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As filed with the Securities and Exchange Commission on June 6, 1996
Registration No. 33-__________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 6712 91-1653725
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1201 THIRD AVENUE
SEATTLE, WA 98101
(206) 461-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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MARC R. KITTNER
SENIOR VICE PRESIDENT
WASHINGTON MUTUAL, INC.
1201 THIRD AVENUE
SEATTLE, WA 98101
(206) 461-2000
(Name, address, including zip code, and telephone number,
-----------------------------------------------------
Copies to:
BERNARD L. RUSSELL, ESQ. STEPHEN M. KLEIN, ESQ.
ROBERT C. SEIDEL, ESQ. CHRISTI MUONEKE, ESQ.
FOSTER PEPPER & SHEFELMAN GRAHAM & DUNN
1111 THIRD AVENUE 1420 FIFTH AVENUE
SUITE 3400 SUITE 3300
SEATTLE, WA 98101 SEATTLE, WA 98101
(206) 447-4400 (206) 624-8300
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALES HEREUNDER: As soon as
practicable after the effective date of this Registration Statement and after
the satisfaction or waiver of all conditions to the Merger of Utah Federal
Savings Bank with and into the Registrant pursuant to the Merger Agreement
described in the enclosed Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: / /
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CALCULATION OF REGISTRATION FEE
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Title of Securities Amount To Be Proposed Maximum Proposed Maximum Amount of
To Be Registered Registered(1) Offering Price Per Share(2) Offering Price(3) Registration Fee(3)
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Common Stock, 555,536 shares $19.4968 $10,831,153 $3,735
no par value
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____________
(1) Represents the estimated maximum number of shares of Washington Mutual, Inc.
common stock to be issued pursuant to the Merger Agreement as described in this
Registration Statement.
(2) Calculated by dividing the book value of Utah Federal Savings Bank common
stock on March 31, 1995 (pursuant to Rule 457(f)(2) under the Securities Act of
1933, as amended) by the estimated maximum number of shares of Washington
Mutual, Inc. common stock to be issued pursuant to the Merger Agreement.
(3) Based on the book value of Utah Federal Savings Bank common stock on March
31, 1996 for the purpose of calculating the registration fee as required by Rule
457(f)(2) under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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WASHINGTON MUTUAL, INC.,
Cross Reference Sheet
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S-4 Item No. and Caption Heading
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Part I. Information Required in the Prospectus
A. Information About the Transaction
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus........................ Facing Page; Cross Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front Cover Page;
Incorporation of Certain Documents by
Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information................................. Summary; Market Prices and
Dividends; Comparative Per Share
Data; Selected Historical Financial
Data
4. Terms of the Transaction.............................. Summary; The Merger - Background
of and Reasons for the Merger; -
Accounting Treatment;
- Federal Income Tax Consequences; -
Opinion of Financial Advisor; The
Merger Agreement; Comparative
Rights of Shareholders
5. Pro Forma Financial Information....................... Not Applicable
6. Material Contracts with the Company Being
Acquired.............................................. Not Applicable
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to Be
Underwriters.......................................... Not Applicable
8. Interests of Named Experts and Counsel................ Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................................... Comparative Rights of Shareholders -
Limitation of Directors' Liability;
Indemnification
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B. Information About the Registrant
10. Information with Respect to
S-3 Registrants....................................... Summary; Information Concerning
Washington Mutual; Selected
Historical Financial Data
11. Incorporation of Certain Information by
Reference............................................. Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3
Registrants........................................... Not Applicable
13. Incorporation of Certain Information by
Reference............................................. Not Applicable
14. Information with Respect to Registrants Other
than S-3 or S-2 Registrants........................... Not Applicable
C. Information About the Company Being Acquired
15. Information with Respect to
S-3 Companies......................................... Not Applicable
16. Information with Respect to S-2 or S-3
Companies............................................. Not Applicable
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies............................. Summary; Market Prices and
Dividends; Comparative Per Share
Data; Information Concerning Utah
Federal; Selected Historical Financial
Data
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited:
(1) Date, Time and Place Information............. Summary - The Special Meeting; The
Special Meeting
(2) Revocability of Proxy........................ The Special Meeting - Voting and
Revocation of Proxies
(3) Dissenters' Rights of Appraisal.............. Summary - The Merger;
- Dissenters' Rights; The Merger -
Dissenters' Rights
(4) Persons Making the Solicitation.............. The Special Meeting - Solicitation of
Proxies
(5)(i) Interest of Certain Persons in Matters to
be Acted Upon................................ Summary - The Merger; - Interest of
Certain Persons in the Merger; The
Merger - Interest of Certain Persons in
the Merger
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(ii) Voting Securities and Principal Holders
Thereof...................................... Information Concerning Utah Federal -
Beneficial Ownership of Utah Federal
Common Stock; Incorporation of
Certain Documents by Reference;
Information Concerning Washington
Mutual
(6) Vote Required for Approval................... Summary - The Special Meeting; -
Votes Required; The Special Meeting -
Quorum; - Votes Required
(7)(i) Directors and Executive Officers............. Information Concerning Washington
Mutual; Incorporation of Certain
Documents by Reference
(ii) Executive Compensation....................... Information Concerning Washington
Mutual; Incorporation of Certain
Documents by Reference
(iii) Certain Relationships and Related
Transactions................................. Information Concerning Utah Federal;
Information Concerning Washington
Mutual; Incorporation of Certain
Documents by Reference
19. Information if Proxies, Consents or
Authorizations are not to be solicited or in an
Exchange Offer........................................ Not Applicable
Part II. Information Not Required in the Prospectus
20. Indemnification of Directors and Officers............. Indemnification of Directors and
Officers
21. Exhibits and Financial Schedules...................... Exhibits
22. Undertakings.......................................... Undertakings
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UTAH FEDERAL SAVINGS BANK
________________, 1996
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
of Utah Federal Savings Bank ("Utah Federal") to be held on _____________, 1996
at _______ a.m., local time, at the corporate headquarters of Utah Federal
located at 2279 Washington Boulevard, Ogden, Utah.
At this meeting you will be asked to consider and vote upon the
following proposal:
To approve the Agreement for Merger (the "Merger Agreement")
dated as of February 29, 1996, among Washington Mutual, Inc.
("Washington Mutual"), Washington Mutual Bank fsb ("WMBfsb")
and Utah Federal, pursuant to which Utah Federal will merge
with and into WMBfsb (the "Merger").
As a result of the Merger, Utah Federal shareholders will receive
$105.63 per share, subject to adjustment as described in the accompanying Proxy
Statement/Prospectus, such consideration to be paid in newly issued shares of
Washington Mutual common stock.
As of the date of this Proxy Statement/Prospectus, one shareholder of
Utah Federal beneficially owns 131,609 shares of Utah Federal common stock,
representing approximately 94.68 percent of the outstanding shares of Utah
Federal common stock, and has indicated that he will vote in favor of the
Merger.
THE UTAH FEDERAL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AND THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT PURSUANT TO WHICH THE MERGER WILL OCCUR.
Details of the proposed Merger and other important information
concerning Utah Federal and Washington Mutual appear in the accompanying Proxy
Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend this special meeting, please
complete, sign and date the accompanying green proxy and return it in the
enclosed prepaid envelope. You may revoke your proxy in the manner described in
the accompanying Proxy Statement/Prospectus at any time before it has been voted
at the special meeting. If you attend the special meeting, you may vote in
person even if you have previously returned your proxy. Your prompt attention
will be greatly appreciated.
Sincerely,
Ernest J. Miller Michael R. Garrett
Chairman of the Board President and Chief Executive Officer
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UTAH FEDERAL SAVINGS BANK
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _________, 1996
TO THE SHAREHOLDERS OF UTAH FEDERAL SAVINGS BANK:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Utah
Federal Savings Bank, a federal savings bank ("Utah Federal"), will be held on
__________, 1996 at _____ a.m., local time, at the corporate headquarters of
Utah Federal located at 2279 Washington Boulevard, Ogden, Utah, for the
following purpose:
To approve the Agreement for Merger (the "Merger Agreement") dated as
of February 29, 1996, among Washington Mutual, Inc. ("Washington
Mutual"), Washington Mutual Bank fsb ("WMBfsb") and Utah Federal,
pursuant to which Utah Federal will merge with and into WMBfsb (the
"Merger").
The Merger Agreement is attached to and described in the enclosed Proxy
Statement/Prospectus.
Only shareholders of record at the close of business on May 16, 1996
are entitled to notice of and to vote at the special meeting. If there are not
sufficient votes to approve the foregoing proposal at the time of the special
meeting, the special meeting may be adjourned or postponed.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed green proxy as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. You may revoke your
proxy in the manner described in the accompanying Proxy Statement/Prospectus at
any time before it has been voted at the special meeting. Any shareholder
attending the special meeting may vote in person even if he or she has returned
a proxy.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXIES.
BY ORDER OF THE BOARD OF DIRECTORS
Georgia S. Goodell, Secretary
Ogden, Utah
____________, 1996
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. APPROVAL OF
THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF HOLDERS OF TWO-THIRDS OF
THE OUTSTANDING SHARES OF UTAH FEDERAL COMMON STOCK. IN ORDER TO ENSURE THAT THE
REQUISITE VOTES ARE OBTAINED, AND IN ORDER TO ENSURE A QUORUM, WE URGE YOU TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY.
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PROXY STATEMENT PROSPECTUS
OF OF
UTAH FEDERAL SAVINGS BANK WASHINGTON MUTUAL, INC.
SPECIAL MEETING OF SHAREHOLDERS COMMON STOCK
TO BE HELD ON _________, 1996 (NO PAR VALUE)
This Proxy Statement/Prospectus is being furnished to the holders of
shares of common stock, par value $10.00 per share ("Utah Federal Common
Stock"), of Utah Federal Savings Bank, a federal savings bank ("Utah Federal"),
in connection with the solicitation of proxies by the Board of Directors of Utah
Federal for use at a special meeting of shareholders to be held on ________,
1996, at ________ a.m., local time, at the corporate headquarters of Utah
Federal located at 2279 Washington Blvd., Ogden, Utah, and at any adjournments
or postponements thereof (the "Special Meeting").
At the Special Meeting, the holders of Utah Federal Common Stock will
consider and vote upon a proposal to approve the Agreement for Merger (the
"Merger Agreement") dated as of February 29, 1996, by and among Washington
Mutual, Inc., a Washington corporation ("Washington Mutual"), Washington Mutual
Bank fsb, a federal savings bank and a wholly-owned subsidiary of Washington
Mutual ("WMBfsb"), and Utah Federal, pursuant to which Utah Federal will merge
with and into WMBfsb (the "Merger"). A copy of the Merger Agreement is attached
to this Proxy Statement/Prospectus as Appendix A. As more fully described
herein, pursuant to the Merger Agreement, Utah Federal will merge with and into
WMBfsb and all of the outstanding shares of Utah Federal Common Stock held by
each holder thereof immediately before the effective time of the Merger will be
converted into the right to receive $105.63 per share, subject to adjustment as
described herein ("Merger Consideration"), to be paid in newly issued shares of
common stock, no par value per share, of Washington Mutual ("Washington Mutual
Common Stock"). Utah Federal currently anticipates that, pursuant to the Merger
Agreement, the Merger Consideration will be decreased by up to $0.35 per share.
See "THE MERGER -- General" and "THE MERGER AGREEMENT -- Expenses."
As of the date of this Proxy Statement/Prospectus, Ernest J. Miller, a
Director and Chairman of the Board of Utah Federal, beneficially owns 131,609
shares of Utah Federal Common Stock, representing approximately 94.68 percent of
the outstanding shares of Utah Federal Common Stock, and has indicated that he
will vote in favor of the Merger.
This Proxy Statement/Prospectus also constitutes a Prospectus of
Washington Mutual with respect to the shares of Washington Mutual Common Stock
to be issued in the Merger. The outstanding shares of Washington Mutual Common
Stock are quoted on the National Market tier of The Nasdaq Stock Market. The
last reported sale price of Washington Mutual Common Stock on The Nasdaq Stock
Market on _________, 1996, was $__________ per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of Utah Federal on or about __________, 1996.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS __________________, 1996.
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AVAILABLE INFORMATION
Washington Mutual is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (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 Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, at prescribed rates. 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.
Utah Federal was subject to the informational requirements of the
Exchange Act from September 23, 1992 to June 30, 1995, and in accordance
therewith filed reports, proxy statements and other information with the Office
of Thrift Supervision ("OTS"). The reports, proxy statements and other
information filed by Utah Federal with the OTS can be inspected at the Office of
Thrift Supervision, Information Services Division, 1700 G Street, N.W.,
Washington, D.C. 20552.
Washington Mutual has filed a Registration Statement on Form S-4
(together with any exhibits, amendments or supplements thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), covering the Washington Mutual Common Stock to be issued
pursuant to the Merger Agreement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement. Such
additional information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Proxy Statement/Prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
THIS PROXY STATEMENT/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 ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON
REQUEST TO WASHINGTON MUTUAL, INVESTOR RELATIONS, WASHINGTON MUTUAL, INC.,
WASHINGTON MUTUAL TOWER, 1201 THIRD AVENUE, 12TH FLOOR, SEATTLE, WASHINGTON
98101 (TELEPHONE NUMBER (206) 461-3187). IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY _________________________, 1996.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus in
connection with the solicitation of proxies or the offering of securities made
hereby and, if given or made, such information or representation must not be
relied upon as having been authorized by Utah Federal, Washington Mutual or any
other person. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities, or the solicitation
of a proxy, in any jurisdiction to or from any person to or from whom it is not
lawful to make any such offer or solicitation in such jurisdiction.
Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of Utah Federal or
Washington Mutual since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
All information contained in this Proxy Statement/Prospectus relating
to Washington Mutual has been supplied by Washington Mutual and all information
herein relating to Utah Federal has been supplied by Utah Federal.
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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 Proxy
Statement/Prospectus:
1. Washington Mutual's Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 1995;
2. Washington Mutual's Quarterly Report on Form 10-Q ("Form
10-Q") for the quarterly period ended March 31, 1996;
3. Washington Mutual's Proxy Statement for the Annual Meeting of
Shareholders held on April 16, 1996;
4. Item 5 of Washington Mutual's Current Report on Form 8-K dated
November 29, 1994; and
5. Washington Mutual's Current Report on Form 8-K dated March 15,
1996.
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
Proxy Statement/Prospectus and before the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/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 Proxy Statement/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 Proxy Statement/Prospectus.
The information relating to Washington Mutual contained in this Proxy
Statement/Prospectus does not purport to be complete and should be read together
with the information in the documents that accompany this Proxy
Statement/Prospectus and the additional documents that are incorporated by
reference herein.
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PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................................. 3
SUMMARY ........................................................................................................ 6
The Participants........................................................................................ 6
The Special Meeting..................................................................................... 7
The Merger.............................................................................................. 7
The Merger Agreement.................................................................................... 10
Comparative Rights of Shareholders...................................................................... 10
Management and Operations of Washington Mutual and WMBfsb After the Merger.............................. 11
Resales of Washington Mutual Common Stock............................................................... 11
MARKET PRICES AND DIVIDENDS..................................................................................... 12
COMPARATIVE PER SHARE DATA...................................................................................... 13
SELECTED HISTORICAL FINANCIAL DATA.............................................................................. 15
Summary Consolidated Financial Data of Washington Mutual................................................ 15
Condensed Consolidated Financial Data of Utah Federal................................................... 17
THE SPECIAL MEETING............................................................................................. 19
General................................................................................................. 19
Matters To Be Considered at the Special Meeting......................................................... 19
Record Date and Voting.................................................................................. 19
Quorum; Votes Required.................................................................................. 19
Voting and Revocation of Proxies........................................................................ 19
Solicitation of Proxies................................................................................. 20
THE MERGER...................................................................................................... 20
General................................................................................................. 20
Background of the Merger................................................................................ 21
Reasons for the Merger; Recommendation of the Utah Federal Board........................................ 23
Opinion of Financial Advisor............................................................................ 24
Interests of Certain Persons in the Merger.............................................................. 26
Affiliate Letters....................................................................................... 27
Regulatory Approvals.................................................................................... 27
Federal Income Tax Consequences......................................................................... 28
Accounting Treatment.................................................................................... 29
Dissenters' Rights...................................................................................... 29
Resales of Washington Mutual Common Stock by Utah Federal Shareholders.................................. 30
THE MERGER AGREEMENT............................................................................................ 31
Effective Date and Time of the Merger................................................................... 31
Conditions to the Merger................................................................................ 31
Business of Utah Federal Pending the Merger............................................................. 32
Waiver and Amendment.................................................................................... 32
Termination............................................................................................. 32
Break-Up Fees........................................................................................... 33
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Stock Option Agreement.................................................................................. 34
Exchange of Stock Certificates.......................................................................... 35
Effect on Employee Benefit Plans and Stock Plans........................................................ 36
Expenses................................................................................................ 36
Post-Merger Dividend Policy............................................................................. 36
COMPARATIVE RIGHTS OF SHAREHOLDERS.............................................................................. 37
Authorized Capital...................................................................................... 37
Voting Rights........................................................................................... 38
Liquidation Rights...................................................................................... 38
Dividend Rights......................................................................................... 39
Board of Directors...................................................................................... 39
Amendments of Articles and Bylaws....................................................................... 39
Anti-Takeover Provisions................................................................................ 40
Limitation of Directors' Liability; Indemnification..................................................... 42
Washington Mutual Shareholder Rights Plan............................................................... 43
CERTAIN DIFFERENCES BETWEEN WASHINGTON CORPORATE LAW AND OTS
REGULATIONS............................................................................................. 43
Right to Call Special Meetings of Shareholders.......................................................... 43
Provisions Affecting Control Share Acquisitions and Business Combinations............................... 43
Transactions With Officers or Directors................................................................. 44
Dissenters' Rights...................................................................................... 44
INFORMATION CONCERNING UTAH FEDERAL............................................................................. 45
Business................................................................................................ 45
Supervision and Regulation.............................................................................. 51
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 55
Beneficial Ownership of Utah Federal Common Stock....................................................... 61
INFORMATION CONCERNING WASHINGTON MUTUAL........................................................................ 61
Washington Mutual....................................................................................... 61
The Reorganization...................................................................................... 62
Washington Mutual's Principal Operating Subsidiaries.................................................... 63
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK.................................................................. 64
LEGAL MATTERS................................................................................................... 65
INDEPENDENT AUDITORS............................................................................................ 65
OTHER MATTERS................................................................................................... 65
APPENDIX A: Agreement for Merger (including Plan of Merger)............................................. A-1
APPENDIX B: Opinion of Columbia Financial Advisors...................................................... B-1
APPENDIX C: Stock Option Agreement...................................................................... C-1
APPENDIX D: OTS Dissenter and Appraisal Rights Regulation (12 CFRSection 552.14)........................ D-1
APPENDIX E: Financial Statements of Utah Federal Savings Bank........................................... E-1
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus, the Appendices hereto or in documents
incorporated herein by reference. This summary is not intended to be complete
and is qualified in its entirety by the more detailed information contained
elsewhere in this Proxy Statement/Prospectus, the Appendices hereto and the
other documents incorporated herein by reference. Shareholders are urged to read
this Proxy Statement/Prospectus, the Appendices hereto and the documents
incorporated herein by reference in their entirety.
THE PARTICIPANTS
WASHINGTON MUTUAL. Washington Mutual is a Washington corporation that
provides a broad range of financial services to individuals and small businesses
in Washington, Oregon, Utah, Montana and Idaho through its subsidiary
operations. The principal subsidiaries of Washington Mutual include its banking
subsidiaries, WMBfsb and Washington Mutual Bank ("WMB"), and its insurance
subsidiary, WM Life Insurance Co. ("WM Life"). Financial services of Washington
Mutual include the traditional savings bank activities of accepting deposits
from the general public and making residential loans, consumer loans and limited
types of commercial real estate loans (primarily multi-family residential
property loans) and, more recently, certain commercial banking activities.
Washington Mutual, through other subsidiaries, also issues and markets annuity
contracts and is the investment advisor to and distributor of mutual funds. On
January 31, 1996, Washington Mutual completed the merger of Western Bank
("Western"), a commercial bank headquartered in Oregon, with and into WMB.
Western operated 42 branches located predominately in western and central
Oregon. At December 31, 1995, Western had assets of $787.1 million, deposits of
$709.7 million and stockholders' equity of $68.6 million.
As of March 31, 1996, Washington Mutual operated a total of 292
financial centers and 23 loan centers in Washington, Oregon, Idaho, Utah and
Montana. At March 31, 1996, Washington Mutual had total consolidated assets of
$22.3 billion, total deposits of $11.3 billion and stockholders' equity of $1.6
billion. 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.
Washington Mutual was formed in August 1994 by its 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"). The Reorganization was completed in November
1994 through the merger of WMSB into WMB, Washington Mutual's Washington
state-chartered savings bank subsidiary, 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.
Because Washington Mutual owns WMB and WMBfsb, Washington Mutual is a savings
and loan holding company under federal law and, as such, is subject to
regulation by the OTS. Except as noted otherwise, references in this Proxy
Statement/Prospectus to "Washington Mutual" refer to both (i) Washington Mutual,
Inc. and its consolidated subsidiaries after the consummation of the
Reorganization; and (ii) WMSB and its consolidated subsidiaries prior to the
consummation of the Reorganization. See "INFORMATION CONCERNING WASHINGTON
MUTUAL -- The Reorganization."
WMBFSB. WMBfsb, a wholly-owned subsidiary of Washington Mutual, is a
federal savings bank, formed in 1994 to participate in a supervisory acquisition
of certain branches of a federal savings bank from the Resolution Trust
Corporation. WMBfsb's principal business includes the traditional savings
association activity of accepting deposits from the general public and making
residential loans, consumer loans and limited types of commercial real estate
loans, primarily multi-family. At March 31, 1996, WMBfsb had assets of $773.5
million and operated 23 financial centers, of which 16 are in Utah, four are in
Idaho, two are in Montana and one is in Oregon, and operated one loan center in
Idaho and one in Utah. WMBfsb's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). The principal executive office of WMBfsb is located in the Washington
Mutual Tower, 1201 Third Avenue, Seattle, Washington.
6
<PAGE> 14
For additional information concerning Washington Mutual and WMBfsb, see
"INFORMATION CONCERNING WASHINGTON MUTUAL," "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
UTAH FEDERAL. Utah Federal was formed as a federal savings bank in
1937. Utah Federal provides the traditional savings association activities of
accepting deposits from the public, and making residential loans, consumer loans
and limited types of commercial real estate loans, primarily multi-family. Utah
Federal operates five branches in Utah, two of which are located in Ogden, and
one branch in each of Brigham City, Logan and Roy, and two loan production
offices in Utah, located in Layton and St. George. At March 31, 1996, Utah
Federal had total assets of $123.2 million, total deposits of $110.3 million and
shareholders' equity of $10.8 million. The principal executive office of Utah
Federal is located at 2279 Washington Blvd., Ogden, Utah and its telephone
number is (801) 621-0100.
For additional information concerning Utah Federal, see "INFORMATION
CONCERNING UTAH FEDERAL" and "APPENDIX E -- FINANCIAL STATEMENTS OF UTAH
FEDERAL."
THE SPECIAL MEETING
TIME, DATE AND PLACE. The Special Meeting will be held at _____ a.m.,
local time, on ___________, 1996, at the corporate headquarters of Utah Federal
located at 2279 Washington Blvd., Ogden, Utah.
MATTERS TO BE CONSIDERED. At the Special Meeting, shareholders of Utah
Federal will be asked to consider and vote upon a proposal to approve the Merger
Agreement and to transact such other business as may properly come before the
Special Meeting. See "THE SPECIAL MEETING -- Matters to be Considered at the
Special Meeting."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM. The Board of Directors of
Utah Federal (the "Utah Federal Board") has fixed the close of business on May
16, 1996 as the record date (the "Record Date") for the determination of the
holders of Utah Federal Common Stock ("Utah Federal Shareholders") entitled to
receive notice of and to vote at the Special Meeting. As of the Record Date,
139,000 shares of Utah Federal Common Stock were outstanding and eligible to be
voted at the Special Meeting. Each share of Utah Federal Common Stock will be
entitled to one vote on each matter to be acted upon or that may properly come
before the Special Meeting. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of Utah Federal Common Stock is required
for a quorum. See "THE SPECIAL MEETING -- Record Date and Voting" and "--
Quorum; Votes Required."
VOTES REQUIRED. The affirmative vote of the holders of two-thirds of
the shares of Utah Federal Common Stock outstanding on the Record Date is
required to approve the Merger Agreement. Accordingly, a failure to submit a
proxy (or to vote in person at the Special Meeting) or an abstention by a Utah
Federal Shareholder or a broker non-vote, which is an indication by a broker
that it does not have discretionary authority to vote on a particular matter,
will have the same effect as a "NO" vote with respect to the vote on the Merger.
As of the date of this Proxy Statement/Prospectus, Mr. Miller, a Director and
Chairman of the Board of Utah Federal, beneficially owns 131,609 shares of Utah
Federal Common Stock, representing approximately 94.68 percent of the
outstanding shares of Utah Federal Common Stock, and has indicated that he will
vote in favor of the Merger. See "THE SPECIAL MEETING -- Record Date and Voting"
and "-- Quorum; Votes Required."
THE MERGER
GENERAL. The Merger Agreement provides for the merger of Utah Federal
with and into WMBfsb, with WMBfsb as the surviving entity. The separate
existence of Utah Federal will cease upon the effectiveness of the Merger. The
Articles of Incorporation and Bylaws of WMBfsb will continue to be the Articles
of Incorporation and Bylaws of the surviving entity after the completion of the
Merger and the WMBfsb Board of Directors will continue to be the Board of
Directors of the surviving entity after the completion of the Merger. Upon
consummation of the Merger, all shares of Utah Federal Common Stock will
automatically be canceled and retired and will cease to exist. Each holder of a
certificate representing any shares of Utah Federal Common Stock will
7
<PAGE> 15
cease to have any rights with respect thereto, except the right to receive
shares of Washington Mutual Common Stock to be issued upon the surrender of such
certificate, without interest, as described below, or the right of dissenting
Utah Federal Shareholders to receive fair value for their shares of Utah Federal
Common Stock, under certain circumstances. See "THE MERGER -- Dissenters'
Rights."
At the effective date of the Merger (the "Effective Date"), each
outstanding share of Utah Federal Common Stock will be converted into the right
to receive $105.63 per share, subject to adjustments as described herein, to be
paid in newly issued shares of Washington Mutual Common Stock, as described in
"THE MERGER -- General." Pursuant to the Merger Agreement, if the amount of all
costs and expenses of third parties paid or owed by Utah Federal in connection
with the Merger Agreement and the consummation of the Merger exceed $150,000,
then the Merger Consideration will be reduced by the amount of such excess
divided by the number of shares of Utah Federal Common Stock outstanding at the
Effective Date. Utah Federal currently expects that its transaction fees will
range from $175,000 to $200,000, resulting in a downward adjustment to the
Merger Consideration of up to $0.35 per share. The Merger Consideration may be
subject to further adjustment in other circumstances. See "THE MERGER --
General" and "THE MERGER AGREEMENT -- Expenses."
The per share value of Washington Mutual Common Stock for purposes of
determining the number of shares of Washington Mutual Common Stock to be
received in the Merger will be based upon the arithmetic average of the closing
prices of Washington Mutual Common Stock on The Nasdaq Stock Market for the ten
trading days immediately preceding the third trading day before the Effective
Date (the "Average Price"). The exchange ratio for determining the number of
shares of Washington Mutual Common Stock to be issued for each share of Utah
Federal Common Stock (the "Exchange Ratio") will be the Merger Consideration
divided by the Average Price.
No certificates for fractional shares of Washington Mutual Common Stock
will be issued as a result of the Merger. Instead, each Utah Federal Shareholder
otherwise entitled to a fractional share will receive cash in lieu of such
fractional share in an amount equal to the fraction multiplied by the Average
Price.
RECOMMENDATION OF THE UTAH FEDERAL BOARD; REASONS FOR THE MERGER. The
Utah Federal Board has carefully considered the terms of the Merger Agreement,
has approved it as being in the best interests of Utah Federal and the Utah
Federal Shareholders, and unanimously recommends that Utah Federal Shareholders
vote FOR the proposal to approve the Merger Agreement.
The recommendation of the Utah Federal Board is based upon a number of
factors, including the terms of the Merger Agreement, the benefits expected to
result from the combination of Utah Federal and WMBfsb, information concerning
the financial condition, results of operations and prospects of WMBfsb and Utah
Federal on a stand-alone and combined basis, the Utah Federal Board's view of
the relative merits of other opportunities presented to the Utah Federal Board
or that the Utah Federal Board believed would be available, including the
possibility of remaining independent, the ability of Utah Federal Shareholders
to convert their Utah Federal Common Stock into publicly traded shares of
Washington Mutual Common Stock and the fairness opinion of Columbia Financial
Advisors ("CFA") as financial advisor to Utah Federal. See "THE MERGER --
Background of and Reasons for the Merger" and "-- Opinion of Financial Advisor."
The Utah Federal Board believes that the Merger would provide Utah
Federal Shareholders with the opportunity to receive a premium over the price
per share of Utah Federal Common Stock at which individual trades have occurred
in the recent past and to participate as Washington Mutual shareholders, on a
tax-deferred basis, in the expanded opportunities made possible by the Merger.
The Utah Federal Board also believes that the Merger would result in a combined
entity that is capable of competing more effectively with larger financial
institutions that have exerted increasing competitive pressure on Utah Federal.
OPINION OF FINANCIAL ADVISOR. CFA has served as financial advisor to
the Utah Federal Board, and has delivered its written opinion, dated as of
February 21, 1996 and updated as of the date of this Proxy Statement/Prospectus
(the "CFA Opinion"), to the Utah Federal Board that the Merger Consideration to
be received by Utah Federal Shareholders pursuant to the Merger Agreement is
fair, from a financial point of view, to such holders. Utah Federal has agreed
to pay CFA a fee for its services. See "THE MERGER -- Opinion of Financial
Advisor." The full text of the CFA Opinion, which sets forth the assumptions
made, matters considered and limits
8
<PAGE> 16
on its review, is attached hereto as Appendix B. Utah Federal Shareholders are
urged to read the CFA Opinion in its entirety.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Certain members of Utah
Federal's management and the Utah Federal Board may be deemed to have interests
in the Merger in addition to their interests as shareholders of Utah Federal
generally. These include, among other things, provisions in the Merger Agreement
relating to indemnification, severance payments, employee benefit plans, and
certain other benefits, including the agreement of Mr. Garrett to accept an
offer of employment with WMBfsb as a mortgage production manager and vice
president upon consummation of the Merger. See "THE MERGER -- Interests of
Certain Persons in the Merger" and "THE MERGER AGREEMENT -- Effect on Employee
Benefit Plans and Stock Plans."
AFFILIATE LETTERS. As of the Record Date, Utah Federal directors and
executive officers beneficially owned an aggregate of 134,919 shares of Utah
Federal Common Stock (excluding 3,000 shares issuable upon the exercise of
outstanding options) or approximately 97.06 percent of the shares of Utah
Federal Common Stock outstanding on such date. All of such Utah Federal
directors and executive officers have entered into letter agreements with
Washington Mutual and WMBfsb (the "Affiliate Letters") pursuant to which, among
other things, each such person agreed to vote all shares of Utah Federal Common
Stock held by them in favor of the Merger. Accordingly, holders of approximately
97.06 percent of the shares of Utah Federal Common Stock outstanding on the
Record Date have committed to voting in favor of the proposal to approve the
Merger Agreement. The Affiliate Letters are intended to preserve treatment of
the Merger as a pooling-of-interests for accounting purposes and to increase the
likelihood that the Merger will be consummated according to the terms set forth
in the Merger Agreement and may discourage competing offers to acquire Utah
Federal. See "THE MERGER -- Affiliate Letters."
REGULATORY APPROVALS. The Merger is subject to the prior approval of
the OTS. Receipt of regulatory approval of the Merger is a condition to
consummation of the Merger. Washington Mutual has filed an application for the
required regulatory approval, but there can be no assurance that such
application will be approved or, if approved, that such approval will not
contain conditions or requirements that cause such approval to fail to satisfy
the conditions set forth in the Merger Agreement. See "THE MERGER -- Regulatory
Approvals."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, for federal income
tax purposes, no gain or loss will be recognized by Utah Federal Shareholders
who receive Washington Mutual Common Stock in exchange for their Utah Federal
Common Stock. Cash received by Utah Federal Shareholders in the Merger will be
wholly or partially taxed. Consummation of the Merger is conditioned upon
receipt by Washington Mutual and Utah Federal of an opinion of counsel to
Washington Mutual to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Code. For a further discussion of the
federal income tax consequences of the Merger, see "THE MERGER -- Federal Income
Tax Consequences."
Because certain tax consequences of the Merger may vary depending upon
the particular circumstances of each Utah Federal Shareholder and other factors,
each holder of Utah Federal Common Stock is urged to consult such holder's own
tax advisor to determine the particular tax consequences to such holder of the
Merger (including the effect of state and local income and other tax laws).
ACCOUNTING TREATMENT. It is intended that the Merger will be accounted
for as a pooling-of-interests of Washington Mutual and Utah Federal under
generally accepted accounting principles. It is Washington Mutual's intention
not to restate financial statements and other financial information for periods
prior to the Merger to include the assets and liabilities and results of
operations of Utah Federal if the Merger is consummated because the transaction
will not be material to Washington Mutual. See "THE MERGER -- Accounting
Treatment" and "-- General."
DISSENTERS' RIGHTS. Pursuant to the provisions of regulations
promulgated by the OTS set forth at 12 C.F.R. Section 552.14 (the "Dissenter and
Appraisal Rights Regulation"), holders of the Utah Federal Common Stock entitled
to vote on approval of the Merger and the Merger Agreement have the right to
dissent from the Merger and, upon consummation of the Merger and the
satisfaction of certain specified procedures and conditions, to receive
9
<PAGE> 17
the fair value of such holders' shares of Utah Federal Common Stock in cash. SEE
"THE MERGER -- Dissenters' Rights" and the text of the Dissenter and Appraisal
Rights Regulation attached to this Proxy Statement/Prospectus as Appendix D.
THE MERGER AGREEMENT
EFFECTIVE DATE AND TIME OF THE MERGER. The Merger will become effective
at the time (the "Effective Time") of the occurrence of the endorsement of the
articles of combination by the OTS, or at such later time after such endorsement
as is specified by the OTS on the endorsement of articles of combination. See
"THE MERGER AGREEMENT -- Effective Date and Time of the Merger."
CONDITIONS TO THE MERGER. The respective obligations of Utah Federal
and Washington Mutual to consummate the Merger are subject to certain
conditions, including the receipt of regulatory approval, approval of the Merger
Agreement by the Utah Federal Shareholders, the receipt of a tax opinion and
certain other conditions customary in a transaction of this nature. See "THE
MERGER AGREEMENT -- Conditions to the Merger" and "THE MERGER -- Regulatory
Approvals."
BREAK-UP FEES. To compensate Utah Federal for certain costs incurred in
anticipation of the Merger and to induce Utah Federal to forego initiating
discussions with other potential acquirors, Washington Mutual has agreed to pay
to Utah Federal $200,000 if Washington Mutual terminates the Merger Agreement
under certain circumstances. To compensate Washington Mutual for certain costs
incurred in anticipation of the Merger and to induce it to forego initiating
discussions regarding other potential acquisitions, Utah Federal has agreed to
pay to Washington Mutual $200,000 if Utah Federal terminates the Merger
Agreement under certain circumstances. See "THE MERGER AGREEMENT -- Break-Up
Fees."
TERMINATION. The Merger Agreement may be terminated, and the Merger
abandoned, at any time before the Effective Time, either before or after its
approval by the Utah Federal Shareholders, by either party if, among other
reasons, the Merger has not become effective by December 31, 1996, unless the
failure of such occurrence is due to the failure of the party seeking
termination to perform its respective covenants and agreements under the Merger
Agreement. See "THE MERGER AGREEMENT -- Termination."
STOCK OPTION AGREEMENT. As a condition to Washington Mutual entering
into the Merger Agreement, Utah Federal and Washington Mutual also entered into
a stock option agreement (the "Stock Option Agreement"), pursuant to which Utah
Federal granted Washington Mutual an option (the "Option") to purchase up to
35,278 authorized and unissued shares of Utah Federal Common Stock (which if
issued, assuming exercise of the outstanding options to acquire up to 3,000
shares of Utah Federal Common Stock, would represent approximately 19.9 percent
of the total issued and outstanding shares of Utah Federal Common Stock) at an
exercise price of $75.61 per share, which was the per share book value of the
Utah Federal Common Stock as of December 31, 1995. The Option is exercisable
only upon the occurrence of certain events (none of which has occurred as of the
date hereof), including without limitation Utah Federal pursuing an acquisition
with an entity other than Washington Mutual. The Stock Option Agreement is
intended to increase the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement and may discourage offers by
other parties to acquire Utah Federal. A copy of the Stock Option Agreement is
attached to this Proxy Statement/Prospectus as Appendix C. See "THE MERGER
AGREEMENT -- Stock Option Agreement."
EXCHANGE OF STOCK CERTIFICATES. Promptly after consummation of the
Merger, an agreed-upon escrow agent (the "Exchange Agent") will mail
instructions to each Utah Federal Shareholder concerning the proper method of
surrendering certificates formerly representing Utah Federal Common Stock in
exchange for the Merger Consideration. UTAH FEDERAL SHAREHOLDERS SHOULD NOT SEND
STOCK CERTIFICATES AT THIS TIME. See "THE MERGER AGREEMENT -- Exchange of Stock
Certificates."
COMPARATIVE RIGHTS OF SHAREHOLDERS
Washington Mutual is a Washington corporation organized under the
Washington Business Corporations Act, RCW Chapter 23B ("WBCA"). Utah Federal is
a federal savings bank operating under OTS regulations. The
10
<PAGE> 18
rights of Utah Federal Shareholders are governed by federal law, OTS regulations
and Utah Federal's Stock Charter and Bylaws. As a federally chartered
institution, Utah Federal is not generally regulated or supervised by the state
of Utah. Upon consummation of the Merger, Utah Federal Shareholders will become
shareholders of Washington Mutual and their rights as shareholders of Washington
Mutual will be governed by the WBCA and the Articles of Incorporation and Bylaws
of Washington Mutual. Certain differences arise from this change of governing
law, as well as the distinctions between Utah Federal's Stock Charter and Bylaws
and the Articles of Incorporation and Bylaws of Washington Mutual. Among other
things, Washington Mutual's Articles of Incorporation include provisions that
generally prohibit certain business combinations with shareholders owning five
percent or more of the voting stock of Washington Mutual except under specified
circumstances. In addition, Washington Mutual has adopted a shareholders' rights
plan that under certain circumstances allows holders of such rights to purchase
an additional share of Washington Mutual Common Stock for each right held. For a
summary of certain differences between the rights of holders of Washington
Mutual Common Stock and holders of Utah Federal Common Stock and an explanation
of certain possible anti-takeover effects of certain provisions in Washington
Mutual's Articles of Incorporation and Bylaws, see "COMPARATIVE RIGHTS OF
SHAREHOLDERS" and "CERTAIN DIFFERENCES BETWEEN WASHINGTON CORPORATE LAW AND OTS
REGULATIONS."
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AND WMBFSB AFTER THE MERGER
Following the Merger, it is expected that the Washington Mutual Board
of Directors (the "Washington Mutual Board") will not change and will continue
as constituted immediately prior to the Merger. From time to time prior to
consummation of the Merger, decisions may be made with respect to the management
and operations of Washington Mutual after the Merger. See "INFORMATION
CONCERNING WASHINGTON MUTUAL" and "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
The Merger Agreement provides for the merger of Utah Federal with and
into WMBfsb, with WMBfsb as the surviving entity. The separate existence of Utah
Federal will cease upon completion of the Merger. The Articles of Incorporation
and Bylaws of WMBfsb will be the Articles of Incorporation and Bylaws of the
surviving entity after the completion of the Merger and the WMBfsb Board of
Directors will be the Board of Directors of the surviving entity after the
completion of the Merger.
RESALES OF WASHINGTON MUTUAL COMMON STOCK
The shares of Washington Mutual Common Stock to be issued to Utah
Federal Shareholders in connection with the Merger have been registered under
the Securities Act. All Washington Mutual Common Stock received by holders of
Utah Federal Common Stock upon consummation of the Merger will be freely
transferable by those shareholders of Utah Federal not deemed to be "affiliates"
of Utah Federal. "Affiliates" are generally defined as persons who control, are
controlled by, or are under common control with Utah Federal at the time of the
Special Meeting (generally, executive officers, directors and certain beneficial
owners). See "THE MERGER -- Resales of Washington Mutual Common Stock by Utah
Federal Shareholders" for a discussion of the limitations on transfer of
Washington Mutual Common Stock held by affiliates of Utah Federal.
11
<PAGE> 19
MARKET PRICES AND DIVIDENDS
Washington Mutual Common Stock is traded on the National Market tier of
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
Washington Mutual Common Stock as reported on The Nasdaq Stock Market, based on
published financial sources, and the dividends declared on such stock.
<TABLE>
<CAPTION>
WASHINGTON MUTUAL
COMMON STOCK
-----------------------------------------
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
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 (through
_____________, 1996)............ _____ _____ 0.22
</TABLE>
On September 23, 1992, Utah Federal converted from a federally
chartered mutual association to a federally chartered stock association through
the issuance of 38,000 shares of preferred stock and 100,000 shares of Utah
Federal Common Stock at the price of $21.00 per share. Since that date, there
has been no established trading market for Utah Federal Common Stock and it has
been subject to only limited trading. Utah Federal Common Stock is not listed or
quoted on any exchange or automated quotation system and no institution makes a
market in the stock. On May 1, 1993, Utah Federal issued 1,000 shares of Utah
Federal Common Stock upon the exercise of stock options at an exercise price of
$21.00 per share. In March 1995, Utah Federal repurchased 1,000 shares of Utah
Federal Common Stock from the former Executive Vice President of Utah Federal at
a price of $40.00 per share and resold all of such shares in November 1995 to
Mr. Miller and Val J. Petersen, the treasurer and controller of Utah Federal, at
a sale price of $40.00 per share. In addition, Utah Federal is aware of twelve
other transactions that occurred between April 13, 1994 and November 30, 1995
which included sales by Mr. Miller to certain executive officers of Utah Federal
and purchases by Mr. Miller of Utah Federal Common Stock from various other
shareholders. Utah Federal believes that all of such transactions were effected
at a sales price of $40.00 per share. To the best knowledge of Utah Federal's
management, other than as described above, there have been no other transactions
in Utah Federal Common Stock since September 1992. The above prices are based
upon the best knowledge of Utah Federal's management and are not necessarily
indicative of the fair market value of the stock at the time of the trade and
may not reflect all trades or the prices of those trades. In January 1994,
January 1995 and January 1996, Utah Federal paid dividends of $0.60, $0.60 and
$0.80 per share, respectively, on the Utah Federal Common Stock. In addition, in
each quarter for each of the past two fiscal years, Utah Federal paid a seven
percent dividend (approximately $14,000 per quarter) on its preferred stock. In
February 1996, all outstanding shares of preferred stock of Utah Federal were
converted on a one-for-one basis into shares of Utah Federal Common Stock.
The following table sets forth (i) the last reported sale price per
share of Washington Mutual Common Stock on February 28, 1996, the last full
trading day before the execution and delivery of the Merger Agreement and the
public announcement thereof, and on _____________, 1996, the most recent date
for which it was practicable to obtain market price data prior to the mailing of
this Proxy Statement/Prospectus, (ii) the sales price per share of Utah Federal
Common Stock on the last transaction reported on Utah Federal's stock transfer
books prior to February 28, 1996, and prior to ________________, 1996, (iii) the
hypothetical Average Price of Washington Mutual Common Stock computed as if the
Effective Date were each of such dates and (iv) the value of Merger
Consideration received for a share of Utah Federal Common Stock, without making
any adjustments to the Merger Consideration.
12
<PAGE> 20
<TABLE>
<CAPTION>
Hypothetical
WASHINGTON Utah Average Price of
MUTUAL Federal Washington
COMMON Common Mutual Merger
STOCK Stock Common Stock Consideration
----- ----- ------------ -------------
<S> <C> <C> <C> <C>
Market Value Per Share at:
February 28, 1996 $30.75 $40.00 $31.35 $105.63
___________, 1996 $_________ $______ $________ $105.63
</TABLE>
No assurance can be given as to what the Average Price will be or as to
what the market price of Washington Mutual Common Stock will be at the time the
Merger is consummated. Utah Federal Shareholders are encouraged to obtain
current market quotations for shares of Washington Mutual Common Stock. In
addition, Utah Federal currently anticipates that, pursuant to the Merger
Agreement, the Merger Consideration will be decreased by up to $0.35 per share
because Utah Federal's transaction fees incurred in connection with the Merger
are expected to exceed $150,000. See "THE MERGER -- General" and "THE MERGER
AGREEMENT -- Expenses."
On March 31, 1996, there were approximately 15,630 shareholders of
record of Washington Mutual Common Stock. As of the Record Date, there were
approximately 47 shareholders of record of Utah Federal Common Stock. See
"COMPARATIVE RIGHTS OF SHAREHOLDERS -- Authorized Capital."
COMPARATIVE PER SHARE DATA
The following table sets forth for Washington Mutual Common Stock and
Utah Federal Common Stock certain historical, unaudited pro forma and unaudited
pro forma equivalent per share financial information for the years ended
December 31, 1993, 1994, and 1995 and for the three months ended March 31, 1996.
The information presented herein should be read in conjunction with the
financial information of Washington Mutual and Utah Federal appearing elsewhere
in this Proxy Statement/Prospectus and incorporated herein by reference. See
"SELECTED HISTORICAL FINANCIAL DATA," "INFORMATION CONCERNING WASHINGTON
MUTUAL," "INFORMATION CONCERNING UTAH FEDERAL," "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "APPENDIX E -- FINANCIAL STATEMENTS OF UTAH
FEDERAL." The pro forma and pro forma equivalent per share data in the following
table are presented for comparative purposes only and are not necessarily
indicative of the combined financial position or results of operations in the
future or what the combined financial position or results of operations would
have been had the Merger been consummated during the period or as of the date
for which this pro forma table is presented.
The pro forma and pro forma equivalent per share data reflect the
combined results of Washington Mutual and Utah Federal, after giving effect to
the Merger under the pooling-of-interests accounting method and assumes an
Exchange Ratio of 3.6581. The pro forma and pro forma equivalent per share data
for each of the three years ended December 31, 1993, 1994 and 1995 and the three
month ended March 31, 1996 would not be materially different if the Merger were
treated as a purchase for accounting purposes.
13
<PAGE> 21
<TABLE>
<CAPTION>
For the Three Months
For the Year Ended December 31, Ended March 31,
------------------------------- --------------------
1993 1994 1995 1996
------------------------------- --------------------
WASHINGTON MUTUAL (unaudited) (unaudited)
COMMON STOCK (1)
<S> <C> <C> <C> <C>
Net income per fully diluted share:
Historical .................... $ 2.57 $ 2.38 $ 2.51 $ 0.74
Pro forma ..................... 2.57 2.38 2.51 0.74
Dividends per share:
Historical .................... 0.50 0.70 0.77 0.21
Pro forma ..................... 0.50 0.70 0.77 0.21
Book value per share at period-end:
Historical .................... 15.87 16.98 19.97 19.78
Pro forma ..................... 15.87 16.99 19.97 19.79
UTAH FEDERAL COMMON STOCK
Net income per fully diluted share:
Historical .................... 7.55 8.52 8.82 2.35
Pro forma equivalent (2) ...... 9.40 8.71 9.18 2.71
Dividends per share:
Historical .................... 0.00 0.60 0.60 0.58
Pro forma equivalent (2) ...... 1.83 2.56 2.82 0.77
Book value per share at period-end:
Historical .................... 58.26 65.91 75.58 77.92
Pro forma equivalent (2) ..... 58.06 62.15 73.05 72.40
</TABLE>
- ----------------
(1) Washington Mutual's acquisition of Summit Bancorp, Inc. on November 14,
1994, Olympus Capital Corporation on April 28, 1995, Enterprise Bank on
August 31, 1995, and Western Bank on January 31, 1996, were each
accounted for as a pooling-of-interests. Washington Mutual has restated
the financial statements and other financial information presented in
this Proxy Statement/Prospectus and Form 10-Q for periods prior to the
date of the Western Bank acquisition.
(2) The Utah Federal pro forma equivalent per share amounts are calculated
by multiplying the Washington Mutual pro forma per share amounts by an
exchange ratio of 3.6581. This exchange ratio is based on a Washington
Mutual Common Stock price of $28.875 per share, the closing price on
May 20, 1996.
14
<PAGE> 22
SELECTED HISTORICAL FINANCIAL DATA
Summary Consolidated Financial Data of Washington Mutual
The following table presents certain historical consolidated financial
data for Washington Mutual. This table is based upon and should be read in
conjunction with the Consolidated Financial Statements of Washington Mutual and
the notes thereto, which are incorporated herein by reference, and the
information included herein regarding Washington Mutual's recent performance.
The financial information contained herein and in the Form 10-Q have been
restated to take into account the acquisition of Western Bank on January 31,
1996 for periods prior to the date of such acquisition. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION CONCERNING WASHINGTON MUTUAL."
Additionally, all per common share information has been adjusted for two 50
percent stock dividends paid on February 14, 1992, and August 13, 1993, each of
which had the effect of a three-for-two stock split. Because of the significant
increase in Washington Mutual's size as a result of the acquisition of Pacific
First Bank and Pioneer Savings Bank early in 1993, the financial results for the
years ended and as of December 31, 1993, 1994 and 1995, are not generally
comparable to prior periods or dates. Because the financial information has been
restated to take into account the acquisition of Western Bank, all information
presented below is unaudited and reflects all adjustments that are, in the
opinion of Washington Mutual management, necessary for a fair statement of the
results for the periods presented. The information as of March 31, 1996 and for
the three-month periods ended March 31, 1995 and 1996 is not necessarily
indicative of the operating results for the entire year.
<TABLE>
<CAPTION>
For the Three Months
For the Year Ended December 31, Ended March 31,
--------------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1996 1995
--------------------------------------------------------------------- ------------------------
(in thousands, except as per share amounts) (unaudited)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARIZED STATEMENTS
OF INCOME:
Net interest income.......... $257,791 $357,017 $560,559 $606,679 $618,236 $170,972 $149,073
Provision for loan losses ... 22,407 14,887 35,225 20,400 11,150 2,912 2,800
Other income................. 101,317 97,509 152,575 118,502 117,874 36,698 28,855
Other expense................ 204,130 252,785 394,874 415,300 417,655 110,005 103,081
Income taxes................. 45,920 64,459 98,864 108,159 107,504 35,224 26,797
Extraordinary items, net of
federal income tax effect... -- (4,638) (8,953) -- -- -- --
Cumulative effect of change
in tax accounting method.... -- -- 13,365 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income .................. $ 86,651 $117,757 $188,583 $181,322 $199,801 $59,529 $45,250
======== ======== ======== ======== ======== ======= =======
Net income attributable
to common stock............. $ 81,776 $112,882 $175,025 $162,738 $181,217 $54,924 $40,604
======== ======== ======== ======== ======== ======= =======
Net income per share:
Primary..................... $1.61 $1.95 $2.70 $2.45 $2.59 $0.76 $0.60
Fully diluted............... 1.52 1.85 2.57 2.38 2.51 0.74 0.58
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
----------------------------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1996 1995
----------------------------------------------------------------------- --------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARIZED STATEMENTS
OF FINANCIAL POSITION:
Total assets............... $8,529,135 $10,531,744 $16,513,432 $19,175,991 $22,420,379 $22,344,769 $19,855,863
Loans...................... 5,526,541 7,035,586 11,267,713 12,845,203 13,035,250 13,562,058 12,990,863
Trading, investment and
mortgage-backed securities 2,526,653 2,809,057 4,210,173 5,348,565 7,941,139 7,610,838 5,839,522
Deposits................... 5,910,396 6,624,584 9,976,961 10,432,888 11,306,436 11,275,508 10,614,749
Borrowings (includes
annuities)................ 1,806,986 2,735,696 5,050,645 7,212,037 9,186,975 9,188,612 7,574,645
Stockholders' equity....... 694,134 1,045,289 1,252,888 1,364,258 1,660,084 1,649,879 1,420,344
</TABLE>
- --------------------
15
<PAGE> 23
OTHER FINANCIAL DATA (1):
<TABLE>
<CAPTION>
For the Three Months
For the Year Ended December 31, Ended March 31,
------------------------------------------------------ -----------------------------
1991 1992 1993 1994 1995 1996 1995
------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets............ 10.06% 9.20% 8.00% 7.58% 8.02% 7.91% 7.94%
Cost of deposits and
borrowings....................... 6.97 5.41 4.00 4.10 5.08 4.86 5.00
Net interest spread................ 3.09 3.79 4.00 3.48 2.94 3.05 2.94
Net interest margin................ 3.34 4.04 4.15 3.65 3.11 3.26 3.15
Operating efficiency
ratio (2)........................ 56.84 55.64 55.37 57.27 56.74 52.97 57.93
Return on average assets........... 1.05 1.24 1.31 1.03 0.97 1.08 0.94
Return on average
stockholders' equity............. 14.33 15.26 16.89 13.77 13.31 14.37 13.25
Ratios of combined
earnings to fixed charges (3):
Excluding interest on
deposits......................... 1.86 2.41 2.70 2.03 1.66 1.69 1.78
Including interest on
deposits......................... 1.25 1.41 1.54 1.44 1.32 1.33 1.39
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------------------------------ --------------------------
1991 1992 1993 1994 1995 1996 1995
------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as
a percentage of total assets..... 1.58% 1.27% 0.68% 0.42% 0.42% 0.42% 0.42%
Loan loss reserves/total
loans............................ 1.01 0.83 1.06 1.03 1.10 1.05 1.03
Loan loss reserves/
nonperforming assets............. 41.39 43.46 105.89 164.08 151.23 150.59 161.32
</TABLE>
- --------------------
(1) Where appropriate, calculations for the three-month periods are
annualized.
(2) Other expense divided by operating income (net interest income plus
other income).
(3) The ratios of combined earnings to fixed charges have been computed by
dividing net earnings (earnings before income tax expense) plus fixed
charges by fixed charges. Fixed charges represent interest expense on
other borrowings and, if indicated, interest expense on deposits.
16
<PAGE> 24
CONDENSED CONSOLIDATED FINANCIAL DATA OF UTAH FEDERAL
The following table sets forth certain condensed historical financial
data of Utah Federal and is based upon and should be read in conjunction with
the Consolidated Financial Statements of Utah Federal, including the respective
notes thereto, and the information herein regarding Utah Federal's recent
performance. The information for the six-month periods ended March 31, 1995 and
1996 is unaudited and reflects all adjustments that are, in the opinion of Utah
Federal management, necessary for a fair statement of results for the periods
presented and is not necessarily indicative of the operating results for the
entire year. See "INFORMATION CONCERNING UTAH FEDERAL" and "APPENDIX E --
FINANCIAL STATEMENTS OF UTAH FEDERAL BANK."
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended September 30, Ended March 31,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1996 1995
------------------------------------------------- ------------------
(in thousands, except for share amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Interest income ............... $ 12,760 $ 11,240 $ 10,055 $ 8,672 $ 10,002 $ 5,556 $ 4,644
Interest expense .............. 9,693 7,424 5,685 4,896 5,110 2,838 2,427
-------- -------- -------- -------- -------- -------- --------
Net interest income ........... 3,066 3,816 4,370 3,776 4,892 2,718 2,217
Provision for losses on
loans ....................... 927 361 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses ... 2,139 3,455 4,370 3,776 4,892 2,718 2,217
Other income .................. 778 962 1,060 1,103 917 543 453
Other expenses ................ 3,147 3,413 3,475 3,576 4,066 2,056 1,975
Provision for losses on REO ... 1,128 569 127 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before
federal income taxes ........ (1,358) 435 1,828 1,302 1,743 1,205 695
Federal income taxes .......... (97) 348 762 167 373 458 248
-------- -------- -------- -------- -------- -------- --------
Net income .................... $ (1,261) $ 87 $ 1,066 $ 1,135 $ 1,370 $ 747 $ 447
======== ======== ======== ======== ======== ======== ========
Cash dividends declared,
including preferred ......... $ -- $ 1 $ 56 $ 116 $ 116 $ 95 $ 88
PER SHARE DATA:
Net income per common share:
Primary ..................... $ -- $ 0.97 $ 10.66 $ 11.35 $ 13.65 $ 7.40 $ 4.47
Fully diluted ............... -- 0.70 7.72 8.22 9.85 5.37 3.24
Cash dividends declared
per common share (1) ........ -- -- 0.41 0.84 0.83 0.78 0.64
Book value per
common share (2) ............ -- 49.85 57.26 64.54 73.24 77.92 67.13
Average common shares
and common stock
equivalents outstanding (2) . -- 138,000 138,000 138,000 139,000 139,000 138,000
</TABLE>
(1) Includes dividends paid on outstanding shares of preferred stock of
Utah Federal, which shares of preferred stock were converted on a
one-for-one basis into shares of Utah Federal Common Stock in February
1995.
(2) Includes outstanding shares of preferred stock of Utah Federal
converted on a one-for-one basis into shares of Utah Federal Common
Stock in February 1996.
17
<PAGE> 25
STATEMENT OF FINANCIAL
CONDITION DATA:
<TABLE>
<CAPTION>
As of September 30, As of March 31,
------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1996 1995
------------------------------------------------ ----------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets................................... $132,565 $126,593 $127,392 $119,464 $123,935 $123,231 $118,261
Loans receivable, net.................... 104,651 94,420 75,753 68,515 86,769 82,460 75,150
Investment securities.................... 10,088 7,594 21,706 29,660 24,229 19,671 27,447
Cash and interest bearing funds.......... 5,288 15,835 23,167 14,904 5,301 12,965 8,317
Total deposits........................... 114,976 111,224 112,609 106,765 108,990 110,257 106,559
Borrowings............................... 9,894 5,322 3,183 1,100 2,389 27 48
Shareholders' equity..................... 4,137 6,879 7,902 8,906 10,180 10,831 9,264
</TABLE>
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended September 30, Ended March 31,
-------------------------------------- -------------------
1991 1992 1993 1994 1995 1996 1995
-------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets......................... 9.95% 9.19% 8.36% 7.03% 8.03% 8.41% 7.81%
Cost of deposits and borrowings................. 7.48 6.17 5.00 4.43 4.71 5.17 4.52
Net interest spread............................. 2.47 3.02 3.36 2.60 3.32 3.24 3.29
Return on average assets........................ (0.95) 0.07 0.84 0.92 1.13 1.21 0.75
Return on average stockholders' equity.......... (26.45) 1.59 14.42 13.50 14.35 14.23 9.83
</TABLE>
<TABLE>
<CAPTION>
As of September 30, As of March 31,
--------------------------------------- -------------------
1991 1992 1993 1994 1995 1996 1995
--------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a percentage
of total assets.............................. 8.18% 3.82% 2.52% 1.86% 0.69% 1.35% 1.10%
Loan loss reserve to total loans................ 1.38 1.59 2.24 2.38 1.95 1.96 2.16
Loan loss reserve to nonperforming assets....... 13.46 31.51 52.35 75.37 193.71 99.34 127.52
Total risk-based capital ratio.................. 5.96 10.66 14.06 17.19 16.35 16.67 16.55
</TABLE>
18
<PAGE> 26
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to Utah Federal
Shareholders in connection with the solicitation of proxies by the Utah Federal
Board for use at the Special Meeting to be held at ________ a.m. local time on
________________, 1996, at the corporate headquarters of Utah Federal located at
2279 Washington Blvd., Ogden, Utah, and at any adjournments or postponements
thereof for the purposes set forth herein.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
As more fully described in this Proxy Statement/Prospectus, the purpose
of the Special Meeting is to consider and vote upon a proposal to approve the
Merger Agreement, pursuant to which Utah Federal will be merged with and into
WMBfsb with WMBfsb as the surviving entity. See "THE MERGER".
RECORD DATE AND VOTING
The Utah Federal Board has fixed the close of business on May 16, 1996
as the Record Date for the determination of holders of Utah Federal Common Stock
entitled to receive notice of and to vote at the Special Meeting. On the Record
Date, 139,000 shares of Utah Federal Common Stock were outstanding and entitled
to vote, which were held by approximately 47 holders of record. Utah Federal
Shareholders will be entitled to one vote, exercisable in person or by properly
executed proxy, for each share of Utah Federal Common Stock held of record at
the close of business on the Record Date on the proposal described herein and on
any other matter that may be presented for consideration and action by the Utah
Federal Shareholders at the Special Meeting.
QUORUM; VOTES REQUIRED
The presence, in person or by proxy, of holders of at least a majority
of the shares of Utah Federal Common Stock outstanding on the Record Date is
necessary to constitute a quorum at the Special Meeting. Abstentions and broker
non-votes will be considered as shares present for purposes of determining the
presence of a quorum. The approval of the Merger will require the affirmative
vote of the holders of two-thirds of the outstanding shares of Utah Federal
Common Stock entitled to vote thereon. Accordingly, a failure to submit a proxy
(or to vote in person at the Special Meeting) or an abstention by a Utah Federal
Shareholder, or a broker non-vote will have the same effect as a "NO" vote with
respect to the vote on the Merger.
As of the Record Date, Utah Federal directors and executive officers
beneficially owned an aggregate of 134,919 shares of Utah Federal Common Stock
(excluding 3,000 shares issuable upon the exercise of outstanding options) or
approximately 97.06 percent of the shares of Utah Federal Common Stock
outstanding on such date. Mr. Miller, a Director and Chairman of the Board of
Utah Federal, individually beneficially owns 131,609 shares of Utah Federal
Common Stock, representing approximately 94.68 percent of the outstanding shares
of Utah Federal Common Stock. All of such Utah Federal directors and executive
officers have entered into letter agreements with Washington Mutual and WMBfsb
pursuant to which, among other things, each such person agreed to vote all
shares of Utah Federal Common Stock held by such person in favor of the Merger.
See "THE MERGER -- Affiliate Letters."
VOTING AND REVOCATION OF PROXIES
Shares of Utah Federal Common Stock represented by a proxy properly
returned, completed, dated and signed will be voted at the Special Meeting in
accordance with the instructions thereon. If a Utah Federal Shareholder returns
a signed proxy without indicating any voting instructions, the shares
represented by the proxy will be voted FOR approval of the Merger. Any Utah
Federal Shareholder who signs and returns a proxy may revoke such proxy at any
time before the proxy is voted by: (i) filing with the Secretary of Utah Federal
a written instrument revoking the proxy, (ii) submitting to the Secretary of
Utah Federal a new proxy bearing a later date, or (iii) voting in person at the
Special Meeting. Attendance at the Special Meeting will not in and of itself
constitute
19
<PAGE> 27
a revocation of a proxy. All written instruments of revocation and other
communications with respect to revocation of proxies should be addressed as
follows: Utah Federal Savings Bank, 2279 Washington Blvd., Ogden, Utah 84402,
Attention: Georgia S. Goodell.
As of the date of this Proxy Statement/Prospectus, the Utah Federal
Board is not aware of any business to be acted on at the Special Meeting other
than as described herein. If, however, any other matters properly come before
the Special Meeting, including, among other things, consideration of a motion to
adjourn or postpone the Special Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the proxy
also confers discretionary authority on the persons named as proxies to vote
upon such matters.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers, and employees
of Utah Federal (who will not be specially compensated for such services) may
solicit proxies, personally or by telephone, telegram or other forms of
communication. Brokerage houses, nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy material to
beneficial owners. Utah Federal will bear its own expenses in connection with
the solicitation of proxies for the Special Meeting. See "THE MERGER AGREEMENT
- -- Expenses."
UTAH FEDERAL SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO UTAH FEDERAL IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
UTAH FEDERAL SHAREHOLDERS SHOULD NOT SEND ANY
STOCK CERTIFICATES WITH THEIR PROXIES
THE MERGER
The following information, insofar as it relates to matters contained
in the Merger Agreement or the Stock Option Agreement, is qualified in its
entirety by reference to the Merger Agreement and the Stock Option Agreement,
which are incorporated herein by reference and attached hereto as Appendix A and
Appendix C, respectively. UTAH FEDERAL SHAREHOLDERS ARE URGED TO READ THE MERGER
AGREEMENT, THE CFA OPINION, THE STOCK OPTION AGREEMENT AND THE OTHER APPENDICES
IN THEIR ENTIRETY.
GENERAL
The Merger Agreement provides for the merger of Utah Federal with and
into WMBfsb, with WMBfsb as the surviving entity. The separate existence of Utah
Federal will cease upon completion of the Merger. The Articles of Incorporation
and Bylaws of WMBfsb will continue to be the Articles of Incorporation and
Bylaws of the surviving entity after the completion of the Merger and the WMBfsb
Board of Directors will continue to be the Board of Directors of the surviving
entity after the completion of the Merger.
Upon consummation of the Merger, all shares of Utah Federal Common
Stock will automatically be canceled and retired and will cease to exist. Each
holder of a certificate representing any shares of Utah Federal Common Stock
will cease to have any rights with respect thereto, except the right to receive
shares of Washington Mutual Common Stock to be issued upon the surrender of such
certificate, or the right of dissenting Utah Federal Shareholders to receive
fair value for their shares of Utah Federal Common Stock, under certain
circumstances. See "THE MERGER -- Dissenters' Rights."
At the Effective Time, each outstanding share of Utah Federal Common
Stock will be converted into the right to receive $105.63 per share, subject to
adjustment as described herein, in newly issued shares of Washington Mutual
Common Stock. Pursuant to the Merger Agreement, if the amount of all costs and
expenses of third parties paid or owed by Utah Federal in connection with the
Merger Agreement and the consummation of the Merger
20
<PAGE> 28
exceed $150,000, then the Merger Consideration will be reduced by the amount of
such excess divided by the number of shares of Utah Federal Common Stock
outstanding at the Effective Date. Utah Federal currently expects that its
transaction fees for the Merger will range from $175,000 to $200,000, resulting
in a downward adjustment to the Merger Consideration of up to $0.35 per share.
The per share value of Washington Mutual Common Stock for purposes of
determining the number of shares of Washington Mutual Common Stock to be
received in the Merger is based upon the arithmetic average of the closing
prices of Washington Mutual Common Stock on The Nasdaq Stock Market for the ten
trading days immediately preceding the third trading day before the Effective
Date. The Exchange Ratio for determining the number of shares of Washington
Mutual Common Stock to be issued for each share of Utah Federal Common Stock
will be the Merger Consideration divided by the Average Price.
The number of shares of Washington Mutual Common Stock to be received
upon conversion of the shares of Utah Federal Common Stock in the Merger will be
subject to further adjustment in certain circumstances, as follows: (i) if prior
to the third trading day before the Effective Time the shares of Washington
Mutual Common Stock are changed into a different number of shares by reason of
any recapitalization, split-up, combination or exchange of shares, or if a stock
dividend on such shares is declared with a record date within such period, then
the Average Price will be adjusted accordingly; or (ii) if immediately prior to
the Effective Time any options to acquire Utah Federal Common Stock or related
SARs remain in effect and unexercised, then the per share Merger Consideration
will be increased by an amount equal to (A) the product of the (w) Merger
Consideration and (x) the number of unexercised options or related share
appreciation rights in effect and unexercised immediately prior to the Effective
Time, divided by (B) the difference between (y) 142,000 and (z) the number of
unexercised options or related stock appreciation rights in effect and
unexercised immediately prior to the Effective Time.
No certificates for fractional shares of Washington Mutual Common Stock
will be issued as a result of the Merger. Instead, each Utah Federal Shareholder
otherwise entitled to a fractional share will receive the cash value of such
fractional share in an amount equal to the fraction multiplied by the Average
Price.
BACKGROUND OF THE MERGER
The Utah Federal Board has been cognizant of increasing levels of
competition in the financial services business and the significant consolidation
that has been occurring among the providers of banking services in Utah
Federal's banking market and throughout the United States, in general. Utah
Federal is and has been aware that larger entities that result from such
consolidations may acquire substantial competitive advantages, including greater
diversity in their loan portfolios, improved access to capital and funding and
the ability to spread costs of new products, services and research and
development over a wider customer base.
In October 1995, Stephen M. Klein, an attorney in Seattle, Washington
who had represented Utah Federal in various matters, contacted L. Brent Hoggan,
Utah Federal's Executive Vice President, and inquired as to whether Utah Federal
would be interested in being acquired. Mr. Klein indicated to Mr. Hoggan that
Washington Mutual had recently acquired various banking institutions, including
a Utah-based savings bank and advised Mr. Hoggan that Washington Mutual might be
interested in expanding its presence in the Northern Utah banking market.
Following that conversation, Mr. Klein sent Mr. Hoggan a package of
publicly-available information on Washington Mutual for his review and
consideration. Prior to Mr. Klein's contact with Mr. Hoggan, Mr. Klein had a
general conversation with Washington Mutual concerning its interest in expanding
its presence in Utah, but no specific reference to Utah Federal was made during
that conversation.
Mr. Hoggan conveyed Mr. Klein's inquiry and the information package to
Ernest J. Miller, the Chairman of the Board of Utah Federal and its principal
shareholder. After considering the possibility of a merger of Utah Federal with
Washington Mutual, doing some independent investigation of Washington Mutual and
consulting with his personal financial advisors, Mr. Miller directed Mr. Hoggan
to indicate to Mr. Klein an interest in an acquisition at a price for Utah
Federal of not less than $15 million, provided that the acquisition could be
structured as a tax-free exchange of Utah Federal Common Stock for Washington
Mutual Common Stock. Mr. Klein then contacted Craig E. Tall, an Executive Vice
President of Washington Mutual, to convey Utah Federal's interest in a possible
acquisition by Washington Mutual.
21
<PAGE> 29
On December 15, 1995, Messrs. Klein and Hoggan, and John E. Clay and
Steven Thunell, members of Utah Federal's Board, met with Mr. Tall in Salt Lake
City, Utah, to discuss the terms and timing of a possible merger transaction. At
this meeting, certain terms of the transaction, including a price of $15
million, were discussed and it was agreed that the matters discussed would be
presented to the Washington Mutual and Utah Federal Boards of Directors for
their consideration.
After the December 15, 1995 meeting, through further correspondence and
conversations between Mr. Tall and Mr. Klein, certain other terms of the
potential transaction were discussed.
The Utah Federal Board met in Ogden, Utah for a special meeting on
January 4, 1996 to consider whether the proposed merger would be in the best
interest of Utah Federal and its shareholders. At the special meeting, the Utah
Federal Board considered the financial strength of Washington Mutual, the fact
that it was a publicly traded company, and the fact that Washington Mutual would
provide a broader range of financial services to Utah Federal's customers than
presently offered. The Utah Federal Board also considered the fact that Utah
Federal's shareholders could not readily sell their shares and that the exchange
of Utah Federal shares for shares in Washington Mutual would result in the
shareholders obtaining a liquid stock in a more diversified and growing
financial services company. At the conclusion of the January 4, 1996 special
meeting, the Utah Federal Board unanimously adopted a resolution to permit
Washington Mutual to conduct a due diligence review of Utah Federal and its
operations. In that resolution, the Utah Federal Board further authorized
Messrs. Hoggan, Clay and Thunell (in the event that after its due diligence
review, Washington Mutual desired to proceed with the merger) to seek a
qualified financial advisor to provide a fairness opinion on the proposed
transaction and to assist in negotiating a definitive agreement with Washington
Mutual for presentation to and consideration by the Utah Federal Board. Pursuant
to such resolution, it was determined by Messrs. Clay, Thunell and Hoggan that
CFA, an investment banking company qualified to provide a fairness opinion on
the proposed transaction, would be retained for this purpose.
Washington Mutual conducted a due diligence review of Utah Federal
during January 1996. Simultaneously, the parties negotiated the terms of the
Merger Agreement and related documents. On February 1, 1996, Michael R. Garrett,
Utah Federal's President, and Messrs. Miller, Hoggan, Clay and legal counsel for
Utah Federal met with representatives of and legal counsel for Washington
Mutual. At this meeting, held in Seattle, the draft Merger Agreement was
discussed at length and various points were negotiated.
Following the meeting of February 1, 1996, revised drafts of the Merger
Agreement were circulated. A substantially final draft was presented to the Utah
Federal Board in its meeting on February 21, 1996. Members of the Utah Federal
Board were informed that Washington Mutual conditioned its offer to acquire Utah
Federal on, among other things, (i) receipt of an irrevocable option for
Washington Mutual to acquire from Utah Federal shares representing 19.9 percent
of the then outstanding Utah Federal Common Stock, exercisable under certain
circumstances, (ii) receipt of a mutual break-up fee of $200,000 upon
termination of the transaction under certain circumstances, and (iii) the
agreement of the directors, executive officers and certain shareholders of Utah
Federal to vote in favor of the transaction and take certain actions intended to
preserve the desired accounting treatment of the Merger. Utah Federal's legal
counsel conducted a detailed review of the transaction documents and related
issues. At this meeting, a representative of CFA made an oral presentation and
delivered a written opinion to the Utah Federal Board that the terms of the
Merger Agreement were fair from a financial point of view to Utah Federal's
shareholders.
After discussing the terms of the Merger Agreement, considering the
advise of its legal counsel and receiving the oral and written fairness opinion
of CFA, the Utah Federal Board concluded that the Merger would be in the best
interests of Utah Federal and its shareholders and unanimously adopted a
resolution approving the Merger Agreement and related documents. The Utah
Federal Board also authorized execution of the Merger Agreement and, directed
that Utah Federal proceed in conjunction with Washington Mutual's
representatives to seek necessary regulatory approval of the proposed
transaction and further, that the Merger Agreement be submitted to the
shareholders of Utah Federal for their approval, subject to a final fairness
opinion from CFA.
On February 21, 1996, and as updated on the date of this Proxy
Statement/Prospectus, CFA delivered a written opinion that the Merger
Consideration to be received by holders of Utah Federal Common Stock pursuant
22
<PAGE> 30
to the Merger Agreement is fair, from a financial point of view, to Utah
Federal's shareholders. A copy of the CFA Opinion is included as Appendix A
hereto.
The Merger Agreement is the result of arm's length negotiations between
Utah Federal and Washington Mutual. There is no affiliation between any of the
directors and officers of the respective entities.
REASONS FOR THE MERGER; RECOMMENDATION OF THE UTAH FEDERAL BOARD
The Utah Federal Board has carefully considered the terms of the Merger
Agreement, unanimously approved it as being in the best interests of Utah
Federal and its shareholders, and recommends that Utah Federal Shareholders vote
FOR the proposal to approve the Merger Agreement.
At its meeting on February 21, 1996, the Utah Federal Board unanimously
determined that the Merger was fair to, and in the best interests of, Utah
Federal's shareholders and recommended that the Merger Agreement be submitted to
the Utah Federal Shareholders for their approval. In making this determination,
the Utah Federal Board considered a variety of factors, including (i) the value
of the Washington Mutual Common Stock that Utah Federal's shareholders would
receive in exchange for their shares of Utah Federal Common Stock and other
terms of the Merger Agreement; (ii) the benefits expected to result from the
Merger based on a consideration of the financial condition, results of operation
and prospects of Washington Mutual and Utah Federal, both on a stand-alone and
on a combined basis; (iii) the Utah Federal Board's view of the relative merits
of other opportunities presented to it or that it believed would be available
(including the possibility of remaining independent); (iv) the liquidity that
Utah Federal's shareholders would enjoy upon converting their Utah Federal
Common Stock into publicly traded shares of Washington Mutual Common Stock; (v)
Utah Federal's ability to continue to provide competitive and comprehensive
services in the markets in which it operates; (vi) the parties' shared belief in
community banking, which emphasizes responsiveness to local markets and the
delivery of personalized services to customers, and (vii) the fairness opinion
of CFA.
