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As filed with the Securities and Exchange Commission on October 29, 1996
Registration No. 333-05365
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------------
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------------------
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)
-----------------------------------------------------
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.
TIMOTHY M. WOODLAND, 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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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; The Merger - Certain Considerations
Related to the Keystone Transaction and
Keystone Holdings
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; Appendix F:
Information Concerning the Keystone
Transaction and Keystone Holdings
5. Pro Forma Financial Information....................... Summary; Appendix F: Information
Concerning the Keystone Transaction
and Keystone Holdings
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; Appendix F:
Information Concerning the Keystone
Transaction and Keystone Holdings
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
October 30, 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 November 29, 1996
at 9:00 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, as amended as of September 10,
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
$107.04 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 we notified you on July 23, 1996, the Utah Federal shareholder
meeting originally scheduled for July 31, 1996 was delayed because of
Washington Mutual's announcement of the execution of an agreement to merge with
Keystone Holdings, Inc. ("Keystone Holdings"), the parent corporation of
American Savings Bank, F.A. American Savings Bank, F.A. is a California-based
savings bank with over $20 billion in assets at June 30, 1996. In connection
with the merger with Keystone Holdings, and certain related transactions,
Washington Mutual will issue approximately 48,000,000 shares of Washington
Mutual common stock. Because of the magnitude of the Keystone Holdings
transaction, the enclosed Proxy Statement/Prospectus has been revised to
include information regarding Keystone Holdings and the terms of the Keystone
Holdings transaction.
As of the date of this Proxy Statement/Prospectus, one shareholder of
Utah Federal beneficially owns 134,609 shares of Utah Federal common stock,
representing approximately 94.8 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, Washington Mutual and Keystone Holdings 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 NOVEMBER 29, 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
November 29, 1996 at 9:00 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, as amended as of September 10, 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 October 28,
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.
[/R]
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
October 30, 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 NOVEMBER 29, 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 November 29,
1996, at 9:00 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, and amended as of
September 10, 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 $107.04 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 may be decreased by up to $0.35 per share.
If Utah Federal's transaction fees in connection with the Merger are higher
than currently anticipated, the Merger Consideration will be subject to
further downward adjustment and, if the reduction exceeds the anticipated
maximum, Utah Federal will resolicit its shareholders with respect to approval
of the Merger Agreement. The Merger Consideration may be subject to further
adjustment in other circumstances. See "THE MERGER -- General" and "THE MERGER
AGREEMENT -- Expenses."
As described in further detail elsewhere herein, Washington Mutual has
entered in to an Agreement for Merger ("Keystone Merger Agreement") dated July
21, 1996, among Washington Mutual, Keystone Holdings Partners, L.P. ("KHP"),
Keystone Holdings, Inc. ("Keystone Holdings"), American Savings Bank, F.A.
("ASB") and other affiliates of Keystone Holdings. Pursuant to the Keystone
Merger Agreement and certain other related agreements (collectively, the
"Keystone Transaction"), Washington Mutual will merge with Keystone Holdings
and the direct and indirect subsidiaries of Keystone Holdings, including ASB,
will become wholly-owned subsidiaries of Washington Mutual. Integral components
of the Keystone Transaction are certain agreements, which provide for (i)
Washington Mutual's acquisition of certain warrants representing the right to
purchase shares of the parent company of ASB (the "Warrants"); and (ii)
granting certain registration rights to recipients of Washington Mutual Common
Stock in the Keystone Transaction. In connection with the Keystone Transaction,
Washington Mutual will issue 47,883,333 shares of Washington Mutual Common
Stock as follows: 25,883,333 shares to KHP, the sole shareholder of Keystone
Holdings, for immediate distribution to its general and limited partners (the
"Investors"); 14,000,000 shares to the FSLIC Resolution Fund (the "FRF"), the
holder of the Warrants; and 8,000,000 shares to an escrow for the benefit of
KHP and the FRF.
Consummation of the Keystone Transaction is conditioned on the approval
of the holders of Washington Mutual Common Stock, regulatory approvals and
other conditions customary in a transaction of this nature. There can be no
assurance that the Keystone Transaction will be consummated.
On September 9, 1996, Washington Mutual continued its expansion into
the Utah market by announcing its agreement to acquire United Western Financial
Group, Inc. of Salt Lake City ("United Western") and its United Savings Bank,
Uniwest Service Corporation and Western Mortgage Loan subsidiaries for $80.3
million in cash. The acquisition is subject to regulatory and shareholder
approvals and certain other conditions. There can be no assurances when or if
the United Western acquisition will be consummated.
As of the date of this Proxy Statement/Prospectus, Ernest J. Miller, a
Director and Chairman of the Board of Utah Federal, beneficially owns 134,609
shares of Utah Federal Common Stock, representing approximately 94.8 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 October 24, 1996, was $39.44 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 October 30, 1996.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS OCTOBER 30, 1996.
<PAGE> 9
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 NOVEMBER 22, 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 and Keystone Holdings 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 for each of
the quarterly periods ended March 31, 1996 and June 30, 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;
5. Washington Mutual's Current Report on Form 8-K dated March 15,
1996;
6. Washington Mutual's Current Report on Form 8-K dated July 22,
1996; and
7. Washington Mutual's Current Report on Form 8-K dated October
18, 1996, as amended by Form 8-K/A dated October 23, 1996 and
Form 8-K/A dated October 25, 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
The Keystone Transaction................................................................................ 11
MARKET PRICES AND DIVIDENDS..................................................................................... 13
SELECTED HISTORICAL FINANCIAL DATA.............................................................................. 15
Summary Consolidated Financial Data of Washington Mutual................................................ 15
Summary Consolidated Financial Data of Keystone Holdings................................................ 18
Summary Consolidated Financial Data of Utah Federal..................................................... 20
Summary Historical and Pro Forma Combined Financial Data for Washington Mutual and Keystone Holdings.... 22
COMPARATIVE PER SHARE DATA...................................................................................... 25
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
Risk Factors Related to the Keystone Transaction and Keystone Holdings.................................. 26
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
APPENDIX F: Information Concerning the Keystone Transaction and Keystone Holdings....................... F-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.
As of June 30, 1996, Washington Mutual operated a total of 297
financial centers and 23 loan centers in Washington, Oregon, Idaho, Utah and
Montana. At June 30, 1996, Washington Mutual had total consolidated assets of
$22.3 billion, total deposits of $11.0 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.
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 June 30, 1996, WMBfsb had assets of $811.5
million and operated 25 financial centers, of which 16 are in Utah, six 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."
KEYSTONE HOLDINGS. Keystone Holdings, a Texas corporation, is a holding
company whose principal operating subsidiary is ASB, a California-based
federally chartered savings bank. As of June 30, 1996, Keystone Holdings had
consolidated assets of $20.5 billion, deposits of $12.7 billion and
stockholder's equity of $550.4 million. The principal business of ASB consists
of attracting funds in the form of retail deposits through its branches and
obtaining funds through borrowings, and investing those funds in single-family
mortgage loans. ASB is one of the largest originators of single-family
adjustable-rate mortgages ("ARMs") in California. ASB also originates a smaller
volume of multi-family residential loans (the majority of which are secured by
properties with 36 or fewer units) and loans secured by mobile home parks, which
are classified as commercial mortgage loans. In addition, ASB owns subsidiary
service corporations that engage in securities and insurance brokerage.
On July 22, 1996, Washington Mutual announced the signing of the
Keystone Merger Agreement. See "APPENDIX F: INFORMATION CONCERNING THE KEYSTONE
TRANSACTION AND KEYSTONE HOLDINGS" for further detailed information regarding
the Keystone Transaction and Keystone Holdings.
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 June 30, 1996, Utah
Federal had total assets of $122.3 million, total deposits of $108.7 million and
shareholders' equity of $11.4 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 9:00 a.m.,
local time, on November 29, 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
October 28, 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,
142,000 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 134,609 shares of Utah
Federal Common Stock, representing approximately 94.8 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 $107.04 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 $200,000,
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
not exceed $200,000 but under certain circumstances may be as high as $250,000,
which would result in a downward adjustment to the Merger Consideration of up
to $0.35 per share. If the actual transaction fees are higher than $250,000
resulting in further downward adjustment to the Merger Consideration, Utah
Federal will resolicit its shareholders with respect to approval of the Merger
Agreement. 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 opinions, dated as of
February 21, 1996, July 1, 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 137,919 shares of Utah
Federal Common Stock or approximately 97.13 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
97.13 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, which approval was granted on July 18, 1996. 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 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
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<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 "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION CONCERNING WASHINGTON MUTUAL."
Upon consummation of the Keystone Transaction, two representatives
mutually agreeable to Robert M. Bass, one of the principal Investors in KHP
("Mr. Bass"), and Washington Mutual will be appointed to fill then-vacant seats
in two different classes of the Washington Mutual Board. Pursuant to the
Keystone Merger Agreement, Washington Mutual has agreed to renominate such
mutually agreeable representatives if Mr. Bass and certain of his affiliates
beneficially own a specified number of shares of Washington Mutual Common Stock.
See "APPENDIX F - THE KEYSTONE TRANSACTION - MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION - Board of Directors."
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.
THE KEYSTONE TRANSACTION
Subject to the terms and conditions of the Keystone Merger Agreement,
on the effective date of such merger (the "Keystone Merger"), Keystone Holdings
will merge with and into Washington Mutual, with Washington Mutual as the
surviving corporation. The separate existence of Keystone Holdings will cease
upon the effectiveness of the Keystone Merger and the direct and indirect
subsidiaries of Keystone Holdings, including ASB, will become wholly-owned
subsidiaries of Washington Mutual. Additionally, and as a condition to the
consummation of the Keystone Merger, the FDIC, as manager of the Federal Savings
and Loan Insurance Corporation ("FSLIC") Resolution Fund (the "FRF") (the FDIC
in its capacity as manager of the FRF is referred to herein as the
"FDIC-Manager"), has agreed, pursuant to the Warrant Exchange Agreement, dated
as of July 21, 1996 by and among the parties to the Keystone Merger Agreement
and the FDIC-Manager (the "Warrant Exchange Agreement"), to effect the exchange
of the Warrants for shares of Washington Mutual Common Stock to be issued in the
Keystone Transaction (the "Warrant Exchange"). See "THE MERGER - Certain
Considerations Related to the Keystone Transaction and Keystone Holdings" and
"APPENDIX F: INFORMATION CONCERNING THE KEYSTONE TRANSACTION AND KEYSTONE
HOLDINGS."
In the Keystone Transaction, Washington Mutual will issue 47,883,333
shares of Washington Mutual Common Stock, as follows: 25,883,333 shares to KHP
(the "Keystone Initial Shares"), 14,000,000 shares to the FRF to effect the
Warrant Exchange (the "FRF Initial Shares") and 8,000,000 shares (the
"Litigation Escrow Shares") to a litigation escrow for the benefit of KHP and
the FRF (the "Litigation Escrow"). The Keystone Initial Shares and the FRF
Initial Shares are referred to collectively as the "Initial Shares." The
Keystone Initial Shares and the contingent right to receive the portion of the
Litigation Escrow Shares attributable to KHP will be distributed to the
Investors immediately following consummation of the Keystone Transaction, based
upon their pro rata interest in KHP. After the Keystone Transaction and assuming
all of the Litigation Escrow Shares are released, the Investors will own
approximately 31,100,000 shares of Washington Mutual Common Stock, or
approximately 25.9% of the Washington Mutual Common Stock then outstanding
(based on the number of shares outstanding on the record date for the special
meeting plus the Initial Shares and Litigation Escrow Shares). In addition, to
the extent that the FRF Initial Shares are not sold in an underwriting as soon
as practicable after the effective date of the Keystone Transaction, the FRF
will own approximately 14.0% of the Washington Mutual Common Stock then
outstanding (based on the number of shares outstanding on such record date plus
the Initial Shares and the Litigation Escrow Shares).
KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs
in a lawsuit against the United States (the "Case"), alleging, among other
things, that they entered into a contract with the FSLIC and the Federal Home
Loan Bank Board ("FHLBB"), and that the U.S. government breached that contract,
causing damage to the plaintiffs. See "APPENDIX F - THE KEYSTONE TRANSACTION -
The Litigation Escrow." Pursuant to the Keystone Merger Agreement, upon
consummation of the Keystone Transaction, Washington Mutual will succeed to the
right to prosecute the Case and will receive any recovery in the Case. Prior to
the effective date of the Keystone Transaction, Washington Mutual, KHP, the
FDIC-Manager and a mutually agreeable escrow agent for the Litigation Escrow
Shares ("Escrow Agent") will enter into an escrow agreement (the "Escrow
Agreement"). Pursuant to the terms of the Escrow Agreement, the Escrow Agent
will hold the Litigation Escrow Shares for six years, subject to extension in
certain circumstances. See "APPENDIX F - THE KEYSTONE TRANSACTION - The
Litigation Escrow."
Upon Washington Mutual's receipt of net cash proceeds from a judgment
or settlement of the Case, if any, reduced by certain tax and
litigation-related costs and expenses ("Case Proceeds"), all or part of the
Litigation Escrow Shares will be released, 64.9% to the Investors and 35.1% to
the FRF. The number of Litigation Escrow Shares released will be equal to the
Case Proceeds divided by the "Case Average Price." The "Case Average Price"
means the arithmetic average of the closing prices of Washington Mutual Common
Stock on The Nasdaq Stock Market for the 10 trading days immediately preceding
the third trading day before the effective date of the Keystone Transaction.
While Litigation Escrow Shares are held in the Litigation Escrow, the
FDIC-Manager and the Investors will have the right to vote their respective
percentage of the Litigation Escrow Shares. If not all of the Litigation Escrow
Shares are distributed prior to the expiration of the Litigation Escrow, any
remaining Litigation Escrow Shares will be returned to Washington Mutual for
cancellation. See "APPENDIX F - THE KEYSTONE TRANSACTION - The Litigation
Escrow."
The ultimate outcome of the Case is uncertain, and there can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses. Generally,
Washington Mutual will not benefit financially from the Case unless Case
Proceeds exceed such an amount and, in negotiating the Keystone Transaction,
Washington Mutual ascribed no value to the possibility that the Case Proceeds
would exceed such amount. As a result, it is uncertain what impact, if any,
recovery in the Case would have on the financial position of Washington Mutual.
In the Keystone Transaction, Washington Mutual, KHP and the
FDIC-Manager have entered into the Registration Rights Agreement dated as of
July 21, 1996 (the "Registration Rights Agreement"), pursuant to which
Washington Mutual will be required, if the Keystone Transaction closes, to use
its best efforts to register for resale to the public under the Securities Act
the shares of Washington Mutual Common Stock issued in the Keystone Transaction.
Pursuant to the Registration Rights Agreement, Washington Mutual has agreed to
file and use its best efforts to cause to become effective with the Commission
as soon as practicable after the effective date of the Keystone Transaction, on
a date mutually acceptable to Washington Mutual and the participants in such
underwriting, a registration statement covering the sale of between 7.5 million
and 20 million shares of Washington Mutual Common Stock (the "Initial
Underwriting"). It is currently expected that the FDIC-Manager will sell the FRF
Initial Shares in the Initial Underwriting, although there are no assurances
that the FDIC-Manager will sell all or any of such shares. See "APPENDIX F - THE
KEYSTONE TRANSACTION - Registration Rights and Resales of Washington Mutual
Common Stock."
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<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 ................. 30.38 26.13 0.22
Third Quarter .................. 39.25 28.50 0.23
Fourth Quarter (through
October 24, 1996 ............. 39.88 36.50 0.29
------ ------ -----
</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. On July 10, 1996, Utah Federal issued
3,000 shares of Utah Federal Common Stock upon exercise of outstanding stock
options at an exercise price of $21.00 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 October 24, 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 October 24, 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 $107.04
October 24, 1996 $39.88 $40.00 $38.80 $107.04
</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 may be decreased by up to $0.35 per share if
Utah Federal's transaction fees incurred in connection with the Merger exceed
$200,000. If the actual transaction fees are higher than currently anticipated
resulting in further downward adjustment to the Merger Consideration, Utah
Federal will resolicit its shareholders with respect to approval of the Merger
Agreement. The downward adjustment could be greater if Utah Federal's
transaction fees are higher than currently anticipated. See "THE MERGER --
General" and "THE MERGER AGREEMENT -- Expenses."
On October 24, 1996, there were approximately 15,900 shareholders of
record of Washington Mutual Common Stock and the last reported sales price per
share on such date was $39.44. As of the Record Date, there were
approximately 47 shareholders of record of Utah Federal Common Stock. See
"COMPARATIVE RIGHTS OF SHAREHOLDERS -- Authorized Capital."
13
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
Summary Consolidated Financial Data of Washington Mutual
The following table presents certain summary 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 (as restated), which are incorporated herein by
reference from the Company's Current report on Form 8-K dated October 18, 1996,
as amended. 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 (which was
accounted for by the purchase method) 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. 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 and is not necessarily indicative of the operating results for the
entire year. The information as of June 30, 1996 and for the six-month periods
ended June 30, 1995 and 1996 is not necessarily indicative of the operating
results for the entire year.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------ ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- ----
(unaudited)
SUMMARIZED STATEMENTS OF INCOME: (dollars in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income .................. $ 834,171 $ 757,463 $1,578,960 $1,258,550 $1,081,309 $ 813,893 $ 777,812
Interest Expense ................. 485,032 458,959 960,724 651,871 520,750 456,876 520,021
Net interest income .............. 349,139 298,504 618,236 606,679 560,559 357,017 257,791
Provision for loan losses ........ 5,825 5,650 11,150 20,400 35,225 14,887 22,407
Other income ..................... 73,514 58,409 117,874 118,502 152,575 97,748 101,317
Other expense .................... 224,779 209,413 417,655 415,300 394,874 253,024 204,130
Income taxes ..................... 71,161 48,827 107,504 108,159 98,864 64,459 45,920
Extraordinary items, net of FIT
effect(1) ...................... -- -- -- -- (8,953) (4,638) --
Cumulative effect of change in tax
accounting method .............. -- -- -- -- 13,365 -- --
--------------------------------------------------------------------------------------
Net income ....................... $ 120,888 $ 93,023 $ 199,801 $ 181,322 $ 188,583 $ 117,757 $ 86,651
======================================================================================
Net income attributable to common
stock .......................... $ 111,678 $ 83,731 $ 181,217 $ 162,738 $ 175,025 $ 112,882 $ 81,776
======================================================================================
Net income per share:
Primary ........................ $1.55 $1.22 $2.59 $2.45 $2.70 $1.95 $1.61
Fully diluted .................. 1.50 1.18 2.51 2.38 2.57 1.85 1.52
Average number of shares:
Primary ........................ 71,982,173 68,784,703 70,061,144 66,361,794 64,808,073 57,823,509 50,662,063
Fully diluted .................. 77,401,033 74,203,950 75,480,391 71,781,041 70,870,441 63,612,956 56,952,721
Dividends declared and paid:
Common ......................... $31,002 $25,229 $52,410 $45,335 $30,936 $21,231 $13,979
Preferred ...................... 9,210 9,292 18,584 18,584 13,559 4,875 4,875
</TABLE>
- ------------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pretax losses of $2.2 million and $3.1 million during 1993 and
1992, respectively, and penalties for prepayment of FHLB advances, resulting
in pretax losses of $10.8 million and $3.6 million during 1993 and 1992,
respectively.
15
<PAGE> 22
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
As of June 30, As of December 31,
---------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARIZED STATEMENTS
OF FINANCIAL POSITION:
Total assets ........................ $22,323,472 $21,042,692 $22,420,379 $19,175,991 $16,513,432 $10,531,744 $ 8,529,135
Loans ............................... 13,800,209 13,209,882 13,035,250 12,845,203 11,267,713 7,035,586 5,526,541
Trading, investment and
mortgage-backed securities ........ 7,405,545 6,714,713 7,941,139 5,348,565 4,210,173 2,810,983 2,368,001
Deposits ............................ 11,026,719 10,826,482 11,306,436 10,432,888 9,976,961 6,624,584 5,910,396
Borrowings (includes annuities) ..... 9,468,550 8,417,216 9,186,975 7,212,037 5,050,645 2,735,696 1,806,986
Stockholders' equity ................ 1,647,073 1,520,379 1,660,084 1,364,258 1,252,888 1,045,289 694,134
</TABLE>
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------ ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets ............. 7.88% 8.00% 8.03% 7.58% 8.00% 9.20% 10.06%
Cost of deposits and borrowings ..... 4.78 5.09 5.06 4.10 4.00 5.41 6.97
Net interest spread ................. 3.10 2.91 2.97 3.48 4.00 3.79 3.09
Net interest margin ................. 3.31 3.12 3.14 3.65 4.15 4.04 3.34
Operating efficiency ratio .......... 53.18 58.67 56.74 57.27 55.37 55.64 56.84
Return on average assets ............ 1.09 0.94 0.97 1.03 1.31 1.24 1.05
Return on average stockholders'
equity ............................. 14.73 13.21 13.31 13.77 16.89 15.26 14.33
Dividend payout ratio ............... 25.65 26.74 25.74 24.50 15.98 15.43 13.06
Ratios of combined earnings to
fixed charges:
Excluding interest on deposits .... 1.78x 1.64x 1.66x 2.03x 2.70x 2.41x 1.86x
Including interest on deposits .... 1.40x 1.31x 1.32x 1.44x 1.54x 1.41x 1.25x
<CAPTION>
As of June 30, As of December 31,
------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a
percentage of total assets ........ 0.46% 0.40% 0.42% 0.42% 0.68% 1.27% 1.58%
Loan loss reserves/total loans ...... 1.05 1.06 1.10 1.03 1.06 0.83 1.01
Loan loss reserves/nonperforming
assets ............................ 139.75 167.09 151.23 164.08 105.89 43.46 41.39
</TABLE>
16
<PAGE> 23
SUMMARY CONSOLIDATED FINANCIAL DATA OF KEYSTONE HOLDINGS
The following table sets forth certain summary historical consolidated
financial data of Keystone Holdings and is based upon and should be read in
conjunction with the Consolidated Financial Statements of Keystone Holdings,
including the respective notes thereto as set forth in Appendix F hereto, and
the other information in this Proxy Statement/Prospectus regarding Keystone
Holdings. The information as of June 30, 1996 and for the six-month periods
ended June 30, 1995 and 1996 is unaudited and reflects all adjustments that are,
in the opinion of Keystone Holdings' 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 "APPENDIX F: INFORMATION CONCERNING
THE KEYSTONE TRANSACTION AND KEYSTONE HOLDINGS."
