-----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, Og3wWQRqVBLcg5llLsrU9JLzM3kg2LNgcAB/U7RpDj6/xNtp1DETXghLVtyvkkVl A5F6Z7yCt+rnAatCo8Ztmg== 0000891020-97-000030.txt : 19970127 0000891020-97-000030.hdr.sgml : 19970127 ACCESSION NUMBER: 0000891020-97-000030 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970124 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: 424B4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17291 FILM NUMBER: 97509925 BUSINESS ADDRESS: STREET 1: 1201 THIRD AVENUE CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064612000 MAIL ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: 1201 THIRD AVE CITY: SEATTLE STATE: WA ZIP: 98101 424B4 1 FINAL PROSPECTUS 1 Filed Pursuant to Rule 424(b)4 PROSPECTUS Registration Statement No. 333-17291 - ----------------- 14,589,649 SHARES [WASHINGTON MUTUAL, INC. LOGO] COMMON STOCK ------------------------ Of the 14,589,649 shares (the "Shares") of common stock, no par value ("Common Stock"), of Washington Mutual, Inc., a Washington corporation ("Washington Mutual" or the "Company"), offered hereby, 14,000,000 Shares are being offered by the Federal Deposit Insurance Corporation (the "FDIC"), for the account of the FSLIC Resolution Fund (the "FRF") and 589,649 Shares are being offered by certain other stockholders of the Company identified herein (collectively with the FRF, the "Selling Stockholders"). See "Selling Stockholders." The FDIC is a government-controlled corporation and instrumentality of the United States of America that manages the FRF(the FDIC in its capacity as manager of the FRF is referred to herein as the "FDIC-Manager"). The Shares were issued in connection with a recent transaction pursuant to which Washington Mutual acquired Keystone Holdings, Inc. ("Keystone Holdings") by merger, as a result of which the direct and indirect subsidiaries of Keystone Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company. See "The Keystone Transaction." The Company will not receive any proceeds from the sale of the Shares hereunder. Of the 14,589,649 Shares offered hereby, 12,329,649 Shares are being offered in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 2,260,000 Shares are being offered outside the United States and Canada by the International Managers (the "International Offering" and, together with the U.S. Offering, the "Offerings"). The initial public offering price and the aggregate underwriting discount per share are identical for the Offerings. See "Underwriting." The Company's Common Stock is traded on the National Market tier of The Nasdaq Stock Market (the "Nasdaq Stock Market") under the symbol "WAMU." On January 22, 1997, the last reported sale price of the Common Stock was $48 1/2 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) - ------------------------------------------------------------------------------------------------- Per Share...................... $47.50 $.95 $46.55 - ------------------------------------------------------------------------------------------------- Total.......................... $693,008,327 $13,860,167 $679,148,161 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have severally agreed to indemnify the several Underwriters (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deduction of expenses payable by the Company estimated to be $720,000. ------------------------ The Shares are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York, on or about January 28, 1997. ------------------------ MERRILL LYNCH & CO. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. ------------------------ The date of this Prospectus is January 22, 1997. 2 MAP OF THE STATES OF WASHINGTON, OREGON, CALIFORNIA, UTAH, IDAHO, MONTANA, ARIZONA, COLORADO AND NEVADA AND A TABLE SETTING FORTH THE NUMBERS OF THE COMPANY'S BRANCHES, LOAN PRODUCTION CENTERS, COMMERCIAL BANK OFFICES AND NUMBER OF HOUSEHOLDS SERVED. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKETS' SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 3 PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus or in documents incorporated herein by reference and is not intended to be complete and is qualified in its entirety by the more detailed information contained elsewhere in this Prospectus and the other documents incorporated herein by reference. Unless otherwise indicated, all references herein to Washington Mutual or the Company refer to the combined entity including Keystone Holdings on a restated basis as if the respective companies had been combined for all periods presented. THE COMPANY With a history dating back to 1889, Washington Mutual is a regional financial services company committed to serving consumers and small to mid-sized businesses throughout the Western United States. Through its subsidiaries, the Company engages in the following activities: - MORTGAGE LENDING AND CONSUMER BANKING ACTIVITIES. Through its principal subsidiaries, Washington Mutual Bank ("WMB"), American Savings Bank, F.A., and Washington Mutual Bank fsb ("WMBfsb"), at September 30, 1996, the Company operated 410 financial centers and 94 loan centers offering a full complement of mortgage lending and consumer banking products and services. For the nine months ended September 30, 1996, WMB was the leading originator of first-lien single-family residential loans in Washington and Oregon, and ASB was the second largest such originator in California. - COMMERCIAL BANKING ACTIVITIES. Through the commercial banking division of WMB, at September 30, 1996, the Company operated 47 full-service business branches offering a range of commercial banking products and services to small to mid-sized businesses. WMB commenced its commercial banking activities through the acquisition of Enterprise Bank of Bellevue, Washington ("Enterprise") in 1995 and Western Bank of Coos Bay, Oregon ("Western") in 1996. - INSURANCE ACTIVITIES. Through WM Life Insurance Co. ("WM Life") and ASB Insurance Agency, Inc. ("ASB Insurance"), the Company underwrites and sells annuities and sells a range of life insurance contracts and selected property and casualty insurance policies. - BROKERAGE ACTIVITIES. Through ASB Financial Services, Inc. ("ASB Financial"), Murphey Favre, Inc. ("Murphey Favre") and Composite Research and Management Co. ("Composite Research"), the Company offers full service securities brokerage and acts as the investment advisor to and the distributor of mutual funds. The Company operates in Washington, California, Oregon, Utah, Idaho, Montana, Arizona, Colorado and Nevada. These operations constitute one of the largest banking franchises in the Western United States and serve more than 1.3 million households. At September 30, 1996, the Company had consolidated assets of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of $2.4 billion. In December 1996, Washington Mutual consummated the merger of Keystone Holdings with and into the Company and certain other transactions in connection therewith (the "Transaction") and thereby acquired ASB. Washington Mutual issued 47,883,333 shares of Common Stock in the Transaction. At September 30, 1996, ASB had assets of $21.3 billion and deposits of $12.9 billion and operated 158 branches and 63 loan centers, substantially all of which were located in California. Washington Mutual intends to continue operating ASB under the name "American Savings Bank" in ASB's markets and has retained a significant number of ASB's management team to guide ASB's operations. Washington Mutual intends to introduce its consumer banking products and approaches throughout ASB's branch system and to expand ASB's loan origination capabilities. The principal executive offices of Washington Mutual are located in the Washington Mutual Tower, 1201 Third Avenue, Suite 1500, Seattle, Washington 98101, and its telephone number is (206) 461-2000. 3 4 BUSINESS STRATEGY In 1995, Washington Mutual introduced a revised strategic plan designed to position the Company to achieve higher levels of profitability and growth. Elements of this strategic plan include strengthening Washington Mutual's consumer banking franchise throughout the West; expanding the commercial banking franchise; managing Washington Mutual's sensitivity to movements in interest rates; maintaining asset quality; and operating more efficiently. Acquisitions have played an integral role in Washington Mutual's past growth and business line expansion. Since 1988, Washington Mutual has acquired numerous financial institutions and substantial assets, including two commercial banks, which significantly expanded its geographic reach beyond the state of Washington. The Company anticipates that acquisitions will continue to be an important element of its strategic plan in the future. The acquisition of ASB (the Company's largest acquisition to date) allowed Washington Mutual to expand into California with a well-capitalized institution with similar business strategies, strong management and complementary product capabilities. Washington Mutual believes that the acquisition of ASB satisfies elements of the Company's strategic plan, including: - STRENGTHENS CONSUMER BANKING FRANCHISE THROUGHOUT THE WESTERN UNITED STATES. The acquisition of ASB gave Washington Mutual immediate access to the consumer banking market in California. ASB has a state-wide presence in California, which at September 30, 1996, included 158 branches and 63 loan centers, predominantly concentrated in the Los Angeles and San Francisco areas. In addition, the acquisition of ASB added more than 575,000 new households to Washington Mutual's customer base. Although ASB has primarily been a residential mortgage lender, the Company intends to introduce its consumer banking products into the ASB system during 1997 and 1998. - DECREASES WASHINGTON MUTUAL'S SENSITIVITY TO INTEREST RATE MOVEMENTS. ASB's loan and investment portfolios consist primarily of adjustable-rate mortgages ("ARMs") and adjustable-rate mortgage-backed securities ("MBS"). These portfolios complement Washington Mutual's pre-Transaction portfolios, which contained a much higher percentage of fixed-rate mortgages. The addition of ASB's loan and investment portfolios to Washington Mutual's portfolios accelerated the Company's efforts to restructure its portfolios to reduce the sensitivity of its results of operations to changes in prevailing interest rates. BACKGROUND OF THE TRANSACTION HISTORY OF KEYSTONE HOLDINGS. Keystone Holdings commenced operations in December 1988 as an indirect holding company for ASB. ASB was formed by Keystone Holdings Partners L.P. ("KHP") to effect the December 1988 acquisition (the "1988 Acquisition") of certain assets and liabilities of the failed savings and loan association subsidiary (the "Failed Association") of Financial Corporation of America. In connection with the 1988 Acquisition, the Federal Savings and Loan Insurance Corporation ("FSLIC") received warrants (the "Warrants"), that represented the right to purchase capital stock of ASB's corporate parent, which is 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 Federal Savings and Loan Association ("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 divested by Keystone Holdings prior to consummation of the Transaction. THE TRANSACTION. In the Transaction, the Company issued 47,883,333 shares of Common Stock as follows: 25,883,333 shares were issued to KHP, the sole shareholder of Keystone Holdings, which shares were subsequently distributed to the general and limited partners of KHP (the "KHP Investors"); 14,000,000 shares were issued to the FRF in exchange for the Warrants; and 8,000,000 shares (the "Litigation Escrow Shares") were issued to an escrow for the benefit of the KHP Investors and the FRF (the "Litigation Escrow"). Shares will be released from the Litigation Escrow to the extent that Washington Mutual receives net cash proceeds ("Case Proceeds") from certain litigation that Keystone Holdings and certain of its subsidiaries were pursuing against the United States, which litigation became an asset of the Company in the 4 5 Transaction. See "The Keystone Transaction -- The Litigation Escrow." The Transaction was treated as a pooling-of-interests for accounting purposes. At January 22, 1997, Robert M. Bass, the single largest KHP Investor, beneficially owned 9,478,300 shares of Common Stock, and the contingent right to receive up to 1,901,276 Litigation Escrow Shares, for an aggregate of 11,379,576 shares of Common Stock (approximately 9.0 percent of the Common Stock then outstanding). Mr. Bass is not selling any shares of Common Stock in the Offerings. After the sale of all the Shares offered hereby by the FDIC-Manager on behalf of the FRF, the FRF will no longer beneficially own any shares of Common Stock, but will have the contingent right to receive up to 2,808,000 Litigation Escrow Shares. See "Selling Stockholders." Holders of contingent rights to receive Litigation Escrow Shares will have the power to direct the Escrow Agent to vote such Litigation Escrow Shares. See "The Keystone Transaction -- The Litigation Escrow." As part of the Transaction, Washington Mutual, KHP and the FDIC-Manager entered into a Registration Rights Agreement (the "Registration Rights Agreement"), which provides that Washington Mutual will use its best efforts to register for resale under the Securities Act shares of Common Stock issued in the Transaction. Pursuant to the Registration Rights Agreement, Washington Mutual agreed to file the registration statement of which this Prospectus is a part (together with all exhibits and amendments thereto, the "Registration Statement") and use its best efforts to cause it to be declared effective by the Securities and Exchange Commission (the "Commission"). Pursuant to the Registration Rights Agreement, Washington Mutual has also agreed to file with the Commission and use its best efforts to cause to become effective as soon as practicable after nine months from the closing of the Transaction, a shelf registration statement (the "Initial Shelf Registration") for sale from time to time of all shares of Common Stock issued in the Transaction that are not sold hereunder, other than the Litigation Escrow Shares (the "Registrable Common"). Washington Mutual also agreed in the Registration Rights Agreement to file with the Commission as soon as practicable after distribution of the Litigation Escrow Shares, and use its best efforts to cause to become effective, an additional shelf registration statement for the sale of such shares. During the three-year period following the effectiveness of the Initial Shelf Registration, persons who hold 15 percent or more of the Registrable Common may require the Company, an aggregate of four times, to facilitate an underwritten public offering of the Registrable Common; and each of the KHP Investors and the FRF (or their transferees) are entitled to notice of any registrations by the Company of Common Stock for sale under the Securities Act for its own account (with certain exceptions) and to include their shares therein. RECENT DEVELOPMENTS RECENT OPERATING RESULTS. The Company announced 1996 earnings of $114.3 million, or 85 cents per share (fully diluted), compared with $289.9 million, or $2.42 per share (fully diluted) in 1995. Earnings for the year were reduced $294.6 million by an after-tax charge of $209.8 million ($205.8 million of which was taken during the fourth quarter and $4.0 million during the third quarter) for Transaction-related expenses, including the addition of $125.0 million (pre-tax) to the reserve for loan losses, and by a third quarter after-tax charge of $84.8 million representing the Company's portion of the one-time Savings Association Insurance Fund ("SAIF") assessment. See "The Keystone Transaction-Transaction Expenses and Addition to Reserve for Loan Losses." For the fourth quarter, earnings were reduced to a loss of $87.9 million or 81 cents per share by the above referenced charge for Transaction-related expenses, including the addition of $125.0 million (pre-tax) to the reserve for loan losses. Although net income was down due to one-time charges, net interest income for the fourth quarter of 1996 increased 13 percent to $307.6 million from $272.0 million for the comparable quarter in the prior year. For the year ended December 31, 1996, net interest income increased to $1.2 billion from $992.7 million in 1995. The spread in the fourth quarter was 2.76 percent compared with 2.55 percent for the comparable period in the prior year. At December 31, 1996, the Company had total assets of $44.6 billion compared to $42.0 billion at December 31, 1995. The increase was primarily the result of growth in the Company's loan portfolio. Total loans (net of allowance for loan losses) were $30.3 billion at December 31, 1996, compared to $24.2 billion at December 31, 1995. The Company's larger asset size helped keep the ratio of total nonperforming assets to 5 6 total assets at 0.74 percent at December 31, 1996, the same level as at September 30, 1996, and down from 0.81 percent at December 31, 1995. Deposits were $24.1 billion at December 31, 1996, which was a reduction from $24.5 billion at December 31, 1995. At December 31, 1996, stockholders' equity was $2.4 billion, or 5.38 percent of assets. Capital ratios of the Company's banking subsidiaries continued to exceed the applicable FDIC or OTS requirements for classification as "well-capitalized" institutions, the highest regulatory standard. REDEMPTION OF KEYSTONE ENTITIES PREFERRED STOCK AND DEBT SECURITIES. In connection with the Transaction, the Company redeemed $20.5 million of debt securities and $80.0 million of nonconvertible preferred stock issued by New American Capital, Inc. ("New Capital"), an indirect subsidiary of Keystone Holdings. Washington Mutual has also given the required notices to redeem in January 1997 $344.0 million of additional debt securities issued by New Capital. By redeeming such equity and debt, management believes it can significantly reduce its overall cost of funds. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Liquidity." UTAH FEDERAL MERGER. On November 30, 1996, the Company consummated a merger of Utah Federal Savings Bank, a federal savings bank ("Utah Federal"), with and into WMBfsb (the "Utah Federal Merger"). The Company issued 347,176 shares of Common Stock in the Utah Federal Merger. At September 30, 1996, Utah Federal operated five branches and two loan production offices in Utah and had assets of $122.2 million, deposits of $106.9 million and stockholders' equity of $11.9 million. UNITED WESTERN MERGER. On September 6, 1996, Washington Mutual entered into an agreement to acquire United Western Financial Group, Inc. of Salt Lake City ("United Western") and its subsidiaries, including United Savings Bank, Uniwest Service Corporation and Western Mortgage Loan Corporation, for $80.3 million in cash (the "United Western Merger"), subject to certain adjustments. United Western operates eight branches in Utah, one branch in Idaho and seven loan production offices. At September 30, 1996, United Western had assets of $414.9 million, deposits of $294.4 million and stockholders' equity of $53.8 million. The United Western Merger was consummated on January 15, 1997. RECENT FEDERAL LEGISLATION. On September 30, 1996, President Clinton signed legislation intended in part to recapitalize the SAIF and to reduce the gap between SAIF premiums and Bank Insurance Fund ("BIF") premiums. The legislation provided for a special one-time assessment on SAIF-insured deposits that were held as of March 31, 1995, including certain deposits acquired after that date. The assessment was designed to bring the SAIF's reserve ratio to the legally required level of $1.25 for every $100 in insured deposits. Prior to this legislation, deposits of Washington Mutual subsidiaries insured through the SAIF were subject to regular FDIC assessments of 23 cents per $100 per year. Beginning in January 1997, deposits of well-capitalized institutions insured through the SAIF will be subject to regular FDIC assessments of 6.48 cents per $100 per year, while deposits of well-capitalized institutions insured through the BIF will be subject to regular FDIC assessments of 1.30 cents per $100 per year. Washington Mutual's special assessment on deposits held by WMB, ASB and WMBfsb resulted in a pretax charge of $124.2 million, which was recorded in the quarter ended September 30, 1996. Based on current levels of deposits, Washington Mutual estimates that the reduction in the regular assessment on its SAIF deposits beginning in 1997 should result in annual savings of approximately $31.2 million. REDEMPTION OF SERIES D PREFERRED STOCK. On November 30, 1996, the Company mailed a notice of redemption to holders of its $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D (the "Series D Preferred Stock"), for redemption of the Series D Preferred Stock on December 31, 1996. The Series D Preferred Stock is redeemable at $103.60 per share or is convertible into 3.8709 common shares per share, or an aggregate of approximately 5.4 million shares of Common Stock. At December 31, 1996, substantially all of the shares of Series D Preferred Stock were converted into shares of Common Stock and the Company redeemed 1,096 shares of Series D Preferred Stock. 6 7 SUMMARY FINANCIAL DATA The following table presents summary supplemental financial data for Washington Mutual. This table is derived from and should be read in conjunction with the Supplemental Consolidated Financial Statements of Washington Mutual and the Notes thereto, which are included elsewhere in this Prospectus. The Transaction was accounted for as a pooling-of-interests. The financial statements presented herein are designated as "supplemental" because generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. The assets, liabilities, and results of operations of Keystone Holdings have been recorded on the books of Washington Mutual at their values as carried on the books of Keystone Holdings, and no goodwill was created. Washington Mutual supplemental financial information contained in this Prospectus has been restated as if the respective companies had been combined for all periods presented. As such, the information presented herein is not comparable to that reflected in the Company's annual report on Form 10-K for the year ended December 31, 1995, or the restated financial statements of the Company contained in the Company's current report on Form 8-K dated October 18, 1996, as amended. Because of the significant increase in Washington Mutual's size as a result of the acquisition early in 1993 of Pacific First Bank, a Federal Savings Bank ("Pacific First") (which was accounted for by the purchase method), the financial results for the years ended and as of December 31, 1995, 1994, and 1993, are not generally comparable to prior periods or dates. The information as of September 30, 1996 and for the nine-month periods ended September 30, 1996 and 1995 is not necessarily indicative of the operating results for the entire year.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------- SUPPLEMENTAL FINANCIAL DATA 1996 1995 1995 1994 1993 1992 1991 - -------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income....................... $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639 Interest expense...................... 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income................... 883,383 720,628 992,650 960,055 986,682 868,480 762,009 Provision for loan losses............. 58,138 57,540 74,987 122,009 158,728 158,537 85,807 Other income.......................... 183,822 152,225 208,339 220,794 246,576 174,365 175,806 Other expense......................... 684,542 525,024 700,514 695,517 687,519 561,688 516,348 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes, extraordinary items, cumulative effect of change in tax accounting method, and minority interest....... 324,525 290,289 425,488 363,323 387,011 322,620 335,660 Income taxes.......................... 97,344 77,877 111,906 109,880 96,034 42,462 45,920 Provision (benefit) for payments in lieu of taxes....................... 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221 Extraordinary items, net of federal income tax effect(1)................ -- -- -- -- (8,953) (4,638) -- Cumulative effect of change in tax accounting method................... -- -- -- -- 13,365 60,045 -- Minority interest in income of consolidated subsidiaries(2)........ (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income............................ $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424 ========== ========== ========== ========== ========== ========== ========== Net income attributable to common stock............................... $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549 ========== ========== ========== ========== ========== ========== ========== Net income per common share:(3) Primary............................. $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20 Fully diluted....................... 1.66 1.69 2.42 2.06 2.36 2.71 2.10 Cash dividends declared per common share(4)............................ 0.66 0.57 0.77 0.70 0.50 0.33 0.28 Common stock dividend payout ratio(4)............................ 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06% Net interest margin................... 2.89 2.55 2.62 2.90 3.31 3.36 3.14 Efficiency ratio...................... 64.14 60.15 58.33 58.90 55.75 53.86 55.06 Return on average assets.............. 0.63 0.68 0.73 0.69 0.84 1.29 0.99 Return on average stockholders' equity.............................. 10.59 12.04 13.44 12.66 15.95 21.05 17.84 Return on average common stockholders' equity.............................. 10.69 12.24 13.73 12.95 16.78 21.05 17.84
7 8
DECEMBER 31, SUPPLEMENTAL FINANCIAL SEPTEMBER 30, ------------------------------------------------------------------------ DATA 1996 1995 1994 1993 1992 1991 - ------------------------- ------------ ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Total assets............. $ 43,711,945 $ 42,026,622 $ 37,481,296 $ 33,614,912 $ 27,678,923 $ 25,531,041 Available-for-sale securities............. 10,063,100 12,154,725 4,282,160 1,751,905 -- -- Held-to-maturity securities............. 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573 Loans: Residential............ 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201 Residential construction......... 668,976 615,814 549,271 430,215 366,808 342,623 Commercial real estate............... 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423 Manufactured housing, second mortgage and other consumer....... 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917 Commercial............. 295,263 179,568 129,048 131,468 118,717 112,312 Reserve for loan losses............... (234,341) (235,275) (244,989) (245,062) (179,612) (130,423) ------------ ------------ ------------ ------------ ------------ ------------ Total loans.......... $ 28,496,757 $ 24,192,840 $ 25,472,092 $ 21,063,698 $ 16,666,525 $ 13,966,053 ============ ============ ============ ============ ============ ============ Deposits................. $ 23,978,515 $ 24,462,960 $ 23,344,006 $ 23,516,317 $ 20,729,204 $ 19,950,479 Annuities................ 868,438 855,503 799,178 713,383 571,428 433,767 Borrowings............... 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292 Stockholders' equity(3).............. 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080 Stockholders' equity ratio.................. 5.54% 6.05% 4.95% 5.25% 5.30% 4.46% Nonperforming assets as a percentage of total assets................. 0.74 0.81 1.12 1.55 2.03 1.68 Reserve for loan losses as a percentage of: Nonperforming loans.... 108.33 110.04 87.22 72.74 54.58 45.50 Nonperforming assets... 72.53 69.42 58.52 46.91 31.98 30.37 Fully diluted book value per common share(3).... $19.61 $20.70 $15.33 $14.84 $12.78 $11.32 Number of common shares used to calculate fully diluted book value per common share(3)........ 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322 Weighted average common shares(3).............. 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
- --------------- (1) Extraordinary items include the call of subordinated capital notes, resulting in pretax losses of $2.2 million and $3.1 million during 1993 and 1992, and penalties for prepayment of FHLB advances, resulting in pretax losses of $10.8 million and $3.6 million during 1993 and 1992. (2) Reflects earnings on preferred stock issued by New Capital, which was redeemed by the Company in December 1996. (3) As computed on a fully diluted basis, including common stock equivalents. The 8,000,000 Litigation Escrow Shares are reflected in earnings per share using the treasury stock method. At the effective date of the Transaction, there was no dilutive effect of the 8,000,000 Litigation Escrow Shares. As a result, stockholders' equity, book value per share, common shares and weighted average shares outstanding, and primary and fully diluted earnings per share were not affected by the issuance of the Litigation Escrow Shares. The reference price of the Common Stock for purposes of the treasury stock method is $42.75 per share. The Litigation Escrow Shares generally will be dilutive to the extent that the market price of the Common Stock exceeds the reference price. (4) Dividends include only amounts paid to Washington Mutual shareholders without consideration of prior business combinations. 8 9 The following tables set forth other summary financial data for the periods and as of the dates indicated for each of Washington Mutual and Keystone Holdings prior to the Transaction on a noncombined basis without giving effect to the Transaction. The Summary Financial Data for each company on a stand-alone basis is intended for informational purposes only and is not indicative of the future financial position or future results of operations of the combined Company. WASHINGTON MUTUAL (PRE-TRANSACTION):
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- ------------------------------------ 1996 1995 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Interest income...................... $1,258,257 $1,163,101 $1,578,960 $1,258,550 $1,081,309 Interest expense..................... 729,739 707,803 960,724 651,871 520,750 ---------- ---------- ---------- ---------- ---------- Net interest income.................. 528,518 455,298 618,236 606,679 560,559 Provision for loan losses............ 8,738 8,450 11,150 20,400 35,225 Other income (expense), net.......... (263,103) (225,254) (299,781) (296,798) (242,299) Income taxes......................... 95,615 76,883 107,504 108,159 98,864 ---------- ---------- ---------- ---------- ---------- Net income from continuing operations......................... 161,062 144,711 199,801 181,322 184,171 Extraordinary items, net of federal income tax effect............... -- -- -- -- (8,953) Cumulative effect in change of tax accounting method............... -- -- -- -- 13,365 ---------- ---------- ---------- ---------- ---------- Net income......................... $ 161,062 $ 144,711 $ 199,801 $ 181,322 $ 188,583 ========== ========== ========== ========== ========== Net income attributable to common stock........................... $ 147,247 $ 130,773 $ 181,217 $ 162,738 $ 175,025 ========== ========== ========== ========== ========== Net interest margin................ 3.30% 2.55% 3.14% 3.65% 4.15% Efficiency ratio................... 58.84 57.56 56.74 57.27 55.37 Return on average assets........... 0.96 0.95 0.97 1.03 1.31 Return on average stockholders' equity.......................... 13.04 13.45 13.31 13.77 16.89 Return on average common stockholders' equity............ 13.39 13.90 13.73 14.30 18.31
SEPTEMBER DECEMBER 30, 31, 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Total assets...................................................... $22,413,697 $22,420,379 Loans............................................................. 14,652,743 13,035,250 Deposits.......................................................... 11,076,868 11,306,436 Borrowings........................................................ 8,578,497 8,332,275 Nonperforming assets as a percentage of total assets.............. 0.46% 0.41% Reserve for loan losses as a percentage of: Nonperforming loans............................................. 186.64 209.91 Nonperforming assets............................................ 139.89 153.07
9 10 KEYSTONE HOLDINGS (PRE-TRANSACTION):
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------ 1996 1995 1995 1994 1993 ---------- --------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Interest income...................... $1,080,328 $ 982,616 $1,337,126 $1,036,863 $1,117,269 Interest expense..................... 725,463 717,286 962,712 683,487 691,146 ---------- -------- ---------- ---------- ---------- Net interest income.................. 354,865 265,330 374,414 353,376 426,123 Provision for loan losses............ 49,400 49,090 63,837 101,609 123,503 Other income (expense), net.......... (237,617) (147,545) (192,394) (177,925) (198,644) Income taxes (benefit)............... 1,729 994 4,402 1,721 (2,830) Provision (benefit) for payments in lieu of taxes...................... 14,465 (1,410) 7,887 (824) 14,075 ---------- -------- ---------- ---------- ---------- Net income from continuing operations......................... 51,654 69,111 105,894 72,945 92,731 Minority interest in income of consolidated subsidiaries(1)....... (24,812) (25,160) (21,092) (22,621) (10,474) ---------- -------- ---------- ---------- ---------- Net income........................... $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257 ========== ======== ========== ========== ========== Net income attributable to common stock.............................. $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257 ========== ======== ========== ========== ========== Net interest margin.................. 2.43% 1.93% 2.02% 2.12% 2.57% Efficiency ratio..................... 72.24 64.40 59.27 60.33 55.15 Return on average assets........... 0.18 0.30 0.44 0.29 0.48 Return on average stockholder's equity.......................... 3.98 7.35 15.15 9.04 15.30 Return on average common stockholder's equity............ 3.98 7.35 15.15 9.04 15.30
SEPTEMBER DECEMBER 30, 31, 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Total assets...................................................... $21,298,248 $19,703,656 Loans............................................................. 13,844,014 11,175,031 Deposits.......................................................... 12,901,647 13,005,029 Borrowings........................................................ 7,294,879 5,391,857 Nonperforming assets as a percentage of total assets.............. 1.03% 1.24% Reserve for loan losses as a percentage of: Nonperforming loans............................................. 64.75 78.07 Nonperforming assets............................................ 40.74 46.08
- --------------- (1) Reflects earnings on preferred stock issued by New Capital. 10 11 RISK FACTORS In addition to all the information in this Prospectus and the documents incorporated herein by reference, the following risk factors should be considered carefully in evaluating an investment in the Shares offered hereby. EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED The Company anticipates that substantial benefits will occur as a result of the Transaction. Whether the anticipated benefits of the Transaction are ultimately achieved, however, will depend on a number of factors, including the ability of the Company to capitalize on its combined asset base and strategic position and its ability to achieve administrative cost savings at projected levels within projected time frames. The ability of the Company to operate efficiently, at least in the short term, will be enhanced by its ability to retain key ASB personnel. There can be no assurance that the expected benefits of the Transaction relative to the combined business will be achieved. ECONOMIC CONDITIONS AND REAL ESTATE RISK Washington Mutual's lending operations are concentrated in Washington, California and Oregon. The bulk of its assets are loans and securities secured by residential real estate in those states. As a result, the financial condition and results of operations of the Company will be subject to general economic conditions and, in particular, the conditions in the single-family or multi-family residential real estate markets prevailing in Washington, California and Oregon. If economic conditions in any one of those states worsen or if the market for residential real estate in particular 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 of single-family or multi-family residential mortgage loans or achieve the level of deposits currently anticipated. Approximately one-half of the Company's loan assets at September 30, 1996 were acquired in the Transaction and are secured by properties in California. In the early 1990's, the California economy sustained an economic recession that resulted in declines in property values and increases in the levels of delinquencies, foreclosures and losses for many of the state's financial institutions. Though the California economy generally began to show signs of recovery in 1994 continuing through 1996, certain real estate submarkets in which ASB operates remain weak. No assurance can be given that levels of delinquencies, foreclosures and losses in the Company's portfolio of loans and investments secured by properties in California will continue to decline or that such levels will not increase. INTEREST RATE RISK Washington Mutual realizes its income principally from the differential or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Net interest spreads are affected by the difference between the repricing characteristics of interest-earning assets and deposits and borrowings and by changes in market and contractual interest rates. Washington Mutual generally will have better financial results in a steep yield curve environment. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Generally, Washington Mutual will experience increased interest rate spreads during periods of downward interest rate movement and decreased interest rate spreads during periods of upward interest rate movement. This effect is ameliorated somewhat by the large percentage of adjustable-rate assets in the Company's loan portfolio. Nevertheless, the adjustments in the interest rates on the ARMs inherently lag by a few months changes in the cost of funds. To the extent that interest rates generally are increasing, the Company's interest rate spread, and thus net income, will in most cases be negatively affected. COMPETITION Washington Mutual faces significant competition both in attracting and retaining deposits and in making loans in all of its market areas. Its most direct competition for deposits has historically come from other thrift institutions, credit unions, and commercial banks doing business in its primary market areas of Washington, 11 12 California and Oregon. As with all banking organizations, however, Washington Mutual has experienced increasing 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 other thrift institutions, commercial banks, mortgage banking companies, consumer finance companies, credit unions, insurance companies and other institutional lenders. Many of these competitors have more significant financial resources, larger market share and greater name recognition than the Company. The existence 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, 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 market. ACQUISITION STRATEGY The Company intends to continue its growth through the acquisition of financial institutions. In this regard, Washington Mutual routinely reviews such acquisition opportunities, but currently has no binding commitments to acquire any specific business or other material assets, other than United Western. Washington Mutual cannot predict whether it will be successful in consummating additional acquisitions or what the consequences of any such acquisition would be. Acquisitions entail numerous risks, including difficulties in the integration of operations and systems, the diversion of management's attention from other business concerns and the potential loss of key employees of any acquired businesses. REGULATION Each of the Company (as a savings and loan holding company), WMB, ASB and WMBfsb is subject to significant regulation, which has materially affected their businesses, as well as the businesses of other banking organizations, in the past and is likely to do so in the future. Statutes and regulations currently affecting the Company or its subsidiaries may be changed at any time, and the interpretation of these statutes and regulations by examining authorities is also subject to change. There can be no assurance that future changes in the regulations or in their interpretations will not adversely affect the business of Washington Mutual. GOVERNMENTAL IMMUNITY OF THE FDIC-MANAGER AS SELLING STOCKHOLDER The doctrine of sovereign immunity, as limited by the Federal Tort Claims Act, 28 U.S.C. sec.sec. 1346(b) and 2671 et seq., as amended (the "Federal Tort Claims Act"), provides that claims may not be brought against the United States of America or any agency or instrumentality thereof unless specifically permitted by an act of Congress. The Federal Tort Claims Act bars claims for fraud or misrepresentation, and courts have held, in cases involving the FDIC as well as other federal agencies and instrumentalities, that the United States may assert its sovereign immunity against claims brought under the federal securities laws. Thus, any attempt to assert a claim against the FDIC-Manager alleging a violation of the federal securities laws (including the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act")), resulting from an alleged material misstatement in or material omission from the Registration Statement or this Prospectus, or any other act or omission in connection with the Offerings to which this Prospectus relates, probably would be barred. In addition, Section 2(f)(1) of the Federal Deposit Insurance Act specifically provides that directors, members, officers and employees of the FDIC have no liability under the Securities Act with respect to any claim arising out of or resulting from any alleged act or omission by such person within the scope of such person's employment in connection with any transaction involving the disposition of assets (or any interests in assets or any obligations backed by any assets) by the FDIC. Moreover, the FDIC-Manager has advised Washington Mutual that the FDIC and its directors, officers, agents, and employees are exempt from liability for any violation or alleged violation of the anti-fraud provisions of Section 10(b) of the Exchange Act by virtue of Section 3(c) thereof. Accordingly, any attempt to assert such a claim against the directors, members, officers or employees of the FDIC for a violation of the Securities Act or the Exchange Act resulting from an alleged material misstatement in or material omission from the Registration Statement 12 13 or this Prospectus or any other act or omission in connection with the Offerings of the Shares hereunder probably would be barred. FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE When used or incorporated by reference in this Prospectus, the words "anticipate," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act. Such statements are subject to certain risks, uncertainties and assumptions, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Several key factors that have a direct bearing on Washington Mutual's ability to attain its goals are discussed above. These forward-looking statements speak only as of the date of this Prospectus. The Company expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. USE OF PROCEEDS All of the Shares offered hereby are being offered by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of the Shares. MARKET PRICES AND DIVIDENDS Washington Mutual Common Stock is traded on the Nasdaq Stock Market under the symbol "WAMU." The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of the Common Stock as reported on the Nasdaq Stock Market, and the dividends declared on such stock.
WASHINGTON MUTUAL COMMON STOCK ------------------------------- HIGH LOW DIVIDENDS ------ ------ --------- 1994 First Quarter........................................... $25.00 $19.13 $0.16 Second Quarter.......................................... 21.50 18.25 0.17 Third Quarter........................................... 21.63 19.63 0.18 Fourth Quarter.......................................... 20.63 15.75 0.19 1995 First Quarter........................................... 20.75 16.63 0.19 Second Quarter.......................................... 24.75 20.00 0.19 Third Quarter........................................... 26.75 22.50 0.19 Fourth Quarter.......................................... 29.50 24.75 0.20 1996 First Quarter........................................... 32.25 27.63 0.21 Second Quarter.......................................... 30.38 26.13 0.22 Third Quarter........................................... 39.25 28.50 0.23 Fourth Quarter.......................................... 45.88 36.50 0.24 1997 First Quarter (through January 22, 1997)................ 49.38 42.75 *
On January 22, 1997, there were 16,002 shareholders of record of the Common Stock. * On January 21, 1997, the Washington Mutual Board of Directors declared a cash dividend of $0.25 per share, payable on February 14, 1997 to shareholders of record on January 31, 1997. Dividends may be paid on the Common Stock as and when declared by the Washington Mutual Board of Directors out of funds legally available for the payment of dividends. Each quarter, the Washington Mutual Board of Directors considers the payment of dividends. The factors affecting this determination include Washington Mutual's long-term interests, current and projected earnings, adequacy of capitalization, and expected asset and deposit growth, as well as other financial conditions, legal, regulatory and contractual restrictions, and tax considerations. See "Description of Washington Mutual Capital Stock -- Dividend Policy." 13 14 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at September 30, 1996, restated following the Transaction as if Washington Mutual and Keystone Holdings had been combined at the date presented.
SEPTEMBER 30, 1996 ------------------------- AS AMOUNT ADJUSTED(1) ---------- ---------- (DOLLARS IN THOUSANDS) Long term debt...................................................... $ 688,268 $ 667,768 Minority interest(2)................................................ 80,000 -- Stockholders' equity: Capital surplus: Preferred stock -- no par value -- 10,000,000 shares authorized; 6,122,400 shares outstanding; 4,722,500 shares outstanding as adjusted.................................................. 250,158 110,168 Common stock -- no par value -- 350,000,000 shares authorized; 120,037,913 shares outstanding(3); 125,456,773 shares outstanding as adjusted....................................... 677,958 817,948 Valuation reserve for available-for-sale securities............... (19,570) (19,570) Retained earnings................................................. 1,513,370 1,303,370 ---------- ---------- Total stockholders' equity................................ 2,421,916 2,211,916 ---------- ---------- Total capitalization...................................... $3,190,184 $2,879,684 ========== ========== Consolidated capital ratios: Stockholders' equity.............................................. 5.54% 5.09% Tangible stockholders' equity..................................... 5.24 4.78 Tangible common stockholders' equity.............................. 4.97 4.51 Book value per fully diluted common share......................... $19.61 $17.83
- ------------------------ (1) Adjusted to record (i) the approximately $210 million in anticipated after-tax Transaction related expenses, (ii) the redemption of New Capital's preferred stock and subordinated notes and (iii) the conversion of all shares of the Company's Series D Preferred Stock into 5,418,860 shares of Common Stock. See "Keystone Transaction -- Transaction Expenses and Addition to Reserve for Loan Losses" and "Management's Discussion and Analysis of Financial Position and Results of Operations -- Liquidity." (2) Preferred stock issued by New Capital, which was redeemed by the Company upon consummation of the Transaction. (3) Includes the 8,000,000 Litigation Escrow Shares. Washington Mutual is using the treasury stock method to determine the effect of the 8,000,000 Litigation Escrow Shares upon the Company's financial statements. At the effective date of the Transaction, there was no dilutive effect of the 8,000,000 Litigation Escrow Shares. As a result, stockholders' equity, book value per share and primary and fully diluted earnings per share were not affected by the issuance of the Litigation Escrow Shares. The reference price of the Litigation Escrow Shares for purposes of the treasury stock method is $42.75 per share. The Litigation Escrow Shares generally will be dilutive to the extent that the market price of the Common Stock exceeds the reference price. 14 15 THE KEYSTONE TRANSACTION THE TRANSACTION On December 20, 1996 (the "Effective Date"), Keystone Holdings merged with and into Washington Mutual, with Washington Mutual as the surviving corporation. The separate existence of Keystone Holdings ceased upon the Effective Date and the direct and indirect subsidiaries of Keystone Holdings, including ASB but excluding New West, became subsidiaries of Washington Mutual. On the Effective Date, Washington Mutual also acquired the Warrants. In the Transaction, Washington Mutual issued 47,883,333 shares of Common Stock, as follows: 25,883,333 shares to KHP, 14,000,000 shares to the FRF and 8,000,000 shares to the Litigation Escrow for the benefit of KHP and the FRF. See " -- The Litigation Escrow" below. The shares issued to KHP and the contingent right to receive the portion of the Litigation Escrow Shares attributable to KHP were distributed by KHP to the KHP Investors immediately following consummation of the Transaction. As an integral part of the Transaction, Washington Mutual, KHP and the FDIC-Manager entered into the Registration Rights Agreement, pursuant to which Washington Mutual is required to use its best efforts to register for resale to the public under the Securities Act certain shares of Common Stock issued in the Transaction. Pursuant to the Registration Rights Agreement, Washington Mutual filed the Registration Statement for the sale of the Shares offered hereby. Pursuant to the Registration Rights Agreement, Washington Mutual has also agreed to file with the Commission and use its best efforts to cause to become effective as soon as practicable after nine months from the closing of the Transaction the Initial Shelf Registration for sale from time to time of all shares of Registrable Common. Washington Mutual also agreed in the Registration Rights Agreement to file with the Commission as soon as practicable after distribution of the Litigation Escrow Shares, and use its best efforts to cause to become effective an additional shelf registration statement for the sale of such shares. During the three-year period following the effectiveness of the Initial Shelf Registration, persons who hold 15 percent or more of the Registrable Common may require the Company, an aggregate of four times, to facilitate an underwritten public offering of the Registrable Common, and the KHP Investors and the FRF are entitled to notice of any registrations by the Company of Common Stock for sale under the Securities Act for its own account (with certain exceptions) and to include their shares therein. TRANSACTION EXPENSES AND ADDITION TO RESERVE FOR LOAN LOSSES Washington Mutual anticipates recording a net after-tax charge of approximately $210 million for Transaction expenses, including a $125.0 million (pre-tax) addition to the reserve for loan losses in the fourth quarter of 1996. The Transaction expenses recorded were related to severance and management payments, payments related to a tax settlement between Keystone Holdings and the FRF, write-downs of software and equipment, premiums paid in redemption of New Capital debt securities, professional fees and investment banking fees. An additional component of the after-tax charge was a downward adjustment to Keystone Holdings' deferred tax assets, which will have diminished value to the combined entity due to limitations provided in the Internal Revenue Code on the use of acquired net operating loss carryforwards. See "Business -- Taxation of the Company -- Net Operating Loss Carryforward Deductions." The addition to the reserve for loan losses was provided principally because a number of Washington Mutual credit administration and asset management philosophies and procedures differed from those of ASB. Those differences consisted principally of the following: (i) Washington Mutual is more proactive in dealing with emerging credit problems and tends to prefer foreclosure actions to induce borrowers to correct defaults, whereas ASB was not as proactive and tended to prefer workouts in lieu of a more aggressive foreclosure stance; and (ii) ASB considered the risk characteristics of its portfolio of loans secured by apartment buildings of less than $1.0 million to be similar to the risk characteristics of its single-family residential portfolio; Washington Mutual, on the other hand, considers the risk characteristics of that portfolio to be more closely aligned with its commercial real estate loan portfolio, which tends to have a higher incidence of loan losses than the single-family residential portfolio. Washington Mutual is conforming ASB's asset management practices, administration, philosophies and procedures to those of WMB and WMBfsb. The plan of realization 15 16 of troubled loans differed between the companies and therefore resulted in different levels of loss reserves. The addition to the reserve for loan losses was to a lesser degree provided because Washington Mutual believed that, while there has 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 late 1996. THE LITIGATION ESCROW KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs in a lawsuit against the United States (the "Case"). In the Case, among other claims, plaintiffs allege that as part of the 1988 Acquisition, they entered into a contract with the FSLIC and the Federal Home Loan Bank Board entitling the plaintiffs to certain economic benefits, and that the U.S. government breached that contract, causing damage to the plaintiffs. A number of other savings institutions have asserted similar types of claims against the U.S. government. Pursuant to the Agreement for Merger among the Company, Keystone Holdings and certain of its affiliates (the "Merger Agreement"), the Case became an asset of Washington Mutual at the Effective Date and the Company will receive any recovery in the Case. Due to its ownership of the Warrants, the FRF was entitled to receive an economic benefit from any recovery from the Case. As consideration for the possible future recovery of Case Proceeds, Washington Mutual issued the Litigation Escrow Shares to The Bank of New York as escrow agent (the "Escrow Agent") to be held for the benefit of the KHP Investors and the FRF. The Litigation Escrow Shares are registered in the name of the Escrow Agent, who will hold such shares together with any dividends, distributions or any additional or substitute securities with respect to such shares, as well as any interest or earnings on such dividends, distributions or additional or substitute securities (collectively, the "Escrow Fund"). The Escrow Agent will vote the Litigation Escrow Shares in accordance with instructions received from each of the KHP Investors and the FDIC-Manager with respect to their respective interests in the Litigation Escrow Shares (64.9 percent for KHP Investors and 35.1 percent for the FDIC-Manager). The Escrow Agent will hold the Escrow Fund until the earlier of the date that is the sixth anniversary of the Effective Date or until the entire Escrow Fund has been released from the Litigation Escrow (the "Escrow Expiration Date"). In general, the Escrow Expiration Date will be automatically extended to 10 years from the Effective Date if, prior to the sixth anniversary of the Effective Date, 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 Escrow Expiration Date may be extended further if Case Proceeds are paid in installments. In the event that Washington Mutual receives any Case Proceeds on or before the Escrow Expiration Date, the Escrow Agent will make distributions of all or a portion of the Escrow Fund, 64.9 percent to the KHP Investors and 35.1 percent to the FRF. The number of Litigation Escrow Shares to be distributed will be calculated based on a formula in the Merger Agreement. The Escrow Agent may make more than one distribution out of the Escrow Fund if Case Proceeds are received in two or more installments. In general, if no Case Proceeds have been received, beginning on the last day of the full calendar month immediately following the sixth anniversary of the Effective Date and on the last day of every succeeding month, the Escrow Agent will return to Washington Mutual for cancellation a number of shares equal to 1.25 percent of the number of Litigation Escrow Shares, together with any dividends and distributions received on such shares and any interest or earnings on such dividends. At the Escrow Expiration Date, any remaining Litigation Escrow Shares, together with any amounts in the Escrow Fund, will be returned to Washington Mutual. The ultimate outcome of the Case is uncertain, and there can be no assurance that any recovery in the Case will result in Case Proceeds that exceed the value of the Litigation Escrow Shares plus costs and expenses. Generally, Washington Mutual will not benefit financially from the Case unless Case Proceeds exceed such an amount and, in negotiating the Transaction, Washington Mutual ascribed no value to the possibility that the Case Proceeds would exceed such amount. As a result, it is uncertain what, if any, effect recovery in the Case will have on the financial position of Washington Mutual. 16 17 SELECTED FINANCIAL DATA The following table presents selected financial data for Washington Mutual. This table is derived from and should be read in conjunction with the Supplemental Consolidated Financial Statements of Washington Mutual and the notes thereto, which are included elsewhere in this Prospectus. The Transaction was accounted for as a pooling-of-interests. The financial statements presented herein are designated as "supplemental" because generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. The assets, liabilities, and results of operations of Keystone Holdings have been recorded on the books of Washington Mutual at their values as carried on the books of Keystone Holdings, and no goodwill was created. Washington Mutual supplemental financial information contained in this Prospectus has been restated as if the respective companies had been combined for all periods presented. As such, the information presented herein is not comparable to that reflected in the Company's annual report on Form 10-K for the year ended December 31, 1995, or the restated financial statements of the Company contained in the Company's current report on Form 8-K dated October 18, 1996, as amended. Because of the significant increase in Washington Mutual's size as a result of the acquisition early in 1993 of Pacific First (which was accounted for by the purchase method), the financial results for the years ended and as of December 31, 1995, 1994, and 1993, are not generally comparable to prior periods or dates. The information as of September 30, 1996 and for the nine-month periods ended September 30, 1996 and 1995 is not necessarily indicative of the operating results for the entire year. 17 18
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SUPPLEMENTAL FINANCIAL DATA Interest income...................... $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639 Interest expense..................... 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income.................. 883,383 720,628 992,650 960,055 986,682 868,480 762,009 Provision for loan losses............ 58,138 57,540 74,987 122,009 158,728 158,537 85,807 Other income......................... 183,822 152,225 208,339 220,794 246,576 174,365 175,806 Other expense........................ 684,542 525,024 700,514 695,517 687,519 561,688 516,348 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes, 324,525 290,289 425,488 363,323 387,011 322,620 335,660 extraordinary items, cumulative effect of change in tax accounting method, and minority interest........................... Income taxes......................... 97,344 77,877 111,906 109,880 96,034 42,462 45,920 Provision (benefit) for payments in 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221 lieu of taxes...................... Extraordinary items, net of federal -- -- -- -- (8,953) (4,638) -- income tax effect(1)............... Cumulative effect of change in tax -- -- -- -- 13,365 60,045 -- accounting method.................. Minority interest in income of (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095) consolidated subsidiaries(2)....... ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income........................... $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424 ========= ========= ========= ========= ========= ========= ========= Net income attributable to $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549 common stock....................... ========= ========= ========= ========= ========= ========= ========= Net income per common share(3) Primary............................ $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20 Fully diluted...................... 1.66 1.69 2.42 2.06 2.36 2.71 2.10 Cash dividends declared per common 0.66 0.57 0.77 0.70 0.50 0.33 0.28 share(3)(4)........................ Common stock dividend payout 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06% ratio(4)........................... Net interest margin.................. 2.89 2.55 2.62 2.90 3.31 3.36 3.14 Efficiency ratio..................... 64.14 60.15 58.33 58.90 55.75 53.86 55.06 Return on average assets............. 0.63 0.68 0.73 0.69 0.84 1.29 0.99 Return on average stockholders' 10.59 12.04 13.44 12.66 15.95 21.05 17.84 equity............................. Return on average common 10.69 12.24 13.73 12.95 16.78 21.05 17.84 stockholders' equity...............