In the course of reaching its determination to approve the Merger
Agreement, the Utah Federal Board consulted with legal counsel with respect to
the legal duties of the Utah Federal Board, the terms of the Merger Agreement
and the issues related thereto; with its financial advisor with respect to the
financial aspects and fairness of the transaction; and with senior management
regarding, among other things, operational and due diligence matters. In
addition to the overall objectives, discussed above, of enhancing shareholder
value and providing high-quality community banking services, the Utah Federal
Board considered a number of other specific factors, including the following:
- Utah Federal's shareholders would receive a premium over the
price per share of Utah Federal Common Stock at which
individual trades have occurred in the recent past;
- Washington Mutual Common Stock is a publicly-traded stock,
thus the Merger would create liquidity for Utah Federal
Shareholders;
- The Merger would permit Utah Federal's shareholders, on a
tax-free basis, to invest in a larger, more diversified
banking organization;
- The combined entity would have a stronger financial condition,
businesses and prospects and an enhanced ability to compete in
the markets it serves;
- The Merger would allow customers to receive certain additional
services that are currently not provided; and
- The combined organization would enable customers to have
access to larger loans due to higher legal lending limits.
The Utah Federal Board did not ascribe relative or specific weights to any
factor in its evaluation of the Merger.
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In considering the recommendation of the Utah Federal Board, Utah
Federal Shareholders should be aware that certain directors and executive
officers of Utah Federal may be deemed to have interests in the Merger in
addition to their interests, if any, as Utah Federal Shareholders. As of the
Record Date, directors and executive officers of Utah Federal beneficially
owned, in the aggregate, 134,919 (approximately 97.06 percent of the outstanding
shares of Utah Federal Common Stock) and one executive officer holds exercisable
options to purchase an additional 3,000 shares of Utah Federal Common Stock at
an exercise price of $21.00. One of the directors of Utah Federal individually
beneficially owned 131,609 shares of Utah Federal Common Stock, representing
approximately 94.68 percent of the outstanding shares of Utah Federal Common
Stock. Assuming that the options held by the executive officer are exercised
prior to the Merger, the directors and executive officers of Utah Federal would
own, in the aggregate, approximately 97.13 percent of the outstanding shares of
Utah Federal Common Stock prior to the Merger, or less than one percent of the
outstanding shares of Washington Mutual Common Stock after the Merger.
Additionally, Washington Mutual has agreed to indemnify the current and former
directors, officers and employees of Utah Federal for acts or omissions
occurring prior to the Effective Date. In addition, Mr. Garrett has accepted an
offer of employment with WMBfsb as a mortgage production manager and vice
president upon consummation of the Merger. See "THE MERGER -- Interest of
Certain Persons in the Merger" and "THE MERGER AGREEMENT -- Effect on Employee
Benefit Plans and Stock Plans."
OPINION OF FINANCIAL ADVISOR
CFA has delivered a written opinion to the Utah Federal Board to the
effect that, as of February 21, 1996 and updated as of the date of this Proxy
Statement/Prospectus, the consideration to be received by Utah Federal
Shareholders pursuant to the terms of the Merger Agreement is fair to such
shareholders from a financial point of view. The Merger Consideration was
determined by Utah Federal and Washington Mutual through negotiations. The CFA
Opinion is directed only to the fairness, from a financial point of view, of the
Merger Consideration to be received by Utah Federal Shareholders and does not
constitute a recommendation to any Utah Federal Shareholder as to how such
shareholder should vote at the Special Meeting.
Utah Federal retained CFA as its exclusive financial advisor pursuant
to an engagement letter dated February 21, 1996 (the "Engagement Letter") in
connection with the Merger. CFA is a regionally recognized investment banking
firm that is regularly engaged in the valuation of business and securities in
connection with mergers and acquisitions. The Utah Federal Board selected CFA to
act as Utah Federal's exclusive financial advisor based on CFA's experience in
mergers and acquisitions and in securities valuation generally.
CFA issued its opinion to the Utah Federal Board on February 21, 1996
and as updated as of the date of this Proxy Statement/Prospectus that, in its
opinion as investment bankers, the Merger Consideration to be received by Utah
Federal Shareholders pursuant to the terms of the Merger Agreement is fair, from
a financial point of view, to Utah Federal and its shareholders. THE FULL TEXT
OF THE CFA OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED,
AND LIMITS ON ITS REVIEW, IS ATTACHED HERETO AS APPENDIX B. THE SUMMARY OF THE
CFA OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. UTAH FEDERAL SHAREHOLDERS ARE URGED
TO READ THE ENTIRE CFA OPINION.
In rendering its opinion to Utah Federal, CFA reviewed, among other
things, historical financial data of Utah Federal, certain internal financial
data and assumptions of Utah Federal prepared for financial planning and
budgeting purposes furnished by the management of Utah Federal and, to the
extent publicly available, the financial terms of certain change of control
transactions involving community banks in the Western U.S. CFA discussed with
Utah Federal's management the financial condition, current operating results,
and business outlook for Utah Federal. CFA also reviewed certain publicly
available information concerning Washington Mutual and certain financial and
securities data of Washington Mutual and companies deemed similar to Washington
Mutual. CFA discussed with Washington Mutual's management the financial
condition, current operating results, and business outlook for Washington Mutual
and Washington Mutual's plans relating to Utah Federal. In rendering its
opinion, CFA relied, without independent verification, on the accuracy and
completeness of all financial and other information reviewed by it and did not
attempt to verify or to make any independent evaluation or appraisal of the
assets of Utah Federal or Washington Mutual nor was it furnished any such
appraisals. Utah Federal did not impose any limitations on the scope of the CFA
investigation in arriving at its opinion.
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CFA analyzed the total purchase price on a cash equivalent fair market
value basis using standard evaluation techniques (as discussed below) including
comparable sales multiples, net present value analysis, and net asset value
based on certain assumption of projected growth, earnings and dividends and a
range of discount rates from 16 percent to 18 percent.
"Net Asset Value" is the value of the net equity of a bank, including
every kind of property and value. This approach normally assumes the liquidation
on the date of appraisal with the recognition of the investment securities gains
or losses, real estate appreciation or depreciation, adjustments to the loan
loss reserve, discounts to the loan portfolio and changes in the net value of
other assets. As such, it is not the best evaluation approach when valuing a
going concern because it is based on historical costs and varying accounting
methods. Even if the assets and liabilities are adjusted to reflect prevailing
market prices and yields (which is often of limited accuracy due to the lack of
readily available data), it still results in a liquidation value. In addition,
since this approach fails to account for the values attributable to the going
concern such as the interrelationship among Utah Federal's assets and
liabilities, customer relations, market presence, image and reputation, staff
expertise and depth, little weight is given by CFA to the net asset value
approach to valuation.
"Market Value" is generally defined as the price, established on a
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a thin market for
its common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. Market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In valuing a business enterprise, when sufficient
comparable trade data are available, the market value approach deserves greater
weighing than the net asset value approach and similar weight as the investment
value approach as discussed below.
CFA maintains a substantial data base concerning prices paid for
banking institutions in the Western U.S., particularly thrift institutions, from
1988 through 1996. This data base provides comparable pricing and financial
performance data for thrift institutions sold or acquired. Organized by
different peer groups, these data present medians of financial performance and
purchase price levels, thereby facilitating a valid comparative purchase price
analysis. In analyzing the transaction value of Utah Federal, CFA has considered
the market approach and has evaluated price to shareholders equity and price to
earnings multiples and the price to total assets percentage for transactions
involving thrift and banking organizations with total assets less than $1
billion located in the Western United States that sold for 100 percent common
stock from January 1988 to January 1996.
COMPARABLE SALES MULTIPLES. CFA calculated an "Adjusted Book Value" for
the Merger for Utah Federal's December 31, 1995 shareholders equity and the
estimated June 30, 1996 shareholders equity adjusted for the price to
stockholders equity ratios for a sample of Western thrift and banking
institutions with assets above $100 million which sold between January 1988
through January 1996 and a sample of Western U.S. thrift and banking
institutions with total assets above $100 million which sold between March 1990
and October 1995. The calculations were $107.54 and $97.50 per share,
respectively.
TRANSACTION VALUE AS A PERCENTAGE OF TOTAL ASSETS. CFA calculated the
percentage of total assets which the transaction represents as a price level
indicator. The transaction value as a percentage of total assets facilitates a
truer price level comparison with comparable banking organizations, regardless
of the differing levels of stockholders equity and earnings. In this instance, a
transaction value of $105.63 per share results in a transaction value as a
percentage of total assets of 12.10 percent. The median price as a percentage of
total assets for a sample of Western U.S. banking institutions with assets below
$1 billion which sold between January 1988 through January 1996 and a sample of
Western U.S. banking institutions with total assets between $100 million and $1
billion which sold between March 1990 and October 1995 were 11 percent and 12
percent, respectively.
"Investment Value" is sometimes referred to as the income or earnings
value. One investment value method frequently used estimates the present value
of a institution's future earnings or cash flow which is discussed below.
NET PRESENT VALUE ANALYSIS. The investment or earnings value of any
banking organization's stock is a estimate of the present value of future
benefits, usually earnings, dividends, or cash flow, which will accrue to the
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stock. An earnings value is calculated using an annual future earning stream
over a period of time of not less than five years and the residual or terminal
value of the earnings stream after five years, using Utah Federal's estimates of
future growth and an appropriate capitalization or discount rate. CFA's
calculations were based on an analysis of the banking industry, Utah Federal's
earnings estimates for the years 1996 through 2000, historical levels of growth
and earnings, and the competitive situation in Utah Federal's market area. Using
discount rates of 16 percent and 18 percent, acceptable discount rates
considering the risk-return relationship most investors would demand for an
investment of this type as of the valuation date, the "Net Present Value of
Future Earnings" provided a rage of $86.88 to $117.54 per share.
When the Net Asset Value, Market Value and Investment Value approaches
are subjectively weighed, using the appraiser's experience and judgment, it is
CFA's opinion that the proposed transaction is fair, from a financial point of
view.
Pursuant to the terms of the Engagement Letter, Utah Federal has agreed
to pay CFA a fee of $15,000. In addition, Utah Federal has agreed to reimburse
CFA for its reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel, and to indemnify CFA against certain liabilities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Utah Federal Board, Utah
Federal Shareholders should be aware that certain directors and executive
officers of Utah Federal may be deemed to have interests in the Merger in
addition to their interests, if any, as Utah Federal Shareholders.
OWNERSHIP OF UTAH FEDERAL COMMON STOCK. As of the Record Date,
directors and executive officers of Utah Federal, beneficially owned an
aggregate of 134,919 shares of Utah Federal Common Stock (or approximately 97.06
percent of the then outstanding shares of Utah Federal Common Stock) excluding
shares that may be acquired upon the exercise of outstanding stock options.
Michael R. Garrett, the President, Chief Executive Officer and a Director of
Utah Federal, holds options to purchase 3,000 shares of Utah Federal Common
Stock at an exercise price of $21 per share. See "INFORMATION CONCERNING Utah
Federal -- Beneficial Ownership of Utah Federal Common Stock."
INDEMNIFICATION AND INSURANCE. Washington Mutual has agreed, from and
after the Effective Time, to indemnify the current and former directors,
officers and employees of Utah Federal as though they had been directors,
officers and/or employees of Washington Mutual or WMBfsb, for acts and omissions
occurring prior to and including the Effective Time. Washington Mutual and
WMBfsb have also agreed to use all reasonable efforts, in cooperation with Utah
Federal, to arrange for insurance coverage for officers and directors of Utah
Federal following the Effective Time with at least as much dollar coverage as
such officers and directors have under their current policy.
EMPLOYMENT ARRANGEMENT WITH GARRETT. Subsequent to the date of the
Merger Agreement, WMBfsb offered Mr. Garrett a position with WMBfsb as a
mortgage production manager and vice president of WMBfsb upon consummation of
the Merger and Mr. Garrett accepted the offer. Mr. Garrett's employment will be
at will and may be terminated at any time by WMBfsb or Mr. Garrett with or
without cause or advance notice. WMBfsb has guaranteed Mr. Garrett an annual
salary of $95,000 for his first year of employment. Thereafter, Mr. Garrett's
compensation will be based on Washington Mutual's standard incentive
compensation model. At any time during Mr. Garrett's first year of employment,
Mr. Garrett may choose to base his salary on the standard incentive model and
forego the guaranteed salary.
SEVERANCE PAYMENTS. The Merger Agreement provides that Washington
Mutual will make severance payments in certain circumstances (in an amount equal
to one-half month's salary for each year of service with Utah Federal up to a
maximum of six months' total pay) to any officer of Utah Federal whose
employment is terminated without "cause" within one year after the Effective
Date. These severance payments are not available to Mr. Garrett, the President
and Chief Executive Officer of Utah Federal, in the event he receives payment
pursuant to his employment agreement with Utah Federal. In addition to the above
described severance payments, Mr. Petersen, the treasurer and controller of Utah
Federal, and Georgia S. Goodell, the corporate secretary and
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director of human resources of Utah Federal, will each be paid an amount equal
to three times his or her current monthly salary if such person remains with
Utah Federal until the Effective Date.
RETENTION BONUS FOR UTAH FEDERAL EMPLOYEES. Subsequent to the date of
the Merger Agreement, WMBfsb made an offer to all Utah Federal officers and
employees, other than Utah Federal's President and Executive Vice President,
that, as a condition of and as an incentive to each such employee remaining an
employee of Utah Federal until the Effective Date and an employee of WMBfsb
(with such employee continuing in his or her former duties and position as with
Utah Federal) after the Effective Date until the successful conversion to
Washington Mutual systems, WMBfsb will pay such employee a retention bonus of
one months' salary plus one weeks' salary for each calendar month or partial
calendar month from the Effective Time to such employee's job-end date. In lieu
of the above-described retention bonus, Mr. Petersen and Ms. Goodell will each
receive a retention bonus of one weeks' salary for each calendar month or
partial calendar month from the Effective Time to such employee's job-end date.
A retention bonus will not be paid to any employee terminated for cause or for
other performance-related reasons or to any employee voluntarily leaving prior
to the job-end date. The retention bonus is independent of and in addition to
any other payments any such employee might be entitled to under the Merger
Agreement.
AFFILIATE LETTERS
As a condition to the execution of the Merger Agreement, each director
and executive officer of Utah Federal (collectively, the "Affiliates"),
beneficially owning in the aggregate 134,919 shares of Utah Federal Common Stock
(97.06 percent of the shares of Utah Federal Common Stock outstanding as of the
Record Date) and holding in the aggregate options to acquire 3,000 shares of
Utah Federal Common Stock, has delivered to Washington Mutual an Affiliate
Letter, pursuant to which, among other things, the Affiliates agreed to vote the
shares of Utah Federal Common Stock held by them in favor of approval of the
Merger Agreement. In addition, pursuant to the Affiliate Letters, each Affiliate
agreed, with certain limited exceptions, not to (i) sell or otherwise dispose of
any shares of Utah Federal Common Stock or Washington Mutual Common Stock during
the period from 30 days preceding the Effective Date until such time as
consolidated financial results covering at least 30 days of post-Merger combined
operations of Washington Mutual and Utah Federal have been published, or (ii)
sell or transfer any shares of Utah Federal Common Stock except in transactions
in which the ultimate beneficial owner will acquire fewer than 1,000 shares. The
Affiliate Letters do not restrict any director or officer of Utah Federal from
voting on any matter, or otherwise from acting, in his or her capacity as a
director or officer with respect to any matters, including but not limited to,
the general management or overall operation of Utah Federal or any other
exercise of fiduciary responsibilities.
The Affiliate Letters are intended to preserve treatment of the Merger
as a pooling-of-interests for accounting purposes and to increase the likelihood
that the Merger will be consummated according to the terms set forth in the
Merger Agreement and may discourage competing acquisition offers for Utah
Federal.
REGULATORY APPROVALS
The Merger is subject to the approval of the OTS under the Home Owners'
Loan Act. The Community Reinvestment Act of 1978 ("CRA") also requires that the
OTS, in deciding whether to approve the Merger, assess the record of performance
of Utah Federal and the bank subsidiaries of Washington Mutual in meeting the
credit needs of the communities they serve, including low and moderate income
neighborhoods.
Washington Mutual has submitted an application seeking OTS approval of
the Merger. There can be no assurance that the OTS will approve the Merger, and
if the Merger is approved, there can be no assurance as to the date of such
approval or as to what conditions, if any, may be imposed in such approval.
Washington Mutual's obligation to consummate the Merger is conditioned upon
receipt of all required regulatory approvals and consents, without any term or
condition that (i) has not normally been imposed in transactions of this type
and would have a material adverse effect on Utah Federal or Washington Mutual or
(ii) would require Washington Mutual to contribute additional capital to WMBfsb
(other than to increase its leverage capital to a level no higher than five
percent). There can be no assurance that the Department of Justice or the
Attorney General of the state of Utah will not challenge the Merger or, if
challenged, what the result of such a challenge would be.
Washington Mutual and Utah Federal are not aware of any other
governmental approvals that are required for consummation of the Merger except
as described above. Should any other approval or action be required, it
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is presently contemplated that such approval would be sought. There can be no
assurance whether or when any such approval, if required, could be obtained.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to constitute a "reorganization" under the Code.
The following discussion summarizes the material federal income tax consequences
relating to the Merger, assuming the Merger is so treated. No ruling from the
Internal Revenue Service (the "IRS") will be applied for with respect to the
federal income tax consequences of the Merger. THERE CAN BE NO ASSURANCE THAT
THE IRS WILL AGREE WITH THE CONCLUSIONS SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS.
Consummation of the Merger is conditioned upon, among other things,
receipt by Utah Federal and Washington Mutual of an opinion from Foster Pepper &
Shefelman, counsel to Washington Mutual, dated as of the Effective Date,
substantially to the effect that the Merger will qualify as a "reorganization"
for federal income tax purposes and that the attendant tax consequences will be
as discussed below. Such opinion is conditioned upon the continued accuracy of
certain factual representations made by Washington Mutual, Utah Federal and
Ernest J. Miller. The opinion will not, however, be binding upon the IRS or the
courts.
Gain or loss will not be recognized by Utah Federal Shareholders on the
exchange of their shares of Utah Federal Common Stock solely for Washington
Mutual Common Stock in the Merger.
Each Utah Federal Shareholder who receives cash in lieu of a fractional
share of Washington Mutual Common Stock and each Utah Federal Shareholder who
receives cash in connection with the perfection of dissenters' rights will be
treated as receiving a distribution in redemption of such share interest. In
general, such distribution in redemption will be treated as a payment in
exchange for such share interest, subject to the provisions and limitations of
Code Section 302 (which in certain circumstances could result in the receipt of
cash being treated as a dividend). If treated as a payment in exchange for such
share interest, gain or loss will be measured by the difference between the tax
basis allocable to the fractional share, or of the dissenters' shares tendered,
as the case may be, and the amount of cash received therefor. Such gain or loss
will be a capital gain or loss if the Utah Federal Common Stock was held as a
capital asset as of the Effective Date.
The gain or loss will be treated as a long-term capital gain or loss if
the Utah Federal Common Stock that resulted in the receipt of such cash was held
by the shareholder for more than one year, and otherwise will be short-term
capital gain or loss.
The aggregate tax basis of the Washington Mutual Common Stock received
by each Utah Federal Shareholder in the Merger will equal the aggregate tax
basis of such shareholder's Utah Federal Common Stock exchanged therefore,
reduced by the basis of the Utah Federal Common Stock allocable to any
fractional share of Washington Mutual Common Stock in lieu of which cash is
received. The holding period for the Washington Mutual Common Stock received by
each shareholder in the Merger will include the period the shareholder held the
Utah Federal Common Stock exchanged therefore, provided such shares of Utah
Federal Common Stock were held as capital assets at the Effective Time.
The cash payments, if any, due holders of Utah Federal Common Stock
(other than certain exempt entities and persons) pursuant to the Merger will be
subject to a 31 percent backup withholding tax by the Exchange Agent under
federal income tax law unless certain requirements are met. Generally, the
Exchange Agent will be required to deduct and withhold the tax if (i) the
shareholder fails to furnish a taxpayer identification number ("TIN") to the
Exchange Agent or fails to certify under penalty of perjury that such TIN is
correct, (ii) the IRS notifies the Exchange Agent that the shareholder has
failed to report interest, dividends or original issue discount in the past, or
(iii) there has been a failure by the shareholder to certify under penalty of
perjury that such shareholder is not subject to the 31 percent backup
withholding tax. Any amounts withheld by the Exchange Agent in collection of the
31 percent backup withholding tax will generally be treated as a credit against
the federal income tax liability of the shareholder from whom such tax was
withheld. The TIN of an individual shareholder is the shareholder's Social
Security Number.
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THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER TO UTAH FEDERAL SHAREHOLDERS UNDER
CURRENTLY EXISTING FEDERAL INCOME TAX LAWS, WITHOUT CONSIDERATION OF THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S SITUATION. EACH UTAH
FEDERAL SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR
AS TO SUCH SHAREHOLDER'S OWN SITUATION, INCLUDING ANY ESTATE, GIFT, STATE, LOCAL
OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER AND/OR ANY SALE THEREAFTER
OF WASHINGTON MUTUAL COMMON STOCK RECEIVED IN THE MERGER.
ACCOUNTING TREATMENT
The Merger, if completed as proposed, will be treated as a
pooling-of-interests for accounting purposes. Accordingly, under generally
accepted accounting principles, the assets and liabilities of Utah Federal will
be recorded on the books of Washington Mutual at their values on the books of
Utah Federal at the time of consummation of the Merger. No goodwill is created
in a merger that is accounted for as a pooling-of-interests.
DISSENTERS' RIGHTS
If the Merger is consummated pursuant to regulations promulgated by the
OTS, any Utah Federal Shareholder who (i) objects to the Merger, (ii) does not
vote any of such holders' shares in favor of the Merger, and (iii) fully
complies with all of the provisions of 12 C.F.R. Section 552.14, the Dissenter
and Appraisal Rights Regulation, will be entitled to demand and receive payment
in an amount equal to the fair or appraised value of such holders' shares of
Utah Federal Common Stock. For the purpose of determining the amount to be
received in connection with the exercise of dissenters' rights pursuant to OTS
regulations, the fair value of a dissenting shareholder's Utah Federal Common
Stock equals the fair market value of such shares as of the Effective Date,
without considering any value arising from the accomplishment or expectation of
the Merger.
Any Utah Federal Shareholder desiring to receive payment of the fair or
appraised value of such holders' Utah Federal Common Stock under the Dissenter
and Appraisal Rights Regulation must (i) deliver to Utah Federal, prior to
voting on the Merger, a writing identifying such holder and stating such
holder's intention to demand appraisal of and payment for such holder's shares
and (ii) not vote such holder's shares of Utah Federal Common Stock in favor of
the Merger. Any written notice of intent to demand appraisal of and payment for
shares of Utah Federal Common Stock must be sent to: Utah Federal Savings Bank,
a federal savings bank, 2279 Washington Blvd., Ogden, Utah 84401, Attention: L.
Brent Hoggan, Executive Vice President. A vote against the Merger alone will not
satisfy the requirements for the separate written notice referred to in
condition (i) above. Rather, such written notice must be prior and in addition
to and separate from any proxy or vote against the Merger by the dissenting
shareholder.
Within 10 days after the Effective Date, WMBfsb must give written
notice of the Effective Date by mail to any Utah Federal Shareholder who
complied with the provisions of the Dissenter and Appraisal Rights Regulation
described above and make a written offer to each such Utah Federal Shareholder
to pay for such holder's shares at a price Washington Mutual estimates to be the
fair value of the shares. It is the current intention of Washington Mutual to
use the per share book value of Utah Federal as of March 31, 1996 as its
estimate of the per share fair market value of the Utah Federal shares, which
per share value was $77.92. Such notice and offer must be accompanied by Utah
Federal's balance sheet and statement of income for a fiscal year ending not
more than 16 months before the date of notice and offer, together with the
latest available interim financial statements and a statement of the procedures
that must be followed if the shareholder elects to demand appraisal and payment
of a different amount than that offered.
If within 60 days of the Effective Date the dissenting shareholder
accepts Washington Mutual's offer of the fair value for such holder's shares, or
the fair value as otherwise agreed upon between Washington Mutual's and the
dissenting shareholder, Washington Mutual must make payment for the dissenting
shareholder's shares within 90 days of the Effective Date. At any time within 60
days of the Effective Date, a dissenting shareholder may withdraw a demand for
appraisal and accept the terms of the Merger, and such shares of Utah Federal
Common
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Stock will become shares of Washington Mutual Common Stock in accordance with
the terms of the Merger Agreement.
If the dissenting shareholder and Washington Mutual do not agree as to
the fair value of the dissenting shareholder's shares within 60 days of the
Effective Date, the dissenting shareholder may file a petition with the Office
of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552, with a copy
by registered or certified mail to Washington Mutual, demanding a determination
of the fair market value of the shares of all such shareholders. Each
shareholder demanding appraisal of and payment for such holder's shares of Utah
Federal Common Stock in compliance with the Dissenter and Appraisal Rights
Regulation must deliver such holder's shares of Utah Federal Common Stock to the
Exchange Agent, for notation thereon that an appraisal proceeding is pending. If
a dissenting shareholder fails to file a petition with the OTS demanding a
determination of fair value within 60 days of the Effective Date or fails to
deliver such holder's shares of Utah Federal Common Stock to the Exchange Agent
within 60 days of the Effective Date, such dissenting shareholder will be deemed
to have accepted the terms of the Merger, and such shareholder's shares of Utah
Federal Common Stock will become shares of Washington Mutual Common Stock in
accordance with the terms of the Merger Agreement.
The director of the OTS (the "Director") will appoint either
appropriate OTS staff or one or more independent persons to determine the
appraised value of the shares of a dissenting shareholder who has complied fully
with the Dissenter and Appraisal Rights Regulation. Appraisals prepared by
independent persons will be subject to review by OTS staff. If the Director
concurs with the appraisal, the Director will direct payment of the appraised
value of the shares upon surrender of the certificates representing such shares,
together with interest from the Effective Date at a rate the Director deems
equitable. The Director, in his or her discretion, may apportion or assess the
cost of the appraisal proceeding against some or all of the parties to the
proceeding. Dissenting shareholders who have given written notice of their
intent to dissent are not entitled to receive dividends or to exercise voting
rights with respect to either Utah Federal Common Stock or Washington Mutual
Common Stock unless and until such shareholders accept or are deemed to have
accepted the terms of the Merger Agreement.
The foregoing does not purport to be a complete statement of the
provisions of the Dissenter and Appraisal Rights Regulation and is qualified in
its entirety by the full text of the Dissenter and Appraisal Rights Regulation
which is reproduced in Appendix D to this Proxy Statement/Prospectus and which
hereby is incorporated by reference herein.
RESALES OF WASHINGTON MUTUAL COMMON STOCK BY UTAH FEDERAL SHAREHOLDERS
The shares of Washington Mutual Common Stock issuable to shareholders
of Utah Federal upon consummation of the Merger have been registered under the
Securities Act. Such shares may be traded freely and without restriction by
those shareholders not deemed to be "affiliates" of Utah Federal or Washington
Mutual as that term is defined in the rules and regulations under the Securities
Act. These rules and regulations generally define "affiliates" as persons who
control, are controlled by, or are under common control with, Utah Federal at
the time of the Special Meeting (generally, executive officers, directors and
certain beneficial owners). Such persons may not sell their Washington Mutual
Common Stock acquired in connection with the Merger, except pursuant to an
effective registration statement under the Securities Act covering such shares
or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. In general, under Rule 145, for
two years following the Effective Time, an affiliate (together with certain
related persons) would be entitled to sell Washington Mutual Common Stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by an
affiliate (together with certain related persons and certain persons acting in
concert) within any three-month period for purposes of Rule 145 may not exceed
the greater of one percent of the outstanding shares of Washington Mutual Common
Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would remain available to
affiliates, however, only if Washington Mutual remained current with its
informational filings with the Commission under the Exchange Act. Two years
after the Effective Time, an affiliate would be able to sell such Washington
Mutual Common Stock without such manner of sale or volume limitations provided
that Washington Mutual was current with its Exchange Act informational filings
and such affiliate was not then an affiliate of Washington Mutual. Three years
after the Effective Time, an affiliate would be able to sell such Washington
Mutual Common Stock
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without any restrictions so long as such affiliate had not been an affiliate of
Washington Mutual for at least three months prior thereto.
THE MERGER AGREEMENT
EFFECTIVE DATE AND TIME OF THE MERGER
The Merger will become effective at the time of the endorsement of the
articles of combination by the OTS or at such later time after such endorsement
as is specified by the OTS on the endorsement of articles of combination. As
used herein, the term "Effective Date" means the day on which the Effective Time
occurs. The parties are unable to predict when or if the Effective Time will
occur.
CONDITIONS TO THE MERGER
The obligations of Utah Federal and Washington Mutual to consummate the
Merger are subject to, among other things, the satisfaction of the following
conditions: (i) the approval of the Merger and the Merger Agreement by the
requisite vote of Utah Federal Shareholders; (ii) the receipt of all applicable
regulatory and governmental approvals and consents and the expiration of all
statutory and regulatory waiting periods; (iii) the absence of any order, decree
or injunction of a court or agency of competent jurisdiction that enjoins or
prohibits the consummation of the Merger; (iv) receipt of an opinion of counsel
to Washington Mutual to the effect that the Merger will qualify as a
"reorganization" as defined by the Code and that Utah Federal Shareholders will
not recognize any gain or loss for federal income tax purposes (with the
exception of cash paid for fractional shares or cash paid as a result of any
Utah Federal Shareholder perfecting dissenters' rights) as a result of the
Merger; (v) compliance with applicable pre-merger notification provisions of
Section 7A of the Clayton Act and the absence of pending or threatened
proceedings under any applicable antitrust law of the states of Utah and
Washington; and (vi) the effectiveness of the Registration Statement and the
absence of any stop order suspending the effectiveness thereof or any
proceedings for that purpose initiated by the Commission.
The obligation of Washington Mutual to consummate the Merger is subject
to the satisfaction or waiver of certain additional conditions, including,
without limitation, the following: (i) the continued accuracy of representations
and warranties of Utah Federal and the performance by Utah Federal of its
covenants and agreements made in the Merger Agreement, except where the failure
of such representations and warranties to be accurate or the failure to perform
such covenants or agreements will not, in the aggregate, have a negative
economic effect of $250,000 or more on Utah Federal or, when adjusted to present
value, have such an effect on Washington Mutual; (ii) the receipt of all
regulatory and governmental consents, waivers, clearances, approvals and
authorizations required in connection with the transactions contemplated by the
Merger Agreement without the imposition of any condition that (a) has not
normally been imposed in such transactions and would have a material adverse
effect on Utah Federal or Washington Mutual or (b) would require Washington
Mutual to contribute additional capital to WMBfsb other than to raise its
leverage capital ratio to a level no higher than five percent (as adjusted to
account for the Merger); (iii) the receipt of an opinion, dated the date of the
closing, from Graham & Dunn, counsel to Utah Federal; (iv) the absence of any
material adverse change in the overall financial condition, businesses or
results of operations of Utah Federal; (v) the receipt of resignations of the
directors of Utah Federal; (vi) the receipt of an indemnification agreement from
Ernest J. Miller, the Chairman of the Board, Director, and majority shareholder
of Utah Federal; (vii) evidence that dissenters' rights have not been preserved
with respect to more than five percent of the outstanding shares of Utah Federal
Common Stock and that each person who executed an Affiliate Letter has voted in
favor of the Merger; (viii) the receipt of statements from Utah Federal setting
forth all costs and expenses paid or owed to third parties by Utah Federal in
connection with the consummation of the Merger; and (ix) the receipt of a
certificate of officers of Utah Federal and such other documents necessary to
evidence fulfillment of the conditions precedent to the closing of the Merger.
The obligation of Utah Federal to consummate the Merger is subject to
the satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of the representations and
warranties of Washington Mutual and WMBfsb, except where the failure to be
accurate would not have a material adverse effect on Washington Mutual, and the
performance by Washington Mutual and WMBfsb of their
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covenants and agreements made in the Merger Agreement; (ii) the receipt of an
opinion, dated the date of closing, from Foster Pepper & Shefelman, counsel to
Washington Mutual; (iii) the absence of any material adverse change in the
overall financial condition, businesses or results of operations of Washington
Mutual; (iv) the receipt of a certificate of officers of Washington Mutual and
such other documents necessary to evidence fulfillment of the conditions
precedent to the closing of the Merger; (v) the receipt of a fairness opinion
from CFA, dated the date of this Proxy Statement/Prospectus; and (vi) the
receipt by Washington Mutual's transfer agent at least two days prior to closing
of instructions with respect to the issuance of Washington Mutual Common Stock
to the Utah Federal Shareholders.
BUSINESS OF UTAH FEDERAL PENDING THE MERGER
Under the Merger Agreement, until the Effective Time, Utah Federal is
generally obligated to conduct its business in the ordinary course and
consistent with past practice and prudent banking practice. In addition, Utah
Federal has agreed to use its best efforts to preserve its business
organizations, keep available the present services of its employees and preserve
the goodwill of its customers and other business relationships. The Merger
Agreement also provides that, prior to the Effective Time, except as otherwise
consented to by Washington Mutual, as permitted by the Merger Agreement or as
required by law, Utah Federal will not: (i) change any provisions of its
articles of incorporation or bylaws; (ii) change the number of shares of its
authorized or issued capital stock, except upon the exercise of certain existing
stock options; (iii) issue, grant or amend any options, warrants or other rights
to purchase capital stock; (iv) split, combine or reclassify any shares of its
capital stock; (v) declare, set aside or pay any dividends or other
distributions on its capital stock; (vi) redeem or otherwise acquire any shares
of its capital stock; (viii) grant any severance or termination pay to or enter
into or amend any employment agreement with or increase the amount of payments
or fees to its employees, officers or directors; (ix) make capital expenditures
in excess of $40,000 per project or $200,000 in the aggregate; (x) open, close
or relocate any branches or make application to do so; (xi) change in any
material manner its lending, pricing, approval, investment or asset/liability
management policies or any other material banking policies; (xii) make loans or
issue loan commitments other than in the ordinary course of business consistent
with past practice at rates not less than prevailing market rates; (xiii) issue
letters of credit or otherwise guarantee the obligations of any other person
except in the ordinary course of business consistent with past practice; (xiv)
acquire, sell, transfer, assign, encumber or otherwise dispose of assets other
than in the ordinary course of business; (xv) enter into, amend or terminate
certain contracts having a term of one year or more or calling for the payment
of $25,000 or more; (xvi) engage or participate in any material transaction or
incur or sustain any material obligation except as one in the ordinary course of
business consistent with past practice; (xvii) make any contributions to any
benefit plans except in amounts consistent with past practice; (xviii) increase
the number of Utah Federal's full-time employees above 84; (xix) foreclose upon
or otherwise acquire any real property (other than 1-to-4 family residential
properties in the ordinary course of business); or (xx) agree to do any of the
foregoing.
WAIVER AND AMENDMENT
At any time prior to the consummation of the Merger, the parties to the
Merger Agreement may (i) amend the Merger Agreement, (ii) extend the time for
the performance of any of the obligations or other acts of any other party
thereto, (iii) waive any inaccuracies in the representations and warranties of
any other party contained therein or in any document delivered pursuant thereto,
or (iv) waive compliance with any of the agreements or conditions contained
therein; provided, however, that after any approval of the Merger by the Utah
Federal Shareholders, there may not be, without further approval of such
shareholders, any amendment or waiver of the Merger Agreement that reduces the
amount or changes the form of the Merger Consideration to be delivered to the
Utah Federal Shareholders.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the Utah
Federal Shareholders:
(a) by mutual written consent of all the parties to the Merger
Agreement;
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(b) by any party to the Merger Agreement (i) if the Effective Time has
not occurred on or prior to December 31, 1996 unless the failure of such
occurrence is due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe its agreements and conditions set forth in the
Merger Agreement; or (ii) 31 days after the date on which any application for
regulatory approval prerequisite to the consummation of the Merger has been
denied or withdrawn at the request of the applicable regulatory authority;
provided, that, if prior to the expiration of such 31-day period Washington
Mutual is engaged in litigation or an appeal procedure relating to an attempt to
obtain such approval, Utah Federal may not terminate the Merger Agreement until
the earlier of (A) December 31, 1996 and (B) 31 days after the completion of
such litigation and appeal procedures, and of any further regulatory or judicial
action pursuant thereto, including any further action by a government agency as
a result of any judicial remand, order or directive or otherwise; or (iii) 10
days after written certification of the vote of the Utah Federal Shareholders is
delivered to Washington Mutual indicating that the Utah Federal Shareholders
failed to approve the Merger at the Special Meeting (or any adjournment
thereof);
(c) by Washington Mutual if (i) at the time of such termination there
has been a material adverse change in the consolidated financial condition of
Utah Federal from that set forth in Utah Federal's financial statements for the
three-month period ended December 31, 1995 (except for changes resulting from
market and economic conditions that generally affect the savings bank industry
as a whole, including changes in regulation); (ii) there has been any material
breach of any covenant of Utah Federal under the Merger Agreement and such
breach has not been remedied within 45 days after receipt by Utah Federal of
notice in writing from Washington Mutual specifying the nature of such breach
and requesting that it be remedied; (iii) Utah Federal or the Utah Federal Board
enters into an agreement or recommends to the Utah Federal Shareholders an
agreement (other than the Merger Agreement) pursuant to which any person or
group would (A) merge or consolidate with, acquire 51 percent or more of the
assets or liabilities of, or enter into any similar transaction with Utah
Federal or (B) acquire 10 percent or more of the voting shares of Utah Federal
(unless the person or group acquires less than 25 percent of the voting shares
of Utah Federal, and the transaction does not result in and is not presumed to
constitute "control" by the OTS); (iv) any person or group (other than
Washington Mutual, WMBfsb or any other person owning 10 percent of Utah Federal
as of February 29, 1996) acquires the beneficial ownership of securities which,
when aggregated with other securities, represents 10 percent or more of the
voting shares of Utah Federal; (v) the Utah Federal Board withdraws its
recommendation that Utah Federal Shareholders vote for approval of the Merger;
or (vi) the Utah Federal Shareholders fail to approve the Merger after any
person or group announces publicly or communicates, in writing, to Utah Federal
a proposal to (A) acquire Utah Federal (by merger, consolidation or purchase of
51 percent of its assets), (B) purchase or otherwise acquire securities
representing 25 percent of the voting shares of Utah Federal or (C) change the
composition of the Utah Federal Board; or
(d) by Utah Federal if (i) at the time of such termination there has
been a material adverse change in the consolidated financial condition of
Washington Mutual from that set forth in Washington Mutual's Annual Report on
Form 10-K for the year ended December 31, 1995 (except for changes resulting
from market and economic conditions that generally affect the savings bank
industry as a whole); (ii) there has been any material breach of any covenant of
Washington Mutual or WMBfsb under the Merger Agreement and such breach has not
been remedied within 45 days after receipt by Washington Mutual of notice in
writing from Utah Federal specifying the nature of such breach and requesting
that it be remedied; or (iii) the directors of Utah Federal, after receiving
advice of counsel, determine in their good faith judgment, in order to discharge
their fiduciary duties, to withdraw or modify or resolve to withdraw or modify
their recommendation that Utah Federal Shareholders vote in favor of the Merger.
BREAK-UP FEES
As part of the Merger Agreement, Washington Mutual and Utah Federal
agreed to pay liquidated damages to each other under certain circumstances. To
compensate Utah Federal for certain costs incurred in connection with the Merger
and to induce Utah Federal to forego initiating discussions with other potential
acquirors Washington Mutual will pay to Utah Federal $200,000 on demand if: (i)
Washington Mutual terminates the Merger Agreement for any reason other than the
mutual consent of the parties, expiration of the term for the occurrence of the
Effective Time for the Merger Agreement, any material change in the financial
condition of Utah Federal, or any material breach of any covenant by Utah
Federal that is not remedied within 45 days after receipt by Utah Federal of
written notice from Washington Mutual of such breach; (ii) the Merger Agreement
terminates because Washington Mutual or WMBfsb did not use all reasonable
efforts to consummate the Merger; or (iii) Utah Federal
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<PAGE> 41
terminates the Merger Agreement because of a material breach of any covenant by
Washington Mutual that is not remedied within 45 days after receipt by
Washington Mutual of written notice from Utah Federal of such breach.
To compensate Washington Mutual for certain costs incurred in
connection with the Merger and to induce it to forego initiating discussions
regarding other potential acquisitions Utah Federal will pay to Washington
Mutual $200,000 on demand, and in addition Washington Mutual will be entitled to
receive any benefits under the Stock Option Agreement if: (i) Utah Federal
terminates the Merger Agreement for any reason other than the mutual consent of
the parties, expiration of the term for the occurrence of the Effective Time for
the Merger Agreement, or any material change in the financial condition of
Washington Mutual; (ii) if the Merger Agreement terminates because Utah Federal
did not use all reasonable efforts to consummate the Merger; (iii) Utah Federal
or the Utah Federal Board enters into an agreement or recommends to the Utah
Federal Shareholders an agreement (other than the Merger Agreement) pursuant to
which any person or group would (A) merge or consolidate with, acquire 51
percent or more of the assets or liabilities of, or enter into any similar
transaction with Utah Federal or (B) acquire 10 percent or more of the voting
shares of Utah Federal (unless the person or group acquires less than 25 percent
of the voting shares of Utah Federal, and the transaction does not result in and
is not presumed to constitute "control" by the OTS); (iv) any person or group
(other than Washington Mutual, WMBfsb or any other person owning 10 percent of
Utah Federal as of February 29, 1996) acquires the beneficial ownership of
securities which, when aggregated with other securities, represents 10 percent
or more of the voting shares of Utah Federal; (v) the Utah Federal Board
withdraws its recommendation that Utah Federal Shareholders vote for approval of
the Merger; or (vi) the Utah Federal Shareholders fail to approve the Merger
after any person or group announces publicly or communicates, in writing, to
Utah Federal a proposal to (A) acquire Utah Federal (by merger, consolidation or
purchase of 51 percent of its assets), (B) purchase or otherwise acquire
securities representing 25 percent of the voting shares of Utah Federal or (C)
change the composition of the Utah Federal Board; or (vii) Washington Mutual
terminates the Merger Agreement because of a material breach of any covenant of
Utah Federal and such breach is not remedied within 45 days after receipt by
Utah Federal of notice in writing from Washington Mutual specifying the nature
of such breach and requesting that it be remedied; See "THE MERGER AGREEMENT --
Stock Option Agreement."
The liquidated damages described above could increase the likelihood
that the Merger will be consummated on the terms set forth in the Merger
Agreement.
STOCK OPTION AGREEMENT
As a condition to Washington Mutual entering into the Merger Agreement,
Utah Federal and Washington Mutual have entered into the Stock Option Agreement,
pursuant to which Utah Federal has granted to Washington Mutual the Option to
purchase an aggregate of 35,278 authorized and unissued shares of Utah Federal
Common Stock (which if issued, assuming exercise of the 3,000 options
outstanding to acquire Utah Federal Common Stock, would represent approximately
19.9 percent of the total issued and outstanding shares of Utah Federal Common
Stock) at a per share price of $75.61, which was the per share book value of the
Utah Federal Common Stock at December 31, 1995. The Option will become
exercisable under any of the following circumstances: (i) Utah Federal or the
Utah Federal Board enters into an agreement or recommends to Utah Federal
Shareholders an agreement (other than the Merger Agreement) pursuant to which
any person or group would (A) merge or consolidate with, acquire 51 percent or
more of the assets or liabilities of, or enter into any similar transaction with
Utah Federal or (B) acquire 10 percent or more of the voting shares of Utah
Federal; (ii) any person or group (other than Washington Mutual, WMBfsb or any
other person owning 10 percent of Utah Federal as of February 29, 1996) acquires
the beneficial ownership of securities which when aggregated with other
securities represent 10 percent or more of the voting shares of Utah Federal
(unless the person or group acquires less than 25 percent of the voting shares
of Utah Federal, and the transaction does not result in and is not presumed to
constitute "control" by the OTS); (iii) the Utah Federal Board withdraws its
recommendation that Utah Federal Shareholders vote for approval of the Merger;
or (iv) the Utah Federal Shareholders fail to approve the Merger after any
person or group announces publicly or communicates, in writing, to Utah Federal
a proposal to (A) acquire Utah Federal (by merger, consolidation or purchase of
51 percent of its assets), (B) purchase or otherwise acquire securities
representing 25 percent of the voting shares of Utah Federal or (C) change the
composition of the Utah Federal Board.
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The Stock Option Agreement and the Option will terminate upon the
earliest of (i) December 31, 1996; (ii) the mutual agreement of Utah Federal and
Washington Mutual; (iii) 31 days after the date on which any application for
regulatory approval for the Merger has been denied (provided, however, that if
prior to the expiration of such 31-day period, Utah Federal, Washington Mutual
or WMBfsb is engaged in litigation or an appeal procedure relating to an attempt
to obtain approval of the Merger, the Stock Option Agreement will not terminate
until the earlier of (a) December 31, 1996 or (b) 31 days after the completion
of such litigation and appeal procedure); (iv) the thirtieth day following the
termination of the Merger Agreement for any reason other than a material
noncompliance or default by Washington Mutual or WMBfsb with respect to its
obligations thereunder; or (v) the date of termination of the Merger Agreement
if such termination is due to a material noncompliance or default by Washington
Mutual or WMBfsb with respect to its obligations thereunder.
The foregoing summary of the terms of the Stock Option Agreement is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, the copy of the Stock Option Agreement, which is attached as
Appendix C to this Proxy Statement/Prospectus and is incorporated herein by
reference.
The Stock Option Agreement is intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement, and may discourage persons from proposing a competing offer to
acquire Utah Federal. The existence of the Stock Option Agreement could
significantly increase the cost to a potential acquiror of acquiring Utah
Federal, compared to its cost had Utah Federal not entered into the Stock Option
Agreement.
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Date, the Exchange Agent will mail written
transmittal materials concerning the exchange of stock certificates to each
record holder of shares of Utah Federal Common Stock outstanding at the
Effective Date. The transmittal materials will contain instructions with respect
to the proper method of surrender of certificates that immediately prior to the
Effective Date represented shares of Utah Federal Common Stock in exchange for
the Merger Consideration. UTAH FEDERAL SHAREHOLDERS SHOULD NOT SEND STOCK
CERTIFICATES AT THIS TIME.
Upon surrender to the Exchange Agent of certificates formerly
representing shares of Utah Federal Common Stock for cancellation, together with
properly completed transmittal material, an Utah Federal Shareholder will be
entitled to receive the number of shares of Washington Mutual Common Stock (and
cash in lieu of any fractional shares of Washington Mutual Common Stock) to
which such holder is entitled as Merger Consideration. Utah Federal Shareholders
will not be entitled to receive interest on any cash payment received in the
Merger.
Until surrendered, each certificate that, prior to the Effective Date,
represented Utah Federal Common Stock (other than shares delivered to Washington
Mutual after the Effective Date pursuant to the exercise of dissenters' rights)
will be deemed for all corporate purposes to evidence ownership of the number of
whole shares of Washington Mutual Common Stock into which the shares of Utah
Federal Common Stock formerly represented thereby were converted. All
certificates so surrendered will be cancelled. However, until surrendered, no
dividend payable to holders of record of Washington Mutual Common Stock will be
paid to any holder of such unsurrendered certificates. Upon surrender and
exchange of such outstanding certificates, the holder thereof will be paid,
without interest, the amount of any dividend or other distributions with a
record date occurring on or after the Effective Date, theretofore paid with
respect to whole shares of Washington Mutual Common Stock, but withheld with
respect to such shares. After the Effective Date, there will be no further
registration or transfers on the records of Utah Federal of outstanding
certificates formerly representing shares of Utah Federal Common Stock.
If any new certificate for Washington Mutual Common Stock is to be
issued in a name other than that in which the certificate surrendered in
exchange therefore is registered, the new certificate will not be issued unless
the certificate surrendered in exchange is properly endorsed and otherwise in
proper form for transfer. In addition, the person requesting such transfer must
pay any transfer or other taxes required by the issuance of a new certificate
for shares of Washington Mutual Common Stock to a person other than the
registered holder of the certificate surrendered, or must establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
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Fractional shares of Washington Mutual Common Stock will not be issued
in the Merger. Instead, each Utah Federal Shareholder who would otherwise be
entitled to a fractional share will receive cash in lieu thereof.
EFFECT ON EMPLOYEE BENEFIT PLANS AND STOCK PLANS
Following the Merger, all employees of Utah Federal will continue as
at-will employees of WMBfsb. Pursuant to the Merger Agreement, Washington Mutual
will make severance payments under the Washington Mutual Severance Plan in
certain circumstances to any employee who is terminated "without cause" by
Washington Mutual, WMBfsb or any other subsidiary of Washington Mutual within
one year after the Effective Date, as follows: (i) non-officer employees will
receive one-half month's salary for each year of service, up to a maximum of
three months' total pay; (ii) officers will receive one-half month's salary for
each year of service, up to a maximum of six months' total pay; and (iii)
regular part-time employees will receive the same severance payments as
non-officer employees, computed at a per month compensation based on the average
number of hours worked per month with Utah Federal in 1995. Severance payments
will be made in a lump sum payment on the first regular pay date following the
date that termination is effective. Utah Federal employees who are terminated
"for cause" will not receive any severance payments.
These severance payments will not be available to Mr. Garrett, the
President and Chief Executive Officer of Utah Federal, in the event he receives
payment pursuant to his employment agreement with Utah Federal. In addition to
the severance benefits described above, Mr. Petersen, the treasurer and
controller of Utah Federal, and Ms. Goodell, the corporate secretary and
director of human resources of Utah Federal, will each be paid an amount equal
to three times his or her current monthly salary if such person remains with
Utah Federal until the Effective Date.
All officers and other employees of Utah Federal are entitled to
receive immediately prior to the Effective Time a bonus incentive payment for
the portion of the current year up to the Effective Time. Bonus incentive
payments will be paid to eligible officers and employees under either Utah
Federal's bonus incentive plan or a contract with Utah Federal (but not under
both) in amounts and otherwise in accordance with past practice. Eligibility to
receive such bonus payments will make such participant ineligible to participate
in any Washington Mutual or WMBfsb cash bonus or cash incentive plan for the
portion of 1996 up to the Effective Time.
All employees of Utah Federal who continue as employees of Washington
Mutual or WMBfsb after the Effective Date will generally receive service credit
for employment at Utah Federal under the Washington Mutual benefit plans
(however, under the Washington Mutual retirement plans this service credit is
limited to certain eligibility and vesting credit). Washington Mutual intends
that Utah Federal employees will become participants in all Washington Mutual
benefit plans as soon as reasonably practical after the Effective Date.
Employees of Utah Federal will be entitled to payment for all accrued but unused
vacation time. All sick pay and short-term disability accrued and not used by
Utah Federal employees before the Effective Time will be maintained by
Washington Mutual.
EXPENSES
All legal and other costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by the
party incurring such costs and expenses unless otherwise specified in the Merger
Agreement. In addition, pursuant to the Merger Agreement, if the transaction
fees incurred by Utah Federal in connection with the Merger exceed $150,000, the
Merger Consideration will be reduced by the amount of such excess divided by the
number of shares of Utah Federal Common Stock outstanding at the Effective Time.
Utah Federal currently expects that its costs and expenses for the Merger will
range from $175,000 to $200,000, resulting in a downward adjustment to the
Merger Consideration of up to $0.70 per share. See "THE MERGER -- General."
POST-MERGER DIVIDEND POLICY
Dividends may be paid on the Washington Mutual Common Stock as and when
declared by the Washington Mutual Board out of funds legally available for the
payment of dividends. Each quarter, the Washington Mutual
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Board 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.
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
WMBfsb, WMB and other subsidiary operations to pay dividends to Washington
Mutual. See "COMPARATIVE RIGHTS OF SHAREHOLDERS -- Dividend Rights."
The three series of outstanding Washington Mutual preferred stock
("Washington Mutual Preferred Stock") rank prior to the Washington Mutual 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 Washington Mutual Preferred Stock.
The right of holders of Washington Mutual Preferred Stock to receive
dividends is noncumulative. Accordingly, if the Washington Mutual Board fails to
declare a dividend on any dividend payment date, the holders of Washington
Mutual 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 Washington Mutual 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 Washington Mutual Common Stock) on stock
junior to the Washington Mutual Preferred Stock ("Junior Stock") may be declared
or paid or set aside for payment or other distribution made upon the Washington
Mutual 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 Washington Mutual Preferred Stock ("Parity Stock") is purchased or
otherwise acquired by Washington Mutual for any consideration except by
conversion into or exchange for Junior Stock.
The Washington Mutual Board may issue Washington Mutual Preferred Stock
that is entitled to such dividend rights as the Washington Mutual Board may
determine, including priority over Washington Mutual Common Stock in the payment
of dividends.
COMPARATIVE RIGHTS OF SHAREHOLDERS
If the Merger is consummated, Utah Federal shareholders receiving
Washington Mutual Common Stock in the Merger will become shareholders of
Washington Mutual. The rights of holders of Utah Federal Common Stock are
governed by federal law, OTS Regulations and Utah Federal's Stock Charter and
Bylaws. As a federally chartered institution, Utah Federal is not generally
regulated or supervised by the state of Utah. The rights of holders of
Washington Mutual Common Stock are governed by the WBCA and the Articles of
Incorporation and Bylaws of Washington Mutual. Certain provisions of the
Washington Mutual Articles could render more difficult or discourage a merger,
tender offer, proxy contest or other attempt to obtain control of Washington
Mutual. The following is a summary of the material differences between the
rights of holders of Utah Federal Common Stock and the rights of holders of
Washington Mutual Common Stock. This summary does not purport to be a complete
discussion of and is qualified in its entirety by reference to the United States
Code, OTS Regulations, the WBCA, Washington Mutual's Articles of Incorporation
and Bylaws and Utah Federal's Stock Charter and Bylaws.
AUTHORIZED CAPITAL
WASHINGTON MUTUAL. Washington Mutual is authorized to issue 100,000,000
shares of Washington Mutual Common Stock and 10,000,000 shares of Preferred
Stock. As of March 31, 1996, Washington Mutual had
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<PAGE> 45
72,120,195 shares of Washington Mutual Common Stock issued and outstanding and
2,752,500 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C
("Series C Preferred Stock"), 1,400,000 shares of $6.00 Noncumulative
Convertible Perpetual Preferred Stock, Series D ("Series D Preferred Stock") and
1,970,000 shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E
("Series E Preferred Stock") issued and outstanding. At March 31, 1996, options
to purchase 1,571,874 shares of Washington Mutual Common Stock under Washington
Mutual's stock option plans had been granted, but not exercised or terminated
and 3,155,500 shares were available for future grants under such plans.
UTAH FEDERAL. Utah Federal is authorized to issue 500,000 shares of
Utah Federal Common Stock, $10.00 par value per share and 50,000 shares of its
$21 noncumulative convertible-preferred stock, $10.00 par value per share. As of
the Record Date, there were 139,000 shares of Common Stock outstanding, held by
47 holders of record, and no shares of Preferred Stock outstanding. As of the
Record Date, options to purchase 3,000 shares of Utah Federal Common Stock under
the Option Plan had been granted but not exercised or terminated.
Pursuant to federal law and Utah Federal's Charter, the Utah Federal
Board may authorize the issuance of additional authorized shares of Utah Federal
capital stock without further action by Utah Federal's shareholders. Utah
Federal's Charter does not provide to the shareholders of Utah Federal
preemptive rights to purchase or subscribe to any unissued authorized shares of
Utah Federal capital stock or any option or warrant for the purchase thereof.
Under Utah Federal's Charter, no shares of capital stock may be issued
to officers, directors or controlling persons of Utah Federal other than as part
of a general public offering or as qualifying shares to a director, unless the
issuance or the plan under which such shares would be issued is approved by a
majority of the outstanding shares of Utah Federal.
VOTING RIGHTS
WASHINGTON MUTUAL. Each holder of Washington Mutual Common Stock is
entitled to one vote for each share held on all matters voted upon by
shareholders. Washington Mutual shareholders are not permitted to cumulate their
votes in the election of directors. The Washington Mutual Board is authorized to
determine the voting rights of any Washington Mutual Preferred Stock. None of
the Series C, D or E Preferred Stock has general voting rights. The holders of
Series C, D and E Preferred Stock have the right to elect two directors for
newly created directorships if dividends are not paid for six quarterly dividend
periods, whether or not consecutive.
UTAH FEDERAL. Pursuant to Utah Federal's Charter, each Utah Federal
shareholder is entitled to one vote for each share held on all matters voted
upon by shareholders. Utah Federal's Charter and Bylaws do not provide for Utah
Federal shareholders to cumulate their votes in the election of directors.
LIQUIDATION RIGHTS
WASHINGTON MUTUAL. In the event of the liquidation of Washington
Mutual, holders of Washington Mutual capital stock will be entitled to receive
any remaining assets of Washington Mutual, in cash or in kind, after payment of
all liabilities. In the event of liquidation, the Washington Mutual Series C, D
and E Preferred Stock ranks prior to the Washington Mutual Common Stock, and to
all other classes and series of equity securities of Washington Mutual other
than any classes or series of equities securities of Washington Mutual ranking
on a parity with the Washington Mutual Preferred Stock. The Washington Mutual
Preferred Stock is also subject to creation of additional Parity Stock and
Junior Stock to the extent not expressly prohibited by the Washington Mutual
Articles of Incorporation. The rights of the holders of Washington Mutual
Preferred Stock are subordinate to the rights of Washington Mutual's general
creditors, and there is no sinking fund with respect to Washington Mutual
Preferred Stock. The Washington Mutual Board is authorized to determine the
liquidation rights of any Washington Mutual Preferred Stock that may be issued
in the future, including priority over the liquidation rights of holders of
Washington Mutual Common Stock.
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UTAH FEDERAL. In the event of the liquidation of Utah Federal, Utah
Federal shareholders will be entitled to receive, any remaining assets of Utah
Federal, in cash or in kind, after payment of all liabilities, and any interest
in the liquidation account, to the extent it is still in existence.
DIVIDEND RIGHTS
WASHINGTON MUTUAL. Washington Mutual's ability to pay dividends to
shareholders is dependent on the ability of its subsidiaries to pay dividends to
Washington Mutual. Washington Mutual's most significant subsidiary, WMB, is
precluded by Washington law from paying dividends to Washington Mutual if to do
so would cause (i) the regulatory capital levels of WMB to be reduced below the
regulatory capital requirements or (ii) its net worth to be reduced below the
amount required for its liquidation accounts or any limits imposed by the
Director. In addition, WMBfsb is precluded from paying dividends that would
cause it to fail to meet OTS capital requirements. Washington law also provides
that 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.
UTAH FEDERAL. OTS regulations permit Utah Federal to pay dividends on
its capital stock only from net income, earned surplus, or undivided profits and
do not permit Utah Federal to pay dividends if its capital would thereby be
reduced below specified levels, including the amount established by Utah Federal
for a liquidation account in connection with its conversion from mutual to stock
form and the capital requirements imposed on Utah Federal. In addition, the OTS
may prohibit any capital distribution that would otherwise be permitted under
the regulations, if the OTS determines that such a capital distribution would
constitute an unsafe or unsound practice.
BOARD OF DIRECTORS
WASHINGTON MUTUAL. Washington Mutual's Articles of Incorporation
provide that the Washington Mutual Board will consist of not less than five
members, with the exact number to be set by Washington Mutual's Bylaws. The
Washington Mutual Board currently consists of 13 members, divided into three
classes. Members of each class serve for three-year "staggered terms" pursuant
to which approximately one-third of the Washington Mutual Board is elected
annually. Vacancies on the Washington Mutual Board may be filled by the
affirmative vote of four-fifths of the remaining directors and any director so
appointed is to serve until the next annual meeting of shareholders. Washington
Mutual's Articles of Incorporation provide that a director may be removed by the
Washington Mutual shareholders only with good cause.
UTAH FEDERAL. Utah Federal's Charter provides that the Utah Federal
Board will consist of not less than five nor more than 15 members with the exact
number to be set by Utah Federal's Bylaws. Utah Federal's Board consists of six
members. Under Utah Federal's Bylaws, Utah Federal's Board is divided into three
classes, with each class as nearly equal in number as possible. Members of each
class serve for a three-year term and one class is elected by ballot annually.
Vacancies on the Utah Federal Board may be filled by the affirmative vote of a
majority of the remaining directors and any director so elected is to serve
until the next annual meeting of shareholders. Pursuant to OTS regulations and
Utah Federal's Bylaws, any director may be removed for cause by a vote of the
holders of the majority of the shares then entitled to vote in an election of
directors at a meeting of shareholders called expressly for that purpose.
AMENDMENTS OF ARTICLES AND BYLAWS
WASHINGTON MUTUAL. Washington Mutual's Articles of Incorporation may be
amended by a vote of its shareholders representing two-thirds of its issued
capital stock; provided, however, that Article XI, relating to business
combinations, may not be repealed or amended unless such action is approved by
holders of at least 95 percent of the outstanding stock or other securities
entitled to vote upon any action to be taken in connection with any business
combination or entitled to vote generally in the election of directors,
including stock convertible into such stock, ("Voting Stock") beneficially owned
by shareholders other than a Major Stockholder. The term "Major Stockholder"
means generally any individual, corporation, partnership or other person, group
or entity, together
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with its affiliates and associates and persons acting in concert with it, that
is the beneficial owner of five percent or more of the Voting Stock of
Washington Mutual. The Washington Mutual Board also may amend the Articles of
Incorporation for the purpose of determining the rights, preferences, voting
powers, privileges and other rights of each new series of authorized Washington
Mutual Preferred Stock that may be issued. The Washington Mutual Board has the
power to amend or repeal Washington Mutual's Bylaws, subject to the concurrent
power of the Washington Mutual shareholders, by at least two-thirds affirmative
vote of the shares of Washington Mutual entitled to vote thereon.
UTAH FEDERAL. Under OTS regulations and Utah Federal's Charter, subject
to certain exceptions, no amendment or repeal thereof may be made unless first
proposed by the Board and then preliminarily approved by the OTS, which
preliminary approval may be granted by the OTS pursuant to regulations
specifying pre-approved Charter amendments. Under Utah Federal's Charter, any
amendment or repeal of the Utah Federal Charter must be approved by Utah Federal
shareholders by a majority of the total votes eligible to be cast at a legal
meeting. Utah Federal's Bylaws provide that they may be amended at any time by a
majority vote of the full Board or by a majority of the votes cast by Utah
Federal shareholders at any legal meeting. Certain amendments to Utah Federal's
Bylaws also must be approved by the OTS.
ANTI-TAKEOVER PROVISIONS
WASHINGTON MUTUAL.
Classified Board of Directors. Article IV of Washington Mutual's
Articles of Incorporation provides that the Washington Mutual Board 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 Washington
Mutual Common Stock, to force an immediate change in the composition of the
majority of the Washington Mutual Board, since the terms of only one-third of
the incumbent directors expire each year. A staggered board of directors makes
it more difficult for Washington Mutual shareholders to change the majority of
directors even when the reason for the change is their performance.
No Restriction on Maximum Number of Directors. Article VI of Washington
Mutual's Articles of Incorporation provides that the number of directors of
Washington Mutual will not be less than five, as provided from time to time in
accordance with Washington Mutual's Bylaws. Additionally, the power to determine
the number of directors above the minimum and the power to fill vacancies,
whether occurring by reason of an increase in the number of directors or by
resignation, is vested in the Washington Mutual Board. Because the existing
Board has the power to increase the number of directors and to fill the newly
created vacancies, such provisions may make it more difficult for a person or
entity to acquire control of Washington Mutual through election of his, her or
its nominees.
Advance Notice Requirements for Nomination of Directors and
Presentation of New Business at Meetings of Shareholders. Article 3.13 of
Washington Mutual's Bylaws generally provides that any shareholder desiring to
make a nomination for the election of directors or a proposal for new business
at a meeting of Washington Mutual shareholders must submit written notice not
less than 90 days in advance of the anniversary date of the mailing of the proxy
statement in connection with the previous year's annual meeting. This advance
notice requirement could make it more difficult to oppose management's nominees
or proposals, even if Washington Mutual shareholders believe such nominees or
proposals are not in Washington Mutual's best interests.
Approval of Mergers, Consolidations, Sale of Substantially All Assets
and Dissolution. Article IX of Washington Mutual's Articles of Incorporation
provides that if pursuant to the WBCA, Washington Mutual's shareholders are
required to approve a merger, and if two-thirds of the Washington Mutual Board
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. See "CERTAIN DIFFERENCES BETWEEN
WASHINGTON CORPORATE AND BANKING LAWS -- Provisions Affecting Control Share
Acquisitions and Business Combinations."
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The Articles of Incorporation of Washington Mutual contain provisions
that, except under specified circumstances discussed below, generally prohibit
Washington Mutual (or any subsidiary of Washington Mutual) from becoming a party
to (i) any merger or consolidation with a Major Stockholder, (ii) any sale,
lease, exchange, distribution to stockholders or other disposition to or with a
Major Stockholder of more than five percent of the assets or business of
Washington Mutual and its subsidiaries; (iii) the purchase, exchange, lease or
other acquisition by Washington Mutual or any subsidiary of assets or business
of a Major Stockholder having a value of more than five percent of the value of
the assets of Washington Mutual and its subsidiaries; (iv) the issuance to a
Major Shareholder of any securities of or rights to acquire securities of
Washington Mutual, or a subsidiary, or the acquisition by Washington Mutual, or
a subsidiary, of any securities of or rights to acquire securities of a Major
Stockholder, or (v) any transaction that has the effect of increasing the
proportionate amount of Voting Stock of Washington Mutual or any subsidiary
beneficially owned by a Major Stockholder, or any partial or complete
liquidation, spin off, split off or split up of Washington Mutual or any
subsidiary (except that any transaction specified in this subparagraph (v) will
not be prohibited if approved by a majority of Washington Mutual's "continuing
directors"). The term "continuing director" means (x) a member of the Washington
Mutual Board immediately prior to the time that any then-existing Major
Stockholder became a Major Stockholder or (y) a member of such board designated,
before becoming a director, as a continuing director by a majority of the
then-continuing directors.
The above prohibition does not apply if the specific transaction is
approved by: (A) a majority of the Washington Mutual Board prior to the Major
Stockholder involved in the transaction becoming such; (B) a majority of the
continuing directors if the Major Stockholder involved obtained prior unanimous
approval of the board to become such; (C) 80 percent of the continuing
directors; or (D) 95 percent of Washington Mutual's outstanding Voting Stock and
a majority of such shares beneficially owned by stockholders other than any
Major Stockholder. The above prohibitions also do not apply if the specific
transaction is approved by a majority of the outstanding Voting Stock and of
such shares beneficially owned other than by any Major Stockholder provided that
holders of Washington Mutual Common Stock receive at least the higher of (a) the
highest price paid by the involved Major Stockholder in acquiring any of the
Washington Mutual Common Stock and (b) an amount that bears the same percentage
relationship to the market price of the Washington Mutual Common Stock
immediately prior to the announcement of the transaction as the highest per
share price paid by the involved Major Stockholder in acquiring any of the
Washington Mutual Common Stock bears to the market price of the Washington
Mutual Common Stock immediately prior to the commencement of acquisition of the
Washington Mutual Common Stock by such Major Stockholder (but in no event in
excess of two times the highest per share price determined in (a) above), and
provided certain other conditions are met. The Articles of Incorporation 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 these provisions of the Articles of Incorporation require the
affirmative vote of 95 percent of Washington Mutual shareholders holding Voting
Stock beneficially owned by stockholders other than any Major Stockholder. This
provision is designed to inhibit hostile takeovers and encourage potential
acquirors to negotiate with the Washington Mutual Board.
UTAH FEDERAL.
Restrictions on Maximum Number of Directors. Section 7 of Utah
Federal's Charter provides that the number of directors of Utah Federal will not
be less than five nor greater than 15, as provided in accordance with Utah
Federal's Bylaws.
Classified Board of Directors. Article III of Utah Federal's Bylaws
provides that the Utah Federal Board 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 Utah Federal Shareholders, including those holding a
majority of the outstanding Utah Federal Common Stock, to force an immediate
change in the composition of the majority of the Utah Federal Board, since the
terms of only one-third of the incumbent directors expire each year. A staggered
board of directors makes it more difficult for Utah Federal Shareholders to
change the majority of directors even when the reason for the change is their
performance.
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Advance Notice Requirements for Nomination of Directors and
Presentation of New Business at Meetings of Shareholders. Nominations of
Directors shall be made by the Board not later than 20 days prior to the annual
meeting and may be made by any shareholder entitled to vote in an election of
Directors by written notice delivered to Utah Federal at least five days prior
to the annual meeting date. No other nominations may be made and voted upon at
the annual meeting, unless the Board shall have failed to act at least 20 days
prior to such meeting, in which case nominations may be made at the annual
meeting by any shareholder entitled to vote, and such nomination shall be voted
on. Any new business to be taken up at the annual meeting shall be stated in
writing and filed with the secretary of Utah Federal at least five days before
the date of the annual meeting in order for such business to be considered at
the annual meeting.
Approval of Mergers and Consolidation. OTS regulations provide that
most mergers to which Utah Federal is a party require the approval of the
holders of two-thirds of the outstanding shares of Utah Federal, except that the
affirmative vote of a majority of Utah Federal shareholders is required to
approve a merger with an interim thrift for the purpose of forming a thrift
holding company.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
WASHINGTON MUTUAL. Under Article XIII of Washington Mutual's Articles
of Incorporation, a Washington Mutual director is not personally liable to
Washington Mutual or its shareholders for monetary damages for conduct as a
director ("Protected Conduct") to the fullest extent permitted under then
current Washington law. Protected Conduct, however, excludes (i) acts or
omissions that involve intentional misconduct or knowing violation of laws by
the director, and (ii) any transaction resulting in the receipt of money,
property or services to which the director is not legally entitled. Pursuant to
Article X of Washington Mutual's Articles of Incorporation and Article VIII of
Washington Mutual's Bylaws, Washington Mutual must, subject to certain
exceptions, indemnify and defend its directors against any liability arising
from or in connection with service for or at the request of Washington Mutual,
including without limitation, liability under the Securities Act. Washington
Mutual is not obligated to indemnify a director from acts of such director that
are finally adjudged to be intentional misconduct or a knowing violation of the
law or if such director received an economic benefit from a transaction to which
he or she was not entitled. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling Washington Mutual pursuant to the provisions described above,
Washington Mutual has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
UTAH FEDERAL. OTS regulations and Utah Federal's Charter or Bylaws do
not provide any limitations on a director's liability.
OTS regulations provide that Utah Federal will indemnify any person
against whom an action is brought or threatened because that person is or was a
director, officer, or employee of Utah Federal for: (i) any amount for which
that person becomes liable under a judgment in such action and (ii) reasonable
costs and expenses, including reasonable attorneys' fees, actually paid or
incurred by that person in defending or settling such action, or in enforcing
such person's right to indemnification if such person attains a favorable
judgment in such enforcement action; provided, however, that any such person
will be indemnified only if: (a) a final judgment on the merits is rendered in
such person's favor or (b) in case of (1) a settlement, (2) a final judgment
against such person, or (3) a final judgement in such person's favor, other than
on the merits, if a majority of the disinterested directors of Utah Federal
determines that such person was acting in good faith within the scope of such
person's employment or authority as such person reasonably could have perceived
it under the circumstances and for a purpose which such person reasonably could
have believed under the circumstances was in the best interest of Utah Federal
or its shareholders; and provided, further, that no such indemnification will be
made by Utah Federal unless Utah Federal gives the OTS at least 60 days' prior
notice and the OTS does not object in writing to such indemnification.
In addition, under OTS regulations, if a majority of the directors of
Utah Federal concludes that, in connection with any action, any person
ultimately may become entitled to indemnification, the directors may authorize
payment of reasonable costs and expenses, including reasonable attorneys' fees,
arising from the defense or settlement of such action. The directors of Utah
Federal may impose such conditions on a payment of expenses as they deem
warranted and in the interest of Utah Federal. Before making any advance payment
of expenses,
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however, Utah Federal must obtain an agreement that it will be repaid if the
person on whose behalf the payment is made is later determined not to be
entitled to such indemnification.
WASHINGTON MUTUAL SHAREHOLDER RIGHTS PLAN
In October 1990, Washington Mutual's predecessor's Board of Directors
adopted a shareholders rights plan and declared a dividend of one right for each
outstanding share of its common stock to shareholders of record on October 31,
1990. In connection with the Reorganization, Washington Mutual 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 acquiror to negotiate a price fair to all stockholders. The rights may
cause substantial dilution to an acquiring party that attempts to acquire
Washington Mutual on terms not approved by the Washington Mutual Board, 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
Washington Mutual.
The rights are not exercisable until the tenth day after a party
acquires beneficial ownership of 20 percent or more of the outstanding
Washington Mutual Common Stock or commences or publicly announces a tender offer
to do so. Each right entitles the holder to purchase one share of Washington
Mutual Common Stock for an exercise price that is currently $26.67 per share. In
the event that an acquiring party thereafter gains control of 30 percent or more
of the Washington Mutual 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 Washington Mutual 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 Washington Mutual 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 Washington Mutual shareholder, including, without limitation, the
right to vote or to receive dividends.
CERTAIN DIFFERENCES BETWEEN WASHINGTON CORPORATE LAW AND OTS REGULATIONS
The WBCA governs the rights of Washington Mutual shareholders and will
govern the rights of Utah Federal Shareholders who become shareholders of
Washington Mutual pursuant to the Merger. The WBCA and the OTS regulations
differ in many respects. Certain of the significant differences between the
provisions of the WBCA and the OTS regulations that could materially affect the
rights of Utah Federal shareholders are discussed below.
RIGHT TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
The WBCA provides that a special meeting of shareholders of the
corporation may be called by its board of directors, by holders of at least 10
percent of all votes entitled to be cast on any issue proposed to be considered
at the proposed special meeting, or by other persons authorized to do so by the
articles of incorporation or bylaws of the company. However, the WBCA allows the
right of shareholders to call a special meeting to be limited or denied to the
extent provided in the articles of incorporation. The Washington Mutual Articles
of Incorporation provide that the written request of holders of at least 25
percent of the outstanding Washington Mutual Common Stock entitled to vote at
the meeting is required to call a special meeting.
Under OTS regulations and Utah Federal's Bylaws, special meetings of
the shareholders of Utah Federal may be called at any time by the Chairman of
the Board, the President, or a majority of the Board and must be called by the
Chairman of the Board, the President or the Secretary upon the written request
of the holders of not less than one-tenth of the outstanding capital stock of
Utah Federal.
PROVISIONS AFFECTING CONTROL SHARE ACQUISITIONS AND BUSINESS COMBINATIONS
The WBCA imposes restrictions on certain transactions between a
corporation and certain significant shareholders. First, subject to certain
exceptions, pursuant to the fair price provision, a merger, share exchange, sale
of substantially all the corporation's assets, other than in the regular course
of business, or dissolution of a corporation involving a shareholder that
beneficially owns more than 20 percent of the corporation's outstanding voting
stock ("Interested Shareholder") must be approved by the holders of two-thirds
of the corporation's outstanding securities entitled to vote on the transaction,
other than those of the Interested Shareholder. This
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restriction does not apply if a majority of disinterested directors determines
that the fair market value of the consideration to be received by shareholders
other than the Interested Shareholder as a result of the transaction is not less
than the highest fair market value of the consideration paid by any Interested
Shareholder for the shares of the same class of the corporation's stock during
the preceding 24 months or if the transaction is approved by a majority of
disinterested directors. A Washington corporation may, in its articles of
incorporation, exempt itself from coverage of this provision; Washington Mutual
has not done so.