<TABLE>
<CAPTION>
For the Six-Month
Period Ended June 30, For the Year Ended December 31,
--------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
OPERATING DATA: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ................. $706,720 $636,301 $1,337,126 $1,036,863 $1,117,269 $1,357,076 $1,629,827
Interest expense ................ 469,096 470,602 962,712 683,487 691,146 845,613 1,125,609
Net interest income ............. 237,624 165,699 374,414 353,376 426,123 511,463 504,218
Provision for losses on loans ... 35,180 34,533 63,837 101,609 123,503 143,650 63,400
Other income .................... 34,624 39,757 72,433 88,902 81,050 66,552 74,489
Other expenses .................. 134,870 136,130 264,827 266,827 279,694 298,599 312,218
Federal and state income taxes .. 27,685 (5,439) 12,289 897 11,245 31,983 85,221
Cumulative effect of change in
accounting principal .......... -- -- -- -- -- 60,045 --
Minority interest in earnings of
consolidated subsidiaries ..... (20,896) (14,708) (21,092) (22,621) (10,474) (883) (874)
-----------------------------------------------------------------------------------------
Net earnings $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257 $ 162,945 $ 116,994
=========================================================================================
Common dividends declared $ 60,000 $ 5,500 $ 5,587 $ 22,500 $ 18,000 $ 97,300 $ 49,000
Common dividends paid ........... 35,000 5,500 5,587 32,500 29,000 76,300 49,000
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
------------------------ ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARIZED BALANCE SHEET
DATA:
Total assets ................ $20,480,706 $19,213,564 $19,703,656 $18,402,403 $17,214,076 $17,262,741 $17,001,906
Loans ....................... 12,854,633 14,339,180 11,175,031 12,643,590 9,808,060 9,601,942 8,364,912
Trading, investment and
mortgage-backed securities. 6,720,966 3,159,220 7,394,103 3,373,497 3,194,395 1,940,993 1,711,163
Deposits .................... 12,728,966 13,303,300 13,005,029 12,815,489 13,367,640 13,988,968 13,973,699
Borrowings .................. 6,494,532 4,934,988 5,391,857 4,733,678 2,880,979 2,377,784 2,263,486
Stockholder's equity ........ 550,398 593,810 668,559 534,124 578,235 497,438 444,946
</TABLE>
[/R]
<PAGE> 24
OTHER FINANCIAL DATA(1):
The following tables set forth certain other financial data of Keystone Holdings
for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------ ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets ........... 7.45% 6.91% 7.23% 6.22% 6.73% 8.00% 9.86%
Cost of deposits and borrowings ... 5.05 5.17 5.28 4.18 4.26 5.10 6.96
Net interest spread ............... 2.40 1.74 1.95 2.04 2.47 2.90 2.91
Net interest margin ............... 2.51 1.80 2.02 2.12 2.57 3.01 3.05
Operating efficiency ratio ........ 49.54 66.26 59.27 60.33 55.15 51.66 53.95
Return on average assets .......... 0.54 0.27 0.44 0.29 0.48 0.92 0.68
Return on average equity .......... 17.09 9.17 15.15 9.04 15.30 32.37 26.35
Dividend payout ratio ............. 111.90 21.55 6.59 44.71 21.88 59.71 41.88
Equity to assets ratio ............ 3.16 2.90 2.90 3.21 3.12 2.85 2.58
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of December 31,
----------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a percentage
of total assets ...................... 1.07% 1.55% 1.24% 1.84% 2.38% 2.48% 1.73%
Allowance for credit losses/gross
receivables and recourse obligations.. 0.48 0.67 0.55 0.80 1.10 1.08 0.75
Allowance for credit losses/nonaccrual
receivables and recourse obligations.. 61.48 58.88 61.17 51.30 48.55 42.88 30.36
</TABLE>
<PAGE> 25
SUMMARY 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 as of June 30, 1996 and for the nine-month
periods ended June 30, 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 Nine Months
Ended June 30, For the Year Ended September 30,
-------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------------------- ----------------------------------------------------------
(in thousands, except for share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Interest income ............... $ 8,203 $ 7,120 $ 10,002 $ 8,672 $ 10,055 $ 11,240 $ 12,760
Interest expense .............. 4,200 3,709 5,110 4,896 5,685 7,424 9,693
-------- -------- -------- -------- -------- -------- --------
Net interest income ........... 4,003 3,411 4,892 3,776 4,370 3,816 3,066
Provision for losses on
loans ....................... -- -- -- -- -- 361 927
Net interest income after
provision for loan losses ... 4,003 3,411 4,892 3,776 4,370 3,455 2,139
Other income .................. 829 780 917 1,103 1,060 962 778
Other expenses ................ 2,966 3,043 4,066 3,576 3,475 3,413 3,147
Provision for losses on REO ... -- -- -- -- 127 569 1,128
-------- -------- -------- -------- -------- -------- --------
Income before
federal income taxes ........ 1,866 1,148 1,743 1,302 1,828 435 (1,358)
Federal income taxes .......... 556 428 373 167 762 348 (97)
-------- -------- -------- -------- -------- -------- --------
Net income .................... $ 1,310 $ 720 $ 1,370 $ 1,135 $ 1,066 $ 87 $ (1,261)
======== ======== ======== ======== ======== ======== ========
Cash dividends declared,
including preferred ......... $ 95 $ 102 $ 116 $ 116 $ 56 $ 1 $ --
PER SHARE DATA:
Net income per common share:
Primary ..................... $ 12.97 $ 7.20 $ 13.56 $ 11.35 $ 10.66 $ 0.97 $ --
Fully diluted ............... 9.42 5.22 9.86 8.22 7.72 0.70 --
Cash dividends declared
per common share (1) ........ 0.68 0.74 0.83 0.84 0.41 -- --
Book value per
common share (2) ............ 81.99 69.17 73.24 64.54 57.26 49.85 --
Average common shares
and common stock
equivalents outstanding (2).. 139,000 138,000 139,000 138,000 138,000 138,000 --
</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> 26
STATEMENT OF FINANCIAL
CONDITION DATA:
<TABLE>
<CAPTION>
As of June 30, As of September 30,
------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets ............................. 122,332 119,178 $123,935 $119,464 $127,392 $126,593 $132,565
Loans receivable, net .............. 83,811 78,545 86,769 68,515 75,753 94,420 104,651
Investment securities .............. 17,731 26,126 24,229 29,660 21,706 7,594 10,088
Cash and interest bearing funds .... 12,308 6,291 5,301 14,904 23,167 15,835 5,288
Total deposits ..................... 108,232 106,763 108,990 106,765 112,609 111,224 114,976
Borrowings ......................... 27 30 2,389 1,100 3,183 5,322 9,894
Shareholders' equity ............... 11,396 9,545 10,180 8,906 7,902 6,879 4,137
</TABLE>
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30, For the Year Ended September 30,
------------------ ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Yield on earning assets ............ 8.52 7.88 8.03% 7.03% 8.36% 9.19% 9.95%
Cost of deposits and borrowings .... 5.15 4.60 4.71 4.43 5.00 6.17 7.48
Net interest spread ................ 3.37 3.28 3.32 2.60 3.36 3.02 2.47
Return on average assets ........... 1.42 0.80 1.13 0.92 0.84 0.07 (0.95)
Return on average stockholders'
equity ........................... 16.19 10.40 14.35 13.50 14.42 1.59 (26.45)
<CAPTION>
As of June 30, As of September 30,
------------------ -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Nonperforming assets as a percentage
of total assets ................. 0.56% 0.90% 0.69% 1.86% 2.52% 3.82% 8.18%
Loan loss reserve to total loans ... 1.92 2.06 1.95 2.38 2.24 1.59 1.38
Loan loss reserve to nonperforming
assets ............................. 224.52 155.36 193.71 75.37 52.35 31.51 13.46
Total risk-based capital ratio ..... 17.07 16.16 16.35 17.19 14.06 10.66 5.96
</TABLE>
18
<PAGE> 27
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA FOR WASHINGTON MUTUAL
AND KEYSTONE HOLDINGS
The following tables set forth (i) consolidated historical summary financial
data for the periods and as of the dates indicated for Washington Mutual and for
Keystone Holdings and (ii) summary pro forma combined financial data for the
periods and as of the dates indicated, giving effect to the Keystone Transaction
as if it had been consummated on January 1, 1993, for income statement
information and on June 30, 1996, for balance sheet information. Pro forma
adjustments made to arrive at the pro forma combined amounts are based on the
pooling of interests method of accounting. The financial data for Utah Federal
and United Western, a recently announced acquisition of Washington Mutual (see
"INFORMATION CONCERNING WASHINGTON MUTUAL - Washington Mutual"), have not been
included because they are not material to Washington Mutual.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and
accompanying notes of Washington Mutual included in the documents described
under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," the consolidated
financial statements and accompanying notes of Keystone Holdings included in
this Proxy Statement/Prospectus in "APPENDIX F - KEYSTONE HOLDINGS -
CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS" and "- UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS AS OF JUNE 30,
1996," and the pro forma combined financial statements and accompanying
discussion and notes set forth under "APPENDIX F - THE KEYSTONE TRANSACTION -
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION." The Summary
Historical and Pro Forma Combined Financial Data is intended for informational
purposes only and is not necessarily indicative of the future financial position
or future results of operations of the combined company or of the financial
position or the results of operations of the combined company that would have
actually occurred had the Keystone Transaction been in effect as of the date
or for the periods presented.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year ended December 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
WASHINGTON MUTUAL:
Net interest income ....................... $ 349,139 $ 298,504 $ 618,236 $ 606,679 $ 560,559
Provision for loan losses ................. 5,825 5,650 11,150 20,400 35,225
Other income (expense), net ............... (151,265) (151,004) (299,781) (296,798) (242,299)
Federal income taxes ...................... 71,161 48,827 107,504 108,159 98,864
-------------------------------------------------------------
Net income from continuing operations ..... 120,888 93,023 199,801 181,322 184,171
Extraordinary items, net of federal
income taxes ............................ -- -- -- -- (8,953)
Cumulative effect in change of
tax method .............................. -- -- -- -- 13,365
-------------------------------------------------------------
Net income ................................ $ 120,888 $ 93,023 $ 199,801 $ 181,322 $ 188,583
=============================================================
Net income attributable to
common stock ............................ $ 111,678 $ 83,731 $ 181,217 $ 162,738 $ 175,025
=============================================================
KEYSTONE HOLDINGS:
Net interest income ....................... $ 237,624 $ 165,699 $ 374,414 $ 353,376 $ 426,123
Provision for loan losses ................. 35,180 34,533 63,837 101,609 123,503
Other income (expense), net ............... (100,246) (96,373) (192,394) (177,925) (198,644)
Federal and state income taxes ............ 27,685 (5,439) 12,289 897 11,245
-------------------------------------------------------------
Earnings from continuing operations ....... 74,513 40,232 105,894 72,945 92,731
Minority interest in earnings of
consolidated subsidiaries ............... (20,896) (14,708) (21,092) (22,621) (10,474)
-------------------------------------------------------------
Net earnings .............................. $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257
=============================================================
Net earnings attributable to common stock.. $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257
=============================================================
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year ended December 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
PRO FORMA INCLUDING KEYSTONE HOLDINGS:(1)
Net interest income........................ $ 586,763 $ 464,203 $ 992,650 $ 960,055 $ 986,682
Provision for loan losses.................. 41,005 40,183 74,987 122,009 158,728
Other income (expense), net................ (251,511) (247,377) (492,175) (474,723) (440,943)
Federal and state income taxes............. 98,846 43,388 119,793 109,056 110,109
-------------------------------------------------------------
Net earnings from continuing operations.... 195,401 133,255 305,695 254,267 276,902
Extraordinary items, net of federal income
taxes.................................... -- -- -- -- (8,953)
Cumulative effect of accounting change..... -- -- -- -- 13,365
Minority interest in earnings of
consolidated subsidiaries(2)............. (6,978) (6,938) (15,793) (13,992) (13,991)
-------------------------------------------------------------
Net earnings............................... $ 188,423 $ 126,317 $ 289,902 $ 240,275 $ 267,323
=============================================================
Net earnings attributable to common stock.. $ 179,213 $ 117,025 $ 271,318 $ 221,691 $ 253,765
=============================================================
</TABLE>
- ----------------
(1) Keystone Transaction-related Expenses. Nonrecurring Transaction-related
expenses anticipated to be recorded are not included in Keystone Holdings
statement of income for the six months ended June 30, 1996. See "APPENDIX
F - THE KEYSTONE TRANSACTION - MANAGEMENT AND OPERATIONS OF WASHINGTON
MUTUAL FOLLOWING THE KEYSTONE TRANSACTION - Operations After the Keystone
Transaction--Keystone Transaction Expense and Addition to Loan Loss
Reserve" and "Notes to Pro Forma Combined Consolidated Statements of
Income." Nonrecurring Transaction-related expenses expected to be recorded
by Washington Mutual are summarized in the following table (dollars in
thousands):
<TABLE>
<S> <C>
Additional loan loss reserves(a) ..................... $ 125,000
Severance and management payments .................... 46,000
Holding company debt call premiums ................... 15,000
FRF tax settlement ................................... 10,500
Other charges ........................................ 47,000
Total charges ...................................... 243,500
Tax benefit .......................................... (86,200)
Negative adjustment to ASB's deferred tax asset ...... 50,000
---------
Net charges ........................................ $ 207,300
=========
</TABLE>
(a) See "APPENDIX F--THE KEYSTONE TRANSACTION--MANAGEMENT AND OPERATIONS" OF
WASHINGTON MUTUAL AFTER THE KEYSTONE TRANSACTION--Operations After the
Keystone Transaction--Keystone Transaction Expenses and Addition to Loan
Loss Reserve" for a discussion of the differences in philosophy between
Washington Mutual and ASB regarding provisions for loan loss and reasons
for the increase in the loan loss provision.
(2) The Keystone Transaction is intended to be accounted for as a
pooling-of-interests. The pro forma adjustments in the unaudited Pro Forma
Including Keystone Holdings statements of income for the three years ended
December 31, 1995 and the six months ended June 30, 1996
and 1995 reflect dividends paid to the holders of $80.0 million in New
Capital's cumulative redeemable preferred stock.
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------
Pro Forma
Washington Keystone Including Keystone
Mutual Holdings Holdings(1)
----------- ----------- ------------------
(dollars in thousands)
<S> <C> <C> <C>
Loans ........................................ $13,800,209 $12,854,633 $26,529,842
Assets ....................................... 22,323,472 20,480,706 42,560,678
Borrowings (including annuities) ............. 9,468,550 6,494,532 15,963,082
Stockholders' equity ......................... 1,647,073 550,398 2,217,150
Nonperforming assets as a percentage of
total assets ............................... 0.46% 1.07% 0.76%
Loan loss reserves/total loans ............... 1.05 0.70 0.88
Loan loss reserves/nonperforming assets ...... 139.75 40.92 72.48
</TABLE>
- --------------
(1) The Pro Forma Including Keystone Holdings stockholder's equity has been
adjusted to reflect the issuance of 14,000,000 shares of the Washington
Mutual Common Stock to effect the Warrant Exchange. The Warrants are
included in Keystone Holdings' balance sheet as minority interest.
<PAGE> 29
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 six months ended June 30, 1996. The
unaudited pro forma and pro forma equivalent per share financial information
presents information for both Washington Mutual and Washington Mutual on the pro
forma combined basis with Keystone Holdings. The information presented herein
should be read in conjunction with the financial information of Washington
Mutual, Utah Federal and Keystone Holdings appearing elsewhere in this Proxy
Statement/Prospectus and incorporated herein by reference. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," "SELECTED HISTORICAL FINANCIAL DATA,"
"INFORMATION CONCERNING WASHINGTON MUTUAL," "INFORMATION CONCERNING UTAH
FEDERAL," "APPENDIX E: FINANCIAL STATEMENTS OF UTAH FEDERAL" and "APPENDIX F -
THE KEYSTONE TRANSACTION - COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS." 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 2.963. 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 six months ended June
30, 1996 would not be materially different if the Merger were treated as a
purchase for accounting purposes.
<PAGE> 30
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------ -------------------------------
1996 1995 1994 1993
------------------ ------ ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
WASHINGTON MUTUAL
COMMON STOCK (1)
Net income per fully diluted share:
Historical ..................................... $ 1.50 $ 2.51 $ 2.38 $ 2.57
Pro forma including Utah Federal ............... 1.50 2.51 2.38 2.57
Pro forma including Utah Federal and
Keystone Holdings ............................ 1.56 2.42 2.06 2.36
Dividends per share:
Historical ....................................... 0.43 0.77 0.70 0.50
Pro forma including Utah Federal ................. 0.43 0.77 0.70 0.50
Pro forma including Utah Federal and
Keystone Holdings .............................. 0.43 0.77 0.70 0.50
Book value per share at period-end:
Historical ....................................... 19.73 19.97 16.98 15.87
Pro forma including Utah Federal ................. 19.73 19.97 16.98 15.87
Pro forma including Utah Federal and
Keystone Holdings .............................. 17.88 20.70 15.33 14.52
UTAH FEDERAL COMMON STOCK
Net income per fully diluted share:
Historical ....................................... 6.40 8.82 8.52 7.55
Pro forma equivalent including Washington
Mutual (2) ..................................... 4.44 7.44 7.06 7.63
Pro forma equivalent including Washington
Mutual and Keystone Holdings (2) ............... 4.62 7.17 6.10 6.99
Dividends per share:
Historical ....................................... 0.68 0.60 0.60 --
Pro forma equivalent including Washington
Mutual (2) ..................................... 1.27 2.28 2.07 1.48
Pro forma equivalent including Washington
Mutual and Keystone Holdings (2) ............... 1.27 2.28 2.07 1.48
Book value per share at period-end:
Historical ....................................... 81.99 75.58 65.91 58.26
Pro forma equivalent including Washington
Mutual (2) ..................................... 58.46 59.17 50.31 47.02
Pro forma equivalent including Washington
Mutual and Keystone Holdings (2) ............... 58.22 61.34 45.43 43.03
</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 2.963. This exchange ratio is based on a Washington
Mutual Common Stock price of $36.125 per share, the closing price on
September 10, 1996.
<PAGE> 31
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 9:00 a.m. local time on
November 29, 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 October 28,
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, 142,000 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.
[/R]
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 137,919 shares of Utah Federal Common Stock
or approximately 97.13 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 134,609 shares of Utah Federal
Common Stock, representing approximately 94.8 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> 32
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 $107.04 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> 33
exceed $200,000, 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 not exceed $200,000, but under certain
circumstances may be as high as $250,000, which would result in a downward
adjustment to the Merger Consideration of up to $0.35 per share. If the actual
transaction fees are higher than $250,000 resulting in further downward
adjustment to the Merger Consideration, Utah Federal will resolicit its
shareholders with respect to approval of the Merger Agreement. 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> 34
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> 35
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.
On July 22, 1996, Washington Mutual announced the signing of the Keystone
Merger Agreement and on July 23, 1996, Utah Federal postponed the Special
Meeting and notified its shareholders in writing of such postponement. Because
of the resulting delay in consummating the Merger, by amendment to the Merger
Agreement dated September 10, 1996, Washington Mutual and Utah Federal agreed to
increase the Merger Consideration from $105.63 to $107.04 per share and to
increase from $150,000 to $200,000 the allowable amount of Utah Federal's
transaction fees incurred in connection with the Merger, beyond which the Merger
Consideration would be reduced by the amount of any excess divided by the number
of shares of Utah Federal Common Stock outstanding at the Effective Date. See
"THE MERGER AGREEMENT - Expenses."
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.
23
<PAGE> 36
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, 137,919 shares of Utah Federal Common Stock prior to
the Merger (approximately 97.13 percent of the outstanding shares of Utah
Federal Common Stock), or less than one percent of the outstanding shares of
Washington Mutual Common Stock after the Merger. One of the directors of Utah
Federal individually beneficially owned 134,609 shares of Utah Federal Common
Stock, representing 94.8 percent of the outstanding shares of Utah Federal
Common Stock. 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 written opinions to the Utah Federal Board to the
effect that, as of February 21, 1996, July 1, 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 opinions to the Utah Federal Board on February 21, 1996,
July 1, 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 $21,000. 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.
RISK FACTORS RELATED TO THE KEYSTONE TRANSACTION AND KEYSTONE HOLDINGS
In addition to the other information set forth in this Proxy
Statement/Prospectus, Utah Federal Shareholders should consider the following
matters related to the Keystone Transaction and Keystone Holdings before voting
on the proposal herein.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used or
incorporated by reference in this Proxy Statement/Prospectus, the words
"anticipate," "estimate," "expect," "project" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Several key factors that have a direct bearing on Washington
Mutual's ability to attain its goals are discussed below.
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED. Washington
Mutual anticipates that substantial benefits will occur as a result of the
Keystone Transaction as described under "APPENDIX F - THE KEYSTONE TRANSACTION -
Reasons for the Transaction; Recommendation of the Washington Mutual Board" and
"APPENDIX F - THE KEYSTONE TRANSACTION - MANAGEMENT AND OPERATIONS OF WASHINGTON
MUTUAL FOLLOWING THE KEYSTONE TRANSACTION." Whether the anticipated benefits of
the Keystone Transaction are ultimately achieved, however, will depend on a
number of factors, including the ability of Washington Mutual and Keystone
Holdings as a combined company ("combined companies") to achieve administrative
cost savings at projected levels within projected time frames, and general
economies of scale and, generally, the ability of the combined companies to
capitalize on their combined asset base and strategic position. There can be no
assurance that the expected benefits of the Keystone Transaction relative to the
combined business will be achieved.
ECONOMIC CONDITIONS AND REAL ESTATE RISK. Washington Mutual's lending
operations are concentrated primarily in Washington and Oregon, with additional
operations in Idaho, Utah and Montana, and ASB's lending operations are
concentrated in California. Both Washington Mutual and ASB have the bulk of
their assets invested in loans and securities secured by residential real estate
in those states. As a result, the financial condition and results of operations
of the combined company will be subject to general economic conditions and,
particularly, the conditions in the single-family or multi-family residential
real estate markets prevailing in Washington, Oregon and California. In
addition, in an economic downturn, there tends to be a run-off in deposits,
which could increase overall funding costs. If economic conditions in any one of
those states worsens or if the market for residential real estate in particular
declines, the combined company may suffer decreased net income or losses
associated with higher default rates and decreased collateral values on its
existing portfolio, and may not be able to originate the volume of high quality
single-family or multi-family residential mortgage loans or achieve the level of
deposits and mutual fund assets currently projected.
In contrast to Washington Mutual's historical situation, approximately
one-half of the combined companies' pro forma loan assets at June 30, 1996 were
secured by properties in California. The California economy and certain of its
real estate submarkets showed signs of recovery in 1994 and 1995 from the
recessionary levels of the early 1990's, and consequently ASB's delinquencies,
non-performing assets and the ratio of loss provisions to nonperforming assets
improved from earlier periods. Other California real estate submarkets continued
to decline in 1996. If the California economy or real estate values in
California were to significantly decline, future financial performance of the
combined companies could be negatively affected.
