be maintained on properties in an amount at least equal to the total of the Company's loan amount plus all prior liens on the property or the replacement cost of the property, whichever is less. Under federal regulations, a real estate loan made by a depository institution may not exceed 100% of the appraised value of the property at the time of origination. In addition, depository institutions are required by regulation to adopt written policies that establish appropriate limits and standards for real estate loans and to consider certain regulatory guidelines in establishing these policies. These guidelines specify that depository institutions should not originate any commercial, multi-family or nonowner-occupied SFR loan (including builder construction loans) with an initial loan-to-value ratio in excess of 85%. The guidelines further provide that depository institutions should not originate any owner-occupied SFR loan with a loan-to-value ratio of 90% or above at origination, unless such loan is protected by an appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral. These real estate lending guidelines recognize that it may be appropriate for a depository institution to originate mortgage loans with loan-to-value ratios exceeding these specified levels, provided that the aggregate amount of all loans in excess of these limits does not exceed a specified level of such depository institution's total capital and such loans are identified in the 5 8 depository institution's records and reported at least quarterly to its board of directors. At December 31, 1997, 3% of the Company's SFR loan portfolio had loan-to-value ratios of 90% or above at origination and were without mortgage insurance. SFR Lending. In the first 10 months of 1997, the Company's banking subsidiaries were the leading originators of SFR loans in California, Washington and Oregon. The Company makes available to borrowers a full range of SFR loans, including FHA-insured and VA-guaranteed loans, conventional fixed-rate loans with a variety of maturities and amortization schedules, and ARMs. ARMs are advantageous to the Company because adjustable-rate loans better match the Company's natural liability base. In recent years, and particularly in the California market, the Company has emphasized the origination of ARMs. The primary ARM products presently being offered are either indexed to the Cost of Funds Index of the Eleventh District Federal Home Loan Bank (San Francisco) ("COFI") or to the one-year Moving Treasury Average ("MTA"). During 1997, 69% of loan originations were ARMs and 31% had a fixed rate. Under the Company's current ARM programs, the borrower may choose among loans that have the initial interest rate fixed for one, three or five years before the adjustments begin. Currently, such ARMs have annual payment adjustments caps of 7.5% per year. Under most options, the borrower may elect, between the sixth and the sixtieth months, to convert to a fixed-rate loan payable over the remainder of the original term. There is no conversion fee, and the fixed interest rate is indexed to the then-current required net yield for loans sold to FNMA. The Company originates loans through its consumer financial centers in Washington, Oregon, Utah, Idaho and Montana, and through home loan centers throughout its franchise. The Company intends to introduce loan originations through its consumer financial centers in California and Florida in 1998. The Company also originates nearly half of its loans through loan brokers. To monitor credit quality, the Company conducts extensive due diligence and reviews the stability and credit experience of each broker prior to accepting any loan packages. Loan production from the wholesale channel is subjected to the same underwriting standards as loan production from the home loan centers. The Company originates loans for its portfolio that meet secondary market standards established by GSEs ("conforming" loans) as well as those that meet the Company's underwriting standards but do not conform to the requirements of the GSEs for sale in the secondary market ("nonconforming" loans). Nonconforming loans comprised approximately half of 1997's total residential originations. These loans may be nonconforming because they exceed the maximum amount allowed by the secondary market ("jumbo loans"), because the loan documentation lacks some information relating to the borrower's credit or employment history unrelated to the value of the collateral, or because the borrower's credit history does not meet secondary market standards. All nonconforming loans are fully supported by appraisals and title insurance. In addition, the loan-to-value requirements are generally lower for nonconforming loans than for conforming loans and decrease as the amount of the loan increases. The delinquency experience on the Company's nonconforming loan portfolio as a whole has not been significantly higher than on conforming loans. SFR Construction Loans. The Company provides financing for two different categories of SFR construction loans. A custom construction loan is made to the intended occupant of a house to finance its construction and typically is combined with the permanent financing of the constructed home. Builder construction loans are made to borrowers who are in the business of building homes for resale. Builder construction loans are made either on a house-by-house basis or, in certain circumstances, through a collateralized, limited line of credit. Builder construction lending involves somewhat more risk than custom construction loans and involves different underwriting considerations. All SFR construction loans require approval by various levels of Company personnel, depending on the size and characteristics of the loan. SFR construction loans for nonconforming residential properties (properties other than single-family detached houses) are subject to more stringent approval requirements than loans for conforming properties. SFR construction loans are an integral part of the Company's overall lending program. Builder construction loans are of short duration, generally 12 to 18 months and are generally priced at a higher rate than are permanent residential loans. In addition, SFR construction loans provide a source of SFR loans. 6 9 Custom Construction loans may be of short duration, generally 9 to 12 months, or maybe 15 to 30 years if combined with permanent financing. At December 31, 1997, 61% of the SFR construction portfolio was custom construction loans and 39% was builder construction loans. Originations of SFR construction loans for 1997 totaled $1.45 billion, an increase of 12% from $1.29 billion in 1996. Substantially all of the 1997 SFR construction loan originations were made in Washington, Oregon and Utah. Commercial Real Estate Loans Commercial real estate lending generally entails greater risks than residential mortgage lending. Commercial real estate loans typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties usually depends on the successful operation of the related real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy, particularly the interest rate environment. Commercial real estate values tend to be cyclical and, while commercial real estate values have trended upward in many areas of the country in 1997, management carefully monitors the commercial real estate environment to determine the level of the Company's activity in this area. In all commercial real estate lending, the Company considers the location, marketability and overall attractiveness of the project. Washington Mutual's current underwriting guidelines for commercial real estate loans require an economic analysis of each property with regard to the annual revenue and expenses, debt service coverage and fair value to determine the maximum loan amount. Commercial real estate loans require approval at various levels of Company personnel, depending on the size and characteristics of the loan. Historically, the Company focused its commercial real estate lending on small to mid-sized apartment lending (loans of $2.5 million or less). During 1996 and 1997, the Company began to broaden its lending scope by originating $295.4 million and $495.0 million of nonresidential real estate loans, compared to $549.0 million and $691.6 million of apartment loans. This change in emphasis was occasioned in part by the acquisitions of Enterprise and Western and the development of the Company's commercial banking operations. Both the Enterprise and Western commercial real estate portfolios are predominantly nonresidential commercial real estate. As the amount of commercial real estate lending increases, the risk characteristics of the Company's commercial loan portfolio will generally increase. Loan Securitization The Company from time to time, depending on its asset and liability management strategy, converts a portion of its SFR loans into either FHLMC participation certificates, GNMA mortgage-backed securities or FNMA mortgage-backed securities (collectively, "MBS"). This securitization of its loans provides the Company with increased liquidity both because the MBS are more readily marketable than the underlying loans and because they can be used as collateral for borrowing. The Company generally securitizes a substantial portion of its fixed-rate SFR loan production in order to sell the MBS in the secondary market. These fixed-rate loans are generally securitized and sold without recourse and become obligations of the applicable GSE. Generally, the servicing of the loans is retained by the Company with the servicing fee income fixed by the relevant GSE. In 1995, 1996 and 1997, the Company securitized loans with FHLMC and FNMA under programs in which the GSE has recourse against the originator of the loans ("Recourse MBS"). These securitizations primarily involve ARMs and are generally less costly and may require less documentation than securitizations without recourse. These Recourse MBS are generally saleable in the secondary market and can be used as collateral for borrowings and to meet regulatory liquidity requirements. The Company has retained the majority of Recourse MBS. The Company has also sold Recourse MBS and has established a contingent liability to cover the estimated recourse obligation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality." 7 10 When MBS composed of loans originated by the Company's banking subsidiaries are owned by such banking subsidiaries, they are serviced in the same manner as any other loan in the loan portfolio. In addition, when loans sold with recourse become nonperforming, the loans are included in the Company's total nonaccrual assets. Manufactured Housing, Second Mortgage and Other Consumer Loans WMB and WMBfsb offer consumer loans programs in Washington, Oregon, Utah, Idaho and Montana that include (i) manufactured housing loans, (ii) second mortgage loans for a variety of purposes, including purchase, renovation, or remodeling of property, and for uses unrelated to the security, (iii) loans for the purchase of automobiles, pleasure boats and recreational vehicles, (iv) student loans, and (v) loans for general purposes, including secured and unsecured loans made under Washington Mutual's line of credit programs. Consumer loans, in addition to being an important part of the Company's orientation toward consumer financial services, provide greater net interest income due to their generally higher yields. The size of the consumer loan portfolio has grown in recent years. Management has begun to introduce these products into WMBFA's service area. Lending in this area may involve special risks, including decreases in the value of collateral and transaction costs associated with foreclosure and repossession. Consumer loans generally are secured loans and are made based on an evaluation of the collateral and the borrower's creditworthiness, including such factors as income, other indebtedness and credit history. Lines of credit are subject to periodic review, revision and, when deemed appropriate by the Company, cancellation as a result of changes in the borrower's financial circumstances. Consumer Finance Loans Aristar makes direct consumer installment loans and purchases retail installment contracts from local retail establishments. These consumer credit transactions are primarily for personal, family or household purposes. Installment loans typically have original terms ranging from 12 to 360 months, and for 1997 originations had an average original term of 72 months. In the year ended December 31, 1997, 61% of the originations of all installment loans were unsecured or secured by luxury goods, automobiles or other personal property, with the remaining 39% secured by real estate. Retail installment contracts are generally acquired without recourse to the originating merchant. These contracts are typically written with original terms of from three to 60 months and for 1997 had an average original term of 27 months. Aristar's operations are currently located in 22 states, primarily in the southeastern United States. The Company anticipates that Aristar will significantly increase its lending volume in Texas as a result of changes in Texas law which permit non-purchase money home equity lending for the first time, commencing January 1, 1998. These changes allow borrowers to obtain loans for a variety of purposes, such as renovation and remodeling of property, as well as, for the first time, for uses unrelated to the security. Commercial Business Loans The Company, primarily through the Western Bank division of WMB, offers a full range of commercial banking products and services. The Company's commercial business loans are mainly loans to individuals and to small to mid-sized businesses, and they are secured by a variety of business and personal assets or, in some cases, are unsecured. In 1997, the Company originated $669.6 million of commercial business loans, and the commercial business loan portfolio totaled $772.5 million at December 31, 1997. ASSET QUALITY General Washington Mutual's comprehensive process for identifying impaired assets, classifying assets and asset review is performed on a quarterly basis. The objective of the review process is to identify any trends and determine the levels of loss exposure to evaluate the need for an adjustment to the reserve accounts. Reserves 8 11 are maintained for assets classified as substandard or doubtful. Any portion of an asset classified as loss is immediately written off or specifically reserved. The principal measures of asset problems are the levels of nonaccrual loans and foreclosed assets, the levels of impaired loans, the amount of the provision for loan losses, the amount of loan charge offs, and writedowns in the value of foreclosed assets. In 1997, the Company changed its accounting policy with respect to reserving for losses on loans securitized and retained. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Asset Quality." Management ceases to accrue interest income on any loan that is four payments or more delinquent (generally beyond 90 days) and reserves all interest accrued up to that time. In addition, when circumstances indicate concern as to the future collectibility of the principal of a commercial real estate or commercial business loan, management stops accruing interest on the loan, whether or not it has reached the four payment delinquency point. 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 on which interest is not being accrued are referred to as loans on nonaccrual status. Foreclosed Assets Real estate or personal property that served as security for a defaulted loan and becomes a foreclosed asset is recorded on the Company's books at the lower of the outstanding loan balance (net of any reserves charged off) or fair value, the determination of which takes into account the effect of sales and financing concessions that may be required to market the property. If management's estimate of fair value at the time a property is foreclosed is less than the loan balance, the loan is written down at that time by a charge to the reserve for loan losses. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Asset Quality." Provision for Loan Losses and Reserve for Loan Losses Loan loss reserves are based upon management's continuing analysis of pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, historical loan loss experience, industry-wide loss experience, current and anticipated economic conditions and detailed analysis of individual loans and credits for which full collectibility may not be assured, as well as management's policies, practices and intentions with respect to credit administration and asset management. As part of the process of determining the adequacy of the reserve for loan losses, management reviews the Company's loan portfolio for specific weaknesses. Commercial real estate, commercial business and builder construction loans are evaluated individually for impairment. This detailed analysis includes estimating the fair value of loan collateral and assessing the potential existence of alternative sources of repayment. When available information confirms that specific loans or portions thereof are uncollectible, those 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 or impairment has 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. Unallocated reserves are established for loss exposure that may exist in the remainder of the loan portfolio that has not yet been identified. In determining the adequacy of unallocated reserves, management considers changes in the size and composition of the loan portfolio, actual historical loan loss experience, current and anticipated economic conditions, and the Company's credit administration and asset management philosophies and procedures. It is possible that the provision for loan losses may, in the future, change as a percentage of total loans. 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. See "Management's Discussion and Analysis of 9 12 Financial Position and Results of Operations -- Asset Quality -- Provision for Loan Losses and Reserve for Loan Losses." INVESTING ACTIVITIES Washington Mutual has authority under Washington state law to make any investment, but Washington Mutual's banking subsidiaries are subject to investment restrictions imposed by state and federal law. Under Washington state law, WMB has authority, subject to a numerical limit, to make any investment deemed prudent by its board of directors, and may invest in commercial paper, corporate bonds, mutual fund shares, debt and equity securities issued by creditworthy entities and interests in real estate located inside or outside of Washington state. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), however, prohibits a state bank (such as WMB) from making or retaining equity investments that are not permissible for a national bank, subject to certain exceptions. WMBFA and WMBfsb have authority to make investments specified by the Home Owners' Loan Act ("HOLA") and applicable regulations, including the purchase of governmental obligations, investment-grade commercial paper, and investment-grade corporate debt securities. Despite these broad investment powers, at December 31, 1997, MBS accounted for $22.87 billion or 95% of the Company's total investment portfolio. Of MBS, at December 31, 1997, 91% were GSE MBS. The remainder, $2.09 billion, were private-issue MBS and collateralized mortgage obligations ("CMOs"). See "Consolidated Financial Statements -- Note 4: Securities." Historically, the yield on private-issue MBS, CMOs, and purchased loan pools has exceeded the yield on GSE MBS because they expose the Company to certain risks that are not inherent in GSE MBS, such as credit risk and liquidity risk. These assets are not guaranteed by the U.S. government or one of its agencies because the loan size, underwriting or underlying collateral of these assets often does not meet set industry standards. Consequently, there is a higher potential of loss of the principal investment. Additionally, the Company may not be able to sell such assets 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 loans with principal balances in amounts larger than can be sold as GSE MBS. The Company has instituted a policy of performing credit reviews on each individual security or loan pool 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. SOURCES OF FUNDS Deposits The Company offers money market deposit accounts ("MMDAs") and checking accounts as well as the more traditional savings accounts and time deposit accounts. The MMDAs generally require higher minimum balances and offer higher yields than savings accounts. The Company offers checking accounts that both bear interest and are noninterest bearing. The interest-bearing checking accounts are subject to monthly service charges, unless a minimum balance is maintained. The vast majority of the noninterest-bearing checking accounts have no monthly fees. At December 31, 1997, the Company had $50.99 billion in deposits, of which $28.13 billion were time deposit accounts, $14.94 billion were MMDAs and savings accounts; and $7.91 billion were checking accounts. Although 55% of deposits at the end of 1997 were time deposit accounts, $23.41 billion or 83% of total time deposit accounts had remaining maturities of one year or less. 10 13 At December 31, 1997, $3.53 billion of the Company's total deposits did not bear interest. Since 1995, WMB and WMBfsb have been actively promoting a "Free Checking" account, and the Company introduced this product into its California and Florida operations during 1997. This account has helped to reduce the overall cost of funds by increasing the percentage of deposits that are noninterest bearing. The Company expects to continue to actively promote its "Free Checking" account throughout its markets. The Company has also actively promoted MMDAs because, while a somewhat volatile source of deposits, they have the advantage of being variable-rate liabilities. At December 31, 1997, the Company had an aggregate of $11.67 billion in MMDAs and only $3.27 billion in regular savings accounts. Wholesale deposits, primarily time deposit accounts, are offered to political subdivisions and public agencies. The Company considers wholesale deposits to be a borrowing source rather than a customer relationship. Borrowings Because deposits have declined in recent years, the Company has increasingly relied on wholesale borrowings to fund its asset growth. Borrowings include securities sold under agreements to repurchase ("reverse repurchase agreements"), the purchase of federal funds, the issuance of mortgage-backed bonds or notes, capital notes and other types of debt securities, the issuance of commercial paper and funds obtained as advances from the Federal Home Loan Bank ("FHLB") of Seattle and the FHLB of San Francisco. The Company also has access to the Federal Reserve Bank's discount window. Under Washington state law, WMB may borrow up to 30% of total assets, but reverse repurchase agreements are not deemed borrowings under such law, and borrowings from federal, state or municipal governments, agencies or instrumentalities, including the FHLBs, also are not subject to the 30% limit. The Company actively engages in reverse repurchase agreements with authorized broker-dealers and major customers, selling U.S. government and corporate debt securities and MBS under agreements to repurchase them or similar securities at a future date. At December 31, 1997, the Company had $12.28 billion of such borrowings. WMB and WMBfsb are members of the FHLB of Seattle and WMBFA is a member of the FHLB of San Francisco. As members, each company maintains a credit line that is a percentage of its total regulatory assets, subject to collateralization requirements. At year-end 1997, WMBFA, WMB and WMBfsb had credit lines ranging from 40% to 45% of total assets. At December 31, 1997, advances under these credit lines totaled $20.30 billion and were secured by mortgage loans and deeds of trust and securities of the U.S. government and agencies thereof. Federal law requires that a member of an FHLB pay in to the FHLB, in exchange for stock of the FHLB, an amount equal to at least 5% of the aggregate outstanding advances made by the FHLB to the member. At December 31, 1997, the Company held stock in FHLBs with an aggregate value of $1.06 billion. In addition to the borrowings discussed above, at December 31, 1997, the Company was in a position to obtain approximately $21 billion in additional borrowings, primarily through the use of collateralized borrowings and deposits of public funds using unpledged mortgage-backed securities and other wholesale borrowing sources. See "Management's Discussion and Analysis of Financial Position and Results of Operation -- Liquidity." 11 14 BUSINESS COMBINATIONS Most of the Company's growth since 1988 has occurred as a result of banking business combinations. The following table summarizes Washington Mutual's business combinations since April 1988:
NUMBER OF ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS LOCATIONS ---------------- -------------- --------- --------- --------- --------- (DOLLARS IN MILLIONS) Columbia Federal Savings Bank and Shoreline Savings Bank............. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26 Old Stone Bank(1).................... June 1, 1990 229.5 292.6 294.0 7 Frontier Federal Savings Association(2)..................... June 30, 1990 -- 95.6 -- 6 Williamsburg Federal Savings Bank(2)............................ Sept. 14, 1990 -- 44.3 -- 3 Vancouver Federal Savings Bank....... July 31, 1991 200.1 253.4 260.7 7 CrossLand Savings, FSB(2)............ Nov. 8, 1991 -- 185.4 -- 15 Sound Savings and Loan Association... Jan. 1, 1992 16.8 20.5 23.51 World Savings and Loan Association(2)..................... March 6, 1992 -- 37.8 -- 2 Great Northwest Bank................. April 1, 1992 603.2 586.4 710.4 17 Pioneer Savings Bank................. March 1, 1993 624.5 659.5 926.5 17 Pacific First Bank, A Federal Savings Bank............................... April 9, 1993 3,770.7 3,831.7 5,861.3 129 Far West Federal Savings Bank(2)..... April 15, 1994 -- 42.2 -- 3 Summit Savings Bank.................. Nov. 14, 1994 127.5 169.3 188.1 4 Olympus Bank, a Federal Savings Bank............................... April 28, 1995 237.8 278.6 391.4 11 Enterprise Bank...................... Aug. 31, 1995 92.8 138.5 153.8 1 Western Bank......................... Jan. 31, 1996 500.8 696.4 776.3 42 Utah Federal Savings Bank............ Nov. 30, 1996 88.9 106.7 122.1 5 American Savings Bank, F.A........... Dec. 20, 1996 14,562.9 12,815.4 21,893.5 224 United Western Financial Group....... Jan. 15, 1997 272.7 299.9 404.1 16 Great Western Financial Corporation........................ July 1, 1997 32,448.3 27,785.1 43,769.8 1,138
- --------------- (1) This was an acquisition of selected assets and liabilities. (2) The acquisition was of branches and deposits only. The only assets acquired were branch facilities or loans collateralized by acquired savings deposits. See "Consolidated Financial Statements -- Note 2: Business Combinations/Restructuring" for a discussion of accounting treatment for certain of the acquisitions. EMPLOYEES The number of full-time equivalent employees at the Company decreased from 19,906 at December 31, 1996 to 19,880 at December 31, 1997. The Company believes that it has been successful in attracting quality employees and believes its employee relations are good. TAXATION OF THE COMPANY General For federal income tax purposes, the Company reports its income and expenses using the accrual method of tax accounting and uses the calendar year as its tax year. Except for the interest expense rules pertaining to certain tax exempt income applicable to banks and the recently repealed bad debt reserve deduction, the Company is subject to federal income tax, under existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in generally the same manner as other corporations. 12 15 Tax Bad Debt Reserve Recapture The Small Business Job Protection Act of 1996 (the "Job Protection Act") requires that qualified thrift institutions, such as WMBFA, WMB 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 an additional approximately $4.2 million (based upon current federal income tax rates) in 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. State Income Taxation The state of Washington does not currently have a corporate income tax. Washington imposes on businesses a business and occupation tax based on a percentage of gross receipts. Currently, interest received on loans secured by first mortgages or deeds of trust on residential properties is not subject to such tax. However, it is possible that legislation will be introduced that would repeal or limit this exemption. The states of California, Oregon, Florida, Utah, Idaho and Montana, as well as many of the other states in which the Company does business, have corporate income taxes, which are imposed on companies doing business in those states. The Company's operations in California, Oregon and Florida result in substantial corporate income tax expenses in such states. As the Company's operations in the remaining states increase, the corporate income taxes will have an increasing effect on the Company's results of operations or financial condition. Assistance Agreement As a result of the Keystone Transaction, the Company and certain of its affiliates are parties to an agreement (the "Assistance Agreement") with a predecessor of the Federal Savings & Loan Insurance Corporation ("FSLIC") Resolution Fund (the "FRF"), which is designed, in part, to provide that over time 75% of most of the federal 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 Federal Savings and Loan Association ("New West") are paid ultimately to the FRF. The provision for such payments is reflected in the financial statements as "Provision for payments in lieu of taxes." See "Management's Discussion and Analysis of Financial Position and Results of Operations -- General -- The Keystone Transaction" and "Consolidated Financial Statements -- Note 19: Payments in Lieu of Taxes." ENVIRONMENTAL REGULATION The Company's business and properties are subject to federal and state laws and regulations governing environmental matters, including the regulation of hazardous substances and wastes. For example, under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state laws, owners and operators of contaminated properties may be liable for the costs of cleaning up hazardous substances without regard to whether such persons actually caused the contamination. Such laws may affect the Company both as an owner of properties used in or held for its business, and as a secured lender of property that is found to contain hazardous substances or wastes. Further, although CERCLA exempts holders of security interests, the exemption may not be available if a secured party engages in the management of its borrower or the collateral property in a manner deemed beyond the protection of the secured party's interest. Recent federal and state legislation, as well as guidance issued by the United States Environmental Protection Agency and a number of court decisions, have provided assurance to lenders regarding the activities they may undertake and remain within CERCLA's secured party exemption. However, these assurances are not absolute and generally will not protect a lender or fiduciary that 13 16 participates or otherwise involves itself in the management of its borrower, particularly in foreclosure proceedings. As a result, CERCLA and similar state statutes may affect the Company's decision whether to foreclose on property that is found to be contaminated. It is the Company's general policy to obtain an environmental assessment prior to foreclosure of commercial property. The existence of hazardous substances or wastes on such property may cause the Company to elect not to foreclose on the property, thereby limiting, and in some instances precluding, the Company from realizing on such loans. REGULATION AND SUPERVISION General. Washington Mutual, in its capacity as a savings and loan holding company, is subject to regulation by the Office of Thrift Supervision ("OTS"). WMB is subject to regulation and supervision by the Director of the Department of Financial Institutions of the State of Washington ("State Director"). Its deposit accounts are insured by the FDIC through both the BIF and SAIF. The FDIC undertakes examination and regulation of WMB and other state-chartered banks that are not members of the Federal Reserve system ("FDIC-regulated banks"). Federal and state laws and regulations govern, among other things, investment powers, deposit activities, borrowings, maintenance of guaranty funds and retained earnings. WMBFA and WMBfsb are subject to extensive regulation and examination by the OTS, which is their primary federal regulator. Their deposit accounts are insured through the SAIF by the FDIC, which also has some authority to regulate WMBFA and WMBfsb. The Company owns two industrial banks, First Community Industrial Bank ("FCIB") in Denver, Colorado and Great Western Thrift & Loan ("GWTL") in Salt Lake City, Utah. FCIB and GWTL (collectively, the "Industrial Banks") are state chartered institutions which are regulated by state authorities in addition to being regulated by the FDIC. State laws specify the investments which these institutions may make and the activities in which they may engage. The Company's consumer finance subsidiaries are governed by state and federal laws. Federal laws relate primarily to fair credit practice matters. State laws establish applicable licensing requirements, provide for periodic examinations and establish maximum finance charges on credit extensions. The description of statutory provisions and regulations applicable to depository institutions, insurance companies, securities companies and their holding companies set forth in this annual report does not purport to be a complete description of the statutes and regulations mentioned herein, nor of all such statutes and regulations. Holding Company Regulation. The Company is a multiple savings and loan holding company, as defined by federal law, because it owns three savings associations -- WMB, WMBFA and WMBfsb. WMB has elected to be treated as a savings association for purposes of the federal savings and loan holding company law. WMI is treated as a unitary savings and loan holding company and is not subject to certain federal statutory restrictions on activities and investments (the "MHC Restrictions") as are some multiple savings and loan holding companies, because WMBFA and WMBfsb are deemed to have been acquired in supervisory transactions. The Company will become subject to the MHC Restrictions, however, if any one of WMB, WMBFA or WMBfsb fails to be a qualified thrift lender ("QTL"), meaning generally that either (i) at least 65% of a specified asset base must consist of loans to small businesses, including credit card loans, educational loans or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or (ii) at least 60% of total assets must consist of cash, United States government or government agency debt or equity securities, fixed assets, or loans secured by deposits, by real property used for residential, educational, church, welfare or health purposes, or by real property in certain urban renewal areas. Failure to remain a QTL also would impose conditions on WMB's ability to obtain advances from the FHLB, and would restrict the ability of WMBFA and WMBfsb, among other things, to branch, to pay dividends and to obtain such advances. Each of WMB, WMBFA and WMBfsb are currently in compliance with QTL standards. HOLA and OTS regulations require the Company, as a savings and loan holding company, to file periodic reports with the OTS. In addition, it must observe such recordkeeping requirements as the OTS may prescribe and is subject to holding company examination by the OTS. The OTS may take enforcement action 14 17 if the activities of a savings and loan holding company constitute a serious risk to the financial safety, soundness or stability of a subsidiary savings association. WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository institutions, are subject to both qualitative and quantitative limitations on the transactions they conduct with the Company and its other subsidiaries. The FDIC has authority to require FDIC-insured banks and savings associations to reimburse the FDIC for losses incurred by the FDIC in connection with the default of a commonly controlled depository institution or with the FDIC's provision of assistance to such an institution. Institutions are commonly controlled if they are controlled by the same holding company or if one depository institution controls another depository institution (as the Company controls WMB, WMBFA, WMBfsb and the Industrial Banks). State Regulation and Supervision. Savings banks in Washington, such as WMB, are empowered by state statute to take deposits and pay interest thereon and, subject to various conditions and limitations, to make loans on or invest in residential and other real estate, to make consumer loans, to make commercial loans, to invest in corporate obligations, government debt securities, and other securities, and to offer various trust and banking services to their customers. Under state law, savings banks in Washington also generally have all of the powers that federal mutual savings banks have under federal laws and regulations. FDIC Insurance. Deposits in the Company's banking subsidiaries are separately insured by the FDIC to the applicable maximum limits in each institution. The FDIC administers two separate deposit insurance funds. The BIF is a deposit insurance fund for commercial banks and some state-chartered savings banks, including WMB and the Industrial Banks. A portion of WMB's deposits are also insured through SAIF. The SAIF is a deposit insurance fund for most savings associations, such as WMBFA and WMBfsb. A small portion of WMBFA's deposits are insured through the BIF. At December 31, 1997, approximately 90% of the combined deposits of the Company were insured through SAIF. The FDIC has developed a deposit insurance system under which the assessment rate for an insured depository institution varies according to the level of risk it poses to the BIF or SAIF. This system bases an institution's risk category partly upon whether the institution is well capitalized, adequately capitalized, or less than adequately capitalized. See "Regulation and Supervision -- Capital Requirements." Each insured depository institution is also assigned to one of three supervisory subgroups based on reviews by the institution's primary federal or state regulator, statistical analyses of financial statements, and other information relevant to gauging the risk posed by the institution. Based on its capital and supervisory subgroups, each institution is assigned an annual FDIC assessment rate. WMB and the Industrial Banks qualify for the lowest rate on its BIF deposits, and WMB, WMBFA and WMBfsb qualify for the lowest rate on their SAIF deposits. Regardless of the potential risk to the insurance fund, Federal law requires the FDIC to establish assessment rates that will maintain each insurance fund's ratio of reserves to insured deposits at $1.25 per $100. The BIF reached the $1.25 per $100 of insured deposits reserve ratio and, effective January 1996, BIF premiums declined. On September 30, 1996, President Clinton signed legislation intended, among other things, to recapitalize the SAIF and to reduce SAIF 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. This assessment brought the SAIF's reserve ratio to the legally required $1.25 per $100 of insured deposits level. Washington Mutual's special assessment resulted in a charge of $312.6 million. Even though the one-time charge reduced the Company's 1996 earnings by $200.0 million, management believes the legislation is in the best interests of the Company due to the reduction in SAIF assessment rates. WMB, WMBFA, WMBfsb and the Industrial Banks currently pay no assessment for deposit insurance. However, under the legislation recapitalizing the SAIF, the FDIC is authorized to collect assessments against insured deposits to be paid to the Finance Corporation ("FICO") to service FICO debt incurred in the 1980s. The current FICO assessment rate for BIF-insured deposits is 1.256 cents per $100 of deposits per year and 6.28 cents per $100 of deposits per year for SAIF-insured deposits. Capital Requirements. The Company is not subject to any regulatory capital requirements. However, each of its subsidiary depository and insurance institutions is subject to various capital requirements. WMB and the Industrial Banks are each subject to FDIC capital requirements, while WMBFA and WMBfsb are subject to OTS capital requirements. 15 18 WMB and the Industrial Banks. FDIC regulations recognize two types or tiers of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital generally includes common stockholders' equity and noncumulative perpetual preferred stock items less most intangible assets. Tier 2 capital, which is limited to 100% of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50% of Tier 1 capital. The FDIC currently measures an institution's capital using a leverage limit together with certain risk-based ratios. The FDIC's minimum leverage capital requirement specifies a minimum ratio of Tier 1 capital to total assets. Most banks are required to maintain a minimum leverage ratio of at least 4.00% to 5.00%. The FDIC retains the right to require a particular institution to maintain a higher capital level based on an institution's particular risk profile. WMB has calculated its leverage ratio to be 5.86% as of December 31, 1997. FCIB and GWTL have calculated their respective leverage ratios to be 22.35% and 11.84% as of December 31, 1997. FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight -- 0%, 20%, 50% or 100% -- based on the relative risk of that category. For example, U.S. Treasury Bills and GNMA securities are placed in the 0% risk category, FNMA and FHLMC securities are placed in the 20% risk category, loans secured by SFR properties and certain private-issue MBS are generally placed in the 50% risk category, and commercial real estate and consumer loans are generally placed in the 100% risk category. In addition, certain off-balance sheet items are converted to balance sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier I capital to risk-weighted assets must be at least 4.00%. WMB has calculated its total risk-based ratio to be 10.93% and its Tier 1 risk-based capital ratio to be 10.13% as of December 31, 1997. FCIB and GWTL have calculated their total risk-based ratios to be 29.53% and 16.03%, and their Tier 1 risk-based capital ratios to be 28.26% and 14.77% as of December 31, 1997. In evaluating the adequacy of a bank's capital, the FDIC may also consider other factors that may affect a bank's financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management's ability to monitor and control financial operating risks. WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and WMBfsb, to meet each of three separate capital adequacy standards: a core capital leverage requirement, a tangible capital requirement and a risk-based capital requirement. OTS regulations require savings associations to maintain core capital (which may include, for a limited time, certain amounts of qualifying supervisory goodwill) of at least 3.00% of assets and tangible capital (excluding all goodwill) of at least 1.50% of assets. As of December 31, 1997, WMBFA's core capital and tangible capital ratios were 5.78% each, and WMBfsb's core capital and tangible capital ratios were 6.66% each. Most savings institutions are required to maintain a minimum leverage ratio of at least 4.00%. OTS regulations incorporate a risk-based capital requirement that is designed to be no less stringent than the capital standard applicable to national banks and is modeled in many respects on, but not identical to, the risk-based capital requirements adopted by the FDIC. These regulations require a core risk-based capital ratio of at least 4.00% and a total risk-based capital ratio of at least 8.00%. As of December 31, 1997, WMBFA had core risk-based and total risk-based capital ratios of 9.54% and 11.11%, while WMBfsb had ratios of 10.84% and 11.95%. FDICIA Requirements. FDICIA created a statutory framework that increased the importance of meeting applicable capital requirements. FDICIA establishes 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 16 19 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 control and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by WMB, WMBFA, WMBfsb or the Industrial Banks to comply with applicable capital requirements would, if unremedied, result in restrictions on their activities and lead to enforcement actions against WMB or the Industrial Banks by the FDIC or against WMBFA 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. 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 WMBFA 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 WMBFA 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 evaluate the 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. Legal Restrictions on Dividends of Depository Institutions. A depository institution such as WMB, WMBFA or WMBfsb may not make a capital distribution if, following such distribution, the institution will be undercapitalized under the FDICIA provisions described above. In addition, Washington state law prohibits WMB from declaring or paying a dividend greater than its retained earnings or if doing so would cause its net worth to be reduced below (i) the amount required for the protection of preconversion depositors or (ii) the net worth requirements, if any, imposed by the State Director. OTS regulations limit the ability of savings associations such as WMBFA and WMBfsb to pay dividends and make other capital distributions according to the institution's level of capital and income, with the greatest flexibility afforded to institutions that meet or exceed their OTS capital requirements. Under current OTS regulations, a savings association that exceeds its OTS regulatory capital requirements both before and after a proposed dividend (or other distribution of capital) and has not been advised by the OTS that it is in need of more than normal supervision may, after prior notice to but without the approval of the OTS, make capital distributions during a calendar year up to the higher of (i) 100% of its income during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the institution's excess capital over its capital requirements) at the beginning of the calendar year or (ii) 75% of its net income over the most recent four-quarter period. In addition, such an institution may make capital distributions in excess of the foregoing limits if the OTS does not object within a 30-day period following notice by the institution. 17 20 A savings association that would not meet OTS capital requirements following payment of a dividend is subject to additional restrictions. It is not anticipated that WMBFA or WMBfsb will pay any dividend that would cause either of them to fail to meet OTS capital requirements. FDIC and OTS Regulation and Examination. The FDIC has adopted regulations to protect the deposit insurance funds and depositors, including regulations governing the deposit insurance of various forms of accounts. The FDIC has also adopted numerous regulations to protect the safety and soundness of FDIC- regulated banks. These regulations cover a wide range of subjects including financial reporting, change in bank control, affiliations with securities firms and capital requirements. In certain instances, these regulations restrict the exercise of powers granted by state law. An FDIC regulation and a joint FDIC/OTS policy statement place a number of restrictions on the activities of WMB's and WMBFA's securities and insurance affiliates and on such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions include requirements that such affiliates follow practices and procedures to distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give customers notice from time to time of their separate corporate status and of the distinction between insured deposits and uninsured nondeposit products. FDICIA also prohibited banks, such as WMB, and their subsidiaries from exercising certain powers that were granted by state law to make investments or carry on activities as principal (i.e., for their own account) unless either (i) national banks have power under federal law to make such investments or carry on such activities, or (ii) the bank and such investments or activities meet certain requirements established by FDICIA and the FDIC. FDICIA imposed new supervisory standards requiring annual examinations, independent audits, uniform accounting and management standards, and prompt corrective action for problem institutions. As a result of FDICIA, depository institutions and their affiliates are subject to federal standards governing asset growth, interest rate exposure, executive compensation, and many other areas of depository institution operations. FDICIA contains numerous other provisions, including reporting requirements and revised regulatory standards for, among other things, real estate lending. The FDIC may sanction any FDIC-regulated bank that does not operate in accordance with FDIC regulations, policies and directives. Proceedings may be instituted against any FDIC-regulated bank, or any institution-affiliated party, such as a trustee, director, officer, employee, agent, or controlling person of the bank, who engages in unsafe and unsound practices, including violations of applicable laws and regulations. The FDIC may revalue assets of an institution, based upon appraisals, and may require the establishment of specific reserves in amounts equal to the difference between such revaluation and the book value of the assets. The State Director has similar authority under Washington state law, and the OTS has similar authority under HOLA. The FDIC has additional authority to terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is operating in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, or order of or condition imposed by the FDIC. Federal savings institutions, such as WMBFA and WMBfsb, are subject to regulatory oversight and examination by the OTS and the FDIC. HOLA and OTS regulations delineate such institutions' investment and lending powers. Federal savings institutions may not invest in noninvestment-grade debt securities, nor may they generally make equity investments, other than investments in service corporations. Federal law and regulations require that WMBFA and WMBfsb maintain liquid assets in excess of a specified limit. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Liquidity." Federal regulation of depository institutions is intended for the protection of depositors (and the BIF and SAIF), and not for the protection of stockholders or other creditors. In addition, a provision in the Omnibus Budget Reconciliation Act of 1993 ("Budget Act") requires that in any liquidation or other resolution of any FDIC-insured depository institution, claims for administrative expenses of the receiver and for deposits in 18 21 U.S. branches (including claims of the FDIC as subrogee of the insured institution) shall have priority over the claims of general unsecured creditors. Federal Reserve Regulation. Under Federal Reserve Board regulations, WMB, WMBFA, WMBfsb and the Industrial Banks are each required to maintain reserves against their transaction accounts (primarily checking and NOW accounts). Because reserves must generally be maintained in cash or in noninterest-bearing accounts, the effect of the reserve requirements is to increase an institution's cost of funds. These regulations generally require that WMB, WMBFA and WMBfsb each maintain reserves against net transaction accounts in the amount of 3% on amounts of $47.8 million or less, plus 10% on amounts in excess of $47.8 million. Institutions may designate and exempt $4.7 million of certain reservable liabilities from these reserve requirements. These amounts and percentages are subject to adjustment by the Federal Reserve Board. A savings bank, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank discount window, but the Federal Reserve Board's regulations require the savings bank to exhaust other reasonable alternative sources before borrowing from the Federal Reserve Bank. Numerous other regulations promulgated by the Federal Reserve Board affect the business operations of the Company's banking subsidiaries. These include regulations relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings and availability of funds. Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their delineated communities, including low-income and moderate-income neighborhoods within those communities, while maintaining safe and sound banking practices. The regulatory agency assigns one of four possible ratings to an institution's CRA performance and is required to make public an institution's rating and written evaluation. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs to improve, and substantial noncompliance. Under new regulations that apply to all CRA performance evaluations after July 1, 1997, many factors play a role in assessing a financial institution's CRA performance. The institution's regulator must consider its financial capacity and size, legal impediments, local economic conditions and demographics, including the competitive environment in which it operates. The evaluation does not rely on absolute standards, and the institutions are not required to perform specific activities or to provide specific amounts or types of credit. Under the regulations applicable before July 1, 1997, WMBFA and WMBfsb each received an "outstanding" CRA rating from the OTS, and WMB and the Industrial Banks received an "outstanding" CRA rating from the FDIC. These ratings reflect Washington Mutual's commitment to meeting the credit needs of the communities it serves. No assurance can be given, however, that the CRA performance of these institutions will result in "outstanding" ratings under the new regulations in the future. The Company maintains a CRA statement for public viewing, as well as an annual CRA highlights document. These documents describe Washington Mutual's credit programs and services, community outreach activities, public comments and other efforts to meet community credit needs. In April 1997, the Company made a public commitment to make $75.00 billion in loans and investments over a 10-year period to families and small businesses in the communities it serves. The primary components of the commitment include $50.00 billion in affordable housing loans to minorities and borrowers in low- to moderate-income census tracts; $8.00 billion in consumer loans to low- to moderate-income borrowers; $7.00 billion in multi-family loans for properties serving low- to moderate-income tenants; $1.00 billion of investments in, and loans to, various community development projects; and $9.00 billion in small business loans of $50,000 or less. Recent and Proposed Federal Legislation and Regulation. Effective June 1, 1997, federal legislation repealed certain restrictions on the establishment of interstate branches by national banks and state-chartered banks. In addition, bank holding companies are now generally permitted to buy banks in any state. WMBFA and WMBfsb already have authority to establish interstate branches under current federal law and regulations, so management expects that such legislation will primarily benefit competitors of the Company. 19 22 Various legislative proposals relating to financial services companies have been or are expected to be introduced in the current session of Congress. These include proposals to restrict or further regulate the sales of mutual funds and annuities by depository institutions or their affiliates, to restrict affiliations between the Company and nonbanking corporations including life insurance companies, and to require federal savings institutions such as WMBFA and WMBfsb to convert to commercial banks. The outcome of these legislative proposals cannot be forecast reliably. The OTS on January 7, 1998, published a proposal that would allow a federal savings institution such as WMBFA or WMBfsb to pay dividends and make capital distributions in an aggregate amount not exceeding the sum of the institution's net income for the year to date, plus previously undistributed net income for the preceding two years, without application to the OTS. This proposal would make OTS regulations on capital distributions more similar to the rules of other federal banking agencies. As subsidiaries of a savings and loan holding company, however, WMBFA and WMBfsb would still be required to notify the OTS 30 days before declaration of a dividend. Regulation of Nonbanking Affiliates. As broker-dealers registered with the Securities and Exchange Commission and as members of the National Association of Securities Dealers ("NASD"), WM Financial, CFDI, GWFSC and SISC are subject to various regulations and restrictions imposed by those entities, as well as by various state authorities. As registered investment advisors, Composite Research, SIAC and SISC are subject to various federal and state securities regulations and restrictions. The NASD has adopted and forwarded to the SEC for approval rules concerning NASD member operations conducted in branches of depository institutions. Although many of the NASD's proposed requirements are substantially similar to the joint FDIC/OTS policy statement governing the activities of the Company's securities affiliates, the NASD proposal, if approved by the SEC, could impose additional restrictions on these affiliates. COMPETITIVE ENVIRONMENT Washington Mutual faces significant competition in attracting and retaining deposits and making loans in all of its market areas. Its most direct competition for deposits has historically come from savings institutions, credit unions and commercial banks doing business in its primary market areas of California, Washington, Oregon, Florida and Utah. As with all banking organizations, however, Washington Mutual has also experienced competition from nonbanking sources, including mutual funds, corporate and governmental debt securities and other investment alternatives. Washington Mutual's competition for loans comes principally from savings institutions, commercial banks, mortgage companies, credit unions, insurance companies and other institutional lenders. Many of these competitors have more significant financial resources, larger market shares and greater name recognition than the Company. The activities of such competitors may make it difficult for Washington Mutual to achieve its financial goals. In addition to the normal competitive factors described above, Washington Mutual management at the holding company level has limited operating experience in California and Florida, each of which has a much larger population with more large financial institution competitors than the states in which WMB has historically operated. Accordingly, there can be no assurance that the Company's consumer banking strategy will prove successful in the California and Florida markets. Although consolidation has decreased the number of institutions competing in the Company's market, both savings and commercial banks have reemphasized their focus on the consumer, making competition for retail deposits and loans extremely fierce. While the increased competitive pressures make the banking environment more difficult, the Company remains a strong market force. For 1997 (through October), WMB's originations of SFR loans ranked first in both Washington and Oregon and WMBFA's originations of residential mortgages ranked first in California. 20 23 PRINCIPAL OFFICERS The following table sets forth certain information regarding the principal officers of Washington Mutual:
EMPLOYEE OF PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE ------------------ --- ------------------------ ------------- Kerry K. Killinger................ 48 Chairman of the Board of Directors, 1983 President and Chief Executive Officer Fay L. Chapman.................... 51 Executive Vice President and General Counsel 1997 Craig S. Davis.................... 46 Executive Vice President 1996 Steven P. Freimuth................ 41 Executive Vice President 1988 Lee D. Lannoye.................... 60 Executive Vice President 1988 William A. Longbrake.............. 54 Executive Vice President and 1996 Chief Financial Officer Deanna W. Oppenheimer............. 39 Executive Vice President 1985 Craig E. Tall..................... 52 Executive Vice President 1985 S. Liane Wilson................... 55 Executive Vice President 1985 Richard M. Levy................... 39 Senior Vice President and Controller 1998 Norman H. Swick................... 48 Senior Vice President and General Auditor 1980 Douglas G. Wisdorf................ 43 Senior Vice President and 1976 Deputy Chief Financial Officer
Mr. Killinger has been Chairman, President and Chief Executive Officer of Washington Mutual since its organization. He has been Chairman of the Board of Directors of WMB since 1991 and Chief Executive Officer since 1990. Mr. Killinger became an Executive Vice President of WMB in 1983, a Senior Executive Vice President of WMB in 1986 and the President and a director of WMB in 1988. Ms. Chapman became an Executive Vice President and General Counsel and member of the Executive Committee of Washington Mutual in September 1997. Prior to that appointment, Ms. Chapman had been a partner with Foster Pepper & Shefelman, a Seattle, Washington law firm, since 1979. Mr. Davis became an Executive Vice President and member of the Executive Committee in January 1997, following the Company's merger with Keystone Holdings. In his capacity as Executive Vice President, Mr. Davis is responsible for lending and financial services. He was Director of Mortgage Origination of ASB from 1993 through 1996 and served as President of ASB Financial Services, Inc. from 1989 to 1993. Mr. Freimuth became an Executive Vice President and member of the Executive Committee of the Company in 1997. In this capacity, he is responsible for corporate lending administration. He joined WMB as a Vice President in 1988 and became a Senior Vice President in 1991. Mr. Lannoye has been an Executive Vice President of the Company since its organization. He has been an Executive Vice President of WMB since 1988 and a member of the Executive Committee since its formation in 1990. In his capacity as Executive Vice President, Mr. Lannoye is responsible for corporate administration and credit. Mr. Longbrake rejoined Washington Mutual in October 1996 as Executive Vice President and Chief Financial Officer and a member of the Company's Executive Committee. In his capacity as Executive Vice President, Mr. Longbrake is responsible for corporate finance. From March of 1995 through September of 1996, he served as Deputy to the Chairman for Finance and Chief Financial Officer of the FDIC. Mr. Longbrake was Senior Executive Vice President and Chief Financial Officer of the Company from its organization through February 1995. He was Chief Financial Officer of WMB from 1988 to 1995 and a member of the Company's Executive Committee from its formation in 1990 until 1995 and again since 1996. Mr. Longbrake became an Executive Vice President and Treasurer of WMB in 1982 and a Senior Executive Vice President of WMB in 1986. 21 24 Ms. Oppenheimer has been an Executive Vice President of Washington Mutual since its organization. She has been an Executive Vice President of WMB since 1993 and a member of the Company's Executive Committee since its formation in 1990. In this capacity, Ms. Oppenheimer is responsible for corporate marketing and consumer bank distribution. She has been an officer of WMB since 1985. She became an Assistant Vice President of WMB in 1986, a Vice President in 1987 and a Senior Vice President in 1989. Mr. Tall has been an Executive Vice President of Washington Mutual since its organization. He had been an Executive Vice President of WMB since 1987 and a member of the Company's Executive Committee since its formation in 1990. In his capacity as Executive Vice President, Mr. Tall is responsible for corporate development, commercial banking and consumer finance. Ms. Wilson has been an Executive Vice President of Washington Mutual since its organization. She has been an Executive Vice President of WMB since 1988 and a member of the Company's Executive Committee since its formation in 1990. In her capacity as Executive Vice President, Ms. Wilson is responsible for corporate operations. Mr. Levy has been a Senior Vice President and Controller since February 1998. In this capacity he is the principal accounting officer of the Company. Prior to joining the Company, Mr. Levy was Executive Vice President and Chief Financial Officer of Community Trust Bancorp from 1995 to 1997. Prior to that, he was the Controller of Bank of America Texas, N.A. Mr. Swick has been Senior Vice President and General Auditor of Washington Mutual since its organization. He has been an officer of WMB since 1980. Mr. Swick became a Vice President in 1984, Senior Vice President in 1988, and General Auditor of WMB in 1989. In this capacity, he monitors the Company's internal controls and compliance with all laws and regulations. Mr. Wisdorf has been Deputy Chief Financial Officer since 1996 and Senior Vice President of Washington Mutual since its organization. Mr. Wisdorf was Controller of the Company from 1994 to February 1998. He became Vice President and Controller of WMB in 1986 and has been an officer since 1978. ITEM 2. PROPERTIES As of December 31, 1997, the Company's banking subsidiaries conducted business from 850 consumer financial centers, 47 Western financial centers, 23 business banking centers and over 200 home loan centers in 26 states. Consumer finance operations were conducted in approximately 500 locations in 22 states. Washington Mutual's administrative offices are located at 1201 Third Avenue, Seattle, Washington, 98101 where, as of December 31, 1997, the Company leased approximately 178,000 square feet pursuant to a lease agreement that starts to terminate in 2007 with multiple options to renew at the Company's discretion. The Company also leases approximately 158,000 square feet of space in Seattle in the Second and Seneca Building pursuant to a lease agreement that starts to terminate in 2001; approximately 75,000 square feet in the adjoining building pursuant to a lease agreement that starts to terminate in 2006; approximately 97,000 square feet in Seattle in the 1st Interstate Building at 999 Third Avenue pursuant to a lease agreement that starts to terminate in 1999; and approximately 61,000 square feet in Seattle in the 1111 3rd Avenue Building pursuant to a lease agreement that starts to terminate in 2004. The Company has multiple options to renew leases at all locations. WMBFA administrative and subsidiary operations are conducted from owned office space totaling 280,000 square feet in Irvine, California, 237,000 square feet in Stockton, California and 305,000 square feet in Chatsworth, California. WMBFA administrative and subsidiary operations are also conducted from leased office space totaling 795,000 square feet in Chatsworth pursuant to a lease agreement that starts to terminate in 2005 with options to renew at the Company's discretion. Aristar administrative operations are conducted from owned office space totaling 71,000 square feet in Tampa, Florida. See "Consolidated Financial Statements -- Note 10: Premises and Equipment." 22 25 ITEM 3. LEGAL PROCEEDINGS Washington Mutual 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 materially adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR WASHINGTON MUTUAL'S, COMMON STOCK AND RELATED SECURITY HOLDER MATTERS COMMON STOCK Washington Mutual's common stock trades on The Nasdaq Stock Market under the symbol WAMU. As of January 31, 1998, there were 257,781,511 shares issued and outstanding held by 22,931 shareholders of record. The last reported sales price of common stock on February 20, 1998 was $67.75 per share. The high and low common stock prices by quarter were as follows:
YEAR ENDED DECEMBER 31, 1997 ------------------ HIGH LOW ------- ------- Fourth quarter............................................. $72.38 $60.31 Third quarter.............................................. 70.25 58.88 Second quarter............................................. 62.69 45.38 First quarter.............................................. 58.88 42.75
YEAR ENDED DECEMBER 31, 1996 ------------------ HIGH LOW ------- ------- Fourth quarter............................................. $45.88 $36.50 Third quarter.............................................. 39.25 28.50 Second quarter............................................. 30.38 26.13 First quarter.............................................. 32.25 27.63
The cash dividends paid by quarter were as follows:
YEAR ENDED DECEMBER 31, ---------------- 1997 1996 ------ ------ Fourth quarter............................................. $ 0.28 $ 0.24 Third quarter.............................................. 0.27 0.23 Second quarter............................................. 0.26 0.22 First quarter.............................................. 0.25 0.21
These dividends do not include amounts paid by acquired companies prior to their combination with the Company. PREFERRED STOCK 7.60% Noncumulative Perpetual Preferred Stock, Series E. Washington Mutual's Series E Preferred Stock trades on The Nasdaq Stock Market under the symbol WAMUM. 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 of $0.475 per share have been declared for each quarter for the two years ended December 31, 1997. At December 31, 1996, there were 1,970,000 shares issued and outstanding held by 23 26 344 shareholders of record. The last reported sales price of the Series E Preferred Stock on February 20, 1998 was $25.38 per share. The high and low stock prices by quarter were as follows:
YEAR ENDED DECEMBER 31, ---------------- 1997 ---------------- HIGH LOW ------ ------ Fourth quarter............................................. $26.00 $25.38 Third quarter.............................................. 26.00 25.50 Second quarter............................................. 25.88 25.25 First quarter.............................................. 25.75 25.00
YEAR ENDED DECEMBER 31, ---------------- 1996 ---------------- HIGH LOW ------ ------ Fourth quarter............................................. $25.75 $24.25 Third quarter.............................................. 24.75 24.00 Second quarter............................................. 25.00 23.63 First quarter.............................................. 25.63 24.50
PAYMENT OF DIVIDENDS AND POLICY Payment of future dividends is subject to declaration by Washington Mutual's Board of Directors. Factors considered in determining the size of dividends are the amount and stability of profits, adequacy of capitalization, and expected asset and deposit growth of its subsidiaries. The dividend policy of Washington Mutual is also dependent on the ability of WMB, WMBFA and WMBfsb to pay dividends to their respective parent company, which is influenced by legal, regulatory and economic restrictions. See "Business -- Regulation and Supervision -- Legal Restrictions on Dividends of Depository Institutions." Retained earnings of the Company at December 31, 1997 included a pre-1988 thrift bad debt reserve for tax purposes of $1.22 billion for which no federal income taxes have been provided. In the future, if the 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 subsidiaries' pre-1988 thrift bad debt reserve. As a result, the Company's ability to pay dividends in excess of current earnings may be limited. 24 27 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected consolidated financial data for Washington Mutual and is derived from and should be read in conjunction with the consolidated financial statements of Washington Mutual and the notes thereto, which are included in this Annual Report on Form 10-K. The Great Western Merger in 1997 and the Keystone Transaction in 1996 were accounted for as poolings of interests. The assets, liabilities, stockholders' equity, and results of operations have been recorded on the books of Washington Mutual at their values as carried on the books of the respective companies, and no goodwill was created. Washington Mutual's financial information contained herein has been restated as if the respective companies had been combined for all periods presented. As such, the information presented herein is not comparable with that reflected in the Company's annual report on Form 10-K/A for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Interest income..................... $ 6,810,964 $ 6,387,090 $ 6,158,371 $ 4,928,851 $ 4,883,407 Interest expense.................... 4,154,491 3,814,143 3,860,018 2,642,806 2,509,827 ------------ ------------ ------------ ------------ ------------ Net interest income................. 2,656,473 2,572,947 2,298,353 2,286,045 2,373,580 Provision for loan losses........... 207,139 392,435 251,424 327,068 620,808 Other income........................ 713,400 658,164 603,567 694,228 648,925 Other expense....................... 2,261,608 2,428,599 1,802,886 1,883,348 1,922,639 ------------ ------------ ------------ ------------ ------------ Income before income taxes, extraordinary items, cumulative effect of accounting changes, and minority interest................. 901,126 410,077 847,610 769,857 479,058 Income taxes........................ 402,116 141,220 273,006 265,180 126,034 Provision for payments in lieu of taxes............................. 17,232 25,187 7,887 (824) 14,075 Extraordinary items, net of federal income tax effect(1).............. -- -- -- -- (8,953) Cumulative effect of change in tax accounting method................. -- -- -- -- 13,365 Minority interest in earnings of consolidated subsidiaries......... -- 13,570 15,793 13,992 13,991 ------------ ------------ ------------ ------------ ------------ Net income.......................... $ 481,778 $ 230,100 $ 550,924 $ 491,509 $ 320,546 ============ ============ ============ ============ ============ Net income attributable to common stock............................. $ 460,346 $ 191,386 $ 507,325 $ 447,910 $ 253,764 ============ ============ ============ ============ ============ Net income per common share: Basic............................. $1.87 $0.81 $2.19 $1.98 $1.30 Diluted........................... 1.86 0.81 2.16 1.96 1.30 Average diluted common shares used to calculate earnings per share... 247,045,339 237,683,414 244,555,332 232,633,542 224,329,524 SELECTED FINANCIAL DATA Cash dividends paid per common share: Pre-business combinations(2)...... $1.06 $0.90 $0.77 $0.70 $0.50 Post-business combinations(3)..... 1.11 1.09 0.75 0.82 0.75 Common stock dividend payout ratio(3).......................... 56.83% 112.13% 33.16% 38.73% 62.81% Return on average assets............ 0.52 0.27 0.66 0.67 0.36 Return on average stockholders' equity............................ 9.21 4.40 11.58 11.36 6.14 Return on average common stockholders' equity.............. 9.25 3.86 11.33 11.07 5.54
25 28 SELECTED FINANCIAL DATA
DECEMBER 31, ---------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Assets...................... $ 96,981,099 $ 87,426,497 $ 86,613,386 $ 79,699,553 $ 71,961,681 Available-for-sale securities................ 11,373,922 16,095,343 20,749,500 7,780,460 4,917,290 Held-to-maturity securities................ 12,779,614 4,479,056 5,084,456 10,791,135 6,270,139 Loans....................... 67,140,157 61,153,968 54,080,189 53,850,887 51,725,601 Deposits.................... 50,986,017 52,666,914 53,697,888 52,044,953 54,876,165 Annuities................... -- 878,057 855,503 799,178 713,383 Borrowings.................. 38,998,647 27,407,744 25,169,766 21,078,049 10,416,757 Stockholders' equity........ 5,309,071 4,993,088 5,364,180 4,338,622 4,188,961 Stockholders' equity ratio..................... 5.47% 5.71% 6.19% 5.44% 5.82% Diluted book value per common share(4)........... $20.80 $19.44 $20.62 $16.91 $16.55 Number of diluted common shares at end of period(4)................. 249,560,018 242,230,645 246,366,127 239,731,824 235,938,428