Second, the WBCA prohibits a corporation, with certain exceptions, from
engaging in certain "significant business transactions" with a person or group
of persons who acquire 10 percent or more of the voting securities of a target
corporation (an "acquiring person") without the prior approval of the
corporation's board of directions for a period of five years after the
acquisition of such securities. Significant business transactions include, among
others, merger or consolidation with, disposition of assets to or with or
issuance or redemption of stock to or from, the acquiring person, termination of
five percent or more of the employees of the target corporation employed in
Washington State as a result of the acquiring person's acquisition of 10 percent
or more of the shares or allowing the acquiring person to receive any
disproportionate benefit as a shareholder.
Federal law and regulations applicable to Utah Federal do not have
provisions comparable to the WBCA statutes regarding control share acquisitions
and business combinations. All depository institutions, including Utah Federal,
WM Bank and WMBfsb, are subject to the Change in Bank Control Act, which
generally provides that no person, acting directly or indirectly or through or
in concert with one or more persons, may acquire control of a depository
institution unless its primary Federal regulator has been given 60 days' prior
written notice.
TRANSACTIONS WITH OFFICERS OR DIRECTORS
The WBCA sets forth a safe harbor for transactions between a
corporation and one or more of its directors. A conflicting interest transaction
may not be enjoined, set aside or give rise to damages if it: (i) is approved by
a majority of qualified directors (but no fewer than two) or by the majority of
qualified shares after full disclosure regarding the transaction; or (ii) is
fair to the corporation. For purposes of this provision, a "qualified director"
is one who does not have either: (a) a conflicting interest respecting the
transaction or (b) a familial, financial, professional or employment
relationship with a second director who has a conflicting interest respecting
the transaction, which relationship would reasonably be expected to influence
the first director's judgment when voting on the transaction. "Qualified Shares"
are defined generally as shares other than those beneficially owned or
controlled by a director (or an affiliate of the director) who has a conflicting
interest respecting the transaction.
OTS regulations and policy statement, provide that each director,
officer, or other affiliated person of a savings association has a fundamental
duty to avoid placing himself or herself in a position that creates, or could
lead to, a conflict of interest or appearance of a conflict of interest between
the accomplishment of the purposes of the Home Owners' Loan Act.
DISSENTERS' RIGHTS
Under the WBCA, a shareholder is entitled to dissent from, and, upon
perfection of the shareholder's appraisal right, to obtain the fair value of his
or her shares in the event of certain corporate actions, including certain
mergers, share exchanges, sales of substantially all assets of the corporation,
and certain amendments to the corporation's articles of incorporation that
materially and adversely affect shareholder rights.
The Dissenter and Appraisal Right Regulation promulgated by the OTS
provides that dissenting shareholders of a federally chartered savings bank such
as Utah Federal have appraisal rights with respect to mergers and certain
exchanges of shares with acquiring bank holding companies. The applicable OTS
regulation is reproduced in its entirety as Appendix D.
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INFORMATION CONCERNING UTAH FEDERAL
BUSINESS
GENERAL. Ogden First Federal Savings and Loan Association (the
"Association") initially commenced operations in 1937 as a federally chartered
savings and loan association. In 1992, the Association was converted to a
federally chartered stock association and its name was changed from "Ogden First
Federal Savings and Loan Association" to "Utah Federal Savings Bank."
Utah Federal is principally engaged in the business of receiving
deposits and making loans for the construction, acquisition or refinance of
residential properties, primarily in Weber, Davis, Box Elder, Cache and
Washington counties in Utah. Deposit services include personal checking
accounts, savings accounts, certificates of deposit, money market accounts and
individual retirement accounts. Lending services include land development loans,
residential construction and long-term loans and consumer loans.
COMPETITION. The financial services industry in the geographic area
served by Utah Federal is highly competitive with respect to both deposits and
loans. Utah Federal's primary competitors for deposits have been commercial
banks, savings banks and credit unions located in its primary market area. Utah
Federal's competition for loans comes primarily from commercial banks, savings
banks, credit unions and mortgage companies. Utah Federal's primary lending area
is dominated by three large commercial banks, a number of smaller commercial
banks, a number of highly competitive credit unions and numerous mortgage
companies. Because of their size and number and their favored tax treatment,
credit unions are able to offer a range of products and services at a cost that
is often difficult for savings banks such as Utah Federal to match. Utah Federal
attempts to compete for loans and deposits in this environment by providing a
high level of individualized customer service and, more recently, by increasing
its originations of residential construction loans.
LENDING. The principal lending activities of Utah Federal are the
origination of residential (one to four family dwellings) and, to a lesser
extent, consumer credit loans. Utah Federal lends primarily in its local market
areas. Beginning in 1992, Utah Federal made a conscious effort to modify its
traditional loan portfolio mix and undertook to increase its levels of
residential construction, home equity and consumer lending, while maintaining
its traditional long-term residential mortgage lending. Construction and home
equity lending generally pay higher rates of interest, but also entail
additional risk as compared with long-term residential mortgage lending.
Construction loans typically involve large loan balances concentrated with
single borrowers or groups of related borrowers. Home equity lending involves
loans secured by second mortgages.
During the past three years Utah Federal has sought to attract and
retain many builders in the Utah Federal's market area and in fiscal 1994, Utah
Federal's management hired personnel to start up a consumer loan/home equity
department. During this three-year period, construction lending increased from
$2.4 million at the end of fiscal 1994 to $15.4 million at March 31, 1996. Home
equity loans increased from $1.9 million to $7.0 million during the same period.
Consumer installment loans include home equity loans, auto loans and
savings account and certificate loans. While some consumer loans are secured by
personal property, the bulk of the collateral taken by Utah Federal to secure
its consumer loans is real estate.
In addition to interest earned on loans, Utah Federal receives fees for
originating loans, for providing loan commitments, and in selling residential
real estate loans into the secondary market with a service release premium. Fees
for originating loans and for providing loan commitments, net of the cost of
originating loans, are deferred and amortized into the income of Utah Federal
over the life of the loan. When loans are sold into the secondary market, all
unamortized fees are taken into income at the time of the sale. Loans are
originated principally as a result of the effort of loan officers hired by Utah
Federal, through referrals from existing customers and through brokers.
Utah Federal's loan underwriting policies focus on each borrower's
ability to service and repay the debt and the availability of collateral that
can be used to secure the loan. Utah Federal's policy is that loans up to
$250,000
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can be approved by its President. Loans between $250,000 and $500,000 are
approved by Utah Federal's President and one other member of Utah Federal's loan
committee. Loans in excess of $500,000 must be approved by Utah Federal's major
loan committee consisting of the President and at least two other members of the
Utah Federal Board. Under Utah Federal's policy, combined loans to one borrower
cannot exceed 90 percent of 15 percent of Utah Federal's total unimpaired
capital and surplus.
Utah Federal also makes brokered loans for the construction, purchase
or refinance of residential real estate and serviced a loan portfolio of
$143,906,870 as of March 31, 1996. The majority of long-term loans made by Utah
Federal are sold into the secondary market, service released. Utah Federal is
not contractually obligated to sell any such loans. Utah Federal contracts with
institutional investors to purchase loans at the time they are originated by
Utah Federal. It is Utah Federal's policy not to issue a commitment on a
brokered construction loan until it has obtained a commitment from an investor
to purchase a long-term mortgage loan secured by that particular property. In
connection with each brokered loan, Utah Federal receives a net brokerage fee
before commissions in the amount of one percent to two percent of the principal
amount of the loan.
Utah Federal's gross fees for originating loans for the fiscal year
ending September 30, 1994 and September 30, 1995 was $351,141 and $684,625,
respectively. Gross fees for originating loans during the quarters ending March
31, 1995 and March 31, 1996 were $128,366 and $259,200 respectively. Gross
income from servicing loans for the fiscal year ending September 30, 1994 and
September 30, 1995 were $247,341 and $259,774 respectively. Gross fees from
servicing loans during the quarters ending March 31, 1995 and March 31, 1996
were $60,512 and $79,848 respectively. In general, commissions paid to Utah
Federal's loan officers are 0.65 of the principal loan amount.
The following table sets forth the composition of Utah Federal's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995 September 30, 1994
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Conventional mortgage loans........... $53,936,834 63.65% $62,754,809 70.35% $59,681,478 84.16%
Insured mortgage loans................ 5,170,179 6.10 7,052,519 7.91 5,643,596 7.96
Real estate construction.............. 15,357,934 18.12 11,173,596 12.52 2,444,738 3.45
Home equity loans..................... 7,010,451 8.27 5,758,399 6.46 1,855,058 2.62
Consumer & other loans................ 3,263,943 3.86 2,464,845 2.76 1,288,052 1.81
----------- ------ ----------- ------ ----------- ------
Total loans........................ $84,739,341 100.00% $89,204,168 100.00% $70,912,922 100.00%
Less:
Deferred loan fees.................... (629,364) (773,205) (720,182)
Reserve for loan losses............... (1,650,196) (1,661,841) (1,677,806)
----------- ----------- -----------
Total loans, net................... $82,459,781 $86,769,122 $68,514,934
=========== =========== ===========
</TABLE>
The following table sets forth certain information at March 31, 1996,
regarding the dollar amount of assets maturing in Utah Federal's portfolio based
on their contractual terms to maturity but does not include undisbursed
proceeds, potential prepayments, or unearned income.
<TABLE>
<CAPTION>
Within One Year One Year to 3 Years Due After 3 Years
--------------- ------------------- -----------------
<S> <C> <C> <C>
Mortgage-backed securities and investments......... $ 0 $ 0 $19,671,000
Other investments.................................. 14,354,000 173,000 0
Mortgage loans..................................... 26,510,000 9,399,000 $23,198,000
Construction loans................................. 15,358,000 0 0
Consumer & other loans............................. 3,689,000 2,863,000 3,722,000
----------- ----------- -----------
Total earning assets........................... $59,911,000 $12,435,000 $46,591,000
=========== =========== ===========
</TABLE>
The following table sets forth the dollar amount of all loans and
investments due one year or more after March 31, 1996, which have fixed interest
rates and have floating or adjustable interest rates.
46
<PAGE> 54
<TABLE>
<CAPTION>
Asset/rate type Dollar Amount
--------------- -------------
<S> <C>
Fixed-rate loans................................. $ 40,604,000
Variable-rate loans.............................. 44,135,000
Fixed-rate investments........................... 4,650,000
Variable-rate investments........................ 29,548,000
------------
Total......................................... $118,937,000
</TABLE>
ASSET QUALITY AND LOAN LOSSES. The following tables set forth (i) the
dollar amount of delinquent loans over 30 days past due as of March 31, 1996
(includes both in-house and investor owned loans and loans on non-accrual
status); (ii) reserves for loan losses and charge-offs during 1995; and (iii)
calculation of reserve adequacy. Management attributes the low level of
delinquencies and charge-offs to the loan approval process, stringent
underwriting and timely collection procedures. Accrual of interest is
discontinued and prior interest is reversed on a loan that management believes,
after considering economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. Management normally discontinues interest accrual when any loan
reaches 91 days or more past due.
The allowance for loan losses has been established through a provision
for loan losses charged to expenses. The allowance is an amount Utah Federal
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of factors such as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, and economic conditions existing at the time the
financial statements are prepared that may affect the borrowers' ability to pay.
Loans are charged off against the loan loss allowance when management believes
that the collection of the principal is unlikely. Total reserves for loan losses
on March 31, 1996, of $1,650,196 is calculated to be in excess of adequate
reserves by $282,900. The reserve for loan losses as a percentage of total loans
was 1.95 percent, 1.87 percent and 2.41 percent at March 31, 1996, September 30,
1995, and September 30, 1994, respectively. Only three loans totaling $9,188
were charged off against the loan loss allowance from January 1, 1995 through
March 31, 1996.
The following table sets forth loans delinquent more than 30 days and
non-accrual loans as of March 31, 1996:
<TABLE>
<CAPTION>
Past Due 31-60 Days Past Due 61-90 Days Past Due 91 Days & Over
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans ........... $ 479,042 0.81% $ 0 0.00% $ 41,129 0.07%
Consumer loans ........... 5,857 0.18 0 0.00 0 0.00
Real estate construction.. 586,923 3.82 767,237 5.00 550,022 3.58
Home equity loans ........ 24,813 0.35 19,219 0.27 27,141 0.39
NOW line of credit loans.. 1,194 1.04 0 0.00 0 0.00
---------- ---- ---------- ---- ---------- ----
Total loans ...... $1,097,829 1.30% $ 786,456 0.93% $ 618,292 0.73%
========== ==== ========== ==== ========== ====
</TABLE>
<TABLE>
<CAPTION>
Non Accrual Loans Amount Number
- ----------------- -------- ------
<S> <C> <C>
Mortgage loans............................ $ 41,129 1
Construction loans........................ 600,142 5
All other loans........................... 27,141 1
-------- --
Total non-accrual loans........... $668,412 7
</TABLE>
Total loans past due 31 days or more on March 31, 1996 were $2,502,577
or 2.95 percent of total loans. The total non accrual loans totalling $668,412
represents 0.79 percent of total loans.
The following table sets forth reserves for losses as of March 31, 1996
with activity from January 1, 1995 through March 31, 1996. Also a calculation of
reserve adequacy is presented.
47
<PAGE> 55
<TABLE>
<S> <C>
Reserve balances at January 1, 1995 .............................. $ 1,658,784
Total charge offs against reserves ........................... 9,188
Total recoveries to reserves ................................. 600
-----------
Reserve balances at March 31, 1996 ............................... $ 1,650,196
Calculation of reserve adequacy:
- --------------------------------
Specific reserves ................................................ $ (145,568)
General reserves for "passing assets" at March 31, 1996 .......... (917,300)
General reserves for "special mention assets" at March 31, 1996 .. (53,400)
General reserves for "substandard assets" as of March 31, 1996 ... (248,200)
General reserves for "doubtful assets" as of March 31, 1996 ...... 0
General reserves for "loss assets" as of March 31, 1996 .......... 0
-----------
Excess/(deficiency) in reserves for losses ....................... $ 285,728
</TABLE>
The following table presents the allocation of the reserve for loan
losses:
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995 September 30, 1994
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash and investments............. $ 12,200 0.74% $ 5,600 0.34% $ 9,200 0.46%
Mortgage residential loans....... 180,700 10.95 200,200 12.05 215,800 10.74
Non residential mortgage loans... 215,200 13.04 232,500 13.99 282,300 14.04
Real estate construction......... 525,200 31.83 247,300 14.88 84,600 4.21
Consumer & home equity........... 135,000 8.18 88,900 5.35 30,400 1.51
Commercial/LOC/land and lot...... 296,200 17.95 237,200 14.27 120,600 6.00
Real estate owned (REO).......... 0 0.00 3,800 0.23 386,700 19.24
Unallocated...................... 285,700 17.31 646,300 38.89 880,600 43.80
---------- ------ ---------- ------ ---------- ------
Total allowance................ $1,650,200 100.00% $1,661,800 100.00% $2,010,200 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
ASSET AND LIABILITY MANAGEMENT. Utah Federal's results of operations
depend substantially on the net interest margin. The net interest margin is
affected by general economic conditions, competition in the marketplace, market
interest rates, and the mix, repricing, and maturity characteristics of Utah
Federal's assets and liabilities. An effort during the past two years to
restructure the loan mix more heavily into residential construction lending has
had a significant positive impact on earnings. For example, since July 1994
total construction loans outstanding totalling $6,343,000 have risen to over
$15,000,000 at March 31, 1996. This $8.6 million increase reflects an average
increase in yields of construction loans compared to long-term mortgage loans of
2.75 percent, which equates to an annual increase in income of approximately
$236,500.
Exposure to interest rate risk is primarily a function of differences
between the maturity and repricing schedules of assets (primarily loans and
investment securities) and liabilities (primarily deposits). Assets and
liabilities are described as interest sensitive for a given period of time when
they mature or can reprice within that period. The difference between the amount
of interest sensitive assets and interest sensitive liabilities is referred to
as the interest sensitivity "GAP" for any given period of time.
As a general rule, in periods of falling interest rates, banks with
positive interest sensitivity GAPs are susceptible to a decline in net interest
income. In periods of rising interest rates, savings associations with negative
interest sensitivity GAPs are likely to experience declines in net interest
income. The actual effect that rising and falling interest rates have on Utah
Federal's net interest income depends, however, not only on the interest
sensitivity GAP, but also the relative changes in interest rates that occur when
assets and liabilities are repriced, unscheduled repayments of loans, early
withdrawals of deposits and other factors.
48
<PAGE> 56
Traditionally, thrift institutions have had a negative interest
sensitivity one-year GAP. As of March 31, 1996, Utah Federal had a positive
interest sensitivity one-year GAP of $8,677,000, or 89.7 percent, from a
marketed position of 100 percent and thus is most vulnerable to falling interest
rates. Utah Federal's positive GAP is primarily due to its variable rate
investments, particularly $19,237,000 in variable rate mortgage backed
securities, and its short term and variable rate lending programs, particularly
$15.0 million in construction loans which are variable rate loans tied to prime.
Utah Federal's management attempts to limit exposure to interest rate risk by
maintaining a balance sheet posture such that net interest income is not
significantly affected by market fluctuations in interest rates. Utah Federal
utilizes interest rate sensitivity GAP reports in conjunction with modeling to
measure the effects of varying interest rate scenarios and balance sheet
strategies on net interest income.
Certain shortcomings are inherent in the interest sensitivity GAP
method of analysis presented in the following table. For example, although
certain assets and liabilities may have similar repricing characteristics, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates.
The following table sets forth the dollar amount of interest sensitive
assets and interest sensitive liabilities at March 31, 1996, and the differences
between them for the maturity or repricing periods indicated.
<TABLE>
<CAPTION>
Variable Fixed Rate Fixed Rate Fixed Rate Fixed Rate
GL Balance Rate Non Rate 0-6 Mo. 6-12 Mo. 12-36 Mo. Over 36 Mo.
---------- -------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments ....................... $ 14,527 $ 9,538 $ 527 $ 4,289 $ 0 $ 173 $ 0
Mortgage-backed securities ........ 19,671 19,237 0 0 0 0 434
Mortgage loans .................... 74,465 43,868 717 1,683 1,540 6,146 20,530
Other loans ....................... 10,274 287 27 2,713 678 2,863 3,705
Less reserves .................. (1,650) 0 (1,650) 0 0 0 0
Other assets/REO .................. 5,944 0 5,944 0 0 0 0
-------- ------- -------- -------- ------- ------- -------
Total assets ................... $123,231 $72,910 $ 5,565 $ 8,686 $ 2,219 $ 9,183 $24,668
======== ======= ======== ======== ======= ======= =======
Savings deposits .................. 16,704 16,704 0 0 0 0 0
Checking/NOW deposits ............. 10,511 0 3,711 0 0 0 6,800
Certificates deposits ............. 83,042 866 0 38,632 18,464 15,445 9,635
Borrowed funds .................... 27 0 0 1 1 4 21
Other liabilities ................. 2,116 480 1,636 0 0 0 0
Equity accounts ................... 10,381 0 10,381 0 0 0 0
-------- ------- -------- -------- ------- ------- -------
Total liabilities and equity .. $123,231 $18,050 $ 16,178 $ 38,633 $18,465 $15,449 $16,456
======== ======= ======== ======== ======= ======= =======
Net difference .................... 0 54,870 (10,613) (29,947) (6,246) (6,266) 8,212
GAP position by window ............ 403.9% 34.4% 22.5% 12.0% 59.4% 149.9%
</TABLE>
Twelve month rate sensitive GAP = asset sensitive $8,677,000 or 89.66 percent
INVESTMENT ACTIVITIES. Utah Federal has adopted, as required, Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). This statement requires investment
securities to be segregated as trading securities, held to maturity, or
available-for-sale based upon managements intent as to the ultimate disposition
of each investment acquired. Utah Federal's current policy does not allow for
the acquisition of trading securities. Investments classified as
held-to-maturity are accounted for at amortized cost, but an institution must
have both the intent and ability to hold such securities to maturity. Securities
not classified as either trading or held-to-maturity are considered to be
available-for-sale. Unrealized gains and losses on available-for-sale securities
are excluded from earnings and reported as a separate component of stockholders'
equity.
As of March 31, 1996, Utah Federal's investment portfolio included
$14,862,000 of held-to-maturity investments (with a fair market value of
$15,045,250), $5,277,500 of available-for-sale investments and no trading
49
<PAGE> 57
account securities. SFAS No. 115 has not had any material effect on Utah
Federal's financial statements or its federal tax liability.
The investment policy of Utah Federal is reviewed by the investment
committee and reviewed and approved annually by the Utah Federal Board. The most
recent review and approval was at March 20, 1996. It has been the policy of Utah
Federal to maintain relatively high levels of liquidity to meet construction
loan funding needs during peak lending periods. At March 31, 1996, Utah Federal
had unfunded loan commitments of $20,571,000.
The following table sets forth the investment securities portfolio of
Utah Federal at carrying book value and market value at the dates indicated. The
carrying value and market value of the available for sale securities is the
same.
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995 September 30, 1994
-------------------------- --------------------------- ---------------------------
Carrying Est. Market Carrying Est. Market Carrying Est. Market
Value Value Value Value Value Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
FHLMC & FNMA mortgage-
backed securities ......... $ 5,104,232 $ 5,104,232 $ 120,964 $ 120,964 $ 124,486 $ 124,486
Held to Maturity:
- -----------------
Government Agencies (SBA) ... 702,819 719,505 770,630 797,531 926,944 940,146
FHLMC & FNMA mortgage-
backed securities ......... 13,429,901 13,561,898 22,845,801 23,031,255 28,020,820 27,566,872
GNMA mortgage-backed
securities ................ 434,320 468,844 492,407 524,735 586,729 609,962
----------- ----------- ----------- ----------- ----------- -----------
Total investment securities.. $19,671,272 $19,854,479 $24,229,803 $24,474,485 $29,658,979 $29,241,466
=========== =========== =========== =========== =========== ===========
</TABLE>
The following table sets forth the maturities of the investment
securities portfolio of Utah Federal at carrying book value, the average
repricing period, and weighted average yield at March 31, 1996.
<TABLE>
<CAPTION>
Less than 20 Years More than 20 Years
---------------------- ---------------------------
Carrying Weighted Carrying Weighted Average Repricing
Value Avg. Yield Value Avg. Yield Period in Months
-------- ---------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Available for Sale:
- -------------------
FHLMC & FNMA mortgage-
backed securities................... $ 0 0.00% $ 5,104,232 7.213% 5.8 months
Held to Maturity:
- -----------------
Government Agencies (SBA).............. 0 0.00 702,819 6.983 9.9 months
FHLMC & FNMA mortgage-
backed securities................... 0 0.00 13,429,901 7.390 5.3 months
GNMA mortgage-backed
securities.......................... 0 0.00 434,320 9.316 277.5 months
--- ---- ----------- ----- ------------
Total investment securities......... $ 0 0.00% $19,671,272 7.465% 10.2 months
=== ==== =========== ===== ============
</TABLE>
SOURCES OF FUNDS. Utah Federal derives funds principally from customer
deposits, payments on loans and mortgage backed securities, and net income. A
credit line is also available at the Federal Home Loan Bank of Seattle ("FHLB").
Utah Federal offers various types of deposit accounts, including
business checking, personal NOW checking, money market investment accounts,
statement savings and a variety of IRA and regular certificate accounts. Deposit
accounts vary as to terms, with the principal differences being minimum balance
required, the time period the funds must remain on deposit and the interest rate
paid. Utah Federal does not utilize "brokered deposits," but relies upon its own
origination of deposits through a strategy that employs superior personalized
customer service, referrals and
50
<PAGE> 58
occasional advertising promotions. From 1994 through March 31, 1996, total
deposits consistently increased, with the growth primarily occurring in the
certificates of deposits and the non-interest bearing accounts.
The following tables set forth the average amount of and the average
rate paid on certain types of deposit accounts by Utah Federal at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995 September 30, 1994
------------------------- ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand.......... $ 6,606,801 5.99% $ 6,269,027 5.75% $ 7,746,787 7.26%
Savings & money market........... 16,897,409 15.33 17,385,501 15.95 18,932,968 17.73
Certificates of deposit.......... 83,041,636 75.32 82,238,342 75.46 79,377,150 74.35
Non-interest-bearing demand...... 3,711,070 3.36 3,096,950 2.84 708,384 0.66
------------ ------ ------------ ------ ------------ ------
Total deposits................ $110,256,916 100.00% $108,989,820 100.00% $106,765,289 100.00%
============ ====== ============ ====== ============ ======
</TABLE>
The following table sets forth the amount of Utah Federal's
certificates of deposit by time remaining until maturity as of March 31, 1996.
<TABLE>
<CAPTION>
Maturity Period Amount Avg. Rate
--------------- ----------- ---------
<S> <C> <C>
Three months or less...................... $22,034,244 5.95%
Over three through six months............. 17,129,291 5.67
Over six through 12 months................ 18,696,490 5.81
Over twelve through 24 months............. 11,330,420 5.98
Over twenty four months................... 13,851,191 6.40
----------- ----
Total certificates................ $83,041,636 5.95%
=========== ====
</TABLE>
BORROWINGS. Utah Federal has a credit line with the FHLB that is
available to supplement its supply of lendable funds and to meet liquidity
requirements. Advances from the FHLB are secured by Utah Federal's stock in the
FHLB and by certain mortgage backed securities and loans. The rates on these
advances vary from time to time in response to general economic conditions. At
March 31, 1996, Utah Federal had no borrowings against its FHLB credit line.
Utah Federal's current available line of credit with the FHLB is 15 percent of
assets, or $18,485,000 at March 31, 1996. Utah Federal has no unsecured federal
funds credit lines with other banks as of March 31, 1996.
SUPERVISION AND REGULATION
GENERAL. Utah Federal, as a federally-chartered savings association, is
subject to examination and supervision by the OTS, which is also its primary
regulator. Utah Federal is further subject to (1) regulation and examination by
the FDIC, which insures the deposits of Utah Federal through the SAIF to the
maximum extent permitted by law, and (2) certain requirements established by the
Federal Reserve Board. In addition, Utah Federal is subject to regulation
incidental to its membership in the FHLB. The lending, investment, and other
business activities of Utah Federal must comply with various federal laws and
regulatory requirements, including requirements governing such matters as
capital standards, reserves against deposits, timing of the availability of
deposited funds, nature and amount of and collateral for loans, mergers,
establishment of branch offices, subsidiary investments and activities, and
general investment authority. The laws and regulations governing Utah Federal
generally have been promulgated to protect depositors and the SAIF and not for
the purpose of protecting stockholders of such institutions or their holding
companies.
51
<PAGE> 59
The description of statutes and regulations applicable to savings
associations set forth in this Proxy Statement/Prospectus does not purport to be
a complete description of the statutes and regulations mentioned or of all such
statutes and regulations.
OTS ENFORCEMENT AUTHORITY. The OTS has extensive enforcement authority
over all savings associations. This authority includes, without limitation, the
ability to (1) assess civil money penalties, (2) issue cease-and-desist or
removal orders, and (3) initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Except under certain circumstances, Federal law
requires public disclosure of final enforcement actions by the OTS.
Grounds for appointment of a conservator or receiver for a savings
association on the basis of an institution's financial condition include: (1)
insolvency, meaning that the assets of the association are less than its
liabilities to depositors and others; (2) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (3) existence
of an unsafe or unsound condition to transact business; (4) likelihood that the
association will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business; and (5) insufficient capital or
the incurring or likely incurring of losses that will deplete substantially all
capital with no reasonable prospect of replenishment of capital without federal
assistance.
LOANS-TO-ONE BORROWER. Utah Federal is subject to limitations on the
aggregate amount of loans that it can make to any one borrower. For purposes of
these rules, the term "borrower" includes (1) the person named as borrower or
debtor on the loan and (2) all other persons, including drawers, endorsers or
guarantors, (a) deemed to directly benefit from the loan proceeds or (b) when a
common enterprise is deemed to exist between the named debtor and such person.
Applicable regulations generally do not permit loans-to-one borrower to exceed
15 percent of unimpaired capital and surplus; however, loans in an amount equal
to an additional 10 percent of unimpaired capital and surplus also may be made
to a borrower if the loans are fully secured by readily marketable securities.
In certain circumstances, as set forth in OTS regulations, loans to more than
one borrower must be combined for purposes these limitations. The OTS by
regulation has amended the loans-to-one borrower rules applicable to savings
associations, such as Utah Federal, to permit savings associations meeting
certain requirements, including fully phased-in capital requirements, to extend
loans-to-one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units. As of
March 31, 1996, Utah Federal was in compliance with applicable
loans-to-one-borrower requirements.
REGULATION OF MANAGEMENT. Federal law (1) provides for the
circumstances under which officers or directors of a financial institution may
be removed by the institution's federal supervisory agency, (2) places
restraints on lending by an institution to its executive officers, directors, or
principal shareholders, and (3) prohibits management personnel from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
INSURANCE OF ACCOUNTS. The FDIC administers two separate deposit
insurance funds: the BIF, which insures commercial bank deposits and some
savings bank deposits, and the SAIF, which insures most savings association
deposits. The deposits of Utah Federal are insured up to $100,000 per insured
member (as defined by law and regulation) by the SAIF and are backed by the full
faith and credit of the United States Government. Utah Federal pays deposit
insurance premiums to the FDIC based on an assessment rate schedule established
by the FDIC.
As required by the Federal Deposit Insurance Improvement Act of 1991
("FDICIA"), the FDIC, adopted a risk-based deposit insurance system. Under this
risk-related insurance assessment system, an institution with deposits insured
by the SAIF, such as Utah Federal, is currently required to pay an assessment
ranging from $0.23 to $0.31 per $100 of deposits based on the institution's risk
classification. The risk classification is based on an assignment of the
institution by the FDIC to one of three capital groups and to one of three
supervisory subgroups. The capital groups are "well capitalized," "adequately
capitalized," and "undercapitalized." The three supervisory subgroups are Group
"A" (for financially sound institutions with only a few minor weaknesses), Group
"B" (for those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C' (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
52
<PAGE> 60
Depository institutions with BIF-insured deposits, currently pay an
assessment to the BIF ranging from $0.0 to $0.27 per $100 of deposits based on
the institution's risk classification. Banks at the zero assessment rate pay
only the statutory minimum of $2,000 for deposit insurance. It is estimated that
over 90 percent of BIF insured institutions will pay only the statutory minimum
for their deposit insurance. This new assessment range does not apply to
institutions whose deposits are insured by the SAIF, such as Utah Federal. Utah
Federal will continue to pay assessments based on the $0.23 to $0.31 assessment
range on its deposits, and will be at competitive disadvantage with respect to
BIF-insured institutions.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
associations, such as Utah Federal, are required to maintain minimum levels of
regulatory capital.
Savings associations must satisfy three different OTS capital
requirements. Under these standards, savings associations must maintain: (1)
"tangible" capital equal to at least 1.5 percent of adjusted total assets, (2)
"core" capital equal to at least 3.0 percent of adjusted total assets (although
most savings associations must generally have core capital equal to at least 4.0
percent of adjusted total assets); and (3) "total" capital equal to 8.0 percent
of "risk- weighted" assets. For purposes of the regulation, "core capital" is
defined as common stockholders' equity (including retained earnings),
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
non-withdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of a savings
association's intangible assets, although limited exceptions to the deduction of
intangible assets are provided for purchase mortgage servicing rights and
certain other intangibles. Tangible capital is core capital less all intangible
assets, with a limited exception for purchased mortgage servicing rights.
Both core and tangible capital are also reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible for national banks (with certain exceptions such as
when the subsidiaries are engaged in activities undertaken as agent for
customers or in mortgage banking activities).
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, as long as the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of (1) certain capital instruments that do not
qualify as core capital and (2) general valuation loan and lease loss allowances
up to a maximum of 1.25 percent of risk-weighted assets. In determining the
required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risk
inherent in the type of assets. The risk weights range from 0.0 percent to 100
percent.
Off-balance sheet items also are adjusted to take into account certain
risk characteristics. Under the risk- based capital standard, savings
associations are required to maintain a ratio of total capital to risk-weighted
assets of at least 8.0 percent.
The OTS has adopted final regulations adding an interest rate risk
component to the risk-based capital requirements for savings associations.
Implementation of the regulation has been delayed.
Utah Federal is currently in compliance with each of the OTS's capital
requirement. As of March 31, 1996, Utah Federal has tangible capital equal to
8.79 percent of adjusted total assets, core capital equal to 8.79 percent of
adjusted capital assets and total capital equal to 16.64 percent of
risk-weighted assets.
PROMPT CORRECTIVE ACTION. Under FDICIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. In September 1992, the federal banking agencies adopted
substantially similar regulations, which became effective on December 19, 1992,
intended to implement this prompt corrective action system. Under the
regulations, an institution is (1) "well capitalized" if it has a total
risk-based capital ratio of 10.0 percent or more, a Tier I risk-based capital
ratio of 6.0 percent or more, a Tier I leverage capital ratio of 5.0 percent or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (2) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0 percent or more, a Tier I
risk-based capital ratio of 4.0 percent or more, a Tier I leverage capital ratio
of 4.0 percent or more (3.0 percent under certain circumstances) and does not
meet the definition of "well capitalized;"
53
<PAGE> 61
(3) "undercapitalized" if it has a total risk-based capital ratio of under 8.0
percent, a Tier I risk-based capital ratio of under 4.0 percent and a Tier I
leverage capital ratio of under 4.0 percent (3.0 percent under certain
circumstances); (4) "significantly undercapitalized" if it has a total
risk-based capital ratio of under 6.0 percent, a Tier I risk-based capital ratio
of under 3.0 percent, a Tier I leverage capital ratio of under 3.0 percent; and
(5) "critically undercapitalized" if it has a ratio of tangible equity to total
assets of 2.0 percent or less.
Undercapitalized institutions are subject to certain prompt corrective
requirements, regulatory controls and restrictions which become more extensive
as the institution becomes more severely undercapitalized.
LIQUIDITY REQUIREMENTS. Federal law and regulations currently require
all savings associations such as Utah Federal to maintain, for each calendar
month, an average daily balance of liquid assets equal to five percent of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term United States Government obligations), and long-term assets (e.g.,
United States Government obligations of more than one and less than five years
and state agency obligations with a minimum term of 18 months). Short-term
liquid assets currently must constitute at least 1.0 percent of an association's
average daily balance of net withdrawable deposit accounts and current
borrowings. Monetary penalties may be imposed upon associations for violations
of liquidity requirements.
Utah Federal is currently in compliance with the foregoing
requirements.
QUALIFIED THRIFT LENDER TEST. In order to avoid certain restrictions on
their operations, all savings associations, such as Utah Federal, are required
to meet a qualified thrift lender ("QTL") test. Generally, in order to meet the
test, an association must have at least 65 percent of specified assets in
qualified thrift investments. Qualified thrift investments are specified
investments generally related to domestic residential real estate. Any savings
association that fails to meet the QTL test must convert to a bank charter or be
subject to bank-like restrictions on its activities, unless it requalifies as a
QTL within certain time limits.
At March 31, 1996, approximately 87 percent of Utah Federal's assets
were invested in qualified thrift investments, which was in excess of the
percentage required to qualify Utah Federal under the QTL test in effect at that
time.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations limit the
ability of savings associations such as Utah Federal to pay dividends and make
other capital distributions according to the institution's level of capital and
income, with the greatest flexibility afforded to institutions that meet or
exceed their OTS capital requirements. Under current OTS regulations, a savings
association that exceeds its OTS regulatory capital requirements both before and
after a proposed dividend (or other distribution of capital) and has not been
advised by the OTS that it is in need of more than normal supervision may, after
prior notice to but without the approval of the OTS, make capital distributions
during a calendar year up to the higher of (i) 100 percent of its income during
the calendar year plus the amount that would reduced by one-half its "surplus
capital ratio" (the institution's excess capital over its capital requirements)
at the beginning of the calendar year or (ii) 75 percent of its net income over
the most recent four-quarter period. In addition, such institution may make
capital distributions in excess of the foregoing limits if the OTS does not
object within a 30-day period following notice by the institution.
FEDERAL HOME LOAN BANK SYSTEM. Utah Federal is a member of the FHLB of
Seattle, which is one of the 13 regional FHLBs that administer the home
financing credit functions of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
March 31, 1996, Utah Federal had no advances from the FHLB of Seattle.
As a member, Utah Federal is required to purchase and maintain stock in
the FHLB of Seattle in an amount equal to at least 1.0 percent of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
54
<PAGE> 62
obligations at the beginning of each year. At March 31, 1996, Utah Federal had
approximately $4 million in FHLB stock, which was sufficient to remain in
compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
in low- and moderate-income housing projects. These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the
future. These contributions also could have an adverse effect on the value of
FHLB stock in the future. Dividends paid by the FHLB of Seattle to Utah Federal
for the years ended September 30, 1995, and September 30, 1994, totalled
$234,500 and $306,800, respectively.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts). Currently, reserves of 3.0
percent must be maintained against total transaction accounts of $52.0 million
or less, plus 10.0 percent on amounts in excess of such amount. Institutions may
designate and exempt $4.3 million of certain reservable liabilities. These
amounts and percentages are subject to adjustment by the Federal Reserve Board.
Numerous other regulations promulgated by the Federal Reserve Board
affect Utah Federal's business operations. These include regulations relating to
equal credit opportunity, electronic fund transfers, collection of checks, truth
in lending, truth in savings and availability of funds.
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low-income and
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The agencies evaluate an institution's CRA
performance based on a four-tiered descriptive rating system and are required to
make public an institution's rating and written evaluation. The four possible
ratings of meeting community credit needs are outstanding, satisfactory, needs
to improve, and substantial noncompliance.
Many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
On June 26, 1995, Utah Federal received a "satisfactory" rating from
the OTS.
RECENT AND PROPOSED FEDERAL LEGISLATION.
Federal legislation was enacted in 1994 which will repeal, effective
June 1, 1997, certain restrictions on the establishment of interstate branches
by national banks and state-chartered banks. In addition, banks holding
companies are now generally permitted to buy banks in any state. The effect of
this legislation is generally to increase competition in the financial
institution industry, since it increases the ability of large banks to expand
the geographic scope of their business.
Various proposals have been introduced in Congress which would attempt
to eliminate or reduce the current disparity between BIF deposit insurance
assessment rates and SAIF deposit insurance assessment rates. Among other
things, it has been proposed that a one-time special assessment be imposed on
SAIF-insured institutions such as Utah Federal in order to recapitalize the
SAIF. No assurance can be given as to whether, when or in what form legislation
relating to the SAIF will be enacted.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto included as "APPENDIX E -
FINANCIAL STATEMENTS OF UTAH FEDERAL SAVINGS BANK" hereto and with reference to
the discussion of the operations and other financial information presented
elsewhere in this Proxy Statement/Prospectus.
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<PAGE> 63
GENERAL. Utah Federal's business consists primarily of attracting
deposits from the public and originating residential, real estate and
construction loans. Beginning in 1992, Utah Federal made a conscious effort to
modify its traditional loan portfolio mix and undertook to increase its levels
of residential construction, home equity and consumer lending, while maintaining
its traditional long-term residential mortgage lending. Construction and home
equity lending generally pay higher rates of interest but also entail additional
risk as compared with long-term residential mortgage lending. Construction loans
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, home equity lending involves loans
secured by second mortgages incurred by consumers borrowing against the equity
in their homes.
Utah Federal's net income is derived principally from net interest
income. Utah Federal exceeded all of its regulatory capital requirements at
March 31, 1996.
NET INTEREST INCOME. The primary component of Utah Federal's net income
is net interest income, which is the difference between interest and fees earned
on earning assets and interest paid on interest-bearing deposits and borrowed
funds. Net interest income, when expressed as a percentage of total average
earning assets, is referred to as the net interest margin. Net interest income
is affected by changes in the amount of earning assets and interest-bearing
liabilities; these are referred to as volume changes. It is also affected by
changes in yields earned on earning assets and rates paid on interest-bearing
deposits and other borrowed funds; these are referred to as rate changes.
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES. The following
table sets forth changes in interest income and interest expense for each major
category of earning assets and interest-bearing liabilities and the amount of
change attributed to volume and rate changes for the periods indicated. Changes
not due entirely to changes in volume or rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Six Months Ended March 31, 1996
Compared to Six Months Ended
March 31, 1995
-------------------------------
Volume Rate Total
------ ----- -----
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable ............................ $ 404 $ 262 $ 666
Mortgage-backed securities .................. (192) 108 (86)
Investment securities ....................... 9 22 31
Other interest-bearing assets ............... (75) (35) (110)
----- ----- -----
Total change in interest income ....... 144 357 501
Interest expense:
Interest-bearing deposits ................... 75 363 438
Borrowed money .............................. (22) (5) (27)
----- ----- -----
Total change in interest expense ...... 53 358 411
----- ----- -----
Increase (decrease) in net interest income .... $ 91 $ (1) $ 90
===== ===== =====
</TABLE>
56
<PAGE> 64
<TABLE>
<CAPTION>
Year Ended September 30, 1995
Compared to Year Ended
September 30, 1994
---------------------------------
Volume Rate Total
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable .......................... $ 850 $ 169 $ 1,019
Mortgage-backed securities ................ (43) 463 420
Investment securities ..................... (40) (58) (98)
Other interest-bearing assets ............. (332) (94) (238)
------- ------- -------
Total change in interest income ......... (435) 668 1,103
------- ------- -------
Interest expense:
Interest-bearing deposits ................. (40) 343 303
Borrowed money ............................ (88) (1) (89)
------- ------- -------
Total change in interest expense ........ (128) 342 214
------- ------- -------
Increase (decrease) in net interest income .. $ 563 $ 326 $ 889
======= ======= =======
</TABLE>
ANALYSIS OF AVERAGE BALANCES AND NET INTEREST MARGIN. The following
tables set forth information regarding average balances of assets and
liabilities, as well as the dollar amounts of shareholders' equity, interest
income and interest expense, average yields and rates and net interest margin
for the six months ended March 31, 1996, and 1995, and the years ended September
30, 1995, and 1994.
<TABLE>
<CAPTION>
Six Months Ended March 31,
-------------------------------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 86,271 $3,967 9.20% $ 73,501 $3,301 8.98%
Mortgage-backed securities............ 21,951 715 6.51 28,553 801 5.61
Investment securities................. 3,922 143 7.29 3,672 112 6.10
Other interest-earning assets......... 6,825 176 5.16 9,496 286 6.04
-------- ------ -------- ------
Total interest-earning assets......... $118,969 $5,001 8.41 $115,195 $4,500 7.81
======== ====== ======== ======
Interest-bearing liabilities:
Interest-bearing deposits............. $109,623 2,883 5.17 106,662 2,395 4.49
Borrowed money........................ 103 5 7.69 834 32 7.67
-------- ------ -------- ------
$109,753 2,838 5.17 $107,496 2,427 4.52
======== ========
Net interest income..................... $2,163 $2,073
====== ======
Interest rate spread.................... 3.24 3.29
====== ======
Net yield on average
interest-earning assets............... 3.64 3.60
====== ======
Interest-earning assets to
interest-bearing liabilities.......... 108.40% 107.46%
====== ======
</TABLE>
57
<PAGE> 65
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
-------------------------------------------------------------------------------------
1995 1994
--------------------------------------- ----------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $ 79,311 $7,198 9.08% $ 69,949 $6,179 8.83%
Mortgage-backed securities............ 26,945 1,666 6.18 27,910 1,246 4.46
Investment securities................. 3,733 235 6.30 4,237 333 7.86
Other interest-earning assets......... 8,311 402 4.84 17,288 640 3.70
-------- ------ ------ -------- ------
Total interest-earning assets......... $118,300 $9,501 8.03 $119,384 $8,398 7.03
======== ====== ======== ======
Interest-bearing liabilities:
Interest-bearing deposits............. $107,878 5,073 4.70 108,801 4,770 4.38
Borrowed money........................ 487 37 7.60 1,608 126 7.84
-------- ------ -------- ------
$108,365 5,110 4.71 $110,409 4,896 4.43
======== ========
Net interest income..................... $4,391 $3,502
====== ======
Interest rate spread.................... 3.32 2.60
====== ======
Net yield on average
interest-earning assets............... 3.71 2.93
====== ======
Interest-earning assets to
interest-bearing liabilities.......... 109.17% 108.13%
====== ======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1996, AND
1995
GENERAL. Net income for the six months ended March 31, 1996, was
$747,000, or $7.40 per share, an increase of $300,000 or 67.11 percent, as
compared to $447,000 or $4.47 per share, for the same period in 1995. Return on
average assets for the six months ended March 31, 1996 was 1.21 percent as
compared to 0.75 percent for the same period in 1995. Return on average equity
also increased to 14.23 percent for the six months ended March 31, 1996, as
compared to 9.83 percent for the same period in 1995. The increases in net
income, return on average assets and return on average equity were principally
due to higher market interest rates that prevailed throughout 1995, a
substantial increase in the volume of mortgage and construction loans closed,
the majority of which were sold into the secondary market and the significant
shift to higher rate construction and home equity loans in the loan portfolio
mix. Additionally, the lag effect from the downward repricing of deposit
liabilities during the previous several quarters lowered the cost of funds and
increased the net interest margin and net income.
NET INTEREST INCOME. Total interest income for the six months ended
March 31, 1996, was $5,556,000, an increase of $912,000 or 19.64 percent, from
$4,644,000 for the same period in 1995. Asset yields increased 60 basis points
to 8.41 percent in the six months ended March 31, 1996, from 7.81 percent in the
same period of 1995. This is a result of an increase in market interest rates,
changes in the loan mix and repricing of liabilities as described in the
preceding paragraph.
Total interest expense for the six months ended March 31, 1996, was
$2,838,000, an increase of $411,000 or 16.93 percent from 2,427,000 for the same
period in 1994. The increase in interest expense resulted from the higher rates
paid on all deposits as market interest rates increased. Rates paid on total
interest-bearing liabilities rose 65 basis points to 5.17 percent for the six
months ended March 31, 1996, from 4.52 percent for the same period in 1995. For
further discussion of Utah Federal's interest sensitivity see "INFORMATION
CONCERNING UTAH FEDERAL -- Business -- Asset and Liability Management."
Overall net interest income (not including fees on loans) increased
$502,000, while the net interest margin decreased to 3.24 percent in the six
months ended March 31, 1996, from 3.29 percent in the same period of 1995. Utah
Federal's interest sensitive assets exceed interest sensitive liabilities, which
in the higher interest rate environment of the six months ended March 31, 1995,
contributed to a greater increase in interest income than the increase in
interest expense.
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<PAGE> 66
PROVISION FOR LOAN LOSSES. For the six months ended March 31, 1996, and
1995, there was no addition to the allowance for loan losses. Utah Federal's
allowance for loan losses was $1,650,000 (1.95 percent of total loans) at March
31, 1996, compared to $1,659,000 (2.16 percent of total loans) at March 31,
1995. This small change is due to charge-offs of $9,000. No additional
provisions for loan losses have been expensed during the six month period ended
March 31, 1996.
OTHER INCOME. Other operating income for the six months ended March 31,
1996, was $544,000, an increase of $91,000 or 20.09 percent from $453,000 for
the same period in 1995. The increase was due to an increase of $188,000 from
gains on the sale of loans into the secondary market, which increase was
partially offset by a decrease of $109,000 resulting from the recognition of a
prior period tax settlement.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by $81,000 to $2,057,000 for the six months ended March 31, 1996,
compared to $1,976,000 for the same period in 1995. The increase was primarily
caused by an increase in salaries and employee benefits of $76,113 and an
increase in occupancy expense of $70,000. Such increases were partially offset
by a decrease of $98,000 in other expenses, primarily resulting from tighter
expense controls and decreases in real estate holdings and their resultant
costs.
PROVISION FOR INCOME TAXES. The provision for income taxes was $458,000
for the six months ended March 31, 1996, compared to $248,000 for the same
period in 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, AND 1994
GENERAL. Utah Federal's net income for the year ended September 30,
1995, was $1,370,000, or $13.65 per share. This represented an increase of
$235,000, or 20.70 percent, as compared to $1,135,000, or $11.35 per share, for
fiscal 1994. Return on average assets was 1.13 percent in fiscal 1995 compared
with 0.92 percent in fiscal 1994. Return on average equity was 14.35 percent in
1995 compared to 13.50 percent for 1994. The increases in net income, return on
average assets and return on average equity were principally due to higher
market interest rates that prevailed throughout fiscal 1995 and, to a lesser
degree, an increase in interest-earning assets. Offsetting a portion of the
greater net interest income was an increase in general and administrative
expenses, primarily salaries and employee benefits.
NET INTEREST INCOME. Total interest income for the year ended September
30, 1995, was $10,002,000, an increase of $1,330,000, or 15.34 percent, from
$8,672,000 for fiscal 1994. This increase was principally due to an increase of
$9,362,000 in average loans receivable and higher yields on most
interest-earning assets. Asset yields increased 100 basis points to 8.03 percent
for 1995 from 7.03 percent in fiscal 1994 as interest rates increased and as a
result of the change in Utah Federal's loan portfolio mix to include the higher
risk and higher margin construction and home equity lending.
Total interest expense for the year ended September 30, 1995, was
$5,110,000, an increase of $214,000 or 4.37 percent from $4,896,000 for 1994.
The increase in interest expense resulted from the higher rates paid on all
deposits as market interest rates increased. Rates paid on total
interest-bearing liabilities rose 28 basis points to 4.71 percent for 1995 from
4.43 percent for 1994.
Overall net interest income increased $1,116,000 and the net interest
margin increased to 3.32 percent for 1995 from 2.60 percent in 1994. Utah
Federal's interest sensitive assets exceed interest sensitive liabilities, which
in the higher interest rate environment of 1995 contributed a greater increase
in interest income than the increase in interest expense. Additionally, the
increase in yields on earning assets exceeded the increase in rates paid on
interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. For the year ended September 30, 1995, and
1994, there was no provision for loan losses. Utah Federal's allowance for loan
losses was $1,661,841 (1.86 percent of total loans) at September 30, 1995,
compared to $1,677,000 (2.37 percent of total loans) at September 30, 1994. This
small change is due to net charge-offs of $15,000.
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<PAGE> 67
OTHER INCOME. Other income decreased by $186,000 from $1,103,000 in
fiscal 1994 to $917,000 in fiscal 1995. This decrease was primarily due to the
recognition in 1994 of a prior period tax settlement.
GENERAL AND ADMINISTRATIVE EXPENSE. Total general and administrative
expense increased by $490,000 to $4,066,000, or 13.05 percent, for the year
ended September 30, 1995, compared to $3,576,000 for the same period in 1994.
The increase was primarily due to an increase in salaries and employee benefits
by $473,000, which was largely a result of changing to a commission structure
for compensating mortgage loan officers. The increase was partially offset by a
decrease in real estate holding costs, resulting from the elimination in 1995 of
the large volumes of real estate owned, and a decrease in FDIC assessments by
$25,000 due to a decreased assessment rate. Data processing expenses also
increased $23,000 due to a change in service bureau.
PROVISION FOR INCOME TAXES. the provision for income taxes was $374,000
for the year ended September 30, 1995, compared to $167,000 for the same period
in 1994.
LIQUIDITY AND CAPITAL REQUIREMENTS
At March 31, 1995, Utah Federal's shareholders' equity was $10,831,000
as compared to $10,180,000 at September 30, 1995, and $8,906,000 at September
30, 1994. Net income of $747,000 for the six months ended March 31, 1996, and
$1,370,000 for the year ended September 30, 1995, provided Utah Federal's
capital accumulation for these periods. During the six months ended March 31,
1996, a dividend of $0.80 per share, or $80,800, was paid on Utah Federal Common
Stock. During each of the years ended September 30, 1995 and September 30, 1994,
a dividend of $0.60 per share, or $60,000, was paid on the Utah Federal Common
Stock.
During each of the years ended September 30, 1995 and September 30, 1994, and
during the first quarter of fiscal 1996, a seven percent dividend (approximately
$14,000 per quarter) was paid on the Utah Federal preferred stock. In February
1996, the preferred stock was converted on a one-for-one basis into shares of
Utah Federal Common Stock.
Utah Federal is subject to capital adequacy guidelines promulgated by
FIRREA. Under the guidelines savings banks must maintain certain minimum levels
of tangible capital, core capital and risk-based capital as defined by the Act.
Utah Federal was in compliance with all regulatory capital requirements at March
31, 1996, and all previous periods. The FIRREA requirement for tangible, core
and risk-based capital is 1.5 percent, 3.0 percent and 8.0 percent of these
respective capital amounts as calculated in accordance with the Act. Utah
Federal's tangible, core and risk-based capital as of March 31, 1996, was 8.8
percent, 8.8 percent and 16.6 percent, respectively.
Utah Federal's primary source of funds are from customer deposits, net
income and principal and interest payments on loans. In addition, Utah Federal
has a $18,485,000 credit line with the FHLB that is available to meet liquidity
requirements. At March 31, 1996, there was no borrowing under such credit line.
Utah Federal is required to maintain a five percent minimum level of liquid
assets. As of March 31, 1996, such minimum liquidity level was $5,523,000. Utah
Federal's liquid assets totaled $13,029,000 at that date, giving the Bank
$7,506,000 of excess liquidity.
At March 31, 1996, Utah Federal had commitments to fund loans totaling
$20,571,000. These commitments are expected to be funded from Utah Federal's
usual funding sources.
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<PAGE> 68
BENEFICIAL OWNERSHIP OF UTAH FEDERAL COMMON STOCK
The following table sets forth information as of May 16, 1996, with
respect to shares of Utah Federal Common Stock beneficially owned (i) by each
director of Utah Federal, (ii) by all directors and executive officers of Utah
Federal as a group and (iii) by all persons believed by management to own
beneficially more than five percent of the Utah Federal Common Stock:
<TABLE>
<CAPTION>
Percent of
Total Shares
Name Shares (1) Outstanding
---- ---------- -----------
<S> <C> <C>
Ernest J. Miller........................... 131,609 94.68%
P.O. Box 305
Hyrum, UT 84319
Michael R. Garrett......................... 3,100(2) 2.18
John E. Clay............................... 100 *
Morris H. Kulmer........................... 2,000 1.4
Richard E. Myers........................... 100 *
Steven J. Thunell.......................... 220 *
L. Brent Hoggan............................ 400 *
Val J. Petersen............................ 390 *
All directors and executive officers
as a group (7 persons)................... 137,919 97.06
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with
respect to securities. Shares of Utah Federal Common Stock subject to
options currently exercisable or convertible, or exercisable or
convertible within 60 days, are deemed outstanding in computing the
percentage of the person holding such option and the percentage of
directors and executive officers as a group, but are not considered to
be outstanding in computing the percentage of any other person.
(2) Includes currently exercisable stock options to purchase 3,000 shares
of Utah Federal Common Stock at an exercise price of $21.00 per share,
granted pursuant to the terms of a nonstatutory stock option agreement
between Mr. Garrett and Utah Federal. Each stock option is accompanied
by a stock appreciation right ("SAR"), which permit Mr. Garrett to
surrender currently exercisable stock options for an amount equal to
the "stock share amount" reduced by $49.00 (the "stock share amount" is
defined as the amounts reflected in shareholders' equity accounts, as
of the end of the preceding year, divided by the total number of shares
of preferred and common stock outstanding). In addition, pursuant to
the terms of a nonstatutory stock option voting trust agreement between
Mr. Garrett and Mr. Miller, all shares of Utah Federal Common Stock
issued upon exercise of any of such options will be placed in a voting
trust for a term of 10 years to be voted by the voting trustee, which
voting trustee is currently Mr. Miller, the majority shareholder of
Utah Federal.
INFORMATION CONCERNING WASHINGTON MUTUAL
WASHINGTON MUTUAL
Washington Mutual is a Washington corporation that provides a broad
range of financial services to individuals and small businesses in Washington,
Oregon, Utah, Montana and Idaho through its subsidiary operations.
61
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The principal assets of WMI are its principal subsidiaries, including its bank
subsidiaries, WMB and WMBfsb, and its insurance subsidiary, WM Life. Financial
services of the Company include the traditional savings bank activities of
accepting deposits from the general public and making residential loans,
consumer loans and limited types of commercial real estate loans (primarily
multi-family) and, more recently, certain commercial banking activities as
discussed below. Washington Mutual, through other subsidiaries, also issues and
markets annuity contracts and is the investment advisor to and distributor of
mutual funds.
Thrift institutions such as Washington Mutual traditionally have funded
loans to homeowners with short-term savings deposits and borrowings. During any
given time period, a large volume of savings deposits and borrowings reprice,
but only a comparatively smaller volume of loans mature or reprice. As a
consequence, the loans still outstanding must be financed with new or repriced
liabilities bearing interest rates, which, depending on market conditions, may
be considerably higher than the original rate. This mismatch between asset and
liability maturities benefits a thrift institution when market interest rates
fall, but adversely affects profitability when interest rates rise.
On August 31, 1995, Washington Mutual diversified its business mix
through a merger of Enterprise Bank ("Enterprise") with and into WMB. Enterprise
was a Seattle-area commercial bank that focused on small- to mid- size
commercial business clients. On January 31, 1996, Western of Coos Bay, Oregon
merged with and into WMB. With 42 offices in 35 communities, Western was
Oregon's largest community-based commercial bank. These two mergers provide
Washington Mutual with access to the higher growth business segment of
commercial banking.
Because the Western merger was not completed until January 31, 1996,
Western's results of operations and analysis of financial position are not
included in the financial information contained in Washington Mutual's Annual
Report on Form 10-K for the year ended December 31, 1995. Such information
regarding Western, however, is included in Washington Mutual's Quarterly Report
on Form 10-Q for the period ended March 31, 1996.
During the first half of 1993, Washington Mutual merged with Pioneer
Savings Bank and acquired Pacific First Bank. As a result of these business
combinations, Washington Mutual became substantially larger, with significant
operations in Oregon as well as Washington. In 1994 and 1995, Washington Mutual
continued to expand its operations through business combinations with other
financial institutions in Washington and Utah.
At March 31, 1996, Washington Mutual, through its subsidiaries,
operated a total of 292 financial centers and 23 loan centers. At March 31,
1996, Washington Mutual had total consolidated assets of $22.3 billion, total
deposits of $11.3 billion and stockholders' equity of $1.6 billion.
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.
Certain information relating to the business, management, executive
compensation, voting securities and the principal holders thereof, certain
relationships and related transactions and other related matters as to
Washington Mutual is set forth in: (1) Washington Mutual's Annual Report on Form
10-K for the year ended December 31, 1995; (2) Washington Mutual's Quarterly
Report on Form 10-Q for the period ended March 31, 1996; and (3) Washington
Mutual's Proxy Statement for the Annual Meeting of Stockholders held on April
16, 1996. Each of these documents is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
THE REORGANIZATION
Washington Mutual was formed in August 1994 by WMSB, a former
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
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. Because Washington Mutual owns WMB and
WMBfsb, Washington Mutual is a savings and loan holding company under federal
law and, as such, is subject to regulation by the OTS.
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As a result of the Reorganization, all shareholders of WMSB became
shareholders of Washington Mutual. Each outstanding share of WMSB common stock
was converted into one share of Washington Mutual Common Stock and each
outstanding share of WMSB 9.12% Noncumulative Perpetual Preferred Stock, Series
C; $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D; and
7.60% Noncumulative Perpetual Preferred Stock, Series E, was converted on a
share-for-share basis into Washington Mutual Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, respectively, with substantially
the same relative rights, privileges and preferences.
WASHINGTON MUTUAL'S PRINCIPAL OPERATING SUBSIDIARIES
WMBfsb
WMBfsb is a federal savings bank formed in 1994 to participate in a
supervisory acquisition of certain branches of a federal savings bank from the
Resolution Trust Corporation. WMBfsb's principal business includes the
traditional savings association activity of accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family. At March 31, 1996, WMBfsb
had assets of $773.5 million and operated 23 financial centers, of which 16 are
in Utah, four are in Idaho, two are in Montana and one is in Oregon, and
operated one loan center in Idaho and one in Utah. WMBfsb's deposits are insured
by the FDIC through the SAIF.
WMB
WMB's principal business is providing a broad range of financial
services, primarily to consumers. These services include the traditional savings
bank activities of accepting deposits from the general public and making
residential mortgage loans, consumer loans and limited types of commercial real
estate loans, primarily multi-family. Beginning in the latter half of 1995, WMB,
through its merger with Enterprise, diversified its traditional activities into
commercial lending.
On December 1, 1995, Washington Mutual, a Federal Savings Bank ("FSB"),
a federally chartered savings bank subsidiary of WMB with operations in
Washington and Oregon and total assets of $8,566.8 million at September 30,
1995, merged with and into WMB, with WMB as the surviving entity. At March 31,
1996, WMB had total assets of $20,613.2 million and operated 269 financial
centers, of which 155 are in Washington and 114 are in Oregon, and 21 loan
centers, of which 14 are in Washington and seven are 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.
WM Life
WM Life is an Arizona-domiciled life insurance company. WM Life is
authorized under state law to issue annuities in seven states. In addition, WM
Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed
under state law to issue annuities in 28 states. WM Life currently issues fixed
and variable flexible premium deferred annuities, single premium fixed deferred
annuities and single premium immediate annuities. Empire currently issues fixed
flexible premium deferred annuities and single premium immediate annuities. Both
companies conduct business through licensed independent agents. The majority of
such agents are employees of affiliates of the Company and operate in the
Company's financial centers. Currently, annuities are primarily issued in
Washington and Oregon.
Murphey Favre, Inc.
Murphey Favre, Inc. ("Murphey Favre") is a registered broker-dealer
that offers a broad range of securities brokerage services, including
distribution of mutual funds. Murphey Favre has seven free-standing offices, and
Murphey Favre representatives are available for consultation regularly or by
appointment in many of the Company's financial centers.
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Composite Research & Management Co.
Composite Research & Management Co. ("Composite Research") is a
registered investment advisor. Composite Research is the investment advisor of
eight mutual funds and offers separate investment management for large accounts.
As of March 31, 1996, Composite Research had a total of $1,315.6 million in
funds under management in the eight mutual funds.
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK
Washington Mutual is authorized by its Articles of Incorporation to
issue up to 100,000,000 shares of Washington Mutual Common Stock and up to
10,000,000 shares of Preferred Stock, no par value per share. As of March 31,
1996, there were issued and outstanding 72,120,915 shares of Washington Mutual
Common Stock, 2,752,500 shares of Series C Preferred Stock, 1,400,000 shares of
Series D Preferred Stock and 1,970,000 shares of Series E Preferred Stock.
COMMON STOCK. Each holder of Washington Mutual Common Stock is entitled
to one vote for each share held on all matters voted upon by shareholders.
Shareholders are not permitted to cumulate their votes for the election of
directors.
In the unlikely event of liquidation of Washington Mutual, holders of
Washington Mutual Common Stock will be entitled to receive any remaining assets
of Washington Mutual, in cash or in kind, after payment of all liabilities and
amounts owed with respect to Washington Mutual Preferred Stock.
Holders of Washington Mutual 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 Washington Mutual
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, 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 described above or as otherwise required to
approve the transactions in which the additional authorized shares of Washington
Mutual Common Stock would be issued, no shareholder approval will be required
for the issuance of these shares.
At March 31, 1996, options to purchase 1,571,874 shares of Washington
Mutual Common Stock under Washington Mutual's stock option plans had been
granted, but not exercised or terminated, leaving 3,155,500 shares available for
further grants under such plans.
PREFERRED STOCK. The Preferred Stock is prior to Common Stock as to
dividends and liquidation, but does not confer general voting rights.
The Series C Preferred Stock 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 Stock, if and when declared by the Washington Mutual
Board, are at an annual rate of $2.28 per share, are noncumulative and payable
quarterly. Washington Mutual may at its option redeem the Series C Preferred
Stock. The Series C Preferred Stock is prior to the Washington Mutual Common
Stock as to dividends and liquidation, but does not confer general voting
rights.
The Series D Preferred Stock has a liquidation preference of $100.00
per share plus dividends accrued and unpaid for the then-current dividend
period, and is convertible into shares of Washington Mutual Common Stock.
Dividends on the Series D Preferred Stock, if and when declared by the
Washington Mutual Board, are at an annual rate of $6.00 per share, are
noncumulative and payable quarterly. Washington Mutual may at its option redeem
the Series D Preferred Stock. The Series D Preferred Stock is prior to the
Washington Mutual Common Stock as to dividends and liquidation, but does not
confer general voting rights.
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The Series E Preferred Stock 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 Stock, if and when declared by the Washington Mutual
Board, are at an annual rate of $1.90 per share, are noncumulative and payable
quarterly. Washington Mutual may at its option redeem the Series E Preferred
Stock. The Series E Preferred Stock is prior to the Washington Mutual Common
Stock as dividends and liquidation, but does not confer general voting rights.
LEGAL MATTERS
The validity of the shares of Washington Mutual Common Stock to be
issued in connection with the Merger will be passed upon by Foster Pepper &
Shefelman, counsel to Washington Mutual. As of May 31, 1996, individual members
of Foster Pepper & Shefelman owned an aggregate of 52,485 shares of Washington
Mutual Common Stock, 160 shares of Series C Preferred Stock and 100 shares of
Series D Preferred Stock.
INDEPENDENT AUDITORS
The consolidated statements of financial position of Washington Mutual
and its subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995, incorporated in this
Proxy Statement/Prospectus by reference to Washington Mutual's Annual Report to
Shareholders for the year ended December 31, 1995, including the Form 10-K have
been audited by Deloitte & Touche LLP, independent auditors, as set forth in
their report with respect thereto and included in reliance upon the authority of
said firm as experts in accounting and auditing.
The consolidated statements of financial position of Utah Federal and
its subsidiaries as of September 30, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1995, have been audited by Jones, Jensen
& Company, independent auditors, as set forth in their report with respect
thereto and are included in reliance upon the authority of said firm as experts
in accounting and auditing.
It is expected that representatives of Jones, Jensen & Company will be
present at the Special Meeting to respond to appropriate questions of Utah
Federal Shareholders and to make a statement if they desire.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Utah Federal
Board knows of no matters to be brought before the Special Meeting other than
those specifically listed in the Notice of Special Meeting of Utah Federal
Shareholders. However, if any other matters should properly come before the
Special Meeting, the proxy holders will vote the proxies on such matters in
accordance with the determination of the Utah Federal Board. The Utah Federal
Board urges each Utah Federal Shareholder, whether or not he or she intends to
be present at the Special Meeting, to complete, sign and return the enclosed
proxy as promptly as possible.
BY ORDER OF THE BOARD OF DIRECTORS
OF UTAH FEDERAL BANK
Michael R. Garrett, Chief Executive
Officer and President
Ogden, Utah
_______________, 1996
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APPENDIX A
AGREEMENT FOR MERGER
This Agreement for Merger (the "Agreement") is made and entered into
as of the 29th day of February, 1996 by and among Washington Mutual, Inc., a
Washington corporation ("WMI"), Washington Mutual Bank fsb, a federal savings
bank ("WMBfsb"), and Utah Federal Savings Bank, a federal savings bank ("Utah
Federal").
WMBfsb is a wholly owned subsidiary of WMI. The parties desire that
WMI and WMBfsb enter into a transaction with Utah Federal which will result in
a merger (the "Merger") of Utah Federal with and into WMBfsb, which shall be
the surviving institution.
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, the parties hereto agree as
follows:
1. Merger. Subject to the terms and conditions of this
Agreement, the Merger is to be accomplished in the manner described herein.
(a) Merger of Utah Federal and WMBfsb. At the Effective
Time (as defined in Section 2), Utah Federal shall be merged with and into
WMBfsb, with WMBfsb being the surviving institution, in accordance with the
Plan of Merger by and among WMI, WMBfsb and Utah Federal substantially in the
form attached hereto as Exhibit A (the "Plan of Merger"). The Plan of Merger
provides for the terms of the Merger and the manner of carrying it into effect.
The terms and conditions of the Plan of Merger are incorporated herein and made
a part hereof.
(b) Conversion of Utah Federal Common Stock. Subject to
the provisions below and in the Plan of Merger, at the Effective Time, all of
the outstanding shares of common stock, par value $10.00 per share, of Utah
Federal ("Utah Federal Common Stock") shall be converted into the right to
receive shares of common stock, no par value per share, of WMI ("WMI Common
Stock"), as described below and in the Plan of Merger.
(i) Subject to the provisions below and the
provisions of the Plan of Merger, each outstanding share of Utah Federal Common
Stock will at the Effective Time be converted into the right to receive $105.63
(the "Merger Consideration"), such consideration to be paid in newly issued
shares of WMI Common Stock, subject to the conditions set forth in this
Agreement and in the Plan of Merger. The per share value of WMI Common Stock
for the purpose of paying the Merger Consideration shall be the arithmetic
average of The Nasdaq Stock Market Closing Price of WMI Common Stock for the
ten trading days immediately preceding the third trading day before the
Effective Date (the "Average Price"). The term "The Nasdaq Stock Market
Closing Price" means the price per share of the last sale of WMI Common Stock
reported on The Nasdaq Stock Market at the close of the trading day by the
National Association of Securities Dealers, Inc. The exchange ratio for
determining the number of shares of WMI Common Stock to be issued for each
share of Utah Federal Common Stock (the "Exchange Ratio") shall be the Merger
Consideration divided by the Average Price. Computations of the Average Price
and of the Exchange Ratio shall be rounded to three decimals, rounding down if
the fourth decimal is four or less or up if it is five or more. No fractional
shares of WMI Common Stock shall be issued. In lieu of any fractional shares,
any holder of Utah Federal Common Stock who would otherwise be entitled to a
fractional share of WMI Common Stock will, upon surrender of his certificate or
certificates representing Utah Federal Common Stock outstanding immediately
prior to the Effective Time, be paid the cash value of such fractional share
interest, which shall be equal to the product of the fraction multiplied by the
Average Price. For the purposes of determining any such fractional share
interests, all shares of Utah Federal Common Stock owned by a Utah Federal
stockholder shall be combined so as to calculate the maximum number of whole
shares of WMI Common Stock issuable to such Utah Federal stockholder.
(ii) If between the date of this Agreement and the
third Nasdaq Stock Market trading day prior to the Effective Time, the shares
of WMI Common Stock shall be changed into a different number of
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shares by reason of any recapitalization, split-up, combination or exchange of
shares, or if a stock dividend thereon shall be declared with a record date
within such period, the Average Price specified in Section 1(b)(i) shall be
adjusted accordingly.
(iii) If the Utah Federal Transaction Fees exceed
$150,000, then the Merger Consideration shall be reduced by an amount equal to
such excess divided by the number of shares of Utah Federal Common Stock
outstanding at the Effective Time. As used herein, "Utah Federal Transaction
Fees" means all costs and expenses of third parties paid or owed by Utah
Federal in connection with the negotiation and execution of this Agreement and
related documents, and the consummation of the transaction contemplated hereby,
including without limitation the obtaining of all necessary approvals. Prior
to the Closing, Utah Federal shall deliver to WMI a statement, in form
reasonably satisfactory to WMI, from each such third party which sets forth the
total costs and expenses owing to such third party in connection with the
consummation of the transaction contemplated hereby.
(iv) In the event that immediately prior to the
Effective Time any options or related share appreciation rights described in
Section 1(c) remain in effect and unexercised, then the per share Merger
Consideration shall be increased by an amount equal to (A) the product of the
(w) Merger Consideration (as calculated under 1(a)(i)-(iii) above) and (x) the
number of unexercised options or related share appreciation rights in effect
and unexercised immediately prior to the Effective Time, divided by (B) the
difference between (y) 142,000 and (z) the number of unexercised options or
related stock appreciation rights in effect and unexercised immediately prior
to the Effective Time.
(v) If no distribution date under WMI's
stockholder rights plan or redemption of the rights thereunder shall have
occurred prior to the Effective Time, then each share of WMI Common Stock
issued in the Merger shall also evidence one right under such plan.
(c) Stock Options. Pursuant to the Nonstatutory Stock
Option Agreement dated April 30, 1993 between Utah Federal and Michael R.
Garrett (the "Utah Federal Option Agreement"), Michael R. Garrett currently
holds options to purchase 3,000 shares of Utah Federal Common Stock, together
with related stock appreciation rights. Pursuant to the terms of the Utah
Federal Option Agreement, all options to acquire Utah Federal Common Stock and
all stock appreciation rights unexercised as of the Effective Time will
terminate at the Effective Time. It is understood that if Michael R. Garrett
exercises his options or stock appreciation rights prior to the Effective Time,
that exercise and any subsequent sale, transfer, pledge or other disposition of
the shares shall be in compliance with any applicable requirements of Section
1(f) hereof and rules and releases of the Securities and Exchange Commission
(the "SEC") relating to the requirements for a merger to qualify for pooling of
interests accounting treatment.
(d) Utah Federal Stockholders' Meeting. Utah Federal
shall, as soon as practicable, hold a meeting of its stockholders (the "Utah
Federal Stockholders' Meeting") to submit for stockholder approval (the "Utah
Federal Stockholder Approval") this Agreement and the Plan of Merger.
(e) Proxy Statement/Prospectus.
(i) The parties hereto will cooperate in the
preparation of an appropriate proxy statement/prospectus satisfying all
applicable requirements of federal and state law (such proxy
statement/prospectus in the form mailed by Utah Federal to Utah Federal
stockholders, together with any and all amendments or supplements thereto,
being herein referred to as the "Proxy Statement/Prospectus").
(ii) WMI will furnish such information concerning
WMI and its subsidiaries as is necessary in order to cause the Proxy
Statement/Prospectus, insofar as it relates to such corporations, to comply
with Section 1(e)(i). WMI agrees promptly to advise Utah Federal if at any
time prior to the Utah Federal Stockholders' Meeting any information provided
by WMI for inclusion in the Proxy Statement/Prospectus becomes incorrect or
incomplete in any material respect and to provide the information needed to
correct such inaccuracy or omission. WMI will continue to furnish Utah Federal
with such supplemental information as may be necessary in order to cause such
Proxy Statement/Prospectus, insofar as it relates to WMI and its subsidiaries,
to comply with Section 1(e)(i) after the mailing thereof to Utah Federal
stockholders.
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(iii) Utah Federal will furnish such information
concerning itself as is necessary in order to cause the Proxy
Statement/Prospectus, insofar as it relates to Utah Federal, to comply with
Section 1(e)(i). Utah Federal agrees promptly to advise WMI if at any time
prior to the Utah Federal Stockholders' Meeting any information provided by
Utah Federal for inclusion in the Proxy Statement/Prospectus becomes incorrect
or incomplete in any material respect and to provide the information needed to
correct such inaccuracy or omission. Utah Federal will continue to furnish WMI
with such supplemental information as may be necessary in order to cause such
Proxy Statement/Prospectus, insofar as it relates to Utah Federal, to comply
with Section 1(e)(i) after the mailing thereof to Utah Federal stockholders.
(iv) WMI will prepare and file with the SEC a
registration statement on Form S-4 (together with amendments thereto, the
"Registration Statement") containing the Proxy Statement/Prospectus in
connection with the registration under the Securities Act of 1933, as amended,
of the WMI Common Stock to be issued in connection with the Merger, will use
all reasonable efforts to have or cause the Registration Statement to become
effective as promptly as practicable, and will take any other action required
to be taken under any applicable federal or state securities laws in connection
with the issuance of WMI Common Stock in the Merger. WMI will advise Utah
Federal promptly when the Proxy Statement/Prospectus has been approved for use
in all necessary states. The parties shall cooperate with each other in taking
any other appropriate actions that may be necessary to cause the WMI Common
Stock to be issued in connection with the Merger to be registered under the
Securities Act of 1933, as amended.