18 19
DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ------------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) SUPPLEMENTAL FINANCIAL DATA Total assets........................ $43,711,945 $42,026,622 $37,481,296 $33,614,912 $27,678,923 $25,531,041 Available-for-sale securities....... 10,063,100 12,154,725 4,282,160 1,751,905 -- -- Held-to-maturity securities......... 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573 Loans: Residential....................... 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201 Residential construction.......... 668,976 615,814 549,271 430,215 366,808 342,623 Commercial real estate............ 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423 Manufactured housing, second 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917 mortgage and other consumer..... Commercial........................ 295,263 179,568 129,048 131,468 118,717 112,312 Reserve for loan losses........... (234,341) (235,275) (244,989) (245,062) (179,612) (130,423) ----------- ----------- ----------- ----------- ----------- ----------- Total loans................. $28,496,757 $24,192,840 $25,472,092 $21,063,698 $16,666,525 $13,966,053 =========== =========== =========== =========== =========== =========== Deposits............................ $23,978,515 $24,462,960 $23,344,006 $23,516,317 $20,729,204 $19,950,479 Annuities........................... 868,438 855,503 799,178 713,383 571,428 433,767 Borrowings.......................... 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292 Stockholders' equity(3)............. 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080 Stockholders' equity ratio.......... 5.54% 6.05% 4.95% 5.25% 5.30% 4.46% Nonperforming assets as a percentage 0.74 0.81 1.12 1.55 2.03 1.68 of total assets................... Reserve for loan losses as a percentage of: Nonperforming loans............... 108.33 110.04 87.22 72.74 54.58 45.50 Nonperforming assets.............. 72.53 69.42 58.52 46.91 31.98 30.37 Fully diluted book value per common $19.61 $20.70 $15.33 $14.84 $12.78 $11.32 share(3).......................... Number of common shares used to 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322 calculate fully diluted book value per common share(3)............... Weighted average common shares(3)... 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
- --------------- (1) Extraordinary items include the call of subordinated capital notes, resulting in pretax losses of $2.2 million and $3.1 million during 1993 and 1992, and penalties for prepayment of FHLB advances, resulting in pretax losses of $10.8 million and $3.6 million during 1993 and 1992. (2) Reflects earnings on preferred stock issued by New Capital, which was redeemed by the Company in December 1996. (3) As computed on a fully-diluted basis, including common stock equivalents. The 8,000,000 Litigation Escrow Shares are reflected in earnings per share using the treasury stock method. At the effective date of the Transaction, there was no dilutive effect of the 8,000,000 Litigation Escrow Shares. As a result, stockholders' equity, book value per share, common shares and weighted average shares outstanding, and primary and fully diluted earnings per share were not affected by the issuance of the Litigation Escrow Shares. The reference price of the Litigation Escrow Shares for purposes of the treasury stock method is $42.75 per share. The Litigation Escrow Shares generally will be dilutive to the extent that the market price of the Common Stock exceeds the reference price. (4) Dividends include only amounts paid to Washington Mutual shareholders without consideration of prior business combinations. 19 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Supplemental Consolidated Financial Statements and Notes thereto presented elsewhere in this Prospectus. GENERAL Washington Mutual is a regional financial services company committed to serving consumers and small to mid-sized businesses throughout the Western United States. The Company's banking subsidiaries accept deposits from the general public, make residential and consumer loans, and engage in certain commercial banking activities. Washington Mutual also underwrites and sells annuities, sells other insurance products, offers full service securities brokerage, and acts as the investment advisor to and the distributor of mutual funds. THE KEYSTONE ACQUISITION. In December 1996, Keystone Holdings merged with and into Washington Mutual and all of its subsidiaries, including ASB, became subsidiaries of the Company. ASB will remain an operating subsidiary of the Company. The Transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated as if the respective companies had been combined for all periods presented. Accordingly, unless otherwise noted, all references to Washington Mutual or the Company refer to the combined entity including Keystone Holdings. The Company anticipates that it will consolidate certain head office functions and back office operations of ASB. The Company anticipates achieving cost savings from such consolidations of between $30 million and $50 million (pretax) in 1998 depending upon the amount of growth in ASB's residential lending and other consumer banking activities and additional growth, if any, in the Company's California operations. OTHER ACQUISITION ACTIVITY. During the first half of 1993, Washington Mutual merged with Pioneer Savings Bank ("Pioneer") and acquired a substantial portion of the assets of Pacific First. As a result of acquiring Pacific First, the Company became substantially larger, with significant operations both in Oregon and Washington. In 1994 and 1995, Washington Mutual continued to expand its operations through business combinations with other financial institutions with locations in Washington, Utah and Montana. During 1995, Washington Mutual took steps to diversify its operations into commercial banking. In August 1995, the Company acquired Enterprise and in January 1996, acquired Western, a commercial bank with branch operations throughout Oregon. Each of these transactions was accounted for as a pooling-of- interests. See "Business -- Business Combinations." RECENT FEDERAL LEGISLATION. On September 30, 1996, President Clinton signed legislation intended in part to recapitalize the SAIF and to reduce the gap between SAIF premiums and BIF premiums. The legislation provided for a special one-time assessment on SAIF-insured deposits that were held as of March 31, 1995, including certain deposits acquired after that date. The assessment was designed to bring the SAIF's reserve ratio to the legally required level of $1.25 for every $100 in insured deposits. Prior to this legislation, deposits of Washington Mutual subsidiaries insured through the SAIF were subject to regular FDIC assessments of 23 cents per $100 per year. Beginning in January 1997, deposits of well-capitalized institutions insured through the SAIF will be subject to regular FDIC assessments of 6.48 cents per $100 per year, while deposits of well-capitalized institutions insured through the BIF will be subject to regular FDIC assessments of 1.30 cents per $100 per year. Washington Mutual's special assessment on deposits held by WMB, ASB and WMBfsb resulted in a pretax charge of $124.2 million, which was taken in the quarter ended September 30, 1996. Based on current levels of deposits, Washington Mutual estimates that the reduction in the regular assessment on its SAIF deposits beginning in 1997 should result in annual savings of approximately $31 million. 20 21 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1995. Net income for the nine months ended September 30, 1996 was $202.2 million or $1.66 per fully diluted share, compared with $201.6 million or $1.69 per fully diluted share for the nine months ended September 30, 1995. Net income was reduced by a pretax charge of $124.2 million representing the Company's portion of the one-time assessment paid by savings institutions and banks to recapitalize the SAIF. For the nine months ended September 30, 1996, the Company's return on average assets ("ROA") and return on average common stockholders' equity ("ROCE") were 0.63 percent and 10.69 percent, compared with 0.68 percent and 12.24 percent for the same period in 1995. Excluding the one-time nonrecurring SAIF assessment, net income, net income per fully diluted share, ROA and ROCE would have been $288.0 million, $2.39, 0.94 percent and 15.40 percent, respectively, for the nine months ended September 30, 1996. Net Interest Income. The Company's net interest income of $883.4 million for the nine months ended September 30, 1996 increased from $720.6 million for the same period a year earlier. The 1996 increase reflected the effect of two primary factors. First, average interest earning assets of $40.7 billion for the nine months ended September 30, 1996 increased eight percent from the same period in 1995. Second, the net interest margin (which measures the Company's annualized net interest income as a percentage of average interest-earning assets) rose to 2.89 percent for the nine months ended September 30, 1996 from 2.55 percent for the same period in 1995. To a certain extent, the Company's net interest margin is affected by changes in the yield curve. Banks generally have better financial results in a steep yield curve environment. At September 30, 1996, the difference between the yield on a three-month treasury bill and a 30-year bond was 187 basis points compared with only 119 basis points a year earlier. This increased differential helped increase the Company's net interest margin. Rising interest rates in the first nine months of 1995 had a negative effect on the margin due to the lag in repricing of the Company's ARMs, particularly its ARMs indexed to the Cost of Funds Index of the Eleventh District Federal Home Loan Bank (San Francisco) ("COFI"). In the first nine months of 1996, short-term interest rates, the main component of COFI, declined slightly with the result that the repricing lag provided a slight benefit to the margin. The net interest spread rose to 2.76 percent for the nine months ended September 30, 1996 from 2.42 percent for the same period in 1995. (The net interest spread is the difference between the Company's yield on interest-earning assets and its cost of funds.) Although long-term interest rates were generally higher during 1996 when compared with 1995, the Company's combined yield on loans and investments rose only six basis points to 7.66 percent for the nine months ended September 30, 1996, compared with 7.60 percent for the same period in 1995. As part of a strategy initiated in late 1995 and continued in 1996 to restructure the Company's asset base, the Company purchased adjustable-rate assets while selling fixed-rate assets. See "-- Interest Rate Risk Management." The disposition of these higher yield fixed-rate assets and inclusion of more adjustable-rate assets partially offset the increased yields resulting from higher market interest rates. The decrease in market short-term interest rates during 1996 led to a decline in the Company's cost of funds to 4.90 percent for the nine months ended September 30, 1996, from 5.18 percent for the same period in 1995. In addition to the favorable interest rate environment, the Company's cost of funds was positively affected by a change in its deposit mix. Maturing time deposit accounts were replaced, in part, with lower interest-cost money market and checking accounts. An increase in market short-term interest rates would make it difficult to maintain the current levels for the net interest margin, net interest spread and net interest income. Other Income. Other income increased by 21 percent to $183.8 million for the nine months ended September 30, 1996, from $152.2 million for the same period in 1995. 21 22 Other income consisted of the following:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Depositor fees................................................. $ 74,484 $ 55,361 Loan servicing fees............................................ 31,769 21,050 Other service fees............................................. 40,465 36,685 Other operating income......................................... 25,804 22,289 Gain (loss) on sale of loans, inclusive of write-downs......... 15,223 (2,117) Gain (loss) on sale of other assets, inclusive of (3,923) 726 write-downs.................................................. Loss on sale of covered assets................................. -- (37,399) Effect of FDIC assistance payment.............................. -- 55,630 -------- -------- Total other income................................... $183,822 $152,225 ======== ========
Depositor fees increased 35 percent to $74.5 million for the nine months ended September 30, 1996 from $55.4 million during the same period in 1995. The increase was primarily the result of a revised fee structure on checks drawn on nonsufficient funds and overdraft fees combined with an aggressive marketing campaign that substantially increased the number of checking accounts. The growth in depositor fees has been tempered somewhat by an increase in the amount of transaction-related losses incurred by the Company resulting from the increased number of checking accounts. Transaction-related losses (included in other operating expense) totaled $8.3 million for the nine months ended September 30, 1996, compared with $6.0 million for the same period in 1995. Management closely monitors the amount of losses incurred to assure the profitability of its deposit products. Loan servicing fees were $31.8 million for the nine months ended September 30, 1996, a 51 percent increase from $21.1 million during the same period in 1995. The average balance of loans serviced for others for the nine months ended September 30, 1996 increased 47 percent from the same period in 1995 due primarily to loan securitizations. Also contributing to the 1996 increase was $1.4 million of additional loan servicing fees booked in September 1996 resulting from a change related to the loan servicing system. Loans serviced for others totaled $23.9 billion at September 30, 1996. Loan servicing fees consisted of the following:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Loan servicing income.......................................... $ 54,851 $ 37,670 Amortization of mortgage servicing rights...................... (23,082) (16,620) -------- -------- Loan servicing fees.................................. $ 31,769 $ 21,050 ======== ========
Other service fees, principally generated by the Company's nonbanking subsidiaries, were $40.5 million for the nine months ended September 30, 1996, compared with $36.7 million for the same period in 1995. Gains on the sale of loans were $15.2 million for the nine months ended September 30, 1996, compared with a loss of $2.1 million for the same period in 1995. The gains in the 1996 period resulted from the sale of fixed-rate loans as part of the Company's program of selling fixed-rate loan production with the objective of reducing the effect of future movements in interest rates. In addition, on January 1, 1996, WMB and WMBfsb adopted Statement of Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which had been adopted by ASB on January 1, 1995. SFAS No. 122 eliminates the distinction between servicing rights that are purchased and those that are retained upon the sale or securitization of loans. The statement requires mortgage servicers to record the servicing rights on loans as separate assets, no matter what their origin. Banks that sell or securitize 22 23 loans and retain the servicing rights are required to allocate the total cost of the loans between servicing rights and principal balance. During the first nine months of 1996, the Company capitalized $26.5 million of mortgage servicing rights as a result of SFAS No. 122. Capitalizing the mortgage servicing rights on loans originated for sale effectively reduces the Company's cost basis in the loans and leads to higher gains on sale. As a result, gains on the sale of loans were $13.9 million more for the nine months ended September 30, 1996 than would have been recognized under prior accounting policies. Mortgage servicing rights, net of amortization and the valuation allowance were as follows:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of period................................... $104,495 $ 70,911 Additions.................................................... 57,602 50,614 Amortization................................................. (23,082) (16,620) Valuation allowance.......................................... (530) (700) -------- -------- Balance, end of period......................................... $138,485 $104,205 ======== ========
The Company records its valuation allowance for mortgage servicing rights as an offset against gains on the sale of loans. Losses on the sale of other assets were $3.9 million for the nine months ended September 30, 1996, compared with gains of $726,000 for the same period in 1995. The net loss in the first nine months of 1996 consisted primarily of securities transaction losses of $7.8 million partially offset by the recognition of a $4.1 million previously deferred gain on the March 1995 sale of Mutual Travel, Inc. ("Mutual Travel"), the Company's travel agency subsidiary. The losses on the sale of securities during 1996 were incurred in connection with the Company's strategy to reduce its exposure to movements in interest rates. See "-- Net Interest Income" and "-- Interest Rate Risk Management." A sale of "covered assets" occurred during the nine months ended September 30, 1995. "Covered assets" are assets as to which ASB was entitled to government assistance as part of the 1988 Acquisition. See "-- For the Three Years Ended December 31, 1995 -- Other Income." There was no comparable transaction in 1996. Other Expense. Other expense for the nine months ended September 30, 1996 totaled $684.5 million (inclusive of the one-time SAIF recapitalization assessment of $124.2 million) compared with $525.0 million during the same period in 1995. The efficiency ratio, one commonly accepted measure of a bank's operating efficiency, is the ratio of its operating expenses to revenues (net interest income and other income). The Company's efficiency ratio, excluding the nonrecurring SAIF recapitalization assessment, was 52.5 percent for the nine months ended September 30, 1996 compared with 60.2 percent for the same period in 1995. The effect of increases in other expense during the first nine months of 1996 (exclusive of the SAIF recapitalization assessment) was offset by substantial increases in net interest income and other income for the same period. 23 24 Other expense consisted of the following:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Salaries and employee benefits................................. $250,106 $233,785 Occupancy and equipment........................................ 88,592 82,665 Regulatory assessments......................................... 36,533 41,124 SAIF recapitalization assessment............................... 124,193 -- Data processing fees........................................... 28,766 24,527 Other operating expense........................................ 127,062 113,623 Amortization of goodwill and other intangible assets........... 20,881 21,337 Real estate owned operations, inclusive of write-downs......... 8,409 7,963 -------- -------- Total other expense.................................. $684,542 $525,024 ======== ========
Salaries and employee benefits increased to $250.1 million for the nine months ended September 30, 1996 from $233.8 million for the same period in 1995 due primarily to increases in staffing levels in commercial banking, financial centers and loan administration. Full-time equivalent employees were 8,214 at September 30, 1996, up from 7,854 at September 30, 1995. The increase in full-time equivalent employees was moderated by the sale of the Company's item processing operation and outsourcing in the information systems and property management departments during 1996. Occupancy and equipment expense increased to $88.6 million for the nine months ended September 30, 1996, compared with $82.7 million for the same period in 1995. This increase was primarily due to the growth in the number of financial centers, an expansion of head office facilities and technology upgrades. Regulatory assessments (excluding the one-time SAIF recapitalization assessment) decreased to $36.5 million for the nine months ended September 30, 1996, compared with $41.1 million for the same period in 1995, reflecting a reduction in the assessment rate on the portion of the Company's deposits insured through the BIF. Other operating expense (including data processing fees) increased 12.8 percent to $155.8 million for the nine months ended September 30, 1996, compared with $138.2 million for the same period in 1995. Increases in 1996 were due in part to higher telecommunications expenses, professional fees associated with process reengineering projects and acquisition-related charges. Taxation. The provision for income taxes was $97.3 million for the nine months ended September 30, 1996 compared to $77.9 million for the same period in 1995, representing an effective tax rate of 30 percent compared to a 27 percent effective tax rate for the same period in the prior year. See "-- For the Three Years Ended December 31, 1995 -- Taxation" for a discussion of the variance from normal corporate tax rates. With respect to Keystone Holdings, the provision for payments in lieu of taxes was $14.5 million, compared with a benefit of $1.4 million for the same period in 1995. The change in payments in lieu of taxes was primarily a result of deductions taken in 1995 that were not taken for the same period in 1996. See "Business -- Tax Related Agreements -- Assistance Agreement." In August 1996, Keystone Holdings amended prior year federal tax returns to reduce tax bad debt deductions and to make other amendments. As a result, the net operating loss carryforwards 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 carryforwards by approximately $545 million. The decrease in the gross deferred tax asset as a result of the amendments that reduced the federal and state net operating loss carryforwards was offset by an equal decrease in the valuation allowance to the deferred tax asset. 24 25 FOR THE THREE YEARS ENDED DECEMBER 31, 1995. Washington Mutual's 1995 net income of $289.9 million increased from $240.3 million in 1994 and $267.3 million in 1993. Fully diluted earnings per share were $2.42 in 1995, compared with $2.06 in 1994 and $2.36 in 1993. Washington Mutual's ROA for 1995 equaled 0.73 percent, up from 0.69 percent in 1994 and down from 0.84 percent in 1993. Its ROCE for 1995 was 13.73 percent, up from 12.95 percent in 1994 and down from 16.78 percent in 1993. During 1993, Washington Mutual operated in a highly favorable interest rate environment. However, an increase of approximately 250 basis points in short-term market interest rates in 1994 led to a compression of the net interest margin and a corresponding pressure on net interest income in 1994 and 1995. Certain short-term interest rates decreased 25 basis points in mid-1995 and again in December 1995, resulting in an improved operating environment for the Company over 1994. Net Interest Income. Net interest income of $992.7 million for 1995 increased from $960.1 million in 1994, which in turn was 3 percent lower than the $986.7 million earned during 1993. The growth in net interest income in 1995 was due primarily to an increase in average interest-earning assets. Although average interest-earning assets increased 14 percent during 1995, a decline in the net interest margin limited the increase in net interest income. A significant portion of the Company's ARMs are indexed to COFI. In both 1995 and 1994, the net interest margin was negatively affected by the lag between COFI and changes in the repricing of the Company's interest-bearing liabilities. The increase in market interest rates during 1994 had a negative effect on the net interest margin during much of 1995. The net interest margin for 1995 of 2.62 percent declined from 2.90 percent in 1994 and 3.31 percent in 1993. See "-- Interest Rate Risk Management" and "Supplemental Consolidated Financial Statements -- Note 18: Interest Rate Risk Management." The lower market interest rates during 1993 resulted in a significant portion of the Company's loans being refinanced and mortgage-backed securities being prepaid, as borrowers sought to lower their interest rates. The result was a decline in the yield on interest-earning assets to 6.93 percent in 1994 from 7.37 percent in 1993. In general, the costs of deposits and borrowings were also lower in 1994, compared with 1993. However, due to an increase in the level and cost of certain borrowings, the Company's overall cost of funds of 4.11 percent during 1994 was virtually unchanged from 4.12 percent during 1993. The full effect of the rise in short-term rates that began in late 1994 was felt in 1995 (mitigated somewhat by a subsequent lowering of short-term rates mid-year) increasing the cost of funds during 1995 to 5.17 percent. The yield on interest-earning assets during 1995 increased to only 7.70 percent because long-term interest rates did not increase as much as short-term rates. The Company also was not in a position to take full advantage of the increase in long-term interest rates because a sizable portion of its earning assets were fixed rate. The net interest spread declined to 2.53 percent for 1995 from 2.82 percent in 1994 and 3.25 percent in 1993. 25 26 The following table sets forth information regarding the Company's consolidated average statements of financial condition, together with the total dollar amounts of interest income and expense and the weighted average interest rates for the periods presented.
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993 --------------------------------- --------------------------------- --------------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME AVERAGE INCOME AVERAGE INCOME BALANCE(1) RATE OR EXPENSE BALANCE(2) RATE OR EXPENSE BALANCE(2) RATE OR EXPENSE ----------- ----- ---------- ----------- ----- ---------- ----------- ----- ---------- (DOLLARS IN THOUSANDS) ASSETS Investments........... $11,260,051 7.06% $ 795,444 $ 8,790,748 5.64% $ 495,556 $ 5,955,132 6.35% $ 378,084 New West Note(3)...... 723,800 8.13 58,841 2,346,753 6.01 141,039 3,894,221 6.19 241,014 Loans(4).............. 25,877,673 7.97 2,061,801 21,987,836 7.54 1,658,818 19,998,871 7.90 1,579,480 ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total interest-earning assets.......... 37,861,524 7.70 2,916,086 33,125,337 6.93 2,295,413 29,848,224 7.37 2,198,578 Other assets.......... 1,841,038 -- -- 1,744,338 -- -- 1,732,053 -- -- ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total assets...... $39,702,562 -- -- $34,869,675 -- -- $31,580,277 -- -- =========== ==== ======== ========== ==== ======== ========== ==== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking accounts... $ 2,389,793 1.20 $ 28,672 $ 2,424,250 1.22 29,530 $ 2,308,229 1.47 $ 34,019 Savings and money market accounts.......... 6,648,539 3.94 261,958 6,107,997 2.74 167,091 6,174,860 2.82 174,437 Time deposits....... 15,242,445 5.54 844,188 14,557,602 4.51 656,045 14,600,232 4.52 659,722 ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total deposits.... 24,280,777 4.67 1,134,818 23,089,849 3.69 852,666 23,083,321 3.76 868,178 Borrowings: Annuities........... 801,129 5.58 44,716 734,969 4.51 33,143 629,636 5.92 37,258 Federal funds purchased......... 305,468 5.30 16,188 -- -- -- -- -- -- Securities sold under agreements to repurchase........ 7,749,929 6.23 482,698 4,328,894 4.68 202,677 2,176,260 3.62 78,853 Advances from the FHLB.............. 3,482,200 5.81 202,422 3,962,913 5.38 213,259 3,148,089 6.18 194,631 Other interest-bearing liabilities....... 558,320 7.63 42,594 397,307 8.46 33,613 403,942 8.16 32,976 ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total borrowings... 12,897,046 6.11 788,618 9,424,083 5.12 482,692 6,357,927 5.41 343,718 ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total interest-bearing liabilities..... 37,177,823 5.17 1,923,436 32,513,932 4.11 1,335,358 29,441,248 4.12 1,211,896 Other liabilities..... 367,702 -- -- 458,350 -- -- 463,052 -- -- ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total liabilities..... 37,545,525 -- -- 32,972,282 -- -- 29,904,300 -- -- Stockholders' equity.............. 2,157,037 -- -- 1,897,393 -- -- 1,675,977 -- -- ----------- ---- -------- ---------- ---- -------- ---------- ---- -------- Total liabilities and stockholders' equity.......... $39,702,562 -- -- $34,869,675 -- -- $31,580,277 -- -- =========== ==== ======== ========== ==== ======== ========== ==== ======== Net interest spread and net interest income.............. 2.53% $ 992,650 2.82% $ 960,055 3.25% $ 986,682 =========== ==== ======== ========== ==== ======== ========== ==== ======== Net interest margin... 2.62% 2.90% 3.31%
- --------------- (1) Average balances were calculated on a monthly basis. Due to the relative consistency of the Company's asset and liability balances during 1995, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1995. (2) Average balances were calculated on a daily basis for Keystone Holdings balances and were calculated on a monthly basis for Washington Mutual. Due to the relative consistency of the Company's asset and liability balances during 1994 and 1993, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1994 and 1993. (3) See "Supplemental Consolidated Financial Statements -- Note 8: Note Receivable." (4) Nonaccruing loans were included in the average loan amounts outstanding. 26 27 The following table presents certain information regarding changes in interest income and interest expense of the Company during the periods indicated. The dollar amounts of interest income and interest expense fluctuate depending upon the changes in the respective interest rates and upon changes in the respective amounts (volume) of the Company's interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate) and (ii) changes in rate (changes in average interest rate multipled by the prior period's rate). Changes in rate/volume (changes in rate times the change in volume) are allocated proportionately to the changes in volume and the changes in rate.
1995 VS. 1994 1994 VS. 1993 ----------------------------------------- ----------------------------------------- INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE TO TO ------------------------- TOTAL ------------------------- TOTAL VOLUME(1) RATE CHANGE VOLUME(2) RATE CHANGE -------- -------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS) INTEREST INCOME Investments................... $157,735 $142,153 $299,888 $153,638 $ (36,166) $117,472 New West Note................. (167,731) 85,533 (82,198) (93,190) (6,785) (99,975) Loans(3)...................... 305,959 97,024 402,983 144,295 (64,957) 79,338 -------- -------- ------- -------- --------- -------- Total interest income..... 295,963 324,710 620,673 204,743 (107,908) 96,835 INTEREST EXPENSE Deposits: Checking accounts........... (417) (441) (858) 1,831 (6,320) (4,489) Savings and money market accounts.................. 15,877 78,990 94,867 (1,874) (5,472) (7,346) Time deposits............... 32,067 156,076 188,143 (1,924) (1,753) (3,677) -------- -------- ------- -------- --------- -------- Total deposit expense..... 47,527 234,625 282,152 (1,967) (13,545) (15,512) Borrowings: Annuities................... 3,178 8,395 11,573 9,745 (13,860) (4,115) Federal funds purchased..... 16,188 -- 16,188 -- -- -- Securities sold under agreements to repurchase............. 197,482 82,539 280,021 95,589 28,235 123,824 Advances from the FHLB...... (31,996) 21,159 (10,837) 37,304 (18,676) 18,628 Other....................... 11,855 (2,874) 8,981 (525) 1,162 637 -------- -------- ------- -------- --------- -------- Total borrowing expense... 196,707 109,219 305,926 142,113 (3,139) 138,974 -------- -------- ------- -------- --------- -------- Total interest expense.... 244,234 343,844 588,078 140,146 (16,684) 123,462 -------- -------- ------- -------- --------- -------- Net interest income........... $ 51,729 $(19,134) $ 32,595 $ 64,597 $ (91,224) $(26,627) ======== ======== ======= ======== ========= ========
- --------------- (1) Average balances in 1995 were calculated on a monthly basis. Due to the relative consistency of the Company's asset and liability balances during 1995, the average balances calculated on a monthly basis approximate the average balances calculated on a daily basis and were representative of the Company's operations in 1995. (2) Average balances were calculated on a daily basis. (3) Nonaccruing loans were included in the average loan amounts outstanding. Other Income. Other income was $208.3 million in 1995, down from $220.8 million in 1994 and $246.6 million in 1993. Other income has declined in each of the years presented, primarily due to one-time gains that were recorded in 1993 and to a lesser extent in 1994. Other income in 1993 included $75.1 million in gain on the sales of loans and other assets. The significant level of gain on sales of assets during 1993 largely resulted from asset restructurings to accommodate the acquisition of Pacific First. In addition, a large number of loans were sold during 1993 as a result of high loan origination volume fueled by home loan refinancing and a declining interest rate environment which enabled the Company to sell these loans at a gain. 27 28 Other income consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Depositor fees..................................... $ 79,017 $ 45,255 $ 39,872 Loan servicing fees................................ 29,315 23,247 20,569 Other service fees................................. 49,679 65,248 71,921 Other operating income............................. 31,035 39,630 39,082 Gain on sale of loans, inclusive of write-downs.... 1,717 23,488 25,266 Gain (loss) on sale of other assets, inclusive of write-downs...................................... (655) 23,926 49,866 Loss on sale of covered assets..................... (37,399) -- -- Effect of FDIC assistance payment.................. 55,630 -- -- -------- -------- -------- Total other income............................... $208,339 $220,794 $246,576 ======== ======== ========
Depositor fees of $79.0 million in 1995 increased substantially from fees of $45.3 million in 1994 and $39.9 million in 1993. The increase in depositor fees reflected substantial account growth coupled with a revised fee structure for certain deposit services. The primary component of this growth was noninterest-bearing checking accounts, considered the core accounts of consumer banking. Checking accounts are an attractive means of providing low-cost deposits, producing added fee income and generating opportunities to sell the Company's other products and services. Loan servicing fees were $29.3 million in 1995, up from $23.2 million in 1994. The balance of mortgage servicing rights also increased during this period to $104.5 million at December 31, 1995, from $70.9 million a year earlier. This higher level of loan servicing fees recognized and capitalized servicing rights both reflected an increase in the amount of loans serviced for others and the implementation of SFAS No. 122 in 1995 by ASB. The portfolio of loans serviced for others increased to $21.4 billion at December 31, 1995, from $15.3 billion at the end of 1994 as a result of the purchase of servicing rights on $4.2 billion of loans and the securitization and sale of residential loans. During 1994, the Company purchased the rights to service $3.9 billion of ARMs and sold servicing rights relating to $1.9 billion of its fixed-rate loan portfolio. Loan servicing fees consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Loan servicing income.............................. $ 53,155 $ 43,665 $ 47,652 Amortization of mortgage servicing rights.......... (23,840) (20,418) (27,083) -------- -------- -------- Loan servicing fees.............................. $ 29,315 $ 23,247 $ 20,569 ======== ======== ========
Mortgage servicing rights, net of amortization and the valuation allowance, were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year......................... $ 70,911 $ 66,031 $ 77,945 Additions........................................ 58,306 38,385 21,446 Sales............................................ -- (13,087) -- Amortization..................................... (23,840) (20,418) (27,083) Valuation allowance.............................. (882) -- (6,277) -------- -------- -------- Balance, end of year............................... $104,495 $ 70,911 $ 66,031 ======== ======== ========
The principal components of other service fees consist of service fees generated by the Company's nonbanking subsidiaries. Nonbanking service fees totaled $24.8 million in 1995, down from $37.9 million in 28 29 1994 and $43.1 million in 1993, primarily due to declining sales of securities products and the March 1995 sale of Mutual Travel. Due to the drop in nonbanking service fees, other service fees in 1995 totaled $49.7 million, compared with $65.2 million in 1994 and $71.9 million in 1993. The gain on sale of loans, inclusive of write-downs on mortgage servicing rights, totaled $1.7 million in 1995, compared with $23.5 million in 1994 and $25.3 million in 1993. During 1994, a $25.0 million gain was realized on the sale of the Company's credit card portfolio with a book value of $151.9 million. Except as noted above, sales activity in 1995 and 1994 was minimal as Washington Mutual retained or securitized most of its loan production. During 1993, gains of $31.4 million were earned on a sales volume of $1.8 billion, but prepayment activity required a write-down of mortgage servicing rights of $6.1 million. During 1995, the net loss of $655,000 on the sale of other assets, inclusive of write-downs, was primarily due to an $8.4 million write-down recorded due to credit quality deterioration on certain MBS partially offset by gains generated through the sale of fixed-rate MBS. Included in gains on the sale of other assets in 1994 of $23.9 million was the recognition of a $20.4 million gain on the sale of mortgage servicing rights related to the sale of $1.9 billion of loans serviced for others. Adjustments to Washington Mutual's balance sheet to accommodate the acquisition of Pacific First were responsible for approximately half of the $49.9 million in gains on the sale of other assets during 1993. During this restructuring, Washington Mutual primarily sold MBS to reduce the preacquisition size of its balance sheet. The balance of the 1993 gain included a $23.0 million gain resulting from a transaction among ASB, New West and their affiliates and the FDIC and the Resolution Trust Corporation (the "RTC"), which served to modify a number of the credit support and other arrangements that had been put in place at the time of the 1988 Acquisition. Other income for the year ended December 31, 1995 included $18.2 million, net, related to the sale of certain assets by ASB. These assets, single-family residential loans, were acquired by ASB in the 1988 Acquisition and were designated by relevant agreements as covered assets. The loss on the sale of the covered assets was offset by a 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 (as defined below). Other Expense. Total other expense of $700.5 million in 1995 increased slightly, compared with $695.5 million in 1994 and $687.5 million in 1993. Between 1993 and 1994, WMB's expenses increased by $20.4 million due to increased operations and number of financial centers. Partially offsetting this increase were efficiency measures taken at ASB, which reduced its operating expenses by $12.4 million. Washington Mutual's efficiency ratio was 58.3 percent for 1995 versus 58.9 percent for 1994 and 55.7 percent for 1993. The increase in the efficiency ratio from 1993 to 1994 was a result of a decrease in net interest income. Other expense consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Salaries and employee benefits..................... $313,304 $315,424 $316,929 Occupancy and equipment............................ 111,381 102,403 106,419 Regulatory assessments............................. 54,909 54,887 52,444 Data processing fees............................... 36,538 33,862 35,613 Other operating expense............................ 145,394 146,463 132,178 Amortization of goodwill and other intangible assets........................................... 28,306 29,076 24,690 Real estate owned operations, inclusive of write-downs...................................... 10,682 13,402 19,246 -------- -------- -------- Total other expense.............................. $700,514 $695,517 $687,519 ======== ======== ========
At year-end 1995, the Company had full-time equivalent employees of 7,903, virtually unchanged from 7,915 at the end of 1994, and from 7,889 at the end of 1993. The increase in occupancy and equipment expense to $111.4 million in 1995 from $102.4 million in 1994 and $106.4 million in 1993 was primarily due to the growth in the number of financial centers, an expansion of 29 30 head office facilities and technology upgrades. The decrease between 1993 and 1994 resulted from efficiency measures at ASB, which more than offset general increases at the rest of the Company. Regulatory assessments totaled $54.9 million in both 1995 and 1994, compared with $52.4 million in 1993. Although total deposits outstanding increased in 1995, the increase in deposit balances was offset by a reduction in the premium rate for BIF-insured deposits. The expense increase in 1994 was primarily the result of the increase in total deposits outstanding. Other operating expense (including data processing fees) increased to $181.9 million in 1995 from $180.3 million (inclusive of a $5.0 million expense for a legal settlement) in 1994 and $167.8 million in 1993. See "-- Nonbanking Subsidiary Operations." Other operating expenses tend to rise with the increased size of the Company. Goodwill and other intangible assets have resulted from business combinations accounted for as purchase transactions. Goodwill and other intangible assets are amortized using the straight-line method over the period that is expected to be benefited. The acquisition of Pacific First in the second quarter of 1993 was the most significant of such business combinations and resulted in the creation of $178.2 million in goodwill and other intangible assets to be amortized over 10 years. The amortization of goodwill and other intangible assets was $28.3 million in 1995, compared with $29.1 million in 1994 and $24.7 million in 1993. The reduction in expense from real estate owned ("REO") operations is generally attributable to a decline in the provision for REO losses, which were $10.5 million, $15.5 million and $26.9 million in 1995, 1994, and 1993, respectively. See "-- Asset Quality -- Provision for Loan Losses and Reserve for Loan Losses." Extraordinary Items. In 1993, Washington Mutual redeemed for cash all $40.0 million in principal of its 10.50 percent subordinated capital notes due March 15, 1999 for an after-tax charge of $1.6 million. Also during 1993, Washington Mutual prepaid advances from the Federal Home Loan Bank ("FHLB") of Seattle totaling $432.6 million for an after-tax charge of $7.4 million. Taxation. Income taxes include federal income taxes and applicable state income taxes. See "Business -- Taxation." As a result of the Budget Act, which was signed into law on August 10, 1993, the corporate tax rate increased to 35 percent effective January 1, 1993. Washington Mutual was also required under the Budget Act to report certain securities and other assets at fair market value effective January 1, 1993. This rule, however, has not had a material effect on the income tax provision of the Company. In connection with the 1988 Acquisition, the Internal Revenue Service entered into a closing agreement (the "Closing Agreement") with respect to the federal income tax consequences of the 1988 Acquisition and certain aspects of the taxation of Keystone Holdings and certain of its affiliates. The Closing Agreement contains provisions that are intended to ensure that losses generated by New West would be available to offset income of ASB for federal income tax purposes. In connection with the 1988 Acquisition, Keystone Holdings and certain of its affiliates entered into a number of continuing agreements with the predecessor to the FRF, which agreements were designed, in part, to provide that over time 75 percent of most of the federal income tax savings and 19.5 percent of most of the California tax savings (in each case computed in accordance with specific provisions contained in the Assistance Agreement between Keystone Holdings and the predecessors to the FRF (the "Assistance Agreement") in connection with the 1988 Acquisition) would be paid by Keystone Holdings to New West for the benefit of the FRF. The provision for such payments is reflected in the financial statements as "payments in lieu of taxes." See "Business -- Tax-Related Agreements -- Assistance Agreement." Due to the above arrangements, the Company's effective tax rate (including payments in lieu of taxes) for the three years ended December 31, 1995 has ranged from approximately 28 percent to 30 percent, compared to a normal corporate tax rate of 35 percent. In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS No. 109, Accounting for Income Taxes, which changed the accounting principles governing accounting for income taxes. The statement requires the use of the liability method in accounting for income taxes and eliminates on 30 31 a prospective basis the former exception from the provision of deferred income taxes on thrift bad debt reserves. The change was implemented in 1992 for ASB and during the first quarter of 1993 for Washington Mutual (without regard to ASB). The change resulted in an after-tax cumulative positive adjustment to earnings of $60.0 million in 1992 and $13.4 million in 1993. NONBANKING SUBSIDIARY OPERATIONS. For a description of the Company's principal nonbanking subsidiaries, see "Business -- Washington Mutual's Operating Subsidiaries." Nonbanking subsidiary results of operations were as follows:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------- --------------------------- 1996 1995 1995 1994 1993 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) WM Life Insurance Co........................... $11,832 $10,912 $14,292 $12,482 $ 9,900 ASB Financial Services, Inc.................... 10,027 7,850 10,599 11,245 14,089 Composite Research & Management Co............. 2,516 2,095 2,967 2,854 2,539 ASB Insurance Agency, Inc...................... 1,438 441 1,100 -- -- Murphey Favre, Inc............................. 561 442 437 (2,249) 4,334 Mutual Travel, Inc............................. -- 229 229 1,178 1,266 Other.......................................... 4,478 (654) (644) (23) 39 ------- ------- ------- ------- ------- Net income before amortization of goodwill and other intangible assets, elimination of intercompany transactions, and income taxes........................................ 30,852 21,315 28,980 25,487 32,167 Amortization of goodwill and other intangible assets....................................... 105 749 932 1,501 1,874 ------- ------- ------- ------- ------- Net income before elimination of intercompany transactions and income taxes................ $30,747 $20,566 $28,048 $23,986 $30,293 ======= ======= ======= ======= =======
Nine Months Ended September 30, 1996 Compared With Nine Months Ended September 30, 1995. Operating income (net income before amortization of goodwill and other intangible assets, elimination of intercompany transactions and income taxes) for the nine months ended September 30, 1996 was $30.9 million, compared with $21.3 million for the same period in 1995. WM Life improved its pretax operating income to $11.8 million for the first nine months of 1996, from $10.9 million in the same period of 1995. Most of the increase in WM Life pretax operating income was due to higher net interest income resulting from growth in net interest-earning assets. ASB Financial had pretax operating income of $10.0 million for the nine months ended September 30, 1996, an increase of 27 percent, compared with $7.9 million for the same period last year, primarily as a result of greater securities sales. Composite Research's pretax operating income improved slightly to $2.5 million during for the first nine months of 1996 from $2.1 million during the same period in 1995. At September 30, 1996, Composite Research's assets under management totaled $1.3 billion. Pretax operating income for ASB Insurance for the nine months ended September 30, 1996 totaled $1.4 million, compared with $441,000 for the same period in 1995. ASB Insurance began operations in 1995. Murphey Favre posted pretax operating income of $561,000 for the first nine months of 1996, compared with $442,000 during the same period in 1995. During 1996, Murphey Favre recorded a $1.7 million charge resulting from a legal settlement with residents of Montana related to the sale by Murphey Favre between 1987 and 1990 of bonds issued by Homestead Savings of Millbrae, California. The results of operations during the first nine months of 1996 for other nonbanking subsidiaries included the recognition of a previously deferred gain of $4.1 million on the 1995 sale of Mutual Travel. For the Three Years Ended December 31, 1995. Operating income was $29.0 million in 1995, compared with $25.5 million in 1994 and $32.2 million in 1993. 31 32 WM Life improved its operating performance, posting pretax operating income of $14.3 million in 1995, up from $12.5 million in 1994 and $9.9 million in 1993. Contributing to the improvement in earnings were strong sales of annuities. However, annuities outstanding at year-end 1995 were up only 7 percent to $855.5 million, from $799.2 million at the end of 1994 due to a high level of surrenders of annuity contracts. Annuities outstanding at the end of 1994 were up 12 percent from $713.4 million at the end of 1993. Higher sales commissions and salaries expense, related to higher securities commission revenues, resulted in a decrease in pretax operating income at ASB Financial in 1995 from $11.2 million in 1994 to $10.6 million in 1995. 1994 pretax operating income was reduced from the 1993 levels of $14.1 million primarily as a result of declining securities commission revenue. Composite Research's financial performance has remained steady during the past three years, with pretax operating income rising slightly to $3.0 million in 1995 from $2.9 million in 1994 and $2.5 million in 1993. Assets of the Composite Group of mutual funds, managed by Composite Research, were $1.3 billion at December 31, 1995, $1.1 billion at year-end 1994 and $1.3 billion at December 31, 1993. Although there has been a net outflow of investor funds, the differences in asset balances are primarily due to fluctuations in market valuation of the mutual fund assets. In 1995, its first year of operations, pretax operating income for ASB Insurance totaled $1.1 million. Lower sales reduced pretax operating income for Murphey Favre to $437,000 in 1995. The pretax net loss of $2.2 million in 1994 resulted primarily from the $5.0 million expense of a legal settlement related to the sale by Murphey Favre between 1987 and 1990 of bonds issued by Homestead Savings of Millbrae, California. Murphey Favre earned $4.3 million on a pretax basis during 1993. The 1994 pretax operating income of Mutual Travel was $1.2 million, compared with $1.3 million in 1993. In March 1995, Washington Mutual sold Mutual Travel to a company whose principal shareholders were Mutual Travel's management team. The sales price resulted in a pretax gain of $4.1 million, which was recognized in 1996. REVIEW OF FINANCIAL POSITION ASSETS. At September 30, 1996, the Company's assets were $43.7 billion, an increase of 4 percent from $42.0 billion at December 31, 1995. During 1995, total assets grew $4.5 billion to end the year at $42.0 billion. At December 31, 1994, total assets were $37.5 billion, an increase of $3.9 billion from December 31, 1993. Most of the growth during 1994, 1995 and 1996 resulted from retaining originated loans (either as part of the loan portfolio or as MBS). Growth in assets is limited by management's decision to maintain all of its banks at a "well-capitalized" level. INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at September 30, 1996 was carried at $13.1 billion, a 15 percent decrease from the December 31, 1995 balance of $15.4 billion. During the first nine months of 1996, the Company continued the restructuring of its investment portfolio by selling fixed-rate securities and replacing them with adjustable-rate securities. This portfolio restructuring was intended to reduce Washington Mutual's sensitivity to changes in market interest rates. As noted above, however, the portfolio restructuring also contributed to a decline in the yield on interest-earning investment securities. See "-- Net Interest Income." At September 30, 1996, the Company's investment portfolio included $10.1 billion of available-for-sale securities, $3.0 billion of held-to-maturity securities (with a fair value of $3.0 billion), and $2.2 million of trading account securities. MBS constituted $11.6 billion or 89 percent of the total investment portfolio. The Company's investment portfolio increased 77 percent to $15.4 billion at December 31, 1995 from $8.7 billion a year, primarily due to the Company's retention of $6.6 billion of loans which it securitized. Also in 1995, as in 1994, Washington Mutual leveraged its capital through purchases of investment securities. These purchases were funded mostly through borrowings. By leveraging the balance sheet through the use of these wholesale activities, Washington Mutual generated additional net interest income. 32 33 At December 31, 1995, the Company's investment portfolio included $12.2 billion of available-for-sale securities, $3.2 billion of held-to-maturity securities (with a fair value of $3.3 billion), and $238,000 of trading account securities. During 1995, the FASB issued a report entitled A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers which allowed companies a one-time reassessment and related reclassification from the held-to-maturity category to the available-for-sale category without adverse accounting consequences for the remainder of the portfolio. Pursuant to the FASB report, Washington Mutual reclassified $4.9 billion of its held-to-maturity securities into the available-for-sale category on December 1, 1995. Of the securities transferred, over half were fixed-rate securities. During 1994, there were no transfers between the available-for-sale and held-to-maturity portfolios, nor were there any sales from the held-to-maturity portfolio. See "Business -- Asset and Liability Management." LOANS. Total loans outstanding, including loans held for sale, at September 30, 1996 were $28.5 billion, up from $24.2 billion at December 30, 1995 and $25.5 billion at year-end 1994. Changes in the loan balances are primarily driven by originations of new loans, prepayments of existing loans, scheduled repayments of principal, and loan securitizations. Loans originated by product line consisted of the following:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, -------------------------- ---------------------------------------- 1996 1995 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Real estate: Residential (1-4 family units): Fixed rate........................ $ 2,772,973 $1,363,634 $2,365,603 $1,040,035 $3,972,550 Adjustable-rate................... 4,557,338 3,233,001 4,455,740 5,288,231 3,173,748 Residential construction............ 973,432 674,208 935,827 1,034,176 847,217 Apartment buildings................. 352,811 245,495 348,942 618,201 674,672 Other commercial real estate........ 183,416 115,701 166,987 136,749 164,435 ----------- ---------- ---------- ---------- ---------- Total real estate loans...... 8,839,970 5,632,039 8,273,099 8,117,392 8,832,622 Consumer: Second mortgage and other consumer.......................... 689,425 539,318 722,871 776,176 768,666 Manufactured housing................ 251,678 207,047 274,115 277,358 210,819 ----------- ---------- ---------- ---------- ---------- Total consumer loans......... 941,103 746,365 996,986 1,053,534 979,485 Commercial business................... 258,634 119,784 167,830 128,539 103,722 ----------- ---------- ---------- ---------- ---------- Total loans originated....... $10,039,707 $6,498,188 $9,437,915 $9,299,465 $9,915,829 =========== ========== ========== ========== ========== Residential refinances to total residential originations............ 40.83% 38.09% 42.14% 48.31% 76.68%
In 1993 and early 1994, the Company's originations included significant refinancing activity that was generated by low market interest rates. Higher interest rates in 1994 curtailed refinancing activity for the year and resulted in an increase in residential adjustable-rate originations compared to residential fixed-rate originations. As a consequence of higher interest rates, total lending volumes in 1994 were below those in 1993. Refinancings increased again during the second half of 1995 as market interest rates declined. The decline in apartment building originations from 1994 to 1995 was due to a management decision at ASB to reduce lending volumes in that product line. DEPOSITS. Total deposits decreased to $24.0 billion at September 30, 1996 from $24.5 billion at December 31, 1995. Time deposits at WMB were allowed to run off because management chose not to be as aggressive in the repricing of time deposits. Partially offsetting the $795.8 million decline in time deposits were increases in the level of money market and checking accounts. Both of these products have the benefit of lower interest costs. Total deposits increased to $24.5 billion at December 31, 1995, from $23.3 billion at December 31, 1994. 33 34 While the vast majority of deposits are retail in nature, the Company does engage in certain wholesale activities -- primarily accepting time deposits from political subdivisions and public agencies. The Company considers wholesale deposits to be an alternative borrowing source rather than a customer relationship, and as such, their levels are determined by management's decisions as to the most economic funding sources. The following table sets forth information relating to deposit flows, total deposits and the weighted average interest rate on deposit accounts:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, --------------------------- ------------------------------------------- 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Decrease due to deposit outflow... $(1,283,490) $ (592,633) $ (432,942) $(1,236,514) $(1,912,765) Increase due to acquired deposits........................ -- 417,078 417,078 211,537 3,831,700 Increase due to interest credited........................ 799,045 842,413 1,134,818 852,666 868,178 ----------- ----------- ----------- ----------- ----------- Increase (decrease) in total deposits...................... $ (484,445) $ 666,858 $ 1,118,954 $ (172,311) $ 2,787,113 =========== =========== =========== =========== =========== Total deposits at end of period... $23,978,515 $24,010,864 $24,462,960 $23,344,006 $23,516,317 Weighted average rate for the period.......................... 4.43% 4.67% 4.69% 3.69% 3.76%