INTEREST RATE RISK. Each of Washington Mutual and ASB realizes its income
principally from the differential between the interest earned on loans,
investments and other interest-earning assets, and the interest paid on
deposits, borrowings and other interest-bearing liabilities. Net interest
spreads are affected by the difference between the repricing characteristics of
interest-earning assets and deposits and other liabilities. Loan volumes and
yields, as well as the volume of, and rates on, investments, deposits and
borrowings, are affected by market interest rates. Generally, Washington Mutual
will experience increased interest rate spreads during periods of downward
interest rate movement and decreased interest rate spreads during periods of
upward interest rate movement. This is also the case with ASB, although to a
somewhat lesser extent. Although ASB's loan portfolio consists primarily of
ARMs, the adjustments in the interest rates on the ARMs inherently lag changes
in ASB's cost of funds. To the extent that interest rates generally are
increasing, the combined company's actual interest rate spread, and thus net
income, will in most cases be negatively affected.
OPERATIONAL ISSUES; MANAGEMENT. ASB's assets and deposits are of comparable
size to Washington Mutual's, and ASB operates primarily in California, where
Washington Mutual has limited operating experience. The combination of two
companies of nearly equal size and the integration of their management teams in
different geographic areas may pose difficulties that could adversely affect the
results of operations of the combined company. In addition, Washington Mutual
anticipates certain cost savings from the consolidation of operations, which may
not materialize or may be delayed as a result of difficulties in consolidating
operations.
The ability of the combined company to operate efficiently, at least in the
short term, will be enhanced by its ability to retain existing management
personnel. If Washington Mutual is not able to retain a substantial number of
key management personnel of ASB, the
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consolidation of the two companies may be more time-consuming, difficult and
expensive, which may negatively affect the predicted cost savings. See
"APPENDIX F--THE KEYSTONE TRANSACTION--MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION."
ABILITY TO REFINANCE DEBT. Washington Mutual currently intends to refinance
certain outstanding debt and preferred equity of certain subsidiaries of
Keystone Holdings following the Keystone Transaction. To the extent that the
interest rates on such refinancing are higher than anticipated, or that some of
such indebtedness is not repaid as contemplated, actual interest and dividend
costs may be higher than anticipated by Washington Mutual. Holders of certain of
such debt have the right to demand payment in the event of a change in control,
such as the Keystone Transaction. If such holders demand payment after the
Keystone Transaction, Washington Mutual will be required to promptly repay such
debt and may not be able to arrange for alternative financing at the anticipated
rates. See "APPENDIX F - THE KEYSTONE TRANSACTION - MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION."
COMPETITION. Washington Mutual and ASB both face significant competition in
their respective markets. Washington Mutual has limited operating experience in
California. California has a much larger population with more large financial
institution competitors than the states in which Washington Mutual currently
operates. Many of these large competitors have more significant financial
resources, larger market share and greater name recognition in California than
the combined company will have. The existence of such competitors may make it
difficult for Washington Mutual to achieve its financial goals following the
Keystone Transaction.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT MARKET PRICE OF STOCK.
Sales of substantial amounts of Washington Mutual Common Stock in the public
market could adversely affect the market price of such stock. As described
elsewhere in this Proxy Statement/Prospectus, it is anticipated that the
FDIC-Manager will sell the FRF Initial Shares in the Initial Underwriting.
Additionally, Washington Mutual has agreed to provide the FRF and the Investors
and their assigns with certain registration rights that will facilitate future
sales of shares of Washington Mutual Common Stock issued in connection with the
Keystone Transaction. If the market price of Washington Mutual Common Stock were
adversely affected by such sales, Washington Mutual's access to equity capital
markets could be adversely affected, and issuances of stock by Washington Mutual
in connection with future acquisitions, or otherwise, could dilute earnings per
share. See "APPENDIX F - THE KEYSTONE TRANSACTION - Registration Rights and
Resales of Washington Mutual Common Stock."
SIGNIFICANT SHAREHOLDERS . Upon consummation of the Keystone Transaction,
the Initial Shares will be issued to the FRF and KHP. The FDIC-Manager is
expected to sell the FRF Initial Shares in the Initial Underwriting, although
there is no assurance that the FDIC-Manager will sell all or any of such shares.
See "APPENDIX F - THE KEYSTONE TRANSACTION - Registration Rights and Resales of
Washington Mutual Common Stock." If the FDIC-Manager does not sell any of the
FRF Initial Shares in the Initial Underwriting, at the Effective Time the FRF
will own approximately 14.0% of the Washington Mutual Common Stock then
outstanding (based on the number of shares outstanding on the Record Date plus
the Initial Shares and Litigation Escrow Shares), assuming all of the Litigation
Escrow Shares are released.
The Keystone Initial Shares and the contingent right to receive the
Litigation Escrow Shares attributable to KHP will be distributed
to the Investors immediately after the consummation of the Keystone Transaction.
After the Keystone Transaction, the Investors will own an aggregate of
31,075,333 shares of Washington Mutual Common Stock, representing approximately
25.9% of the Washington Mutual Common Stock then outstanding (based on the
number of shares outstanding on the Record Date plus the Initial Shares and
Litigation Escrow Shares), assuming all of the Litigation Escrow Shares are
released.
Immediately after the Keystone Transaction, Mr. Bass will beneficially own
approximately 9.5% of the Washington Mutual Common Stock then outstanding (based
on the number of shares outstanding on the Record Date plus the Initial Shares
and Litigation Escrow Shares), assuming all of the Litigation Escrow Shares are
released.
The Investors and the FDIC-Manager are restricted in their right to sell
shares of Washington Mutual Common Stock received in the Keystone Transaction by
state and federal securities and bank regulatory laws. In addition, certain
Investors are also subject to restrictions on sales of their shares of
Washington Mutual Common Stock by the terms of the Keystone Affiliate Letters
("Keystone Affiliate Letters"). Other than such restrictions, Washington Mutual
has no agreements with any Investor, including Mr. Bass, that restrict an
Investor's rights to buy, sell or vote the Washington Mutual Common Stock. As
holders of a significant percentage of the outstanding Washington Mutual Common
Stock, after the Keystone Transaction certain Investors, particularly Mr. Bass,
and the FDIC-Manager, to the extent that the FDIC-Manager does not sell the FRF
Initial Shares in the Initial Underwriting, will be able to affect voting on
matters put before the shareholders of Washington Mutual.
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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 137,919 shares of Utah Federal Common Stock (or approximately 97.13
percent of the then outstanding shares of Utah Federal Common Stock). 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. L. Brent Hoggan, the Executive Vice
President and Legal Counsel, will receive $1,000 per month for three months
after closing pursuant to his agreement to provide certain transition services.
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 137,919 shares of Utah Federal Common Stock
approximately 97.13 percent of the shares of Utah Federal Common Stock
outstanding as of the Record Date) 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. On July 18, 1996, the OTS approved the Merger. Pursuant to the OTS
approval, the Merger must be consummated on or before the 120th day after date
of the approval. If the Merger is not consummated within such period, Washington
Mutual will request an extension from OTS. While there can be no assurance that
such request will be granted, Washington Mutual believes that the OTS will
respond positively to a request for an extension.
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 June 30, 1996 as its estimate
of the per share fair market value of the Utah Federal shares, which per share
value was $81.99. 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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<PAGE> 44
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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<PAGE> 46
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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<PAGE> 47
(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> 48
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 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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<PAGE> 49
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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<PAGE> 50
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 $200,000, 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
not exceed $200,000, but under certain circumstances may be as high as $250,000,
which would result in a downward adjustment to the Merger Consideration of up to
$0.35 per share. If the actual transaction fees are higher than $250,000
resulting in further downward adjustment to the Merger Consideration, Utah
Federal will resolicit its shareholders with respect to approval of the Merger
Agreement. 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 October 24, 1996, Washington Mutual had
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72,307,510 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"), 1,399,000 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 October 24, 1996,
options to purchase 1,480,418 shares of Washington Mutual Common Stock under
Washington Mutual's stock option plans had been granted, but not exercised or
terminated and 3,132,500 shares were available for future grants under such
plans. In connection with the Keystone Transaction, Washington Mutual will hold
a special meeting of its shareholders for the purpose of asking its shareholders
to approve the Keystone Transaction and to approve an amendment to Washington
Mutual's Restated Articles of Incorporation increasing the number of authorized
shares of Washington Mutual Common Stock from 100,000,000 shares to 350,000,000
shares. Consummation of the Keystone Transaction is contingent on approval of
the amendment to Washington Mutual's Restated Articles of Incorporation.
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.
[/R]
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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. Assuming the Keystone Transaction is consummated,
ASB, as a subsidiary of Washington Mutual, will be subject to the same
restrictions on paying dividends as WMBfsb.
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. The Washington Mutual
Board will be increased to 15 members prior to the consummation of the Keystone
Transaction, assuming no vacancies are created on the Washington Mutual Board
prior to such time. Pursuant to the Keystone Merger Agreement, two additional
members will be appointed to the Washington Mutual Board who will be mutually
agreeable to Mr. Bass and Washington Mutual. See "APPENDIX F - THE KEYSTONE
TRANSACTION - MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER THE KEYSTONE
TRANSACTION - Board of Directors."
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
43
<PAGE> 58
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.
44
<PAGE> 59
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 $19.1 million at June 30, 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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<PAGE> 60
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
$141,991,064 as of June 30, 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 were $351,141 and $684,625,
respectively. Gross fees for originating loans during the six months ending
June 30, 1995 and June 30, 1996 were $294,876 and $525,521 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 six months ending June 30, 1995 and June 30, 1996
were $131,200 and $138,120 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>
June 30, 1996 September 30, 1995 September 30, 1994
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Conventional mortgage loans........... $52,296,375 60.76% $62,754,809 70.35% $59,681,478 84.16%
Insured mortgage loans................ 4,746,415 5.52 7,052,519 7.91 5,643,596 7.96
Real estate construction.............. 19,108,850 22.20 11,173,596 12.52 2,444,738 3.45
Home equity loans..................... 6,941,594 8.06 5,758,399 6.46 1,855,058 2.62
Consumer & other loans................ 2,980,636 3.46 2,464,845 2.76 1,288,052 1.81
----------- ------ ----------- ------ ----------- ------
Total loans........................ $86,073,870 100.00% $89,204,168 100.00% $70,912,922 100.00%
Less:
Deferred loan fees.................... (612,406) (773,205) (720,182)
Reserve for loan losses............... (1,650,196) (1,661,841) (1,677,806)
----------- ----------- -----------
Total loans, net................... $83,811,268 $86,769,122 $68,514,934
=========== =========== ===========
</TABLE>
The following table sets forth certain information at June 30, 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 $17,730,000
Other investments.................................. 14,792,000 174,000 0
Mortgage loans..................................... 30,562,000 6,289,000 $20,192,000
Construction loans................................. 19,109,000 0 0
Consumer & other loans............................. 3,370,000 2,692,000 3,860,000
----------- ----------- -----------
Total earning assets........................... $67,833,000 $ 9,155,000 $41,782,000
=========== =========== ===========
</TABLE>
The following table sets forth the dollar amount of all loans and
investments due one year or more after June 30, 1996, which have fixed interest
rates and have floating or adjustable interest rates.
46
<PAGE> 61
<TABLE>
<CAPTION>
Asset/rate type Dollar Amount
--------------- -------------
<S> <C>
Fixed-rate loans................................. $ 39,672,000
Variable-rate loans.............................. 46,401,000
Fixed-rate investments........................... 4,678,000
Variable-rate investments........................ 28,019,000
------------
Total......................................... $118,770,000
</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 June 30, 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 June 30, 1996, of $1,650,196 is calculated to be in excess of
adequate reserves by $370,100. The reserve for loan losses as a percentage of
total loans was 1.92 percent, 1.87 percent and 2.41 percent at June 30, 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 June 30, 1996.
The following table sets forth loans delinquent more than 30 days and
non-accrual loans as of June 30, 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 ............... $ 323,500 0.57% $ 0 0.00% $263,600 0.46%
Consumer loans ............... 104,600 4.69 10,400 0.47 0 0.00
Real estate construction ..... 682,800 3.57 441,400 2.31 512,100 2.68
Home equity loans ............ 18,500 0.27 19,800 0.33 0 0.00
NOW line of credit loans ..... 1,000 1.03 0 0.00 0 0.00
---------- ---- -------- ---- -------- ----
Total loans ......... $1,130,400 1.31% $471,600 0.55% $775,700 0.90%
========== ==== ======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Non Accrual Loans Amount Number
- ----------------- -------- ------
<S> <C> <C>
Mortgage loans............................ $293,164 4
Construction loans........................ 382,287 4
All other loans........................... 0
-------- --
Total non-accrual loans........... $675,451 8
</TABLE>
Total loans past due 31 days or more on June 30, 1996 were $2,377,700
or 2.76 percent of total loans. The total non accrual loans totalling $675,451
represents 0.78 percent of total loans.
The following table sets forth reserves for losses as of June 30, 1996
with activity from January 1, 1995 through June 30, 1996. Also a calculation of
reserve adequacy is presented.
47
<PAGE> 62
<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 June 30, 1996 ............................... $ 1,650,196
Calculation of reserve adequacy:
- --------------------------------
Specific reserves ................................................ $ (125,500)
General reserves for "passing assets" at June 30, 1996 .......... (945,200)
General reserves for "special mention assets" at June 30, 1996 .. (51,000)
General reserves for "substandard assets" as of June 30, 1996 ... (151,800)
General reserves for "doubtful assets" as of June 30, 1996 ...... 6,500
General reserves for "loss assets" as of June 30, 1996 .......... 0
-----------
Excess/(deficiency) in reserves for losses ....................... $ 357,100
</TABLE>
The following table presents the allocation of the reserve for loan
losses:
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995 September 30, 1994
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash and investments............. $ 8,300 0.50% $ 5,600 0.34% $ 9,200 0.46%
Mortgage residential loans....... 158,000 9.57 200,200 12.05 215,800 10.74
Non residential mortgage loans... 411,000 24.96 232,500 13.99 282,300 14.04
Real estate construction......... 436,800 26.42 247,300 14.88 84,600 4.21
Consumer & home equity........... 120,800 7.33 88,900 5.35 30,400 1.51
Commercial/LOC/land and lot...... 194,300 11.77 237,200 14.27 120,600 6.00
Real estate owned (REO).......... 0 0.00 3,800 0.23 386,700 19.24
Unallocated...................... 321,000 19.45 646,300 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 September 30,
1994 total construction loans outstanding totalling $2,444,738 have risen to
over $19,108,850 at June 30, 1996. This $16.7 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 $351,000.
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.
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<PAGE> 63
Traditionally, thrift institutions have had a negative interest
sensitivity one-year GAP. As of June 30, 1996, Utah Federal had a positive
interest sensitivity one-year GAP of $10,936,000, or 87 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 $17,730,000 in variable rate mortgage backed securities, and its
short term and variable rate lending programs, particularly $19.1 million in
construction loans which are variable rate loans tied to the prime rate. 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 June 30, 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.
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investments ................ $ 14,966 $ 10,198 $ 523 $ 4,071 $ 0 $ 174 $ 0
Mortgage-backed securities.. 17,731 17,298 0 0 0 0 433
Mortgage loans ............. 76,152 45,799 602 1,680 1,590 6,289 20,192
Other loans ................ 9,922 302 0 2,287 781 2,692 3,860
Less reserves ........... (1,650) 0 (1,650) 0 0 0 0
Other assets/REO ........... 5,822 0 5,822 0 0 0 0
-------- ------- ------- ------- ------- ------- -------
Total assets ............ $122,943 $73,597 $ 5,297 $ 8,038 $ 2,371 $ 9,155 $24,484
======== ======= ======= ======= ======= ======= =======
Savings deposits ........... 17,342 17,342 0 0 0 0 0
Checking/NOW deposits ...... 10,869 0 3,711 0 0 0 7,158
Certificates deposits ...... 80,514 848 0 35,075 19,803 13,998 10,790
Borrowed funds ............. 27 0 0 1 1 4 21
Other liabilities .......... 2,795 0 2,795 0 0 0 0
Equity accounts ............ 11,396 0 11,396 0 0 0 0
-------- ------- ------- ------- ------- ------- -------
Total liabilities and
equity .............. $122,943 $18,190 $17,902 $35,075 $19,804 $14,002 $17,969
======== ======= ======= ======= ======= ======= =======
Net difference ............. 0 55,407 (12,605) (27,037) (17,433) (4,847) 6,515
GAP position by window ..... 404.6% (29.6)% 22.9 % 12.0 % 65.4% 136.3%
</TABLE>
Twelve month rate sensitive GAP = asset sensitive $10,936,000 or 86.98 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 June 30, 1996, Utah Federal's investment portfolio included
$12,832,400 of held-to-maturity investments (with a fair market value of
$13,156,600), $4,903,800 of available-for-sale investments and no trading
49
<PAGE> 64
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 June 30, 1996, Utah Federal
had unfunded loan commitments of $25,934,400.
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>
June 30, 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 ............. $ 4,729,720 $ 4,729,720 $ 120,964 $ 120,964 $ 124,486 $ 124,486
Held to Maturity:
Government Agencies (SBA) ....... 598,469 612,677 770,630 797,531 926,944 940,146
FHLMC & FNMA mortgage-
backed securities ............. 11,969,785 12,083,766 22,845,801 23,031,255 28,020,820 27,566,872
GNMA mortgage-backed
securities .................... 432,810 460,081 492,407 524,735 586,729 609,962
----------- ----------- ----------- ----------- ----------- -----------
Total investment securities ..... $17,730,784 $17,886,244 $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 June 30, 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% $ 4,729,720 7.225% 5.8 months
Held to Maturity:
Government Agencies (SBA) ........ 0 0.00 598,469 6.733 6.9 months
FHLMC & FNMA mortgage-
backed securities ............. 0 0.00 11,969,785 7.249 5.3 months
GNMA mortgage-backed
securities .................... 0 0.00 432,810 9.322 274.5 months
-- ---- ----------- ----- -----
Total investment securities ... $0 0.00% $17,730,784 7.288% 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
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<PAGE> 65
occasional advertising promotions. From 1994 through March 31, 1996, total
deposits modestly, but consistently increased, with the growth primarily
occurring in the certificates of deposits and the non-interest bearing accounts.
Between March 31, 1996 and June 30, 1996, total deposits decreased by 1.4%.
The following tables set forth the average amount of certain types of
deposit accounts by Utah Federal at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995 September 30, 1994
------------------------ ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------------ ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand ....... $ 7,158,700 6.58% $ 6,269,027 5.75% $ 7,746,787 7.26%
Savings & money market ........ 17,342,400 15.95 17,385,501 15.95 18,932,968 17.73
Certificates of deposit ....... 80,514,300 74.05 82,238,342 75.46 79,377,150 74.35
Non-interest-bearing demand ... 3,710,600 3.42 3,096,950 2.84 708,384 0.66
------------ ------ ------------ ------ ------------ ------
Total deposits ............. $108,726,000 100.00% $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 and until the average rate paid on
maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity Period Amount Percent Avg. Rate
- --------------- ----------- ------- ---------
<S> <C> <C> <C>
Three months or less .................. $17,878,600 22.2% 5.65%
Over three through six months ......... 17,598,600 21.8 5.59
Over six through 12 months ............ 19,887,900 24.7 5.63
Over twelve through 24 months ......... 10,433,900 13.0 5.87
Over twenty four months ............... 14,715,300 18.3 6.34
----------- ----
Total certificates .................... $80,514,300 100% 5.79%
=========== ====
</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
June 30, 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 $18,350,000 at June 30, 1996. Utah Federal has no unsecured federal
funds credit lines with other banks as of June 30, 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> 66
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
June 30, 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> 67
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 June 30, 1996, Utah Federal has tangible capital equal to
9.29 percent of adjusted total assets, core capital equal to 9.29 percent of
adjusted capital assets and total capital equal to 17.07 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;"
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<PAGE> 68
(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 June 30, 1996, approximately 84 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
June 30, 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
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<PAGE> 69
obligations at the beginning of each year. At June 30, 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. See "THE MERGER -- Certain Considerations
Relating to the Keystone Transaction and Keystone Holdings."
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> 70
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
June 30, 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>
Nine Months Ended June 30, 1996
Compared to Nine Months Ended
June 30, 1995
---------------------------------------
Volume Rate Total
------- ----- ------
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable ............................. $ 810 $ 209 $1,019
Mortgage-backed securities ................... (310) 86 (224)
Investment securities ........................ 17 73 90
Other interest-bearing assets ................ (61) (51) (112)
----- ----- ------
Total change in interest income ................ 456 317 773
Interest expense:
Interest-bearing deposits .................... 71 445 516
Borrowed money ............................... (27) (1) (26)
----- ----- ------
Total change in interest expense ............... 44 446 490
----- ----- ------
Increase (decrease) in net interest income ..... $ 412 $(129) $ 283
===== ===== ======
</TABLE>
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<PAGE> 71
<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 nine months ended June 30, 1996, and 1995, and the years ended September
30, 1995, and 1994.
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ----------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ................. $ 87,252 $6,083 9.30% $ 75,629 $5,064 8.93%
Mortgage-backed securities ....... 20,980 1,028 6.53 27,893 1,252 5.98
Investment securities ............ 3,961 258 8.68 3,700 168 6.05
Other interest-earning assets .... 7,122 251 4.70 8,573 363 5.65
-------- ------ -------- ------
Total interest-earning assets .... $119,315 $7,620 8.52 $115,795 $6,847 7.88
======== ====== ======== ======
Interest-bearing liabilities:
Interest-bearing deposits ........ $108,711 4,193 5.14 106,858 3,677 4.59
Borrowed money ................... 97 6 8.25 569 32 7.50
-------- ------ -------- ------
$108,808 4,199 5.15 $107,427 3,709 4.60
======== ========
Net interest income ................ $3,421 $3,138
====== ======
Interest rate spread ............... 3.37 3.28
====== ======
Net yield on average
interest-earning assets .......... 3.82 3.61
====== ======
Interest-earning assets to
interest-bearing liabilities ..... 108.74% 107.79%
====== ======
</TABLE>
57
<PAGE> 72
<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 NINE MONTHS ENDED JUNE 30, 1996, AND
1995
GENERAL. Net income for the nine months ended June 30, 1996, was
$1,309,779, or $9.42 per share, an increase of $590,000 or 82 percent, as
compared to $719,687 or $7.13 per share, for the same period in 1995. Return on
average assets for the nine months ended June 30, 1996 was 1.42 percent as
compared to 0.80 percent for the same period in 1995. Return on average equity
also increased to 16.19 percent for the nine months ended June 30, 1996, as
compared to 10.40 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 nine months ended
June 30, 1996, was $7,620,000, an increase of $773,000 or 11.29 percent, from
$6,647,000 for the same period in 1995. Asset yields increased 64 basis points
to 8.52 percent in the nine months ended June 30, 1996, from 7.88 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 nine months ended June 30, 1996, was
$4,199,000, an increase of $490,000 or 13.21 percent from $3,709,000 for the
same period in 1995. 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 55 basis points to 5.15 percent for the
nine months ended June 30, 1996, from 4.60 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
$283,000, and the net interest margin increased to 3.37 percent in the nine
months ended June 30, 1996, from 3.28 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 nine months ended June 30, 1995,
contributed to a greater increase in interest income than the increase in
interest expense.