(f) Accounting Treatment.
(i) The parties hereto intend for the Merger to
be treated as a pooling of interests for accounting purposes. From and after
the date of this Agreement and until the Effective Time, neither WMI, WMBfsb
nor Utah Federal nor any of their respective subsidiaries or other affiliates
(i) shall knowingly take any action, or shall knowingly fail to take any
action, that would jeopardize the treatment of the Merger as a "pooling of
interests" for accounting purposes; or (ii) shall enter into any contract,
agreement, commitment or arrangement with respect to the foregoing; provided,
however, that no action or omission by any party shall constitute a breach of
this sentence if such action or omission is permitted by the terms of this
Agreement or is made with the written consent of the other parties hereto. The
persons specified on Exhibit B-1 hereto may be deemed to be "affiliates" of
Utah Federal for purposes of the Securities and Exchange Commission's ASR 135
("ASR 135") and other rules and releases related to pooling of interests
accounting treatment. WMI has received from Ernest J. Miller a written
agreement in the form of Exhibit B-2 hereof and from each other person so
identified a written agreement in the form of Exhibit B-3 hereof. Prior to the
Effective Time, Utah Federal shall use all reasonable efforts to cause any
additional person who becomes or is identified as an "affiliate" to execute
such an agreement.
(ii) WMI shall have the right to place a
restrictive legend on all shares of WMI Common Stock to be received by an
"affiliate" so as to preclude their transfer or disposition in violation of
such letters, to instruct its transfer agent not to permit the transfer of any
such shares and/or to take any other steps reasonably necessary to ensure
compliance with ASR 135 and other rules and releases related to pooling of
interests accounting treatment. Except as otherwise permitted in Exhibit B-2
or B-3, prior to 30 days before the Effective Time, stock certificates
evidencing ownership of all Utah Federal Common Stock by Utah Federal
"affiliates" shall be delivered to Utah Federal, and Utah Federal (prior to the
Effective Time) and WMI (after the Effective Time) shall retain such
certificates or certificates of WMI Common Stock into which they are exchanged
until such time as financial results covering at least 30 days of combined
operations of the merged party shall have been published, at which time such
certificates shall be released.
(iii) Notwithstanding the above, WMI, in its sole
discretion, may elect at any time not to proceed with qualifying the Merger to
be treated as a pooling of interests for accounting purposes, in which case the
restrictions in this Section 1(f) shall no longer be applicable except as
otherwise provided in Exhibit B-2 or Exhibit B-3.
2. Effective Time; Closing. The Merger shall become effective at
the time of the occurrence of the endorsement of articles of combination by the
Office of Thrift Supervision (the "OTS"), or at such later time after such
endorsement as is specified by the OTS on the endorsement of articles of
combination. As used herein, the
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term "Effective Time" shall mean the date and time when the Merger becomes
effective. As used herein, the term "Effective Date" shall mean the day on
which the Effective Time occurs. The parties intend that the Effective Time
shall occur as soon as reasonably practicable following the satisfaction of the
conditions set out in Section 7.1(a) and (b) below. A closing (the "Closing")
shall take place prior to the Effective Time at the offices of Foster Pepper &
Shefelman, 1111 Third Avenue, Suite 3400, Seattle, Washington, or at such other
place as the parties hereto may mutually agree upon for the Closing to take
place.
3. Option to Purchase Certain Shares. As a condition of the
execution of this Agreement, WMI has required the delivery by Utah Federal of
an option (the "Option"), substantially in the form attached hereto as Exhibit
C, entitling WMI to purchase shares of Utah Federal Common Stock at a price per
share stated therein.
4. Representations and Warranties of Utah Federal. The "Utah
Federal Disclosure Schedules" shall mean all of the disclosure schedules
required by this Agreement, dated as of the date hereof, which have been
delivered to WMI and WMBfsb. Utah Federal hereby represents and warrants to
WMI and WMBfsb as follows:
4.1 Organization, Power, Good Standing, Etc.
(a) Utah Federal is a federally chartered savings bank
duly organized, validly existing and in good standing under the laws of the
United States. Its charter is in full force and effect, and no conservator or
receiver has been appointed for Utah Federal. Utah Federal has all the
requisite corporate power and authority to own, lease and operate all of its
properties and assets and to carry on its business as currently conducted.
Utah Federal is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it makes such licensing or qualification necessary and where the failure to be
so qualified would, individually or in the aggregate, have a Material Adverse
Effect (as defined below) on Utah Federal. Utah Federal accounts are insured
by the Savings Association Insurance Fund (the "SAIF") administered by the
Federal Deposit Insurance Corporation (the "FDIC") in accordance with the
Federal Deposit Insurance Act. Utah Federal is a member in good standing of
the Federal Home Loan Bank of Seattle. Utah Federal is a qualified thrift
lender pursuant to Section 10(m) of the Home Owners' Loan Act, as amended
("HOLA"). Utah Federal has heretofore delivered or made available to WMI true
and correct copies of its Articles of Incorporation and Charter (together, the
"Articles") and its bylaws as in effect on the date hereof. As used in this
Agreement, the term "Material Adverse Effect" with respect to a party shall
mean any change or effect that is reasonably likely to be materially adverse to
the business, operations, properties, condition (financial or otherwise),
assets or liabilities of such party and such party's subsidiaries taken as a
whole.
(b) Except for 2425 Service Corporation (the "Utah
Federal Subsidiary"), there is no firm, corporation, partnership, joint venture
or similar organization which is consolidated with Utah Federal for financial
reporting purposes or any corporation a majority of the outstanding capital
stock of which is owned by Utah Federal. All of the issued and outstanding
capital stock of the Utah Federal Subsidiary is owned by Utah Federal. The
Utah Federal Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the State of Utah. The Utah Federal
Subsidiary has all requisite corporate power and authority to carry on its
business as currently conducted. The Utah Federal Subsidiary is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it makes such licensing or
qualification necessary and where the failure to be so qualified would have a
Material Adverse Effect on Utah Federal. Disclosure Schedule 4.1(b) correctly
sets forth a list of each firm, corporation, partnership, joint venture or
similar organization in which Utah Federal has a direct or indirect
controlling, or 10 percent or greater, equity interest (an "Investment
Entity").
(c) The minute books of Utah Federal contain materially
complete and accurate records of all meetings held and other corporate action
taken, since December 31, 1991, by its stockholders and Board of Directors.
(d) Except for the Utah Federal Subsidiary or as set
forth on Disclosure Schedule 4.1(d), Utah Federal does not own (beneficially or
otherwise) any capital stock or other equity interest in any corporation or
other entity which is not an Investment Entity.
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(e) Utah Federal has previously delivered to, or made
available for inspection by, WMI or WMBfsb true and complete copies of all
agreements to which it or the Utah Federal Subsidiary is a party or by which it
or the Utah Federal Subsidiary or any of the assets of either may be bound,
other than loans, credit facility agreements or accounts in the ordinary
course, (i) which relate to any ownership interest by Utah Federal or the Utah
Federal Subsidiary of an equity interest in any partnership, joint venture, or
similar enterprise, (ii) pursuant to which either Utah Federal or the Utah
Federal Subsidiary may be required to transfer funds in respect of an equity
interest to, make an investment in, or guarantee or assume any debt, dividend
or other obligation of, any person or entity, partnership, joint venture or
similar enterprise, or (iii) pursuant to which Utah Federal or the Utah Federal
Subsidiary is or may become an equity investor in a real estate project.
4.2 Capitalization. The authorized capital stock of Utah
Federal consists of 500,000 shares of Utah Federal Common Stock and 50,000
shares of preferred stock, par value $10.00 per share ("Utah Federal Preferred
Stock"). As of the date hereof, 139,000 shares of Utah Federal Common Stock
and no shares of Utah Federal Preferred Stock were issued and outstanding. No
shares of stock are held in Utah Federal's treasury, and, except for the
repurchase of 1,000 shares of Utah Federal Common Stock described on Disclosure
Schedule 4.2, Utah Federal has not in the past two years repurchased or retired
any shares of its capital stock. All of the issued and outstanding shares of
Utah Federal Common Stock and Utah Federal Preferred Stock have been duly
authorized, validly issued, and are fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. There are 3000 shares
of Utah Federal Common Stock reserved for issuance upon the exercise of
outstanding employee stock options but not for any other reason. Disclosure
Schedule 4.2 sets forth a list of all stockholders of record of Utah Federal
and the number of shares owned by each and a list of all individuals who hold
stock options, the number of shares for which options have been granted to such
individuals and the exercise price for each option. Except as set forth in
Disclosure Schedule 4.2, neither Utah Federal nor the Utah Federal Subsidiary
is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
or issuance of any shares of its capital stock or any securities representing
the right to purchase or otherwise receive any shares of its capital stock or
any securities convertible into or representing the right to purchase or
subscribe for any such shares, and there are no agreements or understandings to
which Utah Federal or the Utah Federal Subsidiary is a party with respect to
voting any such shares.
4.3 Loan Portfolio.
(a) All evidences of indebtedness in current principal
amount in excess of $150,000 reflected as assets in the Utah Federal December
31, 1995 Financial Statements (as hereinafter defined) were, as of December 31,
1995, in all respects binding obligations of the respective obligors named
therein and no such indebtedness is subject to any defenses which have been
asserted on or prior to the date hereof, or, to the best knowledge of Utah
Federal, may be asserted, except as set forth on Disclosure Schedule 4.3(a),
and except for defenses arising from applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity. To the knowledge of Utah Federal, all such indebtedness
in a current principal amount in excess of $25,000 that is primarily secured by
an interest in personal or real property is secured by a valid and perfected
lien.
(b) All loans with a balance in excess of $250,000 as of
December 31, 1995 which either are unsecured or are secured by property other
than 1-4 family residences are listed on Disclosure Schedule 4.3(b), which
indicates, for each such loan, the loan number, the borrower's name and the
unpaid balance as of December 31, 1995.
(c) Except as disclosed on Disclosure Schedule 4.3(c), no
loan, all or any part of which is an asset of Utah Federal was, as of December
31, 1995, more than 30 days delinquent.
(d) The documentation for each loan (the "Loan File") is
correct and complete to the extent that all Loan Files contain those documents
necessary for Utah Federal to enforce the loans and realize upon the security,
if any, therefor, including but not limited to properly executed notes or
credit agreements and security documents. In addition, the Loan Files for all
loans secured primarily by real property also contain evidence of property
casualty insurance (or are covered by a mortgage protection policy) and, where
required by the OTS or
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other governmental regulators, appraisals, policies of title insurance (or, in
the case of loans closed within the past three months, commitments therefor)
and policies of flood insurance.
(e) Each outstanding loan or commitment to extend credit
was solicited and originated and is administered in accordance with the
relevant loan documents and in material compliance with all requirements of
federal, state and local laws and regulations applicable at the time the loan
was originated or modified.
(f) Except as disclosed on Disclosure Schedule 4.3(f),
none of the loans in which Utah Federal has sold participation interests has
any buy-back or guarantee obligations. The percentage of interest retained by
Utah Federal in any sold participation interest is not subordinated to the
percentage of interest sold.
(g) There are no employee, officer, director or other
affiliate loans on which the borrower is paying a rate other than that
reflected on the note or the relevant credit agreement.
(h) Utah Federal's allowance for possible credit losses
as of September 30, 1995, and December 31, 1995, was adequate to absorb
reasonably anticipated losses in the credit portfolio of Utah Federal
(including losses on loans, financing leases and other extensions of credit),
in view of the size and character of such portfolio, current economic
conditions, and other pertinent factors; and no facts have subsequently come to
the attention of management of Utah Federal which would cause it to restate in
any material way the level of such allowance.
(i) There are no loans, financing leases, or other
extensions of credit or commitments to extend credit that, to Utah Federal's
knowledge, should have been classified by Utah Federal as "Other Assets
Especially Mentioned," "Substandard," "Doubtful," "Loss," or any comparable
classification that are not so classified.
(j) Except as set forth on Schedule 4.3(j), Utah Federal
has no loans secured by commercial real estate. These loans are described by
borrower's name, loan number and unpaid principal loan balance on Schedule
4.3(j). Utah Federal makes no representations or warranties as to the
environmental condition of the properties securing the loans shown on Schedule
4.3(j) and no Phase I environmental studies shall be required by WMI or WMBfsb
on such properties in connection with the transaction contemplated by this
Agreement.
(k) Except for residential loan commitments issued in the
ordinary course of business and except as shown on Disclosure Schedule 4.3(k),
as of December 31, 1995, Utah Federal has no outstanding commitments, including
outstanding letters of credit, repurchase agreements and unfunded agreements to
lend, in excess of $250,000.
4.4 Reports.
(a) Utah Federal has duly filed with the OTS in correct
form in all material respects, the monthly, quarterly, semiannual and annual
reports required to be filed by it under all applicable savings association and
securities laws and regulations for all periods subsequent to December 31,
1992. Utah Federal has previously delivered or made available to WMI or WMBfsb
accurate and complete copies of such reports.
(b) Utah Federal has previously delivered or made
available to WMI or WMBfsb an accurate and complete copy of each (a) final
proxy statement and report delivered by Utah Federal to its stockholders since
June 30, 1992, and (b) other communications (other than general advertising
materials) mailed by Utah Federal to its stockholders since June 30, 1992 and
no such proxy statement, report or communication, as of its date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.5 Authority. Utah Federal has requisite corporate
power and authority to execute and deliver this Agreement, the Option and the
Plan of Merger and, subject to the Utah Federal Stockholder Approval and
applicable regulatory approvals, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement, the Option
and the Plan of Merger and the consummation of the
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transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of Utah Federal. This Agreement and the
Option have been duly and validly executed and delivered by Utah Federal.
Assuming the due authorization, execution and delivery hereof by the other
parties hereto, this Agreement and the Option constitute the valid and binding
obligation of Utah Federal, enforceable against it in accordance with their
respective terms.
4.6 No Violation. Neither the execution and delivery of
this Agreement, the Option or the Plan of Merger nor the consummation by Utah
Federal of the transactions contemplated hereby and thereby, nor compliance by
Utah Federal with any of the terms or provisions hereof or thereof, will (i)
assuming Utah Federal Stockholder Approval, violate any provision of the
Articles or bylaws of Utah Federal, (ii) assuming the consents and approvals
referred to in Section 7.1 hereof are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Utah Federal or any of its respective properties or assets, or
(iii) except as set forth on Disclosure Schedule 4.6, violate, conflict with,
result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default)
under, result in the termination of, accelerate the performance required by, or
result in the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of Utah Federal under any of
the terms, conditions or provisions of any note, bond, mortgage indenture, deed
of trust, license, lease, agreement or other instrument or obligation to which
Utah Federal is a party, or by which it or any of its properties or assets may
be bound or affected, except with respect to (iii) above, for such violations,
conflicts, breaches, defaults, terminations, accelerations and encumbrances
which would not in the aggregate have a Material Adverse Effect on Utah
Federal.
4.7 Consents and Approvals. Except for (i) consents and
approvals of or filings, deliveries or registrations with the SEC, the OTS, the
United States Department of Justice (the "Justice Department"), or other
applicable governmental authorities, (ii) the approval of the stockholders of
Utah Federal and (iii) the consents, approvals, filings or registrations set
forth on Disclosure Schedule 4.7, no consents or approvals of or filings or
registrations with any third party or public body or authority, except for
consents, approvals, filings or registrations where the failure to obtain such
consents or approvals or to make such filings or registrations would not
prevent or delay the Merger and would not in the aggregate have a Material
Adverse Effect on Utah Federal, are necessary in connection with the execution
and delivery by Utah Federal of this Agreement and the consummation of the
transactions contemplated hereby.
4.8 Financial Statements.
(a) Utah Federal has previously delivered or made
available to WMI or WMBfsb copies of (i) the statements of financial condition
of Utah Federal as of September 30, in each of the three fiscal years 1993,
1994, and 1995, and the related consolidated statements of income, statements
of stockholders' equity and statements of cash flows for each of the three year
periods ending, respectively, on September 30, 1993, 1994 and 1995, in the case
of 1993 accompanied by the Utah Federal audit reports of KPMG Peat Marwick LLP
and in the case of 1994 and 1995 accompanied by the Utah Federal audit reports
of Anderson, Peterson & Co., P.C. ("Anderson Peterson"), independent public
accountants, with respect to Utah Federal (the "Utah Federal 1993, 1994 and
1995 Financial Statements," respectively), and (ii) the unaudited consolidated
balance sheet of Utah Federal as of December 31, 1995 and the related unaudited
consolidated statements of income for the three- month period then ended (the
"Utah Federal December 1995 Financial Statements"). The consolidated
statements of condition of Utah Federal referred to herein (including the
related notes) fairly present the consolidated financial position of Utah
Federal as of the respective dates set forth therein, and the other financial
statements referred to herein (including the related notes) fairly present the
results of the consolidated operations and changes in stockholders' equity and
cash flows of Utah Federal for the respective fiscal periods or as of the
respective dates set forth therein, except that interim unaudited financial
statements are subject to normal year-end adjustments.
(b) Each of the financial statements referred to in
Section 4.8(a) (including the related notes) has been prepared in accordance
with generally accepted accounting principles consistently applied during the
periods involved (except as indicated in the notes thereto). The books and
records of Utah Federal have been, and are being, maintained in accordance with
applicable legal and accounting requirements and reflect only actual
transactions.
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4.9 Brokerage. Except for amounts owed to Columbia
Financial Advisors, Inc. in connection with a fairness opinion, there are no
claims for investment banking fees, brokerage commissions, finder's fees or
similar compensation arising out of or due to any act of Utah Federal in
connection with the transactions contemplated by this Agreement.
4.10 Absence of Certain Changes or Events. As of the date
hereof, except as disclosed in Disclosure Schedule 4.10, there has not been any
material adverse change in the business, operations, properties, assets or
financial condition of Utah Federal from that described in Utah Federal 1995
Financial Statements or the Utah Federal December 1995 Financial Statements
(except for changes resulting from market and economic conditions which
generally affect the savings bank industry as a whole, including, without
limitation changes in law or regulation, and changes in generally accepted
accounting principles or interpretations thereof) and, to the best of Utah
Federal's knowledge, no fact or condition existed as of the date hereof that
Utah Federal had reason to believe would cause such a material adverse change
after the date hereof.
4.11 Litigation, Etc. As of the date hereof, except as
disclosed on Disclosure Schedule 4.11, there were no actions, suits, claims,
inquiries, proceedings or, to the knowledge of Utah Federal, investigations
before any court, commission, bureau, regulatory, administrative or
governmental agency, arbitrator, body or authority pending or, to the knowledge
of Utah Federal, threatened against Utah Federal which would reasonably be
expected to result in any liabilities, including defense costs, in excess of
$50,000 in the aggregate. Except as disclosed on Disclosure Schedule 4.11,
Utah Federal is not subject to any order, judgment or decree and Utah Federal
is not in default with respect to any such order, judgment or decree.
4.12 Taxes and Tax Returns.
(a) The amounts set up as provisions for taxes on the
Utah Federal December 1995 Financial Statements are sufficient for all material
accrued and unpaid federal, state, county and local taxes, interest and
penalties of Utah Federal, whether or not disputed, for the period ended
December 31, 1995 and for all fiscal periods prior thereto. Utah Federal has
not entered into any agreements or understandings with the Internal Revenue
Service or other applicable taxing authorities to extend or waive any statute
of limitations or time for assessment. Complete and correct copies of the
income tax returns of Utah Federal for the five fiscal years ending December
31, 1994, as filed with the Internal Revenue Service and all state, county and
local taxing authorities, together with all related correspondence and notices,
have previously been delivered or made available to WMI or WMBfsb.
(b) Utah Federal has timely and correctly filed all
federal, state, county and local tax and other returns and reports
(collectively, "Returns") required by applicable law to be filed (including,
without limitation, estimated tax returns, income tax returns, excise tax
returns, sales tax returns, use tax returns, property tax returns, franchise
tax returns, information returns and withholding, employment and payroll tax
returns), except to the extent that the failure to timely or correctly file
such Returns does not result in aggregate penalties or assessments of more than
$25,000, and has paid all taxes, levies, license and registration fees, charges
or withholdings of any nature whatsoever shown by such Returns to be owed, or
which are otherwise due and payable (hereinafter called "Taxes"), and to the
extent any material liabilities for Taxes have not been fully discharged, full
and complete reserves have been established on the Utah Federal 1995 Financial
Statements. Utah Federal is not in default in the payment of any Taxes due or
payable or any assessments received in respect thereof except for Taxes which
are being contested in good faith. No additional assessments of Taxes are
known to Utah Federal to be proposed, pending or threatened, other than Taxes
for periods for which returns are not yet filed.
(c) Utah Federal has not filed a consent to the
application of Section 341(f) of the Internal Revenue Code of 1986, as amended.
4.13 Employees; Employee Benefit Plans.
(a) Except as set forth on Disclosure Schedule 4.13(a),
as of the date hereof, Utah Federal is not a party to or bound by any contract,
arrangement or understanding (whether written or oral) with respect to the
employment or compensation of any officers, employees or consultants and except
as provided herein, and under those Benefit Plans (as defined below) set forth
on Disclosure Schedule 4.13(a), consummation of the transactions
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contemplated by this Agreement will not (either alone or upon the occurrence of
any additional acts or events) result in any payment (whether of severance pay
or otherwise) becoming due from Utah Federal to any officer or employee
thereof. Utah Federal has previously delivered or made available to WMI or
WMBfsb true and complete copies of all employment, consulting and deferred
compensation agreements that are in writing, to which Utah Federal is a party.
(b) Except as set forth on Disclosure Schedule 4.13(b),
as of the date hereof, no officer or employee of Utah Federal is receiving
aggregate remuneration (bonus, salary and commissions) at a rate which, if
annualized, would exceed $60,000 in 1996.
(c) Except as disclosed on Disclosure Schedule 4.13(c),
as of the date hereof, there are not, and have not been at any time in the past
three years, any actions, suits, claims or proceedings before any court (which
have been served on Utah Federal), commission, bureau, regulatory,
administrative or governmental agency, arbitrator, body or authority pending
or, to the best of Utah Federal's knowledge, threatened by any employees,
former employees or other persons relating to the employment practices or
activities of Utah Federal (except for threatened actions which have
subsequently been resolved). Utah Federal is not a party to any collective
bargaining agreement, and no union organization efforts are pending or, to the
best of Utah Federal's knowledge, threatened nor have any occurred during the
last three years.
(d) Utah Federal has made available to WMI or WMBfsb true
and complete copies of all personnel codes, practices, procedures, policies,
manuals, affirmative action programs and similar materials.
(e) With respect to all employee benefit plans, Utah
Federal represents and warrants as follows:
(i) All employee benefit plans, as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any other pension, bonus, deferred compensation, stock bonus,
stock purchase, post-retirement medical, hospitalization, health and other
employee benefit plan, program or arrangement, whether formal or informal,
under which Utah Federal has any obligation or liability, or under which any
employee or former employee has any rights to benefits or any "cafeteria
plans," as described in Section 125 of the Internal Revenue Code of 1986, as
amended (the "Code") (together, the "Benefit Plans") are set forth on
Disclosure Schedule 4.13(e)(i). Except as set forth on Disclosure Schedule
4.13(e)(i), none of the Benefit Plans is subject to Title IV of ERISA, is a
"multiemployer plan," as such term is defined in Section 3(37) and 4001(a)(3)
of ERISA and Section 414(f) of the Code, or is subject to the funding
requirements of Section 412 of the Code or Title I, Subtitle B, Part 3 of
ERISA.
(ii) All employee benefit plans, as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any other pension, bonus, deferred compensation, stock bonus,
stock purchase, post-retirement medical, hospitalization, health and other
employee benefit plan, program or arrangement, whether formal or informal,
under which Utah Federal has any obligation or liability, or under which any
employee or former employee has any rights to benefits or any "cafeteria
plans," as described in Section 125 of the Internal Revenue Code of 1986, as
amended (the "Code") (together, the "Benefit Plans") are set forth on
Disclosure Schedule 4.13(e)(i).
(iii) In all material respects, except as discussed
on Disclosure Schedule 4.13(e)(ii), the terms of the Benefit Plans are, and the
Benefit Plans have been administered, in accordance with the requirements of
ERISA, the Code, applicable law and the respective plan documents. Except as
disclosed on Disclosure Schedule 4.13(e)(ii), none of the Benefit Plans is
under audit or is the subject of an investigation by the Internal Revenue
Service, the U.S. Department of Labor or any other federal or state
governmental agency. Except as disclosed on Disclosure Schedule 4.13(e)(ii),
all material reports and information required to be filed with, or provided to,
the United States Department of Labor, Internal Revenue Service, the Pension
Benefit Guaranty Corporation (the "PBGC") and plan participants and
beneficiaries with respect to each Benefit Plan have been timely filed or
provided. With respect to each Benefit Plan for which an annual report has
been filed, no material change has occurred with respect to the matters covered
by the most recent annual report since the date thereof.
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(iv) Utah Federal is not aware of any facts
regarding any Benefit Plan which is an "employee pension benefit plan" as
defined in Section 3(2) of ERISA (collectively, the "Employee Pension Benefit
Plans") that would present a significant risk that any Employee Pension Benefit
Plan would not be determined by the appropriate District Director of the
Internal Revenue Service to be "qualified" within the meaning of Section 401(a)
of the Code, or with respect to which any trust maintained pursuant thereto is
not exempt from federal income taxation pursuant to Section 501 of the Code, or
with respect to which a favorable determination letter could not be issued by
the Internal Revenue Service with respect to each such Employee Pension Benefit
Plan.
(v) Prior to the Closing, Utah Federal shall
deliver or make available to WMI or WMBfsb complete and correct copies (if any)
of (w) the most recent Internal Revenue Service determination letter relating
to each Employee Pension Benefit Plan intended to be tax qualified under
Section 401(a) and 501(a) of the Code, (x) the most recent annual report (Form
5500 Series) and accompanying schedules of each Benefit Plan, filed with the
Internal Revenue Service or an explanation of why such annual report is not
required, (y) the most current summary plan description for each Benefit Plan,
and (z) the most recent audited financial statements of each Benefit Plan.
(vi) With respect to each Benefit Plan, all
contributions, premiums or other payments due or required to be made to such
plans as of the Effective Time have been or will be made or accrued prior to
the Effective Time.
(vii) To the best of Utah Federal's knowledge,
there are not now, nor have there been, any "prohibited transactions", as such
term is defined in Section 4975 of the Code or Section 406 of ERISA, involving
Utah Federal, or any officer, director or employee of Utah Federal, with
respect to the Benefit Plans that could subject Utah Federal or any other
party-in-interest to the penalty or tax imposed under Section 502(i) of ERISA
and Section 4975 of the Code.
(viii) As of the date hereof, no claim, lawsuit,
arbitration or other action has been instituted, asserted (and no such lawsuit
has been served on Utah Federal) or, to the best of Utah Federal's knowledge,
threatened by or on behalf of such Benefit Plan or by any employee alleging a
breach or breaches of fiduciary duty or violations of other applicable state or
federal law with respect to such Benefit Plans, which could result in liability
on the part of Utah Federal or a Benefit Plan under ERISA or any other law, nor
is there any known basis for successful prosecution of such a claim, and WMI or
WMBfsb will be notified promptly in writing of any such threatened or pending
claim arising between the date hereof and the Closing.
(ix) Except as may be required by the Consolidated
Omnibus Budget and Reconciliation Act of 1985, as amended ("COBRA"), no Benefit
Plan which is an employee welfare benefit plan (within the meaning of Section
3(1) of ERISA) provides for continuing benefits or coverage for any participant
or beneficiary of a participant after such participant's termination of
employment nor does Utah Federal have any current or projected liability under
any such plans.
(x) Utah Federal has not maintained or
contributed to, and does not currently maintain or contribute to, any severance
pay plan. All payments (other than regular wages and vacation pay) made to
employees of Utah Federal coincident with or in connection with termination of
employment since January 1, 1994 are disclosed on Disclosure Schedule
4.13(e)(ix).
(xi) No individual will accrue or receive any
additional benefits, service, or accelerated rights to payment or vesting of
benefits under any Benefit Plan, or otherwise obtain rights to any "parachute
payment," as defined in Section 280G(b)(2) of the Code, as a result of the
transactions contemplated by this Agreement.
(xii) Utah Federal has complied in all material
respects with all of the requirements of COBRA.
4.14 Utah Federal Information. The information relating
to Utah Federal to be contained in the Proxy Statement/Prospectus contemplated
by Section 1(e) hereof will not, at the time it is filed with the
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applicable governmental authorities, as of the date thereof, or at the date
actions of Utah Federal stockholders are taken with respect to the transactions
contemplated therein, contain any untrue statement of a material fact or omit
to state a material fact necessary to make such statements, in light of the
circumstances under which such statements were made, not misleading.
4.15 Compliance With Applicable Law.
(a) Except as set forth on Disclosure Schedule 4.15(a),
each of Utah Federal and the Utah Federal Subsidiary holds all licenses,
certificates, franchises, permits and other governmental authorizations
("Permits") necessary for the lawful conduct of its respective businesses and
such Permits are in full force and effect, and Utah Federal is in all respects
complying therewith, except where the failure to possess or comply with such
Permits would not have a Material Adverse Effect on Utah Federal.
(b) Except as set forth on Disclosure Schedule 4.15(b),
each of Utah Federal and the Utah Federal Subsidiary is and for the past three
years has been in compliance with all foreign, federal, state and local laws,
statutes, ordinances, rules, regulations and orders applicable to the
operation, conduct or ownership of its business or properties except for any
noncompliance which is not reasonably likely to have in the aggregate a
Material Adverse Effect on Utah Federal.
4.16 Contracts and Agreements.
As of the date hereof, except as disclosed in Disclosure
Schedule 4.16, (i) except with respect to deposits or other borrowings in the
ordinary course of business, Utah Federal is not a party to or bound by any
commitment, contract, agreement or other instrument which involves or could
involve aggregate future payments by Utah Federal of more than $25,000, (ii)
Utah Federal is not a party to nor was it bound by any commitment, contract,
agreement or other instrument which is material to the business, operations,
properties, assets or financial condition of Utah Federal and (iii) no
commitment, contract, agreement or other instrument other than Utah Federal's
charter documents, to which Utah Federal is a party or by which it is bound,
limits the freedom of Utah Federal to compete in any line of business or with
any person.
4.17 Affiliate Transactions.
(a) Except as disclosed in Disclosure Schedule 4.17 or in
Utah Federal's proxy statements relating to its annual meetings of
stockholders, and except as specifically contemplated by this Agreement, since
January 1, 1992, Utah Federal has not engaged in, or is not currently obligated
to engage in (whether in writing or orally), any transaction with any
Affiliated Person (as defined below) involving aggregate payments by or to Utah
Federal of $60,000 or more during any consecutive 12 month period.
(b) For purposes of this Section 4.17, "Affiliated
Person" means:
(i) a director, executive officer or Controlling
Person (as defined below) of Utah Federal;
(ii) a spouse of a director, executive officer or
Controlling Person of Utah Federal;
(iii) a member of the immediate family of a
director, executive officer, or Controlling Person of Utah Federal who has the
same home as such person;
(iv) any corporation or organization (other than
Utah Federal) of which a director, executive officer or Controlling Person of
Utah Federal (w) is a chief executive officer, chief financial officer, or a
person performing similar functions; (x) is a general partner; (y) is a limited
partner who, directly or indirectly, either alone or with his spouse and the
members of his immediate family who are also Affiliated Persons, owns an
interest of five percent or more in the partnership (based on the value of his
contribution) or who, directly or indirectly through other directors, executive
officers and Controlling Persons of Utah Federal and their spouses and their
immediate family members who are also Affiliated Persons, owns an interest in
25 percent or more of the
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partnership; or (z) directly or indirectly either alone or with his spouse and
the members of his immediate family who are also Affiliated Persons, owns or
controls ten percent or more of any class of equity securities, or owns or
controls, with other directors, executive officers, and Controlling Persons of
Utah Federal and their spouses and their immediate family members who are also
Affiliated Persons, 25 percent or more of any class of equity securities;
(v) any trust or estate in which a director,
executive officer, or Controlling Person of Utah Federal or the spouse of such
person has a substantial beneficial interest or as to which such person or his
spouse serves as trustee or in a similar fiduciary capacity.
(c) For purposes of this Section 4.17 "Controlling
Person" means any person or entity which, either directly or indirectly, or
acting in concert with one or more other persons or entities owns, controls or
holds with power to vote, or holds proxies representing ten percent or more of
the outstanding Utah Federal Common Stock.
(d) For purposes of this Section 4.17, the term
"director" means any director, trustee, or other person performing similar
functions with respect to any organization whether incorporated or
unincorporated.
(e) For purposes of this Section 4.17, the term
"executive officer" means the president, any executive vice president, any
senior vice president, the secretary, the treasurer, the comptroller, and any
other person performing similar functions with respect to any organization
whether incorporated or unincorporated.
4.18 Disclosure. To the knowledge of Utah Federal, no
representation or warranty of Utah Federal contained in this Agreement, and no
statement contained in the Disclosure Schedules delivered by Utah Federal
hereunder, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make a statement herein or therein, in
light of the circumstances under which it was made, not misleading.
4.19 Title to Property.
(a) Real Property. Disclosure Schedule 4.19(a) contains
a true and correct description of all interests in real property (other than
real property security interests received in the ordinary course of business),
whether owned, leased or otherwise claimed, including a list of all leases of
real property, in which Utah Federal has or claims an interest as of the date
hereof and any guarantees of any such leases by Utah Federal. True and
complete copies of such leases have previously been delivered or made available
to WMI or WMBfsb, together with all amendments, modifications, agreements or
other writings related thereto. Except as disclosed on Disclosure Schedule
4.19(a), each such lease is legal, valid and binding as between Utah Federal
and the other party or parties thereto, and the occupant is a tenant or
possessor in good standing thereunder, free of any default or breach whatsoever
and quietly enjoys the premises provided for therein. Except as disclosed on
Disclosure Schedule 4.19(a), Utah Federal has good, valid and marketable title
to all real property owned by it on the date hereof, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever,
except liens for current Taxes not yet due and payable, and such encumbrances
and imperfections of title, if any, as do not materially detract from the value
of the properties and do not materially interfere with the present or proposed
use of such properties or otherwise materially impair such operations. All
real property and fixtures material to the business, operations or financial
condition of Utah Federal are in substantially good condition and repair.
(b) Environmental Matters. Except as set forth on
Disclosure Schedule 4.19(b), to the knowledge of Utah Federal, the real
property owned or leased by Utah Federal on the date hereof does not contain
any underground storage tanks, asbestos, ureaformaldehyde, uncontained
polychlorinated biphenyls, or, except for materials which are ordinarily used
in office buildings and office equipment such as janitorial supplies and do not
give rise to financial liability therefor under the hereafter defined
Environmental Laws, releases of hazardous substances as such terms may be
defined by all applicable federal, state or local environmental protection laws
and regulations ("Environmental Laws"). As of the date hereof (i) no part of
any such real property has been listed, or to the knowledge of Utah Federal,
proposed for listing on the National Priorities List pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
or on a registry or inventory of inactive hazardous waste sites maintained by
any state, and, (ii) except as set forth on Disclosure
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Schedule 4.19(b), no notices have been received alleging that Utah Federal was
a potentially responsible person under CERCLA or any similar statute, rule or
regulation. Utah Federal knows of no violation of law, regulation, ordinance
(including, without limitation, laws, regulations and ordinances with respect
to hazardous waste, zoning, environmental, city planning or other similar
matters) relating to its respective properties, which violations could have in
the aggregate a Materially Adverse Effect on Utah Federal.
(c) Personal Property. Disclosure Schedule 4.19(c)
contains a true and correct list of (i) each item of machinery, equipment, or
furniture, including without limitation computers and vehicles, of Utah
Federal, included on the Utah Federal December 1995 Financial Statements at a
carrying value of, or, if acquired after December 31, 1995, for a purchase
price of, more than $25,000, (ii) each lease or other agreement under which any
such item of personal property is leased, rented, held or operated where the
current fair market value of such item is more than $25,000 and (iii) all
trademarks, trade names or service marks currently used, owned, or registered
for use by Utah Federal. Except as disclosed on Schedule 4.19(c), Utah Federal
has good, valid and marketable title to all personal property owned by it, free
and clear of all liens, pledges, charges or encumbrances of any nature
whatsoever.
4.20 Insurance. Disclosure Schedule 4.20 contains a true
and complete list and a brief description (including name of insurer, agent,
coverage and expiration date) of all insurance policies in force on the date
hereof with respect to the business and assets of Utah Federal (other than
insurance policies under which Utah Federal is named as a loss payee or
additional insured as a result of its position as a secured lender). Utah
Federal is in compliance with all of the material provisions of its insurance
policies and are not in default under any of the terms thereof. Each such
policy is outstanding and in full force and effect and, except as set forth on
Disclosure Schedule 4.20, Utah Federal is the sole beneficiary of such
policies. All premiums and other payments due under any such policy have been
paid. Utah Federal has previously delivered to, or made available for
inspection by, WMI or WMBfsb each insurance policy to which Utah Federal is a
party (other than insurance policies under which Utah Federal is named as a
loss payee or additional insured as a result of its position as a secured
lender).
4.21 Powers of Attorney. Utah Federal has no powers of
attorney outstanding other than those issued pursuant to the requirements of
regulatory authority or in the ordinary course of business with respect to
routine matters.
4.22 Benefit Plans Invested in Common Stock. Except for
the Utah Federal Option Agreement, shares of Utah Federal Common Stock are not
available to individuals, directly or indirectly, through any Benefit Plan, and
no Benefit Plan is invested in Utah Federal Common Stock.
4.23 Community Reinvestment Act Compliance. Utah Federal
is in substantial compliance with the applicable provisions of the Community
Reinvestment Act of 1977 and the regulations promulgated thereunder
(collectively, "CRA"). Utah Federal has not been advised of the existence of
any fact or circumstance or set of facts or circumstances which, if true, would
cause Utah Federal to fail to be in substantial compliance with such provisions
or to have its current rating lowered. Any change in the current rating which
would prohibit the Merger from being consummated shall be a material adverse
change in the business of Utah Federal.
4.24 Agreements with Bank Regulators. Utah Federal is not
a party to or is subject to any written order, decree, agreement or memorandum
of understanding with, or a party to any commitment letter or similar
undertaking to, or is a recipient of any currently applicable extraordinary
supervisory letter from, any federal or state governmental agency or authority
charged with the supervision or regulation of depository institutions or the
insurance of deposits therein which is outside the ordinary course of business
or not generally applicable to entities engaged in the same business. Utah
Federal has not been advised within the last 18 months by any such regulatory
authority that such authority is contemplating issuing, requiring or requesting
(or is considering the appropriateness of issuing, requiring or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter
or submission.
5. Representations and Warranties of WMI and WMBfsb. WMI and
WMBfsb hereby represent and warrant to Utah Federal as follows:
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5.1 Corporate Organization.
(a) WMI is a corporation duly organized, validly existing
and in good standing under the laws of the State of Washington. WMI has all
the requisite power and authority to own, lease and operate all of its
properties and assets and to carry on its business as it is currently
conducted, and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of business conducted by it
makes such licensing or qualification necessary and where failure to be so
qualified would, individually or in the aggregate, have a Material Adverse
Effect on WMI. WMI owns all of the outstanding capital stock of WMBfsb. WMI
is a savings and loan holding company duly registered and in good standing with
the OTS.
(b) WMBfsb is a federally-chartered stock savings bank
duly organized, validly existing and in good standing under the laws of the
United States. WMBfsb has all the requisite power and authority to own, lease
and operate all of its properties and assets and to carry on its business as it
is currently conducted, and is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the nature of the business
conducted by it makes such licensing or qualification necessary and where
failure to be so qualified would, individually or in the aggregate, have a
Material Adverse Effect on WMI. WMBfsb accounts are insured by the SAIF,
administered by the FDIC, to the fullest extent permitted by law.
5.2 Authority.
(a) WMI has full corporate power and authority to execute
and deliver this Agreement, the Plan of Merger and the Option, and, subject to
applicable regulatory approvals, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement, the Plan of Merger and
the Option and consummation of the transactions contemplated hereby have been
duly and validly approved by the Board of Directors of WMI. This Agreement and
the Option have been duly and validly executed and delivered by WMI and,
assuming the due authorization, execution and delivery thereof by the other
parties thereto, constitute valid and binding obligations of WMI, enforceable
against it in accordance with their respective terms.
(b) WMBfsb has full corporate power and authority to
execute and deliver this Agreement and the Plan of Merger, and, subject to
applicable regulatory approvals, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Plan
of Merger and consummation of the transactions hereby have been duly and
validly approved by the Board of Directors of WMBfsb and by the Board of
Directors of the stockholder of WMBfsb. This Agreement has been duly and
validly executed and delivered by WMBfsb and, assuming the due authorization,
execution and delivery thereof by the other parties thereto, constitute a valid
and binding obligation of WMBfsb, enforceable against it in accordance with its
respective terms.
5.3 No Violation. Neither the execution and delivery of
this Agreement, the Option and the Plan of Merger by WMI and WMBfsb nor the
consummation by WMI and WMBfsb of the transactions contemplated hereby and
thereby, nor compliance by WMI and WMBfsb with any of the terms hereof or
thereof, will (i) violate any provision of the Articles of Incorporation or
charter or bylaws of WMI or WMBfsb, or (ii) assuming that the consents and
approvals referred to in Section 7.1 are duly obtained, violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to WMI or WMBfsb or any of their respective properties or assets, or
(iii) violate, conflict with, result in the breach of any provisions of,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties or
assets of WMI or WMBfsb under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement
or other instrument or obligation to which WMI or WMBfsb is a party, or by
which they or any of their respective properties or assets may be bound or
affected, except with respect to (iii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or encumbrances which in the
aggregate will not prevent or delay the consummation of the transactions
contemplated hereby.
5.4 Consents and Approvals. Except for consents and
approvals of or filings or registrations with the SEC, the OTS, the Justice
Department and other applicable governmental authorities, no consents or
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approvals of or filings or registrations with any third party or any public
body or authority, except for consents, approvals, filings or registrations
where the failure to obtain such consents or approvals or to make such filings
or registrations would not prevent or delay the Merger and would not in the
aggregate have a Material Adverse Effect on WMI, are necessary in connection
with the execution and delivery by WMI and WMBfsb of this Agreement and the
Plan of Merger.
5.5 WMI Information. The information relating to WMI and
its subsidiaries supplied by WMI for inclusion in the Proxy
Statement/Prospectus contemplated by Section 1(e) hereof will not, at the time
the Proxy Statement/Prospectus is filed with the applicable governmental
authorities, as of the date of such Proxy Statement/Prospectus or at the date
stockholder action is taken with respect to the transactions contemplated
therein, contain any untrue statement of a material fact or omit to state a
material fact necessary to make such statements, in light of the circumstances
under which they were made, not misleading.
5.6 Sufficient Resources. WMI has and will have
available at the Effective Time sufficient authorized but unissued shares of
WMI Common Stock, to enable it lawfully to satisfy its payment obligations
pursuant to this Agreement. WMI has and will have sufficient management and
financial resources to obtain the required regulatory approvals for the Merger.
On the date of this Agreement, there is no pending or, to the knowledge of WMI
or WMBfsb, threatened legal or governmental proceeding against WMI or any
subsidiary or affiliate thereof which would affect WMI's or WMBfsb's ability to
obtain any of the required regulatory approvals or satisfy any of the other
conditions required to be satisfied in order to consummate the transactions
contemplated by this Agreement. WMI will promptly notify Utah Federal if any
of the representations contained in this Section 5.6 ceases to be true and
correct.
5.7 Capitalization, Investments. The authorized capital
stock of WMI as of February 20, 1996 consists of 100,000,000 shares of common
stock, no par value per share, of which 65,939,292 shares (excluding shares
held by a subsidiary of WMI) were, as of December 31, 1995, duly issued and
outstanding, fully paid and nonassessable, and 10,000,000 shares of preferred
stock, of which 6,122,500 shares were, as of December 31, 1995, issued and
outstanding. As used herein, "WMI Subsidiaries" shall mean WMBfsb, Washington
Mutual Bank, WM Financial, Inc., Murphey Favre, Inc., Composite Research &
Management Co. and WM Life Insurance Co. Substantially all of the business of
WMI and its subsidiaries is done through WMI and the WMI Subsidiaries. All of
the WMI Subsidiaries' capital stock, which is issued and outstanding, is owned
by WMI directly or indirectly through wholly-owned subsidiaries. There are
outstanding no options, convertible securities, warrants or other rights to
purchase or acquire capital stock from any of the WMI Subsidiaries, there is no
commitment of any of the WMI Subsidiaries to issue any of the same. The common
stock of WMI to be issued in the Merger will have been duly authorized and,
when issued in accordance with the Plan of Merger, (i) will be validly
authorized and issued and fully paid and nonassessable and no stockholder of
WMI will have any preemptive rights thereto and (ii) will be registered under
the Securities Act of 1933 and listed for trading on a national securities
exchange or The Nasdaq Stock Market.
5.8 Financial Statements. WMI has made available to Utah
Federal audited consolidated statements of financial condition for WMI and its
subsidiaries as of the end of WMI's last three fiscal years, and audited
consolidated statements of (i) operations, (ii) stockholders' equity, and (iii)
cash flows for each of the last three fiscal years, including the notes to such
audited consolidated financial statements, together with the reports of WMI's
independent certified public accountants, pertaining to such audited
consolidated financial statements. For purposes of this Agreement, the "WMI
Statement" shall mean the audited consolidated statement of financial condition
for WMI and its subsidiaries as of December 31, 1995 (including the notes
thereto). The aforesaid audited consolidated statements of financial condition
and the WMI Statement present fairly the financial condition of the companies
indicated on a consolidated basis at the dates thereof, using generally
accepted accounting principles consistently applied. Such audited consolidated
statements of (i) operations, (ii) stockholders' equity, (iii) cash flows, and
(iv) financial position present fairly the results of the operations of the
companies indicated on a consolidated basis for the periods or at the dates
indicated, using generally accepted accounting principles consistently applied.
Except as and to the extent reflected or reserved against in the WMI Statement,
or as otherwise disclosed pursuant to this Agreement, neither WMI nor any of
its subsidiaries had, at the date thereof, any material liabilities or
obligations, or any other liabilities or obligations which in the aggregate
would be material, secured or unsecured (whether accrued, absolute, contingent
or otherwise), including, without limitation,
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any tax liabilities, which should be reflected in the WMI Statement in
accordance with generally accepted accounting principles consistently applied.
The books and records of WMI and its subsidiaries are maintained in accordance
with generally accepted accounting principles consistently applied.
5.9 Absence of Material Adverse Change. Since December
31, 1995, except as set forth on Disclosure Schedule 5.9 hereto, there has been
(i) no material adverse change in the financial condition, business or results
of operations of WMI and its subsidiaries taken as a whole (except for changes
resulting from market and economic conditions which generally affect the
savings industry as a whole), (ii) no loss, destruction or damage to the
properties of WMI or any of its subsidiaries, which loss, destruction, or
damage is material to WMI and its subsidiaries taken as a whole and is not
adequately covered by insurance; and (iii) no change in any of the accounting
methods or practices or revaluation of any of the assets of WMI or its
subsidiaries which is material to WMI and its subsidiaries taken as a whole.
Since such date, WMI and its subsidiaries taken as a whole, have conducted
their businesses, in all material respects, in compliance with applicable
federal, state and local laws, statutes, ordinances and regulations.
5.10 Litigation. Except as set forth on Disclosure
Schedule 5.10 hereto, no action, suit, counterclaim or other litigation,
investigation or proceeding to which WMI or any of its subsidiaries is a party
is pending, or is known by the executive officers of WMI or any of its
subsidiaries to be threatened, against WMI or any of its subsidiaries before
any court or governmental or administrative agency, domestic or foreign which
would be reasonably expected to result in any liabilities which would, in the
aggregate, have a Material Adverse Effect on WMI. Neither WMI nor any of its
subsidiaries is subject to any order, judgment or decree nor is it a party to
any supervisory agreement or arrangement, consensual or otherwise, with any
regulatory authority. Neither WMI nor any of its subsidiaries is in default
with respect to any such order, judgment, decree, agreement or arrangement.
5.11 Brokerage. There are no claims for investment
banking fees, brokerage commissions, finder's fees or similar compensation
arising out of or due to any act of WMI or any of its subsidiaries in
connection with the transactions contemplated by this Agreement.
5.12 Reports. WMI and WMBfsb (or their predecessors) have
duly filed with the Washington Director of Financial Institutions (or his
predecessor), the FDIC and the OTS, in correct form, the monthly, quarterly,
semi-annual and annual reports required to be filed by them under applicable
regulations for all periods subsequent to December 31, 1991. WMI and WMBfsb
have previously delivered or made available to Utah Federal accurate and
complete copies of such reports. WMI (or its predecessor) has timely filed all
reports required to be filed by it pursuant to the Securities Exchange Act of
1934, as amended (the "Securities Exchange Act") and the rules and regulations
promulgated thereunder. WMI has previously delivered or made available to Utah
Federal an accurate and complete copy of each (i) offering circular, definitive
proxy statement filed by it or its predecessor since June 30, 1992 with the
FDIC or the SEC, and (ii) communication (other than general advertising
materials) mailed by each of them to its stockholders since June 30, 1992 and
no such offering circular, proxy statement or communication, as of its date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
5.13 Disclosure. To the knowledge of WMI and WMBfsb, no
representation or warranty of WMI or WMBfsb contained in this Agreement, and no
statement contained in the Disclosure Schedules delivered by WMI or WMBfsb,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make a statement herein or therein, in light of the
circumstances under which it was made, not misleading.
5.14 CRA Compliance. WMBfsb is in substantial compliance
with the applicable provisions of CRA. WMBfsb has not been advised of the
existence of any fact or circumstance or set of circumstances which, if true,
would cause WMBfsb to fail to be in substantial compliance with such
provisions.
5.15 Agreements With Bank Regulators. Neither WMI nor
WMBfsb has been a party to or has been subject to any written order, decree,
agreement or memorandum of understanding with, or any commitment letter or
similar undertaking to, or has been a recipient of any extraordinary
supervisory letter from,
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any federal or state governmental agency or authority charged with the
supervision or regulation of depository institutions or the insurance of
deposits therein which is outside the ordinary course of business or not
generally applicable to entities engaged in the same business. Neither WMI nor
WMBfsb has been advised by any such regulatory authority that such authority is
contemplating issuing, requiring or requesting (or is considering the
appropriateness of issuing, requiring or requesting) any such order, decree,
agreement, memorandum of understanding, commitment letter or submission.
5.16 Compliance With Applicable Law.
(a) WMI and each WMI Subsidiary holds all Permits
necessary for the lawful conduct of their respective businesses and such
Permits are in full force and effect, and WMI and each WMI Subsidiary are in
all material respects complying therewith, except where the failure to possess
or comply with such Permits would not have a Material Adverse Effect on WMI.
(b) Except as set forth on Disclosure Schedule 5.16(b),
WMI and each WMI Subsidiary is and since December 31, 1992 has been in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules, regulations and orders applicable to the operation, conduct
or ownership of its business or properties except for any noncompliance which
has not and will not have in the aggregate a Material Adverse Effect on WMI.
6. Covenants of the Parties.
6.1 Conduct of the Business of Utah Federal. During the
period from the date of this Agreement to the Effective Time, Utah Federal will
conduct the business of Utah Federal and will engage in transactions only in
the ordinary course and consistent with past practice and with prudent banking
practice, except with the written consent of WMI (which will not be
unreasonably withheld, delayed or conditioned). During such period, Utah
Federal will use its best efforts to (x) preserve the business organizations of
Utah Federal intact, (y) keep available to it and to WMI and WMBfsb the present
services of the employees of Utah Federal, and (z) preserve for itself and for
WMI and WMBfsb the goodwill of the customers of Utah Federal and others with
whom business relationships exist. In addition, without limiting the
generality of the foregoing, Utah Federal agrees that from the date hereof to
the Effective Time, except as otherwise consented to or approved by WMI in
writing (which consent or approval shall not be unreasonably withheld, delayed
or conditioned) or as permitted or required by this Agreement or as required by
law (in which case Utah Federal shall notify WMI in writing), Utah Federal will
not:
(a) change any provisions of its Articles or bylaws or
any similar governing documents of Utah Federal;
(b) change the number of shares of its authorized or
issued capital stock (other than issuance of stock as a result of the exercise
of options issued as of the date hereof and described on Disclosure Schedule
4.2) or issue, grant or amend any option, warrant, call, commitment,
subscription, right to purchase or agreement of any character relating to the
authorized or issued capital stock of Utah Federal, or any securities
convertible into shares of such stock, or split, combine or reclassify any
shares of its capital stock, or declare, set aside or pay any dividend, or
other distributions (whether in cash, stock or property or any combination
thereof) in respect of the capital stock of Utah Federal, or redeem or
otherwise acquire any shares of such capital stock;
(c) except as permitted pursuant to Section 6.13 hereof,
grant any severance or termination pay to or enter into or amend any employment
agreement with, or increase the amount of payments or fees to, any of its
employees, officers or directors other than salary increases to employees
(other than those executing Employment Agreements) consistent with past
increases;
(d) make any capital expenditures in excess of (i)
$40,000 per project or related series of projects or (ii) $200,000 in the
aggregate, other than pursuant to binding commitments existing on the date
hereof and expenditures necessary to maintain existing assets in good repair;
(e) make application for the opening of any, or open any,
new branches;
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(f) make application for the relocation or closing of
any, or relocate or close any, branches;
(g) change in any material manner its lending or pricing
policies or approval policies for making loans, its investment policies, its
asset/liability management policies or any other material banking policies;
(h) make any loan or issue a commitment for any loan
except for loans and commitments that are made in the ordinary course of
business consistent with past practice at rates not less than prevailing market
rates or issue or agree to issue any letters of credit or otherwise guarantee
the obligations of any other persons except in the ordinary course of business
consistent with past practice;
(i) acquire assets other than those necessary in the
conduct of its business in the ordinary course;
(j) sell, transfer, assign, encumber or otherwise dispose
of assets other than has been customary in its ordinary course of business;
(k) enter into or amend or terminate any long-term
(one-year or more) contracts (including real property leases) except for
contracts of deposit at Utah Federal not otherwise restricted under this
Agreement which are in the ordinary course of business consistent with past
practice and not in excess of prevailing market rates and except for agreements
for Utah Federal to lend money not otherwise restricted under this Agreement
which are in the ordinary course of business consistent with past practice and
provide for not less than prevailing market rates of interest);
(l) enter into or amend any contract (other than
contracts for deposits at Utah Federal or agreements for Utah Federal to lend
money not otherwise restricted under this Agreement) that calls for the payment
by Utah Federal of $25,000 or more after the date of this Agreement (a
"Material Contract") that cannot be terminated on not more than 30 days' notice
without cause and without payment or loss of any material amount as a penalty,
bonus, premium or other compensation for termination;
(m) engage or participate in any material transaction or
incur or sustain any material obligation except for transactions otherwise
permitted under this Section 6.1 which are in the ordinary course of business
consistent with past practices and which are of similar kinds and involve
similar amounts;
(n) make any contributions to any Benefit Plans except in
such amounts and at such times as consistent with past practice;
(o) increase the number of full time equivalent employees
of Utah Federal above 84;
(p) except after having followed reasonable procedures
with respect to the investigation of potential environmental problems, which
procedures have been approved in writing by WMI (which approval shall not be
unreasonably withheld, delayed or conditioned), foreclose upon or otherwise
acquire (whether by deed in lieu of foreclosure or otherwise) any real property
(other than 1-to-4 family residential properties in the ordinary course of
business); or
(q) agree to do any of the foregoing.
The parties agree that between the date hereof and Closing they shall
reasonably cooperate with each other and work together in good faith to (i)
ensure that commercial checking accounts opened by Utah Federal are done so in
a manner consistent with past practice, (ii) ensure that loans made to persons
or entities located in Nevada or secured by property located in Nevada are made
in a manner consistent with past practice, and (iii) wind down by Closing any
securities brokerage activities conducted by Utah Federal or the Utah Federal
Subsidiary or in or adjacent to Utah Federal branches.
6.2 No Solicitation. Neither Utah Federal nor any of its
directors, officers, representatives, agents or other persons controlled by any
of them, shall, directly or indirectly encourage or solicit, or (except to
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the extent that the directors of Utah Federal in their good faith judgment
after receipt of advice of counsel determine that such response is reasonably
required in order to discharge their fiduciary duties) hold discussions or
negotiations with, or provide any information to, any person, entity or group
other than WMBfsb or WMI concerning any merger, sale of substantial assets not
in the ordinary course of business, sale of shares of capital stock or similar
transactions involving Utah Federal, or any division. Utah Federal will
promptly communicate to WMI the terms of any proposal that it may receive in
respect of any such transaction. Notwithstanding the foregoing two sentences,
if the board of directors of Utah Federal receives an unsolicited offer or
inquiry with respect to such a transaction, the board may respond to such offer
if the board determines in its good faith judgment (after receiving advice of
counsel) that such response is reasonably required in order to discharge its
fiduciary duties.
6.3 Current Information.
(a) No later than ten days after the date of this
Agreement, Utah Federal and WMI shall each designate an individual acceptable
to the other party (a "Designated Representative" and, together, the
"Designated Representatives") to be the primary point of contact between the
parties. During the period from the date of their designation to the Effective
Time, the Designated Representatives or their representatives shall confer on a
regular basis so that WMBfsb and WMI are kept advised as to the general status
of the ongoing operations of Utah Federal. Without limiting the foregoing,
Utah Federal agrees to confer with the WMI Designated Representative regarding
any proposed significant changes to Utah Federal's asset/liability management
policies and objectives. Utah Federal agrees to provide access to members of
WMI's and WMBfsb's acquisition team and to work with them in order to plan,
prepare for and facilitate the coordination of the parties' data processing
systems with each other as well as other matters arising from the Merger. Utah
Federal will promptly notify the WMI Designated Representative or his or her
representatives of any material change in the normal course of business or in
the operation of the properties of Utah Federal or of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) or the institution or the threat of any litigation
involving Utah Federal, and have kept and will keep the WMI Designated
Representative or his or her representatives fully informed of such events and
the progress of any already existing litigation.
(b) WMI shall immediately notify the Utah Federal
Designated Representative if it appears that there has occurred any change in
its financial or other condition or any other event that will or may affect
WMI's ability to complete the Merger or have a Material Adverse Effect on WMI.
6.4 Access to Properties and Records; Confidentiality.
(a) Utah Federal shall permit WMI and WMBfsb reasonable
access to its properties, and shall disclose and make available to WMI and
WMBfsb all books, papers and records relating to the assets, stock, ownership,
properties, obligations, operations and liabilities of Utah Federal, including
but not limited to, all books of account (including the general ledger), tax
records, minute books of directors and stockholders meetings, organizational
documents, bylaws, material contracts and agreements, filings with any
regulatory authority, accountants work papers, litigation files, plans
affecting employees, and any other business activities or prospects in which
WMBfsb or WMI may have a reasonable interest, including, without limitation,
all loan files in each case during normal business hours and upon reasonable
notice. Utah Federal shall not be required to provide access to or disclose
information where such access or disclosure would jeopardize the
attorney-client privilege of Utah Federal or would contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date hereof. The parties will use all reasonable efforts to make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) All information furnished by Utah Federal to WMBfsb
or WMI or the representatives or affiliates of either pursuant to, or in any
negotiation in connection with, this Agreement shall be treated as the sole
property of Utah Federal until consummation of the Merger and, if the Merger
shall not occur, WMBfsb, WMI and their affiliates, agents and advisers shall
upon written request return to Utah Federal, all documents or other materials
containing, reflecting, referring to such information, and shall keep
confidential all such information and shall not disclose or use such
information for competitive purposes. The obligation to keep such information
confidential shall not apply to (i) any information which (w) WMBfsb or WMI can
establish by convincing evidence was already in its possession (subject to no
obligations of confidentiality) prior to the disclosure thereof by Utah
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Federal; (x) was then generally known to the public; (y) becomes known to the
public other than as a result of actions by WMI or WMBfsb or by the directors,
officers or employees or agents of either; or (z) was disclosed to WMI or
WMBfsb, or to the directors, officers or employees of either, solely by a third
party not bound by any obligation of confidentiality; (ii) disclosure in
accordance with the federal securities laws, federal banking laws, or pursuant
to an order of a court or agency of competent jurisdiction; or (iii) disclosure
permitted pursuant to the letter to WMI from Utah Federal dated December 14,
1995.
(c) All information furnished by WMI or its subsidiaries
to Utah Federal or the representatives or affiliates of Utah Federal pursuant
to, or in any negotiation in connection with, this Agreement shall be treated
as the sole property of WMI until consummation of the Merger and, if the Merger
shall not occur, Utah Federal and its affiliates, agents and advisors shall
upon written request return to WMI, all documents or other materials
containing, reflecting, referring to such information, and shall keep
confidential all such information and shall not disclose or use such
information for competitive purposes. The obligation to keep such information
confidential shall not apply to (i) any information which (w) Utah Federal can
establish by convincing evidence was already in its possession (subject to no
obligations or confidentiality) prior to the disclosure thereof by Utah
Federal; (x) was then generally known to the public; (y) becomes known to the
public other than as a result of actions by Utah Federal or by the directors,
officers or employees or agents of Utah Federal; or (z) was disclosed to Utah
Federal, or to the directors, officers or employees of Utah Federal, solely by
a third party not bound by any obligation of confidentiality; (ii) disclosure
in accordance with the federal securities laws, federal banking laws, or
pursuant to an order of a court or agency of competent jurisdiction; or (iii)
disclosure permitted pursuant to the letter to Utah Federal from WMI dated
December 14, 1995.
6.5 Reports.
(a) As soon as reasonably available, but in no event more
than 45 days after the end of each fiscal quarter ending after the date hereof
(other than the last quarter of any fiscal year), Utah Federal will deliver to
WMBfsb or WMI its quarterly report filed with the OTS. As soon as reasonably
available but in no event more than 120 days after the end of each fiscal year
ending after the date hereof, Utah Federal will deliver to WMI its annual
report as filed with the OTS.
(b) As soon as reasonably available, but in no event more
than 45 days after the end of each fiscal quarter ending after the date hereof
(other than the last quarter of any fiscal year), WMI will deliver to Utah
Federal its quarterly report on Form 10-Q, as filed under the Securities
Exchange Act. As soon as reasonably available, but in no event more than 120
days after the end of each fiscal year ending after the date of this Agreement,
WMI will deliver to Utah Federal its annual report on Form 10-K as filed under
the Securities Exchange Act.
6.6 Regulatory Matters.
(a) The parties hereto will cooperate with each other and
use all reasonable efforts to prepare all necessary documentation, to effect
all necessary filings and to obtain all necessary permits, consents, approvals
and authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, those that may be required from the SEC, the OTS, the Justice
Department, other regulatory authorities, or the holders of Utah Federal Common
Stock. WMI and Utah Federal shall each have the right to review reasonably in
advance all information relating to WMI or Utah Federal, as the case may be,
and any of their respective subsidiaries, together with any other information
reasonably requested, which appears in any filing made with or written material
submitted to any governmental body in connection with the transactions
contemplated by this Agreement.
(b) WMI and Utah Federal shall furnish each other with
all reasonable information concerning themselves, their subsidiaries,
directors, officers and stockholders and such other matters as may be necessary
or advisable in connection with the Proxy Statement/Prospectus, or any other
statement or application made by or on behalf of WMI or Utah Federal, or any of
their respective subsidiaries to any governmental body in connection with the
Merger and the other transactions, applications or filings contemplated by this
Agreement.
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(c) WMI and Utah Federal will promptly furnish each other
with copies of written communications received by WMI or Utah Federal or any of
their respective subsidiaries from, or delivered by any of the foregoing to,
any governmental body in respect of the transactions contemplated hereby.
6.7 Approval of Utah Federal Stockholders. Utah Federal
will (a) take all steps necessary duly to call, give notice of, convene and
hold a meeting of its stockholders as soon as practicable for the purpose of
voting on this Agreement and the transactions contemplated hereby and with the
consent of WMI (which consent shall not be unreasonably withheld, delayed or
conditioned), for such other purposes as may be necessary or desirable, (b)
include in the Proxy Statement/Prospectus the recommendation of Utah Federal's
Board of Directors that the stockholders approve this Agreement and the other
transactions contemplated hereby and such other matters as may be submitted to
its stockholders in connection with this Agreement, (c) cooperate and consult
with WMI with respect to each of the foregoing matters, and (d) use all
reasonable efforts to obtain, as promptly as practicable, the necessary
approvals by Utah Federal stockholders of this Agreement and the transactions
contemplated hereby, except, in each case, where the directors of Utah Federal
determine in their good faith judgment (after receiving advice of counsel) that
they are required to do otherwise in order to discharge their fiduciary duties.
6.8 Further Assurances. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement.
6.9 Disclosure Supplements.
(a) As soon as practicable after the end of each calendar
quarter ending after the date hereof, at such other times as WMI may reasonably
request and at least five business days prior to Closing, Utah Federal will
promptly supplement or amend the Disclosure Schedules delivered in connection
herewith with respect to any matter hereafter arising which, if existing,
occurring or known at the date of this Agreement would have been required to be
set forth or described in such Schedules or which is necessary to correct any
information in such Schedules which has been rendered inaccurate thereby.
Notwithstanding this provision, no supplement or amendment to such Disclosure
Schedules shall have any effect for the purpose of determining satisfaction of
the conditions hereinafter set forth in Section 7.2 or the compliance by Utah
Federal with the covenants set forth in Section 6 hereof, nor shall the
delivery of any such supplement or amendment in and of itself be deemed to
constitute an admission by Utah Federal of any omission from, or any
incorrectness or inaccuracy of, any information previously delivered pursuant
hereto.
(b) As soon as practicable after the end of each calendar
quarter ending after the date hereof, at such other times as Utah Federal may
reasonably request and at least five business days prior to Closing, WMI and
WMBfsb will promptly supplement or amend the Disclosure Schedules delivered in
connection herewith with respect to any matter hereafter arising which, if
existing, occurring or known at the date of this Agreement would have been
required to be set forth or described in such Schedules or which is necessary
to correct any information in such Schedules which has been rendered inaccurate
thereby. Notwithstanding this provision, no supplement or amendment to such
Disclosure Schedules shall have any effect for the purpose of determining
satisfaction of the conditions hereinafter set forth in Section 7.3 or the
compliance by WMI or WMBfsb with the covenants set forth in Section 6 hereof.
6.10 Public Announcements. Neither party will issue or
distribute any information to its shareholders or employees, any news releases
or any other public information disclosures with respect to this Agreement or
any of the transactions contemplated hereby without the consent of the other
party, except as may be otherwise required by law.
6.11 Failure to Fulfill Conditions. In the event that WMI
or Utah Federal determines that a condition to its obligation to consummate the
transactions contemplated hereby cannot be, or is not likely to be, fulfilled
on or prior to November 30, 1996, and that it will not waive that condition, it
will promptly notify the other party.
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6.12 Assignment of Contract Rights. Utah Federal shall
obtain any consents, waivers or revisions necessary to allow WMI or WMBfsb to
accede to all of the rights of Utah Federal under any existing real property
leases and all material personal property leases, licenses and other contracts,
including without limitation loan servicing contracts, which WMI wishes to have
continue in effect after the Effective Time, without incurring substantial
costs in connection therewith. WMI will offer its reasonable cooperation with
Utah Federal in obtaining such consents, waivers and revisions, it being
understood that the obligation to obtain such consents, waivers and revisions
shall nevertheless be the obligation of Utah Federal.
6.13 Employees; Employee Benefit Plans.
(a) Except as otherwise provided herein, all employees of
Utah Federal as of the Effective Time will continue as at will employees of
WMBfsb after the Effective Time.
(b) Employees of Utah Federal who are terminated without
cause by WMI, WMBfsb or any other subsidiary of WMI within one year after the
Effective Date shall be eligible for severance pay according to the terms of
the Washington Mutual Severance Plan, as amended and restated effective
November 30, 1994, provided that WMI shall amend that Severance Plan to
incorporate the terms of this Section 6.13(b).
All eligibility requirements in the Washington Mutual Severance Plan
shall apply, except that during the one year period after the Effective Date,
if a Utah Federal employee is terminated without cause it shall not be a
condition of eligibility that the termination was done as part of a general
reduction in the size of the work force or because the position was being
eliminated.
Severance payments shall be paid in a lump sum on the first regular
pay date following the date that any termination is effective. During the one
year period after the Effective Time, severance payments for Utah Federal
employees shall be computed as follows:
Non-officer: 1/2 month per year of service; maximum three
months total pay.
Officer (as set out on Disclosure Schedule 6.13(b)): 1/2
month per year of service; maximum six months total pay.
It is understood and agreed that any employees terminated by Utah
Federal prior to the Effective Time will not receive any severance described
above but shall receive the severance payment, if any, to which they are
entitled under the Utah Federal severance plan.
As used above in this Section 6.13(b), the term "year of service"
shall mean a full year of service, except that any person having at least six
months of service shall be deemed to have one full year of service (it being
understood, for example, that a person with 18 months shall be treated as only
having one year). In computing such severance payments for regular part-time
employees, their per month compensation shall be based on the average number of
hours worked per month while employed by Utah Federal in 1995. Utah Federal
employees who are terminated "for cause" shall receive no severance payments.
In the case of each of Val J. Peterson and Georgia S. Goodell, each
shall be paid an amount equal to three times his or her currently monthly
salary if he or she remains with Utah Federal until closing and is not offered
a position with WMBfsb after the Effective Time. Such payment shall be in
addition to the severance payments described above to which such person may be
entitled.
In the case of Michael R. Garrett, in the event he receives the
payment described in Section 7(b)(i) of the Employment Agreement dated April
28, 1993 between Michael R. Garrett and Utah Federal, then Michael R. Garrett
shall not be eligible to receive any severance payments described above.
As used in this Section 6.13(b), termination "for cause" shall mean
termination because (i) the employee engages in abusive use of alcohol or other
drugs on a continuing or recurring basis, (ii) the employee is convicted of a
crime (other than a traffic violation), or (iii) WMI or WMBfsb determines in
good faith that the employee has engaged in dishonesty, fraud, destruction or
theft of WMI or WMBfsb property, physical attack to a fellow
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employee, willful malfeasance or gross negligence in the performance of his or
her duties, or misconduct materially injurious to WMI or WMBfsb.
(c) All employees of Utah Federal who continue as
employees of WMI, WMBfsb or any other subsidiary of WMI shall receive service
credit for employment with Utah Federal, but not with any other employer unless
service credit is required under section 414(a) of the Code or sections
1.411(a)-5(b)(3)(iv)-(v) of the Treasury Regulations, for purposes of
satisfying all eligibility and vesting requirements in the WMI Retirement
Savings and Investment Plan, the WMI Cash Balance Pension Plan, and the WMI
Supplemental Executive Retirement Plan and for purposes of eligibility and
calculation of benefits in the WMI Employee Stock Purchase Program, the WMI
Severance Plan, the WMI Service Award Plan, the WMI Long Term Disability Plan,
and all other fringe benefit programs and payroll practices, including
temporary disability and vacation pay.
(d) Utah Federal shall not establish any Benefit Plan and
shall not amend or terminate any Benefit Plan without the consultation and
approval of WMI; provided, however, that WMI has decided that it is in its
business interests to have Utah Federal begin termination proceedings with
respect to the Utah Federal Profit Sharing Plan prior to Closing and Utah
Federal hereby agrees to begin such proceedings which may or may not be
completed prior to Closing.
(e) Utah Federal shall not disseminate or make available
any memoranda, notices, plan summaries, or other communications regarding
employment or the Benefit Plans without the consultation and approval of WMI or
the Plan Administration Committee of WMI.
(f) Effective as of the Effective Time, all employees of
Utah Federal shall, at the option of WMI, either continue to participate in the
Benefit Plans that are in effect immediately prior to the Effective Time or
become participants in similar WMI employee benefit plans, practices and
policies (the "WMI Benefit Plans") on the same terms and conditions as
similarly situated employees of WMI or its subsidiaries. If any of the
employees of Utah Federal shall become eligible to participate in any WMI
Benefit Plans that provide medical, hospitalization or dental benefits, WMI and
WMBfsb shall waive any pre-existing condition exclusions and actively at work
requirements (but shall not waive general requirements of formal employment
with WMI or WMBfsb).
(g) All employees of Utah Federal will be entitled to
payment for all accrued but unused vacation days, up to the accrual limit
allowed by Utah Federal; the cost of such payments shall be reserved for by
Utah Federal prior to the Effective Time. All sick leave or short-term
disability accrued and not used by employees of Utah Federal prior to the
Effective Time shall be maintained by WMI or WMBfsb after the Effective Time up
to the accrual limit allowed by Utah Federal. From and after the Effective
Time, all vacation time, sick leave and short-term disability shall accrue at
the same rate as for similarly situated WMBfsb employees up to the accrued
limit for such WMBfsb employees.
(h) All officers and other employees of Utah Federal
shall be entitled to receive immediately prior to the Effective Time a bonus
incentive payment for the portion of the current year up to the Effective Time.
Bonus incentive payments shall be paid to eligible officers and employees under
either Utah Federal's bonus incentive plan or a contract with Utah Federal (but
not under both). The amount of such payments shall be calculated in accordance
with the plan and applicable contracts in a manner consistent with past
practice. The calculations shall be made on a pro rata basis for the portion
of the applicable year up to the Effective Time (so that, by way of example, if
the Effective Time is July 31, 1996, then the amount of the payment under the
plan shall be 7/12ths of what would be the payment for an entire year). Utah
Federal represents that it is its customary practice to accrue the amount of
such payments monthly, it has done so through January 1996, and it will
continue to do so up to the Effective Time. Eligibility to receive the bonus
payments described in this Section 6.13(h) shall be in lieu of eligibility to
participate in any WMI or WMBfsb cash bonus or cash incentive plan for the
portion of 1996 up to the Effective Time (it being understood that WMI may
amend any such plans to incorporate the terms of this Section 6.13(h)).
6.14 Indemnification of Utah Federal Directors and
Officers.
(a) WMI and WMBfsb will use all reasonable efforts, in
cooperation with Utah Federal, to arrange for insurance coverage (with at least
as much dollar coverage as Utah Federal's directors and officers have
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under their current policy) for prior acts for all current and former directors
and officers of Utah Federal, provided that such coverage must be available
from normal carriers at a reasonable cost in light of the cost of similar
policies under similar circumstances. WMI and WMBfsb shall not cancel such
prior acts coverage for three years after the Effective Date.
(b) From and after the Effective Time, WMBfsb will, to
the extent permitted by then applicable law and to the extent they would have
been indemnified by Utah Federal, indemnify current and former directors,
officers and employees of Utah Federal (each an "Indemnified Party") as though
they had been directors, officers and/or employees of WMBfsb, for acts or
omissions occurring prior to, and including, the Effective Time. In no event
shall WMBfsb or its affiliates have any liability to indemnify Ernest J. Miller
for liabilities or costs incurred in connection with the matter described in
item number 4 on Disclosure Schedule 4.2.