BORROWINGS. Washington Mutual's borrowings primarily take the form of federal funds purchased, securities sold under agreements to repurchase and advances from the FHLB of Seattle and San Francisco. These borrowing sources totaled $1.0 billion, $8.6 billion and $5.5 billion, respectively, at September 30, 1996, compared with $433.4 million, $8.0 billion and $4.7 billion, respectively, at year-end 1995. At December 31, 1994, the Company had $6.6 billion of securities sold under agreements to repurchase, $4.1 billion of advances from the FHLB of Seattle and San Francisco and no federal funds purchased. See "Business -- Sources of Funds -- Borrowings and Annuities." ASSET QUALITY PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES. Nine Months Ended September 30, 1996 Compared With Nine Months Ended September 30, 1995. The provision for loan losses is based upon management's estimate of the amount necessary to maintain adequate reserves for losses inherent in the Company's loan portfolio. The estimate of inherent losses is developed by considering a number of factors, including matters pertinent to the underlying quality of the loan portfolio and management's policies, practices and intentions with respect to credit administration and asset management. The provision for loan losses for the nine months ended September 30, 1996 was $58.1 million, which was substantially unchanged from $57.5 million for the same period in 1995, primarily reflecting the fact that the dollar amounts of nonperforming loans were substantially the same in both periods. The balance of the reserve for loan losses was $234.3 million at September 30, 1996, virtually unchanged from $235.3 million at December 31, 1995. Reserves charged off, net of recoveries, totaled $59.1 million for the nine months ended September 30, 1996, compared with $69.3 million for the same period in 1995. 34 35 Changes in the reserve for loan losses were as follows:
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of period..................................... $235,275 $244,989 Provision for loan losses........................................ 58,138 57,540 Reserves added through business combinations..................... -- 5,372 Reserves charged-off: Residential.................................................... (40,387) (42,670) Residential construction....................................... (14) (112) Commercial real estate......................................... (17,636) (26,163) Manufactured housing, second mortgage and other consumer....... (6,583) (5,906) Commercial business............................................ (296) (283) -------- -------- (64,916) (75,134) Reserves recovered: Residential.................................................... 3,323 1,763 Residential construction....................................... -- 47 Commercial real estate......................................... 1,886 3,093 Manufactured housing, second mortgage and other consumer....... 580 715 Commercial business............................................ 55 255 -------- -------- 5,844 5,873 -------- -------- Balance, end of period........................................... $234,341 $238,640 ======== ======== Net charge-offs as a percentage of average loans................. 0.22% 0.27% Reserve for loan losses as a percentage of: Nonperforming loans............................................ 108.33 119.89 Nonperforming assets........................................... 72.53 71.68
As part of the process of determining the adequacy of the reserve for loan losses, management reviews its loan portfolio for specific weaknesses. A portion of the reserve is then allocated to reflect the identified loss exposure. The September 30, 1996 analysis of residential construction, commercial real estate and commercial business loans resulted in an allocation of $23.5 million of the reserve. At December 31, 1995, the Company had allocated reserves of $16.6 million. The remaining reserve of $210.8 million at September 30, 1996 was unallocated and available for potential losses from any of the Company's loans. An analysis of the reserve for loan losses was as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (DOLLARS IN THOUSANDS) Allocated reserves: Commercial real estate................................... $ 21,682 $ 16,488 Residential construction................................. 193 158 Commercial business...................................... 1,672 -- -------- -------- 23,547 16,646 Unallocated reserves....................................... 210,794 218,629 -------- -------- Total reserve for loan losses......................... $234,341 $ 235,275 ======== ========
A reserve for REO losses is maintained for any subsequent decline in the value of foreclosed property. The reserve for REO losses was $6.6 million at September 30, 1996, compared with $10.1 million at December 31, 1995. The level is based upon a routine review of the REO portfolio and the strength of national and local economies. 35 36 The Company recorded a $125.0 million addition to the reserve for loan losses at the Effective Date. The additional reserve for loan losses was provided principally because a number of Washington Mutual's credit administration and asset management philosophies and procedures differed from those of ASB. Those differences consisted principally of the following: (i) Washington Mutual is more proactive in dealing with emerging credit problems and tends to prefer foreclosure actions to induce borrowers to correct defaults, whereas ASB was not as proactive and tended to prefer workouts in lieu of a more aggressive foreclosure stance; and (ii) ASB considered the risk characteristics of its portfolio of loans secured by apartment buildings of less than $1.0 million to be similar to its single-family residential portfolio; Washington Mutual, on the other hand, considers the risk characteristics of that portfolio to be more closely aligned with its commercial real estate loan portfolio, which tends to have a higher incidence of loan losses than the single-family residential portfolio. Washington Mutual is conforming ASB's asset management practices, administration, philosophies and procedures to those of WMB and WMBfsb. The plan of realization of troubled loans differed between the companies and therefore resulted in different levels of loss reserves. The addition to the reserve for loan losses was to a lesser degree provided because Washington Mutual believed that, while there had been an increase in the value of residential real estate in certain California markets, a decline in collateral values for some portions of the California real estate market occurred in late 1996. Management of the Company has individually reviewed ASB's large performing and nonperforming loans and performed a review of its other loan portfolios and is developing appropriate strategies for such credits. As a result, Washington Mutual expects that approximately one-third of the additional $125.0 million provision will be allocated to loans in the commercial real estate loan portfolio. The remainder is attributed to ASB's apartment building loans with balances under $1.0 million and to various residential loan portfolios, for which specific reserve allocations will not be recorded. For the Five Years Ended December 31, 1995. The provision for loan losses during 1995 was $75.0 million, compared with $122.0 million in 1994 and $158.7 million in 1993. The 1995 provision reflected a decline in the level of nonperforming assets, particularly California residential and apartment building real estate loans. The 1994 provision reflected a significant decline in the levels of certain nonperforming assets, but was increased from levels otherwise indicated by $12.5 million related to losses resulting from the Northridge, California earthquake in January 1994 The provision for loan losses of $158.7 million during 1993 was virtually unchanged from 1992's level of $158.5 million, but up significantly from $85.8 million during 1991. During 1991, California's general economic indicators, including employment, consumer confidence and the value of residential real estate, began to deteriorate. These trends continued through 1992 and 1993. In response to these trends, the Company increased its reserve for loan losses through the provision for loan losses during those years and tightened underwriting standards at ASB. Management believes that the stricter underwriting standards initiated at ASB in the latter part of 1991 and 1992 have helped to alleviate the level of loan delinquencies, despite the recessionary conditions that existed in California. The delinquency experience of loans originated by ASB subsequent to 1992 has been significantly less than that of those originated prior to 1992. Management believes that the high rate of delinquencies in prior years' originations can be attributed to a limited documentation program offered by ASB during 1989 and 1990 as well as the general decline in the value of residential real estate that resulted in the deterioration of many borrowers' equity. The loan loss provision in 1992 and 1993 was also affected by the increase in the size of the loan portfolio, and in 1993, caution about the quality of the loans acquired from Pacific First. Integral to determining the level of the provision for loan losses in any given year is an analysis of actual loss experience and plans for problem loan administration and resolution. Loan charge-offs, net of recoveries for 1995, totaled $90.1 million, which was less than the level of net charge-offs of $123.0 million in 1994, $139.3 million in 1993, and $114.7 million in 1992. The downward trend in residential delinquencies over the past two years resulted in reduced charge-offs and declines in the overall provision for loan losses during 1995. Charge-offs on loans secured by commercial real estate were relatively higher in 1995 than in prior years. Although charge-offs have increased, commercial real estate delinquencies as a percentage of the total commercial real estate loan portfolio have declined significantly, contributing to the lower overall provision for loan losses. At year-end 1992, commercial credits, which consisted primarily of high-yield bonds, declined to 36 37 $14.0 million from $22.2 million at the end of the previous year. This decline was mostly due to $6.6 million in sales during the year. However, by the end of 1992, nonperforming assets in this portfolio had increased to $8.5 million from $360,000 one year earlier. This increase in nonperforming credits was anticipated by management and was considered in the 1991 analysis of the reserve for loan losses. During 1991, a major portion of net charge-offs were the result of losses on commercial credits. The Company's exposure to commercial credits has declined significantly in recent years. Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................. $244,989 $245,062 $179,612 $130,423 $ 94,523 Provision for loan losses................... 74,987 122,009 158,728 158,537 85,807 Reserves added through business combinations.............................. 5,372 921 46,000 5,321 573 Reserves charged-off: Residential............................... (57,147) (89,637) (93,799) (77,815) (14,074) Residential construction.................. (125) (190) (297) (937) (139) Commercial real estate.................... (33,149) (26,835) (26,967) (19,377) (7,624) Manufactured housing, second mortgage and other consumer......................... (6,888) (10,544) (16,964) (17,017) (13,055) Commercial business/credits............... (813) (2,065) (3,065) (1,321) (18,544) -------- -------- -------- -------- -------- Total reserves charged off........ (98,122) (129,271) (141,092) (116,467) (53,436) Reserves recovered: Residential............................... 2,393 2,522 45 17 36 Residential construction.................. 47 -- -- -- 314 Commercial real estate.................... 4,426 2,186 889 571 598 Manufactured housing, second mortgage and other consumer......................... 701 1,117 768 313 315 Commercial business/credits............... 482 443 112 897 1,693 -------- -------- -------- -------- -------- Total reserves recovered.......... 8,049 6,268 1,814 1,798 2,956 -------- -------- -------- -------- -------- Balance, end of year........................ $235,275 $244,989 $245,062 $179,612 $130,423 ======== ======== ======== ======== ======== Net charge-offs as a percentage of average loans..................................... 0.35% 0.56% 0.70% 0.69% 0.34%
As part of the process of determining the adequacy of the reserve for loan losses, management reviews the loan portfolio for specific weaknesses. A portion of the reserve is then allocated to reflect the identified loss exposure. Residential real estate and consumer loans are not individually analyzed for impairment and loss exposure because of the significant number of loans and their relatively small individual balances. Residential construction, commercial real estate and commercial business loans with balances over $1.0 million were evaluated individually for impairment, which resulted in an allocation of $16.6 million of the reserve for loan losses at year-end 1995, compared with an allocation of $21.4 million a year earlier. Contributing to the decline was a reduction in the level of allocated reserves related to commercial real estate in California. Unallocated reserves are established for loss exposure that may exist in the remainder of the loan portfolio but has yet to be identified. In determining the adequacy of unallocated reserves, management considers changes in the size and composition of the loan portfolio, actual historical loan loss experience, and current and anticipated economic conditions. 37 38 An analysis of the reserve for loan losses was as follows:
DECEMBER 31, ---------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Allocated reserves: Commercial real estate.................... $ 16,488 $ 20,025 $ 22,833 $ 22,496 $ 5,736 Residential construction.................. 158 1,327 1,503 1,219 1,901 Commercial business/credits............... -- -- 1,718 5,597 10,064 -------- -------- -------- -------- -------- Total allocated reserves.......... 16,646 21,352 26,054 29,312 17,701 Unallocated reserves........................ 218,629 223,637 219,008 150,300 112,722 -------- -------- -------- -------- -------- Total loan loss reserves.......... $235,275 $244,989 $245,062 $179,612 $130,423 ======== ======== ======== ======== ======== Total reserve for loan losses as a percentage of: Nonperforming loans.................... 110.04% 87.22% 72.74% 54.58% 45.60% Nonperforming assets................... 69.42 58.52 46.91 31.98 30.37
CLASSIFIED ASSETS The following table sets forth the Company's classified assets, which consist of nonaccrual loans, loans under foreclosure, REO and performing loans (including substandard troubled debt restructurings) and securities that exhibit credit quality weaknesses. When and if loans sold on a recourse basis are nonperforming, they are included in nonaccrual loans. See "Supplemental Consolidated Financial Statements -- Note 1: Summary of Significant Accounting Policies."
DECEMBER 31, SEPTEMBER 30, ------------------- 1996 1995 1994 ------------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure................. $ 216,325 $213,802 $280,899 REO.......................................................... 106,748 125,101 137,767 -------- -------- -------- Total nonperforming assets......................... 323,073 338,903 418,666 Troubled debt restructurings (classified as substandard)..... 87,239 85,483 54,583 Other classified assets...................................... 133,257 129,264 169,004 -------- -------- -------- Total classified assets............................ $ 543,569 $553,650 $642,253 ======== ======== ========
Nonperforming assets decreased to 0.74 percent of total assets at September 30, 1996 or $323.1 million, compared with $338.9 million or 0.81 percent of total assets at December 31, 1995. Nonperforming assets decreased 19 percent to $338.9 million at the end of 1995, from $418.7 million at the end of 1994. At September 30, 1996, nonperforming assets in California accounted for 71 percent of total nonperforming assets, down from 75 percent and 83 percent at the ends of 1995 and 1994. The decline in residential nonperforming loans from 1993 through 1995 is largely a result of a tightening of underwriting standards at ASB beginning in mid-1991. Declining market rents and occupancy rates in certain areas of Los Angeles that were negatively affected by the economic environment during the three years ended December 31, 1995, as well as the Los Angeles riots in 1992 and the Northridge earthquake in January 1994, contributed to higher charge-offs in the apartment loan portfolio in 1994 and 1995, thereby reducing the level of nonperforming apartment loans. See " -- Provision for Loan Losses and Reserve for Loan Losses." 38 39 Nonperforming assets and troubled debt restructurings consisted of the following:
DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- 1996 1995 1994 1993 1992 1991 ------------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure Real estate loans: Residential................ $ 163,521 $158,040 $172,136 $233,618 $253,888 $232,460 Residential construction... 7,512 9,550 4,640 8,527 5,856 14,583 Apartment buildings........ 12,558 23,300 70,944 53,474 37,059 5,734 Other commercial real estate................... 17,780 12,663 23,549 20,516 14,883 22,501 -------- -------- -------- -------- -------- -------- Total real estate loans................. 201,371 203,553 271,269 316,135 311,686 275,278 Second mortgage and other consumer loans................ 8,972 7,502 6,969 14,783 7,218 8,192 Manufactured housing loans...... 5,033 1,923 1,643 2,207 1,571 1,680 Commercial business loans/credits................. 949 824 1,018 3,785 8,580 867 -------- -------- -------- -------- -------- -------- Total nonperforming loans.................... 216,325 213,802 280,899 336,910 329,055 286,017 REO, net of REO reserves........ 106,748 125,101 137,767 185,492 232,568 143,385 -------- -------- -------- -------- -------- -------- Total nonperforming assets................... $ 323,073 $338,903 $418,666 $522,402 $561,623 $429,402 ======== ======== ======== ======== ======== ======== Troubled debt restructurings.... $ 95,053 $ 90,623 $ 54,583 $ 68,670 $104,538 $ 9,131 Nonperforming assets as a percentage of total assets.... 0.74% 0.81% 1.12% 1.55% 2.03% 1.68%
Nonperforming assets by geographic concentration were as follows:
SEPTEMBER 30, 1996 ------------------------------------------------------------- OTHER CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL -------- ---------- ------- ------ ------- -------- (DOLLARS IN THOUSANDS) Real estate loans: Residential......................... $122,110 $ 29,889 $ 3,933 $ 680 $ 6,909 $163,521 Residential construction............ -- 5,410 1,778 324 -- 7,512 Apartment buildings................. 12,558 -- -- -- -- 12,558 Other commercial real estate........ 10,265 4,382 499 -- 2,634 17,780 -------- ------- ------- ------ ------- -------- Total real estate loans.......... 144,933 39,681 6,210 1,004 9,543 201,371 Second mortgage and other consumer loans............................... 1,679 3,522 1,689 29 2,053 8,972 Manufactured housing loans............ -- 2,135 1,111 115 1,672 5,033 Commercial business loans............. -- 16 750 -- 183 949 -------- ------- ------- ------ ------- -------- Total nonperforming loans........ 146,612 45,354 9,760 1,148 13,451 216,325 REO................................... 88,833 22,652 779 -- 1,120 113,384 REO reserves.......................... (6,636) -------- ------- ------- ------ ------- -------- Total nonperforming assets....... $235,445 $ 68,006 $10,539 $1,148 $14,571 $323,073 ======== ======= ======= ====== ======= ======== Nonperforming assets by state as a percentage of total nonperforming assets.............................. 71% 21% 3% -- 5% 100%
IMPAIRED LOANS. On January 1, 1995, the Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan. It is applicable to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Loans collectively evaluated for impairment include residential real estate and consumer loans because of the significant number of loans and their relatively small balances. All residential construction, commercial real estate and commercial business loans over $1.0 million are individually evaluated for impairment. Factors involved in determining impairment include, but are not 39 40 limited to, the financial condition of the borrower, the value of the underlying collateral, and current economic conditions. SFAS No. 114 also applies to all loans that are restructured in a troubled debt restructuring, subsequent to the adoption of SFAS No. 114, as defined by SFAS No. 15. A troubled debt restructuring is a restructuring in which the creditor grants a concession to the borrower that it would not otherwise consider. At September 30, 1996, the Company had $95.1 million of restructured loans of which $72.8 million, though performing, were considered to be impaired. Troubled debt restructurings that were not considered to be impaired were restructured prior to 1995 and have been performing according to the terms of the restructure. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires that impairment of loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company bases the measurement of loan impairment on the fair value of the loan's underlying collateral. The amount by which the recorded investment in the loan exceeds the value of the impaired loan's collateral is included in the Company's allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off. At September 30, 1996, loans totaling $195.3 million were impaired, of which $122.8 million had allocated reserves of $21.6 million. The remaining $72.5 million were either nonperforming or previously written down and had no reserves allocated to them. Of the $195.3 million of impaired loans, $36.2 million were on nonaccrual status or under foreclosure. The average balance of impaired loans during 1996 was $189.8 million and the Company recognized $14.7 million of related interest income. Interest income is normally recognized on an accrual basis; however, if the impaired loan is nonperforming, interest income is then recorded on the receipt of cash. Impaired loans and the related allocated reserve for loan losses were as follows:
SEPTEMBER 30, 1996 ------------------------------------------------- GROSS LOAN AMOUNT NET LOAN ALLOCATED AMOUNT CHARGED-OFF AMOUNT RESERVES ---------- ----------- -------- ----------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure: With allocated reserves........................... $ 26,853 $ 3,782 $ 23,071 $ 4,553 Without allocated reserves........................ 13,100 -- 13,100 -- -------- ------ -------- ------- 39,953 3,782 36,171 4,553 Troubled debt restructurings: With allocated reserves........................... 23,607 -- 23,607 3,605 Without allocated reserves........................ 50,197 971 49,226 -- -------- ------ -------- ------- 73,804 971 72,833 3,605 Other impaired loans: With allocated reserves........................... 76,392 290 76,102 13,454 Without allocated reserves........................ 15,016 4,844 10,172 -- -------- ------ -------- ------- 91,408 5,134 86,274 13,454 -------- ------ -------- ------- Total impaired loans.............................. $205,165 $ 9,887 $195,278 $21,612 ======== ====== ======== =======
At December 31, 1995, loans totaling $169.1 million were impaired, of which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4 million were either nonperforming or previously written down, and had no reserves allocated to them. Of the $169.1 million of impaired loans, $26.7 million were on nonaccrual status or under foreclosure, and $142.3 million (including $57.1 million of troubled debt restructurings) were performing but judged to be impaired. See "-- Asset Quality -- Classified Assets" and "Supplemental Consolidated Financial Statements -- Note 6: Loans." 40 41 Impaired loans and the related allocated reserve for loan losses were as follows:
DECEMBER 31, 1995 ------------------------------------------------- GROSS LOAN AMOUNT NET LOAN ALLOCATED AMOUNT CHARGED-OFF AMOUNT RESERVES ---------- ----------- -------- ----------- (DOLLARS IN THOUSANDS) Nonaccrual loans and loans under foreclosure: With allocated reserves........................... $ 9,853 $ 1,224 $ 8,629 $ 2,192 Without allocated reserves........................ 19,226 1,113 18,113 -- -------- ------ -------- ------ 29,079 2,337 26,742 2,192 Troubled debt restructurings: With allocated reserves........................... 16,917 -- 16,917 3,115 Without allocated reserves........................ 40,733 516 40,217 -- -------- ------ -------- ------ 57,650 516 57,134 3,115 Other impaired loans: With allocated reserves........................... 66,161 33 66,128 11,339 Without allocated reserves........................ 25,665 6,600 19,065 -- -------- ------ -------- ------ 91,826 6,633 85,193 11,339 -------- ------ -------- ------ Total impaired loans........................... $178,555 $ 9,486 $169,069 $16,646 ======== ====== ======== ======
INTEREST RATE RISK MANAGEMENT Washington Mutual engages in a comprehensive asset and liability management program that attempts to reduce the risk of significant decreases in net interest income caused by interest rate changes. One of the Company's strategies to reduce the effect of future movements in interest rates is to increase the percentage of adjustable-rate assets in its portfolio. During the first nine months of 1996, the Company securitized and then sold the majority of the fixed-rate loans it originated, while retaining nearly all of its adjustable-rate loan production. The Company retained the servicing rights to the loans that were sold. In addition, as part of the restructuring strategy initiated in late 1995, the Company purchased adjustable-rate assets and sold fixed-rate mortgage-backed securities. A conventional measure of interest rate sensitivity for thrift institutions is the one-year gap, which is calculated by dividing the difference between assets maturing or repricing within one year and total liabilities maturing or repricing within one year by total assets. The Company's assets and liabilities that mature or reprice within one year were as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (DOLLARS IN MILLIONS) Interest-sensitive assets.................................... $ 29,885 $ 27,733 Derivative instruments designated against assets............. 1,750 1,825 Interest-sensitive liabilities............................... (33,858) (31,471) Derivative instruments designated against liabilities........ 1,799 832 -------- -------- Net liability sensitivity.................................... $ (424) $ (1,081) ======== ======== One-year gap................................................. (0.97)% (2.57)%
The implementation of strategies to reduce interest rate risk, however, generally has the negative effect of lowering current period earnings. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates; nevertheless, rising interest rates or a flat yield curve adversely affect the Company's operations. Management tries to balance these two factors in administering its interest rate risk program. As part of the asset and liability management program, the Company actively manages the asset and liability maturities and at various times uses derivative instruments, such as interest rate exchange agreements 41 42 and interest rate cap agreements, to reduce the negative effect that rising rates could have on net interest income. Derivative instruments, if not used appropriately, can subject a company to unintended financial exposure. 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. Under no circumstances are these instruments 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 "Supplemental Consolidated Financial Statements -- Note 18: Interest Rate Risk Management." At the end of 1995, Washington Mutual's one-year gap was a negative 2.57 percent, compared to a positive 7.76 percent at the end of 1994. While the one-year gap at December 31, 1995 on a consolidated basis is fairly neutral, the level of interest sensitivity is not the same throughout the organization. WMB's one-year gap was a negative 13.3 percent at the end of 1995 due in large part to the preference of its customers for fixed-rate loan products. Management can compensate for this preference by selling fixed-rate loans, purchasing adjustable-rate assets, and strategically using hedging instruments, all of which were done during 1995. Since the vast majority of interest-earning assets at ASB are COFI ARM products, however, its one-year gap at the end of 1995 was a positive 9.6 percent. At September 30, 1996, interest-sensitive assets of $29.9 billion and interest-sensitive liabilities of $33.9 billion were scheduled to mature or reprice within one year. At September 30, 1996, the Company's one-year gap was a negative 0.97 percent. The Company's interest rate sensitivity has decreased with the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of ARMs originated by ASB. It still, however, suffers from some short-term volatility of net income because of the effect of COFI lag. Management hopes to reduce this short-term volatility in part by increasing production of non-COFI adjustable-rate products and short-term fixed-rate products such as consumer loans. At September 30, 1996, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $14.8 billion. Without these instruments, the Company's one-year gap at September 30, 1996, would have been a negative 9.0 percent as opposed to a negative 0.97 percent. See "Supplemental Consolidated Financial Statements -- Note 18: Interest Rate Risk Management" for a discussion of the use of derivative instruments. 42 43 Interest sensitivity analysis by maturity or repricing period for Washington Mutual at December 31, 1995 was as follows:
WITHIN WITHIN AFTER ONE AFTER TWO AFTER FIVE 0-3 4-12 BUT WITHIN BUT WITHIN BUT WITHIN AFTER MONTHS MONTHS TWO YEARS FIVE YEARS 10 YEARS 10 YEARS TOTAL ------- ------- ---------- ---------- ---------- -------- ------- (DOLLARS IN MILLIONS) Interest-sensitive assets: Cash, cash equivalents, and trading account securities(1).............. $ 1,061 $ -- $ -- $ -- $ -- $ -- $ 1,061 Available-for-sale securities(2)..... 5,284 2,457 396 1,260 1,248 1,263 11,908 Held-to-maturity securities.......... 3,025 3 1 32 66 71 3,198 Loans(3): Real estate loans.................. 11,733 2,817 1,410 2,592 1,513 1,368 21,433 Manufactured housing, second mortgage and other consumer...... 593 638 499 744 336 81 2,891 Commercial business................ 94 28 13 24 16 5 180 ------- ------- ---------- ---------- ---------- -------- ------- Total loans................... 12,420 3,483 1,922 3,360 1,865 1,454 24,504 ------- ------- ---------- ---------- ---------- -------- ------- Total interest-securities assets...................... 21,790 5,943 2,319 4,652 3,179 2,788 40,671 Derivative instruments affecting interest rate sensitivity: Interest rate exchange agreements: Designated against available-for-sale securities.... 775 (75) (200) (500) -- -- -- Interest rate cap agreements: Designated against available-for-sale securities.... 1,975 (850) (875) (250) -- -- -- ------- ------- ---------- ---------- ---------- -------- ------- Total effect of derivative instruments................. 2,750 (925) (1,075) (750) -- -- -- ------- ------- ---------- ---------- ---------- -------- ------- Total interest-sensitive assets...................... 24,540 5,018 1,244 3,902 3,179 2,788 40,671 Interest-sensitive liabilities: Deposits(4).......................... 9,799 9,895 3,017 1,495 90 159 24,455 Borrowings and other liabilities..... 10,870 907 1,165 1,473 151 14 14,580 ------- ------- ---------- ---------- ---------- -------- ------- Total interest-sensitive liabilities................. 20,669 10,802 4,182 2,968 241 173 39,035 Derivative instruments affecting rate sensitivity: Interest rate exchange agreements: Designated against deposits and short-term borrowings............ (663) (159) 485 337 -- -- -- Interest rate cap agreements: Designated against deposits and short-term borrowings......... (10) -- 10 -- -- -- -- ------- ------- ---------- ---------- ---------- -------- ------- Total effect of derivative instruments................. (673) (159) 495 337 -- -- -- ------- ------- ---------- ---------- ---------- -------- ------- Total interest-sensitive liabilities................. 19,996 10,643 4,677 3,305 241 173 39,035 ------- ------- ---------- ---------- ---------- -------- ------- Net asset (liability) sensitivity................. $ 4,544 $(5,625) $ (3,433) $ 597 $ 2,938 $ 2,615 $ 1,636 ======== ======== ========= ========= ========= ======== ======== Cumulative net (liability) asset sensitivity.......................... $ 4,544 $(1,081) Cumulative net (liability) asset sensitivity as a percentage of total assets............................... 10.81% (2.57)%
- --------------- (1) Includes accrued interest on interest-earning assets. (2) Excludes mark-to-market adjustment. (3) Excludes deferred loan fees, reserve for loan losses and premium and discount on purchased loans. (4) Excludes premium on purchased deposits. Deposits without stated maturity are included in the category "Due within 0-3 months." 43 44 While the one-year gap helps provide some information about a financial institution's interest sensitivity, it does not predict the trend of future earnings. For this reason, Washington Mutual uses financial modeling to forecast earnings under different interest rate projections. Although this modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates, loan origination volumes and liability funding sources that may prove to be inaccurate. Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No. 115. This statement requires investment and equity securities to be segregated into three categories: trading, held-to-maturity and available-for-sale. The available-for-sale portfolio is maintained as a source of investment income as well as potential liquidity should it be necessary for the Company to raise cash or reduce its asset size. Because the available-for-sale portfolio is required to be carried at fair value, its carrying value fluctuates with changes in market factors, primarily interest rates. This portfolio is substantially composed of MBS, of which approximately 70 percent 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 agreement provisions, management attempts to reduce the repricing ceiling of the portfolio and to effectively shorten the repricing period. Thus, the Company has a degree of interest rate protection when interest rates increase because the interest rate cap agreements provide a mechanism for repricing the investment portfolio generally on pace with current market rates. In a similar way, interest rate exchange agreements are utilized to provide protection in an increasing rate environment, but also result in sensitivity in a downward market. There can be no assurance that interest rate exchange agreements and interest rate cap agreements will provide the Company with protection in all scenarios or to the full extent of the Company's exposure. The following table presents the effect interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of securities in the available-for-sale portfolio in an increasing interest rate environment (up 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1995 ------------------------------------------------------- AFTER ONE REPRICE WITHIN BUT WITHIN AFTER ONE YEAR TWO YEARS TWO YEARS TOTAL -------------- ---------- --------- ------- (DOLLARS IN MILLIONS) Principal amount of securities............ $ 7,741 $396 $ 3,771 $11,908 Effect of derivative instruments.......... 3,715 -- (3,715) -- -------- ---- ------- ------- Principal amount of securities after effect of derivative instruments..... $ 11,456 $396 $ 56 $11,908 ======== ==== ======= =======
44 45 The following table presents the effect interest rate exchange agreements and interest rate cap agreements would have had on the repricing period of securities in the available-for-sale portfolio in a decreasing interest rate environment (down 200 basis points) for the period the derivatives are outstanding:
DECEMBER 31, 1995 ------------------------------------------------------- AFTER ONE REPRICE WITHIN BUT WITHIN AFTER ONE YEAR TWO YEARS TWO YEARS TOTAL -------------- ---------- --------- ------- (DOLLARS IN MILLIONS) Principal amount of securities............ $ 7,741 $396 $ 3,771 $11,908 Effect of derivative instruments.......... 1,165 -- (1,165) -- -------- ---- ------- ------- Principal amount of securities after effect of derivative instruments..... $ 8,906 $396 $ 2,606 $11,908 ======== ==== ======== =======
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 September 30, 1996, the Company had substantial liquidity compared with its established guidelines. The Company also computes ratios promulgated by the FDIC to monitor the liquidity position of WMB. The regulatory liquidity ratio measures WMB's ability to use liquid assets to meet unusual cash demands. The regulatory dependency ratio measures WMB's reliance upon potentially volatile liabilities to fund long-term assets. WMB manages both ratios to remain within the acceptable ranges and, at September 30, 1996, met the established FDIC guidelines. Regulations promulgated by the Office of Thrift Supervision (the "OTS") require that ASB and WMBfsb maintain for each calendar month an average daily balance of liquid assets at least equal to 5.00 percent of the prior month's average daily balance of net withdrawable deposits plus borrowings due within one year. At September 30, 1996, ASB's liquid assets consisted of currency, cash in banks, short-term investments in federal funds and bankers acceptances. Also included were MBS with maturities of five years or less. ASB's liquidity ratio was 6.23 percent, 5.29 percent and 5.04 percent at September 30, 1996, December 31, 1995 and December 31, 1994, respectively. Washington Mutual's major sources of funds are the collection of loan principal and interest payments, attracting deposits, and borrowing from the FHLB of Seattle and San Francisco and elsewhere. In addition, Washington Mutual is able to generate funds through the sale of loans and investment securities available for sale. The Company uses these funds primarily to originate loans and maintain its investment portfolio. See "Supplemental Consolidated Financial Statements -- Consolidated Statements of Cash Flows." At September 30, 1996, the Company's banking subsidiaries were able to borrow an additional $10.8 billion through the use of collateralized borrowings using unpledged mortgage-backed securities and other wholesale sources. The ability of the Company's banking subsidiaries to make dividends to the Company is influenced by legal, regulatory and economic restrictions. 45 46 In December 1996, Washington Mutual entered into two revolving credit facilities (the "Facilities"): a $100.0 million 364-day facility and a $100.0 million 4-year facility. Chase Manhattan Bank will act as Administrative Agent for the Facilities. Proceeds of the Facilities were used for funding needs at the closing of the Transaction, including redemption of the New Capital securities, and are available for general corporate purposes, including providing capital at a subsidiary level. CAPITAL REQUIREMENTS At September 30, 1996, Washington Mutual's banking subsidiaries exceeded all current regulatory capital requirements and were classified as well-capitalized institutions, the highest regulatory standard. The regulatory capital ratios of WMB, WMBfsb and ASB and minimum regulatory requirements for a well-capitalized institution were as follows:
SEPTEMBER 30, 1996 --------------------------- WELL-CAPITALIZED WMB WMBFSB ASB MINIMUM ----- ------ ------ ---------------- FDIC capital ratios: Leverage...................................... 5.63% --% --% 5.00% Tier 1 risk-based............................. 10.19 -- -- 6.00 Total risk-based.............................. 10.99 -- -- 10.00 OTS capital ratios: Tangible...................................... -- 6.75 5.21 1.50 Leverage...................................... -- 6.75 5.22 5.00 Risk-based.................................... -- 11.42 10.46 10.00
WM Life is subject to risk-based capital requirements developed by the National Association of Insurance Commissions. This measure uses four major categories of risk to calculate an appropriate level of capital to support an insurance company's overall business operations. The four risk categories are asset risk, insurance risk, interest rate risk and business risk. At December 31, 1995, WM Life's capital was 672 percent of its required regulatory risk-based level. The Company's securities subsidiaries are also subject to capital requirements. At December 31, 1995, all of Washington Mutual's securities subsidiaries were in compliance with their applicable capital requirements. 46 47 BUSINESS THE COMPANY With a history dating back to 1889, Washington Mutual is a regional financial services company committed to serving consumers and small to mid-sized businesses throughout the Western United States. Through its subsidiaries, the Company engages in the following activities: - - MORTGAGE LENDING AND CONSUMER BANKING ACTIVITIES. Through its principal subsidiaries, Washington Mutual Bank, American Savings Bank, F.A., and Washington Mutual Bank fsb, at September 30, 1996, the Company operated 410 financial centers and 94 loan centers offering a full complement of mortgage lending and consumer banking products and services. For the nine months ended September 30, 1996, WMB was the leading originator of first-lien single-family residential loans in Washington and Oregon, and ASB was the second largest in California. - - COMMERCIAL BANKING ACTIVITIES. Through the commercial banking division of WMB, at September 30, 1996, the Company operated 47 full-service business branches offering a range of commercial banking products and services to small to midsized businesses. WMB commenced its commercial banking activities through the acquisition of Enterprise in 1995 and Western in 1996. - - INSURANCE ACTIVITIES. Through WM Life Insurance Co. and ASB Insurance Agency, Inc., the Company underwrites and sells annuities and sells a range of life insurance contracts, and selected property and casualty insurance policies. - - BROKERAGE ACTIVITIES. Through ASB Financial Services, Inc., Murphey Favre, Inc. and Composite Research and Management Co., the Company offers full service securities brokerage and acts as the investment advisor to and the distributor of mutual funds. The Company operates in Washington, California, Oregon, Utah, Idaho, Montana, Arizona, Colorado and Nevada. These operations constitute one of the largest banking franchises in the Western United States and serve more than 1.3 million households. At September 30, 1996, the Company had consolidated assets of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of $2.4 billion. In December 1996, Washington Mutual consummated the merger of Keystone Holdings with and into the Company and certain other transactions in connection therewith and thereby acquired ASB. Washington Mutual issued 47,883,333 shares of Common Stock in the Transaction. At September 30, 1996, ASB had assets of $21.3 billion and deposits of $12.9 billion and operated 158 branches and 63 loan centers, substantially all of which were located in California. Washington Mutual intends to continue operating ASB under the name "American Savings Bank" in ASB's markets and has retained a significant number of ASB's management team to guide ASB's operations. Washington Mutual intends to introduce its consumer banking products and approaches throughout ASB's branch system and to expand ASB's loan origination capabilities. THE REORGANIZATION Washington Mutual was formed in August 1994 by its predecessor, Washington Mutual Savings Bank ("WMSB"), a former Washington state-chartered savings bank, for the purpose of serving as a holding company in the reorganization of WMSB into a holding company structure (the "Reorganization"). The Reorganization was completed in November 1994 through the merger of WMSB into WMB, with WMB as the surviving entity. As a result of the Reorganization, Washington Mutual became the parent company of the companies of which WMSB was, prior to the Reorganization, the parent company. As a result of the Reorganization, all common and preferred shareholders of WMSB became shareholders of Washington Mutual on a one-for-one basis with substantially the same relative rights, privileges and preferences. Except as noted otherwise, references in this Prospectus to "Washington Mutual" or the "Company" refer to both (i) Washington Mutual, Inc. and its consolidated subsidiaries after the consumma- 47 48 tion of the Reorganization; and (ii) WMSB and its consolidated subsidiaries prior to the consummation of the Reorganization. BUSINESS STRATEGY In 1995, Washington Mutual revised its strategic plan to position the Company for higher levels of future profitability and growth. The main elements of this strategic plan are: - - Strengthen the Company's consumer banking franchise throughout the West. The Company focuses on increasing the number of households served within its market areas and the scope of its customer relationships. Washington Mutual primarily attracts new customers by offering competitive consumer-oriented deposit products, including "Free Checking" and money market accounts. The Company actively markets to its customers residential mortgages and a variety of higher margin consumer loan products, including manufactured housing loans, home equity loans and lines of credit, automobile and boat loans, student loans, and unsecured consumer loans, as well as investment products, including mutual funds and annuities. To further its penetration within its principal markets, Washington Mutual delivers its products through several alternative distribution channels that allow it to target sub-markets within its franchise area. These alternative delivery channels complement the Company's freestanding financial center network and include in-store financial centers, loan centers, interactive banking kiosks, and telephone banking operations. The Company plans to strengthen its franchise through the continued introduction of its consumer products to all of its market areas, targeted de novo branch openings, and selected in-market acquisitions. - - Expand the commercial banking franchise. The Company is developing and growing a commercial banking presence in Washington, Oregon, and Idaho. The commercial banking division of WMB, which operates primarily as "Western Bank," focuses on serving the needs of small to mid-sized businesses and offers a full range of commercial banking products, including business checking accounts and secured and unsecured loans. The lending activities of the commercial banking division generally provide higher margins than the Company's residential mortgage lending activities. The Company plans to expand its commercial banking activities within its existing market areas and eventually to other parts of the Company's franchise. - - Decrease sensitivity to interest rate movements. The Company intends to decrease the sensitivity of its net interest income to movements in market interest rates. Through purchases and sales of loans and mortgage-backed securities and the retention of internally originated ARMs, the Company has decreased the percentage of fixed-rate assets and increased the percentage of adjustable-rate assets in its loan and investment portfolios in order to more closely match its liability base. The acquisition of ASB with its portfolio of adjustable-rate loans has furthered this strategy. - - Maintain asset quality. Management is committed to maintaining a conservative credit culture even as it pursues growth and diversification opportunities in new markets and product areas. The Company has targeted a nonperforming assets to total assets ratio of one percent or less as a credit quality policy objective. - - Operate more efficiently. The Company has a long-term target of reducing to 50 percent or lower its ratio of operating expenses to revenues. To that end, the Company has undergone an extensive process reengineering review and introduced a number of initiatives to manage expense levels and improve productivity, including the consolidation and outsourcing of certain back office functions and the development of new banking systems and software applications. The Company historically has used acquisitions of other financial institutions to further its strategic plan. Since 1988, the Company has completed 16 acquisitions, two of which were commercial banks, which have expanded the Company's geographic service area beyond the state of Washington. The Company anticipates that acquisitions will continue to be an important element of its strategic plan in the future. WASHINGTON MUTUAL'S OPERATING SUBSIDIARIES WASHINGTON MUTUAL BANK. WMB's principal business is providing a broad range of financial services, primarily to consumers. These services include accepting deposits from the general public and making residential mortgage loans, consumer loans and limited types of commercial real estate loans, primarily loans 48 49 secured by multi-family properties. Beginning in the latter half of 1995, WMB, through its mergers with Enterprise and Western, diversified its traditional activities into commercial banking. At September 30, 1996, WMB had assets of $20.4 billion, deposits of $11.0 billion and operated 226 financial centers, of which 155 were in Washington and 71 were in Oregon; 27 loan centers, of which 19 were in Washington and eight were in Oregon; and 47 full-service business branches, of which one was in Washington and 46 were in Oregon. WMB operates under Title 32 (Mutual Savings Banks) of the Revised Code of Washington. Its deposits are insured by the FDIC through the BIF and the SAIF. AMERICAN SAVINGS BANK, F.A. ASB's principal business is accepting deposits from the general public and making residential mortgage loans and loans secured by multi-family properties. At September 30, 1996, ASB had assets of $21.3 billion, deposits of $12.9 billion and operated 158 branches in California and 63 loan offices in California and Arizona. In November 1996, ASB opened two loan offices in Colorado and one in Nevada. ASB's deposits are insured by the FDIC through the SAIF. WASHINGTON MUTUAL BANK FSB. WMBfsb's principal business includes accepting deposits from the general public and making residential loans, consumer loans and limited types of commercial real estate loans, primarily loans secured by multi-family properties. At September 30, 1996, WMBfsb had assets of $889.7 million, deposits of $323.4 million, and operated 26 financial centers, of which 16 were in Utah, seven were in Idaho, two were in Montana and one was in Oregon, and operated one loan center in Idaho and one in Utah. On November 30, 1996, WMBfsb acquired Utah Federal, which at September 30, 1996, operated five branches and two loan production offices in Utah and had assets of $122.2 million, deposits of $106.9 million and stockholders' equity of $11.9 million. WMBfsb's deposits are insured by the FDIC through the SAIF. WM LIFE INSURANCE COMPANY. WM Life, an Arizona-domiciled life insurance company, is licensed under state law to issue annuities in seven states. In addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed under state law to issue annuities in 28 states. WM Life currently issues fixed and variable flexible premium deferred annuities, single premium fixed deferred annuities and single premium immediate annuities. Empire currently issues fixed flexible premium deferred annuities and single premium immediate annuities. Both companies conduct business through licensed independent agents. The majority of such agents are employees of affiliates of the Company and operate in WMB's financial centers. Annuities presently are issued primarily in Washington and Oregon. At September 30, 1996, WM Life had assets of $1.1 billion. ASB INSURANCE AGENCY, INC . ASB Insurance is a registered insurance broker that offers a wide array of products, including life and property and casualty insurance and annuities, in California. ASB FINANCIAL SERVICES, INC. ASB Financial is a registered broker-dealer that distributes a broad array of mutual funds in California. ASB Financial representatives are available for consultation regularly or by appointment in many of ASB's branches. COMPOSITE RESEARCH & MANAGEMENT CO. Composite Research is a registered investment advisor. Composite Research is the investment advisor of eight mutual funds. At September 30, 1996, Composite Research had a total of $1.3 billion in funds under management in the eight mutual funds. MURPHEY FAVRE, INC. Murphey Favre is a registered broker-dealer that offers a broad range of securities brokerage services, including distribution of mutual funds in Washington, Oregon, Idaho, Utah and Montana. Murphey Favre has seven free-standing offices, and Murphey Favre representatives are available for consultation regularly or by appointment in many of WMB's financial centers. LENDING ACTIVITIES GENERAL. The Company's lending activities are carried on through its banking subsidiaries, WMB, ASB and WMBfsb. At September 30, 1996, the Company's total loan portfolio (carried at historical cost) of $28.7 billion (exclusive of reserve for loan losses) included $21.0 billion in mortgage loans secured by first liens on 1 to 4 family residential properties; $669.0 million in residential construction loans; $3.7 billion in mortgage loans secured by commercial real estate such as apartment buildings, office buildings, warehouses, shopping 49 50 centers and medical office buildings; $3.1 billion in consumer loans; and $295.3 million in commercial business loans. For a discussion of the fair value of the loan portfolio, see "Supplemental Consolidated Financial Statements -- Note 30: 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. ASB and WMBfsb 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. In originating loans, the Company must compete directly with other savings banks, savings and loan associations, commercial banks, credit unions, mortgage companies and life insurance companies (primarily in the commercial real estate area) and indirectly with government-sponsored entities ("GSEs") such as the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National Mortgage Association ("GNMA"). In addition, the Company's lending activities are heavily influenced by economic trends affecting the availability of funds and by general interest rate levels as well as by competitive factors such as the lower cost structure of less regulated originators and the influence of government-sponsored entities in establishing rates. The condition of the construction industry and the demand for housing also directly affect residential lending volumes. In addition to interest earned on loans, the Company receives fees for originating loans and for providing loan commitments. The Company also charges fees for loan modifications, late payments, changes of property ownership and other miscellaneous services. Fees received in connection with loan originations are deferred and amortized into interest income over the life of the loan. The Company also receives fees for servicing loans for others. The Company's loans, exclusive of reserve for loan losses, consisted of the following:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------- ---------------------- ---------------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ----------- ------ ----------- ------ ----------- ------ (DOLLARS IN THOUSANDS) Real estate Residential: Adjustable rate loans....... $15,792,060 55.0% $12,717,134 52.0% $12,773,458 49.7% Fixed rate loans............ 5,185,132 18.0 4,586,171 18.8 4,992,757 19.4 Residential construction loans....................... 668,976 2.3 615,814 2.5 549,271 2.1 Apartment buildings........... 2,473,925 8.6 2,310,344 9.5 3,497,582 13.6 Other commercial real estate loans....................... 1,258,760 4.4 1,177,230 4.8 1,201,638 4.7 ----------- ------ ----------- ------ ----------- ------ Total real estate loans................ 25,378,853 88.3 21,406,693 87.6 23,014,706 89.5 Second mortgage and other consumer loans................ 2,078,073 7.3 1,974,673 8.1 1,841,613 7.2 Manufactured housing loans...... 978,909 3.4 867,181 3.6 731,714 2.8 Commercial business loans....... 295,263 1.0 179,568 0.7 129,048 0.5 ----------- ------ ----------- ------ ----------- ------ Total loans............ $28,731,098 100.0% $24,428,115 100.0% $25,717,081 100.0% =========== ====== =========== ====== =========== ======
Residential loans comprised 64.9, 69.7 and 69.1 percent of total loans at December 31, 1993, 1992 and 1991, respectively. Residential construction loans comprised 2.0, 2.2 and 2.4 percent of total loans at December 31, 1993, 1992 and 1991, respectively. Commercial real estate loans comprised 21.2, 19.0 and 18.3 percent of total loans at December 31, 1993, 1992 and 1991, respectively. Manufactured housing, second mortgage and other consumer loans and commercial business loans comprised 11.3 and 0.6; 8.4 and 0.7; and 9.4 and 0.8 percent of total loans at December 31, 1993, 1992 and 1991, respectively. 50 51 At September 30, 1996, loans, exclusive of reserve for loan losses, by geographic concentration were as follows:
OTHER CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL ----------- ---------- ---------- -------- ---------- ----------- Real estate: Residential............ $12,214,647 $6,245,015 $1,695,022 $230,860 $ 591,648 $20,977,192 Residential construction......... -- 355,498 247,639 44,582 21,257 668,976 Apartment buildings.... 1,551,243 556,446 249,233 57,098 59,905 2,473,925 Other commercial real estate............... 358,789 406,153 357,548 30,847 105,423 1,258,760 ----------- ---------- ---------- -------- ---------- ---------- Total real estate loans......... 14,124,679 7,563,112 2,549,442 363,387 778,233 25,378,853 Second mortgage and other consumer............... 89,994 1,131,229 529,647 23,693 303,510 2,078,073 Manufactured housing..... 106,569 443,534 219,935 31,663 177,208 978,909 Commercial business...... -- 108,065 185,944 104 1,150 295,263 ----------- ---------- ---------- -------- ---------- ---------- Total loans..... $14,321,242 $9,245,940 $3,484,968 $418,847 $1,260,101 $28,731,098 =========== ========== ========== ======== ========== ========== Loans by geographic concentration as a percentage of total loans.................. 50% 32% 12% 1% 5% 100%