- --------------- (1) Included losses in 1993 of $2.3 million on the redemption of subordinated capital notes and $10.8 million from the penalty for prepayment of FHLB advances and the related income tax benefits of $4.1 million. (2) Amounts paid by acquired companies prior to their combination with the Company were not included. (3) Based on dividends paid and earnings of the Company after restatement of financial statements for significant transactions accounted for as poolings of interests. (4) 8,000,000 shares of common stock issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF and their transferees was not included. 26 29 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 financial services company committed to serving consumers and small to mid-sized businesses. 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. The Company's consumer finance operations provide direct installment loans and related credit insurance services and purchase retail installment contracts. Washington Mutual also markets annuities and 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. 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 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 the merger of Keystone Holdings with and into Washington Mutual. New West was subsequently liquidated. The Great Western Merger. On July 1, 1997, GWFC merged with and into New American Capital, Inc. ("NACI"), a wholly-owned subsidiary of the Company, and all of the subsidiaries of GWFC, including GWB and Aristar, became subsidiaries of NACI. On October 1, 1997, GWB was merged with and into ASB; simultaneously the name of ASB was changed to WMBFA. GWFC was a diversified financial services company with more than 1,000 mortgage lending, retail banking and consumer finance offices nationwide. GWB conducted most of its real estate lending operations in 23 states, with business concentrated in California and Florida. Aristar operates in 22 states primarily in the southeastern United States, principally under the names Blazer, City Finance and First Community. In connection with the closing of the Great Western Merger, the Company recorded transaction-related expenses of $431.1 million in 1997. As anticipated, the largest of these expenses were in the categories of severance and management payments, facilities and equipment impairment, and legal, underwriting and other direct transaction costs Additionally, in October 1997, the Company securitized $1.22 billion of SFR loans from GWB's portfolio which the Company had previously identified as having both high loan-to-value ratios and borrowers whose credit history was marginal. These loans were transferred to a trust that issued five classes of securities. Management's intent with this securitization was to isolate the highest credit risk portion of these loans by assigning that credit risk to a separate class of securities so that, as market conditions and execution capabilities permit, a decision to sell this class can be made. At September 30, 1997, the estimated loss of $100.0 million on this highest risk class was included in gain (loss) on sale of loans and leases as a lower of cost or market adjustment. The highest credit risk class is held in the Company's trading portfolio. The Company is holding the lower credit risk classes of the securitization in its investment portfolio as it does with other retained MBS. 27 30 In addition to the transaction-related expenses and the market adjustment described above, during 1997, the Company recorded $116.5 million in tax benefits related to the exercise of options under the GWFC stock option plan. This benefit was recorded directly as an increase to stockholders' equity as the options were exercised. The net effect upon stockholders' equity of all adjustments from the Great Western Merger in 1997 was a reduction of $271.6 million. On December 31, 1997, the Company sold its insurance subsidiary, WM Life to SAFECO for a gain of $20.8 million. The sale was in connection with the negotiation of a distribution agreement with a subsidiary of SAFECO, which will provide annuities for distribution through Washington Mutual's consumer banking network. The agreement with SAFECO should add to Washington Mutual's future fee income, while enabling the Company to redeploy the capital previously invested in WM Life. RESULTS OF OPERATIONS Overview. In each of 1996 and 1997, Washington Mutual completed a transaction which had the effect of doubling the asset size of the Company. Together, the Keystone Transaction and the Great Western Merger (collectively, the "Transactions") transformed the Company from a regional financial services institution whose activities were concentrated in Washington, Oregon and Utah to a company with operations in 36 states, including California, where it is the third largest depository institution. Since the Transactions were accounted for as poolings of interests and the Company's financial statements have been restated for all prior periods, certain of the effects of these combinations are not reflected in the financial statements. For example, prior to the Keystone Transaction, Washington Mutual was in the process of a major restructuring of its loan portfolio to reduce the percentage of fixed-rate assets through large sales of fixed-rate loans and MBS and the purchase of ARMs and MBS consisting of ARMs. The loan portfolios of both ASB and GWB consisted primarily of ARMs and so, as a result of the Transactions, the Company successfully accomplished the portfolio restructuring program on which it embarked in 1995. In addition, the operating performance of the Company has been on a positive trend, even though net income has been negatively affected by transaction-related expenses, the one-time assessment in 1996 to recapitalize the SAIF and additions to the loan loss reserve and write downs of loans securitized and held in the trading portfolio. Washington Mutual's net income for 1997 was $481.8 million compared with $230.1 million in 1996 and $550.9 million in 1995. The Company's net income during 1997 was reduced by charges associated with the Great Western Merger totaling $531.1 million for transaction-related expenses and the write down of loans securitized and held in the trading portfolio. Net income during 1996 was reduced by $489.4 million as a result of charges of $158.1 million for transaction-related expenses and $125.0 million in loan loss provisions due to the Keystone Transaction, the special SAIF assessment of $312.6 million, $68.3 million for restructuring expenses at GWFC prior to the Great Western Merger and a $50.0 million loan loss provision for the bulk sale by GWB of nonperforming loans. Diluted earnings per share were $1.86 in 1997, $0.81 in 1996 and $2.16 in 1995. The various transaction-related expenses, the special SAIF assessment and the addition to the loan loss reserve and loan write downs discussed above negatively affected the various financial ratios which are commonly used to assess the performance of financial institutions. Due to the unusual nature of the merger activity in the past two years, the Company does not believe that the 1996 and 1997 ratios are indicative of the Company's overall performance in those years nor will they necessarily be indicative of the Company's performance in 1998 and subsequent years. Net Interest Income. Net interest income for 1997 of $2.66 billion increased from $2.57 billion in 1996 and $2.30 billion in 1995. The net interest margin for 1997 was 3.03% compared with 3.13% in 1996 and 2.91% in 1995. The 1997 increase in net interest income was due to a 7% rise in average-earning assets to $87.72 billion in 1997, which more than offset the decline in the net interest spread to 2.89% in 1997 from 2.99% in 1996. The increase in net interest income and margin from 1995 to 1996 reflected the effect of two primary factors. First, average interest-earning assets of $82.3 billion increased 4% from 1995. Second, the net interest spread rose to 2.99% for 1996 from 2.81% 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 28 31 yield curve environment. During 1997, the difference between the yields on a three-month U.S. Treasury bill and a 10-year U.S. government note averaged 117 basis points compared with 128 basis points a year earlier, and 94 basis points in 1995. This difference declined significantly to 40 basis points at year-end 1997 from 101 basis points at September 30, 1997 and 126 basis points at June 30, 1997. Approximately 80% of the Company's interest-sensitive assets have adjustable rates that change with movements in short- to mid-term market interest rates as do the majority of the liabilities contributing to the Company's cost of funds. Market interest rates generally declined during 1996 and then increased only slightly during 1997. The Company's yield on its loan and investment portfolio reflected this trend as it decreased 3 basis points from 7.79% in 1995 to 7.76% in 1996 and then rose only slightly to 7.77% during 1997. The Company's cost of funds tends to be much more sensitive to changes in market interest rates; the cost of funds declined 21 basis points from 4.98% in 1995 to 4.77% in 1996 and then increased to 4.88% in 1997. 29 32 Average statements of financial position, together with the total dollar amounts of interest income and expense and the weighted average interest rates were as follows:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 ------------------------------- ------------------------------- ------------------------------- INTEREST INTEREST INTEREST INCOME INCOME INCOME AVERAGE OR AVERAGE OR AVERAGE OR BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash equivalents, securities and FHLB stock(2)................ $22,728,040 7.06% $1,605,457 $25,026,183 7.06% $1,765,937 $23,291,051 7.08% $1,649,792 New West Note............. -- -- -- -- -- -- 723,800 8.13 58,841 Loans(3).................. 64,995,237 8.01 5,205,507 57,273,243 8.07 4,621,153 55,048,673 8.08 4,449,738 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total interest-earning assets.............. 87,723,277 7.77 6,810,964 82,299,426 7.76 6,387,090 79,063,524 7.79 6,158,371 Other assets.............. 4,529,082 4,377,424 4,617,038 ----------- ----------- ----------- Total assets.......... $92,252,359 $86,676,850 $83,680,562 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking accounts....... $ 7,463,552 0.78 58,389 $ 6,898,233 0.83 57,449 $ 6,744,793 0.95 63,958 Savings accounts and MMDAs................. 14,708,431 3.47 510,001 13,670,008 3.18 434,691 13,541,539 3.32 449,813 Time deposit accounts... 29,620,788 5.39 1,597,714 32,458,419 5.39 1,748,162 33,205,445 5.54 1,838,132 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total deposits........ 51,792,771 4.18 2,166,104 53,026,660 4.22 2,240,302 53,491,777 4.40 2,351,903 Annuities and borrowings: Annuities................. 801,178 5.07 40,657 812,185 5.01 40,658 801,129 5.58 44,716 Federal funds purchased and commercial paper.... 2,787,848 5.71 159,129 2,040,637 5.40 110,247 1,898,473 6.19 117,442 Reverse repurchase agreements.............. 12,527,774 5.71 715,047 14,360,452 5.50 790,483 14,800,811 6.11 904,698 Advances from FHLBs....... 13,621,867 5.75 783,338 6,509,897 5.56 361,695 3,668,898 5.73 210,324 Trust preferred securities and other............... 3,659,226 7.93 290,216 3,143,556 8.61 270,758 2,867,735 8.05 230,935 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total annuities and borrowings.......... 33,397,893 5.95 1,988,387 26,866,727 5.86 1,573,841 24,037,046 6.27 1,508,115 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Total interest-bearing liabilities......... 85,190,664 4.88 4,154,491 79,893,387 4.77 3,814,143 77,528,823 4.98 3,860,018 ----------- ---- ---------- ----------- ---- ---------- ----------- ---- ---------- Other liabilities........... 1,830,494 1,552,701 1,392,702 ----------- ----------- ----------- Total liabilities......... 87,021,158 81,446,088 78,921,525 Stockholders' equity........ 5,231,201 5,230,762 4,759,037 ----------- ----------- ----------- Total liabilities and stockholders' equity...... $92,252,359 $86,676,850 $83,680,562 =========== =========== =========== Net interest spread and net interest income....... 2.89% $2,656,473 2.99% $2,572,947 2.81% $2,298,353 ==== ========== ==== ========== ==== ========== Net interest margin......... 3.03% 3.13% 2.91%
- --------------- (1) Average balances were obtained from the best available daily, weekly or monthly data, which in all cases approximated the average balances calculated on a daily basis. (2) The Company held a small amount of tax exempt securities, but chose not to report the applicable interest income and yield on a tax equivalent basis. (3) Nonaccrual loans were included in their respective loan categories. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $67.4 million in 1997, $63.7 million in 1996 and $83.1 million in 1995. 30 33 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. Changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate), (ii) changes in rate (changes in average interest rate multiplied by the prior period's volume), and (iii) changes in rate/volume (changes in rate times the change in volume that were allocated proportionately to the changes in volume and the changes in rate) were as follows:
1997 VS. 1996 1996 VS. 1995 --------------------------------- --------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO --------------------- TOTAL --------------------- TOTAL VOLUME(1) RATE CHANGE VOLUME(1) RATE CHANGE --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) INTEREST INCOME Cash equivalents, securities and FHLB stock.............. $(162,339) $ 1,859 $(160,480) $122,412 $ (6,267) $ 116,145 New West Note................. -- -- -- (58,841) -- (58,841) Loans(2)...................... 618,194 (33,840) 584,354 179,476 (8,061) 171,415 --------- --------- --------- -------- --------- --------- Total interest income.............. 455,855 (31,981) 423,874 243,047 (14,328) 228,719 INTEREST EXPENSE Deposits: Checking accounts........... 3,611 (2,671) 940 1,496 (8,005) (6,509) Savings accounts and MMDAs.. 34,384 40,926 75,310 4,319 (19,441) (15,122) Time deposits............... (153,062) 2,614 (150,448) (40,845) (49,125) (89,970) --------- --------- --------- -------- --------- --------- Total deposit expense............. (115,067) 40,869 (74,198) (35,030) (76,571) (111,601) Borrowings: Annuities................... 84 (85) (1) 627 (4,685) (4,058) Reverse repurchase agreements............... (106,118) 30,682 (75,436) (26,300) (87,915) (114,215) Advances from FHLBs......... 408,551 13,092 421,643 157,640 (6,269) 151,371 Federal funds purchased and commercial paper......... 42,345 6,537 48,882 10,405 (17,600) (7,195) Trust preferred securities and other................ 37,616 (18,158) 19,458 23,108 16,715 39,823 --------- --------- --------- -------- --------- --------- Total borrowing expense............. 382,478 32,068 414,546 165,480 (99,754) 65,726 --------- --------- --------- -------- --------- --------- Total interest expense............. 267,411 72,937 340,348 130,450 (176,325) (45,875) --------- --------- --------- -------- --------- --------- Net interest income........... $ 188,444 $(104,918) $ 83,526 $112,597 $ 161,997 $ 274,594 ========= ========= ========= ======== ========= =========
- --------------- (1) Average balances were obtained from the best available daily, weekly or monthly data, which in all cases approximated the average balances calculated on a daily basis. (2) Nonaccrual loans were included in the average loan amounts outstanding. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $67.4 million in 1997, $63.7 million in 1996 and $83.1 million in 1995. 31 34 Other Income. Income of $713.4 million in 1997 included a $100.0 million loss as a result of the write down of loans securitized and held in the trading portfolio. Other income totaled $658.2 million in 1996 and $603.6 million in 1995. Other income consisted of the following:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Depositor and other retail banking fees: Checking account and MMDA charges................ $280,476 $201,366 $160,155 ATM transaction fees............................. 38,061 36,398 30,569 Other............................................ 47,346 44,704 43,155 -------- -------- -------- Total depositor and other retail banking fees........................................ 365,883 282,468 233,879 Loan servicing fees................................ 89,824 86,987 84,474 Securities fees and commissions.................... 132,071 131,066 135,655 Insurance fees and commissions..................... 47,759 44,417 33,284 Other operating income............................. 136,275 88,836 71,932 Gain (loss) on sale of loans and leases: Gain (loss) on sale of mortgage loans(1)......... (62,642) 20,828 10,529 Gain on sale of student loans.................... 1,494 24,069 495 Gain on sale of leases........................... 805 811 14,909 -------- -------- -------- Total gain (loss) on sale of loans and leases...................................... (60,343) 45,708 25,933 Gain (loss) on sale of other assets: Gain on sale of trading securities............... 207 31 529 Gain on sale of available-for-sale securities.... 7,511 8,009 21,056 Gain on sale of WM Life.......................... 20,845 -- -- Gain (loss) on sale of premises and equipment.... 10,860 (460) (2,958) Gain on sale of Mutual Travel.................... -- 4,100 -- Gain on sale of MBS.............................. -- 4,030 -- Other............................................ -- 1,311 1,203 -------- -------- -------- Net gain on sale of assets.................... 39,423 17,021 19,830 Write down on loans securitized and retained....... (27,621) (38,339) (19,651) Write off of consulting fees....................... (9,871) -- -- FDIC assistance on covered assets.................. -- -- 55,630 Loss on sale of covered assets..................... -- -- (37,399) -------- -------- -------- Total other income............................ $713,400 $658,164 $603,567 ======== ======== ========
- --------------- (1) Included $100.0 million write down of loans securitized and held in the trading portfolio. Depositor and other retail banking fees of $365.9 million in 1997 increased from $282.5 million in 1996 and $233.9 million in 1995. The increases reflected an expanded collection of overdraft protection and NSF charges on checking accounts and MMDAs combined with a focused marketing campaign that increased the number of checking accounts. During 1997, the number of checking accounts increased 186,000 or 8% to approximately 2,520,000. The growth in the Northwest comprised the greatest portion, increasing 149,000 or 24% to 766,000. The introduction of "Free Checking" at the former ASB offices during 1997 increased its checking base by 83,000 or 35% to 321,000. GWB, prior to its merger with the Company, had focused on increasing deposit fee income by raising its fees on products. Although this was a successful strategy, in that fee income did increase, it also resulted in the loss of 134,000 accounts through the first nine months of 1997. The degree of account losses slowed during the third quarter, and reversed during the fourth quarter, growing by 79,000 as a result of the introduction of "Free Checking." "Free Checking" generates income primarily through NSF charges and charges for overdraft protection. As this product becomes a larger portion of the 32 35 California accounts, it is anticipated that the level of service charges on checking accounts will decline; however, management believes that the lost service charge income will be more than offset by the revenue generated by "Free Checking." The growth in depositor and other retail banking fees has been offset 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. Other operating income totaled $136.3 million in 1997, compared with $88.8 million in 1996 and $71.9 million in 1995. Other operating income includes nonrecurring income as well as various types of miscellaneous income that tends to grow with the size of the Company. Impairment charge-offs on MBS are reported in the line item -- write down on loans securitized and retained -- as a charge to earnings in other income. Write downs on loans securitized and retained were $27.6 million for 1997, compared with $38.3 million in 1996 and $19.7 million in 1995. The increase from 1995 to 1996 primarily reflected the Company's decision to securitize more of its loans with recourse. The improvement of the California economy resulted in lower losses during 1997. During 1997, the Company had a net loss on the sale of loans and leases of $60.3 million. Included in the net loss was the $100.0 million write down on loans securitized and held in the trading portfolio. Excluding this transaction the Company had a net gain of $39.7 million in 1997, compared with $45.7 million in 1996 and $25.9 million in 1995. During 1997, the Company sold $4.5 billion of SFR loans, primarily from its fixed-rate loan production. During 1996, GWB sold a substantial portion of its student loan portfolio for $356.6 million, realizing a gain of $22.5 million. Most of the remaining gains recognized during 1996 were the result of selling $2.0 billion of fixed-rate loans. Net gain on the sale of other assets was $39.4 million during 1997, compared with $17.0 million during 1996 and $19.8 million during 1995. On December 31, 1997, the Company recorded a $20.8 million gain on the sale of its insurance subsidiary, WM Life, to SAFECO. The sale was in connection with the negotiation of a distribution agreement with a subsidiary of SAFECO, which will provide annuities for distribution through Washington Mutual's consumer banking network. The agreement with SAFECO should add to Washington Mutual's future fee income, while enabling the Company to redeploy the capital previously invested in WM Life. During 1997, WM Life contributed $17.1 million to pretax earnings to the Company, compared with $16.3 million in 1996 and $14.3 million during 1995. The gain on sale of premises and equipment in 1997 was primarily the result of the disposition of surplus assets as a result of the GWB restructuring plan implemented in 1996 and the Great Western Merger. During 1995, a loss of $37.4 million was recognized on the sale of certain assets by ASB. These assets, SFR 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 1997 totaled $2.26 billion, compared with $2.43 billion in 1996 and $1.80 billion in 1995. In connection with the closing of the Great Western Merger, the Company recorded transaction-related expenses of $431.1 million in 1997. Included in other expense in 1996 were restructuring charges of $68.3 million at GWFC, transaction-related expenses of $158.1 million resulting from the Keystone Transaction and the one-time SAIF recapitalization assessment of $312.6 million. 33 36 Other expense consisted of the following:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Salaries and employee benefits................. $ 821,446 $ 819,965 $ 793,971 Occupancy and equipment: Premises and equipment....................... 219,932 218,418 226,734 Data processing.............................. 102,509 102,724 82,634 ---------- ---------- ---------- Total occupancy and equipment............. 322,441 321,142 309,368 Telecommunications and outsourced information services..................................... 168,322 151,312 138,564 Regulatory assessments......................... 34,873 108,271 121,274 SAIF special assessment........................ -- 312,552 -- Restructuring expense.......................... -- 68,293 -- Transaction-related expense.................... 431,125 158,121 2,000 Other operating expense: Advertising and promotion.................... 84,163 63,505 62,098 Operating losses and settlements............. 51,399 62,805 36,165 Professional fees............................ 48,801 56,346 36,075 Postage...................................... 46,906 35,395 31,535 Office supplies.............................. 23,128 27,459 25,296 Other........................................ 154,838 159,734 160,783 ---------- ---------- ---------- Total other operating expense............. 409,235 405,244 351,952 Amortization of intangible assets arising from acquisitions ................................ 63,588 65,394 68,592 Foreclosed asset expense, net.................. 10,578 18,305 17,165 ---------- ---------- ---------- Total other expense....................... $2,261,608 $2,428,599 $1,802,886 ========== ========== ==========
Salaries and employee benefits totaled $821.4 million during 1997, compared with $820.0 million during 1996 and $794.0 million during 1995. Full-time equivalent employees ("FTE") were 19,880 at December 31, 1997, compared with 19,906 at year-end 1996 and 18,169 at year-end 1995. As part of the restructuring plan at GWFC prior to the Great Western Merger, total FTE were significantly reduced. However, because the terminations occurred at the end of 1996, overall salary expense at GWFC did not decrease until 1997. Offsetting the decreases at GWFC, salary and commission expense was higher in 1997 and 1996 at WMB and ASB due to increases in the number of employees resulting from record loan production and the integration of ASB. Expense for telecommunications and outsourced information services in 1997 was $168.3 million, compared with $151.3 million in 1996 and $138.6 million in 1995. Several outsourcing initiatives were undertaken in 1996, and during 1997 GWB contracted for additional telecommunication services. In general, the year-to-year increase reflected the Company's increased complexity and growth, higher levels of customer support services and continued use of outsourced data processing services. Regulatory assessments were $34.9 million in 1997, down from $108.3 million in 1996 and $121.3 million in 1995, reflecting a reduction in the assessment rate paid on the Company's deposits as a result of the recapitalization of the SAIF. During 1996, Washington Mutual was subject to a special assessment on SAIF deposits held by its banking subsidiaries which resulted in a charge of $312.6 million. See "Business -- Regulation and Supervision -- FDIC Insurance." Other operating expense increased to $409.2 million in 1997, from $405.2 million in 1996 and $352.0 million in 1995. In general, other operating expense tends to rise with the increased size of the Company. Contributing to the rise in advertising costs in 1997 were marketing campaigns designed to bring the Company's products into California. Increases in 1996 were due in part to higher professional fees 34 37 associated with process reengineering projects designed to increase income, improve strategies and operations and reduce costs. Postage costs increased during 1997 due to the system conversions of ASB which required several special customer notifications as well as increased mailings related to various marketing campaigns. During 1996, GWFC implemented a restructuring plan to improve its competitive position, accelerate expense reduction and enhance future revenue growth by streamlining operations, making efficient use of premises and modernizing its systems platform. The Company recorded $68.3 million of restructuring charges in 1996. The components of the restructuring charge were severance and related payments, and facilities and equipment impairment. At December 31, 1996, $47.1 million of these charges remained accrued. The incomplete GWFC restructuring activities have been integrated into the consolidation activities associated with the Great Western Merger and are now accounted for in connection with the transaction-related expenses discussed below. As a result of the Great Western Merger and the Keystone Transaction, the Company recorded transaction-related expenses of $431.1 million and $226.4 million (inclusive of the $68.3 million of restructuring charges discussed above) during 1997 and 1996. The majority of the charges were for severance and related payments, facilities and equipment impairment, and various investment banking, legal and contract exit fees, all of which were incremental expenses. The accrual of $196.1 million at year-end 1997 and the $126.6 million (inclusive of the $47.1 million of restructuring charges discussed above) at year-end 1996 related primarily to costs for specifically identified severance programs, the impairment of premises and equipment and the liability for contract exit fees for duplicate services. The Company expected staff reductions related to the Keystone Transaction and Great Western Merger (inclusive of the GWFC restructuring plan) of approximately 2,850. As of December 31, 1997 and 1996 approximately 1,660 and 630 employee separations had occurred under these plans. The remaining employee separations of approximately 1,190 are planned to be completed by the end of June 1998. Additional staff reductions are anticipated as a result of normal attrition. Offices used by the Company on the Chatsworth campus are being consolidated in order to make more efficient use of the building space. As a result of this consolidation, the Company anticipates that approximately 565,000 square feet, located predominantly in six buildings, will become available to sublet to third party tenants. It is expected that the space will be available for subleasing by June 1998. In addition, the Company has identified 90 consumer financial centers which will be closed and will have their operations consolidated with neighboring financial centers by the end of the third quarter of 1998. In order to meet the Company's goal to consolidate its current systems platform, certain computer hardware and software equipment has been or will be abandoned and written off. The consolidation of systems will allow the Company to increase operational efficiency, improve processing capacity and establish a common user workstation environment. 35 38 Reconciliations of the restructuring and transaction-related expenses and accrual activity during 1996 and 1997 were as follows:
DECEMBER 31, 1996 1996 ACTIVITY 1996 1996 1996 TOTAL CHARGED AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- --------------- ------------ (DOLLARS IN THOUSANDS) Severance.................... $ -- $ 59,714 $ 59,714 $ (2,776) $ 56,938 Premises..................... -- 29,456 29,456 -- 29,456 Equipment.................... -- 29,101 29,101 (18,388) 10,713 Legal, underwriting and other direct transaction costs... 23,179 3,232 26,411 -- 3,232 Contract cancellation costs...................... -- 12,300 12,300 -- 12,300 Other........................ 55,456 13,976 69,432 -- 13,976 -------- -------- -------- --------- -------- $ 78,635 $147,779 $226,414 $ (21,164) $126,615 ======== ======== ======== ========= ========
DECEMBER 31, 1997 1997 ACTIVITY 1997 1997 1997 TOTAL CHARGED AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- --------------- ------------ (DOLLARS IN THOUSANDS) Severance.................... $ 28,807 $ 94,126 $122,933 $ (57,960) $ 93,104 Premises..................... -- 97,165 97,165 (69,317) 57,304 Equipment.................... -- 49,121 49,121 (59,834) -- Legal, underwriting and other direct transaction costs... 109,811 3,503 113,314 (5,993) 742 Contract cancellation costs...................... -- 33,207 33,207 (11,808) 33,699 Other........................ 8,640 6,745 15,385 (9,478) 11,243 -------- -------- -------- --------- -------- $147,258 $283,867 $431,125 $(214,390) $196,092 ======== ======== ======== ========= ========
Net foreclosed asset expense was $10.6 million in 1997, compared with $18.3 million in 1996 and $17.2 million in 1995. During 1997, the Company recorded a net recovery of $2.8 million to the provision for losses on foreclosed assets reflecting improved market values of foreclosed assets. During 1996, the Company recorded a net recovery of $5.9 million to the provision as a result of the reduction in nonperforming real estate assets and improving prospects for the remainder of the California portfolio. The provision for losses totaled $12.0 million during 1995 and reflected deteriorated real estate values in California. See "-- Asset Quality -- Provision for Loan Losses and Reserve for Loan Losses." In general, foreclosed asset operations resulted in net operating expenses in California, as opposed to net operating income in Washington. Year 2000. Washington Mutual has initiated a program to prepare the Company's computer systems and applications for the year 2000. This issue affects computer systems that have time-sensitive programs that may not properly recognize the year 2000. This could result in major system failures or miscalculations for companies that have not successfully adapted their systems or applications. The Company is assessing all internal programs and systems as well as contacting software vendors and others with which it conducts business to ensure that potential problems are identified and resolved. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure enhancements necessary to prepare the systems for the year 2000 and to perform appropriate testing. The Company does not believe that the process of making its systems and applications ready for year 2000 will result in a material cost to the Company. Taxation. Income taxes include federal and applicable state income taxes and payments in lieu of taxes. The provision for income taxes was $419.3 million for 1997, which represented an effective tax rate of 47%, due in part to the nondeductibility of certain transaction-related expenses and a settlement with the Internal Revenue Service (the "Service") for 1986 and 1987 for GWFC. 36 39 The provision for income taxes of $166.4 million for 1996 represented an effective tax rate of 41%. 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 18: Income Taxes and Note 19: Payments in Lieu of 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 recapture for ASB) will be greatly reduced. In connection with the 1988 Acquisition, the 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 were 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 reported in the line item -- provision for payments in lieu of taxes. Due to the above arrangements, the Company's effective tax rate (including payments in lieu of taxes) for 1995 was below 34%, compared with a statutory corporate tax rate of 35%. Consumer Finance Operations. During 1997, the consumer finance line of business had net income of $45.5 million, down from $61.0 million in 1996 and $64.3 million in 1995. Credit quality for the markets served by Aristar deteriorated in 1997 and 1996. The increase in consumer finance delinquencies, charge-offs and loan loss provision reflected, in part, the growth of the portfolio but also a decline in the credit quality of the portfolio. The loan loss provision increased to $66.6 million in 1997 from $58.8 million in 1996 and $48.5 million in 1995.
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Consumer finance operations: Net interest income.............................. $251,086 $260,988 $258,044 Provision for loan losses........................ 66,600 58,800 48,500 Other income..................................... 42,183 49,539 58,329 Other expense.................................... 151,422 150,744 161,281 -------- -------- -------- Net income before income taxes................... 75,247 100,983 106,592 Income taxes..................................... 29,744 40,000 42,300 -------- -------- -------- Net income.................................... $ 45,503 $ 60,983 $ 64,292 ======== ======== ========
REVIEW OF FINANCIAL POSITION Assets. At December 31, 1997, the Company's assets were $96.98 billion, an increase of 11% from $87.43 billion at December 31, 1996. During 1997, total assets grew $9.55 billion. Most of the growth during 1997 and 1996 resulted from retaining originated loans either as part of the loan portfolio or as MBS. 37 40 Interest-earning assets. The Company's interest-earning assets consisted of the following:
DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Cash equivalents............................ $ 275,668 $ 632,976 $ 551,700 Securities: Trading securities........................ 23,364 1,647 238 Available-for-sale securities: MBS.................................... 10,188,107 13,968,875 18,789,067 Investment securities.................. 1,185,815 2,126,468 1,960,433 Held-to-maturity securities: MBS.................................... 12,659,217 4,286,361 4,795,960 Investment securities.................. 120,397 192,695 288,496 ----------- ----------- ----------- 24,176,900 20,576,046 25,834,194 Loans: Loans held in portfolio................... 67,124,935 61,497,847 54,108,904 Loans held for sale....................... 685,716 333,262 569,409 Reserve for loan losses................... (670,494) (677,141) (598,124) ----------- ----------- ----------- 67,140,157 61,153,968 54,080,189 Investment in FHLBs......................... 1,059,491 843,002 755,491 ----------- ----------- ----------- $92,652,216 $83,205,992 $81,221,574 =========== =========== ===========
Interest-earning assets were $92.65 billion at December 31, 1997, an 11% increase from $83.21 billion at year-end 1996. During 1997, the Company retained most of its ARMs as either loans or through securitization as MBS while selling the majority of its fixed-rate SFR loan production. As a result of the Transactions, the Company's interest rate sensitivity targets were attained on a consolidated basis. Securities. The Company's trading, available-for-sale and held-to-maturity securities consisted of the following (at carrying value):
DECEMBER 31, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Agency MBS...................................... $20,781,456 $16,906,066 $21,700,810 Private-issue MBS............................... 2,088,248 1,347,356 1,886,649 U.S. government and agency...................... 530,566 884,972 962,178 Corporate debt.................................. 478,823 1,118,888 1,053,240 Municipal....................................... 100,150 108,073 92,508 Equity securities............................... 196,673 208,877 141,241 ----------- ----------- ----------- 24,175,916 20,574,232 25,836,626 Derivative instruments.......................... 984 1,814 (2,432) ----------- ----------- ----------- $24,176,900 $20,576,046 $25,834,194 =========== =========== ===========
The Company's securities portfolio increased by $3.60 billion at December 31, 1997, compared with the prior year. The increase was due to the securitization of Company-originated loans into MBS for liquidity purposes, the purchase of agency securities in the secondary market and the creation of a $1.22 billion Real Estate Mortgage Investment Conduit ("REMIC") from loans originated by GWB. The increase in 1997 was in contrast to a decline in the securities portfolio in 1996. The decline during 1996 was due to paydowns on the current portfolio as well as the decision to sell fixed-rate MBS and replace them with ARM loans. In determining which security to invest in, the Company considers, among other factors, relative rates, liquidity and credit quality. At December 31, 1997, there were no securities issued by a single issuer (excluding the U.S. government and its agencies and corporations) that exceeded 10% of stockholders' equity. 38 41 Securities classified as held to maturity increased by $8.30 billion in 1997 while securities classified as available for sale decreased by $4.72 billion. The increase in the held-to-maturity category, and the corresponding decline in the available-for-sale category, was due in part to the transfer of $4.36 billion in MBS from available-for-sale to held-to-maturity. Since these securities were created from GWB-originated loans and the intent is to hold these securities to maturity, they were reclassified from available for sale to held to maturity subsequent to the Great Western Merger. In addition to the transfer, an additional $4.50 billion in Company-originated loans were securitized and classified as held to maturity during 1997. Trading securities increased by $21.7 million due to the creation of the REMIC during 1997. The REMIC is made up of five tranches. The fifth tranche was classified as trading because this was a securitization of loans which management intended to sell. The remaining four tranches were classified as available for sale, as management intended to hold these securities in a manner consistent with other internal securitizations. At December 31, 1997, 92% of MBS in the Company's securities portfolio were adjustable rate. Of the 92% indexed to an adjustable rate, 72% were indexed to COFI, 19% to U.S. Treasury indexes, and 1% to LIBOR. The remaining 8% of MBS were fixed rate. Loans. Total loans (exclusive of the reserve for loan losses) at December 31, 1997 were $67.81 billion, up from $61.83 billion at December 31, 1996. Changes in the loan balances are primarily driven by originations of new loans, prepayments of existing loans, scheduled repayments of principal, and loan securitizations and sales. The increase in SFR loans was due to strong originations, the majority of which were ARMs which the Company retained in its portfolio. Loans (exclusive of the reserve for loan losses) consisted of the following:
DECEMBER 31, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans: Real estate loans: SFR................ $53,431,451 $48,689,404 $41,907,598 $42,737,451 $41,171,112 SFR construction... 877,449 728,121 629,280 559,365 435,307 Commercial real estate........... 6,613,541 6,488,254 6,467,013 6,086,906 6,095,881 ----------- ----------- ----------- ----------- ----------- 60,922,441 55,905,779 49,003,891 49,383,722 47,702,300 Manufactured housing, second mortgage and other consumer..... 3,806,337 3,399,278 3,358,832 2,894,327 2,678,169 Consumer finance...... 2,309,407 2,185,903 2,136,022 1,998,830 1,830,995 Commercial business... 772,466 340,149 179,568 257,048 261,468 ----------- ----------- ----------- ----------- ----------- $67,810,651 $61,831,109 $54,678,313 $54,533,927 $52,472,932 =========== =========== =========== =========== =========== Loans as a percentage of total loans (exclusive of the reserve for loan losses): SFR................... 79% 79% 77% 78% 78% SFR construction...... 1 1 1 1 1 Commercial real estate............. 10 10 12 11 12 Manufactured housing, second mortgage and other consumer..... 6 5 6 5 5 Consumer finance...... 3 4 4 4 3 Commercial business... 1 1 -- 1 1 ----------- ----------- ----------- ----------- ----------- 100% 100% 100% 100% 100% =========== =========== =========== =========== ===========
39 42 Real estate loans by product type were as follows:
DECEMBER 31, 1997 -------------------------------- PERCENT OF TOTAL AMOUNT REAL ESTATE LOANS ----------- ----------------- (DOLLARS IN THOUSANDS) Short-term ARMs: COFI......................................... $32,108,461 53% MTA.......................................... 1,602,123 3 CMT.......................................... 3,800,156 6 Other........................................ 4,553,499 7 ----------- --- 42,064,239 69 Medium-term ARMs: CMT.......................................... 4,135,947 7 COFI......................................... 1,244,357 2 Other........................................ 2,880,587 5 ----------- --- 8,260,891 14 Fixed-rate mortgages........................... 10,597,311 17 ----------- --- $60,922,441 100% =========== === Number of real estate loans.................... 513,417
Short-term ARMs reprice within a year. Medium-term ARMs have an initial fixed rate for more than one year and then convert to short-term ARMs. Loan originations were as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Real estate loans: SFR: Adjustable rate............................ $15,167,522 $11,087,922 $10,374,740 Fixed rate................................. 6,798,487 4,930,874 3,583,603 ----------- ----------- ----------- 21,966,009 16,018,796 13,958,343 SFR construction: Custom..................................... 883,211 779,698 583,658 Builder.................................... 565,305 513,972 377,169 Apartment buildings........................... 691,566 548,978 391,942 Other commercial real estate.................. 494,965 295,377 242,987 ----------- ----------- ----------- 24,601,056 18,156,821 15,554,099 Manufactured housing............................ 324,583 334,721 274,115 Second mortgage and other consumer.............. 1,828,268 1,269,849 1,005,871 Consumer finance................................ 2,179,136 1,995,696 2,124,368 Commercial business............................. 669,613 380,609 167,830 ----------- ----------- ----------- $29,602,656 $22,137,696 $19,126,283 =========== =========== =========== SFR refinances to total SFR originations........ 46% 41% 40%
40 43 SFR originations by product type were as follows:
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------- AMOUNT % OF CATEGORY % OF TOTAL ----------- ------------- ---------- (DOLLARS IN THOUSANDS) Short-term ARMs: COFI.............................................. $ 6,688,444 63% 30% MTA............................................... 1,699,542 16 8 CMT............................................... 1,362,150 13 6 Other............................................. 812,800 8 4 ----------- --- --- 10,562,936 100% 48 === Medium-term ARMs: CMT............................................... 3,729,243 81% 17 COFI.............................................. 21,238 -- -- Other............................................. 854,105 19 4 ----------- --- --- 4,604,586 100% 21 === Fixed-rate mortgages................................ 6,798,487 31 ----------- --- $21,966,009 100% =========== ===
The strong housing market, attractive interest rates, and an increased number of distribution outlets led to record lending volumes during 1997. Refinancings have increased since the second half of 1995 as market interest rates have declined. Interest-bearing liabilities. The Company uses customer deposits and wholesale borrowings to fund its operations. Due to increased market competition for customer deposits, the Company has increasingly relied on wholesale borrowings to fund its asset growth. Deposits. Total deposits of $50.99 billion at December 31, 1997, were down from 1996 and 1995. Deposits consisted of the following:
DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing.......................... $ 4,380,133 $ 4,980,766 $ 5,194,668 Noninterest bearing....................... 3,534,242 2,576,822 2,243,622 ----------- ----------- ----------- 7,914,375 7,557,588 7,438,290 Savings accounts............................ 3,267,732 3,265,995 3,668,641 MMDAs....................................... 11,672,313 10,320,276 9,494,137 Time deposit accounts....................... 28,131,597 31,523,055 33,096,820 ----------- ----------- ----------- $50,986,017 $52,666,914 $53,697,888 =========== =========== ===========
The total decrease in deposits reflected the competitive environment of banking institutions and the wide array of investment opportunities available to consumers. Partially offsetting the $3.39 billion decline during 1997 in time deposit accounts were increases in the level of MMDAs and checking accounts. These latter two products have the benefit of lower interest costs compared to time deposit accounts. While MMDAs and checking accounts are liquid, they 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 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 41 44 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. Changes in deposits were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Deposits, beginning of year................. $52,666,914 $53,697,888 $52,044,953 Decrease due to deposit outflow............. (4,146,855) (3,377,939) (1,116,046) Increase due to acquired deposits........... 299,854 106,663 417,078 Increase due to interest credited........... 2,166,104 2,240,302 2,351,903 ----------- ----------- ----------- (Decrease) increase in total deposits....... (1,680,897) (1,030,974) 1,652,935 ----------- ----------- ----------- Deposits, end of year....................... $50,986,017 $52,666,914 $53,697,888 =========== =========== =========== Weighted average rate for the year.......... 4.18% 4.22% 4.40%
Borrowings. Washington Mutual's borrowings primarily take the form of federal funds purchased, commercial paper, reverse repurchase agreements and advances from the FHLBs of Seattle and San Francisco. The exact mix at any given time is dependent upon the market pricing of the individual borrowing sources. Annuities and borrowings consisted of the following:
DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Annuities(1)................................ $ -- $ 878,057 $ 855,503 Federal funds purchased and commercial paper..................................... 2,928,282 2,153,506 1,749,833 Reverse repurchase agreements............... 12,279,040 12,033,119 14,853,052 Advances from FHLBs......................... 20,301,963 10,011,425 5,570,819 Trust preferred securities.................. 800,000 100,000 100,000 Other borrowings............................ 2,689,362 3,109,694 2,896,062 ----------- ----------- ----------- $38,998,647 $28,285,801 $26,025,269 =========== =========== ===========
- --------------------------- (1) Annuities were held by WM Life, which was sold by the Company at the end of 1997. The Company's wholesale borrowing portfolio increased by $10.71 billion at December 31, 1997, compared with the prior year. The increase was due to the Company's inability to obtain additional retail deposits as a funding source for asset growth. Specifically, due to relative pricing advantages, the Company primarily used advances from FHLBs to fund its balance sheet growth during 1997. The Company also issued $700.0 million in trust preferred securities during 1997. See "Consolidated Financial Statements -- Note 16: Trust Preferred Securities." In December 1996, the Company entered into two revolving credit facilities with The Chase Manhattan Bank ("Chase"): a $100.0 million 364-day facility and a $100.0 million four-year facility. In November 1997, these facilities were amended by increasing the amounts for each from $100.0 million to $200.0 million. The facilities are available for general corporate purposes, including providing capital to the Company's subsidiaries. As of December 31, 1997, there were no outstanding borrowings under these facilities. As of December 31, 1997, the Company had entered into five other credit agreements with various parties permitting aggregate borrowings up to $735.1 million. The two largest of these agreements were a $550.0 million revolving credit facility with Bank of Montreal and Chase to back Aristar's commercial paper program and a $177.1 million letter of credit with the FHLB of San Francisco to provide credit enhancement on certain of the Company's private-issue MBS. 42 45 Debt ratings of the Company, WMBFA and Aristar were as follows:
DECEMBER 31, 1997 -------------------------------------------------------- STANDARD & POOR'S MOODY'S INVESTORS SERVICE ------------------------ ---------------------------- WMI WMBFA ARISTAR WMI WMBFA ARISTAR ---- ----- ------- ------ ------- ------- Short-term debt....................... -- A2 A2 -- P1 P2 Senior term debt...................... BBB+ A- A- A3 A2 A3 Subordinated term debt................ -- BBB+ BBB+ Baa1 A3 Baa1 Trust preferred securities............ BBB- -- -- a3 -- -- Noncumulative preferred stock......... BBB- -- -- baa1 -- --
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 Company's determination of the level of the reserve and, correspondingly, the provision for loan losses rests upon various judgments and assumptions, including current and anticipated economic conditions, the underlying quality of the loan portfolio, prior loan loss experience, the Company's credit administration and asset management philosophy and procedures, and the regulatory examination process. The Company has an Officer's Loan Committee ("OLC") that reports to the Board of Directors and continuously reviews loan quality. The Company also has internal staff regularly review the classification of commercial loans and report such classification to the OLC. Such reviews also assist management in establishing the level of the reserve. The Company is also examined by its primary regulators. These examinations generally occur annually and target various activities of the Company, including specific segments of the loan portfolio. The provision for loan losses during 1997 was $207.1 million compared with $392.4 million in 1996, 251.4 million in 1995, $327.1 million in 1994 and $620.8 million in 1993, reflecting a generally declining trend in nonperforming assets since 1993. The provision during 1997 reflected the general improvement in the California economy. The provision for loan losses during 1996 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 was more proactive in dealing with emerging credit problems and tended 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 SFR portfolio; Washington Mutual, on the other hand, considered the risk characteristics of that portfolio to be more closely aligned with its commercial real estate loan portfolio, which tended to have a higher incidence of loan losses than the SFR portfolio. Washington Mutual has conformed ASB's asset management practices, administration, philosophies and procedures to those of WMB and WMBfsb. 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 reviewed ASB's large performing and nonperforming loans on an individual loan basis, reviewed its other loan portfolios in the aggregate, and implemented 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. During 1996, the Company also recorded a loan loss provision of $50.0 million for the bulk sale of nonperforming loans at GWB. 43 46 The high level of the provision for loan losses in 1993 was deemed necessary to counter the deterioration in California's general economic indicators, including employment, consumer confidence and the value of residential real estate. The decline in the value of residential real estate and resultant deterioration of many borrowers' equity led to a high rate of delinquencies, foreclosures and charge offs. 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. During 1997, the California economy improved significantly, resulting in a dramatic turnaround in the housing market. The median price for California homes had declined steadily from a high of $211,000 in 1991 to a low point of $168,000 in February 1997. By December 1997 the median price of homes had increased to $190,000, up $22,000 or 13% from earlier in the year. Most of this improvement occurred during the second half of the year. The result has been a decline in residential loan charge offs and a slowing in foreclosure activity toward the end of 1997. Loan charge offs, net of recoveries, for 1997 totaled $200.2 million, which was less than net charge offs of $314.5 million in 1996 and $341.7 million in 1995. The California economic growth and the recovery of commercial real estate markets nationwide also resulted in significant improvement in the quality of the apartment building and commercial real estate portfolio. At the end of 1996, management was particularly concerned about potential losses in this portfolio and had increased allocated reserves to it. During 1997, the apartment building and commercial real estate portfolios have improved steadily reflecting the growth in jobs and population. Average occupancy levels and rental rates have increased as has the average sales price per square foot. During the period from the second quarter of 1996 to the second quarter of 1997 the average sales price in California increased approximately 19% and the average rental rates increased approximately 11%. The result has been a reduction in the level of nonperforming loans in these portfolios and reduced allocated reserves during 1997. During 1996, the charge off policy for consumer finance was changed from charging off loans when they are 120 days delinquent to charging them off when they are 180 days delinquent. This had the effect of reducing the level of charge offs during 1996 from what it would otherwise have been by approximately $12.0 million. The increases in charge offs of consumer finance loans in recent years reflects some deterioration in credit quality of the consumer finance loan portfolio. The deterioration in credit quality appears to be a reflection of general economic conditions also being experienced by similar lenders. 44 47 Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Balance, beginning of year..... $ 677,141 $ 598,124 $ 683,040 $ 747,331 $ 624,509 Provision for loan losses...... 207,139 392,435 251,424 327,068 620,808 Reserves added through business combinations................. 10,908 1,077 5,372 921 46,000 Reserves transferred to MBS impairment................... (21,755) -- -- -- -- Reserves transferred to contingent liability......... (2,747) -- -- -- -- Adoption of SFAS No. 114....... -- -- -- -- 47,974 Loans charged off: SFR.......................... (100,860) (232,653) (240,489) (278,786) (346,565) SFR construction............. (52) (16) (125) (190) (297) Commercial real estate....... (24,073) (36,354) (55,888) (69,816) (178,667) Manufactured housing, second mortgage and other consumer.................. (17,621) (11,127) (8,905) (14,306) (40,058) Consumer finance............. (79,697) (60,520) (62,206) (54,041) (50,174) Commercial business.......... (2,569) (435) (813) (2,065) (3,065) --------- --------- --------- --------- --------- (224,872) (341,105) (368,426) (419,204) (618,826) Recoveries of loans previously charged off: SFR.......................... 1,353 5,693 3,891 3,942 2,070 SFR construction............. 90 -- 47 -- -- Commercial real estate....... 2,725 3,425 5,286 5,110 5,162 Manufactured housing, second mortgage and other consumer.................. 2,916 1,221 951 1,861 3,999 Consumer finance............. 17,375 16,197 16,057 15,568 15,523 Commercial business.......... 221 74 482 443 112 --------- --------- --------- --------- --------- 24,680 26,610 26,714 26,924 26,866 --------- --------- --------- --------- --------- Net charge offs.............. (200,192) (314,495) (341,712) (392,280) (591,960) --------- --------- --------- --------- --------- Balance, end of year......... $ 670,494 $ 677,141 $ 598,124 $ 683,040 $ 747,331 ========= ========= ========= ========= ========= Charge offs as a percentage of average loans.......... 0.31% 0.55% 0.62% 0.74% 1.14%
As part of the process of determining the adequacy of the reserve for loan losses, management reviews the loan portfolio for weaknesses. A portion of the reserve is then either specified or allocated to reflect the identified loss exposure. SFR and consumer loans are not individually analyzed for impairment because of the significant number of loans and their relatively small individual balances. Commercial real estate, commercial business and builder construction loans are evaluated individually for impairment. At December 31, 1997, the Company had specific or allocated reserves totaling $90.5 million. Specific and allocated reserves at year-end 1996 were $118.6 million, a significant increase from $66.6 million at December 31, 1995. During 1996, the Company's review of ASB's loan portfolio resulted in approximately 43% of the additional $125.0 million provision in 1996 being allocated to loans in the commercial real estate loan portfolio. This allocation reflected the decline in some portions of the California real estate market during 1996. During 1997 the economy in California improved significantly and boosted the value of real estate across the state, particularly during the second half of the year. This increase in real estate values resulted in a reduction in allocated reserves for commercial real estate loans during 1997. 45 48 Unallocated reserves are established for loss exposure that is not yet identified but may exist in the remainder of the loan portfolio. 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. An analysis of the reserve for loan losses was as follows:
DECEMBER 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Specific and allocated reserves: Commercial real estate................ $ 84,969 $117,343 $ 66,397 $ 58,595 $ 60,005 Commercial business................... 3,277 1,285 -- -- 1,718 Builder construction.................. 2,207 -- 158 1,327 1,503 -------- -------- -------- -------- -------- 90,453 118,628 66,555 59,922 63,226 Unallocated reserves.................... 580,041 558,513 531,569 623,118 684,105 -------- -------- -------- -------- -------- $670,494 $677,141 $598,124 $683,040 $747,331 ======== ======== ======== ======== ======== Total reserve for loan losses as a percentage of: Nonaccrual loans...................... 112% 118% 85% 81% 78% Nonperforming assets.................. 83 84 60 59 52
The Company considers the reserve for loan losses of $670.5 million adequate to cover losses inherent in the loan portfolio at December 31, 1997. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluation of the loan portfolio, in light of the factors then prevailing, including economic conditions and the Company's ongoing examination process and that of its regulators, will not require significant increases in the reserve for loan losses. When determining the adequacy of the reserve for loan losses, management has historically looked not only to those loans currently in its loan portfolio, but also to any loan pool where the Company has a recourse obligation resulting from securitization of its loans. With the Great Western Merger, the Company began recording losses on loans repurchased from Recourse MBS as a write down on the security, rather than as a charge against the reserve for loan losses. Write downs on these Recourse MBS were included as a component of other income in the line item -- write down of loans securitized and retained. GWB had adopted this accounting policy in 1996. Prior periods have been restated so that charge offs on SFR loans are comparable period to period. Also, as part of the Great Western Merger, the Company reclassified the identified impairment on Recourse MBS from the reserve for loan losses to a reduction in the basis of the security. During 1997, impairment of $21.8 million was recorded through a transfer from the reserve for loan losses. The impairment was based upon an analysis of the loans underlying Recourse MBS. Because this reclassification was immaterial to the Company's statement of financial position, prior periods have not been restated. The impairment on MBS is evaluated periodically and any subsequent impairment is recorded as a write down to MBS. At December 31, 1997, the Company had securitized $15.00 billion of loans with recourse. The corresponding impairment was recorded as a basis adjustment to the MBS and totaled $35.6 million at the end of 1997. The Company also maintains a contingent liability to cover potential losses on Recourse MBS sold to third parties and loans sold with recourse. During 1997, an additional $2.7 million was set aside to cover losses on these Recourse MBS and loans sold with recourse. At December 31, 1997 the Company had sold $2.13 billion of Recourse MBS and loans sold with recourse, and the contingent liability totaled $8.8 million, which the Company considers adequate to cover inherent losses. 46 49 Delinquent Assets. The Company regularly reviews its portfolio of accruing and performing loans for delinquencies. The three-year trend in loans with two or three delinquent payments was as follows:
DECEMBER 31, --------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ----------------------- ----------------------- % OF % OF % OF AMOUNT PORTFOLIO(1) AMOUNT PORTFOLIO(1) AMOUNT PORTFOLIO(1) -------- ------------ -------- ------------ -------- ------------ Delinquent loans: SFR...................... $499,638 0.73% $526,242 0.86% $386,854 0.71% SFR construction......... 9,143 1.04 6,674 0.92% 1,563 0.27 Commercial real estate... 30,685 0.34 33,341 0.51% 29,268 0.46 Manufactured housing..... 24,647 2.28 10,347 1.14% 3,252 0.42 Second mortgage and other consumer.............. 55,121 2.02 40,742 1.53% 38,190 1.35 Consumer finance......... 68,814 2.98 62,000 2.84% 60,000 2.81 Commercial business...... 1,013 0.13 20 -- -- -- -------- ---- -------- ---- -------- ---- $689,061 0.81% $679,366 0.90% $519,127 0.78% ======== ==== ======== ==== ======== ====
- --------------- (1) Loans that have been securitized or sold for which the Company retains the credit risk were also included. Nonperforming Assets. Assets considered to be nonperforming include nonaccrual loans and securities, foreclosed assets and real estate held for investment purposes ("REI") that does not generate sufficient income to meet return on investment criteria. When loans securitized or sold on a recourse basis are nonperforming, they are included in nonaccrual loans. Management's classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Loans are generally placed on nonaccrual status when they are four payments or more past due. See "Consolidated Financial Statements -- Note 1: Summary of Significant Accounting Policies." Nonperforming assets were $806.6 million or 0.83% of total assets at December 31, 1997, compared with $805.1 million or 0.92% of total assets at December 31, 1996. Since 1993, nonperforming assets as a percentage of total assets have steadily declined. 47 50 Nonperforming assets consisted of the following:
DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) Nonaccrual loans: Real estate loans: SFR............................. $469,127 $461,730 $590,040 $ 662,136 $ 754,618 SFR construction................ 10,413 9,235 9,550 4,640 8,527 Apartment buildings............. 17,296 19,659 36,300 110,944 93,474 Other commercial real estate.... 25,825 14,616 26,663 35,549 63,516 -------- -------- -------- ---------- ---------- 522,661 505,240 662,553 813,269 920,135 Manufactured housing............... 11,127 8,721 1,923 1,643 2,207 Second mortgage and other consumer........................ 14,071 14,346 9,266 8,077 16,487 Consumer finance................... 50,930 45,622 25,772 21,277 20,667 Commercial business................ 2,585 1,068 824 1,018 3,785 -------- -------- -------- ---------- ---------- 601,374 574,997 700,338 845,284 963,281 Foreclosed assets.................... 205,272 222,883 286,705 313,392 470,167 Other nonperforming assets........... -- 7,232 4,564 4,980 -- -------- -------- -------- ---------- ---------- $806,646 $805,112 $991,607 $1,163,656 $1,433,448 ======== ======== ======== ========== ========== Nonperforming assets as a percentage of total assets.................... 0.83% 0.92% 1.14% 1.46% 1.99%
The increase in consumer finance delinquencies, charge offs and loan loss provision reflected, in part, the growth of the portfolio but also a decline in the credit quality of the portfolio. During 1996, the Company sold $292.4 million of nonperforming loans and real estate. The loans and properties were primarily associated with originations that occur between 1989 and 1992. As a result of the improving economies where WMBFA operates, bulk sales of foreclosed properties were discontinued in mid-1997 and Washington Mutual began using retail sales channels to dispose of WMBFA's foreclosed assets. Loans and nonaccrual loans by geographic concentration at December 31, 1997 were as follows:
OREGON CALIFORNIA WASHINGTON FLORIDA ------------------------ ------------------------ ----------------------- PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL ----------- ---------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Real estate loans: SFR...................... $30,343,943 $327,262 $11,427,196 $51,439 $1,959,902 $22,660 SFR construction......... 16,174 -- 741,498 3,771 536 -- Apartment buildings...... 3,119,766 17,296 797,671 -- 46,691 -- Other commercial real estate................ 1,233,720 22,158 916,054 2,266 31,578 -- ----------- -------- ----------- ------- ---------- ------- 34,713,603 366,716 13,882,419 57,476 2,038,707 22,660 Manufactured housing....... 11,749 194 825,451 7,947 -- -- Second mortgage and other consumer................. 385,758 3,983 1,942,703 7,175 49,533 115 Consumer finance........... 195,137 2,999 -- -- 126,918 2,928 Commercial business........ 73,355 149 534,793 2,182 2,935 24 ----------- -------- ----------- ------- ---------- ------- $35,379,602 $374,041 $17,185,366 $74,780 $2,218,093 $25,727 =========== ======== =========== ======= ========== ======= Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans......... 52% 62% 26% 13% 3% 4%
48 51
CONNECTICUT MASSACHUSETTS NEW YORK OTHER(1) TOTAL ----------------------- ------------------------ ------------------------ PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL ---------- ---------- ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Real estate loans: SFR......................... $2,214,675 $18,137 $ 7,485,735 $ 49,629 $53,431,451 $469,127 SFR construction............ -- -- 119,241 6,642 877,449 10,413 Apartment buildings......... 112 -- 223,652 -- 4,187,892 17,296 Other commercial real estate................... 107 -- 244,190 1,401 2,425,649 25,825 ---------- ------- ----------- -------- ----------- -------- 2,214,894 18,137 8,072,818 57,672 60,922,441 522,661 Manufactured housing.......... 243,993 2,986 1,081,193 11,127 Second mortgage and other consumer.................... 335 -- 346,815 2,798 2,725,144 14,071 Consumer finance.............. -- -- 1,987,352 45,003 2,309,407 50,930 Commercial business........... 760 -- 160,623 230 772,466 2,585 ---------- ------- ----------- -------- ----------- -------- $2,215,989 $18,137 $10,811,601 $108,689 $67,810,651 $601,374 ========== ======= =========== ======== =========== ======== Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans....................... 3% 3% 16% 18% 100% 100%
- --------------- (1) No one other state represented more than 1% of the total. At December 31, 1997, nonaccrual loans in California accounted for 62% of total nonaccrual loans, down from 65% in 1996. The California real estate market requires continual review. In general, real estate values have improved during 1997. However, there may be regional differences in economic performance within California and among property types which are attributable to differing recovery rates for the wide range of economic activities within California. Impaired Loans. Commercial real estate, commercial business and builder construction loans are individually evaluated for impairment. A loan in one of these categories is considered impaired when it is (i) probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement, or (ii) a substandard loan, whether or not performing. 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. At December 31, 1997, loans totaling $551.3 million were impaired, of which $454.6 million had allocated reserves of $90.5 million. The remaining $96.6 million were either nonperforming or previously written down and had no reserves allocated to them. Of the $551.3 million of impaired loans, $49.5 million were on nonaccrual status. 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 made at the date of the merger with Keystone Holdings, $18.9 million was allocated to $110.3 million of commercial real estate loans that management deemed to be impaired. 49 52 The amount of impaired loans and the related allocated reserve for loan losses were as follows:
DECEMBER 31, ------------------------------------------------- 1997 1996 --------------------- ------------------------ LOAN ALLOCATED ALLOCATED AMOUNT RESERVES LOAN AMOUNT RESERVES -------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans: With allocated reserves................... $ 33,980 $ 7,760 $ 19,071 $ 6,641 Without allocated reserves................ 15,481 -- 39,609 -- -------- ------- -------- ------- 49,461 7,760 58,680 6,641 Other impaired loans: With allocated reserves................... 420,662 82,693 384,272 73,168 Without allocated reserves................ 81,160 -- 177,516 -- -------- ------- -------- ------- 501,822 82,693 561,788 73,168 -------- ------- -------- ------- $551,283 $90,453 $620,468 $79,809 ======== ======= ======== =======
The average balance of impaired loans and the related interest income recognized were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Average balance of impaired loans...................... $572,727 $607,514 $436,034 Interest income recognized............................. 38,523 34,248 28,815
MARKET RISK AND ASSET/LIABILITY MANAGEMENT Nature of risk The long-run profitability of the Company depends not only on the success of the services it offers to its customers and the credit quality of its loans and securities, but also the extent to which its earnings are unaffected by changes in interest rates. The Company 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 without unduly penalizing current earnings. A key component of this program is the origination and retention of short-term and adjustable-rate assets whose repricing characteristics more closely match the repricing characteristics of the Company's liabilities. At the same time, the Company's policy is to sell most fixed-rate loan originations. In certain interest rate environments this strategy makes it difficult for the Company to increase or even maintain its asset size, which can have an adverse effect on net interest income. As a result of the program described above, the Company is subject to various types of interest rate risk. Management characterizes these risks as yield curve, prepayment, lag, basis and cap risk. Yield curve risk During periods of moderate to high market interest rates, originations of ARMs have been well received by customers. When interest rates are relatively low, however, unless long-term rates remain appreciably higher than short-term rates (what is referred to as a steep yield curve environment), borrowers show a preference for fixed-rate loans rather than ARMs. During the fourth quarter of 1997, interest rates on the 10-year U.S. government note declined approximately 36 basis points while interest rates on three-month U.S. Treasury bill increased 25 basis points. This flattened the slope of the yield curve so that there was only a 40 basis point difference between the three-month U.S. Treasury bill rate and the 10-year U.S. government note rate at year-end 1997 versus a 101 basis point difference three months earlier. The effect of this interest rate environment in late 1997 and early 1998 has been a decrease in the percentage of ARM originations and an increase in the percentage of fixed-rate originations. Because it is the Company's practice to sell conforming fixed-rate loans, lower levels of ARM originations could have an adverse effect on the Company's asset size. 50 53 Prepayment risk In a low interest rate environment with a flat yield curve, customers' preference for fixed-rate loans may result in the prepayment and refinancing of existing loans, fixed-rate and ARMs, to lower, fixed-rate mortgage loans. This preference may make it more difficult for the Company to increase the size of its loan and MBS portfolio during these periods when combined with its policy of selling most all of its fixed-rate loan production. Premiums related to loans and MBS on the Company's balance sheet, as well as the servicing rights attributed to loans serviced for others, would need to be written off at the time of repayment, and could have an adverse impact on earnings. Lag risk In times of rising interest rates, the Company is negatively affected by an inherent timing difference between the repricing of its ARM assets and its liabilities. The effect of this timing difference, or "lag," will be favorable during a period of declining interest rates. Although the effect of this lag generally balances out over the life of a given loan, it can produce short-term volatility in the Company's net interest income during periods of interest rate movement. One example of this is the delay in the repricing of COFI based assets, commonly referred to as "COFI lag." This lag results from the two month delay in reporting COFI because of the time required to gather the data needed to compute the index. Consequently, the COFI used to reprice ARMs and adjustable rate MBS actually reflects the cost of funds for a two month prior period. As a result, COFI loans reprice more slowly than the Company's liabilities. Basis risk The repricing of the Company's assets and liabilities is subject to additional interest rate risk because generally the repricing of its assets and liabilities is tied to different indices which may react differently to changes in interest rates. Loans tied to the COFI index create a form of basis risk for the Company because the portion of the Company's liabilities that are borrowings rather than deposits is higher than for most of the other savings institutions whose costs of funds are a component of COFI. Borrowings are generally more rate sensitive than deposits and reprice more quickly as market interest rates (such as treasury rates) change. To the extent that other loan indexes move at a different rate or direction from the Company's cost of funds, additional basis risk may be realized. Cap risk The lifetime interest rate caps which the Company offers to its ARM borrowers introduce another element of interest rate risk to the Company. In periods of high interest rates, it is possible for market interest rates to exceed the lifetime interest rate caps of existing ARM loans. Loan indexes As discussed previously, the majority of the Company's loans and MBS have adjustable rates that are tied to a market index. The Company's cost of funds compared to various indexes were as follows:
WASHINGTON WASHINGTON MUTUAL'S COST OF FUNDS MUTUAL'S LESS THAN (GREATER THAN) COST OF ---------------------------------- FOR THE QUARTER ENDED: FUNDS COFI CMT MTA LAMA COFI CMT MTA LAMA ---------------------- ---------- ---- ---- ---- ---- ------- ------ ------ ------ December 31, 1997............... 4.90 4.95 5.53 5.63 5.65 0.05 0.63 0.73 0.75 September 30, 1997.............. 4.88 4.90 5.61 5.66 5.58 0.02 0.73 0.78 0.70 June 30, 1997................... 4.86 4.82 5.75 5.67 5.53 (0.04) 0.89 0.81 0.67 March 31, 1997.................. 4.75 4.81 5.64 5.58 5.47 0.06 0.89 0.83 0.72
51 54 Quantitative Information About Interest Rate Risk The table below represents in tabular form contractual balances of the Company's financial instruments at the expected maturity dates as well as the fair value of those financial instruments at December 31, 1997. The expected maturity categories take into consideration historical prepayment speeds as well as actual amortization of principal and does not take into consideration reinvestment of cash. Principal prepayments are the amounts of principal reduction over and above normal amortization. The Company has used prepayment assumptions that are materially higher than normal for this analysis based on the current yield curve environment. The weighted average interest rates for the various assets and liabilities presented are actual as of December 31, 1997. The principal/notional amounts and fair values presented in the table do not include the reserve for loan losses, impairment on Recourse MBS or market adjustments on securities. See "Consolidated Financial Statements -- Note 28: Fair Value of Financial Instruments."