Any Indemnified Party wishing to claim indemnification under this
provision shall, upon learning of any claim, action, suit, proceeding or
investigation (hereinafter a "Claim"), promptly notify WMBfsb thereof. WMBfsb
shall have the right to assume the defense of any such Claim and upon so doing
shall not thereafter be liable to such Indemnified Party for any expenses, of
other counsel or otherwise, subsequently incurred by such Indemnified Party in
connection with such Claim. If WMBfsb elects not to assume such defense, or
counsel for the Indemnified Party advises that there are issues which raise
conflicts of interest between WMBfsb and the Indemnified Party, the Indemnified
Party may retain counsel satisfactory to such Indemnified Party and WMBfsb will
pay all reasonable fees and expenses of such counsel incurred in defending the
Claim; provided, however, that (i) in the event that more than one Indemnified
Party is involved in the same Claim, WMBfsb shall not be obligated to pay for
more than one firm of counsel for all Indemnified Parties in any one
jurisdiction (unless counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between the Indemnified Parties), (ii)
the Indemnified Parties will cooperate in the defense of the Claim, and (iii)
WMBfsb shall not be liable for any settlement effected without its prior
written consent. If, upon the conclusion of the proceedings in any Claim, it
is determined by WMBfsb that the Indemnified Party was not entitled to such
indemnification, such party shall be required to reimburse WMBfsb for all cost
expended in defending such Indemnified Party.
(c) This Section 6.14 is intended to be for the benefit
of, and shall be enforceable by, the Indemnified Parties, their heirs and
personal representatives and shall be binding on WMBfsb and its successors and
assigns.
6.15 Post-Closing Financial Statements. WMI agrees to use
all reasonable efforts to file an 8-K with the SEC within 20 calendar days
after the end of the first full calendar month deemed by Deloitte & Touche LLP
to satisfy the requirement of ASR 135 with respect to the time period required
for post-Merger financial results following the Effective Time (except if such
month is the last month of a calendar quarter), which 8-K shall include
financial results covering at least 30 days of post-merger combined operations
of WMI and Utah Federal in accordance with ASR 135.
6.16 Post-Merger Actions. Following the Merger, neither
WMI nor any of its affiliates shall take any action which will adversely affect
the federal income tax treatment of the transaction to the stockholders of Utah
Federal including, without limitation failing to continue at least one
significant historic business line of Utah Federal or to use at least a
significant portion of Utah Federal's historic assets in a business, in each
case within the meaning of Treas. Reg. Section 1.368-1(d). This Section 6.16
is intended to benefit the stockholders of Utah Federal.
6.17 Current Public Information. WMI shall continue to
satisfy the current public information requirements of Rules 144 and 145 of the
SEC with respect to the WMI Common Stock, and to provide affiliates of Utah
Federal with such information as they may reasonably require and to otherwise
cooperate with them to facilitate sales of WMI Common Stock in compliance with
Rules 144 and 145 of the SEC.
7. Closing Conditions.
7.1 Conditions to Each Party's Obligations Under This
Agreement. The respective obligations of each party under this Agreement to
consummate the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following conditions:
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(a) This Agreement and the transactions contemplated
hereby shall have been approved by the requisite vote of the stockholders of
Utah Federal.
(b) All necessary regulatory or governmental approvals
and consents required to consummate the transactions contemplated hereby shall
have been obtained and shall remain in full force and effect and all statutory
or regulatory waiting periods in respect thereof shall have expired.
(c) No party hereto shall be subject to any order, decree
or injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger.
(d) Tax Opinion. An opinion shall be obtained from
Foster Pepper & Shefelman in a form reasonably satisfactory to WMI and Utah
Federal with respect to federal income tax laws substantially to the effect
that:
(i) The Merger will qualify as a "reorganization"
under Section 368(a) of the Code.
(ii) No gain or loss will be recognized by a
stockholder of Utah Federal who, pursuant to the Agreement, exchanges shares of
Utah Federal Common Stock solely for shares of WMI Common Stock.
(iii) Subject to the provisions and limitations of
Section 302 of the Code, gain or loss will be recognized with respect to each
stockholder of Utah Federal who holds shares of Utah Federal Common Stock and
who, pursuant to the exercise of dissenter rights, exchanges such shares solely
for cash.
(iv) The payment of cash to a Utah Federal
stockholder in lieu of a fractional share of WMI Common Stock will be treated
as a distribution in redemption of the fractional share interest, such
stockholder will be taxed on the cash received in accordance with the
provisions and limitations of Section 302 of the Code and, in general, such
distribution in redemption will be treated as a payment in exchange for such
fractional share interest.
(v) The aggregate basis of the WMI Common Stock
received by a Utah Federal stockholder who exchanges Utah Federal Common Stock
for WMI Common Stock will be the same as the aggregate basis of the Utah
Federal Common stock surrendered in exchange therefor (reduced by the basis
allocable to any fractional share for which cash is received).
(vi) The holding period of the WMI Common Stock
received by a Utah Federal stockholder will include the period during which the
Utah Federal Common Stock surrendered in exchange therefore was held (if such
Utah Federal Common Stock was held by such Utah Federal stockholder as a
capital asset at the Effective Time).
(vii) Gain or loss recognized in exchange for a
fractional share or if Utah Federal Common Stock is converted into cash by
exercise of dissenter rights generally will be capital gain or loss if the
shares of Utah Federal Common Stock were held by the Utah Federal stockholder
as a capital asset. For such stockholders, if the shares had been held for
more than one year, the gain or loss will be long-term capital gain or loss.
Whether or not the character of any taxable gain or loss is material to a Utah
Federal Stockholder depends upon the particular circumstances of the
stockholder.
It is understood that in connection with the delivery of such opinion,
Ernest J. Miller shall execute and deliver to Foster Pepper & Shefelman a
certificate substantially in the form attached hereto as Exhibit D.
(e) Antitrust Law. Any applicable pre-merger
notification provisions of Section 7A of the Clayton Act shall have been
complied with by the parties hereto, and no other statutory or regulatory
requirements with respect to the Clayton Act shall be applicable other than
Section 18(c) of the Federal Deposit Insurance Act and rules and regulations in
connection therewith. There shall be no pending or threatened proceedings
under any applicable antitrust law of the State of Washington and Utah.
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(f) Securities Laws. The shares of WMI Common Stock to
be issued to the stockholders of Utah Federal in exchange for their shares
shall be exempt or shall have been qualified or registered for offering and
sale under the federal securities law and the state securities or Blue Sky laws
of each jurisdiction in which stockholders of Utah Federal reside, and no order
suspending the sale of such shares of WMI Common Stock in any such jurisdiction
shall have been issued prior to the Effective Time and no proceedings for that
purpose shall have been instituted or shall be contemplated; provided, that WMI
shall not have been obligated to execute or file any general consent to service
of process or to qualify as a foreign corporation in any jurisdiction in which
it is not qualified. As soon as reasonably practicable, Utah Federal shall
advise WMI of each jurisdiction in which stockholders of Utah Federal reside.
7.2 Conditions to the Obligations of WMI Under This
Agreement. The obligations of WMI under this Agreement shall be further
subject to the satisfaction, at or prior to the Effective Time, of all of the
following conditions, any one or more of which may be waived by WMI:
(a) Each of the obligations or covenants of Utah Federal
required to be performed by it at or prior to the Closing pursuant to the terms
of this Agreement shall have been duly performed and complied with and each of
the representations and warranties of Utah Federal contained in this Agreement
shall be true and correct as of the date hereof and as of the Effective Time as
though made at and as of the Effective Time (except as to any representation or
warranty that specifically relates to an earlier date, which shall be true and
correct as of such earlier date), except where the failure of such
representations to be true and correct or the failure of Utah Federal to have
performed the obligations and covenants as required by Section 6 hereof, shall
not in the aggregate have had a negative economic effect of $250,000 or more on
Utah Federal or will, when adjusted to their present value, have such an effect
on WMI; provided, however, that the representations and covenants contained in
Sections 4.2, 6.1(a), 6.1(b) and 6.2 shall not be subject to the foregoing
materiality exception and must be fully complied with; and provided further,
that for purposes of this Section 7.2(a), the calculation of the effect of the
failure of specific representations or warranties to be true and correct or the
failure of Utah Federal to perform covenants or obligations shall be done
without giving effect to any materiality standards contained in such
representations, warranties or covenants.
(b) Any consents, waivers, clearances, approvals and
authorizations of regulatory or governmental bodies that are necessary in
connection with the consummation of the transactions contemplated hereby shall
have been obtained, and none of such consents, waivers, clearances, approvals
or authorizations shall contain any term or condition that (i) is a term or
condition that has not heretofore been normally imposed in such transactions
and which would have a Material Adverse Effect on Utah Federal or WMI, or (ii)
would require WMI to contribute additional capital to WMBfsb other than to
increase the leverage capital ratio of WMBfsb (as defined in 12 C.F.R. Part 567
as proposed or adopted by the OTS) to a level no higher than 5.0 percent (as
adjusted to account for the Merger). It is hereby agreed that any term or
condition contained in any previous approval granted to WMI, WMBfsb or
Washington Mutual Bank, for a merger or acquisition transaction shall be deemed
a "normal" condition for purposes of this Section 7.2(b). For purposes of
Section 8 hereof, any "approval" which contains any of the foregoing
unacceptable terms or conditions shall be deemed to be a regulatory "denial."
(c) WMI shall have received an opinion, dated the date of
the Closing, from Graham & Dunn, counsel to Utah Federal, substantially to the
effect set forth in Exhibit E hereto.
(d) Since the date of this Agreement there shall have
been no Material Adverse Effect with respect to Utah Federal (except for
changes resulting from market and economic conditions which generally affect
the savings banking industry as a whole including, without limitation, changes
in law or regulation or changes in generally accepted accounting principles or
interpretations thereof); provided, however, that the following expenses and
adjustments shall be excluded in determining whether a material adverse change
has occurred: (i) fees and expenses relating to the consummation of the
transactions contemplated hereby, (ii) charges for severance and other payments
to officers and employees made or expected to be made in connection with the
transactions contemplated hereby, and (iii) costs and expenses related to any
transactions of the type set forth in Section 6.1 undertaken by Utah Federal
with the prior written consent of WMI or WMBfsb.
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(e) Except as otherwise requested, the directors of Utah
Federal shall have resigned effective on or prior to the Effective Time.
(f) WMI shall have received from Ernest J. Miller an
agreement in substantially the form attached hereto as Exhibit F.
(g) Dissenters' rights shall not have been preserved by
stockholders of Utah Federal with respect to more than 5 percent of the
outstanding shares of Utah Federal Common Stock and each affiliate of Utah
Federal shall have delivered to Utah Federal stock certificates evidencing all
shares of Utah Federal Common Stock owned by such affiliate as provided in
Section 1(f) hereof and delivered to WMI assurance that such affiliate has
voted for the Merger, together with any other assurances requested by WMI, that
such affiliates will not have dissenters' rights.
(h) WMI shall have received the statements referred to in
Section 1(a)(iii) hereof.
(i) Utah Federal shall have furnished WMI with such
certificates of its officers and such other documents to evidence fulfillment
of the conditions set forth in this Section 7.2 as WMBfsb may reasonably
request.
7.3 Conditions to the Obligations of Utah Federal Under
This Agreement. The obligations of Utah Federal under this Agreement shall be
further subject to the satisfaction, at or prior to the Effective Time, of all
of the following conditions, any one or more of which may be waived by Utah
Federal:
(a) Each of the obligations of WMI and WMBfsb required to
be performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(b) Each of the representations and warranties of WMI and
WMBfsb contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time as
though made at and as of the Effective Time except as to any representation or
warranty which specifically relates to an earlier date, which shall be true and
correct as of such earlier date, except in the case of such representations and
warranties, where the failure to be true would not have a Material Adverse
Effect on WMI.
(c) Utah Federal shall have received an opinion, dated
the date of the Closing, from Foster Pepper & Shefelman, counsel to WMI,
substantially to the effect set forth in Exhibit G hereto.
(d) Since the date of this Agreement, there shall have
been no Material Adverse Effect with respect to WMI (except for changes
resulting from market and economic conditions which generally affect the
savings bank industry as a whole including, without limitation, changes in law
or regulation or changes in generally accepted accounting principles or
interpretations thereof).
(e) WMI shall have furnished Utah Federal with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Section 7.3 as Utah Federal may
reasonably request.
(f) Utah Federal shall have received an opinion
reasonably satisfactory to it from Columbia Financial Advisors, Inc., a
financial advisory firm, dated as of the date of the Proxy
Statement/Prospectus, as to the fairness, from a financial point of view, of
the consideration to be received by the stockholders of Utah Federal pursuant
to this Agreement.
(g) WMI shall have instructed its transfer agent with
respect to the issuance of WMI Common Stock to the Utah Federal stockholders at
least two days prior to Closing.
8. Termination, Amendment and Waiver.
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8.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval of the
Merger by the Utah Federal stockholders:
(a) by mutual written consent of all the parties hereto;
(b) by any party hereto (i) if the Effective Time shall
not have occurred on or prior to December 31, 1996 unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe its agreements and conditions set forth herein
to be performed or observed by such party at or before the Effective Time; or
(ii) 31 days after the date on which any application for regulatory approval
prerequisite to the consummation of the transactions contemplated hereby shall
have been denied or withdrawn at the request of the applicable regulatory
authority; provided, that, if prior to the expiration of such 31-day period WMI
is engaged in litigation or an appeal procedure relating to an attempt to
obtain such approval, Utah Federal may not terminate this Agreement until the
earlier of (A) December 31, 1996 and (B) 31 days after the completion of such
litigation and appeal procedures, and of any further regulatory or judicial
action pursuant thereto, including any further action by a government agency as
a result of any judicial remand, order or directive or otherwise; or (iii) 10
days after written certification of the vote of the Utah Federal's stockholders
is delivered to WMI indicating that such stockholders failed to adopt the
resolution to approve this Agreement and the transactions contemplated hereby
at the stockholders' meeting (or any adjournment thereof) contemplated by
Section 1(d) hereof;
(c) by WMI (i) if at the time of such termination there
shall have been a material adverse change in the consolidated financial
condition of Utah Federal from that set forth in Utah Federal's December 1995
Financial Statements for the three-month period ended December 31, 1995 (except
for changes resulting from market and economic conditions which generally
affect the savings bank industry as a whole, including changes in regulation),
it being understood that any of the matters set forth in Utah Federal's
Disclosure Schedules as of the date of this Agreement or any of the matters
described in clauses (i), (ii) or (iii) of Section 7.2(d) are not deemed to be
a material adverse change for purposes of this paragraph (c); (ii) if there
shall have been any material breach of any covenant of Utah Federal hereunder
and such breach shall not have been remedied within 45 days after receipt by
Utah Federal of notice in writing from WMI specifying the nature of such breach
and requesting that it be remedied; or (iii) any of the events or circumstances
described in Section 2(a), 2(b), 2(c) or 2(d) of the Option occurs.
(d) by Utah Federal (i) if at the time of such
termination there shall have been a material adverse change in the consolidated
financial condition of WMI from that set forth in the WMI Statement (except for
changes resulting from market and economic conditions which generally affect
the savings bank industry as a whole), it being understood that any of the
matters set forth in WMI's Disclosure Schedules as of the date of this
Agreement are not deemed to be a material adverse change for purposes of this
paragraph (d); or (ii) if there shall have been any material breach of any
covenant of WMI or WMBfsb hereunder and such breach shall have not been
remedied within 45 days after receipt by WMI of notice in writing from Utah
Federal specifying the nature of such breach and requesting that it be remedied
or (iii) if the directors of Utah Federal, after receiving advice of counsel,
determine in their good faith judgment that they are required to do so in order
to discharge their fiduciary duties, shall withdraw or modify or resolve to
withdraw or modify its recommendation that stockholders vote in favor of the
transactions contemplated hereby.
8.2 Break-Up Fee.
(a) The parties hereby acknowledge that, in negotiating
and executing this Agreement and in taking the steps necessary or appropriate
to effect the transactions contemplated hereby, Utah Federal has incurred and
will incur direct and indirect monetary and other costs (including without
limitation attorneys' fees and costs, costs of Utah Federal management and
employee time and potential damage to Utah Federal's business and franchises as
a result of the announcement of the pending Merger), will forego discussions
with other potential merger candidates and will forego various business
activities which it would have otherwise undertaken if it remained an
independent institution. To compensate Utah Federal for such costs and to
induce it to forego initiating discussions with other potential merger
candidates, (i) if this Agreement terminates because WMI or WMBfsb does not use
all reasonable efforts to consummate the transactions contemplated by this
Agreement in accordance with
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the terms of this Agreement (unless a condition set forth in Section 7.3 is not
satisfied and such nonsatisfaction has not been the result of the failure of
WMI or WMBfsb to use all reasonable efforts to consummate this Agreement in
accordance with the terms of this Agreement), (ii) if WMI terminates this
Agreement for any reason other than the grounds for termination set out in
Sections 8.1(a), 8.1(b) or 8.1(c) or (iii) if Utah Federal terminates this
Agreement pursuant to Section 8.1(d)(ii), then WMI shall pay to Utah Federal on
demand (and in no event more than three days after such demand) in immediately
available funds, Two Hundred Thousand Dollars ($200,000.00).
(b) The parties hereby acknowledge that, in negotiating
and executing this Agreement and in taking the steps necessary or appropriate
to effect the transaction contemplated hereby, WMI and WMBfsb have incurred and
will incur direct and indirect monetary and other costs (including without
limitation attorneys' fees and costs and costs of WMI and WMBfsb employee and
management time) and will forego discussions with respect to other potential
mergers. To compensate WMI for such costs and to induce it to forego
initiating such discussions, if (i) this Agreement terminates because Utah
Federal does not use all reasonable efforts to consummate the transactions
contemplated by this Agreement in accordance with the terms of this Agreement
(unless a condition set forth in Section 7.3 is not satisfied and such
nonsatisfaction has not been the result of the failure of Utah Federal to use
all reasonable efforts to consummate this Agreement in accordance with the
terms of this Agreement) or any of the events or circumstances described in
Section 2(a), 2(b), 2(c) or 2(d) of the Option occurs; (ii) Utah Federal
terminates this Agreement for any reason other than the grounds for termination
set out in Sections 8.1(a), 8.1(b) or 8.1(d); or (iii) WMI terminates this
Agreement pursuant to Section 8.1(c)(iv), then Utah Federal shall be obligated
to pay WMI on demand (and in no event more than three days after such demand)
in immediately available funds Two Hundred Thousand Dollars ($200,000.00), and
in addition WMI shall be entitled to receive any benefits under the Option. It
is understood and agreed that this Section 8.2(b) does not limit or restrict in
any way the events or circumstances upon which WMI may exercise its options
under the Option.
If (a) each of the conditions set forth in Section 7.1 has been
satisfied, (b) WMI has delivered to Utah Federal a written waiver of the
conditions set forth in Section 7.2 hereof, and (c) Utah Federal has not yet
published its financial statements for the year ended December 31, 1995, then,
upon the written request of WMI, Utah Federal shall, to the extent (i)
permissible under generally accepted accounting principles (in the judgment of
Utah Federal's accountants) and (ii) permissible under applicable federal
regulations and not objectionable to Utah Federal's regulators, reflect the
following changes or adjustments on its income statement for the year ended
December 31, 1995:
(i) costs and expenses incurred or expected to be
incurred in connection with the transactions contemplated hereby; and
(ii) charges for severance and other payments to
officers and employees made or expected to be made in connection with the
transactions contemplated hereby.
8.3 Effect of Termination. In the event of termination
of this Agreement by any party, this Agreement shall forthwith become void
(other than Section 6.4(b) hereof, which shall remain in full force and effect)
and, except as and to the extent provided in Section 8.2, there shall be no
further liability on the part of any party or its officers or directors except
for the liability of WMI and WMBfsb under Section 6.4(b), it being understood
and agreed that termination of this Agreement shall not affect the rights of
WMI under the Option except as and to the extent expressly provided in the
Option.
8.4 Amendment, Extension and Waiver. Subject to
applicable law, at any time prior to the consummation of the Merger, whether
before or after approval thereof by the stockholders of Utah Federal, the
parties may (a) amend this Agreement (including the Plan of Merger incorporated
herein), (b) extend the time for the performance of any of the obligations or
other acts of any other party hereto, (c) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (d) waive compliance with any of the
agreements or conditions contained herein; provided, however, that after any
approval of the Merger by the Utah Federal stockholders, there may not be,
without further approval of such stockholders, any amendment or waiver of this
Agreement (or the Plan of Merger) that reduces the amount or changes the form
of consideration to be delivered to the Utah Federal stockholders (it being
understood and agreed that a change in the Exchange Ratio pursuant to Section
1(g) hereof shall not constitute an amendment or waiver
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requiring further stockholder approval). This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto. Any agreement on the part of a party hereto to any extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party, but such waiver or failure to insist on strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
9. Miscellaneous.
9.1 Expenses. All legal and other costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be borne by the party incurring such costs and expenses unless
otherwise specified in this Agreement.
9.2 Survival. Except for the covenants of Sections 6.13,
6.14, 6.15, 6.16 and 6.17, the respective representations and warranties,
covenants and agreements set forth in this Agreement and all Disclosure
Schedules shall not survive the Effective Time.
9.3 Notices. All notices, requests, claims, demands or
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by delivery, by
registered or certified mail (return receipt requested) or by cable,
telecopier, or telex to the respective parties as follows:
(a) If to WMI or WMBfsb, to:
Washington Mutual, Inc.
1201 Third Avenue, Suite 1500
Seattle, Washington 98101
Attn: Craig E. Tall, Executive
Vice President
With a copy to:
Foster Pepper & Shefelman
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Fay L. Chapman
(b) If to Utah Federal, to:
Utah Federal Savings Bank
2279 Washington Boulevard
Ogden, Utah 84401
Attn: L. Brent Hoggan, Executive
Vice President
With a copy to:
Graham & Dunn
1420 Fifth Avenue, 33rd Floor
Seattle, Washington 98101
Attn: Stephen M. Klein
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
9.4 Parties in Interest. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any
party hereto without the prior
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written consent of the other parties. Nothing in this Agreement is intended to
confer, expressly or by implication, upon any other person any rights or
remedies under or by reason of this Agreement (except for Sections 1, 6.13,
6.14, 6.15, 6.16 and 6.17, which are intended to benefit third party
beneficiaries).
9.5 Entire Agreement. This Agreement, including the
documents and other writings referred to herein or delivered pursuant hereto,
contains the entire agreement and understanding of the parties with respect to
its subject matter. There are no restrictions, agreements, promises,
warranties, covenants or undertakings between the parties other than those
expressly set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties, both written and oral, with
respect to its subject matter.
9.6 Counterparts. This Agreement may be executed in one
or more counterparts all of which shall be considered one and the same
agreement and each of which shall be deemed an original.
9.7 Governing Law. This Agreement, in all respects,
including all matters of construction, validity and performance, is governed by
the internal laws of the state of Washington as applicable to contracts
executed and delivered in Washington by citizens of such state to be performed
wholly within such state without giving effect to the principles of conflicts
of laws thereof. This Agreement is being delivered in Seattle, Washington.
9.8 Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
WASHINGTON MUTUAL, INC.
By: /s/ Craig E. Tall
---------------------------------
Its: Executive Vice President
---------------------------------
WASHINGTON MUTUAL BANK fsb
By: /s/ Craig E. Tall
---------------------------------
Its: Executive Vice President
---------------------------------
UTAH FEDERAL SAVINGS BANK
By: /s/ Michael R. Garrett
----------------------------------
Its: President and Chief Executive Officer
--------------------------------------
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APPENDIX B
OPINION OF COLUMBIA FINANCIAL ADVISORS
____________, 1996
Board of Directors
Utah Federal Savings Bank
2279 Washington Boulevard
Ogden, Utah 84401
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Utah Federal Savings Bank ("UFSB" or the
"Company"), of the consideration to be received by such shareholders pursuant to
the terms of the Merger Agreement and Plan of Merger, dated March 1, 1996, (the
"Agreement") between UFSB, Washington Mutual, Inc. ("WAMU") and Washington
Mutual Bank fsb.
In connection with the proposed merger transaction (the "Merger") whereby UFSB
will be merged into Washington Mutual Bank fsb, a wholly-owned subsidiary of
WAMU, each issued and outstanding share of the Company common stock (along with
its associated rights) at the effective time of the Merger (other than (i)
shares of holders of which are exercising appraisal rights pursuant to
applicable law and (ii) shares held directly by or indirectly by UFSB, its
parent company or any subsidiary thereof other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted) shall be converted
into the right to receive $105.63 in WAMU common stock (the Merger
"Consideration"), except for fractional shares which will receive a proportional
amount of cash.
Columbia Financial Advisors, Inc. ("CFAI"), as a part of its investment banking
services, is periodically engaged in the valuation of banks and thrifts and
advises the directors, officers and shareholders of both public and private
banks and thrift institutions with respect to the fairness, from a financial
point of view, of the consideration to be received in transactions such as that
proposed by the Agreement. CFAI has performed investment banking services for
WAMU in the past and may perform future services. For our services in rendering
this opinion, UFSB has agreed to pay CFAI a fee which is not contingent upon the
consummation of the Merger.
In connection with rendering this opinion, we have, among other things: (i)
reviewed the Agreement; (ii) reviewed UFSB's financial and related audited
financial information for the twelve months ended September 30, 1995 and for the
interim three month period ending December 31, 1995; (iii) reviewed certain
internal financial analyses and certain other forecasts for the Company prepared
by and reviewed with the management of the Company; (iv) conducted interviews
with senior management of the Company regarding the past and current business
operations, results thereof, financial condition and future prospects of the
Company; (v) reviewed the current market environment generally and the banking
and thrift environment in particular; (vi) reviewed the prices paid in certain
recent mergers and acquisitions in the banking and thrift industries on a
regional basis; (vii) reviewed WAMU's audited financial information for the
fiscal year ended December 31, 1995 including the Form 10-K filed with the U.S.
Securities and Exchange Commission; (ix) reviewed the price ranges and dividend
history for WAMU common stock; (x) and reviewed such other information, studies
and analyses and performed such other investigations and took into account such
other matters as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of the
Company. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of the
Company. This opinion is
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necessarily based upon circumstances and conditions as they exist and can be
evaluated as of the date of this letter. We have assumed, with your consent, the
Merger will qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended.
In arriving at our opinion, we have not performed any appraisals or valuations
of specific assets of UFSB or WAMU. We have not been authorized to solicit and
did not solicit other entities for purposes of a business combination with UFSB.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof. We
are not expressing any opinion herein as to the prices at which shares of WAMU
Common Stock have traded or may trade at any future date.
This opinion is for the benefit of the Board of Directors of UFSB and will not
be relied upon by others, and will not be published or otherwise used, nor will
any public references to us be made, without our prior written consent, which
consent will not be unreasonably withheld; provided that UFSB may use,
reproduce, disseminate, quote and refer to the opinion (i) to its shareholders
in conjunction with shareholder approval of the Merger, (ii) to its advisors and
regulatory agencies in conjunction with regulatory approval of the Merger; and
(iii) in any court or regulatory proceeding arising out of the Merger. This
opinion is not intended to be and does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
In reliance upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be received by the shareholders of UFSB
pursuant to the Agreement is fair, from a financial point of view, to the
shareholders of UFSB.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
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APPENDIX C
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement"), dated as of February
29, 1996, is made by and between Utah Federal Savings Bank, a federal savings
bank ("Utah Federal"), and Washington Mutual, Inc., a Washington corporation
("WMI").
Concurrently with the execution hereof, Utah Federal, WMI and
Washington Mutual Bank fsb ("WMBfsb") have executed a certain Agreement for
Merger (the "Merger Agreement") which would result in the merger of Utah
Federal with and into WMBfsb (the "Merger").
It is understood and acknowledged that by negotiating and executing
the Merger Agreement and by taking actions necessary or appropriate to effect
the transactions contemplated by the Merger Agreement, WMI and WMBfsb have
incurred and will incur substantial direct and indirect costs (including
without limitation the costs of management and employee time) and will forgo
the pursuit of certain alternative investments and transactions.
THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in the Merger Agreement, the parties hereto agree as follows:
1. Grant of Option. Subject to the terms and conditions set
forth herein, Utah Federal hereby irrevocably grants an option (the "Option")
to WMI to purchase an aggregate of 35,278 authorized but unissued shares of
Utah Federal's Common Stock, $10.00 par value (the "Common Stock") (which if
issued, and assuming exercise of outstanding options to acquire the Common
Stock, would represent 19.9% of total stock issued and outstanding), at a per
share price of $75.61 (the "Option Price"), which was the per share book value
of the Common Stock at December 31, 1995.
2. Exercise of Option. Subject to the provisions of this Section
2 and of Section 13(a) of this Agreement, this Option may be exercised by WMI
or any transferee as set forth in Section 5 of this Agreement, in whole or in
part, at any time, or from time to time in any of the following circumstances:
(a) Utah Federal or its board of directors enters into an
agreement or recommends to Utah Federal shareholders an agreement (other than
the Merger Agreement) pursuant to which any entity, person or group, within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (any of the foregoing hereinafter in this Section 2, a
"Person"), would: (i) merge or consolidate with, acquire 51 percent or more of
the assets or liabilities of, or enter into any similar transaction with Utah
Federal, or (ii) purchase or otherwise acquire (including by merger,
consolidation, share exchange or any similar transaction) securities
representing ten percent or more of the voting shares of Utah Federal;
(b) any Person (other than WMI or any of its subsidiaries
and other than any Person owning as of the date hereof ten percent or more of
the voting shares of Utah Federal) acquires the beneficial ownership or the
right to acquire beneficial ownership of securities which, when aggregated with
other such securities owned by such Person, represents ten percent or more of
the voting shares of Utah Federal (the term "beneficial ownership" for purposes
of this Agreement shall have the meaning set forth in Section 13(d) of the
Exchange Act, and the regulations promulgated thereunder); provided, however,
notwithstanding the foregoing, the Option shall not be exercisable in the
circumstances described above in this subsection (b) if (x) a Person acquires
the beneficial ownership of securities which, when aggregated with other such
securities owned by such Person, represents ten percent or more but less than
25 percent of the voting shares of Utah Federal and either (y) the transaction
does not result in, and is not presumed to constitute, "control" as defined
under Section 7(j)(1) of the Federal Deposit Insurance Act or 12 CFR Part 574
or (z) the Office of Thrift Supervision determines pursuant to 12 CFR Part 574
that any presumption of control does not exist;
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(c) failure of the board of directors of Utah Federal to
recommend, or withdrawal by the board of directors of a prior recommendation
of, the Merger to the shareholders; or
(d) failure of the shareholders to approve the Merger by
the required affirmative vote at a meeting of the shareholders, after any
Person (other than WMI or a subsidiary of WMI) announces publicly or
communicates, in writing, to Utah Federal a proposal to (i) acquire Utah
Federal (by merger, consolidation, the purchase of 51 percent or more of its
assets or liabilities or any other similar transaction), (ii) purchase or
otherwise acquire securities representing 25 percent or more of the voting
shares of Utah Federal or (iii) change the composition of the board of
directors of Utah Federal.
It is understood and agreed that the Option shall become exercisable
upon the occurrence of any of the above-described circumstances even though the
circumstance occurred as a result, in part or in whole, of the board of Utah
Federal complying with its fiduciary duties.
Notwithstanding the foregoing, the Option may not be exercised if
either (A) any applicable and required governmental approvals have not been
obtained with respect to such exercise or if such exercise would violate any
applicable regulatory restrictions, or (B) at the time of exercise WMI or
WMBfsb is failing in any material respect to perform or observe its covenants
or conditions under the Merger Agreement unless the reason for such failure is
that Utah Federal is failing to perform or observe its covenants or conditions
under the Merger Agreement.
3. Notice, Time and Place of Exercise. Each time that WMI or any
transferee wishes to exercise any portion of the Option, WMI or such transferee
shall give written notice of its intention to exercise the Option specifying
the number of shares as to which the Option is being exercised ("Option
Shares") and the place and date for the closing of the exercise (which date
shall be not later than ten business days from the date such notice is mailed).
If any law, regulation or other restriction will not permit such exercise to be
consummated during such ten-day period, the date for the closing of such
exercise shall be within five days following the cessation of such restriction
on consummation.
4. Payment and Delivery of Certificate(s). At any closing for an
exercise of the Option or any portion thereof, (a) WMI and Utah Federal will
each deliver to the other certificates as to the accuracy, as of the closing
date, of their respective representations and warranties hereunder, (b) WMI or
the transferees will pay the aggregate purchase price for the shares of Common
Stock to be purchased by delivery of a certified or bank cashier's check in
immediately available funds payable to the order of Utah Federal, and (c) Utah
Federal will deliver to WMI or the transferees a certificate or certificates
representing the shares so purchased.
5. Transferability of the Option and Option Shares. Prior to the
time the Option, or a portion thereof, becomes exercisable pursuant to the
provisions of Section 2 of this Agreement, neither the Option nor any portion
thereof shall be transferable. Upon the occurrence of any of the events or
circumstances set forth in Sections 2(a) through (d) above, the Option or any
portion thereof or any of the Option Shares may be freely transferred by WMI,
subject to applicable federal and state securities laws.
For purposes of this Agreement, a merger or consolidation of WMI
(whether or not WMI is the surviving entity) or an acquisition of WMI shall not
be deemed a transfer.
6. Representations, Warranties and Covenants of Utah Federal.
Utah Federal hereby represents, warrants, and covenants to WMI as follows:
(a) Due Authorization. This Agreement has been duly
authorized by all necessary corporate action on the part of Utah Federal, has
been duly executed by a duly authorized officer of Utah Federal and constitutes
a valid and binding obligation of Utah Federal. No shareholder approval by
Utah Federal shareholders is required by applicable law or otherwise prior to
the exercise of the Option in whole or in part.
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(b) Option Shares. Utah Federal has taken all necessary
corporate and other action to authorize and reserve and to permit it to issue,
and at all times from the date hereof to such time as the obligation to deliver
shares hereunder terminates will have reserved for issuance, at the closing(s)
upon exercise of the Option, or any portion thereof, the Option Shares (subject
to adjustment, as provided in Section 8 below), all of which, upon issuance
pursuant hereto shall be duly and validly issued, fully paid and nonassessable,
and shall be delivered free and clear of all claims, liens, encumbrances and
security interests, including any preemptive right of any of the shareholders
of Utah Federal.
(c) No Conflicts. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will violate or result in any violation of or be in conflict with or constitute
a default under any term of the articles of incorporation or bylaws of Utah
Federal or any agreement, instrument, judgment, decree, law, rule or order
applicable to Utah Federal or any subsidiary of Utah Federal or to which Utah
Federal or any such subsidiary is a party.
(d) Notification of Record Date. At any time from and
after the date of this Agreement until such time as the Option is no longer
exercisable, Utah Federal shall give WMI or any transferee thirty days prior
written notice before setting the record date for determining the holders of
record of the Common Stock entitled to vote on any matter, to receive any
dividend or distribution or to participate in any rights offering or other
matters, or to receive any other benefit or right, with respect to the Common
Stock.
7. Representations, Warranties and Covenants of WMI. WMI hereby
represents, warrants and covenants to Utah Federal as follows:
(a) Due Authorization. This Agreement has been duly
authorized by all necessary corporate action on the part of WMI, has been duly
executed by a duly authorized officer of WMI and constitutes a valid and
binding obligation of WMI.
(b) Transfers of Common Stock. No shares of Common Stock
acquired upon exercise of the Option will be transferred except in a
transaction registered or exempt from registration under any applicable
securities laws.
(c) No Conflicts. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will violate or result in any violation of or be in conflict with or constitute
a default under any term of the charter documents or bylaws of WMI or any
agreement, instrument, judgment, decree, law, rule or order applicable to WMI
or any subsidiary of WMI or to which WMI or any such subsidiary is a party.
8. Adjustment Upon Changes in Capitalization. In the event of
any change in the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, exchanges of shares or the like, the
number and kind of shares or securities subject to the Option and the purchase
price per share of Common Stock shall be appropriately adjusted. If prior to
the termination or exercise of the Option Utah Federal shall be acquired by
another party, consolidate with or merge into another corporation or liquidate,
WMI or any transferee shall thereafter receive upon exercise of the Option the
securities or properties to which a holder of the number of shares of Common
Stock then deliverable upon the exercise thereof would have been entitled upon
such acquisition, consolidation, merger or liquidation, and Utah Federal shall
take such steps in connection with such acquisition, consolidation, merger or
liquidation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be practicable, in
relation to any securities or property thereafter deliverable upon exercise of
the Option.
9. Nonassignability. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and the successors of each of the
undersigned. This Agreement and any right hereunder shall not be assignable by
either party except that WMI may transfer the Option, the Option Shares or any
portion thereof in accordance with Section 5. A merger or consolidation of WMI
(whether or not WMI is the surviving entity) or an acquisition of WMI shall not
be deemed an assignment or transfer.
C-3
<PAGE> 109
10. Regulatory Restrictions. Utah Federal shall use its best
efforts to obtain or to cooperate with WMI or any transferee in obtaining all
necessary regulatory consents, approvals, waivers or other action (whether
regulatory, corporate or other) to permit the acquisition of any or all Option
Shares by WMI or any transferee.
11. Remedies. Utah Federal agrees that if for any reason WMI or
any transferee shall have exercised its rights under this Agreement and Utah
Federal shall have failed to issue the Option Shares to be issued upon such
exercise or to perform its other obligations under this Agreement, unless such
action would violate any applicable law or regulation by which Utah Federal is
bound, then WMI or any transferee shall be entitled to specific performance and
injunctive and other equitable relief. WMI agrees that if it shall fail to
perform any of its obligations under this Agreement, then Utah Federal shall be
entitled to specific performance and injunctive and other equitable relief.
This provision is without prejudice to any other rights that Utah Federal or
WMI or any transferee may have against the other party for any failure to
perform its obligations under this Agreement.
12. No Rights as Stockholder. This Option, prior to the exercise
thereof, shall not entitle the holder hereof to any rights as a stockholder of
Utah Federal at law or in equity; specifically this Option shall not entitle
the holder to vote on any matter presented to the stockholders of Utah Federal
or, except as provided herein, to any notice of any meetings of stockholders or
any other proceedings of Utah Federal.
13. Miscellaneous.
(a) Termination. This Agreement and the Option, to the
extent not previously exercised, shall terminate upon the earliest of (i)
December 31, 1996; (ii) the mutual agreement of the parties hereto; (iii) 31
days after the date on which any application for regulatory approval for the
Merger shall have been denied; provided, however, that if prior to the
expiration of such 31-day period, Utah Federal, WMI or WMBfsb is engaged in
litigation or an appeal procedure relating to an attempt to obtain approval of
the Merger, this Agreement will not terminate until the earlier of (a) December
31, 1996, or (b) 31 days after the completion of such litigation and appeal
procedure; (iv) the thirtieth day following the termination of the Merger
Agreement for any reason other than a material noncompliance or default by WMI
or WMBfsb with respect to its obligations thereunder; or (v) the date of
termination of the Merger Agreement if such termination is due to a material
noncompliance or default by WMI or WMBfsb with respect to its obligations
thereunder; provided, however, that if the Option has been exercised, in whole
or in part, prior to the termination of this Agreement, then such exercise
shall close pursuant to Section 4 hereof even though such closing date is after
the termination of this Agreement; and provided, further, that if the Option is
sold prior to the termination of this Agreement, such Option may be exercised
by the transferee at any time within 31 days after the date of termination even
though such exercise and/or the closing of such exercise occurs after the
termination of this Agreement.
(b) Amendments. This Agreement may not be modified,
amended, altered or supplemented, except upon the execution and delivery of a
written agreement executed by the parties hereto.
(c) Severability of Terms. Any provision of this
Agreement that is invalid, illegal, or unenforceable shall be ineffective only
to the extent of such invalidity, illegality, or unenforceability without
affecting in any way the remaining provisions hereof or rendering any other
provisions of this Agreement invalid, illegal or unenforceable. Without
limiting the generality of the foregoing, if the right of WMI or any transferee
to exercise the Option in full for the total number of shares of Common Stock
or other securities or property issuable upon the exercise of the Option is
limited by applicable law, or otherwise, WMI or any transferee may,
nevertheless, exercise the Option to the fullest extent permissible.
(d) Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by delivery, by cable,
telecopies, or telex, or by registered or certified mail, postage prepaid,
return receipt requested, to the respective parties as follows:
C-4
<PAGE> 110
If to Utah Federal, to:
Utah Federal Savings Bank
2279 Washington Boulevard
Ogden, Utah 84401
Attn: L. Brent Hoggan, Executive
Vice President
With a copy to:
Graham & Dunn
1420 Fifth Avenue, 33rd Floor
Seattle, Washington 98101
Attn: Stephen M. Klein
If to WMI:
Washington Mutual, Inc.
1201 Third Avenue, Suite 1500
Seattle, Washington 98101
Attention: Craig E. Tall
With copies to:
Foster Pepper & Shefelman
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attention: Fay L. Chapman
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
(e) Governing Law. This Agreement and the Option, in all
respects, including all matters of construction, validity and performance, are
governed by the internal laws of the State of Washington by citizens of such
state to be performed wholly within such state without giving effect to the
principles of conflicts of law thereof. This Agreement is being delivered in
Seattle, Washington.
(f) Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original, but all of which
together shall constitute one and the same agreement.
C-5
<PAGE> 111
(g) Effects of Headings. The section headings herein are
for convenience only and shall not affect the construction hereof.
DATED as of the day first written above.
UTAH FEDERAL SAVINGS BANK
By: /s/ Michael R. Garrett
-----------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
WASHINGTON MUTUAL, INC.
By: /s/ Craig E. Tall
--------------------------------
Its: Executive Vice President
--------------------------------
C-6
<PAGE> 112
APPENDIX D
DISSENTERS RIGHTS STATUTE
12 CFR Section 552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) Right to demand payment of fair or appraised value. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with Section 552.13 of this part shall
have the right to demand payment of the fair or appraised value of his stock:
Provided, That such stockholder has not voted in favor of the combination and
complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Section 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure.
(1) Notice. Each constituent Federal stock association
shall notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and may
be part of management's proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder
electing to make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying himself or
herself and stating his or her intention thereby to demand appraisal of and
payment for his or her shares. Such demand must be in addition to and separate
from any proxy or vote against the combination by the stockholder.
(3) Notification of effective date and written offer.
Within ten days after the effective date of the combination, the resulting
association shall:
(i) Give written notice by mail to stockholders
of constituent Federal stock associations who have complied with the
provisions of paragraph (c)(2) of this section and have not voted in
favor of the combination, of the effective day of the combination;
(ii) Make a written offer to each stockholder to
pay for dissenting shares at a specified price deemed by the resulting
association to be the fair value thereof; and
(iii) Inform them that, within sixty days of such
date, the respective requirements of paragraphs (c)(5) and (c)(6) of
this section (set out in the notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
D-1
<PAGE> 113
(4) Acceptance of offer. If within sixty days of the
effective date of the combination the fair value is agreed upon between the
resulting association and any stockholder who has complied with the provisions
of paragraph (c)(2) of this section, payment therefor shall be made within
ninety days of the effective date of the combination.
(5) Petition to be filed if offer not accepted. If
within sixty days of the effective date of the combination the resulting
association and any stockholder who has complied with the provisions of
paragraph (c)(2) of this section do not agree as to the fair value, then any
such stockholder may file a petition with the Office, with a copy by registered
or certified mail to the resulting association, demanding a determination of
the fair market value of the stock of all such stockholders. A stockholder
entitled to file a petition under this section who fails to file such petition
within sixty days of the effective date of the combination shall be deemed to
have accepted he terms offered under the combination.
(6) Stock certificates to be noted. Within sixty days of
the effective date of the combination, each stockholder demanding appraisal and
payment under this section shall submit to the transfer agent his certificates
of stock for notation thereon that an appraisal and payment have been demanded
with respect to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights under this section and shall be
deemed to have accepted the terms offered under the combination.
(7) Withdrawal of demand. Notwithstanding the foregoing,
at any time within sixty days after the effective date of the combination, any
stockholder shall have the right to withdraw his or her demand for appraisal
and to accept the terms offered upon the combination.
(8) Valuation and payment. The Director shall, as he or
she may elect, either appoint one or more independent persons or direct
appropriate staff of the Office to appraise the shares to determine their fair
market value, as of the effective date of the combination, exclusive of any
element of value arising from the accomplishment or expectation of the
combination. Appropriate staff of the Office shall review and provide an
opinion on appraisals prepared by independent persons as to the suitability of
the appraisal methodology and the adequacy of the analysis and supportive data.
The Director after consideration of the appraisal report and the advice of the
appropriate staff shall, if he or she concurs in the valuation of the shares,
direct payment by the resulting association of the appraised fair market value
of the shares, upon surrender of the certificates representing such stock.
Payment shall be made, together with interest from the effective date of the
combination, at a rate deemed equitable by the Director.
(9) Costs and expenses. The costs and expenses of any
proceeding under this section may be apportioned and assessed by the Director
as he or she may deem equitable against all or some of the parties. In making
this determination the Director shall consider whether any party has acted
arbitrarily, vexatiously, or not in good faith in respect to the rights
provided by this section
(10) Voting and distribution. Any stockholder who has
demanded appraisal rights as provided in paragraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any propose nor be
entitled to the payment of dividends or other distributions on the stock
(except dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) Status. Shares of the resulting association into
which shares of the stockholders demanding appraisal rights would have been
converted or exchanged, had they assented to the combination, shall have the
status of authorized and unissued shares of the resulting association.
D-2
<PAGE> 114
APPENDIX E
UTAH FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Financial Statements
and Schedules
September 30, 1995
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-2
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . E-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . E-5
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . E-6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . E-7
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . E-9
Consolidating Statement of Financial Condition (Schedule 1) . . . . . . . . . . . . . . E-19
Consolidating Statements of Operations (Schedule 2) . . . . . . . . . . . . . . . . . . E-20
</TABLE>
E-1
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Utah Federal Savings Bank and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated statement of financial condition
of Utah Federal Savings Bank and Subsidiary as of September 30, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 1995 and 1994. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Utah Federal Savings
Bank and Subsidiary as of September 30, 1995, and the results of their
operations and their cash flows for the years ended September 30, 1995 and 1994,
in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information included in Schedules 1 and 2 is presented for the purpose of
additional analysis of the consolidated financial statements rather than to
present the financial position, results of operations, and cash flows of the
individual companies. The consolidating information has been subjected to the
auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
Jones, Jensen & Company
May 12, 1996
E-2
<PAGE> 116
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statement of Financial Condition
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents
Cash and amounts due from depository institutions . . . . . . . . . . . $ 2,662,127 $ 1,953,116
Interest-bearing deposits in other banks, including certificates of
deposit of $886,000 in 1995 . . . . . . . . . . . . . . . . . . . . . 10,302,491 3,348,360
------------ ------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . 12,964,618 5,301,476
------------ ------------
Mortgage-backed securities
Securities held to maturity, market value of $24,353,521 (Note 3) . . . 14,567,040 24,108,839
Securities available, for sale, cost basis $122,302 . . . . . . . . . . 5,104,232 120,462
------------ ------------
Total mortgage-backed securities . . . . . . . . . . . . . . . . . . 19,671,272 24,229,301
------------ ------------
Loans receivable, net of loss reserves $1,661,841
(Notes 4,9, and 12) . . . . . . . . . . . . . . . . . . . . . . . . . . 81,164,999 83,482,205
Loans receivable, held for sale, cost basis of $3,286,917 . . . . . . . . 1,294,782 3,286,917
Accrued interest receivable, net of allowance for estimated
uncollectible interest of $70,533 (Note 5) . . . . . . . . . . . . . . 720,185 768,907
Real estate acquired in settlement of loans . . . . . . . . . . . . . . . -- 51,335
Federal Home Loan Bank capital stock, at cost (Note 9) . . . . . . . . . 3,993,800 3,850,400
Premises and equipment, net (Note 6) . . . . . . . . . . . . . . . . . . 2,728,349 2,709,897
Income tax receivable (Note 10) . . . . . . . . . . . . . . . . . . . . . 17,010 132,685
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676,417 121,409
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,231,432 $123,934,532
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-3
<PAGE> 117
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statement of Financial Condition, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
------------ ------------
Liabilities (Unaudited)
<S> <C> <C>
Deposits (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . $110,256,916 $108,989,820
Other borrowings (Note 8) . . . . . . . . . . . . . . . . . . . . . . . 27,441 28,838
Federal Home Loan Bank advances (Note 9) . . . . . . . . . . . . . . . -- 2,360,000
Advance payments by borrowers for taxes and insurance . . . . . . . . . 478,415 1,133,222
Deferred income taxes (Note 10) . . . . . . . . . . . . . . . . . . . . 697,129 553,300
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,378 689,151
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 112,400,279 113,754,331
------------ ------------
Stockholders' equity
$21 noncumulative convertible-preferred stock, $10 par value,
50,000 shares authorized, 38,000 shares issued and outstanding
liquidation preference $798,000 (Note 1b) . . . . . . . . . . . . . . -- 380,000
Common stock, $10 par value, 500,000 shares authorized, 101,000 shares
issued and outstanding (Notes 1b and 13) . . . . . . . . . . . . . . . 1,390,000 1,010,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 1,285,720 1,285,720
Retained earnings-substantially restricted (Notes 1b, 11, and 13) . . . 8,155,433 7,504,481
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 10,831,153 10,180,201
Commitments and contingencies (Note 12) . . . . . . . . . . . . . . . . . -- --
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,231,432 $123,934,532
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-4
<PAGE> 118
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the six months ended For the years ended
March 31, September 30,
------------------------------ ------------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans receivable .................... $ 4,522,494 $ 3,445,253 $ 7,699,953 $ 6,453,375
Interest on mortgage-backed securities ................... 714,505 800,726 1,666,110 1,245,783
Interest and dividends on investment securities .......... 143,474 112,206 234,732 333,111
Other interest income .................................... 175,930 286,081 401,691 639,906
------------ ------------ ------------ ------------
Total interest and dividend income ..................... 5,556,403 4,644,266 10,002,486 8,672,175
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits (Note 7) ............................ 2,832,666 2,395,042 5,073,349 4,770,575
Interest on Federal Home Loan Bank advances .............. 3,751 27,900 31,754 119,056
Interest on other borrowings ............................. 1,393 3,919 5,251 6,797
------------ ------------ ------------ ------------
Total interest expense ................................. 2,837,810 2,426,861 5,110,354 4,896,428
------------ ------------ ------------ ------------
Net interest income before provision for loan losses...... 2,718,593 2,217,405 4,892,132 3,775,747
Provision for loan losses (Note 4) ......................... -- -- -- --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses....... 2,718,593 2,217,405 4,892,132 3,775,747
------------ ------------ ------------ ------------
Other income:
Loan servicing fees ...................................... 133,996 122,886 259,752 236,650
Gain on sale of loans receivable ......................... 234,193 45,553 163,866 180,560
Other income ............................................. 175,718 284,793 493,506 685,313
------------ ------------ ------------ ------------
Net other income ....................................... 543,907 453,232 917,124 1,102,523
------------ ------------ ------------ ------------
General and administrative expenses:
Salaries and employee benefits ........................... 1,182,654 1,106,541 2,381,489 1,908,706
Office occupancy ......................................... 280,412 210,939 383,953 358,155
Advertising .............................................. 36,126 39,589 76,667 72,254
Federal insurance premiums ............................... 123,963 123,209 245,196 270,162
Gain on sale of real estate acquired in
settlement of loans .................................... -- (8,320) (8,098) (43,781)
Data processing .......................................... 101,099 73,043 179,193 156,594
Real estate holding costs, net ........................... 2,648 17,090 21,016 100,008
Other general and administrative expenses ................ 330,021 413,754 786,300 753,886
------------ ------------ ------------ ------------
Total general and administrative expenses .............. 2,056,923 1,975,845 4,065,716 3,575,984
------------ ------------ ------------ ------------
Income before income tax expense ........................... 1,205,577 694,792 1,743,540 1,302,286
Income tax expense (Note 10) ............................... (458,145) (248,135) (373,772) (167,349)
------------ ------------ ------------ ------------
Net income ............................................. $ 747,432 $ 446,657 $ 1,369,768 $ 1,134,937
============ ============ ============ ============
Earnings per share information:
Earnings per share ....................................... $ 7.40 $ 4.47 $ 13.65 $ 11.35
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-5
<PAGE> 119
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, September 30, 1993 .................... $ 380,000 $ 1,000,000 $ 1,274,720 $ 5,246,911 $ 7,901,631
Dividends paid on preferred stock ............. -- -- -- (69,940) (69,940)
Dividends paid on common stock ................ -- -- -- (60,000) (60,000)
Market adjustment on mortgage backed securities
held for sale ............................... -- -- -- (541) (541)
Net income .................................... -- -- -- 1,134,937 1,134,937
------------ ------------ ------------ ------------ ------------
Balances, September 30, 1994 .................... 380,000 1,000,000 1,274,720 6,251,367 8,906,087
Issuance of common stock ...................... -- 10,000 11,000 -- 21,000
Dividends paid on preferred stock ............. -- -- -- (55,860) (55,860)
Dividends paid on common stock ................ -- -- -- (60,000) (60,000)
Market adjustment on mortgage-backed securities
held for sale ............................... -- -- -- (794) (794)
Net income .................................... -- -- -- 1,369,768 1,369,768
------------ ------------ ------------ ------------ ------------
Balances, September 30, 1995 .................... 380,000 1,010,000 1,285,720 7,504,481 10,180,201
Conversion of preferred stock (unaudited) ..... (380,000) 380,000 -- -- --
Dividends paid on preferred stock (unaudited) . -- -- -- (14,080) (14,080)
Dividends paid on common stock (unaudited) .... -- -- -- (80,800) (80,800)
Market adjustment on mortgage backed securities
held for sale (unaudited) ................... -- -- -- (1,600) (1,600)
Net income (unaudited) ........................ -- -- -- 747,432 747,432
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1996 (unaudited) ............. $ -- $ 1,390,000 $ 1,285,720 $ 8,155,433 $ 10,831,153
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-6
<PAGE> 120
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
March 31, September 30,
--------------------------- ---------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income .................................................... $ 747,432 $ 446,657 $ 1,369,768 $ 1,134,937
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................... 111,360 132,555 198,143 247,449
Provision for loan losses ................................... -- -- -- --
Provision for losses on real estate acquired in settlement of
loans and real estate held for investment ................. -- -- 18,502 --
Increase (decrease) in deferred loan fees ................... (143,841) 62,437 (448,251) (357,767)
Federal Home Loan Bank stock dividend ....................... (143,400) (112,100) (234,500) (306,800)
Gain on sale of premises and equipment ...................... -- -- (3,882) --
Gain on sale of loans receivable ............................ (234,193) (45,553) (163,866) (180,560)
Origination of loans held for sale .......................... (13,591,756) (4,518,371) (22,846,221) (18,356,236)
Proceeds from sale of loans held for sale ................... 15,461,381 4,152,858 20,144,890 21,172,072
Deferred income taxes ....................................... 144,115 -- (114,600) 207,900
Gain on the sale of real estate acquired in settlement
of loans .................................................. -- (8,320) (5,946) (43,781)
(Increase) Decrease in accrued interest receivable .......... 48,722 (122,195) (314,115) 76,784
Decrease (Increase) in income tax receivable ................ 115,675 96,884 (6,301) (126,384)
Decrease (Increase) in other assets ......................... (555,510) (413,469) 181,806 221,433
Increase (Decrease) in other liabilities .................... 222,829 (97,639) (293,553) (1,069,012)
Market value increase (decrease) investment
available for sale ........................................ 39,326 -- -- --
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities ....... 2,222,140 (426,256) (2,518,126) 2,620,035
------------ ------------ ------------ ------------
Cash flows from investing activities
Decrease in real estate held for investment ................... -- 39,600 39,600 119,202
Purchase of investment securities ............................. -- -- -- (1,032,500)
Maturities of investment securities ........................... -- -- -- 2,020,000
Purchase of mortgage-backed securities ........................ -- -- -- (14,269,817)
Repayment of principal on mortgage-backed securities .......... 3,967,104 2,171,404 5,427,776 5,411,986
Purchase of mortgage-backed securities held for sale .......... 590,925 -- -- (126,699)
Repayment of principal on mortgage-backed securities
held for sale ............................................... -- 1,554 1,711 3,191
Loans originated .............................................. (31,566,130) (21,585,729) (55,321,167) (27,103,943)
Repayment of loans receivable ................................. 34,382,038 15,742,859 40,329,092 32,241,875
Proceeds from the sale of real estate acquired in
settlement of loans ......................................... 51,335 185,827 345,571 209,811
Purchase of premises and equipment ............................ (146,581) (884,662) (1,431,143) (153,980)
Proceeds from sale of premises and equipment .................. -- -- 13,447 --
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities ......... $ 7,278,691 $ (4,329,147) $(10,595,113) $ (2,680,874)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-7
<PAGE> 121
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
March 31, September 30,
--------------------------- ---------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Dividends on stock .............................................. $ (135,806) $ (88,160) $ (115,860) $ (115,860)
Proceeds from sale of common and preferred stock ................ -- -- 21,000 --
Increase (decrease) in deposits ................................. 1,267,096 (206,717) 2,224,531 (5,843,218)
Decrease in other borrowings .................................... (1,397) (51,610) (70,673) (83,251)
Repayments of Federal Home Loan Bank advances ................... (2,360,000) (1,000,000) (1,000,000) (2,000,000)
Proceeds from Federal Home Loan Bank advances ................... -- -- 2,360,000 --
Increase (decrease) in advance payments by
borrowers for taxes and insurance ............................. (607,582) (485,913) 90,831 (159,427)
------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities ........... (1,837,689) (1,832,400) 3,509,829 (8,201,756)
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................ 7,663,142 (6,587,803) (9,603,410) (8,262,595)
Cash and cash equivalents, beginning of period .................. 5,301,476 14,904,886 14,904,886 23,167,481
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ........................ $ 12,964,618 $ 8,317,083 $ 5,301,476 $ 14,904,886
============ ============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for interest, net of
amount credited to deposit accounts ........................... $ 250,211 $ 240,914 $ 43,118 $ 585,513
============ ============ ============ ============
Cash paid for income taxes ...................................... $ 212,500 $ 28,116 $ 484,173 $ 292,186
============ ============ ============ ============
Cash received from income tax refund ............................ $ 115,675 $ -- $ -- $ 190,304
============ ============ ============ ============
Supplemental schedule of noncash investing and financing activities
Interest credited to deposit accounts,
net of interest paid in cash .................................. $ 2,587,984 $ 2,187,437 $ 5,087,046 $ 4,350,752
============ ============ ============ ============
Real estate acquired in settlement of loans ..................... $ -- $ -- $ 51,335 $ 207,418
============ ============ ============ ============
Loans originated in connection with sale of real
estate acquired in settlement of loans ........................ $ -- $ -- $ -- $ 385,397
============ ============ ============ ============
Transfer of real estate acquired in settlement of
loans to premises and equipment ............................... $ -- $ -- $ 387,000 $ --
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-8
<PAGE> 122
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1995
(1) Organization
The consolidated financial statements include the accounts of Utah Federal
Savings Bank (the Bank) and its wholly owned subsidiary, 2425 Service
Corporation (a service corporation incorporated in the state of Utah). All
significant intercompany transactions and accounts have been eliminated.
(A) Business
The Bank provides a full range of banking and other financial services
to its corporate, individual and institutional customers. The Bank is
subject to competition from other financial institutions, the
regulations of certain federal agencies, and undergoes periodic
examinations by those regulatory authorities.
(B) Conversion to Stock Form of Ownership
On September 23, 1992, the Bank converted from a Federally Chartered
Mutual Association to a Federally Chartered Stock Association through
the issuance of 38,000 shares of preferred stock and 100,000 shares of
common stock for $2,898,000 in gross proceeds. Costs associated with
the conversion that totaled $243,280 were deducted from gross proceeds.
The preferred stock bears noncumulative annual dividends of seven
percent per share. However, no dividends may be paid on the common
stock or common stock shares redeemed or retired unless full dividends
on the preferred stock for the then current fiscal year have been paid
or set aside. The preferred stock is convertible to shares of common
stock at the stockholder's option any time after two years from the
date of issuance. Each share of preferred stock is convertible into one
share of common stock, but if a full dividend is not paid during any
year prior to conversion of the preferred stock, the amount of common
stock to be received upon stock conversion will be increased to reflect
the amount of the unpaid dividends. In the event of the complete
liquidation or dissolution of the Bank, the preferred stockholders are
entitled to any accrued dividends for the then current fiscal year and
a liquidation preference of $21 per share, after payment or provision
for payment of (i) all debts and liabilities of the Bank (including all
savings deposits and accrued interest thereon), (ii) any accrued
dividends and (iii) any interests in the liquidation account.
At the time of the conversion, the Bank established a liquidation
account by restricting a portion of net worth for the benefit of
eligible account holders who maintain their deposit accounts after
conversion. In the event of a complete liquidation of the Bank, each
eligible account holder will be entitled to receive a distribution from
the liquidation account after payment of all creditors, but before a
liquidation distribution with respect to the preferred and common
stock. The liquidation account balance was approximately $1,446,000, at
September 30, 1995. This account will be proportionately reduced for
any subsequent reduction in the eligible holders' deposit accounts.
(2) Summary of Significant Accounting Policies
This summary of significant accounting policies of Utah Federal Savings Bank is
presented to assist in understanding the Bank's financial statements. The
financial statements and notes are representations of the Bank's management,
which is responsible for their integrity and objectivity. These accounting
principles conform to generally accepted accounting principles and have been
consistently applied in the preparation of these financial statements.
(A) Use of Estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of
E-9
<PAGE> 123
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
financial condition, and of revenues, and expenses for the years
reported. Accordingly, future results could be impacted by differences
in such estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses, the valuation of real estate acquired in settlement of
loans, and the valuation of real estate held for investment. In
connection with the determination of the allowances for loan losses and
real estate owned, management obtains independent appraisals for
significant properties.
Management believes that the allowances for losses on loans, real
estate acquired in settlement of loans, and real estate held for
investment are adequate. While management uses available information to
recognize losses on loans, real estate acquired in settlement of loans,
and real estate held for investment, future additions to the allowances
may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans,
real estate acquired in settlement of loans, and real estate held for
investment. Such agencies may require the Bank to recognize additions
to the allowances based on their judgments about information available
to them at the time of their examination.
(B) Investments and Mortgage-Backed Securities
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and the Bank has the
ability at the time of purchase to hold securities until maturity or on
a long-term basis, they are classified as investments and carried at
amortized historical cost. Securities to be held for indefinite periods
of time and not intended to be held to maturity or on a long-term basis
are classified as available for sale and carried at fair value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset and liability management
strategy. Such securities may be sold in response to changes in
interest rates, and prepayment risk and other factors related to
interest rate changes.
Realized gains and losses on dispositions are based on the net proceeds
and the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment
securities available for sale are based on the difference between book
value and fair value of each security. These unrealized gains and
losses are credited or charged to shareholders' equity, whereas
realized gains and losses flow through the Bank's yearly operations.
(C) Allowance for Estimated Losses on Loans
The allowance for estimated losses on loans is increased by charges to
income and decreased by charge offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on the
Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to
repay, estimated value of any underlying collateral, and current and
prospective economic conditions. Interest is accrued as earned unless
management doubts the collectibility of the loan or the unpaid interest
or when a loan is contractually 90 days or more past due, at which time
the uncollected interest is charged off or an allowance is established.
The allowance is established by a charge to interest income equal to
all interest previously accrued and income is subsequently recognized
only to the extent cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is
returned to accrual status. Subsequent collection of delinquent
interest is reflected in income in the period of recovery.
E-10
<PAGE> 124
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
(D) Loans Held for Sale
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income.
(E) Gains and Losses from the Sale of Loans
The Bank sells whole loans and participations in mortgage loans,
without recourse, to institutional and private investors. Gains and
losses resulting from the sales of loans are determined on the
specific-identification method and reflect the extent that the sales
proceeds exceed or are less than the Bank's investment in the loans
(which includes the unpaid principal balance of the loans adjusted for
unearned discounts, premiums, and deferred fees at the time of sale).
In some cases, the Bank sells loans and continues to service such loans
for the investor. In these cases, the Bank recognizes a gain or loss on
the loan sale measured by the present value of the difference between
the yield on the loans and the yield to be paid to the buyer, reduced
by the normal servicing fees, over the estimated remaining lives of
those loans using market prepayment, default, and discount rate
assumptions. The resulting deferred discount or premium is amortized as
an addition to or deduction from income using the level-yield method,
adjusted for actual prepayments. The Bank periodically reviews the
remaining net premium to ensure that it does not exceed the present
value of the estimated excess servicing fees. In the event that actual
prepayments exceed the assumptions used in determining the gain or
loss, the deferred net premium is adjusted to reflect current
prepayment projections by a charge to earnings.
(F) Real Estate Acquired in the Settlement of Loans
Real estate acquired in the settlement of loans is recorded at the
lower of cost or fair value at the date of acquisition. Subsequent
valuations are performed by management and any excess carrying value
over estimated net realizable value is charged to operations. Costs
relating to the development and improvement of property are
capitalized, whereas those relating to holding the property are charged
to expense.
(G) Premises and Equipment
Premises and equipment are stated at cost. Depreciation and
amortization is generally computed on a straight-line method over the
estimated useful lives of 40 years for buildings, 20 years for
leasehold improvements, and 3 to 7 years for furniture and equipment.
(H) Income Taxes
The Bank has adopted Statement of Financial Accounting Standards No.
109. Under the asset and liability method of FASB 109, deferred tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as income or expense in the period that includes
the enactment date.
(I) Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks, including
certificates of deposit. For purposes of the consolidated statements of
cash flows, the Bank considers all highly liquid debt instruments with
original maturities of six months or less to be cash equivalents.
E-11
<PAGE> 125
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
(J) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred and
the net fee or cost is recognized in income according to FASB 91.
Commitment fees and costs relating to commitments whose likelihood of
exercise is remote are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during
the commitment period, the remaining unamortized commitment fee at the
time of exercise is recognized over the life of the loan as an
adjustment of yield.
(K) Earnings Per Share
Earnings per share have been computed on the basis of the weighted
average number of shares outstanding in 1995 and 1994.
(L) Reclassifications
Certain reclassifications have been made to the prior financial
statements in order for them to conform with the current year
presentation.
(M) Escrowed Cash
The amount of escrowed cash held by the bank as a fiduciary or agent
was $1,287,956 as of September 30, 1995.
(3) Mortgage-Backed Securities
At September 30, 1995, the mortgage-backed securities portfolio was comprised of
securities classified as available for sale and held to maturity, in conjunction
with the early adoption of FASB 115, resulting in mortgage-backed securities
available for sale being carried at market value and mortgage-backed securities
held to maturity being carried at cost, adjusted for amortization of premiums
and accretions of discounts. FASB 115 does not allow retroactive restatement
and, therefore, the investment securities portfolio at September 30, 1995 was
carried at cost, adjusted for amortization of premiums and accretions of
discounts. There was no adjustment of the carrying value of mortgage-backed
securities required by the early adoption of FASB 115.
The carrying values, gross unrealized gains and losses, and estimated market
values of mortgage-backed securities held to maturity as of September 30, 1995
are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Government National Mortgage
Association certificates .................. $ 492,408 $ 32,327 $ -- $ 524,735
Federal National Mortgage Association
adjustable rate certificates .............. 15,772,118 114,782 -- 15,886,900
Federal Home Loan Mortgage Corporation
adjustable certificates ................... 7,073,683 70,672 -- 7,144,355
Small Business Administration
adjustable certificates ................... 770,630 26,901 -- 797,531
----------- ----------- ---------- -----------
Total ................................... $24,108,839 $ 244,682 $ -- $24,353,521
=========== =========== ========== ===========
</TABLE>
E-12
<PAGE> 126
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
The carrying values, gross unrealized gains and losses, and estimated market
valued of mortgage-backed securities available for sale at September 30, 1995
are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Federal National Mortgage Association
adjustable rate certificates . . . . . . . $ 67,811 $ -- $ 1,238 $ 66,573
Federal Home Loan Mortgage Corporation
adjustable securities . . . . . . . . . . . 54,491 -- 602 53,889
--------- ------- -------- --------
Total . . . . . . . . . . . . . . . . . . $ 122,302 $ -- $ 1,840 $120,462
========= ======= ======== ========
</TABLE>
(4) Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30, 1995
------------------
<S> <C>
Loans secured by real estate:
One-to-four family residential loans . . . . . . . . . . . . . . . . . . . . . . . $73,194,974
Other conventional loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,800,038
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,190,243
FHA and VA loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,052,519
Land acquisition and development loans . . . . . . . . . . . . . . . . . . . . . . 3,353,000
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,590,774
Loans collateralized by savings deposits . . . . . . . . . . . . . . . . . . . . . . 896,374
Consumer, home improvements, and other loans . . . . . . . . . . . . . . . . . . . . 1,141,371
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,628,519
Less:
Undisbursed portion of construction loans . . . . . . . . . . . . . . . . . . . . . 13,711,268
Net deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773,205
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,661,841
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,482,205
===========
</TABLE>
Loans are made in the normal course of business to various officers and
directors of the Bank. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions and do
not involve more than a normal risk of collectibility. Activity during fiscal
year ended September 30, 1995 included new loans of $1,630,000, repayment of
$58,000 with an ending balance of $1,840,000.
The activity in the allowances for losses on loans receivable, real estate
acquired in settlement of loans, and real estate held for investment is
summarized as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Allowance for losses on:
Loans receivable:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,677,086
Provisions for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Charge offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,045)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
----------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,661,841
==========
</TABLE>
E-13
<PAGE> 127
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
<TABLE>
<S> <C>
Real estate acquired in settlement of loans:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,772
Provisions for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502
Charge offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (319,274)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
---------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --
=========
</TABLE>
Loans on nonaccrual status were approximately $152,000 at September 30, 1995. At
the original contract rates, additional interest income of approximately $6,500
and $4,000 for the year ended September 30, 1995, would have been recognized had
these loans performed as originally agreed. Renegotiated loans for which
interest has been reduced was insignificant.
The balance of loan participations sold without recourse and loans serviced for
others, not included in the accompanying consolidated statements of financial
condition, was $58,189,109 at September 30, 1995.
(5) Accrued Interest Receivable
Accrued interest receivable is as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $576,257
Investment securities and interest-bearing deposits in
other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,187
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,463
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $768,907
========
</TABLE>
(6) Premises and Equipment
Premises and equipment and related accumulated depreciation and amortization are
as follows:
<TABLE>
<CAPTION>
September 30, 1995
------------------
<S> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,231,899
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 1,347,053
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,623,169
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . (1,492,224)
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,709,897
============
</TABLE>
(7) Deposits
Deposits account balances at September 30, 1995 is summarized as follows:
<TABLE>
<CAPTION>
1995
--------------------------------
Weighted Average
Interest Rate Carrying Value
---------------- --------------
<S> <C> <C>
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . 2.20% $ 9,548,903
Passbook accounts . . . . . . . . . . . . . . . . . . . . . . 2.98% 9,444,109
Money market accounts . . . . . . . . . . . . . . . . . . . . 3.90% 7,756,462
-----------
26,749,474
-----------
</TABLE>
E-14
<PAGE> 128
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
<TABLE>
<S> <C> <C>
Certificates:
3 to 6 month maturities . . . . . . . . . . . . . . . . . . 5.90% 10,445,664
7 to 24 month maturities . . . . . . . . . . . . . . . . . . 6.09% 38,358,993
Over 24 month maturities . . . . . . . . . . . . . . . . . . 6.20% 33,435,689
============
Total certificates . . . . . . . . . . . . . . . . . . . . 82,240,346
============
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $108,989,820
============
</TABLE>
At September 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year Ending September 30,
---------------------------------------------
1996 1997 1998 After 1988 Total
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4.0% to 4.99% . . $11,110,207 $1,715,062 $ 12,133 $ 537,226 $13,374,628
5.0% to 5.99% . . 24,440,380 848,130 1,458,012 1,121,540 27,868,062
6.0% to 6.99% . . 19,903,356 8,422,256 2,891,748 7,599,292 38,816,652
7.0% to 7.99% . . 2,162,630 -- 12,083 6,291 2,181,004
----------- ----------- ---------- ---------- -----------
$57,616,573 $10,985,448 $4,373,976 $9,264,349 $82,240,346
=========== =========== ========== ========== ===========
</TABLE>
Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
September 30, 1995
------------------
<S> <C>
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,936
Passbook accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,934
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,782
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,341,697
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,073,349
==========
</TABLE>
Jumbo CD's were $8,073,005 as of September 30, 1995.
(8) Other Borrowings
The Bank's other borrowings consists of notes payable at September 30, 1995. The
weighted average interest rates and maturity schedule for notes payable are as
follows:
<TABLE>
<CAPTION>
1995
--------------------------------
Weighted Average
Interest Rate Carrying Value
---------------- --------------
<S> <C> <C>
Three to five years . . . . . . . . . . . . . . . . . . . . . -- $ --
Five or more years . . . . . . . . . . . . . . . . . . . . . . 10.00% 28,838
---------
$ 28,838
=========
</TABLE>
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances consist of the following:
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------
Weighted Average
Interest Rate Carrying Value
---------------- --------------
<S> <C> <C>
Fiscal year of maturity
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.925% $2,360,000
==========
</TABLE>
E-15
<PAGE> 129
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
The Bank is required to maintain pledged collateral, consisting of certain
qualifying real estate loans, equal to at least 120% of the balance of advances
outstanding. The stock of the FHLB is also pledged as collateral for the
advances.
(10) Income Taxes
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
September 30, 1995
------------------
<S> <C>
Current:
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (63,556)
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (424,816)
---------
(488,372)
---------
Deferred:
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,900
---------
114,600
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(373,772)
=========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Deferred tax assets:
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $309,400
Book allowance for losses on loans and real estate
owned in excess of tax allowance . . . . . . . . . . . . . . . . . . . . . 94,900
Stock appreciation rights . . . . . . . . . . . . . . . . . . . . . . . . . 30,400
---------
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . 434,700
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . --
---------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . 434,700
---------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . . . . . . (957,000)
Tax depreciation in excess of book . . . . . . . . . . . . . . . . . . . . . (31,000)
---------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . (988,000)
---------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . $(553,300)
=========
</TABLE>
If certain conditions are met in determining taxable income, the Bank is allowed
a special bad debt deduction for tax purposes based on a percentage of taxable
income, or tax reserves are determined based on specified experience formulas.
For financial statement purposes and its tax return, the Bank uses the most
beneficial method for computing its bad debt deduction.
Retained earnings at September 30, 1995 includes approximately $1,418,000 for
which no provision for federal income tax has been made. This amount represents
an allocation of income to bad debt deductions for tax purposes only. Reduction
of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which would be subject to the then current corporate
income tax rate.
The Bank files consolidated income tax returns on a calendar-year basis.
E-16
<PAGE> 130
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
(11) Profit Sharing Plan and Stock Appreciation Rights
The Bank has an employee profit sharing plan for all employees who have
completed at least 1,000 hours during one year service. Participants must
contribute from 1/2 to 4 percent of their base compensation, limited to $60,000
of base compensation per participant per year, and the Bank is required to pay
the lesser of 25 percent of profits before income taxes or 1.875 to 15 percent
of all base compensation. The Bank made contributions of $123,996 for the year
ended September 30, 1995.
The Bank has an agreement with two key officers, as of September 30, 1993, and
with one key officer for the year ended September 30, 1994, for the granting of
Stock Appreciation Rights (SAR). SARs permit each optionee to surrender an
exercisable option for an amount equal to the stock share amount reduced by
forty-nine dollars (the stock share amount is defined as the amounts reflected
in the shareholders' equity accounts, as of the end of the preceding Stock
Option Plan year, divided by the total number of shares of preferred and common
stock). Each employee was granted 1,000 shares effective December 31, 1993, one
employee is granted 1,000 shares for each successive December 31, 1993, and
thereafter through December 31, 2003. Upon exercising the options, the shares
are placed into a voting trust, to be voted by the trustee (a major
shareholder). As of September 30, 1995, there were 2,000 SARs or options
outstanding.