RESIDENTIAL LOANS. General. Primarily as a result of recent business combinations, the size of the Company's residential loan portfolio has increased dramatically. The bulk of the Company's residential loan portfolio is focused in California, Washington and Oregon. All of the Company's residential mortgage lending is subject to nondiscriminatory underwriting standards, and most is subject to loan origination and documentation procedures acceptable to the secondary market. All loans are subject to underwriting review and approval by various levels of Company personnel, depending on the size 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. Mortgage insurance currently is required on all residential real estate loans originated at a loan-to-value ratio of 90 percent or above. Any exceptions must be reported to the board of directors of the subsidiary bank issuing the credit. At September 30, 1996, six percent of the Company's residential real estate loan portfolio had loan-to-value ratios of 90 percent or above at origination and were without mortgage insurance. Under federal regulations, a real estate loan may not exceed 100 percent of the appraised value of the property at the time of origination. In addition, savings associations 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 savings associations should not originate any commercial, multi-family or nonowner-occupied 1 to 4 family mortgage loan with an initial loan-to-value ratio in excess of 85 percent. The guidelines further provide that savings associations should not originate any owner-occupied 1 to 4 family mortgage loan with a loan-to-value ratio that equals or exceeds 90 percent 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 savings association 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 association's total capital and such loans are identified in the association's records and reported at least quarterly to its board of directors. 51 52 WMB and WMBfsb Residential Lending. WMB makes available to borrowers in Washington and Oregon a full range of residential loans, including FHA-insured and VA-guaranteed loans, conventional fixed-rate loans for terms of five, 15 or 30 years, and ARMs. WMBfsb makes the same loan products available to customers in Utah, Montana and Idaho. ARMs are advantageous to the Company because adjustable-rate loans better match the Company's natural liability base. However, WMB's and WMBfsb's ability to originate ARMs in lieu of fixed-rate loans has varied in response to changes in market interest rates. Between 1992 and 1993, ARMs constituted less than 25 percent of WMB's residential loan originations, reflecting continuing lower market interest rates. When interest rates rose in 1994, ARMs totaled 62 percent of WMB's residential loan originations. However, interest rates declined in mid-1995 and, as a result, ARMs totaled 32 percent of WMB's and 28 percent of WMBfsb's residential loan originations during 1995. For the nine months ended September 30, 1996, ARMs accounted for 35 percent of WMB's and 33 percent of WMBfsb's residential loan originations. Under WMB's and WMBfsb'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 are indexed to the one-year Constant Maturity Treasury Index and have annual caps of two percent. Under most options, the borrower may elect, between the 6th and the 60th 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 majority of WMB's and WMBfsb's loan originations satisfy all requirements to make them saleable in the secondary market. In the first nine months of 1996, WMB and WMBfsb securitized and sold $785.7 million of its fixed-rate loans, but did not sell any ARMs. See "-- Loan Securitization." WMB and WMBfsb originate loans through all of their branches as well as through home loan centers and loan representatives located in real estate brokers' offices. In addition, a small portion of their originations comes through loan brokers. WMB was the leading originator of first lien residential mortgage loans in both Washington and Oregon for the nine months ended September 30, 1996. ASB Residential Lending. ASB offers an array of mortgage products to customers in California, Arizona, Nevada and Colorado. The primary products are COFI ARMs that adjust monthly with maturities up to a maximum of 40 years; mortgages that have a fixed initial rate for up to five years and then reprice monthly at a set margin over COFI until maturity ("Flex-5 Loans") and fixed-rate 15-, 20- and 30-year mortgages. For the nine months ended September 30, 1996, substantially all of ASB's 1996 ARM residential loan originations were indexed to COFI. As interest rates increased in the latter part of 1994 and the first half of 1995, the rates on COFI ARMs rose and the difference between those rates and the rates on fixed rate loans narrowed. As a result, the origination volume of fixed-rate loans at ASB increased, while the origination volume on adjustable-rate loans stabilized. The same conditions also made the Flex-5 loans more popular. Nevertheless, because ASB sells virtually all of its fixed-rate product on the secondary market, its portfolio is comprised almost entirely of ARMs. At September 30, 1996, ASB's gross loan balance consisted of 97 percent ARMs and 3 percent fixed-rate loans. The majority of the ARMs adjust monthly to a predetermined margin over COFI. The monthly payments on substantially all of ASB's ARMs adjust annually with the adjustment limited to 7.5 percent per year (except at the end of each five-year interval during the life of the loan, when the payment may be adjusted by more than 7.5 percent to assure that the loan will amortize over the remaining term). These protections for borrowers can result in monthly payments that are greater or less than the amount necessary to amortize a loan by its maturity at the interest rate in effect in any particular month. In the event that a monthly payment is not sufficient to pay the interest accruing on the loan, the shortage is added to the principal balance and is repaid through future monthly payments. This is referred to as negative amortization. The portion of outstanding loan principal arising from negative amortization was $26.5 million at September 30, 1996. The majority of ASB's fixed-rate loan originations are salable in the secondary market either through FNMA or, in the case of loans with balances larger than the FNMA/FHLMC limit for conforming loans 52 53 ("Jumbo loans"), to private investors. For the nine months ended September 30, 1996, all of such originations (12 percent of total originations) have been sold. The remainder of ASB's originations, approximately 88 percent of the total for the nine months ended September 30, 1996, are intended for ASB's portfolio. These loans are almost entirely COFI ARMs. One of the primary market segments in which ASB originates loans for its portfolio is that group of borrowers who are creditworthy, but who are unable for one reason or another to provide some of the documentation required to meet agency secondary market rules. These loans are referred to as low documentation (or alternative documentation) loans. Through September 30, 1996, approximately 47 percent of ASB's 1996 portfolio originations consisted of low documentation loans. The documentation that is omitted generally relates to the credit or employment history of the borrower and not to the value of the collateral. All low documentation loans are fully supported by appraisals and title insurance. In addition, the maximum loan-to-value ratio on low documentation loans is 80 percent and the required ratio decreases as the amount of the loan increases. The average loan-to-value ratio on all low documentation loans originated in the nine months ended September, 30, 1996 is 68 percent. Low documentation loans are generally priced at a premium to FNMA or FHLMC conforming loans. The delinquency experience on low documentation loans originated by ASB in 1994, 1995 and 1996 is comparable to the experience on ASB's COFI ARM portfolio as a whole. The delinquency experience on ASB's portfolio as a whole has historically been higher than the delinquency experience at WMB and WMBfsb. ASB does not originate residential mortgage loans in its branches. All direct originations (54.3 percent of total residential originations for the nine months ended September 30, 1996) are through its 63 loan centers. In addition, ASB indirectly originates loans through independent mortgage brokers throughout the state of California. Indirect originations accounted for 45.7 percent of total residential loan originations for the nine months ended September 30, 1996. ASB's wholesale mortgage broker distribution channel was established in 1991 to serve geographic regions not covered by residential loan centers. Initially the participating brokers were primarily in northern California but in 1993 the program was expanded to the rest of the state. Participation grew through 1994 and 1995 and it has become a significant element of ASB's overall lending strategy, including in its more recently opened loan production offices in Arizona, Colorado and Nevada. To monitor credit quality, ASB 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 residential loan centers. All underwriting decisions are made by ASB personnel. ASB was the second largest originator of first lien residential mortgage loans in California for the nine months ended September 30, 1996. RESIDENTIAL CONSTRUCTION LOANS. WMB and WMBfsb provide financing for two different categories of residential construction loans. A custom construction loan is made to the intended occupant of a house to finance its construction. Speculative construction loans are made to borrowers who are in the business of building homes for resale. Speculative construction loans are made either on a house-by-house basis or, in certain circumstances, through a collateralized, limited line of credit. Speculative construction lending involves somewhat more risk than custom construction loans and involves different underwriting considerations. All construction loans require approval by various levels of Company personnel, depending on the size of the loan. 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. Residential construction loans are an integral part of WMB's overall lending program. Construction loans are of short duration, generally 12 to 18 months, and have adjustable rates, so they are an important element in the Company's interest rate sensitivity management. Speculative construction loans are generally priced at a higher spread than are permanent residential loans. In addition, the residential construction loan program provides a source of permanent loans. Most custom construction loans have provisions for conversion to permanent loan status upon completion of construction. 53 54 Speculative construction loan builders are a good source of referrals when their buyers need financing. WMB has a program under which it waives certain closing fees for borrowers who are buying homes for which WMB provided construction financing. At September 30, 1996, 57 percent of the residential construction portfolio was custom construction loans and 43 percent was speculative construction loans. The demand for residential construction loans is sensitive to the same factors as the market for residential loans generally. Lower market interest rates help to improve the market for houses generally and this, in turn, stimulates new construction. As a result, originations of residential construction loans in the first nine months of 1996 totaled $973.4 million, an increase of 44 percent from $674.2 million for the first nine months of 1995. ASB has never originated any residential construction loans. COMMERCIAL REAL ESTATE LOANS. General. 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 generally. In recent years, commercial real estate values in many areas of the country have substantially declined, particularly in California, as a result of excess supply and weak economies. 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 of the loan. WMB and WMBfsb Commercial Real Estate Lending. The Boards of Directors of both WMB and WMBfsb have adopted lending policies that generally limit future commercial real estate loan originations to Washington, Oregon, Idaho, Utah, Montana and contiguous states. WMB's existing commercial real estate loan portfolio is principally concentrated in Washington, Oregon and California. WMBfsb's commercial real estate loan portfolio is concentrated in Utah and Montana. During the past few years, WMB focused its commercial real estate lending on small to mid-sized apartment lending (loans of $2.5 million or less). The focus on apartment lending has been altered by the Company's diversification into commercial banking. Both the Enterprise and Western commercial real estate portfolios consisted of predominantly nonresidential commercial real estate. However, the relatively small size of both Enterprise and Western before they merged with WMB placed constraints on the size and to some extent the type of loans they could make. For example, the individual loan size limitations made meaningful participation in office building and urban retail loans impossible. With the added flexibility provided by WMB's size, the size and the type of commercial real estate loans that WMB will be able to make will change; this will generally increase the risk characteristics of the commercial loan portfolio. ASB Commercial Real Estate Lending. ASB's commercial real estate portfolio is concentrated in California. Due to ASB's past desire to remain a "traditional thrift lender," management historically did not emphasize commercial loan originations other than for apartment properties. No commercial loans, other than apartment loans, have been originated by ASB since 1994, at which time such commercial loans represented approximately 1 percent of total loan originations by principal balance. Because of credit weaknesses in the small to mid-sized apartment house market in California, in 1994, ASB tightened its underwriting of apartment property loans. Due to tightened underwriting standards, apartment loan originations have declined as a percentage of the total from 10.9 percent in 1994 to 5.3 percent in 1995 and 4.7 percent for the first nine months of 1996. From time to time, ASB originates mobile-home loans and refinances its existing commercial loans. 54 55 Under OTS regulations, a savings association may invest in commercial real estate loans up to 400 percent of its total risk-based capital. ASB was in compliance with this limitation at September 30, 1996. The amount of apartment lending and residential lending is not limited by federal regulation. Commercial Real Estate Portfolio Management. In order to monitor its commercial real estate loan portfolio, the Company periodically (i) inspects real estate collateral based on the loan risk classification, the loan size and the location of the collateral; (ii) analyzes the economic condition of markets in which the Company has a geographic concentration; and (iii) reviews operating statements and rent rolls, updated financial and tax statements of borrowers, evidence of insurance coverage and evidence that real estate taxes have been paid. These procedures are designed to analyze the economic viability of the property and to determine whether or not the debt service coverage and loan-to-value ratios remain consistent with the Company's underwriting policies. It is the intention of management to perform a continual review of the commercial real estate loan portfolio in light of the condition of the real estate market. Based upon the above procedures, the Company classifies loans that fall below underwriting standards into various risk or watch categories. LOAN SECURITIZATION. The Company from time to time, depending on its asset and liability management strategy, converts a portion of its loan portfolio into either FHLMC participation certificates, GNMA mortgage-backed securities or FNMA conventional mortgage-backed securities, (collectively "GSE MBS"). This securitization of its loans provides the Company with increased liquidity both because the mortgage securities are more readily marketable than the underlying loans and because they can be used as collateral for borrowing. WMB has historically securitized its fixed-rate loan production with the intent to sell those MBS in the secondary market and, from time to time, securitizes other loans and retains the resulting MBS as investment securities. ASB generally securitizes substantially all of its fixed-rate production for potential sale in the secondary market. Loans securitized through GSEs for sale in the secondary market are 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 and 1996, the Company securitized loans with FHLMC and FNMA under programs in which the owner of the MBS has recourse against the originator of the loans rather than the GSE. These MBS are generally saleable in the secondary market and can be used as collateral for borrowings and to meet regulatory liquidity requirements. Generally, however, MBS created under this program are retained by the originator, and the Company has retained the majority of MBS created under these programs. In 1995, ASB created a real estate mortgage investment conduit (a "REMIC") by means of which it securitized a pool of loans consisting of $1.2 billion in apartment loans and $200.0 million of its Flex-5 Loans. To date, ASB has not sold any portion of this REMIC and the entire amount is still owned by ASB with full recourse. The Company has, however, sold securitized loans with recourse. At September 30, 1996, the Company's total recourse obligation with respect to securitized loans was $6.9 billion, of which $989.1 million represented the retained recourse obligation for securitized loans which had been sold. 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 and the associated collateral properties are included in the Company's total nonperforming assets. MANUFACTURED HOUSING, SECOND MORTGAGE AND OTHER CONSUMER LOANS. WMB and WMBfsb offer consumer loan 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 household purposes, including loans made under Washington Mutual's secured line of credit programs. Consumer loans, in addition to being an important part of the Company's orientation toward consumer financial services, promote greater net interest income stability because of their somewhat shorter maturities and faster prepayment characteristics. The size of the consumer loan portfolio has grown in recent years. It is management's intention 55 56 to introduce these products into ASB'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. Secured consumer loan amounts typically do not exceed 80 percent of the value of the collateral, less the outstanding balance of any first-mortgage loan. Manufactured housing loans do not exceed 90 percent of the value of the collateral plus taxes and other costs. Additional limitations may be based on the customer's income, credit history and other factors showing creditworthiness, and 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. As a result of the acquisition of Pacific First, the amount of loans in the Company's portfolio that were for the purchase of recreational vehicles, pleasure boats and automobiles increased. While Washington Mutual is authorized to make these loans, they have not been a significant part of the Company's consumer loan business in recent years. At September 30, 1996, the Company's portfolio included $74.5 million of recreational vehicle loans, $42.2 million of boat loans and $70.2 million of automobile loans. The other acquisitions completed from 1993 through 1996 did not have a material effect on the Company's consumer loan portfolio. ASB has originated various types of consumer loans that are generally unsecured lines of credit and loans that are secured by personal property. These loans have historically been provided as a service to ASB's existing customers and have not represented a significant portion of its business. In the first quarter of 1994, ASB discontinued its credit card operations and sold its entire credit card portfolio for a gain of $25.0 million. COMMERCIAL BUSINESS LOANS. The Company's commercial business loans are mainly loans to small to mid-sized businesses and to individuals, secured by a variety of business and personal assets, real estate and equipment or are in some cases unsecured. They are originated through WMB's commercial banking division, which at September 30, 1996, accounted for $1.1 billion of WMB's assets. The commercial banking division offers a full range of commercial banking products and services through 47 free standing, full service commercial banking branches, supplemented by ten business banking centers located near or in WMB financial centers. ASSET QUALITY GENERAL. Washington Mutual reviews its assets for weakness on a regular basis. Reserves are maintained for assets classified as substandard or doubtful. Any portion of an asset classified as loss is immediately written off. 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. The principal measures of asset problems are the levels of nonaccrual loans, loans under foreclosure and REO (nonperforming assets or "NPAs"), levels of impaired loans, the size of the provision for loan losses, loan charge-offs and the size of the write-downs in the value of REO. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Asset Quality -- Classified Assets." Management ceases to accrue interest income on any loan that becomes 90 days or more delinquent 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 loan, management stops accruing interest on the loan, whether or not it has reached the 90-day 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. Nonperforming loans include loans on which payment is 90 days or more delinquent and loans that are under foreclosure (a category that includes properties for which decrees of foreclosure have been granted but that are held under sheriffs' certificates pending expiration of the borrowers' redemption rights). 56 57 REO. Real estate that served as security for a defaulted loan and becomes REO 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 becomes REO is less than the loan balance, the loan is written down at that time by a charge to the reserve for loan losses. The REO reserve provides for losses that may result from unforeseen market changes in the REO portfolio and declines in fair values of properties subsequent to their initial transfer to REO. REO properties are analyzed periodically to determine the adequacy of the REO reserve. Any adjustment in the reserve that results from such evaluations is charged to the results of REO operations in the period in which it is identified. Personal property that has been repossessed is recorded at the lower of the outstanding loan balance (net of any charge-offs) or fair value at the time the property was repossessed. See "Management's Discussion and Analysis of Financial Position and Results of Operations -- Asset Quality" for further discussion. 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. Residential construction, commercial real estate and commercial business loans that are above the thresholds described above or are delinquent are evaluated individually for impairment. This detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential 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 but 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, and current and anticipated economic conditions. The Company recorded an additional $125.0 million to the reserve for loan losses at the Effective Date. The additional reserve for loan losses was provided principally because a number of credit administration and asset management philosophies and procedures of WMB differed from those of ASB. The Company is conforming ASB's administration, philosophies and procedures to those of WMB and WMBfsb. The additional reserve for loan losses was to a lesser degree provided because the Company believed that while there had been an increase in the value of residential real estate in certain California markets, a decline in collateral values in some portions of the California real estate market occurred in late 1996. 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 Financial Position and Results of Operations -- Asset Quality -- Provision for Loan Losses and Reserve for Loan Losses." 57 58 INVESTING ACTIVITIES GENERAL. Washington Mutual has authority under state law to make any investment, but may be subject to certain restrictions imposed by the Home Owners' Loan Act ("HOLA"). Under Washington state law, WMB has authority 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. ASB and WMBfsb have authority to make investments specified by HOLA and applicable regulations, including the purchase of governmental obligations, investment-grade commercial paper, and investment-grade corporate debt securities. Under the laws of the states of Arizona and Washington, respectively, WM Life and Empire have broad authority to make investments in debt and equity securities subject to applicable reserve requirements and risk-based capital requirements. Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No. 115. This statement required investment and equity securities to be segregated into three categories: "trading" securities, "held-to-maturity" securities and "available-for-sale" securities. As a result of SFAS No. 115, at September 30, 1996, a net unrealized loss (on an after-tax basis) of $19.6 million associated with available-for-sale securities was included as a separate component of stockholder's equity. At September 30, 1996, the Company's investment portfolio included $3.0 billion of held-to-maturity securities (with a fair value of $3.0 billion), $10.1 billion of available-for-sale securities and $2.2 million of trading account securities. At September 30, 1996, MBS accounted for $11.6 billion or 89 percent of the total investment portfolio. The Company's investment portfolio by investment type at carrying value consisted of the following:
SEPTEMBER 30, DECEMBER 31, ------------- ----------------------------------------- 1996 1995 1994 1993 ------------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations........................ $ 210,865 $ 345,510 $ 565,025 $ 459,664 Corporate debt obligations............ 538,163 607,926 617,548 550,608 Municipal obligations................. 105,730 92,508 80,762 73,360 Equity securities..................... 617,484 525,153 387,997 347,167 ------------ ------------ ---------- ---------- 1,472,242 1,571,097 1,651,332 1,430,799 Mortgage-backed securities: U.S. government agency................ 10,714,973 12,561,748 6,113,146 4,984,828 Private issue......................... 859,300 1,222,270 913,941 1,014,843 ------------ ------------ ---------- ---------- 11,574,273 13,784,018 7,027,087 5,999,671 Derivative instruments: Interest rate exchange agreements..... 507 (11,847) 18,654 -- Interest rate cap agreements.......... 4,525 9,415 41,690 -- ------------ ------------ ---------- ---------- 5,032 (2,432) 60,344 -- ------------ ------------ ---------- ---------- Total investment portfolio......... $ 13,051,547 $15,352,683 $8,738,763 $7,430,470 ============ ============ ========== ==========
For a discussion of the stated maturities of the Company's investment portfolio at December 31, 1995, see Notes 4 and 5 to the Supplemental Consolidated Financial Statements. The risk of loss upon default of the borrower is generally greater for corporate debt securities than for real estate loans. In addition, investments by the Company in debt or equity securities of an issuer are generally much larger than investments in any particular real estate loan, resulting in a greater effect on the Company in 58 59 the event of default or decline in market value. The Company regularly analyzes these securities for impairment of value and makes adjustments in their carrying value or yield as appropriate. Historically, the yield on private-issue MBS, collateralized mortgage obligations, 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 collateralized mortgage obligations 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 collateralized mortgage obligations where the Company holds subordinated tranches, certain collateralized mortgage obligations that have been resecuritized, and certain securities that contain a significant number of Jumbo loans. In an effort to reduce these risks, beginning in 1995, the Company has performed 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. At September 30, 1996, the Company held $859.3 million of private-issue MBS. Of that amount, 29 percent were the highest investment grade (AAA), 57 percent were rated investment grade (AA or A), 8 percent were rated lowest investment grade (BBB) and 6 percent were rated below investment grade (BB or below). The Company's policy is not to purchase securities that are below investment grade. The below investment grade securities in the Company's portfolio at September 30, 1996 were the result of downgrades of such securities by the rating agencies. During 1995, the Company realized $8.4 million of losses on certain securities in the below investment grade portfolio due to credit quality deterioration. SOURCES OF FUNDS DEPOSITS. At September 30, 1996, WMB accepted deposits at 273 financial centers in Washington and Oregon, ASB accepted deposits at 158 branches in California, and WMBfsb accepted deposits at 26 financial centers in Utah, Idaho, Montana and Oregon. The Company's banking subsidiaries compete with other financial institutions in attracting savings deposits. Competition from commercial banks has been particularly strong due to their extensive branch systems. In addition, there is strong competition for customer dollars from credit unions, mutual funds and nonbank corporations, such as securities brokerage companies and other diversified companies, some of which have nationwide networks of offices. In recent years, deposit growth has resulted almost exclusively from business combinations. At September 30, 1996, the Company's deposits totaled $24.0 billion. During 1993, the acquisition of Pacific First and the merger with Pioneer added $3.8 billion and $659.5 million in deposits, respectively. Additional business combinations during 1994 and 1995 added $211.5 million and $417.1 million in deposits, respectively. The merger with ASB added $12.9 billion in deposits. ASB itself had grown deposits through acquisition, with $4.0 billion in acquired deposits over its less than eight year life. Without the addition of the acquired deposits, the Company's deposits would have decreased from December 31, 1993 to September 30, 1996. The Company offers traditional passbook and statement savings accounts as well as checking accounts. In addition, the Company offers money market deposit accounts ("MMDAs") with higher minimum balances that offer higher yields. 59 60 The Company's deposits consisted of the following:
DECEMBER 31, SEPTEMBER 30, --------------------------- 1996 1995 1994 ------------- ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing.......................... $ 2,037,577 $ 2,111,124 $ 2,342,407 Noninterest bearing....................... 797,717 665,205 499,282 ------------ ------------ ------------ 2,835,294 2,776,329 2,841,689 Savings accounts............................ 1,719,506 1,905,659 2,224,784 MMDAs....................................... 5,106,381 4,667,884 3,502,981 Time deposit accounts Due within one year....................... 12,244,657 12,696,186 10,496,491 After one but within two years............ 999,017 1,410,809 2,780,944 After two but within three years.......... 592,354 409,580 765,219 After three but within four years......... 378,757 243,541 293,167 After four but within five years.......... 79,280 258,415 293,522 After five years.......................... 23,269 94,557 145,209 ------------ ------------ ------------ 14,317,334 15,113,088 14,774,552 ------------ ------------ ------------ Total deposits......................... $ 23,978,515 $24,462,960 $23,344,006 ============ ============ ============
WMB's and WMBfsb's Deposits. WMB and WMBfsb offer a broad range of deposit products and at September 30, 1996 had a total of $11.1 billion in deposits, $5.3 billion of which were time deposits, $4.2 billion of which were MMDAs and savings accounts; and $1.6 billion of which were checking accounts. The most popular time deposit is a product called Investor's Choice, which is a time deposit with maturities available from one to 120 months in any one of three deposit size categories. Interest rates on Investor's Choice time deposits generally increase with increased maturity and amount. Less than 50 percent of deposits at September 30, 1996 were time deposits and of those, only $1.1 billion or 22 percent of total time deposits had original maturities longer than one year. Since 1995, WMB and WMBfsb have been heavily promoting a "Free Checking" account. This account has helped to reduce the overall cost of funds by increasing the percentage of deposits that are noninterest-bearing. At September 30, 1996, $702.0 million or 45 percent of WMB's and WMBfsb's total checking accounts did not bear interest. WMB and WMBfsb have also actively promoted MMDAs because, while a somewhat volatile source of deposits, they have the advantage of being variable-rate liabilities. At September 30, 1996, WMB and WMBfsb had an aggregate of $3.3 billion in MMDAs and only $973.0 million in regular savings accounts. Wholesale deposits, primarily time deposits, are sold to political subdivisions and public agencies. The Company considers wholesale deposits to be a borrowing source rather than a customer relationship. ASB's Deposits. Like WMB and WMBfsb, ASB's deposit liabilities are primarily short term. Of ASB's total deposits of $12.9 billion at September 30, 1996, only $940.0 million was in time deposits with original maturities of longer than one year. Like WMB and WMBfsb, ASB has also promoted a checking account, in its case "Mileage Checking." Mileage Checking is, unlike Free Checking, an interest-bearing checking account product. At September 30, 1996, ASB had total interest-bearing checking deposits of $1.2 billion. Management of the Company hopes to reduce ASB's cost of funds in the future by introducing Free Checking in ASB's markets. Management also hopes to interest more of ASB's depositors in MMDAs, which currently account for only 14 percent of ASB's deposits. Borrowings and Annuities. The Company uses borrowings, in addition to deposit acquisitions, as an integral part of funding its growth. In addition to the borrowings discussed below, at September 30, 1996, the 60 61 Company was in a position to obtain an additional $10.8 billion, 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." Borrowings include the sale of securities subject to repurchase agreements, the purchase of federal funds, the issuance of mortgage-backed bonds or notes, capital notes and other types of debt securities, and funds obtained as advances from the 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 percent of total assets, but sales of securities subject to agreements to repurchase are not deemed borrowings under such law, and borrowings from federal, state or municipal governments, agencies or instrumentalities thereof also are not subject to the 30 percent limit. The following table shows the Company's borrowings:
SEPTEMBER DECEMBER 31, 30, --------------------------- 1996 1995 1994 ----------- ----------- ----------- Annuities........................................... $ 868,438 $ 855,503 $ 799,178 Federal funds purchased............................. 1,030,500 433,420 -- Securities sold under agreements to repurchase...... 8,615,157 7,984,756 6,637,346 Advances from the FHLB.............................. 5,539,551 4,715,739 4,128,977 New Capital borrowings.............................. 364,500 364,500 300,500 Other............................................... 323,768 225,717 80,566 ----------- ----------- ----------- Total borrowings............................... $16,741,914 $14,579,635 $11,946,567 =========== =========== ===========
The Company actively engages in repurchase agreements with authorized broker-dealers and major customers selling U.S. government and corporate securities and MBS under agreements to repurchase them or similar securities at a future date. At September 30, 1996, the Company had $8.6 billion of such borrowings. WMB, WMBfsb and WM Life are members of the FHLB of Seattle and ASB 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 1995, WMB, ASB, WMBfsb, and WM Life had credit lines of 17 percent, 14 percent, 19 percent and 45 percent, respectively, of total regulatory assets. At September 30, 1996, advances under these credit lines totaled $5.5 billion and were secured in aggregate by grants of security interests in all FHLB stock owned, deposits with the FHLB, and certain mortgage loans and deeds of trust and securities of the U.S. government and agencies thereof. In August 1995, the Company filed a shelf registration statement with the Commission for the Offerings, on a delayed or continuous basis, of up to $250.0 million of debt securities, of which $100.0 million remains available. In December 1996, Washington Mutual entered into the Facilities: a $100.0 million 364-day facility and a $100.0 million 4-year facility. Chase Manhattan Bank has agreed to act as Administrative Agent for the Facilities. Proceeds of the Facilities were used for funding needs at the closing of the Transaction, including redemption of the New Capital securities, and are available for general corporate purposes, including providing capital at a subsidiary level. WM Life and Empire issue fixed annuity contracts through licensed agents who are employees of subsidiaries of the Company and operate in WMB financial centers. Currently, annuities are issued primarily in Washington and Oregon. At September 30, 1996, the policy value of such contracts was $806.6 million. WM Life also issues variable annuity contracts. At September 30, 1996, the policy value of such contracts was $61.8 million. All annuity contracts impose a contractual surrender charge in the event of a customer's withdrawal of funds within a certain number of years (in the case of most of WM Life's fixed annuity contracts, five years) from the date the annuity contract was issued. 61 62 In connection with the Transaction, the Company redeemed $20.5 million of debt securities of New Capital, and intends to redeem the remaining $344.0 million of New Capital debt securities in January 1997. ASSET AND LIABILITY MANAGEMENT The long-run profitability of the Company depends not only on the success of the services it offers to its customers and the quality of its loans and investments, but also the extent to which its earnings are unaffected by changes in interest rates. The Company's asset and liability management strategy attempts to reduce the risk of a significant decrease in net interest income caused by interest rate changes without unduly penalizing current earnings. WMB and WMBfsb, as is true of many financial institutions, have had a mismatch between the maturity of its assets and liabilities. Their customers generally prefer short-term deposits (see "Sources of Funds -- Deposits") and many of them also prefer long-term fixed-rate loans. This mismatch is not a problem when interest rates are stable or declining. However, with a rise in short-term interest rates, as was experienced throughout most of 1994, the interest paid on deposits and other short-term borrowings increases much more quickly than the interest earned on loans and investments. The result for WMB and WMBfsb was a reduction in their net interest spread and corresponding pressure on net interest income in both 1994 and 1995. One means of reducing the effect of interest rate volatility on net interest income is to shorten asset durations. In recent years, WMB and WMBfsb have attempted to do this by emphasizing ARMs and short-term consumer loan programs. At September 30, 1996, the portion of WMB's and WMBfsb's residential loans and MBS that were adjustable-rate was approximately 45 percent. ASB does not suffer from the same asset liability mismatch as WMB and WMBfsb because the majority of its assets are COFI ARMs which reprice monthly. In times of rising interest rates, however, 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 and unfavorable in a rising interest rate environment. Although the effect of this lag generally balances out over the life of a loan, it can produce shortterm volatility in the Company's net interest income during periods of interest rate movement. 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 the index to exceed the rate on the lifetime interest rate caps offered to customers. When determined appropriate by management, the Company hedges this risk by purchasing COFI- and LIBOR-based interest rate cap and floor agreements. Over half of the $4.9 billion of securities reclassified from Washington Mutual's held-to-maturity category to its available-for sale category in 1995 were fixed-rate MBS. The reclassification gave the Company the flexibility to dispose of a portion of such securities over time and replace them with adjustable-rate assets as part of its interest rate risk management program. During the first nine months of 1996, the Company securitized and then sold a substantial portion of the fixed-rate loans it originated, while retaining nearly all of its adjustable-rate loan production. The Company retained the servicing rights to the loans that were sold. In addition, as part of the restructuring strategy initiated in late 1995, the Company purchased adjustable-rate assets and sold fixed-rate mortgage-backed assets. In the future, it is anticipated that a portion of the remaining fixed-rate securities may be replaced with adjustable-rate GSE MBS, adjustable-rate private-issue MBS, collateralized mortgage obligations, and purchased loan pools as well as new originations of ARMs, as the fixed-rate securities pay down or are sold as market conditions permit. During periods of moderate to high market interest rates, originations of ARMs have been well received by customers. During periods of low market interest rates, however, customers have preferred fixed-rate mortgage loans. This portfolio restructuring strategy is intended to reduce the Company's interest rate sensitivity while simultaneously protecting its yield. As the Company substitutes adjustable-rate assets for fixed-rate assets, its sensitivity to future changes in interest rates decreases, because, unlike fixed-rate securities, interest rates on adjustable-rate assets change, within certain periodic and lifetime cap restraints, with corresponding changes in market rates. However, substituting adjustable-rate assets for fixed-rate assets can have two disadvantages. First, adjustable-rate assets, when compared with similar fixed-rate 62 63 assets, carry additional credit risk in an increasing interest rate environment. As these assets reprice upward, the borrower's creditworthiness may become impaired. Second, the holding of adjustable-rate assets will decrease the overall portfolio yield in a stable or declining interest rate environment. Accordingly, the Company plans to replace some of its fixed-rate MBS with private-issue MBS, collateralized mortgage obligations, and purchased loan pools to minimize the decline in portfolio yield. Another way to reduce the effect of the volatility of interest rates is to lengthen liability durations, which is difficult because of depositors' preferences for liquidity. This was apparent from the fact that at September 30, 1996, the Company's MMDAs accounted for $5.1 billion or 21 percent of total deposits and time deposits with maturities less than one year totaled $12.2 billion or 51 percent of total deposits. At September 30, 1996, interest-sensitive assets of $29.9 billion and interest-sensitive liabilities of $33.9 billion were scheduled to mature or reprice within one year. At September 30, 1996, the Company's one-year gap was a negative 0.97 percent. The Company's interest rate sensitivity has decreased with the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of ARMs originated by ASB. It still, however, suffers from some short-term volatility of net income because of the effect of COFI lag. Management hopes to reduce this short-term volatility in part by increasing production of non-COFI adjustable-rate products and short-term fixed-rate products such as consumer loans. In addition to managing the terms of its actual assets and liabilities, the Company uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, to mitigate interest rate risk. At September 30, 1996, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $14.8 billion. Without these instruments, the Company's one-year gap at September 30, 1996, would have been a negative 9.0 percent as opposed to a negative 0.97 percent. See "Supplemental Consolidated Financial Statements -- Note 18: Interest Rate Risk Management" for a discussion of the use of derivative instruments. 63 64 BUSINESS COMBINATIONS Most of the Company's growth since 1988 has occurred as a result of banking business combinations. These institutions were generally combined with the Company's federally chartered banking subsidiaries, primarily for regulatory reasons. The following table summarizes Washington Mutual's business combinations since April 1988:
NUMBER ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS OF 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 23.5 1 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 Federal Savings Bank............. March 1, 1993 624.5 659.5 926.5 17 Pacific First............................ 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(3)............. Nov. 30, 1996 87.5 106.9 122.2 5 American Savings Bank(3)................. Dec. 20, 1996 13,844.0 12,902.0 21,298.2 221 United Western Financial Group(3)........ Jan. 15, 1997 217.9 294.4 414.9 9
- --------------- (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. (3) Information given at September 30, 1996. See "Supplemental Consolidated Financial Statements -- Note 2: Business Combinations" for a discussion of the accounting treatment of certain of the acquisitions. EMPLOYEES The number of full-time equivalent employees at the Company increased from 7,915 at December 31, 1995 to 8,214 at September 30, 1996. The Company believes that it has been successful in attracting quality employees and believes its employee relations are excellent. 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 64 65 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. TAX BAD DEBT RESERVE RECAPTURE. The recently enacted "Small Business Job Protection Act of 1996" (the "Job Protection Act") requires that qualified thrift institutions, such as WMB, WMBfsb and ASB, 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 1996, or as late as 1998 if certain conditions are met. 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. As required by the Merger Agreement, Keystone Holdings filed amended federal income tax returns with the IRS for 1992 and 1993 in order to reduce the tax bad debt reserve recapture amount that ASB would otherwise incur due to the Job Protection Act. Net operating loss carryforward deductions arising from prior ASB operations will be available to offset the majority of bad debt reserve recapture amounts attributable to prior ASB operations. 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. NET OPERATING LOSS CARRYFORWARD DEDUCTIONS. Due to Section 382 of the Code, most of the value of the net operating loss carryforward deductions of Keystone Holdings and its subsidiaries will be eliminated due to the 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 described above for ASB) will be greatly reduced. Further, the actual savings due to such reduced net operating loss carryforward deductions will be even further reduced due to a provision in the Assistance Agreement generally requiring that approximately 75 percent of most of the federal tax savings resulting from such net operating loss carryforwards be paid to the FRF. STATE INCOME TAXATION. The state of Washington does not currently have a corporate income tax. A business and occupation tax based on percentage of gross receipts is assessed on businesses. 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, Utah, Idaho, Montana, Colorado and Nevada have corporate income taxes, which are imposed on companies doing business in those states. The Company's substantial operations in California and Oregon will 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 Company's results of operations or financial condition. If and to the extent the Company carries on activities in other states, the Company may in certain circumstances be subject to tax in such states. TAX-RELATED AGREEMENTS CLOSING AGREEMENTS. In connection with the 1988 Acquisition, the Internal Revenue Service entered into the Closing Agreement with respect to the federal income tax consequences of the 1988 Acquisition and certain aspects of the taxation of Keystone Holdings and certain of its affiliates. The Closing Agreement contains provisions that are intended to ensure that losses generated by New West would be available to offset income of ASB for federal income tax purposes. To accomplish this, the Closing Agreement provides, among other things, that: (a) the 1988 Acquisition was a tax-free reorganization, (b) the tax attributes of the Failed Association, including net operating losses and tax bad debt reserves, carried over to ASB, (c) as long as ASB 65 66 qualified as a domestic building and loan association and New West was its nominee, any assistance received or accrued from the FRF would be excluded from gross income, and (d) as long as certain conditions (the "nominee conditions") existed, New West would be a nominee for ASB with the result that all of New West's income, deductions, gains and losses would be treated as ASB's income, deductions, gains and losses. The California Franchise Tax Board issued an opinion letter with provisions substantially similar to the Closing Agreement; thus, New West's losses similarly should be available to offset ASB's income for California franchise tax purposes. In 1993, California enacted legislation reducing the net operating loss carryforward period to 10 years from 15 years for losses incurred prior to 1994 related to assets acquired in a tax-free reorganization such as that used in the 1988 Acquisition. No adverse effect is expected from this legislative change. Federal legislation enacted in 1993 retroactively disallowed certain losses and bad debt deductions relating to assets acquired in a federally assisted transaction. This legislation reduced Keystone Holdings' federal net operating loss carryforward by approximately $445 million. The federal net operating loss carryforwards available to Keystone Holdings at December 31, 1995 total approximately $3.2 billion. See "-- Taxation of the Company -- Net Operating Loss Carryforward Deductions." On October 24, 1995, New West and ASB ceased to meet the nominee conditions. Accordingly, the tax benefits generated by any future losses of New West may not offset ASB's taxable income. ASSISTANCE AGREEMENT. The Assistance Agreement between Keystone Holdings and it subsidiaries is designed, in part, to provide that over time, 75 percent of most of the federal tax savings and 19.5 percent 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 any current losses or tax loss carryforwards of New West are paid ultimately to the FRF. The provision for such payments is reflected in the financial statements as "Payments in Lieu of Taxes." TAX SETTLEMENT AGREEMENT. The Tax Settlement Agreement, which was a condition to closing the Transaction, resolved certain disputes that arose between Keystone Holdings and certain of its affiliates and the FDIC-Manager regarding interpretations of provisions in the Assistance Agreement pertaining to the general requirement that approximately 75 percent of the federal income tax savings attributable to New West be paid to the FRF. The Tax Settlement Agreement required Keystone Holdings to pay $10.5 million to the FRF upon the closing of the Transaction, in addition to any other undisputed amounts owed. TAX SHARING AGREEMENT. Under the Tax Sharing Agreement entered into by Keystone Holdings and its subsidiaries, ASB and its parent are required to pay to Keystone Holdings an amount equal to the federal income tax liability that such corporations would have had if they had filed a separate consolidated federal income tax return, except that such separate federal income tax liability is to be calculated excluding certain significant deductions (including NOL carryforwards attributable to New West) and with certain other adjustments and including as an add-back, for years ending before 1995 the agreed upon amortization of the excess of tax basis over value of the assets acquired by ASB in the 1988 Acquisition. A similar concept applies in determining the amount of the tax sharing payment related to the California franchise tax that ASB must pay to Keystone Holdings. See Note 21, "Payments in Lieu of Taxes," in the Notes to the Supplemental Consolidated Financial Statements. 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. With respect to a property owned by the Company, the Company has been notified that it may be liable for certain investigatory and other costs related 66 67 to groundwater contamination allegedly caused by dry cleaners purported to have operated at the property prior to the Company's ownership. The Company believes it has meritorious defenses in this matter and plans to vigorously defend against any liability therefor. There can be no assurance, however, that the Company will not incur liability for this matter or that any such liability will not be material. 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 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. SELLING STOCKHOLDERS Except as noted below, the Selling Stockholders consist of the FRF and certain KHP Investors all of whom received shares of Common Stock in the Transaction. The following table sets forth the number of Shares beneficially owned and being offered by each Selling Stockholder specified.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO NUMBER OF OWNED AFTER THE SELLING STOCKHOLDERS THE OFFERINGS(1) SHARES OFFERED OFFERINGS(1) - ------------------------------------- ------------------- -------------- ------------------- FSLIC Resolution Fund(2)............. 14,000,000 14,000,000 0 William E. Oberndorf(3).............. 328,465 100,000 228,465 Barry R. Jackson(3).................. 157,802 75,000 82,802 William P. Hallman, Jr.(3)(4)(5)..... 78,777 38,777 40,000 KHI Associates, L.P.(3)(5)........... 349,726 36,223 313,503 26 Savings Associates, L.P.(3)(5).... 156,142 18,910 137,232 President and Fellows of Harvard College(6)......................... 320,739 320,739 0 ---------- ---------- ------- Total...................... 15,391,651 14,589,649 802,002 ========== ========== =======