PRINCIPAL/NOTIONAL AMOUNT MATURING IN: --------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 THEREAFTER TOTAL ----------- ----------- ----------- ---------- ---------- ----------- ----------- (DOLLARS IN THOUSANDS) INTEREST RATE SENSITIVE ASSETS: Adjustable-rate loans.......... $10,616,419 $ 8,821,821 $ 6,706,714 $4,939,289 $3,700,939 $18,021,634 $52,806,816 Average interest rate........ 6.83% 7.65% 7.70% 7.68% 7.69% 7.66% 7.50% Fixed-rate loans............... 3,864,751 2,338,619 1,651,611 1,216,639 931,910 5,000,305 15,003,835 Average interest rate........ 12.37 10.81 9.70 8.84 9.54 7.58 9.77 Adjustable-rate securities..... 3,311,033 2,430,146 2,028,213 1,639,151 1,350,215 11,057,019 21,815,777 Average interest rate........ 6.88 6.63 6.67 6.61 6.56 6.48 6.59 Fixed-rate securities.......... 645,385 547,124 165,706 200,773 220,253 1,658,782 3,438,023 Average interest rate........ 6.90 6.76 6.87 7.14 6.86 6.44 6.67 Cash and cash equivalents...... 1,560,890 -- -- -- -- -- 1,560,890 Average interest rate........ 1.14 -- -- -- -- -- 1.14 ----------- ----------- ----------- ---------- ---------- ----------- ----------- $19,998,478 $14,137,710 $10,552,244 $7,995,852 $6,203,317 $35,737,740 $94,625,341 =========== =========== =========== ========== ========== =========== =========== 7.47% 7.96% 7.80% 7.62% 7.69% 7.23% 7.52% DERIVATIVES MATCHED AGAINST ASSETS: Pay fixed swaps................ $ 300,000 $ 500,000 $ -- $ -- $ -- $ -- $ 800,000 Average pay rate............. 6.05% 5.97% -- -- -- -- 6.00% Average receive rate......... 5.83 5.88 -- -- -- -- 5.86 Interest rate caps............. 650,000 -- -- -- -- -- 650,000 Average strike rate.......... 6.17 -- -- -- -- -- 6.17 Average index rate........... 5.89 -- -- -- -- 5.89 ----------- ----------- ----------- ---------- ---------- ----------- ----------- $ 950,000 $ 500,000 $ -- $ -- $ -- $ -- $ 1,450,000 =========== =========== =========== ========== ========== =========== =========== INTEREST RATE SENSITIVE LIABILITIES: Noninterest-bearing checking accounts..................... $ 1,413,697 $ 353,424 $ 353,424 $ 353,424 $ 353,424 $ 706,849 $ 3,534,242 Average interest rate........ --% --% --% --% --% --% --% Interest-bearing checking accounts, savings accounts and MMDAs.................... 10,728,825 4,399,262 897,488 817,832 765,122 1,711,649 19,320,178 Average interest rate........ 3.45 3.54 1.63 1.62 1.61 1.63 3.07 Time deposit accounts.......... 23,411,811 2,746,532 879,090 546,680 462,110 85,374 28,131,597 Average interest rate........ 5.32 5.62 6.19 5.74 5.83 6.96 5.40 Short-term and adjustable-rate borrowings................... 6,421,934 10,673,549 4,949,504 468,900 50,000 550,905 23,114,792 Average interest rate........ 5.78 5.80 5.80 5.83 5.81 5.84 5.79 Fixed-rate borrowings.......... 10,799,317 1,742,667 1,024,210 598,984 555,898 1,162,779 15,883,855 Average interest rate........ 5.76 6.17 6.56 7.43 7.05 8.18 6.14 ----------- ----------- ----------- ---------- ---------- ----------- ----------- $52,775,584 $19,915,434 $ 8,103,716 $2,785,820 $2,186,554 $ 4,217,556 $89,984,664 =========== =========== =========== ========== ========== =========== =========== 4.95% 5.20% 5.22% 4.18% 3.72% 3.82% 4.92% DERIVATIVES MATCHED AGAINST LIABILITIES: Pay fixed swaps................ $ 506,533 $ 277,600 $ 159,000 $ 234,600 $ -- $ 9,200 $ 1,186,933 Average pay rate............. 6.07% 7.94% 5.55% 5.48% --% 5.58% 6.37% Average receive rate......... 5.59 5.45 4.90 4.90 -- 4.90 5.00 Pay variable rate swaps........ -- -- 100,000 -- -- -- $ 100,000 Average pay rate............. -- -- 5.70 -- -- -- 5.73 Average receive rate......... -- -- 9.03 -- -- -- 9.03 Interest rate caps............. 565,500 855,750 265,000 154,000 80,000 304,750 2,225,000 Average strike rate.......... 7.89 7.16 8.00 7.60 8.63 8.24 7.68 Average index rate........... 5.82 5.33 5.53 5.32 4.96 5.03 5.42 ----------- ----------- ----------- ---------- ---------- ----------- ----------- $ 1,072,033 $ 1,133,350 $ 524,000 $ 388,600 $ 80,000 $ 313,950 $ 3,511,933 =========== =========== =========== ========== ========== =========== =========== FAIR VALUE DECEMBER 31, 1997 ------------ INTEREST RATE SENSITIVE ASSETS: Adjustable-rate loans.......... $53,067,161 Average interest rate........ -- Fixed-rate loans............... 15,540,836 Average interest rate........ -- Adjustable-rate securities..... 21,629,263 Average interest rate........ -- Fixed-rate securities.......... 3,526,183 Average interest rate........ -- Cash and cash equivalents...... 1,560,890 Average interest rate........ -- ----------- $95,324,333 =========== -- DERIVATIVES MATCHED AGAINST ASSETS: Pay fixed swaps................ $ (218) Average pay rate............. -- Average receive rate......... -- Interest rate caps............. 1,202 Average strike rate.......... -- Average index rate........... -- ----------- $ 984 =========== INTEREST RATE SENSITIVE LIABILITIES: Noninterest-bearing checking accounts..................... $ 3,534,242 Average interest rate........ --% Interest-bearing checking accounts, savings accounts and MMDAs.................... 19,320,178 Average interest rate........ -- Time deposit accounts.......... 28,062,263 Average interest rate........ -- Short-term and adjustable-rate borrowings................... 23,117,105 Average interest rate........ -- Fixed-rate borrowings.......... 16,048,062 Average interest rate........ -- ----------- $90,081,850 =========== -- DERIVATIVES MATCHED AGAINST LIABILITIES: Pay fixed swaps................ $ 9,958 Average pay rate............. -- Average receive rate......... -- Pay variable rate swaps........ (6,549) Average pay rate............. -- Average receive rate......... -- Interest rate caps............. (202) Average strike rate.......... -- Average index rate........... -- ----------- $ 3,207 ===========
52 55 A conventional measure of interest rate sensitivity for savings institutions is the one-year gap, which is calculated 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, ---------------------------- 1997 1996 ------------ ------------ (DOLLARS IN THOUSANDS) Interest-sensitive assets............................... $ 74,938,422 $ 66,697,670 Derivative instruments designated against assets........ 1,450,000 1,150,000 Interest-sensitive liabilities.......................... (70,204,799) (66,759,281) Derivative instruments designated against liabilities... 1,078,400 1,707,433 ------------ ------------ Net asset sensitivity......................... $ 7,262,023 $ 2,795,822 ============ ============ One-year gap.................................. 6.50% 3.20%
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. This is due in part to the lag risk, described previously. 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. 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. Asset and Liability Strategy The Company's asset/liability strategy is to reduce the risk of significant decreases in net interest income caused by interest rate changes without unduly penalizing current earnings. The implementation of strategies to reduce interest rate risk, however, generally has a negative effect on earnings. 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 this strategy, the Company actively manages asset and liability maturities. An inherent characteristic of the Company deposit structure is customers' preference for liquidity. This is apparent from the fact that at December 31, 1997, the Company's MMDAs accounted for $11.67 billion or 23% of total deposits, and time deposit accounts with maturities less than one year totaled $23.41 billion or 46% of total deposits. Because its principal funding source of deposits is very interest rate sensitive, the Company's primary asset strategy is to originate and hold in portfolio ARMs. During 1997, the Company securitized and then sold the majority of the fixed-rate loans it originated, while retaining nearly all of its ARM production. At December 31, 1997, approximately 80% of the Company's total loan and MBS portfolio had adjustable rates. Although ARMs reduce the Company's level of interest rate risk, it is not entirely eliminated because of the lag and basis risk. Lag risk is generally not a significant problem because the timing difference between when assets and liabilities reprice is relatively short. ARMs indexed to COFI, however, also introduce basis risk for the Company because of the larger percentage of assets funded by borrowings compared to the average of 11th District institutions which comprise COFI. To reduce basis risk, during 1997, the Company introduced the MTA loan. This loan has all the same borrower advantages as the COFI product, such as a 7.5% annual payment cap and the negative amortization feature. However, the MTA loan is indexed to the 12 month moving average of the one-year Treasury bill which more closely reflects the Company's borrowing costs. During 1997, $1.7 billion or 11% of all SFR ARM originations were MTA loans. During the fourth quarter of 1997, MTA originations were 22% of total SFR ARM originations. Management hopes to reduce potential net interest income volatility caused by COFI basis risk by increasing its production of MTA and other non-COFI adjustable-rate products and short-term fixed-rate products such as consumer loans. In addition to originating and holding in portfolio adjustable-rate and short-term loans, the Company also lengthens its liability duration through mid- to long-term borrowings. This is primarily done through borrowings from the FHLBs. 53 56 To further manage interest rate risk, the Company uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, to mitigate interest rate risk. At December 31, 1997, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $4.96 billion. 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. The Company utilizes counterparties in order to conduct various banking operations, including cash management and wholesale funding. If a counterparty were to default, the Company could be exposed to a financial loss. A loss would result to the extent the value of the collateral or funds held by the counterparty exceeded the value of the collateral or funds held by the Company. In order to minimize the risk, all counterparties are evaluated for financial strength on at least an annual basis. Exposure limits are then established for each counterparty. The Company's primary focus is to deal with well established, reputable and financially strong firms. The majority of the counterparties are U.S. based companies. Total exposure to foreign broker-dealers and banks as of December 31, 1997, was $50.8 million, of which $5.6 million was with Asian firms. 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 27: Interest Rate Risk Management." One of the main uses of derivative instruments is to lengthen the repricing period of the Company's deposits and borrowings. For example, the Company has entered 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 second major use of derivatives is to reduce the risk of the available-for-sale portfolio. 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 the vast majority 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 available-for-sale portfolio generally on pace with current 54 57 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 effect that interest rate exchange and interest rate cap agreements would have had on the repricing period of MBS in the available-for-sale portfolio in an increasing rate environment (up 200 basis points) for the period the derivatives are outstanding was as follows:
DECEMBER 31, 1997 --------------------------------------------------------------------------- AFTER THREE MONTHS AFTER ONE DUE WITHIN BUT WITHIN BUT WITHIN AFTER THREE MONTHS ONE YEAR TWO YEARS TWO YEARS TOTAL ------------ ------------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of MBS.................. $ 5,142,414 $ 3,332,725 $ 307,095 $ 1,306,818 $10,089,052 Effect of derivative instruments.................. 1,450,000 (575,000) -- (875,000) -- ----------- ----------- ----------- ----------- ----------- Amount of MBS after effect of derivative instruments....... $ 6,592,414 $ 2,757,725 $ 307,095 $ 431,818 $10,089,052 =========== =========== =========== =========== ===========
The effect that interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of MBS in the available-for-sale portfolio in a decreasing interest rate environment (down 200 basis points) for the period the derivatives are outstanding was as follows:
DECEMBER 31, 1997 --------------------------------------------------------------------------- AFTER THREE MONTHS AFTER ONE DUE WITHIN BUT WITHIN BUT WITHIN AFTER THREE MONTHS ONE YEAR TWO YEARS TWO YEARS TOTAL ------------ ------------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of MBS.................. $ 5,142,414 $ 3,332,725 $ 307,095 $ 1,306,818 $10,089,052 Effect of derivative instruments.................. 800,000 -- -- (800,000) -- ----------- ----------- ----------- ----------- ----------- Amount of MBS after effect of derivative instruments....... $ 5,942,414 $ 3,332,725 $ 307,095 $ 506,818 $10,089,052 =========== =========== =========== =========== ===========
The effect that interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of deposits and borrowings in a increasing interest rate environment (up 200 basis points) for the period the derivatives are outstanding was as follows:
DECEMBER 31, 1997 ------------------------------------------------------------------------------ AFTER THREE MONTHS AFTER ONE DUE WITHIN BUT WITHIN BUT WITHIN AFTER THREE MONTHS ONE YEAR TWO YEARS TWO YEARS TOTAL ------------ ------------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of deposits and borrowings................. $49,985,482 $20,219,316 $ 9,461,138 $10,318,728 $89,984,664 Effect of derivative instruments................ (3,511,933) 1,072,033 1,133,350 1,306,550 -- ----------- ----------- ----------- ----------- ----------- Amount of deposits and borrowings after effect of derivative instruments..... $46,473,549 $21,291,349 $10,594,488 $11,625,278 $89,984,664 =========== =========== =========== =========== ===========
55 58 The effect that interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of deposits and borrowings in a decreasing interest rate environment (down 200 basis points) for the period the derivatives are outstanding was as follows:
DECEMBER 31, 1997 ------------------------------------------------------------------------------ AFTER THREE MONTHS AFTER ONE DUE WITHIN BUT WITHIN BUT WITHIN AFTER THREE MONTHS ONE YEAR TWO YEARS TWO YEARS TOTAL ------------ ------------------ -------------- ----------- ----------- (DOLLARS IN THOUSANDS) Amount of deposits and borrowings................. $49,985,482 $20,219,316 $9,461,138 $10,318,728 $89,984,664 Effect of derivative instruments................ (1,286,933) 506,533 277,600 502,800 -- ----------- ----------- ---------- ----------- ----------- Amount of deposits and borrowings after effect of derivative instruments..... $48,698,549 $20,725,849 $9,738,738 $10,821,528 $89,984,664 =========== =========== ========== =========== ===========
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, 1997, 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, 1997, met the established FDIC guidelines. Regulations promulgated by the OTS require that the Company's federal savings banks maintain for each calendar quarter an average daily balance of liquid assets at least equal to 4.00% of net withdrawable deposits plus borrowings due within one year calculated on either the last day of the preceding quarter, or as a daily average for the preceding quarter. 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 1997 of $481.8 million, $591.3 million for noncash items and $887.2 million of other net cash outflows from operating activities. Cash flows from investing activities consisted mainly of both proceeds from and purchases of securities, and loan principal repayments and loan originations. In 1997, cash flows from investing activities included sales and principal payments on securities totaling $5.46 billion. Loans originated and purchased for investment were in excess of repayments by $12.46 billion, and $3.26 billion was used for the purchase of 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 long-term reverse purchase agreements and FHLB advances, and also the issuance of long-term debt. In 1997, the above mentioned financing activities increased cash and cash equivalents by $9.64 billion on a net basis. Cash and cash equivalents were $1.56 billion at December 31, 1997. See "Consolidated Financial Statements -- Consolidated Statements of Cash Flows." 56 59 At December 31, 1997, the Company was in a position to obtain approximately $21.0 billion in additional borrowings primarily through the use of collateralized borrowings and deposits of public funds using unpledged MBS and other wholesale borrowing sources. CAPITAL ADEQUACY The Company's capital (stockholders' equity) was $5.31 billion at December 31, 1997, compared with $4.99 billion at year-end 1996. At the end of 1997, the ratio of capital to total assets was 5.47% compared with 5.71% a year earlier. The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum regulatory requirements to be categorized as well capitalized were as follows:
DECEMBER 31, 1997 ------------------------ WELL-CAPITALIZED WMBFA WMB WMBFSB MINIMUM ----- ----- ------ ---------------- Capital ratios: Leverage.................................. 5.78% 5.86% 6.66% 5.00% Tier 1 risk-based......................... 9.54 10.13 10.84 6.00 Total risk-based.......................... 11.11 10.93 11.95 10.00
In addition, both the Industrial Banks were well capitalized at December 31, 1997. The Company's federal savings bank subsidiaries are also 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. WMBFA and WMBfsb both satisfied this requirement at December 31, 1997. The Company's securities subsidiaries are also subject to capital requirements. At December 31, 1997, all of Washington Mutual's securities subsidiaries were in compliance with their applicable capital requirements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For financial statements, see Index to Consolidated Financial Statements on page 60. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Part III is incorporated by reference from the Company's definitive proxy statement issued in conjunction with the Company's Annual Meeting of Shareholders to be held April 21, 1998. Certain information regarding the principal officers of Washington Mutual is set forth in "Business -- Principal Officers." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS See Index to Consolidated Financial Statements on page 60. (2) FINANCIAL STATEMENT SCHEDULES All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or the notes thereto. 57 60 (B) REPORTS ON FORM 8-K: A Current Report on Form 8-K dated November 10, 1997 was filed with the Securities and Exchange Commission (the "Commission") and included under Item 7(c) certain exhibits relating to the 6.50% Senior Notes issued by Aristar. A Current Report on Form 8-K dated October 22, 1997 was filed with the Commission and included under Item 7(a) unaudited consolidated financial statements for the quarter ended September 30, 1997, and under Item 7(c) a press release announcing Washington Mutual's 1997 third quarter financial results. A Current Report on Form 8-K dated October 10, 1997, as amended on Form 8-K/A dated October 23, 1997, was filed with the Commission and included under Item 5 a description of the merger of GWFC with and into a subsidiary of Washington Mutual, stating that the merger was accounted for as a pooling of interests. The report on Form 8-K as amended also included under Item 7(a) audited supplemental consolidated financial statements for the three years ended December 31, 1996 and unaudited supplemental consolidated financial statements for the six months ended June 30, 1997 and 1996, each restated as if the respective companies had been combined for all periods presented. (C) EXHIBITS: See Index of Exhibits on page 124. 58 61 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 February 27, 1998. WASHINGTON MUTUAL, INC. /s/ KERRY K. KILLINGER -------------------------------------- Kerry K. Killinger President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 27, 1998. /s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE - ----------------------------------------------------- ----------------------------------------------------- Kerry K. Killinger William A. Longbrake Chairman, President and Chief Executive Officer; Executive Vice President and Chief Financial Director (Principal Executive Officer) Officer (Principal Financial Officer) /s/ RICHARD M. LEVY ----------------------------------------------------- Richard M. Levy Senior Vice President and Controller (Principal Accounting Officer) /s/ DOUGLAS P. BEIGHLE /s/ WILLIAM P. GERBERDING - ----------------------------------------------------- ----------------------------------------------------- Douglas P. Beighle William P. Gerberding Director Director /s/ DAVID BONDERMAN /s/ ENRIQUE HERNANDEZ, JR. - ----------------------------------------------------- ----------------------------------------------------- David Bonderman Enrique Hernandez, Jr. Director Director /s/ J. TAYLOR CRANDALL /s/ DR. SAMUEL B. MCKINNEY - ----------------------------------------------------- ----------------------------------------------------- J. Taylor Crandall Dr. Samuel B. McKinney Director Director /s/ ROGER H. EIGSTI /s/ MICHAEL K. MURPHY - ----------------------------------------------------- ----------------------------------------------------- Roger H. Eigsti Michael K. Murphy Director Director /s/ JOHN W. ELLIS /s/ WILLIAM G. REED, JR. - ----------------------------------------------------- ----------------------------------------------------- John W. Ellis William G. Reed, Jr. Director Director /s/ DANIEL J. EVANS /s/ JAMES H. STEVER - ----------------------------------------------------- ----------------------------------------------------- Daniel J. Evans James H. Stever Director Director /s/ ANNE V. FARRELL /s/ WILLIS B. WOOD - ----------------------------------------------------- ----------------------------------------------------- Anne V. Farrell Willis B. Wood Director Director /s/ STEPHEN E. FRANK - ----------------------------------------------------- Stephen E. Frank Director
59 62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ 61 Report of Independent Accountants........................... 62 Independent Auditors' Report................................ 63 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.......................... 64 Consolidated Statements of Financial Position at December 31, 1997 and 1996......................................... 65 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.................................................. 66 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................... 68 Notes to Consolidated Financial Statements.................. 70
60 63 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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. The consolidated financial statements give retroactive effect to the mergers of Washington Mutual, Inc. and Great Western Financial Corporation and Washington Mutual, Inc. and Keystone Holdings, Inc. both of which were accounted for as poolings of interests as described in Note 2 to the consolidated financial statements. We did not audit the consolidated statement of financial condition of Great Western Financial Corporation as of December 31, 1996, or the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1996 and 1995, which statements reflect total assets constituting 49% of consolidated total assets as of December 31, 1996, and total net income constituting 50% and 47% of consolidated net income for the years ended December 31, 1996 and 1995, respectively. Those statements were audited by other auditors whose report, dated, January 22, 1997 (except as to Note 28 to the consolidated financial statements, which is as of March 7, 1997) has been furnished to us, and our opinion, insofar as it relates to the amounts included for Great Western Financial Corporation for 1996 and 1995, is based solely on the report of such other auditors. We did not audit the consolidated statement of earnings, stockholder's equity, and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995, which statements reflect total net income constituting 16% of consolidated net income for the year ended December 31, 1995. 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, 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 reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. LOGO February 20, 1998 Seattle, Washington 61 64 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Great Western Financial Corporation In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Great Western Financial Corporation and its subsidiaries ("the Company") at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Company adopted accounting standards that changed its methods of accounting for mortgage servicing rights and long lived assets in 1995. LOGO Los Angeles, California January 22, 1997, except as to Note 28, which is as of March 7, 1997 62 65 INDEPENDENT AUDITORS' REPORT The Board of Directors Keystone Holdings, Inc.: We have audited the consolidated statements of earnings, stockholder's equity and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995, which are 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. LOGO Los Angeles, California January 26, 1996, except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996 63 66 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Loans....................................................... $5,205,507 $4,621,153 $4,449,738 Available-for-sale securities............................... 1,005,991 1,310,781 694,957 Held-to-maturity securities................................. 501,834 366,592 882,654 Notes receivable............................................ -- -- 58,841 Cash equivalents and other.................................. 97,632 88,564 72,181 ---------- ---------- ---------- Total interest income..................................... 6,810,964 6,387,090 6,158,371 INTEREST EXPENSE Deposits.................................................... 2,166,104 2,240,302 2,351,903 Borrowings.................................................. 1,988,387 1,573,841 1,508,115 ---------- ---------- ---------- Total interest expense.................................... 4,154,491 3,814,143 3,860,018 ---------- ---------- ---------- Net interest income....................................... 2,656,473 2,572,947 2,298,353 Provision for loan losses................................... 207,139 392,435 251,424 ---------- ---------- ---------- Net interest income after provision for loan losses....... 2,449,334 2,180,512 2,046,929 OTHER INCOME Depositor and other retail banking fees..................... 365,883 282,468 233,879 Loan servicing fees......................................... 89,824 86,987 84,474 Securities fees and commissions............................. 132,071 131,066 135,655 Insurance fees and commissions.............................. 47,759 44,417 33,284 Other operating income...................................... 136,275 88,836 71,932 Gain (loss) on sale of loans and leases..................... (60,343) 45,708 25,933 Gain on sale of other assets................................ 39,423 17,021 19,830 Write down of loans securitized and retained................ (27,621) (38,339) (19,651) Write off of consulting fees................................ (9,871) -- -- Federal Deposit Insurance Corporation ("FDIC") assistance on covered assets............................................ -- -- 55,630 Loss on sale of covered assets.............................. -- -- (37,399) ---------- ---------- ---------- Total other income........................................ 713,400 658,164 603,567 OTHER EXPENSE Salaries and employee benefits.............................. 821,446 819,965 793,971 Occupancy and equipment..................................... 322,441 321,142 309,368 Telecommunications and outsourced information services...... 168,322 151,312 138,564 Regulatory assessments...................................... 34,873 108,271 121,274 Savings Association Insurance Fund ("SAIF") special assessment................................................ -- 312,552 -- Restructuring expense....................................... -- 68,293 -- Transaction-related expense................................. 431,125 158,121 2,000 Other operating expense..................................... 409,235 405,244 351,952 Amortization of intangible assets arising from acquisitions.............................................. 63,588 65,394 68,592 Foreclosed asset expense.................................... 10,578 18,305 17,165 ---------- ---------- ---------- Total other expense....................................... 2,261,608 2,428,599 1,802,886 ---------- ---------- ---------- Income before income taxes................................ 901,126 410,077 847,610 Income taxes................................................ 402,116 141,220 273,006 Provision for payments in lieu of taxes..................... 17,232 25,187 7,887 ---------- ---------- ---------- Income before minority interest in earnings of consolidated subsidiaries.............................................. 481,778 243,670 566,717 Minority interest in earnings of consolidated subsidiaries.............................................. -- 13,570 15,793 ---------- ---------- ---------- Net income.................................................. $ 481,778 $ 230,100 $ 550,924 ========== ========== ========== Net income attributable to common stock..................... $ 460,346 $ 191,386 $ 507,325 ========== ========== ========== Net income per common share: Basic..................................................... $1.87 $0.81 $2.19 Diluted................................................... 1.86 0.81 2.16
See Notes to Consolidated Financial Statements. 64 67 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash........................................................ $ 1,285,222 $ 1,032,379 Cash equivalents............................................ 275,668 632,976 Trading securities.......................................... 23,364 1,647 Available-for-sale securities, amortized cost $11,258,232 and $15,913,440: Mortgage-backed securities ("MBS")........................ 10,188,107 13,968,875 Investment securities..................................... 1,185,815 2,126,468 Held-to-maturity securities, fair value $12,699,653 and $4,545,125: MBS....................................................... 12,659,217 4,286,361 Investment securities..................................... 120,397 192,695 Loans: Loans held in portfolio................................... 67,124,935 61,497,847 Loans held for sale....................................... 685,716 333,262 Reserve for loan losses................................... (670,494) (677,141) ----------- ----------- Total loans............................................. 67,140,157 61,153,968 Investment in Federal Home Loan Banks ("FHLBs")............. 1,059,491 843,002 Foreclosed assets........................................... 205,272 222,883 Premises and equipment...................................... 937,198 1,034,813 Intangible assets arising from acquisitions................. 356,650 419,500 Mortgage servicing rights................................... 215,360 185,984 Other assets................................................ 1,329,181 1,324,946 ----------- ----------- Total assets............................................ $96,981,099 $87,426,497 =========== =========== LIABILITIES Deposits: Checking accounts......................................... $ 7,914,375 $ 7,557,588 Savings accounts and money market deposit accounts ("MMDAs")............................................... 14,940,045 13,586,271 Time deposit accounts..................................... 28,131,597 31,523,055 ----------- ----------- Total deposits.......................................... 50,986,017 52,666,914 Annuities................................................... -- 878,057 Federal funds purchased and commercial paper................ 2,928,282 2,153,506 Securities sold under agreements to repurchase ("reverse repurchase agreements")................................... 12,279,040 12,033,119 Advances from FHLBs......................................... 20,301,963 10,011,425 Trust preferred securities.................................. 800,000 100,000 Other borrowings............................................ 2,689,362 3,109,694 Other liabilities........................................... 1,687,364 1,480,694 ----------- ----------- Total liabilities....................................... 91,672,028 82,433,409 Commitments and contingencies (Notes 5, 10 and 20).......... -- -- STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 5,382,500 shares issued and outstanding, liquidation preference....................... 118,063 283,063 Common stock, no par value: 800,000,000 shares authorized -- 257,560,018 and 250,230,644 shares issued and outstanding........................................... -- -- Capital surplus -- common stock............................. 1,943,294 1,664,870 Valuation reserve for available-for-sale securities......... 134,610 118,625 Retained earnings........................................... 3,113,104 2,926,530 ----------- ----------- Total stockholders' equity.............................. 5,309,071 4,993,088 ----------- ----------- Total liabilities and stockholders' equity.............. $96,981,099 $87,426,497 =========== ===========
See Notes to Consolidated Financial Statements. 65 68 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) PREFERRED STOCK Balance, beginning of year............................. $ 283,063 $ 552,438 $ 554,376 Repurchase of Series C and Series E shares............. -- -- (1,938) Redemption or conversion of preferred stock............ (165,000) (269,375) -- ---------- ---------- ---------- Balance, end of year................................... 118,063 283,063 552,438 CAPITAL SURPLUS -- COMMON STOCK Balance, beginning of year............................. 1,664,870 1,521,438 1,425,671 Common stock issued through stock options, restricted stock grants and employee stock plans, including tax benefit.............................................. 309,593 46,334 25,055 Immaterial business combinations accounted for as poolings of interests................................ -- 11,844 23,562 Common stock issued under dividend reinvestment plan... 847 2,547 47,150 Conversion of preferred stock.......................... -- 268,270 -- Common stock acquired.................................. (32,016) (185,563) -- ---------- ---------- ---------- Balance, end of year................................... 1,943,294 1,664,870 1,521,438 CAPITAL SURPLUS OFFSET AGAINST NOTE RECEIVABLE Balance, beginning of year............................. -- -- (167,000) Capital surplus previously offset against note receivable........................................... -- -- 167,000 ---------- ---------- ---------- Balance, end of year................................... -- -- -- VALUATION RESERVE FOR AVAILABLE-FOR-SALE SECURITIES Balance, beginning of year............................. 118,625 297,148 (116,333) Valuation adjustments, net of related income taxes..... 15,985 (178,523) 413,481 ---------- ---------- ---------- Balance, end of year................................... 134,610 118,625 297,148 RETAINED EARNINGS Balance, beginning of year............................. 2,926,530 2,993,156 2,641,908 Net income............................................. 481,778 230,100 550,924 Cash dividends declared on preferred stock............. (21,432) (38,714) (43,599) Cash dividends declared on common stock................ (273,772) (258,012) (182,670) Immaterial business combinations accounted for as poolings of interests................................ -- -- 26,645 Repurchase of Series C and Series E shares............. -- -- (52) ---------- ---------- ---------- Balance, end of year................................... 3,113,104 2,926,530 2,993,156 ---------- ---------- ---------- Total stockholders' equity............................. $5,309,071 $4,993,088 $5,364,180 ========== ========== ==========
See Notes to Consolidated Financial Statements. 66 69 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (NUMBER OF SHARES IN THOUSANDS) PREFERRED STOCK Balance, beginning of year.................................. 5,383 7,301 7,379 Repurchase of Series C and Series E shares.................. -- -- (78) Redemption or conversion of preferred stock................. (660) (1,918) -- ------- ------- ------- Balance, end of year........................................ 4,723 5,383 7,301 ======= ======= ======= COMMON STOCK Balance, beginning of year.................................. 250,231 243,239 236,605 Common stock issued through stock options, restricted stock grants and employee stock plans, net of cancellations..... 8,217 1,628 1,150 Immaterial business combinations accounted for as poolings of interests.............................................. -- 347 3,429 Common stock issued under dividend reinvestment plan........ 20 92 2,055 Conversion of preferred stock............................... -- 11,081 -- Common stock acquired....................................... (908) (6,156) -- ------- ------- ------- Balance, end of year........................................ 257,560 250,231 243,239 ======= ======= =======
See Notes to Consolidated Financial Statements. 67 70 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income....................................... $ 481,778 $ 230,100 $ 550,924 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................... 207,139 392,435 251,424 Loss (gain) on sale of loans and leases..... 60,343 (45,708) (25,933) (Gain) on sale of other assets.............. (39,423) (17,021) (19,830) Depreciation and amortization............... 222,317 221,679 209,936 Stock dividends from FHLBs.................. (64,086) (57,176) (39,971) Write down of loans securitized and retained.................................. 27,621 38,339 19,651 Transaction-related charges................. 196,628 145,023 -- Decrease (increase) in trading securities... 1,647 (1,409) 334 Origination of loans held for sale.......... (5,029,499) (3,171,102) (1,957,791) Sales of loans held for sale................ 4,616,468 3,622,240 2,317,031 Additions to mortgage servicing rights...... (76,352) (96,189) (69,138) Sales of mortgage servicing rights.......... -- 5,395 -- (Increase) decrease in other assets......... (486,371) 543,285 (512,624) Increase (decrease) in other liabilities.... 67,636 22,148 (177,059) ------------ ------------ ------------ Net cash provided (used) by operating activities............................. 185,846 1,832,039 (546,954) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities....... (3,231,900) (4,130,281) (3,897,102) Principal payments and maturities of available-for-sale securities.................. 2,439,250 4,825,963 2,814,550 Sales of available-for-sale securities........... 2,350,541 4,540,171 2,130,340 Purchases of held-to-maturity securities......... (31,251) (3,414,473) (697,470) Principal payments and maturities of held-to-maturity securities.................... 627,163 4,019,873 1,653,413 Sales of loans................................... 41,088 1,314,090 119,194 Origination of loans, net of principal payments....................................... (12,464,718) (10,550,109) (10,003,476) Payments received on New West Federal Savings and Loan Association ("New West") Note......... -- -- 1,682,040 Proceeds from sale of foreclosed assets.......... 366,986 544,347 553,621 Purchases of premises and equipment, net......... (131,422) (113,086) (164,169) Cash acquired through acquisitions............... -- 3,506 69,358 Proceeds from sale of WM Life.................... 105,000 -- -- ------------ ------------ ------------ Net cash (used) by investing activities... (9,929,263) (2,959,999) (5,739,701)
See Notes to Consolidated Financial Statements. 68 71 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in deposits................... (1,680,897) (1,030,974) 1,652,935 (Decrease) increase in annuities.................. (9,538) 22,554 56,325 Increase in federal funds purchased and commercial paper........................................... 774,776 403,673 729,372 (Decrease) in short-term reverse repurchase agreements...................................... (2,634,089) (2,181,151) (1,049,527) Proceeds from long-term reverse repurchase agreements...................................... 9,800,553 4,011,148 5,347,579 Repayment of long-term reverse repurchase agreements...................................... (6,920,543) (4,649,930) (2,381,401) Proceeds from FHLBs advances...................... 51,718,045 24,676,544 5,472,178 Payments on FHLBs advances........................ (41,427,507) (20,235,938) (4,217,336) Proceeds from trust preferred..................... 700,000 -- 100,000 (Repayments of) proceeds from other borrowings.... (420,332) 229,025 90,852 Repayments to minority interest................... -- (95,372) -- Common stock repurchased.......................... (32,016) (176,732) -- Common stock issued............................... 230,704 38,944 70,215 Redemption of preferred stock..................... (165,000) Cash dividends paid............................... (295,204) (296,726) (226,269) ------------ ------------ ----------- Net cash provided by financing operations....... 9,638,952 715,065 5,644,923 ------------ ------------ ----------- (Decrease) increase in cash and cash equivalents.................................. (104,465) (412,895) 452,176 Cash and cash equivalents, beginning of year.... 1,665,355 2,078,250 1,626,074 ------------ ------------ ----------- Cash and cash equivalents, end of year.......... $ 1,560,890 $ 1,665,355 $ 2,078,250 ============ ============ =========== NONCASH INVESTING ACTIVITIES Loans exchanged for MBS........................... $ 6,408,056 $ 920,072 $ 8,585,719 Transfer to available-for-sale securities......... -- -- 10,844,168 Transfer to held-to-maturity securities........... 4,359,814 -- -- Loans transferred to foreclosed assets............ 443,412 650,079 676,001 Loans originated to facilitate the sale of foreclosed assets............................... 83,395 145,315 152,059 Loans originated to refinance existing loans...... 1,800,512 1,227,974 908,486 Loans transferred to loans held for sale.......... -- 214,991 621,267 Transaction-related write down on premises and equipment....................................... 129,151 18,388 -- CASH PAID DURING THE YEAR FOR Interest on deposits.............................. 2,177,244 2,215,708 2,340,107 Interest on borrowings............................ 2,388,780 1,549,354 1,483,695 Income taxes...................................... 226,245 269,900 159,468
See Notes to Consolidated Financial Statements. 69 72 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On July 1, 1997, Great Western Financial Corporation ("GWFC") merged with and into a subsidiary of Washington Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the "Company"), and all of the subsidiaries of GWFC including Great Western Bank, a Federal Savings Bank ("GWB") and Aristar, Inc. and its subsidiaries ("Aristar"), became subsidiaries of the Company (the "Great Western Merger"). 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. 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. The results of operations 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. Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 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 to mid-sized businesses primarily throughout the western United States and Florida through its subsidiary operations. Financial services of the Company include consumer banking, mortgage lending, consumer finance, commercial banking and securities activities. 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 have the effect of changing the interest rate characteristics of the assets or liabilities to which they are designated. Such effect is measured 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 70 73 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest rate cap agreements designated against deposits and borrowings are reported at historical cost using settlement accounting. Under settlement accounting 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 cost 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, the option fee 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. Trading Securities Securities classified as trading are accounted for at fair value with unrealized gains and losses included in current period earnings. 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 from 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. 71 74 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Held-to-Maturity Securities Investments classified as held to maturity are accounted for at amortized cost, but the 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. Loans Loans held in portfolio are stated at the principal amount outstanding, net of deferred loan fees and any discounts or premiums on purchased loans. Deferred fees, discounts and premiums are amortized using the interest method over the estimated life of the loan. The Company sells most of its conforming one-to-four family residential mortgage ("SFR") 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. Management generally ceases to accrue interest income on any loan that becomes more than 90 days 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. The Company evaluates commercial real estate, commercial business and builder construction loans for impairment on an individual basis. A loan in one of the categories is considered impaired when it is (i) probable that a creditor will be unable to collect all amounts due according to the terms of the loan agreement, or (ii) a substandard loan, whether or not performing. 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. The valuation of impaired loans is based on (i) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price, or (iii) the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment in the loan exceeds either the present value of expected future cash flows or 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 or specifically reserved. 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 72 75 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. 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. Consumer finance loans are also reviewed on a systematic basis. In evaluating the adequacy of the reserve, consideration is given to recent loan loss experience and such other factors as, in management's judgment, deserve current recognition in estimating losses. Loans secured by collateral other than real estate are charged off based on the number of days contractually delinquent (180 days for substantially all loans). 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. MBS Impairment and Contingent Liability for Loans Sold with Recourse Retained The Company records an impairment on loans securitized with full or limited recourse and held in its portfolio of MBS. The Company also maintains a contingent liability to cover potential losses on loans that have been sold to third parties where the Company has retained full or limited recourse. Foreclosed Assets Foreclosed assets include properties acquired through foreclosure that are transferred 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 a reserve for losses. The amount the Company ultimately recovers from foreclosed assets 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. Mortgage Servicing Rights Originated servicing rights are recorded when mortgage loans are originated and subsequently sold or securitized (and held as available-for-sale securities) 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 their relative fair values. Purchased servicing rights represent the cost of acquiring the right to service mortgage loans. 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. "Short servicing" is recorded in other liabilities in instances where the cost of servicing exceeds the servicing fees received and is amortized in proportion to, and over the period of, estimated net servicing loss. 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 rate (less than 6%, 50 basis point 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"). 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 73 76 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. The Company periodically reviews premises and equipment for impairment. If identified, an impairment loss is recognized. Intangible Assets Arising from Acquisitions Because of the earnings power or other identifiable values of certain purchased companies or businesses, the Company paid amounts in excess of identifiable fair value for businesses and tangible assets acquired. Generally, such amounts are being amortized by systematic charges to income over a period no greater than the estimated remaining life of the assets acquired or not exceeding the estimated average remaining life of the existing deposit base assumed. The Company periodically reviews intangibles to assess recoverability and impairment is recognized in operations if permanent loss of value occurs. Reverse Repurchase Agreements The Company enters into agreements under which the Company sells securities subject to an obligation to repurchase the same or similar securities ("reverse repurchase agreements"). Under these arrangements, the Company transfers legal control over the assets but still retains effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, reverse repurchase agreements are accounted for as financing arrangements and not as a sale and subsequent repurchase. The obligation to repurchase the securities is reflected as a liability in the Consolidated Statements of Financial Position while the dollar amount of securities underlying the agreements remains 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 $137.5 million and $85.8 million as of December 31, 1997 and 1996 were held by the Company in fiduciary or agency capacity. Transaction-Related Expenses The Company records transaction-related expenses in conjunction with its major business combinations. Transaction-related expenses are comprised of three major categories: employee severance costs, the write down of duplicate or excess premises and equipment, and other incremental expenses related to effecting a business combination. The Company recognizes a liability for the cost of employee termination benefits that management decides to provide involuntarily terminated employees in the period in which management approves the specific plan of termination, if all of the following conditions exist: (i) management has the appropriate level of authority to involuntarily terminate employees, (ii) management approves and commits the enterprise to the plan of termination, (iii) management establishes the benefits that current employees will receive upon termination, (iv) the benefit arrangement has been communicated to employees, (v) the communication of the benefit arrangement includes sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are terminated, (vi) the plan of termination specifically identifies the number 74 77 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of employees to be terminated, their job classifications or functions, and their locations, and (vii) the period of time to complete the plan of termination indicates that significant changes to the plan of termination are not likely. Upon consummation of a business combination, the Company specifically identifies duplicate or excess facilities in the combined operations. Duplicate or excess facilities fall into two categories: facilities owned by the Company and facilities leased by the Company. Duplicate or excess facilities owned by the Company are recorded at the lower of cost or fair value. The loss estimated and recorded while these facilities remain in service does not include the portion of the cost that is properly allocable to anticipated future service of the facility. Depreciation is recorded on these facilities while they remain in service. The loss estimated and recorded on leased duplicate or excess facilities represents either costs to be incurred by the Company under contractual obligations or represents penalties that will be incurred to cancel the contractual obligations. Lease payments made on these facilities while they remain in service are included in occupancy and equipment expense and are not included in transaction-related expenses. The other incremental expenses related to effecting a business combination consist of both period costs and accrued contract exit fees for duplicate services provided. The period costs include actual fees of professional services firms (legal, underwriting, etc.) that were incurred in conjunction with the combinations, and one-time, nonrecurring incremental costs associated with combining the entities which are being expensed as incurred. The liability for contract exit fees for duplicate services provided is recognized when Company management makes the decision to terminate such contracts. 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 on that basis as well. The Company's tax filings generally include all subsidiaries. Keystone Holdings 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 carryforward by ASB and have been included in the schedule of net operating loss carryforwards presented in Note 18: Income Taxes. For periods subsequent to the Keystone Transaction, the Company's consolidated tax return includes Keystone Holdings. GWFC will file separate consolidated tax returns for periods prior to July 1, 1997. For periods subsequent to the Great Western Merger, the Company's consolidated tax return will include GWFC. Average Balances Average balances are obtained from the best available daily, weekly or monthly data, which in all cases approximate the average balances calculated on a daily basis. Adoption of Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and established, 75 78 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, SFAS No. 125 was effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the effective date of certain provisions of SFAS No. 125. The Company has and 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. SFAS No. 130, Reporting Comprehensive Income was issued in June 1997 and requires businesses to disclose comprehensive income and its components in their financial statements. This statement will not affect the results of operations or financial position of the Company. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and is applicable to interim periods. SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information was issued in June 1997 and redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. SFAS No. 131 is effective for the Company beginning January 1, 1998. The statement will not affect the results of operations or financial position of the Company. The Company has not yet completed its analysis of which operating segments it will report on. NOTE 2: BUSINESS COMBINATIONS/RESTRUCTURING On July 1, 1997, WMI completed its business combination with GWFC. On that date GWFC had assets of $43.77 billion, deposits of $27.79 billion and stockholders' equity of $2.69 billion. The Company issued 125,649,551 shares of common stock to complete the Great Western Merger. Results of operations of the Company and GWFC for the six months ended June 30, 1997 were as follows:
SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $1,850,340 $1,811,823 $3,662,163 Net income..................................... $ 232,796 $ 138,036 $ 370,832
Reconciliations of revenue and net income previously presented by the Company with the combined amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1996 and 1995 were as follows.
YEAR ENDED DECEMBER 31, 1996 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $3,414,117 $3,631,137 $7,045,254 Net income..................................... $ 114,278 $ 115,822 $ 230,100
YEAR ENDED DECEMBER 31, 1995 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $3,132,675 $3,629,263 $6,761,938 Net income..................................... $ 289,902 $ 261,022 $ 550,924
76 79 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 20, 1996, the Company merged with Keystone Holdings. At November 30, 1996, Keystone Holdings had assets of $21.89 billion, deposits of $12.82 billion and stockholder's equity of $808.6 million. The Company issued 47,883,333 shares of common stock to complete the Keystone Transaction. During 1996, GWFC implemented a restructuring plan to improve its competitive position, accelerate expense reduction and enhance future revenue growth by streamlining operations, making efficient use of premises and modernizing its systems platform. The Company recorded $68.3 million of restructuring charges in 1996. The components of the restructuring charge were severance and related payments, and facilities and equipment impairment. At December 31, 1996, $47.1 million of these charges remained accrued. The incomplete GWFC restructuring activities have been integrated into the consolidation activities associated with the Great Western Merger and are now accounted for in connection with the transaction-related expenses discussed below. As a result of the Great Western Merger and the Keystone Transaction, the Company recorded transaction-related expenses of $431.1 million and $226.4 million (inclusive of the $68.3 million of restructuring charges discussed above) during 1997 and 1996. The majority of the charges were for severance and related payments, facilities and equipment impairment, and various investment banking, legal and contract exit fees, all of which were incremental expenses. The accrual of $196.1 million at year-end 1997 and the $126.6 million (inclusive of the $47.1 million of restructuring charges discussed above) at year-end 1996 related primarily to costs for specifically identified severance programs, the impairment of premises and equipment and the liability for contract exit fees for duplicate services. The Company expected staff reductions related to the Keystone Transaction and Great Western Merger (inclusive of the GWFC restructuring plan) of approximately 2,850. As of December 31, 1997 and 1996 approximately 1,660 and 630 employee separations had occurred under these plans. The remaining employee separations of approximately 1,190 are planned to be completed by the end of June 1998. Additional staff reductions are anticipated as a result of normal attrition. Offices used by the Company on the Chatsworth campus are being consolidated in order to make more efficient use of the building space. As a result of this consolidation, the Company anticipates that approximately 565,000 square feet, located predominantly in six buildings, will become available to sublet to third party tenants. It is expected that the space will be available for subleasing by June 1998. In addition, the Company has identified 90 consumer financial centers which will be closed and will have their operations consolidated with neighboring financial centers by the end of the third quarter of 1998. In order to meet the Company's goal to consolidate its current systems platform, certain computer hardware and software equipment has been or will be abandoned and written off. The consolidation of systems will allow the Company to increase operational efficiency, improve processing capacity and establish a common user workstation environment. 77 80 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of the restructuring and transaction-related expenses and accrual activity during 1996 and 1997 were as follows:
1996 ACTIVITY DECEMBER 31, 1996 CHARGED 1996 1996 1996 TOTAL AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Severance..................... $ -- $ 59,714 $ 59,714 $ (2,776) $ 56,938 Premises...................... -- 29,456 29,456 -- 29,456 Equipment..................... -- 29,101 29,101 (18,388) 10,713 Legal, underwriting and other direct transaction costs.... 23,179 3,232 26,411 -- 3,232 Contract cancellation costs... -- 12,300 12,300 -- 12,300 Other......................... 55,456 13,976 69,432 -- 13,976 -------- -------- -------- -------- -------- $ 78,635 $147,779 $226,414 $(21,164) $126,615 ======== ======== ======== ======== ========
1997 ACTIVITY DECEMBER 31, 1997 CHARGED 1997 1997 1997 TOTAL AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Severance..................... $ 28,807 $ 94,126 $122,933 $ (57,960) $ 93,104 Premises...................... -- 97,165 97,165 (69,317) 57,304 Equipment..................... -- 49,121 49,121 (59,834) -- Legal, underwriting and other direct transaction costs.... 109,811 3,503 113,314 (5,993) 742 Contract cancellation costs... -- 33,207 33,207 (11,808) 33,699 Other......................... 8,640 6,745 15,385 (9,478) 11,243 -------- -------- -------- --------- -------- $147,258 $283,867 $431,125 $(214,390) $196,092 ======== ======== ======== ========= ========
On January 31, 1996, the Company acquired Western Bank ("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, the assets, liabilities and stockholders' equity of Western were recorded on the books of the Company 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. On January 15, 1997, Washington Mutual acquired United Western Financial Group, Inc. ("United Western") of Salt Lake City, Utah 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 accounted for as a purchase for accounting purposes. Accordingly, on January 15, 1997, the assets, liabilities and stockholders' equity of United Western were recorded on the books of the Company at their respective fair 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 intangible assets, was recorded at 78 81 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $4.2 million. 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, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Cash........................................................ $1,285,222 $1,032,379 Cash equivalents: Overnight investments..................................... 257,583 381,029 Commercial paper.......................................... 10,975 -- Securities purchased under agreements to resell ("repurchase agreements").............................. -- 250,000 Time deposit accounts..................................... 7,110 1,947 ---------- ---------- 275,668 632,976 ---------- ---------- $1,560,890 $1,665,355 ========== ==========
The Company enters into repurchase agreements having terms of up to 90 days; however, repurchase agreements are typically overnight investments. The Company generally takes possession of collateral supporting repurchase agreements. The repurchase agreements were collateralized by U.S. government agency securities with fair values at least 2% above the face amounts of the repurchase agreements. For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight investments, commercial paper, repurchase agreements and time deposits. These time deposit accounts 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 were balances maintained at the Federal Reserve Bank of San Francisco of $102.2 million and $149.7 million at December 31, 1997 and 1996. 79 82 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4: SECURITIES The amortized cost, unrealized gains, unrealized losses, and fair values of securities (exclusive of trading securities) were as follows:
DECEMBER 31, 1997 ----------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE YIELD(1) ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS) Available-for-sale securities Investment securities: U.S. government and agency...... $ 528,528 $ 2,211 $ (173) $ 530,566 6.67% Corporate debt.................. 456,064 2,849 (363) 458,550 6.51 Municipal(2).................... 25 1 -- 26 9.61 Equity securities: Preferred stock.............. 172,199 13,188 (75) 185,312 6.33 Other securities............. 11,331 163 (133) 11,361 6.29 ----------- -------- --------- ----------- ---- 1,168,147 18,412 (744) 1,185,815 6.55 MBS: U.S. government agency.......... 8,118,693 108,671 (5,542) 8,221,822 6.64 Private issue................... 1,970,359 13,492 (18,550) 1,965,301 7.35 ----------- -------- --------- ----------- ---- 10,089,052 122,163 (24,092) 10,187,123 6.78 Derivative instruments: Interest rate exchange agreements................... -- -- (218) (218) -- Interest rate cap agreements.... 1,033 169 -- 1,202 -- ----------- -------- --------- ----------- ---- 1,033 169 (218) 984 -- ----------- -------- --------- ----------- ---- 10,090,085 122,332 (24,310) 10,188,107 6.78 ----------- -------- --------- ----------- ---- $11,258,232 $140,744 $ (25,054) $11,373,922 6.75% =========== ======== ========= =========== ==== Held-to-maturity securities Investment securities: Corporate debt.................. $ 20,273 $ 1,152 $ (7) $ 21,418 8.21% Municipal(2).................... 100,124 5,429 -- 105,553 5.84 ----------- -------- --------- ----------- ---- 120,397 6,581 (7) 126,971 6.24 MBS: U.S. government agency.......... 12,559,634 48,337 (134,872) 12,473,099 6.38 Private issue................... 99,583 -- -- 99,583 5.90 ----------- -------- --------- ----------- ---- 12,659,217 48,337 (134,872) 12,572,682 6.38 ----------- -------- --------- ----------- ---- $12,779,614 $ 54,918 $(134,879) $12,699,653 6.38% =========== ======== ========= =========== ====
80 83 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE YIELD(1) ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS) Available-for-sale securities: Investment securities: U.S. government and agency............. $ 878,179 $ 2,068 $ (1,904) $ 878,343 6.38% Corporate debt......................... 1,032,876 11,168 (4,796) 1,039,248 6.51 Equity securities: Preferred stock..................... 171,029 4,012 (831) 174,210 6.88 Other securities.................... 34,621 175 (129) 34,667 5.99 ----------- -------- -------- ----------- ---- 2,116,705 17,423 (7,660) 2,126,468 6.48 MBS: U.S. government agency................. 12,541,352 231,349 (53,412) 12,719,289 6.89 Private issue.......................... 1,250,738 8,372 (11,338) 1,247,772 7.38 ----------- -------- -------- ----------- ---- 13,792,090 239,721 (64,750) 13,967,061 6.93 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 -- ----------- -------- -------- ----------- ---- 13,796,735 240,257 (68,117) 13,968,875 6.93 ----------- -------- -------- ----------- ---- $15,913,440 $257,680 $(75,777) $16,095,343 6.87% =========== ======== ======== =========== ==== Held-to-maturity securities: Investment securities: U.S. government and agency............. $ 6,629 $ 559 $ -- $ 7,188 8.25% Corporate debt......................... 77,993 5,215 (28) 83,180 8.61 Municipal(2)........................... 108,073 3,618 (238) 111,453 6.23 ----------- -------- -------- ----------- ---- 192,695 9,392 (266) 201,821 7.28 MBS: U.S. government agency................. 4,186,777 73,534 (7,781) 4,252,530 7.60 Private issue.......................... 99,584 -- (8,810) 90,774 5.55 ----------- -------- -------- ----------- ---- 4,286,361 73,534 (16,591) 4,343,304 7.56 ----------- -------- -------- ----------- ---- $ 4,479,056 $ 82,926 $(16,857) $ 4,545,125 7.55% =========== ======== ======== =========== ====
- --------------- (1) Weighted average yield at end of year. (2) The Company held a small amount of tax exempt securities, but chose not to report the applicable interest income and yield on a tax equivalent basis. 81 84 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Securities (exclusive of trading securities) by contractual maturity were as follows:
DECEMBER 31, 1997 ------------------------------------------------------------------------------------------------------ DUE AFTER ONE AFTER FIVE CARRYING WITHIN BUT WITHIN BUT WITHIN AFTER VALUE YIELD ONE YEAR YIELD FIVE YEARS YIELD 10 YEARS YIELD 10 YEARS YIELD ----------- ----- -------- ----- ---------- ----- ---------- ----- ----------- ----- (DOLLARS IN THOUSANDS) Available-for-sale securities Investment securities: U.S. government and agency................. $ 530,566 6.67% $251,924 6.06% $ 265,517 7.24% $ 8,037 6.86% $ 5,088 6.95% Corporate debt........... 458,550 6.51 139,043 6.37 229,503 6.53 51,776 6.77 38,228 6.47 Municipal................ 26 9.61 -- -- 26 9.61 -- -- -- -- Equity securities: Preferred stock.......... 185,312 6.33 -- -- -- -- -- -- 185,312 6.33 Other securities......... 11,361 6.29 3,069 5.73 2,701 5.83 2,410 7.24 3,181 6.50 MBS: U.S. government agency... 8,221,822 6.64 9,608 5.25 898,807 6.53 140,149 7.09 7,173,258 6.64 Private issue............ 1,965,301 7.35 -- -- 2,149 12.33 -- -- 1,963,152 7.35 Derivative instruments: Interest rate exchange agreements............. (218) -- (334) -- 116 -- -- -- -- -- Interest rate cap agreements............. 1,202 -- 1,202 -- -- -- -- -- -- -- ----------- ---- -------- ---- ---------- ----- -------- ---- ----------- ---- $11,373,922 6.75% $404,512 6.11% $1,398,819 6.68% $202,372 6.91% $ 9,368,219 6.79% =========== ==== ======== ==== ========== ===== ======== ==== =========== ====
Held-to-maturity securities Investment securities: Corporate debt........... $ 20,273 8.21% $ -- --% $ 100 5.50% $ -- --% $ 20,173 8.21% Municipal................ 100,124 5.84 -- -- 5,666 5.48 23,948 6.14 70,510 5.77 MBS: U.S. government agency... 12,559,634 6.38 -- -- 3,564 6.59 67,322 6.79 12,488,748 6.38 Private issue............ 99,583 5.90 -- -- -- -- -- -- 99,583 5.90 ----------- ---- -------- ---- ---------- ----- -------- ---- ----------- ---- $12,779,614 6.38% $ -- --% $ 9,330 5.90% $ 91,270 6.62% $12,679,014 6.38% =========== ==== ======== ==== ========== ===== ======== ==== =========== ====
The available-for-sale portfolio contains a small amount of private-issue securities. Private-issue securities include 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 higher rate of interest than U.S. government agency securities, thereby enhancing the overall yield of the portfolio. Such securities do not qualify for guarantee 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 agency 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. Other than temporary declines in fair value are recognized as a reduction to current earnings. At December 31, 1997, the Company held $2.09 billion of private-issue MBS and CMOs (including the $1.22 billion Real Estate Mortgage Investment Conduit ("REMIC") created during the fourth quarter of 1997). Of the $2.09 billion, 49% were of the highest investment grade (AAA), 38% were rated investment grade (AA or A), 5% were rated lowest investment grade (BBB) and 8% were rated below investment grade (BB or below). At December 31, 1996, the Company held $1.34 billion of private-issue MBS and CMOs. Of 82 85 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that amount, 16% were of the highest investment grade (AAA), 75% were rated investment grade (AA or A), 6% were rated lowest investment grade (BBB) and 3% were rated below investment grade (BB or below). At December 31, 1997, $15.00 billion of MBS where the Company has retained recourse against the loans collateralizing the MBS ("Recourse MBS") had an associated impairment of $35.6 million. The Company also maintains a contingent liability to cover potential losses on Recourse MBS sold to third parties and loans sold with recourse. During 1997, an additional $2.7 million was set aside to cover losses on these Recourse MBS and loans sold with recourse. At December 31, 1997 the Company had sold $2.13 billion of Recourse MBS and loans sold with recourse, and the contingent liability totaled $8.8 million, which the Company considers adequate to cover inherent losses. Proceeds from sales of securities in the available-for-sale portfolio during 1997, 1996 and 1995 were $2.35 billion, $4.54 billion and $2.13 billion. The Company realized $8.3 million in gains and $800,000 in losses on these sales during 1997. The Company realized $42.1 million in gains and $34.1 million in losses on sales during 1996. Similarly, the Company realized $31.1 million in gains and $10.0 million in losses during 1995. MBS with an amortized cost of $14.55 billion and fair value of $14.58 billion at December 31, 1997 were pledged to secure public deposits, reverse repurchase agreements, other borrowings, interest rate exchange agreements, and access to the Federal Reserve discount window. At December 31, 1997, net unrealized gains on the available-for-sale portfolio were $115.7 million and net unrealized losses on the derivative instruments designated against this portfolio were $49,000. During 1997, certain MBS were transferred from available for sale to held to maturity. The related market adjustment of $101.3 million was retained in equity and will be amortized over the life of the related securities in accordance with SFAS No. 115. The net (after tax) result was a valuation reserve of $134.6 million included as a separate component of stockholders' equity. At December 31, 1996, net unrealized gains on the available-for-sale portfolio were $184.7 million and net 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 $118.6 million. 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 $10.84 billion and unrealized gains of $225.6 million and unrealized losses of $28.2 million to the available-for-sale category. No transfers from the held-to-maturity category to the available-for-sale category were made during 1997 and 1996. 83 86 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5: LOANS Loans consisted of the following:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Real estate: SFR..................................................... $53,431,451 $48,689,404 SFR construction........................................ 877,449 728,121 Commercial real estate(1)............................... 6,613,541 6,488,254 ----------- ----------- 60,922,441 55,905,779 Manufactured housing...................................... 1,081,193 1,028,192 Second mortgage and other consumer........................ 2,725,144 2,371,086 Consumer finance.......................................... 2,309,407 2,185,903 Commercial business....................................... 772,466 340,149 Reserve for loan losses................................... (670,494) (677,141) ----------- ----------- $67,140,157 $61,153,968 =========== ===========
- --------------- (1) At December 31, 1997, included $65.0 million of commercial real estate construction lending. Real estate construction (including SFR construction and commercial real estate construction) and commercial business loans by maturity date were as follows:
DECEMBER 31, 1997 ---------------------------------------------------------- REAL ESTATE CONSTRUCTION COMMERCIAL BUSINESS --------------------- --------------------- ARMS FIXED RATE ARMS FIXED RATE TOTAL -------- ---------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) Due within one year.................... $339,119 $ 25,382 $435,550 $ 40,517 $ 840,568 After one but within five years........ 38,584 59,527 154,298 48,038 300,447 After five years....................... 172,319 307,503 18,948 75,115 573,885 -------- -------- -------- -------- ---------- $550.022 $392,412 $608,796 $163,670 $1,714,900 ======== ======== ======== ======== ==========
Nonaccrual loans totaled $601.4 million and $575.0 million at December 31, 1997 and 1996. If interest on these loans had been recognized, such income would have been $43.6 million in 1997, $53.5 million in 1996 and $48.9 million in 1995. 84 87 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of impaired loans and the related allocated reserve for loan losses were as follows:
DECEMBER 31, ------------------------------------------------- 1997 1996 --------------------- ------------------------ LOAN ALLOCATED ALLOCATED AMOUNT RESERVES LOAN AMOUNT RESERVES -------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans: With allocated reserves................... $ 33,980 $ 7,760 $ 19,071 $ 6,641 Without allocated reserves................ 15,481 -- 39,609 -- -------- ------- -------- ------- 49,461 7,760 58,680 6,641 Other impaired loans: With allocated reserves................... 420,662 82,693 384,272 73,168 Without allocated reserves................ 81,160 -- 177,516 -- -------- ------- -------- ------- 501,822 82,693 561,788 73,168 -------- ------- -------- ------- $551,283 $90,453 $620,468 $79,809 ======== ======= ======== =======
The average balance of impaired loans and the related interest income recognized were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Average balance of impaired loans...................... $572,727 $607,514 $436,034 Interest income recognized............................. 38,523 34,248 28,815
Loans totaling $24.36 billion and $12.01 billion at December 31, 1997 and 1996 were pledged to secure advances from FHLBs. At December 31, 1997, the Company had $1.16 billion in fixed-rate SFR loan commitments, $1.46 billion in ARM commitments, $773.8 million in SFR construction loan commitments, $155.0 million in commercial real estate loan commitments, $518.9 million in commercial business loan commitments, and $1.60 billion in undisbursed lines of credit. Unamortized deferred loan fees were $67.7 million and $162.0 million at December 31, 1997 and 1996. The amortization of deferred loan fees included in interest income totaled $67.4 million in 1997, $63.7 million in 1996 and $83.1 million in 1995. As of December 31, 1997, the Company serviced 423 Government National Mortgage Association ("GNMA") loan pools with an outstanding security balance of $371.0 million. The Company did not issue any additional GNMA loan pools during 1997. 85 88 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6: RESERVE FOR LOAN LOSSES Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance, beginning of year......................... $ 677,141 $ 598,124 $ 683,040 Provision for loan losses.......................... 207,139 392,435 251,424 Reserves added through business combinations....... 10,908 1,077 5,372 Reserves transferred to MBS impairment............. (21,755) -- -- Reserves transferred to contingent liability....... (2,747) -- -- Loans charged off: SFR.............................................. (100,860) (232,653) (240,489) SFR construction................................. (52) (16) (125) Commercial real estate........................... (24,073) (36,354) (55,888) Manufactured housing, second mortgage and other consumer................................ (17,621) (11,127) (8,905) Commercial business.............................. (2,569) (435) (813) Consumer finance................................. (79,697) (60,520) (62,206) --------- --------- --------- (224,872) (341,105) (368,426) Recoveries of loans previously charged off: SFR.............................................. 1,353 5,693 3,891 SFR construction................................. 90 -- 47 Commercial real estate........................... 2,725 3,425 5,286 Manufactured housing, second mortgage and other consumer................................ 2,916 1,221 951 Commercial business.............................. 221 74 482 Consumer finance................................. 17,375 16,197 16,057 --------- --------- --------- 24,680 26,610 26,714 --------- --------- --------- Net charge offs.................................... (200,192) (314,495) (341,712) --------- --------- --------- Balance, end of year............................... $ 670,494 $ 677,141 $ 598,124 ========= ========= =========
In connection with the Keystone Transaction, the Company provided an additional $125.0 million in loan loss provision. 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. The provision in 1996 also included $50.0 million attributable to a bulk sale of loans at GWB. 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. 86 89 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) An analysis of the reserve for loan losses was as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Specific and allocated reserves: Commercial real estate............................. $ 84,969 $117,343 Commercial business................................ 3,277 1,285 Builder construction............................... 2,207 -- -------- -------- 90,453 118,628 Unallocated reserves................................. 580,041 558,513 -------- -------- $670,494 $677,141 ======== ======== Total reserve for loan losses as a percentage of: Nonaccrual loans................................... 112% 118% Nonperforming assets............................... 83 84
NOTE 7: MORTGAGE SERVICING Loans serviced consisted of the following:
DECEMBER 31, 1997 ---------------------- (DOLLARS IN THOUSANDS) Loans held in portfolio and held for sale (exclusive of loans serviced by others)............................... $ 67,351,417 Loans securitized and retained (with and without recourse)............................................... 17,007,970 Loans serviced for others................................. 29,457,988 ------------ $113,817,375 ============
Changes in the balance of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year................. $185,984 $136,359 $ 96,846 Additions.................................. 76,352 96,189 69,138 Sales...................................... -- (5,395) -- Amortization of mortgage servicing rights................................... (48,027) (39,011) (28,743) Impairment adjustment...................... 1,051 (2,158) (882) -------- -------- -------- Balance, end of year....................... $215,360 $185,984 $136,359 ======== ======== ========
87 90 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes in the balance of short servicing were as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................... $20,714 $21,214 $25,357 Additions..................................... -- 23 2,590 Sales......................................... -- -- -- Amortization.................................. (3,858) (2,166) (6,733) Impairment adjustment......................... 1,128 1,643 -- ------- ------- ------- Balance, end of year.......................... $17,984 $20,714 $21,214 ======= ======= =======
Changes in the valuation for impairment of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 ------- -------- ------- (DOLLARS IN THOUSANDS) Balance, beginning of year................... $ 3,040 $ 882 $ -- Additions.................................... 2,830 2,158 882 Recoveries................................... (3,881) -- -- ------- -------- ------- Balance, end of year......................... $ 1,989 $ 3,040 $ 882 ======= ======== =======
NOTE 8: INVESTMENT IN FHLBS The investment in the FHLBs of Seattle and San Francisco consisted of capital stock, at cost, totaling $1.06 billion at December 31, 1997 and $843.0 million at December 31, 1996. The Company earned yields of 6.66% in 1997, 6.78% in 1996 and 5.29% in 1995 from dividends on its investment in FHLBs. FHLB capital stock is pledged to secure FHLB borrowings. Earnings on FHLB capital stock will presumably continue to be restricted due to the funding requirements imposed on the FHLBs for affordable housing programs and the Resolution Funding Corporation. NOTE 9: FORECLOSED ASSETS Foreclosed assets are primarily real estate acquired through foreclosure. Real estate acquired through foreclosure is recorded at the lower of cost or fair value (less estimated selling costs) at the date of acquisition and is periodically reviewed by management to determine whether there has been deterioration or recovery in value. Foreclosed assets consisted of the following:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Real estate acquired through foreclosure............... $202,241 $229,237 Other repossessed assets............................... 6,038 2,651 Reserve for losses..................................... (3,007) (9,005) -------- -------- $205,272 $222,883 ======== ========
88 91 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreclosed assets operations were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Loss from operations....................... $(32,754) $(40,538) $(29,435) Gain on sale of foreclosed assets.......... 19,359 16,298 24,293 Provision for losses....................... 2,817 5,935 (12,023) -------- -------- -------- $(10,578) $(18,305) $(17,165) ======== ======== ========
Changes in the reserve for losses were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................. $ 9,005 $ 36,962 $ 50,057 Provision (recovery of reserve) for losses.................................... (2,817) (5,935) 12,023 Reserves charged off, net of recoveries..... (3,181) (22,022) (25,118) ------- -------- -------- Balance, end of year........................ $ 3,007 $ 9,005 $ 36,962 ======= ======== ========