(12) Commitments and Contingencies
The Bank leases office space and equipment under operating lease agreements that
require approximate future minimum annual payments as follows:
<TABLE>
<CAPTION>
Years ended September 30:
-------------------------
<S> <C>
1996 $ 61,179
1997 55,217
1998 50,145
1999 5,828
-------------
Total $ 172,369
=============
</TABLE>
Rent expenses for the years ended September 30, 1995 and 1994 amounted to
$101,575 and $85,108, respectively.
The Bank had primarily fixed-rate loan commitments outstanding of approximately
$4,142,247 at September 30, 1995, excluding undisbursed portions of construction
loans in process. Commitments, which are disbursed subject to certain
limitations, extend over time with the majority disbursed within a one-month
period. The range of interest rates on the commitments were from 5.875 to 12.25
percent at September 30, 1995. The Bank had undisbursed balances on lines of
credit of approximately $648,599 at September 30, 1995. In addition, the Bank
has an outstanding letter of credit for approximately $2,354,000 at September
30, 1995. Loans receivable and mortgage-backed securities pledged in connection
with this outstanding letter of credit was approximately $4,846,795 at September
30, 1995. The Bank has commitments to sell loans of $2,036,466 at September 30,
1995.
(13) Regulatory Capital
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
includes minimum capital requirements for savings institutions, provisions for
changes in the federal regulatory structure for institutions including a new
deposit insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of housing
related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5 percent of adjusted total assets, a minimum of 3 percent
core capital ratio, and a 8.0 percent risk-based capital ratio at September 30,
E-17
<PAGE> 131
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
September 30, 1995
1995. Included in regulatory capital is $803,982 and $72,000 at September 30,
1995, which consists of real estate acquired in settlement of foreclosed assets
held for five years or more and that portion of land loans and non-residential
construction loans in excess of 80% loan to value ratio. This amount is required
to be deducted from regulatory Risk-Based Capital starting with ten percent on
July 1, 1990, and increasing periodically to 100 percent on July 1, 1994.
The Bank's capital as defined by FIRREA was as follows (in thousands)
(unaudited):
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------
Amount Percent
----------- -------
<S> <C> <C>
Tangible capital . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,128 8.17%
Tangible capital requirement . . . . . . . . . . . . . . . . . . . . 1,859 1.50%
----------- -----
Excess over requirement . . . . . . . . . . . . . . . . . . . . $ 8,269 6.67%
=========== =====
Core capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,128 8.17%
Core capital requirement . . . . . . . . . . . . . . . . . . . . . . 3,718 3.00%
----------- -----
Excess over requirement . . . . . . . . . . . . . . . . . . . . $ 6,410 5.17%
=========== =====
Risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,975 16.35%
Risk-based capital requirement . . . . . . . . . . . . . . . . . . . 5,370 8.00%
----------- -----
Excess over requirement . . . . . . . . . . . . . . . . . . . . $ 5,605 8.35%
=========== =====
</TABLE>
The Bank is in compliance with all regulatory capital requirements at September
30, 1995.
(14) Subsequent Event
On February 21, 1996, the Board of Directors approved a share for share
conversion of all outstanding shares of preferred stock to common stock. See
also note 1(b)
E-18
<PAGE> 132
Schedule 1
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidating Statement of Financial Condition
September 30, 1995
<TABLE>
<CAPTION>
2425
Utah Federal Service Consolidated
Savings Bank Corporation Eliminations Assets
------------ ----------- ------------ ------
<S> <C> <C> <C> <C>
Assets
Cash and amounts due from depository
institutions ............................ $ 1,965,409 $ 185,139 $ (197,432) $ 1,953,116
Interest-bearing deposits in other banks,
including certificates of deposit ....... 3,039,435 308,925 -- 3,348,360
Mortgage-backed securities ................ 24,108,839 -- -- 24,108,839
Mortgage-backed securities held for sale .. 120,462 -- -- 120,462
Loans receivable .......................... 83,457,808 31,889 (7,492) 83,482,205
Loans receivable held for sale ............ 3,286,917 -- -- 3,286,917
Accrued interest receivable ............... 768,907 -- -- 768,907
Real estate acquired in settlement of loans 51,335 -- -- 51,335
Federal Home Loan Bank capital stock ...... 3,850,400 -- -- 3,850,400
Premises and equipment .................... 2,693,127 16,770 -- 2,709,897
Income tax receivable ..................... 132,685 -- -- 132,685
Other assets .............................. 112,106 9,303 -- 121,409
Investment in service corp ................ 525,423 -- (525,423) --
------------- ------------- ------------- -------------
Total Assets ............................ $ 124,112,853 $ 552,026 $ (730,347) $ 123,934,532
============= ============= ============= =============
Liabilities and Stockholders' Equity
Deposits .................................. $ 109,187,252 -- $ (197,432) $ 108,989,820
Other borrowings .......................... 28,838 $ 7,492 (7,492) 28,838
Federal Home Loan Bank advances ........... 2,360,000 -- -- 2,360,000
Advance payments by borrowers for taxes
and insurance ........................... 1,133,222 -- -- 1,133,222
Deferred income taxes ..................... 553,300 -- -- 553,300
Other liabilities ......................... 670,040 19,111 -- 689,151
------------- ------------- ------------- -------------
Total liabilities ....................... 113,932,652 26,603 (204,924) 113,754,331
------------- ------------- ------------- -------------
Stockholders' equity:
Preferred stock ......................... 380,000 -- -- 380,000
Common stock ............................ 1,010,000 492,000 (492,000) 1,010,000
Additional paid-in capital .............. 1,285,720 -- -- 1,285,720
Retained earnings ....................... 7,504,481 33,423 (33,423) 7,504,481
------------- ------------- ------------- -------------
Total stockholders' equity .............. 10,180,201 525,423 (525,423) 10,180,201
------------- ------------- ------------- -------------
$ 124,112,853 $ 552,026 $ (730,347) $ 123,934,532
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
E-19
<PAGE> 133
Schedule 2
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidating Statements of Operations
Year Ended September 30, 1995
<TABLE>
<CAPTION>
2425
Utah Federal Service Consolidated
Savings Bank Corporation Eliminations Assets
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans receivable ....... $ 7,697,361 $ 2,592 -- $ 7,699,953
Interest on mortgage-backed securities ...... 1,666,110 -- -- 1,666,110
Interest and dividends on
investment securities ..................... 234,732 -- -- 234,732
Other interest income ....................... 379,509 22,603 (421) 401,691
----------- ----------- ----------- -----------
Total interest and dividend income ........ 9,977,712 25,195 (421) 10,002,486
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits ........................ 5,073,770 -- (421) 5,073,349
Interest on Federal Home Loan Bank
advances .................................. 31,754 -- -- 31,754
Interest on other borrowings ................ 4,724 527 -- 5,251
----------- ----------- ----------- -----------
Total interest expense .................... 5,110,248 527 (421) 5,110,354
----------- ----------- ----------- -----------
Net interest income before provisions for
loan losses ........................... 4,867,464 24,668 -- 4,892,132
Provision for loan losses ..................... -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ........................... 4,867,464 24,668 -- 4,892,132
----------- ----------- ----------- -----------
Other income:
Loan servicing fees ......................... 259,752 -- -- 259,752
Gain on sale of loans ....................... 163,866 -- -- 163,866
Income on service corp ...................... 4,955 -- (4,955) --
Other income ................................ 469,876 224,846 (201,216) 493,506
----------- ----------- ----------- -----------
Net other income .......................... $ 898,449 $ 224,846 $ (206,171) $ 917,124
----------- ----------- ----------- -----------
General and administrative:
Salaries and employee ....................... $ 2,295,201 $ 86,288 $ -- $ 2,381,489
Office occupancy ............................ 379,341 4,612 -- 383,953
Advertising ................................. 76,667 -- -- 76,667
Federal insurance premiums .................. 245,196 -- -- 245,196
Loss on sale of real estate acquired in
settlement of loans ....................... (8,098) -- -- (8,098)
Data processing ............................. 179,193 -- -- 179,193
Real estate holding costs, net .............. 21,016 -- -- 21,016
Other general and administrative expenses ... 837,600 149,916 (201,216) 786,300
----------- ----------- ----------- -----------
Total general and administrative expenses . 4,026,116 240,816 (201,216) 4,065,716
----------- ----------- ----------- -----------
Income (loss) before income
tax (expense) benefit ................... 1,739,797 8,698 (4,955) 1,743,540
Income tax expense ............................ (370,029) (3,743) -- (373,772)
----------- ----------- ----------- -----------
Net income ................................ $ 1,369,768 $ 4,955 $ (4,955) $ 1,369,768
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
E-20
<PAGE> 134
PROXY
UTAH FEDERAL SAVINGS BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints __________________ and
_________________, and each of them, as proxies, with full power of
substitution, with authority to represent and vote, as designated below, all
shares of common stock of Utah Federal Savings Bank held of record by the
undersigned on May 16, 1996 at the Special Meeting of Shareholders to be held at
the corporate offices of Utah Federal Savings Bank located at 2279 Washington
Blvd., Ogden, Utah, on __________, 1996, at __:00 a.m., local time, or at any
adjournment or postponement thereof, upon the matters set forth below, all in
accordance with and as more fully described in the Notice of Special Meeting and
Joint Proxy Statement and Prospectus dated _________, 1996.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
The Board of Directors recommends a vote "FOR" the following proposals:
Please mark boxes /X/ or /X/ in blue or black ink.
1. Proposal to approve the Agreement for Merger dated as of February 29,
1996, among Washington Mutual, Inc., Washington Mutual Bank fsb and Utah
Federal Savings Bank, pursuant to which, among other things, (i) Utah
Federal Savings Bank will merge with and into Washington Mutual Bank
fsb, and (ii) all of the outstanding shares of Utah Federal common stock
held by each holder thereof immediately before the effective time of the
merger will be converted into the right to receive $105.63 paid in newly
issued shares of common stock, no par value per share, of Washington
Mutual, Inc., subject to adjustment.
/_/ FOR /_/ AGAINST /_/ ABSTAIN
Date: _______________________, 1996
Signed:
(Please sign exactly as your name appears on
the proxy. When shares are held jointly,
each party should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If a corporation, please sign in full
corporate name, by president or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.)
Please Mark, Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
<PAGE> 135
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS & OFFICERS.
Section 23B.08.320 of the Washington Business Corporation Act (the
"Corporation Act") provides that the personal liability of directors to a
corporation imposed by Section 23B.08.310 of the Corporation Act may be
eliminated by the articles of incorporation of the corporation, except in the
case of acts or omissions involving certain types of conduct. At Article XIII of
its Restated Articles of Incorporation, the Registrant has elected to eliminate
the liability of directors to the Registrant to the extent permitted by law.
Thus, a director of the Registrant is not personally liable to the Registrant or
its shareholders for monetary damages for conduct as a director, except for
liability of the director (i) for acts or omissions that involve intentional
misconduct by the director or a knowing violation of law by the director, (ii)
for conduct violating Section 23B.08.310 of the Corporation Act, or (iii) for
any transaction from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled. If
Washington law is amended to authorize corporate action that further eliminates
or limits the liability of directors, then the liability of Washington Mutual
directors will be eliminated or limited to the fullest extent permitted by
Washington law, as so amended.
Section 23B.08.560 of the Corporation Act provides that if authorized by
(i) the articles of incorporation, (ii) a bylaw adopted or ratified by the
shareholders, or (iii) a resolution adopted or ratified, before or after the
event, by the shareholders, a corporation will have the power to indemnify
directors made party to a proceeding, or to obligate itself to advance or
reimburse expenses incurred in a proceeding, without regard to the limitations
on indemnification contained in Sections 23B.08.510 through 23B.08.550 of the
Corporation Act.
Pursuant to Article X of Washington Mutual's Restated Articles of
Incorporation and Article VIII of Washington Mutual's Bylaws, Washington Mutual
must, subject to certain exceptions, indemnify and defend its directors against
any expense, liability or loss arising from or in connection with any actual or
threatened action, suit or proceeding relating to service for or at the request
of Washington Mutual, including without limitation, liability under the
Securities Act. Washington Mutual is not permitted to indemnify a director from
or on account of acts or omissions of such director which are finally adjudged
to be intentional misconduct, or from or on account of conduct in violation of
RCW 23B.08.310, or a knowing violation of the law from or on account of any
transaction with respect to which it is finally adjudged that such director
received a benefit in money, property or services to which he or she was not
entitled. If Washington law is amended to authorize further indemnification of
directors, then Washington Mutual directors shall be indemnified to the fullest
extent permitted by Washington law, as so amended. Also, pursuant to Article X
of Washington Mutual's Restated Articles of Incorporation and Article VIII of
Washington Mutual's Bylaws, Washington Mutual may, by action of the Board of
Directors of Washington Mutual, provide indemnification and pay expenses to
officers, employees and agents of Washington Mutual or another corporation,
partnership, joint venture, trust or other enterprise with the same scope and
effect as above described in relation to directors. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling Washington Mutual pursuant to the provisions
described above, Washington Mutual has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS.
An index of exhibits appears at page II-3.
ITEM 22. UNDERTAKING.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1993;
II-1
<PAGE> 136
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference in the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 137
FORM S-4 REGISTRATION STATEMENT 10-K
UNDER
THE SECURITIES ACT OF 1933
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
2.1* Agreement for Reorganization between the Registrant and WMSB,
dated October 19, 1994
3.1* Restated Articles of Incorporation of the Registrant, filed
November 28, 1994 (the "Articles")
3.2 Amended and Restated Bylaws of the Registrant (Incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1995, File No. 0-25188)
4.1* Article II, Section D(2) of the Articles, which define the
rights of holders of the Series C Preferred Stock, the Series
D Preferred Stock and the Series E Preferred Stock (included
as Exhibit 3.1 hereto)
4.2* Rights Agreement, dated October 16, 1990
4.3* Amendment No. 1 to Rights Agreement, dated October 31, 1994
4.4* Supplement to Rights Agreement, dated November 29, 1994
4.5 Form of Indenture between the Registrant and Harris Trust and
Savings Bank, as Trustee for the Debt Securities (Incorporated
by reference to Washington Mutual, Inc. Registration Statement
on Form S-3, registration no. 33-93850)
5.1 Opinion of Foster Pepper & Shefelman re legality
8.1 Form of Tax Opinion of Foster Pepper & Shefelman
10.1* 1994 Stock Option Plan
10.2* Amended and Restated Incentive Stock Option Plan
10.3* Amended and Restated Restricted Stock Plan (1986)
10.4* Employees' Stock Purchase Program
10.5* Retirement Savings and Investment Plan
10.6* Employee Service Award Plan
10.7* Supplemental Employee Retirement Plan for Salaried Employees
of Washington Mutual
10.8* Employment Contract of Kerry K. Killinger
10.9* Employment Contract of Lee D. Lannoye
10.10* Employment Contract of Deanna Oppenheimer
10.11* Employment Contract of Craig E. Tall
10.12* Employment Contract of S. Liane Wilson
10.13* Lease Agreement between Third and University Limited
Partnership and WMSB, dated September 1, 1988
</TABLE>
II-3
<PAGE> 138
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.14* First Amendment to Stock Purchase Agreement between WMSB,
Washington Mutual, a Federal Savings Bank ("FSB"), RT
Holdings, Inc., Pacific First Financial Corporation, RT
Capital Corporation, RT Finance Corporation and Royal Trustco
Limited, dated April 9, 1993
10.15 Amended and Restated Agreement for Merger among Washington
Mutual, Inc., Washington Mutual Bank, Washington Mutual
Federal Savings Bank and Olympus Capital Corporation and
Olympus Bank, a Federal Savings Bank, dated as of January 20,
1995 (Incorporated by reference to Appendix A to the
Washington Mutual, Inc. Registration Statement on Form S-4,
registration no. 33-57413)
10.16 Agreement for Merger among Washington Mutual, Inc.,
Washington Mutual Bank and Western Bank dated as of October
11, 1995 as amended by Amendment No. 1 to Agreement for
Merger dated as of November 28, 1995 (Incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1995, File No. 0-25188)
13.1 Annual Report of Washington Mutual on Form 10-K for the Fiscal Year Ended
December 31, 1995
13.2 Quarterly Report of Washington Mutual on Form 10-Q for the Quarterly Period
Ended March 31, 1996
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Foster Pepper & Shefelman (contained in opinion to be filed as Exhibit
5.1 hereto)
23.2 Consent of Deloitte & Touche LLP (contained on page II-5)
23.3 Consent of Jones, Jensen & Company (contained on page II-6)
23.4 Consent of Columbia Financial Advisors, Inc. (contained on page II-7)
24.1 Power of Attorney (contained on signature page)
</TABLE>
- ---------------
* Incorporated by reference to the Registrant's filing on Form 8-K dated
November 29, 1994 (File No. 0-75188).
II-4
<PAGE> 139
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in this Registration Statement of
Washington Mutual, Inc. on Form S-4 of our report dated February 14, 1996,
appearing in the Annual Report on Form 10-K of Washington Mutual, Inc. for the
year ended December 31, 1995, and to the reference to us under the heading
"Independent Auditors" in this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
June 5, 1996
II-5
<PAGE> 140
CONSENT OF JONES, JENSEN & COMPANY
Board of Directors
Washington Mutual, Inc.
We consent to the use in this Registration Statement of Washington Mutual, Inc.
on Form S-4, of our report dated May 12, 1996, of Utah Federal Savings Bank and
Subsidiary for the year ended September 30, 1995, appearing in the Proxy
Statement/Prospectus, which is part of the Registration Statement, and to all
references to our firm included in this Registration Statement.
Salt Lake City, Utah
May 31, 1996
Sincerely,
/s/ Jones, Jensen & Company
Jones, Jensen & Company
II-6
<PAGE> 141
CONSENT OF COLUMBIA FINANCIAL ADVISORS, INC.
We hereby consent to all references to our firm and to the inclusion of
our opinion as an exhibit in the Prospectus/Proxy Statement related to the
merger transaction.
/s/ Columbia Financial Advisors, Inc.
Seattle, Washington
May 31, 1996
II-7
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on the 21st day of May, 1996.
WASHINGTON MUTUAL, INC.
By: /s/ Kerry K. Killinger
-------------------------------------
Kerry K. Killinger
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints and
hereby authorizes Kerry K. Killinger and Marc R. Kittner, and each of them, with
the full power of substitution, as attorney-in-fact to sign in such person's
behalf, individually and in each capacity stated below, and to file any
amendments, including post-effective amendments to this Registration Statement.
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated below on the 21st day of May, 1996.
/s/ Kerry K. Killinger /s/ Thomas J. Kappock
- ------------------------------------ ------------------------------------
Kerry K. Killinger Thomas J. Kappock
Chairman, President and Executive Vice President and
Chief Executive Officer; Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
/s/ Douglas G. Wisdorf
------------------------------------
Douglas G. Wisdorf
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ Douglas P. Beighle /s/ William P. Gerberding
- ------------------------------------ ------------------------------------
Douglas P. Beighle William P. Gerberding
Director Director
/s/ Herbert M. Bridge /s/ Samuel B. McKinney
- ------------------------------------ ------------------------------------
Herbert M. Bridge Dr. Samuel B. McKinney
Director Director
/s/ Michael K. Murphy
- ------------------------------------ ------------------------------------
Roger H. Eigsti Michael K. Murphy
Director Director
<PAGE> 143
/s/ John W. Ellis
- ------------------------------------ ------------------------------------
John W. Ellis Louis H. Pepper
Director Director
/s/ Daniel J. Evans /s/ William G. Reed, Jr.
- ------------------------------------ ------------------------------------
Daniel J. Evans William G. Reed, Jr.
Director Director
/s/ Anne V. Farrell /s/ James H. Stever
- ------------------------------------ ------------------------------------
Anne V. Farrell James H. Stever
Director Director
<PAGE> 144
FORM S-4 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
5.1 Opinion of Foster Pepper & Shefelman
8.1 Form of Tax Opinion of Foster Pepper & Shefelman
13.1 Annual Report of Washington Mutual on Form 10-K for the Fiscal Year
Ended December 31, 1995
13.2 Quarterly Report of Washington Mutual on Form 10-Q for the Quarterly
Period Ended March 31, 1996
21.1 List of Subsidiaries of the Registrant
23.2 Consent of Deloitte & Touche LLP (contained on page II-5)
23.3 Consent of Jones, Jensen & Company (contained on page II-6)
23.4 Consent of Columbia Financial Advisors, Inc. (contained on page II-7)
</TABLE>
<PAGE> 1
EXHIBIT 5.1
OPINION OF FOSTER PEPPER & SHEFELMAN
June 5, 1996
Board of Directors
Washington Mutual, Inc.
1201 Third Avenue
Seattle, Washington 98101
Ladies and Gentlemen:
We have acted as counsel for Washington Mutual, Inc., a Washington
corporation (the "Company") in connection with the proposed merger (the
"Merger") of Utah Federal Savings Bank ("Utah Federal") with and into Washington
Mutual Bank fsb, a wholly-owned subsidiary of the Company ("WMBfsb"), in
accordance with the terms of that certain Agreement for Merger dated as of
February 29, 1996 among the Company, WMBfsb and Utah Federal (the "Merger
Agreement") and the preparation and filing of a Registration Statement
("Registration Statement") on Form S-4 under the Securities Act of 1933, as
amended, for up to 555,536 shares (the "Shares") of the Company's common
stock, no par value per share, that are issuable to shareholders of Utah Federal
as consideration for the surrender of their shares of Utah Federal common stock
in the Merger. We have examined the Registration Statement, the Merger Agreement
and such other documents and records as we deem necessary for the purpose of
this opinion.
Based on the foregoing, we are of the opinion that upon the issuance of
the Shares in accordance with the terms of the Merger Agreement and the
Registration Statement, the Shares will be legally issued, fully paid and
nonassessable.
We hereby consent to the filing of this Opinion as an Exhibit to the
Registration Statement and to the reference to our firm in the Proxy
Statement/Prospectus included in the Registration Statement under the caption
entitled "Legal Matters."
Very truly yours,
FOSTER PEPPER & SHEFELMAN
/s/ Robert C. Seidel
<PAGE> 1
EXHIBIT 8.1
TAX OPINION OF FOSTER PEPPER & SHEFELMAN
_________ ___, 1996
Washington Mutual, Inc.
1201 Third Avenue, Suite 1500
Seattle, Washington 98101
Attention: Craig E. Tall
Utah Federal Savings Bank
2279 Washington Boulevard
Ogden, Utah 84401
Attention: L. Brent Hoggan
Gentlemen:
Washington Mutual/Utah Federal Merger
Based upon our review of the Proxy Statement/Prospectus dated ________ ___,
1996, certain other facts and documents we consider relevant, and certain
representations made to us by Washington Mutual, Utah Federal and Mr. Ernest J.
Miller, under federal income tax laws in effect on the date hereof, in our
opinion the merger of Utah Federal with and into WMBfsb (the "Merger"), if it
occurs, will have the federal income tax consequences set forth below, subject
to the conditions and qualifications described in the "Federal Income Tax
Consequences" portion of the Proxy Statement/ Prospectus:
(i) the Merger will qualify as a "reorganization" under Section
368(a) of the Code;
(ii) no gain or loss will be recognized by a shareholder of Utah
Federal who, pursuant to the Merger Agreement, exchanges
shares of Utah Federal Common Stock solely for shares of
Washington Mutual Common Stock;
(iii) subject to the provisions and limitations of Section 302 of
the Code, gain or loss will be recognized with respect to
each shareholder of Utah Federal who holds shares of Utah
Federal Common Stock and who, pursuant to the exercise of
dissenter rights, exchanges such shares solely for cash;
(iv) the payment of cash to a Utah Federal Shareholder in lieu of
a fractional share of Washington Mutual Common Stock will be
treated as a distribution in redemption of the fractional
share interest, such shareholder will be taxed on the cash
received in accordance with the provisions and limitations
of Section 302 of the Code and, in general, such
distribution in redemption will be recognized and treated as
a payment in exchange for such fractional share interest;
(v) the aggregate basis of the Washington Mutual Common Stock
received by a Utah Federal Shareholder who exchanges Utah
Federal Common Stock for Washington Mutual Common Stock will
be the same as the aggregate basis of the Utah Federal
Common Stock surrendered in exchange therefor (reduced by
the basis allocable to any fractional share for which cash
is received);
<PAGE> 2
(vi) the holding period of the Washington Mutual Common Stock
received by a Utah Federal Shareholder will include the
period during which the Utah Federal Common Stock
surrendered in exchange therefor was held if such Utah
Federal Common Stock was held by such Utah Federal
Shareholder as a capital asset at the Effective Time; and
(vii) gain or loss recognized due to the payment of cash in lieu
of a fractional share or due to Utah Federal Common Stock
being converted into cash by exercise of dissenter rights
generally will be capital gain or loss if the shares of Utah
Federal Common Stock were held by the Utah Federal
Shareholder as a capital asset. For such shareholders, if
the shares had been held for more than one year, the gain or
loss will be long-term capital gain or loss. Whether or not
the character of any taxable gain or loss is material to an
Utah Federal Shareholder depends upon the particular
circumstances of the shareholder.
Capitalized terms used but not otherwise defined in this letter have the
meanings given to them in the Proxy Statement/ Prospectus.
Our opinion is intended solely for the benefit of Washington Mutual and Utah
Federal and may not be relied upon for any other purpose or by any other person
or entity or made available to any other person or entity without our prior
written consent, except that a copy of this opinion may, as required, be
delivered to any appropriate governmental regulatory agency.
Very truly yours,
Carl J. West
<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Fiscal Year Ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to :
Commission file number 0-25188
WASHINGTON MUTUAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-1653725
---------------- ----------------------
(State or Other (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation or
Organization)
1201 Third Avenue
Seattle, Washington 98101
--------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
(206) 461-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
- --------------------------------------------------------------------------------------------------
<S> <C>
Common Stock The Nasdaq Stock Market
9.12% Noncumulative Perpetual Preferred Stock, Series C The Nasdaq Stock Market
$6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D The Nasdaq Stock Market
7.60% Noncumulative Perpetual Preferred Stock, Series E The Nasdaq Stock Market
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1996:
COMMON STOCK -- $2,174,372,773
The number of shares outstanding of the issuer's classes of common stock as of
January 31, 1996:
COMMON STOCK -- 72,030,845
DOCUMENTS INCORPORATED BY REFERENCE
- --------------------------------------------------------------------------------
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 16, 1996, are incorporated by reference into Part
III.
<PAGE> 2
WASHINGTON MUTUAL, INC.
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I...................................................................................... 1
ITEM 1. BUSINESS.......................................................................... 1
General................................................................................ 1
The Reorganization..................................................................... 2
Washington Mutual's Operating Subsidiaries............................................. 2
Lending Activities..................................................................... 3
Asset Quality.......................................................................... 6
Provision for Loan Losses and Reserve for Loan Losses.................................. 7
Other Investments...................................................................... 8
Sources of Funds....................................................................... 9
Asset and Liability Management......................................................... 10
Business Combinations.................................................................. 11
Employees.............................................................................. 12
Taxation............................................................................... 12
Environmental Regulation............................................................... 12
Regulation and Supervision............................................................. 13
Competitive Environment................................................................ 18
Principal Officers..................................................................... 19
ITEM 2. PROPERTIES........................................................................ 20
ITEM 3. LEGAL PROCEEDINGS................................................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................... 20
PART II..................................................................................... 21
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS... 21
ITEM 6. SELECTED FINANCIAL DATA........................................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF
OPERATIONS........................................................................ 24
Results of Operations.................................................................. 24
Review of Financial Position........................................................... 31
Asset Quality.......................................................................... 37
Provision for Loan Losses and Reserve for Loan Losses.................................. 39
Interest Rate Risk Management.......................................................... 40
Liquidity.............................................................................. 41
Capital Requirements................................................................... 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................... 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................................ 42
PART III.................................................................................... 43
PART IV..................................................................................... 43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................. 43
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Washington Mutual, Inc. ("WMI" and, together with its subsidiaries,
"Washington Mutual" or the "Company") is a Washington corporation that provides
a broad range of financial services to individuals and small businesses in
Washington, Oregon, Utah, Montana and Idaho through its subsidiary operations.
The principal assets of WMI are its principal subsidiaries, including its bank
subsidiaries, Washington Mutual Bank ("WMB") and Washington Mutual Bank fsb
("WMBfsb"), and its insurance subsidiary, WM Life Insurance Co. ("WM Life").
Financial services of the Company include the traditional savings bank
activities of accepting deposits from the general public and making residential
loans, consumer loans and limited types of commercial real estate loans
(primarily multi-family) and, more recently, certain commercial banking
activities as discussed below. Washington Mutual, through other subsidiaries,
also issues and markets annuity contracts and is the investment advisor to and
distributor of mutual funds.
Thrift institutions such as Washington Mutual traditionally have funded
loans to homeowners with short-term savings deposits and borrowings. During any
given time period, a large volume of savings deposits and borrowings reprice,
but only a comparatively smaller volume of loans mature or reprice. As a
consequence, the loans still outstanding must be financed with new or repriced
liabilities bearing interest rates, which, depending on market conditions, may
be considerably higher than the original rate. This mismatch between asset and
liability maturities benefits a thrift institution when market interest rates
fall, but adversely affects profitability when interest rates rise. (For a
discussion of the impact of interest rates on the Company's financial
performance, see "Management's Discussion and Analysis of Financial Position and
Results of Operations - Results of Operations and Interest Rate Risk
Management.")
On August 31, 1995, Washington Mutual diversified its business mix through
a merger of Enterprise Bank ("Enterprise") with and into WMB. Enterprise was a
Seattle-area commercial bank that focused on small- to mid-size commercial
business clients. On January 31, 1996, Western Bank ("Western") of Coos Bay,
Oregon merged with and into WMB. With 42 offices in 35 communities, Western was
Oregon's largest community-based commercial bank. These two mergers provide the
Company with access to the higher growth business segment of commercial banking.
Because the Western merger was not completed until January 31, 1996,
Western's results of operations and analysis of financial position are not
included in the financial information contained in the 1995 Form 10-K.
During the first half of 1993, Washington Mutual merged with Pioneer
Savings Bank ("Pioneer") and acquired Pacific First Bank ("Pacific First"). As a
result of these business combinations, the Company became substantially larger,
with significant operations in Oregon as well as Washington. In 1994 and 1995,
Washington Mutual continued to expand its operations through business
combinations with other financial institutions in Washington and Utah. See
"Business Combinations."
At December 31, 1995, Washington Mutual, through its subsidiaries, operated
a total of 248 financial centers and 23 loan centers. At December 31, 1995,
Washington Mutual had total consolidated assets of $21.6 billion, total deposits
of $10.6 billion and stockholders' equity of $1.6 billion.
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.
1
<PAGE> 4
THE REORGANIZATION
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"). The Reorganization was completed in November 1994 through the
merger of WMSB into WMB, the Company's Washington state-chartered savings bank
subsidiary, with WMB as the surviving entity. As a result of the Reorganization,
WMI became the parent company of the companies of which WMSB was, prior to the
Reorganization, the parent company. Because WMI owns WMB and WMBfsb, WMI is a
savings and loan holding company under federal law and, as such, is subject to
regulation by the Office of Thrift Supervision ("OTS").
As a result of the Reorganization, all shareholders of WMSB became
shareholders of WMI. Each outstanding share of WMSB common stock was converted
into one share of WMI common stock, no par value per share, and each outstanding
share of WMSB 9.12% Noncumulative Perpetual Preferred Stock, Series C; $6.00
Noncumulative Convertible Perpetual Preferred Stock, Series D; and 7.60%
Noncumulative Perpetual Preferred Stock, Series E, was converted on a
share-for-share basis into WMI 9.12% Noncumulative Perpetual Preferred Stock,
Series C; $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D;
and 7.60% Noncumulative Perpetual Preferred Stock, Series E, with substantially
the same relative rights, privileges and preferences.
Except where otherwise indicated, references hereinafter to "Washington
Mutual" or the "Company" refer to both (i) WMI and its consolidated subsidiaries
after the consummation of the Reorganization and (ii) WMSB and its consolidated
subsidiaries prior to the consummation of the Reorganization. Hereinafter, "WMB"
is used to refer both to WMB and its predecessor, WMSB.
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 the traditional savings bank
activities of accepting deposits from the general public and making residential
mortgage loans, consumer loans and limited types of commercial real estate
loans, primarily multi-family. Beginning in the latter half of 1995, WMB,
through its merger with Enterprise, diversified its traditional activities into
commercial lending.
On December 1, 1995, Washington Mutual, a Federal Savings Bank ("FSB"), a
federally chartered savings bank subsidiary of WMB with operations in Washington
and Oregon and total assets of $8,566.8 million at September 30, 1995, merged
with and into WMB, with WMB as the surviving entity. At December 31, 1995, WMB
had total assets of $19,928.8 million and operated 225 financial centers, of
which 154 are in Washington and 71 are in Oregon, and 21 loan centers, of which
14 are in Washington and seven are in Oregon.
WMB operates under Title 32 (Mutual Savings Banks) of the Revised Code of
Washington. Its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF").
Washington Mutual Bank fsb
WMBfsb is a federal savings bank formed in 1994 to participate in a
supervisory acquisition of certain branches of a federal savings bank from the
Resolution Trust Corporation. WMBfsb's principal business includes the
traditional savings association activity of accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family. At December 31, 1995,
WMBfsb had assets of $654.3 million and operated 23 financial centers, of which
16 are in Utah, four are in Idaho, two are in Montana and one is in Oregon, and
operated one loan center in Idaho and one in Utah. WMBfsb's deposits are insured
by the FDIC through the SAIF.
WM Life Insurance Company
WM Life is an Arizona-domiciled life insurance company. WM Life is
authorized under state law to issue annuities in seven states. In addition, WM
Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed
under state law to
2
<PAGE> 5
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.
Murphey Favre, Inc.
Murphey Favre, Inc. ("Murphey Favre") is a registered broker-dealer that
offers a broad range of securities brokerage services, including distribution of
mutual funds. Murphey Favre has seven free-standing offices, and Murphey Favre
representatives are available for consultation regularly or by appointment in
many of the Company's financial centers.
Composite Research & Management Co.
Composite Research & Management Co. ("Composite Research") is a registered
investment advisor. Composite Research is the investment advisor of eight mutual
funds and offers separate investment management for large accounts. As of
December 31, 1995, Composite Research had a total of $1,268.5 million in funds
under management in the eight mutual funds.
LENDING ACTIVITIES
General
The Company's lending activities are carried on through its banking
subsidiaries, WMB and WMBfsb. As of December 31, 1995, the Company's total loan
portfolio (carried at historical cost) of $12,673.8 million (exclusive of
reserve for loan losses) included $7,749.0 million in mortgage loans secured by
first liens on 1-4 family residential properties; $578.6 million in residential
construction loans; $1,690.9 million in mortgage loans secured by commercial
properties such as apartment buildings, office buildings, warehouses, shopping
centers and medical office buildings; $2,597.3 million in consumer loans; and
$58.0 million in commercial loans. (For a discussion of the fair value of the
loan portfolio, see "Financial Statements and Supplementary Data -- Note 27:
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. WMBfsb has 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, mortgage companies and
life insurance companies (primarily in the commercial real estate area) and
indirectly with government-sponsored agencies such as the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). 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 agencies
in establishing rates. The condition of the construction industry and the demand
for housing also directly affect residential lending volumes.
During 1995, Washington Mutual took steps to diversify its operations by
acquiring two commercial banks through mergers with and into WMB. In August, WMB
merged with Enterprise, a Bellevue, Washington-based commercial bank
specializing in lending to small- and mid-size businesses. In October,
Washington Mutual signed an agreement to merge WMB with Western, a commercial
bank with branch operations throughout Oregon. The Western merger was completed
on January 31, 1996.
Residential Real Estate Loans
The Company makes available to borrowers in its primary consumer market
area 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
adjustable-rate mortgage loans ("ARMs"). ARMs are advantageous to the Company
because adjustable-rate loans better match its natural liability base. However,
Washington Mutual's ability to originate ARMs in lieu of fixed-rate loans has
varied in response to
3
<PAGE> 6
changes in market interest rates. Between 1992 and 1993, ARMs constituted less
than 25 percent of residential loan originations, reflecting continuing lower
market interest rates. When interest rates rose in 1994, ARMs totaled 62 percent
of residential loan originations. However, interest rates declined mid-1995 and,
as a result, ARMs totaled 32 percent of residential loan originations during
1995.
Under the Company's current ARM programs, the borrower may choose among
loans that have the initial interest rate fixed for one, three or five years
before the adjustments begin. Currently ARMs are indexed to the one-year
Treasury Securities Index and have annual caps of two percent. Under most
options, the borrower may elect, between the sixth and the sixtieth months, to
convert to a fixed-rate loan payable over the remainder of the original term.
There is no conversion fee, and the fixed interest rate is indexed to the
then-current required net yield for loans sold to FNMA.
Originations in 1993 and early 1994 included significant refinancing
activity that was generated by low market interest rates. Higher interest rates
in 1994 curtailed refinancing activity for the year. Consequently, total lending
volumes in 1994 were below those in 1993. Refinancings increased again during
the second half of 1995 as market interest rates declined.
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.
Residential loans are originated using standard FNMA and FHLMC applications and
appraisal forms. All loans are subject to underwriting review and approval by
various levels of Company personnel, depending on the size of the loan.
Residential loan applications come in through various channels, primarily the
Company's loan centers and financial centers.
Mortgage insurance currently is required on all residential real estate
loans originated at a loan-to-value ratio of 90 percent and above. Any
exceptions must be reported to the board of the subsidiary bank issuing the
credit. As of December 31, 1995, 8 percent of the residential real estate loan
portfolio had loan-to-value ratios of 90 percent or above at origination and
were without mortgage insurance.
The Company from time to time, depending upon its asset and liability
management strategy, converts a portion of its 15-year and 30-year, fixed-rate
mortgage production into either FHLMC participation certificates, Government
National Mortgage Association ("GNMA") mortgage-backed securities or FNMA
conventional mortgage-backed securities, primarily for sale in the secondary
market. 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.
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.
Primarily as a result of recent business combinations, the size of the
Company's residential loan portfolio has increased dramatically. While there has
been some shifting in the geographic dispersement of the portfolio toward
California and other states, the bulk of the Company's residential loan
portfolio remains focused in Washington and Oregon (90 percent of the portfolio
at December 31, 1995). Although the residential loans made by banks acquired by
Washington Mutual were not underwritten according to the specific guidelines of
the Company, they generally were underwritten to conform to FNMA and FHLMC
standards.
Residential real estate loans totaled $7,749.0 million or 61 percent of the
loan portfolio at December 31, 1995, compared with $8,004.3 million or 64
percent a year earlier.
Residential Construction Loans
Washington Mutual provides 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.
4
<PAGE> 7
Residential construction loans totaled $578.6 million or 5 percent of the
loan portfolio at December 31, 1995, compared with $516.5 million or 4 percent a
year earlier. At year-end 1995, 57 percent of the portfolio were custom
construction loans and 43 percent were speculative construction loans.
Commercial Real Estate Loans
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. The Company's
existing commercial real estate loan portfolio is principally concentrated in
Washington, Oregon and California.
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.
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.
During the past few years, Washington Mutual has shifted its commercial
real estate lending to focus on small- to medium-size apartment lending ($2.5
million or less). During 1995, originations of apartment loans totaled $96.6
million, up from $92.1 million during 1994. Other commercial real estate lending
totaled $22.9 million versus $23.0 million for the same time periods. The shift
to apartment lending will be somewhat moderated by the Company's diversification
into commercial banking; both the Enterprise and Western commercial real estate
portfolios contain predominately nonresidential commercial real estate.
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.
In 1993, the acquisition of Pacific First added approximately $966.1
million to the Company's commercial real estate loan portfolio. The acquisition
of Pacific First increased the commercial real estate portfolio in California by
approximately one-third or $90.0 million. The Company's Special Credits
department closely monitors this portfolio and regularly revises risk
assessments. The Company believes that, although they do not conform to its
guidelines, the commercial real estate loans acquired from Pacific First were
generally underwritten according to standards and procedures that are acceptable
to management.
As of December 31, 1995, loans within Washington and Oregon accounted for
77 percent of the commercial real estate loan portfolio and loans on
multi-family projects comprised 56 percent of the portfolio.
At December 31, 1995, loans on apartment buildings totaled $938.5 million
and loans on other commercial real estate totaled $752.4 million. Commercial
real estate loans totaled $1,690.9 million or 13 percent of the total loan
portfolio at December 31, 1995, compared with $1,675.4 million or 13 percent a
year earlier.
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<PAGE> 8
Manufactured Housing, Second Mortgage and Other Consumer Loans
The Company offers consumer loan programs in Washington, Oregon, Utah,
Montana and Idaho 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 rapidly in
recent years. 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 originated 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. As of December 31, 1995, the
Company's portfolio included $85.5 million of recreational vehicle loans, $53.1
million of boat loans and $58.5 million of automobile loans. Some of the Pacific
First recreational vehicle and boat loans were for amounts greater than
$100,000; the additional risk inherent in these loans was considered in
determining the level of the reserve for loan losses acquired from Pacific
First. The other acquisitions completed from 1993 through 1995 did not have a
material effect on the Company's consumer loan portfolio.
Consumer loans totaled $2,597.3 million or 20 percent of the loan portfolio
at December 31, 1995, compared with $2,336.0 million or 19 percent a year
earlier.
Commercial Business
The Company's commercial loans are mainly business loans secured by a
variety of business or personal assets. At December 31, 1995, the majority of
commercial loans were business loans resulting from the Enterprise merger.
Commercial business loans totaled $58.0 million or less than 0.5 percent of
Washington Mutual's loan portfolio at December 31, 1995, up from $2.4 million a
year earlier. Management expects the merger with Western to increase the
commercial business loan portfolio to approximately 3 percent of the loan
portfolio.
ASSET QUALITY
Washington Mutual reviews its assets for weakness on a regular basis.
Adequate 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 are 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. Classified assets consist of nonaccrual loans, loans under
foreclosure, real estate owned ("REO") and performing loans (including
substandard trouble debt restructurings) and securities that exhibit credit
quality weaknesses.
The principal measures of asset problems are the levels of nonaccruing
loans, loans under foreclosure and REO, the size of the provision for loan
losses, loan charge-offs and the size of the write-downs in the value of REO.
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
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<PAGE> 9
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).
On January 1, 1995, Washington Mutual adopted Statement of Financial
Accounting Standards ("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 measured
at fair value or at the lower of cost or fair value, leases, and debt securities
(as defined by SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities). It 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. While an
impaired loan will always be a classified asset, it may or may not be
nonperforming. 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.
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 part of the process of determining the adequacy of the reserve for loan
losses, the Company reviews its loan portfolio for specific weaknesses. This
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, although there can
be no assurance that the reserve level is in fact adequate. A portion of the
reserve is then allocated to reflect the potential loss exposure of those
specific weaknesses. 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.
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<PAGE> 10
Residential real estate and consumer loans are not individually analyzed
for loss exposure because of the significant number of loans, their relatively
small balances and historically low level of losses.
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 -- Provision for Loan Losses and Reserve for Loan
Losses.")
OTHER INVESTMENTS
General
WMI 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. (See "Regulation and Supervision.") WMBfsb has
authority to make investments specified by HOLA and applicable regulations,
including 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. (See "Regulation and
Supervision -- Regulation of Nonbanking Affiliates.")
The Company's investments are in the form of mortgage-backed securities or
corporate debt or equity securities. At December 31, 1995, mortgage-backed
securities purchased from third parties or from securitizing the Company's
fixed-rate loan portfolio accounted for 87 percent of the total investment
portfolio. Investments in corporate debt and equity securities have different
risks than investments in real estate loans. 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 impact on the Company in 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.
Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No.
115. This statement required investment and equity securities to be segregated
into trading, held-to-maturity and available-for-sale categories.
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.
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 very 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. These circumstances include a significant deterioration of the
issuer's creditworthiness; changes in tax law that reduce the tax-exempt status
of interest on the debt security; major business combinations that require a
significant disposition of assets to maintain the enterprise's existing interest
rate risk or credit risk policy; and certain changes in statutory or regulatory
investment authority or capital requirements. Any security that might be sold in
response to changes in market interest rates, changes in the security's
prepayment risk, increases in loan demand or general liquidity needs, or similar
factors should not be classified as held-to-maturity. Because a company has the
ability and intent to hold these securities to maturity, unrealized gains or
losses are not recognized in the financial statements and will not be recognized
unless, for some unforeseen reason, a portion of the portfolio is liquidated.
Securities not classified as either trading or held-to-maturity are
considered to be available-for-sale. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity (net of tax) until
realized. (Under regulations adopted by the FDIC and OTS during fourth quarter
1994, this component is not included in regulatory capital calculations.)
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<PAGE> 11
During 1995, the Financial Accounting Standards Board ("FASB") issued a
report entitled A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities, Questions and Answers 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. Washington Mutual
elected to take advantage of this opportunity and reclassified $3,471.0 million
of its held-to-maturity securities into the available-for-sale category on
December 1, 1995. Of the securities transferred, approximately 80 percent were
fixed-rate securities. It is anticipated that these fixed-rate securities will
be replaced with adjustable-rate agency securities, adjustable- and fixed-rate
private-issue (nonagency) mortgage-backed securities ("private-issue
securities"), collateralized mortgage obligations, and purchased loan pools as
the fixed-rate securities pay down or are sold as market conditions permit. This
portfolio restructuring strategy is intended to reduce the Company's interest
rate sensitivity while simultaneously protecting its yield.
The available-for-sale portfolio is now much larger as a result of the
transfer on December 1, 1995. Therefore, the Company redesignated $1,567.0
million of interest rate exchange agreements and interest rate cap agreements
from short-term borrowings and deposits to the available-for-sale portfolio.
While this is not expected to fully offset the impact of further changes in
interest rates on the portfolio, it will help to reduce the impact of future
changes. As of December 31, 1994, a net unrealized loss (on an after-tax basis)
of $29.0 million associated with the available-for-sale securities was included
as a separate component of stockholders' equity. But as a result of interest
rate declines during 1995 and the reclassification of securities into the
available-for-sale portfolio, the valuation reserve for the available-for-sale
portfolio increased to a net unrealized gain (on an after-tax basis) of $78.4
million as of December 31, 1995.
As of December 31, 1995, the Company's investment portfolio included $171.4
million of held-to-maturity securities (with a fair value of $185.1 million),
$7,689.0 million of available-for-sale securities and $238,000 of trading
account securities.
(See "Management's Discussion and Analysis of Financial Position and
Results of Operations -- Investment Activities" for further discussion.)
SOURCES OF FUNDS
Deposits
Washington Mutual competes with other financial institutions in attracting
savings deposits. WMB accepts deposits at 225 financial centers in Washington
state and Oregon. WMBfsb accepts deposits at 23 financial centers in Utah,
Idaho, Montana and Oregon. 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 December 31, 1995, the Company's deposits totaled
$10,596.7 million. During 1993, the acquisition of Pacific First and the merger
with Pioneer added $3,831.7 million and $659.5 million in deposits. Additional
business combinations during 1994 and 1995 added $211.5 million and $417.1
million in deposits. Excluding the balance of combined deposits at their
combination date and interest credited, the Company's deposits decreased
$1,097.3 million from December 31, 1992 to December 31, 1995.
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. At
December 31, 1995, there were $820.3 million in savings accounts, $1,195.8
million in checking accounts and $2,795.1 million in MMDAs.
Washington Mutual offers a broad range of retail time deposits and at
December 31, 1995 had a total of $5,271.2 million in retail time deposits, of
which $2,417.0 million had original maturities longer than one year. The most
popular time deposit is Investor's Choice, which is a retail 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. At December 31, 1995, Investor's Choice time
deposits totaled $5,115.9 million.
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. At December 31, 1995,
there was a total of $514.3 million in wholesale time deposits.
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<PAGE> 12
Annuities
WM Life and Empire issue fixed annuity contracts 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 issued primarily in Washington and Oregon. At December 31, 1995, the policy
value of such contracts was $809.1 million. WM Life also issues variable annuity
contracts. At December 31, 1995, the policy value of such contracts was $46.4
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) after the
date the annuity contract was issued.
Borrowings
In addition to accepting deposits, the Company borrows funds. 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 Federal
Home Loan Bank of Seattle ("FHLB"). 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 Company actively engages in repurchase agreements with authorized
broker-dealers and major customers selling U.S. government and corporate
securities and mortgage-backed securities under agreements to repurchase them at
a future date. As of December 31, 1995, the Company had $3,962.4 million of such
borrowings.
WMB, WMBfsb and WM Life are members of the FHLB. 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, WM Life and
WMBfsb had credit lines of 17 percent, 19 percent and 45 percent of total
regulatory assets. At December 31, 1995, advances under these credit lines
totaled $3,711.4 million and are 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
Securities and Exchange Commission ("SEC") for the offering, on a delayed or
continuous basis, of up to $250 million of debt securities or the Company's
common stock. The debt securities will be unsecured and will either rank prior
to all subordinated indebtedness of the Company or be subordinated in right of
payment to other debt obligations and may be issued in one or more series of
debentures, notes or other unsecured obligations of the Company, any of which
may be convertible into common stock of the Company. During 1995, the Company
issued $150.0 million of 7.25% senior notes due in 2005 under this registration.
The senior notes are not redeemable prior to maturity and are not subject to
retirement through a sinking fund.
In addition to the borrowings discussed above, at December 31, 1995, the
Company was in a position to obtain an additional $5,424.1 million, 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
Operations -- Liquidity.")
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. Historically, the Company has had a mismatch between the
maturities of its assets and liabilities because its customers have
traditionally preferred short-term deposits and long-term fixed-rate loans. This
mismatch generally is not a problem when interest rates are stable or declining.
When interest rates increase, however, the interest paid to depositors and on
borrowings tends to increase much more quickly than the interest earned on loans
and investments, reducing the Company's net interest spread and impacting its
net interest income. 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.
One means of reducing the effect of interest rate volatility on net
interest income is to shorten asset durations. In recent years, the Company has
attempted to do this by emphasizing ARMs and short-term consumer loan programs.
During periods of moderate to high market interest rates, originations of ARMs
have been well received by customers. But during periods of
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<PAGE> 13
low market interest rates, customers have preferred fixed-rate mortgage loans.
At year-end 1995, the portion of the Company's loans and mortgage-backed
securities that was adjustable-rate was approximately 40 percent, reflecting the
low interest rate environment throughout much of the year.
The $3,471.0 million of securities reclassified from Washington Mutual's
held-to-maturity category to its available-for-sale category in 1995 (discussed
above in "Other Investments") were primarily fixed-rate mortgage-backed
securities. The reclassification will give 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.
Also, the Company anticipates, as a part of its program to reduce interest rate
risk, it may securitize and sell a portion of its fixed-rate loan production and
purchase adjustable-rate securities and loans.
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 December 31,
1995, the Company's MMDAs accounted for $2,795.1 million or 28 percent of total
retail deposits and retail time deposits with maturities less than one year
totaled $2,854.2 million or 29 percent of total retail deposits.
In addition to managing the terms of its actual assets and liabilities,
from time to time, the Company uses derivative instruments, such as interest
rate exchange agreements and interest rate cap agreements, to manage interest
rate risk.
As of December 31, 1995, interest-sensitive assets of $9,174.3 million and
interest-sensitive liabilities of $12,296.2 million were scheduled to mature or
reprice within one year. A conventional measure of interest rate sensitivity for
thrift institutions is to divide the difference between assets maturing or
repricing within one year and total liabilities maturing or repricing within one
year by total assets -- "one-year gap". At December 31, 1995, the Company had
entered into interest rate exchange agreements and interest rate cap agreements
with notional values of $1,165.0 million and $2,550.0 million. Without these
instruments, the Company's one-year gap at December 31, 1995, would have been a
negative 22.9 percent as opposed to a negative 14.4 percent. (See "Management's
Discussion and Analysis of Financial Position and Results of
Operations -- Interest Rate Risk Management" and "Financial Statements and
Supplementary Data -- Note 15: Interest Rate Risk Management" for a discussion
of the use of derivative instruments.)
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, the FSB and WMBfsb,
primarily for regulatory reasons.
The following table summarizes Washington Mutual's business combinations
since April 1988:
<TABLE>
<CAPTION>
Number of
Acquisition Name Date Acquired Loans Deposits Assets Branches
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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 Savings Bank March 1, 1993 624.5 659.5 926.5 17
Pacific First Bank April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2) April 15, 1994 -- 42.2 -- 3
Summit Savings Bank Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings Bank April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank Aug. 31, 1995 92.8 138.5 153.8 1
</TABLE>
- -------------
(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.
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<PAGE> 14
(See "Financial Statements and Supplementary Data -- Note 25: Business
Combinations" for a discussion of the accounting treatment of the acquisition of
Pacific First and the merger with Pioneer.)
On October 11, 1995, Washington Mutual announced the signing of a merger
agreement with Western, an Oregon commercial bank. At December 31, 1995, Western
had assets of $787.1 million, deposits of $709.7 million and stockholders'
equity of $68.6 million. Western operated 42 offices in Oregon. On January 31,
1996, the transaction was completed when Western merged with and into WMB.
On December 1, 1995, the FSB, a federally chartered savings bank subsidiary
of WMB with operations in Washington and Oregon and total assets of $8,566.8
million at September 30, 1995, merged with and into WMB, with WMB as the
surviving entity.
EMPLOYEES
The number of full-time equivalent employees at the Company decreased from
4,371 at December 31, 1994 to 4,364 at December 31, 1995. (See "Management's
Discussion and Analysis of Financial Position and Results of Operations --
Nonbanking Subsidiary Operations.") The Company believes that it has been
successful in attracting quality employees and believes its employee relations
are excellent.
TAXATION
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 bad debt reserve deduction and interest expense
rules pertaining to certain tax exempt income applicable to banks, the Company
is subject to federal income tax, under existing provisions of the Code, in
generally the same manner as other corporations. Legislation has been introduced
in Congress that would do away with the thrift bad debt deduction and require
thrifts to calculate a bad debt deduction based on actual losses. If enacted,
such legislation would require the Company to recapture its post-1987 thrift bad
debt reserves over a six-year period. As of December 31, 1995, the post-1987
reserve totaled $67.4 million. Such legislation would not require the Company to
recapture $220.6 million of pre-1988 thrift bad debt reserve. The post-1987
reserve has been fully provided for in the deferred tax liability and, thus,
enactment of the legislation as currently proposed would have no adverse effect
on the Company's results of operations or financial condition. (See "Financial
Statements and Supplementary Data -- Note 17: Income Taxes and Note 19:
Stockholders' Equity" for further discussion.)
The state of Washington does not currently have a corporate income tax. A
business and occupation tax based on a 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 Oregon, Utah, Idaho and Montana have corporate income taxes,
which are imposed on companies doing business in those states. As the Company's
operations increase in these states, the corporate income taxes have an
increasing effect on the Company's results of operations or financial condition.
If and to the extent the Company carries on activities in other states, it
may in certain circumstances be subject to such states' tax laws.
ENVIRONMENTAL REGULATION
The business of the Company is affected from time to time by federal and
state laws and regulations relating to hazardous substances. Under the federal
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), owners and operators of properties containing hazardous substances
may be liable for the costs of cleaning up the substances. CERCLA and similar
state laws can affect the Company both as an owner of branches and other
properties used in its business and as a lender holding a security interest in
property that is found to contain hazardous substances. While CERCLA contains an
exemption for holders of security interests, the exemption is not available if
the holder participates in the management of a property, and some courts have
broadly defined what constitutes participation in management of a property.
Moreover, CERCLA and similar state statutes can affect the Company's decision of
whether or not to foreclose on a property. Before foreclosing on commercial real
estate, it is the Company's general policy to obtain an environmental report,
thereby increasing
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<PAGE> 15
the costs of foreclosure. In addition, the existence of hazardous substances on
a property securing a troubled loan may cause the Company to elect not to
foreclose on the property, thereby reducing the Company's flexibility in
handling the loan.
REGULATION AND SUPERVISION
General
WMI, in its capacity as a savings and loan holding company, is subject to
regulation by the OTS. WMB is subject to regulation and supervision by the
Director of Financial Institutions of the State of Washington ("State
Director"). Its deposit accounts are insured by the FDIC through both the BIF
and SAIF. The FDIC undertakes examination and regulation of WMB and other
state-chartered banks that are not members of the Federal Reserve system
("FDIC-regulated banks"). Federal and state laws and regulations govern, among
other things, investment powers, deposit activities, borrowings, maintenance of
guaranty funds and retained earnings. WMBfsb is subject to extensive regulation
and examination by the OTS, which is its primary federal regulator. Its deposit
accounts are insured through the SAIF by the FDIC, which also has some authority
to regulate WMBfsb.
The description of statutory provisions and regulations applicable to
depository institutions, insurance companies, securities companies and their
holding companies set forth in this annual report does not purport to be a
complete description of the statutes and regulations mentioned herein, nor of
all such statutes and regulations.
Holding Company Regulation
WMI is a multiple savings and loan holding company, as defined by federal
law, because it owns two savings associations -- WMB and WMBfsb. WMB has elected
to be treated as a savings association for purposes of the federal savings and
loan holding company law. WMI is treated as a unitary savings and loan holding
company and is not subject to certain federal statutory restrictions on
activities and investments (the "MHC Restrictions") as are some multiple savings
and loan holding companies, because WMBfsb was acquired in a supervisory
transaction. WMI will become subject to the MHC Restrictions, however, if either
WMB or WMBfsb fails to be a qualified thrift lender ("QTL"), meaning generally
that at least 65 percent of a specified asset base must consist of certain
assets related to domestic residential real estate. Failure to remain a QTL also
would impose conditions on WMB's ability to obtain advances from the FHLB, and
would restrict WMBfsb's ability, among other things, to branch, to pay dividends
and to obtain such advances. WMB and WMBfsb are currently in compliance with QTL
standards.
HOLA and OTS regulations require WMI, as a savings and loan holding
company, to file periodic reports with the OTS. In addition, it must observe
such recordkeeping requirements as the OTS may prescribe and is subject to
holding company examination by the OTS. The OTS may take enforcement action if
the activities of a savings and loan holding company constitute a serious risk
to the financial safety, soundness or stability of a subsidiary savings
association. WMB and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
The FDIC has authority to require FDIC-insured banks and savings
associations to reimburse the FDIC for losses incurred by the FDIC in connection
with the default of a commonly controlled depository institution or with the
FDIC's provision of assistance to such an institution. Institutions are commonly
controlled if they are controlled by the same holding company or if one
depository institution controls another depository institution (as WMI controls
WMB and WMBfsb).
State Regulation and Supervision
Savings banks in Washington, such as WMB, are empowered by state statute to
take deposits and pay interest thereon and, subject to various conditions and
limitations, to make loans on or invest in residential and other real estate, to
make consumer loans, to make commercial loans, to invest in corporate
obligations, government debt securities, and other securities, and to offer
various trust and banking services to their customers. (See "General" and
"Washington Mutual's Operating Subsidiaries.") Under state law, savings banks in
Washington also generally have all of the powers that federal mutual savings
banks have under federal laws and regulations.
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<PAGE> 16
FDIC Insurance
Deposits in WMB and WMBfsb are separately insured by the FDIC to the
applicable maximum limits in each institution. The FDIC administers two separate
deposit insurance funds. The BIF is a deposit insurance fund for commercial
banks and some state-chartered banks, including WMB. A portion of WMB's deposits
are also insured through SAIF. The SAIF is a deposit insurance fund for most
savings associations, such as WMBfsb. At December 31, 1995, approximately 59
percent of the combined deposits of WMB and WMBfsb were insured through SAIF.
The FDIC has developed a deposit insurance system under which the
assessment rate for an insured depository institution varies according to the
level of risk it poses to the BIF or SAIF. The risk-based system went into
effect on January 1, 1994. This system bases an institution's risk category
partly upon whether the institution is well capitalized, adequately capitalized,
or less than adequately capitalized. (See "Regulation and Supervision -- Capital
Requirements.") Each insured depository institution is also assigned to one of
three supervisory subgroups based on reviews by the institution's primary
federal or state regulator, statistical analyses of financial statements, and
other information relevant to gauging the risk posed by the institution. Based
on its capital and supervisory subgroups, each institution is assigned an annual
FDIC assessment rate. Both banking subsidiaries qualify for the lowest rate.
Regardless of the potential risk to the insurance fund, FDICIA prohibits
assessment rates from falling below the current assessment rate of 23 cents per
$100 of eligible deposits if the insurance fund has outstanding borrowings from
the U.S. Treasury Department or until the insurance fund's ratio of reserves to
insured deposits is recapitalized to 1.25 percent.
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
between 0 percent and 0.27 percent per annum of total adjusted deposits for all
deposits insured through the BIF, to be effective in January 1996. The
assessment rate schedule applicable to deposits insured through the SAIF is
between 0.23 percent and 0.31 percent per annum of total adjusted SAIF deposits.
The assessment rates are calculated to keep the respective insurance funds
capitalized at 1.25 percent of estimated insured deposits. Since the BIF has
reached the required reserve ratio, under the new assessment rate schedule, over
90 percent of institutions will be assessed the statutory annual minimum of
$2,000 for their BIF deposits. In contrast, because the SAIF is still
undercapitalized, the assessment rate for SAIF deposits is expected to continue
at between 0.23 percent and 0.31 percent per annum. The resulting premium
differential will have adverse consequences on those institutions with SAIF
deposits, including a competitive disadvantage with respect to pricing of loans
and deposits and with respect to the ability to control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. The federal budget reconciliation bill
contained a provision designed to recapitalize the SAIF by means of a one-time
assessment, estimated at 0.78 percent of SAIF deposits. Such a proposal would
lead to elimination of the ongoing differential. However, such budget bill was
vetoed by the President on December 6, 1995 and no prediction as to the
likelihood of such a one-time assessment can be made at this time. Such an
assessment on Washington Mutual's SAIF deposits would not cause the Company's
banking subsidiaries to cease to be well capitalized.
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 FDIC capital requirements, while WMBfsb
is subject to OTS capital requirements. WM Life is subject to National
Association of Insurance Commissioners ("NAIC") capital requirements.
WMB. FDIC regulations recognize two types or tiers of capital: core ("Tier
1") capital and supplementary ("Tier 2") capital. Tier 1 capital generally
includes common stockholders' equity and noncumulative perpetual preferred
stock, less most intangible assets. Tier 2 capital, which is limited to 100
percent of Tier 1 capital, includes such items as qualifying general loan loss
reserves, cumulative perpetual preferred stock, mandatory convertible debt, term
subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock (original maturity of at
least five years but less than 20 years) that may be included in Tier 2 capital
is limited to 50 percent of Tier 1 capital.
The FDIC currently measures an institution's capital using a leverage limit
together with certain risk-based ratios. The FDIC's minimum leverage capital
requirement specifies a minimum ratio of Tier 1 capital to total assets. Most
banks are required to maintain a minimum leverage ratio of at least 4.00 percent
to 5.00 percent. The FDIC retains the right to require a particular institution
to maintain a higher capital level based on an institution's particular risk
profile. WMB has calculated its leverage ratio to be 5.60 percent as of December
31, 1995.
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<PAGE> 17
FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight -- zero percent, 20 percent, 50
percent or 100 percent -- based on the relative risk of that category. For
example, U.S. Treasury Bills and GNMA securities are placed in the zero percent
risk category, FNMA and FHLMC securities are placed in the 20 percent risk
category, loans secured by one-to-four family residential properties and certain
privately issued mortgage-backed securities are generally placed in the 50
percent risk category, and commercial real estate and consumer loans are
generally placed in the 100 percent risk category. In addition, certain
off-balance sheet items are converted to balance sheet credit equivalent
amounts, and each amount is then assigned to one of the four categories. Under
the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital)
to risk-weighted assets must be at least 8.00 percent, and the ratio of Tier 1
capital to risk-weighted assets must be at least 4.00 percent. WMB has
calculated its total risk-based ratio to be 11.46 percent as of December 31,
1995, and its Tier 1 risk-based capital ratio to be 10.59 percent. In evaluating
the adequacy of a bank's capital, the FDIC may also consider other factors that
may affect a bank's financial condition. Such factors may include interest rate
risk exposure, liquidity, funding and market risks, the quality and level of
earnings, concentration of credit risk, risks arising from nontraditional
activities, loan and investment quality, the effectiveness of loan and
investment policies, and management's ability to monitor and control financial
operating risks.
WMBfsb. The OTS requires savings associations, such as WMBfsb, to meet each
of three separate capital adequacy standards: a core capital leverage
requirement, a tangible capital requirement and a risk-based capital
requirement. OTS regulations require savings associations to maintain core
capital (which may include, for a limited time, certain amounts of qualifying
supervisory goodwill) of at least 3.00 percent of assets and tangible capital
(excluding all goodwill) of at least 1.50 percent of assets. As of December 31,
1995, WMBfsb's core capital and tangible capital ratios were each 6.76 percent.
Most savings institutions are required to maintain a minimum leverage ratio of
at least 4.00 percent. As of December 31, 1995, the leverage capital ratio of
WMBfsb was 6.76 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 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. As of December 31,
1995, WMBfsb had core risk-based and total risk-based capital ratios of 11.39
percent and 12.64 percent.
FDICIA Requirements. FDICIA created a statutory framework that increased
the importance of meeting applicable capital requirements. For WMB 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 that implement this statutory framework. Under these regulations, an
institution is treated as well capitalized if its ratio of total capital to
risk-weighted assets is 10.00 percent or more, its ratio of core capital to
risk-weighted assets is 6.00 percent or more, its ratio of core capital to
adjusted total assets is 5.00 percent or more and it is not subject to any
federal supervisory order or directive to meet a specific capital level. In
order to be adequately capitalized, an institution must have a total risk-based
capital ratio of not less than 8.00 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 prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure by
WMB or WMBfsb to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against WMB by the FDIC or against WMBfsb by the OTS, including, but not
limited to, the issuance of a capital directive to ensure the maintenance of
required capital levels. FDICIA requires the federal banking regulators to take
prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. Additionally, FDIC or OTS approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.
FDICIA required the federal banking agencies (including the FDIC and the
OTS) to revise their risk-based capital guidelines to take into account interest
rate risk, concentration of credit risk, risks associated with nontraditional
activities, and the actual performance and expected risk of loss of multi-family
mortgages. In 1994, the federal banking agencies jointly revised their capital
standards to specify that concentration of credit and nontraditional activities
are among the factors that the
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<PAGE> 18
agencies will consider in evaluating capital adequacy. In that year, the OTS and
FDIC amended their risk-based capital standards with respect to the risk
weighting of loans made to finance the purchase or construction of multi-family
residences.
The OTS has adopted final regulations adding an interest rate risk
component to the risk-based capital requirements for savings associations (such
as WMBfsb), although implementation of the regulation has been delayed.
Management believes that the effect of including such an interest rate risk
component in the calculation of risk-adjusted capital will not cause 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. WM Life is subject to risk-based capital requirements developed by
the NAIC. The NAIC measure uses four major categories of risk to calculate an
appropriate level of capital to support an insurance company's overall business
operations. The four risk categories are asset risk, insurance risk, interest
rate risk and business risk. At December 31, 1995, WM Life's actual capital was
672 percent of its required regulatory risk-based level.
Legal Restrictions on Dividends of Depository Institutions
A depository institution such as WMB or WMBfsb may not make a capital
distribution if, following such distribution, the institution will be
undercapitalized under the FDICIA provisions described above. In addition,
Washington state law prohibits WMB from declaring or paying a dividend greater
than its retained earnings or if doing so would cause its net worth to be
reduced below (i) the amount required for the protection of preconversion
depositors or (ii) the net worth requirements, if any, imposed by the State
Director.
OTS regulations limit the ability of savings associations such as WMBfsb to
pay dividends and make other capital distributions according to the
institution's level of capital and income, with the greatest flexibility
afforded to institutions that meet or exceed their OTS capital requirements.
Under current OTS regulations, a savings association that exceeds its OTS
regulatory capital requirements both before and after a proposed dividend (or
other distribution of capital) and has not been advised by the OTS that it is in
need of more than normal supervision may, after prior notice to but without the
approval of the OTS, make capital distributions during a calendar year up to the
higher of (i) 100 percent of its income during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the institution's
excess capital over its capital requirements) at the beginning of the calendar
year or (ii) 75 percent of its net income over the most recent four-quarter
period. In addition, such an institution may make capital distributions in
excess of the foregoing limits if the OTS does not object within a 30-day period
following notice by the institution.
A savings association that would not meet OTS capital requirements
following payment of a dividend is subject to additional restrictions. It is not
anticipated that WMBfsb will pay any dividend that would cause them to fail to
meet OTS capital requirements.
FDIC and OTS Regulation and Examination
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC has also adopted numerous regulations to protect the
safety and soundness of FDIC-regulated banks. These regulations cover a wide
range of subjects including financial reporting, change in bank control,
affiliations with securities firms and capital requirements. In certain
instances, these regulations restrict the exercise of powers granted by state
law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's securities and insurance affiliates, and
on such affiliates' transactions with WMB and WMBfsb. These restrictions include
requirements that such affiliates follow practices and procedures to distinguish
them from WMB and WMBfsb and that such affiliates give customers notice from
time to time of this distinction and of the distinction between insured deposits
and uninsured nondeposit products.
FDICIA also prohibits banks such as WMB and their subsidiaries from
exercising certain powers that were granted by state law to make investments or
carry on activities as principal (i.e. for their own account) unless either (i)
national banks
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<PAGE> 19
have power under federal law to make such investments or carry on such
activities, or (ii) the bank and such investments or activities meet certain
requirements established by FDICIA and the FDIC.
FDICIA imposed new supervisory standards requiring annual examinations,
independent audits, uniform accounting and management standards, and prompt
corrective action for problem institutions. As a result of FDICIA, depository
institutions and their affiliates are subject to federal standards governing
asset growth, interest rate exposure, executive compensation, and many other
areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The State Director has similar authority under Washington state law
and the OTS has similar authority under HOLA. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing, upon a finding
that the insured institution is or has engaged in any unsafe or unsound practice
that has not been corrected, or is operating in an unsafe or unsound condition,
or has violated any applicable law, regulation, rule, or order of or condition
imposed by the FDIC.
Federal savings institutions, such as WMBfsb, are subject to regulatory
oversight and examination by the OTS and the FDIC. HOLA and OTS regulations
delimit such institutions' investment and lending powers. Federal savings
institutions may not invest in noninvestment-grade debt securities, nor may they
generally make equity investments, other than investments in service
corporations.
Federal law and regulations requires WMBfsb to maintain, for each calendar
month, an average daily balance of liquid assets equal to not less than 5
percent of its average daily balance of total savings accounts and borrowings
payable in one year or less, subject to certain adjustments for deposit
outflows. This liquidity requirement may be changed from time to time.
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and SAIF), and not for the protection of
stockholders or other creditors. In addition, a provision in the Omnibus Budget
Reconciliation Act of 1993 ("Budget Act") requires that in any liquidation or
other resolution of any FDIC-insured depository institution, claims for
administrative expenses of the receiver and for deposits in U.S. branches
(including claims of the FDIC as subrogee of the insured institution) shall have
priority over the claims of general unsecured creditors.
Federal Reserve Regulation
Under Federal Reserve Board regulations, WMB and WMBfsb are each required
to maintain reserves against their transaction accounts (primarily checking and
NOW accounts). Because reserves must generally be maintained in cash or in
noninterest-bearing accounts, the effect of the reserve requirements is to
increase an institution's cost of funds. These regulations generally require
that WMB and WMBfsb each maintain reserves against net transaction accounts in
the amount of 3 percent on amounts of $52.0 million or less, plus 10 percent on
amounts in excess of $52.0 million. Institutions may designate and exempt $4.3
million of certain reservable liabilities from these reserve requirements. These
amounts and percentages are subject to adjustment by the Federal Reserve Board.
A savings bank, like other depository institutions maintaining reservable
accounts, may borrow from the Federal Reserve Bank discount window, but the
Federal Reserve Board's regulations require the savings bank to exhaust other
reasonable alternative sources before borrowing from the Federal Reserve Bank.
Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of the Company's banking subsidiaries. These include
regulations relating to equal credit opportunity, electronic fund transfers,
collection of checks, truth in lending, truth in savings and availability of
funds.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low-income and
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The agencies evaluate an institution's CRA
performance based on a four-tiered descriptive rating system and are required to
make public an
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<PAGE> 20
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance.
Many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
In January 1995, WMB received an outstanding rating from the FDIC. This
rating reflects Washington Mutual's commitment to meeting the credit needs of
the communities it serves. The Company maintains a CRA statement for public
viewing, as well as an annual CRA highlights document. These documents describe
Washington Mutual's credit programs and services, community outreach activities,
public comments and other efforts to meet community credit needs. WMBfsb has not
been rated separately.
Recent and Proposed Federal Legislation
Federal legislation was enacted in 1994 which will repeal, effective June
1, 1997, certain restrictions on the establishment of interstate branches by
national banks and state-chartered banks. In addition, bank holding companies
are now generally permitted to buy banks in any state. WMBfsb already has
authority to establish interstate branches under current federal law and
regulations, so management expects that such legislation will primarily benefit
competitors of the Company.
Various legislative proposals relating to depository institutions have been
or are expected to be introduced in the current session of Congress. These
include proposals to restrict or further regulate the sales of mutual funds and
annuities by depository institutions or their affiliates, to restrict
affiliations between the Company and nonbanking corporations including life
insurance companies, and effectively to require federal savings institutions
such as WMBfsb to convert to banks. The outcome of these legislative proposals
cannot be forecast reliably.
Regulation of Nonbanking Affiliates
As insurance companies, WM Life and Empire are subject to comprehensive
regulation and supervision by the states in which they are domiciled (WM Life is
domiciled in the state of Arizona and Empire is domiciled in the state of
Washington) as well as the states in which they transact business. The laws of
the various states establish supervisory agencies with broad administrative and
supervisory powers. Such agencies set standards related to granting and revoking
licenses to transact business, regulation of trade practices and market conduct,
licensing of agents, approval of policy forms, regulating of certain premium
rates, setting of insurance liability and investment reserve requirements,
determining the form and content of required financial statements, determining
the reasonableness and adequacy of capital and surplus, and prescribing the
types and amounts of permitted investments. Insurance companies are subject to
periodic examinations by such supervisory agencies. State insurance laws and
regulations also impose limits on the extent to which the insurance company
subsidiaries may pay dividends or lend or otherwise supply funds to the Company.
As a broker-dealer registered with the Securities and Exchange Commission
and as a member of the National Association of Securities Dealers ("NASD"),
Murphey Favre is subject to various regulations and restrictions imposed by
those entities, as well as by various state authorities. As a registered
investment advisor, Composite Research is subject to various federal and state
securities regulations and restrictions.
On December 28, 1995, the NASD adopted and forwarded to the SEC for
approval rules concerning NASD member operations conducted in branches of
depository institutions. Although many of the NASD's proposed requirements are
substantially similar to the joint FDIC/OTS policy statement governing the
activities of WMB's securities affiliates, the NASD proposal, if approved by the
SEC, could impose additional restrictions on these affiliates.
COMPETITIVE ENVIRONMENT
Financial institutions operate in a competitive environment. Washington
Mutual competes with commercial banks, other savings banks and associations,
finance companies, money market funds, credit unions and other financial
institutions, some of which have substantially greater financial resources than
the Company. Additionally, the consolidation of the financial institutions
industry in the Northwest in recent years has increased the level of
competition.
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Although consolidation has decreased the number of institutions competing
in the Company's market, both thrifts and commercial banks have reemphasized
their focus on the consumer, making competition for retail deposits and loans
extremely fierce. While the increased competitive pressures make the banking
environment more difficult, the Company remains a strong market force. For 1995,
the Company's originations of residential mortgage loans ranked first in both
Washington state and Oregon and at September 30, 1995 the Company had 16 percent
of total deposits held by commercial banks, thrifts and credit unions in
Washington and 7 percent of such deposits in Oregon.