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<PAGE> 73
PROVISION FOR LOAN LOSSES. For the nine months ended June 30, 1996, and
1995, there was no addition to the allowance for loan losses. Utah Federal's
allowance for loan losses was $1,650,000 (1.96 percent of total loans) at
June 30, 1996, compared to $1,666,000 (2.06 percent of total loans) at June 30,
1995. This small change is due to charge-offs of $16,000. No additional
provisions for loan losses have been expensed during the nine month period ended
June 30, 1996.
OTHER INCOME. Other operating income for the nine months ended June 30,
1996, was $774,000, a decrease of $21,000 or 2.64 percent from $795,000 for
the same period in 1995. The decrease was due to a decrease of $175,000,
primarily resulting from the recognition of a prior period tax settlement,
which decrease was partially offset by an increase of $154,000 from gains on
the sale of loans into the secondary market.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased by $133,000 to $2,956,000 for the nine months ended June 30, 1996,
compared to $3,089,403 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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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 June 30, 1995, Utah Federal's shareholders' equity was $11,396,463
as compared to $10,180,000 at September 30, 1995, and $8,906,000 at September
30, 1994. Net income of $1,309,779 for the nine months ended June 30, 1996, and
$1,370,000 for the year ended September 30, 1995, provided Utah Federal's
capital accumulation for these periods. During the nine months ended June 30,
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 June
30, 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 June 30, 1996, was 9.3
percent, 9.3 percent and 17.0 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 June 30, 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 June 30, 1996, such minimum liquidity level was $5,436,000. Utah
Federal's liquid assets totaled $12,233,000 at that date, giving Utah Federal
$6,797,000 of excess liquidity.
At June 30, 1996, Utah Federal had commitments to fund loans totaling
$26,055,800. These commitments are expected to be funded from Utah Federal's
usual funding sources.
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BENEFICIAL OWNERSHIP OF UTAH FEDERAL COMMON STOCK
The following table sets forth information as of October 24, 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........................... 134,609 94.8%
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 (8 persons)................... 137,919 97.13
</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 3,000 shares of Utah Federal Common Stock held of record by
Mr. Garrett, which shares are held in a voting trust over which Mr.
Miller, as the voting trustee, exercises sole voting power. Pursuant to
the terms of the nonstatutory stock option voting trust agreement
between Mr. Garrett and Mr. Miller, such 3,000 shares of Utah Federal
Common Stock are subject to the voting trust for a term of 10 years to
be voted by the voting trustee.
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.
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The principal assets of Washington Mutual 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.
On July 22, 1996, Washington Mutual announced the signing of the
Keystone Merger Agreement. See "APPENDIX F" for further detailed information
regarding the Keystone Transaction and Keystone Holdings.
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 September 9, 1996, Washington Mutual continued its expansion in the
Utah market by announcing its agreement to acquire United Western and its United
Savings Bank, Uniwest Service Corporation and Western Mortgage Loan subsidiaries
for $80.3 million in cash. The acquisition is subject to approval by banking
regulators and by the shareholders of United Western and other conditions
customary in a transaction of this nature.
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 of Coos Bay,
Oregon ("Western") 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. This information
has been restated to include Western in Washington Mutual's Current Report on
Form 8-K dated October 18, 1996, as amended.
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 June 30, 1996, Washington Mutual, through its subsidiaries,
operated a total of 297 financial centers and 23 loan centers. At June 30,
1996, Washington Mutual had total consolidated assets of $22.3 billion, total
deposits of $11.0 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
Reports on Form 10-Q for the periods ended March 31, 1996 and June 30, 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 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.
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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 June 30, 1996, WMBfsb
had assets of $811.5 million and operated 25 financial centers, of which 16 are
in Utah, six 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 June 30,
1996, WMB had total assets of $20.6 billion and operated 268 financial centers,
of which 156 are in Washington and 116 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 June 30, 1996, Composite Research had a total of $1.3 billion 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 October 24,
1996, there were issued and outstanding 72,307,510 shares of Washington Mutual
Common Stock, 2,752,500 shares of Series C Preferred Stock, 1,399,900 shares of
Series D Preferred Stock and 1,970,000 shares of Series E Preferred Stock.
In order to effect the Keystone Transaction, Washington Mutual will
hold a special meeting of its shareholders at which it will ask its shareholders
to approve a proposal to increase the number of shares of authorized Washington
Mutual Common Stock from 100,000,000 shares to 350,000,000 shares and to approve
the Keystone Transaction. See "APPENDIX F."
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 October 24, 1996, options to purchase 1,480,418 shares of Washington
Mutual Common Stock under Washington Mutual's stock option plans had been
granted, but not exercised or terminated, leaving 3,132,500 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 October 28, 1996, individual
members of Foster Pepper & Shefelman owned an aggregate of 42,380.5 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 balance sheets of Keystone Holdings and its
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1995, have been included
herein and in the Registration Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent public accountants, as set forth in their
report appearing elsewhere herein, and 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
October 30, 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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PLAN OF MERGER
This Plan of Merger is made by and among Utah Federal Savings Bank, a
federally chartered stock savings bank ("Utah Federal"), Washington Mutual,
Inc., a Washington corporation ("WMI"), and Washington Mutual Bank fsb, a
federally chartered stock savings bank ("WMBfsb") in connection with the
transactions described in an Agreement for Merger dated as of February 29, 1996
(the "Merger Agreement") among WMI, WMBfsb and Utah Federal. WMBfsb is a
wholly-owned subsidiary of WMI. Capitalized terms used but not otherwise defined
herein shall have the meaning given them in the Merger Agreement. This Plan of
Merger, including related documents, is intended to constitute a "plan of
reorganization" as that term is used in section 354 of the Code. Further, this
Merger is intended to constitute a "reorganization" as defined in section 368 of
the Code by reason of section 368(a)(2)(D) of the Code.
The boards of directors of Utah Federal, WMI and WMBfsb have approved
this Plan of Merger (the "Plan of Merger") under which Utah Federal shall be
merged with and into WMBfsb. The Plan of Merger has been approved by the
shareholders of Utah Federal and the shareholder of WMBfsb.
Utah Federal, WMI and WMBfsb hereby agree as follows:
1. Merger. At and on the Effective Time of the Merger, Utah
Federal shall be merged with and into WMBfsb in accordance with the terms
hereof. WMBfsb shall be the surviving bank.
2. Effective Time. The Merger shall not be effective unless and
until approved by the Office of Thrift Supervision (the "OTS"). The effective
time ("Effective Time") of this Merger shall be the time and date of the
occurrence of the endorsement of articles of combination by the OTS, or at such
later time or date after such endorsement as specified by the OTS on the
endorsement of the articles of combination.
3. Name. The name of the surviving bank shall continue to be
"Washington Mutual Bank fsb."
4. Directors and Principal Officers. The directors and the
principal officers of WMBfsb immediately prior to the Effective Time shall
continue to serve as directors and principal officers of the surviving bank
after the Effective Time. WMBfsb, as the resulting bank, shall have [INSERT
NUMBER AS OF CLOSING] directors. There shall be three classes of directors;
members of each class shall have a three-year term. The name, residential
address and term of each director are set forth on Schedule A attached hereto
and incorporated herein by this reference.
5. Offices. The location of the home office of the surviving bank
shall be 111 S. State Street, Lake Oswego, Oregon and the surviving bank shall
immediately after the Effective Time have the same branches and other offices as
each of Utah Federal and WMBfsb had immediately prior to the Effective Time. A
list of all the branches and other offices of the surviving bank is attached
hereto as Schedule B, which is incorporated herein by this reference.
6. Terms and Conditions of Merger. At the Effective Time of the
Merger:
(a) Conversion of Utah Federal Common Stock. Subject to
the provisions below, at the Effective Time, each 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 [INSERT EXCHANGE RATIO]
shares of common stock, no par value per share, of WMI ("WMI Common Stock").
Each shareholder of record of Utah Federal Common Stock immediately prior to the
Effective Time shall be entitled to receive (subject to the conditions set forth
below) the number of shares of WMI Common Stock determined by multiplying
[INSERT EXCHANGE RATIO] times the number of shares of Utah Federal Common Stock
owned by such shareholder, provided that cash will be paid in lieu of fractional
shares as provided in Section 6(c) below. [IF NECESSARY,
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INSERT APPROPRIATE LANGUAGE TO ACCOUNT FOR ANY ADJUSTMENTS IN MERGER
CONSIDERATION PURSUANT TO SECTION 1(b)(ii)-(iv) OF THE MERGER AGREEMENT].
(b) WMBfsb Common Stock. Each share of WMBfsb Common
Stock issued and outstanding immediately prior to the Effective Time shall at
the Effective Time remain outstanding and unchanged and shall continue to be
owned by WMI. No new shares of WMBfsb capital stock shall be issued or otherwise
used in the Merger.
Upon the Effective Time, WMI shall remain the owner of all the issued
and outstanding shares of the surviving bank.
(c) No Fractional Shares. Notwithstanding any term or
provision hereof, no fractional shares of WMI Common Stock, and no certificates
or scrip therefor, or other evidence of ownership thereof, shall be issued in
exchange for any shares of Utah Federal Common Stock; no dividend or
distribution with respect to WMI Common Stock shall be payable on or with
respect to any fractional share interests; and no such fractional share interest
shall entitle the owner thereof to vote or to any other rights of a stockholder
of WMI. In lieu of such fractional share interests, 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 $[INSERT 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.
7. Method of Effectuation; Exchange of Certificates. Prior to the
Effective Time, WMI shall designate a bank or trust company to act as an
exchange agent (the "Exchange Agent") in connection with the Merger. Prior to or
at the Effective Time, WMI shall deposit with the Exchange Agent certificates
representing the shares of WMI Common Stock to be received by shareholders of
Utah Federal, together with cash sufficient to pay fractional shares as provided
in Section 6 hereof.
As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each person who was, at the Effective Time, a holder of record of
Utah Federal Common Stock a letter of transmittal (which shall specify that
delivery of certificates which, immediately prior to the Effective Time,
represented outstanding shares of Utah Federal Common Stock (the "Certificates")
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon receipt of the Certificates by the Exchange Agent) and instructions
for effecting the surrender of the Certificates. Upon surrender to the Exchange
Agent of the Certificates, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may be reasonably requested, the Exchange Agent shall
promptly deliver to the person entitled thereto a certificate representing the
number of shares of WMI Common Stock (and cash in lieu of any fractional shares
of WMI Common Stock) such holder is entitled to receive pursuant to this Plan of
Merger. All Certificates so surrendered shall be cancelled. Until so surrendered
and exchanged, each Certificate shall, after the Effective Time, be deemed to
evidence only the right to receive the number of shares of WMI Common Stock (and
cash in lieu of any fractional shares of WMI Common Stock) to which such holder
is entitled pursuant to Section 6 hereof.
No dividends or other distributions declared with respect to shares of
WMI Common Stock and payable to the holders of record thereof after the
Effective Time shall be paid to the holder of any unsurrendered Certificate
until the holder thereof surrenders such Certificate. Subject to the effect of
any applicable escheat laws and unclaimed property laws, after the subsequent
surrender and exchange of a Certificate, the record holder thereof shall be
entitled to receive any such dividends or other distributions, without any
interest thereon, which theretofore had become payable with respect to the WMI
Common Stock for which such Certificate was exchangeable.
If delivery of shares of WMI Common Stock (and any cash in lieu of
fractional shares) is to be made to a person other than the person in whose name
a surrendered Certificate is registered, it shall be a condition of such
delivery that the Certificate so surrendered be properly endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise be in proper
form for transfer and that the person requesting such delivery shall have paid
any transfer and other taxes required by reason of such delivery to a person
other than the registered holder of the surrendered Certificate or shall have
established to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
At the Effective Time, the stock transfer books of Utah Federal shall
be closed and there shall be no further registration of transfers of shares of
Utah Federal Common Stock thereafter on the records of Utah Federal. From and
after
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the Effective Time, the holders of Certificates shall cease to have any rights
with respect to the shares of Utah Federal Common Stock represented thereby
immediately prior to the Effective Time except as provided herein.
No interest shall be paid or accrue on or in respect of any portion of
the WMI Common Stock, or the cash in lieu of fractional shares, to be delivered
in exchange for the surrendered Certificates.
The Exchange Agent shall return to WMI all shares of WMI Common Stock
and cash not previously paid to Utah Federal shareholders 90 days following the
Effective Time, and thereafter all former shareholders of Utah Federal shall
only be entitled to receive shares of WMI Common Stock (and any cash in lieu of
fractional shares) from WMI upon proper surrender of their Certificates.
Notwithstanding anything to the contrary herein, neither the Exchange Agent nor
WMI or WMBfsb shall be liable to a holder of Utah Federal Common Stock for any
amount properly paid to a public official pursuant to any applicable unclaimed
property, escheat or similar laws.
Notwithstanding the foregoing, shares of Utah Federal Common Stock
which are issued and outstanding immediately prior to the Effective Time and
which are held by holders who have not voted their shares in favor of the Merger
and have complied with the provisions of Section 552.14 of Title 12 of the Code
of Federal Regulations or any other applicable provision of federal law relating
to dissenting shareholders, shall not be converted into the right to receive
shares of WMI Common Stock as provided herein, unless and until such holder
shall have effectively withdrawn or lost the right to payment under Section
552.14 or any other applicable provision of federal law, in which case each such
share shall thereupon be deemed to have been converted at the Effective Time
into the right to receive shares of WMI Common Stock as provided herein, without
any interest thereon.
8. Charter and Bylaws. At and after the Effective Time, the
charter (the "Charter") and articles of incorporation and the bylaws of WMBfsb
as in effect immediately prior to the Effective Time shall continue to be the
charter and articles of incorporation and the bylaws of the surviving bank until
amended in accordance with law.
9. Rights and Duties of the Surviving Bank. At the Effective
Time, Utah Federal shall be merged with and into WMBfsb, which shall be the
surviving bank and which shall continue to be a federally chartered stock
savings bank. The business of the surviving bank shall be that of a stock
savings bank chartered under the laws of the United States and as provided for
in the Charter of WMBfsb as now existing, the business of which shall be
continued at its head office and at its legally established branches and other
offices. All assets, rights, privileges, powers, franchises and property (real,
personal and mixed, tangible and intangible, choses in action, rights and
credits) of Utah Federal shall be automatically vested in WMBfsb as the
surviving bank by virtue of the Merger without any deed or other document of
transfer. The surviving bank, without any order or action on the part of any
court or otherwise and without any documents of assumption or assignment, shall
hold and enjoy all of the properties, franchises and interests, including
appointments, powers, designations, nominations and all other rights and
interests as agent or other fiduciary in the same manner and to the same extent
as such rights, franchises and interests and powers were held or enjoyed by
WMBfsb and Utah Federal, respectively. The surviving bank shall be responsible
for all the liabilities of every kind and description of both WMBfsb and Utah
Federal immediately prior to the Effective Time, including liabilities for all
debts, savings accounts, deposits, obligations and contracts of WMBfsb and Utah
Federal, respectively, matured or unmatured, whether accrued, absolute,
contingent or otherwise and whether or not reflected or reserved against on
balance sheets, books or accounts or records of either WMBfsb or Utah Federal.
Without limiting the generality of the foregoing, WMBfsb as the surviving bank
shall be liable for the obligations of Utah Federal with respect to the
liquidation account for the benefit of any and all of its preconversion
depositors. All rights of creditors and other obligees and all liens on property
of either WMBfsb or Utah Federal shall be preserved and shall not be released or
impaired.
10. Execution. This Plan of Merger may be executed in any number
of counterparts each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument.
Dated as of _______________, 1996.
WASHINGTON MUTUAL, INC.
By _____________________________________________
____________, President
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By
_______________________________________________
____________, Secretary
WASHINGTON MUTUAL BANK fsb
By
_______________________________________________
____________, President
By
_______________________________________________
____________, Secretary
UTAH FEDERAL SAVINGS BANK
By
_______________________________________________
____________, President
By
_______________________________________________
____________, Secretary
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<PAGE> 115
WASHINGTON MUTUAL, INC.
September 10, 1996
Utah Federal Savings Bank
2279 Washington Boulevard
Ogden, UT 84401
Attention: L. Brent Hoggan, Executive Vice President
Ladies and Gentlemen:
Utah Federal Savings Bank ("Utah Federal"), Washington Mutual, Inc.
("WMI") and Washington Mutual Bank fsb ("WMBfsb") are parties to that certain
Agreement for Merger dated February 29, 1996 (the "Merger Agreement") pursuant
to which Utah Federal will merge with and into WMBfsb. In this letter, Utah
Federal is sometimes referred to as "you" and WMI and WMBfsb are sometimes
referred to as "we."
You and we now desire to amend certain terms of the Merger Agreement.
The purpose of this letter is to confirm certain discussions you and we have had
regarding amendments to the Merger Agreement and to set forth our agreement with
regard to certain amendments thereto.
Accordingly, you and we hereby agree as follows:
1. Section 1(b)(i) of the Merger Agreement is hereby amended by
deleting "$105.63" in the first sentence thereof and substituting therefor
"$107.04".
2. Section 1(b)(iii) of the Merger Agreement is hereby amended by
deleting "$150,000" in the first sentence thereof and substituting therefor
"$200,000".
3. The effective date of the amendments provided by this letter
shall be September 10, 1996.
4. Except as expressly amended hereby, the Merger Agreement
remains in full force and effect.
If this letter correctly sets forth our agreement with respect to
amendments to the Merger Agreement, please so indicate by signing below and
returning to us two of the four enclosed originals of this letter.
Very truly yours,
WASHINGTON MUTUAL, INC.
By /s/ Craig E. Tall
--------------------------------------
Its Executive Vice President
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WASHINGTON MUTUAL, BANK FSB
By /s/ Craig E. Tall
--------------------------------------
Its Executive Vice President
Agreed to this 12th day
of September, 1996
UTAH FEDERAL SAVINGS BANK
By /s/ L. Brent Hoggan
----------------------------------------------
Its Executive Vice President
cc: Fay L. Chapman
Stephen M. Klein
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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 $107.04 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.