NOTE 10: PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
DECEMBER 31, ----------------------- 1997 1996 --------- ---------- (DOLLARS IN THOUSANDS) Furniture and equipment............................. $ 641,339 $ 787,763 Buildings........................................... 594,274 627,793 Leasehold improvements.............................. 204,423 217,469 Construction in progress............................ 108,338 17,203 --------- ---------- 1,548,374 1,650,228 Accumulated depreciation............................ (780,804) (785,197) Land................................................ 169,628 169,782 --------- ---------- $ 937,198 $1,034,813 ========= ==========
See "-- Note 2: Business Combinations/Restructuring." Depreciation expense for 1997, 1996 and 1995 was $115.8 million, $117.3 million and $112.6 million. The Company leases various branch offices, office facilities and equipment under capital and noncancelable operating leases which expire at various dates through 2054. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five- to 10-year periods. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $116.8 million, $102.4 million and $100.9 million in 1997, 1996 and 1995. 89 92 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
OPERATING LEASE CAPITAL LEASE ------------------------ ------------------------ LAND & FURNITURE & LAND & FURNITURE & BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT --------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Year ending December 31, 1998................................ $ 76,968 $ 6,317 $ 7,595 $1,713 1999................................ 65,583 4,588 7,595 1,713 2000................................ 57,641 1,985 7,693 1,713 2001................................ 50,340 878 7,693 1,713 2002................................ 40,169 644 7,693 291 Thereafter.......................... 167,591 -- 70,464 -- -------- ------- -------- ------ $458,292 $14,412 $108,733 $7,143 ======== ======= ======== ======
NOTE 11: INTANGIBLE ASSETS ARISING FROM ACQUISITIONS Intangible assets arising from acquisitions consisted of the following:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Branch acquisitions, net of amortization of $326,140 and $289,612.................................................. $249,330 $285,991 Business combinations, net of amortization of $150,950 and $125,542.................................................. 107,017 132,425 Other, net of amortization of $11,010 and $10,258........... 303 1,084 -------- -------- $356,650 $419,500 ======== ========
Intangible assets arising from acquisitions result from acquisitions accounted for as the purchase of assets and the assumption of liabilities and primarily consist of goodwill, core deposit intangibles and covenants not to compete. Intangible assets arising from acquisitions are amortized using the straight-line method over the period that is expected to be benefited, generally from three to 25 years. The average remaining amortization period at December 31, 1997 was approximately five years. 90 93 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12: DEPOSITS Deposits consisted of the following:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing................................... $ 4,380,133 $ 4,980,766 Noninterest bearing................................ 3,534,242 2,576,822 ----------- ----------- 7,914,375 7,557,588 Savings accounts..................................... 3,267,732 3,265,995 MMDAs................................................ 11,672,313 10,320,276 Time deposit accounts: Due within one year................................ 23,411,811 27,002,176 After one but within two years..................... 2,746,532 2,525,843 After two but within three years................... 879,090 713,005 After three but within four years.................. 546,680 631,922 After four but within five years................... 462,110 567,004 After five years................................... 85,374 83,105 ----------- ----------- 28,131,597 31,523,055 ----------- ----------- $50,986,017 $52,666,914 =========== ===========
Time deposit accounts in amounts of $100,000 or more totaled $5.74 billion and $7.08 billion at December 31, 1997 and 1996. At December 31, 1997, $1.65 billion of these deposits mature within three months, $1.34 million mature in three to six months, $1.70 billion mature in six months to one year, and $1.05 billion mature after one year. The following table shows the change in deposit balances:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing.......................................... $ (600,633) $ (213,902) Noninterest bearing....................................... 957,420 333,200 Savings accounts and MMDAs.................................. 1,353,774 423,493 Time deposit accounts....................................... (3,391,458) (1,573,765) ----------- ----------- $(1,680,897) $(1,030,974) =========== ===========
Financial data pertaining to the weighted average cost of deposits were as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- Weighted average interest rate during the year.............. 4.18% 4.22% 4.40%
The weighted average interest rate is based upon stated interest rates without giving consideration to daily compounding of interest or forfeiture of interest because of premature withdrawals. Accrued but unpaid interest on deposits included in other liabilities totaled $49.8 million and $51.1 million at December 31, 1997 and 1996. 91 94 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest expense on deposits was as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Checking (interest bearing) accounts............... $ 58,389 $ 57,449 $ 63,958 Savings accounts and MMDAs......................... 510,001 434,691 449,813 Time deposit accounts.............................. 1,597,714 1,748,162 1,838,132 ---------- ---------- ---------- $2,166,104 $2,240,302 $2,351,903 ========== ========== ==========
NOTE 13: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Federal funds purchased..................................... $2,570,750 $1,681,000 Commercial paper............................................ 357,532 472,506 ---------- ---------- $2,928,282 $2,153,506 ========== ==========
Federal funds purchased have maturities of up to 12 months, and at December 31, 1997, the average maturity was 82 days. Aristar issues commercial paper with original maturities of less than 270 days, with an average maturity at December 31, 1997, of 61 days. Financial data pertaining to federal funds purchased and commercial paper were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Federal funds purchased: Weighted average interest rate at end of year.... 5.92% 5.78% 5.84% Weighted average interest rate during the year... 5.64 5.40 6.05 Average balance of federal funds purchased....... $2,347,791 $1,344,706 $ 734,402 Maximum amount of federal funds purchased at any month end..................................... 3,955,600 2,242,000 998,000 Interest expense during the year................. 132,450 72,639 44,413 Commercial paper: Weighted average interest rate at end of year.... 5.99% 5.70% 5.88% Weighted average interest rate during the year... 6.06 5.40 6.27 Average balance of commercial paper.............. $ 440,057 $ 695,931 $1,164,071 Maximum amount of commercial paper issued at any month end..................................... 694,006 967,962 1,551,200 Interest expense during the year................. 26,679 37,608 73,029
92 95 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14: REVERSE REPURCHASE AGREEMENTS 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 reverse repurchase agreements were as follows:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Due within 30 days................................ $ 3,330,069 $ 5,662,338 After 30 but within 90 days....................... 1,346,043 5,455,639 After 90 but within 180 days...................... 265,000 321,987 After 180 days but within one year................ 667,197 99,067 After one year.................................... 6,670,731 494,088 ----------- ----------- $12,279,040 $12,033,119 =========== ===========
Financial data pertaining to reverse repurchase agreements were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year....................... 5.73% 5.50% 5.85% Weighted average interest rate during the year................... 5.71 5.50 6.11 Average balance of reverse repurchase agreements............. $12,527,774 $14,360,452 $14,800,811 Maximum amount of reverse repurchase agreements............. 12,574,964 15,578,289 16,192,165 Interest expense during the year.... 715,047 790,483 904,698
NOTE 15: ADVANCES FROM FHLBS As members of the FHLBs of San Francisco and Seattle, WMBFA, WMB and WMBfsb maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. Advances are collateralized in the aggregate by all stock owned of the FHLBs, by deposits with the FHLBs, and by certain mortgages or deeds of trust and securities of the U.S. government and agencies thereof. The maximum amount of credit which the FHLBs will extend for purposes other than meeting withdrawals varies from time to time in accordance with their policies. The interest rates charged by the FHLBs for advances vary depending upon maturity, the cost of funds in the individual FHLB and the purpose of borrowing. 93 96 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31, --------------------------------------------------- 1997 1996 ------------------------ ------------------------ RANGES OF RANGES OF INTEREST INTEREST AMOUNT RATES AMOUNT RATES ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Due within one year............. $10,271,528 5.50%-8.50% $ 7,388,583 4.38%-8.45% After one but within two years......................... 7,638,329 5.51 -8.53 1,698,891 5.30 -8.50 After two but within three years......................... 1,774,099 4.50 -9.34 267,889 6.17 -8.53 After three but within four years......................... 456,000 5.68 -5.79 59,397 4.98 -9.34 After four but within five years......................... 50,318 3.50 -5.73 450,000 5.40 -5.51 After five years................ 111,689 2.80 -8.65 146,665 2.80 -8.65 ----------- ----------- $20,301,963 $10,011,425 =========== ===========
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ----------- ----------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year....................................... 5.78% 5.51% 5.73% Weighted average interest rate during the year....................................... 5.75 5.56 5.73 Average balance of advances from FHLBs....... $13,621,867 $ 6,509,897 $3,668,898 Maximum amount of advances from FHLBs at any month end.................................. 20,301,963 10,011,425 5,570,819 Interest expense during the year............. 783,338 361,695 210,324
NOTE 16: TRUST PREFERRED SECURITIES The Company is the guarantor of three separate issues of trust preferred securities. In December 1995, Great Western Financial Trust I ("GWFT I") a wholly-owned subsidiary of GWFC, issued $100.0 million of 8.25% Trust Originated Preferred Securities (the "preferred securities"). In connection with GWFT I's issuance of preferred securities, GWFC issued to GWFT I $103.1 million principal amount of its 8.25% subordinated deferrable interest notes, due 2025 (the "subordinated notes"). The sole assets of GWFT I are and will be the subordinated notes. On January 27, 1997, Great Western Financial Trust II ("GWFT II"), a wholly-owned subsidiary of GWFC, issued $300.0 million of 8.206% Trust Originated Preferred Securities (the "preferred securities II"). In connection with GWFT II's issuance of the preferred securities II, GWFC issued to GWFT II $309.3 million principal amount of its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated notes II"). The sole assets of GWFT II are and will be the subordinated notes II. On May 31, 1997, Washington Mutual Capital I ("WMC I"), a wholly-owned subsidiary of Washington Mutual issued $400.0 million of 8.375% Subordinated Capital Income Securities (the "capital securities"). In connection with WMC I's issuance of the capital securities, Washington Mutual issued to WMC I $412.4 million principal amount of its 8.375% Junior Subordinated Debentures, due 2027 (the "subordinated debentures"). The sole assets of WMC I are and will be the subordinated debentures. GWFC's obligations under the subordinated notes and subordinated notes II were assumed by the Company. Washington Mutual's obligations under the subordinated notes, subordinated notes II and subordinated debentures and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the obligations of GWFT I under the preferred securities, of GWFT II under the preferred securities II and of WMC I under the capital securities. 94 97 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has a right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding the extension period described in the table below with respect to each deferral period, provided that no extension period may extend beyond the stated maturity of the respective debentures. Distributions paid on the securities are recorded as interest expense in the consolidated statements of income. Trust preferred securities and debentures were as follows:
DECEMBER 31, 1997 -------------------------------------------------------------------------------------- AGGREGATE LIQUIDATION AGGREGATE PER AMOUNT OF LIQUIDATION AGGREGATE STATED ANNUM TRUST AMOUNT OF PRINCIPAL MATURITY INTEREST PREFERRED COMMON AMOUNT OF OF RATE OF EXTENSION NAME OF TRUST SECURITIES SECURITIES DEBENTURES DEBENTURES DEBENTURES PERIOD ------------- ----------- ----------- ---------- ---------- ---------- ------------------- (DOLLARS IN THOUSANDS) Great Western Financial Trust I.............. $100,000 $ 3,093 $103,093 2025 8.250% 20 consecutive quarters Great Western Financial Trust II............. 300,000 9,279 309,279 2027 8.206% 10 consecutive semi-annual periods Washington Mutual Capital I............ 400,000 12,371 412,371 2027 8.375% 10 consecutive semi-annual periods -------- ------- -------- ----- $800,000 $24,743 $824,743 8.296% ======== ======= ======== ===== DECEMBER 31, 1997 ------------------- REDEMPTION NAME OF TRUST OPTION ------------- ------------------- Great Western Financial Trust I.............. On or after December 31, 2000 Great Western Financial Trust II............. On or after February 1, 2007 Washington Mutual Capital I............ On or after June 1, 2007
DECEMBER 31, 1996 -------------------------------------------------------------------------------------- AGGREGATE LIQUIDATION AGGREGATE PER AMOUNT OF LIQUIDATION AGGREGATE STATED ANNUM TRUST AMOUNT OF PRINCIPAL MATURITY INTEREST PREFERRED COMMON AMOUNT OF OF RATE OF EXTENSION NAME OF TRUST SECURITIES SECURITIES DEBENTURES DEBENTURES DEBENTURES PERIOD ------------- ----------- ----------- ---------- ---------- ---------- ------------------- (DOLLARS IN THOUSANDS) Great Western Financial 20 consecutive Trust I.............. $100,000 $ 3,093 $103,093 2025 8.250% quarters DECEMBER 31, 1996 ------------------- REDEMPTION NAME OF TRUST OPTION ------------- ------------------- Great Western Financial On or after Trust I.............. December 31, 2000
95 98 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 17: OTHER BORROWINGS Other borrowings consisted of the following:
DECEMBER 31, ---------------------------------------------------------- 1997 1996 --------------------------- --------------------------- AMOUNT INTEREST RATE AMOUNT INTEREST RATE ---------- ------------- ---------- ------------- (DOLLARS IN THOUSANDS) Senior notes: Series C floating rate, due in 2000, LIBOR plus 1.375%............. $ -- --% $ 175,000 6.91% Series B 9.60%, due in 1999...... -- -- 169,000 9.60 Due in 1997...................... -- -- 352,229 7.38-9.50 Due in 1998...................... 399,903 5.75-8.63 399,728 5.75-8.60 Due in 1999...................... 199,939 6.75-7.88 199,890 6.75-7.88 Due in 2000...................... 474,037 6.13-6.38 473,706 6.12-6.38 Due in 2001...................... 349,762 6.75-7.75 349,704 6.75-7.75 Due in 2002...................... 349,068 6.30-8.60 199,410 8.60 Due in 2003...................... 149,314 6.50 -- -- Due in 2005...................... 148,182 7.25 148,007 7.25 Subordinated notes: Due in 1998...................... 99,979 8.88 99,948 8.88 Due in 1999...................... 99,788 7.50 99,659 7.50 Due in 2000...................... 63,275 10.25-10.50 63,253 10.25-10.50 Due in 2001...................... 149,764 9.88 149,708 9.88 Floating rate due in 1998, LIBOR plus 2.875%............. -- -- 10,000 8.41 Other: Notes payable, due in 1998....... 71,923 8.16 74,111 8.16 Notes payable, due in 2006....... 98,765 6.63 98,650 6.63 Other............................ 35,663 7.60-10.70 47,691 7.60-10.70 ---------- ---------- $2,689,362 $3,109,694 ========== ==========
In December 1996, the Company entered into two revolving credit facilities with The Chase Manhattan Bank ("Chase"): a $100.0 million 364-day facility and a $100.0 million four-year facility. In November 1997, these credit facilities were amended by increasing the amounts for each from $100.0 million to $200.0 million. The facilities are available for general corporate purposes, including providing capital to the Company's subsidiaries. As of December 31, 1997, there were no outstanding borrowings under these facilities. As of December 31, 1997, the Company had entered into five other credit agreements with various parties permitting aggregate borrowing up to $735.1 million. The two largest of these agreements were a $550.0 million revolving credit facility with Bank of Montreal and Chase to back Aristar's commercial paper program and a $177.1 million letter of credit with the FHLB of San Francisco to provide credit enhancement on certain of the Company's private-issue MBS. 96 99 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18: INCOME TAXES The provision for income taxes from continuing operations consisted of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- -------- -------- (DOLLARS IN THOUSANDS) Current income tax expense................ $ 529,047 $166,713 $197,515 Deferred income tax (benefit) expense..... (126,931) (25,493) 75,491 --------- -------- -------- $ 402,116 $141,220 $273,006 ========= ======== ========
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 experience method in 1995. The Small Business Job Protection Act of 1996 (the "Job Protection Act") requires that qualified thrift institutions, such as WMB, WMBFA 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, the Company will have to recapture approximately $151.3 million and 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 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, 1997. 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 January 1998, the Company completed a settlement with the Internal Revenue Service (the "Service") for GWFC for 1986 and 1987. The Service is currently examining GWFC for 1988 through and including 1992 and WMB for 1992 and 1993. No additional adjustments are required as of December 31, 1997, for the above examinations. 97 100 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, --------------------------- 1997 1996 ---------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards....................... $1,039,905 $ 1,269,124 Book loan loss reserves................................ 273,932 277,360 Purchase accounting adjustments........................ 14,262 20,153 Deferred losses........................................ 132,652 41,757 Other.................................................. 322,402 254,001 ---------- ----------- 1,783,153 1,862,395 Valuation allowance...................................... (966,087) (1,192,676) ---------- ----------- Deferred tax asset, net of valuation allowance........... 817,066 669,719 Deferred tax liabilities: Tax bad debt reserves.................................. 51,113 63,193 Stock dividends from FHLBs............................. 188,902 155,629 Financial leases....................................... 66,087 70,035 Deferred loan fees..................................... 245,885 229,538 Deferred gains......................................... 163,825 172,733 Purchase accounting adjustments........................ 12,757 18,098 Other.................................................. 212,966 173,820 ---------- ----------- 941,535 883,046 ---------- ----------- Net deferred tax liability............................... $ (124,469) $ (213,327) ========== ===========
The valuation allowances of $966.1 million at December 31, 1997 and $1.19 billion at December 31, 1996 included $45.8 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 decrease in the valuation allowance of $226.6 million during the year ended December 31, 1997 was due primarily to adjustments for anticipated use of net operating losses and a change in state tax rates. Due to Section 382 of the Internal Revenue 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 adjustments. 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 amendments was offset by an equal decrease in the valuation allowance for the deferred tax asset. 98 101 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, 1997 ----------------------- FEDERAL STATE ---------- ---------- (DOLLARS IN THOUSANDS) 1999........................................................ $ -- $ 551,522 2000........................................................ 1,497 599,241 2001........................................................ 140 557,803 2002........................................................ 278 -- 2003........................................................ 1,483,640 -- 2004........................................................ 784,195 -- 2005........................................................ 700,619 -- 2007........................................................ 12,780 -- 2008........................................................ 37,460 -- ---------- ---------- $3,020,609 $1,708,566 ========== ==========
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, 1997 and 1996 were included in the deferred tax liabilities and assets. The tax effect was recorded directly to stockholders' equity and was not included in the provision for income taxes. The change in the net deferred tax liability was as follows:
YEAR ENDED DECEMBER 31, 1997 ----------------------- (DOLLARS IN THOUSANDS) Deferred tax liability, beginning of year................... $(213,327) Tax effect of valuation adjustment on available-for-sale securities................................................ (33,155) Deferred income tax benefit................................. 126,931 Other adjustments........................................... (4,918) --------- Deferred tax liability, end of year......................... $(124,469) =========
99 102 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, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Income taxes computed at statutory rates............... $318,849 $155,657 $322,412 Tax effect of: State franchise tax, net of federal tax benefit...... 38,951 (38,616) 3,899 Utilization of tax losses of New West (nominee of ASB).............................................. (21,260) (31,200) (17,482) Amortization of goodwill and other intangible assets............................................ 9,649 7,865 10,430 Dividends received deduction......................... (3,241) (2,460) (987) Tax exempt income.................................... (1,971) (2,309) (1,973) Restructuring adjustments............................ 68,276 9,321 -- Valuation allowance change from prior year........... -- 33,073 (7,114) Change in tax laws and rates......................... -- 9,397 -- Adjustment of deferred tax rate...................... -- (2,239) 422 Increase in base year reserve amount................. -- (706) (16,318) Low income housing................................... -- -- (5,065) Reversal of taxes previously provided................ -- -- (2,533) Other................................................ (7,137) 3,437 (12,685) -------- -------- -------- Income taxes included in the consolidated statements of income............ $402,116 $141,220 $273,006 ======== ======== ========
NOTE 19: PAYMENTS IN LIEU OF TAXES As a result of the Keystone Transaction, the Company 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% 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 certain 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 WMBFA to recognize certain loan fees ratably over seven years adjusted for loan dispositions and treat certain of the income and expenses of New American Capital, Inc. as income and expenses of WMBFA. The provision for payments in lieu of taxes consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------- ------- ------ (DOLLARS IN THOUSANDS) Federal.............................................. $15,948 $ 4,006 $3,450 State................................................ 1,284 21,181 4,437 ------- ------- ------ $17,232 $25,187 $7,887 ======= ======= ======
NOTE 20: 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. 100 103 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The Company 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 $41.6125 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 $41.6125. 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. The operations of the Company are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulatory policies of financial institution regulatory authorities. Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. NOTE 21: STOCKHOLDERS' EQUITY Common Stock Cash dividends paid per share were as follows(1):
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Fourth quarter.............................................. $0.28 $0.24 $0.20 Third quarter............................................... 0.27 0.23 0.19 Second quarter.............................................. 0.26 0.22 0.19 First quarter............................................... 0.25 0.21 0.19
- --------------- (1) Amounts paid by acquired companies prior to their combination with the Company were not included. Prior to the business combination with Washington Mutual, acquired companies paid total common cash dividends of $68.9 million, $193.0 million and $133.6 million in 1997, 1996 and 1995. 101 104 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, regulatory and debt covenant restrictions on their ability to pay dividends. Retained earnings of the Company at December 31, 1997 included a pre-1988 thrift bad debt reserve for tax purposes of $1.22 billion 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. In 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. See -- "Note 20: Contingencies" for discussion of the 8,000,000 shares of common stock held in escrow. Preferred Stock In 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. The Series E Preferred Stock is senior to common stock as to dividends and liquidation, but does not confer general voting rights. In November 1995, the Company purchased and retired 30,000 shares of the Series E Preferred Stock. In 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 had 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, were at an annual rate of $2.28 per share. Dividends were declared and paid in all quarters since issuance. In November 1995, the Company purchased and retired 47,500 shares of the Series C Preferred Stock. The Company redeemed the Series C Preferred Stock on January 1, 1998 at the redemption price of $25 per share plus unpaid dividends, for the then current dividend period up to the date fixed for redemption. In 1992, GWFC issued 6,600,000 depository shares, each representing a one-tenth interest in a share of 8.30% Cumulative Preferred Stock ("Cumulative Preferred Stock"). The Cumulative Preferred Stock had a liquidation value of $250 per share. Each share of Cumulative Preferred Stock, $1.00 par value, was redeemable at the option of the Company on or after November 1, 1997, at $250 per share, plus accrued and unpaid dividends. Dividends were cumulative from the date of issue and were payable quarterly. Dividends were declared and paid in all quarters since issuance. On July 1, 1997, in connection with the Great Western Merger, each outstanding share of Cumulative Preferred Stock was converted into one share of Washington Mutual, Inc. 8.30% Cumulative Preferred Stock, Series F ("Series F Preferred Stock"). The terms, preferences, limitations, privileges and rights of the Series F Preferred Stock were substantially identical to 102 105 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) those of the Cumulative Preferred Stock. As in the case of the Cumulative Preferred Stock, each share of Series F Preferred Stock was represented by depository shares (the "New Washington Mutual Depository Shares"), each representing a one-tenth interest in a share of the Series F Preferred Stock. The Company redeemed the Series F Preferred Stock on November 1, 1997. Also in 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 1991, the Company issued 2,587,500 depository shares, each representing a one-fifth interest in a share of 8.75% Cumulative Convertible Preferred Stock ("Convertible Preferred Stock"). The Convertible Preferred Stock had a liquidation value of $250 per share. The Convertible Preferred Stock was redeemable prior to May 1, 1996. Each share of Convertible Preferred Stock, $1.00 par value, was redeemable at the option of the Company, in whole or in part, at prices declining to $250 per share on or after May 1, 2001, from $260.94 per share on or after May 1, 1996, plus accrued and unpaid dividends. Each share of Convertible Preferred Stock was convertible at the option of the holder into shares of common stock of the Company at a conversion price of $20.40 per share of common stock, subject to adjustment in certain events. Dividends were cumulative from the date of issue and were payable quarterly. In September 1996, substantially all of the depository shares were converted to approximately 5,666,000 shares of common stock. In 1988, a subsidiary of Keystone Holdings 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. The Cumulative Redeemable Preferred Stock was redeemed on December 20, 1996. NOTE 22: EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This statement established standards for computing and presenting earnings per share ("EPS"). The statement simplified the standards for computing EPS and made them comparable to international EPS standards. It replaced the presentation of primary EPS with the presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed similarly to previously reported fully diluted EPS. This statement required restatement of all prior period EPS data presented. 103 106 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information used to calculate EPS was as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 ------------------------------------- ----------- PER INCOME SHARES SHARE INCOME (NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) ----------- ------------- ------- ----------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Basic EPS: Net income...................... $481,778 $230,100 Less: preferred stock dividends..................... (21,432) (38,714) -------- -------- Income available to common shareholders.................. 460,346 246,119,646 $1.87 191,386 Diluted EPS: Effect of dilutive securities: Options....................... 925,693 Convertible preferred stock....................... Income available to common shareholders -------- ----------- -------- and assumed conversions....... $460,346 247,045,339 $1.86 $191,386 ======== =========== ======== YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1996 1995 ----------------------- ------------------------------------- PER PER SHARES SHARE INCOME SHARES SHARE (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS ------------- ------- ----------- ------------- ------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Basic EPS: Net income...................... $550,924 Less: preferred stock dividends..................... (43,599) -------- Income available to common shareholders.................. 235,115,650 $0.81 507,325 232,104,843 $2.19 Diluted EPS: Effect of dilutive securities: Options....................... 2,567,764 1,323,521 Convertible preferred stock....................... 19,720 11,126,968 Income available to common shareholders ----------- -------- ----------- and assumed conversions....... 237,683,414 $0.81 $527,045 244,555,332 $2.16 =========== ======== ===========
Options to purchase 2,984,550 million shares of common stock at a weighted average exercise price of $62.80 per share were outstanding at December 31, 1997, but were not included in the computation of diluted EPS because the exercise price of the options was greater than the average market price of the common shares during the period. Additionally, as part of the business combination with Keystone Holdings, 8,000,000 shares of common stock, with an assigned value of $41.6125 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 conditions upon which these shares are contingently issuable are not based on earnings or market price. The contingencies had not been met at December 31, 1997, and therefore the contingently issuable shares have not been included in the above computations. NOTE 23: REGULATORY CAPITAL REQUIREMENTS WMI is not subject to any regulatory capital requirements. However, each of its subsidiary depository institutions is subject to various capital requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb are subject to Office of Thrift Supervision ("OTS") capital requirements. The Company's also owns two small industrial banks that are subject to FDIC capital requirements. At December 31, 1997, these two institutions met all capital requirements to which they were subject and were considered well capitalized. The capital adequacy requirements are quantitative measures established by regulation that require WMBFA, WMB 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 WMBFA and WMBfsb to maintain minimum ratios of total capital to risk-weighted assets, as well as ratios of core capital and tangible capital to tangible assets. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") created a statutory framework that increased the importance of meeting applicable capital requirements. 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- 104 107 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 any of the Company's depository institutions to comply with applicable capital requirements would, if unremedied, result in restrictions on its activities and lead to regulatory enforcement actions against such institution 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. The actual regulatory capital ratios calculated for WMBFA, WMB and WMBfsb, along with the minimum capital amounts and ratios for capital adequacy purposes and the minimum amounts required to be categorized as well capitalized under the regulatory framework for prompt corrective action were as follows:
DECEMBER 31, 1997 ------------------------------------------------------------ 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) WMBFA: Total capital to risk-weighted assets(2).......................... $4,497,262 11.11% $3,242,490 8.00% $4,050,336 10.00% Tier I capital to risk-weighted assets............................. 3,865,394 9.54 -- -- 2,434,644 6.00 Core capital to adjusted tangible assets............................. 3,865,394 5.78 2,007,736 3.00 3,346,226 5.00 Tangible capital to tangible assets... 3,865,394 5.78 1,003,868 1.50 -- -- WMB: Total capital to risk-weighted assets............................. 1,605,745 10.93 1,175,592 8.00 1,469,490 10.00 Tier I capital to risk-weighted assets............................. 1,488,610 10.13 587,796 4.00 881,694 6.00 Tier I capital to average assets...... 1,488,610 5.86 1,015,372 4.00 1,269,216 5.00 WMBfsb: Total capital to risk-weighted assets(2).......................... 77,813 11.95 52,077 8.00 65,096 10.00 Tier I capital to risk-weighted assets............................. 70,535 10.84 -- -- 39,058 6.00 Core capital to adjusted tangible assets............................. 70,535 6.66 31,789 3.00 52,982 5.00 Tangible capital to tangible assets... 70,535 6.66 15,895 1.50 -- --
105 108 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 ------------------------------------------------------------ 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) WMBFA: Total capital to risk-weighted assets(2).......................... $4,070,395 11.12% $2,929,835 8.00% $3,660,828 10.00% Tier I capital to risk-weighted assets............................. 3,464,547 9.46 -- -- 2,198,843 6.00 Core capital to adjusted tangible assets............................. 3,464,547 5.61 1,852,145 3.00 3,086,909 5.00 Tangible capital to tangible assets... 3,463,438 5.61 926,073 1.50 -- -- 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 5.84 843,623 4.00 1,054,529 5.00 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 -- -- 36,964 6.00 Core capital to adjusted tangible assets............................. 64,707 6.90 28,254 3.00 46,923 5.00 Tangible capital to tangible assets... 64,707 6.90 14,077 1.50 -- --
- --------------- (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. Management believes, as of December 31, 1997, that WMBFA, WMB and WMBfsb individually met all capital adequacy requirements to which they were subject. Additionally, as of the most recent notifications from the FDIC (for WMB) and the OTS (for WMBFA and WMBfsb) prior to both December 31, 1997 and 1996, the FDIC and OTS individually categorized WMBFA, WMB 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 and 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 WMBFA's, WMB'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 WMBFA 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 WMBFA 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 106 109 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 24: STOCK OPTION PLANS 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 (the "1994 Plan") in which the right to purchase common stock of the Company may be granted to officers, 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. The 1994 Plan does not affect any options granted under the 1983 plan. Under the 1994 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. On September 16, 1997, the Company's Board of Directors approved the adoption of a broad-based stock option plan called "WAMU Shares" as part of the Company's effort to build a unified team and to appropriately compensate its employees. This plan provides for an award of nonqualified stock options to all eligible employees who were employed by the Company on September 1, 1997. Generally, full-time employees received an option to purchase 100 shares of Company common stock, while part-time employees received an option to purchase 50 shares, and employees who were designated to receive options under the 1994 Plan were excluded. All grants were made using the fair market value of the Company's common stock on September 1, 1997, and all options vest on September 1, 1999. The WAMU Shares plan provides for the granting of options for a maximum of 2,200,000 common shares. On April 26, 1988, GWFC stockholders approved the adoption of the 1988 Stock Option and Incentive Plan (the "GWFC Plan"). Options were granted at the market value of the GWFC common stock on the date of grant. The GWFC plan consisted of two separate plans: the Key Employee Program, under which options (both incentive and nonqualified), stock appreciation rights, dividend equivalents and certain other performance and incentive awards were granted to officers, key employees and certain other individuals; and the Non-employee Director Program, under which nonqualified options were granted to non-employee directors under certain circumstances. Options may be exercised either by payment of cash, or the optionee may deliver WMI common stock of an equivalent market value at the date of exercise. As of July 1, 1997, this plan was amended to eliminate further grants. Stock options under all Plans are generally exercisable on a phased-in schedule over three to five years, depending upon the date of grant, and expire five to 10 years from the grant date. At December 31, 1997, options to purchase 1,747,416 shares were fully exercisable. 107 110 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock options granted, exercised, or forfeited were as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE PER SHARE NUMBER OF EXERCISE PRICE OF OF OPTIONS AT OPTION SHARES OPTION SHARES DATE OF GRANT ------------- ----------------- -------------------- Balance, beginning of 1995............... 7,626,589 $17.65 Granted in 1995.......................... 823,012 20.01 $ 5.62 Exercised in 1995........................ (925,468) 16.58 Forfeited in 1995........................ (279,312) 20.10 ---------- ------ Balance, end of 1995..................... 7,244,821 18.01 Granted in 1996.......................... 4,406,339 31.48 9.10 Exercised in 1996........................ (1,156,121) 18.07 Forfeited in 1996........................ (195,752) 21.30 ---------- ------ Balance, end of 1996..................... 10,299,287 23.70 Granted in 1997.......................... 3,165,259 61.46 16.59 Exercised in 1997........................ (7,946,473) 23.17 Forfeited in 1997........................ (65,626) 31.72 ---------- ------ Balance, end of 1997..................... 5,452,447 $46.32 ========== ======
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED AVERAGE NUMBER OF REMAINING AVERAGE NUMBER OF EXERCISE PRICE OF RANGES OF OPTION CONTRACTUAL EXERCISE PRICE EXERCISABLE EXERCISABLE EXERCISE PRICES SHARES LIFE OF OPTION SHARES OPTION SHARES OPTION SHARES - ---------------------- --------- ---------------- ---------------- ------------- ----------------- $ 7.53 through $ 8.44.............. 380,375 2.8 $ 8.09 380,375 $ 8.09 10.53 through 13.48.. 112,579 4.2 12.75 112,579 12.75 17.29 through 26.25.. 801,796 6.4 21.64 732,801 21.78 26.53 through 38.50.. 562,647 8.4 30.30 316,308 31.73 42.63 through 42.75.. 581,000 9.0 42.64 196,353 42.64 47.50 through 67.38.. 3,014,050 9.8 62.66 9,000 49.87 --------- ------ --------- ------ 5,452,447 $46.32 1,747,416 $22.51 ========= ====== ========= ======
Under the terms of the Company's employee stock purchase plan ("ESPP"), 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 ESPP, 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 its fair value recognition provisions. FAS 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 108 111 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company adopted the disclosure requirements of SFAS No. 123, but has determined 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 plans and its ESPP. Had compensation cost for the Company's compensation plans been determined consistent with SFAS No. 123, the Company's net income available to fully diluted common stock and fully diluted earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income attributable to common stock Basic: As reported............................ $460,346 $191,386 $507,325 Pro forma.............................. 429,395 186,568 506,503 Diluted: As reported............................ 460,346 191,386 515,725 Pro forma.............................. 429,395 186,568 514,903 Net income per common share Basic: As reported............................ $1.87 $0.81 $2.19 Pro forma.............................. 1.74 0.79 2.19 Diluted: As reported............................ 1.86 0.81 2.16 Pro forma.............................. 1.74 0.78 2.16
The compensation expense included in the pro forma net income attributable to diluted common stock and 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 plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995: annual dividend yield of 2.67% for 1997 and 2.50% for 1996 and 1995; expected volatility of 27.37% for 1997 and 23.99% for 1996 and 1995; risk-free interest rates of 6.01% for 1997 and 5.78% for 1996 and 1995; and expected lives of five years for 1997, 1996 and 1995. NOTE 25: EMPLOYEE BENEFITS PROGRAMS Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for substantially all eligible employees. 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. ASB provided a noncontributory defined benefit pension plan (the "ASB Plan" and together with the Pension Plan, the "Pension Plans"), which was terminated effective June 30, 1995. The combined net periodic pension cost for the Pension Plans was $3.2 million, $2.1 million and $2.0 million for 1997, 1996 and 1995; the weighted average discount rate was 7.25% for 1997 and 1996 and 8.00% for 1995; the long-term rate of return on assets was 8.00% for 1997, 1996 and 1995; and the assumed rate of increase in future compensation levels was 6.00% for all years presented. The Pension Plans' assets consist primarily of listed common stocks, U.S. government obligations, asset-backed securities, corporate debt obligations, and annuity contracts. 109 112 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At the termination date of the ASB Plan, all participants' accrued benefits became fully vested. The net assets of the ASB Plan were allocated as prescribed by the Employee Retirement Income Security Act of 1974 and 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. WMBFA maintains a substantially similar plan from the Great Western Merger (the "Great Western Plan"). On January 1, 1997, the Great Western Plan was converted from a final average pay plan to a cash balance plan, under which participants' accounts are credited with pay-related contributions and interest. It is the Company's policy to fund the Great Western Plan on a current basis to the extent deductible under federal income tax regulations. The net periodic pension cost or benefit for the Great Western Plan was a benefit of $4.5 million for 1997, and a cost of $400,000 for 1996 and a cost of $7.6 million for 1995, the weighted average discount rate was 7.50%, 7.81%, and 8.25% for 1997, 1996 and 1995; the long-term rate of return on assets was 9.0% for all three years presented; and the assumed rate of increase in future compensation levels was 5.25% for 1997 and 1996, and 5.50% for 1995. The Great Western Plan assets consist primarily of listed common stocks, U.S. government obligations, asset-backed securities, corporate debt obligations, and annuity contracts. The Company's defined benefit plans' status and amounts recognized in the financial statements were as follows:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Benefit obligations: Vested benefits........................................ $(244,525) $(214,687) Nonvested benefits..................................... (5,104) (12,571) --------- --------- Accumulated benefit obligation........................... (249,629) (227,258) Effect of future compensation increases.................. (4,006) (1,168) --------- --------- Projected benefit obligation............................. (253,635) (228,426) Plan assets at fair value................................ 333,000 307,168 --------- --------- Plan assets in excess of projected benefit obligation.... 79,365 78,742 Unrecognized gain due to past experience different from assumptions............................................ 7,613 2,303 Unrecognized prior service cost.......................... (34,204) (29,221) Unrecognized net asset at transition being recognized over 18.6 years........................................ (2,536) (2,918) --------- --------- Prepaid pension asset.................................... $ 50,238 $ 48,906 ========= =========
The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 were: weighted average discount rate of 7.00% for 1997 and 7.50% for 1996 and 1995; rate of increase in future compensation level was 5.25% for all years presented; and expected long-term rate of return on plan assets was 9.00% for all years presented. 110 113 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension expense for the Company's defined benefit plans was as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Service cost -- benefits earned during the period........................................... $ 12,604 $ 12,294 $ 12,600 Interest cost on projected benefit obligations..... 16,589 16,953 18,196 Actual (gain) on plan assets....................... (31,838) (27,253) (28,534) Amortization and deferral, net..................... 1,313 517 7,348 -------- -------- -------- $ (1,332) $ 2,511 $ 9,610 ======== ======== ========
The Company sponsors unfunded defined benefit postretirement plans that make medical and life insurance coverage available to eligible employees and dependents based on age and length of service. Medical coverage options are the same as available to active employees. The cost of the plan coverage for retirees and their qualifying dependents is based upon a point system that combines age and years of service which results, generally, in lower costs to retirees in conjunction with higher accumulated points within limits. Postretirement benefits, such as retiree health benefits, are accrued during the years an employee provides services. The funded status of these benefits were as follows:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation............... $(34,600) $(57,836) Unrecognized transition obligation.......................... 2,209 2,356 Unrecognized (gain)......................................... (6,249) (4,782) -------- -------- Prepaid postretirement liability............................ $(38,640) $(60,262) ======== ========
Net periodic postretirement expense was as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ (DOLLARS IN THOUSANDS) Service cost............................................. $1,454 $2,445 $2,513 Interest cost............................................ 3,422 3,998 4,240 Amortization of transition obligation.................... 147 147 147 Curtailment (gain)....................................... (350) (580) (570) ------ ------ ------ $4,673 $6,010 $6,330 ====== ====== ======
Net periodic postretirement expense was calculated using the following assumptions: the weighted average discount rate was 7.25% for all years presented; and the medical trend rate was estimated to increase at a rate of 9.00% in 1996 and 8.00% in 1997, thereafter decreasing 1.00% per year until a stable 5.00% medical inflation rate is reached in 2000. The effect of a 1.00% increase in the trend rates is not significant. The Company, as successor to GWFC, has assumed responsibility for certain unfunded post retirement benefits, including retirement restoration plans for certain employees, a supplemental Executive Retirement Plan (the "GW SERP") for certain senior officers and a nonqualified directors' retirement plan. At December 31, 1997, the projected benefit obligation for these plans was $4.5 million. The Company has purchased cost recovery life insurance, primarily with one carrier, on the lives of the participants in the GW SERP, the directors' retirement plan and the deferred compensation plan (described below), and it is sole owner and beneficiary of said policies. The net cash surrender value of this life insurance, recorded in other 111 114 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets, was $187.5 million at December 31, 1997 and $180.3 million at December 31, 1996, and net premium income related to insurance purchased was $7.0 million in 1997, $8.4 million in 1996 and $6.8 million in 1995. The Company sponsors a Supplemental Executive Retirement Plan (the "ASB SERP"), under which benefits are paid to certain officers formerly of ASB 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 10 years of employment. These benefits are reduced to the extent a participant receives benefits from the ASB Plan and social security benefits. WMBFA has purchased cost recovery life insurance, primarily with two carriers, on the lives of the participants of the ASB SERP and deferred compensation plan, and it is the sole owner and beneficiary of said policies. The amount of coverage is designed to provide sufficient revenues to fund said plans. The net cash surrender value of this life insurance, recorded in other assets, was $29.6 million at December 31, 1997. The Company sponsors a Supplemental Employee Retirement Plan ("WMI SERP") for the benefit of certain officers. The WMI SERP is a nonqualified, noncontributory plan designed to supplement the benefits that are accrued under the Pension Plan with respect to compensation earned above designated compensation limits. Compensation for the WMI SERP includes amounts deferred into a compensation plan sponsored by the Company. The Company also sponsors the Washington Mutual, Inc. Supplemental Executive Retirement Accumulation Plan ("WMI SERAP") for the purpose of providing supplemental retirement benefits for certain officers. The level of the benefits under the SERAP is determined by the Company. The SERAP is not funded. The Company maintains a retirement savings and investment plan for substantially all eligible employees that allows participants to make contributions by salary deduction equal to 15% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. Employees' contributions vest immediately. The Company's partial matching contributions vest over five years. The Company maintains a savings plan for substantially all eligible employees formerly of GWFC that allows participants to make contributions equal to 14% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. The Company's partial matching contributions vest over five years. The Company maintains optional deferred compensation plans for certain employees formerly employed by GWFC and ASB. Eligible employees covered defer a portion of their compensation, and the Company agrees to pay interest on the balance of funds deferred. An enhanced rate is paid on funds deferred over three years. No additional compensation may be deferred under these plans. The Company provides an optional deferred compensation plan for certain employees and directors. Eligible participants can defer a portion of their compensation, and WMI agrees to pay interest on the balance of funds deferred. The Company 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. 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 benefits under the PSP were payable, and ASB incurred an expense of $12.0 million in December 1996. 112 115 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total employee benefit plan expense was as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (DOLLARS IN THOUSANDS) Company's contributions to savings plans.............. $21,373 $21,934 $19,163 SERP expense.......................................... 6,928 6,494 5,821 Net periodic postretirement expense................... 4,673 6,010 6,330 Net periodic pension expense.......................... (1,332) 2,511 9,610 Restricted stock expense.............................. 2,831 4,736 3,958 Other................................................. 4,226 3,928 4,120 ------- ------- ------- $38,699 $45,613 $49,002 ======= ======= =======
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations on a quarterly basis have been restated to give effect to the business combination with GWFC. Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------------- FIRST QUARTER(1) SECOND QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $830,154 $785,262 $1,615,416 $876,165 $794,184 $1,670,349 Interest expense.............. 509,780 446,094 955,874 550,386 466,578 1,016,964 -------- -------- ---------- -------- -------- ---------- Net interest income........... 320,374 339,168 659,542 325,779 327,606 653,385 Provision for loan losses..... 13,420 40,390 53,810 13,927 36,072 49,999 Other income.................. 71,500 116,751 188,251 72,521 115,626 188,147 Other expense................. 194,270 300,826 495,096 195,944 276,248 472,192 -------- -------- ---------- -------- -------- ---------- Income before income taxes.... 184,184 114,703 298,887 188,429 130,912 319,341 Income taxes.................. 70,112 49,000 119,112 69,705 58,579 128,284 -------- -------- ---------- -------- -------- ---------- Net income.................... $114,072 $ 65,703 $ 179,775 $118,724 $ 72,333 $ 191,057 ======== ======== ========== ======== ======== ========== Net income attributable to common stock................ $111,567 $ 62,279 $ 173,846 $116,219 $ 68,909 $ 185,128 ======== ======== ========== ======== ======== ========== Net income per common share: Basic....................... $1.00 $0.72 $1.04 $0.76 Diluted..................... 0.99 0.71 1.03 0.75
113 116 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ------------------------------- THIRD QUARTER FOURTH QUARTER WASHINGTON WASHINGTON MUTUAL MUTUAL ------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............................................. $1,728,553 $1,796,646 Interest expense............................................ 1,072,902 1,108,751 ---------- ---------- Net interest income......................................... 655,651 687,895 Provision for loan losses................................... 52,131 51,199 Other income................................................ 111,113 225,889 Other expense............................................... 825,966 468,354 ---------- ---------- Income (loss) before income taxes........................... (111,333) 394,231 Income taxes................................................ 15,621 156,331 ---------- ---------- Net income (loss)........................................... $ (126,954) $ 237,900 ========== ========== Net income (loss) attributable to common stock.............. $ (132,883) $ 234,255 ========== ========== Net income (loss) per common share: Basic..................................................... $(0.54) $0.94 Diluted................................................... (0.54) 0.94
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------- FIRST QUARTER(1) SECOND QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $764,622 $825,240 $1,589,862 $776,269 $808,617 $1,584,886 Interest expense.............. 477,620 472,642 950,262 476,508 454,994 931,502 -------- -------- ---------- -------- -------- ---------- Net interest income........... 287,002 352,598 639,600 299,761 353,623 653,384 Provision for loan losses..... 19,910 36,021 55,931 19,396 32,566 51,962 Other income.................. 58,594 85,792 144,386 60,893 90,221 151,114 Other expense................. 183,657 283,575 467,232 189,040 280,707 469,747 -------- -------- ---------- -------- -------- ---------- Income before income taxes and minority interest........... 142,029 118,794 260,823 152,218 130,571 282,789 Income taxes.................. 49,695 47,500 97,195 49,151 51,300 100,451 Minority interest in earnings of consolidated subsidiary.................. 3,527 -- 3,527 3,450 -- 3,450 -------- -------- ---------- -------- -------- ---------- Net income.................... $ 88,807 $ 71,294 $ 160,101 $ 99,617 $ 79,271 $ 178,888 ======== ======== ========== ======== ======== ========== Net income attributable to common stock................ $ 84,202 $ 65,040 $ 149,242 $ 95,013 $ 73,029 $ 168,042 ======== ======== ========== ======== ======== ========== Net income per common share: Basic....................... $0.75 $0.64 $0.85 $0.71 Diluted..................... 0.74 0.64 0.83 0.71
114 117 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------- THIRD QUARTER(1) FOURTH QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $797,694 $801,486 $1,599,180 $810,651 $802,511 $1,613,162 Interest expense.............. 501,074 461,742 962,816 503,027 466,536 969,563 -------- -------- ---------- -------- -------- ---------- Net interest income........... 296,620 339,744 636,364 307,624 335,975 643,599 Provision for loan losses..... 15,269 41,671 56,940 141,702 85,900 227,602 Other income.................. 69,016 82,995 152,011 76,378 134,275 210,653 Other expense................. 320,089 449,343 769,432 343,370 378,818 722,188 -------- -------- ---------- -------- -------- ---------- Income before income taxes and minority interest........... 30,278 (68,275) (37,997) (101,070) 5,532 (95,538) Income taxes.................. 12,963 (28,400) (15,437) (16,202) 400 (15,802) Minority interest in earnings of consolidated subsidiary.................. 3,527 -- 3,527 3,066 -- 3,066 -------- -------- ---------- -------- -------- ---------- Net income (loss)............. $ 13,788 $(39,875) $ (26,087) $(87,934) $ 5,132 $ (82,802) ======== ======== ========== ======== ======== ========== Net income (loss) attributable to common stock............. $ 9,183 $(44,250) $ (35,067) $(92,539) $ 1,708 $ (90,831) ======== ======== ========== ======== ======== ========== Net income (loss) per common share: Basic....................... $0.08 $(0.15) $(0.82) $(0.38) Diluted..................... 0.08 (0.15) (0.82) (0.38)
- --------------- (1) Previously reported balances of the merged companies have been reclassified to conform to the Company's presentation and restated to give effect to the combination. NOTE 27: 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 fixed-rate SFR loan production or fixed-rate MBS; and the use of derivative instruments, such as interest rate exchange agreements, interest rate cap agreements, cash flow swap agreements, put options and forward sales contracts. The Company uses forward sales contracts to hedge its exposure to increasing interest rates with respect to fixed-rate loans which the Company intends to sell in the secondary market. Forward sales contracts are used to sell specific financial instruments (fixed-rate loans) at a future date for a specified price. Gains or losses are recognized at the time the contracts mature and are recorded as a component of gain on sale of loans and leases. At December 31, 1997, the Company had executed $812.1 million in forward sales contracts to hedge $930.7 million in fixed-rate SFR loan commitments which are expected to close as well as loans which have been funded but not yet sold. At December 31, 1996, the Company had executed $215.4 million in forward sales contracts. Interest rate exchange agreements, cash flow swap agreements, interest rate cap agreements, put options and forward sales contracts 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 various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. 115 118 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. During 1997 and 1996, the Company did not terminate any interest rate exchange agreements, cash flow swaps or interest rate cap agreements. Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1997 ---------------------------------------------------------------- NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE ---------- --------------- ------------ -------- ------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year.................. $ 300,000 5.83% 6.05% $(334) $ (334) After one but within two years....... 500,000 5.88 5.97 116 116 Designated against deposits and borrowings: Due within one year.................. 506,533 5.59 6.07 -- (1,541) After one but within two years....... 277,600 5.45 7.94 -- (8,301) After two but within three years..... 259,000 6.50 5.62 -- 6,534 After three years.................... 243,800 4.90 5.49 -- (101) ---------- ----- ----- ----- ------- $2,086,933 5.71% 6.17% $(218) $(3,627) ========== ===== ===== ===== =======
DECEMBER 31, 1996 ------------------------------------------------------------------- NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE 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 years.... 200,000 5.87 6.09 265 265 Designated against deposits and borrowings: Due within one year................. 578,948 7.34 6.24 (498) 6,924 After one but within two years...... 506,533 5.45 6.04 52 (1,839) 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 ---------- ---- ---- ------- -------- $2,570,881 5.98% 6.23% $(1,092) $ 11,250 ========== ==== ==== ======= ========
116 119 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1997 --------------------------------------------------------- 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)...................... $ 650,000 6.17% 5.89% $ 1,202 $1,202 Designated against deposits and borrowings: Due within one year(3)...................... 565,500 7.89 5.82 380 (771) After one but within two years(4)........... 855,750 7.16 5.33 3,505 157 After two but within three years(5)......... 265,000 8.00 5.53 1,498 106 After three years(6)........................ 538,750 8.11 5.11 6,005 710 ---------- ---- ---- ------- ------ $2,875,000 7.34% 5.53% $12,590 $1,404 ========== ==== ==== ======= ======
- --------------- (1) The terms of each agreement had specific LIBOR or COFI reset and index requirements, which resulted in different short-term receipt rates for each agreement. The receipt rate represented the weighted average rate as of the last reset date for each agreement. (2) Included $550.0 million notional amount with a weighted average cap ceiling of 7.64% and $100.0 million notional amount with a binary (1.00%) cap. (3) Included $150.0 million notional amount with a weighted average cap floor of 5.50% and $240.0 million notional amount with a weighted average cap ceiling of 9.50%. (4) Included $839.8 million notional amount with a weighted average cap ceiling of 8.77%. (5) Included $112.0 million notional amount with a weighted average cap ceiling of 9.50%. (6) Included $459.8 million notional amount with a weighted average cap ceiling of 9.49%.
DECEMBER 31, 1996 --------------------------------------------------------- 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)..................... $ 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 had specific LIBOR or COFI reset and index requirements, which resulted in different short-term receipt rates for each agreement. The receipt rate represented the weighted average rate as of the last reset date for each agreement. (2) Included $600.0 million notional amount with a weighted average cap ceiling of 7.75%. (3) Had a weighted average cap ceiling of 7.56%. (4) Included $45.0 million notional amount with a weighted average cap ceiling of 9.50%. (5) Included $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) Included $839.8 million notional amount with a weighted average cap ceiling of 8.77%. (7) Included $571.8 million notional amount with a weighted average cap ceiling of 9.49%. 117 120 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, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average net effective cost (benefit) at end of year................................................. 0.55% 0.24% (0.24)% Weighted average net effective cost (benefit) during the year............................................. 0.60 (0.26) (0.45) Monthly average notional amount of interest rate exchange agreements.................................. $2,107,184 $2,882,041 $3,049,803 Maximum notional amount of interest rate exchange agreements at any month-end.......................... 2,466,233 3,436,157 3,208,681 Net cost (benefit) included with interest expense on deposits during the year............................. 3,951 (14,471) (9,260) Net cost included with interest expense on borrowings during the year...................................... 5,975 9,951 5,889 Net cost (benefit) included with interest income on available-for-sale securities during the year........ 2,637 (2,984) (10,495)
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, 1996 --------------------------------------- 1997 1996 1995 ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Monthly average notional amount of interest rate cap agreements................................. $3,897,769 $10,433,750 $6,363,000 Maximum notional amount of interest rate cap agreements at any month end.................... 3,965,000 12,514,500 9,774,000 Net cost included with interest expense on deposits during the year....................... 5,773 6,206 7,875 Net cost included with interest expense on borrowings during the year..................... -- 2,162 415 Net cost (benefit) included with interest income on available-for-sale securities during the year........................................... 3,612 (4,686) (5,340)
Changes in interest rate exchange agreements and interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, 1997 ------------------------------ INTEREST RATE INTEREST RATE EXCHANGE CAP AGREEMENTS AGREEMENTS ------------- ------------- (DOLLARS IN THOUSANDS) Notional balance, beginning of year......................... $2,570,881 $6,780,000 Additions................................................... 300,000 -- Maturities.................................................. 783,948 3,905,000 ---------- ---------- Notional balance, end of year............................... $2,086,933 $2,875,000 ========== ==========
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 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. 118 121 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of financial instruments were as follows:
DECEMBER 31, ----------------------------------------------------- 1997 1996 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents................. $ 1,560,890 $ 1,560,890 $ 1,665,355 $ 1,665,355 Trading securities........................ 23,364 23,364 1,647 1,647 Available-for-sale securities............. 11,372,938 11,372,938 16,093,529 16,093,529 Held-to-maturity securities............... 12,779,614 12,699,653 4,479,056 4,545,125 Loans, exclusive of reserve for loan losses................................. 67,810,651 68,607,997 61,831,109 61,849,717 Investment in FHLBs....................... 1,059,491 1,059,491 843,002 843,002 Mortgage servicing rights................. 215,360 228,484 185,984 213,121 ----------- ----------- ----------- ----------- 94,822,308 95,552,817 85,099,682 85,211,496 Financial liabilities: Deposits.................................. 50,986,017 50,916,683 52,666,914 52,779,563 Annuities................................. -- -- 878,057 878,057 Federal funds purchased and commercial paper....................... 2,928,282 2,930,231 2,153,506 2,153,506 Reverse repurchase agreements............. 12,279,040 12,279,962 12,033,119 12,050,518 Advances from FHLBs....................... 20,301,963 20,325,343 10,011,425 10,028,513 Trust preferred securities................ 800,000 854,692 100,000 99,520 Other borrowings.......................... 2,689,362 2,774,939 3,109,694 3,286,356 ----------- ----------- ----------- ----------- 89,984,664 90,081,850 80,952,715 81,276,033 Derivative financial instruments(1): Interest rate exchange agreements: Designated against available-for-sale securities........................... (218) (218) (646) (646) Designated against deposits and borrowings........................... -- (3,409) (446) 11,896 Interest rate cap agreements: Designated against available-for-sale securities........................... 1,202 1,202 2,460 2,460 Designated against deposits and borrowings........................... 11,388 202 17,533 3,411 ----------- ----------- ----------- ----------- Total............................. 12,372 (2,223) 18,901 17,121 Other off-balance sheet instruments: Standby letters of credit................. -- -- -- (42) Forward sales contracts designated against loans.......................... -- (4,861) -- 83 Off-balance sheet loan commitments........ -- (781) -- 7,714 ----------- ----------- ----------- ----------- -- (5,642) -- 7,755 ----------- ----------- ----------- ----------- Net financial instruments......... $ 4,850,016 $ 5,463,102 $ 4,165,868 $ 3,960,339 =========== =========== =========== ===========
- --------------- (1) See Note 27: Interest Rate Risk Management. 119 122 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of December 31, 1997 and 1996: Cash and cash equivalents -- The carrying amount represented fair value. Trading securities -- Fair values were based on quoted market prices. Available-for-sale securities -- Fair values were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar securities as well as internal analytics. Held-to-maturity securities -- Fair values were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar securities, as well as internal analytics. Loans -- Loans were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Investment in FHLBs -- The carrying amount represented fair value. Mortgage servicing rights -- The fair value of mortgage servicing rights was 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 MMDAs 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 alternate funding sources with similar maturities. Core deposit intangibles are not included. Annuities -- The carrying amount represented fair value. Federal funds purchased and commercial paper -- The value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Reverse repurchase agreements -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Advances from FHLBs -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Trust preferred securities -- Fair value was estimated using quoted market prices for similar securities. 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 financial 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. Standby letters of credit -- The fair value of standby letters of credit was based on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Forward sales contracts designated against loans -- The fair value of forward sales contracts purchased as a hedge of fixed-rate commitments and commitments to fund real estate loans was estimated using current market prices adjusted for various risk factors and market volatility. Off-balance-sheet loan commitments -- 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. 120 123 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 29: FINANCIAL INFORMATION -- WMI The following WMI (parent company only) financial information should be read in conjunction with the other notes to the consolidated financial statements. STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST INCOME Loans...................................................... $ 3,832 $ -- $ -- Available-for-sale securities.............................. 1,769 6,777 8,033 Cash equivalents........................................... 1,448 5,378 471 -------- -------- -------- Total interest income.................................... 7,049 12,155 8,504 INTEREST EXPENSE Borrowings................................................. 34,839 14,396 9,072 -------- -------- -------- Total interest expense................................... 34,839 14,396 9,072 -------- -------- -------- Net interest expense.................................. (27,790) (2,241) (568) OTHER INCOME Other operating income..................................... 353 122 8 Gain (loss) on sale of other assets........................ 20,845 -- (171) -------- -------- -------- Total other income....................................... 21,198 122 (163) OTHER EXPENSE Salaries and employee benefits............................. 6,907 3,561 2,716 Occupancy and equipment.................................... -- 11 1 Other operating expense.................................... 5,629 18,013 3,289 Transaction-related expense................................ 32,308 -- -- Amortization of goodwill................................... 731 629 -- -------- -------- -------- Total other expense...................................... 45,575 22,214 6,006 -------- -------- -------- Loss before income taxes and equity in net earnings of subsidiaries........................................ (52,167) (24,333) (6,737) Income tax benefit......................................... (21,523) (8,105) (865) Equity in net earnings of subsidiaries..................... 512,422 246,328 556,796 -------- -------- -------- Net income................................................. $481,778 $230,100 $550,924 ======== ======== ========
121 124 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 330,764 $ 109,356 Available-for-sale securities............................... 1,000 82,033 Loans....................................................... 11,555 92,083 Investment in subsidiaries.................................. 5,496,975 4,925,262 Other assets................................................ 114,442 12,917 ---------- ---------- Total assets.............................................. $5,954,736 $5,221,651 ========== ========== LIABILITIES Reverse repurchase agreements............................... $ -- $ 68,326 Other borrowings............................................ 562,298 148,007 Other liabilities........................................... 83,367 12,230 ---------- ---------- Total liabilities......................................... 645,665 228,563 STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 5,382,500 shares issued and outstanding, liquidation preference....................... 118,063 283,063 Common stock, no par value: 800,000,000 shares authorized -- 257,560,018 and 250,230,644 shares issued and outstanding........................................... -- -- Capital surplus -- common stock............................. 1,943,294 1,664,870 Valuation reserve for available-for-sale securities......... -- 1,156 Valuation reserve for available-for-sale securities -- subsidiaries 134,610 117,469 Retained earnings........................................... 3,113,104 2,926,530 ---------- ---------- Total stockholders' equity................................ 5,309,071 4,993,088 ---------- ---------- Total liabilities and stockholders' equity................ $5,954,736 $5,221,651 ========== ==========
122 125 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 481,778 $ 230,100 $ 550,924 Adjustments to reconcile net income to net cash (used) provided by operating activities: (Gain) on sale of assets............................... (20,845) -- -- Decrease (increase) in interest receivable............. 326 (69) 80 Increase in interest payable........................... 2,624 530 3,167 Decrease in income taxes payable....................... (88,809) (8,105) (865) Equity in undistributed earnings of subsidiaries....... (512,422) (246,328) (556,796) Decrease (increase) in other assets.................... 6,047 (16,619) 9,910 Increase in other liabilities.......................... 60,483 14,867 720 --------- --------- --------- Net cash (used) provided by operating activities (70,818) (25,624) 7,140 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities............. (1,000) -- -- Sales of available-for-sale securities................. 75,866 -- -- Principal payments of available-for-sale securities.... 4,191 16,118 12,594 Sale of subsidiary..................................... 102,775 -- -- Origination of loans, net of principal payments........ 80,528 55,784 (147,867) Investment in subsidiary............................... (554,412) (170,000) -- Dividends received from subsidiaries................... 476,525 280,026 136,521 --------- --------- --------- Net cash provided by investing activities............ 184,473 181,928 1,248 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in reverse repurchase agreements.............. (68,326) (14,155) (1,848) Proceeds from other borrowings......................... 414,291 -- 147,845 Issuance of common stock through stock options and employee stock plans................................. 146,266 20,604 8,379 Repurchase of preferred stock.......................... (165,000) -- (1,990) Conversion of preferred stock to common stock.......... -- (107) -- Cash dividends paid.................................... (219,478) (143,386) (76,581) --------- --------- --------- Net cash provided (used) by financing activities 107,753 (137,044) 75,805 --------- --------- --------- Increase in cash and cash equivalents.................. 221,408 19,260 84,193 Cash and cash equivalents, beginning of year........... 109,356 90,096 5,903 --------- --------- --------- Cash and cash equivalents, end of year................. $ 330,764 $ 109,356 $ 90,096 ========= ========= =========
123 126 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 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 Washington Mutual agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of Washington Mutual and its consolidated subsidiaries. 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. 10.14 Agreement For Merger, dated July 21, 1996, as amended November 1, 1996, by and among Washington Mutual, Inc., Keystone Holdings Partners, L.P., Keystone Holdings, Inc., New American Holdings, Inc., New American Capital, Inc., N.A. Capital Holdings, Inc. and American Savings Bank, F.A. (Incorporated by reference to the Washington Mutual, Inc. Current Report to the Securities and Exchange Commission on Form 8-K dated January 3, 1997. File No. 0-25188). 10.15 Escrow Agreement, dated December 20, 1996, by and among Washington Mutual, Inc., Keystone Holdings Partners, L.P., the Federal Deposit Insurance Corporation as manager of the FSLIC Resolution Fund, and The Bank of New York (Incorporated by reference to the Washington Mutual, Inc. Current Report to the Securities and Exchange Commission on Form 8-K dated January 3, 1997. File No. 0-25188).
124 127
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.16 Registration Rights Agreement, dated July 21, 1996, by and among Washington Mutual, Inc., Keystone Holdings Partners, L.P., and the Federal Deposit Insurance Corporation as manager of the FSLIC Resolution Fund (Incorporated by reference to the Washington Mutual, Inc. Current Report to the Securities and Exchange Commission on Form 8-K dated January 3, 1997. File No. 0-25188). 10.17 Agreement and Plan of Merger By and Among Washington Mutual, Inc., New American Capital, Inc., and Great Western Financial Corporation ("GWFC"), dated as of March 5, 1997 (Incorporated by reference to Washington Mutual, Inc. Registration Statement on Form S-4 dated May 13, 1997, Registration no. 333-23221). 10.18 The 1998 Stock Option and Incentive Plan (as amended effective July 26, 1994), (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended September 30, 1994). 10.19*** Amendment No. 1996-1 to the 1988 Stock Option and Incentive Plan, effective December 10, 1996. 10.20 Form of Director Stock Option Agreement (Incorporated by reference to GWFC's Registration Statement on Form S-8 Registration no. 33-21469 pertaining to GWFC's 1988 Stock Option and Incentive Plan). 10.21 Form of Director Stock Option Agreement effective January 3, 1994, (Incorporated by reference to GWFC's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1993). 10.22* GWFC Directors' Deferred Compensation Plan (1992 Restatement) (Incorporated by reference to GWFC's Annual Report to the Securities and Exchange Commission on Form 10- K for the fiscal year ended December 31, 1991). 10.23* Amendment to GWFC Directors', Senior Officers' and basic Deferred Compensation Plans (1992 Restatement) (Incorporated by reference to GWFC's Annual Report to the Securities and Exchange Commission on form 10-K for the fiscal year ended December 31, 1994). 10.24* Amendment No. 2 to Directors' Deferred Compensation Plan 1992 Restatement. (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1996). 10.25*** Amendment No. 1996-2 to Directors' Deferred Compensation Plan, dated December 10, 1996. 10.26 GWFC Umbrella Trust for Directors (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1989). 10.27*** Amendment No. 1996-1 to Umbrella Trust for Directors, dated December 16, 1996. 10.28 Omnibus Amendment 1995-1 to the Umbrella Trusts replacing the Finance Committee of the Board of Directors with the Compensation Committee of the Board of Directors as administrator of the plans (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 1995.) 10.29 Restated Retirement Plan for Directors (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 1993.) 10.30 Employee Home Loan Program (Incorporated by reference to GWFC's Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 1993.) 10.31*** Amendment No. 1996-1 to Employee Home Loan Programs, effective December 10. 1996. 10.32*** Omnibus Amendment 1997-1 amending the definition of change in control in the GWFC 1988 Stock Option and Incentive Plan, as amended December 10, 1996, the GWFC Directors' Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996, the Umbrella Trust for Directors as amended December 10, 1996, and the Employee Home Loan Program (Revised and restated as of April 27, 1993), as Amended December 10, 1996.
125 128
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.33 Amended and Restated 364-Day Credit Agreement between the Registrant and The Chase Manhattan Bank as Administrative Agent. 10.34 Amended and Restated Four-Year Credit Agreement between the Registrant and The Chase Manhattan Bank as Administrative Agent. 21 List of Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Price Waterhouse LLP. 27 Financial Data Schedule.