- --------------- (1) Does not include each Selling Stockholder's contingent right to receive its pro rata interest in the 8,000,000 Litigation Escrow Shares (other than the President and Fellows of Harvard College, which does not have any such right). Upon consummation of the Offerings, none of the Selling Stockholders will own in excess of one percent of the Company's outstanding Common Stock. (2) The Shares being offered by the FRF were acquired by the FRF pursuant to the Warrant Exchange Agreement as part of the Transaction. See "Summary -- Background of the Transaction." The FRF had held the Warrants since 1989, when certain assets and liabilities of the FSLIC, including the Warrants that the FSLIC received as part of the 1988 Acquisition, were transferred to the FRF pursuant to federal legislation. The FSLIC (and after the FSLIC was abolished, the FRF) has, pursuant to contractual agreements entered into at the time of the 1988 Acquisition, as such agreements have been amended from to time, provided a variety of forms of financial assistance to ASB and certain of its affiliates. See "Summary -- Background of the Transaction" and "Business -- Tax-related Agreements." As a government-controlled entity of the United States of America, the FDIC-Manager benefits from certain governmental immunities from actions under the federal securities laws. See "Risk Factors -- Governmental Immunity of the FDIC-Manager as Selling Stockholder." Mr. William Longbrake, the Company's 67 68 Executive Vice President and Chief Financial Officer, served as Chief Financial Officer and Deputy to the Chairman for Financial Policy at the FDIC from February 1995 through September 1996. (3) Such person or entity is a limited partner of KHP and received the Shares held by them and being offered hereunder upon the distribution of such Shares by KHP upon consummation of the Transaction. See "The Keystone Transaction -- The Transaction." (4) Mr. Hallman is a director in Kelly, Hart & Hallman, a professional corporation ("KHH"), which served as special counsel to KHP and Keystone Holdings and its subsidiaries in connection with the Transaction and has been or will be paid fees and reimbursed expenses for such services. During the three-year period prior to the Offerings, KHH has from time to time served as outside counsel to KHP and its subsidiaries and has been paid fees and reimbursed expenses for such services. (5) The general partner of such partnership is a limited partnership, the general partner of which is a trust, the sole trustee of which is William P. Hallman, Jr. As sole trustee of the trust that is the general partner of the limited partnership that is the general partner of KHI Associates, L.P. ("KHIA") and 26 Savings Associates, L.P. ("SA"), Mr. Hallman has voting and investment power with respect to the Shares owned by KHIA and SA and may be deemed to be the beneficial owner of such Shares. Mr. Hallman disclaims beneficial ownership as to Shares held by KHIA or SA. Robert M. Bass is a limited partner in KHIA and SA, but neither KHIA nor SA is disposing of any Shares in the Offering attributable to Mr. Bass' respective partnership interests therein. (6) The President and Fellows of Harvard College received such Shares pursuant to a transaction entered into with Mr. Andrew E. Furer, a KHP Investor, who received such Shares upon the distribution of such Shares by KHP upon consummation of the Transaction. See "The Keystone Transaction -- The Transaction." 68 69 DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK Washington Mutual is authorized by its Restated Articles of Incorporation (the "Articles") to issue up to 350,000,000 shares of no par value Common Stock and up to 10,000,000 shares of preferred stock, no par value. At January 22, 1997, there were issued and outstanding 126,258,858 shares of Common Stock, 2,752,500 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C (the "Series C Preferred"); and 1,970,000 shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E (the "Series E Preferred"). Collectively, the Series C Preferred and Series E Preferred are referred to as the "Preferred Stock." COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held by such holder on all matters voted upon by holders of Common Stock. Shareholders are not permitted to cumulate their votes for the election of directors. In the unlikely event of liquidation, dissolution or winding up of Washington Mutual, holders of Common Stock will be entitled to share ratably in any remaining assets of Washington Mutual, in cash or in kind, after payment or provision for payment of all liabilities and the liquidation preference of any outstanding Preferred Stock. Holders of Common Stock are not entitled to preemptive rights with respect to any additional shares that may be issued. The authorized but unissued and unreserved shares of Common Stock will be available for general corporate purposes, including but not limited to possible issuance in exchange for capital notes, as stock dividends or stock splits, upon conversion of preferred stock in future mergers or acquisitions, under a cash dividend reinvestment plan, for employee benefit plans, or in a future underwritten or other public offering. Except as required to approve the transactions in which the additional authorized shares of Common Stock would be issued, no shareholder approval will be required for the issuance of these shares. PREFERRED STOCK Each series of Preferred Stock is prior to Common Stock as to dividends and payments upon liquidation, dissolution or winding up, but does not confer general voting rights. The Series C Preferred has a liquidation preference of $25.00 per share plus dividends accrued and unpaid for the then-current dividend period, and is not convertible into any other Washington Mutual securities. Dividends on the Series C Preferred, if and when declared by the Washington Mutual Board of Directors, or a duly authorized committee thereof, are noncumulative, are payable quarterly and are set at an annual rate of $2.28 per share. On or after December 31, 1997, Washington Mutual may at its option redeem the Series C Preferred. The Series E Preferred has a liquidation preference of $25.00 per share plus dividends accrued and unpaid for the then-current dividend period, and is not convertible into any other Washington Mutual securities. Dividends on the Series E Preferred, if and when declared by the Washington Mutual Board of Directors, or a duly authorized committee thereof, are noncumulative, are payable quarterly and are set at an annual rate of $1.90 per share. On or after September 15, 1998, Washington Mutual may at its option redeem the Series E Preferred. DIVIDEND POLICY Dividends may be paid on the Common Stock as and when declared by the Washington Mutual Board of Directors (the "Board of Directors") out of funds legally available for the payment of dividends. Each quarter, the Board of Directors considers the payment of dividends. The factors affecting this determination include Washington Mutual's long-term interests, current and projected earnings, adequacy of capitalization, expected asset and deposit growth as well as other financial conditions, legal, regulatory and contractual restrictions, and tax considerations. 69 70 According to Washington law, Washington Mutual dividends may be paid only if, after giving effect to the dividend, Washington Mutual will be able to pay its debts as they become due in the ordinary course of business and Washington Mutual's total assets will not be less than the sum of its total liabilities plus the amount that would be needed, if Washington Mutual were to be dissolved at the time of the dividend, to satisfy the preferential rights of persons whose right to payment is superior to those receiving the dividend. Washington Mutual's ability to pay dividends is also dependent on the ability of WMB, and ASB, and WMBfsb and other subsidiary operations to pay dividends to Washington Mutual. The three series of outstanding Preferred Stock rank prior to the Common Stock and to all other classes and series of equity securities of Washington Mutual, other than any classes or series of equity securities of Washington Mutual ranking on a parity with the Preferred Stock. The rights of holders of Preferred Stock to receive dividends is noncumulative. Accordingly, if the Board of Directors fails to declare a dividend on any dividend payment date, the holders of Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date and Washington Mutual will have no obligation to pay the dividend accrued for such period, whether or not dividends are declared payable on any future dividend payment dates. Full dividends on Preferred Stock must be declared and paid or set apart for payment for the most recent dividend period ended before (i) any dividend (other than in Common Stock) on stock junior to the Preferred Stock ("Junior Stock") may be declared or paid or set aside for payment or other distribution made upon the Common Stock or on any other Junior Stock or (ii) Junior Stock is redeemed (or any moneys are paid to or made available for a sinking fund for the redemption of any share of any such stock) or any Junior Stock or stock on a parity with Preferred Stock is purchased or otherwise acquired by Washington Mutual for any consideration except by conversion into or exchange for Junior Stock. The Board of Directors may issue preferred stock that is entitled to such dividend rights as the Board of Directors may determine, including priority over Common Stock in the payment of dividends. CERTAIN ANTI-TAKEOVER PROVISIONS IN WASHINGTON MUTUAL'S ARTICLES AND BYLAWS The Articles and bylaws of Washington Mutual currently contain provisions that may assist the Board of Directors in resisting, or enabling the Board of Directors to resist, a takeover attempt it does not consider beneficial to Washington Mutual. These provisions are designed to inhibit hostile takeovers and encourage potential acquirers to negotiate with the Board of Directors. The possible effect of these provisions may be to delay, defer, or prevent a change in control of Washington Mutual. AUTHORITY TO ISSUE PREFERRED STOCK. The Board of Directors is authorized to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the shareholders. Washington Mutual has no present plans to issue any additional shares of preferred stock. NO CUMULATIVE VOTING. The Articles do not provide for cumulative voting. As a result, to be ensured of representation on the Board of Directors, a shareholder must control the votes of a majority of the shares present and voting at a shareholders' meeting at which a quorum is present. In addition, the Articles provide that a transaction is not void or voidable solely by virtue of the interested status of a director in such a transaction, if the relationship is known or disclosed and a sufficient number of disinterested directors, at a meeting at which a quorum is present, approve the transaction. CLASSIFIED BOARD OF DIRECTORS. Article IV of the Articles provides that the Board of Directors is to be divided into three classes as nearly equal in number as possible. A classified board of directors could make it more difficult for Washington Mutual shareholders, including those holding a majority of the outstanding Common Stock, to force an immediate change in the composition of the majority of the Board of Directors. 70 71 APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS AND DISSOLUTION. Article IX of Washington Mutual's Articles provides that if, pursuant to the Washington Business Corporation Act, Washington Mutual's shareholders are required to approve a merger and if two-thirds of the Board of Directors vote to recommend the merger to the Washington Mutual shareholders, then the merger may be approved by a vote of the Washington Mutual shareholders holding a majority of the outstanding voting shares. In addition, Article XI of the Articles prohibits, except under specified circumstances, Washington Mutual (or any subsidiary of Washington Mutual) from engaging in certain significant business transactions with a "Major Stockholder" (defined as a person who, without the prior approval of the Board of Directors, acquires beneficial ownership of five percent or more of the votes held by the holders of the outstanding shares of Washington Mutual's voting stock). Prohibited transactions include, among others, any merger with, disposition of assets to, acquisition by Washington Mutual of the assets of, issuance of securities of Washington Mutual to, or acquisition by Washington Mutual of securities of a Major Stockholder, or any reclassification of the voting stock of Washington Mutual or of any subsidiary beneficially owned by a Major Stockholder, or any partial or complete liquidation, spin off, slit off or split up of Washington Mutual or any subsidiary. The above prohibitions do not apply, in general, if the specific transaction is approved by a supermajority vote of either the Board of Directors or the holders of voting stock owned other than by any Major Stockholder. The Articles also provide that during the time a Major Stockholder exists, Washington Mutual may voluntarily dissolve only upon the unanimous consent of its stockholders or an affirmative vote of at least two-thirds of its directors and the holders of at least two-thirds of both the shares entitled to vote on such a dissolution and of each class of shares entitled to vote on such a dissolution as a class, if any. Amendments to this Article XI require the affirmative vote of 95% of Washington Mutual shareholders holding voting stock beneficially owned by shareholders other than any Major Stockholder. SHAREHOLDER RIGHTS PLAN. In October 1990, WMSB's board of directors adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of common stock of WMSB to stockholders of record on October 31, 1990. The Company has assumed the shareholder rights plan. The rights have certain anti-takeover effects and are intended to discourage coercive or unfair takeover tactics and to encourage any potential acquirer to negotiate a price fair to all stockholders. 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. The rights are not exercisable until the tenth day after a party acquires beneficial ownership of 20 percent or more of outstanding Common Stock or commences or publicly announces for the first time a tender offer to do so. Each right entitles the holder to purchase one share of Common Stock for an exercise price that is currently $26.67 per share. In the event, among certain other specified events, that an acquiring party thereafter gains control of 30 percent or more of the Common Stock, any rights held by that party will be void and, for the next 60 days, all other holders of rights can receive that number of shares of Common Stock having a market value of two times the exercise price of the right. The rights, which expire on October 16, 2000, may be redeemed by the Company for $0.0044 per right prior to being exercisable. Until a right is exercised, the holder of that right will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. 71 72 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES PURCHASERS The following is a general discussion of certain United States Federal tax consequences of the acquisition, ownership, and disposition of Common Stock by a holder that, for United States Federal income tax purposes, is not a "United States person" (as defined below) (a "Non-United States Holder"). This discussion is based upon the United States Federal tax law now in effect, which is subject to change, possibly retroactively. This discussion does not consider any specific facts or circumstances that may apply to a particular Non-United States Holder. Prospective investors are urged to consult their tax advisors regarding the United States Federal tax consequences of acquiring, holding, and disposing of Common Stock, as well as any tax consequences that may arise under the laws of any foreign state, local, or other taxing jurisdiction. For purposes of this discussion, a "United States person" means (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, (iii) an estate whose income is includible in gross income for United States Federal income tax purposes regardless of its source, or (iv) a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States fiduciaries who have the authority to control all substantial decisions of the trust. It is important that each prospective Non-United States Holder understand that all words and phrases in this tax discussion are used in accordance with United States interpretations, which may vary materially from interpretations used by other countries. DIVIDENDS Dividends paid to a Non-United States Holder will generally be subject to withholding of United States Federal income tax at the rate of 30% unless the dividend is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder, in which case the dividend will be subject to the United States Federal income tax imposed on net income on the same basis that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax). Non-United States Holders should consult any applicable income tax treaties that may provide for a lower rate of withholding or other rules different from those described above. A Non-United States Holder may be required to satisfy certain certification requirements in order to claim treaty benefits or otherwise claim a reduction of or exemption from withholding under the foregoing rules. GAIN ON DISPOSITION A Non-United States Holder will generally not be subject to United States Federal income tax on gain recognized on a sale or other disposition of Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder or (ii) in the case of an individual who holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met. Gain that is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder will be subject to the United States Federal income tax imposed on net income on the same basis that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax) but will not be subject to withholding. Non-United States Holders should consult applicable income tax treaties that may provide for different rules. The Company believes that it is not currently, and is not likely to become, a United States real property holding corporation for United States Federal income tax purposes. FEDERAL ESTATE TAXES Common Stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for United States Federal estate tax purposes) of the United States on the date of death will be included in such individual's estate for United States Federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. 72 73 INFORMATION REPORTING AND BACKUP WITHHOLDING The Company must report annually to the United States Internal Revenue Service and to each Non-United States Holder the amount of dividends paid to, and the tax withheld with respect to, such holder, regardless of whether any tax has been actually withheld. This information may also be made available to the tax authorities of a country in which the Non-United States Holder resides. Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Common Stock to a Non-United States Holder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding at a rate of 31% and information reporting unless the holder certifies its Non-United States Holder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Common Stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a Non-United States Holder and certain other conditions are met, or the holder otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Non-United States Holder's United States Federal income tax liability, provided that certain required information is furnished to the United States Internal Revenue Service. These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Common Stock could be changed by future regulations. The United States Internal Revenue Service has recently issued proposed Treasury regulations concerning these rules which are presently proposed to be effective for payments made after December 31, 1997. Prospective investors should consult their tax advisors concerning the potential adoption of such proposed Treasury regulations and the potential effect on their ownership and disposition of the Common Stock. 73 74 UNDERWRITING Subject to the terms and conditions set forth in a U.S. purchase agreement (the "U.S. Purchase Agreement") between the Company and each of the underwriters named below (the "U.S. Underwriters", for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives (the "U.S. Representatives")), and concurrently with the sale of 2,260,000 shares of Common Stock to certain underwriters outside the United States (the "International Managers" and together with the U.S. Underwriters, the "Underwriters"), the Company has agreed to sell to each of the U.S. Underwriters, and each of the U.S. Underwriters has severally agreed to purchase, the aggregate number of shares of Common Stock set forth opposite its name below:
NUMBER OF U.S. UNDERWRITERS SHARES ------------------------------------------------------------------------- ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................ 3,462,325 Friedman, Billings, Ramsey & Co., Inc. .................................. 3,462,324 Bear, Stearns & Co. Inc. ................................................ 230,000 Alex. Brown & Sons Incorporated ......................................... 230,000 Credit Suisse First Boston Corporation .................................. 230,000 Dean Witter Reynolds Inc. ............................................... 230,000 A.G. Edwards & Sons, Inc. ............................................... 230,000 Keefe, Bruyette & Woods, Inc. ........................................... 230,000 Lehman Brothers Inc. .................................................... 230,000 Montgomery Securities ................................................... 230,000 J.P. Morgan Securities Inc. ............................................. 230,000 Morgan Stanley & Co. Incorporated........................................ 230,000 PaineWebber Incorporated................................................. 230,000 Ragen MacKenzie Incorporated............................................. 230,000 Smith Barney Inc. ....................................................... 230,000 UBS Securities LLC....................................................... 230,000 Wasserstein Perella Securities, Inc. .................................... 230,000 Sanford C. Bernstein & Co., Inc. ........................................ 115,000 Dain Bosworth Incorporated............................................... 115,000 D. A. Davidson & Co. .................................................... 115,000 Fox-Pitt, Kelton Inc. ................................................... 115,000 Hoefer & Arnett Incorporated............................................. 115,000 Jenson Securities Co. ................................................... 115,000 Legg Mason Wood Walker, Incorporated..................................... 115,000 Ormes Capital Markets, Inc. ............................................. 115,000 Pacific Crest Securities................................................. 115,000 Piper Jaffray Inc. ...................................................... 115,000 Rodman & Renshaw, Inc. .................................................. 115,000 Ryan, Beck & Co. ........................................................ 115,000 Sandler O'Neill & Partners L.P. ......................................... 115,000 The Seidler Companies Incorporated ...................................... 115,000 Southeast Research Partners, Inc. ....................................... 115,000 Sutro & Co. Incorporated................................................. 115,000 Utendahl Capital Partners, L.P. ......................................... 115,000 ----------- Total....................................................... 12,329,649 ===========
74 75 The Company has also entered into a purchase agreement (the "International Purchase Agreement") with the International Managers. Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of 12,329,649 shares of Common Stock to the U.S. Underwriters, the Company has agreed to sell to the International Managers, and the International Managers have severally agreed to purchase, an aggregate of 2,260,000 shares of Common Stock. The initial public offering price per share of the Common Stock and the underwriting discount per share of the Common Stock are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In the U.S. Purchase Agreement and the International Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such Purchase Agreement if any such shares of Common Stock being sold pursuant to each such Purchase Agreement are purchased. Under certain circumstances, the commitments of non-defaulting U.S. Underwriters or International Managers may be increased. The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, sales may be made between the U.S. Underwriters and the International Managers of such number of shares of Common Stock as may be mutually agreed. The price of any share of Common Stock so sold shall be the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-United States or non-Canadian persons or to persons they believe intend to resell to persons who are non-United States or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to United States or Canadian persons or to persons they believe intend to resell to United States or Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. The U.S. Representatives have advised the Company that the U.S. Underwriters propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers (who may include U.S. Underwriters) at such price less a concession not in excess of $.57 per share of Common Stock. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $.10 per share of Common Stock to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company has agreed that it will not, with certain exceptions, offer, sell or otherwise dispose of any shares of Common Stock for a period of 60 days from the date of this Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. This prohibition will not affect shares of Common Stock issued by the Company pursuant to acquisitions, employee or director benefit plans, any dividend reimbursement plan, or the conversion or exercise of securities convertible into or exercisable for Common Stock. Merrill Lynch, Pierce, Fenner & Smith Incorporated renders various financial advisory services to the Company from time to time. ERISA MATTERS Washington Mutual and certain of its subsidiaries and affiliates, including WMB, ASB, Murphey Favre, Composite Research and WM Life, may be considered "parties in interest" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or "disqualified persons" within the meaning of Section 4975 of the Code, with respect to many employee benefit plans and individual retirement accounts ("IRAs"), including without limitation by reason of providing trust custodial services, 75 76 annuity products, investment advice or brokerage services to such plans and IRAs. Prohibited transactions within the meaning of ERISA or the Code may occur if, for example, the Shares are acquired by an employee benefit plan or IRA or an entity (such as an insurance company general account) deemed to be investing assets of an employee benefit plan, unless such Shares are acquired pursuant to an exemption from the prohibited transaction rules. Any such plan or entity proposing to invest in the Shares should consult with its legal counsel. EXPERTS The Supplemental Consolidated Financial Statements of the Company, as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. Insofar as the report of Deloitte & Touche LLP relates to the amounts included for Keystone Holdings Inc. and subsidiaries for 1995, 1994, and 1993 it is based solely on the report of other auditors. The consolidated financial statements of Keystone Holdings and subsidiaries for 1995, 1994 and 1993, incorporated herein by reference from the Proxy Statement dated November 12, 1996 have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report also incorporated herein by reference. The consolidated financial statements of the Company incorporated in this Prospectus by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995, as amended by Form 8-K dated October 18, 1996, Form 8-K/A dated October 23, 1996, and Form 8-K/A dated October 25, 1996 also have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports, which are incorporated herein by reference. Such financial statements of the Company and Keystone Holdings are included herein or incorporated by reference in reliance upon the respective reports of such firms given upon their authority as experts in accounting and auditing. LEGAL MATTERS The validity of the issuance of the Common Stock offered hereby has been passed upon by Foster Pepper & Shefelman, counsel to Washington Mutual. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. As of January 22, 1997, individual members of Foster Pepper & Shefelman owned an aggregate of 40,014 shares of Common Stock and 160 shares of Series C Preferred. AVAILABLE INFORMATION Washington Mutual is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. The reports, proxy statements and other information filed by Washington Mutual with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center (13th Floor), New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at prescribed rates. The Commission also maintains a Web site that contains copies of reports, proxy and information statements and other information regarding registrants that file electronically, including the Company, with the Commission at http://www.sec.gov. In addition, material filed by Washington Mutual can be inspected at the offices of the National Association of Securities Dealers, Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. In accordance with the rules and regulations of the Commission, this Prospectus does not contain certain information contained in the Registration Statement the Company has filed with the Commission to which reference is hereby made for further information. Statements in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document, reference is made to the copy of such document filed with the Commission for a more complete description of the matter involved, and each statement shall be deemed to be qualified in its entirety by such reference. 76 77 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission by Washington Mutual pursuant to the Exchange Act are incorporated by reference in this Prospectus: 1. Annual Report on Form 10-K for the year ended December 31, 1995; 2. Quarterly Reports on Form 10-Q, as amended, for each of the quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996; 3. Current Report on Form 8-K dated March 15, 1996; 4. Item 2 of Current Report on Form 8-K dated July 22, 1996; 5. Current Report on Form 8-K dated October 18, 1996, as amended by Form 8-K/A dated October 23, 1996, as amended by Form 8-K/A dated October 25, 1996; 6. Appendix B, pages B-1 through B-54, of the Company's definitive proxy statement dated November 12, 1996; 7. Current Report on Form 8-K dated January 3, 1997; and 8. Current Report on Form 8-K, as amended, dated January 22, 1997. All documents and reports filed by Washington Mutual pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of offering of the Shares shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing of such documents or reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference that are not presented herein or delivered herewith. These documents (other than exhibits to such documents unless such exhibits are specifically incorporated by reference) are available upon request to each person to whom a copy of this Prospectus is delivered, without charge, upon request to the Company at Investor Relations, Washington Mutual, Inc., Washington Mutual Tower, 1201 Third Avenue, 12th Floor, Seattle, Washington 98101 (telephone number (206) 461-3187). 77 78 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF WASHINGTON MUTUAL, INC. AND SUBSIDIARIES INDEX
PAGE ---- UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND 1995 Supplemental Consolidated Statements of Income for the nine months ended September 30, 1996 and 1995................................................................ F-2 Supplemental Consolidated Statements of Financial Position as of September 30, 1996 and December 31, 1995............................................................ F-3 Supplemental Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996 and 1995................................................ F-4 Supplemental Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995...................................................... F-5 Notes to Supplemental Consolidated Financial Statements............................. F-7 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995, 1994 AND 1993 Independent Auditors' Report........................................................ F-9 Supplemental Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993.............................................................. F-10 Supplemental Consolidated Statements of Financial Position as of December 31, 1995 and 1994....................................................... F-12 Supplemental Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993................................................. F-13 Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.............................................................. F-14 Notes to Supplemental Consolidated Financial Statements............................. F-16
F-1 79 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) (UNAUDITED) INTEREST INCOME Loans............................................................... $1,557,650 $1,525,432 Available-for-sale securities....................................... 607,748 252,896 Held-to-maturity securities......................................... 171,164 308,308 Notes receivable.................................................... -- 56,650 Cash equivalents.................................................... 2,023 2,431 ---------- ---------- Total interest income............................................. 2,338,585 2,145,717 INTEREST EXPENSE Deposits............................................................ 799,045 842,413 Borrowings.......................................................... 656,157 582,676 ---------- ---------- Total interest expense............................................ 1,455,202 1,425,089 ---------- ---------- Net interest income............................................ 883,383 720,628 Provision for loan losses........................................... 58,138 57,540 ---------- ---------- Net interest income after provision for loan losses............ 825,245 663,088 OTHER INCOME Depositor fees...................................................... 74,484 55,361 Loan servicing fees................................................. 31,769 21,050 Other service fees.................................................. 40,465 36,685 Other operating income.............................................. 25,804 22,289 Gain on sale of loans, inclusive of write-downs..................... 15,223 (2,117) Gain (loss) on sale of other assets, inclusive of write-downs....... (3,923) 726 Loss on sale of covered assets...................................... -- (37,399) Federal Deposit Insurance Corporation ("FDIC") assistance on covered assets............................................................ -- 55,630 ---------- ---------- Total other income................................................ 183,822 152,225 OTHER EXPENSE Salaries and employee benefits...................................... 250,106 233,785 Occupancy and equipment............................................. 88,592 82,665 Regulatory assessments.............................................. 36,533 41,124 SAIF recapitalization assessment.................................... 124,193 -- Data processing fees................................................ 28,766 24,527 Other operating expense............................................. 127,062 113,623 Amortization of goodwill and other intangible assets................ 20,881 21,337 Real estate owned ("REO") operations, inclusive of write-downs...... 8,409 7,963 ---------- ---------- Total other expense............................................... 684,542 525,024 ---------- ---------- Income before income taxes and minority interest............... 324,525 290,289 Income taxes........................................................ 97,344 77,877 Provision (benefit) for payments in lieu of taxes................... 14,465 (1,410) ---------- ---------- Income before minority interest................................ 212,716 213,822 Minority interest in earnings of consolidated subsidiaries.......... (10,504) (12,244) ---------- ---------- Net Income.......................................................... $ 202,212 $ 201,578 ========== ========== Net Income Attributable to Common Stock............................. $ 188,397 $ 187,640 ========== ========== Per share amounts -- primary Net Income.......................................................... $1.68 $1.72 ========== ========== Per share amounts -- fully diluted Net Income.......................................................... $1.66 $1.69 ========== ==========
See Notes to Supplemental Consolidated Financial Statements F-2 80 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER DECEMBER 30, 31, 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) (UNAUDITED) ASSETS Cash and cash equivalents......................................... $ 657,640 $ 983,833 Trading account securities........................................ 2,151 238 Available-for-sale securities, amortized cost $10,092,075 and $11,919,009..................................................... 10,063,100 12,154,725 Held-to-maturity securities, fair value $3,030,168 and $3,262,850...................................................... 2,986,296 3,197,720 Loans, net of allowance for loan losses........................... 28,336,065 24,109,136 Loans held for sale............................................... 160,692 83,704 REO............................................................... 106,748 125,101 Premises and equipment............................................ 463,513 452,743 Goodwill and other intangible assets.............................. 140,300 161,127 Other assets...................................................... 795,440 758,295 ----------- ----------- Total assets............................................ $43,711,945 $42,026,622 =========== =========== LIABILITIES Deposits: Checking accounts............................................... $ 2,835,294 $ 2,776,329 Savings and money market accounts............................... 6,825,887 6,573,543 Time deposit accounts........................................... 14,317,334 15,113,088 ----------- ----------- Total deposits.......................................... 23,978,515 24,462,960 Annuities......................................................... 868,438 855,503 Federal funds purchased........................................... 1,030,500 433,420 Securities sold under agreements to repurchase.................... 8,615,157 7,984,756 Advances from the Federal Home Loan Bank ("FHLB")................. 5,539,551 4,715,739 Other borrowings.................................................. 688,268 590,217 Other liabilities................................................. 489,600 362,323 ----------- ----------- Total liabilities....................................... 41,210,029 39,404,918 Minority interest................................................. 80,000 80,000 STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 6,122,400 and 6,122,500 shares issued and outstanding..................................................... -- -- Common stock, no par value: 350,000,000 shares authorized -- 120,037,913 and 119,687,860 shares issued and outstanding..................................................... -- -- Capital surplus................................................... 928,116 920,406 Valuation reserve for available-for-sale ("AFS") securities....... (19,570) 188,715 Retained earnings................................................. 1,513,370 1,432,583 ----------- ----------- Total stockholders' equity.............................. 2,421,916 2,541,704 ----------- ----------- Total liabilities, minority interest and stockholders' equity............................................... $43,711,945 $42,026,622 =========== ===========
See Notes to Supplemental Consolidated Financial Statements F-3 81 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NUMBER OF SHARES CAPITAL VALUATION ------------------- SURPLUS RESERVE TOTAL PREFERRED COMMON CAPITAL OFFSET AGAINST RETAINED FOR AFS STOCKHOLDERS' STOCK STOCK SURPLUS NOTE RECEIVABLE EARNINGS SECURITIES EQUITY --------- ------- -------- --------------- ---------- --------- ------------ (IN THOUSANDS) Balance at December 31, 1995......... 6,123 111,688 $920,406 $ -- $1,432,583 $ 188,715 $2,541,704 Net income........................... -- -- -- 202,212 -- 202,212 Cash dividends on preferred stock.... -- -- -- -- (13,814) -- (13,814) Cash dividends on common stock....... -- -- -- -- (107,611) -- (107,611) Common stock issued through stock options and employee stock plans... -- 350 7,711 -- -- -- 7,711 Adjustment in valuation reserve for available-for-sale securities...... -- -- -- -- -- (208,285) (208,285) Conversion of preferred stock to common stock....................... (1) -- (1) -- -- -- (1) ----- ------- -------- --------- ---------- -------- ---------- Balance at September 30, 1996 (unaudited)........................ 6,122 112,038 $928,116 $ -- $1,513,370 $ (19,570) $2,421,916 ===== ======= ======== ========= ========== ======== ========== Balance at December 31, 1994......... 6,200 107,720 $890,344 $(167,000) $1,192,741 $ (61,249) $1,854,836 Net income........................... -- -- -- -- 201,578 -- 201,578 Cash dividends on preferred stock.... -- -- -- -- (13,938) -- (13,938) Cash dividends on common stock....... -- -- -- -- (43,874) -- (43,874) Common stock issued through stock options and employee stock plans... -- 388 6,038 -- -- -- 6,038 Adjustment in valuation reserve for available-for-sale securities...... -- -- -- -- -- 101,803 101,803 Immaterial business combination accounted for as a pooling-of-interests............... -- 3,429 23,562 -- 26,645 9 50,216 ----- ------- -------- --------- ---------- -------- ---------- Balance at September 30, 1995 (unaudited)........................ 6,200 111,537 $919,944 $(167,000) $1,363,152 $ 40,563 $2,156,659 ===== ======= ======== ========= ========== ======== ==========
See Notes to Supplemental Consolidated Financial Statements F-4 82 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................ $ 202,212 $ 201,578 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses....................................... 58,138 57,540 (Gain) loss on sale of loans.................................... (15,223) 2,117 Loss (gain) on sale of other assets............................. 3,923 (726) Loss on sale of covered assets.................................. -- 37,399 Effect of FDIC assistance on covered assets..................... -- (55,630) REO operations, inclusive of write-downs........................ 8,409 7,963 Depreciation and amortization................................... 63,448 44,752 FHLB stock dividend............................................. (22,187) (18,867) (Increase) in trading account securities........................ (722) (1,330) Origination of loans, held for sale............................. (1,534,225) (452,177) Proceeds on sale of loans, held for sale........................ 1,631,365 812,774 (Increase) in interest receivable............................... (17,501) (49,898) (Increase) decrease in interest payable......................... (1,953) 39,064 Increase in income taxes payable................................ 8,430 27,887 Decrease (increase) in other assets............................. 69,020 (57,186) Increase in payable to FSLIC Resolution Fund ("FRF")............ 31,117 -- Increase in other liabilities................................... 150,508 15,182 ----------- ----------- Net cash provided by operating activities.................... 634,759 610,442 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities........................ (1,569,122) (1,341,521) Principal payments and maturities of available-for-sale securities...................................................... 1,101,438 421,038 Sales of available-for-sale securities............................ 3,082,344 815,023 Purchases of held-to-maturity securities.......................... (3,963,691) (529,535) Principal payments and maturities of held-to-maturity securities...................................................... 4,172,020 628,088 Sales of loans.................................................... 61,335 19,391 Principal payments on loans....................................... 3,012,042 1,981,642 Origination and purchases of loans................................ (8,462,376) (5,753,939) New West Note, payments received.................................. -- 1,176,763 Sales of REO...................................................... 115,376 109,422 Other REO operations.............................................. (16,023) (2,247) Proceeds from sales of premises and equipment..................... 1,648 2,868 Purchase of premises and equipment................................ (49,157) (87,738) Purchase of mortgage servicing rights............................. (13,704) (38,433) Cash acquired through acquisitions................................ -- 69,348 ----------- ----------- Net cash (used) by investing activities...................... (2,527,870) (2,529,830)
F-5 83 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in deposits................................... $ (482,475) $ 954,257 Increase in annuities............................................. 12,935 51,120 Increase (decrease) in federal funds purchased.................... 597,080 (50,000) Increase in securities sold under short-term agreements to repurchase...................................................... (751,998) 1,414,334 Proceeds from securities sold under long-term agreements to repurchase...................................................... 2,497,407 1,666,557 Repurchase of securities sold under long-term agreements to repurchase...................................................... (1,115,008) (355,151) Proceeds from FHLB advances....................................... 8,160,050 1,445,084 Repayments of FHLB advances....................................... (7,335,114) (3,200,553) Proceeds from other borrowings.................................... 99,172 322,867 Repayments of other borrowings.................................... (192) (111,129) Issuance of common stock through stock options and employee stock plans........................................................... 7,711 6,037 Increase in payable to affiliate.................................. (1,225) -- Cash dividends paid............................................... (121,425) (57,812) ----------- ----------- Net cash provided by financing activities.................... 1,566,918 2,085,611 ----------- ----------- (Decrease) increase in cash and cash equivalents............. (326,193) 166,223 Cash and cash equivalents at beginning of period............. 983,833 477,509 ----------- ----------- Cash and cash equivalents at end of period................... $ 657,640 $ 643,732 =========== =========== NONCASH INVESTING ACTIVITIES Loans exchanged for mortgage-backed securities.................... $ 884,314 $ 582,659 Real estate acquired through foreclosure.......................... 172,229 210,818 Loans originated to facilitate the sale of foreclosed properties...................................................... 55,472 52,202 CASH PAID DURING THE PERIOD FOR Interest on deposits.............................................. 778,274 548,950 Interest on borrowings............................................ 677,353 354,905 Income taxes...................................................... 87,200 55,680
See Notes to Supplemental Consolidated Financial Statements F-6 84 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING ADJUSTMENTS The information included in the consolidated statements of financial position as of September 30, 1996 and December 31, 1995, the supplemental consolidated statements of income and cash flows for the nine months ended September 30, 1996 and 1995, and the supplemental consolidated statement of stockholders' equity for the nine months ended September 30, 1996 and 1995 of Washington Mutual, Inc. ("Washington Mutual" or the "Company") reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the period presented. 2. EARNINGS PER COMMON SHARE Information used to calculate earnings per share was as follows:
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) (UNAUDITED) DATA USED TO COMPUTE PER SHARE AMOUNTS Net income...................................................... $ 202,212 $ 201,578 Preferred stock dividends: Noncumulative Perpetual, Series C............................. (4,707) (4,788) Noncumulative Perpetual, Series E............................. (2,808) (2,850) Noncumulative Convertible Perpetual, Series D................. (6,300) (6,300) ----------- ----------- Net income available to primary common stock.................... $ 188,397 $ 187,640 =========== =========== Net income...................................................... $ 202,212 $ 201,578 Preferred stock dividends: Noncumulative Perpetual, Series C............................. (4,707) (4,788) Noncumulative Perpetual, Series E............................. (2,808) (2,850) ----------- ----------- Net income available to fully diluted common stock.............. $ 194,697 $ 193,940 =========== =========== Average common shares outstanding (1): Primary....................................................... 111,908,946 109,376,709 Noncumulative Convertible Perpetual Preferred Stock, Series D.......................................................... 5,418,860 5,419,247 ----------- ----------- Fully diluted................................................. 117,327,806 114,795,956 =========== ===========
- --------------- (1) As part of the business combination with Keystone Holdings, Inc., 8,000,000 shares of common stock, with an assigned value of $42.75 per share were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings, Inc. and the FRF. The Company will use the treasury stock method to determine the effect of the shares upon the Company's financial statements. As of the merger date, there is no potential dilutive effect of the 8,000,000 shares of common stock. The shares in the escrow will be dilutive in the future to the extent that the market price of the common stock exceeds $42.75 per share. 3. INCOME TAXES In August 1996, Keystone Holdings, Inc. amended prior-year federal tax returns to reduce tax bad debt deductions and to make other amendments. As a result, the net operating loss carryforwards for federal tax purposes were reduced by approximately $756 million. In September 1996, ASB amended prior-year state tax returns to reduce tax bad debt deductions. The result was to decrease state net operating loss carryforwards by F-7 85 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $545 million. The decrease in the gross deferred tax asset as a result of the amendments which reduced the federal and state net operating loss carryforwards was offset by an equal decrease in the valuation allowance for the deferred tax asset. As of September 30, 1996, the Company had the following federal and state income tax net operating loss carryforwards due to expire under current law during the years indicated:
FEDERAL STATE ---------- ---------- (DOLLARS IN THOUSANDS) 1999...................................... $ -- $ 140 2000...................................... 1,666 754,460 2001...................................... 140 599,241 2002...................................... 278 557,803 2003...................................... 1,602,736 -- 2004...................................... 784,195 -- 2005...................................... 700,619 -- 2007...................................... 12,780 -- 2008...................................... 37,460 -- ---------- ---------- $3,139,874 $1,911,644 ========== ==========
4. COMMON SHARES OUTSTANDING On December 18, 1996, the shareholders of Washington Mutual approved an amendment to the Company's Restated Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 350,000,000 shares. The supplemental consolidated financial statements reflect the amendment. F-8 86 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Washington Mutual, Inc.: We have audited the accompanying supplemental consolidated statements of financial position of Washington Mutual, Inc. and subsidiaries ("the Company") as of December 31, 1995 and 1994, and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. The supplemental consolidated financial statements give retroactive effect to the merger of Keystone Holdings, Inc., with and into Washington Mutual, Inc. on December 20, 1996, which has been accounted for as a pooling-of-interests as described in Note 2 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These supplemental financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued. We did not audit the consolidated balance sheets of Keystone Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, or the related consolidated statements of earnings, stockholder's equity, and cash flows for the years ended December 31, 1995, 1994 and 1993, which statements reflect total assets constituting 47% and 49%, respectively, of consolidated total assets as of December 31, 1995 and 1994, and total net income constituting 31%, 25% and 30% for the years ended December 31, 1995, 1994 and 1993, respectively. Those statements were audited by other auditors whose report, dated, January 26, 1996, except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996, has been furnished to us, and our opinion, insofar as it relates to the amounts included for Keystone Holdings, Inc. and subsidiaries for 1995, 1994, and 1993, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such supplemental 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, on January 1, 1994 and December 31, 1993. Deloitte & Touche LLP December 24, 1996 Seattle, Washington F-9 87 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) INTEREST INCOME Loans............................................................... $2,061,801 $1,658,818 $1,579,480 Note receivable..................................................... 58,841 141,039 241,014 Held-to-maturity securities......................................... 409,063 235,709 54,377 Available-for-sale securities....................................... 381,633 258,678 320,588 Cash equivalents.................................................... 4,748 1,169 3,119 ---------- ---------- ---------- Total interest income............................................. 2,916,086 2,295,413 2,198,578 INTEREST EXPENSE Deposits............................................................ 1,134,818 852,666 868,178 Borrowings.......................................................... 788,618 482,692 343,718 ---------- ---------- ---------- Total interest expense............................................ 1,923,436 1,335,358 1,211,896 ---------- ---------- ---------- Net interest income............................................ 992,650 960,055 986,682 Provision for loan losses........................................... 74,987 122,009 158,728 ---------- ---------- ---------- Net interest income after provision for loan losses............ 917,663 838,046 827,954 OTHER INCOME Depositor fees...................................................... 79,017 45,255 39,872 Loan servicing fees................................................. 29,315 23,247 20,569 Other service fees.................................................. 49,679 65,248 71,921 Other operating income.............................................. 31,035 39,630 39,082 Gain on sale of loans, inclusive of write-downs..................... 1,717 23,488 25,266 Gain (loss) on sale of other assets, inclusive of write-downs....... (655) 23,926 49,866 Loss on sale of covered assets...................................... (37,399) -- -- Federal Deposit Insurance Corporation ("FDIC") assistance on covered assets............................................................ 55,630 -- -- ---------- ---------- ---------- Total other income................................................ 208,339 220,794 246,576 OTHER EXPENSE Salaries and employee benefits...................................... 313,304 315,424 316,929 Occupancy and equipment............................................. 111,381 102,403 106,419 Regulatory assessments.............................................. 54,909 54,887 52,444 Data processing fees................................................ 36,538 33,862 35,613 Other operating expense............................................. 145,394 146,463 132,178 Amortization of goodwill and other intangible assets................ 28,306 29,076 24,690 Real estate owned ("REO") operations, inclusive of write-downs...... 10,682 13,402 19,246 ---------- ---------- ---------- Total other expense............................................... 700,514 695,517 687,519 ---------- ---------- ---------- Income before income taxes, extraordinary items, cumulative effect of change in tax accounting method and minority interest...................................................... 425,488 363,323 387,011 Income taxes........................................................ 111,906 109,880 96,034 Provision (benefit) for payments in lieu of taxes................... 7,887 (824) 14,075 ---------- ---------- ---------- Income before extraordinary items, cumulative effect of change in tax accounting method and minority interest................ 305,695 254,267 276,902 Extraordinary items, net of federal income tax effect............... -- -- (8,953) Cumulative effect of change in tax accounting method................ -- -- 13,365 Minority interest in income of consolidated subsidiaries............ (15,793) (13,992) (13,991) ---------- ---------- ---------- Net Income.......................................................... $ 289,902 $ 240,275 $ 267,323 ========== ========== ========== Net Income Attributable to Common Stock............................. $ 271,318 $ 221,691 $ 253,764 ========== ========== ==========
F-10 88 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ----- ----- ----- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method........................................................ $2.47 $2.09 $2.38 Extraordinary items, net of federal income tax effect....................... -- -- (0.09) Cumulative effect of change in tax accounting method........................ -- -- 0.13 ----- ----- ----- Net Income............................................................... $2.47 $2.09 $2.42 ===== ===== ===== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method........................................................ $2.42 $2.06 $2.32 Extraordinary items, net of federal income tax effect....................... -- -- (0.08) Cumulative effect of change in tax accounting method........................ -- -- 0.12 ----- ----- ----- Net Income............................................................... $2.42 $2.06 $2.36 ===== ===== =====
See Notes to Supplemental Consolidated Financial Statements F-11 89 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents.................................................. $ 983,833 $ 477,509 Trading account securities................................................. 238 572 Available-for-sale securities, amortized cost $11,919,009 and $4,362,152... 12,154,725 4,282,160 Held-to-maturity securities, fair value $3,262,850 and $4,228,897.......... 3,197,720 4,456,031 Loans, net of the allowance for loan losses................................ 24,109,136 25,463,458 Loans held for sale........................................................ 83,704 8,634 Note receivable............................................................ -- 1,515,040 REO........................................................................ 125,101 137,767 Premises and equipment..................................................... 452,743 392,688 Goodwill and other intangible assets....................................... 161,127 190,998 Other assets............................................................... 758,295 556,439 ----------- ----------- Total assets..................................................... $42,026,622 $37,481,296 =========== =========== LIABILITIES Deposits: Checking accounts........................................................ $ 2,776,329 $ 2,841,689 Savings and money market accounts........................................ 6,573,543 5,727,765 Time deposit accounts.................................................... 15,113,088 14,774,552 ----------- ----------- Total deposits................................................... 24,462,960 23,344,006 Annuities.................................................................. 855,503 799,178 Federal funds purchased.................................................... 433,420 -- Securities sold under agreements to repurchase............................. 7,984,756 6,637,346 Advances from the Federal Home Loan Bank ("FHLB").......................... 4,715,739 4,128,977 Other borrowings........................................................... 590,217 381,066 Other liabilities.......................................................... 362,323 255,887 ----------- ----------- Total liabilities................................................ 39,404,918 35,546,460 Minority interest.......................................................... 80,000 80,000 Contingencies (Note 28).................................................... -- -- STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 6,122,500 and 6,200,000 shares issued and outstanding.............................. -- -- Common stock, no par value: 350,000,000 shares authorized -- 119,687,860 and 115,720,886 shares issued and outstanding............................ -- -- Capital surplus............................................................ 920,406 890,344 Capital surplus offset against note receivable............................. -- (167,000) Valuation reserve for available-for-sale securities........................ 188,715 (61,249) Retained earnings.......................................................... 1,432,583 1,192,741 ----------- ----------- Total stockholders' equity....................................... 2,541,704 1,854,836 ----------- ----------- Total liabilities, minority interest and stockholders' equity.... $42,026,622 $37,481,296 =========== ===========
See Notes to Supplemental Consolidated Financial Statements F-12 90 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF SHARES CAPITAL VALUATION ------------------- SURPLUS OFFSET RESERVE TOTAL PREFERRED COMMON CAPITAL AGAINST NOTE RETAINED FOR AFS STOCKHOLDERS' STOCK STOCK SURPLUS RECEIVABLE EARNINGS SECURITIES EQUITY --------- ------- -------- -------------- ---------- ---------- ------------ (IN THOUSANDS) Balance at January 1, 1993............. 5,494 98,779 $791,736 $ (167,000) $ 843,099 $ -- $1,467,835 Net income............................. -- -- -- -- 267,323 -- 267,323 Miscellaneous stock transactions....... 375 7,523 -- (7,546) -- (23) Cash dividends declared on preferred stock................................ -- -- -- -- (13,559) -- (13,559) Cash dividends declared on common stock................................ -- -- -- -- (48,936) -- (48,936) Preferred stock issued................. 2,000 -- 48,182 -- -- -- 48,182 Common stock issued through stock options and employee stock plans..... -- 1,151 15,508 -- 18 -- 15,526 Establishment of valuation reserve for available-for-sale securities -- Keystone Holdings, Inc.................................. -- -- -- -- -- 29,657 29,657 Conversion of preferred stock to common stock................................ (1,294) 5,152 -- -- (445) -- (445) ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1993........... 6,200 105,457 862,949 (167,000) 1,039,954 29,657 1,765,560 Establishment of valuation reserve for available-for-sale securities -- Washington Mutual, Inc.................................. -- -- -- -- -- 13,836 13,836 Net income............................. -- -- -- -- 240,275 -- 240,275 Miscellaneous stock transactions....... -- 384 7,762 -- (7,774) -- (12) Cash dividends declared on preferred stock................................ -- -- -- -- (18,584) -- (18,584) Cash dividends declared on common stock................................ -- -- -- -- (67,835) -- (67,835) Adjustments in valuation reserve for available-for-sale securities........ -- -- -- -- -- (104,742) (104,742) Common stock issued through stock options and employee stock plans..... -- 426 10,038 -- -- -- 10,038 Immaterial business combination accounted for as a pooling-of-interests................. -- 1,454 9,595 -- 6,705 -- 16,300 ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1994........... 6,200 107,721 890,344 (167,000) 1,192,741 (61,249) 1,854,836 Net income............................. -- -- -- -- 289,902 -- 289,902 Miscellaneous stock transactions....... -- (1) (13) -- -- -- (13) Cash dividends declared on preferred stock................................ -- -- -- -- (18,584) -- (18,584) Cash dividends declared on common stock................................ -- -- -- -- (57,997) -- (57,997) Adjustments in valuation reserve for available-for-sale securities........ -- -- -- -- -- 249,964 249,964 Common stock issued through stock options and employee stock plans..... -- 539 8,379 -- -- -- 8,379 Capital surplus previously offset against note receivable.............. -- -- -- 167,000 -- -- 167,000 Immaterial business combination accounted for as a pooling-of-interests................. -- 3,429 23,562 -- 26,645 -- 50,207 Repurchase of preferred stock.......... (77) -- (1,866) -- (124) -- (1,990) ------ ------- -------- --------- ---------- --------- ---------- Balance at December 31, 1995........... 6,123 111,688 $920,406 $ -- $1,432,583 $ 188,715 $2,541,704 ====== ======= ======== ========= ========== ========= ==========