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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:
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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> 124
(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> 125
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> 126
(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> 127
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> 128
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> 129
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statement of Financial Condition
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Cash and cash equivalents
Cash and amounts due from depository institutions ............................. $ 1,936,254 $ 1,953,116
Interest-bearing deposits in other banks, including certificates of deposit
of $886,000 in 1995 ......................................................... 10,570,032 3,348,360
------------ ------------
Total cash and cash equivalents ............................................. 12,506,286 5,301,476
------------ ------------
Mortgage-backed securities
Securities held to maturity, market value of $24,353,521 (Note 3) ............. 13,000,632 24,108,839
Securities available, for sale, cost basis $122,302 ........................... 4,730,152 120,462
------------ ------------
Total mortgage-backed securities ............................................ 17,730,784 24,229,301
------------ ------------
Loans receivable, net of loss reserves $1,661,841
(Notes 4,9, and 12) ........................................................... 82,600,674 83,482,205
Loans receivable, held for sale, cost basis of $3,286,917 ....................... 1,680,416 3,286,917
Accrued interest receivable, net of allowance for estimated
uncollectible interest of $70,533 (Note 5) .................................... 724,407 768,907
Real estate acquired in settlement of loans ..................................... -- 51,335
Federal Home Loan Bank capital stock, at cost (Note 9) .......................... 4,071,200 3,850,400
Premises and equipment, net (Note 6) ............................................ 2,709,989 2,709,897
Income tax receivable (Note 10) ................................................. 17,010 132,685
Other assets .................................................................... 5,670 121,409
------------ ------------
Total assets .............................................................. $122,046,436 $123,934,532
============ ============
</TABLE>
E-3
<PAGE> 130
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statement of Financial Condition, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
---- ----
Liabilities (Unaudited)
<S> <C> <C>
Deposits (Note 7) ........................................................ $108,431,875 $108,989,820
Other borrowings (Note 8) ................................................ 26,718 28,838
Federal Home Loan Bank advances (Note 9) ................................. -- 2,360,000
Advance payments by borrowers for taxes and insurance .................... 651,633 1,133,222
Deferred income taxes (Note 10) .......................................... 712,976 553,300
Other liabilities ........................................................ 826,711 689,151
------------ ------------
Total liabilities ..................................................... 110,649,973 113,754,331
------------ ------------
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) ........ 8,720,743 7,504,481
------------ ------------
Total stockholders' equity ............................................ 11,396,463 10,180,201
Commitments and contingencies (Note 12) .................................... -- --
------------ ------------
Total assets ......................................................... $122,046,436 $123,934,532
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-4
<PAGE> 131
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the nine months ended For the years ended
June 30, September 30,
-------- -------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans receivable ............. $6,708,651 $5,374,270 $ 7,699,953 $ 6,453,375
Interest on mortgage-backed securities ............ 1,027,756 1,252,290 1,666,110 1,245,783
Interest and dividends on investment securities ... 258,241 167,973 234,732 333,111
Other interest income ............................. 251,322 363,469 401,691 639,906
---------- ---------- ------------ -----------
Total interest and dividend income .............. 8,245,970 7,158,002 10,002,486 8,672,175
---------- ---------- ------------ -----------
Interest expense:
Interest on deposits (Note 7) ..................... 4,193,223 3,676,745 5,073,349 4,770,575
Interest on Federal Home Loan Bank advances ....... 3,828 27,900 31,754 119,056
Interest on other borrowings ...................... 2,067 4,360 5,251 6,797
---------- ---------- ------------ -----------
Total interest expense .......................... 4,199,118 3,709,005 5,110,354 4,896,428
---------- ---------- ------------ -----------
Net interest income before provision
for loan losses ................................. 4,046,852 3,448,997 4,892,132 3,775,747
Provision for loan losses (Note 4) .................. -- -- -- --
---------- ---------- ------------ -----------
Net interest income after provision
for loan losses ................................. 4,046,852 3,448,997 4,892,132 3,775,747
---------- ---------- ------------ -----------
Other income:
Loan servicing fees ............................... 192,270 193,573 259,752 236,650
Gain on sale of loans receivable .................. 267,548 113,779 163,866 180,560
Other income ...................................... 314,308 487,347 493,506 685,313
---------- ---------- ------------ -----------
Net other income ................................ 774,126 794,699 917,124 1,102,523
---------- ---------- ------------ -----------
General and administrative expenses:
Salaries and employee benefits .................... 1,674,186 1,710,412 2,381,489 1,908,706
Office occupancy .................................. 374,722 301,801 383,953 358,155
Advertising ....................................... 53,578 58,952 76,667 72,254
Federal insurance premiums ........................ 186,674 184,281 245,196 270,162
Gain on sale of real estate acquired in
settlement of loans ............................. -- (8,098) (8,098) (43,781)
Data processing ................................... 147,841 134,664 179,193 156,594
Real estate holding costs, net .................... 2,422 19,226 21,016 100,008
Other general and administrative expenses ......... 516,636 688,165 786,300 753,886
---------- ---------- ------------ -----------
Total general and administrative expenses ....... 2,956,059 3,089,403 4,065,716 3,575,984
---------- ---------- ------------ -----------
Income before income tax expense .................... 1,864,919 1,154,293 1,743,540 1,302,286
Income tax expense (Note 10) ........................ (555,140) (434,606) (373,772) (167,349)
---------- ---------- ------------ -----------
Net income ...................................... $1,309,779 $ 719,687 $ 1,369,768 $ 1,134,937
========== ========== ============ ===========
Earnings per share information:
Earnings per common share ......................... $ 9.42 $ 7.13 $ 13.65 $ 11.35
========== ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
E-5
<PAGE> 132
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 1,639,768
--------- ---------- ---------- ---------- -----------
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) ....................... -- -- -- 1,363 1,363
Net income (unaudited) ............................ -- -- -- 1,309,779 1,309,779
--------- ---------- ---------- ---------- -----------
Balance, June 30, 1996 (unaudited) .................. -- $1,390,000 $1,285,720 $8,720,743 $11,396,463
========= ========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
E-6
<PAGE> 133
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
June 30, September 30,
----------------------------- ----------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income .................................................... $ 1,309,779 $ 719,687 $ 1,369,768 $ 1,134,937
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................... 166,532 177,110 198,143 247,449
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 ................... (160,799) (291,898) (448,251) (357,767)
Federal Home Loan Bank stock dividend ....................... (220,800) (167,800) (234,500) (306,800)
Gain on sale of premises and equipment ...................... -- -- (3,882) --
Gain on sale of loans receivable ............................ (267,548) (113,779) (163,866) (180,560)
Origination of loans held for sale .......................... (18,125,926) (7,105,294) (22,846,221) (18,356,236)
Proceeds from sale of loans held for sale ................... 19,609,917 7,012,582 20,144,890 21,172,072
Deferred income taxes ....................................... 159,676 -- (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 .......... 44,500 (172,176) (314,115) 76,784
Decrease (Increase) in income tax receivable ................ 115,675 96,884 (6,301) (126,384)
Decrease (Increase) in other assets ......................... 115,739 (259,005) 181,806 221,433
Increase (Decrease) in other liabilities .................... 137,620 336,837 (293,553) (1,069,012)
Market value increase (decrease) investment
available for sale ........................................ 17,938 -- -- --
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities ....... 2,866,427 224,828 (2,518,126) 2,620,035
------------ ------------ ------------ ------------
Cash flows from investing activities
Decrease in real estate held for investment ................... -- (11,735) 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 .......... 5,533,512 3,498,336 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 ............................................... 982,296 2,187 1,711 3,191
Loans originated .............................................. (55,646,028) (34,110,217) (55,321,167) (27,103,943)
Repayment of loans receivable ................................. 56,530,427 24,557,859 40,329,092 32,241,875
Proceeds from the sale of real estate acquired in
settlement of loans ......................................... 51,335 204,447 345,571 209,811
Purchase of premises and equipment ............................ (166,624) (1,142,269) (1,431,143) (153,980)
Proceeds from sale of premises and equipment .................. -- -- 13,447 --
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities ......... $ 7,875,843 $ (7,001,392) $(10,595,113) $ (2,680,874)
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-7
<PAGE> 134
UTAH FEDERAL SAVINGS BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
June 30, September 30,
---------------------------- ----------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Dividends on stock .............................................. $ (135,806) $ (101,934) $ (115,860) $ (115,860)
Proceeds from sale of common and preferred stock ................ -- 21,000 21,000 --
Increase (decrease) in deposits ................................. (557,945) (11,727) 2,224,531 (5,843,218)
Decrease in other borrowings .................................... (2,120) (70,003) (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 ............................. (481,589) (202,246) 90,831 (159,427)
------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities ........... (3,357,460) (1,364,910) 3,509,829 (8,201,756)
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................ 7,204,810 (8,141,474) (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 ........................ $ 12,506,286 $ 6,763,412 $ 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 ........................... $ 370,495 $ 348,811 $ 43,118 $ 585,513
============ ============ ============ ============
Cash paid for income taxes ...................................... $ 387,500 $ 108,116 $ 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 .................................. $ 3,828,257 $ 3,361,243 $ 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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
APPENDIX F
INFORMATION CONCERNING THE KEYSTONE TRANSACTION AND KEYSTONE HOLDINGS
THE KEYSTONE TRANSACTION
<TABLE>
<S> <C>
THE KEYSTONE TRANSACTION............................................................................. F-3
General..................................................................................... F-3
Reasons for the Keystone Transaction; Recommendation of the Washington Mutual Board......... F-4
Registration Rights and Resales of Washington Mutual Common Stock........................... F-6
Conditions to the Keystone Transaction...................................................... F-7
The Litigation Escrow....................................................................... F-9
MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE KEYSTONE
TRANSACTION................................................................................. F-11
General..................................................................................... F-11
Board of Directors.......................................................................... F-11
Operations After the Keystone Transaction................................................... F-11
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS.......................................... F-14
Pro Forma Combined Consolidated Statement of Financial Position............................. F-15
Notes to Pro Forma Combined Consolidated Statement of Financial Position.................... F-16
Pro Forma Combined Consolidated Statements of Income........................................ F-18
Notes to Pro Forma Combined Consolidated Statements of Income............................... F-20
PROPOSED AMENDMENT TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -
INCREASE IN AUTHORIZED SHARES............................................................... F-22
KEYSTONE HOLDINGS
BUSINESS OF KEYSTONE HOLDINGS........................................................................ F-23
Lending Activities.......................................................................... F-24
Investing Activities........................................................................ F-29
Funding Activities.......................................................................... F-30
Asset Liability Management.................................................................. F-32
Taxation.................................................................................... F-32
Properties.................................................................................. F-32
Legal Proceedings........................................................................... F-32
Management.................................................................................. F-33
Keystone Holdings Common Stock; Dividends................................................... F-35
KEYSTONE HOLDINGS.................................................................................... F-36
General..................................................................................... F-36
The 1988 Acquisition........................................................................ F-37
The Warrants................................................................................ F-39
REGULATION AND SUPERVISION........................................................................... F-39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF KEYSTONE HOLDINGS.......................................................... F-40
Summary Financial Information for Keystone Holdings......................................... F-41
Financial Condition......................................................................... F-41
Originations................................................................................ F-42
Credit Quality.............................................................................. F-43
</TABLE>
F-1
<PAGE> 148
<TABLE>
<S> <C>
Deposits and Other Borrowings............................................................... F-48
Results of Operations....................................................................... F-49
Capital Regulations and Requirements........................................................ F-58
Asset/Liability Management.................................................................. F-59
Liquidity and Capital Resources............................................................. F-60
CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS............................................... F-62
Independent Auditors' Report................................................................ F-63
Consolidated Balance Sheets as of December 31, 1995 and 1994................................ F-64
Consolidated Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993.... F-65
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1995, 1994
and 1993............................................................................. F-66
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and
1993................................................................................. F-67
Notes to Consolidated Financial Statements.................................................. F-69
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
KEYSTONE HOLDINGS AS OF JUNE 30, 1996......................................................................... F-110
Condensed Consolidated Balance Sheets....................................................... F-111
Condensed Consolidated Statements of Earnings............................................... F-112
Condensed Consolidated Statements of Stockholder's Equity................................... F-113
Condensed Consolidated Statements of Cash Flows............................................. F-114
Notes to Condensed Consolidated Financial Statements........................................ F-116
</TABLE>
F-2
<PAGE> 149
THE KEYSTONE TRANSACTION
The following is a discussion of certain matters related to the
Keystone Transaction and Keystone Holdings. The following information, insofar
as it relates to matters contained in the Keystone Merger Agreement, the Warrant
Exchange Agreement and the Registration Rights Agreement, is qualified in its
entirety by reference to the other information contained elsewhere in this Proxy
Statement/Prospectus and the documents, including the agreements noted above,
incorporated herein by reference.
UTAH FEDERAL SHAREHOLDERS ARE URGED TO READ THIS APPENDIX F AND THE
DOCUMENTS INCORPORATED BY REFERENCE IN THEIR ENTIRETY.
GENERAL
On July 22, 1996, Washington Mutual publicly announced it had entered
into several agreements with Keystone Holdings, Inc. ("Keystone Holdings") and
the Federal Deposit Insurance Corporation (the "FDIC"), as manager of the
Federal Savings and Loan Insurance Corporation ("FSLIC") Resolution Fund (the
"FRF") (the FDIC in its capacity as manager of the FRF is referred to herein as
the "FDIC-Manager"), pursuant to which, among other things, Washington Mutual
would merge with Keystone Holdings and the direct and indirect subsidiaries of
Keystone Holdings, including American Savings Bank, F.A. ("ASB"), would become
wholly-owned subsidiaries of Washington Mutual (the "Keystone Transaction"). In
connection with the Keystone Transaction, Washington Mutual intends to call a
special meeting of its shareholders (the "Washington Mutual Special Meeting") at
which the holders of Washington Mutual common stock, no par value per share
("Washington Mutual Common Stock"), will be asked to vote to approve the
Keystone Transaction. Consummation of the Keystone Transaction requires the
implementation of the following agreements and the completion of the following
actions:
Washington Mutual has entered into that certain Agreement for Merger,
which includes the form of Plan of Merger contained therein, dated as of July
21, 1996 (the "Keystone Merger Agreement"), among Washington Mutual, Keystone
Holdings Partners, L.P., the sole shareholder of Keystone Holdings ("KHP"),
Keystone Holdings, New American Holdings, Inc. ("New Holdings'), New American
Capital, Inc. ("New Capital"), N.A. Capital Holdings, Inc. ("NACH Inc."), and
ASB (Keystone Holdings, New Holdings, New Capital, NACH Inc. and ASB are
collectively referred to in this Proxy Statement as the "Keystone Entities"),
pursuant to which Keystone Holdings will merge with and into Washington Mutual
(the "Keystone Merger") and, as a result, the direct and indirect subsidiaries
of Keystone Holdings, including ASB, will become subsidiaries of Washington
Mutual.
The parties to the Keystone Merger Agreement, together with the FDIC,
as manager of the FRF and certain affiliates of Keystone Holdings and KHP have
also entered into that certain Warrant Exchange Agreement dated as of July 21,
1996 (the "Warrant Exchange Agreement"). Pursuant to the Warrant Exchange
Agreement the FDIC-Manager has agreed to exchange certain warrants (the
"Warrants") representing the right to purchase shares of NACH Inc., a subsidiary
of Keystone Holdings and the parent corporation of ASB, for shares of Washington
Mutual Common Stock (the "Warrant Exchange").
In the Keystone Transaction, Washington Mutual will issue 47,883,333
shares of Washington Mutual Common Stock as follows: 25,883,333 shares to KHP
(the "Keystone Initial Shares") for immediate distribution to its general and
limited partners (the "Investors"); 14,000,000 shares to the FRF (the "FRF
Initial Shares"); and 8,000,000 shares (the "Litigation Escrow Shares") to an
escrow for the benefit of the Investors and the FRF (the "Litigation Escrow").
The Keystone Initial Shares and the FRF Initial Shares are referred to
collectively as the "Initial Shares." If, prior to the consummation of the
Keystone Transaction, the Washington Mutual Common Stock undergoes a stock
split, stock dividend, recapitalization or similar transaction, the number of
shares to be issued in the Keystone Transaction will be adjusted accordingly.
All references in this Proxy Statement/Prospectus to any number of shares of
Washington Mutual Common Stock to be issued in the Keystone Transaction refer to
such number as so adjusted. After the Keystone Transaction and assuming all of
the Litigation Escrow Shares are released, the Investors will own approximately
31,100,000 shares of Washington Mutual Common Stock, or approximately 25.9% of
the Washington Mutual Common Stock then outstanding (based on the number of
shares outstanding on the record date for the Washington Mutual Special Meeting
plus the Initial Shares and Litigation
F-3
<PAGE> 150
Escrow Shares). In addition, to the extent that the FDIC-Manager does not sell
the FRF Initial Shares as soon as practicable after the Effective Date pursuant
to the Registration Rights Agreement, the FRF will own approximately 14.0% of
the Washington Mutual Common Stock then outstanding (based on the number of
shares outstanding on the record date for the Washington Mutual Special Meeting
plus the Initial Shares and Litigation Escrow Shares).
The last reported sales price of a share of Washington Mutual Common
Stock on The Nasdaq Stock Market on October 24, 1996 was $39.44. Based on such
sales price, the value of the Keystone Initial Shares and the FRF Initial Shares
would be approximately $1,020,774,000 and $552,125,000, respectively, and the
value of the Litigation Escrow Shares would be $315,500,000. The actual sales
price of a share of Washington Mutual Common Stock as of the effective date of
the Keystone Transaction and the value of the shares to be issued may vary
materially from such amounts.
Washington Mutual, KHP and the FDIC-Manager will enter into an escrow
agreement (the "Escrow Agreement") pursuant to which the Litigation Escrow
Shares (or a portion thereof) will be released, 64.9% to the Investors and 35.1%
to the FRF, or their respective assigns, to the extent that Washington Mutual
receives net cash proceeds from certain litigation that Keystone Holdings and
certain of its affiliates are pursuing against the United States, which
litigation is being assumed by Washington Mutual in the Keystone Transaction
(the "Case").
In addition, Washington Mutual, KHP and the FDIC-Manager have entered
into that certain Registration Rights Agreement, dated as of July 21, 1996 (the
"Registration Rights Agreement"), which provides that Washington Mutual will be
required, if the Keystone Transaction closes, to use its best efforts to
register for resale to the public under the Securities Act of 1933, as amended
(the "Securities Act"), shares of Washington Mutual Common Stock issued in the
Keystone Transaction. Pursuant to the Registration Rights Agreement, Washington
Mutual has agreed to file and use its best efforts to cause to become effective
with the Securities and Exchange Commission (the "SEC") as soon as practicable
after the effective date of the Keystone Transaction on a date mutually
acceptable to Washington Mutual and the participants in such underwriting a
registration statement for an underwritten public offering of between 7,500,000
and 20,000,000 shares of Washington Mutual Common Stock issued in the Keystone
Transaction (the "Initial Underwriting"). It is currently expected that the
FDIC-Manager will sell the FRF Initial Shares in the Initial Underwriting,
although there are no assurances that the FDIC-Manager will sell all or any of
such shares. Pursuant to the Registration Rights Agreement, the Investors and
the FRF will also receive additional registration rights as described in "--
Registration Rights and Resales of Washington Mutual Common Stock."
As a further condition to the consummation of the Keystone Transaction,
at the Washington Mutual Special Meeting the holders of Washington Mutual Common
Stock will be asked to vote separately and as a group with the holders of each
of the Washington Mutual 9.12% Noncumulative Perpetual Preferred Stock, Series C
(the "Series C Preferred"), $6.00 Noncumulative Convertible Perpetual Preferred
Stock, Series D (the "Series D Preferred"), and 7.60% Noncumulative Perpetual
Preferred Stock, Series E (the "Series E Preferred") (collectively, the
"Preferred Stock") to consider and vote on a proposal to approve an amendment to
Washington Mutual's Restated Articles of Incorporation (the "Articles") to
increase the number of authorized shares of Washington Mutual Common Stock from
100,000,000 shares to 350,000,000 shares. The implementation of the Keystone
Transaction is conditioned on the approval of the amendment to the Articles.
CONSUMMATION OF THE KEYSTONE TRANSACTION IS SUBJECT TO THE SATISFACTION
OF A NUMBER OF CONDITIONS, INCLUDING APPROVAL BY THE SHAREHOLDERS OF WASHINGTON
MUTUAL OF THE KEYSTONE TRANSACTION AND THE AMENDMENT TO THE ARTICLES. THERE CAN
BE NO ASSURANCE THAT THE KEYSTONE TRANSACTION WILL BE CONSUMMATED.
REASONS FOR THE KEYSTONE TRANSACTION; RECOMMENDATION OF THE WASHINGTON MUTUAL
BOARD
The Washington Mutual Board of Directors (the "Washington Mutual
Board") believes that Keystone Holdings and ASB are a unique strategic fit with
Washington Mutual, which will allow Washington Mutual to expand into California
with a financially strong institution that has similar business strategies,
strong management and complementary product capabilities.
F-4
<PAGE> 151
In 1995, the Washington Mutual Board revised its 5-year strategic plan.
The strategies enumerated in the strategic plan include strengthening Washington
Mutual's consumer banking franchise throughout the West; diversifying its
business mix by deploying capital to higher growth business lines, such as
commercial banking; decreasing Washington Mutual's sensitivity to movements in
interest rates; improving margins of its core businesses; operating more
efficiently; and maintaining strong asset quality.
The Washington Mutual Board believes that the Keystone Transaction
satisfies elements of this strategic plan. In particular, the following benefits
were identified by the Washington Mutual Board:
- Strengthens Consumer Banking Franchise in West. The Keystone
Transaction will give Washington Mutual immediate access to
the consumer banking market in California. ASB has a
state-wide presence in California, with over 200 branches and
loan offices concentrated in the Los Angeles and San Francisco
areas. The Keystone Transaction will add more than 500,000 new
households to Washington Mutual's customer base.
- Decreases Washington Mutual's Sensitivity to Interest Rate
Changes. ASB's loan and investment portfolios consist
primarily of ARMs and variable rate mortgage-backed
securities. This will complement Washington Mutual's
portfolios, which contain a much higher percentage of fixed
rate mortgages, and will accelerate Washington Mutual's
efforts to reduce the sensitivity of its results of operations
to changes in prevailing interest rates.
- Expense Savings. The consolidation of certain head office
functions and back office operations is expected to achieve
annual savings of operating costs projected by management at
$25 million and $50 million (pre-tax) in 1997 and 1998,
respectively.
The benefits described above are forward-looking statements and actual
results may vary materially from such projections. See "PROXY
STATEMENT/PROSPECTUS -- THE MERGER -- Risk Factors Related to the Keystone
Transaction and Keystone Holdings," for factors that may cause such variances.
The Washington Mutual Board considered certain potentially negative
factors in its deliberations regarding the Keystone Transaction, such as the
risk that economic conditions in California where ASB has the bulk of its real
estate assets could deteriorate, the fact that following the Keystone
Transaction a significant amount of Washington Mutual Common Stock would be held
by a single shareholder or group of shareholders, the level of competition the
Company would face in California, the effect on the Company's capital of a
special SAIF assessment and the Company's potential inability following the
Keystone Transaction to refinance certain outstanding debt and preferred equity
of subsidiaries of Keystone Holdings. See "MANAGEMENT AND OPERATIONS OF
WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION -- Operations After the
Keystone Transaction." The Washington Mutual Board determined, however, that the
benefits of the Keystone Transaction discussed above outweighed the potential
negative factors.
In reaching its conclusion, the Washington Mutual Board considered
information provided at its February 20, 1996, June 18, 1996 and July 19, 1996
board meetings, including, among other things, (i) information concerning the
financial performance and condition, business operations, capital levels, asset
quality, loan portfolio breakdown and prospects of ASB and information
concerning the two companies on a combined basis; (ii) the structure of the
Keystone Transaction, including the accounting treatment of the Keystone
Transaction and the fact that Washington Mutual's shareholders would retain
approximately 66% of the common equity of the combined company; (iii) the terms
of the Keystone Merger Agreement, Warrant Exchange Agreement, Registration
Rights Agreement, Escrow Agreement, and other documents to be executed in the
Keystone Transaction; (iv) the state of the California economy; (v) the
presentation and recommendation made by the management of Washington Mutual;
(vi) current industry, economic and market conditions and trends, including the
likelihood of continuing consolidation and increasing competition in the banking
and financial services industries; (vii) the possibility of achieving
significant cost savings, operating efficiencies and synergies as a result of
the Keystone Transaction; (viii) the fairness opinions of CS First Boston
Corporation ("CS First Boston") as financial advisor to the Washington Mutual
Board as to the fairness from a financial point of view of the consideration
paid by Washington Mutual (the "CS First Boston Opinions"); (ix) the terms of
other recent comparable combinations of savings and loan holding
F-5
<PAGE> 152
companies; and (x) the effect of the Keystone Transaction on the depositors,
employees, customers and communities served by each company.
In reaching its decision to approve the Keystone Transaction and
recommend the Keystone Transaction to the shareholders of Washington Mutual, the
Washington Mutual Board did not assign any relative or specific weights to the
various factors considered and individual directors may have given differing
weights to different factors.
REGISTRATION RIGHTS AND RESALES OF WASHINGTON MUTUAL COMMON STOCK
GENERAL. At the effective time of the Keystone Transaction, the shares
of Washington Mutual Common Stock to be issued to KHP and the FRF in connection
with the Keystone Transaction will not have been registered under the Securities
Act. All such shares will be issued pursuant to an exemption from the
registration provisions of the Securities Act and will be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. Washington Mutual Common Stock received in the Keystone Transaction will be
transferable only pursuant to an effective registration or a valid exemption
from registration under the Securities Act. Pursuant to the Registration Rights
Agreement, Washington Mutual has agreed to provide certain registration rights
to the Investors and the FRF, and their permitted assigns and transferees, as
holders of the Washington Mutual Common Stock issued in the Keystone
Transaction, as described below:
Registration Rights. Washington Mutual has agreed to file with the SEC
and use its best efforts to cause to become effective as soon as practicable
after the effective date of the Keystone Transaction on a date mutually
acceptable to Washington Mutual and the participants in such underwriting, a
registration statement with respect to the Initial Underwriting of not less than
7,500,000 and not more than 20,000,000 of the 39,883,333 shares of Washington
Mutual Common Stock issued to KHP and the FRF on such effective date (the
"Initial Shares"). Washington Mutual currently expects that all of the FRF
Initial Shares (14,000,000 shares of Washington Mutual Common Stock) will be
registered and sold in the Initial Underwriting, although there is no assurance
that the FDIC-Manager will sell any or all of such shares.