- --------------- *Incorporated by reference to Washington Mutual, Inc. Current Report on Form 8-K dated November 29, 1994. File No. 0-25188. **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, 1996. File No. 0-25188. ***Incorporated by reference to GWFC's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1997. File No. 97553219. 126 EX-10.11 2 EMPLOYMENT CONTRACT OF KERRY K. KILLINGER 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT (1998) This Employment Agreement (the "Agreement") is between WASHINGTON MUTUAL, INC., a Washington corporation ("Washington Mutual") and KERRY K. KILLINGER ("Employee"). Employee has many years of experience in the financial services business, and has been employed as an officer of Washington Mutual and/or an affiliate since March 1976. Because of Employee's importance to Washington Mutual and the value to be derived from Employee's continued employment, it is the desire of Washington Mutual and Employee to set forth certain terms and conditions relating to Employee's employment as an inducement for Employee continuing his employment for so long as Washington Mutual desires to employ Employee. Therefore, the parties agree as follows: Employment - Term. Washington Mutual agrees to, and does hereby, employ Employee, and Employee agrees to, and does hereby, accept such employment, on the terms in this agreement. Employee's employment and this Agreement both shall remain in effect until Employee's employment and this Agreement are simultaneously terminated in accordance with the terms hereof. Duties. Employee shall perform such duties as the Board of Directors of Washington Mutual (the "Board") may from time to time reasonably direct consistent with this paragraph. (As used herein "Board" shall include the board of directors or other successor body performing their function in the event of a Change in Control as defined below.) Employee shall initially have the titles of Chairman, President and Chief Executive Officer. Employee's titles may be changed from time to time as the Board may determine, provided that Employee shall at all times retain the title of either Chief Executive Officer or President unless he agrees otherwise. Employee's duties shall include primary responsibility for the business strategies of Washington Mutual and other duties customarily performed by a chief executive officer or president. Compensation. During Employee's employment under this Agreement, Employee shall receive base salary compensation in the amount determined by the Directors' Compensation and Stock Option Committee (the "Compensation Committee"), payable semi-monthly or in such manner as is consistent with Washington Mutual's policy relating to salaried employees. In addition, Employee is entitled to participate in Washington Mutual's Bonus and Incentive Plan for Executive and Senior Management as adopted by the Compensation Committee, under which Employee may receive, subject to the terms of the Plan, a bonus based on Washington Mutual's achievement of specified financial goals. Employee may also be awarded stock options and/or restricted stock, as determined by the Compensation Committee. Employee's compensation shall be reviewed by the Compensation Committee annually and, if in their discretion it appears appropriate, such compensation shall be adjusted provided that: (a) there may be no reduction without Employee's consent 2 including no reduction in the level of bonus, stock options and restricted stock available to Employee; and (b) Washington Mutual has no implied obligation to raise Employee's compensation. Other Benefits. Subject to the respective eligibility requirements and other terms and provisions of the applicable benefit or insurance plans (including relevant waiting periods), Employee shall be enrolled as a participant in all employee benefit plans (including retirement and insurance plans) available to other officers of Washington Mutual, as the same may from time to time be adopted or amended. Employee shall also be entitled to receive such other perquisites as the Board may from time to time deem appropriate. Performance of Duties. Employee agrees that during his employment with Washington Mutual: (a) Employee will faithfully perform the duties of such office or offices as he may occupy, which duties shall be such as may be assigned to him by the Board; (b) Employee will devote to the performance of his duties all such time and attention as the Board shall reasonably require, taking, however, from time to time such reasonable vacations as are consistent with his duties and Washington Mutual policy; and (c) Employee will not, without the express consent of the Board, become actively associated with or engaged in any business or activity during the term of this Agreement other than that of Washington Mutual (excepting of course customary family and personal activities which may include management of personal investments so long as it does not entail active involvement in a business enterprise) and Employee will do nothing inconsistent with his duties to Washington Mutual. Termination. The Board may terminate Employee's employment at any time in its sole discretion, and Employee may terminate Employee's employment in his sole discretion. Except as expressly provided in this Agreement, upon termination of employment Washington Mutual shall have no liability to pay any further compensation or any other benefit or sum whatsoever to Employee. Upon termination of employment, Employee's rights under all employee pension plans, employee welfare benefit plans, bonus plans and stock option and restricted stock plans shall be determined under the terms of the plans and grants themselves except as otherwise specifically provided in this Agreement. If (i) Employee's employment is terminated by Washington Mutual at any time for any reason other than for cause (as defined below), (ii) Employee's employment is terminated by Washington Mutual for any reason upon or within three years after a Change in Control (as defined below) or (iii) Employee resigns for "good cause" (as defined below) upon or within three years after a Change in Control, Employee shall be entitled to receive, within five business days after the effective date of such termination or resignation, from Washington Mutual or its successor, an amount equal to three times Employee's annual compensation. In addition, upon such an event: 3 all stock options held by Employee shall become immediately vested and exercisable notwithstanding any provisions in the grant of such options regarding vesting, and the lapse of the restrictions on Employee's restricted stock shall automatically be accelerated; provided that the provision in this subsection (2) shall be effective only if the Compensation Committee has taken action approving the acceleration; and provided further that the Compensation Committee may exclude any particular grant(s) of restricted stock from the acceleration provided for in this subsection (2), either at the time it approves the acceleration or in connection with making any particular grant of restricted stock. For purposes of Section 6(c), Employee's "annual compensation" shall include all items of compensation provided by Washington Mutual other than the value of stock options and/or restricted stock granted to Employee. Employee's "annual compensation" shall include the greater of (i) the total of Employee's salary and target bonus for the calendar year in which the termination occurs (if established before the termination) or (ii) Employee's salary and actual bonus for the prior calendar year (annualized if Employee was not employed by Washington Mutual for the entire previous calendar year). Employee's "annual compensation" shall also include the amount of the contributions made or anticipated to have been made on Employee's behalf to Washington Mutual's benefit plans for the calendar year in which the termination occurs, including without limitation contributions to pension plans and plans qualified under Section 125 of the Internal Revenue Code of 1986 (cafeteria plans). If Employee becomes entitled to the payments and equity acceleration described in Section 6(c) (collectively the "Severance Payments"), and if any of the Severance Payments constitute a "parachute payment" under Section 280G of the Internal Revenue Code of 1986 (the "Code"), as amended, or any successor statute then in effect, then Washington Mutual shall pay an additional amount (the "Gross-Up Payment") to Employee at the time specified in the following paragraph. The Gross-Up Payment shall be equal to the amount necessary so that the net amount retained by Employee, after subtracting the parachute excise tax imposed by Section 4999 of the Code, as amended, or any successor statute then in effect (the "Excise Tax"), and after also subtracting all federal, state or local income tax, FICA tax and Excise Tax on the Gross-Up Payment, shall be equal to the net amount Employee would have retained if no Excise Tax had been imposed and no Gross-Up Payment had been paid. The amount of the Gross-Up Payment shall be determined in good faith by independent accountants or tax counsel selected by Washington Mutual and acceptable to Employee, who shall apply the following assumptions: (i) Employee shall be treated as paying federal income taxes at the highest marginal rate in the calendar year in which the Gross-Up Payment is made, and (ii) Employee shall be treated as paying state and local income taxes at the highest marginal rate(s) in the calendar year in which the Gross-Up Payment is made in the locality of Employee's residence as of the effective date of Employee's termination or resignation, net of the maximum reduction in federal income taxes that could be obtained from deducting those state and local taxes. The Gross-Up Payment shall be made within five business days after the 4 effective date of Employee's termination or resignation, provided that if the Gross-Up Payment cannot be determined within that time, Washington Mutual shall pay Employee within that time an estimate, determined in good faith by Washington Mutual, of the minimum amount of the Gross-Up Payment and shall pay the remainder (plus interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount can be determined but in no event later than the 30th day after the effective date of Employee's termination or resignation. If the estimated payment is more than the amount later determined to have been due, the excess (plus interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be repaid by Employee within five business days after written demand. If the actual Excise Tax imposed is less than the amount that was taken into account in determining the amount of the Gross-Up Payment, Employee shall repay at the time that the amount of the reduced Excise Tax is finally determined the portion of the Gross-Up Payment attributable to that reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax, FICA tax and federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid by Employee, to the extent the repayment results in a reduction in or refund of Excise Tax, FICA tax or federal, state or local income tax), plus interest on the amount of the repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the actual Excise Tax imposed is more than the amount that was taken into account in determining the amount of the Gross-Up Payment, Washington Mutual shall make an additional gross-up payment in respect of such excess (plus interest at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of the excess is finally determined. Termination of Employee's employment hereunder for "cause" shall mean termination because (i) Employee engages in abusive use of alcohol or other drugs on a continuing or recurring basis, (ii) Employee is convicted of any felony or of a misdemeanor involving moral turpitude (including forgery, fraud, theft or embezzlement), or is convicted or enters into a pretrial diversion or similar program in connection with the prosecution for an offense involving dishonesty, breach of trust or money laundering, or (iii) Employee has engaged in dishonesty, fraud, destruction or theft of property of Washington Mutual or a Subsidiary, physical attack on another employee, willful malfeasance or gross negligence in the performance of his duties, or misconduct materially injurious to Washington Mutual or a Subsidiary. In addition, on or after January 1, 2015, and provided the termination is not done upon or within three years after a Change in Control, "cause" shall include a reasonable, good-faith determination by the Board that Employee has failed to properly perform or fulfill the duties of his office. Continuation of Medical Insurance. If Employee's employment by Washington Mutual terminates for any reason (including early retirement) other than gross misconduct, Employee shall be entitled to continue to participate in Washington Mutual's self-funded group medical plan, at Employee's expense, to the extent provided in the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Death or Disability. If Employee should die or become disabled at any time 5 during his employment hereunder this Agreement shall terminate and neither Employee nor anyone claiming by, through or under him shall be entitled to any further compensation or other sum under this Agreement (other than payments made by insurers under policies of life and disability insurance and any sums which may become available under any employee benefit plan). For purposes of this Agreement, Employee shall be considered disabled if, and only if, Employee has been unable to perform the essential functions of his job for a continuous period of 180 days, provided that after the 180 day period Washington Mutual shall grant additional unpaid leave, without terminating this Agreement or Employee's employment, to the extent required by law. Confidentiality. Employee agrees that information not generally known to the public to which Employee has been or will be exposed as a result of Employee's employment by Washington Mutual is confidential information that belongs to Washington Mutual. This includes information developed by Employee, alone or with others, or entrusted to Washington Mutual by its customers or others. Washington Mutual's confidential information includes, without limitation, information relating to Washington Mutual's trade secrets, know-how, procedures, purchasing, accounting, marketing, sales, customers, clients, employees, business strategies and acquisition strategies. Employee will hold Washington Mutual's confidential information in strict confidence and will not disclose or use it except as authorized by Washington Mutual and for Washington Mutual's benefit. Possession of Materials. Employee agrees that upon conclusion of employment or request by Washington Mutual, Employee shall turn over to Washington Mutual all documents, files, office supplies and any other material or work product in Employee's possession or control that were created pursuant to or derived from Employee's services for Washington Mutual. Change in Control. For purposes of this Agreement, "Change in Control" shall mean: The acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date of this Agreement), other than Washington Mutual, a Subsidiary or any employee benefit plan of Washington Mutual or its Subsidiaries, of shares representing more than 25% of (i) the common stock of Washington Mutual, (ii) the aggregate voting power of Washington Mutual's voting securities or (iii) the total market value of Washington Mutual's voting securities; During any period of 25 consecutive calendar months, a majority of the Board of Directors of Washington Mutual (the "Board") ceasing to be composed of individuals (i) who were members of the Board on the first day of such period, (ii) whose election or nomination to the Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of the Board or (iii) whose election or nomination to the Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a 6 majority of the Board; The good-faith determination by the Board that any Person or group (other than a Subsidiary or any employee benefit plan of Washington Mutual or a Subsidiary) has acquired direct or indirect possession of the power to direct or cause to direct the management or policies of Washington Mutual, whether through the ability to exercise voting power, by contract or otherwise; The merger, consolidation, share exchange or similar transaction between Washington Mutual and another Person (other than a Subsidiary) other than a merger in which Washington Mutual is the surviving corporation; or The sale or transfer (in one transaction or a series of related transactions) of all or substantially all of Washington Mutual's assets to another Person (other than a Subsidiary) whether assisted or unassisted, voluntary or involuntary. For purposes of this Agreement: "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof); and "Subsidiary" shall mean a corporation that is wholly owned by Washington Mutual, either directly or through one or more corporations which are wholly owned by Washington Mutual. For purposes of this Agreement, "good cause" for Employee to resign shall mean: The assignment of duties to Employee which (i) are materially different from Employee's duties immediately prior to the Change in Control, or (ii) result in Employee having significantly less authority and/or responsibility than he had prior to the Change in Control, without his express written consent; The removal of Employee from the position held immediately prior to the Change in Control, except where such removal is for cause (as defined above) or by reason of Employee's disability; A reduction of Employee's base salary as in effect on the date of the Change in Control or as the same may be increased from time to time thereafter, or a failure by Washington Mutual to increase such base salary each year after such Change in Control by an amount which at least equals, on a percentage basis, the percentage increase, if any, in the cost of living as set forth in the Consumer Price Index (United States City Average for All Urban Consumers) - All Items (Reference Base 1982 = 100) over the preceding year; 7 A reduction in the overall level of Employee's total compensation below the average total compensation for the 24 months immediately preceding the Change in Control; or Any change in Employee's duties which would require him to relocate out of the Seattle area, without Employee's express written consent. Resolution of Disputes. Any dispute arising out of or relating to this Agreement or Employee's employment (or termination of employment) shall be submitted to and resolved by final and binding arbitration as provided in the Binding Arbitration Agreement attached as Exhibit A, whether the claimant is Employee or Washington Mutual. In any dispute in arbitration or court arising out of or relating to this Agreement, the losing party shall pay the prevailing party's reasonable attorneys' fees, costs and expenses. Miscellaneous. This Agreement is the entire agreement between the parties and may not be modified or abrogated orally or by course of dealing, but only by another instrument in writing duly executed by the parties. This Agreement replaces and supersedes all prior agreements on these subjects that Employee may have with Washington Mutual, Inc., or any Subsidiary of Washington Mutual, Inc., including without limitation that certain Employment Agreement between the parties dated for reference purposes January 1, 1997. Employee acknowledges that Employee shall be entitled to change in control benefits, severance benefits or other employment separation benefits only as specifically provided in this Agreement (or, to the extent applicable according to its terms, as provided in the Washington Mutual Severance Plan as in effect from time to time), notwithstanding the terms of any other representation, policy, severance plan, benefit plan or agreement. This Agreement has been drafted in contemplation of and shall be construed in accordance with and governed by Washington law. Jurisdiction and venue of any court action in connection with this Agreement shall be had exclusively in the Superior Court for King County, Washington or the U.S. District Court in Seattle. Employee acknowledges that this Agreement has been drafted by counsel for Washington Mutual, and that Employee has not relied upon such counsel with respect to this Agreement. If a court or arbitrator of competent jurisdiction or governmental authority declares any term or provision hereof invalid, unenforceable or unacceptable, the remaining terms and provisions hereof shall be unimpaired and the invalid, unenforceable or unacceptable term or provision shall be replaced by a term or provision that is valid, enforceable and acceptable and that comes closest to expressing the intention of the invalid, unenforceable or unacceptable term or provision. Employee may not assign Employee's rights or delegate Employee's 8 duties under this Agreement. Washington Mutual may assign its rights and delegate its duties under this Agreement to any purchaser of all or substantially all of Washington Mutual's assets. The transfer of Employee's employment from Washington Mutual to the purchaser of all or substantially all of the assets of Washington Mutual shall not be considered a termination of employment, but this Agreement shall run to the benefit of, and be binding upon, the new employer. In the event of a Change in Control, as defined above, this Agreement shall bind, and run to the benefit of, the successor to Washington Mutual resulting from the Change in Control. DATED effective as of the 1st day of January 1998. WASHINGTON MUTUAL: WASHINGTON MUTUAL, INC. By____________________________________ S. Liane Wilson Its Executive Vice President EMPLOYEE: ________________________________________ Kerry K. Killinger 9 EXHIBIT A BINDING ARBITRATION AGREEMENT This Binding Arbitration Agreement is a part of, and incorporated into, that certain Employment Agreement between the parties dated effective as of the 1st day of January 1998. I, the employee who is a party to the Employment Agreement to which this Exhibit is attached, as well as Washington Mutual, agree as follows: Any and all disputes which involve or relate in any way to my employment (or termination of employment) with Washington Mutual shall be submitted to and resolved by final and binding arbitration. Washington Mutual and I understand that by entering into this Binding Arbitration Agreement, we are each waiving any right we may have to file a lawsuit or other civil action or proceeding relating to my employment with Washington Mutual, and are waiving any right we may have to resolve employment disputes through trial by jury. We agree that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment. This Binding Arbitration Agreement is intended to cover all civil claims which involve or relate in any way to my employment (or termination of employment) with Washington Mutual, including, but not limited to, claims of employment discrimination or harassment on the basis of race, sex, age, religion, color, national origin, sexual orientation, disability and veteran status (including claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act ("ERISA"), the Fair Labor Standards Act, the Immigration Reform and Control Act and any other local, state or federal law concerning employment or employment discrimination), claims based on violation of public policy or statute, and claims against individuals or entities employed by, acting on behalf of, or affiliated with Washington Mutual. However, ERISA plan benefit issues and claims for workers compensation or for unemployment compensation benefits are not covered by this Binding Arbitration Agreement. The statutes of limitations otherwise applicable under law shall apply to all claims made in the arbitration. I understand and agree that despite anything in this Binding Arbitration Agreement to the contrary, I am not waiving the right to file or institute a complaint or charge with any government agency authorized to investigate or resolve employment-related matters, including but not limited to the United States Equal Employment Opportunity Commission, the Department of Labor, the Occupational Safety and Health Commission, the National Labor Relations Board, the Immigration and Naturalization Service, and any other comparable local, state or federal agency. I also understand and agree that despite anything in this Binding Arbitration Agreement to the contrary, either party may request a court to issue such temporary or interim relief (including temporary restraining orders and preliminary injunctions) as may be appropriate, either before or after arbitration is commenced. The temporary or interim relief may remain in effect pending the outcome of arbitration. No such 10 request shall be a waiver of the right to submit any dispute to arbitration. This Binding Arbitration Agreement does not constitute an employment contract, require discharge only for cause, or require any particular corrective action or discharge procedures. Arbitration under this Binding Arbitration Agreement shall be conducted before a single arbitrator and shall take place within the state where I am currently employed by Washington Mutual, or where I was so employed at the time of termination. 9. In order to initiate arbitration, Washington Mutual or I must so notify the other party in writing of their decision to initiate arbitration, either by personal delivery or certified mail. The notification should include the following information about the employee: name, home address, work address, work and home phone number, and the following information about the occurrence: date, location, nature of the claims or dispute, facts upon which the claims are made, and remedy requested. Any notice of arbitration initiated by Washington Mutual shall be sent to my last known residence address as reflected in my personnel file at Washington Mutual. Notice of arbitration initiated by me shall be sent to Washington Mutual's General Counsel. The General Counsel's address is currently Washington Mutual, 1201 Third Avenue, WMT 1500, Seattle, Washington 98101. Within thirty (30) days after receipt of notice of arbitration, Washington Mutual and I will attempt to agree upon a mutually acceptable arbitrator. If Washington Mutual and I are unable to agree upon an arbitrator, we will submit the dispute to the American Arbitration Association ("AAA"). If AAA is, for some reason, unable or unwilling to accept the matter, we will submit the matter to a comparable arbitration service. The arbitration shall be conducted in accordance with the laws of the state in which the arbitration is conducted and the rules and requirements of the arbitration service being utilized, to the extent that such rules and requirements do not conflict with the terms of this Binding Arbitration Agreement. At the request of either Washington Mutual or myself, the arbitrator will schedule a pre-hearing conference to, among other things, agree on procedural matters, obtain stipulations, and attempt to narrow the issues. During the arbitration process, Washington Mutual and I may each make a written demand on the other for a list of witnesses, including experts, to be called and/or copies of documents to be introduced at the hearing. The demand must be served at least thirty (30) days prior to the hearing. The list and copies of documents must be delivered within twenty-five (25) days of service of the demand. Either party shall be entitled to conduct a limited amount of discovery prior to the arbitration hearing. Either party may take a maximum of two (2) depositions. Either party may apply to the arbitrator for further discovery. Such further discovery may, in the discretion of the arbitrator, be awarded upon a showing of sufficient cause. If any documents to be produced or requested for production contain or refer to matters which are private, 11 proprietary and/or confidential, the arbitrator shall make an appropriate protective order prohibiting or limiting use and disclosure of such documents and providing for return of documents produced after the arbitration is concluded. Either party may file a brief with the arbitrator. Each brief must be served on the arbitrator and the other party at least five (5) working days prior to the hearing, and if not timely served must be disregarded by the arbitrator. The brief shall specify the facts the party intends to prove, analyze the applicable law or policy, and specify the remedy sought. At the close of the hearing, each party shall be given leave to file a post-hearing brief. The time for filing the post-hearing brief shall be set by the arbitrator. I understand that, at my expense, I have the right to hire an attorney to represent me in the arbitration, and Washington Mutual has that same right. I also understand that all parties shall have the right to present evidence at the arbitration, through testimony and documents, and to cross-examine witnesses called by another party. Each party agrees to pay the fees of any witnesses testifying at that party's request. Each party also agrees to pay the cost of any stenographic record of the arbitration hearing should that party request any such record. The requesting party must notify the other of such arrangements at least two (2) working days in advance of the hearing. Any postponement or cancellation fee imposed by the arbitration service will be paid by the party requesting the postponement or cancellation. During the time the arbitration proceedings are ongoing, Washington Mutual will advance any required administrative or arbitrator's fees. Each party will pay its own witness fees. At the conclusion of the arbitration, each party agrees to promptly pay any arbitration award against it. We agree that the decision of the arbitrator shall be final and binding on all parties and shall be the exclusive remedy of the parties. The arbitrator shall issue a written and signed statement of the basis of his or her decision, including findings of fact and conclusions of law. In making the decision and award, if any, the arbitrator shall apply applicable substantive law. The arbitrator may only award any remedy that would have been available in court. The decision and award, if any, shall be consistent with the terms of this Binding Arbitration Agreement and shall include an allocation of the costs of the arbitration proceeding between the parties. This Binding Arbitration Agreement may be enforced by a court of competent jurisdiction through the filing of a petition to compel arbitration, or otherwise. The decision and award of the arbitrator may also be judicially enforced pursuant to applicable law. Because of the interstate nature of Washington Mutual's business, this Binding Arbitration Agreement is governed by the Federal Arbitration Act, 9 U.S.C. Section 1 et seq. (the "FAA"). The provisions of the FAA (and to the extent not preempted by the FAA, the provisions of the law of the state of my principal place of employment with Washington 12 Mutual that generally apply to commercial arbitration agreements, such as provisions granting stays of court actions pending arbitration) are incorporated into this Binding Arbitration Agreement to the extent not inconsistent with the other terms of this Binding Arbitration Agreement. We agree that if any provision of this Binding Arbitration Agreement is found to be unenforceable to any extent or in violation of any statute, rule, regulation or common law, it will not affect the enforceability of the remaining provisions and the court shall enforce the affected provision and all remaining provisions to the fullest extent permitted by law. 22. This Binding Arbitration Agreement shall remain in full force and effect at all times during and subsequent to my employment with Washington Mutual, or any successor in interest to Washington Mutual. EX-10.12 3 EMPLOYMENT CONTRACT FOR EXECUTIVE OFFICERS 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT (1998) This Employment Agreement (the "Agreement") is between WASHINGTON MUTUAL, INC., a Washington corporation ("Washington Mutual") and ("Employee"). Employee has many years of experience in the financial services business, and has been employed as an officer of Washington Mutual and/or an affiliate since . Because of Employee's importance to Washington Mutual and the value to be derived from Employee's continued employment, it is the desire of Washington Mutual and Employee to set forth certain terms and conditions relating to Employee's employment as an inducement for Employee continuing his or her employment for so long as Washington Mutual desires to employ Employee. Therefore, the parties agree as follows: Employment. Washington Mutual agrees to, and does hereby, employ Employee, and Employee agrees to, and does hereby, accept such employment, on the terms in this Agreement. Duties. Employee shall perform such duties as the Chairman, the President or the Board of Directors of Washington Mutual (the "Board") may from time to time direct. (As used herein "Board" shall include the board of directors or other successor body performing their function in the event of a Change in Control as defined below.) Employee shall initially have the title of with duties principally in the area of , but this may be changed from time to time as the Chairman, the President or the Board may determine. Compensation. During Employee's employment under this Agreement, Employee shall receive base salary compensation in the amount determined by the Directors' Compensation and Stock Option Committee (the "Compensation Committee"), payable semi-monthly or in such manner as is consistent with Washington Mutual's policy relating to salaried employees. In addition, Employee is entitled to participate in Washington Mutual's Bonus and Incentive Plan for Executive and Senior Management as adopted by the Compensation Committee, under which Employee may receive, subject to the terms of the Plan, a bonus based on Washington Mutual's achievement of specified financial goals. Employee may also be awarded stock options and/or restricted stock, as determined by the Compensation Committee. Employee's compensation shall be reviewed by the Compensation Committee annually and, in the sole discretion of the Compensation Committee, such compensation may be adjusted either upward or downward. Other Benefits. Subject to the respective eligibility requirements and other terms and provisions of the applicable benefit or insurance plans (including relevant waiting periods), Employee shall be enrolled as a participant in all employee benefit plans (including retirement and insurance plans) available to other officers of Washington Mutual, as the same 2 may from time to time be adopted or amended. Employee shall also be entitled to receive such other perquisites as the Chairman, the President or the Board may from time to time deem appropriate. Performance of Duties. Employee agrees that during his or her employment with Washington Mutual: (a) Employee will faithfully perform the duties of such office or offices as he or she may occupy, which duties shall be such as may be assigned to him or her by the Chairman, the President or the Board; (b) Employee will devote to the performance of his or her duties all such time and attention as the Chairman, the President or the Board shall reasonably require, taking, however, from time to time such reasonable vacations as are consistent with his or her duties and Washington Mutual policy; and (c) Employee will not, without the express consent of the Chairman or the Board, become actively associated with or engaged in any business or activity during the term of this Agreement other than that of Washington Mutual (excepting of course customary family and personal activities which may include management of personal investments so long as it does not entail active involvement in a business enterprise) and Employee will do nothing inconsistent with his or her duties to Washington Mutual. Termination. Either Washington Mutual or Employee may terminate Employee's employment at any time in their sole discretion. Except as expressly provided in this Agreement, upon termination of employment Washington Mutual shall have no liability to pay any further compensation or any other benefit or sum whatsoever to Employee. Upon termination of employment, Employee's rights under all employee pension plans, employee welfare benefit plans, bonus plans and stock option and restricted stock plans shall be determined under the terms of the plans and grants themselves except as otherwise specifically provided in this Agreement. If (i) Employee's employment is terminated by Washington Mutual for any reason upon or within three years after a Change in Control (as defined below) or (ii) Employee resigns for "good cause" (as defined below) upon or within three years after a Change in Control, then (but in no other circumstances) Employee shall be entitled to receive, within five business days after the effective date of such termination or resignation, from Washington Mutual or its successor, an amount equal to three times Employee's annual compensation. In addition, upon such an event: all stock options held by Employee shall become immediately vested and exercisable notwithstanding any provisions in the grant of such options regarding vesting, and the lapse of the restrictions on Employee's restricted stock shall automatically be accelerated; provided that the provision in this subsection (2) shall be effective only if the Compensation Committee has taken action approving the acceleration; and 3 provided further that the Compensation Committee may exclude any particular grant(s) of restricted stock from the acceleration provided for in this subsection (2), either at the time it approves the acceleration or in connection with making any particular grant of restricted stock. For purposes of Section 6(c), Employee's "annual compensation" shall include all items of compensation provided by Washington Mutual other than the value of stock options and/or restricted stock granted to Employee. Employee's "annual compensation" shall include the greater of (i) the total of Employee's salary and target bonus for the calendar year in which the termination occurs (if established before the termination) or (ii) Employee's salary and actual bonus for the prior calendar year (annualized if Employee was not employed by Washington Mutual for the entire previous calendar year). Employee's "annual compensation" shall also include the amount of the contributions made or anticipated to have been made on Employee's behalf to Washington Mutual's benefit plans for the calendar year in which the termination occurs, including without limitation contributions to pension plans and plans qualified under Section 125 of the Internal Revenue Code of 1986 (cafeteria plans). If Employee becomes entitled to the payments and equity acceleration described in Section 6(c) (collectively the "Severance Payments"), and if any of the Severance Payments constitute a "parachute payment" under Section 280G of the Internal Revenue Code of 1986 (the "Code"), as amended, or any successor statute then in effect, then Washington Mutual shall pay an additional amount (the "Gross-Up Payment") to Employee at the time specified in the following paragraph. The Gross-Up Payment shall be equal to the amount necessary so that the net amount retained by Employee, after subtracting the parachute excise tax imposed by Section 4999 of the Code, as amended, or any successor statute then in effect (the "Excise Tax"), and after also subtracting all federal, state or local income tax, FICA tax and Excise Tax on the Gross-Up Payment, shall be equal to the net amount Employee would have retained if no Excise Tax had been imposed and no Gross-Up Payment had been paid. The amount of the Gross-Up Payment shall be determined in good faith by independent accountants or tax counsel selected by Washington Mutual and acceptable to Employee, who shall apply the following assumptions: (i) Employee shall be treated as paying federal income taxes at the highest marginal rate in the calendar year in which the Gross-Up Payment is made, and (ii) Employee shall be treated as paying state and local income taxes at the highest marginal rate(s) in the calendar year in which the Gross-Up Payment is made in the locality of Employee's residence as of the effective date of Employee's termination or resignation, net of the maximum reduction in federal income taxes that could be obtained from deducting those state and local taxes. The Gross-Up Payment shall be made within five business days after the effective date of Employee's termination or resignation, provided that if the Gross-Up Payment cannot be determined within that time, Washington Mutual shall pay Employee within that time an estimate, determined in good faith by Washington Mutual, of the minimum amount of the Gross-Up Payment and shall pay the remainder (plus interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount can be determined but in no event later than the 30th day after the effective date of Employee's termination or resignation. If the estimated payment is more than the amount later determined to have been due, the excess (plus interest at 4 the rate provided in Section 1274(b)(2)(B) of the Code) shall be repaid by Employee within five business days after written demand. If the actual Excise Tax imposed is less than the amount that was taken into account in determining the amount of the Gross-Up Payment, Employee shall repay at the time that the amount of the reduced Excise Tax is finally determined the portion of the Gross-Up Payment attributable to that reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax, FICA tax and federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid by Employee, to the extent the repayment results in a reduction in or refund of Excise Tax, FICA tax or federal, state or local income tax), plus interest on the amount of the repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the actual Excise Tax imposed is more than the amount that was taken into account in determining the amount of the Gross-Up Payment, Washington Mutual shall make an additional gross-up payment in respect of such excess (plus interest at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of the excess is finally determined. Continuation of Medical Insurance. If Employee's employment by Washington Mutual terminates for any reason (including early retirement) other than gross misconduct, Employee shall be entitled to continue to participate in Washington Mutual's self-funded group medical plan, at Employee's expense, to the extent provided in the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Death or Disability. If Employee should die or become disabled at any time during his or her employment hereunder this Agreement shall terminate and neither Employee nor anyone claiming by, through or under him or her shall be entitled to any further compensation or other sum under this Agreement (other than payments made by insurers under policies of life and disability insurance and any sums which may become available under any employee benefit plan). Confidentiality. Employee agrees that information not generally known to the public to which Employee has been or will be exposed as a result of Employee's employment by Washington Mutual is confidential information that belongs to Washington Mutual. This includes information developed by Employee, alone or with others, or entrusted to Washington Mutual by its customers or others. Washington Mutual's confidential information includes, without limitation, information relating to Washington Mutual's trade secrets, know-how, procedures, purchasing, accounting, marketing, sales, customers, clients, employees, business strategies and acquisition strategies. Employee will hold Washington Mutual's confidential information in strict confidence and will not disclose or use it except as authorized by Washington Mutual and for Washington Mutual's benefit. Possession of Materials. Employee agrees that upon conclusion of employment or request by Washington Mutual, Employee shall turn over to Washington Mutual all documents, files, office supplies and any other material or work product in Employee's possession or control that were created pursuant to or derived from Employee's services for 5 Washington Mutual. Change in Control. For purposes of this Agreement, "Change in Control" shall mean: The acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date of this Agreement), other than Washington Mutual, a Subsidiary or any employee benefit plan of Washington Mutual or its Subsidiaries, of shares representing more than 25% of (i) the common stock of Washington Mutual, (ii) the aggregate voting power of Washington Mutual's voting securities or (iii) the total market value of Washington Mutual's voting securities; During any period of 25 consecutive calendar months, a majority of the Board of Directors of Washington Mutual (the "Board") ceasing to be composed of individuals (i) who were members of the Board on the first day of such period, (ii) whose election or nomination to the Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of the Board or (iii) whose election or nomination to the Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of the Board; The good-faith determination by the Board that any Person or group (other than a Subsidiary or any employee benefit plan of Washington Mutual or a Subsidiary) has acquired direct or indirect possession of the power to direct or cause to direct the management or policies of Washington Mutual, whether through the ability to exercise voting power, by contract or otherwise; The merger, consolidation, share exchange or similar transaction between Washington Mutual and another Person (other than a Subsidiary) other than a merger in which Washington Mutual is the surviving corporation; or The sale or transfer (in one transaction or a series of related transactions) of all or substantially all of Washington Mutual's assets to another Person (other than a Subsidiary) whether assisted or unassisted, voluntary or involuntary. For purposes of this Agreement: "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof); and "Subsidiary" shall mean a corporation that is wholly owned by Washington Mutual, either directly or through one or more corporations which are wholly 6 owned by Washington Mutual. For purposes of this Agreement, "good cause" for Employee to resign shall mean: The assignment of duties to Employee which (i) are materially different from Employee's duties immediately prior to the Change in Control, or (ii) result in Employee having significantly less authority and/or responsibility than he or she had prior to the Change in Control, without his or her express written consent; The removal of Employee from the position held immediately prior to the Change in Control, except where such removal is for cause (as defined below) or by reason of Employee's disability; A reduction of Employee's base salary as in effect on the date of the Change in Control or as the same may be increased from time to time thereafter; A reduction in the overall level of Employee's total compensation below the average total compensation paid by Washington Mutual to Employee for the 24 months immediately preceding the Change in Control; or Any change in Employee's duties which would require him or her to relocate out of the Seattle area, without Employee's express written consent. For purposes of this Agreement, a removal of Employee from his or her position will be considered to be for "cause" if, but only if, the removal is because (i) Employee engages in abusive use of alcohol or other drugs on a continuing or recurring basis, (ii) Employee is convicted of any felony or of a misdemeanor involving moral turpitude (including forgery, fraud, theft or embezzlement), or is convicted or enters into a pretrial diversion or similar program in connection with the prosecution for an offense involving dishonesty, breach of trust or money laundering, or (iii) Employee has engaged in dishonesty, fraud, destruction or theft of property of Washington Mutual or a Subsidiary, physical attack on another employee, willful malfeasance or gross negligence in the performance of his or her duties, or misconduct materially injurious to Washington Mutual or a Subsidiary. Title. Although it is the intention of the parties that during the term of this Agreement Employee shall be an executive employee of Washington Mutual with the title and duties described in Section 2 above, it is specifically understood that, subject to the provisions of Section 6(c), the employment and the nature and situs of services to be rendered shall be subject to the authority of the Chairman, the President or the Board to change the same from time to time and at any time and to provide for the operation of Washington Mutual as specified by applicable banking laws and regulations. Resolution of Disputes. Any dispute arising out of or relating to this Agreement or Employee's employment (or termination of employment) shall be submitted to and resolved by final and binding arbitration as provided in the Binding Arbitration Agreement attached as 7 Exhibit A, whether the claimant is Employee or Washington Mutual. In any dispute in arbitration or court arising out of or relating to this Agreement, the losing party shall pay the prevailing party's reasonable attorneys' fees, costs and expenses. Miscellaneous. This Agreement is the entire agreement between the parties and may not be modified or abrogated orally or by course of dealing, but only by another instrument in writing duly executed by the parties. This Agreement replaces and supersedes all prior agreements on these subjects that Employee may have with Washington Mutual, Inc., or any Subsidiary of Washington Mutual, Inc., including without limitation that certain Employment Agreement between the parties dated for reference purposes January 1, 1997. Employee acknowledges that Employee shall be entitled to change in control benefits, severance benefits or other employment separation benefits only as specifically provided in this Agreement (or, to the extent applicable according to its terms, as provided in the Washington Mutual Severance Plan as in effect from time to time), notwithstanding the terms of any other representation, policy, severance plan, benefit plan or agreement. This Agreement has been drafted in contemplation of and shall be construed in accordance with and governed by Washington law. Jurisdiction and venue of any court action in connection with this Agreement shall be had exclusively in the Superior Court for King County, Washington or the U.S. District Court in Seattle. Employee acknowledges that this Agreement has been drafted by counsel for Washington Mutual, and that Employee has not relied upon such counsel with respect to this Agreement. If a court or arbitrator of competent jurisdiction or governmental authority declares any term or provision hereof invalid, unenforceable or unacceptable, the remaining terms and provisions hereof shall be unimpaired and the invalid, unenforceable or unacceptable term or provision shall be replaced by a term or provision that is valid, enforceable and acceptable and that comes closest to expressing the intention of the invalid, unenforceable or unacceptable term or provision. Employee may not assign Employee's rights or delegate Employee's duties under this Agreement. Washington Mutual may assign its rights and delegate its duties under this Agreement to any purchaser of all or substantially all of Washington Mutual's assets. The transfer of Employee's employment from Washington Mutual to the purchaser of all or substantially all of the assets of Washington Mutual shall not be considered a termination of employment, but this Agreement shall run to the benefit of, and be binding upon, the new employer. In the event of a Change in Control, as defined above, this Agreement shall bind, and run to the benefit of, the successor to Washington Mutual resulting from the Change in Control. 8 DATED effective as of the 1st day of January 1998. WASHINGTON MUTUAL: WASHINGTON MUTUAL, INC. By______________________________________ Kerry K. Killinger Its Chairman and Chief Executive Officer EMPLOYEE: ____________________________ 9 EXHIBIT A BINDING ARBITRATION AGREEMENT This Binding Arbitration Agreement is a part of, and incorporated into, that certain Employment Agreement between the parties dated effective as of the 1st day of January 1998. I, the employee who is a party to the Employment Agreement to which this Exhibit is attached, as well as Washington Mutual, agree as follows: Any and all disputes which involve or relate in any way to my employment (or termination of employment) with Washington Mutual shall be submitted to and resolved by final and binding arbitration. Washington Mutual and I understand that by entering into this Binding Arbitration Agreement, we are each waiving any right we may have to file a lawsuit or other civil action or proceeding relating to my employment with Washington Mutual, and are waiving any right we may have to resolve employment disputes through trial by jury. We agree that arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment. This Binding Arbitration Agreement is intended to cover all civil claims which involve or relate in any way to my employment (or termination of employment) with Washington Mutual, including, but not limited to, claims of employment discrimination or harassment on the basis of race, sex, age, religion, color, national origin, sexual orientation, disability and veteran status (including claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act ("ERISA"), the Fair Labor Standards Act, the Immigration Reform and Control Act and any other local, state or federal law concerning employment or employment discrimination), claims based on violation of public policy or statute, and claims against individuals or entities employed by, acting on behalf of, or affiliated with Washington Mutual. However, ERISA plan benefit issues and claims for workers compensation or for unemployment compensation benefits are not covered by this Binding Arbitration Agreement. The statutes of limitations otherwise applicable under law shall apply to all claims made in the arbitration. I understand and agree that despite anything in this Binding Arbitration Agreement to the contrary, I am not waiving the right to file or institute a complaint or charge with any government agency authorized to investigate or resolve employment-related matters, including but not limited to the United States Equal Employment Opportunity Commission, the Department of Labor, the Occupational Safety and Health Commission, the National Labor Relations Board, the Immigration and Naturalization Service, and any other comparable local, state or federal agency. I also understand and agree that despite anything in this Binding Arbitration Agreement to the contrary, either party may request a court to issue such temporary or interim relief (including temporary restraining orders and preliminary injunctions) as may be appropriate, either before or after arbitration is commenced. The temporary or interim relief may remain in effect pending the outcome of arbitration. No such 10 request shall be a waiver of the right to submit any dispute to arbitration. This Binding Arbitration Agreement does not constitute an employment contract, require discharge only for cause, or require any particular corrective action or discharge procedures. Arbitration under this Binding Arbitration Agreement shall be conducted before a single arbitrator and shall take place within the state where I am currently employed by Washington Mutual, or where I was so employed at the time of termination. 9. In order to initiate arbitration, Washington Mutual or I must so notify the other party in writing of their decision to initiate arbitration, either by personal delivery or certified mail. The notification should include the following information about the employee: name, home address, work address, work and home phone number, and the following information about the occurrence: date, location, nature of the claims or dispute, facts upon which the claims are made, and remedy requested. Any notice of arbitration initiated by Washington Mutual shall be sent to my last known residence address as reflected in my personnel file at Washington Mutual. Notice of arbitration initiated by me shall be sent to Washington Mutual's General Counsel. The General Counsel's address is currently Washington Mutual, 1201 Third Avenue, WMT 1500, Seattle, Washington 98101. Provided that if I am filling the position of Washington Mutual's General Counsel, notice of arbitration initiated by me shall be sent to Washington Mutual's Legal Services Department, attention Deputy General Counsel. Within thirty (30) days after receipt of notice of arbitration, Washington Mutual and I will attempt to agree upon a mutually acceptable arbitrator. If Washington Mutual and I are unable to agree upon an arbitrator, we will submit the dispute to the American Arbitration Association ("AAA"). If AAA is, for some reason, unable or unwilling to accept the matter, we will submit the matter to a comparable arbitration service. The arbitration shall be conducted in accordance with the laws of the state in which the arbitration is conducted and the rules and requirements of the arbitration service being utilized, to the extent that such rules and requirements do not conflict with the terms of this Binding Arbitration Agreement. At the request of either Washington Mutual or myself, the arbitrator will schedule a pre-hearing conference to, among other things, agree on procedural matters, obtain stipulations, and attempt to narrow the issues. During the arbitration process, Washington Mutual and I may each make a written demand on the other for a list of witnesses, including experts, to be called and/or copies of documents to be introduced at the hearing. The demand must be served at least thirty (30) days prior to the hearing. The list and copies of documents must be delivered within twenty-five (25) days of service of the demand. Either party shall be entitled to conduct a limited amount of discovery prior to the arbitration hearing. Either party may take a maximum of two (2) depositions. Either party may apply to the arbitrator for further discovery. Such further discovery may, in the 11 discretion of the arbitrator, be awarded upon a showing of sufficient cause. If any documents to be produced or requested for production contain or refer to matters which are private, proprietary and/or confidential, the arbitrator shall make an appropriate protective order prohibiting or limiting use and disclosure of such documents and providing for return of documents produced after the arbitration is concluded. Either party may file a brief with the arbitrator. Each brief must be served on the arbitrator and the other party at least five (5) working days prior to the hearing, and if not timely served must be disregarded by the arbitrator. The brief shall specify the facts the party intends to prove, analyze the applicable law or policy, and specify the remedy sought. At the close of the hearing, each party shall be given leave to file a post-hearing brief. The time for filing the post-hearing brief shall be set by the arbitrator. I understand that, at my expense, I have the right to hire an attorney to represent me in the arbitration, and Washington Mutual has that same right. I also understand that all parties shall have the right to present evidence at the arbitration, through testimony and documents, and to cross-examine witnesses called by another party. Each party agrees to pay the fees of any witnesses testifying at that party's request. Each party also agrees to pay the cost of any stenographic record of the arbitration hearing should that party request any such record. The requesting party must notify the other of such arrangements at least two (2) working days in advance of the hearing. Any postponement or cancellation fee imposed by the arbitration service will be paid by the party requesting the postponement or cancellation. During the time the arbitration proceedings are ongoing, Washington Mutual will advance any required administrative or arbitrator's fees. Each party will pay its own witness fees. At the conclusion of the arbitration, each party agrees to promptly pay any arbitration award against it. We agree that the decision of the arbitrator shall be final and binding on all parties and shall be the exclusive remedy of the parties. The arbitrator shall issue a written and signed statement of the basis of his or her decision, including findings of fact and conclusions of law. In making the decision and award, if any, the arbitrator shall apply applicable substantive law. The arbitrator may only award any remedy that would have been available in court. The decision and award, if any, shall be consistent with the terms of this Binding Arbitration Agreement and shall include an allocation of the costs of the arbitration proceeding between the parties. This Binding Arbitration Agreement may be enforced by a court of competent jurisdiction through the filing of a petition to compel arbitration, or otherwise. The decision and award of the arbitrator may also be judicially enforced pursuant to applicable law. Because of the interstate nature of Washington Mutual's business, this Binding Arbitration Agreement is governed by the Federal Arbitration Act, 9 U.S.C. Section 1 et seq. (the 12 "FAA"). The provisions of the FAA (and to the extent not preempted by the FAA, the provisions of the law of the state of my principal place of employment with Washington Mutual that generally apply to commercial arbitration agreements, such as provisions granting stays of court actions pending arbitration) are incorporated into this Binding Arbitration Agreement to the extent not inconsistent with the other terms of this Binding Arbitration Agreement. We agree that if any provision of this Binding Arbitration Agreement is found to be unenforceable to any extent or in violation of any statute, rule, regulation or common law, it will not affect the enforceability of the remaining provisions and the court shall enforce the affected provision and all remaining provisions to the fullest extent permitted by law. 22. This Binding Arbitration Agreement shall remain in full force and effect at all times during and subsequent to my employment with Washington Mutual, or any successor in interest to Washington Mutual. EX-10.33 4 AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT 1 EXHIBIT 10.33 CONFORMED COPY ******************************************************************************** WASHINGTON MUTUAL, INC. ----------------------------- AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT Dated as of November 25, 1997 ------------------------------ THE FIRST NATIONAL BANK OF CHICAGO BANK OF AMERICA N.T. & S.A., as Syndication Agents THE CHASE MANHATTAN BANK, as Administrative Agent ******************************************************************************** 2 TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience of reference only.
Page ---- Section 1. Definitions and Accounting Matters............................... 1 1.01 Certain Defined Terms............................................... 1 1.02 Accounting Terms and Determinations................................. 15 1.03 Classes and Types of Loans.......................................... 17 Section 2. Commitments, Loans, Notes and Prepayments........................ 17 2.01 Syndicated Loans.................................................... 17 2.02 Borrowings of Syndicated Loans...................................... 17 2.03 Money Market Loans.................................................. 17 2.04 Changes of Commitments.............................................. 23 2.05 Facility Fee........................................................ 23 2.06 Lending Offices..................................................... 23 2.07 Several Obligations; Remedies Independent........................... 23 2.08. Evidence of Debt................................................... 24 2.09 Prepayments......................................................... 25 2.10 Extension of Commitment Termination Date............................ 25 Section 3. Payments of Principal and Interest............................... 27 3.01 Repayment of Loans.................................................. 27 3.02 Interest............................................................ 27 Section 4. Payments; Pro Rata Treatment; Computations; Etc.................. 28 4.01 Payments............................................................ 28 4.02 Pro Rata Treatment.................................................. 29 4.03 Computations........................................................ 30 4.04 Minimum Amounts..................................................... 30 4.05 Certain Notices..................................................... 30 4.06 Non-Receipt of Funds by the Administrative Agent.................... 31 4.07 Sharing of Payments, Etc............................................ 32 Section 5. Yield Protection, Etc............................................ 34 5.01 Additional Costs.................................................... 34 5.02 Limitation on Types of Loans........................................ 37 5.03 Illegality.......................................................... 37 5.04 Treatment of Affected Loans......................................... 38 5.05 Compensation........................................................ 38 5.06 U.S. Taxes.......................................................... 39 5.07 Replacement of Banks................................................ 40 Section 6. Conditions Precedent............................................. 41 6.01 Conditions to Effectiveness......................................... 41 6.02 Loans............................................................... 43
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Section 7. Representations and Warranties................................... 43 7.01 Corporate Existence................................................. 43 7.02 Financial Condition................................................. 44 7.03 Litigation.......................................................... 44 7.04 No Breach........................................................... 44 7.05 Action.............................................................. 45 7.06 Approvals........................................................... 45 7.07 ERISA............................................................... 45 7.08 Taxes............................................................... 45 7.09 Investment Company Act.............................................. 46 7.10 Public Utility Holding Company Act.................................. 46 7.11 Material Agreements and Liens....................................... 46 7.12 Environmental Matters............................................... 47 7.13 Subsidiaries........................................................ 47 7.14 True and Complete Disclosure........................................ 47 Section 8. Covenants of the Company......................................... 48 8.01 Financial Statements Etc............................................ 48 8.02 Litigation.......................................................... 52 8.03 Existence, Etc...................................................... 52 8.04 Insurance........................................................... 53 8.05 Prohibition of Fundamental Changes.................................. 53 8.06 Limitation on Liens................................................. 54 8.07 Lines of Business................................................... 56 8.08 Use of Proceeds..................................................... 56 8.09 Adequate Capitalization............................................. 56 8.10 Certain Financial Covenants......................................... 56 Section 9. Events of Default................................................ 57 Section 10. The Administrative Agent........................................ 61 10.01 Appointment, Powers and Immunities................................. 61 10.02 Reliance by Administrative Agent................................... 62 10.03 Defaults........................................................... 62 10.04 Rights as a Bank................................................... 63 10.05 Indemnification.................................................... 63 10.06 Non-Reliance on Administrative Agent and Other Banks.......................................................... 64 10.07 Failure to Act..................................................... 64 10.08 Resignation or Removal of Administrative Agent..................... 64 10.09 Syndication Agents................................................. 65 Section 11. Miscellaneous................................................... 65 11.01 Waiver............................................................. 65 11.02 Notices............................................................ 66 11.03 Expenses, Etc...................................................... 66 11.04 Amendments, Etc.................................................... 67 11.05 Successors and Assigns............................................. 68 11.06 Assignments and Participations..................................... 68 11.07 Survival........................................................... 72 11.08 Captions........................................................... 72
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11.09 Counterparts....................................................... 72 11.10 Governing Law; Submission to Jurisdiction.......................... 73 11.11 Waiver of Jury Trial............................................... 73 11.12 Treatment of Certain Information; Confidentiality................................................ 73
SCHEDULE I - Material Agreements and Liens SCHEDULE II - Subsidiaries SCHEDULE III - Litigation EXHIBIT A-1 - Form of Syndicated Note EXHIBIT A-2 - Form of Money Market Note EXHIBIT B - Form of Opinion of Counsel to the Company EXHIBIT C - Form of Opinion of Special New York Counsel to Chase EXHIBIT D - Form of Money Market Quote Request EXHIBIT E - Form of Money Market Quote EXHIBIT F - Form of Confidentiality Agreement EXHIBIT G - Form of Assignment and Acceptance (4) 5 AMENDED and RESTATED 364-DAY CREDIT AGREEMENT dated as of November 25, 1997, between: WASHINGTON MUTUAL, INC., a corporation duly organized and validly existing under the laws of the State of Washington (the "Company"); each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto and each lender that becomes a "Bank" after the date hereof pursuant to Section 11.06(b) hereof (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN BANK, a New York banking association, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, certain Banks (the "Original Banks") and the Administrative Agent are party to a Credit Agreement dated as of December 10, 1996 (the "Original Credit Agreement") providing for Loans (as hereinafter defined) in an aggregate principal amount not to exceed $100,000,000. The Company has requested that the Banks and the Administrative Agent agree, and the Banks and the Administrative Agent are willing, to amend and restate the Original Credit Agreement to provide for, among other things, Loans (as hereinafter defined) in an aggregate principal amount not to exceed $200,000,000. Accordingly, the parties hereto agree to amend and restate the Original Credit Agreement so that, as amended and restated, it reads in its entirety as provided herein. Section 1. Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Acquisition" shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Company and/or one or more of its Subsidiaries (in one transaction or as the most recent transaction in a series of related transactions) (i) acquires any going business or all or substantially all of the assets of any firm or corporation (or division or operating unit thereof), whether through purchase of assets, merger or otherwise, (ii) directly or indirectly acquires control of at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors or (iii) directly or indirectly acquires control of an ownership interest in any partnership or joint venture (including a joint venture in corporate form). Amended and Restated Credit Agreement 6 - 6 - "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the highest of (a) the Federal Funds Rate for such day plus 1/2 of 1%, (b) the Prime Rate for such day and (c) the Base CD Rate plus 1%. Each change in any interest rate provided for herein based upon the Alternate Base Rate resulting from a change in the Alternate Base Rate shall take effect at the time of such change in the Alternate Base Rate. "Alternate Base Rate Loans" shall mean Syndicated Loans that bear interest at rates based upon the Alternate Base Rate. "Amendment Effective Date" shall mean the date on which all of the conditions set forth in Section 6.01 hereof shall have been satisfied or waived by the Banks. "Applicable Margin" shall mean: (a) with respect to Eurodollar Loans, 0.2750% per annum; and (b) with respect to Alternate Base Rate Loans, 0.0% per annum. "Assessment Rate" shall mean, for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Banks. "Asset Securitization" shall mean a public or private transfer of installment receivables, credit card receivables, lease receivables or any other type of secured or unsecured financial assets which transfer is recorded as a sale according to generally accepted accounting principles as of the date of such transfer. "Bank Regulatory Authority" shall mean the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and all other relevant bank regulatory authorities (including, without limitation, relevant state bank regulatory authorities). Amended and Restated Credit Agreement 7 - 7 - "Bankruptcy Code" shall mean the Federal Bankruptcy Code of 1978, as amended from time to time. "Base CD Rate" shall mean the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Basle Accord" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "Business Day" shall mean any day (a) on which commercial banks are not authorized or required to close in New York City and (b) if such day relates to the giving of notices or quotes in connection with a LIBOR Auction or to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a LIBOR Market Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capital Lease Obligations" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Change in Control" shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; (b) during any period of 25 consecutive calendar months, a majority of the Board of Directors of the Company ceasing to be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such Amended and Restated Credit Agreement 8 - 8 - election or nomination at least a majority of said Board; or (c) the acquisition by any Person or group of direct or indirect possession of the power to direct or cause to direct the management or policies of the Company, whether through the ability to exercise voting power, by contract or otherwise. "Chase" shall mean The Chase Manhattan Bank. "Class" shall have the meaning assigned to such term in Section 1.03 hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment" shall mean, as to each Bank, the obligation of such Bank to make Syndicated Loans pursuant to Section 2.01 hereof in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite the name of such Bank on the signature pages hereof under the caption "Commitment" or, in the case of a Person that becomes a Bank pursuant to an assignment permitted under Section 11.06(b) hereof, as specified in the respective instrument of assignment pursuant to which such assignment is effected (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). "Commitment Termination Date" shall mean the date 364 days after the date hereof, as the same may be extended pursuant to Section 2.10 hereof; provided that, if such date is not a Business Day, the Commitment Termination Date shall be the next preceding Business Day. "Consolidated Assets" shall mean, at any date, the amount at which the assets of the Company and its Subsidiaries are or should be shown on a consolidated statement of financial position prepared in accordance with GAAP as at such date. "Consolidated Equity" shall mean, at any date, the amount of stockholders' equity of the Company and its Subsidiaries determined on a consolidated basis without duplication in accordance with GAAP (and, for the purposes of Section 8.10 of this Agreement only, shall include Special Preferred Equity Securities, but only to the extent that such preferred equity securities could be treated as Tier 1 capital of the Company if the Company were a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System). "Consolidated Reserves" shall mean, at any date, the amount of loan loss reserves held by the Company and its Amended and Restated Credit Agreement 9 - 9 - Subsidiaries at such date determined on a consolidated basis without duplication in accordance with GAAP. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. "Double Leverage Ratio" shall mean, at any date, the ratio of (a) the sum of (i) the aggregate book value of the Investments of the Company in the capital notes and stock of its Subsidiaries plus (ii) the aggregate book value of intangibles (including, without limitation, purchased mortgage servicing rights and purchased credit card relationships) of the Company at such date to (b) Consolidated Equity at such date. "Environmental Laws" shall mean any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "Equity Rights" shall mean, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Amended and Restated Credit Agreement 10 - 10 - Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "Eurodollar Loans" shall mean Syndicated Loans that bear interest at rates based on rates referred to in the definition of "Fixed Base Rate" in this Section 1.01. "Event of Default" shall have the meaning assigned to such term in Section 9 hereof. "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Administrative Agent. "Fee Letter" shall mean the fee letter dated as of October 24, 1997 between the Company and the Administrative Agent. "Fixed Base Rate" shall mean, with respect to any Fixed Rate Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) reported at 10:00 a.m., London time on the date two Business Days prior to the first day of such Interest Period on display page 3750 (British Bankers Association Settlement Rate) of the Dow Jones Markets (Telerate) Service as the London Interbank Offered Rate for Dollar deposits having a term comparable to such Interest Period and in an amount equal to the amount of such Fixed Rate Loan (or, if said Page shall cease to be publicly available or if the information contained on said Page, in the sole judgment of the Administrative Agent, shall cease to accurately reflect such London Interbank Offered Rate, the Fixed Base Rate for such Loans shall mean the rate reported by any publicly available source of similar market data selected by the Administrative Agent that, in the sole judgment of the Administrative Agent, accurately reflects such London Interbank Offered Rate). Amended and Restated Credit Agreement 11 - 11 - "Fixed Rate Loans" shall mean Eurodollar Loans and, for the purposes of the definition of "Fixed Base Rate" in this Section 1.01 and in Section 5 hereof, LIBOR Market Loans. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those that, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "Guarantee" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Guarantees by such Person of Indebtedness of others. "Information Memorandum" shall mean the Confidential Information Memorandum dated as of October 1997 regarding the Amended and Restated Credit Agreement 12 - 12 - Company and this financing. "Insured Subsidiary" shall mean any insured depositary institution (as defined in 12 U.S.C. Section 1813(c) (or any successor provision), as amended, re-enacted or redesignated from time to time, that is controlled (within the meaning of 12 U.S.C. Section 1841 (or any successor provision), as amended, re-enacted or redesignated from time to time) by the Company. "Interest Period" shall mean: (a) with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, or, any other period to which all the Banks have consented, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; (b) with respect to any Alternate Base Rate Loan, each period commencing on the date such Alternate Base Rate Loan is made and ending on the Commitment Termination Date; (c) with respect to any Set Rate Loan, the period commencing on the date such Set Rate Loan is made and ending on any Business Day no fewer than 7 days thereafter, as the Company may select as provided in Section 2.03(b) hereof; and (d) with respect to any LIBOR Market Loan, the period commencing on the date such LIBOR Market Loan is made and ending on the numerically corresponding day in such subsequent month, as the Company may select as provided in Section 2.03(b) hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period for any Syndicated Loan or Money Market Loan would otherwise end after the Commitment Termination Date, such Interest Period shall not be available hereunder for such period; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Amended and Restated Credit Agreement 13 - 13 - Day (or, in the case of an Interest Period for a Eurodollar Loan or a LIBOR Market Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) no Interest Period for any Loan (other than a Set Rate Loan) shall have a duration of less than one month and, if the Interest Period for any Eurodollar or LIBOR Market Loan would otherwise be a shorter period, such Loan shall not be available hereunder for such period. "Interest Rate Protection Agreement" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "Investment" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement. "LIBO Margin" shall have the meaning assigned to such term in Section 2.03(c)(ii)(C) hereof. "LIBOR Auction" shall mean a solicitation of Money Market Quotes setting forth LIBO Margins based on the Fixed Base Rate pursuant to Section 2.03 hereof. "LIBOR Market Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of Fixed Base Rates pursuant to a LIBOR Auction. "Lien" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital Amended and Restated Credit Agreement 14 - 14 - lease or other title retention agreement (other than an operating lease) relating to such Property. "Loans" shall mean Syndicated Loans and Money Market Loans. "Majority Banks" shall mean Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations or financial condition of the Company and its Subsidiaries taken as a whole, (b) the ability of the Company to perform its obligations hereunder and under the Notes (if any), (c) the validity or enforceability of this Agreement or of the Notes (if any), (d) the rights and remedies of the Banks and the Administrative Agent hereunder and under the Notes (if any) or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "Money Market Borrowing" shall have the meaning assigned to such term in Section 2.03(b) hereof. "Money Market Loan Limit" shall have the meaning assigned to such term in Section 2.03(c)(ii) hereof. "Money Market Loans" shall mean the loans provided for by Section 2.03 hereof. "Money Market Notes" shall mean the promissory notes (if any) provided for by Section 2.08(d) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Money Market Quote" shall mean an offer in accordance with Section 2.03(c) hereof by a Bank to make a Money Market Loan with one single specified interest rate. "Money Market Quote Request" shall have the meaning assigned to such term in Section 2.03(b) hereof. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA. "Non-Material Subsidiaries" shall mean, as at any date, Amended and Restated Credit Agreement 15 - 15 - Subsidiaries of the Company the total assets of which, in the aggregate, do not exceed one percent (1%) of the Consolidated Assets of the Company and all of its Subsidiaries, as at such date. "Non-Performing Assets" shall mean, as at any date, the sum, for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the following: (a) non-accrual loans plus (b) accruing loans past due 90 days or more plus (c) other non-performing assets plus (d) other real estate owned plus (e) without duplication for amounts included as other real estate owned, property acquired pursuant to in substance foreclosures. "Notes" shall mean Syndicated Notes and Money Market Notes. "Original Notes" shall mean the promissory notes of the Company delivered to each Original Bank pursuant to the Original Credit Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Post-Default Rate" shall mean a rate per annum equal to 2% plus the Alternate Base Rate as in effect from time to time, provided that, with respect to principal of a Eurodollar Loan or a Money Market Loan that shall become due (whether at stated maturity, by acceleration or otherwise) on a day other than the last day of the Interest Period therefor, the "Post-Default Rate" shall be, for the period from and including such due date to but excluding the last day of such Interest Period, 2% plus the interest rate for such Loan as provided in Section 3.02 hereof and, thereafter, the rate provided for above in this definition. "Prime Rate" shall mean the rate of interest from time to time announced by Chase at its principal office as its prime Amended and Restated Credit Agreement 16 - 16 - commercial lending rate. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Quarterly Dates" shall mean the last Business Day of each March, June, September and December, the first of which shall be the first such day after the date hereof. "Register" has the meaning set forth in Section 11.06. "Regulations A, D, G, U and X" shall mean, respectively, Regulations A, D, G, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Regulatory Change" shall mean, with respect to any Bank, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Repurchase Arrangements" shall mean repurchase and reverse repurchase arrangements with respect to securities and financial instruments. "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "Set Rate" shall have the meaning assigned to such term in Section 2.03(c)(ii)(D) hereof. "Set Rate Auction" shall mean a solicitation of Money Market Quotes setting forth Set Rates pursuant to Section 2.03 hereof. "Set Rate Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of Set Rates pursuant to a Set Rate Auction. "Special Preferred Equity Securities" shall mean preferred equity securities, if any, issued by a Wholly-Owned Subsidiary of the Company of the type marketed under proprietary Amended and Restated Credit Agreement 17 - 17 - names such as MIPS, SKIS and TOPRS. "Statutory Reserve Rate" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System to which the Administrative Agent is subject, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Syndicated Loans" shall mean the loans provided for by Section 2.01 hereof, which may be Alternate Base Rate Loans and/or Eurodollar Loans. "Syndicated Notes" shall mean the promissory notes (if any) provided for by Section 2.08(d) hereof and all promissory notes delivered in substitution or exchange thereof, in each case as the same shall be modified and supplemented and in effect from time to time. "Tangible Net Worth" shall mean, as at any date, the sum of: (a) Consolidated Equity; minus (b) the amount of Special Preferred Equity Securities, to the extent otherwise included in Consolidated Equity; minus (c) the sum for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the cost of treasury shares Amended and Restated Credit Agreement 18 - 18 - and the book value of all assets that should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at Consolidated Equity) but in any event including goodwill, minority interests, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all reserves and any write-up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 1996. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Type" shall have the meaning assigned to such term in Section 1.03 hereof. "Wholly-Owned Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly-Owned Subsidiaries of such Person or by such Person and one or more Wholly-Owned Subsidiaries of such Person. 1.02 Accounting Terms and Determinations. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with those Amended and Restated Credit Agreement 19 - 19 - used in the preparation of the latest financial statements furnished to the Banks hereunder (which, prior to the delivery of the first financial statements under Section 8.01 hereof, shall mean the audited financial statements as at December 31, 1996 referred to in Section 7.02 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Banks pursuant to Section 8.01 hereof (or, prior to the delivery of the first financial statements under Section 8.01 hereof, used in the preparation of the audited financial statements as at December 31, 1996 referred to in Section 7.02 hereof) unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Majority Banks shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 8.01 hereof, shall mean the audited financial statements referred to in Section 7.02 hereof). (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 8.01 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above that affects the calculation of the Company's Double Leverage Ratio, Consolidated Equity, Consolidated Assets, Tangible Net Worth or Non-Performing Assets and (ii) reasonable estimates of the differences in such calculations between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in Section 8 hereof, the Company will not, and will not permit any of its Subsidiaries to, change the last day of its fiscal year from December 31, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30, respectively. Amended and Restated Credit Agreement 20 - 20 - 1.03 Classes and Types of Loans. Loans hereunder are distinguished by "Class" and by "Type". The "Class" of a Loan refers to whether such Loan is a Money Market Loan or a Syndicated Loan, each of which constitutes a Class. The "Type" of a Loan refers to whether such Loan is a Alternate Base Rate Loan, a Eurodollar Loan, a Set Rate Loan or a LIBOR Market Loan, each of which constitutes a Type. Loans may be identified by both Class and Type. Section 2. Commitments, Loans, Notes and Prepayments. 2.01 Syndicated Loans. Each Bank severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars during the period from and including the date hereof to but not including the Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time, provided that the aggregate principal amount of all Syndicated Loans, together with the aggregate principal amount of all Money Market Loans, at one time outstanding shall not exceed the aggregate amount of the Commitments at such time. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Commitments by means of Alternate Base Rate Loans and Eurodollar Loans; provided that no more than three separate Interest Periods in respect of Eurodollar Loans from each Bank may be outstanding at any one time. 2.02 Borrowings of Syndicated Loans. The Company shall give the Administrative Agent notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m. New York time on the date specified for each borrowing of Syndicated Loans hereunder, each Bank shall make available the amount of the Syndicated Loan or Loans to be made by it on such date to the Administrative Agent, at an account in New York designated by the Administrative Agent, in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company designated by the Company. 2.03 Money Market Loans. (a) In addition to borrowings of Syndicated Loans, at any time prior to the Commitment Termination Date the Company may, as set forth in this Section 2.03, request the Banks to make offers to make Money Market Loans to the Company in Dollars. The Banks may, but shall have no obligation to, make such offers and Amended and Restated Credit Agreement 21 - 21 - the Company may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.03. Money Market Loans may be LIBOR Market Loans or Set Rate Loans (each a "Type" of Money Market Loan), provided that: (i) there may be no more than fifteen different Interest Periods for both Syndicated Loans and Money Market Loans outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); and (ii) the aggregate principal amount of all Money Market Loans, together with the aggregate principal amount of all Syndicated Loans, at any one time outstanding shall not exceed the aggregate amount of the Commitments at such time. (b) When the Company wishes to request offers to make Money Market Loans, it shall give the Administrative Agent (which shall promptly notify the Banks) notice (a "Money Market Quote Request") so as to be received no later than 11:00 a.m. New York time on (x) the fourth Business Day prior to the date of borrowing proposed therein, in the case of a LIBOR Auction or (y) the Business Day next preceding the date of borrowing proposed therein, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree). The Company may request offers to make Money Market Loans for up to three different Interest Periods in a single notice (for which purpose Interest Periods in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); provided that the request for each separate Interest Period shall be deemed to be a separate Money Market Quote Request for a separate borrowing (a "Money Market Borrowing"). Each such notice shall be substantially in the form of Exhibit D hereto and shall specify as to each Money Market Borrowing: (i) the proposed date of such borrowing, which shall be a Business Day; (ii) the aggregate amount of such Money Market Borrowing, which shall be at least $10,000,000 (or a larger multiple of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; (iii) the duration of the Interest Period Amended and Restated Credit Agreement 22 - 22 - applicable thereto; (iv) whether the Money Market Quotes requested for a particular Interest Period are seeking quotes for LIBOR Market Loans or Set Rate Loans; and (v) if the Money Market Quotes requested are seeking quotes for Set Rate Loans, the date on which the Money Market Quotes are to be submitted if it is before the proposed date of borrowing (the proposed date of such borrowing or, if the date on which such Money Market Quotes are to be submitted is before the proposed date of borrowing, such submission date is called the "Quotation Date"). Except as otherwise provided in this Section 2.03(b), no Money Market Quote Request shall be given within five Business Days (or such other number of days as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree) of any other Money Market Quote Request. (c) (i) Each Bank may submit one or more Money Market Quotes, each constituting an offer to make a Money Market Loan in response to any Money Market Quote Request; provided that, if the Company's request under Section 2.03(b) hereof specified more than one Interest Period, such Bank may make a single submission containing one or more Money Market Quotes for each such Interest Period. Each Money Market Quote must be submitted to the Administrative Agent not later than (x) 2:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 10:00 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree); provided that any Money Market Quote may be submitted by Chase (or its lending office) only if Chase (or such lending office) notifies the Company of the terms of the offer contained therein not later than (x) 1:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 9:45 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction. Subject to Sections 5.02(b), 5.03, 6.02 and 9 hereof, any Money Market Quote so made shall be irrevocable except with the consent of the Administrative Agent given on the instructions of the Company. (ii) Each Money Market Quote shall be substantially in the form of Exhibit E hereto and shall Amended and Restated Credit Agreement 23 - 23 - specify: (A) the proposed date of borrowing and the Interest Period therefor; (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount shall be at least $5,000,000 (or a larger multiple of $1,000,000); provided that the aggregate principal amount of all Money Market Loans for which a Bank submits Money Market Quotes (x) may be greater or less than the Commitment of such Bank but (y) may not exceed the principal amount of the Money Market Borrowing for a particular Interest Period for which offers were requested; (C) in the case of a LIBOR Auction, the margin above or below the applicable Fixed Base Rate (the "LIBO Margin") offered for each such Money Market Loan, expressed as a percentage (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) to be added to or subtracted from the applicable Fixed Base Rate; (D) in the case of a Set Rate Auction, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) offered for each such Money Market Loan (the "Set Rate"); and (E) the identity of the quoting Bank. Unless otherwise agreed by the Administrative Agent and the Company, no Money Market Quote shall contain qualifying, conditional or similar language or propose terms other than or in addition to those set forth in the applicable Money Market Quote Request and, in particular, no Money Market Quote may be conditioned upon acceptance by the Company of all (or some specified minimum) of the principal amount of the Money Market Loan for which such Money Market Quote is being made, provided that the submission by any Bank containing more than one Money Market Quote may be conditioned on the Company not accepting offers contained in such submission that would result in such Bank making Money Market Loans pursuant thereto in excess of a specified aggregate amount (the "Money Market Loan Limit"). (d) The Administrative Agent shall (x) in the case of a Set Rate Auction, as promptly as practicable after the Money Market Quote is submitted (but in any event not later than 10:15 a.m. New York time on the Quotation Date) or (y) in the case of a LIBOR Auction, by 4:00 p.m. New York time on the day a Amended and Restated Credit Agreement 24 - 24 - Money Market Quote is submitted, notify the Company of the terms (i) of any Money Market Quote submitted by a Bank that is in accordance with Section 2.03(c) hereof and (ii) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Company shall specify (A) the aggregate principal amount of the Money Market Borrowing for which offers have been received and (B) the respective principal amounts and LIBO Margins or Set Rates, as the case may be, so offered by each Bank (identifying the Bank that made each Money Market Quote). (e) Not later than 11:00 a.m. New York time on (x) the third Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree), the Company shall notify the Administrative Agent of its acceptance or nonacceptance of the offers so notified to it pursuant to Section 2.03(d) hereof (which notice shall specify the aggregate principal amount of offers from each Bank for each Interest Period that are accepted, it being understood that the failure of the Company to give such notice by such time shall constitute nonacceptance) and the Administrative Agent shall promptly notify each affected Bank. The notice from the Administrative Agent shall also specify the aggregate principal amount of offers for each Interest Period that were accepted and the lowest and highest LIBO Margins and Set Rates that were accepted for each Interest Period. The Company may accept any Money Market Quote in whole or in part (provided that any Money Market Quote accepted in part shall be at least $5,000,000 or a larger multiple of $1,000,000); provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the aggregate principal amount of each Money Market Borrowing shall be at least $10,000,000 (or a larger multiple of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; (iii) acceptance of offers may, subject to clause (v) below, be made only in ascending order of LIBO Margins or Set Rates, as the case may be, in each case beginning Amended and Restated Credit Agreement 25 - 25 - with the lowest rate so offered; (iv) the Company may not accept any offer where the Administrative Agent has advised the Company that such offer fails to comply with Section 2.03(c)(ii) hereof or otherwise fails to comply with the requirements of this Agreement (including, without limitation, Section 2.03(a) hereof); (v) the aggregate principal amount of each Money Market Borrowing from any Bank may not exceed any applicable Money Market Loan Limit of such Bank. If offers are made by two or more Banks with the same LIBO Margins or Set Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Company among such Banks as nearly as possible (in amounts of at least $5,000,000 or larger multiples of $1,000,000) in proportion to the aggregate principal amount of such offers. Determinations by the Company of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. (f) Any Bank whose offer to make any Money Market Loan has been accepted in accordance with the terms and conditions of this Section 2.03 shall, not later than 1:00 p.m. New York time on the date specified for the making of such Loan, make the amount of such Loan available to the Administrative Agent at an account in New York designated by the Administrative Agent in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company on such date by depositing the same, in immediately available funds, in an account of the Company maintained with Chase at the Principal Office designated by the Company. (g) Except for the purpose and to the extent expressly stated in Sections 2.04(b) and 2.05 hereof, the amount of any Money Market Loan made by any Bank shall not constitute a utilization of such Bank's Commitment. 2.04 Changes of Commitments. (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Syndicated Loans or Money Amended and Restated Credit Agreement 26 - 26 - Market Loans are outstanding, to terminate the Commitments and (ii) to reduce the aggregate unused amount of the Commitments (for which purpose use of the Commitments shall be deemed to include the aggregate principal amount of all Money Market Loans); provided that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction shall be in a multiple of $10,000,000. (c) The Commitments once terminated or reduced may not be reinstated. 2.05 Facility Fee. The Company shall pay to the Administrative Agent for account of each Bank a facility fee on the daily average amount of such Bank's Commitment (whether or not utilized), for the period from and including the date hereof to but not including the earlier of the date such Commitment is terminated and the Commitment Termination Date, at a rate per annum equal to 0.0750%. Accrued facility fee shall be payable on each Quarterly Date in arrears and on the earlier of the date the Commitments are terminated and the Commitment Termination Date. 2.06 Lending Offices. The Loans of each Type made by each Bank shall be made and maintained at such Bank's lending office for Loans of such Type. 2.07 Several Obligations; Remedies Independent. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank, and (except as otherwise provided in Section 4.06 hereof) no Bank shall have any obligation to the Administrative Agent or any other Bank for the failure by such Bank to make any Loan required to be made by such Bank. The amounts payable by the Company at any time hereunder and under the Notes (if any) to each Bank shall be a separate and independent debt and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes (if any), and it shall not be necessary for any other Bank or the Administrative Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.08. Evidence of Debt. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and Amended and Restated Credit Agreement 27 - 27 - paid to such Bank from time to time hereunder. (b) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Banks and each Bank's share thereof. (c) The entries in the accounts maintained pursuant to paragraph (a) or (b) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Bank or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the Loans in accordance with the terms of this Agreement. (d) Any Bank may request that Loans made by it be evidenced by a promissory note. In such event, Syndicated Loans made by such Bank (if any) shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-1 hereto, and Money Market Loans made by such Bank (if any) shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-2 hereto. (e) No Bank shall be entitled to have its Notes (if any) substituted or exchanged for any reason, or subdivided for promissory notes of lesser denominations, except in connection with a permitted assignment of all or any portion of such Bank's Commitment, Loans and Notes pursuant to Section 11.06 hereof (and, if requested by any Bank, the Company agrees to so exchange any Note). 2.09 Prepayments. Subject to Sections 4.04 and 5.05 hereof, the Company shall have the right to prepay Syndicated Loans at any time or from time to time, provided that the Company shall give the Administrative Agent notice of each such prepayment as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder). Money Market Loans may not be prepaid without the consent of the Bank holding such Loan. 2.10 Extension of Commitment Termination Date. (a) The Company may, by notice to the Administrative Agent (which shall promptly notify the Banks) not less than 45 Amended and Restated Credit Agreement 28 - 28 - days and not more than 60 days prior to the Commitment Termination Date then in effect hereunder (the "Existing Commitment Termination Date"), request that the Banks extend the Commitment Termination Date for an additional 360 days from the Consent Date (as defined below). Each Bank, acting in its sole discretion, shall, by notice to the Company and the Administrative Agent given on or before the date (herein, the "Consent Date") that is 30 days prior to the Existing Commitment Termination Date (except that, if such date is not a Business Day, such notice shall be given on the next succeeding Business Day) but not more than 15 days prior to the Consent Date, advise the Company and the Administrative Agent whether or not such Bank agrees to such extension; provided that, if such Bank gives notice of its consent to such extension prior to the Consent Date, such Bank may revoke such consent at any time prior to the Consent Date by giving notice of such revocation to the Company and the Administrative Agent; and provided further that each Bank that determines not to extend the Commitment Termination Date (a "Non-extending Bank") shall notify the Administrative Agent (which shall notify the Banks) of such fact promptly after such determination (but in any event no later than the Consent Date) and any Bank that does not advise the Company on or before the Consent Date shall be deemed to be a Non-extending Bank. The election of any Bank to agree to such extension shall not obligate any other Bank to so agree. (b) If (and only if) the total of the Commitments of the Banks that have agreed so to extend the Commitment Termination Date shall be at least 66-2/3% of the aggregate amount of the Commitments in effect immediately prior to the Consent Date, the Company shall have the right on or before the Existing Commitment Termination Date to replace each Non-extending Bank with, and otherwise add to this Agreement, one or more other banks (which may include any Bank, each prior to the Existing Commitment Termination Date an "Additional Commitment Bank") with the approval of the Administrative Agent (which approval shall not be unreasonably withheld), each of which Additional Commitment Banks shall have entered into an agreement in form and substance satisfactory to the Company and the Administrative Agent pursuant to which such Additional Commitment Bank shall, effective as of the Existing Commitment Termination Date, undertake a Commitment (and, if any such Additional Commitment Bank is already a Bank, its Commitment shall be in addition to such Bank's Commitment hereunder on such date). (c) If (and only if) the total of the Commitments of the Banks that have agreed so to extend the Commitment Termination Date shall be at least 66-2/3% of the aggregate amount of the Commitments in effect immediately prior to the Amended and Restated Credit Agreement 29 - 29 - Consent Date, then, effective as of the Existing Commitment Termination Date, the Existing Commitment Termination Date shall be extended to the date falling 360 days after the Consent Date (except that, if such date is not a Business Day, such Commitment Termination Date as so extended shall be the next preceding Business Day) and each Additional Commitment Bank shall thereupon become a "Bank" for all purposes of this Agreement. Notwithstanding the foregoing, the extension of the Existing Commitment Termination Date shall not be effective with respect to any Bank unless: (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension, on the Consent Date and on the Existing Commitment Termination Date; (ii) each of the representations and warranties made by the Company in Section 7 hereof shall be true and complete on and as of each of the date of the notice requesting such extension, the Consent Date and the Existing Commitment Termination Date with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and (iii) each Non-extending Bank shall have been paid in full by the Company all amounts owing to such Bank hereunder on or before the Existing Termination Date. Even if the Existing Commitment Termination Date is extended as aforesaid, the Commitment of each Non-extending Bank shall terminate on the Existing Commitment Termination Date. Section 3. Payments of Principal and Interest. 3.01 Repayment of Loans. (a) The Company hereby promises to pay the Administrative Agent for account of each Bank the principal amount of each of such Bank's Syndicated Loans, and each Syndicated Loan shall mature, on the last day of the Interest Period for such Syndicated Loan. (b) The Company hereby promises to pay to the Administrative Agent for account of each Bank that makes any Money Market Loan the principal amount of such Money Market Loan, and such Money Market Loan shall mature, on the last day of the Interest Period for such Money Market Loan. Amended and Restated Credit Agreement 30 - 30 - 3.02 Interest. The Company hereby promises to pay to the Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during such periods as such Loan is a Alternate Base Rate Loan, the Alternate Base Rate (as in effect from time to time) plus the Applicable Margin plus, 0.05% per annum at any time when Loans outstanding shall exceed 50% of the Commitments; (b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Fixed Base Rate for such Loan for such Interest Period plus the Applicable Margin, plus, 0.05% per annum at any time when Loans outstanding shall exceed 50% of the Commitments; (c) if such Loan is a LIBOR Market Loan, the Fixed Base Rate for such Loan for the Interest Period therefor plus (or minus) the LIBO Margin quoted by the Bank making such Loan in accordance with Section 2.03 hereof; and (d) if such Loan is a Set Rate Loan, the Set Rate for such Loan for the Interest Period therefor quoted by the Bank making such Loan in accordance with Section 2.03 hereof. Notwithstanding the foregoing, the Company hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder or under the Notes held by such Bank to or for account of such Bank, that shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Alternate Base Rate Loan on the Quarterly Dates in arrears, (ii) in the case of a Eurodollar Loan or a Money Market Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than 90 days (in the case of a Set Rate Loan) or three months (in the case of a Eurodollar Loan or a LIBOR Market Loan), at 90-day or three-month intervals, respectively, following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the Amended and Restated Credit Agreement 31 - 31 - determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Section 4. Payments; Pro Rata Treatment; Computations; Etc. 4.01 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes (if any) and the Fee Letter, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at an account in New York designated by the Administrative Agent, not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) The Company shall, at the time of making each payment under this Agreement or any Note for account of any Bank, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (c) Each payment received by the Administrative Agent under this Agreement or any Note for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's lending office for the Loan or other obligation in respect of which such payment is made. (d) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing of Syndicated Loans from the Banks under Section 2.01 hereof shall be made from the Banks, each payment of facility fee under Section 2.05 hereof Amended and Restated Credit Agreement 32 - 32 - shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.04 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 5.04 hereof, Eurodollar Loans having the same Interest Period shall be allocated pro rata among the Banks according to the amounts of their respective Commitments; (c) each payment or prepayment of principal of Syndicated Loans by the Company shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Syndicated Loans held by them; and (d) each payment of interest on Syndicated Loans by the Company shall be made for account of the Banks pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Banks. 4.03 Computations. Interest on Money Market Loans, Eurodollar Loans and facility fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable and interest on Alternate Base Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first date but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day the Alternate Base Rate is calculated by reference to the Federal Funds Rate, the interest on Alternate Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 Minimum Amounts. Each borrowing of Syndicated Loans shall be in an aggregate amount at least equal to $5,000,000 (in the case of Alternate Base Rate Loans) and $10,000,000 (in the case of Eurodollar Loans) or larger multiples of $1,000,000 in excess thereof; and each prepayment of principal of Syndicated Loans shall be in an aggregate amount at least equal to $5,000,000 or larger multiples of $1,000,000 (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods, at the same time hereunder to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period). 4.05 Certain Notices. Except as otherwise provided in Section 2.03 hereof with respect to Money Market Loans, notices by the Company to the Administrative Agent of terminations or reductions of the Commitments and of borrowings and optional prepayments of Loans, of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. Amended and Restated Credit Agreement 33 - 33 - New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing or prepayment or the first day of such Interest Period specified below:
Number of Business Notice Days Prior ------ ---------- Termination or reduction of Commitments 3 Borrowing of Alternate Base Rate Loans same day Prepayment of Alternate Base Rate Loans 1 Borrowing and duration of Interest Period for, and prepayment of,Eurodollar Loans 3
Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof) and Type of each Loan to be borrowed or prepaid and the date of borrowing or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. 4.06 Non-Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be made by such Bank hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day Amended and Restated Credit Agreement 34 - 34 - during the period commencing on the date (the "Advance Date")such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, provided that if neither the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Banks, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Post-Default Rate (without duplication of the obligation of the Company under Section 3.02 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of the Company under said Section 3.02 to pay interest at the Post-Default Rate in respect of the Required Payment and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Banks to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment pursuant to whichever of the rates specified in Section 3.02 hereof is applicable to the Type of such Loan, it being understood that the return by the Company of the Required Payment to the Administrative Agent shall not limit any claim the Company may have against the Payor in respect of such Required Payment. 4.07 Sharing of Payments, Etc. (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option (to the fullest extent permitted by law), to set off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of the Company at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of Amended and Restated Credit Agreement 35 - 35 - whether such deposit or other indebtedness are then due to the Company), in which case it shall promptly notify the Company and the Administrative Agent thereof, provided that such Bank's failure to give such notice shall not affect the validity thereof. (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan of any Class owing to it or payment of any other amount under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans of such Class or such other amounts then due hereunder by the Company to such Bank than the percentage received by any other Bank, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans of such Class or such other amounts, respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans of such Class or such other amounts, respectively, owing to each of the Banks. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, tothe extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Amended and Restated Credit Agreement 36 - 36 - Section 5. Yield Protection, Etc. 5.01 Additional Costs. (a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may reasonably determine to be necessary to compensate such Bank for any costs that such Bank determines are attributable to its making or maintaining of any Fixed Rate Loans or its obligation to make any Fixed Rate Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change that: (i) shall subject any Bank (or its lending office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Notes or changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes (if any) in respect of any of such Loans (excluding changes in the rate of tax on the overall net income or gross receipts of such Bank or of such lending office by the jurisdiction in which such Bank has its principal office or such lending office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than, in the case of any Bank for any period as to which the Company is required to pay any amount under paragraph (d) below, the reserves against "Eurocurrency liabilities" under Regulation D therein referred to) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other condition affecting this Agreement or its Notes (if any) (or any of such extensions of credit or liabilities) or its Commitment. If any Bank requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable), provided that such suspension shall not affect the Amended and Restated Credit Agreement 37 - 37 - right of such Bank to receive the compensation so requested. (b) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any lending office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord, of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any lending office or such bank holding company) to a level below that which such Bank (or any lending office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (c) Each Bank shall notify the Company of any event occurring after the date hereof entitling such Bank to compensation under paragraph (a) or (b) of this Section 5.01 as promptly as practicable, but in any event within 60 days, after such Bank obtains actual knowledge thereof; provided that (i) if any Bank fails to give such notice within 60 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 60 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different lending office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank. Each Bank will furnish to the Company a certificate setting forth in reasonably specific detail the basis and amount of each request by such Bank for compensation under paragraph (a) or (b) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (b) of this Section 5.01, on its Amended and Restated Credit Agreement 38 - 38 - costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive, provided that such determinations and allocations are made on a reasonable basis. (d) Without limiting the effect of the foregoing, the Company shall pay to each Bank on the last day of each Interest Period so long as such Bank is maintaining reserves against "Eurocurrency liabilities" under Regulation D (or, unless the provisions of paragraph (b) above are applicable, so long as such Bank is, by reason of any Regulatory Change, maintaining reserves against any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Loans or LIBOR Market Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Bank that includes any Eurodollar Loans or LIBOR Market Loans) an additional amount (reasonably determined by such Bank and notified to the Company through the Administrative Agent) equal to the product of the following for each Eurodollar Loan or LIBOR Market Loan for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan or LIBOR Market Loan outstanding on such day; and (ii) the remainder of (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Loan or LIBOR Market Loan for such Interest Period as provided in this Agreement (less the Applicable Margin) and the denominator of which is one minus the effective rate (expressed as a decimal) at which such reserve requirements are imposed on such Bank on such day minus (y) such numerator; and (iii) 1/360. 5.02 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Fixed Base Rate for any Interest Period: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for either Type of Fixed Rate Loans as provided herein; or (b) the Majority Banks determine (or any Bank that has Amended and Restated Credit Agreement 39 - 39 - outstanding a Money Market Quote with respect to a LIBOR Market Loan determines), which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans (or LIBOR Market Loans, as the case may be) for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks (or to such quoting Bank) of making or maintaining Eurodollar Loans for such Interest Period; then the Administrative Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks (or such quoting Bank) shall be under no obligation to make additional Eurodollar Loans. 5.03 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its lending office to honor its obligation to make Eurodollar Loans or LIBOR Market Loans hereunder (and, in the sole opinion of such Bank, the designation of a different lending office would either not avoid such unlawfulness or would be disadvantageous to such Bank), then such Bank shall promptly notify the Company thereof (with a copy to the Administrative Agent) and such Bank's obligation to make Eurodollar Loans shall be suspended until such time as such Bank may again make Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable), and such Bank shall no longer be obligated to make any LIBOR Market Loan that it has offered to make. 5.04 Treatment of Affected Loans. If the obligation of any Bank to make a Eurodollar Loan shall be suspended pursuant to Section 5.01 or 5.03 hereof, such Bank's Eurodollar Loans shall be made instead as Alternate Base Rate Loans and, if such Bank has Eurodollar Loans outstanding, each such Eurodollar Loan shall be converted to an Alternate Base Rate Loan on such date prior to the last day of the Interest Period for such Eurodollar Loan as such Bank may specify to the Company with a copy to the Administrative Agent, and to the extent that such Bank's Eurodollar Loans have been so converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Alternate Base Rate Loans. 5.05 Compensation. The Company shall pay to the Administrative Agent for account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Amended and Restated Credit Agreement 40 - 40 - Bank) to compensate it for any loss, cost or expense that such Bank determines is attributable to: (a) any payment or prepayment of a Fixed Rate Loan or a Set Rate Loan made by such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow a Fixed Rate Loan or a Set Rate Loan (with respect to which, in the case of a Money Market Loan, the Company has accepted a Money Market Quote) from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 or 2.03(b) hereof; provided, however, that such Bank shall have delivered to the Company a certificate as to the amount of such loss, cost or expense, which certificate shall be conclusive, provided that the determination of such compensation is made on a reasonable basis. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or not borrowed for the period from the date of such payment, prepayment or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Bank would have bid in the London interbank market (if such Loan is a Eurodollar Loan or a LIBOR Market Loan) or the United States secondary certificate of deposit market (if such Loan is a Set Rate Loan) for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Bank), or if such Bank shall cease to make such bids, the equivalent rate, as reasonably determined by such Bank, derived from Telerate Access Service Page 3750 (British Bankers Association Settlement Rate) or other publicly available source as described in the definition of "Fixed Base Rate" in Section 1.01 hereof). 5.06 U.S. Taxes. Amended and Restated Credit Agreement 41 - 41 - (a) The Company agrees to pay to each Bank that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due to such non-U.S. Person hereunder after deduction for or withholding in respect of any U.S. Taxes imposed with respect to such payment (or in lieu thereof, payment of such U.S. Taxes by such non-U.S. Person), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 11.06(b) hereof) and on the date of any change in the lending office of such Bank, either entitled to submit a Form 1001 (relating to such Bank and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by such Bank hereunder in respect of the Loans); provided that it being understood that, if thereafter as a result of any change in law or regulation such Bank becomes unable to submit the Form previously submitted, the foregoing obligation to pay such additional amounts shall apply; or (ii) to any U.S. Taxes imposed solely by reason of the failure by such non-U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non-U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes. For the purposes of this Section 5.06(a), (A) "U.S. Person" shall mean a citizen, national or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America and (D) "Form 4224" shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in Amended and Restated Credit Agreement 42 - 42 - the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates). Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Company shall deliver to the Administrative Agent for delivery to such non-U.S. Person evidence satisfactory to such Person of such deduction, withholding or payment (as the case may be). 5.07 Replacement of Banks. If any Bank requests compensation pursuant to Section 5.01 or 5.06 hereof, or any Bank's obligation to make Eurodollar Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof (any such Bank requesting such compensation, or whose obligations are so suspended, being herein called a "Requesting Bank"), the Company, upon three Business Days notice, may require that such Requesting Bank transfer all of its right, title and interest under this Agreement and such Requesting Bank's Notes (if any) to any bank or other financial institution (a "Proposed Bank") identified by the Company that is satisfactory to the Administrative Agent in its reasonable determination (i) if such Proposed Bank agrees to assume all of the obligations of such Requesting Bank hereunder, and to purchase all of such Requesting Bank's Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Bank's Loans, together with interest thereon to the date of such purchase, and satisfactory arrangements are made for payment to such Requesting Bank of all other amounts payable hereunder to such Requesting Bank on or prior to the date of such transfer (including any fees accrued hereunder and any amounts that would be payable under Section 5.05 hereof as if all of such Requesting Bank's Loans were being prepaid in full on such date) and (ii) if such Requesting Bank has requested compensation pursuant to Section 5.01 or 5.06 hereof, such Proposed Bank's aggregate requested compensation, if any, pursuant to said Section 5.01 or 5.06 with respect to such Requesting Bank's Loans is lower than that of the Requesting Bank. Subject to the provisions of Section 11.06(b) hereof, such Proposed Bank shall be a "Bank" for all purposes hereunder, provided that no such Proposed Bank shall as a result of such purchase hold more than 25% of the aggregate amount of the Amended and Restated Credit Agreement 43 - 43 - Commitments. Without prejudice to the survival of any other agreement of the Company hereunder the agreements of the Company contained in Sections 5.01, 5.06 and 11.03 hereof (without duplication of any payments made to such Requesting Bank by the Company or the Proposed Bank) shall survive for the benefit of such Requesting Bank under this Section 5.07 with respect to the time prior to such replacement. Section 6. Conditions Precedent. 6.01 Conditions to Effectiveness. The effectiveness of the amendment and restatement of the Original Credit Agreement provided for hereby is subject to the conditions precedent that the Administrative Agent shall have received the following documents (with, in the case of clauses (a), (b), (c) and (d) below, sufficient copies for each Bank), each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance: (a) Corporate Documents. Certified copies of the charter and by-laws (or equivalent documents) of the Company and of all corporate authority for the Company (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of this Agreement and the Notes (if any) and each other document to be delivered by the Company from time to time in connection herewith and the Loans hereunder (and the Administrative Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Company to the contrary). (b) Officer's Certificate. A certificate of a senior officer of the Company, dated the date hereof, to the effect set forth in the first sentence of Section 6.02 hereof. (c) Opinion of Counsel to the Company. An opinion, dated the date hereof, of Foster Pepper & Shefelman, counsel to the Company, substantially in the form of Exhibit B hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request (and the Company hereby instructs such counsel to deliver such opinion to the Banks and the Administrative Agent). (d) Opinion of Special New York Counsel to Chase. An opinion, dated the date hereof, of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, substantially in the form of Exhibit C hereto (and Chase hereby instructs such counsel to deliver such opinion to the Banks). Amended and Restated Credit Agreement 44 - 44 - (e) Payment of Facility Fee. Evidence that all fees payable to the Original Banks accrued to the Amendment Effective Date under the Original Credit Agreement and unpaid have been paid in full. (f) Other Documents. Such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. The effectiveness of the amendment and restatement of the Original Credit Agreement provided for hereby is also subject to the payment by the Company of such fees as the Company shall have agreed to pay or deliver to any Bank or the Administrative Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes (if any) and the making of the Loans hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). 6.02 Loans. The obligation of any Bank to make any Loan (including any Money Market Loan and such Bank's initial Syndicated Loan) to the Company upon the occasion of each borrowing hereunder is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 7 hereof (except, in the case of any borrowing that does not increase the total principal amount of the Loans outstanding of any Bank, the representations and warranties in Sections 7.03, 7.07 or 7.12 hereof) shall be true and complete on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Company otherwise notifies the Administrative Agent prior to the date of such borrowing, as of the date of such borrowing). Amended and Restated Credit Agreement 45 - 45 - Section 7. Representations and Warranties. The Company represents and warrants to the Administrative Agent and the Banks that: 7.01 Corporate Existence. Each of the Company and its Subsidiaries (except Non-Material Subsidiaries): (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the failure to have any such license authorization, consent or approval would not have a Material Adverse Effect; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect. 7.02 Financial Condition. The Company has heretofore furnished to each of the Banks the consolidated statement of financial position of the Company and its Subsidiaries as at December 31, 1996 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Deloitte & Touche LLP, and the unaudited consolidated statement of financial position of the Company and its Subsidiaries as at September 30, 1997 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the nine-month period ended on such date. All such financial statements present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as at said dates, and the consolidated results of operations for the fiscal year and nine-month period ended on said dates (subject, in the case of such financial statements as at September 30, 1997, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. From December 31, 1996 until the date of this Agreement, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries from that set forth in said financial statements as at said date. 7.03 Litigation. Except as disclosed to the Banks in Schedule III hereto, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory Amended and Restated Credit Agreement 46 - 46 - authority or agency, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries that are reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect. 7.04 No Breach. None of the execution and delivery of this Agreement and the Notes (if any), the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. 7.05 Action. The Company has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under this Agreement and the Notes (if any); the execution, delivery and performance by the Company of this Agreement and the Notes (if any) have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by the Company and constitutes, and each of the Notes (if any) when executed and delivered for value will constitute, its legal, valid and binding obligation, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 7.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by the Company of this Agreement or the Notes (if any) or for the legality, validity or enforceability hereof or thereof. 7.07 ERISA. Each Plan, and, to the knowledge of the Company, each Multiemployer Plan, is in compliance in all respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law (except where failure so to comply would not have a Material Adverse Effect), and no event or Amended and Restated Credit Agreement 47 - 47 - condition has occurred and is continuing as to which the Company would be under an obligation to furnish a report to the Banks under Section 8.01(g) hereof. 7.08 Taxes. The Company and its Subsidiaries are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which the Company is the "common parent" (within the meaning of Section 1504 of the Code) of such group. The Company and its Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries, except for any such tax being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. 7.09 Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.10 Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.11 Material Agreements and Liens. (a) Part A of Schedule I hereto is a complete and correct list of each credit agreement, loan agreement, indenture, note purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, the Company or any of its Subsidiaries (excluding Repurchase Arrangements, deposits, annuities or Federal funds transactions, each entered into by the Company or a Subsidiary in the ordinary course of its business, Interest Rate Protection Agreements or borrowings from the Federal Home Loan Bank and any commercial paper or medium term note program of the Company or any of its Subsidiaries), outstanding on the date of this Agreement the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $10,000,000, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part A of said Schedule I. Amended and Restated Credit Agreement 48 - 48 - (b) Part B of Schedule I hereto is a complete and correct list of each Lien securing Indebtedness of any Person outstanding on the date of this Agreement (excluding Repurchase Arrangements, deposits, annuities or Federal funds transactions, each entered into by the Company or a Subsidiary in the ordinary course of its Business, and Interest Rate Protection Agreements or borrowings from the Federal Home Loan Bank) the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $10,000,000 and covering any Property of the Company or any of its Subsidiaries, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the Property covered by each such Lien is correctly described in Part B of said Schedule I. 7.12 Environmental Matters. Each of the Company and its Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations required under all Environmental Laws to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. 7.13 Subsidiaries. Set forth in Schedule II hereto is a complete and correct list of all of the Subsidiaries of the Company as of the date of this Agreement together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule II hereto, (x) each of the Company and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule II hereto, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person. 7.14 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Administrative Agent or any Bank in connection with the negotiation, preparation or delivery of this Agreement or included herein or delivered pursuant hereto, when taken as a whole (together with the Information Memorandum) do not, as of the date of this Agreement, contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after Amended and Restated Credit Agreement 49 - 49 - the date of this Agreement by the Company and its Subsidiaries to the Administrative Agent and the Banks in connection with this Agreement and the transactions contemplated hereby will be true, complete and accurate in every material respect, or (in the case of projections) made in good faith and based on estimates believed by management to be reasonable, on the date as of which such information is stated or certified. Section 8. Covenants of the Company. The Company covenants and agrees with the Banks and the Administrative Agent that, so long as any Commitment or Loan is outstanding and until payment in full of all amounts payable by the Company hereunder: 8.01 Financial Statements Etc. The Company shall deliver to each of the Banks (except for the items referred to in clauses (c), (d) and (e), which the Company shall deliver only to those Banks that specifically request delivery thereof): (a) as soon as available and in any event within 75 days after the end of each quarterly fiscal period of each fiscal year of the Company, consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated statements of financial position of the Company and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding periods in the preceding fiscal year (except that, in the case of statements of financial position, such comparison shall be to the last day of the prior fiscal year), accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its Subsidiaries, in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments) (it being understood that delivery to the Bank of the Company's Report on Form 10-Q filed with the SEC shall satisfy the financial statement requirements of this Section 8.01(a) so long as the information required to be contained in such Report is substantially the same as that required under this Section 8.01(a)); (b) as soon as available and in any event within 105 days after the end of each fiscal year of the Company, consolidated statements of income, stockholders' equity and Amended and Restated Credit Agreement 50 - 50 - cash flows of the Company and its Subsidiaries for such fiscal year and the related consolidated statements of financial position of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by an opinion thereon of Deloitte & Touche, LLP or independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, and a statement of such accountants to the effect that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Company was not in compliance with Section 8.10 hereof, insofar as such Section relates to accounting matters (it being understood that delivery to the Bank of the Company's Report on Form 10-K filed with the SEC shall satisfy the financial statement requirements of this Section 8.01(b) so long as the information required to be contained in such Report is substantially the same as that required under this Section 8.01(b)); (c) promptly upon their becoming available, and in any event within 75 days after the end of each quarterly fiscal period of each fiscal year of the Company, the "Reports of Condition and Income" (report no. FFIEC 032, or any successor form thereto) of each Insured Subsidiary as is required to file such report, all such reports prepared in accordance with regulatory accounting principles prescribed by the Federal Financial Institutions Examination Council; (d) promptly upon their becoming available, and in any event within 75 days after the end of each quarterly fiscal period the Statements of Condition and Operations, including all supporting schedules (Office of Thrift Supervision Form 1313, or any successor form thereto) for each Insured Subsidiary that is required to file such statements, all such statements prepared in accordance with Office of Thrift Supervision instructions. (e) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange or the Office of Thrift Supervision; Amended and Restated Credit Agreement 51 - 51 - (f) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (g) within ten days after the Company knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to the PBGC by the Company or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(c) of ERISA and the regulations issued thereunder, with respect to a Plan, that is required to be reported to the PBGC and as to which the PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Company or an ERISA Affiliate to terminate any Plan; (iii) the institution by the PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Company or any ERISA Affiliate that results in liability under Section 4201 Amended and Restated Credit Agreement 52 - 52 - or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Company or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (h) promptly after the Company knows or has reason to believe that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; and (i) from time to time such other information regarding the financial condition, operations, business or prospects of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Bank or the Administrative Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.06(g), 8.09 and 8.10 hereof as of the end of the respective quarterly fiscal period or fiscal year. 8.02 Litigation. The Company will promptly give to each Bank notice of all legal or arbitral proceedings, and of all Amended and Restated Credit Agreement 53 - 53 - proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings that are not (either individually or in the aggregate) reasonably likely to have a Material Adverse Effect. 8.03 Existence, Etc. The Company will, and will cause each of its Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 8.03 shall (i) with respect to the Company or any Major Subsidiary (as defined in Section 8.05 hereof), prohibit any transaction expressly permitted under Section 8.05 hereof or (ii) with respect to any Subsidiary (other than a Major Subsidiary), prohibit such Subsidiary from entering into any merger or consolidation or amalgamation or from liquidating, winding up or dissolving, itself (or suffering any liquidation or dissolution) or prohibit a Disposition (as defined in Section 8.05 hereof) by or of such Subsidiary); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could (either individually or in the aggregate) have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto (or in the case of any Person that becomes a Subsidiary after the date hereof by Acquisition promptly upon becoming aware of penalties attaching thereto), except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its material Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; (e) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; and (f) permit representatives of any Bank or the Amended and Restated Credit Agreement 54 - 54 - Administrative Agent, during normal business hours, to examine, copy and make extracts from its books and records (subject to Section 11.12 hereof), to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank or the Administrative Agent (as the case may be). 8.04 Insurance. The Company will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies, and with respect to Property and risks of a character usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations. 8.05 Prohibition of Fundamental Changes. The Company will not, nor will it permit any of its Major Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Major Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of (a "Disposition"), in one transaction or a series of transactions, all or substantially all of its Property, whether now owned or hereafter acquired (for which purpose, the Disposition of all or substantially all of the capital stock of a Major Subsidiary of the Company shall be deemed to be the Disposition by such Major Subsidiary of all or substantially all of the Property of such Major Subsidiary). Notwithstanding the foregoing provisions of this Section 8.05: (a) any Major Subsidiary of the Company may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other Subsidiary of the Company; provided that (x) if any such transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any Major Subsidiary of the Company may make a Disposition of any or all of its Property (upon voluntary liquidation or otherwise) to the Company or a Wholly-Owned Subsidiary of the Company; and (c) the Company or any Major Subsidiary of the Company may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Amended and Restated Credit Agreement 55 - 55 - Company is the surviving corporation and, in any other case, the surviving corporation is, after giving effect to such merger or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder. For purposes of this Section 8.05, "Major Subsidiaries" shall mean Washington Mutual Bank and Washington Mutual Bank, FA. 8.06 Limitation on Liens. The Company will not create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except: (a) Liens in existence on the date hereof and listed in Part B of Schedule I hereto; (b) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or that are being contested in good faith and by appropriate proceedings if, unless the amount thereof is not material with respect to it or its financial condition, adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(m) hereof; (d) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case Amended and Restated Credit Agreement 56 - 56 - materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (g) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company each of which Liens either (A) existed on such Property before the time of its acquisition and was not created in anticipation thereof or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such Property; provided that (i) no such Lien shall extend to or cover any Property of the Company other than the Property so acquired and improvements thereon and (ii) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 80% of the fair market value (as determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); (h) Liens arising out of Repurchase Arrangements; (i) Liens arising out of or securing Interest Rate Protection Agreements; and (j) Liens arising out of Asset Securitizations. 8.07 Lines of Business. The Company will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than (a) the business of owning and operating a depository institution (as defined in 12 U.S.C. Section 1461(b)(1)(A)), a consumer finance company, a mortgage company, an insurance company, a trust company, an investment advisor or a securities broker-dealer, (b) the business of providing other financial services or (c) any business that may be engaged in by a Washington state chartered savings bank (as defined in RCW 32.04.020), a Federal savings association (as defined in 12 U.S.C. Section 1462(5)) or a bank holding company (as defined in 12 U.S.C. Section 1841(a)) or a Subsidiary of any of them. 8.08 Use of Proceeds. The Company will use the proceeds of the Loans hereunder solely for general corporate purposes, including commercial paper back-up (in compliance with all applicable legal and regulatory requirements, including, without limitation, Regulations G, U and X and the Securities Act of 1933 and the Securities Exchange Act of 1934 and the regulations thereunder); provided that, without the consent of each Bank, the Company may not use the proceeds of any of the Amended and Restated Credit Agreement 57 - 57 - Loans hereunder to finance or refinance, directly or indirectly, an Acquisition of any Person (or the acquisition of (i) more than 50% of the publicly traded stock (of any class) of any Person or (ii) any of the publicly traded stock (of any class) of any Person after the Company or any of its Subsidiaries shall have been required to file a Schedule 13D under the Securities Exchange Act of 1934, as amended, with respect to such stock) unless such Acquisition (or acquisition) has been approved by the board of directors of such Person or officers thereof duly authorized to do so; provided further that neither the Administrative Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.09 Adequate Capitalization. The Company shall assure that each Insured Subsidiary shall be adequately capitalized at all times. For purposes of this Section 8.09, "adequately capitalized" shall have the meaning assigned such term by Section 38 of the Federal Deposit Insurance Act, as amended or any successor act thereto. 8.10 Certain Financial Covenants. (a) Double Leverage Ratio. The Company will not permit at any time its Double Leverage Ratio to be greater than 1.30 to 1.00. (b) Ratio of Consolidated Equity to Consolidated Assets. The Company will not permit at any time its ratio of Consolidated Equity to Consolidated Assets to be less than 0.05 to 1.00. (c) Minimum Tangible Net Worth. The Company will not permit at any time its Tangible Net Worth to be less than $3,723,439,000 plus the sum of 50% of the net income of the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP and for which purpose any net loss shall be deemed to be a net income of zero) for each fiscal quarter of the Company ending after September 30, 1997. (d) Maximum Non-Performing Assets. The Company will not permit at any time its Non-Performing Assets to constitute more than 4.5% of the Company's Consolidated Assets. Section 9. Events of Default. If one or more of the following events (herein called "Events of Default") shall occur and be continuing: Amended and Restated Credit Agreement 58 - 58 - (a) The Company shall: (i) default in the payment of any principal of any Loan when due (whether at stated maturity or at mandatory or optional prepayment); or (ii) default in the payment of any interest on any Loan, any fee or any other amount payable by it hereunder when due and such default shall have continued unremedied for three or more Business Days; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating $40,000,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof; or the Company shall default in the payment when due of any amount aggregating $40,000,000 or more under any Interest Rate Protection Agreement; or any event specified in any Interest Rate Protection Agreement shall occur if the effect of such event is to cause, or to permit, termination or liquidation payment or payments aggregating $40,000,000 or more to become due; or (c) Any representation, warranty or certification made or deemed made herein (or in any modification or supplement hereto) by the Company, or any certificate furnished to any Bank or the Administrative Agent pursuant to the provisions hereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under any of Sections 8.01(h), 8.05, 8.06, 8.08, 8.09 or 8.10 hereof; or the Company shall default in the performance of any of its other obligations in this Agreement and such default shall continue unremedied for a period of thirty or more days after notice thereof to the Company by the Administrative Agent or any Bank (through the Administrative Agent); or (e) The Company or any of its Subsidiaries (other than a Non-Material Subsidiary) shall admit in writing its inability to, or be generally unable to, pay its debts as Amended and Restated Credit Agreement 59 - 59 - such debts become due; or (f) The Company or any of its Subsidiaries (other than a Non-Material Subsidiary) shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries (other than a Non-Material Subsidiary), in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its Property or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) The Company or any of its Subsidiaries and any Bank Regulatory Authority shall enter into any supervisory agreement, consent order or any agreement (in writing or otherwise) affecting in any material respect the management, business, Properties, condition (financial or otherwise) or operations, present or prospective, of the Company and its Subsidiaries taken as a whole; or any Bank Regulatory Authority shall issue a cease and desist order to or in respect of the Company or any of its Subsidiaries; or (i) Any Insured Subsidiary shall cease accepting Amended and Restated Credit Agreement 60 - 60 - deposits or making loans on the instruction of any Federal, state or other regulatory body with authority to give such instruction other than pursuant to an instruction generally applicable to banks organized under the jurisdiction of organization of such Insured Subsidiary; or (j) Any Bank Regulatory Authority shall notify any Insured Subsidiary that such Insured Subsidiary's capital stock has become impaired; any of Washington Mutual Bank, Washington Mutual Bank fsb or Washington Mutual Bank, FA shall, cease to be an insured bank under the Federal Deposit Insurance Act, as amended, and the rules and regulations promulgated thereunder; or any Insured Subsidiary (other than Washington Mutual Bank, Washington Mutual Bank fsb or Washington Mutual Bank, FA) shall pursuant to an order of any Bank Regulatory Authority, cease to be an insured bank under the Federal Deposit Insurance Act, as amended, and the rules and regulations promulgated thereunder; or (k) Any Insured Subsidiary shall be required (whether or not the time allowed by the appropriate Bank Regulatory Authority for the submission of such plan has been established or elapsed) to submit a capital restoration plan of the type referred to in 12 U.S.C. Section 1831o(b)(2)(C), as amended, re-enacted or redesignated from time to time; or (l) The Company shall Guarantee in writing (voluntarily or otherwise) the capital of any Insured Subsidiary as part of or in connection with any agreement or arrangement with any Bank Regulatory Authority; or (m) A final judgment or judgments for the payment of money of $40,000,000 or more in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) or of $120,000,000 or more in the aggregate (regardless of insurance coverage) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged or paid (or provision shall not be made for such discharge or payment), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (n) An event or condition specified in Section 8.01(g) hereof shall occur or exist with respect to any Plan or Amended and Restated Credit Agreement 61 - 61 - Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) that, in the determination of the Majority Banks, would (either individually or in the aggregate) have a Material Adverse Effect; or (o) A Change in Control shall occur; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 9 with respect to the Company, (A) the Administrative Agent may and, upon request of the Majority Banks, will, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Administrative Agent may and, upon request of the Banks holding more than 50% of the aggregate unpaid principal amount of the Loans shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (if any) (including, without limitation, any amounts payable under Section 5.05 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (if any) (including, without limitation, any amounts payable under Section 5.05 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Administrative Agent. 10.01 Appointment, Powers and Immunities. Each Bank hereby appoints and authorizes the Administrative Agent to act as its agent hereunder with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees Amended and Restated Credit Agreement 62 - 62 - and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other document referred to or provided for herein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative Agent, together with the consent of the Company to such assignment or transfer (to the extent required by Section 11.06(b) hereof). 10.02 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all Amended and Restated Credit Agreement 63 - 63 - of the Banks. 10.03 Defaults. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall (subject to Section 10.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04 Rights as a Bank. With respect to its Commitment and the Loans made by it, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or affiliates) as if it were not acting as the Administrative Agent, and Chase (and any such successor) and its affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05 Indemnification. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way Amended and Restated Credit Agreement 64 - 64 - relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 11.03 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06 Non-Reliance on Administrative Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) that may come into the possession of the Administrative Agent or any of its affiliates. 10.07 Failure to Act. Except for action expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation or Removal of Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Administrative Agent may be removed at any Amended and Restated Credit Agreement 65 - 65 - time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent, after consultation with the Company (unless an Event of Default shall have occurred and is continuing). If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, after consultation with the Company (unless an Event of Default shall have occurred and is continuing) appoint a successor Administrative Agent, that shall be a bank that has an office in New York, New York. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. 10.09 Syndication Agents. The Syndication Agents identified on the cover page of this Agreement or of any amendment hereto shall have no duties or responsibilities hereunder other than as Banks. Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of the Administrative Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Company irrevocably waives, to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by the Administrative Agent or any Bank relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any action or Amended and Restated Credit Agreement 66 - 66 - proceeding commenced by the Company relating in any way to this Agreement whether or not commenced earlier. To the fullest extent permitted by applicable law, the Company shall take all measures necessary for any such action or proceeding commenced by the Administrative Agent or any Bank to proceed to judgment prior to the entry of judgment in any such action or proceeding commenced by the Company. 11.02 Notices. All notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, or with respect to notices given pursuant to Section 2.03 hereof, by telephone, confirmed in writing by telecopier by the close of business on the day the notice is given, as follows: (a) if to the Company, to it at Washington Mutual, Inc., 1201 3rd Avenue, Seattle, Washington 98101, Attention of Marangal I. Domingo (Telecopy No. 206-554-4954); (b) if to the Administrative Agent, to The Chase Manhattan Bank, Agent Bank Services Group, 1 Chase Manhattan Plaza, New York, New York 10081, Attention of Laura Rebecca (Telecopy No. (212) 552-7490), with a copy to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Christine M. Herrick (Telecopy No. (212) 270-1789); (c) if to any other Bank, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. Except as otherwise provided in this Agreement, all notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 11.03 Expenses, Etc. The Company agrees to pay or reimburse each of the Banks and the Administrative Agent for: (a) all reasonable out-of-pocket costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase) in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the Notes (if any) and the making of the Loans hereunder and (ii) the negotiation or preparation of any Amended and Restated Credit Agreement 67 - 67 - modification, supplement or waiver of any of the terms of this Agreement or any of the Notes (if any) (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Banks and the Administrative Agent (including, without limitation, the reasonable fees and expenses of legal counsel and allocated costs of in-house counsel) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 11.03; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any Notes or any other document referred to herein. The Company hereby agrees to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.04 Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company and the Majority Banks, or by the Company and the Administrative Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; provided that: (a) except as provided in Section 2.10 hereof, no modification, supplement or waiver shall, unless by an instrument signed by all of the Banks or by the Administrative Agent acting with the consent of all of Amended and Restated Credit Agreement 68 - 68 - the Banks: (i) increase or extend the term of the Commitments, or extend the time or waive any requirement for the reduction or termination of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied as between the Banks or Types or Classes of Loans, (vii) alter the terms of this Section 11.04, (viii) modify the definition of the term "Majority Banks" or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, or (ix) waive any of the conditions precedent set forth in Section 6.01 hereof; and (b) any modification or supplement of Section 10 hereof, or of any of the rights or duties of the Administrative Agent hereunder, shall require the consent of the Administrative Agent. 11.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. (a) The Company may not assign any of its rights or obligations hereunder or under the Notes (if any) without the prior consent of all of the Banks and the Administrative Agent. (b) Each Bank may assign any of its Loans, its Notes (if any), and its Commitment (but only with the consent of the Company and the Administrative Agent, each of which consents will not be unreasonably withheld); provided that (i) no such consent by the Company or the Administrative Agent shall be required in the case of any assignment to another Bank or an affiliate of a Bank; (ii) except to the extent the Company and the Administrative Agent shall otherwise consent, any such partial assignment (other than to another Bank) shall be in an amount at least equal to $5,000,000; (iii) each such assignment by a Bank of its Loans, Note (if any) or Commitment shall be made in such manner so that the same portion of its Loans, Note (if any) and Commitment is assigned to the respective assignee; (iv) each such assignment shall be effected by an Amended and Restated Credit Agreement 69 - 69 - Assignment and Acceptance in the form of Exhibit G hereto; and (v) each assignee, if it shall not be a Bank, shall deliver to the Administrative Agent an Administrative Questionnaire. (c) The Administrative Agent, acting for this purpose as an agent of the Company, shall maintain at one of its offices in the City of New York a copy of each such Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Company, the Administrative Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Company and any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Upon execution and delivery by the assignor and the assignee to the Company and the Administrative Agent (if applicable) of such Assignment and Acceptance, and upon consent thereto by the Company and the Administrative Agent to the extent required above and the delivery to the Administrative Agent of the assignee's completed Administrative Questionnaire (i) the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Company and the Administrative Agent), the obligations, rights and benefits of a Bank hereunder holding the Commitment and Loans (or portions thereof) assigned to it and specified in such Assignment and Acceptance (in addition to the Commitment and Loans, if any, theretofore held by such assignee), (ii) the assigning Bank shall, to the extent of such assignment, be released from the Commitment (or portion thereof) so assigned and (iii) the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. Upon each such assignment the assigning Bank shall pay the Administrative Agent an assignment fee of $3,000. (e) A Bank may sell or agree to sell to one or more other Persons (each a "Participant") a participation in all or any part of any Loans held by it, or in its Commitment, provided that such Participant shall not have any rights or obligations under this Agreement or any Note (the Participant's rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in favor of the Amended and Restated Credit Agreement 70 - 70 - Participant). All amounts payable by the Company to any Bank under Section 5 hereof in respect of Loans held by it, and its Commitment, shall be determined as if such Bank had not sold or agreed to sell any participations in such Loans and Commitment, and as if such Bank were funding each of such Loan and Commitment in the same way that it is funding the portion of such Loan and Commitment in which no participations have been sold. In no event shall a Bank that sells a participation agree with the Participant to take or refrain from taking any action hereunder except that such Bank may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term of such Bank's Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee or (v) consent to any modification, supplement or waiver hereof to the extent that the same, under Section 11.04 hereof, requires the consent of each Bank. (f) In addition to the assignments and participations permitted under the foregoing provisions of this Section 11.06, any Bank may (without notice to the Company, the Administrative Agent or any other Bank and without payment of any fee) (i) assign and pledge all or any portion of its Loans and its Notes (if any) to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank and (ii) assign all or any portion of its rights under this Agreement and its Loans and its Notes (if any) to an affiliate. No such assignment to a Federal Reserve Bank shall release the assigning Bank from its obligations hereunder. (g) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12(b) hereof. (h) Anything in this Section 11.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to the Company or any of its affiliates or Subsidiaries without the prior consent of each Bank. (i) Notwithstanding anything to the contrary contained herein, any Bank (a "Granting Bank") may grant to a special Amended and Restated Credit Agreement 71 - 71 - purpose funding vehicle (an "SPC") of such Granting Bank, identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Company, the option to provide all or any part of any Loan that such Granting Bank would otherwise be obligated to make, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Bank shall make such Loan pursuant to the terms hereof, and (iii) the rights of any such SPC shall be derivative of the rights of the Granting Bank, and such SPC shall be subject to all of the restrictions upon the Granting Bank herein contained. Each SPC shall be conclusively presumed to have made arrangements with its Granting Bank for the exercise of voting and other rights hereunder in a manner which is acceptable to the SPC, the Administrative Agent, the Banks and the Company, and each of the Administrative Agent, the Banks and the Company shall be entitled to rely upon and deal solely with the Granting Bank with respect to Loans made by or through its SPC. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Loan were made by the Granting Bank. Each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof, provided that the Granting Bank for each SPC hereby agrees to indemnify, save and hold harmless each other party hereto for any loss, cost, damage and expense arising out of their inability to institute any such proceeding against its SPC. In addition, notwithstanding anything to the contrary contained in this Section 11.06(i), any SPC may (i) with the prior written consent of the Company and the Administrative Agent (which consents shall not be unreasonably withheld) but without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Bank or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans (but nothing contained herein shall be construed in derogation of the obligation of the Granting Bank to make Loans hereunder), provided that neither the consent of the SPC or of any such assignee shall be required for amendments or waivers hereunder except for those amendments or waivers for which the consent of participants is required under Section 11.04, and (ii) disclose on a confidential basis (in the same manner described in Section 11.12) any non-public information relating to its Loans to any rating agency, Amended and Restated Credit Agreement 72 - 72 - commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. 11.07 Survival. The obligations of the Company under Sections 5.01, 5.05, 5.06 and 11.03 hereof, and the obligations of the Banks under Section 10.05 hereof, shall survive the repayment of the Loans and the termination of the Commitments and, in the case of any Bank that may assign any interest in its Commitment or Loans hereunder, shall survive the making of such assignment, notwithstanding that such assigning Bank may cease to be a "Bank" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.08 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law; Submission to Jurisdiction. This Agreement and the Notes (if any) shall be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of the Supreme Court of the State of New York sitting in New York County (including its Appellate Division), and of any other appellate court in the State of New York, for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO Amended and Restated Credit Agreement 73 - 73 - THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES (IF ANY) OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12 Treatment of Certain Information; Confidentiality. (a) The Company acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates of such Bank and the Company hereby authorizes each Bank to share any information delivered to such Bank by the Company and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) below as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and the termination of the Commitments. (b) Each Bank and the Administrative Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement that is identified by the Company as being confidential at the time the same is delivered to the Banks or the Administrative Agent, provided that nothing herein shall limit the disclosure of any such information (i) after such information shall have become public (other than through a violation of this Section 11.12), (ii) to the extent required by statute, rule, regulation or judicial process, (iii) to counsel for any of the Banks or the Administrative Agent, (iv) to bank examiners (or any other regulatory authority having jurisdiction over any Bank or the Administrative Agent), or to auditors or accountants, (v) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (vi) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, or in connection with the enforcement of rights or remedies hereunder, (vii) to a subsidiary or affiliate of such Bank as provided in paragraph (a) above or (viii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit F Amended and Restated Credit Agreement 74 - 74 - hereto (or executes and delivers to such Bank and the Company an acknowledgement to the effect that it is bound by the provisions of this Section 11.12(b), which acknowledgement may be included as part of the respective assignment or participation agreement pursuant to which such assignee or participant acquires an interest in the Loans hereunder); provided, further, that in no event shall any Bank or the Administrative Agent be obligated or required to return any materials furnished by the Company. The obligations of each Bank under this Section 11.12 shall supersede and replace the obligations of such Bank under the confidentiality letter in respect of this financing signed and delivered by such Bank to the Company prior to the date hereof; in addition, the obligations of any assignee that has executed a Confidentiality Agreement in the form of Exhibit F hereto shall be superseded by this Section 11.12 upon the date upon which such assignee becomes a Bank hereunder pursuant to Section 11.06(b) hereof. Amended and Restated Credit Agreement 75 - 75 - [This page is intentionally left blank] Amended and Restated Credit Agreement 76 - 76 - IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Credit Agreement to be duly executed as of the day and year first above written. WASHINGTON MUTUAL, INC. By /s/ Douglas G. Wisdorf ---------------------------------------- Title: Senior Vice President and Deputy Chief Financial Officer Amended and Restated Credit Agreement 77 - 77 - BANKS Commitment THE CHASE MANHATTAN BANK $20,000,000 By /s/ Christine Herrick ---------------------------------------- Title: Vice President Commitment BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION $20,000,000 By /s/ Christine Davis ---------------------------------------- Title: Vice President Commitment THE FIRST NATIONAL BANK OF CHICAGO $20,000,000 By /s/ Robert C. English ---------------------------------------- Title: Authorized Agent Commitment THE BANK OF NEW YORK $15,000,000 By /s/ Thomas J. Srednicki ---------------------------------------- Title: Vice President Commitment WELLS FARGO BANK $15,000,000 By /s/ David B. Hollingsworth ---------------------------------------- Title: Vice President By /s/ Rachel Uyama ---------------------------------------- Title: Assistant Vice President Commitment BANK OF MONTREAL $11,500,000 By /s/ J. Donald Higgins ---------------------------------------- Title: Managing Director Commitment THE BANK OF TOKYO-MITSUBISHI, LTD., SEATTLE BRANCH Amended and Restated Credit Agreement 78 - 78 - $11,500,000 By /s/ David M. Purcell ---------------------------------------- Title: Vice President Commitment THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO $11,500,000 By /s/ Takuo Yoshida ---------------------------------------- Title: General Manager & Agent Commitment U.S. BANK NATIONAL ASSOCIATION $11,500,000 By /s/ Stephen Mitchell ---------------------------------------- Title: Vice President Commitment CITIBANK, N.A. $8,000,000 By /s/ Mary E. Marshall ---------------------------------------- Title: Vice President Commitment CREDIT LYONNAIS, SAN FRANCISCO BRANCH $8,000,000 By /s/ Edward W. Leong ---------------------------------------- Title: Vice President & Manager Commitment DEUTSCHE BANK $8,000,000 By /s/ Gayma Z. Shivnarain ---------------------------------------- Title: Vice President By /s/ John S. McGill ---------------------------------------- Title: Vice President Commitment KEYBANK NATIONAL ASSOCIATION $8,000,000 By /s/ Kathleen J. Johanson ---------------------------------------- Amended and Restated Credit Agreement 79 - 79 - Title: Vice President Commitment MELLON BANK, N.A. $8,000,000 By /s/ Dean G. Pace ---------------------------------------- Title: Vice President Commitment MORGAN GUARANTY TRUST COMPANY $8,000,000 By /s/ Anthony R. Malloy ---------------------------------------- Title: Vice President Commitment UNION BANK OF CALIFORNIA $8,000,000 By /s/ Jim Chappel ---------------------------------------- Title: Vice President Commitment WESTDEUTSCHE LANDESBANK $8,000,000 By /s/ Raymond Miller ---------------------------------------- Title: Vice President By /s/ Leo Kapakos ---------------------------------------- Title: Associate THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ Christine Herrick ---------------------------------------- Title: Vice President Amended and Restated Credit Agreement 80 EXHIBIT B [Form of Opinion of Counsel to the Company] November 25, 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as counsel to Washington Mutual, Inc. (the "Company"), in connection with (i) the Amended and Restated 364-Day Credit Agreement (the "Credit Agreement") dated as of November 25, 1997, between the Company, the lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, providing for loans to be made by said lenders to the Company in an aggregate principal amount not exceeding $200,000,000 and (ii) the instruments and other documents referred to in the next following paragraph. Terms used herein without definition have the meanings assigned to them in the Credit Agreement. This opinion is being delivered pursuant to Section 6.01(c) of the Credit Agreement. In rendering the opinions expressed below, we have examined the following agreements, instruments and other documents: (a) the Credit Agreement; (b) the Notes executed and delivered on the date hereof (if any); and (c) such records of the Company and such other documents as we have deemed necessary as a basis for the opinions expressed below. The Credit Agreement and such Notes are collectively referred to as the "Credit Documents". In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon statements of governmental officials and upon representations made in or pursuant to the Credit Documents and certificates of appropriate representatives of the Company. Opinion of Counsel to the Company 81 - 88 - In rendering the opinions expressed below, we have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the Company): (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents; (ii) all signatories to such documents have been duly authorized and all signatories have the legal capacity to execute and deliver such documents; and (iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform such documents. For purposes of this letter, when we render an opinion "to our knowledge" or as to which we have "knowledge", we have based such opinion on (i) inquiries of the attorneys in our firm who routinely work on matters related to the Company and (ii) inquiries of representatives of the Company whom we reasonably believe to have knowledge about the subject matter of the inquiries. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of Washington. Each Subsidiary of the Company listed in Annex I hereto is a corporation duly organized and validly existing under the laws of the respective state indicated opposite its name in Annex I hereto. 2. The Company has all requisite corporate power to execute and deliver, and to perform its obligations under, the Credit Documents. The Company has all requisite corporate power to borrow under the Credit Agreement. 3. The execution, delivery and performance by the Company of each Credit Document, and the borrowings by the Company under the Credit Agreement, have been duly Opinion of Counsel to the Company 82 - 89 - authorized by all necessary corporate action on the part of the Company. 4. Each Credit Document has been duly executed and delivered by the Company. 5. If the Credit Documents were stated to be governed by and construed in accordance with the law of the State of Washington, or if a court of the State of Washington were to apply the law of the State of Washington to the Credit Documents, each Credit Document would constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. 6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Washington is required on the part of the Company for the execution, delivery or performance by the Company of any of the Credit Documents or for the borrowings by the Company under the Credit Agreement. 7. The execution, delivery and performance by the Company of, and the consummation by the Company of the transactions contemplated by, the Credit Documents do not and will not (a) violate any provision of its Articles of Incorporation or by-laws, (b) violate any applicable law, rule or regulation, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to the Company or any of its Subsidiaries of which we have knowledge or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which we have knowledge to which the Company or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject. 8. Except as set forth in Schedule III to the Credit Opinion of Counsel to the Company 83 - 90 - Agreement, we have no knowledge of any legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, pending or threatened against the Company or any of its Subsidiaries or any of their respective Properties that are reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 11.03 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct or unlawful conduct. (B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of Washington) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second paragraph of Section 11.01 of the Credit Agreement, (iv) the first sentence of Section 11.10, (v) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents, (vi) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement, (vii) Section 11.11 of the Credit Agreement and (viii) the enforceability of provisions in the Credit Documents that purport to establish evidentiary standards. (D) The courts of the State of Washington will consider extrinsic evidence of circumstances surrounding the making of the Credit Documents to ascertain the intent of the parties in using the language employed in the Credit Documents, regardless of whether or not the language used in the Credit Documents is plain and unambiguous on its face, and may incorporate additional or supplementary terms into the Credit Documents. Opinion of Counsel to the Company 84 - 91 - (E) We call to your attention that, under Washington law, where a provision of contract permits one party to the contract to recover attorneys' fees, such provision will be construed to permit the prevailing party in any action to enforce the contract to recover its reasonable attorneys' fees. (F) We have assumed that any compensation owed pursuant to Section 5.05 of the Credit Agreement is reasonable in amount, reflecting compensation for actual economic loss. We also not that in McCausland v. Bankers Life Insurance, 110 Wn.2d 716, 757 P.2d 941 (1988) and in Rodgers v. Rainier National Bank, 111 Wn.2d 232, 757 P.2d 976 (1988), the Washington Supreme Court indicated that, at least under certain circumstances, a lender may lose the right to a prepayment fee by accelerating the debt. (G) Our opinion in paragraphs 6 and 7(b) above is not intended to address the issue as to whether any filing or registrations would be required under applicable securities laws in connection with the sale, assignment or other transfer by a Bank of any Loan or Note or any interest or participation therein. (H) We note that, under Washington law, if a Bank is deemed to be transacting business as a foreign corporation in the State of Washington without being qualified to do so, it will not be entitled to commence a proceeding in the courts in this state with respect to the Credit Documents unless it qualifies to transact business as a foreign corporation under the Washington Business Corporation Act and under Title 30 of the Revised Code of Washington (Banks and Trust Companies), to the extent such Title is applicable to such Bank. We further note, however, that no Bank will be subject to the requirement to qualify to transact business as a foreign corporation solely by reason of the execution, delivery, performance or enforcement of the Credit Documents. The foregoing opinions are limited to matters involving the Federal laws of the United States and the law of the State of Washington, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our clients, this opinion letter is, pursuant to Section 6.01(c) of the Credit Agreement, provided to you by us in our capacity as counsel to the Company and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Opinion of Counsel to the Company 85 - 92 - Very truly yours, Opinion of Counsel to the Company 86 EXHIBIT C [Form of Opinion of Special New York Counsel to Chase] November 25, 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as special New York counsel to The Chase Manhattan Bank ("Chase") in connection with the Amended and Restated 364-Day Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc. (the "Company"), the lenders party thereto, and Chase, as Administrative Agent, providing for loans to be made by said lenders to the Company in an aggregate principal amount not exceeding $200,000,000. Terms defined in the Credit Agreement are used herein as defined therein. This opinion is being delivered pursuant to Section 6.01(d) of the Credit Agreement. In rendering the opinions expressed below, we have examined the following agreements, instruments: (a) the Credit Agreement; and (b) the Notes executed and delivered on the date hereof (if any). The Credit Agreement and such Notes are collectively referred to as the "Credit Documents". In our examination, we have assumed the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon representations made in or pursuant to the Credit Documents. Opinion of Special Counsel to Chase 87 - 94 - In rendering the opinions expressed below, we have assumed, with respect to all of the Credit Documents, that: (i) each of the Credit Documents has been duly authorized by, has been duly executed and delivered by, and (except to the extent set forth in the opinions below as to the Company) constitutes legal, valid, binding and enforceable obligations of, all of the parties thereto; (ii) all signatories to the Credit Documents have been duly authorized; and (iii) all of the parties to the Credit Documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the Credit Documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that each of the Credit Documents constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 11.03 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct. (B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain Opinion of Special Counsel to Chase 88 - 95 - circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of New York) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second sentence of Section 11.01 of the Credit Agreement, (iv) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents, and (v) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement with respect to proceedings in the United States District Court for the Southern District of New York. The foregoing opinions are limited to matters involving the Federal laws of the United States and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our client, this opinion letter is, pursuant to Section 6.01(d) of the Credit Agreements provided to you by us in our capacity as special New York counsel to Chase and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Very truly yours, CDP/RMG Opinion of Special Counsel to Chase 89 EXHIBIT D [Form of Money Market Quote Request] [Date] To: The Chase Manhattan Bank, as Administrative Agent From: Washington Mutual, Inc. Re: Money Market Quote Request Pursuant to Section 2.03 of the Amended and Restated 364-Day Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc., the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent, we hereby give notice that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Borrowing Quotation Interest Date Date[*1] Amount[*2] Type[*3] Period[*4] - --------- --------- ---------- -------- ---------- Terms used herein have the meanings assigned to them in the Credit Agreement. WASHINGTON MUTUAL, INC. By_________________________ Title: - -------------------------- * All numbered footnotes appear on the last page of this Exhibit. Money Market Quote Request 90 - 97 - - ---------- [1] For use if a Set Rate in a Set Rate Auction is requested to be submitted before the Borrowing Date. [2] Each amount must be $10,000,000 or a larger multiple of $1,000,000. [3] Insert either "LIBO Margin" (in the case of LIBOR Market Loans) or "Set Rate" (in the case of Set Rate Loans). [4] A whole number of months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of not less than 7 days after the making of such Set Rate Loan and ending on a Business Day. Money Market Quote Request 91 EXHIBIT E [Form of Money Market Quote] To: The Chase Manhattan Bank, as Administrative Agent Attention: Re: Money Market Quote to Washington Mutual, Inc. (the "Company") This Money Market Quote is given in accordance with Section 2.03(c) of the Amended and Restated 364-Day Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc., the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. In response to the Company's invitation dated __________, 199_, we hereby make the following Money Market Quote(s) on the following terms: 1. Quoting Bank: 2. Person to contact at Quoting Bank: 3. We hereby offer to make Money Market Loan(s) in the following principal amount[s], for the following Interest Period(s) and at the following rate(s): Borrowing Quotation Interest Date Date[*1] Amount[*2] Type[*3] Period[*4] Rate[*5] - --------- --------- ---------- -------- ---------- -------- provided that the Company may not accept offers that would result in the undersigned making Money Market Loans pursuant hereto in excess of $___________ in the aggregate (the "Money Market Loan Limit"). - ---------- * All numbered footnotes appear on the last page of this Exhibit. Money Market Quote 92 - 99 - We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement, irrevocably obligate(s) us to make the Money Market Loan(s) for which any offer(s) (is/are) accepted, in whole or in part (subject to the third sentence of Section 2.03(e) of the Credit Agreement and any Money Market Loan Limit specified above). Very truly yours, [NAME OF BANK] By________________________________ Authorized Officer Dated: __________, ____ - ---------- [1] As specified in the related Money Market Quote Request. [2] The principal amount bid for each Interest Period may not exceed the principal amount requested. Bids must be made for at least $5,000,000 (or a larger multiple of $1,000,000). [3] Indicate "LIBO Margin" (in the case of LIBOR Market Loans) or "Set Rate" (in the case of Set Rate Loans). [4] A whole number of months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of not less than 7 days after the making of such Set Rate Loan and ending on a Business Day, as specified in the related Money Market Quote Request. [5] For a LIBOR Market Loan, specify margin over or under the London interbank offered rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of interest per annum (rounded to the nearest 1/10,000 of 1%). Money Market Quote 93 EXHIBIT F [Form of Confidentiality Agreement] CONFIDENTIALITY AGREEMENT [Date] [Insert Name and Address of Prospective Participant or Assignee] Re: Amended and Restated 364-Day Credit Agreement dated as of November 25, 1997 (the "Credit Agreement"), between Washington Mutual, Inc. (the "Company"), the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent. Dear Ladies and Gentlemen: As a Bank party to the Credit Agreement, we have agreed with the Company pursuant to Section 11.12 of the Credit Agreement to use reasonable precautions to keep confidential, except as otherwise provided therein, all non-public information identified by the Company as being confidential at the time the same is delivered to us pursuant to the Credit Agreement. As provided in said Section 11.12, we are permitted to provide you, as a prospective [holder of a participation in the Loans (as defined in the Credit Agreement)] [assignee Bank], with certain of such non-public information subject to the execution and delivery by you, prior to receiving such non-public information, of a Confidentiality Agreement in this form. Such information will not be made available to you until your execution and return to us of this Confidentiality Agreement. Accordingly, in consideration of the foregoing, you agree (on behalf of yourself and each of your affiliates, directors, officers, employees and representatives and for the benefit of us and the Company) that (A) such information will not be used by you except in connection with the proposed [participation][assignment] mentioned above and (B) you shall use reasonable precautions, in accordance with your customary procedures for handling confidential information and in accordance with safe and sound banking practices, to keep such Confidentiality Agreement 94 - 101 - information confidential, provided that nothing herein shall limit the disclosure of any such information (i) after such information shall have become public (other than through a violation of Section 11.12 of the Credit Agreement), (ii) to the extent required by statute, rule, regulation or judicial process, (iii) to your counsel or to counsel for any of the Banks or the Administrative Agent, (iv) to bank examiners (or any other regulatory authority having jurisdiction over any Bank or the Administrative Agent), or to auditors or accountants, (v) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (vi) in connection with any litigation to which you or any one or more of the Banks or the Administrative Agent are a party, or in connection with the enforcement of rights or remedies under the Credit Agreement, (vii) to a subsidiary or affiliate of yours as provided in Section 11.12(a) of the Credit Agreement or (viii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to you a Confidentiality Agreement substantially in the form hereof and that in no event shall you be obligated to return any materials furnished to you pursuant to this Confidentiality Agreement. If you are a prospective assignee, your obligations under this Confidentiality Agreement shall be superseded by Section 11.12 of the Credit Agreement on the date upon which you become a Bank under the Credit Agreement pursuant to Section 11.06(b) thereof. Please indicate your agreement to the foregoing by signing as provided below the enclosed copy of this Confidentiality Agreement and returning the same to us. Very truly yours, [INSERT NAME OF BANK] By_________________________ The foregoing is agreed to as of the date of this letter. Confidentiality Agreement 95 - 102 - [INSERT NAME OF PROSPECTIVE PARTICIPANT OR ASSIGNEE] By_________________________ Confidentiality Agreement 96 EXHIBIT G [Form of Assignment and Acceptance] ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated 364-Day Credit Agreement, dated as of November 25, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement"), between Washington Mutual, Inc., a Washington corporation (the "Company"), the lenders named therein, and The Chase Manhattan Bank, as agent for such lenders (in such capacity, the "Administrative Agent"). Terms defined in the Credit Agreement are used herein as defined therein. ________________ (the "Assignor") and ________________ (the "Assignee") agree as follows: 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date as set forth in Schedule 1 hereto (the "Effective Date"), an interest (the "Assigned Interest") in and to the Assignor's rights and obligations under the Credit Agreement with respect to those credit facilities contained in the Credit Agreement as are set forth on Schedule 1 (individually, an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal amount and percentage for each Assigned Facility as set forth on Schedule 1. 2. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument or document furnished pursuant thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that it is the beneficial owner of the interest being assigned by it hereunder and that it has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company, any of its Subsidiaries or any other obligation or the performance or observance by the Company, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; and (iii) if any Note(s) are held by it to evidence the Assigned Facilities, attaches such Note(s) and requests that Notice of Assignment 97 - 104 - the Administrative Agent exchange such Note(s) for a new Note or Notes payable to the Assignor (if the Assignor has retained any interest in the Assigned Facility) and a new Note or Notes payable to the Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.02 thereof, the financial statements delivered pursuant to Section 8.01 thereof, if any, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (iv) appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (v) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by the Administrative Agent pursuant to Section 11.06(b) of the Credit Agreement, effective as of the Effective Date (which date shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance by the Administrative Agent), together with (if the Assignee is not already a Bank under the Credit Agreement), an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. 5. Upon such acceptance, from and after the Effective Date, the Administrative Agent shall make all payments in respect Notice of Assignment 98 - 105 - of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee which accrue subsequent to the Effective Date. 6. From and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and shall be bound by the provisions thereof and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement except as provided in Section 11.07 of the Credit Agreement. 7. This Assignment and Acceptance shall be governed by and construed in accordance with the law of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Assignment and Acceptance by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance relating to the Amended and Restated 364-Day Credit Agreement, dated as of November 25, 1997 between Washington Mutual, Inc., the lenders named therein and The Chase Manhattan Bank, as administrative agent for the Banks (in such capacity, the "Administrative Agent") Name of Assignor: Name of Assignee: Effective Date of Assignment: Credit Principal Percentage Facility Assigned Amount Assigned Assigned - ----------------- --------------- ---------- Notice of Assignment 99 - 106 - [ASSIGNEE] [ASSIGNOR] By:___________________________ By:__________________________ Title: Title: [Agreed and] Accepted: THE CHASE MANHATTAN BANK By:___________________________ Title: [Agreed: WASHINGTON MUTUAL, INC. By:___________________________ Title:] Notice of Assignment EX-10.34 5 AMENDED AND RESTATED FOUR-YEAR CREDIT AGREEMENT 1 EXHIBIT 10.34 CONFORMED COPY ************************************************************ WASHINGTON MUTUAL, INC. ----------------------------- AMENDED AND RESTATED FOUR-YEAR CREDIT AGREEMENT Dated as of November 25, 1997 ------------------------------ THE FIRST NATIONAL BANK OF CHICAGO BANK OF AMERICA N.T. & S.A., as Syndication Agents THE CHASE MANHATTAN BANK, as Administrative Agent ************************************************************ 2 TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience of reference only.