See Notes to Supplemental Consolidated Financial Statements F-13 91 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 289,902 $ 240,275 $ 267,323 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.............................. 74,987 122,009 158,728 Cumulative effect of change in tax accounting method... -- -- (13,365) (Gain) on sale of loans................................ (1,717) (23,488) (25,266) Loss (gain) on sale of other assets.................... 655 (23,926) (49,866) Loss on sale of covered assets......................... 37,399 -- -- Effect of FDIC assistance on covered assets............ (55,630) -- -- REO operations, inclusive of write-downs............... 10,682 13,402 19,246 Extraordinary loss..................................... -- -- 13,028 Depreciation and amortization.......................... 54,361 58,939 91,435 FHLB stock dividend.................................... (23,155) (22,108) (25,715) Decrease in trading account securities................. 749 691 1,574 Origination of loans, held for sale.................... (822,025) (263,055) (987,678) Proceeds on sale of loans, held for sale............... 1,127,076 764,710 900,623 (Increase) in interest receivable...................... (58,902) (28,800) (28,553) Increase (decrease) in interest payable................ 31,027 22,159 (4,741) Increase in income taxes payable....................... 38,683 40,205 10,360 (Increase) decrease in other assets.................... (88,951) 10,757 31,114 (Decrease) in other liabilities........................ (23,527) (65,641) (78,523) ----------- ----------- ----------- Net cash provided by operating activities........... 591,614 846,129 279,724 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities............... (2,312,072) (1,480,421) (348,374) Principal payments and maturities of available-for-sale securities............................................. 817,048 545,753 142,116 Sales of available-for-sale securities................... 1,673,853 499,719 262,132 Purchases of held-to-maturity securities................. (697,470) (1,931,537) (2,086,760) Principal payments and maturities of held-to-maturity securities............................................. 885,205 1,109,796 1,774,438 Sales of held-to-maturity securities..................... -- -- 838,358 Proceeds from sales of loans............................. 84,197 54,754 919,768 Principal payments on loans.............................. 3,067,145 3,332,483 4,691,734 Origination and purchases of loans....................... (8,562,080) (8,666,382) (8,805,116) New West Note, payments received......................... 1,682,040 1,569,018 1,569,018 Sales of REO............................................. 148,756 202,374 204,335 Other REO operations..................................... 1,774 (1,236) (8,573) Proceeds from sale of premises and equipment............. 4,871 2,211 8,130 Purchase of premises and equipment....................... (102,877) (58,396) (59,852) Purchase of mortgage servicing rights.................... (38,270) (37,605) -- Cash proceeds from disposition of credit card receivables............................................ -- 166,315 -- Cash acquired through acquisitions....................... 68,358 40,679 387,688 ----------- ----------- ----------- Net cash (used) by investing activities............. (3,279,522) (4,652,475) (510,958)
F-14 92 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in deposits......................... $ 707,375 $ (380,297) $(1,048,485) Increase in annuities................................... 56,325 85,795 141,955 Increase in federal funds purchased..................... 433,420 -- -- (Decrease) increase in securities sold under short-term agreements to repurchase.............................. (186,833) 2,289,611 1,065,235 Proceeds from securities sold under long-term agreements to repurchase......................................... 2,872,557 1,391,682 914,156 Repurchase of securities sold under long-term agreements to repurchase......................................... (1,408,127) (260,713) (332,188) Proceeds from FHLB advances............................. 4,710,333 8,209,790 7,116,870 Repayments of FHLB advances............................. (4,123,336) (7,698,071) (7,460,874) Call of subordinated capital notes...................... -- -- (41,600) Proceeds of other borrowings............................ 147,867 -- -- Repayments of other borrowings.......................... (1,470) (3,488) (5,536) Issuance of Keystone Holdings, Inc. Series C Notes...... 175,000 -- -- Repayment of Keystone Holdings, Inc. Series A Notes..... (111,000) -- -- Proceeds from issuance of subordinate notes............. -- -- 19,988 Retirement of subordinate debentures.................... -- -- (20,000) Decrease in payable to affiliate........................ -- -- (21,000) Other capital transactions, net......................... (1,298) 14,742 26,430 Cash dividends paid..................................... (76,581) (96,419) (52,495) ----------- ----------- ----------- Net cash provided by financing activities............. 3,194,232 3,552,632 302,456 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents...... 506,324 (253,714) 71,222 Cash and cash equivalents at beginning of year........ 477,509 731,223 660,001 ----------- ----------- ----------- Cash and cash equivalents at end of year.............. $ 983,833 $ 477,509 $ 731,223 =========== =========== =========== NONCASH INVESTING ACTIVITIES Loans exchanged for mortgage-backed securities.......... $ 6,588,124 $ 183,269 $ 2,374,344 Implementation of new accounting standard -- reclass to available-for-sale portfolio.......................... -- 2,127,890 1,615,482 Transfer of securities to the available-for-sale portfolio............................................. 4,924,168 -- -- Real estate acquired through foreclosure................ 255,028 334,499 349,239 Loans originated to facilitate the sale of foreclosed properties............................................ 65,693 92,415 47,832 CASH PAID DURING THE YEAR FOR Interest on deposits.................................... 1,125,226 851,546 891,626 Interest on borrowings.................................. 762,000 458,033 322,310 Federal income taxes.................................... 73,130 92,172 65,930 Deposits exchanged in branch swaps...................... -- -- 152,382 DIVIDENDS DECLARED AND PAYABLE IN DIFFERENT YEARS Common stock dividends.................................. -- (10,000) 10,000
See Notes to Supplemental Consolidated Financial Statements F-15 93 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying Supplemental Consolidated Financial Statements are the same as the restated financial statements that will be issued after the postmerger operating results are published. On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings") merged with and into Washington Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the "Company"). The supplemental 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. WMI was formed in August 1994 by the Company's predecessor, Washington Mutual Savings Bank ("WMSB"), a Washington state-chartered savings bank, in connection with the reorganization of WMSB into a holding company structure. The reorganization was completed in November 1994 through the merger of WMSB into Washington Mutual Bank ("WMB"), the Company's Washington state-chartered savings bank subsidiary, with WMB as the surviving entity. WMB continued as a wholly owned subsidiary of WMI. The par values of preferred and common stock and capital surplus of the Company have been restated to reflect the new par value of the holding company, effective November 1994. Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the 1995 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 WMI'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 individuals and small to mid-sized businesses in Washington, California, Oregon, Utah, Idaho, Montana, Arizona, Colorado and Nevada through its subsidiary operations. Financial services of the Company include accepting deposits from the general public and making residential loans, consumer loans and limited types of commercial real estate loans, primarily multi-family, which are offered principally through WMB, American Savings Bank, F.A. ("ASB") and Washington Mutual Bank fsb ("WMBfsb"). Washington Mutual, through other subsidiaries, also issues and markets annuity contracts and is the investment advisor to and distributor of mutual funds. Washington Mutual diversified its business mix by merging WMB with Enterprise Bank ("Enterprise"), a Seattle-area commercial bank and Western Bank ("Western") of Coos Bay, Oregon, Oregon's largest community-based commercial bank. The mergers with Enterprise and Western provide the Company with access to the higher-growth business segment of commercial banking. 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 F-16 94 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 either through ongoing correlation or effectiveness tests. Interest rate exchange agreements and interest rate cap agreements are designated either against the available-for-sale portfolio or against borrowings and deposits. Agreements designated against available-for-sale securities are included at their fair value in the available-for-sale portfolio and any mark-to-market adjustments are reported as a separate component of stockholders' equity, net of tax. The fair value of interest rate exchange agreements and interest rate cap agreements designated against loans, short-term borrowings, and deposits are not reported on the balance sheet. The interest differential paid or received on interest rate exchange agreements is recorded as an adjustment to interest income or interest expense and classified with the interest income or interest expense of the related asset or liability. 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 premium is paid at the time an interest rate exchange agreement is 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 short-term deposits and borrowings. Such redesignations are treated as a sale out of the one portfolio and as a purchase by the other portfolio and recorded at the fair value at the time of transfer. The Company may also buy put or call options on mortgage instruments. The purpose and criteria for the purchase of options are to manage the interest rate risk inherent in secondary marketing activities. The costs of such options are capitalized and amortized on a straight-line basis as a reduction of other income over the original terms of the options. All such options 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 to enhance fee income. If the option is exercised, the option fee is an adjustment to the gain or loss on the sale of the security. If the option is not exercised, it is recognized as fee income. Covered call options are carried at cost. Additionally, 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 would be marked to market with the corresponding gain or loss recognized in income. INVESTMENT SECURITIES Effective December 31, 1993, Keystone Holdings adopted Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Washington Mutual F-17 95 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adopted SFAS No. 115 on January 1, 1994. Following the provisions of the Statement, management has segregated investment and equity securities into the following three categories: trading, held-to-maturity and available-for-sale, and utilizes the accounting conventions for each category described below. The effect on stockholders' equity at December 31, 1993 of the Keystone Holdings adoption was a $29.7 million increase. The effect on stockholders' equity at January 1, 1994 of the Washington Mutual adoption was a $13.8 million increase. Trading Securities Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Their unrealized gains and losses are included in earnings. Held-To-Maturity Securities Investments classified as held-to-maturity are accounted for at amortized cost, but an institution 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. Recognition is provided for unrealized losses in the debt portfolio if any market valuation differences are deemed to be other than temporary. Available-For-Sale Securities Securities not classified as either trading or held-to-maturity are considered to be available-for-sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses for available-for-sale securities are excluded from earnings and reported (net of tax) as a net amount in a separate component of stockholders' equity until realized. The available-for-sale portfolio contains adjustable- and fixed-rate private-issue (nonagency) mortgage-backed securities ("private-issue securities") and collateralized mortgage obligations that expose the Company to certain risks that are not inherent in agency securities, primarily credit risk and liquidity risk. Because of this added risk, private-issue securities have historically paid a greater rate of interest than agency securities, enhancing the overall yield of the portfolio. Such securities are not guaranteed by the U.S. government or one of its agencies because the loan size, underwriting or underlying collateral of these securities often does not meet set industry standards. Consequently, there is the possibility of loss of the principal investment. For this reason, it is possible that the Company will not receive an enhanced overall yield on the portfolio and, in fact, could incur a loss. Additionally, the Company may not be able to sell such securities in certain market conditions as the number of interested buyers may be limited at that time. Furthermore, the complex structure of certain collateralized mortgage obligations 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 collateralized mortgage obligations where the Company holds subordinated tranches, certain collateralized mortgage obligations that have been "resecuritized," and certain securities that contain a significant number of jumbo, nonconforming loans. In an effort to reduce the aforementioned risks, the Company now performs a credit review on each individual security prior to purchase. Such a review includes consideration of the collateral characteristics, borrower payment histories and information concerning loan delinquencies and losses of the underlying collateral. After a security is purchased, similar information will be monitored on a periodic basis. Furthermore, the Company has established internal guidelines limiting the geographic concentration of the underlying collateral. F-18 96 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LOANS Loans held for investment are stated at the principal amount outstanding, net of deferred loan fees and any discounts or premiums on purchased loans. The deferred fees, discounts and premiums are amortized using the interest method over the estimated life of the loan. The Company sells residential fixed-rate loans in the secondary market. At the date of origination, the loans so designated and meeting secondary market guidelines are identified as 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 ceases to accrue interest income on any loan that becomes 90 days or more delinquent and reserves 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 in not being accrued are referred to as loans on nonaccrual status. On January 1, 1995, the Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan. This standard is applicable to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Loans that are collectively evaluated for impairment by Washington Mutual include residential real estate and consumer loans because of the significant number of loans, their relatively small balances and historically low level of losses. Residential construction, commercial real estate and commercial business loans that become delinquent, regardless of the loan amount, are individually evaluated for impairment. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral, and current economic conditions. SFAS No. 114 also applies to all loans that are restructured in a troubled debt restructuring subsequent to the adoption of SFAS No. 114, as defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. A troubled debt restructuring is a restructuring in which the creditor grants a concession to the borrower that it would not otherwise consider. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the terms of the loan agreement. SFAS No. 114 requires that the valuation of impaired loans be based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company bases the measurement of loan impairment on the fair value of the loan's underlying collateral. The amount by which the recorded investment in the loan exceeds the value of the impaired loan's collateral is included in the Company's allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off. The adoption of SFAS No. 114 had no material impact on the results of operations or financial condition of the Company. The Company holds certain loans that have been securitized into mortgage-backed securities with full recourse. 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, actual 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. The reserve includes amounts relating to loans which have been securitized with recourse, and not sold. F-19 97 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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; 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. Commercial real estate loans are considered by the Company to have somewhat greater risk of uncollectibility than residential real estate loans due to the dependency on income production or future development of the real estate. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control. These factors may result in losses or recoveries differing significantly from those provided in the financial statements. NOTE RECEIVABLE On December 28, 1988, (the "1988 Acquisition"), substantially all assets and liabilities of the failed savings and loan subsidiary (the "Failed Association") of Financial Corporation of America ("FCA"), were transferred to ASB and New West Federal Savings and Loan Association ("New West"). As part of the 1988 Acquisition, ASB received a note ("Note Receivable") from New West representing the difference between the amount of the deposits and other liabilities assumed and the value of the assets acquired by ASB at the time of such acquisition. As of the 1988 Acquisition, Keystone Holdings and other related entities also entered into an assistance agreement (the "Assistance Agreement") with the Federal Savings and Loan Insurance Corporation (the "FSLIC"). Under the terms of the Assistance Agreement, the FSLIC Resolution Fund (the "FRF") is required to indemnify ASB for specified losses that may be incurred on, or in connection with, certain of the acquired assets, and the FRF received warrants entitling the holder thereof to purchase, for a nominal price, 3,000 shares of N.A. Capital Holdings ("N.A. Holdings") Class B Common Stock. Although the Company holds the ownership interest in New West, the Company does not have a financial interest in New West because of certain contractual provisions and indemnifications, described above. Any loss incurred by New West during its liquidation is the financial responsibility of the FRF. In addition, substantially all decisions made by New West's management must be approved by the FDIC prior to execution. New West has not recorded any earnings or losses since its inception. New West was considered a nominee corporation of ASB for state and federal tax purposes until October 24, 1995 when the Note receivable was prepaid in full (see Note 8 "Note Receivable" for further discussion). The balance of the Note Receivable reported in the Company's financial statements prior to December 31, 1995 has been reduced by the $167.0 million value ascribed to the warrants. Consensus No. 88-19 of the Emerging Issues Task Force of the Financial Accounting Standards Board ("FASB") requires that capital arising from instruments issued to the FSLIC be offset against amounts receivable from the FSLIC, which in this case included the Note Receivable as its repayment was supported by FRF assistance to New West. REO REO includes properties acquired through foreclosure that are transferred to REO at the lower of cost or fair value, less estimated selling costs, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in the REO reserve for losses. The amount the Company will ultimately recover from REO may differ substantially from the amount used in F-20 98 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) arriving at the net carrying value of these assets because of future market factors beyond the Company's control or because of changes in the Company's strategy for sale or development of the property. Commercial REO that is managed and operated by the Company is depreciated using the straight-line method over the property's estimated useful life. MORTGAGE SERVICING RIGHTS In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing Rights. The statement eliminates the distinction between servicing rights that are purchased and those that are retained upon the sale or securitization of loans. The statement requires mortgage servicers to recognize the servicing rights on loans as separate assets, no matter how acquired. Banks that sell loans and retain the servicing rights are required to allocate the total cost of the loans between servicing rights and loans based on their relative fair values if their values can be estimated. In September 1995, Keystone Holdings elected early adoption of SFAS No. 122, as permitted by the Statement, and implemented it as of January 1, 1995. Effective January 1, 1996, Washington Mutual adopted SFAS No. 122. The adoption of SFAS No. 122 did not have a material impact on the results of operations or financial condition of the Company. Purchased servicing represents the cost of acquiring the right to service mortgage loans. Originated servicing rights are recorded when mortgage loans are originated and subsequently sold or securitized with the servicing rights retained. The total cost of the mortgage loans is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The cost relating to purchased and originated servicing is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses impairment of the capitalized mortgage servicing portfolio 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 rights are stratified based on the following predominant risk characteristics of the underlying loans: fixed-rate loans by coupon (less than 8%, 8%-10%, 10%-12% and greater than 12%); and adjustable rate loans by index (Weighted Average Cost of Funds Index for the Eleventh District Savings Institutions ("COFI"), Treasury, London Interbank Offering Rate ("LIBOR"), etc.) The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. In order to determine the fair value of the servicing rights, the Company uses the market prices under comparable servicing sales contracts, when available, or alternatively, it uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. The prepayment speeds are determined from market sources for fixed-rate mortgages with similar coupons and prepayment reports for comparable adjustable-rate mortgages ("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. Amounts capitalized are recorded at cost, net of accumulated amortization and valuation allowance. PREMISES AND EQUIPMENT Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives on the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. ANNUITY AND INSURANCE ACCOUNTING WM Life Insurance, Inc. ("WM Life") is an Arizona-domiciled life insurance company. WM Life is authorized under state law to issue annuities in seven states. In addition, WM Life owns Empire Life F-21 99 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Insurance Co. ("Empire"), which is currently licensed under state law to issue annuities in 28 states. WM Life currently issues fixed and variable flexible premium deferred annuities, single premium fixed deferred annuities and single premium immediate annuities. Empire currently issues fixed flexible premium deferred annuities and single premium immediate annuities. Both companies conduct business through licensed independent agents. The majority of such agents are employees of affiliates of the Company and operate in the Company's financial centers. Currently, annuities are primarily issued in Washington and Oregon. The Company defers certain costs, such as commissions and the expenses of underwriting and issuing policies, that are involved in acquiring new annuity and life insurance business. These costs, which are included in other assets in the accompanying Consolidated Statements of Financial Position, are amortized over the lives of the policies in relation to the estimated gross profit. Annuities equal the policy value as defined in the policy contract as of the balance sheet date. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company enters into sales of securities under agreements to repurchase the same ("reverse repurchase agreements") or similar ("dollar repurchase agreements") securities. Reverse repurchase agreements and dollar rolls are accounted for as financing arrangements, with the obligation to repurchase securities sold reflected as a liability in the Consolidated Statement of Financial Position. The dollar amount of securities underlying the agreements remain in the respective asset accounts. TRUST ASSETS Assets held by the Company in fiduciary or agency capacity for customers are not included in the Consolidated Financial Statements as such items are not assets of the Company. Assets totaling $67.3 million and $60.9 million as of December 31, 1995 and 1994 were held by the Company in fiduciary or agency capacity. FEDERAL INCOME TAXES Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in the Company's income tax returns. The deferred tax provision for the year is equal to the change in the deferred tax liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company reports income and expenses using the accrual method of accounting and files a consolidated tax return that includes all of its subsidiaries excluding Keystone Holdings and its subsidiaries. Keystone Holdings and its subsidiaries filed a separate consolidated tax return for periods prior to December 20, 1996. Subsequent to the consummation of the merger with Keystone Holdings, the Company will file a consolidated tax return that includes all of its subsidiaries. For California franchise tax purposes, ASB joins in the filing of a combined return with its subsidiaries and with ASB Real Estate Group, Inc. ("AREG"). AREG formerly managed certain real estate related assets of New West and is now inactive as a result of a restructuring transaction in 1993. The tax sharing agreement entered into by Keystone Holdings and its subsidiaries (the "Tax Sharing Agreement") requires the subsidiaries to compute their tax sharing payments as if they were filing a separate return. Such agreement further requires N.A. Holdings to compute its tax sharing payment as if it were filing a separate consolidated return with its subsidiaries (including ASB), with certain adjustments. The principal adjustments are (a) the income, expenses, gains and losses of New West, a nominee of ASB for income and F-22 100 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) franchise tax purposes through October 23, 1995, are excluded; (b) loan fees are recognized on a straight-line basis over seven years, adjusted for sales of such loans, rather than as received; and (c) for the years ending on or before December 31, 1994, the mark-to-market adjustments attributable to the real estate loan portfolio acquired from the Failed Association is accreted into income ratably over seven years, adjusted for sales of the acquired loans. NOTE 2: BUSINESS COMBINATIONS On March 1, 1993, the Company merged with Pioneer Savings Bank ("Pioneer") of Lynnwood, Washington. Pioneer operated 17 branches and one mortgage lending center. At February 28, 1993, Pioneer had assets of $926.5 million, deposits of $659.5 million and stockholders' equity of $114.4 million. The Company issued 8,779,581 shares of common stock (after adjustment for the third quarter 1993 50 percent stock dividend) to complete the merger with Pioneer. The financial information presented in this document reflects the pooling-of-interests method of accounting for the merger of Pioneer into the Company. Accordingly, under generally accepted accounting principles, the assets and liabilities of Pioneer were recorded on the books of the resulting institution at their values as reported on the books of Pioneer immediately prior to the consummation of the merger with Pioneer. No goodwill was created in the merger with Pioneer. This presentation required the restatement of prior periods as if the companies had been combined. The following pro forma information represents the results of operations of the Company and Pioneer for 1993, on an individual as well as combined basis. The pro forma results do not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The unaudited pro forma results of operations were as follows:
YEAR ENDED DECEMBER 31, 1993 ---------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual: Net interest income...................................................... $522,816 Income before extraordinary items and cumulative effect of change in tax accounting method..................................................... 173,428 Extraordinary items, net of federal income tax effect.................... (8,953) Cumulative effect of change in tax accounting method..................... 13,365 -------- Net income................................................................. $177,840 ======== Net income attributable to common stock.................................... $164,282 ======== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method..................................................... $2.78 Extraordinary items, net of federal income tax effect.................... (0.15) Cumulative effect of change in tax accounting method..................... 0.23 -------- Net income................................................................. $2.86 ======== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method..................................................... $2.63 Extraordinary items, net of federal income tax effect.................... (0.14) Cumulative effect of change in tax accounting method..................... 0.21 -------- Net income................................................................. $2.70 ========
F-23 101 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1993 ---------------------- (DOLLARS IN THOUSANDS) Pioneer: Net interest income....................................................... $ 6,615 Income before extraordinary items and cumulative effect of change in tax accounting method....................................................... 1,836 -------- Net income................................................................ $ 1,836 ======== Net income attributable to common stock................................... $ 1,836 ======== YEAR ENDED DECEMBER 31, 1993 ---------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual and Pioneer combined: Net interest income....................................................... $529,431 Income before extraordinary items and cumulative effect of change in tax accounting method....................................................... 175,264 Extraordinary items, net of federal income tax effect..................... (8,953) Cumulative effect of change in tax accounting method...................... 13,365 -------- Net income................................................................ $179,676 ======== Net income attributable to common stock................................... $166,118 ======== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method.................................................... $2.74 Extraordinary items, net of federal income tax effect................... (0.15) Cumulative effect of change in tax accounting method.................... 0.23 -------- Net income................................................................ $2.82 ======== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method.................................................... $2.60 Extraordinary items, net of federal income tax effect................... (0.14) Cumulative effect of change in tax accounting method.................... 0.21 -------- Net income................................................................ $2.67 ========
On April 9, 1993, the Company acquired Pacific First Bank ("Pacific First") from RT Holdings, Inc. ("RTH"), a subsidiary of Royal Trustco Limited of Toronto, Canada. In April 1993, Pacific First operated 129 branches and 14 home loan centers in Washington and Oregon. At March 31, 1993, Pacific First had assets of $5.8 billion and deposits of $3.8 billion. As part of the acquisition of Pacific First, the Company negotiated several provisions designed to reduce the effect of any Pacific First asset quality problems on the resulting combined loan portfolio. As a result of the provisions, RTH purchased $656.2 million book value in assets from Pacific First prior to the sale to the Company. As part of the purchase agreement, the Company received indemnification from RTH for a variety of problems Pacific First had that could result in future losses to the Company. These indemnification provisions were secured by both specific funds held in escrow and by a guarantee from RTH's parent company. The largest individual component is a $10.0 million general indemnity escrow that can be drawn upon to pay a variety of claims, including any exposure arising from transactions or acts prior to the purchase date. F-24 102 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The acquisition of Pacific First was treated as a purchase for accounting purposes. Accordingly, under generally accepted accounting principles, the assets and liabilities of Pacific First have been recorded on the books of the Company at their respective fair market values at the time of the consummation of the acquisition of Pacific First. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities, including identified intangible assets, was recorded at $178.2 million. Amortization of goodwill over a 10-year period will result in a charge to earnings of approximately $17.8 million per year. The accompanying financial statements include the operations of the two institutions from April 1, 1993 to December 31, 1993. The following pro forma information presents the results of operations for 1993 as though the acquisition had occurred on January 1, 1993. The pro forma results do not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The unaudited pro forma results of operations were as follows:
YEAR ENDED DECEMBER 31, 1993 ---------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Net interest income........................................................ $571,220 Income before extraordinary items and cumulative effect of change in tax accounting method........................................................ 198,327 Extraordinary items, net of federal income tax effect...................... (8,953) Cumulative effect of change in tax accounting method....................... 13,365 -------- Net income................................................................. $202,739 ======== Net income attributable to common stock.................................... $189,181 ======== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method..................................................... $3.13 Extraordinary items, net of federal income tax effect.................... (0.15) Cumulative effect of change in tax accounting method..................... 0.23 -------- Net income................................................................. $3.21 ======== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method..................................................... $2.95 Extraordinary items, net of federal income tax effect.................... (0.14) Cumulative effect of change in tax accounting method..................... 0.21 -------- Net income................................................................. $3.02 ========
On April 28, 1995, Washington Mutual merged with Olympus Capital Corporation of Salt Lake City, Utah ("Olympus"), the holding company of Olympus Bank, a Federal Savings Bank ("Olympus Bank"). At the merger date, Olympus (on a consolidated basis) had assets of $391.4 million, deposits of $278.6 million and stockholders' equity of $37.2 million. Olympus Bank operated 11 branches in Utah and Montana. Under the terms of the transaction, Olympus Bank merged into WMBfsb. The merger was treated as a pooling-of-interests. Due to the immaterial nature of the transaction, prior-period information has not been restated as if the companies had been combined. On August 31, 1995, Washington Mutual acquired Enterprise through a merger of Enterprise with and into WMB. Enterprise, a Washington-based commercial bank specializing in lending to small- and mid-size businesses, had assets of $153.8 million, deposits of $138.5 million and stockholders' equity of $14.0 million on August 31, 1995. The merger was treated as a pooling-of-interests. Due to the immaterial nature of the transaction, prior-period information has not been restated as if the companies had been combined. F-25 103 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 31, 1996, WMB merged with Western of Coos Bay, Oregon. 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 5,866,199 shares of common stock to complete the merger with Western. The merger was treated as a pooling-of-interests. The supplemental financial information presented in this document reflects the pooling-of-interests method of accounting for the merger of Western into the Company. Accordingly, under generally accepted accounting principles, the assets and liabilities of Western were recorded on the books of the resulting institution at their values as reported on the books of Western immediately prior to the consummation of the merger with Western. No goodwill was created in the merger with Western. This presentation required the restatement of prior periods as if the companies had been combined for all years presented. The following supplemental information represents the results of operations of the Company and Western for 1995, 1994 and 1993 on an individual as well as combined basis. This information does not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The supplemental results of operations were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual: Total revenue.............................................. $1,625,451 $1,315,651 $1,177,313 Income before extraordinary items and cumulative effect of change in tax accounting method.................... 190,624 172,304 175,264 Extraordinary items, net of federal income tax effect.... -- -- (8,953) Cumulative effect of change in tax accounting method..... -- -- 13,365 ---------- ---------- ---------- Net income................................................. $ 190,624 $ 172,304 $ 179,676 ========== ========== ========== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method.................... $2.68 $2.54 $2.74 Extraordinary items, net of federal income tax effect.... -- -- (0.15) Cumulative effect of change in tax accounting method..... -- -- 0.23 ---------- ---------- ---------- Net income................................................. $2.68 $2.54 $2.82 ========== ========== ========== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method.................... $2.59 $2.46 $2.60 Extraordinary items, net of federal income tax effect.... -- -- (0.14) Cumulative effect of change in tax accounting method..... -- -- 0.21 ---------- ---------- ---------- Net income................................................. $2.59 $2.46 $2.67 ========== ========== ==========
F-26 104 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Western: Total revenue.............................................. $ 71,383 $ 61,401 $ 56,571 ---------- ---------- ---------- Net Income................................................. $ 9,177 $ 9,018 $ 8,907 ========= ========= =========
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual and Western: Total revenue.............................................. $1,696,834 $1,377,052 $1,233,884 Income before extraordinary items and cumulative effect of change in tax accounting method.................... 199,801 181,322 184,171 Extraordinary items, net of federal income tax effect.... -- -- (8,953) Cumulative effect of change in tax accounting method..... -- -- 13,365 ---------- ---------- ---------- Net income................................................. $ 199,801 $ 181,322 $ 188,583 ========== ========== ========== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method....................... $2.59 $2.45 $2.63 Extraordinary items, net of federal income tax effect.... -- -- (0.14) Cumulative effect of change in tax accounting method..... -- -- 0.21 ---------- ---------- ---------- Net income................................................. $2.59 $2.45 $2.70 ========== ========== ========== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method....................... $2.51 $2.38 $2.51 Extraordinary items, net of federal income tax effect.... -- -- (0.13) Cumulative effect of change in tax accounting method..... -- -- 0.19 ---------- ---------- ---------- Net income................................................. $2.51 $2.38 $2.57 ========== ========== ==========
On November 30, 1996, WMI merged with Utah Federal Savings Bank ("Utah FSB") by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB, which was an Ogden-based institution, had assets of $121.9 million, deposits of $105.9 million and stockholders' equity of $12.2 million. The merger will be accounted for as a pooling-of-interests. Due to the immaterial nature of the transaction, the Company will not restate prior-period information as if the companies had been combined. On December 20, 1996, WMI merged with Keystone Holdings. Keystone Holdings is an indirect holding company whose principal operating subsidiary, through a multi-tiered holding company structure, is ASB, a California-based federally chartered savings bank. N.A. Holdings owns all of the outstanding common stock of ASB. N.A. Holdings is owned by New American Capital, Inc. ("New Capital") whose common stock is owned by New American Holdings, Inc. ("New Holdings"), a direct subsidiary of Keystone Holdings. At December 20, 1996, Keystone Holdings had assets of approximately $21.9 billion, deposits of approximately $12.9 billion and stockholder's equity of approximately $574.0 million. The Company issued 47,883,333 shares of common stock to complete the merger with Keystone Holdings. The merger was treated as a pooling-of-interests. The financial information presented in this document reflects the pooling-of-interests F-27 105 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) method of accounting for the merger of Keystone Holdings into the Company. Accordingly, under generally accepted accounting principles, the assets and liabilities of Keystone Holdings were recorded on the books of the resulting institution at the amounts as reported on the books of Keystone Holdings immediately prior to the consummation of the merger with Keystone Holdings. No goodwill was created in the merger with Keystone Holdings. This presentation required the restatement of prior periods as if the companies had been combined for all years presented. Certain amounts in Keystone Holdings' financial statements have been restated to conform to WMI's presentation. The following pro forma information represents the results of operations of the Company and Keystone Holdings for 1995, 1994 and 1993 on an individual as well as combined basis. The pro forma results do not necessarily indicate the actual results that would have been obtained, nor are they necessarily indicative of the future operations of the combined companies. The pro forma results of Keystone Holdings have been adjusted to (i) eliminate earnings attributable to the warrant holders and (ii) reflect the preferred stock dividends to related parties as minority interest. The pro forma results of operations were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual: Total revenue.......................................... $1,696,834 $1,377,052 $1,233,884 Income before extraordinary items and cumulative effect of change in tax accounting method......... 199,801 181,322 184,171 Extraordinary items, net of federal income tax effect............................................ -- -- (8,953) Cumulative effect of change in tax accounting method............................................ -- -- 13,365 ---------- ---------- ---------- Net income............................................. $ 199,801 $ 181,322 $ 188,583 ========== ========== ========== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method......... $2.59 $2.45 $2.63 Extraordinary items, net of federal income tax effect............................................ -- -- (0.14) Cumulative effect of change in tax accounting method............................................ -- -- 0.21 ---------- ---------- ---------- Net income............................................. $2.59 $2.45 $2.70 ========== ========== ========== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method......... $2.51 $2.38 $2.51 Extraordinary items, net of federal income tax effect............................................ -- -- (0.13) Cumulative effect of change in tax accounting method............................................ -- -- 0.19 ---------- ---------- ---------- Net income............................................. $2.51 $2.38 $2.57 ========== ========== ==========
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Keystone Holdings: Total revenue.......................................... $1,427,591 $1,139,155 $1,211,270 ---------- ---------- ---------- Net Income............................................. $ 90,101 $ 58,953 $ 78,740 ========== ========== ==========
F-28 106 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Washington Mutual and Keystone Holdings: Total revenue.......................................... $3,124,425 $2,516,207 $2,445,154 Income before extraordinary items and cumulative effect of change in tax accounting method................... 289,902 240,275 262,911 Extraordinary items, net of federal income tax effect............................................... -- -- (8,953) Cumulative effect of change in tax accounting method... -- -- 13,365 ---------- ---------- ---------- Net income............................................. $ 289,902 $ 240,275 $ 267,323 ========== ========== ========== Per share amounts -- primary Income before extraordinary items and cumulative effect of change in tax accounting method......... $2.47 $2.09 $2.38 Extraordinary items, net of federal income tax effect............................................ -- -- (0.09) Cumulative effect of change in tax accounting method............................................ -- -- 0.13 ---------- ---------- ---------- Net income............................................. $2.47 $2.09 $2.42 ========== ========== ========== Per share amounts -- fully diluted Income before extraordinary items and cumulative effect of change in tax accounting method......... $2.42 $2.06 $2.32 Extraordinary items, net of federal income tax effect............................................ -- -- (0.08) Cumulative effect of change in tax accounting method............................................ -- -- 0.12 ---------- ---------- ---------- Net income............................................. $2.42 $2.06 $2.36 ========== ========== ==========
NOTE 3: CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Cash and demand deposits....................................... $689,258 $406,149 Cash equivalents: Overnight investments........................................ 293,000 69,884 Time deposits................................................ 1,575 1,476 -------- -------- 294,575 71,360 -------- -------- $983,833 $477,509 ======== ========
For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight investments and time deposits. Generally, time deposits are short term, with an original maturity of three months or less. Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. Included in cash and demand deposits were required deposits at the Federal Reserve of $107.9 million and $96.0 million at December 31, 1995 and 1994. F-29 107 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4: AVAILABLE-FOR-SALE SECURITIES Available-for-sale securities classified by type and contractual maturity date consisted of the following:
DECEMBER 31, 1995 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year................. $ 65,120 $ -- $ (64) $ 65,056 4.72% After one but within five years..... 184,837 526 (29) 185,334 6.48 After five but within 10 years...... 9,755 41 (125) 9,671 7.23 After 10 years...................... 59,813 121 (770) 59,164 7.02 ----------- -------- -------- ----------- ---- 319,525 688 (988) 319,225 6.24 Corporate debt obligations: Due within one year................. 1,502 10 -- 1,512 8.27 After one but within five years..... 136,447 7,492 (205) 143,734 8.70 After five but within 10 years...... 181,038 8,237 (819) 188,456 7.02 After 10 years...................... 97,755 6,626 (98) 104,283 7.50 ----------- -------- -------- ----------- ---- 416,742 22,365 (1,122) 437,985 7.69 Equity securities: Preferred stock..................... 110,532 2,535 (2,311) 110,756 7.21 FHLB stock.......................... 414,389 -- -- 414,389 6.74 Other stock......................... 5 3 -- 8 -- ----------- -------- -------- ----------- ---- 524,926 2,538 (2,311) 525,153 6.84 ----------- -------- -------- ----------- ---- 1,261,193 25,591 (4,421) 1,282,363 6.98 Mortgage-backed securities: U.S. government agency: Due within one year............... 5 -- -- 5 9.23 After one but within five years... 467,226 14,883 (497) 481,612 7.64 After five but within 10 years.... 236,497 14,338 (86) 250,749 7.84 After 10 years.................... 8,713,086 226,286 (19,214) 8,920,158 6.93 ----------- -------- -------- ----------- ---- 9,416,814 255,507 (19,797) 9,652,524 6.99 Corporate: Due after five but within 10 years.......................... 18,614 901 (258) 19,257 7.14 After 10 years.................... 1,211,290 8,739 (17,016) 1,203,013 7.37 ----------- -------- -------- ----------- ---- 1,229,904 9,640 (17,274) 1,222,270 7.37 ----------- -------- -------- ----------- ---- 10,646,718 265,147 (37,071) 10,874,794 7.03 Derivative instruments: Interest rate exchange agreements... (848) 2,225 (13,224) (11,847) -- Interest rate cap agreements........ 11,946 -- (2,531) 9,415 -- ----------- -------- -------- ----------- ---- 11,098 2,225 (15,755) (2,432) -- ----------- -------- -------- ----------- ---- $11,919,009 $ 292,963 $ (57,247) $12,154,725 7.03% =========== ======== ======== =========== ====
- --------------- (1) Weighted average yield at end of year F-30 108 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 ------------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year.................. $ 66,937 $ -- $ (887) $ 66,050 4.17% After one but within five years...... 382,890 7 (17,728) 365,169 5.55 After five but within 10 years....... 9,469 -- (254) 9,215 6.08 After 10 years....................... 70,340 -- (2,316) 68,024 5.97 ---------- ------- --------- ---------- ---- 529,636 7 (21,185) 508,458 5.44 Corporate debt obligations: Due after one but within five years.............................. 133,255 231 (3,857) 129,629 6.33 After five but within 10 years....... 50,609 296 (2,980) 47,925 7.50 After 10 years....................... 6,502 23 (644) 5,881 7.65 ---------- ------- --------- ---------- ---- 190,366 550 (7,481) 183,435 6.68 Equity securities: Preferred stock...................... 35,457 -- (1,790) 33,667 9.95 FHLB stock........................... 353,298 -- -- 353,298 5.67 Other stock.......................... 1,032 -- -- 1,032 -- ---------- ------- --------- ---------- ---- 389,787 -- (1,790) 387,997 6.03 ---------- ------- --------- ---------- ---- 1,109,789 557 (30,456) 1,079,890 5.86 Mortgage-backed securities U.S. government agency: Due after one but within five years........................... 209,806 35 (7,440) 202,401 5.06 After five but within 10 years..... 56,929 9 (2,134) 54,804 5.61 After 10 years..................... 2,608,957 1,272 (79,609) 2,530,620 6.30 ---------- ------- --------- ---------- ---- 2,875,692 1,316 (89,183) 2,787,825 6.20 Corporate: Due after five but within 10 years........................... 9,716 -- (280) 9,436 5.46 After 10 years..................... 360,549 511 (16,395) 344,665 6.14 ---------- ------- --------- ---------- ---- 370,265 511 (16,675) 354,101 6.12 ---------- ------- --------- ---------- ---- 3,245,957 1,827 (105,858) 3,141,926 6.19 Derivative instruments: Interest rate exchange agreements.... (2,360) 21,014 -- 18,654 -- Interest rate cap agreements......... 8,766 32,924 -- 41,690 -- ---------- ------- --------- ---------- ---- 6,406 53,938 -- 60,344 -- ---------- ------- --------- ---------- ---- $4,362,152 $ 56,322 $ (136,314) $4,282,160 6.02% ========== ======= ========= ========== ====
- --------------- (1) Weighted average yield at end of year Proceeds from sales of investment securities in the available-for-sale portfolio during 1995 and 1994 were $626.2 million and $161.8 million. The Company realized $4.0 million in gains and $2.2 million in losses on these sales during 1995. Similarly, the Company realized $2.5 million in gains and $740,000 in losses on sales F-31 109 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) during 1994. Proceeds from sales of mortgage-backed securities in the available-for-sale portfolio during 1995 and 1994 were $1.0 billion and $337.9 million. The Company realized $13.5 million in gains and $16.2 million in losses on these sales during 1995 and $2.8 million in gains and $469,000 in losses on these sales during 1994. Available-for-sale mortgage-backed securities with a book value of $5.6 billion and a market value of $5.8 billion at December 31, 1995 were pledged to secure public deposits, securities sold under agreements to repurchase, other borrowings, interest rate exchange agreements and access to the Federal Reserve discount window. There were no sales out of the held-to-maturity portfolio during 1995 and 1994. 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 a book value of $4.9 billion and gross unrealized gains of $82.6 million and gross unrealized losses of $28.2 million. No transfers between the held-to-maturity and available-for-sale categories were made during 1994. At December 31, 1995, net unrealized gains on the available-for-sale portfolio were $249.2 million and unrealized losses on the derivative instruments designated against this portfolio were $13.5 million, resulting in a combined net unrealized gain included as a separate component of stockholders' equity (on an after-tax basis) of $188.7 million. At December 31, 1994, net unrealized losses on the available-for-sale portfolio were $133.9 million and unrealized gains on the derivative instruments designated against this portfolio were $53.9 million, resulting in a combined net unrealized loss included as a separate component of stockholders' equity (on an after-tax basis) of $61.2 million. On December 31, 1995, the Company held $1.2 billion of private-issue mortgage-backed securities. Of that amount, 33 percent were of the highest investment grade (AAA), 55 percent were rated investment grade (AA or A), 8 percent were rated lowest investment grade (BBB) and 4 percent were rated below investment grade (BB or below). During 1995, the Company realized $8.4 million in losses on securities in the below investment grade portfolio. As of December 31, 1995, the Company had mortgage-backed securities with book value of $293.3 million and a market value of $291.9 million from a single issuer, the Resolution Trust Corporation. F-32 110 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5: HELD-TO-MATURITY SECURITIES Held-to-maturity securities classified by type and contractual maturity date consisted of the following:
DECEMBER 31, 1995 ------------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year................... $ 19,693 $ -- $ -- $ 19,693 5.24% After five but within 10 years........ 6,592 906 -- 7,498 8.09 ---------- ------- ------- ---------- ---- 26,285 906 -- 27,191 6.03 Corporate debt obligations: Due within one year................... 98,969 -- (9) 98,960 5.70 After one but within five years....... 31,173 2,895 (2) 34,066 8.66 After five but within 10 years........ 22,586 2,472 (3) 25,055 8.37 After 10 years........................ 17,162 2,310 (9) 19,463 8.91 ---------- ------- ------- ---------- ---- 169,890 7,677 (23) 177,544 7.00 Municipal obligations: Due within one year................... 1,090 1 -- 1,091 6.85 After one but within five years....... 1,658 89 -- 1,747 7.44 After five but within 10 years........ 36,202 2,083 -- 38,285 6.88 After 10 years........................ 53,371 2,908 -- 56,279 6.37 ---------- ------- ------- ---------- ---- 92,321 5,081 -- 97,402 6.60 ---------- ------- ------- ---------- ---- 288,496 13,664 (23) 302,137 6.78 Mortgage-backed securities U.S. government agency: After 10 years........................ 2,909,224 54,833 (3,344) 2,960,713 7.44 ---------- ------- ------- ---------- ---- $3,197,720 $ 68,497 $ (3,367) $3,262,850 7.38% ========== ======= ======= ========== ====
- --------------- (1) Weighted average yield at end of year. F-33 111 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 ------------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE YIELD(1) ---------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Investment securities: U.S. government and agency obligations: Due within one year.................. $ 24,038 $ -- $ (2) $ 24,036 $ 4.95% After one but within five years...... 23,972 1 (478) 23,495 6.82 After five but within 10 years....... 8,557 -- (61) 8,496 7.75 ---------- ------- --------- ---------- ---- 56,567 1 (541) 56,027 6.16 Corporate debt obligations: Due within one year.................. 69,269 15 (82) 69,202 5.65 After one but within five years...... 95,607 1,914 (3,644) 93,877 8.00 After five but within 10 years....... 172,808 727 (13,787) 159,748 7.24 After 10 years....................... 95,857 493 (8,831) 87,519 7.80 ---------- ------- --------- ---------- ---- 433,541 3,149 (26,344) 410,346 7.27 Municipal obligations: Due within one year.................. 806 3 -- 809 8.33 After one but within five years...... 1,662 7 (14) 1,655 7.15 After five but within 10 years....... 26,968 812 (636) 27,144 6.51 After 10 years....................... 51,326 1,867 (753) 52,440 6.88 ---------- ------- --------- ---------- ---- 80,762 2,689 (1,403) 82,048 6.78 ---------- ------- --------- ---------- ---- 570,870 5,839 (28,288) 548,421 7.08 Mortgage-backed securities: U.S. government agency: Due within one year.................. 4 -- -- 4 6.72 After five but within 10 years....... 12,296 -- (1,019) 11,277 6.13 After 10 years....................... 3,313,021 640 (188,128) 3,125,533 6.68 ---------- ------- --------- ---------- ---- 3,325,321 640 (189,147) 3,136,814 6.68 Corporate: Due within one year.................. 15 -- -- 15 9.23 After one but within five years...... 51 2 (1) 52 10.44 After five but within 10 years....... 548 13 -- 561 11.06 After 10 years....................... 559,226 252 (16,444) 543,034 6.44 ---------- ------- --------- ---------- ---- 559,840 267 (16,445) 543,662 6.44 ---------- ------- --------- ---------- ---- 3,885,161 907 (205,592) 3,680,476 6.65 ---------- ------- --------- ---------- ---- $4,456,031 $6,746 $ (233,880) $4,228,897 6.71% ========== ======= ========= ========== ====
- --------------- (1) Weighted average yield at end of year. Held-to-maturity mortgage-backed securities with a book value of $1.9 billion and a market value of $1.9 billion at December 31, 1995 were pledged to secure public deposits, securities sold under agreements to repurchase, other borrowings, interest rate exchange agreements and access to the Federal Reserve discount window. F-34 112 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6: LOANS Loans consisted of the following:
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Real Estate: Residential............................................. $17,303,305 $17,766,215 Residential construction................................ 615,814 549,271 Commercial real estate.................................. 3,487,574 4,699,220 ----------- ----------- 21,406,693 23,014,706 Second mortgage and other consumer........................ 1,974,673 1,841,613 Manufactured housing...................................... 867,181 731,714 Commercial business....................................... 179,568 129,048 Reserve for loan losses................................... (235,275) (244,989) ----------- ----------- $24,192,840 $25,472,092 =========== ===========