Washington Mutual has also agreed to file with the SEC and use its best
efforts to cause to become effective as soon as practicable after nine months
from the effective date of the Keystone Transaction a shelf registration
statement ("Shelf Registration Statement") for sale from time to time to the
public of all the Initial Shares not previously sold in the Initial
Underwriting, together with any other securities issued as a dividend or other
distribution with respect to, or in exchange for or in replacement of the
Initial Shares ("Registrable Shares"). Shares may be sold under the Shelf
Registration Statement only in brokers transactions pursuant to Rule 144(f)
promulgated under the Securities Act or in an underwritten offering pursuant to
the demand and piggyback underwriting rights described below. Washington Mutual
will use its best efforts to keep the Shelf Registration Statement continuously
effective for three years after the initial effective date of the Shelf
Registration Statement.
Washington Mutual has also agreed to file with the SEC a shelf
registration statement (the "Litigation Shelf") for sale from time to time to
the public of the Litigation Escrow Shares. Washington Mutual will use its best
efforts to have such registration statement become effective as soon as
practicable after the first date any Litigation Escrow Shares are distributed
from the Litigation Escrow and keep such Litigation Shelf continuously effective
until the later of (i) the date three years after the initial effective date of
the Litigation Shelf and (ii) the date one year after the last distribution of
Litigation Escrow Shares from the Litigation Escrow. Shares may be sold under
the Litigation Shelf only in brokers' transactions pursuant to Rule 144(f)
promulgated under the Securities Act.
Pursuant to the Registration Rights Agreement, the holders of the
Initial Shares may require Washington Mutual an aggregate of four times during
the three-year period following the effectiveness of the Shelf Registration
Statement to facilitate an underwritten public offering of the Initial Shares
then owned by them. In addition, if Washington Mutual proposes to register any
shares of Washington Mutual Common Stock for sale under the Securities Act
through the three-year anniversary of the effectiveness of the Shelf
Registration Statement for its own account (other than in connection with an
acquisition by Washington Mutual, the redemption or conversion of
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outstanding convertible securities, or an employee equity plan), the holders of
the Initial Shares will be entitled to notice of the registration and to include
their shares in such offering.
AFFILIATE LETTERS. Pursuant to the Keystone Merger Agreement, Keystone
Holdings is required to deliver from each party who may be deemed to be an
"affiliate" of Keystone Holdings (collectively, the "Keystone Affiliates") for
the purposes of SEC Accounting Series Release No. 130, as amended by Release No.
135 ("ASR 135"), to Washington Mutual a letter agreement ("Keystone Affiliate
Letter"), pursuant to which, among other things, each Keystone Affiliate agrees,
with certain limited exceptions, not to sell or otherwise dispose of any
interest in KHP or Washington Mutual Common Stock during the period commencing
30 days preceding the effective date of the Keystone Transaction until such time
as consolidated financial results covering at least 30 days of post-transaction
combined operations of Washington Mutual and Keystone Holdings have been
published. While not required to be subject to written agreements, Washington
Mutual affiliates are subject to the same restrictions as to sales of Washington
Mutual Common Stock. In order to assure that the Keystone Merger will be treated
as a pooling of interests, Washington Mutual will have the right to place a
restrictive legend on all shares of Washington Mutual Common Stock to be
received by a Keystone Affiliate so as to preclude the transfer of such shares
in violation of the Keystone Affiliate Letters. The Keystone Affiliate Letters
and restrictive legends are intended to preserve treatment of the Keystone
Merger as a pooling-of-interests for accounting purposes.
CONDITIONS TO THE KEYSTONE TRANSACTION
The respective obligations of Washington Mutual, Keystone Holdings and
the FDIC-Manager to consummate the Keystone Transaction are subject to numerous
conditions described in further detail below, including those related to: (i)
the approval by Washington Mutual shareholders of the Keystone Transaction and
the amendment to the Articles; (ii) the receipt of all applicable regulatory
approvals and confirmations; (iii) the divestiture of the stock of an indirect
subsidiary of Keystone Holdings; and (iv) the renegotiation of certain
agreements between Keystone Holdings and the FRF. There can be no assurance that
such conditions will be satisfied or that the Keystone Transaction will be
consummated.
REGULATORY APPROVALS. The Keystone Transaction is subject to the
approval of the Office of Thrift Supervision (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 Keystone Transaction, assess the record
of performance of ASB and the bank subsidiaries of Washington Mutual in meeting
the credit needs of the communities they serve, including low and moderate
income neighborhoods. Each of ASB, WMB and WMBfsb currently has "outstanding"
CRA ratings from its primary regulator.
Washington Mutual has submitted an application seeking OTS approval of
the Keystone Transaction. There can be no assurance that the OTS will approve
the Keystone Transaction, and if the Keystone Transaction 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. As of the date of this Proxy
Statement/Prospectus, three community groups have filed protests with the OTS
with regard to the Keystone Transaction. The OTS will consider these protests in
connection with consideration of the Company's application as a whole. The
Company believes that the protests are without merit and has responded to the
OTS to that effect. Washington Mutual's obligation to consummate the Keystone
Transaction 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
Keystone Holdings or Washington Mutual or (ii) would require Washington Mutual's
bank subsidiaries to raise additional capital (other than to increase either
WMB's or WMBfsb's leverage capital or core capital to a level no higher than
five percent). In addition, the U.S. Department of Justice must examine whether
there are significant anti-competitive effects of the Keystone Transaction.
There can be no assurance that the U.S. Department of Justice or the Attorney
General of the state of California will not challenge the Keystone Merger or, if
challenged, what the result of such a challenge would be.
Mr. Bass has filed a notice of change of control with the OTS. The
parties' obligations to consummate the Keystone Transaction are conditioned on
the receipt of the non-objection of the OTS to such notice. There can
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be no assurance that such non-objection will be forthcoming, and if received,
there can be no assurance as to the date of such non-objection or what
conditions may be imposed.
The obligation of Washington Mutual to consummate the Keystone
Transaction is also subject to the satisfaction of the following conditions: (i)
Washington Mutual's receipt (x) from the OTS of confirmation that upon
consummation of the Keystone Transaction, Washington Mutual will not be deemed
to control Family Savings Bank (a minority-owned financial institution of which
Keystone Holdings owns 14.7% of the outstanding common stock and all the
outstanding preferred stock) and (y) from the FDIC of either confirmation that
Washington Mutual will not be deemed to control Family Savings Bank or a waiver
for Washington Mutual's subsidiaries of certain "cross guaranty" liability with
respect to Family Savings Bank; and (ii) the resolution of any material
outstanding differences between KHP and the Keystone Entities, on one hand, and
the FDIC-Manager, on the other hand, without material liability attaching to the
Keystone Entities. There can be no assurance that these conditions will be
satisfied.
Washington Mutual is not aware of any other governmental approvals that
are required for consummation of the Keystone Transaction except as described
above. Should any other approval or action be required, it 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.
FRF MATTERS. Keystone Holdings commenced operations as an indirect
holding company for ASB to effect the December 1988 acquisition (the "1988
Acquisition") of certain assets and liabilities of the failed savings and loan
association subsidiary of Financial Corporation of America (the "Failed
Institution"). In connection with the 1988 Acquisition, the Keystone Entities
and the FRF entered into a number of agreements (the "FRF Agreements"). Pursuant
to the Warrant Exchange Agreement, at the effective time of the Keystone
Transaction, certain of the FRF Agreements (or portions thereof) relating to the
Warrants will be terminated. Additionally, pursuant to the Keystone Merger
Agreement, KHP and the Keystone Entities have agreed to use their best efforts
to: (i) obtain consents necessary so that the FRF Agreements can be assumed by a
subsidiary of Washington Mutual; (ii) resolve, without material liability to
Washington Mutual or the Keystone Entities, any material outstanding differences
between KHP and the Keystone Entities, on the one hand, and the FDIC-Manager, on
the other hand, relating to the FRF Agreements; and (iii) facilitate a
renegotiation of the FRF Agreements to simplify the remaining effective
provisions thereof. Washington Mutual anticipates that at the effective time of
the Keystone Transaction, assuming the renegotiation of the FRF Agreements, the
only material continuing obligations under the FRF Agreements will be (i) the
obligation of the FDIC-Manager to indemnify Washington Mutual in certain
circumstances and (ii) the obligation of Washington Mutual to share certain tax
savings with the FDIC-Manager. See "MANAGEMENT AND OPERATIONS OF WASHINGTON
MUTUAL FOLLOWING THE KEYSTONE TRANSACTION - Operations After the Keystone
Transaction."
In addition, the 1988 Acquisition utilized a "good bank/bad bank"
structure in which New West Federal Savings and Loan Association ("New West")
was structured to be the "bad bank" that acquired substantially all of the
underperforming loans and certain other assets from the Failed Association while
ASB acquired substantially all of the performing loans. Pursuant to the FRF
Agreements, New West indemnified ASB and one of its affiliates from liability
arising out of certain management responsibilities for New West. As conditions
of the consummation of the Keystone Transaction, (i) the stock of New West,
together with any obligations and liabilities in connection with the ownership,
business or operation of New West, will be transferred by Keystone Holdings to,
or assumed by, an entity not being acquired by Washington Mutual and (ii) the
indemnities provided by New West to ASB and one of its affiliates will be
provided by the FRF. The divestiture of New West must be effected without any
substantial cost to any Keystone Entity.
In addition, the FDIC Office of Inspector General has commenced a
compliance audit (the "Audit") with regard to certain of the FRF Agreements. The
completion of the Audit without liability to New West and ASB exceeding $500,000
is a condition to consummation of the Keystone Transaction. To the extent that
the Audit is completed prior to the effective date of the Keystone Transaction,
the FDIC-Manager and KHP and the Keystone Entities have agreed to use their good
faith efforts to resolve any dispute that may arise with respect to the items or
periods covered by the Audit and to enter into a release in which the parties
will agree that, subject to certain
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exceptions, all entries on the schedules of activities will be deemed approved
at all levels of audit review and for all purposes.
OTHER CONDITIONS. The obligations of Keystone Holdings, Washington
Mutual and the FDIC-Manager to consummate the Keystone Transaction are subject
to, among other things, the satisfaction of the following conditions, of which,
as of the date of this Proxy Statement/Prospectus, substantially all remain to
be satisfied: (i) the approval of the Keystone Transaction and the amendment to
the Articles by the requisite vote of the shareholders of Washington Mutual;
(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
Keystone Merger; (iv) the receipt of an opinion of counsel to Washington Mutual,
dated as of the effective date of the Keystone Transaction to the effect that
the Keystone Merger will qualify as a "reorganization" as defined by the Code;
(v) the 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 state of California; (vi) the divestiture of
the shares of stock in New West to an entity other than a Keystone Entity; (vii)
the concurrent consummation of the Warrant Exchange and the Keystone Merger and
receipt by the Keystone Entities of certain consents relating to and
modifications of the surviving FRF Agreements; (viii) the receipt of a letter
from Deloitte & Touche LLP stating that the Keystone Transaction qualifies for
pooling of interests accounting treatment; (ix) the execution and delivery of an
Escrow Agreement by the parties thereto; and (x) the continued accuracy of the
representations and warranties of and the performance of the covenants and
agreements by each party to each of the Keystone Merger Agreement and the
Warrant Exchange Agreement except where the failure of such representations and
warranties to be accurate or the failure to perform such covenants or agreements
would not have a material adverse effect on such party.
THE LITIGATION ESCROW
The following discussion contains a summary of all material terms and
conditions of the Keystone Merger Agreement, Warrant Exchange Agreement and
Escrow Agreement relating to the Litigation Escrow and is qualified in its
entirety by the full text of the Keystone Merger Agreement, Warrant Exchange
Agreement and Escrow Agreement which are incorporated by reference herein.
GENERAL. As described elsewhere herein, the Litigation Escrow Shares
will be held by a mutually agreed upon escrow agent (the "Escrow Agent") in the
Litigation Escrow pursuant to the terms of the Escrow Agreement. Initially, KHP
and the FRF will be the holders of contingent rights to up to 64.9% and 35.1%,
respectively, of the Litigation Escrow Shares. Immediately after the effective
time of the Keystone Transaction, KHP intends to distribute its contingent right
in the Litigation Escrow Shares to the Investors.
The Litigation Escrow Shares will be registered in the name of the
Escrow Agent who will hold such shares together with any dividends,
distributions or any additional or substitute securities with respect to such
shares, as well as any interest or earnings on such dividends, distributions or
additional or substitute securities (collectively, the "Escrow Fund"). The
Escrow Agent will hold the Escrow Fund until the earlier of the date that is the
sixth anniversary of the effective date of the Keystone Transaction or until the
entire Escrow Fund has been released from the Litigation Escrow (the "Escrow
Expiration Date"). In general, the Escrow Expiration Date will be automatically
extended to 10 years from the effective date of the Keystone Transaction if,
prior to the sixth anniversary of the effective date of the Keystone
Transaction, there has been any judgment or final settlement in the Case granted
or entered in favor of Washington Mutual or any of its subsidiaries. The Escrow
Expiration Date may be extended further if Case Proceeds are paid in
installments. In the event that Washington Mutual receives any Case Proceeds on
or before the Escrow Expiration Date, the Escrow Agent will make distributions
of all or a portion of the Escrow Fund to the holders of contingent rights to
the Escrow Fund. The number of Litigation Escrow Shares to be distributed will
be computed as (a) the amount of Case Proceeds received less (b) the aggregate
of (i) taxes owed on the Case Proceeds to be calculated based on a formula in
the Keystone Merger Agreement, (ii) fees, costs and expenses paid or accrued by
Washington Mutual in connection with the Case or pursuant to the Escrow
Agreement, (iii) 200 percent of the allocated time costs of Washington Mutual
employees for time reasonably devoted to the Case, and (iv) all amounts paid by
any Keystone Entity prosecuting the Case in excess of $10,000,000, (c) divided
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by the Average Price. The "Average Price" means the arithmetic average of the
closing prices of the Washington Mutual Common Stock on The Nasdaq Stock Market
for the 10 trading days immediately preceding the third trading day before the
effective date of the Keystone Transaction. The Escrow Agent may make more than
one distribution out of the Escrow Fund if Case Proceeds are received in two or
more installments. In general, if no Case Proceeds have been received, beginning
on the last day of the full calendar month immediately following the sixth
anniversary of the effective date of the Keystone Transaction and on the last
day of every succeeding month, the Escrow Agent will return to Washington Mutual
for cancellation a number of shares equal to 1.25% of the number of Litigation
Escrow Shares, together with any dividends and distributions received on such
shares and any interest or earnings on such dividends. At the Escrow Expiration
Date, any remaining Litigation Escrow Shares, together with any amounts in the
Escrow Fund, will be returned to Washington Mutual.
The ultimate outcome of the Case is uncertain, and their can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses. Generally,
Washington Mutual will not benefit financially from the Case unless Case
Proceeds exceed such an amount and, in negotiating the Keystone Transaction,
Washington Mutual ascribed no value to the possibility that the Case Proceeds
would exceed such amount. As a result, it is uncertain what, if any, impact
recovery in the Case will have on the financial position of Washington Mutual.
THE CASE. On December 28, 1992, ASB, KHP, Keystone Holdings and other
related parties (the "Plaintiffs") filed the Case in the U.S. Court of Federal
Claims. In the Case, Plaintiffs allege that they entered into a contract with
the FSLIC and the FHLBB, agencies of the United States government, whereby the
Plaintiffs acquired the capital stock of ASB and New West and undertook other
liabilities and responsibilities for the benefit of the FSLIC and the FHLBB, in
return for which the FSLIC and the FHLBB agreed, among other things, that ASB
would be authorized to operate with a lower level of capital than the applicable
regulations would otherwise have required. Plaintiffs further allege that the
United States government's abrogation of this agreement constituted a breach of
contract, damaging the Plaintiffs. The contract promises which Plaintiffs allege
are similar to those asserted in Winstar Corp. v. United States, Statesman
Savings Holding Corp. v. United States and Glendale Federal Bank, FSB v. United
States (the "Winstar Cases"). On July 1, 1996, the United States Supreme Court
affirmed two lower courts' decisions holding that the government was liable for
breach of contract in the Winstar Cases. The Winstar Cases have been remanded to
the Court of Federal Claims for further proceedings, including a determination
of damages. There can be no assurance that the United States government will not
assert additional defenses or counterclaims on remand. The Court of Federal
Claims has also initiated procedures for resolving the merits of other related
cases, including the Case. The Plaintiffs have asserted claims for damages in an
unspecified amount. The government has not yet answered the complaint in the
Case. As a consequence of the Keystone Transaction, Washington Mutual will
succeed by operation of law to all of the rights of the Keystone Entities in the
Case and KHP has contractually agreed to remit to Washington Mutual proceeds
received from the Case. Based on the Winstar Cases, as of the date of this Proxy
Statement/Prospectus, no record has been established which would indicate what,
if any, damages the Plaintiffs are entitled to recover in the Case, and
Plaintiffs are unable to assess the likelihood of their success in the Case.
RIGHTS IN THE LITIGATION ESCROW SHARES. Each holder of contingent
rights to receive Litigation Escrow Shares will have the absolute right to have
its pro rata portion of such shares at the time of the applicable record date
(and any additional or substitute securities with respect thereto) voted on all
matters with respect to which the vote of the holders of such securities is
required or solicited, in accordance with such holder's written instructions to
the Escrow Agent. The Escrow Agent does not have discretionary authority to vote
any of the Litigation Escrow Shares for which it does not receive written voting
instructions from the holder of contingent rights to such shares.
The Litigation Escrow Shares will be validly issued shares of
Washington Mutual Common Stock and will not be registered under the Securities
Act, nor will the contingent right to receive the Litigation Escrow Shares be
registered as a separate security. The holders of the contingent rights to the
Escrow Fund may transfer any or all such rights upon delivery to Washington
Mutual of (i) an opinion of counsel that such transfer is exempt from the
registration requirements of the Securities Act and similar requirements under
all applicable state securities laws and (ii) a written instrument executed by
the proposed transferee agreeing to be bound by all applicable provisions of the
Escrow Agreement.
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MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE KEYSTONE
TRANSACTION
GENERAL
The Keystone Transaction provides for the merger of Keystone Holdings
with and into Washington Mutual, with Washington Mutual as the surviving
corporation. The separate existence of Keystone Holdings will cease upon
completion of the Keystone Transaction and, ASB will become a wholly-owned
subsidiary of Washington Mutual. The Articles and Bylaws of Washington Mutual
will be the Articles of Incorporation and Bylaws of the surviving entity after
the completion of the Keystone Transaction.
BOARD OF DIRECTORS
The names of the continuing directors of Washington Mutual at the
Effective Time and information regarding such persons are set forth in
Washington Mutual's Proxy Statement for its 1996 Annual Meeting, which is
incorporated herein by reference. See "PROXY STATEMENT/PROSPECTUS --
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "PROXY STATEMENT/PROSPECTUS
- -- AVAILABLE INFORMATION."
After completion of the Keystone Transaction, two representatives
mutually agreeable to Mr. Bass and Washington Mutual will be appointed to fill
then-vacant seats in two different classes of the Washington Mutual Board.
Pursuant to the Keystone Merger Agreement, after the effective date the
Washington Mutual Board will, in connection with each annual shareholders
meeting at which either of such representatives' term as a director ends,
nominate the one mutually-agreeable representative if Mr. Bass and certain of
his affiliates beneficially own, as of the record date for such meeting, a
number of shares of Washington Mutual Common Stock greater than the sum of (i)
8.5 million, plus (ii) 21.3 percent of the Litigation Escrow Shares that have
been released as of such date (the "2 Director Total"); however, if as of each
such record date, the number of shares of Washington Mutual Common Stock
beneficially owned by Mr. Bass and certain of his affiliates is fewer than the 2
Director Total, but greater than the sum of (a) 5.0 million, plus (b) 21.3
percent of the Litigation Escrow Shares that have been released as of such date
(the "1 Director Total"), the Washington Mutual Board will not re-nominate such
director and the term of such director will expire and the remaining
representative will continue on the Washington Mutual Board. The remaining
director will be renominated if Mr. Bass and certain of his affiliates
beneficially own, as of the record date for the meeting at which such director's
term as a director ends, a number of shares greater than the 1 Director Total.
The Washington Mutual Board has no obligation to re-nominate any representative
if Mr. Bass and such affiliates do not maintain beneficial ownership of the 1
Director Total or at least 5% of Washington Mutual's outstanding Washington
Mutual Common Stock on the record date for such meeting.
As of the date of this Proxy Statement/Prospectus, Washington Mutual
and Mr. Bass have not selected the representatives to serve as Washington Mutual
directors.
OPERATIONS AFTER THE KEYSTONE TRANSACTION.
GENERAL. Washington Mutual intends to continue operating ASB under the
"American Savings Bank" name in California. ASB will become a separate first
tier subsidiary of Washington Mutual. While final operating plans are not
complete, Washington Mutual currently intends to introduce its consumer banking
products and approaches throughout ASB's branch system and to expand ASB's loan
origination capabilities.
CONSOLIDATION OF OPERATIONS; PROJECTED COST SAVINGS. Washington Mutual
intends to consolidate certain corporate functions and computer and back office
operations within six months after the effective date of the Keystone
Transaction. Washington Mutual expects to achieve annual operating cost savings
through such consolidations of approximately $25 million and $50 million
(pre-tax) in 1997 and 1998, respectively. There can be no assurance that such
cost savings will be realized or that they will be realized in the time periods
expected.
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KEYSTONE TRANSACTION EXPENSE AND ADDITION TO LOAN LOSS RESERVE.
Keystone Transaction expenses of approximately $118.5 million (pre-tax) are
expected to be recorded by Washington Mutual at the effective time of the
Keystone Transaction. This charge includes the creation of reserves of $46
million for severance and management payments, $15 million for prepayment
premiums on certain Keystone Entity debt which Washington Mutual intends to
refinance as soon as possible after the effective date of the Keystone
Transaction and $24.5 million for investment banking and other professional
fees. These Washington Mutual transaction-related charges are subject to change
as further information becomes available.