Page ---- Section 1. Definitions and Accounting Matters............................................. 1 1.01 Certain Defined Terms........................................................ 1 1.02 Accounting Terms and Determinations.......................................... 17 1.03 Classes and Types of Loans................................................... 18 Section 2. Commitments, Loans, Notes and Prepayments...................................... 19 2.01 Syndicated Loans............................................................. 19 2.02 Borrowings of Syndicated Loans............................................... 19 2.03 Money Market Loans........................................................... 19 2.04 Changes of Commitments....................................................... 25 2.05 Facility Fee................................................................. 25 2.06 Lending Offices.............................................................. 25 2.07 Several Obligations; Remedies Independent.................................... 25 2.08 Evidence of Debt............................................................. 26 2.09 Prepayments.................................................................. 27 2.10 Extension of Commitment Termination Date..................................... 27 Section 3. Payments of Principal and Interest............................................. 29 3.01 Repayment of Loans........................................................... 29 3.02 Interest..................................................................... 29 Section 4. Payments; Pro Rata Treatment; Computations; Etc................................ 30 4.01 Payments..................................................................... 30 4.02 Pro Rata Treatment........................................................... 31 4.03 Computations................................................................. 32 4.04 Minimum Amounts.............................................................. 32 4.05 Certain Notices.............................................................. 32 4.06 Non-Receipt of Funds by the Administrative Agent............................. 33 4.07 Sharing of Payments, Etc..................................................... 34 Section 5. Yield Protection, Etc.......................................................... 36 5.01 Additional Costs............................................................. 36 5.02 Limitation on Types of Loans................................................. 39 5.03 Illegality................................................................... 39 5.04 Treatment of Affected Loans.................................................. 40 5.05 Compensation................................................................. 40 5.06 U.S. Taxes................................................................... 41 5.07 Replacement of Banks......................................................... 42 Section 6. Conditions Precedent........................................................... 43 6.01 Conditions to Effectiveness.................................................. 43 6.02 Loans........................................................................ 45
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Page ---- Section 7. Representations and Warranties................................................. 45 7.01 Corporate Existence.......................................................... 45 7.02 Financial Condition.......................................................... 46 7.03 Litigation................................................................... 46 7.04 No Breach.................................................................... 46 7.05 Action....................................................................... 47 7.06 Approvals.................................................................... 47 7.07 ERISA........................................................................ 47 7.08 Taxes........................................................................ 47 7.09 Investment Company Act....................................................... 48 7.10 Public Utility Holding Company Act........................................... 48 7.11 Material Agreements and Liens................................................ 48 7.12 Environmental Matters........................................................ 49 7.13 Subsidiaries................................................................. 49 7.14 True and Complete Disclosure................................................. 49 Section 8. Covenants of the Company....................................................... 50 8.01 Financial Statements Etc..................................................... 50 8.02 Litigation................................................................... 54 8.03 Existence, Etc............................................................... 54 8.04 Insurance.................................................................... 55 8.05 Prohibition of Fundamental Changes........................................... 55 8.06 Limitation on Liens.......................................................... 56 8.07 Lines of Business............................................................ 58 8.08 Use of Proceeds.............................................................. 58 8.09 Adequate Capitalization...................................................... 58 8.10 Certain Financial Covenants.................................................. 59 Section 9. Events of Default.............................................................. 59 Section 10. The Administrative Agent...................................................... 63 10.01 Appointment, Powers and Immunities.......................................... 63 10.02 Reliance by Administrative Agent............................................ 64 10.03 Defaults.................................................................... 65 10.04 Rights as a Bank............................................................ 65 10.05 Indemnification............................................................. 65 10.06 Non-Reliance on Administrative Agent and Other Banks........................ 66 10.07 Failure to Act.............................................................. 66 10.08 Resignation or Removal of Administrative Agent.............................. 67 10.09 Syndication Agents.......................................................... 67 Section 11. Miscellaneous................................................................. 67 11.01 Waiver...................................................................... 67 11.02 Notices..................................................................... 68 11.03 Expenses, Etc............................................................... 69 11.04 Amendments, Etc............................................................. 70 11.05 Successors and Assigns...................................................... 70 11.06 Assignments and Participations.............................................. 70 11.07 Survival.................................................................... 74 11.08 Captions.................................................................... 75
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Page ---- 11.09 Counterparts................................................................ 75 11.10 Governing Law; Submission to Jurisdiction................................... 75 11.11 Waiver of Jury Trial........................................................ 75 11.12 Treatment of Certain Information; Confidentiality........................... 75
SCHEDULE I - Material Agreements and Liens SCHEDULE II - Subsidiaries SCHEDULE III - Litigation EXHIBIT A-1 - Form of Syndicated Note EXHIBIT A-2 - Form of Money Market Note EXHIBIT B - Form of Opinion of Counsel to the Company EXHIBIT C - Form of Opinion of Special New York Counsel to Chase EXHIBIT D - Form of Money Market Quote Request EXHIBIT E - Form of Money Market Quote EXHIBIT F - Form of Confidentiality Agreement EXHIBIT G - Form of Assignment and Acceptance (5) 5 AMENDED and RESTATED FOUR-YEAR CREDIT AGREEMENT dated as of November 25, 1997, between: WASHINGTON MUTUAL, INC., a corporation duly organized and validly existing under the laws of the State of Washington (the "Company"); each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto and each lender that becomes a "Bank" after the date hereof pursuant to Section 11.06(b) hereof (individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN BANK, a New York banking association, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). The Company, certain Banks (the "Original Banks") and the Administrative Agent are party to a Credit Agreement dated as of December 10, 1996 (the "Original Credit Agreement") providing for Loans (as hereinafter defined) in an aggregate principal amount not to exceed $100,000,000. The Company has requested that the Banks and the Administrative Agent agree, and the Banks and the Administrative Agent are willing, to amend and restate the Original Credit Agreement to provide for, among other things, Loans (as hereinafter defined) in an aggregate principal amount not to exceed $200,000,000. Accordingly, the parties hereto agree to amend and restate the Original Credit Agreement so that, as amended and restated, it reads in its entirety as provided herein. Section 1. Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa): "Acquisition" shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Company and/or one or more of its Subsidiaries (in one transaction or as the most recent transaction in a series of related transactions) (i) acquires any going business or all or substantially all of the assets of any firm or corporation (or division or operating unit thereof), whether through purchase of assets, merger or otherwise, (ii) directly or indirectly acquires control of at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors or (iii) directly or indirectly acquires control of an ownership interest in any partnership or joint venture (including a joint venture in corporate form). Amended and Restated Credit Agreement 6 - 7 - "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the highest of (a) the Federal Funds Rate for such day plus 1/2 of 1%, (b) the Prime Rate for such day and (c) the Base CD Rate plus 1%. Each change in any interest rate provided for herein based upon the Alternate Base Rate resulting from a change in the Alternate Base Rate shall take effect at the time of such change in the Alternate Base Rate. "Alternate Base Rate Loans" shall mean Syndicated Loans that bear interest at rates based upon the Alternate Base Rate. "Amendment Effective Date" shall mean the date on which all of the conditions set forth in Section 6.01 hereof shall have been satisfied or waived by the Banks. "Applicable Facility Fee Rate" and "Applicable Margin" shall mean, during any period when any Rating Group set forth below is in effect, with respect to any facility fee payable hereunder or any Type of Syndicated Loan outstanding hereunder, the percentage set forth below opposite such fee or Type of Syndicated Loan for such Rating Group:
=========================================================================================================== Fee or Loan Rating Rating Rating Rating Rating Group Group Group Group Group I II III IV V - ----------------------------------------------------------------------------------------------------------- Facility Fee .090% .100% .125% .150% .250% - ----------------------------------------------------------------------------------------------------------- Eurodollar Loans .210% .250% .275% .300% .500% - ----------------------------------------------------------------------------------------------------------- Alternate Base Rate 0.0% 0.0% 0.0% 0.0% 0.0% Loans ===========================================================================================================
For the purposes of this Agreement, any change in the Applicable Facility Fee Rate or Applicable Margin by reason of a change in the Moody's Rating or the Standard & Poor's Rating shall become effective on the date of announcement or publication by the respective Rating Agency of a change in such Rating or, in the absence of such announcement or publication, on the effective date of such changed rating. "Assessment Rate" shall mean, for any day, the annual assessment rate in effect on such day that is payable by a member Amended and Restated Credit Agreement 7 - 8 - of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Banks. "Asset Securitization" shall mean a public or private transfer of installment receivables, credit card receivables, lease receivables or any other type of secured or unsecured financial assets which transfer is recorded as a sale according to generally accepted accounting principles as of the date of such transfer. "Bank Regulatory Authority" shall mean the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and all other relevant bank regulatory authorities (including, without limitation, relevant state bank regulatory authorities). "Bankruptcy Code" shall mean the Federal Bankruptcy Code of 1978, as amended from time to time. "Base CD Rate" shall mean the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Basle Accord" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "Business Day" shall mean any day (a) on which commercial banks are not authorized or required to close in New York City and (b) if such day relates to the giving of notices or quotes in connection with a LIBOR Auction or to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a LIBOR Market Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. Amended and Restated Credit Agreement 8 - 9 - "Capital Lease Obligations" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Change in Control" shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; (b) during any period of 25 consecutive calendar months, a majority of the Board of Directors of the Company ceasing to be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said Board; or (c) the acquisition by any Person or group of direct or indirect possession of the power to direct or cause to direct the management or policies of the Company, whether through the ability to exercise voting power, by contract or otherwise. "Chase" shall mean The Chase Manhattan Bank. "Class" shall have the meaning assigned to such term in Section 1.03 hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment" shall mean, as to each Bank, the obligation of such Bank to make Syndicated Loans pursuant to Section 2.01 hereof in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set opposite the name of such Bank on the signature pages hereof under the caption "Commitment" or, in the case of a Person that becomes a Bank pursuant to an assignment permitted under Section 11.06(b) hereof, as specified in the respective instrument of assignment pursuant to which such assignment is effected (as the same may be reduced at any time or from time to time pursuant to Section 2.04 hereof). Amended and Restated Credit Agreement 9 - 10 - "Commitment Termination Date" shall mean the date one day prior to the date four years after the date hereof, as the same may be extended pursuant to Section 2.10 hereof; provided that, if such date is not a Business Day, the Commitment Termination Date shall be the next preceding Business Day. "Consolidated Assets" shall mean, at any date, the amount at which the assets of the Company and its Subsidiaries are or should be shown on a consolidated statement of financial position prepared in accordance with GAAP as at such date. "Consolidated Equity" shall mean, at any date, the amount of stockholders' equity of the Company and its Subsidiaries determined on a consolidated basis without duplication in accordance with GAAP (and, for the purposes of Section 8.10 of this Agreement only, shall include Special Preferred Equity Securities, but only to the extent that such preferred equity securities could be treated as Tier 1 capital of the Company if the Company were a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System). "Consolidated Reserves" shall mean, at any date, the amount of loan loss reserves held by the Company and its Subsidiaries at such date determined on a consolidated basis without duplication in accordance with GAAP. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. "Double Leverage Ratio" shall mean, at any date, the ratio of (a) the sum of (i) the aggregate book value of the Investments of the Company in the capital notes and stock of its Subsidiaries plus (ii) the aggregate book value of intangibles (including, without limitation, purchased mortgage servicing rights and purchased credit card relationships) of the Company at such date to (b) Consolidated Equity at such date. "Environmental Laws" shall mean any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or Amended and Restated Credit Agreement 10 - 11 - wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes. "Equity Rights" shall mean, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "Eurodollar Loans" shall mean Syndicated Loans that bear interest at rates based on rates referred to in the definition of "Fixed Base Rate" in this Section 1.01. "Event of Default" shall have the meaning assigned to such term in Section 9 hereof. "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Chase on such Business Day on such transactions as determined by the Amended and Restated Credit Agreement 11 - 12 - Administrative Agent. "Fee Letter" shall mean the fee letter dated as of October 24, 1997 between the Company and the Administrative Agent. "Fixed Base Rate" shall mean, with respect to any Fixed Rate Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) reported at 10:00 a.m., London time on the date two Business Days prior to the first day of such Interest Period on display page 3750 (British Bankers Association Settlement Rate) of the Dow Jones Markets (Telerate) Service as the London Interbank Offered Rate for Dollar deposits having a term comparable to such Interest Period and in an amount equal to the amount of such Fixed Rate Loan (or, if said Page shall cease to be publicly available or if the information contained on said Page, in the sole judgment of the Administrative Agent, shall cease to accurately reflect such London Interbank Offered Rate, the Fixed Base Rate for such Loans shall mean the rate reported by any publicly available source of similar market data selected by the Administrative Agent that, in the sole judgment of the Administrative Agent, accurately reflects such London Interbank Offered Rate). "Fixed Rate Loans" shall mean Eurodollar Loans and, for the purposes of the definition of "Fixed Base Rate" in this Section 1.01 and in Section 5 hereof, LIBOR Market Loans. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those that, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "Guarantee" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary Amended and Restated Credit Agreement 12 - 13 - course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Guarantees by such Person of Indebtedness of others. "Information Memorandum" shall mean the Confidential Information Memorandum dated as of October 1997 regarding the Company and this financing. "Insured Subsidiary" shall mean any insured depositary institution (as defined in 12 U.S.C. ss.1813(c) (or any successor provision), as amended, re-enacted or redesignated from time to time, that is controlled (within the meaning of 12 U.S.C. ss.1841 (or any successor provision), as amended, re-enacted or redesignated from time to time) by the Company. "Interest Period" shall mean: (a) with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, or, any other period to which all the Banks have consented, as the Company may select as provided in Section 4.05 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; (b) with respect to any Alternate Base Rate Loan, each period commencing on the date such Alternate Base Rate Loan Amended and Restated Credit Agreement 13 - 14 - is made and ending on the Commitment Termination Date; (c) with respect to any Set Rate Loan, the period commencing on the date such Set Rate Loan is made and ending on any Business Day no fewer than 7 days thereafter, as the Company may select as provided in Section 2.03(b) hereof; and (d) with respect to any LIBOR Market Loan, the period commencing on the date such LIBOR Market Loan is made and ending on the numerically corresponding day in such subsequent month, as the Company may select as provided in Section 2.03(b) hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period for any Syndicated Loan or Money Market Loan would otherwise end after the Commitment Termination Date, such Interest Period shall not be available hereunder for such period; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, in the case of an Interest Period for a Eurodollar Loan or a LIBOR Market Loan, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) no Interest Period for any Loan (other than a Set Rate Loan) shall have a duration of less than one month and, if the Interest Period for any Eurodollar or LIBOR Market Loan would otherwise be a shorter period, such Loan shall not be available hereunder for such period. "Interest Rate Protection Agreement" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "Investment" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Amended and Restated Credit Agreement 14 - 15 - Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement. "LIBO Margin" shall have the meaning assigned to such term in Section 2.03(c)(ii)(C) hereof. "LIBOR Auction" shall mean a solicitation of Money Market Quotes setting forth LIBO Margins based on the Fixed Base Rate pursuant to Section 2.03 hereof. "LIBOR Market Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of Fixed Base Rates pursuant to a LIBOR Auction. "Lien" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "Loans" shall mean Syndicated Loans and Money Market Loans. "Majority Banks" shall mean Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Banks holding more than 50% of the aggregate unpaid principal amount of the Loans. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations or financial condition of the Company and its Subsidiaries taken as a whole, (b) the ability of the Company to perform its obligations hereunder and under the Notes (if any), (c) the validity or enforceability of this Agreement or of the Notes (if any), (d) the rights and remedies of the Banks and the Administrative Agent hereunder and under the Notes (if any) or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "Money Market Borrowing" shall have the meaning assigned to such term in Section 2.03(b) hereof. Amended and Restated Credit Agreement 15 - 16 - "Money Market Loan Limit" shall have the meaning assigned to such term in Section 2.03(c)(ii) hereof. "Money Market Loans" shall mean the loans provided for by Section 2.03 hereof. "Money Market Notes" shall mean the promissory notes (if any) provided for by Section 2.08(d) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Money Market Quote" shall mean an offer in accordance with Section 2.03(c) hereof by a Bank to make a Money Market Loan with one single specified interest rate. "Money Market Quote Request" shall have the meaning assigned to such term in Section 2.03(b) hereof. "Moody's" shall mean Moody's Investors Service, Inc. or any successor thereto. "Moody's Rating" shall mean, as of any date of determination thereof, the rating most recently published by Moody's relating to the unsecured, unguaranteed senior long-term debt securities of the Company then outstanding. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA. "Non-Material Subsidiaries" shall mean, as at any date, Subsidiaries of the Company the total assets of which, in the aggregate, do not exceed one percent (1%) of the Consolidated Assets of the Company and all of its Subsidiaries, as at such date. "Non-Performing Assets" shall mean, as at any date, the sum, for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the following: (a) non-accrual loans plus (b) accruing loans past due 90 days or more plus (c) other non-performing assets plus (d) other real estate owned plus (e) without duplication for amounts included as other real estate owned, property acquired pursuant to in substance foreclosures. "Notes" shall mean Syndicated Notes and Money Market Notes. Amended and Restated Credit Agreement 16 - 17 - "Original Notes" shall mean the promissory notes of the Company delivered to each Original Bank pursuant to the Original Credit Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Post-Default Rate" shall mean a rate per annum equal to 2% plus the Alternate Base Rate as in effect from time to time, provided that, with respect to principal of a Eurodollar Loan or a Money Market Loan that shall become due (whether at stated maturity, by acceleration or otherwise) on a day other than the last day of the Interest Period therefor, the "Post-Default Rate" shall be, for the period from and including such due date to but excluding the last day of such Interest Period, 2% plus the interest rate for such Loan as provided in Section 3.02 hereof and, thereafter, the rate provided for above in this definition. "Prime Rate" shall mean the rate of interest from time to time announced by Chase at its principal office as its prime commercial lending rate. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Quarterly Dates" shall mean the last Business Day of each March, June, September and December, the first of which shall be the first such day after the date hereof. "Rating" shall mean the Moody's Rating or the Standard & Poor's Rating. "Rating Agency" shall mean either Moody's or Standard & Poor's. "Rating Group" shall mean any of Rating Group I, Rating Amended and Restated Credit Agreement 17 - 18 - Group II, Rating Group III, Rating Group IV and Rating Group V. "Rating Group I" shall mean (a) no Event of Default has occurred and is continuing and (b) the Moody's Rating is at or above A1 and the Standard & Poor's Rating is at or above A+; "Rating Group II" shall mean (a) no Event of Default has occurred and is continuing, (b) the Moody's Rating is at or above A3 and the Standard & Poor's Rating is at or above A- and (c) Rating Group I is not in effect; "Rating Group III" shall mean (a) no Event of Default has occurred and is continuing, (b) the Moody's Rating is at or above Baa1 and the Standard & Poor's Rating is at or above BBB+ and (c) neither Rating Group I nor Rating Group II is in effect; "Rating Group IV" shall mean (a) no Event of Default has occurred and is continuing, (b) the Moody's Rating is at or above Baa2 and the Standard & Poor's Rating is at or above BBB and (c) none of Rating Group I, Rating Group II or Rating Group III is in effect; and "Rating Group V" shall mean that none of Rating Group I, Rating Group II, Rating Group III or Rating Group IV is in effect; provided that (A) if the Moody's Rating and the Standard & Poor's Rating fall into different Rating levels and one of such Ratings is no more than one Rating level lower than the other of such Ratings, then the applicable Rating Group shall be based upon the higher of such Ratings and (B) if the Moody's Rating and the Standard & Poor's Rating fall into different Rating levels and one of such Ratings is two Rating levels lower than the other of such Ratings, then the applicable Rating Group shall be based upon a hypothetical Rating that would fall into the Rating level that is one lower than the Rating level into which the higher of such Ratings falls. "Register" has the meaning set forth in Section 11.06. "Regulations A, D, G, U and X" shall mean, respectively, Regulations A, D, G, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Regulatory Change" shall mean, with respect to any Bank, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Bank under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Repurchase Arrangements" shall mean repurchase and Amended and Restated Credit Agreement 18 - 19 - reverse repurchase arrangements with respect to securities and financial instruments. "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "Set Rate" shall have the meaning assigned to such term in Section 2.03(c)(ii)(D) hereof. "Set Rate Auction" shall mean a solicitation of Money Market Quotes setting forth Set Rates pursuant to Section 2.03 hereof. "Set Rate Loans" shall mean Money Market Loans the interest rates on which are determined on the basis of Set Rates pursuant to a Set Rate Auction. "Special Preferred Equity Securities" shall mean preferred equity securities, if any, issued by a Wholly-Owned Subsidiary of the Company of the type marketed under proprietary names such as MIPS, SKIS and TOPRS. "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc., or any successor thereto. "Standard & Poor's Rating" shall mean, as at any date of determination thereof, the rating most recently published by Standard & Poor's relating to the unsecured, unguaranteed senior long-term debt securities of the Company then outstanding. "Statutory Reserve Rate" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System to which the Administrative Agent is subject, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other Amended and Restated Credit Agreement 19 - 20 - ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Syndicated Loans" shall mean the loans provided for by Section 2.01 hereof, which may be Alternate Base Rate Loans and/or Eurodollar Loans. "Syndicated Notes" shall mean the promissory notes (if any) provided for by Section 2.08(d) hereof and all promissory notes delivered in substitution or exchange thereof, in each case as the same shall be modified and supplemented and in effect from time to time. "Tangible Net Worth" shall mean, as at any date, the sum of: (a) Consolidated Equity; minus (b) the amount of Special Preferred Equity Securities, to the extent otherwise included in Consolidated Equity; minus (c) the sum for the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the cost of treasury shares and the book value of all assets that should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at Consolidated Equity) but in any event including goodwill, minority interests, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all reserves and any write-up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 1996. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, Amended and Restated Credit Agreement 20 - 21 - the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Type" shall have the meaning assigned to such term in Section 1.03 hereof. "Wholly-Owned Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly-Owned Subsidiaries of such Person or by such Person and one or more Wholly-Owned Subsidiaries of such Person. 1.02 Accounting Terms and Determinations. (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Banks hereunder (which, prior to the delivery of the first financial statements under Section 8.01 hereof, shall mean the audited financial statements as at December 31, 1996 referred to in Section 7.02 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Banks pursuant to Section 8.01 hereof (or, prior to the delivery of the first financial statements under Section 8.01 hereof, used in the preparation of the audited financial statements as at December 31, 1996 referred to in Section 7.02 hereof) unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Majority Banks shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall Amended and Restated Credit Agreement 21 - 22 - not have been made (which, if objection is made in respect of the first financial statements delivered under Section 8.01 hereof, shall mean the audited financial statements referred to in Section 7.02 hereof). (b) The Company shall deliver to the Banks at the same time as the delivery of any annual or quarterly financial statement under Section 8.01 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above that affects the calculation of the Company's Double Leverage Ratio, Consolidated Equity, Consolidated Assets, Tangible Net Worth or Non-Performing Assets and (ii) reasonable estimates of the differences in such calculations between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in Section 8 hereof, the Company will not, and will not permit any of its Subsidiaries to, change the last day of its fiscal year from December 31, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30, respectively. 1.03 Classes and Types of Loans. Loans hereunder are distinguished by "Class" and by "Type". The "Class" of a Loan refers to whether such Loan is a Money Market Loan or a Syndicated Loan, each of which constitutes a Class. The "Type" of a Loan refers to whether such Loan is a Alternate Base Rate Loan, a Eurodollar Loan, a Set Rate Loan or a LIBOR Market Loan, each of which constitutes a Type. Loans may be identified by both Class and Type. Section 2. Commitments, Loans, Notes and Prepayments. 2.01 Syndicated Loans. Each Bank severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars during the period from and including the date hereof to but not including the Commitment Termination Date in an aggregate principal amount at any one time Amended and Restated Credit Agreement 22 - 23 - outstanding up to but not exceeding the amount of the Commitment of such Bank as in effect from time to time, provided that the aggregate principal amount of all Syndicated Loans, together with the aggregate principal amount of all Money Market Loans, at one time outstanding shall not exceed the aggregate amount of the Commitments at such time. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Commitments by means of Alternate Base Rate Loans and Eurodollar Loans; provided that no more than three separate Interest Periods in respect of Eurodollar Loans from each Bank may be outstanding at any one time. 2.02 Borrowings of Syndicated Loans. The Company shall give the Administrative Agent notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m. New York time on the date specified for each borrowing of Syndicated Loans hereunder, each Bank shall make available the amount of the Syndicated Loan or Loans to be made by it on such date to the Administrative Agent, at an account in New York designated by the Administrative Agent, in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company designated by the Company. 2.03 Money Market Loans. (a) In addition to borrowings of Syndicated Loans, at any time prior to the Commitment Termination Date the Company may, as set forth in this Section 2.03, request the Banks to make offers to make Money Market Loans to the Company in Dollars. The Banks may, but shall have no obligation to, make such offers and the Company may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.03. Money Market Loans may be LIBOR Market Loans or Set Rate Loans (each a "Type" of Money Market Loan), provided that: (i) there may be no more than fifteen different Interest Periods for both Syndicated Loans and Money Market Loans outstanding at the same time (for which purpose Interest Periods described in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); and (ii) the aggregate principal amount of all Money Market Loans, together with the aggregate principal amount of all Syndicated Loans, at any one time outstanding shall not exceed the aggregate amount of the Commitments at such time. (b) When the Company wishes to request offers to make Money Market Loans, it shall give the Administrative Agent (which Amended and Restated Credit Agreement 23 - 24 - shall promptly notify the Banks) notice (a "Money Market Quote Request") so as to be received no later than 11:00 a.m. New York time on (x) the fourth Business Day prior to the date of borrowing proposed therein, in the case of a LIBOR Auction or (y) the Business Day next preceding the date of borrowing proposed therein, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree). The Company may request offers to make Money Market Loans for up to three different Interest Periods in a single notice (for which purpose Interest Periods in different lettered clauses of the definition of the term "Interest Period" shall be deemed to be different Interest Periods even if they are coterminous); provided that the request for each separate Interest Period shall be deemed to be a separate Money Market Quote Request for a separate borrowing (a "Money Market Borrowing"). Each such notice shall be substantially in the form of Exhibit D hereto and shall specify as to each Money Market Borrowing: (i) the proposed date of such borrowing, which shall be a Business Day; (ii) the aggregate amount of such Money Market Borrowing, which shall be at least $10,000,000 (or a larger multiple of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; (iii) the duration of the Interest Period applicable thereto; (iv) whether the Money Market Quotes requested for a particular Interest Period are seeking quotes for LIBOR Market Loans or Set Rate Loans; and (v) if the Money Market Quotes requested are seeking quotes for Set Rate Loans, the date on which the Money Market Quotes are to be submitted if it is before the proposed date of borrowing (the proposed date of such borrowing or, if the date on which such Money Market Quotes are to be submitted is before the proposed date of borrowing, such submission date is called the "Quotation Date"). Except as otherwise provided in this Section 2.03(b), no Money Market Quote Request shall be given within five Business Days (or such other number of days as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree) of any other Money Market Quote Request. Amended and Restated Credit Agreement 24 - 25 - (c) (i) Each Bank may submit one or more Money Market Quotes, each constituting an offer to make a Money Market Loan in response to any Money Market Quote Request; provided that, if the Company's request under Section 2.03(b) hereof specified more than one Interest Period, such Bank may make a single submission containing one or more Money Market Quotes for each such Interest Period. Each Money Market Quote must be submitted to the Administrative Agent not later than (x) 2:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 10:00 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the consent of the Majority Banks, may agree); provided that any Money Market Quote may be submitted by Chase (or its lending office) only if Chase (or such lending office) notifies the Company of the terms of the offer contained therein not later than (x) 1:00 p.m. New York time on the fourth Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) 9:45 a.m. New York time on the Quotation Date, in the case of a Set Rate Auction. Subject to Sections 5.02(b), 5.03, 6.02 and 9 hereof, any Money Market Quote so made shall be irrevocable except with the consent of the Administrative Agent given on the instructions of the Company. (ii) Each Money Market Quote shall be substantially in the form of Exhibit E hereto and shall specify: (A) the proposed date of borrowing and the Interest Period therefor; (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount shall be at least $5,000,000 (or a larger multiple of $1,000,000); provided that the aggregate principal amount of all Money Market Loans for which a Bank submits Money Market Quotes (x) may be greater or less than the Commitment of such Bank but (y) may not exceed the principal amount of the Money Market Borrowing for a particular Interest Period for which offers were requested; (C) in the case of a LIBOR Auction, the margin above or below the applicable Fixed Base Rate (the "LIBO Margin") offered for each such Money Market Loan, expressed as a percentage (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) to be added Amended and Restated Credit Agreement 25 - 26 - to or subtracted from the applicable Fixed Base Rate; (D) in the case of a Set Rate Auction, the rate of interest per annum (rounded upwards, if necessary, to the nearest 1/10,000th of 1%) offered for each such Money Market Loan (the "Set Rate"); and (E) the identity of the quoting Bank. Unless otherwise agreed by the Administrative Agent and the Company, no Money Market Quote shall contain qualifying, conditional or similar language or propose terms other than or in addition to those set forth in the applicable Money Market Quote Request and, in particular, no Money Market Quote may be conditioned upon acceptance by the Company of all (or some specified minimum) of the principal amount of the Money Market Loan for which such Money Market Quote is being made, provided that the submission by any Bank containing more than one Money Market Quote may be conditioned on the Company not accepting offers contained in such submission that would result in such Bank making Money Market Loans pursuant thereto in excess of a specified aggregate amount (the "Money Market Loan Limit"). (d) The Administrative Agent shall (x) in the case of a Set Rate Auction, as promptly as practicable after the Money Market Quote is submitted (but in any event not later than 10:15 a.m. New York time on the Quotation Date) or (y) in the case of a LIBOR Auction, by 4:00 p.m. New York time on the day a Money Market Quote is submitted, notify the Company of the terms (i) of any Money Market Quote submitted by a Bank that is in accordance with Section 2.03(c) hereof and (ii) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Company shall specify (A) the aggregate principal amount of the Money Market Borrowing for which offers have been received and (B) the respective principal amounts and LIBO Margins or Set Rates, as the case may be, so offered by each Bank (identifying the Bank that made each Money Market Quote). (e) Not later than 11:00 a.m. New York time on (x) the third Business Day prior to the proposed date of borrowing, in the case of a LIBOR Auction or (y) the Quotation Date, in the case of a Set Rate Auction (or, in any such case, such other time and date as the Company and the Administrative Agent, with the Amended and Restated Credit Agreement 26 - 27 - consent of the Majority Banks, may agree), the Company shall notify the Administrative Agent of its acceptance or nonacceptance of the offers so notified to it pursuant to Section 2.03(d) hereof (which notice shall specify the aggregate principal amount of offers from each Bank for each Interest Period that are accepted, it being understood that the failure of the Company to give such notice by such time shall constitute nonacceptance) and the Administrative Agent shall promptly notify each affected Bank. The notice from the Administrative Agent shall also specify the aggregate principal amount of offers for each Interest Period that were accepted and the lowest and highest LIBO Margins and Set Rates that were accepted for each Interest Period. The Company may accept any Money Market Quote in whole or in part (provided that any Money Market Quote accepted in part shall be at least $5,000,000 or a larger multiple of $1,000,000); provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the aggregate principal amount of each Money Market Borrowing shall be at least $10,000,000 (or a larger multiple of $1,000,000) but shall not cause the limits specified in Section 2.03(a) hereof to be violated; (iii) acceptance of offers may, subject to clause (v) below, be made only in ascending order of LIBO Margins or Set Rates, as the case may be, in each case beginning with the lowest rate so offered; (iv) the Company may not accept any offer where the Administrative Agent has advised the Company that such offer fails to comply with Section 2.03(c)(ii) hereof or otherwise fails to comply with the requirements of this Agreement (including, without limitation, Section 2.03(a) hereof); (v) the aggregate principal amount of each Money Market Borrowing from any Bank may not exceed any applicable Money Market Loan Limit of such Bank. If offers are made by two or more Banks with the same LIBO Margins or Set Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Company among such Banks as nearly as possible (in amounts of at least $5,000,000 or larger multiples of $1,000,000) in proportion to the aggregate principal amount of Amended and Restated Credit Agreement 27 - 28 - such offers. Determinations by the Company of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. (f) Any Bank whose offer to make any Money Market Loan has been accepted in accordance with the terms and conditions of this Section 2.03 shall, not later than 1:00 p.m. New York time on the date specified for the making of such Loan, make the amount of such Loan available to the Administrative Agent at an account in New York designated by the Administrative Agent in immediately available funds, for account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company on such date by depositing the same, in immediately available funds, in an account of the Company maintained with Chase at the Principal Office designated by the Company. (g) Except for the purpose and to the extent expressly stated in Sections 2.04(b) and 2.05 hereof, the amount of any Money Market Loan made by any Bank shall not constitute a utilization of such Bank's Commitment. 2.04 Changes of Commitments. (a) The aggregate amount of the Commitments shall be automatically reduced to zero on the Commitment Termination Date. (b) The Company shall have the right at any time or from time to time (i) so long as no Syndicated Loans or Money Market Loans are outstanding, to terminate the Commitments and (ii) to reduce the aggregate unused amount of the Commitments (for which purpose use of the Commitments shall be deemed to include the aggregate principal amount of all Money Market Loans); provided that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction shall be in a multiple of $10,000,000. (c) The Commitments once terminated or reduced may not be reinstated. 2.05 Facility Fee. The Company shall pay to the Administrative Agent for account of each Bank a facility fee on the daily average amount of such Bank's Commitment (whether or not utilized), for the period from and including the date hereof to but not including the earlier of the date such Commitment is terminated and the Commitment Termination Date, at a rate per annum equal to the Applicable Facility Fee Rate. Accrued facility fee shall be payable on each Quarterly Date in arrears and on the earlier of the date the Commitments are terminated and Amended and Restated Credit Agreement 28 - 29 - the Commitment Termination Date. 2.06 Lending Offices. The Loans of each Type made by each Bank shall be made and maintained at such Bank's lending office for Loans of such Type. 2.07 Several Obligations; Remedies Independent. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but neither any Bank nor the Administrative Agent shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank, and (except as otherwise provided in Section 4.06 hereof) no Bank shall have any obligation to the Administrative Agent or any other Bank for the failure by such Bank to make any Loan required to be made by such Bank. The amounts payable by the Company at any time hereunder and under the Notes (if any) to each Bank shall be a separate and independent debt and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes (if any), and it shall not be necessary for any other Bank or the Administrative Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.08. Evidence of Debt. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder. (b) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Banks and each Bank's share thereof. (c) The entries in the accounts maintained pursuant to paragraph (a) or (b) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Bank or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the Loans in accordance with the terms of this Agreement. Amended and Restated Credit Agreement 29 - 30 - (d) Any Bank may request that Loans made by it be evidenced by a promissory note. In such event, Syndicated Loans made by such Bank (if any) shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-1 hereto, and Money Market Loans made by such Bank (if any) shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-2 hereto. (e) No Bank shall be entitled to have its Notes (if any) substituted or exchanged for any reason, or subdivided for promissory notes of lesser denominations, except in connection with a permitted assignment of all or any portion of such Bank's Commitment, Loans and Notes pursuant to Section 11.06 hereof (and, if requested by any Bank, the Company agrees to so exchange any Note). 2.09 Prepayments. Subject to Sections 4.04 and 5.05 hereof, the Company shall have the right to prepay Syndicated Loans at any time or from time to time, provided that the Company shall give the Administrative Agent notice of each such prepayment as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder). Money Market Loans may not be prepaid without the consent of the Bank holding such Loan. 2.10 Extension of Commitment Termination Date. (a) The Company may, by notice to the Administrative Agent (which shall promptly notify the Banks) not less than 45 days and not more than 60 days prior to each of the first and second anniversaries of the date of this Agreement (a "Relevant Anniversary Date"), request that the Banks extend the Commitment Termination Date (the "Existing Commitment Termination Date") for one year after such Existing Commitment Termination Date. Each Bank, acting in its sole discretion, shall, by notice to the Company and the Administrative Agent given not later than the date (herein, the "Consent Date") that is 30 days immediately after the date of such request (except that, if such date is not a Business Day, such notice shall be given on the next succeeding Business Day) but not more than 15 days prior to the Consent Date, advise the Company and the Administrative Agent whether or not such Bank agrees to such extension; provided that, if such Bank gives notice of its consent to such extension not later than Consent Date, such Bank may revoke such consent at any time not later than the Consent Date by giving notice of such revocation to the Company and the Administrative Agent; and provided further that each Bank that determines not to extend the Commitment Termination Date (a "Non-extending Bank") shall notify the Administrative Agent (which shall notify the Banks) of such fact Amended and Restated Credit Agreement 30 - 31 - promptly after such determination (but in any event no later than the Consent Date) and any Bank that does not advise the Company on or before the Consent Date shall be deemed to be a Non-extending Bank. The election of any Bank to agree to such extension shall not obligate any other Bank to so agree. (b) If (and only if) the total of the Commitments of the Banks that have agreed so to extend the Commitment Termination Date shall be at least 66-2/3% of the aggregate amount of the Commitments in effect immediately prior to the Consent Date, the Company shall have the right on or before the Relevant Anniversary Date to replace each Non-extending Bank with, and otherwise add to this Agreement, one or more other banks (which may include any Bank, each prior to the Relevant Anniversary Date an "Additional Commitment Bank") with the approval of the Administrative Agent (which approval shall not be unreasonably withheld), each of which Additional Commitment Banks shall have entered into an agreement in form and substance satisfactory to the Company and the Administrative Agent pursuant to which such Additional Commitment Bank shall, effective as of the Relevant Anniversary Date, undertake a Commitment (and, if any such Additional Commitment Bank is already a Bank, its Commitment shall be in addition to such Bank's Commitment hereunder on such date). (c) If (and only if) the total of the Commitments of the Banks that have agreed so to extend the Commitment Termination Date together with the additional Commitments of the Additional commitment Banks that will become effective on the Anniversary Date shall aggregate 100% of the aggregate amount of the Commitments in effect immediately prior to the Consent Date, then, effective as of the Relevant Anniversary Date, the Existing Commitment Termination Date shall be extended to the date falling one-year after the Existing Commitment Termination Date (except that, if such date is not a Business Day, such Commitment Termination Date as so extended shall be the next preceding Business Day) and each Additional Commitment Bank shall thereupon become a "Bank" for all purposes of this Agreement. Notwithstanding the foregoing, the extension of the Existing Commitment Termination Date shall not be effective with respect to any Bank unless: (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension, on the Consent Date and on the Relevant Anniversary Date; (ii) each of the representations and warranties made by the Company in Section 7 hereof shall be true and Amended and Restated Credit Agreement 31 - 32 - complete on and as of each of the date of the notice requesting such extension, the Consent Date and the Relevant Anniversary Date with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and (iii) each Non-extending Bank shall have been paid in full by the Company all amounts owing to such Bank hereunder on or before the Relevant Anniversary Date. Even if the Existing Commitment Termination Date is extended as aforesaid, the Commitment of each Non-extending Bank shall terminate on the Existing Commitment Termination Date. Section 3. Payments of Principal and Interest. 3.01 Repayment of Loans. (a) The Company hereby promises to pay the Administrative Agent for account of each Bank the principal amount of each of such Bank's Syndicated Loans, and each Syndicated Loan shall mature, on the last day of the Interest Period for such Syndicated Loan. (b) The Company hereby promises to pay to the Administrative Agent for account of each Bank that makes any Money Market Loan the principal amount of such Money Market Loan, and such Money Market Loan shall mature, on the last day of the Interest Period for such Money Market Loan. 3.02 Interest. The Company hereby promises to pay to the Administrative Agent for account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (a) during such periods as such Loan is a Alternate Base Rate Loan, the Alternate Base Rate (as in effect from time to time) plus the Applicable Margin plus, 0.05% per annum at any time when Loans outstanding shall exceed 50% of the Commitments; (b) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Fixed Base Rate for such Loan for such Interest Period plus the Applicable Margin, plus, 0.05% per annum at any time when Loans outstanding shall exceed 50% of the Commitments; Amended and Restated Credit Agreement 32 - 33 - (c) if such Loan is a LIBOR Market Loan, the Fixed Base Rate for such Loan for the Interest Period therefor plus (or minus) the LIBO Margin quoted by the Bank making such Loan in accordance with Section 2.03 hereof; and (d) if such Loan is a Set Rate Loan, the Set Rate for such Loan for the Interest Period therefor quoted by the Bank making such Loan in accordance with Section 2.03 hereof. Notwithstanding the foregoing, the Company hereby promises to pay to the Administrative Agent for account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder or under the Notes held by such Bank to or for account of such Bank, that shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Alternate Base Rate Loan on the Quarterly Dates in arrears, (ii) in the case of a Eurodollar Loan or a Money Market Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than 90 days (in the case of a Set Rate Loan) or three months (in the case of a Eurodollar Loan or a LIBOR Market Loan), at 90-day or three-month intervals, respectively, following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof (but only on the principal amount so paid or prepaid), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Banks to which such interest is payable and to the Company. Section 4. Payments; Pro Rata Treatment; Computations; Etc. 4.01 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Company under this Agreement and the Notes (if any) and the Fee Letter, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at an account in New York designated by the Administrative Agent, not later than 1:00 p.m. New York time on the date on which such payment shall become due (each such Amended and Restated Credit Agreement 33 - 34 - payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) The Company shall, at the time of making each payment under this Agreement or any Note for account of any Bank, specify to the Administrative Agent (which shall so notify the intended recipient(s) thereof) the Loans or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02 hereof, may determine to be appropriate). (c) Each payment received by the Administrative Agent under this Agreement or any Note for account of any Bank shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for account of such Bank's lending office for the Loan or other obligation in respect of which such payment is made. (d) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing of Syndicated Loans from the Banks under Section 2.01 hereof shall be made from the Banks, each payment of facility fee under Section 2.05 hereof shall be made for account of the Banks, and each termination or reduction of the amount of the Commitments under Section 2.04 hereof shall be applied to the respective Commitments of the Banks, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 5.04 hereof, Eurodollar Loans having the same Interest Period shall be allocated pro rata among the Banks according to the amounts of their respective Commitments; (c) each payment or prepayment of principal of Syndicated Loans by the Company shall be made for account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Syndicated Loans held by them; and (d) each payment of interest on Syndicated Loans by the Company shall be made for account of the Banks pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Banks. 4.03 Computations. Interest on Money Market Loans, Eurodollar Loans and facility fee shall be computed on the basis of a year of 360 days and actual days elapsed (including the Amended and Restated Credit Agreement 34 - 35 - first day but excluding the last day) occurring in the period for which payable and interest on Alternate Base Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed (including the first date but excluding the last day) occurring in the period for which payable. Notwithstanding the foregoing, for each day the Alternate Base Rate is calculated by reference to the Federal Funds Rate, the interest on Alternate Base Rate Loans shall be computed on the basis of a year of 360 days and actual days elapsed. 4.04 Minimum Amounts. Each borrowing of Syndicated Loans shall be in an aggregate amount at least equal to $5,000,000 (in the case of Alternate Base Rate Loans) and $10,000,000 (in the case of Eurodollar Loans) or larger multiples of $1,000,000 in excess thereof; and each prepayment of principal of Syndicated Loans shall be in an aggregate amount at least equal to $5,000,000 or larger multiples of $1,000,000 (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods, at the same time hereunder to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period). 4.05 Certain Notices. Except as otherwise provided in Section 2.03 hereof with respect to Money Market Loans, notices by the Company to the Administrative Agent of terminations or reductions of the Commitments and of borrowings and optional prepayments of Loans, of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing or prepayment or the first day of such Interest Period specified below: Number of Business Notice Days Prior Termination or reduction of Commitments 3 Borrowing of Alternate Base Rate Loans same day Prepayment of Alternate Base Rate Loans 1 Borrowing and duration of Interest Period for, and Amended and Restated Credit Agreement 35 - 36 - prepayment of, Eurodollar Loans 3 Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing or optional prepayment shall specify the Loans to be borrowed or prepaid and the amount (subject to Section 4.04 hereof) and Type of each Loan to be borrowed or prepaid and the date of borrowing or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. 4.06 Non-Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified by a Bank or the Company (the "Payor") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be made by such Bank hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Banks hereunder (such payment being herein called the "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent, the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "Advance Date") such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, provided that if neither the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Banks, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Post-Default Rate (without Amended and Restated Credit Agreement 36 - 37 - duplication of the obligation of the Company under Section 3.02 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of the Company under said Section 3.02 to pay interest at the Post-Default Rate in respect of the Required Payment and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Banks to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment pursuant to whichever of the rates specified in Section 3.02 hereof is applicable to the Type of such Loan, it being understood that the return by the Company of the Required Payment to the Administrative Agent shall not limit any claim the Company may have against the Payor in respect of such Required Payment. 4.07 Sharing of Payments, Etc. (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option (to the fullest extent permitted by law), to set off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of the Company at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Bank's Loans or any other amount payable to such Bank hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness are then due to the Company), in which case it shall promptly notify the Company and the Administrative Agent thereof, provided that such Bank's failure to give such notice shall not affect the validity thereof. (b) If any Bank shall obtain from the Company payment of any principal of or interest on any Loan of any Class owing to it or payment of any other amount under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Bank shall have received a greater percentage of the principal of or interest on the Loans of such Class or such other amounts then due hereunder by the Company to such Bank than the percentage received by any other Bank, it shall promptly purchase from such other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans of such Class or such other amounts, respectively, owing to such Amended and Restated Credit Agreement 37 - 38 - other Banks (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses that may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans of such Class or such other amounts, respectively, owing to each of the Banks. To such end all the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Bank so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other amounts (as the case may be) owing to such Bank in the amount of such participation. (d) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. If, under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Section 5. Yield Protection, Etc. 5.01 Additional Costs. (a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may reasonably determine to be necessary to compensate such Bank for any costs that such Bank determines are attributable to its making or maintaining of any Fixed Rate Loans or its obligation to make any Fixed Rate Loans hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change that: (i) shall subject any Bank (or its lending office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Notes or changes the basis of Amended and Restated Credit Agreement 38 - 39 - taxation of any amounts payable to such Bank under this Agreement or its Notes (if any) in respect of any of such Loans (excluding changes in the rate of tax on the overall net income or gross receipts of such Bank or of such lending office by the jurisdiction in which such Bank has its principal office or such lending office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than, in the case of any Bank for any period as to which the Company is required to pay any amount under paragraph (d) below, the reserves against "Eurocurrency liabilities" under Regulation D therein referred to) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including, without limitation, any of such Loans or any deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof), or any commitment of such Bank (including, without limitation, the Commitment of such Bank hereunder); or (iii) imposes any other condition affecting this Agreement or its Notes (if any) (or any of such extensions of credit or liabilities) or its Commitment. If any Bank requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Bank (with a copy to the Administrative Agent), suspend the obligation of such Bank thereafter to make Eurodollar Loans until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable), provided that such suspension shall not affect the right of such Bank to receive the compensation so requested. (b) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Bank from time to time on request such amounts as such Bank may reasonably determine to be necessary to compensate such Bank (or, without duplication, the bank holding company of which such Bank is a subsidiary) for any costs that it determines are attributable to the maintenance by such Bank (or any lending office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Amended and Restated Credit Agreement 39 - 40 - Basle Accord, of capital in respect of its Commitment or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Bank (or any lending office or such bank holding company) to a level below that which such Bank (or any lending office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (c) Each Bank shall notify the Company of any event occurring after the date hereof entitling such Bank to compensation under paragraph (a) or (b) of this Section 5.01 as promptly as practicable, but in any event within 60 days, after such Bank obtains actual knowledge thereof; provided that (i) if any Bank fails to give such notice within 60 days after it obtains actual knowledge of such an event, such Bank shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 60 days prior to the date that such Bank does give such notice and (ii) each Bank will designate a different lending office for the Loans of such Bank affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank. Each Bank will furnish to the Company a certificate setting forth in reasonably specific detail the basis and amount of each request by such Bank for compensation under paragraph (a) or (b) of this Section 5.01. Determinations and allocations by any Bank for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (b) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Bank under this Section 5.01, shall be conclusive, provided that such determinations and allocations are made on a reasonable basis. (d) Without limiting the effect of the foregoing, the Company shall pay to each Bank on the last day of each Interest Period so long as such Bank is maintaining reserves against "Eurocurrency liabilities" under Regulation D (or, unless the provisions of paragraph (b) above are applicable, so long as such Bank is, by reason of any Regulatory Change, maintaining reserves against any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Loans or LIBOR Market Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Bank that includes any Eurodollar Loans or LIBOR Market Loans) an additional amount (reasonably determined by such Bank and notified to the Company through the Administrative Agent) Amended and Restated Credit Agreement 40 - 41 - equal to the product of the following for each Eurodollar Loan or LIBOR Market Loan for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan or LIBOR Market Loan outstanding on such day; and (ii) the remainder of (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Loan or LIBOR Market Loan for such Interest Period as provided in this Agreement (less the Applicable Margin) and the denominator of which is one minus the effective rate (expressed as a decimal) at which such reserve requirements are imposed on such Bank on such day minus (y) such numerator; and (iii) 1/360. 5.02 Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Fixed Base Rate for any Interest Period: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for either Type of Fixed Rate Loans as provided herein; or (b) the Majority Banks determine (or any Bank that has outstanding a Money Market Quote with respect to a LIBOR Market Loan determines), which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in the definition of "Fixed Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans (or LIBOR Market Loans, as the case may be) for such Interest Period is to be determined are not likely adequately to cover the cost to such Banks (or to such quoting Bank) of making or maintaining Eurodollar Loans for such Interest Period; then the Administrative Agent shall give the Company and each Bank prompt notice thereof and, so long as such condition remains in effect, the Banks (or such quoting Bank) shall be under no obligation to make additional Eurodollar Loans. 5.03 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Amended and Restated Credit Agreement 41 - 42 - Bank or its lending office to honor its obligation to make Eurodollar Loans or LIBOR Market Loans hereunder (and, in the sole opinion of such Bank, the designation of a different lending office would either not avoid such unlawfulness or would be disadvantageous to such Bank), then such Bank shall promptly notify the Company thereof (with a copy to the Administrative Agent) and such Bank's obligation to make Eurodollar Loans shall be suspended until such time as such Bank may again make Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable), and such Bank shall no longer be obligated to make any LIBOR Market Loan that it has offered to make. 5.04 Treatment of Affected Loans. If the obligation of any Bank to make a Eurodollar Loan shall be suspended pursuant to Section 5.01 or 5.03 hereof, such Bank's Eurodollar Loans shall be made instead as Alternate Base Rate Loans and, if such Bank has Eurodollar Loans outstanding, each such Eurodollar Loan shall be converted to an Alternate Base Rate Loan on such date prior to the last day of the Interest Period for such Eurodollar Loan as such Bank may specify to the Company with a copy to the Administrative Agent, and to the extent that such Bank's Eurodollar Loans have been so converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Eurodollar Loans shall be applied instead to its Alternate Base Rate Loans. 5.05 Compensation. The Company shall pay to the Administrative Agent for account of each Bank, upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense that such Bank determines is attributable to: (a) any payment or prepayment of a Fixed Rate Loan or a Set Rate Loan made by such Bank for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 9 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 6 hereof to be satisfied) to borrow a Fixed Rate Loan or a Set Rate Loan (with respect to which, in the case of a Money Market Loan, the Company has accepted a Money Market Quote) from such Bank on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 or 2.03(b) hereof; Amended and Restated Credit Agreement 42 - 43 - provided, however, that such Bank shall have delivered to the Company a certificate as to the amount of such loss, cost or expense, which certificate shall be conclusive, provided that the determination of such compensation is made on a reasonable basis. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid or not borrowed for the period from the date of such payment, prepayment or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Bank would have bid in the London interbank market (if such Loan is a Eurodollar Loan or a LIBOR Market Loan) or the United States secondary certificate of deposit market (if such Loan is a Set Rate Loan) for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Bank), or if such Bank shall cease to make such bids, the equivalent rate, as reasonably determined by such Bank, derived from Telerate Access Service Page 3750 (British Bankers Association Settlement Rate) or other publicly available source as described in the definition of "Fixed Base Rate" in Section 1.01 hereof). 5.06 U.S. Taxes. (a) The Company agrees to pay to each Bank that is not a U.S. Person such additional amounts as are necessary in order that the net payment of any amount due to such non-U.S. Person hereunder after deduction for or withholding in respect of any U.S. Taxes imposed with respect to such payment (or in lieu thereof, payment of such U.S. Taxes by such non-U.S. Person), will not be less than the amount stated herein to be then due and payable, provided that the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to any Bank hereunder unless such Bank is, on the date hereof (or on the date it becomes a Bank hereunder as provided in Section 11.06(b) hereof) and on the date of any change in the lending office of such Bank, either entitled to submit a Form 1001 (relating to such Bank and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all Amended and Restated Credit Agreement 43 - 44 - interest to be received by such Bank hereunder in respect of the Loans); provided that it being understood that, if thereafter as a result of any change in law or regulation such Bank becomes unable to submit the Form previously submitted, the foregoing obligation to pay such additional amounts shall apply; or (ii) to any U.S. Taxes imposed solely by reason of the failure by such non-U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non-U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes. For the purposes of this Section 5.06(a), (A) "U.S. Person" shall mean a citizen, national or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America and (D) "Form 4224" shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates). Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates. (b) Within 30 days after paying any amount to the Administrative Agent or any Bank from which it is required by law to make any deduction or withholding, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Company shall deliver to the Administrative Agent for delivery to such non-U.S. Person evidence satisfactory to such Person of such deduction, withholding or payment (as the case may be). Amended and Restated Credit Agreement 44 - 45 - 5.07 Replacement of Banks. If any Bank requests compensation pursuant to Section 5.01 or 5.06 hereof, or any Bank's obligation to make Eurodollar Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof (any such Bank requesting such compensation, or whose obligations are so suspended, being herein called a "Requesting Bank"), the Company, upon three Business Days notice, may require that such Requesting Bank transfer all of its right, title and interest under this Agreement and such Requesting Bank's Notes (if any) to any bank or other financial institution (a "Proposed Bank") identified by the Company that is satisfactory to the Administrative Agent in its reasonable determination (i) if such Proposed Bank agrees to assume all of the obligations of such Requesting Bank hereunder, and to purchase all of such Requesting Bank's Loans hereunder for consideration equal to the aggregate outstanding principal amount of such Requesting Bank's Loans, together with interest thereon to the date of such purchase, and satisfactory arrangements are made for payment to such Requesting Bank of all other amounts payable hereunder to such Requesting Bank on or prior to the date of such transfer (including any fees accrued hereunder and any amounts that would be payable under Section 5.05 hereof as if all of such Requesting Bank's Loans were being prepaid in full on such date) and (ii) if such Requesting Bank has requested compensation pursuant to Section 5.01 or 5.06 hereof, such Proposed Bank's aggregate requested compensation, if any, pursuant to said Section 5.01 or 5.06 with respect to such Requesting Bank's Loans is lower than that of the Requesting Bank. Subject to the provisions of Section 11.06(b) hereof, such Proposed Bank shall be a "Bank" for all purposes hereunder, provided that no such Proposed Bank shall as a result of such purchase hold more than 25% of the aggregate amount of the Commitments. Without prejudice to the survival of any other agreement of the Company hereunder the agreements of the Company contained in Sections 5.01, 5.06 and 11.03 hereof (without duplication of any payments made to such Requesting Bank by the Company or the Proposed Bank) shall survive for the benefit of such Requesting Bank under this Section 5.07 with respect to the time prior to such replacement. Section 6. Conditions Precedent. 6.01 Conditions to Effectiveness. The effectiveness of the amendment and restatement of the Original Credit Agreement provided for hereby is subject to the conditions precedent that the Administrative Agent shall have received the following documents (with, in the case of clauses (a), (b), (c) and (d) below, sufficient copies for each Bank), each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Bank) in form and substance: Amended and Restated Credit Agreement 45 - 46 - (a) Corporate Documents. Certified copies of the charter and by-laws (or equivalent documents) of the Company and of all corporate authority for the Company (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of this Agreement and the Notes (if any) and each other document to be delivered by the Company from time to time in connection herewith and the Loans hereunder (and the Administrative Agent and each Bank may conclusively rely on such certificate until it receives notice in writing from the Company to the contrary). (b) Officer's Certificate. A certificate of a senior officer of the Company, dated the date hereof, to the effect set forth in the first sentence of Section 6.02 hereof. (c) Opinion of Counsel to the Company. An opinion, dated the date hereof, of Foster Pepper & Shefelman, counsel to the Company, substantially in the form of Exhibit B hereto and covering such other matters as the Administrative Agent or any Bank may reasonably request (and the Company hereby instructs such counsel to deliver such opinion to the Banks and the Administrative Agent). (d) Opinion of Special New York Counsel to Chase. An opinion, dated the date hereof, of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, substantially in the form of Exhibit C hereto (and Chase hereby instructs such counsel to deliver such opinion to the Banks). (e) Payment of Facility Fee. Evidence that all fees payable to the Original Banks accrued to the Amendment Effective Date under the Original Credit Agreement and unpaid have been paid in full. (f) Other Documents. Such other documents as the Administrative Agent or any Bank or special New York counsel to Chase may reasonably request. The effectiveness of the amendment and restatement of the Original Credit Agreement provided for hereby is also subject to the payment by the Company of such fees as the Company shall have agreed to pay or deliver to any Bank or the Administrative Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase, in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes (if any) and the making of the Loans Amended and Restated Credit Agreement 46 - 47 - hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). 