Included in the table above are loans held-for-sale of $83.7 million and $8.6 million at December 31, 1995 and 1994. Nonaccrual loans totaled $213.8 million and $280.9 million at December 31, 1995 and 1994. If interest on these loans had been recognized, such income would have been $10.8 million and $11.6 million for 1995 and 1994. At December 31, 1995 and 1994, the Company had troubled debt restructurings aggregating $90.6 million and $54.6 million. During 1995 and 1994, these troubled debt restructurings returned a net yield of 8.13 percent and 8.87 percent, thereby contributing $5.9 million and $5.5 million to interest income. Had these loans not been restructured and interest accrued at their original rates, the additional interest income would not have been material. At December 31, 1995, loans totaling $169.1 million were impaired, of which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4 million were previously written down and had no reserves allocated to them. Of the $169.1 million of impaired loans, $26.7 million were on nonaccrual status and $142.3 million (including $57.1 million of troubled debt restructurings) were performing but judged to be impaired. The average balance of impaired loans during the year was $177.6 million, and the Company recognized $12.4 million of related interest income. Interest income on impaired loans is normally recognized on the accrual basis, unless the loan is more than 90 days past due, in which case interest income is recorded on the cash basis. An immaterial amount of interest income was recorded on the cash basis during 1995. F-35 113 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loans, exclusive of reserve for loan losses, by geographic concentration were as follows:
DECEMBER 31, 1995 -------------------------------------------------------------- CALIFORNIA WASHINGTON OREGON OTHER TOTAL ----------- ---------- ---------- -------- ----------- (DOLLARS IN THOUSANDS) Real estate: Residential....................... $ 9,701,368 $5,669,411 $1,450,311 $482,215 $17,303,305 Residential construction.......... -- 345,163 224,117 46,534 615,814 Apartment buildings............... 1,296,649 591,764 201,452 109,358 2,199,223 Other commercial real estate...... 500,652 425,240 264,235 98,224 1,288,351 ----------- ---------- ---------- -------- ----------- 11,498,669 7,031,578 2,140,115 736,331 21,406,693 Second mortgage and other consumer.......................... 88,764 1,519,796 344,708 21,405 1,974,673 Manufactured housing................ 99,464 567,012 166,322 34,383 867,181 Commercial business................. -- 57,882 121,519 167 179,568 ----------- ---------- ---------- -------- ----------- $11,686,897 $9,176,268 $2,772,664 $792,286 $24,428,115 =========== ========== ========== ======== ===========
California loans include $3.7 billion of loans in the Los Angeles area, $3.7 billion of loans in the San Francisco Bay area, $1.5 billion of loans in Orange County and $2.9 billion of loans in other California areas. Loans, exclusive of reserve for loan losses, deferred loan fees and premiums and discounts, by maturity or repricing date were as follows:
DECEMBER 31, 1995 ---------------------- (DOLLARS IN THOUSANDS) Adjustable-rate loans: Due within one year............................................. $ 14,151,629 After one but within five years................................. 2,385,004 After five but within 10 years.................................. 101,957 After 10 years.................................................. 29,840 ----------- 16,668,430 Fixed-rate loans: Due within one year............................................. 401,380 After one but within five years................................. 1,347,147 After five but within 10 years.................................. 1,690,024 After 10 years.................................................. 4,396,502 ----------- 7,835,053 ----------- $ 24,503,483 ===========
In addition to loans the Company serviced for its own portfolio, it serviced loans of $21.4 billion and $15.3 billion at December 31, 1995 and 1994 for U.S. government agencies, institutions and private investors. Loans of $5.2 billion at December 31, 1995 were pledged to secure advances from the FHLB. Unamortized deferred loan fees were $75.1 million and $121.3 million at December 31, 1995 and 1994. At December 31, 1995, the Company had $663.4 million in fixed-rate mortgage loan commitments, $638.2 million in adjustable-rate mortgage loan commitments, $72.0 million in commercial business loan commitments and $576.5 million in undisbursed lines of credit. F-36 114 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7: RESERVE FOR LOAN LOSSES Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 -------- --------- --------- (DOLLARS IN THOUSANDS) Balance, beginning of year............................... $244,989 $ 245,062 $ 179,612 Provision for loan losses................................ 74,987 122,009 158,728 Reserves added through business combinations............. 5,372 921 46,000 Reserves charged off: Residential............................................ (57,147) (89,637) (93,799) Residential construction............................... (125) (190) (297) Commercial real estate................................. (33,149) (26,835) (26,967) Manufactured housing, second mortgage and other consumer............................................ (6,888) (10,544) (16,964) Commercial business.................................... (813) (2,065) (3,065) -------- --------- --------- (98,122) (129,271) (141,092) Reserves recovered: Residential............................................ 2,393 2,522 45 Residential construction............................... 47 -- -- Commercial real estate................................. 4,426 2,186 889 Manufactured housing, second mortgage and other consumer............................................ 701 1,117 768 Commercial business.................................... 482 443 112 -------- --------- --------- 8,049 6,268 1,814 -------- --------- --------- Balance, end of year..................................... $235,275 $ 244,989 $ 245,062 ======== ========= =========
The Company holds certain loans that have been securitized into mortgage-backed securities with full recourse. The Company includes those loans securitized with recourse in determining the adequacy of the reserve for loan losses. The balance of the reserve for loan losses related to loans securitized with recourse totaled $17.4 million, $16.7 million and $12.1 million at December 31, 1995, 1994 and 1993. 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. Reserves are then allocated for impaired loans. The Company intends to provide an additional $125.0 million in loan loss provision at the Effective Date. This additional loan loss provision is being provided principally because a number of Washington Mutual (prior to the business combination with Keystone Holdings) credit administration and asset management philosophies and procedures differ from those of ASB. These differences consist principally of the following: (i) Washington Mutual is more proactive than ASB in dealing with emerging credit problems and tends to prefer judicial foreclosure actions to induce borrowers to correct defaults, whereas ASB tends to prefer workouts in lieu of a more aggressive foreclosure stance; and (ii) ASB has considered the risk characteristics of its portfolio of multi-family loans of less than $1 million to be similar to its single-family residential portfolio. Washington Mutual, on the other hand, considers the risk characteristics of that portfolio to be more closely aligned with its commercial property portfolio, which tends to have more loss exposure than the single- family residential portfolio. Washington Mutual intends to conform ASB's asset management practices, administration, philosophies and procedures to its own, or in some instances to revise ASB's current asset management strategies to conform to strategies being developed by Washington Mutual. The plan of realization of troubled loans differed between the companies and therefore results in different levels of loss F-37 115 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reserves. The additional loan loss provision is to a lesser degree being provided because Washington Mutual believes that, while there has been an increase in the price of houses in California markets, a decline in collateral values for some portions of the California real estate market has occurred in 1996. An analysis of the reserve for loan losses is as follows:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Allocated reserves: Commercial real estate....................................... $ 16,488 $ 20,025 Residential construction..................................... 158 1,327 Commercial business.......................................... -- -- -------- -------- 16,646 21,352 Unallocated reserves........................................... 218,629 223,637 -------- -------- $235,275 $244,989 ======== ======== Total reserve for loan losses as a percentage of: Total loans and recourse obligations......................... 0.79% 0.91% Nonperforming loans.......................................... 110.04 87.22
NOTE 8: NOTE RECEIVABLE In October 1995, Keystone Holdings agreed with the FDIC to allow prepayment of the remaining balance of the Note Receivable. Prior to October 1995, the FDIC had always caused New West to prepay the Note Receivable to the maximum extent permitted by its terms. If the maximum prepayments under its terms were to have continued, the balance of the Note Receivable would have been reduced to approximately $113.0 million in November 1995 and fully repaid in February 1996. ASB received the remaining principal balance of $505.3 million, plus interest, on October 24, 1995. ASB utilized the proceeds received to pay down certain short-term borrowings and to originate new loans. The following is a summary of the Note Receivable activity for the years indicated:
CAPITAL NET OF NOTE RECEIVABLE SURPLUS OFFSET CAPITAL SURPLUS --------------- -------------- --------------- (DOLLARS IN THOUSANDS) Balance at December 31, 1992...................... $ 4,767,144 $ 167,000 $ 4,600,144 Receivable transferred to New West................ 52,932 -- 52,932 Optional prepayments.............................. (1,569,018) -- (1,569,018) ----------- -------- ----------- Balance at December 31, 1993...................... 3,251,058 167,000 3,084,058 Optional prepayments.............................. (1,569,018) -- (1,569,018) ----------- -------- ----------- Balance at December 31, 1994...................... 1,682,040 167,000 1,515,040 Optional prepayments.............................. (1,682,040) (167,000) (1,515,040) ----------- -------- ----------- Balance at December 31, 1995...................... $ -- $ -- $ -- =========== ======== ===========
F-38 116 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9: REO REO consisted of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Real estate acquired through foreclosure....................... $134,195 $144,923 Other repossessed assets....................................... 1,018 979 Reserve for losses............................................. (10,112) (8,135) --------- -------- $125,101 $137,767 ========= ========
Changes in the REO reserve for losses were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year......................... $ 8,135 $ 13,330 $ 16,025 Provision for REO losses........................... 10,523 15,491 26,889 Reserves charged-off, net of recoveries............ (8,546) (20,686) (29,584) ------- -------- -------- $ 10,112 $ 8,135 $ 13,330 ======= ======== ========
REO operations, inclusive of write-downs were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- (DOLLARS IN THOUSANDS) Income (loss) from operations...................... $ (3,457) $ (2,977) $ 665 Gain on sale of REO................................ 3,298 5,066 6,978 Provision for REO losses........................... (10,523) (15,491) (26,889) -------- -------- -------- $(10,682) $(13,402) $(19,246) ======== ======== ========
NOTE 10: PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Furniture and equipment........................................ $243,527 $235,771 Buildings...................................................... 363,894 289,434 Leasehold improvements......................................... 54,683 54,490 Construction in progress....................................... 8,080 9,047 -------- -------- 670,184 588,742 Accumulated depreciation....................................... (296,779) (268,755) -------- -------- 373,405 319,987 Land........................................................... 79,338 72,701 -------- -------- $452,743 $392,688 ======== ========
Depreciation expense for 1995, 1994, and 1993 was $41.3 million, $38.4 million, and $38.9 million, respectively. F-39 117 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has noncancelable operating leases for financial centers, office facilities and equipment. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $40.4 million, $44.5 million and $44.2 million in 1995, 1994, and 1993, respectively. Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
DECEMBER 31, 1995 ------------------------- LAND & FURNITURE & BUILDINGS EQUIPMENT --------- ----------- (DOLLARS IN THOUSANDS) Commitments: Due within one year......................................... $ 30,200 $ 3,882 After one but within two years.............................. 28,803 2,822 After two but within three years............................ 26,268 1,630 After three but within four years........................... 24,177 652 After four but within five years............................ 22,344 -- After five years............................................ 87,315 -- -------- ------ $ 219,107 $ 8,986 ======== ======
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement establishes accounting standards for the impairment of long-lived assets that either will be held and used in operations or that will be disposed of. Effective January 1, 1996, the Company adopted SFAS No. 121. The adoption is not anticipated to have a material impact on the results of operations or financial condition of the Company. In January 1995, a wholly owned service corporation subsidiary of ASB purchased from a related limited partnership the Irvine Plaza building structures and adjoining land currently utilized for ASB's executive offices and various departments. The total cash purchase price paid for the property was $45.2 million. NOTE 11: GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consisted of the following:
DECEMBER 31, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Washington Mutual Bank, net of amortization of $98,654 and $71,366...................................................... $159,259 $186,547 Murphey Favre and Composite Research & Management Co., net of amortization of $9,389 and $8,653............................ 1,468 2,203 Mutual Travel, Inc., net of amortization of $3,136............. -- 1,799 Other, net of amortization of $85 and $36...................... 400 449 -------- -------- $161,127 $190,998 ======== ========
Goodwill and other intangible assets result from business combinations accounted for as a purchase of assets and an assumption of liabilities. Other intangible assets primarily consist of core deposit intangibles and covenants not-to-compete resulting from acquisitions of thrift branch systems. Goodwill and other intangible assets are amortized using the straight-line method over the period that is expected to be benefited, which ranges from three to 10 years. The average remaining amortization period at December 31, 1995 was approximately six years. The Company periodically evaluates goodwill and other intangible assets for impairment. The level of goodwill and other intangible assets at December 31, 1995 was supported by the value attributed to the retail operations of acquired financial institutions. F-40 118 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1993, the acquisition of Pacific First was accounted for as a purchase of assets and assumption of liabilities and increased goodwill and other intangible assets by $178.2 million. NOTE 12: MORTGAGE SERVICING RIGHTS Mortgage servicing rights are included in other assets and consisted of the following:
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 --------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year........................ $ 70,911 $ 66,031 $ 77,945 Additions......................................... 58,306 38,385 21,446 Sales............................................. -- (13,087) -- Amortization...................................... (23,840) (20,418) (27,083) Write-downs....................................... -- -- (6,277) Impairment valuation allowance.................... (882) -- -- -------- -------- -------- Balance, end of year.............................. $ 104,495 $ 70,911 $ 66,031 ======== ======== ========
In 1995, with the adoption of SFAS No. 122, the Company recorded a valuation allowance for impairment of mortgage servicing rights of $882,000. No write-downs were recorded in 1994. In 1993, prior to the adoption of SFAS No. 122, the Company recorded a specific write-down of $6.3 million on mortgage servicing rights. NOTE 13: DEPOSITS Deposits consisted of the following:
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing........................................ $ 2,111,124 $ 2,342,407 Noninterest bearing..................................... 665,205 499,282 ----------- ----------- 2,776,329 2,841,689 Savings accounts.......................................... 1,905,659 2,224,784 Money market accounts..................................... 4,667,884 3,502,981 Time deposit accounts: Due within one year..................................... 12,696,186 10,496,491 After one but within two years.......................... 1,410,809 2,780,944 After two but within three years........................ 409,580 765,219 After three but within four years....................... 243,541 293,167 After four but within five years........................ 258,415 293,522 After five years........................................ 94,557 145,209 ----------- ----------- 15,113,088 14,774,552 ----------- ----------- $24,462,960 $23,344,006 =========== ===========
Time certificates of deposit in amounts of $100,000 or more totaled $3.1 billion and $2.8 billion at December 31, 1995 and 1994. At December 31, 1995, $1.9 billion of these deposits mature within three F-41 119 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) months, $490.8 million mature in three to six months, $371.3 million mature in six months to one year, and $352.8 million mature after one year. Financial data pertaining to the weighted average cost of deposits were as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ---- ---- ---- Weighted daily average interest rate during the year........... 4.69% 3.69% 3.76%
NOTE 14: FEDERAL FUNDS PURCHASED The Company purchased federal funds from a variety of counterparties during 1995. All federal funds purchased had maturities of thirty days or less, with the majority having maturities of one day. As of December 31, 1995, the balance of federal funds purchased was $433.4 million. Financial data pertaining to the weighted average cost, the level of federal funds purchased, and the related interest expense were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- ---- ---- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year............. 5.83% --% --% Weighted daily average interest rate during the year...... 5.98 -- -- Daily average balance of federal funds purchased.......... $270,861 $ -- $ -- Maximum amount of federal funds purchased at any month end..................................................... 998,000 -- -- Interest expense during the year.......................... 16,188 -- --
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase consisted of the following:
DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) Reverse repurchase agreements............................... $7,592,841 $6,109,868 Dollar repurchase agreements................................ 391,915 527,478 ---------- ---------- $7,984,756 $6,637,346 ========== ==========
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. The 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. The securities underlying the agreements with customers were held in a segregated account by a safekeeping agent for the Company. F-42 120 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities or repricing of securities sold under agreements to repurchase were as follows:
DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) Securities sold under agreements to repurchase: Due within 30 days........................................ $5,225,817 $4,853,237 After 30 but within 90 days............................... 1,764,074 787,151 After 90 but within 180 days.............................. 490,361 502,123 After 180 but within one year............................. -- 244,360 After one year............................................ 504,504 250,475 ---------- ---------- $7,984,756 $6,637,346 ========== ==========
Financial data pertaining to the weighted average cost, the level of securities sold under agreements to repurchase and the related interest expense were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year......................................... 5.92% 5.94% 3.41% Weighted daily average interest rate during the year......................................... 6.14 4.69 3.66 Daily average of securities sold under agreements to repurchase..................... $7,859,948 $4,318,592 $2,155,082 Maximum securities sold under agreements to repurchase at any month end.................. 8,647,814 6,637,346 3,208,288 Interest expense during the year............... 482,698 202,677 78,853
NOTE 16: ADVANCES FROM THE FHLB As members of the FHLB, WMB, WM Life, WMBfsb and ASB maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. As members of the FHLB of Seattle, WMB's, WM Life's and WMBfsb's advances are collateralized in aggregate, as provided for in the Advances, Security and Deposit Agreements with the FHLB, by all FHLB stock owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and securities of the U.S. government and agencies thereof. As a member of the FHLB of San Francisco, ASB's advances are collateralized by all FHLB stock owned and certain mortgages and deeds of trust. F-43 121 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of advances from the FHLB were as follows:
DECEMBER 31, ------------------------------------------------------------------- 1995 1994 ------------------------------- ------------------------------- RANGES OF RANGES OF AMOUNT INTEREST RATES AMOUNT INTEREST RATES ---------- ---------------- ---------- ---------------- (DOLLARS IN THOUSANDS) FHLB advances: Due within one year................ $2,545,594 4.74%-8.54% $1,466,133 3.95%-8.30% After one but within two years..... 1,331,000 4.38 -8.45 1,394,852 4.74 -8.54 After two but within three years... 545,642 5.59 -8.50 789,478 4.38 -7.44 After three but within four years........................... 57,000 8.50 -8.63 146,944 5.49 -6.15 After four but within five years... 55,137 6.25 -9.34 110,403 6.19 -8.53 After five years................... 181,366 2.80 -8.65 221,167 4.50 -9.34 ---------- ---------- $4,715,739 $4,128,977 ========== ==========
Financial data pertaining to the weighted average cost, the level of FHLB advances and the related interest expense were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year.......... 5.76% 5.72% 5.36% Weighted daily average interest rate during the year... 5.72 5.38 6.17 Daily average of FHLB advances......................... $3,539,006 $3,966,494 $3,152,198 Maximum FHLB advances at any month end................. 4,715,739 4,560,891 3,617,596 Interest expense during the year....................... 202,422 213,259 194,631
NOTE 17: OTHER BORROWINGS Other borrowings consisted of the following:
DECEMBER 31, ----------------------------------------------------------- RANGE OF RANGE OF AMOUNT INTEREST RATES AMOUNT INTEREST RATES -------- -------------- -------- -------------- (DOLLARS IN THOUSANDS) Series C Floating Rate Notes, due 2000...... $175,000 7.31% $ -- --% Series B 9.60% Notes, due 1999.............. 169,000 9.60 169,000 9.60 Senior notes, due 2005...................... 147,845 7.46 -- -- Series A Floating Notes, due 1997........... -- -- 111,000 7.88 Notes payable, due 1998..................... 76,405 6.13-8.00 79,039 6.13-8.75 Subordinated notes, due 1998................ 20,500 8.81 20,500 8.50 Other....................................... 1,467 -- 1,527 -- -------- -------- $590,217 $381,066 ======== ========
On March 23, 1995, New Capital completed the private placement of $175.0 million of its Series C Floating Rate Notes due April 12, 2000 (the "Series C Notes"). The net proceeds from the issuance of the Series C Notes were used to redeem the $111.0 million Series A Notes and to fund a $60.0 million capital contribution from N.A. Holdings to ASB. Interest on the Series C Notes accrues at a rate equal to three-month LIBOR plus 1.375 percent, reset on a quarterly basis, and interest payments are made quarterly. F-44 122 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The indenture related to the Series C Notes contains certain covenants that, among other things, require the maintenance of regulatory capital at ASB and limit the following: (i) funded indebtedness, (ii) subsidiary funded indebtedness, (iii) upstream payments, (iv) subsidiary dividends, (v) liens, (vi) certain mergers and consolidations, (vii) issuance of subsidiary capital stock, (viii) transactions with affiliates and (ix) lines of business. New Capital is in compliance with all such covenants and restrictions. On January 14, 1992, New Capital completed the private placement of $111.0 million of its Series A Floating Rate Notes due 1997 ("Series A Notes") and $169.0 million of its Series B 9.60 percent Notes due 1999 ("Series B Notes"). Interest on the Series A Notes accrued at three-month LIBOR plus 2.25 percent and repriced quarterly. A note purchase agreement (the "Note Purchase Agreement") was executed by New Capital in connection with the private placement of the Series A and Series B Notes. On October 12, 1993, in accordance with a subordinated note purchase agreement (the "Subordinated Note Agreement"), New Capital issued $20.5 million of subordinated notes. The subordinated notes accrue interest at a rate equal to three-month LIBOR plus 2.875 percent. Interest is paid quarterly and the subordinated notes mature on October 12, 1998. The Note Purchase Agreement and the Subordinated Note Agreement contain certain limitations regarding the payment of cash dividends on common or preferred stock, the reacquisition or issuance of common or preferred stock, additional borrowings and payments thereon and certain other transactions. Under the terms of the Note Purchase Agreement and the Subordinated Note Agreement, New Capital cannot pay dividends on its preferred stock or common stock unless its consolidated net worth exceeds $375.0 million. As long as New Capital's consolidated net worth exceeds $375.0 million, it can make restricted payments if the cumulative restricted payments do not exceed the sum of (i) $30.0 million, (ii) the proceeds from certain capital contributions, and (iii) 50% of the cumulative adjusted net earnings (as defined in the agreements) of New Capital. The percentage limitation applied to cumulative adjusted net earnings is increased to 65% percent as long as New Capital's consolidated net worth after the proposed restricted payments exceeds $475.0 million. As of December 31, 1995, New Capital's consolidated net worth was $653.4 million and the 65% percent limitation was in effect. Under the terms of the Series C Note Indenture, New Capital may pay dividends and make other capital distributions ("Upstream Payments") to the extent that it has the capacity to incur an additional dollar of funded indebtedness (as defined in the Series C Indenture) after the proposed Upstream Payment. Based on the most restrictive of New Capital's debt covenants, as of December 31, 1995, New Capital would have been permitted to make up to $55.8 million in dividend or other restricted payments. New Capital is in compliance with all such limitations. A redemption notice was provided to holders of the Series A Notes as required by the Note Purchase Agreement and the redemption was completed on April 12, 1995. As of March 30, 1995, New Capital irrevocably placed sufficient funds in trust with its paying agent to satisfy the required principal and interest necessary to redeem the Series A Notes on their redemption date. As a result, New Capital recorded the payment of those funds as an in-substance defeasance of the Series A Notes. The early retirement of the Series A Notes required New Capital to write off certain related unamortized debt issuance costs and to mark certain interest rate cap agreements to market as of March 30, 1995, resulting in a pre-tax loss on early retirement of debt of approximately $2.1 million. In August 1995, the Company issued $150.0 million of senior notes bearing an interest rate of 7.25 percent. The notes are due August 15, 2005 and may not be redeemed prior to maturity. As part of the acquisition of Pacific First, the Company assumed a $75.0 million note payable bearing an interest rate of 8.0 percent to the City of Tampa. The City of Tampa issued capital improvement revenue bonds in 1988 and invested a portion of the receipts with Pacific First. The note matures in 1998 and is subject to periodic withdrawals. F-45 123 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18: 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 adjustable-rate mortgage loans and the purchase of adjustable-rate mortgage-backed securities; the sale of fixed-rate residential mortgage loan production or fixed-rate mortgage-backed securities; and the use of derivative instruments, such as interest rate exchange agreements and interest rate cap agreements. As of December 31, 1995, interest-sensitive assets of $27.7 billion and interest-sensitive liabilities of $31.5 billion were scheduled to mature or reprice within one year. At December 31, 1995, the Company had entered into interest rate exchange agreements and interest rate cap agreements with notional values of $2.7 billion and $9.8 billion. Without these instruments the Company's one-year gap at December 31, 1995 would have been a negative 8.90 percent as opposed to a negative 2.57 percent. Interest rate exchange agreements and interest rate cap agreements expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. The Company controls the credit risk associated with its interest rate exchange agreements and interest rate cap agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company's use of derivative instruments reduces the negative effect that changing interest rates may have on net interest income. The Company uses such instruments to reduce the volatility of net interest income over an interest rate cycle. None of the Company's derivative instruments are what are termed leveraged derivative instruments. These types of instruments are riskier than the derivatives used by the Company in that they have significant embedded options that enhance the performance in certain circumstances but dramatically reduce the performance in other circumstances. 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. During 1995, the Company terminated an interest rate exchange agreement with a notional value of $75.0 million and recorded a deferred gain of $845,000. There were no other terminations of interest rate exchange agreements or interest rate cap agreements in 1995. During 1994, the Company terminated interest rate exchange agreements with a notional value of $370.0 million for deferred gains of $1.4 million and deferred losses of $4.8 million. In 1993, interest rate exchange agreements with a notional value of $90.0 million were terminated and deferred losses of $3.4 million were recorded. During 1994, the Company terminated interest rate cap agreements with a notional value of $375.0 million and deferred gains of $860,000 were recorded. No interest rate cap agreements were terminated in 1993. F-46 124 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1995 ----------------------------------------------------------------- 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................ $ 465,000 5.13% 5.92% $ 1,528 $ 1,528 After one but within two years..... 200,000 6.83 5.88 (4,144) (4,144) After two but within three years... 300,000 6.05 5.92 (5,244) (5,244) After three years.................. 200,000 6.88 5.88 (3,987) (3,987) Designated against deposits and borrowings: Due within one year................ 495,000 6.95 6.08 -- 2,385 After one but within two years..... 484,500 5.96 6.62 -- (8,461) After two but within three years... 276,000 6.04 6.75 -- (8,746) After three years.................. 261,000 7.10 8.27 -- (7,793) ---------- ---- ---- --------- --------- $2,681,500 6.26% 6.38% $(11,847) $(34,462) ========== ==== ==== ========= =========
- --------------- (1) The terms of each agreement have specific London Interbank Offering Rate reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement.
DECEMBER 31, 1994 ----------------------------------------------------------------- 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................ $ 150,000 6.38% 4.33% $ 4,700 $ 4,700 After one but within two years..... 350,000 5.69 4.54 13,954 13,954 Designated against deposits and borrowings: Due within one year................ 355,000 4.62 6.66 -- (3,367) After one but within two years..... 685,000 6.52 6.16 -- 8,748 After two but within three years... 500,500 5.75 6.76 -- 14,772 After three years.................. 602,000 6.33 7.70 -- 1,908 ---------- ---- ---- --------- --------- $2,642,500 5.96% 6.37% $ 18,654 $ 40,715 ========== ==== ==== ========= =========
- --------------- (1) The terms of each agreement have specific London Interbank Offering Rate reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. F-47 125 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1994 --------------------------------------------------------- SHORT-TERM NOTIONAL STRIKE RECEIPT CARRYING FAIR AMOUNT RATE RATE(1) VALUE VALUE ---------- ------ -------------- -------- ------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year(2)..................... $1,425,000 5.34% 5.90% $ 4,484 $ 4,484 After one but within two years(3).......... 875,000 5.85 5.83 3,799 3,799 After two but within three years(4)........ 250,000 6.05 5.90 1,132 1,132 Designated against deposits and borrowings: Due within one year(5)..................... 5,193,000 7.43 5.63 151 (1,775) After one but within two years(6).......... 386,000 9.18 5.60 1,241 2 After two but within three years(7)........ 286,000 8.81 5.49 1,177 42 After three years............................ 1,359,000 8.05 5.27 15,122 1,101 ---------- ---- ---- -------- ------- $9,774,000 7.14% 5.64% $ 27,106 $ 8,785 ========== ==== ==== ======== =======
- --------------- (1) The terms of each agreement have specific London Interbank Offering Rate or Cost of Funds Index for the Eleventh District Savings Institutions reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. (2) Includes $425.0 million notional amount with a weighted average cap ceiling of 8.06% (3) Includes $600.0 million notional amount with a weighted average cap ceiling of 7.75% (4) Includes $250.0 million notional amount with a weighted average cap ceiling of 7.65% (5) Includes $30.0 million notional amount with a weighted average cap ceiling of 9.50% and $5.0 billion notional amount with a weighted average floor of 4.85% (6) Includes $45.0 million notional amount with a weighted average cap ceiling of 9.50% (7) Includes $40.0 million notional amount with a weighted average cap ceiling of 9.50% (8) Includes $1.1 billion notional amount with a weighted average cap ceiling of 9.50%
DECEMBER 31, 1994 --------------------------------------------------------- SHORT-TERM NOTIONAL STRIKE RECEIPT CARRYING FAIR AMOUNT RATE RATE(1) VALUE VALUE ---------- ------ -------------- -------- ------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due after one but within two years......... $ 600,000 5.13% 5.76% $ 24,936 $24,936 After two years............................ 275,000 4.80 5.70 16,754 16,754 Designated against deposits and borrowings: Due after one but within two years(2)...... 1,018,000 6.14 5.90 937 21,366 After two but within three years(3)........ 441,000 9.21 5.91 2,234 3,677 After three years(4)....................... 1,250,000 8.21 4.53 13,641 15,759 ---------- ---- ---- ------- ------- $3,584,000 6.97% 5.38% $ 58,502 $82,492 ========== ==== ==== ======= =======
- --------------- (1) The terms of each agreement have specific London Interbank Offering Rate or Cost of Funds Index for the Eleventh District Savings Institutions reset and index requirements, which result in different short-term receipt rates for each agreement. The receipt rate represents the weighted average rate as of the last reset date for each agreement. F-48 126 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Includes $455.0 million notional amount with a weighted average cap ceiling of 8.15%. (3) Includes $45.0 million notional amount with a weighted average cap ceiling of 9.50%. (4) Includes $968.5 million notional amount with a weighted average cap ceiling of 9.50%. Changes in interest rate exchange agreements and interest rate cap agreements were as follows:
INTEREST RATE INTEREST RATE EXCHANGE AGREEMENTS CAP AGREEMENTS ------------------- -------------- (DOLLARS IN THOUSANDS) Notional balance, beginning of year.................. $ 2,642,500 $3,584,000 Purchases............................................ 705,000 6,190,000 Terminations and maturities.......................... (666,000) -- ---------- ---------- Notional balance, end of year........................ $ 2,681,500 $9,774,000 ========== ==========
The unamortized balance of prepaid fees and deferred gains and losses from terminated interest rate exchange agreements and interest rate cap agreements are scheduled to be amortized into interest expense as follows:
DECEMBER 31, 1995 ------------------------------------------------------------- GAIN ON GAIN ON SHORT- LOSS ON SHORT- NET AVAILABLE-FOR- TERM BORROWINGS TERM BORROWINGS GAIN SALE SECURITIES AND DEPOSITS AND DEPOSITS (LOSS) --------------- --------------- --------------- ------- (DOLLARS IN THOUSANDS) 1996............................... $ 1,152 $ 367 $(3,030) $(1,511) 1997............................... -- -- (392) (392) 1998............................... -- -- (81) (81) ------ ---- ------- ------- Unamortized deferred gain (loss)... $ 1,152 $ 367 $(3,503) $(1,984) ====== ==== ======= =======
Financial data pertaining to the weighted average net effective (benefit) cost, the level of interest rate exchange agreements and the related cost (benefit) were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average net effective cost at end of year..... 0.12% 0.42% 0.88% Weighted average net effective cost during the year.... -- 1.44 2.26 Monthly average notional amount of interest rate exchange agreements.................................. $2,749,167 $2,803,750 $1,992,517 Maximum notional amount of interest rate exchange agreements at any month end.......................... 2,901,500 3,058,500 2,593,500 Net cost included with interest expense on deposits during the year...................................... 3,540 13,286 19,250 Net cost included with interest expense on borrowings during the year...................................... 6,842 28,426 25,827 Net (benefit) included with interest income on available-for-sale securities during the year........ (10,495) (1,316) --
F-49 127 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial data pertaining to the level of interest rate cap agreements and related net cost (benefit) were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Monthly average notional amount of interest rate cap agreements........................................... $6,363,000 $2,557,625 $1,761,625 Maximum notional amount of interest rate cap agreements at any month end..................................... 9,774,000 3,584,000 2,129,500 Net cost included with interest expense on deposits during the year...................................... 7,875 2,257 3,078 Net cost included with interest expense on borrowings during the year...................................... 415 565 472 Net (benefit) cost included with interest income on available-for-sale securities during the year........ (5,340) 1,365 --
NOTE 19: GAIN (LOSS) ON SALE OF OTHER ASSETS, INCLUSIVE OF WRITE-DOWNS Gain (loss) on sale of other assets, inclusive of write-downs consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (DOLLARS IN THOUSANDS) Trading account securities............................ $ 529 $ 45 $ 1,123 Available-for-sale securities......................... (929) 4,111 2,675 Held-to-maturity securities........................... -- -- 26,706 Premises and equipment................................ (1,458) (1,270) 442 Other................................................. 1,203 21,040 18,920 ------- ------- ------- $ (655) $23,926 $49,866 ======= ======= =======
NOTE 20: INCOME TAXES The provision for income taxes from continuing operations consisted of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- -------- ------- (DOLLARS IN THOUSANDS) Current income tax expense.......................... $ 92,315 $ 94,452 $77,390 Deferred income tax expense......................... 19,591 15,428 14,569 -------- -------- ------- $111,906 $109,880 $91,959 ======== ======== =======
In determining taxable income, savings banks are allowed bad debt deductions based on a percentage of taxable income or on actual experience. Each year, savings banks may select whichever method results in the most tax savings. The Company primarily used the percentage method in 1995 and 1994 and the experience method in 1993. Effective with the adoption of SFAS No. 109, this bad debt deduction is no longer treated as a permanent difference. Effective for years ending after December 31, 1995, the reserve method of accounting for tax basis bad debts is no longer available to the Company (see Note 32, "Subsequent Events"). F-50 128 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the Company's deferred tax assets and liabilities were as follows:
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards........................ $ 1,632,230 $ 1,690,939 Book loan loss reserves................................. 106,828 124,075 Purchase accounting adjustments......................... 41,343 56,486 Deferred losses......................................... -- 12,166 Other................................................... 59,468 52,377 ----------- ----------- 1,839,869 1,936,043 Valuation allowance....................................... (1,150,206) (1,157,320) ----------- ----------- Deferred tax asset, net of valuation allowance............ 689,663 778,723 Deferred tax liabilities: Tax bad debt reserves................................... 467,125 538,297 FHLB stock dividends.................................... 60,636 50,810 Deferred loan fees...................................... 32,958 19,163 Deferred gains.......................................... 50,947 11,655 Purchase accounting adjustments......................... 26,644 41,831 Other................................................... 63,546 49,073 ----------- ----------- 701,856 710,829 ----------- ----------- Net deferred tax (liability) asset........................ $ (12,193) $ 67,894 =========== ===========
The valuation allowances of $1.2 billion at December 31, 1995 and 1994, include $130.6 million and $270.2 million, respectively, related to payments in lieu of taxes that will arise from the realization of the net deferred tax asset. These valuation allowances represent the excess of the gross deferred tax asset over the sum of the taxes and the payments in lieu of taxes related to: (1) projected future taxable income; (2) reversing taxable temporary differences; and (3) tax planning strategies. The decline in the valuation allowance of $7.1 million during the year ended December 31, 1995 was due primarily to a greater-than-anticipated utilization of the beginning balance of the deferred tax asset. The enactment in 1993 of certain federal tax legislation had the effect of retroactively disallowing certain losses and bad debt deductions arising from assets of New West. As a result, the Company reduced its gross deferred tax asset and related valuation allowance by $155.0 million. Also during 1993, California enacted legislation reducing the net operating loss carryforward period from 15 years to 10 years for losses incurred prior to 1994 relating to assets acquired in a tax-free reorganization under Internal Revenue Code Section 368(a)(1)(G). This change had a negligible impact on the valuation allowance. As of December 31, 1995, Keystone Holdings' net deferred tax asset was $112.6 million. In order to fully realize the net deferred tax asset, Keystone Holdings will need to generate future taxable income of approximately $672.1 million prior to the expiration of its tax net operating losses, which begin to expire in 1999. Based on Keystone Holdings' history of prior operating earnings and expectations for the future, management believes it is more likely than not that Keystone Holdings, on a continuing company basis, will realize the recorded benefit of $112.6 million as of December 31, 1996 through use of existing net operating F-51 129 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loss carryovers existing at December 31, 1995. However, in August 1996 Keystone Holdings amended certain prior-year state and federal tax returns. (See Note 32 "Subsequent Events" for further discussion.) As of December 31, 1995, prior to the amendments mentioned above, the Company had the following federal and state income tax net operating loss carryforwards due to expire under current law during the years indicated:
FEDERAL STATE ---------- ---------- (DOLLARS IN THOUSANDS) 2000........................................................ $ -- $ 140 2001........................................................ -- 754,460 2002........................................................ -- 599,241 2003........................................................ -- 1,102,387 2004........................................................ 1,641,595 -- 2005........................................................ 784,196 -- 2006........................................................ 701,008 -- 2007........................................................ 105,825 -- 2008........................................................ 625,887 -- 2009........................................................ 37,460 -- ---------- ---------- $3,895,971 $2,456,228 ========== ==========
In April 1994, revenue procedures were issued allowing the Company to change its method of accounting for loan fees, effective for 1993. The change allowed most members of the Company's consolidated filing group to defer the recognition of loan fees for income tax purposes. Under SFAS No. 115, where actual benefits or liabilities are expected to be realized, the net realizable tax effects of unrealized gains and losses on available-for-sale securities at December 31, 1995 and 1994 were included in the deferred tax liabilities and assets. The tax effect was made directly to stockholders' equity and was not included in the provision for income taxes. The change in the net deferred tax asset (liability) was as follows:
YEAR ENDED DECEMBER 31, 1995 ---------------------------- (DOLLARS IN THOUSANDS) Deferred tax asset, beginning of year....................... $ 67,894 Tax effect of valuation adjustment on available-for-sale securities............................................. (55,155) Deferred income tax expense............................... (19,591) Other adjustments......................................... (5,341) -------- Deferred tax liability, end of year......................... $(12,193) ========
F-52 130 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations between income taxes computed at statutory rates and income taxes included in the Supplemental Consolidated Statements of Income were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 -------- -------- --------- (DOLLARS IN THOUSANDS) Income taxes computed at statutory rates.......... $148,920 $127,163 $ 136,420 Tax effect of: Utilization of current tax losses of New West (nominee to ASB)........................... (17,482) (55,100) (90,136) Amortization of goodwill and other intangible assets.......................... 6,631 6,688 6,281 Change in tax laws and rates................. -- -- 121,034 State franchise tax, net of federal tax benefit.................................... 3,899 (2,890) 39,286 Increase in base year reserve amount......... (16,318) (11,605) -- Valuation allowance change from prior year... (7,114) 48,241 (107,658) Dividends received deduction................. (987) (506) (441) Tax exempt income............................ (1,973) (1,680) (1,924) Other........................................ (3,670) (431) (6,828) -------- -------- --------- Income taxes before extraordinary items........... 111,906 109,880 96,034 Tax effect of: Call of subordinated capital notes........... -- -- (709) Penalty for prepayment of FHLB advances...... -- -- (3,366) -------- -------- --------- Income taxes included in the Consolidated Statements of Income............................ $111,906 $109,880 $ 91,959 ======== ======== =========
NOTE 21: PAYMENTS IN LIEU OF TAXES The Assistance Agreement generally provides that 75.0 percent of most of the federal tax savings and approximately 19.5 percent of most of the California tax savings (as computed in accordance with the Assistance Agreement) attributable to ASB's utilization of any current tax losses or tax loss carryovers of New West are to be paid by the Company for the benefit of the FRF. The Assistance Agreement sets forth certain special adjustments to federal taxable income to arrive at "FSLIC taxable income." The principal adjustments effectively permit ASB to (i) recognize loan fees ratably over seven years adjusted for loan dispositions, (ii) treat the income and expenses of N.A. Holdings and New Capital as income and expenses of ASB, and (iii) for years ending on or before December 31, 1994, to recognize approximately 36.0 percent of the amortization of the mark-to-market adjustment attributable to the acquired loan portfolio. The provision (benefit) for payments in lieu of taxes consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 ------ ----- ------- (DOLLARS IN THOUSANDS) Provision (benefit) for payments in lieu of taxes: Federal................................................ $3,450 $(137) $ 327 State.................................................. 4,437 (687) 13,748 ------ ----- ------- Total provision (benefit) for payments in lieu of taxes.................................................. $7,887 $(824) $14,075 ====== ===== =======
F-53 131 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 22: EXTRAORDINARY ITEMS Extraordinary items consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 ------ ------ -------- (DOLLARS IN THOUSANDS) Call of subordinated capital notes.................... $ -- $ -- $ (2,266) Penalty for prepayment of FHLB advances............... -- -- (10,762) ----- ----- -------- -- -- (13,028) Federal income tax benefits........................... -- -- 4,075 ----- ----- -------- $ -- $ -- $ (8,953) ===== ===== ========
On September 15, 1993, the Company redeemed for cash all $40.0 million in principal of its 10.50 percent subordinated capital notes due March 15, 1999. The Company prepaid $432.6 million in advances from the FHLB during 1993. NOTE 23: STOCKHOLDERS' EQUITY COMMON STOCK In the third quarter of 1993, Washington Mutual's Board of Directors declared a 50 percent stock dividend on its shares of common stock. The stock dividend had the effect of a three-for-two stock split. Cash dividends declared, as adjusted for the above mentioned stock dividend, were as follows:
YEAR ENDED DECEMBER 31,(1) ------------------------- 1995 1994 1993 ----- ----- ----- First quarter............................................... $0.19 $0.16 $0.10 Second quarter.............................................. 0.19 0.17 0.11 Third quarter............................................... 0.19 0.18 0.14 Fourth quarter.............................................. 0.20 0.19 0.15
- --------------- (1) Dividends per share includes only those amounts paid to Washington Mutual shareholders, prior to business combinations. Prior to the business combination with Washington Mutual, Keystone Holdings paid total common cash dividends of $5.6 million, $22.5 million and $18.0 million in 1995, 1994 and 1993. Not only is the dividend policy of Washington Mutual influenced by legal, regulatory and economic restrictions, but it is also predicated on the ability of its subsidiaries to declare and pay dividends to Washington Mutual. These subsidiaries are in turn subject to legal and regulatory restrictions on their ability to pay dividends. Retained earnings of the Company at December 31, 1995 included a pre-1988 thrift bad debt reserve for tax purposes of $448.1 million for which no federal income taxes had been provided. In the future, if this thrift bad debt reserve is used for any purpose other than to absorb bad debt losses, if any of the banking subsidiaries do not meet the 60 percent qualified assets test or if legislation is enacted requiring recapture of all thrift bad debt reserves, the Company will incur a federal income tax liability at the then prevailing corporate tax rate. On October 16, 1990, the Company's Board of Directors adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of common stock to shareholders of record on October 31, 1990. The rights have certain anti-takeover effects. They are intended to discourage coercive or unfair takeover tactics and to encourage any potential acquirer to negotiate a price fair to all shareholders. The rights F-54 132 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. PREFERRED STOCK In August 1989, the Company issued 1,300,000 shares of Noncumulative Convertible Perpetual Preferred Stock, Series A, at $50 per share for net proceeds of $63.2 million. In January 1993, the Company issued a notice of redemption to all holders of its Preferred Stock, Series A. Virtually all holders of the Preferred Stock, Series A, converted their shares into common stock prior to the redemption date of February 12, 1993. In December 1992, the Company issued 2,800,000 shares of Noncumulative Perpetual Preferred Stock, Series C, at $25 per share for net proceeds of $67.4 million. The stock has a liquidation preference of $25 per share plus dividends accrued and unpaid for the then current dividend period. Dividends, if and when declared by Washington Mutual's Board of Directors, are at an annual rate of $2.28 per share. Dividends have been declared and paid in all quarters since issuance. The Company may redeem the stock on or after December 31, 1997 at the redemption price of $25 per share plus unpaid dividends, whether or not declared, for the then current dividend period up to the date fixed for redemption. In November 1995, the Company purchased and retired 47,500 shares of its stock. Also in December 1992, the Company issued 1,400,000 shares of Noncumulative Convertible Perpetual Preferred Stock, Series D, at $100 per share for net proceeds of $136.4 million. The stock has a liquidation preference of $100 per share plus dividends accrued and unpaid for the then current dividend period. The stock is convertible at a rate of 3.870891 shares of common stock per share of preferred stock (after adjustment for the third quarter 1993 50 percent stock dividend discussed below). Dividends, if and when declared by Washington Mutual's Board of Directors, are at an annual rate of $6.00 per share. Dividends have been declared and paid in all quarters since issuance. The Company may redeem the stock on or after December 31, 1996 at an initial redemption price of $103.60 per share. The redemption price declines to $100 per share by the year 2003. In September 1993, the Company issued 2,000,000 shares of Noncumulative Perpetual Preferred Stock, Series E, at $25 per share for net proceeds of $48.2 million. The 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 stock on or after September 15, 1998, at the redemption price of $25 per share plus unpaid dividends, whether or not declared, for the then current dividend period up to the date fixed for redemption. In November 1995, the Company purchased and retired 30,000 shares of its stock. In December 1988, New Capital issued $80 million of Cumulative Redeemable Preferred Stock. The Preferred Stock is presented as a minority interest in the Company's Supplemental Consolidated Financial Statements. The Preferred Stocks, Series C, Series D and Series E, are senior to common stock as to dividends and liquidation, but they do not confer general voting rights. NOTE 24: EARNINGS PER COMMON SHARE Primary earnings per common share have been calculated by dividing net income, after deducting dividends on preferred stock, by the weighted average number of shares outstanding for the period. Fully diluted earnings per common share assume conversion of the outstanding convertible preferred stock. F-55 133 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information used to calculate earnings per share was as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Net income.......................................... $ 289,902 $ 240,275 $ 267,323 Preferred stock dividends: Noncumulative Perpetual, Series C................. (6,384) (6,384) (5,628) Noncumulative Perpetual, Series E................. (3,800) (3,800) (538) Noncumulative Convertible Perpetual, Series D..... (8,400) (8,400) (7,393) ----------- ----------- ----------- Net income attributable to primary common stock..... $ 271,318 $ 221,691 $ 253,764 =========== =========== =========== Net income.......................................... $ 289,902 $ 240,275 $ 267,323 Preferred stock dividends: Noncumulative Perpetual, Series C................. (6,384) (6,384) (5,628) Noncumulative Perpetual, Series E................. (3,800) (3,800) (538) ----------- ----------- ----------- Net income attributable to fully diluted common stock............................................. $ 279,718 $ 230,091 $ 261,157 =========== =========== =========== Average number of common shares outstanding (1): Primary........................................... 109,944,477 106,245,127 104,691,406 Noncumulative Convertible Perpetual, Series A..... -- -- 643,121 Noncumulative Convertible Perpetual, Series D..... 5,419,247 5,419,247 5,419,247 ----------- ----------- ----------- Fully diluted..................................... 115,363,724 111,664,374 110,753,774 =========== =========== ===========