PRINCIPAL OFFICERS
The following table sets forth certain information regarding the principal
officers of Washington Mutual and its operating subsidiaries:
<TABLE>
<CAPTION>
Employee of
Company
Principal Officers Age Capacity in Which Served Since
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kerry K. Killinger 46 Chairman of the Board of Directors, President and
Chief Executive Officer 1983
Thomas J. Kappock 51 Executive Vice President and Chief Financial Officer 1995
Lee D. Lannoye 58 Executive Vice President 1988
Deanna W. Oppenheimer 37 Executive Vice President 1985
Craig E. Tall 50 Executive Vice President 1985
S. Liane Wilson 53 Executive Vice President 1985
Norman H. Swick 46 Senior Vice President and General Auditor 1980
Douglas G. Wisdorf 41 Senior Vice President and Controller 1976
</TABLE>
Mr. Killinger has been Chairman, President and Chief Executive Officer of
WMI since its organization. He has been Chairman of the Board of Directors of
WMB since 1991 and Chief Executive Officer since 1990. Mr. Killinger became an
Executive Vice President of WMB in 1983, a Senior Executive Vice President of
WMB in 1986 and the President and a director of WMB in 1988.
Mr. Kappock joined WMI in August 1995 as Executive Vice President and Chief
Financial Officer. He had spent the previous 23 years with Bancorp Hawaii, Inc.,
a Honolulu-based bank holding company. From 1987 until 1995, he served as
Executive Vice President of Bancorp Hawaii, Inc. and Vice Chairman of the
holding company's lead bank, Bank of Hawaii. Mr. Kappock served Bank of Hawaii
as Chief Financial Officer from 1983 to 1987.
Mr. Lannoye has been an Executive Vice President of WMI since its
organization. He has been an Executive Vice President of WMB since 1988 and a
member of WMB's Executive Committee since its formation in 1990. In his capacity
as Executive Vice President, Mr. Lannoye is responsible for corporate
administration and credit.
Ms. Oppenheimer has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1993 and a
member of the Executive Committee since its formation in 1990. In this capacity,
Ms. Oppenheimer is responsible for corporate marketing and consumer bank
distribution. She has been an officer of WMB since 1985. She became an Assistant
Vice President of WMB in 1986, a Vice President in 1987 and a Senior Vice
President in 1989.
Mr. Tall has been an Executive Vice President of WMI since its
organization. He had been an Executive Vice President of WMB since 1987 and a
member of WMB's Executive Committee since its formation in 1990. In his capacity
as Executive Vice President, Mr. Tall is responsible for corporate development
and commercial banking.
Ms. Wilson has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1988 and a
member of WMB's Executive Committee since its formation in 1990. In her capacity
as Executive Vice President, Ms. Wilson is responsible for corporate operations.
Mr. Swick has been Senior Vice President and General Auditor of WMI since
its organization. He has been an officer of WMB since 1980. Mr. Swick became a
Vice President in 1984, Senior Vice President in 1988, and General Auditor of
WMB in 1989. In this capacity, he monitors WMI's internal controls and
compliance with all laws and regulations.
19
<PAGE> 22
Mr. Wisdorf has been Senior Vice President and Controller of WMI since its
organization. Mr. Wisdorf has been Senior Vice President and Controller of WMB
since 1991. In this capacity he serves as principal accounting officer of WMI.
He joined WMB in 1976 and has been an officer since 1978. Since 1986, he has
served as Vice President and Controller.
ITEM 2. PROPERTIES
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington, 98101 where, as of December 31, 1995, WMB leased
approximately 170,000 square feet pursuant to a lease agreement that terminates
in 2007 with multiple options to renew at WMB's discretion. WMB also leased
approximately 160,000 square feet of space in Seattle in the Second and Seneca
Building pursuant to a lease agreement that terminates in 2001 and approximately
75,000 square feet in the adjoining building, pursuant to a lease agreement that
terminates in 2006, with multiple options to renew both leases at WMB's
discretion. As of December 31, 1995, Washington Mutual's banking subsidiaries
conducted business from 248 financial centers and 23 loan centers in Washington,
Oregon Utah, Montana and Idaho. Nonbanking subsidiary operations were conducted
in 9 nonfinancial center locations in Washington, Oregon and Montana. (See
"Financial Statements and Supplementary Data -- Note 8: Premises and
Equipment.")
ITEM 3. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 23
PART II
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK
Washington Mutual's common stock trades on The Nasdaq Stock Market under
the symbol WAMU. As of December 31, 1995, there were 65,939,292 shares issued
and outstanding held by 14,876 shareholders of record.
The following table shows the high and low common stock prices by quarter
for the two years ended December 31, 1995:
<TABLE>
1995 1994
- --------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter $20.75 $16.63 $25.00 $19.13
Second quarter 24.75 20.00 21.50 18.25
Third quarter 26.75 22.50 21.63 19.63
Fourth quarter 29.50 24.75 20.63 15.75
</TABLE>
Retained earnings of the Company at December 31, 1995, included a pre-1988
thrift bad debt reserve for tax purposes of approximately $220.6 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.
In December 1985, Washington Mutual's Board of Directors declared its first
dividend on common stock of 10 cents per share (before adjustment for the stock
dividends discussed below). In the third quarters of 1987 and 1986, Washington
Mutual's Board of Directors declared a 50 percent stock dividend along with the
continuance of a regular cash dividend on its shares of common stock. In the
first quarter of 1992 and the third quarter of 1993, Washington Mutual's Board
of Directors declared 50 percent stock dividends along with the continuance of
regular cash dividends on its shares of common stock. All four stock dividends
had the effect of three-for-two stock splits. The cash dividends declared by
quarter for the two years ended December 31, 1995 were as follows:
<TABLE>
- -------------------------------------------------------------
1995 1994
- -------------------------------------------------------------
<S> <C> <C>
First quarter $0.19 $0.16
Second quarter 0.19 0.17
Third quarter 0.19 0.18
Fourth quarter 0.20 0.19
</TABLE>
PREFERRED STOCK
9.12% Noncumulative Perpetual Preferred Stock, Series C
Washington Mutual's Series C Preferred Stock trades on The Nasdaq Stock
Market under the symbol WAMUO. The Series C Preferred Stock has a liquidation
preference of $25 per share plus dividends accrued and unpaid for the
then-current dividend period. Dividends, if and when declared by Washington
Mutual's Board of Directors, are at an annual rate of
21
<PAGE> 24
$2.28 per share. At December 31, 1995, there were 2,752,500 shares issued and
outstanding held by 520 shareholders of record. The following table shows the
high and low stock prices by quarter for the two years ended December 31, 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1995 1994
High Low High Low
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter $25.88 $24.75 $27.88 $25.75
Second quarter 26.50 25.88 26.63 25.13
Third quarter 26.88 25.63 26.25 25.50
Fourth quarter 26.75 26.00 26.13 24.50
</TABLE>
$6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D
Washington Mutual's Series D Preferred Stock trades on The Nasdaq Stock
Market under the symbol WAMUN. The Series D Preferred Stock has a liquidation
preference of $100 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 $6.00 per share. At
December 31, 1995, there were 1,400,000 shares issued and outstanding held by 17
shareholders of record. The following table shows the high and low stock prices
by quarter for the two years ended December 31, 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1995 1994
High Low High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter $ 91.00 $ 79.25 $116.25 $96.75
Second quarter 104.50 89.75 97.00 90.00
Third quarter 107.00 98.25 96.25 90.63
Fourth quarter 116.00 106.00 93.50 78.50
</TABLE>
7.60% Noncumulative Perpetual Preferred Stock, Series E
Washington Mutual's Series E Preferred Stock trades on The Nasdaq Stock
Market under the symbol WAMUM. The Series E Preferred Stock has a liquidation
preference of $25 per share plus dividends accrued and unpaid for the
then-current dividend period. Dividends, if and when declared by Washington
Mutual's Board of Directors, are at an annual rate of $1.90 per share. At
December 31, 1995, there were 1,970,000 shares issued and outstanding held by
437 shareholders of record. The following table shows the high and low stock
prices by quarter for the two years ended December 31, 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1995 1994
High Low High Low
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter $23.75 $21.75 $25.50 $23.38
Second quarter 25.00 22.75 23.75 21.88
Third quarter 24.63 23.63 23.63 22.50
Fourth quarter 25.00 24.38 23.00 20.50
</TABLE>
PAYMENT OF DIVIDENDS AND POLICY
Payment of future dividends is subject to a declaration by Washington
Mutual's Board of Directors. Factors considered in determining the size of
dividends are the amount and stability of profits, adequacy of capitalization,
and expected asset and deposit growth of its subsidiaries. The dividend policy
of Washington Mutual is also dependent on the ability of WMB and WMBfsb to make
dividends to their respective parent company, which is influenced by legal,
regulatory and economic restrictions. (See "Business -- Regulation and
Supervision -- Legal Restrictions on Dividends of Depository Institutions.")
22
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
of the Company at and for the years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands, except for
per share amounts) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $577,630 $571,225 $529,431 $329,558 $234,061
Provision for loan losses 10,000 20,000 35,000 14,000 21,627
Other income 106,738 107,838 141,374 87,980 92,092
Other expense 382,315 384,312 366,776 228,184 181,409
- ------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary items and
cumulative effect of change in
tax accounting method 292,053 274,751 269,029 175,354 123,117
Income taxes 101,429 102,447 93,765 60,247 42,526
Extraordinary items, net of federal
income tax effect -- -- (8,953) (4,638) --
Cumulative effect of change in tax
accounting method -- -- 13,365 -- --
- ------------------------------------------------------------------------------------------------------------
Net income $190,624 $172,304 $179,676 $110,469 $ 80,591
============================================================================================================
Net income attributable to common
stock $172,040 $153,720 $166,118 $105,594 $ 75,716
============================================================================================================
Net income per common share(1):
Primary $2.68 $2.54 $2.82 $2.01 $1.65
Fully diluted 2.59 2.46 2.67 1.91 1.58
Cash dividend declared per share:
Preferred stock $10.18 $10.18 $7.56 $3.75 $3.75
Common stock(1) 0.77 0.70 0.50 0.33 0.24
Common stock dividend payout ratio 25.74% 24.50% 15.98% 19.22% 17.35%
Return on average assets 0.96 1.02 1.31 1.24 1.04
Return on average stockholders'
equity 13.28 13.69 16.92 15.16 14.08
Return on average common
stockholders' equity 13.71 14.24 17.73 15.17 14.08
Assets $21,633,278 $18,457,682 $15,827,228 $9,911,602 $7,970,427
Available-for-sale securities 7,689,041 2,535,018 -- -- --
Held-to-maturity securities 171,351 2,608,585 4,012,000 2,585,550 2,115,487
Loans:
Residential 7,748,975 8,004,319 6,680,466 4,332,236 3,182,502
Residential construction 578,554 516,486 409,789 350,736 326,508
Commercial real estate 1,690,919 1,675,406 1,828,266 988,712 832,393
Manufactured housing, second
mortgage and other consumer 2,597,283 2,335,984 2,081,189 1,087,997 940,252
Commercial 58,049 2,443 6,606 13,969 22,208
Reserve for loan losses (138,242) (128,049) (115,214) (53,970) (52,305)
- ------------------------------------------------------------------------------------------------------------
Total loans 12,535,538 12,406,589 10,891,102 6,719,680 5,251,558
============================================================================================================
Deposits 10,596,735 9,777,912 9,351,402 6,058,112 5,410,236
Annuities 855,503 799,178 713,383 571,428 433,767
Borrowings 8,328,052 6,412,301 4,337,262 2,164,224 1,355,541
Preferred stock 250,168 252,034 252,053 266,633 63,152
Stockholders' equity 1,591,519 1,304,568 1,195,704 995,036 658,326
Stockholders' equity ratio 7.36% 7.07% 7.55% 10.04% 8.26%
Leverage capital ratio 5.60 5.90 6.00 9.35 7.57
Book value per common share(1) $20.65 $17.58 $16.42 $14.37 $12.00
Number of common shares
outstanding(1) 65,939,292 61,970,704 60,090,996 53,787,701 49,661,491
Number of preferred shares
outstanding 6,122,500 6,200,000 6,200,000 5,494,150 1,300,000
</TABLE>
- -------------
(1) Net income per common share, cash dividends declared per common share, book
value per common share and number of common shares outstanding for 1992 and
1991 have been adjusted for the third quarter 1993 and first quarter 1992 50
percent stock dividends, each of which had the effect of a three-for-two
stock split.
23
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto, and with reference to
the discussion of the operations and other financial information presented
elsewhere in this report.
During the first half of 1993, Washington Mutual merged with Pioneer and
acquired Pacific First. As a result of these business combinations, the Company
became substantially larger, with significant operations in Oregon as well as
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, the Company acquired Enterprise through a merger
of Enterprise with and into WMB. Enterprise, a Bellevue, Washington-based
commercial bank specializes in lending to small- and mid-size businesses. In
October, Washington Mutual signed an agreement to merge WMB with Western, a
commercial bank with branch operations throughout Oregon. The Western
transaction was completed on January 31, 1996. Therefore, the following
financial information of Washington Mutual does not contain Western's results of
operations or analysis of financial position.
During 1994, there was an increase in short-term interest rates, which had
an adverse effect not only on the results of operations but also on the market
value of the Company's net financial assets. Although short-term interest rates
did not generally increase further in 1995 and actually declined somewhat in the
latter half of the year, the 1994 interest rate increase continued to affect the
Company's financial performance during much of 1995. Except for
available-for-sale securities, financial assets and liabilities were reported at
historical cost and accordingly the financial statements do not reflect changes
in market value. (See "Financial Statements and Supplementary Data -- Note 27:
Fair Value of Financial Instruments.")
RESULTS OF OPERATIONS
Washington Mutual's net income of $190.6 million for 1995 exceeded earnings
of $172.3 million in 1994 and $179.7 million in 1993. Fully diluted earnings per
share were $2.59 in 1995, compared with $2.46 in 1994 and $2.67 in 1993.
Washington Mutual's return on average assets ("ROA") for 1995 equaled 0.96
percent, down from 1.02 percent in 1994 and 1.31 percent in 1993. Its return on
average common stockholders' equity ("ROCE") of 13.71 percent for 1995 was also
down from the previous two years -- 14.24 percent in 1994 and 17.73 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 interest rates in 1994 led to a compression of the net interest
margin (net interest income divided by average interest-earning assets) and a
corresponding pressure on net interest income in 1994 and 1995. Certain
short-term interest rates were lowered 25 basis points in mid-1995 and again in
December, resulting in an improved operating environment for the Company. This
favorable change in interest rates helped the Company earn an ROA and ROCE of
1.03 percent and 14.42 percent for 4th quarter 1995.
Net Interest Income
Net interest income of $577.6 million for 1995 was up slightly from $571.2
million in 1994, which in turn was 8 percent higher than the $529.4 million
earned during 1993. Most of the growth in net interest income was due to the
increase in average interest-earning assets. Although average interest-earning
assets were up 19 percent during 1995, a decline in the net interest margin
limited the increase in net interest income.
The increase in market interest rates during 1994 had a negative impact on
the net interest margin throughout 1995. The net interest margin for 1995 of
3.05 percent declined from 3.60 percent in 1994 and 4.12 percent in 1993. During
the last three months of 1995 the net interest margin rose to 3.09 percent,
aided by a decrease in short-term interest rates beginning in mid-1995. However,
an increase in market interest rates during 1996 could place pressure on the net
interest margin and, unless offset by growth of interest-earning assets, a
corresponding pressure on net interest income. (See "Financial Statements and
Supplementary Data -- Note 15: Interest Rate Risk Management.")
24
<PAGE> 27
The low level of 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 8.03 percent in 1993 and
7.57 percent in 1994. The lower interest rate levels also resulted in a lower
cost of funds during 1993. The average rate paid on deposits and borrowings fell
to 4.04 percent in 1993. However, an increase in short-term rates during 1994
caused the cost of funds to increase to 4.12 percent. The full effect of this
rise in short-term rates was felt in 1995 (mitigated somewhat by a subsequent
lowering of short-term rates mid-year) pushing the cost of funds up to 5.13
percent for the year. The yield on earning assets during 1995 increased to only
7.99 percent because longer-term interest rates did not increase as much as
short-term rates. Also, the Company, because most of its earning assets were
fixed rate, was not in a position to take full advantage of the increase. The
net interest spread (the difference between the yield on interest-earning assets
and the cost of funds) declined to 2.86 percent for 1995 from 3.45 percent
earned during 1994 and 3.99 percent in 1993.
25
<PAGE> 28
Average consolidated statements of financial position and analysis of net
interest spread were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------
Interest
Average Income
(dollars in thousands) Balance(1) Rate or Expense
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments $ 6,432,456 7.36% $ 473,478
Loans(3) 12,571,140 8.31 1,045,235
- -----------------------------------------------------------------------------------------------------
Total interest-earning assets 19,003,596 7.99 1,518,713
Other assets 839,917 -- --
- -----------------------------------------------------------------------------------------------------
$19,843,513 -- --
=====================================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,139,172 1.29 14,748
Savings and money market accounts 3,413,425 4.06 138,745
Time deposits 5,733,106 5.68 325,706
- -----------------------------------------------------------------------------------------------------
10,285,703 4.66 479,199
Borrowings:
Annuities 801,129 4.98 39,893
Federal funds purchased 299,495 5.96 17,856
Securities sold under agreements to repurchase 3,780,228 5.92 223,714
Advances from the FHLB 2,970,831 5.80 172,246
Other interest-bearing liabilities 194,052 4.21 8,175
- -----------------------------------------------------------------------------------------------------
8,045,735 5.74 461,884
- -----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,331,438 5.13 941,083
Other liabilities 76,398 -- --
- -----------------------------------------------------------------------------------------------------
18,407,836 -- --
Stockholders' equity 1,435,677 -- --
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,843,513 -- --
=====================================================================================================
Net interest spread and income 2.86% $ 577,630
=====================================================================================================
Net interest margin 3.05%
</TABLE>
- -------------
(1) Average balances were calculated on a monthly basis.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the daily average loan amounts
outstanding.
26
<PAGE> 29
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1993
-----------------------------------------------------------------------------
Interest Interest
Average Income Average Income
Balance(2) Rate or Expense Balance(2) Rate or Expense
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4,433,650 6.71% $ 297,422 $ 3,441,748 7.16% $ 246,270
11,544,461 7.89 910,391 9,496,169 8.32 789,669
-----------------------------------------------------------------------------
15,978,111 7.57 1,207,813 12,937,917 8.03 1,035,939
878,367 -- -- 819,498 -- --
-----------------------------------------------------------------------------
$16,856,478 -- -- $13,757,415 -- --
=============================================================================
$ 1,152,363 1.38 15,848 $ 1,042,356 1.69 17,611
3,074,650 3.16 97,201 2,737,603 3.32 90,845
5,150,552 4.71 242,771 4,936,929 4.70 232,139
-----------------------------------------------------------------------------
9,377,565 3.81 355,820 8,716,888 3.91 340,595
734,969 4.51 33,143 629,636 5.44 34,261
-- -- -- -- -- --
2,213,080 4.45 98,425 1,526,197 3.84 58,613
2,998,593 4.81 144,163 1,573,678 4.19 65,890
81,792 6.16 5,037 97,076 7.36 7,149
-----------------------------------------------------------------------------
6,028,434 4.61 280,768 3,826,587 4.34 165,913
-----------------------------------------------------------------------------
15,405,999 4.12 636,588 12,543,475 4.04 506,508
191,834 -- -- 151,823 -- --
-----------------------------------------------------------------------------
15,597,833 -- -- 12,695,298 -- --
1,258,645 -- -- 1,062,117 -- --
-----------------------------------------------------------------------------
$16,856,478 -- -- $13,757,415 -- --
=============================================================================
3.45% $ 571,225 3.99% $ 529,431
=============================================================================
3.60% 4.12%
</TABLE>
27
<PAGE> 30
An analysis of the change in net interest income was as follows:
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
--------------------- Total --------------------- Total
(dollars in thousands) Volume(1) Rate Change Volume(2) Rate Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Investments $134,086 $ 41,970 $176,056 $ 69,934 $(18,782) $ 51,152
Loans(3) 80,963 53,881 134,844 158,187 (37,465) 120,722
- --------------------------------------------------------------------------------------------------------
215,049 95,851 310,900 228,121 (56,247) 171,874
Interest expense
Deposits:
Checking accounts (182) (918) (1,100) 1,733 (3,496) (1,763)
Savings and money
market accounts 10,705 30,839 41,544 10,802 (4,446) 6,356
Time deposits 27,438 55,497 82,935 10,068 564 10,632
- --------------------------------------------------------------------------------------------------------
37,961 85,418 123,379 22,603 (7,378) 15,225
Borrowings:
Annuities 2,984 3,766 6,750 5,247 (6,365) (1,118)
Federal funds
purchased -- 17,856 17,856 -- -- --
Securities sold
under agreements
to repurchase 69,738 55,551 125,289 29,465 10,347 39,812
Advances from the
FHLB (1,335) 29,418 28,083 67,261 11,012 78,273
Other 6,915 (3,777) 3,138 (1,035) (1,077) (2,112)
- --------------------------------------------------------------------------------------------------------
78,302 102,814 181,116 100,938 13,917 114,855
- --------------------------------------------------------------------------------------------------------
116,263 188,232 304,495 123,541 6,539 130,080
- --------------------------------------------------------------------------------------------------------
Net interest
income $ 98,786 $(92,381) $ 6,405 $104,580 $(62,786) $ 41,794
========================================================================================================
</TABLE>
(1) Average balances were calculated on a monthly basis.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the daily average loan amounts
outstanding.
Other Income
Other income was $106.7 million in 1995, down from $107.8 million in 1994
and $141.4 million in 1993. Other income in 1993 included $41.7 million in gains
on the sale of loans and other assets. The significant level of asset gains
during 1993 resulted from asset restructuring to accommodate the acquisition of
Pacific First. In addition, loans were sold during 1993 to take advantage of
record 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.
Service fees grew 15 percent in 1995 and 3 percent in 1994. Nonbanking
service fees constituted 63 percent of service fees in 1993, but this level
declined to 54 percent in 1994 and to 31 percent in 1995. Although the
nonbanking subsidiaries continued to provide substantial fee income, their
contributions were outpaced by an increase in retail deposit fees generated by
an expanded deposit customer base coupled with a revised fee structure for
certain deposit services. Deposit fees of $52.6 million in 1995 were far in
excess of the prior year's $23.8 million and $17.9 million in 1993.
Loan servicing fees were $10.3 million in 1995, up from $9.2 million in
1994. During 1995, the Company securitized $2,373.2 million in residential
loans, increasing the portfolio of loans serviced for others to $5,093.6 million
at December 31, 1995 from $3,897.5 million at the end of 1994. Loan servicing
fees were $13.4 million in 1993. The 1993 level was the result of an expanded
loan servicing portfolio stemming from the acquisition of Pacific First. The
decision to retain loans originated in the latter half of 1993 and into 1994,
coupled with the significant refinancing activity of 1993, resulted in a
shrinkage of the portfolio of loans serviced for others to $3,897.5 million at
December 31, 1994, from $4,698.8 million one year earlier.
The gain on sale of loans, inclusive of write-downs totaled $1.2 million in
1995, compared with $427,000 in 1994 and $14.1 million in 1993. Sales activity
in 1995 and 1994 was minimal as Washington Mutual retained or securitized most
of its
28
<PAGE> 31
loan production. However, during 1993, gains of $20.2 million were earned on a
sales volume of $901.0 million, but prepayment activity required a write-down of
mortgage servicing rights of $6.1 million.
During 1995, the net loss of $3.3 million on the sale of other assets,
inclusive of write-downs was the result of $8.4 million in write-downs taken due
to credit quality deterioration on certain securities offset by $5.1 million in
gains generated through the disposition of primarily fixed-rate mortgage-backed
securities. Gains on the sale of other assets in 1994 were $3.7 million, down
from $25.0 million in 1993. The gains generated in 1995 and 1994 were from the
available-for-sale portfolio. Adjustments to Washington Mutual's balance sheet
to accommodate the acquisition of Pacific First were primarily responsible for
the large gains on the sale of other assets during 1993. During this
restructuring, Washington Mutual primarily sold mortgage-backed securities to
reduce the pre-acquisition size of its balance sheet.
Other Expense
Total other expense of $382.3 million in 1995 compared favorably with
$384.3 million in 1994 and $366.8 million in 1993. The decrease from 1994 to
1995 was due primarily to $7.3 million of income generated through REO
operations. The increase from 1993 to 1994 reflected the growth in total assets,
particularly the increased number of financial centers. 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 has established
a long-term operating efficiency goal of 50 percent. Washington Mutual's
operating efficiency ratios were 55.9 percent for 1995 versus 56.6 percent for
1994 and 54.7 percent for 1993.
At year-end 1995, staffing for the organization of 4,364 full-time
equivalent employees was virtually unchanged from 4,371 at the end of 1994, but
down from 4,697 at the end of 1993. The decline in the number of full-time
equivalent employees during 1994 was the result of reducing staffing levels to
match lower lending volumes. These declines helped to alleviate the upward
pressure on salaries and employee benefits. The expense for salaries and
employee benefits totaled $172.3 million, $173.6 million and $162.5 million in
1995, 1994, and 1993.
The increase in occupancy and equipment expense to $67.5 million in 1995
from $63.0 million in 1994 and $55.9 million in 1993 was primarily due to the
growth in the number of financial centers, an expansion of head office
facilities and technology upgrades to accommodate the Company's reengineering
efforts.
Regulatory assessments totaled $20.7 million in 1995, compared with $22.4
million in 1994 and $20.4 million in 1993. Although total deposits outstanding
increased in 1995, the expected increase in deposit premiums paid to the FDIC
was offset by a reduction in the premium rate. (See "Regulation and Supervision
- -- FDIC Insurance.") The expense increase in 1994 was solely the result of the
increase in total deposits outstanding.
Other operating expenses increased to $100.9 million in 1995 from $96.2
million (inclusive of a $5.0 million one-time expense of a legal settlement, see
"Nonbanking Subsidiary Operations") in 1994 and $96.9 million in 1993. 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, which originally ranged from three to 10
years. 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.
During 1995, REO operations, inclusive of write-downs generated $7.3
million of income, compared with net expense of $12,000 in 1994 and $6.3 million
in 1993. During 1995, net gains on the disposition of properties totaled $5.0
million. There were no gains or losses in 1994 and only $340,000 of net gains in
1993. During 1994 and 1993, write-downs of $100,000 and $7.3 million were taken
to increase the REO reserve for losses. (See "Financial Statements and
Supplementary Data -- Note 7: REO" for further discussion of REO operations.)
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. Also, during
1993, Washington Mutual prepaid advances from the FHLB totaling $432.6 million.
29
<PAGE> 32
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.
The increased tax provision required in the third quarter as a result of
enactment of the bill was approximately $600,000. 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 impact on the income tax provision of the Company.
In February 1992, FASB issued SFAS No. 109, Accounting for Income Taxes,
that changed the accounting principle governing accounting for income taxes. The
statement requires the use of the liability method in accounting for income
taxes and eliminates on a prospective basis the former exception from the
provision of deferred income taxes on thrift bad debt reserves. Washington
Mutual implemented the change in first quarter 1993, as required by FASB. The
change resulted in a cumulative positive adjustment to earnings of $13.4
million, on an after-tax basis.
Nonbanking Subsidiary Operations
Nonbanking subsidiary operations generally constitute 5 percent of the
Company's total pretax operating income. Pretax operating income (net income
before amortization of goodwill and intangible assets and elimination of
intercompany transactions) was $17.2 million in 1995, compared with $14.2
million in 1994 and $18.1 million in 1993. The securities and insurance
operations typically account for more than 90 percent of nonbanking pretax
operating income.
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.
Lower than anticipated 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 one-time 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.
Composite Research's financial performance has remained steady during the
past three years, rising slightly to $3.0 million in 1995 from $2.9 million in
1994 and $2.5 million in 1993.
The 1994 pretax operating income of Mutual Travel was $1.2 million,
compared with $1.3 million in 1993. In March 1995, as part of the Company's
decision to refocus on its core business, WMI sold Mutual Travel to a company
whose principal shareholders were Mutual Travel's management team. The sale
price is contingent upon the operating performance of Mutual Travel over the
next three years, and is expected to result in a minimum pretax gain of
approximately $4.0 million. The gain will be recognized when a substantial
portion of the applicable provisions of the sale agreement are met, which is
anticipated to be in early 1996.
30
<PAGE> 33
Nonbanking subsidiary results of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities:
Murphey Favre, Inc. $ 437 $(2,249) $ 4,334
Composite Research & Management Co. 2,967 2,854 2,539
- ----------------------------------------------------------------------------------------------------
3,404 605 6,873
WM Life Insurance Co. 14,292 12,482 9,900
Mutual Travel, Inc. 229 1,178 1,266
WM Financial, Inc. and other (691) (23) 40
- ----------------------------------------------------------------------------------------------------
Net income before amortization of goodwill and other intangible
assets, elimination of intercompany transactions, and federal
income taxes 17,234 14,242 18,079
Amortization of goodwill and other intangible assets 932 1,501 1,874
- ----------------------------------------------------------------------------------------------------
Net income before elimination of intercompany transactions and
federal income taxes $16,302 $12,741 $16,205
====================================================================================================
</TABLE>
REVIEW OF FINANCIAL POSITION
Assets
Assets grew substantially in 1995, as they did in 1994. During 1995, total
assets grew $3,175.6 million to end the year at $21,633.3 million. At December
31, 1994, total assets were $18,457.7 million, an increase of $2,630.5 million
from December 31, 1993. Most of the growth over the past two years has come from
retaining originated loans (either as part of the loan portfolio or as
securitized mortgage-backed securities) and acquiring investment-grade
securities.
Investment Activities
The Company's investment portfolio increased 53 percent to $7,860.6 million
at December 31, 1995 from $5,144.2 million a year earlier. Contributing to the
growth in 1995 was the securitization and retention of $2,373.2 million of
loans. Also in 1995, as in 1994, Washington Mutual leveraged its capital and
increased its investment portfolio. This increase was funded mostly through
borrowings. By leveraging the balance sheet through the use of these wholesale
activities, Washington Mutual generated additional net interest income.
As of December 31, 1995, the Company's investment portfolio included $171.4
million held-to-maturity securities (with a fair value of $185.1 million),
$7,689.0 million available-for-sale securities and $238,000 trading account
securities. 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. Washington Mutual elected to take advantage of this
opportunity and reclassified $3,471.0 million of its held-to-maturity securities
into the available-for-sale category on December 1, 1995. Of the securities
transferred, approximately 80 percent were fixed-rate securities.
It is anticipated that these fixed-rate securities will be replaced with
adjustable-rate agency securities, adjustable- and fixed-rate private-issue
securities, collateralized mortgage obligations, and purchased loan pools as the
fixed-rate securities pay down or are sold as market conditions permit. 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 securities, its sensitivity to
future changes in interest rates decreases. This is because, unlike fixed-rate
securities, adjustable-rate assets' interest rates change, within certain
periodic and lifetime cap restraints, with corresponding changes in market
rates. But, substituting adjustable-rate assets for fixed-rate securities can
have two disadvantages. First of all, adjustable-rate assets, when compared with
similar fixed-rate assets, carry additional credit risk in an increasing
interest rate environment. As these assets reprice upward, the underlying
borrower's creditworthiness may become impaired. Secondly, 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 securities with private-issue securities, collateralized
mortgage obligations, and purchased loan pools to minimize the decline in
portfolio yield.
31
<PAGE> 34
Historically, the yield on private-issue securities, collateralized
mortgage obligations, and purchased loan pools has exceeded agency securities
because they expose the Company to certain risks that are not inherent in agency
securities, 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. 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 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. An example 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 these risks, the Company now performs a credit
review 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 will
be monitored on a periodic basis. Furthermore, the Company has established
internal guidelines limiting the geographic concentration of the underlying
collateral.
As of December 31, 1995, the Company held $744.6 million of private-issue
securities. Of that amount, 14 percent were the highest investment grade (AAA),
66 percent were rated investment grade (AA or A), 13 percent were rated lowest
investment grade (BBB) and 7 percent were rated below investment grade (BB or
below). During 1995, the Company realized $8.4 million of losses on certain
securities in the below investment grade portfolio due to credit quality
deterioration.
The available-for-sale portfolio is now much larger as a result of the
transfer on December 1, 1995. Therefore, the Company redesignated $1,567.0
million of interest rate exchange agreements and interest rate cap agreements
from short-term borrowings and deposits to the available-for-sale portfolio.
While this is not expected to fully offset the impact of further changes in
interest rates on the portfolio, it will help to reduce the impact of future
changes. As of December 31, 1994, a net unrealized loss (on an after-tax basis)
of $29.0 million associated with the available-for-sale securities was included
as a separate component of stockholders' equity. But as a result of interest
rate declines during 1995 and the reclassification of securities into the
available-for-sale portfolio, the valuation reserve for the available-for-sale
portfolio increased to a net unrealized gain (on an after-tax basis) of $78.4
million as of December 31, 1995.
Available-for-sale securities reported in the financial statements at fair
value consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. government and agency obligations $ 78,846 $ 254,103 $--
Corporate debt obligations 433,916 135,060 --
Equity securities 365,204 265,010 --
- ---------------------------------------------------------------------------------------------------
877,966 654,173 --
Mortgage-backed securities:
U.S. government agency 6,068,898 1,471,070 --
Corporate 744,609 349,431 --
- ---------------------------------------------------------------------------------------------------
6,813,507 1,820,501
Derivative instruments:
Interest rate exchange agreements (11,847) 18,654 --
Interest rate cap agreements 9,415 41,690 --
- ---------------------------------------------------------------------------------------------------
(2,432) 60,344 --
- ---------------------------------------------------------------------------------------------------
$7,689,041 $2,535,018 $--
===================================================================================================
</TABLE>
32
<PAGE> 35
The stated maturities of the Company's available-for-sale securities were
as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------------------------
After
five
Due after one but No
but within within After stated
(dollars in thousands) five years 10 years 10 years maturity Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations $ 10,011 $ 9,671 $ 59,164 $ -- $ 78,846
Corporate debt obligations 141,177 188,456 104,283 -- 433,916
Equity securities -- -- -- 365,204 365,204
- ----------------------------------------------------------------------------------------------------------
151,188 198,127 163,447 365,204 877,966
Mortgage-backed securities:
U.S. government agency 13,849 9,446 6,045,603 -- 6,068,898
Corporate -- 19,257 725,352 -- 744,609
- ----------------------------------------------------------------------------------------------------------
13,849 28,703 6,770,955 -- 6,813,507
Derivative instruments:
Interest rate exchange agreements (11,847) -- -- -- (11,847)
Interest rate cap agreements 9,415 -- -- -- 9,415
- ----------------------------------------------------------------------------------------------------------
(2,432) -- -- -- (2,432)
- ----------------------------------------------------------------------------------------------------------
$162,605 $226,830 $6,934,402 $365,204 $7,689,041
==========================================================================================================
Weighted average yield at end of year 8.47% 7.01% 7.01% 7.00% 7.04%
</TABLE>
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 mortgage-backed securities of which approximately 40 percent have
adjustable rates and the remainder 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 have on the repricing period of securities in
the available-for-sale portfolio currently (as of December 31, 1995) or in an
increasing interest rate environment (up 200 basis points):
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $3,623 $ 389 $ 3,541 $7,553
Effect of derivative instruments 3,715 (174) (3,541) --
- ----------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $7,338 $ 215 $ -- $7,553
==========================================================================================================
</TABLE>
33
<PAGE> 36
The following table presents the effect interest rate exchange agreements
and interest rate cap agreements have on the repricing period of securities in
the available-for-sale portfolio in a decreasing interest rate environment (down
200 basis points):
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $3,623 $389 $ 3,541 $7,553
Effect of derivative instruments 1,165 -- (1,165) --
- ----------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $4,788 $389 $ 2,376 $7,553
==========================================================================================================
</TABLE>
The held-to-maturity portfolio by investment type consisted of the
following:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. government and agency obligations $ 6,592 $ 7,563 $ 277,022
Corporate debt obligations 72,855 360,233 447,240
Municipal obligations 90,886 78,521 70,493
Equity securities -- -- 240,637
- -----------------------------------------------------------------------------------------------------
170,333 446,317 1,035,392
Mortgage-backed securities:
U.S. government agency 1,018 2,044,216 2,322,768
Corporate -- 118,052 653,840
- -----------------------------------------------------------------------------------------------------
1,018 2,162,268 2,976,608
- -----------------------------------------------------------------------------------------------------
$171,351 $2,608,585 $4,012,000
=====================================================================================================
</TABLE>
The stated maturities of the Company's held-to-maturity securities were as
follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------
After one After five
Due within but within but within After
(dollars in millions) one year five years 10 years 10 years Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations $ -- $ -- $ 6,592 $ -- $ 6,592
Corporate debt obligations 2,034 31,123 22,536 17,162 72,855
Municipal obligations -- 1,313 36,202 53,371 90,886
- -----------------------------------------------------------------------------------------------------------
2,034 32,436 65,330 70,533 170,333
Mortgage-backed securities:
U.S. government agency -- -- -- 1,018 1,018
- -----------------------------------------------------------------------------------------------------------
-- -- -- 1,018 1,018
- -----------------------------------------------------------------------------------------------------------
$2,034 $32,436 $65,330 $71,551 $171,351
===========================================================================================================
Weighted average yield at end of year 4.73% 8.61% 7.52% 7.03% 7.49%
</TABLE>
Due to the transfer of predominantly fixed-rate mortgage-backed securities
from the held-to-maturity portfolio to the available-for-sale portfolio in 1995,
the held-to-maturity portfolio now consists almost entirely of long-term
fixed-rate debt securities that the Company intends to hold until maturity. This
portfolio had a market value appreciation of 8 percent or $13.7 million on a
pretax basis at year-end 1995, compared with a 8 percent or $201.9 million
market value depreciation on a pretax basis at December 31, 1994. The decline in
value at December 31, 1994 was due to the significant increase in interest rates
during 1994.
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.
34
<PAGE> 37
Loans
Loans grew modestly during 1995 to end the year at $12,535.5 million. At
December 31, 1994, total loans outstanding equaled $12,406.6 million. Over half
of the 1995 loan production was securitized and retained in the Company's
investment portfolio.
The total amount of loans originated in 1995 was $4,218.9 million compared
with $4,128.9 million in 1994. While a year-to-year comparison of total lending
volume doesn't show much change, the mix between fixed- and adjustable-rate loan
originations has substantially altered. With the easing of interest rates during
the second half of 1995, loan production switched predominantly to fixed-rate
lending compared with a preference towards adjustable-rate loans during 1994.
Residential loan originations of $2,259.9 million in 1995 were up slightly
from the 1994 level of $2,040.3 million. For the year, originations of loans to
purchase homes were $1,418.1 million compared with $1,187.2 million last year,
and refinancing activity in 1995 accounted for $841.8 million of the residential
lending volume compared with $853.1 million in 1994. At year-end 1995, 1-4
family residential loans comprised 61 percent of total loans outstanding.
However, with the more favorable interest rate environment in the latter half of
1995, residential loan originations during the fourth quarter were up 114
percent from the same period a year ago.
Residential construction originations of $929.8 million for 1995 were down
from $1,034.2 million in 1994. Custom built homes for the final purchaser were
responsible for over 60 percent of these originations during both years. The
remainder were to builders for resale. At year-end 1995, total residential
construction loans outstanding for custom homes were $330.2 million and builder
loans totaled $248.4 million, or collectively 5 percent of total loans. Because
of its short-term nature and relatively high profit margins, residential
construction lending is very profitable. Residential construction loans also
contain a higher degree of risk than other residential loans. For this reason,
Washington Mutual has strict lending and monitoring policies to limit credit
exposure. At year-end 1995, less than 2 percent of residential construction
loans were nonperforming, and loan charge-offs were minimal during the year.
Consumer loan originations of $897.6 million for all of 1995 were slightly
below the prior year's level of $939.3 million. The majority of consumer lending
was for second mortgage and manufactured housing loans. Both of these loan areas
are natural extensions of shelter-based lending and have higher yields and
generally shorter terms than traditional first mortgages. At year-end 1995,
consumer loans accounted for 20 percent of total loans.
At December 31, 1995, commercial real estate lending constituted 13 percent
of total loans, of which 55 percent were for multi-family housing.
Commercial business lending accounted for less than 1 percent of total
loans at year-end 1995, but is expected to gain in importance with the recent
commercial bank mergers.
35
<PAGE> 38
Loans originated consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential (1-4 family units):
Fixed-rate $1,540,809 $ 772,080 $2,994,210 $2,142,054 $1,217,845
Adjustable-rate 719,136 1,268,187 820,743 679,559 126,950
Residential construction 929,827 1,034,176 847,217 652,952 459,029
- ---------------------------------------------------------------------------------------------------------
3,189,772 3,074,443 4,662,170 3,474,565 1,803,824
Consumer:
Second mortgage and other
consumer 643,236 710,327 704,089 434,377 306,376
Manufactured housing 254,394 229,011 190,555 172,827 146,131
- ---------------------------------------------------------------------------------------------------------
897,630 939,338 894,644 607,204 452,507
Commercial real estate:
Apartment buildings 96,639 92,135 71,771 59,959 31,177
Other 22,847 22,974 93,978 33,951 30,081
- ---------------------------------------------------------------------------------------------------------
119,486 115,109 165,749 93,910 61,258
Commercial business 12,064 -- -- -- --
- ---------------------------------------------------------------------------------------------------------
$4,218,952 $4,128,890 $5,722,563 $4,175,679 $2,317,589
=========================================================================================================
</TABLE>
Deposits
Total deposits increased to $10,596.7 million at December 31, 1995, from
$9,777.9 million at December 31, 1994. Retail deposits were up $861.6 million to
$9,920.6 million. Wholesale activities -- primarily time deposits from political
subdivisions and public agencies -- were down $42.8 million. Wholesale deposits
are an alternative to other borrowings and 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 for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease due to deposit outflow $(77,454) $(140,847) $ (879,005)
Increase due to acquired deposits 417,078 211,537 3,831,700
Increase due to interest credited 479,199 355,820 340,595
- -----------------------------------------------------------------------------------------------------
Increase in total deposits $818,823 $ 426,510 $3,293,290
=====================================================================================================
Total deposits at end of year $10,596,735 $9,777,912 $9,351,402
Weighted average rate for the year 4.66% 3.81% 3.91%
</TABLE>
The Company utilizes interest rate exchange agreements and interest rate
cap agreements to reduce its exposure to rising interest rates. (See "Financial
Statements and Supplementary Data -- Note 15: Interest Rate Risk Management.")
Nondeposit Products
Through its nonbanking subsidiaries, Washington Mutual offers to its
customers alternative retail investment products. Annuities underwritten by WM
Life increased $56.3 million to $855.5 million. Assets of the Composite Group of
mutual funds, managed by Composite Research ended the year at $1,268.5 million,
up from $1,095.5 million at December 31, 1994. The improvement was due primarily
to an increase in market valuation.
36
<PAGE> 39
Borrowings
Washington Mutual's borrowings primarily take the form of securities sold
under agreements to repurchase and advances from the FHLB. These two borrowing
sources totaled $3,962.4 million and $3,711.4 million at year-end 1995 compared
with $2,595.7 million and $3,737.6 million at December 31, 1994. The exact mix
at any given time is dependent upon the market pricing of the two borrowing
sources. The increase in the level of borrowing was used to fund the Company's
asset growth.
The Company utilizes interest rate exchange agreements and interest rate
cap agreements to reduce its exposure to rising interest rates. (See "Financial
Statements and Supplementary Data -- Note 15: Interest Rate Risk Management.")
ASSET QUALITY
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, were as
follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans and loans under foreclosure $ 67,497 $ 60,840
REO 25,064 19,048
- --------------------------------------------------------------------------------------------------
Total nonperforming assets 92,561 79,888
Troubled debt restructurings (classified as substandard) 13,094 10,289
Other classified loans 93,236 150,714
Classified securities 37,645 12,865
- --------------------------------------------------------------------------------------------------
$236,536 $253,756
==================================================================================================
</TABLE>
Classified assets of $236.5 million were down 7 percent from year-end 1994
due to both the improved credit quality of certain commercial real estate and
residential construction loans and to loan repayments.
Nonperforming assets increased to $92.6 million at the end of the 1995 from
$79.9 million at December 31, 1994. The majority of the increase stemmed from a
rise in the level of nonperforming residential real estate loans. However,
nonperforming assets as a percentage of total assets remained steady at 0.43
percent at year-end 1995, compared with year-end 1994.
Even though nonperforming commercial real estate assets declined to $32.1
million at December 31, 1995, from $35.6 million a year ago, four large loans
(properties valued at $1.0 million or more) were placed on nonaccrual -- a
California loan for $2.7 million and three Washington loans totaling $6.3
million. Also, during 1995, a REO property valued at $4.8 million was sold and
another loan with a basis of $1.8 million was returned to current status. At the
end of 1995, troubled assets in California totaled less than 12 percent of total
nonperforming assets.
Nonperforming assets and troubled debt restructurings consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------
Nonaccruing Total As a
Loans & Loans Nonperforming Percentage of Troubled Debt
(dollars in thousands) Under Foreclosure REO Assets Total Assets Restructurings
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential $38,064 $ 7,965 $46,029 0.21% $ --
Residential construction 9,550 695 10,245 0.05 --
Apartment buildings 3,934 -- 3,934 0.02 2,605
Other commercial real estate 7,125 21,048 28,173 0.13 15,629
Second mortgage and other
consumer 6,895 445 7,340 0.04 --
Manufactured housing 1,923 1,286 3,209 0.01 --
Commercial business 6 -- 6 -- --
Reserve for REO losses -- (6,375) (6,375) (0.03) --
- --------------------------------------------------------------------------------------------------------------
$67,497 $25,064 $92,561 0.43% $18,234
==============================================================================================================
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------
Nonaccruing Total As a
Loans & Loans Nonperforming Percentage of Troubled Debt
(dollars in thousands) Under Foreclosure REO Assets Total Assets Restructurings
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential $27,658 $ 6,733 $34,391 0.19% $ --
Residential construction 4,640 1,691 6,331 0.04 --
Apartment buildings 9,106 729 9,835 0.05 1,680
Other commercial real estate 10,828 14,972 25,800 0.14 8,609
Second mortgage and other
consumer 6,296 692 6,988 0.04 --
Manufactured housing 1,643 736 2,379 0.01 --
Commercial business 669 -- 669 -- --
Reserve for REO losses -- (6,505) (6,505) (0.04) --
- --------------------------------------------------------------------------------------------------------------
$60,840 $19,048 $79,888 0.43% $10,289
==============================================================================================================
December 31, 1993 $77,043 $34,057 $111,100 0.07% $8,144
December 31, 1992 45,010 87,427 132,437 1.34 9,631
December 31, 1991 39,270 93,029 132,299 1.66 8,431
</TABLE>
Nonperforming commercial real estate and troubled debt restructurings by
geographic distribution and property type consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------------------------------
As a
Nonaccruing Total Total Percentage of
Loans & Loans Nonperforming Loans Total Loans Troubled Debt
(dollars in thousands) Under Foreclosure REO Assets & REO & REO Restructurings
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Washington $ 5,193 $16,059 $21,252 $1,033,063 2.06% $ 1,014
California 5,745 4,989 10,734 210,125 5.11 13,466
Other states 121 -- 121 468,779 0.03 3,754
- ----------------------------------------------------------------------------------------------------------------
$11,059 $21,048 $32,107 $1,711,967 1.88% $18,234
================================================================================================================
Apartment buildings $ 3,934 $ -- $ 3,934 $ 938,533 0.42% $ 2,605
Office buildings 2,931 11,655 14,586 164,103 8.89 --
Shopping centers -- 1,357 1,357 114,158 1.19 --
Medical/dental
buildings 586 4,364 4,950 50,349 9.83 --
Other 3,608 3,672 7,280 444,824 1.64 15,629
- ----------------------------------------------------------------------------------------------------------------
$11,059 $21,048 $32,107 $1,711,967 1.88% $18,234
================================================================================================================
</TABLE>
On January 1, 1995, Washington Mutual 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 measured at fair value or at the lower of cost or fair value,
leases, and debt securities (as defined by SFAS No. 115). It 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 December 31, 1995, the
Company had $18.2 million of restructured loans of which $13.1 million, though
performing, were classified substandard.
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. While an
impaired loan will always be a classified asset, it may or may not be
nonperforming. 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.
At December 31, 1995, loans totaling $82.2 million were impaired, of which
$67.0 million had allocated reserves of $10.9 million. The remaining $15.2
million were previously written down and have no reserves allocated to them at
this time. Of the $82.2 million of impaired loans, $10.0 million were
nonperforming and $72.2 million were performing but judged to be impaired. (See
"Financial Statements and Supplementary Data -- Note 5: Loans.")
38
<PAGE> 41
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES
The provision for loan losses during 1995 was $10.0 million compared with
$20.0 million in 1994 and $35.0 million in 1993. The 1995 and 1994 provision
reflected the Company's strong level of reserves and continued improvement in
asset quality. The provision during 1993 was determined necessary by management
because of uncertainty about the economic conditions in some lending markets as
well as caution about the quality of the loans acquired from Pacific First.
The reserve for loan losses increased to $138.2 million at December 31,
1995 from $128.0 million at December 31, 1994. Loan charge-offs, net of
recoveries for 1995 totaled $5.2 million. This was less than the level of net
charge-offs of $8.1 million in 1994 and $19.8 million in 1993. During 1993, net
charge-offs of commercial real estate loans accounted for $13.3 million of total
net charge-offs. However, with the improved performance of the commercial real
estate portfolio, recoveries exceeded charge-offs by $427,000 in 1995 and net
charge-offs on commercial real estate loans totaled only $318,000 during 1994.
Of the $5.2 million of net charge-offs taken in 1995, $4.7 million was the
result of consumer loan activity in large part due to loans acquired from
Pacific First. Net charge-offs on consumer loans have grown to the current level
from $4.3 million in 1994 and $2.1 million in 1993.
Changes in the reserve for loan losses were as follows:
<TABLE>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $128,049 $115,214 $ 53,970 $ 52,305 $ 52,843
Provision for loan losses 10,000 20,000 35,000 14,000 21,627
Reserves added through business combinations 5,372 921 46,000 5,320 571
Reserves charged-off:
Residential (1,214) (1,604) (1,612) (1,138) (379)
Residential construction (125) (190) (297) (937) (139)
Commercial real estate (1,260) (2,263) (13,786) (14,932) (5,285)
Manufactured housing, second mortgage and other
consumer (5,378) (5,223) (2,664) (1,028) (1,097)
Commercial business (20) (1,712) (2,590) (1,096) (18,457)
- -------------------------------------------------------------------------------------------------------
(7,997) (10,992) (20,949) (19,131) (25,357)
Reserves recovered:
Residential 171 17 45 17 36
Residential construction 47 -- -- -- 314
Commercial real estate 1,687 1,945 514 494 563
Manufactured housing, second mortgage and other
consumer 701 944 600 145 109
Commercial business 212 -- 34 820 1,599
- -------------------------------------------------------------------------------------------------------
2,818 2,906 1,193 1,476 2,621
- -------------------------------------------------------------------------------------------------------
Balance, end of year $138,242 $128,049 $115,214 $ 53,970 $ 52,305
=======================================================================================================
</TABLE>
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 loss exposure. Residential real
estate and consumer loans are not individually analyzed for impairment and loss
exposure 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 were evaluated individually
for impairment, which resulted in an allocation of $10.9 million of the reserve
for loan loss at year-end 1995, compared with an allocation of $16.9 million a
year earlier. Contributing to the decline was a reduction in the level of
allocated reserves related to commercial real estate in California. While the
quality of the California commercial real estate portfolio appears to have
stabilized, reserves allocated to this portfolio comprised 60 percent of total
allocated reserves.
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. Further analysis of the reserve
for loan losses during 1996 will determine if the current level of provision for
loan loss will be sustainable throughout 1996 and beyond.
39
<PAGE> 42
An analysis of the reserve for loan losses was as follows:
<TABLE>
December 31,
- -------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allocated reserves:
Commercial real estate $ 10,770 $ 15,594 $ 19,354 $21,746 $ 5,736
Residential construction 158 1,327 1,503 1,219 1,901
Commercial business -- -- 1,718 5,597 10,064
- -------------------------------------------------------------------------------------------------------
10,928 16,921 22,575 28,562 17,701
Unallocated reserves 127,314 111,128 92,639 25,408 34,604
- -------------------------------------------------------------------------------------------------------
$138,242 $128,049 $115,214 $53,970 $52,305
=======================================================================================================
Total reserve for loan losses as a
percentage of:
Total loans 1.10% 1.03% 1.06% 0.80% 1.00%
Nonperforming loans 204.81 210.47 149.55 119.91 133.19
</TABLE>
INTEREST RATE RISK MANAGEMENT
Washington Mutual's banking subsidiaries traditionally have had a mismatch
between the maturities of their assets and liabilities because customers
generally prefer short-term deposits and 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 Washington Mutual was a reduction in its net interest spread and the
corresponding pressure on net interest income in both 1994 and 1995. 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. The implementation of strategies to reduce
interest rate risk, however, generally has the negative effect of lowering
current period earnings. Management tries to balance these two factors in
administering its interest rate risk program. 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 affects the Company's operations.
As part of this program, management actively manages the actual asset and
liability maturities and at various times uses derivative instruments, such as
interest rate exchange agreements and interest rate cap agreements, to reduce
the negative effect that rising rates could have on net interest income.
Derivative instruments have received a lot of attention lately because of the
financial exposure they may cause if not used appropriately. Management, in
conjunction with the Company's Board of Directors, has established strict
policies and guidelines for their use. Moreover, Washington Mutual has used
these instruments for many years solely 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 "Financial Statements and Supplementary
Data -- Note 15: Interest Rate Risk Management.")
Another strategy management has used to reduce the Company's sensitivity to
rising interest rates is to securitize and then sell its fixed-rate loan
production. Toward the end of 1995, the Company sold $1,255.3 million of
predominately fixed-rate mortgage-backed securities. Essentially, these
securities were replaced with the purchase of adjustable-rate securities.
Depending on market conditions at the time, management may pursue this strategy
more vigorously in 1996.
At the end of 1995, Washington Mutual's one-year gap was a negative 14.4
percent, relatively unchanged from a negative 14.3 percent at the end of 1994.
The one-year gap is a conventional measure of interest sensitivity for thrift
institutions.
40
<PAGE> 43
Interest sensitivity analysis by maturity or repricing period was as
follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
Due or
repricing After one After two After five
within but within but within but within After
(dollars in millions) one year two years five years 10 years 10 years Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Cash, cash equivalents, and
trading account
securities(1) $ 441 $ -- $ -- $ -- $ -- $ 441
Available-for-sale
securities(2)(5) 3,623 389 1,044 1,234 1,263 7,553
Held-to-maturity securities 2 1 32 66 70 171
Loans(3):
Real estate loans 4,062 1,144 2,123 1,411 1,314 10,054
Manufactured housing,
second mortgage and
other consumer 992 486 719 321 75 2,593
Commercial credits 54 1 1 1 1 58
- ------------------------------------------------------------------------------------------------------------------
5,108 1,631 2,843 1,733 1,390 12,705
- ------------------------------------------------------------------------------------------------------------------
9,174 2,021 3,919 3,033 2,723 20,870
Interest-sensitive
liabilities:
Deposits(4) 7,194 2,166 1,139 87 3 10,589
Borrowings and other
liabilities 6,927 1,150 950 150 7 9,184
- ------------------------------------------------------------------------------------------------------------------
14,121 3,316 2,089 237 10 19,773
Derivative instruments
affecting interest rate
sensitivity:
Interest rate exchange agreements:
Designated against
available-for-sale
securities(5) (700) 200 500 -- -- --
Interest rate cap
agreements:
Designated against
available-for-sale
securities(5) (1,125) 875 250 -- -- --
- ------------------------------------------------------------------------------------------------------------------
(1,825) 1,075 750 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net (liability) asset
sensitivity $(3,122) $(2,370) $1,080 $2,796 $2,713 $ 1,097
==================================================================================================================
Net (liability) asset
sensitivity as a percentage
of total assets (14.42)% (10.95)% 4.99% 12.92% 12.53% 5.07%
</TABLE>
- ---------------
(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 one year."
(5) See "Investment Activities" regarding the effect of derivative instruments
on the repricing period of available-for-sale securities against which the
derivative instruments are designated.
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.
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
41
<PAGE> 44
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 actively manages its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances 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
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At December 31,
1995, the Company had excess liquidity compared to its established guidelines.
To meet its immediate needs for funds as well as long-term lending demands,
Washington Mutual maintains various sources of liquid assets and borrowing
capabilities. At December 31, 1995, the Company was able to borrow an additional
$5,424.1 million through the use of collateralized borrowings using unpledged
mortgage-backed securities and other wholesale sources.
CAPITAL REQUIREMENTS
Washington Mutual's banking subsidiaries exceeded all current regulatory
capital requirements to be classified as well-capitalized institutions, the
highest regulatory standard. In order to be categorized as a well-capitalized
institution, the FDIC requires banks it regulates to maintain a leverage ratio,
defined as Tier 1 capital divided by total regulatory assets, of at least 5.00
percent; total capital of at least 10.00 percent of risk-weighted assets; and
Tier 1 (or core) capital of at least 6.00 percent of risk-weighted assets. At
December 31, 1995, WMB's consolidated ratio of leverage capital to assets was
5.60 percent, the ratio of total capital to risk-weighted assets was 11.46
percent, and the ratio of core capital to risk-weighted assets was 10.59
percent.
Washington Mutual's federal savings bank subsidiary is required by the OTS
to maintain certain capital levels. In order to be classified as a
well-capitalized institution, the OTS requires banks it regulates to maintain a
leverage ratio of at least 5.00 percent; total capital of at least 10.00 percent
of risk-weighted assets; and core capital of at least 6.00 percent of risk-
weighted assets. At December 31, 1995, the federal banking subsidiary was in
compliance with all well-capitalized requirements.
WM Life is subject to risk-based capital requirements developed by the
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.
(See "Financial Statements and Supplementary Data -- Note 21: Regulatory
Capital Requirements.")
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see index on page 45.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
<PAGE> 45
PART III
Part III is incorporated by reference from the Company's definitive proxy
statement issued in conjunction with the Company's Annual Meeting of
Shareholders to be held April 16, 1996. Certain information regarding the
principal officers of Washington Mutual is set forth in "Business -- Principal
Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page 45.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes thereto.
(b) Reports on 8-K:
None.
(c) Exhibits:
See Index of Exhibits on page 89.
43
<PAGE> 46
SIGNATURES BY REGISTRANT
Pursuant to the requirements of the Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on February 20, 1996.
WASHINGTON MUTUAL, INC.
/s/ Kerry K. Killinger
-----------------------------------------
Kerry K. Killinger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on February 20, 1996.
<TABLE>
<S> <C>
/s/ Kerry K. Killinger /s/ Thomas J. Kappock
- --------------------------------------------- ---------------------------------------------
Kerry K. Killinger Thomas J. Kappock
Chairman, President and Chief Executive Vice President and
Executive Officer; Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
/s/ Douglas G. Wisdorf
---------------------------------------------
Douglas G. Wisdorf
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ Douglas P. Beighle /s/ William P. Gerberding
- --------------------------------------------- ---------------------------------------------
Douglas P. Beighle William P. Gerberding
Director Director
/s/ Herbert M. Bridge /s/ Dr. Samuel B. McKinney
- --------------------------------------------- ---------------------------------------------
Herbert M. Bridge Dr. Samuel B. McKinney
Director Director
/s/ Roger H. Eigsti /s/ Michael K. Murphy
- --------------------------------------------- ---------------------------------------------
Roger H. Eigsti Michael K. Murphy
Director Director
/s/ John W. Ellis /s/ Louis H. Pepper
- --------------------------------------------- ---------------------------------------------
John W. Ellis Louis H. Pepper
Director Director
/s/ Daniel J. Evans /s/ William G. Reed, Jr.
- --------------------------------------------- ---------------------------------------------
Daniel J. Evans William G. Reed, Jr.
Director Director
/s/ Anne V. Farrell
- --------------------------------------------- ---------------------------------------------
Anne V. Farrell James H. Stever
Director Director
</TABLE>
44
<PAGE> 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.............................................................. 46
Consolidated Statements of Income,
Years ended December 31, 1995, 1994 and 1993............................................ 47
Consolidated Statements of Financial Position,
December 31, 1995 and 1994.............................................................. 48
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1995, 1994 and 1993............................................ 49
Consolidated Statements of Cash Flows,
Years ended December 31, 1995, 1994 and 1993............................................ 50
Notes to Consolidated Financial Statements................................................ 52
</TABLE>
45
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Washington Mutual, Inc.:
We have audited the accompanying consolidated statements of financial position
of Washington Mutual, Inc. and subsidiaries (the Company) as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 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.
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.
LOGO
Deloitte & Touche LLP
Seattle, Washington
February 14, 1996
46
<PAGE> 49
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $1,045,235 $ 910,391 $ 789,669
Available-for-sale securities 288,761 143,549 --
Held-to-maturity securities 183,185 153,207 244,573
Cash equivalents 1,532 666 1,697
- -----------------------------------------------------------------------------------------------------
Total interest income 1,518,713 1,207,813 1,035,939
INTEREST EXPENSE
Deposits 479,199 355,820 340,595
Borrowings 461,884 280,768 165,913
- -----------------------------------------------------------------------------------------------------
Total interest expense 941,083 636,588 506,508
- -----------------------------------------------------------------------------------------------------
Net interest income 577,630 571,225 529,431
Provision for loan losses 10,000 20,000 35,000
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 567,630 551,225 494,431
OTHER INCOME
Service fees 80,967 70,621 68,862
Loan servicing fees 10,301 9,209 13,381
Other operating income 17,532 23,840 19,963
Gain on sale of loans, inclusive of write-downs 1,191 427 14,133
Gain (loss) on sale of other assets, inclusive of
write-downs (3,253) 3,741 25,035
- -----------------------------------------------------------------------------------------------------
Total other income 106,738 107,838 141,374
OTHER EXPENSE
Salaries and employee benefits 172,260 173,615 162,516
Occupancy and equipment 67,462 63,000 55,936
Regulatory assessment fees 20,746 22,404 20,425
Other operating expense 100,922 96,205 96,914
Amortization of goodwill and other intangible assets 28,269 29,076 24,690
Real estate owned ("REO") operations, inclusive of
write-downs (7,344) 12 6,295
- -----------------------------------------------------------------------------------------------------
Total other expense 382,315 384,312 366,776
- -----------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary items and
cumulative effect of change in tax accounting method 292,053 274,751 269,029
Income taxes 101,429 102,447 93,765
- -----------------------------------------------------------------------------------------------------
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
=====================================================================================================
Net Income Attributable to Common Stock $ 172,040 $ 153,720 $ 166,118
=====================================================================================================
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
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
47
<PAGE> 50
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 428,650 $ 222,435
Trading account securities 238 572
Available-for-sale securities, amortized cost $7,563,598 and
$2,580,816 7,689,041 2,535,018
Held-to-maturity securities, fair value of $185,076 and $2,406,659 171,351 2,608,585
Loans 12,535,538 12,406,589
REO 25,064 19,048
Premises and equipment 190,583 173,805
Goodwill and other intangible assets 161,127 190,998
Other assets 431,686 300,632
- ---------------------------------------------------------------------------------------------------
Total assets $21,633,278 $18,457,682
===================================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,195,841 $ 1,117,545
Savings and money market accounts 3,615,412 3,268,697
Time certificates 5,785,482 5,391,670
- ---------------------------------------------------------------------------------------------------
Total deposits 10,596,735 9,777,912
Annuities 855,503 799,178
Federal funds purchased 430,000 --
Securities sold under agreements to repurchase 3,962,400 2,595,651
Advances from the Federal Home Loan Bank of Seattle ("FHLB") 3,711,402 3,737,611
Other borrowings 224,250 79,039
Other liabilities 261,469 163,723
- ---------------------------------------------------------------------------------------------------
Total liabilities 20,041,759 17,153,114
Contingencies (Note 24)
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: 100,000,000 shares authorized --
65,939,292 and 61,970,704 shares issued and outstanding -- --
Capital surplus 669,484 639,409
Valuation reserve for available-for-sale securities 78,406 (28,980)
Retained earnings 843,629 694,139
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 1,591,519 1,304,568
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $21,633,278 $18,457,682
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
48
<PAGE> 51
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Shares Valuation Total
------------------ Reserve Stock-
Preferred Common Capital Retained for AFS holders'
(in thousands) Stock Stock Surplus Earnings Securities Equity
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 5,494 53,788 $556,086 $438,950 $ -- $ 995,036
Net income -- -- -- 179,676 -- 179,676
Cash dividends declared on preferred
stock -- -- -- (13,559) -- (13,559)
Cash dividends declared on common stock -- -- -- (28,712) -- (28,712)
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
Conversion of preferred stock to
common stock (1,294) 5,152 -- (445) -- (445)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 6,200 60,091 619,776 575,928 -- 1,195,704
Establishment of valuation reserve for
available-for-sale securities -- -- -- -- 13,565 13,565
Net income -- -- -- 172,304 -- 172,304
Cash dividends declared on preferred
stock -- -- -- (18,584) -- (18,584)
Cash dividends declared on common stock -- -- -- (42,214) -- (42,214)
Adjustment in valuation reserve for
available-for-sale securities -- -- -- -- (42,545) (42,545)
Common stock issued through stock options
and employee stock plans -- 426 10,038 -- -- 10,038
Business combination accounted for as a
pooling-of-interests -- 1,454 9,595 6,705 -- 16,300
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 6,200 61,971 639,409 694,139 (28,980) 1,304,568
Net income -- -- -- 190,624 -- 190,624
Cash dividends declared on preferred
stock -- -- -- (18,584) -- (18,584)
Cash dividends declared on common stock -- -- -- (49,071) -- (49,071)
Adjustment in valuation reserve for
available-for-sale securities -- -- -- -- 107,386 107,386
Common stock issued through stock options
and employee stock plans -- 539 8,379 -- -- 8,379
Business combination accounted for as a
pooling-of-interests -- 3,429 23,562 26,645 -- 50,207
Repurchase of preferred stock (78) -- (1,866) (124) -- (1,990)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 6,122 65,939 $669,484 $843,629 $ 78,406 $1,591,519
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
49
<PAGE> 52
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 190,624 $ 172,304 $ 179,676
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 10,000 20,000 35,000
Cumulative effect of change in tax accounting method -- -- (13,365)
(Gain) on sale of loans (1,191) (427) (14,133)
Loss (gain) on sale of other assets 3,253 (3,741) (25,035)
REO operations, inclusive of write-downs (7,344) 12 6,295
Extraordinary loss -- -- 13,028
Depreciation and amortization 24,870 34,946 36,458
FHLB stock dividend (15,967) (16,753) (22,943)
Decrease in trading account securities 742 691 1,574
(Increase) in interest receivable (24,841) (14,249) (32,096)
Increase (decrease) in interest payable 10,475 11,761 (24,815)
Increase in income taxes payable 37,376 40,500 13,190
(Increase) decrease in other assets (48,894) 13,114 6,948
(Decrease) in other liabilities (10,768) (57,414) (21,396)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 168,335 200,744 138,386
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (1,662,380) (1,037,632) --
Principal payments and maturities of available-for-sale
securities 328,845 343,348 --
Sales of available-for-sale securities 1,138,346 304,806 --
Purchases of held-to-maturity securities (88,249) (773,498) (1,430,792)
Principal payments and maturities of held-to-maturity
securities 176,559 188,372 920,635
Sales of held-to-maturity securities -- -- 764,162
Sales of loans 84,197 54,754 919,768
Principal payments on loans 2,164,389 2,329,872 3,554,065
Origination and purchases of loans (4,411,811) (3,965,043) (5,654,511)
Sales of REO 22,793 32,789 52,586
Other REO operations 1,774 (1,236) (8,573)
Expenditures for premises and equipment (31,787) (31,410) (35,031)
Cash acquired through acquisitions 68,358 40,679 387,688
- -----------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (2,208,966) (2,514,199) (530,003)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 406,928 229,743 (538,029)
Increase in annuities 56,325 85,795 141,955
Increase in federal funds purchased 430,000 -- --
Increase in securities sold under agreements to
repurchase 1,294,374 421,958 1,112,361
Proceeds from FHLB advances 3,616,601 5,703,996 3,946,509
Payments for FHLB advances (3,642,575) (4,045,800) (4,241,356)
Call of subordinated capital notes -- -- (41,600)
Proceeds of other borrowings 147,867 -- --
Payments of other borrowings (1,408) (3,431) (5,428)
Issuance of preferred stock -- -- 48,182
Issuance of common stock through stock options and
employee stock plans 8,379 10,038 15,526
Repurchase of preferred stock (1,990) -- --
Conversion of preferred stock to common stock -- -- (445)
Cash dividends paid (67,655) (60,798) (42,271)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,246,846 2,341,501 395,404
- -----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 206,215 28,046 3,787
Cash and cash equivalents at beginning of year 222,435 194,389 190,602
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 428,650 $ 222,435 $ 194,389
=====================================================================================================
</TABLE>
50
<PAGE> 53
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES RELATED TO THE
CONSOLIDATED STATEMENTS OF CASH FLOWS
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities $2,373,213 $ 174,572 $816,859
Implementation of new accounting standard -- reclass to
available-for-sale portfolio 3,471,032 2,127,890 --
Real estate acquired through foreclosure 23,190 15,773 32,870
CASH PAID DURING THE YEAR FOR
Interest on deposits 477,524 354,531 364,022
Interest on borrowings 451,490 269,414 167,301
Federal income taxes 65,000 85,000 60,000
</TABLE>
See Notes to Consolidated Financial Statements.
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Washington
Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or
the "Company"). WMI was formed in August 1994 by the Company's predecessor,
Washington Mutual Savings Bank ("WMSB"), a Washington state-chartered savings
bank, in connection with the reorganization of WMSB into a holding company
structure. The reorganization was completed in November 1994 through the merger
of WMSB into Washington Mutual Bank ("WMB"), the Company's Washington
state-chartered savings bank subsidiary, with WMB as the surviving entity. WMB
continued as a wholly owned subsidiary of WMI. The par value 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 acquired companies.
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
WMI is a Washington corporation that provides a broad range of financial
services to individuals and small businesses in Washington, Oregon, Utah,
Montana and Idaho through its subsidiary operations. The principal assets of WMI
are its principal subsidiaries, including its bank subsidiaries, WMB and
Washington Mutual Bank fsb ("WMBfsb"), and its insurance subsidiary, WM Life
Insurance Co. ("WM Life"). Financial services of the Company include the
traditional savings bank activities of accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family. Washington Mutual, through
other subsidiaries, also issues and markets annuity contracts and is the
investment advisor to and distributor of mutual funds.
On August 31, 1995, Washington Mutual diversified its business mix by
merging WMB with Enterprise Bank ("Enterprise"), a Seattle-area commercial bank
that focuses on small- to mid-size commercial business clients. The merger was
treated as a pooling-of-interests. Due to the immaterial nature of the
transaction, prior period information has not been restated as if the companies
had been combined.
On January 31, 1996, WMB merged with Western Bank ("Western") of Coos Bay,
Oregon. With 42 offices in 35 communities, Western is Oregon's largest
community-based commercial bank. The merger was treated as a pooling-of-
interests. Because the merger occurred after year-end 1995, the Company's
financial statements have not been restated to reflect the combination of these
companies.
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 to reduce its exposure to interest
rate risk. Interest rate exchange agreements and interest rate cap agreements
are used only if they have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. Such
effect is measured through ongoing correlation tests.
Interest rate exchange agreements and interest rate cap agreements are
designated either against the available-for-sale portfolio or against short-term
borrowings and deposits. Agreements designated against available-for-sale
securities are included at their fair value in the available-for-sale portfolio.
Any mark-to-market adjustments are reported as a separate component of
52
<PAGE> 55
stockholders' equity, net of tax. The fair value of interest rate exchange
agreements and interest rate cap agreements designated against 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 on a straight-line basis 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 cost of such options are
capitalized and amortized on a straight-line basis as a reduction of other
income over the original terms of the options. All such options are carried at
fair value with the corresponding gain or loss recognized in other income.
Additionally, 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.
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 January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This statement requires investment and equity
securities to be segregated into the following three categories: trading,
held-to-maturity and available-for-sale.
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 very 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-
53
<PAGE> 56
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 traunches, 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.
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.
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.
On January 1, 1995, Washington Mutual 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 measured at fair value or at the lower of cost or fair value,
leases, and debt securities (as defined by SFAS No. 115). It 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. While an impaired
loan will always be a classified asset, it may or may not be nonperforming.
Classified assets consist of nonaccrual loans, loans under foreclosure, REO and
performing loans (including substandard trouble debt restructurings) and
securities that exhibit credit quality weaknesses. The adoption of SFAS No. 114
had no material impact on the results of operations or financial condition of
the Company.
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, Accounting for Mortgage Servicing Rights. The statement eliminates the
distinctions 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 who sell loans and retain the servicing
rights will be 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.
54
<PAGE> 57
Effective January 1, 1996, the Company adopted SFAS No. 122. The adoption is not
anticipated to have a material impact on the results of operations or financial
condition of the Company.
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.
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.
REO
REO includes properties acquired through foreclosure that are transferred
to REO at the lower of cost or fair value, 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 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.
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 is an Arizona-domiciled life insurance company. WM Life is
authorized under state law to issue annuities in seven states. In addition, WM
Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed
under state law to issue annuities in 28 states. WM Life currently issues fixed
and variable flexible premium deferred annuities, single premium fixed deferred
annuities and single premium immediate annuities. Empire currently issues fixed
flexible premium deferred annuities and single premium immediate annuities. Both
companies conduct business through licensed independent agents. The majority of
such agents are employees of affiliates of the Company and operate in the
Company's financial centers. Currently, annuities are primarily issued in
Washington and Oregon.
The Company defers certain costs, such as commissions and the expenses of
underwriting and issuing policies, that are involved in acquiring new annuity
and life insurance business. These costs, which are included in other assets in
the accompanying Consolidated Statements of Financial Position, are amortized
over the lives of the policies in relation to the estimated gross profit.
Annuities equal the policy value as defined in the policy contract as of the
balance sheet date.
55
<PAGE> 58
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.
NOTE 2: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and demand deposits $257,075 $220,959
Cash equivalents:
Overnight investments 170,000 --
Time deposits 1,575 1,476
- --------------------------------------------------------------------------------------------------
171,575 1,476
- --------------------------------------------------------------------------------------------------
$428,650 $222,435
==================================================================================================
</TABLE>
For the purpose 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.
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 $34.6 million and $27.3 million
at December 31, 1995 and 1994.