6.02 Loans. The obligation of any Bank to make any Loan (including any Money Market Loan and such Bank's initial Syndicated Loan) to the Company upon the occasion of each borrowing hereunder is subject to the further conditions precedent that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 7 hereof (except, in the case of any borrowing that does not increase the total principal amount of the Loans outstanding of any Bank, the representations and warranties in Sections 7.03, 7.07 or 7.12 hereof) shall be true and complete on and as of the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice and, unless the Company otherwise notifies the Administrative Agent prior to the date of such borrowing, as of the date of such borrowing). Section 7. Representations and Warranties. The Company represents and warrants to the Administrative Agent and the Banks that: 7.01 Corporate Existence. Each of the Company and its Subsidiaries (except Non-Material Subsidiaries): (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the failure to have any such license authorization, consent or approval would not have a Material Adverse Effect; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and Amended and Restated Credit Agreement 47 - 48 - where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect. 7.02 Financial Condition. (a) The Company has heretofore furnished to each of the Banks the consolidated statement of financial position of the Company and its Subsidiaries as at December 31, 1996 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Deloitte & Touche LLP, and the unaudited consolidated statement of financial position of the Company and its Subsidiaries as at September 30, 1997 and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for the nine-month period ended on such date. All such financial statements present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as at said dates, and the consolidated results of operations for the fiscal year and nine-month period ended on said dates (subject, in the case of such financial statements as at September 30, 1997, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. From December 31, 1996 until the date of this Agreement, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries from that set forth in said financial statements as at said date. 7.03 Litigation. Except as disclosed to the Banks in Schedule III hereto, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against the Company or any of its Subsidiaries that are reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect. 7.04 No Breach. None of the execution and delivery of this Agreement and the Notes (if any), the consummation of the transactions herein contemplated or compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. Amended and Restated Credit Agreement 48 - 49 - 7.05 Action. The Company has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under this Agreement and the Notes (if any); the execution, delivery and performance by the Company of this Agreement and the Notes (if any) have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by the Company and constitutes, and each of the Notes (if any) when executed and delivered for value will constitute, its legal, valid and binding obligation, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 7.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by the Company of this Agreement or the Notes (if any) or for the legality, validity or enforceability hereof or thereof. 7.07 ERISA. Each Plan, and, to the knowledge of the Company, each Multiemployer Plan, is in compliance in all respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law (except where failure so to comply would not have a Material Adverse Effect), and no event or condition has occurred and is continuing as to which the Company would be under an obligation to furnish a report to the Banks under Section 8.01(g) hereof. 7.08 Taxes. The Company and its Subsidiaries are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which the Company is the "common parent" (within the meaning of Section 1504 of the Code) of such group. The Company and its Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries, except for any such tax being contested in good faith and by proper proceedings and against which adequate reserves are being maintained. The charges, accruals and reserves on the books of the Company and its Subsidiaries in Amended and Restated Credit Agreement 49 - 50 - respect of taxes and other governmental charges are, in the opinion of the Company, adequate. 7.09 Investment Company Act. Neither the Company nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 7.10 Public Utility Holding Company Act. Neither the Company nor any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.11 Material Agreements and Liens. (a) Part A of Schedule I hereto is a complete and correct list of each credit agreement, loan agreement, indenture, note purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, the Company or any of its Subsidiaries (excluding Repurchase Arrangements, deposits, annuities or Federal funds transactions, each entered into by the Company or a Subsidiary in the ordinary course of its business, Interest Rate Protection Agreements or borrowings from the Federal Home Loan Bank and any commercial paper or medium term note program of the Company or any of its Subsidiaries), outstanding on the date of this Agreement the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $10,000,000, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part A of said Schedule I. (b) Part B of Schedule I hereto is a complete and correct list of each Lien securing Indebtedness of any Person outstanding on the date of this Agreement (excluding Repurchase Arrangements, deposits, annuities or Federal funds transactions, each entered into by the Company or a Subsidiary in the ordinary course of its Business, and Interest Rate Protection Agreements or borrowings from the Federal Home Loan Bank) the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $10,000,000 and covering any Property of the Company or any of its Subsidiaries, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the Property covered by each such Lien is correctly described in Part B of said Schedule I. 7.12 Environmental Matters. Each of the Company and its Subsidiaries has obtained all environmental, health and Amended and Restated Credit Agreement 50 - 51 - safety permits, licenses and other authorizations required under all Environmental Laws to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. 7.13 Subsidiaries. Set forth in Schedule II hereto is a complete and correct list of all of the Subsidiaries of the Company as of the date of this Agreement together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Schedule II hereto, (x) each of the Company and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule II hereto, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person. 7.14 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Company to the Administrative Agent or any Bank in connection with the negotiation, preparation or delivery of this Agreement or included herein or delivered pursuant hereto, when taken as a whole (together with the Information Memorandum) do not, as of the date of this Agreement, contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date of this Agreement by the Company and its Subsidiaries to the Administrative Agent and the Banks in connection with this Agreement and the transactions contemplated hereby will be true, complete and accurate in every material respect, or (in the case of projections) made in good faith and based on estimates believed by management to be reasonable, on the date as of which such information is stated or certified. Section 8. Covenants of the Company. The Company covenants and agrees with the Banks and the Administrative Agent that, so long as any Commitment or Loan is outstanding and until payment in full of all amounts payable by the Company hereunder: 8.01 Financial Statements Etc. The Company shall deliver to each of the Banks (except for the items referred to in clauses (c), (d) and (e), which the Company shall deliver only to Amended and Restated Credit Agreement 51 - 52 - those Banks that specifically request delivery thereof): (a) as soon as available and in any event within 75 days after the end of each quarterly fiscal period of each fiscal year of the Company, consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated statements of financial position of the Company and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding periods in the preceding fiscal year (except that, in the case of statements of financial position, such comparison shall be to the last day of the prior fiscal year), accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its Subsidiaries, in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments) (it being understood that delivery to the Bank of the Company's Report on Form 10-Q filed with the SEC shall satisfy the financial statement requirements of this Section 8.01(a) so long as the information required to be contained in such Report is substantially the same as that required under this Section 8.01(a)); (b) as soon as available and in any event within 105 days after the end of each fiscal year of the Company, consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year and the related consolidated statements of financial position of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by an opinion thereon of Deloitte & Touche, LLP or independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, and a statement of such accountants to the effect that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Company was not in compliance with Amended and Restated Credit Agreement 52 - 53 - Section 8.10 hereof, insofar as such Section relates to accounting matters (it being understood that delivery to the Bank of the Company's Report on Form 10-K filed with the SEC shall satisfy the financial statement requirements of this Section 8.01(b) so long as the information required to be contained in such Report is substantially the same as that required under this Section 8.01(b)); (c) promptly upon their becoming available, and in any event within 75 days after the end of each quarterly fiscal period of each fiscal year of the Company, the "Reports of Condition and Income" (report no. FFIEC 032, or any successor form thereto) of each Insured Subsidiary as is required to file such report, all such reports prepared in accordance with regulatory accounting principles prescribed by the Federal Financial Institutions Examination Council; (d) promptly upon their becoming available, and in any event within 75 days after the end of each quarterly fiscal period the Statements of Condition and Operations, including all supporting schedules (Office of Thrift Supervision Form 1313, or any successor form thereto) for each Insured Subsidiary that is required to file such statements, all such statements prepared in accordance with Office of Thrift Supervision instructions. (e) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange or the Office of Thrift Supervision; (f) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (g) within ten days after the Company knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to the PBGC by the Company or an ERISA Affiliate with respect to such event or condition): Amended and Restated Credit Agreement 53 - 54 - (i) any reportable event, as defined in Section 4043(c) of ERISA and the regulations issued thereunder, with respect to a Plan, that is required to be reported to the PBGC and as to which the PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Company or an ERISA Affiliate to terminate any Plan; (iii) the institution by the PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Company or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a Amended and Restated Credit Agreement 54 - 55 - part if the Company or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (h) promptly after the Company knows or has reason to believe that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; and (i) from time to time such other information regarding the financial condition, operations, business or prospects of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Bank or the Administrative Agent may reasonably request. The Company will furnish to each Bank, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 8.06(g), 8.09 and 8.10 hereof as of the end of the respective quarterly fiscal period or fiscal year. 8.02 Litigation. The Company will promptly give to each Bank notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings that are not (either individually or in the aggregate) reasonably likely to have a Material Adverse Effect. 8.03 Existence, Etc. The Company will, and will cause each of its Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 8.03 shall (i) with respect to the Company or any Major Subsidiary (as defined in Section 8.05 hereof), prohibit any transaction expressly permitted under Section 8.05 hereof or (ii) with respect to any Subsidiary (other than a Major Subsidiary), prohibit Amended and Restated Credit Agreement 55 - 56 - such Subsidiary from entering into any merger or consolidation or amalgamation or from liquidating, winding up or dissolving, itself (or suffering any liquidation or dissolution) or prohibit a Disposition (as defined in Section 8.05 hereof) by or of such Subsidiary); (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could (either individually or in the aggregate) have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto (or in the case of any Person that becomes a Subsidiary after the date hereof by Acquisition promptly upon becoming aware of penalties attaching thereto), except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its material Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; (e) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; and (f) permit representatives of any Bank or the Administrative Agent, during normal business hours, to examine, copy and make extracts from its books and records (subject to Section 11.12 hereof), to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Bank or the Administrative Agent (as the case may be). 8.04 Insurance. The Company will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies, and with respect to Property and risks of a character usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations. 8.05 Prohibition of Fundamental Changes. The Company will not, nor will it permit any of its Major Subsidiaries to, Amended and Restated Credit Agreement 56 - 57 - enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Major Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of (a "Disposition"), in one transaction or a series of transactions, all or substantially all of its Property, whether now owned or hereafter acquired (for which purpose, the Disposition of all or substantially all of the capital stock of a Major Subsidiary of the Company shall be deemed to be the Disposition by such Major Subsidiary of all or substantially all of the Property of such Major Subsidiary). Notwithstanding the foregoing provisions of this Section 8.05: (a) any Major Subsidiary of the Company may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other Subsidiary of the Company; provided that (x) if any such transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any Major Subsidiary of the Company may make a Disposition of any or all of its Property (upon voluntary liquidation or otherwise) to the Company or a Wholly-Owned Subsidiary of the Company; and (c) the Company or any Major Subsidiary of the Company may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is, after giving effect to such merger or consolidation, a Wholly-Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder. For purposes of this Section 8.05, "Major Subsidiaries" shall mean Washington Mutual Bank and Washington Mutual Bank, FA. 8.06 Limitation on Liens. The Company will not create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except: (a) Liens in existence on the date hereof and listed in Part B of Schedule I hereto; (b) Liens imposed by any governmental authority for Amended and Restated Credit Agreement 57 - 58 - taxes, assessments or charges not yet due or that are being contested in good faith and by appropriate proceedings if, unless the amount thereof is not material with respect to it or its financial condition, adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(m) hereof; (d) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (g) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company each of which Liens either (A) existed on such Property before the time of its acquisition and was not created in anticipation thereof or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such Property; provided that (i) no such Lien shall extend to or cover any Property of the Company other than the Property so acquired and improvements thereon and (ii) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 80% of the fair market value (as Amended and Restated Credit Agreement 58 - 59 - determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); (h) Liens arising out of Repurchase Arrangements; (i) Liens arising out of or securing Interest Rate Protection Agreements; and (j) Liens arising out of Asset Securitizations. 8.07 Lines of Business. The Company will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than (a) the business of owning and operating a depository institution (as defined in 12 U.S.C. ss.1461(b)(1)(A)), a consumer finance company, a mortgage company, an insurance company, a trust company, an investment advisor or a securities broker-dealer, (b) the business of providing other financial services or (c) any business that may be engaged in by a Washington state chartered savings bank (as defined in RCW 32.04.020), a Federal savings association (as defined in 12 U.S.C. ss.1462(5)) or a bank holding company (as defined in 12 U.S.C. ss.1841(a)) or a Subsidiary of any of them. 8.08 Use of Proceeds. The Company will use the proceeds of the Loans hereunder solely for general corporate purposes, including commercial paper back-up (in compliance with all applicable legal and regulatory requirements, including, without limitation, Regulations G, U and X and the Securities Act of 1933 and the Securities Exchange Act of 1934 and the regulations thereunder); provided that, without the consent of each Bank, the Company may not use the proceeds of any of the Loans hereunder to finance or refinance, directly or indirectly, an Acquisition of any Person (or the acquisition of (i) more than 50% of the publicly traded stock (of any class) of any Person or (ii) any of the publicly traded stock (of any class) of any Person after the Company or any of its Subsidiaries shall have been required to file a Schedule 13D under the Securities Exchange Act of 1934, as amended, with respect to such stock) unless such Acquisition (or acquisition) has been approved by the board of directors of such Person or officers thereof duly authorized to do so; provided further that neither the Administrative Agent nor any Bank shall have any responsibility as to the use of any of such proceeds. 8.09 Adequate Capitalization. The Company shall assure that each Insured Subsidiary shall be adequately capitalized at all times. For purposes of this Section 8.09, "adequately capitalized" shall have the meaning assigned such Amended and Restated Credit Agreement 59 - 60 - term by Section 38 of the Federal Deposit Insurance Act, as amended or any successor act thereto. 8.10 Certain Financial Covenants. (a) Double Leverage Ratio. The Company will not permit at any time its Double Leverage Ratio to be greater than 1.30 to 1.00. (b) Ratio of Consolidated Equity to Consolidated Assets. The Company will not permit at any time its ratio of Consolidated Equity to Consolidated Assets to be less than 0.05 to 1.00. (c) Minimum Tangible Net Worth. The Company will not permit at any time its Tangible Net Worth to be less than $3,723,439,000 plus the sum of 50% of the net income of the Company and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP and for which purpose any net loss shall be deemed to be a net income of zero) for each fiscal quarter of the Company ending after September 30, 1997. (d) Maximum Non-Performing Assets. The Company will not permit at any time its Non-Performing Assets to constitute more than 4.5% of the Company's Consolidated Assets. Section 9. Events of Default. If one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) The Company shall: (i) default in the payment of any principal of any Loan when due (whether at stated maturity or at mandatory or optional prepayment); or (ii) default in the payment of any interest on any Loan, any fee or any other amount payable by it hereunder when due and such default shall have continued unremedied for three or more Business Days; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating $40,000,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full Amended and Restated Credit Agreement 60 - 61 - (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof; or the Company shall default in the payment when due of any amount aggregating $40,000,000 or more under any Interest Rate Protection Agreement; or any event specified in any Interest Rate Protection Agreement shall occur if the effect of such event is to cause, or to permit, termination or liquidation payment or payments aggregating $40,000,000 or more to become due; or (c) Any representation, warranty or certification made or deemed made herein (or in any modification or supplement hereto) by the Company, or any certificate furnished to any Bank or the Administrative Agent pursuant to the provisions hereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under any of Sections 8.01(h), 8.05, 8.06, 8.08, 8.09 or 8.10 hereof; or the Company shall default in the performance of any of its other obligations in this Agreement and such default shall continue unremedied for a period of thirty or more days after notice thereof to the Company by the Administrative Agent or any Bank (through the Administrative Agent); or (e) The Company or any of its Subsidiaries (other than a Non-Material Subsidiary) shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Subsidiaries (other than a Non-Material Subsidiary) shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate action for the purpose of effecting any of the foregoing; or Amended and Restated Credit Agreement 61 - 62 - (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries (other than a Non-Material Subsidiary), in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Subsidiary or of all or any substantial part of its Property or (iii) similar relief in respect of the Company or such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) The Company or any of its Subsidiaries and any Bank Regulatory Authority shall enter into any supervisory agreement, consent order or any agreement (in writing or otherwise) affecting in any material respect the management, business, Properties, condition (financial or otherwise) or operations, present or prospective, of the Company and its Subsidiaries taken as a whole; or any Bank Regulatory Authority shall issue a cease and desist order to or in respect of the Company or any of its Subsidiaries; or (i) Any Insured Subsidiary shall cease accepting deposits or making loans on the instruction of any Federal, state or other regulatory body with authority to give such instruction other than pursuant to an instruction generally applicable to banks organized under the jurisdiction of organization of such Insured Subsidiary; or (j) Any Bank Regulatory Authority shall notify any Insured Subsidiary that such Insured Subsidiary's capital stock has become impaired; any of Washington Mutual Bank, Washington Mutual Bank fsb or Washington Mutual Bank, FA shall cease to be an insured bank under the Federal Deposit Insurance Act, as amended, and the rules and regulations promulgated thereunder; or any Insured Subsidiary (other than Washington Mutual Bank, Washington Mutual Bank fsb or Washington Mutual Bank, FA) shall, pursuant to an order of any Bank Regulatory Authority, cease to be an insured bank under the Federal Deposit Insurance Act, as amended, and the rules and regulations promulgated thereunder; or Amended and Restated Credit Agreement 62 - 63 - (k) Any Insured Subsidiary shall be required (whether or not the time allowed by the appropriate Bank Regulatory Authority for the submission of such plan has been established or elapsed) to submit a capital restoration plan of the type referred to in 12 U.S.C. ss.1831o(b)(2)(C), as amended, re-enacted or redesignated from time to time; or (l) The Company shall Guarantee in writing (voluntarily or otherwise) the capital of any Insured Subsidiary as part of or in connection with any agreement or arrangement with any Bank Regulatory Authority; or (m) A final judgment or judgments for the payment of money of $40,000,000 or more in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) or of $120,000,000 or more in the aggregate (regardless of insurance coverage) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged or paid (or provision shall not be made for such discharge or payment), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (n) An event or condition specified in Section 8.01(g) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) that, in the determination of the Majority Banks, would (either individually or in the aggregate) have a Material Adverse Effect; or (o) A Change in Control shall occur; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 9 with respect to the Company, (A) the Administrative Agent may and, upon request of the Majority Banks, will, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Administrative Agent may and, upon request of the Banks Amended and Restated Credit Agreement 63 - 64 - holding more than 50% of the aggregate unpaid principal amount of the Loans shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (if any) (including, without limitation, any amounts payable under Section 5.05 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 9 with respect to the Company, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (if any) (including, without limitation, any amounts payable under Section 5.05 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company. Section 10. The Administrative Agent. 10.01 Appointment, Powers and Immunities. Each Bank hereby appoints and authorizes the Administrative Agent to act as its agent hereunder with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement, together with such other powers as are reasonably incidental thereto. The Administrative Agent (which term as used in this sentence and in Section 10.05 and the first sentence of Section 10.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other document referred to or provided for herein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any Amended and Restated Credit Agreement 64 - 65 - litigation or collection proceedings hereunder; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own gross negligence or willful misconduct. The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Administrative Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Administrative Agent, together with the consent of the Company to such assignment or transfer (to the extent required by Section 11.06(b) hereof). 10.02 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) reasonably believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent. As to any matters not expressly provided for by this Agreement, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 10.03 Defaults. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall (subject to Section 10.07 hereof) take such action with respect to such Default as shall be directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement expressly requires that such action be taken, Amended and Restated Credit Agreement 65 - 66 - or not be taken, only with the consent or upon the authorization of the Majority Banks or all of the Banks. 10.04 Rights as a Bank. With respect to its Commitment and the Loans made by it, Chase (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Chase (and any successor acting as Administrative Agent) and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Company (and any of its Subsidiaries or affiliates) as if it were not acting as the Administrative Agent, and Chase (and any such successor) and its affiliates may accept fees and other consideration from the Company for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 10.05 Indemnification. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed under Section 11.03 hereof, but without limiting the obligations of the Company under said Section 11.03) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Administrative Agent (including by any Bank) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 11.03 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 10.06 Non-Reliance on Administrative Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, Amended and Restated Credit Agreement 66 - 67 - independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement or any other document referred to or provided for herein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) that may come into the possession of the Administrative Agent or any of its affiliates. 10.07 Failure to Act. Except for action expressly required of the Administrative Agent hereunder, the Administrative Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its satisfaction from the Banks of their indemnification obligations under Section 10.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 10.08 Resignation or Removal of Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Administrative Agent may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent, after consultation with the Company (unless an Event of Default shall have occurred and is continuing). If no successor Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, after consultation with the Company (unless an Event of Default shall have occurred and is continuing) appoint a successor Administrative Agent, that shall be a bank that has an office in New York, New York. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Amended and Restated Credit Agreement 67 - 68 - Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. 10.09 Syndication Agents. The Syndication Agents identified on the cover page of this Agreement or of any amendment hereto shall have no duties or responsibilities hereunder other than as Banks. Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of the Administrative Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Company irrevocably waives, to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by the Administrative Agent or any Bank relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any action or proceeding commenced by the Company relating in any way to this Agreement whether or not commenced earlier. To the fullest extent permitted by applicable law, the Company shall take all measures necessary for any such action or proceeding commenced by the Administrative Agent or any Bank to proceed to judgment prior to the entry of judgment in any such action or proceeding commenced by the Company. 11.02 Notices. All notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, or with respect to notices given pursuant to Section 2.03 hereof, by telephone, confirmed in writing by telecopier by the close of business on the day the notice is given, as follows: Amended and Restated Credit Agreement 68 - 69 - (a) if to the Company, to it at Washington Mutual, Inc., 1201 3rd Avenue, Seattle, Washington 98101, Attention of Marangal I. Domingo (Telecopy No. 206-554-4954); (b) if to the Administrative Agent, to The Chase Manhattan Bank, Agent Bank Services Group, 1 Chase Manhattan Plaza, New York, New York 10081, Attention of Laura Rebecca (Telecopy No. (212) 552-7490), with a copy to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Christine M. Herrick (Telecopy No. (212) 270-1789); (c) if to any other Bank, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. Except as otherwise provided in this Agreement, all notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 11.03 Expenses, Etc. The Company agrees to pay or reimburse each of the Banks and the Administrative Agent for: (a) all reasonable out-of-pocket costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy, special New York counsel to Chase) in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the Notes (if any) and the making of the Loans hereunder and (ii) the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement or any of the Notes (if any) (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Banks and the Administrative Agent (including, without limitation, the reasonable fees and expenses of legal counsel and allocated costs of in-house counsel) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 11.03; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any Notes or any other document referred to herein. Amended and Restated Credit Agreement 69 - 70 - The Company hereby agrees to indemnify the Administrative Agent and each Bank and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Administrative Agent to any Bank, whether or not the Administrative Agent or any Bank is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Loans hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the Loans hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.04 Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company and the Majority Banks, or by the Company and the Administrative Agent acting with the consent of the Majority Banks, and any provision of this Agreement may be waived by the Majority Banks or by the Administrative Agent acting with the consent of the Majority Banks; provided that: (a) except as provided in Section 2.10 hereof, no modification, supplement or waiver shall, unless by an instrument signed by all of the Banks or by the Administrative Agent acting with the consent of all of the Banks: (i) increase or extend the term of the Commitments, or extend the time or waive any requirement for the reduction or termination of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on any Loan or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied as between the Banks or Types or Classes of Loans, (vii) alter the terms of this Section 11.04, (viii) modify the definition of the term "Majority Banks" or modify in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to modify any provision hereof, or (ix) waive any of the conditions precedent set forth in Section 6.01 hereof; and (b) any modification or supplement of Section 10 hereof, or of any of the rights or duties of the Administrative Agent hereunder, shall Amended and Restated Credit Agreement 70 - 71 - require the consent of the Administrative Agent. 11.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Assignments and Participations. (a) The Company may not assign any of its rights or obligations hereunder or under the Notes (if any) without the prior consent of all of the Banks and the Administrative Agent. (b) Each Bank may assign any of its Loans, its Notes (if any), and its Commitment (but only with the consent of the Company and the Administrative Agent, each of which consents will not be unreasonably withheld); provided that (i) no such consent by the Company or the Administrative Agent shall be required in the case of any assignment to another Bank or an affiliate of a Bank; (ii) except to the extent the Company and the Administrative Agent shall otherwise consent, any such partial assignment (other than to another Bank) shall be in an amount at least equal to $5,000,000; (iii) each such assignment by a Bank of its Loans, Note (if any) or Commitment shall be made in such manner so that the same portion of its Loans, Note (if any) and Commitment is assigned to the respective assignee; (iv) each such assignment shall be effected by an Assignment and Acceptance in the form of Exhibit G hereto; and (v) each assignee, if it shall not be a Bank, shall deliver to the Administrative Agent an Administrative Questionnaire. (c) The Administrative Agent, acting for this purpose as an agent of the Company, shall maintain at one of its offices in the City of New York a copy of each such Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Company, the Administrative Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, Amended and Restated Credit Agreement 71 - 72 - notwithstanding notice to the contrary. The Register shall be available for inspection by the Company and any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) Upon execution and delivery by the assignor and the assignee to the Company and the Administrative Agent (if applicable) of such Assignment and Acceptance, and upon consent thereto by the Company and the Administrative Agent to the extent required above and the delivery to the Administrative Agent of the assignee's completed Administrative Questionnaire (i) the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Company and the Administrative Agent), the obligations, rights and benefits of a Bank hereunder holding the Commitment and Loans (or portions thereof) assigned to it and specified in such Assignment and Acceptance (in addition to the Commitment and Loans, if any, theretofore held by such assignee), (ii) the assigning Bank shall, to the extent of such assignment, be released from the Commitment (or portion thereof) so assigned and (iii) the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. Upon each such assignment the assigning Bank shall pay the Administrative Agent an assignment fee of $3,000. (e) A Bank may sell or agree to sell to one or more other Persons (each a "Participant") a participation in all or any part of any Loans held by it, or in its Commitment, provided that such Participant shall not have any rights or obligations under this Agreement or any Note (the Participant's rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in favor of the Participant). All amounts payable by the Company to any Bank under Section 5 hereof in respect of Loans held by it, and its Commitment, shall be determined as if such Bank had not sold or agreed to sell any participations in such Loans and Commitment, and as if such Bank were funding each of such Loan and Commitment in the same way that it is funding the portion of such Loan and Commitment in which no participations have been sold. In no event shall a Bank that sells a participation agree with the Participant to take or refrain from taking any action hereunder except that such Bank may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term of such Bank's Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant Amended and Restated Credit Agreement 72 - 73 - is entitled to receive such interest or fee or (v) consent to any modification, supplement or waiver hereof to the extent that the same, under Section 11.04 hereof, requires the consent of each Bank. (f) In addition to the assignments and participations permitted under the foregoing provisions of this Section 11.06, any Bank may (without notice to the Company, the Administrative Agent or any other Bank and without payment of any fee) (i) assign and pledge all or any portion of its Loans and its Notes (if any) to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank and (ii) assign all or any portion of its rights under this Agreement and its Loans and its Notes (if any) to an affiliate. No such assignment to a Federal Reserve Bank shall release the assigning Bank from its obligations hereunder. (g) A Bank may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 11.12(b) hereof. (h) Anything in this Section 11.06 to the contrary notwithstanding, no Bank may assign or participate any interest in any Loan held by it hereunder to the Company or any of its affiliates or Subsidiaries without the prior consent of each Bank. (i) Notwithstanding anything to the contrary contained herein, any Bank (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC") of such Granting Bank, identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Company, the option to provide all or any part of any Loan that such Granting Bank would otherwise be obligated to make, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Bank shall make such Loan pursuant to the terms hereof, and (iii) the rights of any such SPC shall be derivative of the rights of the Granting Bank, and such SPC shall be subject to all of the restrictions upon the Granting Bank herein contained. Each SPC shall be conclusively presumed to have made arrangements with its Granting Bank for the exercise of voting and other rights hereunder in a manner which is acceptable to the SPC, the Administrative Agent, the Banks and the Company, and each of the Administrative Agent, the Banks and the Company shall be entitled to rely upon and deal solely with the Granting Bank with respect to Loans made by or Amended and Restated Credit Agreement 73 - 74 - through its SPC. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Loan were made by the Granting Bank. Each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof, provided that the Granting Bank for each SPC hereby agrees to indemnify, save and hold harmless each other party hereto for any loss, cost, damage and expense arising out of their inability to institute any such proceeding against its SPC. In addition, notwithstanding anything to the contrary contained in this Section 11.06(i), any SPC may (i) with the prior written consent of the Company and the Administrative Agent (which consents shall not be unreasonably withheld) but without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Bank or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans (but nothing contained herein shall be construed in derogation of the obligation of the Granting Bank to make Loans hereunder), provided that neither the consent of the SPC or of any such assignee shall be required for amendments or waivers hereunder except for those amendments or waivers for which the consent of participants is required under Section 11.04, and (ii) disclose on a confidential basis (in the same manner described in Section 11.12) any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. 11.07 Survival. The obligations of the Company under Sections 5.01, 5.05, 5.06 and 11.03 hereof, and the obligations of the Banks under Section 10.05 hereof, shall survive the repayment of the Loans and the termination of the Commitments and, in the case of any Bank that may assign any interest in its Commitment or Loans hereunder, shall survive the making of such assignment, notwithstanding that such assigning Bank may cease to be a "Bank" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of any Loan, herein or pursuant hereto shall survive the making of such representation and warranty, and no Bank shall be deemed to have waived, by reason of making any Loan, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Bank or the Administrative Agent may have had notice or knowledge or reason Amended and Restated Credit Agreement 74 - 75 - to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.08 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 11.09 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 11.10 Governing Law; Submission to Jurisdiction. This Agreement and the Notes (if any) shall be governed by, and construed in accordance with, the law of the State of New York. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of the Supreme Court of the State of New York sitting in New York County (including its Appellate Division), and of any other appellate court in the State of New York, for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Company hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES (IF ANY) OR THE TRANSACTIONS CONTEMPLATED HEREBY. 11.12 Treatment of Certain Information; Confidentiality. (a) The Company acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Bank or by one or more subsidiaries or affiliates of such Bank and the Company hereby authorizes each Bank to share any information delivered to such Bank by the Company and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Bank to enter into this Agreement, to any Amended and Restated Credit Agreement 75 - 76 - such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) below as if it were a Bank hereunder. Such authorization shall survive the repayment of the Loans and the termination of the Commitments. (b) Each Bank and the Administrative Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement that is identified by the Company as being confidential at the time the same is delivered to the Banks or the Administrative Agent, provided that nothing herein shall limit the disclosure of any such information (i) after such information shall have become public (other than through a violation of this Section 11.12), (ii) to the extent required by statute, rule, regulation or judicial process, (iii) to counsel for any of the Banks or the Administrative Agent, (iv) to bank examiners (or any other regulatory authority having jurisdiction over any Bank or the Administrative Agent), or to auditors or accountants, (v) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (vi) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, or in connection with the enforcement of rights or remedies hereunder, (vii) to a subsidiary or affiliate of such Bank as provided in paragraph (a) above or (viii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Bank a Confidentiality Agreement substantially in the form of Exhibit F hereto (or executes and delivers to such Bank and the Company an acknowledgement to the effect that it is bound by the provisions of this Section 11.12(b), which acknowledgement may be included as part of the respective assignment or participation agreement pursuant to which such assignee or participant acquires an interest in the Loans hereunder); provided, further, that in no event shall any Bank or the Administrative Agent be obligated or required to return any materials furnished by the Company. The obligations of each Bank under this Section 11.12 shall supersede and replace the obligations of such Bank under the confidentiality letter in respect of this financing signed and delivered by such Bank to the Company prior to the date hereof; in addition, the obligations of any assignee that has executed a Confidentiality Agreement in the form of Exhibit F hereto shall be superseded by this Section 11.12 upon the date upon which such assignee becomes a Bank hereunder pursuant to Section 11.06(b) hereof. Amended and Restated Credit Agreement 76 - 77 - IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Credit Agreement to be duly executed as of the day and year first above written. WASHINGTON MUTUAL, INC. By /s/ Douglas G. Wisdorf ----------------------------------------- Title: Senior Vice President and Deputy Chief Financial Officer Amended and Restated Credit Agreement 77 - 78 - BANKS Commitment THE CHASE MANHATTAN BANK $20,000,000 By /s/ Christine Herrick ----------------------------------------- Title: Vice President Commitment BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION $20,000,000 By /s/ Christine Davis ----------------------------------------- Title: Vice President Commitment THE FIRST NATIONAL BANK OF CHICAGO $20,000,000 By /s/ Robert C. English ----------------------------------------- Title: Authorized Agent Commitment THE BANK OF NEW YORK $15,000,000 By /s/ Thomas J. Srednicki ----------------------------------------- Title: Vice President Commitment WELLS FARGO BANK $15,000,000 By /s/ David B. Hollingsworth ----------------------------------------- Title: Vice President By /s/ Rachel Uyama ----------------------------------------- Title: Assistant Vice President Commitment BANK OF MONTREAL $11,500,000 By /s/ J. Donald Higgins ----------------------------------------- Title: Managing Director Commitment THE BANK OF TOKYO-MITSUBISHI, LTD., SEATTLE BRANCH Amended and Restated Credit Agreement 78 - 79 - $11,500,000 By /s/ David M. Purcell ----------------------------------------- Title: Vice President Commitment THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO $11,500,000 By /s/ Takuo Yoshida ----------------------------------------- Title: General Manager & Agent Commitment U.S. BANK NATIONAL ASSOCIATION $11,500,000 By /s/ Stephen Mitchell ----------------------------------------- Title: Vice President Commitment CITIBANK, N.A. $8,000,000 By /s/ Mary E. Marshall ----------------------------------------- Title: Vice President Commitment CREDIT LYONNAIS, SAN FRANCISCO BRANCH $8,000,000 By /s/ Edward W. Leong ----------------------------------------- Title: Vice President & Manager Commitment DEUTSCHE BANK $8,000,000 By /s/ Gayma Z. Shivnarain ----------------------------------------- Title: Vice President By /s/ John S. McGill ----------------------------------------- Title: Vice President Commitment KEYBANK NATIONAL ASSOCIATION $8,000,000 By /s/ Kathleen J. Johanson ----------------------------------------- Amended and Restated Credit Agreement 79 - 80 - Title: Vice President Commitment MELLON BANK, N.A. $8,000,000 By /s/ Dean G. Pace ----------------------------------------- Title: Vice President Commitment MORGAN GUARANTY TRUST COMPANY $8,000,000 By /s/ Anthony R. Malloy ----------------------------------------- Title: Vice President Commitment UNION BANK OF CALIFORNIA $8,000,000 By /s/ Jim Chappel ----------------------------------------- Title: Vice President Commitment WESTDEUTSCHE LANDESBANK $8,000,000 By /s/ Raymond Miller ----------------------------------------- Title: Vice President By /s/ Leo Kapakos ----------------------------------------- Title: Associate THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ Christine Herrick ----------------------------------------- Title: Vice President Amended and Restated Credit Agreement 80 SCHEDULE III Litigation None. 81 EXHIBIT A-1 [Form of Syndicated Note] PROMISSORY NOTE $_______________ November 25, 1997 New York, New York FOR VALUE RECEIVED, WASHINGTON MUTUAL, INC., a Washington corporation (the "Company"), hereby promises to pay to __________________ (the "Bank"), for account of its respective lending offices provided for by the Credit Agreement referred to below, at the principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, NY 10017, the principal sum of _______________ Dollars (or such lesser amount as shall equal the aggregate unpaid principal amount of the Syndicated Loans made by the Bank to the Company under the Credit Agreement), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Syndicated Loan, at such office, in like money and funds, for the period commencing on the date of such Syndicated Loan until such Syndicated Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Syndicated Loan made by the Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note, endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Syndicated Loans made by the Bank. This Note is one of the Syndicated Notes referred to in the Amended and Restated Four-Year Credit Agreement dated as of November 25, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") between the Company, the lenders party thereto (including the Bank), and The Chase Manhattan Bank, as Administrative Agent, providing for Loans in an aggregate principal amount not to exceed $200,000,000, and evidences Syndicated Loans made by the Bank thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of Syndicated Note 82 the maturity of this Note upon the occurrence of certain events and for prepayments of Syndicated Loans upon the terms and conditions specified therein. Except as permitted by Section 11.06 of the Credit Agreement, this Note may not be assigned by the Bank to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. WASHINGTON MUTUAL, INC. By_________________________ Title: Syndicated Note 83 SCHEDULE OF SYNDICATED LOANS This Note evidences Syndicated Loans made under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and having Interest Periods (if applicable) of the durations set forth below, subject to the payments and prepayments of principal set forth below:
Principal Duration Amount Type of Amount Unpaid Date of of Interest Interest Paid or Principal Notation Made Loan Loan Rate Period Prepaid Amount Made by - ---- --------- ---- -------- -------- ------- --------- --------
Syndicated Note 84 EXHIBIT A-2 [Form of Money Market Note] PROMISSORY NOTE November 25, 1997 New York, New York FOR VALUE RECEIVED, WASHINGTON MUTUAL, INC., a Washington corporation (the "Company"), hereby promises to pay to __________________ (the "Bank"), for account of its respective lending offices provided for by the Credit Agreement referred to below, at the principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, NY 10017, the aggregate unpaid principal amount of the Money Market Loans made by the Bank to the Company under the Credit Agreement, in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Money Market Loan, at such office, in like money and funds, for the period commencing on the date of such Money Market Loan until such Money Market Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and maturity date of each Money Market Loan made by the Bank to the Company, and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note, endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Money Market Loans made by the Bank. This Note is one of the Money Market Notes referred to in the Amended and Restated Four-Year Credit Agreement dated as of November 25, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") between the Company, the lenders party thereto (including the Bank), and The Chase Manhattan Bank, as Administrative Agent, providing for Loans in an aggregate principal amount not to exceed $200,000,000, and evidences Money Market Loans made by the Bank thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Money Market Loans upon the terms and conditions specified therein. Money Market Note 85 - 86 - Except as permitted by Section 11.06 of the Credit Agreement, this Note may not be assigned by the Bank to any other Person. This Note shall be governed by, and construed in accordance with, the law of the State of New York. WASHINGTON MUTUAL, INC. By_________________________ Title: Money Market Note 86 - 87 - SCHEDULE OF MONEY MARKET LOANS This Note evidences Money Market Loans made under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and maturing on the dates set forth below, subject to the payments and prepayments of principal set forth below:
Principal Amount Maturity of Type Date Amount Unpaid Date Notation of Interest of Paid or Principal Made Loan Loan Rate Loan Prepaid Amount Made by - ---- --------- ---- -------- -------- ------- --------- -------
Money Market Note 87 EXHIBIT B [Form of Opinion of Counsel to the Company] November 25, 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as counsel to Washington Mutual, Inc. (the "Company"), in connection with (i) the Amended and Restated Four-Year Credit Agreement (the "Credit Agreement") dated as of November 25, 1997, between the Company, the lenders party thereto, and The Chase Manhattan Bank, as Administrative Agent, providing for loans to be made by said lenders to the Company in an aggregate principal amount not exceeding $200,000,000 and (ii) the instruments and other documents referred to in the next following paragraph. Terms used herein without definition have the meanings assigned to them in the Credit Agreement. This opinion is being delivered pursuant to Section 6.01(c) of the Credit Agreement. In rendering the opinions expressed below, we have examined the following agreements, instruments and other documents: (a) the Credit Agreement; (b) the Notes executed and delivered on the date hereof (if any); and (c) such records of the Company and such other documents as we have deemed necessary as a basis for the opinions expressed below. The Credit Agreement and such Notes are collectively referred to as the "Credit Documents". In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon statements of governmental officials and upon representations made in or pursuant to the Credit Documents and certificates of appropriate representatives of the Company. Opinion of Counsel to the Company 88 - 89 - In rendering the opinions expressed below, we have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the Company): (i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents; (ii) all signatories to such documents have been duly authorized and all signatories have the legal capacity to execute and deliver such documents; and (iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform such documents. For purposes of this letter, when we render an opinion "to our knowledge" or as to which we have "knowledge", we have based such opinion on (i) inquiries of the attorneys in our firm who routinely work on matters related to the Company and (ii) inquiries of representatives of the Company whom we reasonably believe to have knowledge about the subject matter of the inquiries. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of Washington. Each Subsidiary of the Company listed in Annex I hereto is a corporation duly organized and validly existing under the laws of the respective state indicated opposite its name in Annex I hereto. 2. The Company has all requisite corporate power to execute and deliver, and to perform its obligations under, the Credit Documents. The Company has all requisite corporate power to borrow under the Credit Agreement. 3. The execution, delivery and performance by the Company of each Credit Document, and the borrowings by the Company under the Credit Agreement, have been duly Opinion of Counsel to the Company 89 - 90 - authorized by all necessary corporate action on the part of the Company. 4. Each Credit Document has been duly executed and delivered by the Company. 5. If the Credit Documents were stated to be governed by and construed in accordance with the law of the State of Washington, or if a court of the State of Washington were to apply the law of the State of Washington to the Credit Documents, each Credit Document would constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. 6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Washington is required on the part of the Company for the execution, delivery or performance by the Company of any of the Credit Documents or for the borrowings by the Company under the Credit Agreement. 7. The execution, delivery and performance by the Company of, and the consummation by the Company of the transactions contemplated by, the Credit Documents do not and will not (a) violate any provision of its Articles of Incorporation or by-laws, (b) violate any applicable law, rule or regulation, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to the Company or any of its Subsidiaries of which we have knowledge or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which we have knowledge to which the Company or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject. 8. Except as set forth in Schedule III to the Credit Opinion of Counsel to the Company 90 - 91 - Agreement, we have no knowledge of any legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, pending or threatened against the Company or any of its Subsidiaries or any of their respective Properties that are reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 11.03 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves negligence, recklessness, willful misconduct or unlawful conduct. (B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of Washington) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second paragraph of Section 11.01 of the Credit Agreement, (iv) the first sentence of Section 11.10, (v) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents, (vi) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement, (vii) Section 11.11 of the Credit Agreement and (viii) the enforceability of provisions in the Credit Documents that purport to establish evidentiary standards. (D) The courts of the State of Washington will consider extrinsic evidence of circumstances surrounding the making of the Credit Documents to ascertain the intent of the parties in using the language employed in the Credit Documents, regardless of whether or not the language used in the Credit Documents is plain and unambiguous on its face, and may incorporate additional or supplementary terms into the Credit Documents. Opinion of Counsel to the Company 91 - 92 - (E) We call to your attention that, under Washington law, where a provision of contract permits one party to the contract to recover attorneys' fees, such provision will be construed to permit the prevailing party in any action to enforce the contract to recover its reasonable attorneys' fees. (F) We have assumed that any compensation owed pursuant to Section 5.05 of the Credit Agreement is reasonable in amount, reflecting compensation for actual economic loss. We also not that in McCausland v. Bankers Life Insurance, 110 Wn.2d 716, 757 P.2d 941 (1988) and in Rodgers v. Rainier National Bank, 111 Wn.2d 232, 757 P.2d 976 (1988), the Washington Supreme Court indicated that, at least under certain circumstances, a lender may lose the right to a prepayment fee by accelerating the debt. (G) Our opinion in paragraphs 6 and 7(b) above is not intended to address the issue as to whether any filing or registrations would be required under applicable securities laws in connection with the sale, assignment or other transfer by a Bank of any Loan or Note or any interest or participation therein. (H) We note that, under Washington law, if a Bank is deemed to be transacting business as a foreign corporation in the State of Washington without being qualified to do so, it will not be entitled to commence a proceeding in the courts in this state with respect to the Credit Documents unless it qualifies to transact business as a foreign corporation under the Washington Business Corporation Act and under Title 30 of the Revised Code of Washington (Banks and Trust Companies), to the extent such Title is applicable to such Bank. We further note, however, that no Bank will be subject to the requirement to qualify to transact business as a foreign corporation solely by reason of the execution, delivery, performance or enforcement of the Credit Documents. The foregoing opinions are limited to matters involving the Federal laws of the United States and the law of the State of Washington, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our clients, this opinion letter is, pursuant to Section 6.01(c) of the Credit Agreement, provided to you by us in our capacity as counsel to the Company and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Opinion of Counsel to the Company 92 - 93 - Very truly yours, Opinion of Counsel to the Company 93 EXHIBIT C [Form of Opinion of Special New York Counsel to Chase] November 25, 1997 To the Banks party to the Credit Agreement referred to below and The Chase Manhattan Bank, as Administrative Agent Ladies and Gentlemen: We have acted as special New York counsel to The Chase Manhattan Bank ("Chase") in connection with the Amended and Restated Four-Year Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc. (the "Company"), the lenders party thereto, and Chase, as Administrative Agent, providing for loans to be made by said lenders to the Company in an aggregate principal amount not exceeding $200,000,000. Terms defined in the Credit Agreement are used herein as defined therein. This opinion is being delivered pursuant to Section 6.01(d) of the Credit Agreement. In rendering the opinions expressed below, we have examined the following agreements, instruments: (a) the Credit Agreement; and (b) the Notes executed and delivered on the date hereof (if any). The Credit Agreement and such Notes are collectively referred to as the "Credit Documents". In our examination, we have assumed the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon representations made in or pursuant to the Credit Documents. Opinion of Special Counsel to Chase 94 - 95 - In rendering the opinions expressed below, we have assumed, with respect to all of the Credit Documents, that: (i) each of the Credit Documents has been duly authorized by, has been duly executed and delivered by, and (except to the extent set forth in the opinions below as to the Company) constitutes legal, valid, binding and enforceable obligations of, all of the parties thereto; (ii) all signatories to the Credit Documents have been duly authorized; and (iii) all of the parties to the Credit Documents are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the Credit Documents. Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that each of the Credit Documents constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing. The foregoing opinions are subject to the following comments and qualifications: (A) The enforceability of Section 11.03 of the Credit Agreement may be limited by laws limiting the enforceability of provisions exculpating or exempting a party, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct. (B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain Opinion of Counsel to the Company 95 - 96 - circumstances. (C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Bank is located (other than the State of New York) that limit the interest, fees or other charges such Bank may impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second sentence of Section 11.01 of the Credit Agreement, (iv) the second sentence of Section 11.10 of the Credit Agreement, insofar as such sentence relates to the subject matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents, and (v) the waiver of inconvenient forum set forth in Section 11.10 of the Credit Agreement with respect to proceedings in the United States District Court for the Southern District of New York. The foregoing opinions are limited to matters involving the Federal laws of the United States and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction. At the request of our client, this opinion letter is, pursuant to Section 6.01(d) of the Credit Agreements provided to you by us in our capacity as special New York counsel to Chase and may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent. Very truly yours, CDP/RMG Opinion of Special Counsel to Chase 96 EXHIBIT D [Form of Money Market Quote Request] [Date] To: The Chase Manhattan Bank, as Administrative Agent From: Washington Mutual, Inc. Re: Money Market Quote Request Pursuant to Section 2.03 of the Amended and Restated Four- Year Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc., the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent, we hereby give notice that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Borrowing Quotation Interest Date Date[*1] Amount[*2] Type[*3] Period[*4] - --------- --------- ---------- -------- ---------- Terms used herein have the meanings assigned to them in the Credit Agreement. WASHINGTON MUTUAL, INC. By_________________________ Title: - ---------- * All numbered footnotes appear on the last page of this Exhibit. Money Market Quote Request 97 - 98 - [1] For use if a Set Rate in a Set Rate Auction is requested to be submitted before the Borrowing Date. [2] Each amount must be $10,000,000 or a larger multiple of $1,000,000. [3] Insert either "LIBO Margin" (in the case of LIBOR Market Loans) or "Set Rate" (in the case of Set Rate Loans). [4] A whole number of months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of not less than 7 days after the making of such Set Rate Loan and ending on a Business Day. Money Market Quote Request 98 EXHIBIT E [Form of Money Market Quote] To: The Chase Manhattan Bank, as Administrative Agent Attention: Re: Money Market Quote to Washington Mutual, Inc. (the "Company") This Money Market Quote is given in accordance with Section 2.03(c) of the Amended and Restated Four-Year Credit Agreement dated as of November 25, 1997 (the "Credit Agreement") between Washington Mutual, Inc., the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. In response to the Company's invitation dated __________, 199_, we hereby make the following Money Market Quote(s) on the following terms: 1. Quoting Bank: 2. Person to contact at Quoting Bank: 3. We hereby offer to make Money Market Loan(s) in the following principal amount[s], for the following Interest Period(s) and at the following rate(s): Borrowing Quotation Interest Date Date[*1] Amount[*2] Type[*3] Period[*4] Rate[*5] - --------- -------- ---------- -------- ---------- -------- provided that the Company may not accept offers that would result in the undersigned making Money Market Loans pursuant hereto in excess of $___________ in the aggregate (the "Money Market Loan Limit"). - ---------- * All numbered footnotes appear on the last page of this Exhibit. Money Market Quote 99 - 100 - We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement, irrevocably obligate(s) us to make the Money Market Loan(s) for which any offer(s) (is/are) accepted, in whole or in part (subject to the third sentence of Section 2.03(e) of the Credit Agreement and any Money Market Loan Limit specified above). Very truly yours, [NAME OF BANK] By_________________________ Authorized Officer Dated: __________, ____ - ---------- [1] As specified in the related Money Market Quote Request. [2] The principal amount bid for each Interest Period may not exceed the principal amount requested. Bids must be made for at least $5,000,000 (or a larger multiple of $1,000,000). [3] Indicate "LIBO Margin" (in the case of LIBOR Market Loans) or "Set Rate" (in the case of Set Rate Loans). [4] A whole number of months, in the case of a LIBOR Market Loan or, in the case of a Set Rate Loan, a period of not less than 7 days after the making of such Set Rate Loan and ending on a Business Day, as specified in the related Money Market Quote Request. [5] For a LIBOR Market Loan, specify margin over or under the London interbank offered rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of interest per annum (rounded to the nearest 1/10,000 of 1%). Money Market Quote 100 EXHIBIT F [Form of Confidentiality Agreement] CONFIDENTIALITY AGREEMENT [Date] [Insert Name and Address of Prospective Participant or Assignee] Re: Amended and Restated Four-Year Credit Agreement dated as of November 25, 1997 (the "Credit Agreement"), between Washington Mutual, Inc. (the "Company"), the lenders party thereto and The Chase Manhattan Bank, as Administrative Agent. Dear Ladies and Gentlemen: As a Bank party to the Credit Agreement, we have agreed with the Company pursuant to Section 11.12 of the Credit Agreement to use reasonable precautions to keep confidential, except as otherwise provided therein, all non-public information identified by the Company as being confidential at the time the same is delivered to us pursuant to the Credit Agreement. As provided in said Section 11.12, we are permitted to provide you, as a prospective [holder of a participation in the Loans (as defined in the Credit Agreement)] [assignee Bank], with certain of such non-public information subject to the execution and delivery by you, prior to receiving such non-public information, of a Confidentiality Agreement in this form. Such information will not be made available to you until your execution and return to us of this Confidentiality Agreement. Accordingly, in consideration of the foregoing, you agree (on behalf of yourself and each of your affiliates, directors, officers, employees and representatives and for the benefit of us and the Company) that (A) such information will not be used by you except in connection with the proposed [participation][assignment] mentioned above and (B) you shall use reasonable precautions, in accordance with your customary procedures for handling confidential information and in accordance with safe and sound banking practices, to keep such Confidentiality Agreement 101 - 102 - information confidential, provided that nothing herein shall limit the disclosure of any such information (i) after such information shall have become public (other than through a violation of Section 11.12 of the Credit Agreement), (ii) to the extent required by statute, rule, regulation or judicial process, (iii) to your counsel or to counsel for any of the Banks or the Administrative Agent, (iv) to bank examiners (or any other regulatory authority having jurisdiction over any Bank or the Administrative Agent), or to auditors or accountants, (v) to the Administrative Agent or any other Bank (or to Chase Securities, Inc.), (vi) in connection with any litigation to which you or any one or more of the Banks or the Administrative Agent are a party, or in connection with the enforcement of rights or remedies under the Credit Agreement, (vii) to a subsidiary or affiliate of yours as provided in Section 11.12(a) of the Credit Agreement or (viii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to you a Confidentiality Agreement substantially in the form hereof and that in no event shall you be obligated to return any materials furnished to you pursuant to this Confidentiality Agreement. If you are a prospective assignee, your obligations under this Confidentiality Agreement shall be superseded by Section 11.12 of the Credit Agreement on the date upon which you become a Bank under the Credit Agreement pursuant to Section 11.06(b) thereof. Please indicate your agreement to the foregoing by signing as provided below the enclosed copy of this Confidentiality Agreement and returning the same to us. Very truly yours, [INSERT NAME OF BANK] By_________________________ The foregoing is agreed to as of the date of this letter. Confidentiality Agreement 102 - 103 - [INSERT NAME OF PROSPECTIVE PARTICIPANT OR ASSIGNEE] By_________________________ Confidentiality Agreement 103 EXHIBIT G [Form of Assignment and Acceptance] ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated Four-Year Credit Agreement, dated as of November 25, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement"), between Washington Mutual, Inc., a Washington corporation (the "Company"), the lenders named therein, and The Chase Manhattan Bank, as agent for such lenders (in such capacity, the "Administrative Agent"). Terms defined in the Credit Agreement are used herein as defined therein. ________________ (the "Assignor") and ________________ (the "Assignee") agree as follows: 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date as set forth in Schedule 1 hereto (the "Effective Date"), an interest (the "Assigned Interest") in and to the Assignor's rights and obligations under the Credit Agreement with respect to those credit facilities contained in the Credit Agreement as are set forth on Schedule 1 (individually, an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal amount and percentage for each Assigned Facility as set forth on Schedule 1. 2. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument or document furnished pursuant thereto, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that it is the beneficial owner of the interest being assigned by it hereunder and that it has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company, any of its Subsidiaries or any other obligation or the performance or observance by the Company, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; and (iii) if any Note(s) are held by it to evidence the Assigned Facilities, attaches such Note(s) and requests that the Notice of Assignment 104 - 105 - Administrative Agent exchange such Note(s) for a new Note or Notes payable to the Assignor (if the Assignor has retained any interest in the Assigned Facility) and a new Note or Notes payable to the Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 7.02 thereof, the financial statements delivered pursuant to Section 8.01 thereof, if any, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (iv) appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (v) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by the Administrative Agent pursuant to Section 11.06(b) of the Credit Agreement, effective as of the Effective Date (which date shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance by the Administrative Agent), together with (if the Assignee is not already a Bank under the Credit Agreement), an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. 5. Upon such acceptance, from and after the Effective Date, the Administrative Agent shall make all payments in respect Notice of Assignment 105 - 106 - of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee which accrue subsequent to the Effective Date. 6. From and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and shall be bound by the provisions thereof and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement except as provided in Section 11.07 of the Credit Agreement. 7. This Assignment and Acceptance shall be governed by and construed in accordance with the law of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Assignment and Acceptance by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance relating to the Amended and Restated Four-Year Credit Agreement, dated as of November 25, 1997 between Washington Mutual, Inc., the lenders named therein and The Chase Manhattan Bank, as administrative agent for the Banks (in such capacity, the "Administrative Agent") Name of Assignor: Name of Assignee: Effective Date of Assignment: Credit Principal Percentage Facility Assigned Amount Assigned Assigned ----------------- --------------- ---------- Notice of Assignment 106 - 107 - [ASSIGNEE] [ASSIGNOR] By:___________________________ By:_____________________________ Title: Title: [Agreed and] Accepted: THE CHASE MANHATTAN BANK By:___________________________ Title: [Agreed: WASHINGTON MUTUAL, INC. By:___________________________ Title:] Notice of Assignment EX-21 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21 WASHINGTON MUTUAL, INC. SUBSIDIARY LISTING WASHINGTON MUTUAL BANK Incorporated under the laws of the state of Washington DBA: Washington Mutual Bank Washington Mutual Savings Bank Enterprise Bank Western Bank WASHINGTON MUTUAL BANK, F.A. Federally chartered under the laws of the United States (Home office located in Stockton, California) WASHINGTON MUTUAL BANK fsb Federally chartered under the laws of the United States (Home office located in Lake Oswego, Oregon) DBA: Washington Mutual Bank fsb FIRST COMMUNITY INDUSTRIAL BANK Incorporated under the laws of the state of Colorado GREAT WESTERN THRIFT AND LOAN Incorporated under the laws of the state of Utah ARISTAR INSURANCE COMPANY Incorporated under the laws of the state of South Carolina ARISTAR LIFE INSURANCE COMPANY Incorporated under the laws of the state of Utah CITY HOLDINGS REINSURANCE LIFE COMPANY Incorporated under the laws of the state of Arizona EX-23 7 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT - -------------------------------------------------------------------------------- We consent to the incorporation by reference in Registration Statement No. 33-93850 of Washington Mutual, Inc. on Form S-3; Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) of Washington Mutual, Inc.; Registration Statement No. 33-86840 of Washington Mutual, Inc. on Form S-8; and Registration Statement No. 333-37685 of Washington Mutual, Inc. on Form S-3 of our report dated February 20, 1998, appearing in the Annual Report on Form 10-K of Washington Mutual, Inc. for the year ended December 31, 1997. Deloitte & Touche LLP Seattle, Washington March 18, 1998 EX-23.1 8 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Washington Mutual, Inc., as successor to Keystone Holdings, Inc.: We consent to incorporation by reference in Registration Statement No. 33-93850 of Washington Mutual, Inc. on Form S-3, Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) of Washington Mutual, Inc., Registration Statement No. 33-86840 of Washington Mutual, Inc. on Form S-8, and Registration Statement No. 333-37685 of Washington Mutual, Inc. on Form S-3 of our report dated January 26, 1996, except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996, relating to the consolidated statements of earnings, stockholder's equity, and cash flows for the year ended December 31, 1995, which report appears in the December 31, 1997, annual report on Form 10-K of Washington Mutual, Inc. KPMG Peat Marwick LLP Los Angeles, California March 18, 1998 EX-23.2 9 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registrations Statements on Form S-3 (Nos. 33-93850 and 333-37685), on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) and on Form S-8 (No. 33-86840) of Washington Mutual, Inc. of our report dated January 22, 1997, except as to Note 28, which is as of March 7, 1997, relating to the consolidated financial statements of Great Western Financial Corporation, which appears on page 62 of this Form 10-K. Price Waterhouse LLP Los Angeles, California March 18, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
9 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 1,285,222 1,032,379 275,668 632,976 0 0 23,364 1,647 11,373,922 16,095,343 12,779,614 4,479,056 12,699,653 4,545,125 67,810,651 61,831,109 670,494 677,141 96,981,099 87,426,497 50,986,017 52,666,914 19,379,924 22,311,406 1,687,364 1,480,694 19,618,723 5,974,395 0 0 118,063 283,063 1,943,294 1,664,870 3,247,714 3,045,155 96,981,099 87,426,497 5,205,507 4,621,153 1,507,825 1,677,373 97,632 88,564 6,810,964 6,387,090 2,166,104 2,240,302 4,154,491 3,814,143 2,656,473 2,572,947 207,139 392,435 7,718 8,040 2,261,608 2,428,599 901,126 410,077 481,778 230,100 0 0 0 0 481,778 230,100 1.87 0.81 1.86 0.81 7.77 7.76 601,374 574,997 0 0 0 0 845,275 485,364 677,141 598,124 224,872 341,105 24,680 26,610 670,494 677,141 90,453 118,628 0 0 580,041 558,513
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