- --------------- (1) As part of the business combination with Keystone Holdings, 8,000,000 shares of common stock, with a assigned value of $42.75 per share were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF. The Company will use the treasury stock method to determine the effect of the shares upon the Company's financial statements. As of the merger date, there is no potential dilutive effect of the 8,000,000 shares of common stock. The shares in the escrow will be dilutive in the future to the extent that the market price of the common stock exceeds $42.75 per share. NOTE 25: REGULATORY CAPITAL REQUIREMENTS WMI is not subject to any regulatory capital requirements. However, each of its subsidiary depository and insurance institutions is subject to various capital requirements. WMB is subject to the FDIC capital requirements while ASB and WMBfsb are subject to the Office of Thrift Supervision ("OTS") capital requirements. The FDIC currently measures an institution's capital using a leverage limit together with certain risk-based ratios. The FDIC requires most banks it regulates to maintain a minimum leverage ratio, defined as core ("Tier 1") capital divided by total regulatory assets, of at least 4.00 percent to 5.00 percent. It also requires total capital of at least 8.00 percent of risk-weighted assets and Tier 1 capital of at least 4.00 percent of risk- weighted assets. The OTS requires savings associations, such as ASB 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 of at least 3.00 percent of assets and tangible capital (excluding all goodwill) of at least 1.50 percent of assets. Most savings institutions are required to maintain a minimum leverage capital ratio of at least 4.00 percent. 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 F-56 134 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) capital requirements adopted by the FDIC. These regulations require a core risk-based capital ratio of at least 4.00 percent and a total risk-based capital ratio of at least 8.00 percent. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") created a statutory framework that increased the importance of meeting applicable capital requirements. For WMB, ASB and WMBfsb, 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 which implement this statutory framework. Under these regulations, in order to be well capitalized a bank must have a ratio of total capital to risk-weighted assets of not less than 10.00 percent, a ratio of Tier 1 capital to risk-weighted assets of not less than 6.00 percent, and a leverage ratio of Tier 1 capital to total average assets of not less than 5.00 percent and must not be 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 percent, a Tier 1 risk-based capital ratio of not less than 4.00 percent, and a leverage ratio of not less than 4.00 percent. Any institution which is neither well capitalized nor adequately capitalized will be considered undercapitalized. Undercapitalized institutions are subject to certain regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. At December 31, 1995, WMB, ASB and WMBfsb were well capitalized. The OTS has adopted final regulations adding an interest rate risk component to the risk-based capital requirements for savings associations (such as ASB and WMBfsb), although implementation of the regulation has been delayed. Management believes the effect of including such an interest rate risk component in the calculation of risk-adjusted capital will not cause ASB or WMBfsb to cease to be well capitalized. In August 1995, the FDIC revised its capital standards to state explicitly that it will consider the risk of declines in the economic value of capital due to changes in interest rates. The FDIC stated that in the future, after gaining more experience with the risk measurement process, it will issue a proposed rule that would establish an explicit minimum capital charge for interest rate risk. The ultimate effect of such risk-based capital requirements cannot be determined until final regulations are adopted. WM Life is subject to risk-based capital requirements developed by the National Association of Insurance Commissioners ("NAIC"). This measure uses four major categories of risk to calculate an appropriate level of capital to support an insurance company's overall business operations. The four risk categories are asset risk, insurance risk, interest rate risk and business risk. At December 31, 1995, WM Life's capital was 672 percent of its required regulatory risk-based level. Capital ratios for WMB (on a consolidated basis), WMBfsb (on a consolidated basis) and ASB (on a consolidated basis) were as follows:
DECEMBER 31, 1995 -------------------------- WMB WMBFSB ASB ----- ------ ----- Tangible capital ratio.................................... n.a.% 6.76% 5.39% Leverage capital ratio.................................... 5.72 6.76 5.41 Total risk-based capital ratio............................ 11.58 12.64 10.12 Tier 1 or core risk-based capital ratio................... 10.70 11.39 9.39
F-57 135 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of WMB, WMBfsb and ASB's consolidated stockholders' equity to regulatory capital were as follows:
DECEMBER 31, 1995 ------------------------------------- WMB WMBFSB ASB ---------- ------- ---------- (DOLLARS IN THOUSANDS) Stockholders' equity..................................... $1,418,271 $46,117 $1,238,950 Reporting differences: Goodwill and other intangible assets................... (160,781) (401) (3,329) Valuation reserve for available-for-sale securities.... (65,683) (202) (110,367) Deferred tax asset..................................... -- -- (78,596) Investment in securities-related subsidiaries.......... (6,579) -- -- Purchased mortgage servicing rights.................... (542) (818) -- Other nonqualifying assets............................. (542) -- -- ---------- -------- ---------- Total regulatory capital............................ $1,184,144 $44,696 $1,046,658 ========== ======== ==========
NOTE 26: STOCK OPTION 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 and stock appreciation rights ("SARs") to certain officers of the Company at the discretion of the Board of Directors. On April 19, 1994, the Company's stockholders' approved the adoption of the 1994 stock option plan in which the right to purchase common stock of the Company may be granted to employees, directors, consultants and advisers of the Company. The 1994 plan is similar in some respects to the 1983 plan, which terminated according to its terms in 1993. Consistent with the Company's practice under the 1983 plan, it is anticipated that the majority of options available under the plan will be granted to the most senior management of the Company. The 1994 plan does not affect any options granted under the 1983 plan. Under the 1994 stock option plan, on the date of the grant, the exercise price of the option must at least equal the market value per share of the Company's common stock. The 1994 plan provides for the granting of options for a maximum of 4,000,000 common shares. A SAR represents the right to receive in cash an amount equal to the difference between the market value of one share of the Company's common stock on the date of exercise of the SAR and the market value of such a share on the date of the grant. The market value is the closing stock price on the date of the grant. The increased value of SARs during 1995 and 1993, which had been recorded as compensation expense, was $81,000 and $15,000. During 1994, due to the decline in the price of the Company's common stock, a credit of $49,000 was recorded against compensation expense. Stock options and SARs are exercisable on a phased-in schedule. At December 31, 1995, stock options of 900,528 and 6,750 SARs were fully exercisable. F-58 136 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock options and SARs granted, exercised or terminated were as follows:
STOCK OPTIONS(1) SARs(1) --------------------------- ------------------------ AVERAGE PRICE NUMBER AVERAGE PRICE NUMBER ------------- --------- ------------- ------ Outstanding January 1, 1993.................. $ 7.86 1,456,859 $5.86 6,750 Granted in 1993.............................. 22.25 202,500 -- -- Exercised in 1993............................ 6.04 (519,019) -- -- ----- --------- ---- ----- Outstanding December 31, 1993................ 11.24 1,140,340 5.86 6,750 Granted in 1994.............................. 22.27 191,631 -- -- Exercised in 1994............................ 7.96 (106,399) -- -- ----- --------- ---- ----- Outstanding December 31, 1994................ 13.25 1,225,572 5.86 6,750 Granted in 1995.............................. 17.47 416,618 -- -- Exercised in 1995............................ 7.92 (290,981) -- -- Terminated in 1995........................... 22.07 (49,848) -- -- ----- --------- ---- ----- Outstanding December 31, 1995................ $ 15.46 1,301,361 $5.86 6,750 ===== ========= ==== =====
- --------------- (1) Average price and number of stock options and SARs granted, exercised and terminated in 1993 have been adjusted for the third quarter 1993 50 percent stock dividend, which had the effect of a three-for-two stock split. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation. The statement requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) application of the fair value recognition provisions in the statement. SFAS No. 123 does not rescind or interpret the existing accounting rules for employee stock-based arrangements. Companies may continue following those rules to recognize and measure compensation as outlined in Accounting Principles Board Opinion 25 ("APB 25"), but they will now be required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value recognition provisions of SFAS No. 123. Effective January 1, 1996, the Company adopted the disclosure requirements of SFAS No. 123, but has determined that it will continue to measure its employee stock-based compensation arrangements under the provisions of APB 25. The adoption of the disclosure requirements of SFAS No. 123 will have no material impact on the results of operations or financial condition of the Company. NOTE 27: EMPLOYEE BENEFITS PROGRAMS Washington Mutual maintains a noncontributory cash balance defined benefit pension plan for substantially all eligible employees. American provided a substantially similar plan which was terminated effective June 30, 1995. Benefits earned for each year of service are based primarily on the level of compensation in that year plus a stipulated rate of return on the benefit balance. It is the Company's policy to fund the Plan on a current basis to the extent deductible under federal income tax regulations. The combined net periodic pension cost for the Plans was $2.0 million, $1.3 million and $3.9 million for 1995, 1994 and 1993. The weighted average discount rate was 7.25 percent, 8.00 percent and 7.25 percent for 1995, 1994 and 1993. The long-term rate of return on assets was 8.00 percent for 1995, 8.00 percent for 1994 and 9.00 percent for 1993. The assumed rate of increase in future compensation levels was 6.00 percent for all years presented. The Plan's assets consist primarily of listed common stocks, U. S. government obligations, corporate debt obligations and annuity contracts. At the termination date of American's plan, all participants' accrued benefits became fully vested. The net assets of the plan were allocated as prescribed by the Employee Retirement Income Security Act of 1974 F-59 137 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and the Pension Benefit Guaranty Corporation and their related regulations. All participants received full benefits. The termination resulted in a settlement under SFAS 88. American recognized a gain of $1.7 million as a result of the settlement. The majority of the projected benefit obligation was settled in 1995. At December 31, 1995, the terminated plan had $1.8 million in remaining assets. Ultimate distribution of these assets is pending IRS approval. The plan's funded status and amounts recognized in the Company's financial statements were as follows:
DECEMBER 31, ---------------------------------- KEYSTONE WASHINGTON MUTUAL HOLDINGS --------------------- -------- 1995 1994 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Benefit obligations: Vested benefits........................................... $(46,628) $(34,885) $ (5,307) Nonvested benefits........................................ (2,367) (4,690) (1,316) -------- -------- ------- Accumulated benefit obligation.............................. (48,995) (39,575) (6,623) Effect of future compensation increases..................... (1,598) (1,429) -- -------- -------- ------- Projected benefit obligation................................ (50,593) (41,004) (6,623) Plan assets at fair value................................... 61,722 53,037 8,035 Plan assets in excess of projected benefit obligation....... 11,129 12,033 1,412 -------- -------- ------- Unrecognized (gain) loss due to past experience different from assumptions.......................................... (2,103) 1,710 -- Unrecognized prior service cost............................. 2,093 -- -- Unrecognized net asset at transition being recognized over 18.6 years................................................ (3,300) (3,682) (3,317) -------- -------- ------- Prepaid pension asset....................................... $ 7,819 $ 10,061 $ (1,905) ======== ======== =======
Net periodic pension expense included the following:
WASHINGTON MUTUAL KEYSTONE HOLDINGS YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------------------ ------------------------ 1995 1994 1993 1995 1994 1993 -------- ------- ------- ----- ----- ------ (DOLLARS IN THOUSANDS) Service cost -- benefits earned during the period........................... $ 3,240 $ 2,952 $ 1,643 $ -- $ -- $3,162 Interest cost on projected benefit obligation........................... 3,336 2,695 1,904 594 688 803 Actual (gain) loss on plan assets...... (11,935) 463 (5,637) (896) 152 (840) Amortization and deferral, net......... 7,601 (4,779) 2,665 78 (896) 233 -------- ------- ------- ----- ----- ------ $ 2,242 $ 1,331 $ 575 $(224) $ (56) $3,358 ======== ======= ======= ===== ===== ======
During 1994, the defined benefit pension plan acquired in the acquisition of Pacific First was merged into the Company's defined benefit pension plan. The fair value of plan assets exceeded the projected benefit obligation, and the accrued pension cost was reduced by $10.8 million. In addition, the Company currently provides eligible retired employees with access to medical coverage on the same basis as active employees and provides certain other health care insurance benefits to a limited number of retired employees. Postretirement benefits, such as retiree health benefits, are accrued during the years an employee provides services. F-60 138 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of these benefits were as follows:
DECEMBER 31, ------------------- 1995 1994 ------- ------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation.................... $(5,484) $(4,488) Unrecognized transition obligation............................... 2,503 2,650 Unrecognized (gain).............................................. (36) (189) ------- ------- Prepaid postretirement liability................................. $(3,017) $(2,027) ======= =======
Net periodic postretirement expense included the following:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Service cost.................................................. $206 $220 $154 Interest cost................................................. 344 322 320 Amortization of transition obligation......................... 147 147 147 ---- ---- ---- $697 $689 $621 ==== ==== ====
The weighted average discount rate was 7.25 percent, 8.00 percent and 7.25 percent for 1995, 1994 and 1993. The medical trend rate starts at 13.00 percent for 1993 and declines steadily to 6.00 percent by the year 2000. The effect of a 1.00 percent increase in the trend rates is not significant. Washington Mutual maintains a savings plan for substantially all eligible employees that allows participants to make contributions by salary deduction equal to 15.00 percent or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. ASB maintained a substantially similar plan. Employees' contributions vest immediately. The Company's partial matching contributions vest over five years. ASB implemented a Supplemental Executive Retirement Plan ("SERP") in 1990. The SERP is a non qualified, noncontributory, defined benefit plan where benefits are paid to certain officers using a target percentage which is based upon the number of years of service with ASB. This percentage is applied to the participant's average annual earnings for the highest three out of the final ten years of employment. These benefits are reduced to the extent a participant receives benefits from the defined benefit pension plan. In 1990, ASB implemented the Phantom Share Plan (the "PSP") for the benefit of certain of its officers. The PSP provides a long-term financial performance incentive to its participants. Participants in the PSP are granted phantom shares (units of value), the values of which are determined similar to that of actual equity securities. The PSP calls for immediate exercisability and cashing out in the event of a change in control of Keystone Holdings or any of its subsidiaries. In July 1996, Keystone Holdings entered into an agreement to merge with Washington Mutual. As a result of the business combination, the phantom shares will become immediately exercisable, and ASB will incur an expense of approximately $12.0 million in 1996, upon consummation of the merger. ASB established a Short-Term Incentive Plan ("STI") for the benefit of certain of its executives. The STI provides a short-term incentive to its participants based upon the achievement of both overall company and individual goals. F-61 139 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total employee benefit plan expense was as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (DOLLARS IN THOUSANDS) Net periodic pension expense........................ $ 2,018 $ 1,275 $ 3,933 Net periodic postretirement expense................. 697 689 621 Company's contributions to savings plan............. 10,027 12,374 7,641 SERP expense........................................ 1,590 1,900 1,237 STI expense......................................... 3,247 2,219 3,141 ------- ------- ------- $17,579 $18,457 $16,573 ======= ======= =======
In November 1992, the FASB issued SFAS No. 112, Employers' Accounting for Postemployment Benefits. This statement establishes standards of financial accounting and reporting for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. Effective January 1, 1994, the Company adopted SFAS No. 112. There were no costs accrued under this pronouncement. NOTE 28: CONTINGENCIES The Company has certain litigation and negotiations in progress resulting from activities arising from normal operations. In the opinion of management, none of these matters is likely to have a material adverse effect on the Company's financial position. As part of the administration and oversight of the Assistance Agreement and other agreements among ASB, certain of its affiliates and the FDIC, the FDIC has a variety of review and audit rights, including the right to review and audit computations of payments in lieu of taxes. ASB and certain of its affiliates have entered into a settlement agreement 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 commenced an audit of certain transactions and payments under the Assistance Agreement and other agreements occurring during the period beginning July 1, 1994 and ending June 30, 1996. Keystone Holdings has received no notice of any issues involving more than nominal amounts arising after June 30, 1994. F-62 140 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 29: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations on a quarterly basis have been restated to give effect to the business combination with Keystone Holdings. Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER -------------------------------- -------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income.................. $367,447 $305,735 $673,182 $390,016 $330,727 $720,743 Interest expense................. 218,374 228,270 446,644 240,585 242,493 483,078 -------- -------- -------- -------- -------- -------- Net interest income.............. 149,073 77,465 226,538 149,431 88,234 237,665 Provision for loan losses........ 2,800 18,869 21,669 2,850 15,664 18,514 Other income..................... 28,855 29,188 58,043 29,554 18,315 47,869 Other expense.................... 103,081 71,496 174,577 106,332 73,101 179,433 -------- -------- -------- -------- -------- -------- Income before income taxes....... 72,047 16,288 88,335 69,803 17,784 87,587 Income taxes..................... 26,797 (6,081) 20,716 22,030 642 22,672 Minority interest in earnings of consolidated subsidiary........ -- 4,081 4,081 -- 4,081 4,081 -------- -------- -------- -------- -------- -------- Net income....................... $ 45,250 $ 18,288 $ 63,538 $ 47,773 $ 13,061 $ 60,834 ======== ======== ======== ======== ======== ======== Net income attributable to common stock.......................... $ 40,604 $ 18,288 $ 58,892 $ 43,127 $ 13,061 $ 56,188 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................ $0.60 $0.55 $0.62 $0.51 Fully diluted.................. 0.58 0.54 0.60 0.51
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------------- THIRD QUARTER FOURTH QUARTER -------------------------------- -------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income.................. $405,638 $346,343 $751,981 $415,859 $354,321 $770,180 Interest expense................. 248,844 246,712 495,556 252,921 245,237 498,158 -------- -------- -------- -------- -------- -------- Net interest income.............. 156,794 99,631 256,425 162,938 109,084 272,022 Provision for loan losses........ 2,800 14,557 17,357 2,700 14,747 17,447 Other income..................... 28,280 18,033 46,313 31,185 24,929 56,114 Other expense.................... 102,530 68,484 171,014 105,712 69,778 175,490 -------- -------- -------- -------- -------- -------- Income before income taxes....... 79,744 34,623 114,367 85,711 49,488 135,199 Income taxes..................... 28,056 5,023 33,079 30,621 12,705 43,326 Minority interest in earnings of consolidated subsidiary........ -- 4,082 4,082 -- 3,549 3,549 -------- -------- -------- -------- -------- -------- Net income....................... $ 51,688 $ 25,518 $ 77,206 $ 55,090 $ 33,234 $ 88,324 ======== ======== ======== ======== ======== ======== Net income attributable to common stock.......................... $ 47,042 $ 25,518 $ 72,560 $ 50,444 $ 33,234 $ 83,678 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................ $0.66 $0.66 $0.71 $0.75 Fully diluted.................. 0.64 0.64 0.69 0.73
F-63 141 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER -------------------------------- -------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income.................. $287,581 $253,452 $541,033 $300,272 $248,798 $549,070 Interest expense................. 136,111 155,147 291,258 149,832 157,856 307,688 -------- -------- -------- -------- -------- -------- Net interest income.............. 151,470 98,305 249,775 150,440 90,942 241,382 Provision for loan losses........ 5,000 32,973 37,973 5,050 25,218 30,268 Other income..................... 30,782 34,481 65,263 30,236 16,500 46,736 Other expense.................... 107,557 74,647 182,204 104,422 68,627 173,049 -------- -------- -------- -------- -------- -------- Income before income taxes....... 69,695 25,166 94,861 71,204 13,597 84,801 Income taxes..................... 25,923 1,467 27,390 26,930 921 27,851 Minority interest in earnings of consolidated subsidiary........ -- 3,498 3,498 -- 3,498 3,498 -------- -------- -------- -------- -------- -------- Net income....................... $ 43,772 $ 20,201 $ 63,973 $ 44,274 $ 9,178 $ 53,452 ======== ======== ======== ======== ======== ======== Net income attributable to common stock.......................... $ 39,126 $ 20,201 $ 59,327 $ 39,628 $ 9,178 $ 48,806 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................ $0.59 $0.56 $0.60 $0.46 Fully diluted.................. 0.58 0.55 0.58 0.46
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------------------- THIRD QUARTER FOURTH QUARTER -------------------------------- -------------------------------- WASHINGTON KEYSTONE WASHINGTON KEYSTONE MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Interest income.................. $321,545 $257,746 $579,291 $349,152 $276,867 $626,019 Interest expense................. 168,756 173,468 342,224 197,172 197,016 394,188 -------- -------- -------- -------- -------- -------- Net interest income.............. 152,789 84,278 237,067 151,980 79,851 231,831 Provision for loan losses........ 5,200 21,047 26,247 5,150 22,371 27,521 Other income..................... 28,389 15,788 44,177 29,095 35,523 64,618 Other expense.................... 101,464 69,387 170,851 101,857 67,556 169,413 -------- -------- -------- -------- -------- -------- Income before income taxes....... 74,514 9,632 84,146 74,068 25,447 99,515 Income taxes..................... 28,035 (1,249) 26,786 27,271 (242) 27,029 Minority interest in earnings of consolidated subsidiary........ -- 3,498 3,498 -- 3,498 3,498 -------- -------- -------- -------- -------- -------- Net income....................... $ 46,479 $ 7,383 $ 53,862 $ 46,797 $ 22,191 $ 68,988 ======== ======== ======== ======== ======== ======== Net income attributable to common stock.......................... $ 41,833 $ 7,383 $ 49,216 $ 42,151 $ 22,191 $ 64,342 ======== ======== ======== ======== ======== ======== Net income per common share: Primary........................ $0.63 $0.47 $0.63 $0.60 Fully diluted.................. 0.61 0.46 0.61 0.59
F-64 142 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 30: 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. The fair value of financial instruments were as follows:
DECEMBER 31, ----------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents........... $ 983,833 $ 983,833 $ 477,509 $ 477,509 Trading account securities.......... 238 238 572 572 Available-for-sale securities....... 12,154,725 12,154,725 4,282,160 4,282,160 Held-to-maturity securities......... 3,197,720 3,262,850 4,456,031 4,228,897 Mortgage servicing rights........... 104,495 109,950 70,911 71,915 Loans, exclusive of reserve for loan losses........................... 24,428,115 24,788,750 25,717,081 24,777,595 Note receivable..................... -- -- 1,515,040 1,667,405 ----------- ----------- ----------- ----------- 40,869,126 41,300,346 36,519,304 35,506,053 Financial liabilities: Deposits............................ 24,462,960 24,624,673 23,344,006 23,284,547 Annuities........................... 855,503 855,503 799,178 799,178 Federal funds purchased............. 433,420 433,493 -- -- Securities sold under agreements to repurchase....................... 7,984,756 7,985,202 6,637,346 6,636,487 Advances from the FHLB.............. 4,715,739 4,732,366 4,128,977 4,060,902 Other borrowings.................... 590,217 612,240 381,066 378,780 ----------- ----------- ----------- ----------- 39,042,595 39,243,477 35,290,573 35,159,894 Derivative instruments(1): Interest rate exchange agreements: Designated against available for sale securities.................. (11,847) (11,847) 18,654 18,654 Designated against short term borrowings and deposits.......... -- (22,615) -- 22,061 Interest rate cap agreements: -- -- -- -- Designated against available for sale securities.................. 9,415 9,415 41,690 41,690 Designated against short term borrowings and deposits.......... 17,691 (630) 16,812 40,802 ----------- ----------- ----------- ----------- 15,259 (25,677) 77,156 123,207 Off-balance-sheet loan commitments.... -- 3,595 -- (8,078) ----------- ----------- ----------- ----------- Net financial instruments............. $ 1,841,790 $ 2,034,787 $ 1,305,887 $ 461,288 =========== =========== =========== ===========
- --------------- (1) See Note 18: Interest Rate Risk Management. F-65 143 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL 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, 1995 and 1994: Cash and cash equivalents -- The carrying amount represented fair value. Note Receivable -- In January 1995, the FDIC offered to pay down the remaining principal balance of the Note Receivable at-par. Therefore, the fair value of the Note Receivable at December 31, 1994 represented the at-par offer by the FDIC, as it was the best indication of the current fair value. Keystone Holdings agreed with the FDIC in October 1995 to allow prepayment of the remaining balance of the Note Receivable. On October 24, 1995, ASB received the remaining principal balance of the Note Receivable of $505.3 million, plus interest. Trading account securities--Fair values were based on quoted market prices. Available-for-sale securities--Fair values were based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Held-to-maturity securities--Fair values were based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Mortgage servicing rights--The fair value of mortgage servicing rights is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate. Loans--Loans were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Deposits--The fair value of checking accounts, savings accounts and money market accounts was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Core deposit intangibles are not included. Annuities--The carrying amount represented fair value. Federal funds purchased--These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Securities sold under agreements to repurchase--These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Advances from the FHLB--These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Other borrowings--These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Derivative instruments--The fair value for interest rate exchange agreements was determined using dealer quotations, when available, or the discounted cash flow method. The market prices for similar instruments were used to value interest rate cap agreements. Off-balance-sheet loan commitments--Loan commitments are commitments the Company made to borrowers at locked-in rates. The fair value of loan commitments was estimated based on current levels of interest rates versus the committed interest rates. The balance shown represents the differential between committed value and fair value. F-66 144 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 31: FINANCIAL INFORMATION -- WMI WMI was formed August 17, 1994. The following WMI (parent company only) financial information should be read in conjunction with the other notes to the consolidated financial statements. STATEMENTS OF INCOME
PERIOD OF AUGUST 17, 1994 YEAR ENDED (INCEPTION) TO DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ------------------------- (DOLLARS IN THOUSANDS) INTEREST INCOME Available-for-sale securities............................ $ 8,033 $ 1,641 Cash equivalents......................................... 471 44 -------- ------- Total interest income.................................. 8,504 1,685 INTEREST EXPENSE Borrowings............................................... 9,072 884 -------- ------- Total interest expense................................. 9,072 884 -------- ------- Net interest (expense) income....................... (568) 801 OTHER INCOME Equity in net earnings of subsidiaries(1)................ 293,630 13,103 Other operating income................................... 8 -- (Loss) on sale of other assets, inclusive of write-downs............................................ (171) -- -------- ------- Total other income..................................... 293,467 13,103 OTHER EXPENSE Salaries and employee benefits........................... 2,716 -- Occupancy and equipment.................................. 1 -- Other operating expense.................................. 3,289 228 -------- ------- Total other expense.................................... 6,006 228 -------- ------- Income before income taxes.......................... 286,893 13,676 Income taxes............................................. (865) 201 -------- ------- Net income(1)............................................ $287,758 $13,475 ======== =======
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. F-67 145 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ------------------------- 1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents........................................... $ 90,096 $ 5,903 Available-for-sale securities....................................... 99,932 104,987 Loans............................................................... 147,867 -- Investment in subsidiaries(1)....................................... 2,451,956 1,834,977 Other assets........................................................ 929 654 ---------- ---------- Total assets........................................................ $2,790,780 $1,946,521 ========== ========== LIABILITIES Securities sold under agreements to repurchase...................... $ 82,481 $ 84,329 Other borrowings.................................................... 147,845 -- Other liabilities................................................... 5,647 (14) ---------- ---------- Total liabilities................................................... 235,973 84,315 Stockholders' Equity Preferred stock, no par value: 10,000,000 shares authorized -- 6,122,500 and 6,200,000 shares issued and outstanding..................................................... -- -- Common stock, no par value: 350,000,000 shares authorized -- 119,574,254 and 115,720,886 shares issued and outstanding..................................................... -- -- Capital surplus(1).................................................. 1,029,549 998,497 Valuation reserve for available-for-sale securities................. 2,390 (2,511) Valuation reserve for available-for-sale securities -- subsidiaries........................................ 186,325 (58,738) Retained earnings(1)................................................ 1,336,543 924,958 ---------- ---------- Total stockholders' equity.......................................... 2,554,807 1,862,206 ---------- ---------- Total liabilities and stockholders' equity.......................... $2,790,780 $1,946,521 ========== ==========
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. F-68 146 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF CASH FLOWS
PERIOD OF AUGUST 17, 1994 YEAR ENDED (INCEPTION) TO DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ------------------------- (DOLLARS IN THOUSANDS) Cash Flows From Operating Activities Net income(1)....... $ 287,758 $ 13,475 Adjustments to reconcile net income to net cash provided (used) by operating activities: Decrease (increase) in interest receivable.............. 80 (693) Increase in interest payable............................ 3,167 884 (Decrease) in income taxes payable...................... (865) (1,151) Equity in undistributed earnings of subsidiaries(1)..... (293,630) (13,103) Decrease in other assets................................ 9,910 39 Increase in other liabilities........................... 720 252 --------- -------- Net cash provided (used) by operating activities..... 7,140 (297) Cash Flows From Investing Activities Purchases of available-for-sale securities................ -- (111,984) Principal repayments of available-for-sale securities..... 12,594 4,486 Originations and purchases of loans....................... (147,867) -- Dividends received from subsidiaries...................... 136,521 -- Acquisition of wholly owned subsidiary(1)................. -- (82,877) --------- -------- Net cash provided (used) by investing activities..... 1,248 (190,375) Cash Flows From Financing Activities (Decrease) increase in securities sold under agreements to repurchase.............................................. (1,848) 84,329 Proceeds of other borrowings.............................. 147,845 -- Issuance of common stock through stock options and employee stock plans.................................... 8,379 994 Repurchase of preferred stock............................. (1,990) -- Cash dividends paid....................................... (76,581) -- Contribution from wholly owned subsidiaries(1)............ -- 111,252 --------- -------- Net cash provided by financing activities............ 75,805 196,575 --------- -------- Increase in cash and cash equivalents................ 84,193 5,903 Cash and cash equivalents at beginning of year....... 5,903 -- --------- -------- Cash and cash equivalents at end of year............. $ 90,096 $ 5,903 ========= ========
- --------------- (1) Contains intercompany transactions eliminated upon consolidation. NOTE 32: SUBSEQUENT EVENTS BUSINESS COMBINATIONS On July 21, 1996, Washington Mutual signed an agreement to acquire, through merger, Keystone Holdings, the indirect holding company of American Savings Bank F.A. At September 30, 1996, Keystone Holdings, on a consolidated basis, had assets of $21.3 billion, deposits of $12.9 billion, and stockholder's equity of $520.0 million. The transaction was completed December 20, 1996. F-69 147 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On September 9, 1996, Washington Mutual signed an agreement to acquire United Western Financial Group, Inc. ("United Western") of Salt Lake City and its United Savings Bank and Western Mortgage Loan subsidiaries for $80.3 million in cash. At September 30, 1996, United Western had assets of $414.9 million, deposits of $294.4 million, and stockholders' equity of $53.8 million. The transaction, which is scheduled to be completed in the first quarter of 1997, is subject to the approval of banking regulators and a majority of shareholders of United Western's common stock. On November 30, 1996, WMI merged with Utah Federal Savings Bank (Utah FSB") by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB, which was an Ogden-based institution, had assets of $121.9 million, deposits of $105.9 million and stockholders' equity of $12.2 million. The merger will be accounted for as a pooling-of-interests. Due to the immaterial nature of the transaction, the Company will not restate prior-period information as if the companies had been combined. The balances stated above related to Keystone Holdings, United Western and Utah FSB are unaudited. FEDERAL AND STATE TAXATION MATTERS In August 1996, the President signed the Small Business Job Protection Act of 1996 (the "Act"). Under the Act, the reserve method of accounting for tax basis bad debts is no longer available, effective for years ending after December 31, 1995. As a result, the Company will be required to use the specific charge-off method of accounting for tax basis bad debts for 1996 and later years. In addition, the Company will also be required to recapture its post-1987 additions to its bad debt reserves, whether such additions were made pursuant to the percentage of taxable income method or the experience method. As of December 31, 1995, these additions were $151.3 million which, pursuant to the Act, will be included in taxable income ratably over a six-taxable-year period beginning with the year ending December 31, 1997. The recapture of the post-1987 additions to tax basis bad debt reserves will not result in a charge to earnings as these amounts are included in the deferred tax liability at December 31, 1995. In August 1996, Keystone Holdings amended prior-year federal tax returns to reduce tax bad debt deductions and to make other amendments. As a result, net operating loss carryforwards for federal tax purposes were reduced by approximately $756 million. In September 1996, ASB amended prior-year state tax returns to reduce tax bad debt deductions. The result was to decrease state net operating loss carryovers by approximately $545 million. The decrease in the gross deferred tax asset as a result of the amendments which reduced the federal and state net operating loss carryforwards was offset by an equal decrease in the valuation allowance for the deferred tax asset. SAIF RECAPITALIZATION ASSESSMENT On September 30, 1996, President Clinton signed legislation intended, among other things, to recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce the gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums. The legislation provides for a special one-time assessment on SAIF-insured deposits that were held as of March 31, 1995, including certain deposits acquired after that date. The assessment will bring the SAIF's reserve ratio to the legally required level of $1.25 for every $100 in insured deposits. Beginning in January 1997, deposits insured through the SAIF at most institutions probably will be subject to regular FDIC assessments amounting to 6.4 cents per $100 per year, while deposits insured through the BIF at most institutions probably will be subject to regular FDIC assessments amounting to 1.3 cents per $100 per year. The Company's special assessment resulted in a pretax charge of $124.2 million, which was taken in the quarter ended September 30, 1996. Based on the current level of deposits, the Company estimates that the reduction in the regular assessment on its SAIF deposits beginning in 1997 should result in annual savings of approximately $31 million. F-70 148 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FINANCING MATTERS On February 8, 1996, ASB completed the private placement of $100.0 million of Subordinated Notes (the "Notes") maturing February 15, 2006. The Notes bear interest at a rate of 6.625% per annum. Interest on the Notes is payable semi-annually in arrears on each February 15 and August 15, beginning on August 15, 1996. In November 1996, Washington Mutual received commitments for $200 million of Revolving Credit Facilities with two tranches: a $100 million 364-day facility and a $100 million 4-year facility. Chase Manhattan Bank will act as Administrative Agent for the Facilities. Proceeds of the Facilities were used for funding needs at the closing of the Transaction, including redemption of the New Capital securities, and are available for general corporate purposes, including providing capital at a subsidiary level. On December 2, 1996, Washington Mutual announced it will redeem on December 31, 1996, all of the Company's outstanding noncumulative perpetual preferred stock, Series D at the redemption price of $103.60 per share. On December 20, 1996, Washington Mutual redeemed $10.5 million of debt securities and $80.0 million of nonconvertible preferred stock issued by New Capital. Washington Mutual also gave the requisite notice to redeem $354.0 million of additional debt securities issued by New Capital. By redeeming such equity and debt, management believes it can significantly reduce its overall cost of funds. AMENDMENTS TO THE ARTICLES OF INCORPORATION On December 18, 1996, the shareholders of Washington Mutual approved an amendment to the Company's Restated Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 shares to 350,000,000 shares. F-71 149 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Summary Financial Data................ 7 Risk Factors.......................... 11 Use of Proceeds....................... 13 Market Prices and Dividends........... 13 Capitalization........................ 14 The Keystone Transaction.............. 15 Selected Financial Data............... 17 Management's Discussion and Analysis of Financial Position and Results of Operations.......................... 20 Business.............................. 47 Selling Stockholders.................. 67 Description of Washington Mutual Capital Stock....................... 69 Certain United States Federal Tax Consequences to Non-United States Purchasers.......................... 72 Underwriting.......................... 74 ERISA Matters......................... 75 Experts............................... 76 Legal Matters......................... 76 Available Information................. 76 Incorporation of Certain Documents by Reference........................... 77 Supplemental Consolidated Financial Statements.......................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 14,589,649 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ MERRILL LYNCH & CO. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. JANUARY 22, 1997 - ------------------------------------------------------ - ------------------------------------------------------ 150 PROSPECTUS 14,589,649 SHARES [WASHINGHTON MUTUAL INC. LOGO] COMMON STOCK ------------------------ Of the 14,589,649 shares (the "Shares") of common stock, no par value ("Common Stock"), of Washington Mutual, Inc., a Washington corporation ("Washington Mutual" or the "Company"), offered hereby, 14,000,000 Shares are offered by the Federal Deposit Insurance Corporation (the "FDIC"), for the account of the FSLIC Resolution Fund, which is a government-controlled instrumentality of the United States of America managed by the FDIC (the "FRF"; the FDIC in its capacity as manager of the FRF is referred to herein as the "FDIC-Manager"), and 589,649 Shares are being offered by certain other stockholders of the Company identified herein (collectively with the FRF, the "Selling Stockholders"). See "Selling Stockholders." The Shares were issued in connection with a recent transaction pursuant to which Washington Mutual acquired Keystone Holdings, Inc. ("Keystone Holdings") by merger, as a result of which the direct and indirect subsidiaries of Keystone Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company. See "The Keystone Transaction." The Company will not receive any proceeds from the sale of the Shares hereunder. Of the 14,589,649 Shares offered hereby, 2,260,000 Shares are being offered outside the United States and Canada by the International Managers (the "International Offering") and 12,329,649 Shares are being offered in a concurrent offering in the United States and Canada by the U.S. Underwriters (the "U.S. Offering" and, together with the International Offering, the "Offerings"). The initial public offering price and the aggregate underwriting discount per Share are identical for the Offerings. See "Underwriting." The Company's Common Stock is traded on the National Market tier of The Nasdaq Stock Market (the "Nasdaq Stock Market") under the symbol "WAMU." On January 22, 1997, the last reported sale price of the Common Stock was $48 1/2 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) - ------------------------------------------------------------------------------------------------- Per Share...................... $47.50 $.95 $46.55 - ------------------------------------------------------------------------------------------------- Total.......................... $693,008,327 $13,860,167 $679,148,161 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have severally agreed to indemnify the several Underwriters (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deduction of expenses payable by the Company estimated to be $720,000. ------------------------ The Shares are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York, on or about January 28, 1997. ------------------------ MERRILL LYNCH INTERNATIONAL FRIEDMAN, BILLINGS, RAMSEY & CO., INC. BAYERISCHE LANDESBANK GIROZENTRALE FOX-PITT, KELTON N.V. UNION BANCAIRE PRIVEE ------------------------ The date of this Prospectus is January 22, 1997. 151 MAP OF THE STATES OF WASHINGTON, OREGON, CALIFORNIA, UTAH, IDAHO, MONTANA, ARIZONA, COLORADO AND NEVADA AND A TABLE SETTING FORTH THE NUMBERS OF THE COMPANY'S BRANCHES, LOAN PRODUCTION CENTERS, COMMERCIAL BANK OFFICES AND NUMBER OF HOUSEHOLDS SERVED. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKETS' SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. 2 152 NO ACTION HAS BEEN TAKEN IN ANY JURISDICTION BY THE COMPANY OR THE UNDERWRITERS THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN THE UNITED STATES. THE DISTRIBUTION OF THIS PROSPECTUS AND THE OFFERING AND SALE OF THE COMMON STOCK IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. THE COMMON STOCK MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, AND NEITHER THIS PROSPECTUS NOR ANY OTHER OFFERING MATERIAL OR ADVERTISEMENT IN CONNECTION WITH THE COMMON STOCK MAY BE DISTRIBUTED OR PUBLISHED, IN OR FROM ANY JURISDICTION, EXCEPT UNDER CIRCUMSTANCES THAT WILL RESULT IN COMPLIANCE WITH APPLICABLE RULES AND REGULATIONS OF ANY SUCH JURISDICTION. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE INTERNATIONAL MANAGERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY SUCH RESTRICTIONS. FOR A FURTHER DESCRIPTION OF CERTAIN RESTRICTIONS ON OFFERING AND SALES OF THE COMMON STOCK, SEE "UNDERWRITING." THE COMMON STOCK MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESSES (OR IN OTHER CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM FOR THE PURPOSES OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995), AND THIS DOCUMENT MAY ONLY BE ISSUED OR PASSED ON IN OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT MAY LAWFULLY BE ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE UNDER, SECTION 58 FINANCIAL SERVICES ACT 1986. ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 AND THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT OF ANYTHING DONE IN RELATION TO THE COMMON STOCK IN, FROM OR OTHERWISE INVOLVING, THE UNITED KINGDOM. 2A 153 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "International Purchase Agreement") between the Company and each of the institutions named below (the "International Managers", for whom Merrill Lynch International and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives (the "International Representatives")), and concurrently with the sale of 12,329,649 shares of Common Stock to certain underwriters in the United States (the "U.S. Underwriters" and, together with the International Managers, the "Underwriters"), the Company has agreed to sell to each of the International Managers, and each of the International Managers has severally agreed to purchase, the aggregate number of shares of Common Stock set forth opposite its name below:
NUMBER INTERNATIONAL MANAGERS OF SHARES -------------------------------------------------------------------------- --------- Merrill Lynch International............................................... 1,017,500 Friedman, Billings, Ramsey & Co., Inc..................................... 1,017,500 Bayerische Landesbank Girozentrale........................................ 75,000 Fox-Pitt, Kelton N.V...................................................... 75,000 Union Bancaire Privee..................................................... 75,000 --------- Total.......................................................... 2,260,000 =========
The Company also has entered into a purchase agreement (the "U.S. Purchase Agreement") with the U.S. Underwriters. Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of 2,260,000 shares of Common Stock to the International Managers, the Company has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase an aggregate of 12,329,649 shares of Common Stock. The initial public offering price per share of the Common Stock and the underwriting discount per share of the Common Stock are identical under the International Purchase Agreement and the U.S. Purchase Agreement. In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such Purchase Agreement if any such shares of Common Stock being sold pursuant to each such Purchase Agreement are purchased. Under certain circumstances, the commitments of non-defaulting International Managers or U.S. Underwriters may be increased. The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, sales may be made between the International Managers and the U.S. Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any share of Common Stock so sold shall be the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-United States or non-Canadian persons or to persons they believe intend to resell to persons who are non-United States or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to United States or Canadian persons or to persons they believe intend to resell to United States or Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. The International Representatives have advised the Company that the International Managers propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers (who may include International Managers) at such price less a concession not in excess of $.57 per share of Common Stock. The International Managers may allow, and such dealers may reallow, a discount not in excess of $.10 per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 74 154 Each International Manager has agreed that (i) it has not offered or sold, and will not for a period of six months following consummation of the Offerings offer or sell, in the United Kingdom by means of any document, any shares of Common Stock offered hereby, other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995, (ii) it has complied with and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the shares of Common Stock in, from, or otherwise involving the United Kingdom any document received by it in connection with the issue of the shares of Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, as amended, or is a person to whom the document may otherwise lawfully be issued or passed on. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company has agreed that it will not, with certain exceptions, offer, sell or otherwise dispose of any shares of Common Stock for a period of 60 days from the date of this Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. This prohibition will not affect shares of Common Stock issued by the Company pursuant to acquisitions, employee or director benefit plans, any dividend reimbursement plan, or the conversion or exercise of securities convertible into or exercisable for Common Stock. Merrill Lynch, Pierce, Fenner & Smith Incorporated renders various financial advisory services to the Company from time to time. ERISA MATTERS Washington Mutual and certain of its subsidiaries and affiliates, including WMB, ASB, Murphey Favre, Composite Research and WM Life, may be considered "parties in interest" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or "disqualified persons" within the meaning of Section 4975 of the Code, with respect to many employee benefit plans and individual retirement accounts ("IRAs"), including without limitation by reason of providing trust custodial services, annuity products, investment advice or brokerage services to such plans and IRAs. Prohibited transactions within the meaning of ERISA or the Code may occur if, for example, the Shares are acquired by an employee benefit plan or IRA or an entity (such as an insurance company general account) deemed to be investing assets of an employee benefit plan, unless such Shares are acquired pursuant to an exemption from the prohibited transaction rules. Any such plan or entity proposing to invest in the Shares should consult with its legal counsel. EXPERTS The Supplemental Consolidated Financial Statements of the Company, as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. Insofar as the report of Deloitte & Touche LLP relates to the amounts included for Keystone Holdings Inc. and subsidiaries for 1995, 1994, and 1993 it is based solely on the report of other auditors. The consolidated financial statements of Keystone Holdings and subsidiaries for 1995, 1994 and 1993, incorporated herein by reference from the Proxy Statement dated November 12, 1996 have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report also incorporated herein by reference. The consolidated financial statements of the Company incorporated in this Prospectus by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995, as amended by Form 8-K dated October 18, 1996, Form 8-K/A dated October 23, 1996, and Form 8-K/A dated October 25, 1996 also have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports, which 75 155 are incorporated herein by reference. Such financial statements of the Company and Keystone Holdings are included herein or incorporated by reference in reliance upon the respective reports of such firms given upon their authority as experts in accounting and auditing. LEGAL MATTERS The validity of the issuance of the Common Stock offered hereby has been passed upon by Foster Pepper & Shefelman, counsel to Washington Mutual. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. As of January 22, 1997, individual members of Foster Pepper & Shefelman owned an aggregate of 40,014 shares of Common Stock and 160 shares of Series C Preferred. AVAILABLE INFORMATION Washington Mutual is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. The reports, proxy statements and other information filed by Washington Mutual with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center (13th Floor), New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at prescribed rates. The Commission also maintains a Web site that contains copies of reports, proxy and information statements and other information regarding registrants that file electronically, including the Company, with the Commission at http://www.sec.gov. In addition, material filed by Washington Mutual can be inspected at the offices of the National Association of Securities Dealers, Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. In accordance with the rules and regulations of the Commission, this Prospectus does not contain certain information contained in the Registration Statement the Company has filed with the Commission to which reference is hereby made for further information. Statements in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document, reference is made to the copy of such document filed with the Commission for a more complete description of the matter involved, and each statement shall be deemed to be qualified in its entirety by such reference. 76 156 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission by Washington Mutual pursuant to the Exchange Act are incorporated by reference in this Prospectus: 1. Annual Report on Form 10-K for the year ended December 31, 1995; 2. Quarterly Reports on Form 10-Q, as amended, for each of the quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996; 3. Current Report on Form 8-K dated March 15, 1996; 4. Item 2 of Current Report on Form 8-K dated July 22, 1996; 5. Current Report on Form 8-K dated October 18, 1996, as amended by Form 8-K/A dated October 23, 1996, as amended by Form 8-K/A dated October 25, 1996; and 6. Appendix B, pages B-1 through B-54, of the Company's definitive proxy statement dated November 12, 1996; 7. Current Report on Form 8-K dated January 3, 1997; and 8. Current Report on Form 8-K, as amended, dated January 22, 1997. All documents and reports filed by Washington Mutual pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of offering of the Shares shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing of such documents or reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference that are not presented herein or delivered herewith. These documents (other than exhibits to such documents unless such exhibits are specifically incorporated by reference) are available upon request to each person to whom a copy of this Prospectus is delivered, without charge, upon request to the Company at Investor Relations, Washington Mutual, Inc., Washington Mutual Tower, 1201 Third Avenue, 12th Floor, Seattle, Washington 98101 (telephone number (206) 461-3187). 77 157 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Summary Financial Data................ 7 Risk Factors.......................... 11 Use of Proceeds....................... 13 Market Prices and Dividends........... 13 Capitalization........................ 14 The Keystone Transaction.............. 15 Selected Financial Data............... 17 Management's Discussion and Analysis of Financial Position and Results of Operations.......................... 20 Business.............................. 47 Selling Stockholders.................. 67 Description of Washington Mutual Capital Stock....................... 69 Certain United States Federal Tax Consequences to Non-United States Purchasers.......................... 72 Underwriting.......................... 74 ERISA Matters......................... 75 Experts............................... 75 Legal Matters......................... 76 Available Information................. 76 Incorporation of Certain Documents by Reference........................... 77 Supplemental Consolidated Financial Statements.......................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 14,589,649 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ MERRILL LYNCH INTERNATIONAL FRIEDMAN, BILLINGS, RAMSEY & CO., INC. BAYERISCHE LANDESBANK GIROZENTRALE FOX-PITT, KELTON N.V. UNION BANCAIRE PRIVEE JANUARY 22, 1997 - ------------------------------------------------------ - ------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----