56
<PAGE> 59
NOTE 3: AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Yield(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after one but within five years $ 9,908 $ 119 $ (16) $ 10,011 6.39%
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
- ----------------------------------------------------------------------------------------------------------
79,476 281 (911) 78,846 6.97
Corporate debt obligations:
Due after one but within five years 133,863 7,492 (178) 141,177 8.77
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
- ----------------------------------------------------------------------------------------------------------
412,656 22,355 (1,095) 433,916 7.70
Equity securities:
Preferred stock 110,532 2,535 (2,311) 110,756 7.21
FHLB stock 254,440 -- -- 254,440 6.91
Other stock 5 3 -- 8 --
- ----------------------------------------------------------------------------------------------------------
364,977 2,538 (2,311) 365,204 7.00
- ----------------------------------------------------------------------------------------------------------
857,109 25,174 (4,317) 877,966 7.34
Mortgage-backed securities:
U.S. government agency:
Due after one but within five years 13,979 -- (130) 13,849 5.47
After five but within 10 years 9,479 24 (57) 9,446 6.44
After 10 years 5,923,040 141,777 (19,214) 6,045,603 6.91
- ----------------------------------------------------------------------------------------------------------
5,946,498 141,801 (19,401) 6,068,898 6.91
Corporate:
Due after five but within 10 years 18,614 901 (258) 19,257 7.14
After 10 years 730,279 7,482 (12,409) 725,352 7.74
- ----------------------------------------------------------------------------------------------------------
748,893 8,383 (12,667) 744,609 7.73
- ----------------------------------------------------------------------------------------------------------
6,695,391 150,184 (32,068) 6,813,507 7.00
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) --
- ----------------------------------------------------------------------------------------------------------
$7,563,598 $177,583 $(52,140) $7,689,041 7.04%
==========================================================================================================
</TABLE>
(1) Weighted average yield at end of year.
57
<PAGE> 60
<TABLE>
<CAPTION>
December 31, 1994
- ----------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Yield(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after one but within five years $ 187,992 $ 7 $ (11,135) $ 176,864 5.74%
After five but within 10 years 9,469 -- (254) 9,215 6.08
After 10 years 70,340 -- (2,316) 68,024 5.97
- ----------------------------------------------------------------------------------------------------------
267,801 7 (13,705) 254,103 5.81
Corporate debt obligations:
Due after one but within five years 83,255 231 (2,232) 81,254 6.71
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
- ----------------------------------------------------------------------------------------------------------
140,366 550 (5,856) 135,060 7.04
Equity securities:
Preferred stock 35,457 -- (1,790) 33,667 9.95
FHLB stock 230,311 -- -- 230,311 6.00
Other stock 1,032 -- -- 1,032 --
- ----------------------------------------------------------------------------------------------------------
266,800 -- (1,790) 265,010 6.48
- ----------------------------------------------------------------------------------------------------------
674,967 557 (21,351) 654,173 6.34
Mortgage-backed securities:
U.S. government agency:
Due after one but within five years 52,036 -- (4,191) 47,845 5.18
After five but within 10 years 6,152 9 (2) 6,159 7.78
After 10 years 1,475,882 1,272 (60,088) 1,417,066 6.51
- ----------------------------------------------------------------------------------------------------------
1,534,070 1,281 (64,281) 1,471,070 6.47
Corporate:
Due after five but within 10 years 9,716 -- (280) 9,436 5.46
After 10 years 355,657 511 (16,173) 339,995 6.14
- ----------------------------------------------------------------------------------------------------------
365,373 511 (16,453) 349,431 6.12
- ----------------------------------------------------------------------------------------------------------
1,899,443 1,792 (80,734) 1,820,501 6.40
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 --
- ----------------------------------------------------------------------------------------------------------
$2,580,816 $56,287 $(102,085) $2,535,018 6.23%
==========================================================================================================
</TABLE>
(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 $253.0 million and $39.1 million. The
Company realized $2.2 million in gains and $2.1 million in losses on these sales
during 1995. Similarly, the Company realized $723,000 in gains and $100,000 in
losses on sales during 1994. Proceeds from sales of mortgage-backed securities
in the available-for-sale portfolio during 1995 and 1994 were $888.0 million and
$261.7 million. The Company realized $12.3 million in gains and $16.0 million in
losses on these sales during 1995 and $3.6 million in gains and $469,000 in
losses on these sales during 1994.
Available-for-sale mortgage-backed securities with a book value of $4,545.0
million and $1,644.0 million and a market value of $4,642.0 million and $1,573.4
million at December 31, 1995 and 1994, 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.
58
<PAGE> 61
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. On December 1, 1995, Washington Mutual elected to
take advantage of this opportunity and reclassified $3,471.0 million of its
held-to-maturity securities into the available-for-sale category. 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 $138.9 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 $78.4 million. At December 31, 1994, net
unrealized losses on the available-for-sale portfolio were $99.7 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 $29.0
million.
On December 31, 1995, the Company held $744.6 million of private-issue
securities. Of that amount, 14 percent were of the highest investment grade
(AAA), 66 percent were rated investment grade (AA or A), 13 percent were rated
lowest investment grade (BBB) and 7 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 and market value of $168.0 million from a single issuer, the
Resolution Trust Corporation.
NOTE 4: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Yield(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations
Due after five but within 10 years $ 6,592 $ 906 $ -- $ 7,498 8.09%
- --------------------------------------------------------------------------------------------------------
6,592 906 -- 7,498 8.09
Corporate debt obligations:
Due within one year 2,034 -- (7) 2,027 4.73
After one but within five years 31,123 2,895 -- 34,018 8.67
After five but within 10 years 22,536 2,472 -- 25,008 8.38
After 10 years 17,162 2,310 (9) 19,463 8.91
- --------------------------------------------------------------------------------------------------------
72,855 7,677 (16) 80,516 8.53
Municipal obligations:
Due after one but within five years 1,313 80 -- 1,393 7.29
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
- --------------------------------------------------------------------------------------------------------
90,886 5,071 -- 95,957 6.59
- --------------------------------------------------------------------------------------------------------
170,333 13,654 (16) 183,971 7.48
Mortgage-backed securities:
U.S. government agency:
Due after 10 years 1,018 87 -- 1,105 10.25
- --------------------------------------------------------------------------------------------------------
$171,351 $13,741 $(16) $185,076 7.49%
========================================================================================================
</TABLE>
(1) Weighted average yield at end of year.
59
<PAGE> 62
<TABLE>
<CAPTION>
December 31, 1994
- ---------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value Yield(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
After one but within five years $ 1,006 $ 1 $ -- $ 1,007 4.44%
After five but within 10 years 6,557 -- (42) 6,515 8.25
- ---------------------------------------------------------------------------------------------------------
7,563 1 (42) 7,522 7.74
Corporate debt obligations:
Due within one year 5,867 14 (75) 5,806 5.30
After one but within five years 85,848 1,898 (3,422) 84,324 8.18
After five but within 10 years 172,661 727 (13,781) 159,607 7.24
After 10 years 95,857 493 (8,831) 87,519 7.80
- ---------------------------------------------------------------------------------------------------------
360,233 3,132 (26,109) 337,256 7.58
Municipal obligations:
Due after one but within five years 227 6 (3) 230 7.39
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
- ---------------------------------------------------------------------------------------------------------
78,521 2,685 (1,392) 79,814 6.76
- ---------------------------------------------------------------------------------------------------------
446,317 5,818 (27,543) 424,592 7.43
Mortgage-backed securities:
U.S. government agency:
After five but within 10 years 12,296 -- (1,019) 11,277 6.13
After 10 years 2,031,920 38 (175,624) 1,856,334 7.15
- ---------------------------------------------------------------------------------------------------------
2,044,216 38 (176,643) 1,867,611 7.14
Corporate:
Due after five but within 10 years 548 13 -- 561 11.06
After 10 years 117,504 252 (3,861) 113,895 7.04
- ---------------------------------------------------------------------------------------------------------
118,052 265 (3,861) 114,456 7.06
- ---------------------------------------------------------------------------------------------------------
2,162,268 303 (180,504) 1,982,067 7.14
- ---------------------------------------------------------------------------------------------------------
$2,608,585 $6,121 $ (208,047) $2,406,659 7.19%
=========================================================================================================
</TABLE>
(1) Weighted average yield at end of year.
No held-to-maturity securities were pledged as collateral as of December
31, 1995. Held-to-maturity mortgage-backed securities with a book value of
$1,995.6 million and a market value of $1,828.0 million at December 31, 1994
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.
NOTE 5: LOANS
Loans consisted of the following:
<TABLE>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Residential $ 7,748,975 $ 8,004,319
Residential construction 578,554 516,486
Commercial real estate 1,690,919 1,675,406
- ---------------------------------------------------------------------------------------------------
10,018,448 10,196,211
Second mortgage and other consumer 1,829,566 1,689,379
Manufactured housing 767,717 646,605
Commercial business 58,049 2,443
Reserve for loan losses (138,242) (128,049)
- ---------------------------------------------------------------------------------------------------
$12,535,538 $12,406,589
===================================================================================================
</TABLE>
Nonaccrual loans totaled $42.6 million and $32.7 million at December 31,
1995 and 1994. If interest on these loans had been recognized, such income would
have been $3.7 million and $2.8 million for 1995 and 1994. Loans under
foreclosure
60
<PAGE> 63
were $24.9 million and $28.1 million at December 31, 1995 and 1994. In addition,
at December 31, 1995 and 1994, the Company had troubled debt restructurings
aggregating $18.2 million and $10.3 million. During 1995 and 1994, these
troubled debt restructurings returned a net yield of 8.69 percent and 8.53
percent, thereby contributing $1.6 million and $878,000 to interest income. Had
these loans not been restructured and interest accrued at their original rates,
the additional interest income would have been $82,000 and $93,000 for 1995 and
1994.
At December 31, 1995, loans totaling $82.2 million were impaired of which
$67.0 million had allocated reserves of $10.9 million. The remaining $15.2
million were previously written down and had no reserves allocated to them. Of
the $82.2 million of impaired loans, $7.1 million were on nonaccrual status,
$2.9 million were under foreclosure and $72.2 million were performing but judged
to be impaired. The average balance of impaired loans during the year was $91.1
million and the Company recognized $7.7 million of related interest income.
Interest income is normally recognized on the accrual basis, however, if the
impaired loan is nonperforming, then interest income is recorded on the receipt
of cash.
Loans, exclusive of reserve for loan losses, by geographic concentration
were as follows:
<TABLE>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) Washington Oregon California Utah Other States Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $5,668,638 $1,337,296 $ 296,816 $107,423 $338,802 $ 7,748,975
Residential construction 345,163 186,857 -- 23,321 23,213 578,554
Apartment buildings 591,764 201,452 61,817 30,889 52,611 938,533
Other commercial real estate 425,240 87,807 143,319 37,595 58,425 752,386
- --------------------------------------------------------------------------------------------------------------
7,030,805 1,813,412 501,952 199,228 473,051 10,018,448
Second mortgage and other
consumer 1,519,796 288,141 229 10,749 10,651 1,829,566
Manufactured housing 567,012 166,322 -- 7,317 27,066 767,717
Commercial business 57,882 -- -- -- 167 58,049
- --------------------------------------------------------------------------------------------------------------
$9,175,495 $2,267,875 $ 502,181 $217,294 $510,935 $12,673,780
==============================================================================================================
</TABLE>
Loans, exclusive of reserve for loan losses, deferred loan fees and
premiums and discounts, by maturity or repricing date were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31, 1995
- -------------------------------------------------------------------------------------------------
<S> <C>
Adjustable-rate loans:
Due within one year $ 3,475,761
After one but within five years 1,791,279
After five but within 10 years 90,925
After 10 years 21,853
- -------------------------------------------------------------------------------------------------
5,379,818
Fixed-rate loans:
Due within one year 345,040
After one but within five years 1,211,686
After five but within 10 years 1,576,277
After 10 years 4,192,454
- -------------------------------------------------------------------------------------------------
7,325,457
- -------------------------------------------------------------------------------------------------
$12,705,275
=================================================================================================
</TABLE>
In addition to loans the Company serviced for its own portfolio, it
serviced loans of $5,093.6 million and $3,897.5 million at December 31, 1995 and
1994 for U.S. government agencies, institutions and private investors.
Unamortized deferred loan fees were $72.7 million and $92.6 million at
December 31, 1995 and 1994.
At December 31, 1995, the Company had $590.1 million in fixed-rate mortgage
loan commitments, $369.2 million in adjustable-rate mortgage loan commitments,
$31.1 million in commercial business loan commitments and $515.9 million in
undisbursed lines of credit.
It is the policy of Washington Mutual to not grant loans to employees who
hold the position of Senior Vice President or above.
61
<PAGE> 64
NOTE 6: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $128,049 $115,214 $ 53,970
Provision for loan losses 10,000 20,000 35,000
Reserves added through business combinations 5,372 921 46,000
Reserves charged-off:
Residential (1,214) (1,604) (1,612)
Residential construction (125) (190) (297)
Commercial real estate (1,260) (2,263) (13,786)
Manufactured housing, second mortgage and other consumer (5,378) (5,223) (2,664)
Commercial business (20) (1,712) (2,590)
- ----------------------------------------------------------------------------------------------------
(7,997) (10,992) (20,949)
Reserves recovered:
Residential 171 17 45
Residential construction 47 -- --
Commercial real estate 1,687 1,945 514
Manufactured housing, second mortgage and other consumer 701 944 600
Commercial business 212 -- 34
- ----------------------------------------------------------------------------------------------------
2,818 2,906 1,193
- ----------------------------------------------------------------------------------------------------
Balance, end of year $138,242 $128,049 $115,214
====================================================================================================
</TABLE>
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.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated reserves:
Commercial real estate $ 10,770 $ 15,594
Residential construction 158 1,327
- --------------------------------------------------------------------------------------------------
10,928 16,921
Unallocated reserves 127,314 111,128
- --------------------------------------------------------------------------------------------------
$138,242 $128,049
==================================================================================================
Total reserve for loan losses as a percentage of:
Total loans 1.10% 1.03%
Nonperforming loans 204.81 210.47
</TABLE>
NOTE 7: REO
REO consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure $30,421 $24,574
Other repossessed assets 1,018 979
Reserve for losses (6,375) (6,505)
- --------------------------------------------------------------------------------------------------
$25,064 $19,048
==================================================================================================
</TABLE>
62
<PAGE> 65
Changes in the REO reserve for losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $6,505 $5,475 $ 11,239
Provision for REO losses -- 100 7,300
Reserves charged-off, net of recoveries (130) 930 (13,064)
- ----------------------------------------------------------------------------------------------------
Balance, end of year $6,375 $6,505 $ 5,475
====================================================================================================
</TABLE>
REO operations, inclusive of write-downs were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $2,337 $ 88 $ 665
Gain on sale of REO 5,007 -- 340
Provision for REO losses -- (100) (7,300)
- ----------------------------------------------------------------------------------------------------
$7,344 $ (12) $(6,295)
====================================================================================================
</TABLE>
NOTE 8: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $127,066 $125,058
Buildings 94,067 70,719
Leasehold improvements 32,931 35,280
- --------------------------------------------------------------------------------------------------
254,064 231,057
Accumulated depreciation (95,880) (89,126)
- --------------------------------------------------------------------------------------------------
158,184 141,931
Land 32,399 31,874
- --------------------------------------------------------------------------------------------------
$190,583 $173,805
==================================================================================================
</TABLE>
Depreciation expense for 1995, 1994 and 1993 was $21.6 million, $18.9
million and $13.4 million.
The Company has noncancelable operating leases for financial centers,
office facilities and equipment. Rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $27.3 million for 1995 and $25.7
million in both 1994 and 1993.
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------
Land & Furniture &
(dollars in thousands) Buildings Equipment
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments:
Due within one year $ 20,406 $3,882
After one but within two years 19,538 2,822
After two but within three years 18,265 1,630
After three but within four years 17,295 652
After four but within five years 16,490 --
After five years 61,252 --
- -----------------------------------------------------------------------------------------------------
$153,246 $8,986
=====================================================================================================
</TABLE>
63
<PAGE> 66
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.
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==================================================================================================
</TABLE>
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.
During 1993, the acquisition of Pacific First Bank ("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 10: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Checking accounts:
Interest bearing $ 794,014 $ 798,465
Noninterest bearing 401,827 319,080
- ---------------------------------------------------------------------------------------------------
1,195,841 1,117,545
Savings accounts 820,343 1,018,637
Money market accounts 2,795,069 2,250,060
Time deposit accounts:
Due within one year 4,543,722 3,868,134
After one but within two years 583,546 749,372
After two but within three years 238,653 308,655
After three but within four years 173,995 190,588
After four but within five years 155,863 214,896
After five years 89,703 60,025
- ---------------------------------------------------------------------------------------------------
5,785,482 5,391,670
- ---------------------------------------------------------------------------------------------------
$10,596,735 $9,777,912
===================================================================================================
</TABLE>
Deposits with individual account balances of $100,000 or greater aggregated
$1,238.1 million and $1,912.9 million at December 31, 1995 and 1994. Included in
these accounts were wholesale time deposit accounts totaling $511.6 million and
$619.1 million and Bank Investment Contracts ("BICs") totaling $2.7 million and
$22.8 million at December 31, 1995
64
<PAGE> 67
and 1994. At December 31, 1995, wholesale time deposit accounts and BICs of
$197.1 million mature within three months, $124.6 million mature in three months
to six months, $107.0 million mature in six months to one year, and $85.6
million mature after one year. The related interest expense on these two
wholesale products was $35.6 million, $17.7 million and $17.4 million for 1995,
1994 and 1993.
Deposits, principally wholesale time deposit accounts, from political
subdivisions and public agencies in Washington, were $274.4 million and $281.3
million at December 31, 1995 and 1994.
Financial data pertaining to the weighted average cost of deposits were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted daily average interest rate during the year 4.66% 3.81% 3.91%
</TABLE>
NOTE 11: 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 $430.0 million.
Financial data pertaining to the weighted average cost, the level of
federal funds purchased, and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.83% --% --%
Weighted daily average interest rate during the year 5.84 -- --
Daily average balance of federal funds purchased $264,888 $-- $--
Maximum amount of federal funds purchased at any month end 998,000 -- --
Interest expense during the year 15,460 -- --
</TABLE>
NOTE 12: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Reverse repurchase agreements $3,576,400 $2,076,651
Dollar repurchase agreements 386,000 519,000
- ---------------------------------------------------------------------------------------------------
$3,962,400 $2,595,651
===================================================================================================
</TABLE>
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.
65
<PAGE> 68
Scheduled maturities or repricing of securities sold under agreements to
repurchase were as follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase:
Due within 30 days $2,673,357 $1,706,693
After 30 but within 90 days 397,178 --
After 90 but within 180 days 392,361 394,123
After 180 but within one year -- 244,360
After one year 499,504 250,475
- ---------------------------------------------------------------------------------------------------
$3,962,400 $2,595,651
===================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.68% 5.64% 3.49%
Weighted daily average interest rate during the year 5.91 4.70 3.84
Daily average of securities sold under agreements to
repurchase $3,750,031 $2,202,778 $1,526,197
Maximum securities sold under agreements to repurchase at
any month end 4,545,140 2,676,447 2,173,693
Interest expense during the year 221,481 98,425 58,613
</TABLE>
NOTE 13: ADVANCES FROM THE FHLB
As members of the FHLB, WMB, WM Life and WMBfsb maintain credit lines that
are percentages of their total regulatory assets, subject to collateralization
requirements. At December 31, 1995, the credit lines were 17 percent, 19 percent
and 45 percent of regulatory assets for WMB, WM Life and WMBfsb. 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.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------
Range of Range of
Interest Interest
(dollars in thousands) Amount Rates Amount Rates
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within one year $1,896,718 4.74%-8.35% $1,456,133 3.95%-7.89%
After one but within two years 1,321,000 4.38 -8.45 1,369,852 4.74 -5.78
After two but within three years 457,000 5.71 -8.50 774,478 4.38 -5.60
After three but within four years 7,000 8.50 -8.50 57,575 5.95 -5.99
After four but within five years 5,137 6.25 -6.89 60,403 6.19 -6.28
After five years 24,547 2.80 -8.65 19,170 4.50 -8.65
- ------------------------------------------------------------------------------------------------------
$3,711,402 $3,737,611
======================================================================================================
</TABLE>
66
<PAGE> 69
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.64% 5.66% 3.82%
Weighted daily average interest rate during the year 5.63 4.54 4.19
Daily average of FHLB advances $3,046,722 $3,002,174 $1,573,678
Maximum FHLB advances at any month end 3,711,402 3,737,611 2,079,934
Interest expense during the year 171,564 144,163 65,890
</TABLE>
NOTE 14: OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------
Range of Range of
(dollars in thousands) Amount Interest Rates Amount Interest Rates
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior notes $147,845 7.46% $ -- --%
Notes payable 76,405 6.13-8.00 79,039 6.13-8.75
- --------------------------------------------------------------------------------------------------
$224,250 $79,039
==================================================================================================
</TABLE>
In August 1995, the Company issued $150.0 million of senior notes bearing
an interest rate of 7.25%. 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 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.
Financial data pertaining to the weighted average cost, the level of other
borrowings and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 6.88% 6.13% 6.21%
Weighted daily average interest rate during the year 6.65 6.22 6.14
Daily average of other borrowings $130,342 $81,071 $67,572
Maximum other borrowings at any month end 226,017 82,925 89,548
Interest expense during the year 8,663 5,037 4,152
</TABLE>
NOTE 15: 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 $9,174.3 million and
interest-sensitive liabilities of $12,296.2 million 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 $1,165.0 million and $2,550.0 million. Without these instruments the
Company's one-year gap at December 31, 1995 would have been a negative 22.9
percent as opposed to a negative 14.4 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
67
<PAGE> 70
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.
Scheduled maturities of interest rate exchange agreements were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------
Short-Term
Notional Receipt Long-Term Carrying Fair
(dollars in thousands) Amount Rate(1) Payment Rate Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
$1,165,000 5.96% 5.89% $(11,847) $(11,847)
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------------------------------
Short-Term
Notional Receipt Long-Term Carrying Fair
(dollars in thousands) Amount Rate(1) Payment Rate Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 short-term
borrowings and deposits:
Due within one year 69,000 5.79 7.46 -- (209)
After one but within two years 190,000 5.80 6.75 -- 2,319
- -------------------------------------------------------------------------------------------------------
$759,000 5.86% 5.32% $18,654 $20,764
=======================================================================================================
</TABLE>
(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.
68
<PAGE> 71
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying Fair
(dollars in thousands) Amount Rate Receipt Rate Value Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due within one year(1) $1,425,000 5.34% 5.90% $4,484 $4,484
After one but within two years(2) 875,000 5.85 5.83 3,799 3,799
After two but within three years(3) 250,000 6.05 5.90 1,132 1,132
- -----------------------------------------------------------------------------------------------------
$2,550,000 5.59% 5.87% $9,415 $9,415
=====================================================================================================
</TABLE>
(1) Includes $425.0 million notional amount with a weighted average cap ceiling
of 8.06%
(2) Includes $600.0 million notional amount with a weighted average cap ceiling
of 7.75%
(3) Includes $250.0 million notional amount with a weighted average cap ceiling
of 7.65%
<TABLE>
<CAPTION>
December 31, 1994
- -----------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying Fair
(dollars in thousands) Amount Rate Receipt Rate Value Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 short-term
borrowings and deposits:
Due after one but within two
years(1) 825,000 5.50 5.89 -- 20,421
- -----------------------------------------------------------------------------------------------------
$1,700,000 5.25% 5.81% $41,690 $62,111
====================================================================================================
</TABLE>
(1) Includes $425.0 million notional amount with a weighted average cap ceiling
of 8.06%.
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------
Interest Rate Interest Rate
(dollars in thousands) Exchange Agreements Cap Agreements
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional balance, beginning of year $ 759,000 $1,700,000
Purchases 700,000 850,000
Terminations and maturities (294,000) --
- ------------------------------------------------------------------------------------------------------
Notional balance, end of year $1,165,000 $2,550,000
======================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------
Gain on Gain on Short- Loss on Short- Net
Available-For- Term Borrowings Term Borrowings Gain
(dollars in thousands) Sale Securities and Deposits and Deposits (Loss)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
=========================================================================================================
</TABLE>
69
<PAGE> 72
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average net effective (benefit) cost at end of year (0.07)% (0.54)% 2.92%
Weighted average net effective (benefit) cost during the year (0.51) 1.73 4.25
Monthly average notional amount of interest rate exchange
agreements $1,113,500 $ 890,250 $670,767
Maximum notional amount of interest rate exchange agreements
at any
month end 1,382,000 1,125,000 855,000
Net cost included with interest expense on deposits during
the year 3,887 15,289 24,268
Net cost included with interest expense on borrowings during
the year 902 1,426 4,210
Net (benefit) included with interest income on
available-for-sale securities during the year (10,495) (1,316) --
</TABLE>
Financial data pertaining to the level of interest rate cap agreements and
related net cost (benefit) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Monthly average notional amount of interest rate cap
agreements $2,083,333 $1,064,583 $462,500
Maximum notional amount of interest rate cap agreements at
any
month end 2,550,000 1,700,000 675,000
Net cost (benefit) included with interest expense on deposits
during the year 4,380 (301) --
Net (benefit) cost included with interest income on
available-for-sale securities during the year (5,340) 1,365 --
</TABLE>
NOTE 16: 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:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trading account securities $ 408 $ 165 $ 746
Available-for-sale securities (3,760) 3,794 --
Held-to-maturity securities -- -- 26,706
Premises and equipment (626) 140 1,397
Other 725 (358) (3,814)
$(3,253) $3,741 $25,035
</TABLE>
NOTE 17: INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $ 82,241 $ 87,054 $72,003
Deferred income tax expense 19,188 15,393 17,687
$101,429 $102,447 $89,690
</TABLE>
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.
70
<PAGE> 73
The significant components of the Company's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Purchase accounting adjustments $ 22,996 $ 37,331
FHLB stock dividends 42,100 35,783
Deferred loan fees 32,958 19,163
Deferred gains 50,947 11,655
Other 50,202 31,318
- --------------------------------------------------------------------------------------------------
199,203 135,250
Deferred tax assets:
Book reserves 44,076 44,655
Purchase accounting adjustments 12,318 16,167
Deferred losses -- 12,166
Other 16,376 14,181
- --------------------------------------------------------------------------------------------------
72,770 87,169
- --------------------------------------------------------------------------------------------------
$126,433 $ 48,081
==================================================================================================
</TABLE>
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 the Company to defer the recognition of loan fees for income tax
purposes.
Under SFAS No. 115, the tax effect of net 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 liability was as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax liability, beginning of year $ 48,081
Tax effect of valuation adjustment on available-for-sale securities 55,155
Deferred income tax expense 19,188
Other adjustments 4,009
- ---------------------------------------------------------------------------------------------------
Deferred tax liability, end of year $126,433
===================================================================================================
</TABLE>
Reconciliations between income taxes computed at statutory rates and income
taxes included in the Consolidated Statements of Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at statutory rates $102,218 $ 96,163 $95,126
Tax effect of:
Amortization of goodwill and other intangible assets 6,631 6,688 6,281
Dividends received deduction (987) (506) (441)
Tax exempt income (1,902) (1,624) (1,838)
Other (4,531) 1,726 (5,363)
- ----------------------------------------------------------------------------------------------------
Income taxes before extraordinary items 101,429 102,447 93,765
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 $101,429 $102,447 $89,690
====================================================================================================
</TABLE>
71
<PAGE> 74
NOTE 18: EXTRAORDINARY ITEMS
Extraordinary items consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
====================================================================================================
</TABLE>
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 19: 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:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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 $220.6 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 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.
72
<PAGE> 75
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.
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 20: 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.
73
<PAGE> 76
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $190,624 $172,304 $179,676
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) (7,392)
- -----------------------------------------------------------------------------------------------------
Net income attributable to primary common stock $172,040 $153,720 $166,118
=====================================================================================================
Net income $190,624 $172,304 $179,676
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 $180,440 $162,120 $173,510
=====================================================================================================
Average number of common shares outstanding:
Primary 64,194,945 60,494,945 58,954,059
Noncumulative Convertible Perpetual, Series A -- -- 643,121
Noncumulative Convertible Perpetual, Series D 5,419,247 5,419,247 5,419,247
- -----------------------------------------------------------------------------------------------------
Fully diluted 69,614,192 65,914,192 65,016,427
=====================================================================================================
</TABLE>
NOTE 21: 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 Federal Deposit Insurance
Corporation ("FDIC") capital requirements while WMBfsb is 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 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 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 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. Undercapital-
74
<PAGE> 77
ized institutions are subject to certain regulatory controls and restrictions
which become more extensive as an institution becomes more severely
undercapitalized. At December 31, 1995, both WMB 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 WMBfsb), although implementation of the regulation has been delayed.
Management believes that the effect of including such an interest rate risk
component in the calculation of risk-adjusted capital will not cause 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) and WMBfsb (on a
consolidated basis) were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -------------------------------------------------------------------------------------------------
WMB WMBfsb
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Tangible capital ratio n.a.% 6.76%
Leverage capital ratio 5.60 6.76
Total risk-based capital ratio 11.46 12.64
Tier 1 or core risk-based capital ratio 10.59 11.39
</TABLE>
Reconciliation of WMB's consolidated stockholders' equity to regulatory
capital was as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C>
Stockholders' equity $1,349,706
Reporting differences:
Goodwill and other intangible assets (160,727)
Valuation reserve for available-for-sale securities (65,741)
Investment in securities-related subsidiaries (6,579)
Purchased mortgage servicing rights (542)
Other nonqualifying assets (542)
- --------------------------------------------------------------------------------------------------
Total regulatory capital $1,115,575
==================================================================================================
</TABLE>
NOTE 22: 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,
75
<PAGE> 78
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.
Stock options and SARs granted, exercised or terminated were as follows:
<TABLE>
<CAPTION>
Stock Options(1) SARs(1)
- ---------------------------------------------------------------------------------------------------------
Average Price Number Average Price Number
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=========================================================================================================
</TABLE>
(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 23: EMPLOYEE BENEFITS PROGRAMS
The Company maintains a noncontributory cash balance defined benefit
pension plan ("Plan") for substantially all eligible employees. Benefits earned
for each year of service are based primarily on the level of compensation in
that year plus a stipulated rate of return on the benefit balance. It is the
Company's policy to fund the Plan on a current basis to the extent deductible
under federal income tax regulations. The net periodic pension cost for the Plan
was $2.2 million, $1.3 million and $575,000 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.
76
<PAGE> 79
The Plan's funded status and amounts recognized in the Company's financial
statements were as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit obligations:
Vested benefits $(46,628) $(34,885)
Nonvested benefits (2,367) (4,690)
- --------------------------------------------------------------------------------------------------
Accumulated benefit obligation (48,995) (39,575)
Effect of future compensation increases (1,598) (1,429)
- --------------------------------------------------------------------------------------------------
Projected benefit obligation (50,593) (41,004)
Plan assets at fair value 61,722 53,037
- --------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 11,129 12,033
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)
- --------------------------------------------------------------------------------------------------
Prepaid pension asset $ 7,819 $ 10,061
==================================================================================================
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 3,240 $ 2,952 $ 1,643
Interest cost on projected benefit obligation 3,336 2,695 1,904
Actual (gain) loss on Plan assets (11,935) 463 (5,637)
Amortization and deferral, net 7,601 (4,779) 2,665
- ----------------------------------------------------------------------------------------------------
$ 2,242 $ 1,331 $ 575
====================================================================================================
</TABLE>
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. The net periodic expense was
$697,000, $689,000 and $621,000 for 1995, 1994 and 1993.
The funded status of these benefits were as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
==================================================================================================
</TABLE>
Net periodic postretirement expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $206 $220 $154
Interest cost 344 322 320
Amortization of transition obligation 147 147 147
- --------------------------------------------------------------------------------------------------
$697 $689 $621
==================================================================================================
</TABLE>
77
<PAGE> 80
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.
The Company also 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. Employees' contributions vest immediately. The Company's
partial matching contributions vest over five years. The Company's contributions
to the savings plan in 1995, 1994 and 1993 were $5.8 million, $8.0 million and
$4.5 million.
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 24: CONTINGENCIES
The Company has certain litigation and negotiations in progress resulting
from activities arising from normal operations. In the opinion of management and
legal counsel, none of these matters is likely to have a materially adverse
effect on the Company's financial position.
At periodic intervals, the FDIC and OTS regulators examine the Company's
financial statements as part of their legally prescribed oversight. Based on
these examinations, the regulators can direct that the Company's financial
statements be adjusted in accordance with their findings. A future examination
by the FDIC or the OTS could include a review of certain transactions or other
amounts reported in the Company's 1995 financial statements. The regulators have
not proposed significant adjustments to the Company's financial statements in
prior years and management is not aware of any basis for any such adjustments
for 1995. But, in view of the uncertain regulatory environment in which the
Company operates, the extent, if any, to which a forthcoming examination may
ultimately result in regulatory adjustments to the 1995 financial statements
cannot presently be determined.
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
between 0 percent and 0.27 percent per annum of total adjusted deposits for all
deposits insured through the Bank Insurance Fund ("BIF"), to be effective in
January 1996. The assessment rate schedule applicable to deposits insured
through the Savings Association Insurance Fund ("SAIF") is between 0.23 percent
and 0.31 percent per annum of total adjusted SAIF deposits. The assessment rates
are calculated to keep the respective insurance funds capitalized at 1.25
percent of estimated insured deposits. Since the BIF has reached the required
reserve ratio, under the new assessment rate schedule, most institutions will be
assessed the statutory annual minimum of $2,000 for their BIF deposits. In
contrast, because the SAIF is still undercapitalized, the assessment rate for
SAIF deposits is expected to continue at between 0.23 percent and 0.31 percent
per annum. The resulting premium differential will have adverse consequences on
those institutions with SAIF deposits, including a competitive disadvantage with
respect to pricing of loans and deposits and with respect to the ability to
control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. The federal budget reconciliation bill
contained a provision designed to recapitalized the SAIF by means of a one-time
assessment, estimated at 0.78 percent of SAIF deposits. Such a proposal would
lead to elimination of the ongoing differential. However, the budget
reconciliation bill was vetoed by the President on December 6, 1995 and no
prediction as to the likelihood of such a one-time assessment can be made at
this time. Such an assessment on Washington Mutual's SAIF deposits at March 31,
1995 would result in a charge to earnings of approximately $50.5 million or
$32.4 million on an after-tax basis.
NOTE 25: 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
78
<PAGE> 81
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -------------------------------------------------------------------------------------------------
<S> <C>
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
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1993
- -------------------------------------------------------------------------------------------------
<S> <C>
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
=================================================================================================
</TABLE>
79
<PAGE> 82
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -------------------------------------------------------------------------------------------------
<S> <C>
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
=================================================================================================
</TABLE>
On April 9, 1993, the Company acquired 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 $5,847.5 million and
deposits of $3,825.7 million.
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.
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.
80
<PAGE> 83
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:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -------------------------------------------------------------------------------------------------
<S> <C>
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
=================================================================================================
</TABLE>
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.
On October 11, 1995, Washington Mutual signed an agreement to merge with
Western, an Oregon commercial bank through a merger of Western with and into
WMB. At December 31, 1995, Western had 42 offices located predominately in
western and central Oregon and assets of $787.1 million, deposits of $709.7
million and stockholders' equity of $68.6 million. The merger was completed
during the first quarter of 1996 and was treated as a pooling-of-interests.
Because the merger occurred after year-end 1995, the financial statements
presented in this document for Washington Mutual have not been restated as if
the companies had been combined.
81
<PAGE> 84
The following pro forma information represents the results of operations of
the Company and Western 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 unaudited pro forma results
of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual:
Total revenue $1,625,451 $1,315,651 $1,179,801
- -----------------------------------------------------------------------------------------------------
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
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western:
Total revenue $71,383 $61,401 $56,571
- -----------------------------------------------------------------------------------------------------
Net income $ 9,177 $ 9,018 $ 8,907
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual and Western:
Total revenue $1,696,834 $1,377,052 $1,236,372
- -----------------------------------------------------------------------------------------------------
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 $2.37 $ 2.52
Extraordinary items, net of federal income tax effect -- -- (0.13)
Cumulative effect of change in tax accounting method -- -- 0.19
- -----------------------------------------------------------------------------------------------------
Net income $2.51 $2.37 $ 2.58
=====================================================================================================
</TABLE>
82
<PAGE> 85
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
(dollars in thousands, except for per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $353,378 $375,224 $390,114 $399,997
Interest expense 213,906 235,828 243,729 247,620
- -----------------------------------------------------------------------------------------------------
Net interest income 139,472 139,396 146,385 152,377
Provision for loan losses 2,500 2,500 2,500 2,500
Other income 26,585 26,828 25,620 27,705
Other expense 95,171 98,135 94,466 94,543
- -----------------------------------------------------------------------------------------------------
Income before income taxes 68,386 65,589 75,039 83,039
Income taxes 25,381 20,398 26,233 29,417
- -----------------------------------------------------------------------------------------------------
Net income $ 43,005 $ 45,191 $ 48,806 $ 53,622
=====================================================================================================
Net income attributable to common stock $ 38,359 $ 40,545 $ 44,160 $ 48,976
=====================================================================================================
Net income per common share
Primary $0.62 $0.64 $0.68 $0.74
Fully diluted 0.60 0.62 0.66 0.72
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
(dollars in thousands, except for per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $276,166 $287,784 $308,427 $335,436
Interest expense 132,629 146,041 164,887 193,031
- -----------------------------------------------------------------------------------------------------
Net interest income 143,537 141,743 143,540 142,405
Provision for loan losses 5,000 5,000 5,000 5,000
Other income 28,348 27,747 25,782 25,961
Other expense 100,583 96,890 93,722 93,117
- -----------------------------------------------------------------------------------------------------
Income before income taxes 66,302 67,600 70,600 70,249
Income taxes 24,607 25,531 26,517 25,792
- -----------------------------------------------------------------------------------------------------
Net income $ 41,695 $ 42,069 $ 44,083 $ 44,457
=====================================================================================================
Net income attributable to common stock $ 37,049 $ 37,423 $ 39,437 $ 39,811
=====================================================================================================
Net income per common share
Primary $0.62 $0.62 $0.65 $0.65
Fully diluted 0.60 0.60 0.63 0.63
</TABLE>
NOTE 27: 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.
83
<PAGE> 86
The fair value of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 428,650 $ 428,650 $ 222,435 $ 222,435
Trading account securities 238 238 572 572
Available-for-sale securities 7,689,041 7,689,041 2,535,018 2,535,018
Held-to-maturity securities 171,351 185,681 2,608,585 2,406,659
Loans, exclusive of reserve for loan
losses 12,673,780 12,766,836 12,534,638 12,085,196
- -------------------------------------------------------------------------------------------------------
20,963,060 21,070,446 17,901,248 17,249,880
Financial liabilities:
Deposits 10,596,735 10,626,532 9,777,912 9,771,116
Annuities 855,503 855,503 799,178 799,178
Federal funds purchased 430,000 430,073 -- --
Securities sold under agreements to
repurchase 3,962,400 3,962,042 2,595,651 2,594,802
Advances from the FHLB 3,711,402 3,713,968 3,737,611 3,671,503
Other borrowings 224,250 234,854 79,039 79,039
- -------------------------------------------------------------------------------------------------------
19,780,290 19,822,972 16,989,391 16,915,638
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 -- -- -- 2,110
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 -- -- -- 20,421
- -------------------------------------------------------------------------------------------------------
(2,432) (2,432) 60,344 82,875
Off balance sheet loan commitments -- 4,476 -- (8,057)
- -------------------------------------------------------------------------------------------------------
Net financial instruments $ 1,180,338 $ 1,249,518 $ 972,201 $ 409,060
=======================================================================================================
</TABLE>
(1) See "Note 15: Interest Rate Risk Management."
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument as of December 31, 1995 and 1994:
Cash and cash equivalents -- The carrying amount represented fair value.
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.
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.
84
<PAGE> 87
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 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.
85
<PAGE> 88
NOTE 28: 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
<TABLE>
<CAPTION>
Year Ended Period of August 17, 1994
(dollars in thousands) December 31, 1995 (inception) to December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 income (568) 801
OTHER INCOME
Equity in net earnings of subsidiaries(1) 194,352 13,103
Other operating income 8 --
Gain (loss) on sale of other assets, inclusive
of write-downs (171) --
- --------------------------------------------------------------------------------------------------------
Total other income 194,189 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 13,676
Income taxes (865) 201
- --------------------------------------------------------------------------------------------------------
Net Income(1) $188,480 $13,475
========================================================================================================
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
86
<PAGE> 89
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
December 31,
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 90,096 $ 5,903
Available-for-sale securities 99,932 104,987
Loans 147,867 --
Investment in subsidiaries(1) 1,501,771 1,284,709
Other assets 929 654
Total assets $1,840,595 $1,396,253
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: 100,000,000 shares authorized --
66,052,898 and 61,970,704 shares issued and outstanding -- --
Capital surplus(1) 778,627 747,562
Valuation reserve for available-for-sale securities 2,390 (2,511)
Valuation reserve for available-for-sale securities -- subsidiaries 76,016 (26,469)
Retained earnings(1) 747,589 593,356
Total stockholders' equity 1,604,622 1,311,938
Total liabilities and stockholders' equity $1,840,595 $1,396,253
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
87
<PAGE> 90
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Period of August 17, 1994
(dollars in thousands) December 31, 1995 (inception) to December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(1) $ 188,480 $ 13,475
Adjustments to reconcile net income to net cash
provided 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) (194,352) (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 127,595 --
Acquisition of wholly-owned subsidiary(1) -- (82,877)
Net cash (used) by investing activities (7,678) (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 (67,655) --
Contribution from wholly-owned subsidiary(1) -- 111,252
Net cash provided by financing activities 84,731 196,575
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
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
88
<PAGE> 91
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
-------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1* Agreement for Reorganization between the Registrant and Washington Mutual,
dated October 19, 1994.........................................................
3.1* Restated Articles of Incorporation of the Registrant, filed November 28, 1994
(the "Articles")...............................................................
3.2 Bylaws of the Registrant.......................................................
4.1* Article II, Sections D(2), D(3), and D(4) of the Articles, which define the
rights of holders of the Series C Preferred Stock, the Series D Preferred Stock
and the Series E Preferred Stock (filed together with Exhibit 3.1 hereto)......
4.2* Rights Agreement, dated October 16, 1990.......................................
4.3* Amendment No. 1 to Rights Agreement, dated October 31, 1994....................
4.4* Supplement to Rights Agreement, dated November 29, 1994........................
4.5 Form of Indenture between the Registrant and Harris Trust and Savings Bank, as
Trustee for the Debt Securities (Incorporated by reference to Washington
Mutual, Inc. Registration Statement on Form S-3, registration no. 33-93850)....
10.1* Washington Mutual 1994 Stock Option Plan.......................................
10.2* Amended and Restated Incentive Stock Option Plan...............................
10.3* Amended and Restated Washington Mutual Restricted Stock Plan (1986)............
10.4* Washington Mutual Employees' Stock Purchase Program............................
10.5* Washington Mutual Retirement Savings and Investment Plan.......................
10.6* Washington Mutual Employee Service Award Plan..................................
10.7* Supplemental Employee's Retirement Plan for Salaried Employees of Washington
Mutual.........................................................................
10.8* Employment Contract of Kerry K. Killinger......................................
10.9* Employment Contract of Lee D. Lannoye..........................................
10.10* Employment Contract of Deanna Oppenheimer......................................
10.11* Employment Contract of Craig E. Tall...........................................
10.12* Employment Contract of S. Liane Wilson.........................................
10.13* Lease Agreement between Third and University Limited Partnership and Washington
Mutual Savings Bank, dated September 1, 1988...................................
10.14* First Amendment to Stock Purchase Agreement between Washington Mutual Savings
Bank; Washington Mutual, a Federal Savings Bank; RT Holdings, Inc.; Pacific
First Financial Corporation; RT Capital Corporation; RT Finance Corporation;
and Royal Trustco Limited dated April 9, 1993..................................
10.15 Amended and Restated Agreement for Merger among Washington Mutual, Inc.,
Washington Mutual Bank, Washington Mutual Federal Savings Bank and Olympus
Capital Corporation and Olympus Bank, a Federal Savings Bank, dated as of
January 20, 1995 (Incorporated by reference to Appendix A to the Washington
Mutual, Inc. Registration Statement on Form S-4, registration no. 33-57413)....
10.16 Agreement for Merger among Washington Mutual, Inc., Washington Mutual Bank and
Western Bank dated as of October 11, 1995 as amended by Amendment No. 1 to
Agreement for Merger dated as of November 28, 1995.............................
21.00 List of Subsidiaries of the Registrant.........................................
</TABLE>
- ---------------
* Incorporated by reference to Washington Mutual, Inc. Current Report on Form
8-K dated November 29, 1994 (File No. 0-25188).
89
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1653725
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1201 THIRD AVENUE SEATTLE, WASHINGTON 98101
------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(206) 461-2000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the last 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's classes of common stock as
of March 31, 1996:
COMMON STOCK - 72,120,915
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated financial statements of Washington Mutual, Inc. ("Washington
Mutual" or the "Company") begin on page 9.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
- - Net income for first quarter 1996 was $59.5 million, up 32 percent from
earnings of $45.3 million during first quarter 1995. Fully diluted earnings per
share were 74 cents for first quarter 1996 compared with 58 cents in 1995.
During first quarter 1996, the Company's return on assets was 1.08 percent
compared with 0.94 percent a year earlier.
- - The Company's net interest margin for the quarter ended March 31, 1996 was
3.26 percent compared with 3.15 percent for the same quarter in 1995.
- - Lower market interest rates during the first three months of 1996 resulted in
loan production of $1,673.6 million for the quarter compared with $696.4 million
during the same period in 1995, an increase of 140 percent. Loan production
during the quarter just ended included $606.7 million of refinancing activity.
- - During the quarter, the Company took steps to expand its position in Utah by
signing an agreement to acquire Utah Federal Savings Bank ("Utah FSB"). Utah FSB
is an Ogden-based savings bank operating five branches and three loan production
centers in Utah. At December 31, 1995, Utah FSB had assets of $122.6 million,
deposits of $110.0 million and stockholder's equity of $10.5 million. The merger
is scheduled to be completed during the third quarter of 1996 subject to the
receipt of regulatory and Utah FSB shareholder approval.
- - On January 31, 1996, Washington Mutual completed the merger of Western Bank
("Western"), a commercial bank headquartered in Oregon, with and into Washington
Mutual Bank ("WMB"), a subsidiary of the Company. Western operated 42 branches
located predominately in western and central Oregon. At December 31, 1995,
Western had assets of $787.1 million, deposits of $709.7 million and
stockholders' equity of $68.6 million. The Company issued 5.87 million shares of
common stock (equal to approximately 8.2 percent of the shares of common stock
outstanding as of December 31, 1995) to complete the merger. Results from 1995
have been restated to reflect the merger with Western, which was accounted for
as a pooling of interests.
RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net interest income was $171.0 million for
the quarter, up 15 percent from $149.1 million a year earlier. The 1996 level
reflected the continuing effect of low interest rates on the Company's net
interest margin which increased to 3.26 percent from 3.15 percent in first
quarter 1995. (The net interest margin measures the Company's annualized net
interest income as a percentage of interest-earning assets.)
Lower market interest rates decreased the Company's combined yield on loans
and investments to 7.91 percent for the quarter ended March 31, 1996 from 7.94
percent for the quarter ended March 31, 1995. They also, however, decreased the
cost of funds by even more to 4.86 percent for first quarter 1996, from 5.00
percent for the same period a year ago. The net interest spread was 3.05 percent
in the first quarter, compared with 2.94 percent for the same period in 1995.
(The net interest spread is the difference between the Company's yield on assets
and its cost of funds.)
With the increase in interest rates during second quarter 1996, maintaining
the current levels for the net interest margin, net interest spread and net
interest income will be more difficult.
1
<PAGE> 3
OTHER INCOME. Other income was $36.7 million for the quarter ended March 31,
1996 compared with $28.9 million for the same period in 1995.
Service fees rose 14 percent to $24.6 million. A revised fee structure on
certain deposit services resulted in a 42 percent growth in deposit fees to
$16.6 million. Offsetting this growth was the loss of $3.6 million of fee income
as a result of the sale of the Company's travel agency subsidiary in March 1995.
Loan servicing fees were $3.9 million, up 62 percent from $2.4 million for
the same period a year ago. Loans serviced for others increased to $6,812.4
million at March 31, 1996 from $3,926.5 million one year earlier due to
substantial securitizations of loans throughout 1995 and the April 1995 addition
of the loan servicing portfolio of Olympus Bank, a Federal Savings Bank.
Other operating income declined from $4.7 million in first quarter 1995 to
$3.6 million for the same period this year. In 1995, this item included $1.0
million of interest income on a tax refund.
Gains on the sale of loans for first quarter 1996 were $2.7 million
compared with $199,000 for first quarter 1995. The higher level of gains in the
quarter just ended reflected the continued sale of fixed-rate loans as the
Company restructures its asset base with the objective of reducing the effect of
future interest rate movements.
The Company offsets the write-down of mortgage servicing rights against its
gains on the sale of loans. No write-downs of mortgage servicing rights were
made during the first quarter in either 1996 or 1995. On January 1, 1996 the
Company adopted Statement of Accounting Standards ("SFAS") No. 122, Accounting
for Mortgage Servicing Rights. The statement eliminates the distinctions 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 how acquired. Banks that
sell or securitize loans and retain the servicing rights will be required to
allocate the total cost of the loans between servicing rights and principal
balance.
During first quarter 1996, the Company capitalized $6.7 million of mortgage
servicing rights as a result of SFAS No. 122. Gains on the sale of loans as a
result of capitalizing mortgage servicing rights under the provisions of this
statement were $867,000 more for the quarter just ended than would have been
recognized under prior accounting policies. At March 31, 1996, the Company's
balance sheet included mortgage servicing rights valued at $6.6 million as a
result of this statement.
Gains on sale of other assets were $1.8 million during first quarter 1996
compared with a loss of $176,000 for the same period in 1995. The net gain for
the quarter consisted of a $4.1 million gain on the sale of Mutual Travel,
securities transaction losses of $2.8 million and net gains of $490,000 on the
sale of other bank assets. In 1995, most of the first quarter loss of $176,000
resulted from the sale of bank property.
OTHER EXPENSE. Operating expenses were up 7 percent from $103.1 million in first
quarter 1995 to $110.0 million for the current quarter.
Salaries and employee benefits increased 10 percent to $50.8 million from
$46.2 million a year ago due primarily to increases in staffing levels in
financial centers, lending support, telephone banking services and commercial
banking . The staffing level of full-time equivalent employees was 4,909 at
March 31, 1996, up from 4,637 a year earlier. The increase in full-time
equivalent employees was moderated by the sale of the Company's item processing
operation which resulted in a decrease of 98 employees.
Occupancy and equipment expense increased 4 percent to $18.7 million
compared with $18.0 million a year earlier.
Regulatory assessments decreased 48 percent to $3.3 million due to a
reduction in the assessment rate on the Company's deposits insured by the Bank
Insurance Fund ("BIF"). (See Item 5, Other Information on page 7 for a
discussion of deposit assessments.)
Other operating expense increased 12 percent to $30.7 million from $27.3
million a year ago due in part to higher telecommunications expenses, other
professional fees associated with reengineering projects and acquisition-related
charges.
Amortization of goodwill and intangible assets for the quarter ended March
31, 1996 was $7.0 million down 5 percent from $7.3 million from the same period
in 1995.
2
<PAGE> 4
Real estate owned ("REO") operations, inclusive of write-downs resulted in
income of $490,000 for the current quarter. REO operations in first quarter 1995
had income of $2.1 million and included a recovery on one large commercial loan.
OPERATING EFFICIENCY RATIO. The Company's operating efficiency ratio - other
expense as a percentage of net interest income plus other income - was 53.0
percent for first quarter 1996 compared with 57.9 percent for the same period in
1995. The effect of increases in other expenses was offset by substantial
increases in net interest income and other income during the first quarter 1996.
NONBANKING SUBSIDIARY OPERATIONS. Pretax operating income (net income before
amortization of goodwill and intangible assets and elimination of intercompany
transactions) for first quarter 1996 was $9.8 million compared with $3.7 million
for the same period in 1995. The Company's insurance subsidiaries reported a 6
percent increase in pretax operating income to $4.1 million from $3.8 million a
year earlier. The securities subsidiaries had pretax operating income of $1.6
million compared with $249,000 in first quarter 1995. Operating income in 1995
was reduced by the effect of a one-time legal settlement of $455,000. The
results of operations during first quarter 1996 for other nonbanking
subsidiaries included the recognition of a deferred gain of $4.1 million on the
sale of Mutual Travel in 1995. Results of operations for nonbanking subsidiaries
were as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities:
Murphey Favre, Inc. $ 742 $ (400)
Composite Research & Management Co. 829 649
- -----------------------------------------------------------------------------------------------------------
Total securities 1,571 249
WM Life Insurance Co. 4,058 3,828
Mutual Travel - 229
Other 4,118 (612)
- -----------------------------------------------------------------------------------------------------------
Net income before taxes, amortization of goodwill and other intangible
assets, and elimination of intercompany transactions 9,747 3,694
Amortization of goodwill and other intangible assets 103 381
- -----------------------------------------------------------------------------------------------------------
Net income before elimination of intercompany transactions $9,644 $3,313
===========================================================================================================
</TABLE>
FINANCIAL POSITION
ASSETS. At March 31, 1996, the Company's assets were $22,344.8 million down
slightly from $22,420.4 million at year-end 1995.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at March 31,
1996 was carried at $7,608.4 million, a 4 percent decrease from the year-end
1995 balance of $7,940.9 million. During the quarter just ended, the Company
continued the restructuring of its investment portfolio by selling approximately
$880.0 million of fixed-rate securities and replacing them with approximately
$639.0 million of adjustable-rate securities and loans.
At March 31, 1995, the Company's investment portfolio included $7,426.9
million available-for-sale securities and $181.5 million held-to-maturity
securities. Mortgage-backed securities comprised $6,548.7 million or 86 percent
of the total investment portfolio at quarter end.
LOAN ORIGINATIONS. For first quarter 1996, total lending was $1,673.6 million
compared with $696.4 million a year earlier. Lower market interest rates helped
generate increases in lending volumes in all loan categories. Residential loan
originations increased more than fourfold to $1,048.1 million during the quarter
just ended compared with $252.9 million a year earlier. Originations of
residential loans to
3
<PAGE> 5
purchase homes were $441.4 million compared with $203.7 million a year ago,
while home loan refinancings were $606.7 million compared with $39.4 million in
first quarter 1995. The Company remained the leading residential first-mortgage
lender in Washington and Oregon. Originations of residential construction loans
during the quarter were $249.7 million, an increase of 52 percent from first
quarter 1995's total of $164.6 million. Consumer loan originations, primarily
home equity and manufactured home loans, increased to $237.5 million for the
first three months of 1996 from $207.5 million a year ago. Commercial real
estate lending, primarily for apartment buildings, increased to $101.4 million
for the quarter just ended from $42.5 million for first quarter 1995. Commercial
business lending increased to $36.9 million for the first quarter 1996 compared
with $28.9 million a year ago.
DEPOSITS. Total deposits decreased to $11,275.5 million at March 31, 1996 from
$11,306.4 million at December 31, 1995. Retail deposits were down $33.0 million
to $10,599.5 million. Wholesale activities - predominantly time deposits greater
than $100,000 - increased $2.1 million. 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.
BORROWINGS. Washington Mutual's borrowings primarily take the form of securities
sold under agreements to repurchase and advances from the Federal Home Loan Bank
of Seattle. These two borrowing sources totaled $4,690.0 million and $2,740.9
million at March 31, 1996 compared with $3,965.8 million and $3,711.4 million at
year-end 1995. The exact mix at any given time is dependent upon the market
pricing of the two borrowing sources.
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. 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. At the end of 1995, the
Company reported a one-year gap of a negative 14.4 percent. But, due to the
merger with Western, the one-year gap at December 31, 1995 has been restated to
a negative 13.3 percent.
The Company's assets and liabilities that mature or reprice within one year
were as follows:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in millions) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest-sensitive assets $ 10,662 $ 9,885
Interest-sensitive liabilities 15,316 14,679
Derivative instruments (1,550) (1,825)
- -------------------------------------------------------------------------------------
Net liability sensitivity $ (3,104) $ (2,969)
=====================================================================================
Net liability sensitivity as a percentage of total assets (13.9)% (13.3)%
</TABLE>
During first quarter 1996, the Company continued it's efforts to replace
fixed-rate mortgages and mortgage-backed securities with adjustable-rate
instruments. In addition to acquiring $775.3 million of primarily
adjustable-rate assets from Western, the Company sold approximately $880.0
million of fixed-rate mortgage-backed securities and purchased approximately
$639.0 million of adjustable-rate assets. Liabilities that mature or reprice
within one year increased $637.0 million to $15,316.0 million at March 31, 1996
as liabilities with an original maturity term greater than one year fell to
within one year.
4
<PAGE> 6
ASSET QUALITY
Classified assets, which consist of nonaccrual loans, loans under
foreclosure, real estate owned ("REO") and performing loans (including
substandard troubled debt restructurings) and securities that exhibit credit
quality weaknesses, were as follows:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans and loans under foreclosure $ 71,263 $ 69,707
REO 23,690 25,064
- -------------------------------------------------------------------------------------
Total nonperforming assets 94,953 94,771
Troubled debt restructurings (classified as substandard) 14,615 13,094
Other classified assets 94,689 97,946
Classified securities 26,428 37,645
- -------------------------------------------------------------------------------------
$230,685 $243,456
=====================================================================================
</TABLE>
Nonperforming assets increased slightly from $94.8 million at December 31,
1995 to $95.0 million at March 31, 1996, but as a percentage of total assets
remained steady at 0.42 percent for both periods.
The level of nonperforming commercial real estate loans declined to $27.6
million at March 31, 1996 compared with $32.9 million three months earlier.
During the period, a medical office building in California at $4.4 million was
sold. Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets (loans and REO) by collateral type:
Residential real estate $ 49,876 $ 46,414
Residential construction 10,348 10,245
Apartment buildings 2,378 3,934
Other commercial real estate 25,210 28,937
Consumer and manufactured housing 11,432 10,792
Commercial business 853 824
Reserve for REO losses (5,144) (6,375)
- ------------------------------------------------------------------------------------
Total $ 94,953 $ 94,771
====================================================================================
Nonperforming assets as a percentage of total loans 0.70% 0.73%
Nonperforming assets as a percentage of total assets 0.42 0.42
</TABLE>
On January 1, 1995, Washington Mutual 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 measured at fair value or at the lower of cost or fair value;
leases; and debt securities (as defined by SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities). It applies to all loans that are
restructured in a troubled debt restructuring as defined by SFAS 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 March 31, 1996, the
Company had $18.9 million of restructured loans of which $14.6 million, though
performing, were classified substandard.
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. At March 31, 1996, loans totaling $88.5 million were impaired of
which $72.0 million had allocated reserves of $10.2 million. The remaining $16.5
million were previously written down and have no reserves allocated to them. Of
the $88.5 million of impaired loans, $5.5 million were on nonaccrual status and
$7.8 million were under foreclosure. The average balance of impaired loans
during the quarter was $87.8 million and the Company recognized $1.8 million of
related interest income. Interest income is normally recognized on an accrual
basis, however, if the impaired loan is nonperforming, then interest income is
recorded on the receipt of cash.
5
<PAGE> 7
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN AND REO LOSSES. The quarterly
provision for loan losses was $2.9 million for first quarter 1996 compared with
$2.8 million for first quarter 1995 and reflected the Company's high level of
reserves and continued strength in asset quality. The reserve for loan losses
decreased slightly to $143.0 million at March 31, 1996 from $143.3 million at
December 31, 1995. Reserves charged off, net of recoveries, totaled $3.2 million
for the first three months of 1996 compared with $1.1 million for the same
period in 1995. At March 31, 1996, the reserve for loan losses represented 1.05
percent of outstanding loans and 200.65 percent of nonperforming loans, compared
with 1.10 percent and 151.23 percent three months earlier.
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 loss exposure. The March 31,
1996 analysis of residential construction and commercial real estate resulted in
an allocation for impaired loans of $10.2 million of the reserve for loan loss
exposure. At December 31, 1995, the Company had allocated reserves of $10.9
million. The remaining reserve of $132.8 million at March 31, 1996 was
unallocated and available for potential losses from any of the Company's loans.
A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $5.1 million at
March 31, 1996, down from $6.4 million at December 31, 1995. The level is based
upon a routine review of the REO portfolio and the state of national and local
economies.
LIQUIDITY AND CAPITAL REQUIREMENTS
LIQUIDITY. Washington Mutual monitors its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances 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
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At March 31, 1996,
the Company had substantial liquidity compared with its established guidelines.
The Federal Deposit Insurance Corporation ("FDIC") uses two ratios to
monitor WMB's liquidity position. The liquidity ratio measures WMB's ability to
use liquid assets to meet unusual cash demands. The 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 March 31,
1996, met the established FDIC guidelines.
To meet its immediate needs for funds as well as long-term lending demands,
Washington Mutual maintains various sources of liquid assets and borrowing
capabilities. At March 31, 1996, the Company was able to borrow an additional
$6,592.4 million through the use of collateralized borrowings using unpledged
mortgage-backed securities and other wholesale sources.
Because the low interest rate environment of recent years and competition
from non-regulated activities (such as mutual funds) has 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.
CAPITAL REQUIREMENTS. At March 31, 1996, Washington Mutual's banking
subsidiaries exceeded all current regulatory capital requirements and were
classified as well capitalized institutions, the highest regulatory standard. In
order to be categorized as a well capitalized institution, the FDIC requires
banks it regulates to maintain a leverage ratio, defined as Tier 1 capital
divided by total regulatory assets, of at least 5.00 percent; total capital of
at least 10.00 percent of risk-weighted assets; and Tier 1 (or core) capital of
at least 6.00 percent of risk-weighted assets. At March 31, 1996, WMB's
(consolidated with its subsidiaries) ratio of leverage capital to assets was
5.60 percent, its ratio of total capital to risk-weighted assets was 11.21
percent, and the ratio of core capital (Tier I) to risk-weighted assets was
10.41 percent.
Washington Mutual's federal savings bank subsidiary is required by the
Office of Thrift Supervision ("OTS") to maintain certain capital levels. In
order to be classified as a well capitalized institution, the
6
<PAGE> 8
OTS requires banks it regulates to maintain a leverage ratio of at least 5.00
percent, total capital of a least 10.00 percent of risk-weighted assets, and
core capital of at least 6.00 percent of risk-weighted assets. At March 31,
1996, the subsidiary was in compliance with all well capitalized requirements.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
between 0 percent and 0.27 percent per annum of total adjusted deposits for all
deposits insured through the BIF, effective as of January 1996. The assessment
rate schedule applicable to deposits insured through the Savings Association
Insurance Fund ("SAIF") is between 0.23 percent and 0.31 percent per annum of
total adjusted SAIF deposits. The assessment rates are calculated to keep the
respective insurance funds capitalized at 1.25 percent of estimated insured
deposits. Since the BIF has reached the required reserve ratio, under the new
assessment rate schedule, most institutions are being assessed the statutory
annual minimum of $2,000 for their BIF deposits. In contrast, because the SAIF
is still undercapitalized, the assessment rate for SAIF deposits is expected to
continue at between 0.23 percent and 0.31 percent per annum. The resulting
premium differential will have adverse consequences on those institutions with
SAIF deposits, including a competitive disadvantage with respect to pricing of
loans and deposits and with respect to the ability to control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, estimated at 0.78 percent of SAIF deposits. Such
a proposal would lead to elimination of the ongoing differential. The budget
bill signed by the President in April 1996 did not include such a one-time
assessment, however, and it is not known when or if such a proposal will be
adopted. Such an assessment on Washington Mutual's SAIF deposits at March 31,
1995 would result in a charge to earnings of approximately $50.5 million or
$32.4 million on an after-tax basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
7
<PAGE> 9
11. Statement re computation of per share earnings
(b) During the quarter, the Company filed Current Report on Form 8-K dated
March 15, 1996.
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 14, 1996.
Washington Mutual, Inc.
/s/ Kerry K. Killinger
-----------------------------------------------
Kerry K. Killinger
Chairman, President and Chief Executive Officer
/s/ Douglas G. Wisdorf
-----------------------------------------------
Douglas G. Wisdorf
Senior Vice President and Controller
9
<PAGE> 11
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended March 31,
- -----------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1996 1995
- -----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income
Loans $ 278,900 $ 266,887
Available-for-sale securities 132,269 52,918
Held-to-maturity securities 3,314 47,398
Cash equivalents 914 244
- -----------------------------------------------------------------------------------------
Total interest income 415,397 367,447
Interest expense
Deposits 122,920 114,327
Borrowings 121,505 104,047
- -----------------------------------------------------------------------------------------
Total interest expense 244,425 218,374
- -----------------------------------------------------------------------------------------
Net interest income 170,972 149,073
Provision for loan losses 2,912 2,800
- -----------------------------------------------------------------------------------------
Net interest income after provision for loan losses 168,060 146,273
Other income
Service fees 24,640 21,657
Loan servicing fees 3,870 2,389
Other operating income 3,620 4,786
Gain on sale of loans, inclusive of write-downs 2,747 199
Gain (loss) on sale of other assets, inclusive of write-downs 1,821 (176)
- -----------------------------------------------------------------------------------------
Total other income 36,698 28,855
Other expense
Salaries and employee benefits 50,770 46,242
Occupancy and equipment 18,728 17,972
Regulatory assessments 3,308 6,319
Other operating expense 30,721 27,342
Amortization of goodwill and other intangible assets 6,968 7,317
Real estate owned ("REO") operations, inclusive of write-downs (490) (2,111)
- -----------------------------------------------------------------------------------------
Total other expense 110,005 103,081
- -----------------------------------------------------------------------------------------
Income before income taxes 94,753 72,047
Income taxes 35,224 26,797
- -----------------------------------------------------------------------------------------
Net income $ 59,529 $ 45,250
=========================================================================================
Net income attributable to common stock $ 54,924 $ 40,604
=========================================================================================
Net income per common share:
Primary $ 0.76 $ 0.60
Fully Diluted 0.74 0.58
Dividends declared per common share 0.22 0.19
</TABLE>
See Notes to Consolidated Financial Statements
10
<PAGE> 12
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, Dec. 31,
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 290,031 $ 598,272
Trading account securities 2,447 238
Available-for-sale securities 7,426,919 7,768,115
Held-to-maturity securities 181,472 172,786
Loans 13,562,058 13,035,250
Real estate owned 23,690 25,064
Bank premises and equipment 218,267 219,056
Goodwill and other intangible assets 154,212 161,127
Other assets 485,673 440,471
- -------------------------------------------------------------------------------------------
Total assets $22,344,769 $22,420,379
===========================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,429,763 $ 1,336,340
Savings and money market accounts 4,185,842 3,983,267
Time certificates 5,659,903 5,986,829
- -------------------------------------------------------------------------------------------
Total deposits 11,275,508 11,306,436
Annuities 859,939 855,503
Federal funds purchased 674,000 430,000
Securities sold under agreements to repurchase 4,690,011 3,965,820
Advances from the Federal Home Loan Bank of Seattle 2,740,907 3,711,402
Other borrowings 223,755 224,250
Other liabilities 230,770 266,884
- -------------------------------------------------------------------------------------------
Total liabilities 20,694,890 20,760,295
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -
6,122,500 and 6,122,500 shares issued and outstanding -- --
Common stock, no par value: 100,000,000 shares authorized -
72,007,309 and 71,804,527 shares issues and outstanding -- --
Capital surplus 726,948 722,986
Valuation reserve for available-for-sale securities 24,382 78,348
Retained earnings 898,549 858,750
- -------------------------------------------------------------------------------------------
Total stockholders' equity 1,649,879 1,660,084
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,344,769 $22,420,379
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Shares Total
-------------------- Valuation Stock-
Preferred Common Capital Retained Reserve for holders'
(in thousands) Stock Stock Surplus Earnings Securities Equity
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 6,123 71,805 $722,986 $858,750 $ 78,348 $1,660,084
Net income - - - 59,529 - 59,529
Cash dividends on preferred stock - - - (4,605) - (4,605)
Cash dividends on common stock - - - (15,125) - (15,125)
Common stock issued through stock
options and employee stock plans - 202 3,962 - - 3,962
Adjustment in valuation reserve
for available-for-sale securities - - - - (53,966) (53,966)
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 6,123 72,007 $726,948 $898,549 $ 24,382 $1,649,879
===========================================================================================================
Balance at December 31, 1994 6,200 67,837 $695,922 $700,424 $(32,088) $1,364,258
Net income - - - 45,250 - 45,250
Cash dividends on preferred stock - - - (4,646) - (4,646)
Cash dividends on common stock - - - (12,572) - (12,572)
Common stock issued through stock
options and employee stock plans - 177 2,872 - - 2,872
Adjustment in valuation reserve
for available-for-sale securities - - - - 25,182 25,182
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 6,200 68,014 $698,794 $728,456 $ (6,906) $1,420,344
===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Quarter Ended March 31,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net income $ 59,529 $ 45,250
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,912 2,800
(Gain) on sale of loans (2,747) (199)
(Gain) loss on sale of other assets (1,821) 176
REO operations, exclusive of write-downs (490) (2,111)
Depreciation and amortization 10,698 4,557
FHLB stock dividend (4,744) (6,956)
(Increase) in trading account securities (2,204) (1,530)
(Increase) in interest receivable (2,702) (9,880)
Increase in interest payable 4,732 8,236
Increase in federal income taxes payable 28,782 27,218
Decrease (increase) in other assets 44,690 (8,501)
(Decrease) increase in other liabilities (28,414) 20,973
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 108,221 80,033
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (515,775) (383,727)
Maturities and principal payments on available-for-sale securities 288,795 67,783
Sales of available-for-sale securities 850,271 --
Purchases of held-to-maturity securities (12,777) (29,481)
Maturities, calls and principal payments on held-to-maturity securities 4,658 28,133
Sales of loans 103,906 5,784
Principal payments on loans 758,575 477,431
Origination and purchases of loans (1,848,328) (736,443)
Sales of REO 8,711 3,342
Other REO operations 178 2,111
Expenditures for premises and equipment (6,194) (8,820)
- ----------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (367,980) (573,887)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits (34,907) 176,404
Increase in annuities 4,436 19,316
Increase in federal funds purchased 244,000 --
Increase in securities sold under agreements to repurchase 724,191 438,060
Proceeds from FHLB advances 729,791 326,080
Payments for maturing and prepaid FHLB advances (1,700,000) (420,000)
(Repayments) of other borrowings (225) (74)
Common stock issued through stock options and employee stock plans 3,962 2,872
Cash dividends paid (19,730) (17,218)
- ----------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (48,482) 525,440
- ----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents (308,241) 31,586
Cash and cash equivalents at beginning of period 598,272 262,256
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 290,031 $ 293,842
====================================================================================================
</TABLE>
13
<PAGE> 15
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended March 31,
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities and held for investment $461,315 $109,117
Real estate acquired through foreclosure 5,446 8,233
CASH PAID DURING THE PERIOD FOR
Interest on deposits 122,920 114,324
Interest on borrowings 121,505 104,047
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of March 31, 1996 and December 31, 1995 and the consolidated
statements of income, stockholders' equity and cash flows of Washington Mutual,
Inc. ("Washington Mutual" or the "Company") for the quarters ended March 31,
1996 and 1995 reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the period presented.
2. CONTINGENCIES
On November 14, 1995, the Federal Deposit Insurance Corporation ("FDIC")
adopted a new assessment rate schedule of between 0 percent and 0.27 percent per
annum of total adjusted deposits for all deposits insured through the Bank
Insurance Fund ("BIF"), effective as of January 1996. The assessment rate
schedule applicable to deposits insured through the Savings Association
Insurance Fund ("SAIF") is between 0.23 percent and 0.31 percent per annum of
total adjusted SAIF deposits. The assessment rates are calculated to keep the
respective insurance funds capitalized at 1.25 percent of estimated insured
deposits. Since the BIF has reached the required reserve ratio, under the new
assessment rate schedule, most institutions are being assessed the statutory
annual minimum of $2,000 for their BIF deposits. In contrast, because the SAIF
is still undercapitalized, the assessment rate for SAIF deposits is expected to
continue at between 0.23 percent and 0.31 percent per annum. The resulting
premium differential will have adverse consequences on those institutions with
SAIF deposits, including a competitive disadvantage with respect to pricing of
loans and deposits and with respect to the ability to control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, estimated at 0.78 percent of SAIF deposits. Such
a proposal would lead to elimination of the ongoing differential. The budget
bill signed by the President in April 1996 did not include such a one-time
assessment, however, and it is not known when or if such a proposal will be
adopted. Such an assessment on Washington Mutual's SAIF deposits at March 31,
1995 would result in a charge to earnings of approximately $50.5 million or
$32.4 million on an after-tax basis.
3. MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights. The statement eliminates the distinctions 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
who sell loans and retain the servicing rights will be 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. Effective January 1,
1996, the Company adopted SFAS No. 122.
During first quarter 1996, the Company capitalized $6.7 million of mortgage
servicing rights as a result of this statement. Gains on the sale of loans as a
result of capitalizing mortgage servicing rights under the provisions of SFAS
No. 122 were $867,000 more for the quarter just ended than would have been
recognized under prior accounting policies. At March 31, 1996, the Company's
balance sheet included $6.6 million of mortgage rights as a result of this
statement.
15
<PAGE> 17
Washington Mutual, Inc.
List of Exhibits
<TABLE>
<CAPTION>
Exhibit Page
- --------------------------------------------------------------------------------
<S> <C> <C>
11 Statement re computation of per share earnings.................
</TABLE>
16
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF WASHINGTON MUTUAL, INC.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Incorporation
Name of Subsidiary Affiliate Parent or Organization
- ------------------ ---------------- ---------------
<S> <C> <C>
Benefit Service Corporation WM Financial, Inc. Washington
Composite Research & Washington Mutual, Inc. Washington
Management Co.
Empire Life Insurance Company WM Life Insurance Co. Washington
GNW Land Company Seacoast Management, Inc. Washington
Mill-Maple Properties, Inc. Washington Mutual Bank Oregon
Murphey Favre, Inc. Washington Mutual, Inc. Washington
Murphey Favre Murphey Favre Washington
Housing Managers, Inc. Properties, Inc.
Murphey Favre Insurance Murphey Favre, Inc. Idaho
Services, Inc.
Murphey Favre WM Financial, Inc. Washington
Properties, Inc.
Murphey Favre Securities Murphey Favre, Inc. Washington
Services, Inc.
Olympus Development Company Washington Mutual Utah
Financial Services, Inc.
Pacific First Insurance, Inc. Washington Mutual Bank Washington
Pioneer Properties, Inc. Washington Mutual Bank Washington
Preston Properties Preston Ridge Financial Washington
California, Inc. Services Corporation
(Also does business under the name
Preston Ridge California, Inc.)
Preston Ridge Financial Washington Mutual Bank Washington
Services Corporation
SS Service Corporation Washington Mutual Bank Washington
(Also does business under the name
SS Scout Properties California)
Seacoast Management, Inc. Washington Mutual Bank Washington
WM Enterprises & Washington Mutual Bank Washington
Holdings, Inc.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
WM Financial, Inc. Washington Mutual Bank Washington
WM Life Insurance Company Washington Mutual, Inc. Washington
Washington Mutual Bank Washington Mutual, Inc. Washington
(Also does business under name
Washington Mutual Savings Bank,
Enterprise Bank, Western Bank))
Washington Mutual Bank fsb Washington Mutual, Inc. Federal
Washington Mutual Washington Mutual Bank fsb Oregon
Financial Services, Inc.
Washington Mutual Insurance Washington Mutual Montana
Brokerage Services, Inc. Financial Services, Inc.
(Also does business under the name
Washington Mutual Insurance Agency, Inc.)
Washington Mutual Insurance Washington Mutual Bank Washington
Services, Inc.
Washington Mutual Insurance Washington Mutual Idaho
Services of Idaho, Inc. Financial Services, Inc.
Western Aero, Ltd. Washington Mutual Bank Oregon
Western Credit Services Washington Mutual Bank Oregon
Western Services Co. Washington Mutual Bank Oregon
</TABLE>