Washington Mutual intends to provide an additional $125 million in loan
loss provisions as a charge to earnings at the effective date of the Keystone
Transaction. This additional loan loss provision is being provided principally
because a number of Washington Mutual credit administration and asset management
philosophies and procedures differ from those of ASB. These differences consist
principally of the following: (1) Washington Mutual is more proactive than ASB
in dealing with emerging credit problems and tends to prefer judicial
foreclosure actions to induce borrowers to correct defaults, whereas ASB tends
to prefer workouts in lieu of a more aggressive foreclosure stance; and (2) ASB
has considered the risk characteristics of its portfolio of multi-family loans
of less than $1 million to be similar to its single family residential
portfolio. Washington Mutual on the other hand considers the risk
characteristics of that portfolio to be more closely aligned with its
commercial income property portfolio, which tends to have a higher loan loss
provision than the single-family residential portfolio. Washington Mutual
intends to conform ASB's asset management practices, administration,
philosophies and procedures to its own, or in some instances to revise ASB's
current asset management strategies to conform to strategies being developed by
Washington Mutual. The plan of realization of troubled loans differs between the
companies and therefore results in different levels of loss reserves. The
additional loan loss provision is to a lesser degree being provided because
Washington Mutual believes that while there has been an increase in the price of
houses in certain California markets, a decline in collateral values for some
portions of the California real estate market has occurred in 1996.
NEW FEDERAL LAW. On September 30, 1996, President Clinton signed
legislation intended to recapitalize the Savings Association Insurance Fund
("SAIF") and to reduce the gap between SAIF premiums and the Bank Insurance Fund
("BIF") premiums, among other things. The legislation provides for a special
one-time assessment on SAIF-insured deposits that were held as of March 31,
1995, including certain deposits acquired after that date. The assessment will
bring the SAIF's reserve ratio to the legally required level of $1.25 for every
$100 in insured deposits. Beginning in January 1997, deposits insured through
the SAIF at most institutions probably will be subject to regular FDIC
assessments amounting to 6.4 cents per $100 per year, while deposits insured
through the BIF at most institutions probably will be subject to regular FDIC
assessments amounting to 1.3 cents per $100 per year.
Washington Mutual's special assessment will result in an estimated
pre-tax charge of about $35.7 million, which will be taken in the quarter ended
September 30, 1996. ASB's special assessment will result in an estimated pre-tax
charge of $88.5 million. Based on current levels of deposits, Washington Mutual
estimates that the reduction in the regular assessment on its SAIF deposits
beginning in 1997 should result in annual savings of approximately $10 million,
and ASB estimates that the reduction in the regular assessment on its SAIF
deposits should result in annual savings of approximately $21.2 million.
The Federal legislation that was enacted on September 30, 1996, also
amended the provision that prescribes the investments that WMB and WMBfsb must
hold in order to be a "qualified thrift lender" ("QTL"). Washington Mutual would
become subject to certain statutory restrictions on activities and investments,
would be required to register with the Board of Governors of the Federal Reserve
System (the "FRB") and would be subject to the FRB's bank holding company
regulations, including capital requirements, if WMB or WMBfsb were to fail to be
a QTL. For example, bank holding companies are not generally permitted to
underwrite life insurance. Federal law prior to September 30, 1996, prescribed
that at least 65% of a specified asset base of a QTL generally must consist of
certain assets related to domestic residential real estate, including
residential mortgage loans and mortgage securities. As amended, Federal law
allows an institution to qualify as a QTL either (a) by having at least 65% of a
specified asset base invested in loans to small businesses, credit card loans,
educational loans or certain assets related to domestic residential real estate,
including residential mortgage loans and mortgage securities; or (b) by having
at least 60% of total assets invested in cash, United States government and
government agency debt or equity securities, certain state or local debt
securities, education loans, certificates of deposit, fixed assets, or loans
secured by deposits, by real property used for residential, educational, church,
welfare or health purposes, or by real property in certain urban renewal areas.
Failure to remain a QTL also would impose conditions on WMB's ability to obtain
advances from the FHLB, and would restrict 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.
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MANAGEMENT OF ASB AFTER THE KEYSTONE TRANSACTION. Following the
Keystone Transaction, Washington Mutual will retain a majority of ASB's current
management team in the management of ASB. As previously announced, Mario Antoci,
the Chairman and Chief Executive Officer of ASB, will retire upon the closing of
the Keystone Transaction. Mr. Antoci will consult with Washington Mutual on CRA
and community development issues after consummation of the Keystone Transaction.
Robert T. Barnum, President, Chief Operating Officer and a director of ASB, will
continue after the Keystone Transaction as President of ASB and a significant
number of ASB's current executive officers will remain in the management of ASB.
It is currently anticipated that the consolidations planned by Washington Mutual
will not have a material effect on overall ASB employment. In addition, the
current management team of Washington Mutual will remain in place following the
Keystone Transaction, with the addition of Mr. Barnum as Executive Vice
President.
REDEMPTION OF KEYSTONE ENTITIES PREFERRED STOCK AND REPAYMENT OF DEBT.
New Capital has three series of debt securities outstanding. These debt
securities consist of (i) $169 million in current outstanding principal amount
of Series B 9.60% Notes due in 1999, (ii) $175 million in current outstanding
principal amount of Series C Floating Rate Notes due in 2002 and (iii) $20.5
million in current outstanding principal amount of Subordinated Notes due in
1998. The Series B Notes and Subordinated Notes bear interest at 1.375 and 2.875
percent, respectively, over the three-month London Interbank Offer Rate (LIBOR)
reset on a quarterly basis. New Capital also has outstanding $80 million of
Cumulative Redeemable Preferred Stock. Washington Mutual intends to redeem the
New Capital preferred stock and repay the New Capital debt as soon as possible
after the effective time of the Keystone Transaction. By redeeming such equity
and repaying such debt, Washington Mutual's management believes it can
significantly reduce the cost of such borrowings. There can be no assurance that
the cost of such borrowings will be reduced significantly, or at all, in
connection with such refinancing. See "PROXY STATEMENT/PROSPECTUS -- THE MERGER
- -- Risk Factors Related to the Keystone Transaction and Keystone Holdings."
Many of the benefits described above are forward-looking statements and
actual results may vary materially from such projections.
CERTAIN FEDERAL INCOME TAX MATTERS.
Net Operating Loss Carryforward Deductions. Due to Section 382
of the Internal Revenue Code of 1986, as amended (the "Code"), most of the value
of the net operating loss carryforward deductions described in the Consolidated
Financial Statements of Keystone Holdings will be eliminated due to the Keystone
Transaction. Accordingly, the future tax savings attributable to such net
operating loss carryforward deductions will be greatly reduced. Further, the
actual savings due to such reduced net operating loss carryforward deductions
will be even further reduced due to a provision in the FRF Agreements generally
requiring that approximately 75% of the federal tax savings resulting from such
net operating loss carry forwards be paid to the FRF. See "BUSINESS OF KEYSTONE
HOLDINGS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF KEYSTONE HOLDINGS," and "CONSOLIDATED FINANCIAL
STATEMENTS OF KEYSTONE HOLDINGS."
Tax Bad Debt Reserve Recapture. The recently enacted "Small
Business Job Protection Act of 1996" (the "Job Protection Act") requires that
qualified thrift institutions, such as Washington Mutual and ASB, generally
recapture for federal income tax purposes that portion of the balance of their
tax bad debt reserves that exceeds the December 31, 1987 balance, with certain
adjustments. Such recaptured amounts are to be generally taken into ordinary
income ratably over a six year period beginning in 1996, or as late as 1998 if
certain conditions are met. Accordingly Washington Mutual will have to pay, with
respect to current Washington Mutual entities, an additional approximate $4.2
million (based upon current federal income tax rates) in federal income taxes
each year of the six-year period due to the Job Protection Act. The Keystone
Merger Agreement requires that Keystone Holdings file amended federal income tax
returns with the IRS for 1992 and 1993 in order to reduce the tax bad debt
reserve recapture amount that ASB would otherwise incur due to the Job
Protection Act.
The Job Protection Act also repeals the reserve method of
accounting for tax bad debt deductions and, thus, requires thrifts to calculate
the tax bad debt deduction based on actual current loan losses.
F-13
<PAGE> 160
Tax Settlement Agreement. The Tax Settlement Agreement, which
is a condition to closing the Keystone Transaction, resolved certain disputes
that arose between the Keystone Entities and the FDIC-Manager regarding
interpretations of provisions in the FRF Agreements pertaining to the general
requirement that approximately 75% of the federal income tax savings
attributable to New West be paid to the FRF. The Tax Settlement Agreement also
requires Keystone Holdings to pay $10.5 million to the FRF if the Keystone
Transaction closes, in addition to any other undisputed amounts owed. See "Note
3 -- Transaction-Related Expenses in the Notes to the Pro Forma Combined
Consolidated Statements of Income."
COMBINED UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Subject to the terms and conditions of the Keystone Merger Agreement,
on the effective date of the Keystone Transaction, Keystone Holdings will merge
with and into Washington Mutual, with Washington Mutual as the surviving
corporation. The separate existence of Keystone Holdings will cease upon the
effectiveness of the Keystone Merger and the direct and indirect subsidiaries of
Keystone Holdings, including ASB, will become subsidiaries of Washington Mutual.
Additionally, the FDIC has agreed to effect the Warrant Exchange. Upon the
effective date of the Keystone Transaction, Washington Mutual will directly or
indirectly wholly-own all of the subsidiaries of Keystone Holdings, including
ASB. In connection with the Keystone Transaction, Washington Mutual will issue
47,883,333 shares of Washington Mutual Common Stock as follows: 25,883,333
shares to KHP; 14,000,000 shares to the FRF; and 8,000,000 shares to an escrow
for the benefit of the Investors and the FRF.
The following pro forma combined unaudited consolidated statement of
financial position as of June 30, 1996 and the pro forma combined unaudited
consolidated statements of income for the three years ended December 31, 1995
and the six months ended June 30, 1996 are based upon the supplemental and
historical consolidated financial statements of Washington Mutual as previously
filed with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in this Proxy
Statement/Prospectus, as restated for the Western Merger, and of Keystone
Holdings as set forth in the "Consolidated Financial Statement of Keystone
Holdings" included herein and should be read in conjunction with those
consolidated financial statements and related notes. The financial data for Utah
Federal and United Western Financial Group, pending acquisition by Washington
Mutual, have not been included because they are not material to Washington
Mutual. These combined unaudited pro forma condensed financial statements are
not necessarily indicative of the operating results that would have been
achieved had the Keystone Transaction been consummated as of the beginning of
the periods presented and should not be construed as representative of future
operating results. These combined unaudited pro forma condensed financial
statements give effect to the Keystone Transaction by combining the results of
operations of Washington Mutual and Keystone Holdings using the "pooling of
interests" method of accounting.
F-14
<PAGE> 161
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(1) Including
Washington Keystone ---------------------------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings
----------- ----------- --------- --------- -------- ------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ..................... $ 303,851 $ 144,062 $ $ (46,000) 1(e)(iii)
(15,000) 1(e)(iii)
(10,500) 1(e)(iii)
(47,000) 1(e)(iii) $ 329,413
Trading account securities .................... 3,715 -- 3,715
Available-for-sale securities ................. 7,221,172 3,844,439 11,065,611
Held-to-maturity securities ................... 180,658 2,876,527 3,057,185
Loans ......................................... 13,800,209 12,854,633 (125,000) 1(e)(iv) 26,529,842
Real estate owned ............................. 27,072 84,036 111,108
Bank premises and equipment ................... 222,830 231,455 454,285
Goodwill and other intangible assets .......... 147,251 -- 147,251
Other assets .................................. 416,714 445,554 862,268
-------------------------------------------------------------------------------
Total assets ................................ $22,323,472 $20,480,706 $ -- $(243,500) $ 42,560,678
===============================================================================
LIABILITIES
Deposits:
Checking, savings and money market
accounts .................................. $ 5,610,889 $ 3,855,659 $ $ 97,089 1(a) $ 9,563,637
Time certificates ........................... 5,415,830 8,873,307 14,289,137
-------------------------------------------------------------------------------
Total deposits ............................ 11,026,719 12,728,966 -- 97,089 23,852,774
Annuities ..................................... 866,349 -- 866,349
Federal funds purchased ....................... 770,000 -- 770,000
Securities sold under agreements to repurchase 4,645,682 3,987,359 8,633,041
Advances from Federal Home Loan Banks ......... 2,962,205 2,013,439 4,975,644
Other borrowings .............................. 224,314 493,734 718,048
Other liabilities ............................. 181,130 399,831 (97,089) 1(a)
(86,200) 1(e)(ii)
50,000 1(e)(v) 447,672
-------------------------------------------------------------------------------
TOTAL LIABILITIES ........................... 20,676,399 19,623,329 (183,289) 147,089 40,263,528
Minority interest ............................... -- 306,979 (167,000) 1(b)
(59,979) 1(c) 80,000
STOCKHOLDERS' EQUITY
Preferred stock ............................... -- -- --
Common stock .................................. -- 1 (1) 1(d) --
Capital surplus ............................... 728,914 30,419 167,000 1(b)
1 1(d) 926,334
Valuation reserve for available-for-sale
securities .................................. (21,267) (1,411) (22,678)
Retained earnings ............................... 939,426 521,389 59,979 1(c)
(207,300) 1(e)(i) 1,313,494
-------------------------------------------------------------------------------
Total stockholders' equity .................. 1,647,073 550,398 (207,300) 226,980 2,217,150
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity .. $22,323,472 $20,480,706 $(617,569) $ 374,069 $ 42,560,678
===============================================================================
Book value per common share (2) ................. $ 19.73 -- -- $ 17.88
Number of fully diluted common shares
outstanding (2) ............................... 77,505,610 -- -- 117,388,943
</TABLE>
F-15
<PAGE> 162
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(1) Statement of Financial Position. The pro forma adjustments reflected in
the unaudited pro forma combined statement of financial position of Washington
Mutual including Keystone Holdings as of June 30, 1996 give effect to the
following adjustments:
a. Deposits have been increased by $97.1 million to reflect a
reclassification of certain escrow accounts classified as
other liabilities in Keystone Holdings' statement of financial
position.
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------
<S> <C> <C>
Dr Other liabilities..... $97,089
Cr Deposits............ $97,089
</TABLE>
b. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted by $167.0 million to reflect the
issuance of 14,000,000 shares of Washington Mutual Common
Stock in the Warrant Exchange. Due to the Warrant Exchange,
the warrant holder is no longer shown as minority interest in
that Washington Mutual will directly or indirectly wholly-own
all of the subsidiaries of Keystone Holdings. See "THE
KEYSTONE TRANSACTION."
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------
<S> <C> <C>
Dr Minority interest..... $167,000
Cr Capital surplus..... $167,000
</TABLE>
c. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted by $60.0 million to give effect to
the earnings attributable to the warrant holder. Due to the
Warrant Exchange, the warrant holder is no longer shown as
minority interest in that Washington Mutual will directly or
indirectly wholly-own all of the subsidiaries of Keystone
Holdings. See "THE KEYSTONE TRANSACTION."
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------
<S> <C> <C>
Dr Minority interest..... $59,979
Cr Retained earnings... $59,979
</TABLE>
d. The minority interest and stockholders' equity of Keystone
Holdings have been adjusted to give effect to the exchange of
1,048 shares of Keystone Holdings common stock, par value
$1.00 per share for 25,883,333 shares of Washington Mutual
Common Stock.
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------
<S> <C> <C>
Dr Common stock.......... $ 1
Cr Capital surplus..... $ 1
</TABLE>
e. Keystone Transaction-related Expenses. Nonrecurring Keystone
Transaction-related expenses anticipated to be recorded are
included in the Pro Forma Including Keystone Holdings
statement of financial position as of June 30, 1996.
Nonrecurring Keystone Transaction-related expenses expected to
be recorded by Washington Mutual are summarized in the
following table (dollars in thousands):
<TABLE>
<S> <C>
Additional loan loss reserves (a)..................... $ 125,000
Severance and management payments..................... 46,000
Holding company debt call premiums.................... 15,000
FRF tax settlement.................................... 10,500
Other charges......................................... 47,000
---------
Total charges....................................... 243,500
Tax benefit........................................... (86,200)
Negative adjustment to ASB's deferred tax asset....... 50,000
---------
Net charges......................................... $ 207,300
=========
</TABLE>
F-16
<PAGE> 163
---------------
(a) See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER
THE KEYSTONE TRANSACTION -- Operations After the Keystone
Transaction -- Keystone Transaction Expenses and Addition to
Loan Loss Reserve" for a discussion of the differences in
philosophy between Washington Mutual and ASB regarding
provisions for loan loss and reasons for the increase in the
loan loss provision.
<TABLE>
<CAPTION>
(dollars in thousands)
-----------------------------------------------------------------------------------
<S> <C> <C>
(i) Dr Retained earnings - net charges .................. $207,300
(ii) Dr Other liabilities - tax benefit ................. 86,200
(iii) Cr Cash - Severance & management premiums ....... 46,000
(iii) Cr Cash - Holding company debt call premiums .... 15,000
(iii) Cr Cash - FRF tax settlement .................... 10,500
(iii) Cr Cash - Other charges ......................... 47,000
(iv) Cr Loans - Additional loan loss reserves ......... 125,000
(v) Cr Other liabilities - Negative adjustment to ASB's
deferred tax asset .................................. 50,000
</TABLE>
(2) Per Share Data. Washington Mutual's book value per common share of $19.73
and pro forma combined book value per common share of $17.88 as of June 30, 1996
were calculated using the following information:
<TABLE>
<CAPTION>
Pro forma including
Washington Mutual Keystone Holdings
----------------- -------------------
<S> <C> <C>
Stockholders' equity ............................ $ 1,647,073 $ 2,217,150
Noncumulative Perpetual Series C Preferred Stock (68,813) (68,813)
Noncumulative Perpetual Series E Preferred Stock (49,250) (49,250)
---------- --------
Total stockholders' equity attributable to common
shares ........................................ $ 1,529,010 $ 2,099,087
========== ==========
Number of fully diluted common shares outstanding 77,505,610 117,388,943
</TABLE>
Washington Mutual will issue 8,000,000 shares of Washington Mutual
Common Stock to the Litigation Escrow. The shares will be released, 64.9% to the
Investors and 35.1% to the FRF, to the extent that Washington Mutual receives
net cash proceeds from certain litigation that Keystone Holdings and its
affiliates are pursuing against the United States, which litigation is being
assumed by Washington Mutual in the Keystone Transaction. The ultimate outcome
of the Case is uncertain and there can be no assurance that there will be any
recovery. Washington Mutual will use the treasury stock method to determine the
effect of the 8,000,000 shares upon the Company's financial statements. As of
the Effective Date, there is no potential dilutive effect of the 8,000,000
shares of Washington Mutual Common Stock. Stockholders' equity, book value per
share and primary and fully diluted earnings per share have therefore not been
adjusted for the issuance of the Litigation Escrow Shares.
F-17
<PAGE> 164
PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(2) Including
Washington Keystone -------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
----------- ---------- -------- ------- ---- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans ................................................ $ 1,094,538 $ 967,263 $ $ $ 2,061,801
New West note ........................................ -- 58,841 58,841
Available-for-sale securities ........................ 294,286 114,777 409,063
Held-to-maturity securities .......................... 185,388 196,245 381,633
Cash equivalents ..................................... 4,748 -- 4,748
-------------------------------------------------------------------------
Total interest income .............................. 1,578,960 1,337,126 2,916,086
INTEREST EXPENSE
Deposits ............................................. 498,503 636,315 1,134,818
Borrowings ........................................... 462,221 326,397 788,618
-------------------------------------------------------------------------
Total interest expense ............................. 960,724 962,712 1,923,436
-------------------------------------------------------------------------
Net interest income ................................ 618,236 374,414 992,650
Provision for loan losses .............................. 11,150 63,837 74,987
-------------------------------------------------------------------------
Net interest income after provision for loan losses 607,086 310,577 917,663
Other income ........................................... 117,874 72,433 18,032 2(a) 208,339
Other expense .......................................... 417,655 264,827 18,032 2(a) 700,514
-------------------------------------------------------------------------
Income before income taxes ......................... 307,305 118,183 (18,032) 18,032 425,488
Income taxes ........................................... 107,504 12,289 119,793
-------------------------------------------------------------------------
Net income from continuing operations .................. 199,801 105,894 (18,032) 18,032 305,695
Extraordinary items, net of federal income tax effect .. -- -- --
Cumulative effect of change in tax accounting method ... -- -- --
Minority interest in earnings related to Warrants ...... -- (14,592) -- 14,592 2(b) --
Dividends paid to minority interest .................... -- (6,500) (9,293) -- 2(b) (15,793)
-------------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries ......................................... -- (21,092) (9,293) 14,592 2(b) (15,793)
-------------------------------------------------------------------------
NET INCOME ............................................. $ 199,801 $ 84,802 $(27,325) $32,624 $ 289,902
=========================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK ................ $ 181,217 $ 84,802 $(27,325) $32,624 $ 271,318
=========================================================================
Net income from continuing operations per
common share (1):
Primary .............................................. $2.59 -- $2.47
Fully diluted ........................................ 2.51 -- 2.42
Net income per common share (1):
Primary .............................................. $2.59 -- $2.47
Fully diluted ........................................ 2.51 -- 2.42
Average number of common shares outstanding (2):
Primary .............................................. 70,061,144 -- 109,944,477
Fully diluted ........................................ 75,480,391 -- 115,363,724
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(2) Including
Washington Keystone -------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
----------- ---------- -------- ------- ---- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans ................................................ $ 563,495 $ 448,397 $ $ $ 1,011,892
New West note ........................................ -- -- --
Available-for-sale securities ........................ 262,662 153,352 416,014
Held-to-maturity securities .......................... 6,606 104,971 111,577
Cash equivalents ..................................... 1,408 -- 1,408
------------------------------------------------------------------------
Total interest income .............................. 834,171 706,720 1,540,891
INTEREST EXPENSE
Deposits ............................................. 239,374 298,357 537,731
Borrowings ........................................... 245,658 170,739 416,397
------------------------------------------------------------------------
Total interest expense ............................. 485,032 469,096 954,128
------------------------------------------------------------------------
Net interest income ................................ 349,139 237,624 586,763
Provision for loan losses .............................. 5,825 35,180 41,005
------------------------------------------------------------------------
Net interest income after provision for loan losses 343,314 202,444 545,758
Other income ........................................... 73,514 34,624 7,496 2(a) 115,634
Other expense .......................................... 224,779 134,870 7,496 2(a) 367,145
------------------------------------------------------------------------
Income before income taxes ......................... 192,049 102,198 (7,496) 7,496 294,247
Income taxes ........................................... 71,161 27,685 98,846
------------------------------------------------------------------------
Net income from continuing operations .................. 120,888 74,513 (7,496) 7,496 195,401
Extraordinary items, net of federal income tax effect .. -- -- --
Cumulative effect of change in tax accounting method ... -- -- --
Minority interest in earnings related to Warrants ...... -- (13,918) -- 13,918 2(b) --
Dividends paid to minority interest .................... -- (6,978) -- -- 2(b) (6,978)
------------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries ......................................... -- (20,896) -- 13,918 2(b) (6,978)
------------------------------------------------------------------------
NET INCOME ............................................. $ 120,888 $ 53,617 $ (7,496) $21,414 $ 188,423
========================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK ................ $ 111,678 $ 53,617 $ (7,496) $21,414 $ 179,213
========================================================================
Net income from continuing operations per
common share (1):
Primary .............................................. $1.55 -- $1.60
Fully diluted ........................................ 1.50 -- 1.56
Net income per common share (1):
Primary .............................................. $1.55 -- $1.60
Fully diluted ........................................ 1.50 -- 1.56
Average number of common shares outstanding (2):
Primary .............................................. 71,982,173 -- 111,865,506
Fully diluted ........................................ 77,401,033 -- 117,284,366
</TABLE>
F-18
<PAGE> 165
<TABLE>
<CAPTION>
For Years Ended December 31,
--------------------------------------------------------------------------
1993
--------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(2) Including
Washington Keystone -------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
----------- ---------- -------- ------- ---- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans ............................................. $ 822,874 $ 756,606 $ $ $ 1,579,480
New West note ..................................... -- 241,014 241,014
Available-for-sale securities ..................... 1,371 53,006 54,377
Held-to-maturity securities ....................... 253,945 66,643 320,588
Cash equivalents .................................. 3,119 -- 3,119
-------------------------------------------------------------------------
Total interest income ........................... 1,081,309 1,117,269 2,198,578
INTEREST EXPENSE
Deposits .......................................... 354,743 513,435 868,178
Borrowings ........................................ 166,007 177,711 343,718
-------------------------------------------------------------------------
Total interest expense .......................... 520,750 691,146 1,211,896
-------------------------------------------------------------------------
Net interest income ............................. 560,559 426,123 986,682
Provision for loan losses ........................... 35,225 123,503 158,728
-------------------------------------------------------------------------
Net interest income after provision for loan
losses ........................................ 525,334 302,620 827,954
Other income ........................................ 152,575 81,050 12,951 2(a) 246,576
Other expense ....................................... 394,874 279,694 12,951 2(a) 687,519
-------------------------------------------------------------------------
Income before income taxes ...................... 283,035 103,976 (12,951) 12,951 387,011
Income taxes ........................................ 98,864 11,245 110,109
-------------------------------------------------------------------------
Net income from continuing operations ............... 184,171 92,731 (12,951) 12,951 276,902
Extraordinary items, net of federal income tax effect (8,953) -- (8,953)
Cumulative effect of change in tax accounting method 13,365 -- 13,365
Minority interest in earnings relating to Warrants .. -- (9,600) 9,600 2(b) --
Dividends paid to minority interest ................. -- (874) (13,117) 2(b) (13,991)
-------------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries ...................................... -- (10,474) (13,117) 9,600 2(b) (13,991)
-------------------------------------------------------------------------
NET INCOME .......................................... $ 188,583 $ 82,257 $(26,068) $22,551 $ 267,323
=========================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK ............. $ 175,025 $ 82,257 $(26,068) $22,551 $ 253,765
=========================================================================
Net income from continuing operations per common
share (1):
Primary ........................................... $2.63 -- $2.38
Fully diluted ..................................... 2.51 -- 2.32
Net income per common share (1):
Primary ........................................... $2.70 -- $2.42
Fully diluted ..................................... 2.57 -- 2.36
Average number of common shares outstanding (2):
Primary ........................................... 64,808,073 -- 104,691,406
Fully diluted ..................................... 70,870,441 -- 110,753,774
</TABLE>
<TABLE>
<CAPTION>
For Years Ended December 31,
--------------------------------------------------------------------------
1994
--------------------------------------------------------------------------
Pro Forma Pro Forma
Adjustments(2) Including
Washington Keystone -------------- Keystone
Mutual Holdings Debit Credit Ref. Holdings(3)
----------- ---------- -------- ------- ---- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans ............................................. $ 949,777 $ 709,041 $ $ $ 1,658,818
New West note ..................................... -- 141,039 141,039
Available-for-sale securities ..................... 151,561 84,148 235,709
Held-to-maturity securities ....................... 156,043 102,635 258,678
Cash equivalents .................................. 1,169 -- 1,169
-------------------------------------------------------------------------
Total interest income ........................... 1,258,550 1,036,863 2,295,413
INTEREST EXPENSE
Deposits .......................................... 370,872 481,794 852,666
Borrowings ........................................ 280,999 201,693 482,692
-------------------------------------------------------------------------
Total interest expense .......................... 651,871 683,487 1,335,358
-------------------------------------------------------------------------
Net interest income ............................. 606,679 353,376 960,055
Provision for loan losses ........................... 20,400 101,609 122,009
-------------------------------------------------------------------------
Net interest income after provision for loan
losses ........................................ 586,279 251,767 838,046
Other income ........................................ 118,502 88,902 13,390 2(a) 220,794
Other expense ....................................... 415,300 266,827 13,390 2(a) 695,517
-------------------------------------------------------------------------
Income before income taxes ...................... 289,481 73,842 (13,390) 13,390 363,323
Income taxes ........................................ 108,159 897 109,056
-------------------------------------------------------------------------
Net income from continuing operations ............... 181,322 72,945 (13,390) 13,390 254,267
Extraordinary items, net of federal income tax effect -- -- --
Cumulative effect of change in tax accounting method -- -- --
Minority interest in earnings relating to Warrants .. -- (21,746) 21,746 2(b) --
Dividends paid to minority interest ................. -- (875) (13,117) 2(b) (13,992)
-------------------------------------------------------------------------
Minority interest in earnings of consolidated
subsidiaries ...................................... -- (22,621) (13,117) 21,746 2(b) (13,992)
-------------------------------------------------------------------------
NET INCOME .......................................... $ 181,322 $ 50,324 $(26,507) $35,136 $ 240,275
=========================================================================
NET INCOME ATTRIBUTABLE TO COMMON STOCK ............. $ 162,738 $ 50,324 $(26,507) $35,136 $ 221,691
=========================================================================
Net income from continuing operations per common
share (1):
Primary ........................................... $2.45 -- $2.09
Fully diluted ..................................... 2.38 -- 2.06
Net income per common share (1):
Primary ........................................... $2.45 -- $2.09
Fully diluted ..................................... 2.38 -- 2.06
Average number of common shares outstanding (2):
Primary ........................................... 66,361,794 -- 106,245,127
Fully diluted ..................................... 71,781,041 -- 111,664,374
</TABLE>
F-19
<PAGE> 166
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(1) Per Share Data. Fully diluted net income from continuing operations per
common share and fully diluted net income per common share as of the six months
ended June 30, 1996 and the three years ended December 31, 1995 were calculated
using the following information:
<TABLE>
<CAPTION>
Six Months Year ended December 31,
Ended -----------------------------------------------
June 30, 1996 1995 1994 1993
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
WASHINGTON MUTUAL
Net income ..................................................... $ 120,888 $ 199,801 $ 181,322 $ 188,583
Preferred stock dividends:
Noncumulative Perpetual, Series C ............................ (3,138) (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E ............................ (1,872) (3,800) (3,800) (538)
----------------------------------------------------------------
Net income available to fully diluted common stock ............. 115,878 189,617 171,138 182,417
Less:
Extraordinary items, net of federal income tax effect ...... -- -- -- (8,953)
Cumulative effect of change in tax accounting method ....... -- -- -- 13,365
----------------------------------------------------------------
Net income from continuing operations available to fully diluted
common stock ................................................. $ 115,878 $ 189,617 $ 171,138 $ 178,005
================================================================
Average common shares outstanding:
Primary ...................................................... 71,982,173 70,061,144 66,361,794 64,808,073
Noncumulative Convertible Perpetual Preferred Stock,
Series A ................................................... -- -- -- 643,121
Noncumulative Convertible Perpetual Preferred Stock,
Series D ................................................... 5,418,860 5,419,247 5,419,247 5,419,247
----------------------------------------------------------------
Fully diluted ................................................ 77,401,033 75,480,391 71,781,041 70,870,441
================================================================
PRO FORMA INCLUDING KEYSTONE HOLDINGS
Net income ..................................................... $ 188,423 $ 289,902 $ 240,275 $ 267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C ............................ (3,138) (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E ............................ (1,872) (3,800) (3,800) (538)
----------------------------------------------------------------
Net income available to fully diluted common stock ............. 183,413 279,718 230,091 261,157
Less:
Extraordinary items, net of federal income tax effect ...... -- -- -- (8,953)
Cumulative effect of change in tax accounting method ....... -- -- -- 13,365
----------------------------------------------------------------
Net income from continuing operations available to fully diluted
common stock ................................................. $ 183,413 $ 279,718 $ 230,091 $ 256,745
----------------------------------------------------------------
Average common shares outstanding:
Primary ...................................................... 111,865,506 109,944,477 106,245,127 104,691,406
Noncumulative Convertible Perpetual Preferred Stock,
Series A ................................................... -- -- -- 643,121
Noncumulative Convertible Perpetual Preferred Stock,
Series D ................................................... 5,418,860 5,419,247 5,419,247 5,419,247
----------------------------------------------------------------
Fully diluted ................................................ 117,284,366 115,363,724 111,664,374 110,753,774
================================================================
</TABLE>
(2) Statements of Income. The pro forma adjustments reflected in the unaudited
Pro Forma Including Keystone Holdings statements of income for the three years
ended December 31, 1995 and six months ended June 30, 1996 give effect to the
following adjustments:
a. Real estate owned expenses included in the other income
category in the Consolidated Statements of Keystone Holdings'
have been reclassed to other expense.
F-20
<PAGE> 167
b. New Capital's $80.0 million cumulative redeemable preferred
stock was issued to three investment partnerships, two of whom
share substantially common ownership with KHP, the holder of
the Keystone Holdings common stock. The two investment
partnerships received $75.0 million of the $80.0 million of
the preferred stock issued. Due to the substantially common
ownership, the $75.0 million of preferred stock was previously
presented in Keystone Holdings' Consolidated Financial
Statements as "Additional Paid-in Capital." The remaining $5.0
million of preferred stock, owned by an unrelated investment
partnership, has been presented as a minority interest.
Effective August 1, 1995, the three investment partnerships
sold all of the preferred stock to an unrelated party. Due to
that sale, all of the preferred stock is presented as minority
interest in Keystone Holdings' Consolidated Financial
Statements as of December 31, 1995.
On the effective date of the Keystone Transaction, the two
investment partnerships holding $75.0 million of the preferred
stock during 1993, 1994 and the first seven months of 1995
would cease to have substantially common ownership with KHP.
As a result of the Transaction, the persons creating the
common ownership will no longer have controlling interest in
the pooled company. Therefore, dividends paid on the full
$80.0 million would be considered to be dividends paid to
minority interest.
Holders of the preferred stock are entitled to receive
cumulative dividends from the date of issue equal to 17.25%
per annum. The dividends are payable quarterly and unpaid
dividends will be compounded quarterly on each dividend
payment date. Accrued and unpaid dividends on the preferred
stock amounted to $1.8 million at both December 31, 1995 and
1994.
In addition, on the effective date of the Keystone
Transaction, the amount of earnings attributable to the
warrant holder during 1993, 1994, 1995 and the six months
ended June 30, 1996 no longer needs to be shown as minority
interest in that on such date Washington Mutual will directly
or indirectly wholly-own all of the subsidiaries of Keystone
Holdings. See "THE KEYSTONE TRANSACTION."
(3) Keystone Transaction-related Expenses. Nonrecurring Keystone
Transaction-related expenses anticipated to be recorded are not included in the
unaudited pro forma combined statements of income of Washington Mutual including
Keystone Holdings for the six months ended June 30, 1996. See "MANAGEMENT AND
OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION -- Operations
After the Keystone Transaction -- Keystone Transaction Expense and Addition to
Loan Loss Reserve." Nonrecurring Keystone Transaction-related expenses expected
to be recorded by Washington Mutual are summarized in the following table
(dollars in thousands):
Additional loan loss reserves (a)................... $ 125,000
Severance and management payments................... 46,000
Holding company debt call premiums.................. 15,000
FRF tax settlement.................................. 10,500
Other charges....................................... 47,000
-------
Total charges..................................... 243,500
Tax benefit......................................... (86,200)
Negative adjustment to ASB's deferred tax asset..... 50,000
-------
Net charges....................................... $ 207,300
==========
(a) See "MANAGEMENT AND OPERATIONS OF WASHINGTON MUTUAL AFTER THE KEYSTONE
TRANSACTION -- Operations After the Keystone Transaction -- Keystone Transaction
Expenses and Addition to Loan Loss Reserve" for a discussion of the differences
in philosophy between Washington Mutual and ASB regarding provisions for loan
loss and reasons for the increase in the loan loss provision.
F-21
<PAGE> 168
PROPOSED AMENDMENT TO WASHINGTON MUTUAL ARTICLES OF INCORPORATION -
INCREASE IN AUTHORIZED SHARES
It is a condition to Washington Mutual's obligation to consummate the
Keystone Transaction that Washington Mutual's Shareholders approve an amendment
to the Articles to increase the authorized shares of Washington Mutual Common
Stock from 100,000,000 to 350,000,000. This proposal is not conditioned on the
consummation of the Keystone Transaction, and, if approved by Washington
Mutual's Shareholders, it is the present intent of the Washington Mutual Board
to implement this proposal even if the Keystone Transaction is not consummated.
The primary reason for the proposed increase in the number of
authorized shares is to make sufficient shares available for issuance in
connection with the Keystone Transaction and to provide additional available
shares for use in future transactions. As of October 24, 1996, Washington Mutual
had a total of 72,307,510 shares issued and outstanding and an aggregate of
4,612,918 shares reserved for issuance upon the exercise of outstanding stock
options and upon the issuance of additional stock options under Washington
Mutual's 1994 Stock Option Plan. As of that date, Washington Mutual had also set
aside 5,418,876 unissued shares of Washington Mutual Common Stock for issuance
upon conversion of the Series D Preferred. In addition, in connection with the
Keystone Transaction, Washington Mutual will issue 47,883,333 additional shares
of Washington Mutual Common Stock. Consequently, 17,232,124 shares of Washington
Mutual Common Stock are authorized, unissued and not reserved for issuance.
Assuming shareholder approval of the Keystone Transaction and the
proposed amendment to the Articles to increase the number of authorized shares
of Washington Mutual Common Stock, Washington Mutual will issue 47,883,333
shares of the additionally authorized Washington Mutual Common Stock in
connection with the Keystone Transaction, 8,000,000 shares of which will be
delivered to the Escrow Agent pursuant to the Escrow Agreement.
The Washington Mutual Board believes that having additional shares of
Washington Mutual Common Stock authorized and available for issuance at the
Washington Mutual Board's discretion is in the best interest of Washington
Mutual and its shareholders and would provide several long-term advantages to
Washington Mutual and its shareholders. Washington Mutual would have greater
flexibility in considering future actions involving the issuance of stock and in
determining Washington Mutual's proper capitalization, such as through stock
dividends or splits and other employee and shareholder distributions. Additional
authorized shares could also be used to raise cash through sales of stock to
public and private investors. The Washington Mutual Board also would have
greater flexibility to authorize Washington Mutual to pursue additional
acquisitions that involve the issuance of stock and that Washington Mutual
believes provide the potential for growth and profit.
In certain circumstances, an increase in the authorized shares of
Washington Mutual Common Stock could be used to enhance the Washington Mutual
Board's bargaining capability on behalf of Washington Mutual's shareholders in a
takeover situation and could render more difficult or discourage a merger,
tender offer or proxy contest. Similarly, an increase in the authorized shares
of Washington Mutual Common Stock could have an anti-takeover effect in that
such additional shares could be used to dilute the stock ownership of persons
seeking to obtain control of Washington Mutual. Washington Mutual is not aware
of any present efforts to gain control of Washington Mutual or to organize a
proxy contest. If such proposal was presented, management would make a
recommendation based upon the best interests of Washington Mutual's
shareholders.
In the event the proposal to increase the number of authorized shares
of Washington Mutual Common Stock is approved, further shareholder approval of
the issuance of the 250,000,000 additional shares of Washington Mutual Common
Stock will not be sought prior to such issuance unless such issuances relate to
a merger, consolidation or other transaction that otherwise requires shareholder
approval. Upon issuance, such shares will have the same rights as the
outstanding shares of Washington Mutual Common Stock. Holders of Washington
Mutual Common Stock have no preemptive rights.
Other than the 47,883,333 shares to be issued pursuant to the Keystone
Transaction and except as otherwise described in this Proxy Statement,
Washington Mutual has no present plans to issue additional shares of Washington
Mutual Common Stock. The proposed increase in the number of authorized shares
will not change the number of shares currently outstanding or the rights of the
holders of such stock.
F-22
<PAGE> 169
BUSINESS OF KEYSTONE HOLDINGS
The following discussion regarding Keystone Holdings, Inc. and its
principal subsidiary, American Savings Bank F.A., should be read in conjunction
with the Consolidated Financial Statements of Keystone Holdings, Inc. and
Subsidiaries and the notes thereto, and the Condensed Consolidated Financial
Statements of Keystone Holdings, Inc. and Subsidiaries and the notes thereto,
which are included in this Appendix F.
Keystone Holdings is a holding company, substantially all of whose
business activities are conducted through it principal operating subsidiary,
ASB, a California-based federally chartered savings bank. All of Keystone
Holdings' lending activities are conducted through ASB. Keystone Holdings,
together with its consolidated subsidiaries, including ASB, is referred to
herein as "Keystone Holdings." Keystone Holdings had consolidated assets of
$20.5 billion, deposits of $12.7 billion and stockholder's equity of $550.4
million at June 30, 1996. For the six months ended June 30, 1996 and 1995,
Keystone Holdings recorded net interest income of $237.6 million and $165.7
million, respectively, and net earnings of $53.6 million and $25.5 million,
respectively. ASB had assets of $20.4 billion, deposits of $12.7 billion and
stockholder's equity of $1.2 billion at June 30, 1996.
ASB is one of the largest originators of single-family adjustable-rate
mortgages ("ARMs") in California. Single-family ARM originations for the
six-month period ended June 30, 1996 and for the year ended December 31, 1995
were $1.3 billion and $2.8 billion, respectively. For the six months ended June
30, 1996 and 1995, ASB recorded net interest income of $251.8 million and $181.8
million, respectively, and net earnings of $93.6 million and $62.5 million,
respectively. At June 30, 1996, ASB's capital levels qualified it as
"well-capitalized," the highest of the five categories under applicable
regulatory definitions. See "KEYSTONE HOLDINGS -- General."
ASB's deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through the Savings Association Insurance Fund (the "SAIF"). It is
a member of, and borrower from, the Federal Home Loan Bank (the "FHLB") of San
Francisco and is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS").
The principal business of ASB consists of attracting funds in the form
of retail deposits through its branches and through borrowings, and investing
those funds in single-family mortgage loans. ASB also originates a smaller
volume of multi-family residential loans (the majority of which are secured by
properties with 36 or fewer units) and loans secured by mobile home parks, which
are classified as commercial mortgage loans. ASB also has a limited portfolio of
other commercial mortgage loans, which were acquired from ASB's predecessor
institution. In addition, ASB owns subsidiary service corporations that engage
in securities and insurance brokerage. ASB's distribution network at June 30,
1996 consisted of 158 branches and 62 loan origination offices, all located in
California except for a loan origination office located in Phoenix, Arizona. ASB
expects to open three additional loan origination offices, one each in Las
Vegas, Nevada and Denver and Boulder, Colorado prior to year end 1996. The
California branches and loan origination offices are concentrated in the Los
Angeles and San Francisco metropolitan areas. A majority of ASB's loan
origination offices are located in close proximity to ASB's branch offices.
ASB's principal loan products are single-family residential ARMs that
reprice monthly to a predetermined margin over the Weighted Average Cost of
Funds Index for the Eleventh District Savings Institutions ("COFI"). ASB manages
interest rate risk by seeking to closely match the duration and repricing
periods of its assets and liabilities. By concentrating its loan origination
activities on COFI ARMs with monthly interest rate adjustments, ASB generates
interest-earning assets while managing interest rate risk. ASB also offers
fixed-rate and Treasury-indexed ARM loans. ASB sells substantially all of its
fixed-rate and non-COFI ARM originations immediately after funding.
F-23
<PAGE> 170
At June 30, 1996, ASB's capital exceeded all currently applicable
regulatory capital requirements and the requirements for being a
well-capitalized institution, as indicated in the table below:
<TABLE>
<CAPTION>
Minimum Well-Capitalized
Ratio Actual Requirement Requirement
----- ------ ----------- -----------
<S> <C> <C> <C>
Tangible capital to adjusted total assets........... 5.41% 1.50% n/a
Core capital to adjusted total assets............... 5.42 3.00(1) 5.00
Core capital to risk-weighted assets................ 9.26 4.00(2) 6.00
Total risk-based capital to risk-weighted assets.... 10.74 8.00 10.00
</TABLE>
----------------
(1) Under the prompt corrective action standards of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), an
institution is subject to regulatory sanctions if its core capital
ratio is less than 4.00%.
(2) Adequately capitalized standard under the prompt corrective standards
of FDICIA.
Keystone Holdings and ASB were formed to effect the December 1988
acquisition (the "1988 Acquisition") of certain assets and liabilities of the
failed savings and loan association subsidiary (the "Failed Association") of
Financial Corporation of America. The 1988 Acquisition utilized a "good bank/bad
bank" structure, with ASB, the "good bank," acquiring substantially all of the
Failed Association's performing loans and fixed assets. New West, the "bad
bank," was formed to acquire the Failed Association's underperforming and
certain other assets, with a view towards their liquidation. New West is a
wholly-owned subsidiary of New Holdings, which is a wholly-owned subsidiary of
Keystone Holdings. Although Keystone Holdings beneficially owns the stock of New
West through New Holdings, it does not have a financial interest in New West
because of certain contractual agreements with, and indemnifications by, the
FDIC as manager of the FSLIC Resolution Fund (the "FRF"). Any loss incurred by
New West during its liquidation is the financial responsibility of the FRF. In
addition, substantially all decisions made by New West's management must be
approved by the FDIC prior to execution. New West has not recorded any earnings
or losses since its inception. Therefore, New West is not included in the
Consolidated Financial Statements of Keystone Holdings. Steps are currently
being taken to effect the divestiture of New West and it is a condition to
closing of the Keystone Transaction that the stock of New West, together with
any obligations and liabilities related to New West, be transferred to or
assumed by an entity not being acquired by Washington Mutual as a result of the
Keystone Transaction. See "THE KEYSTONE TRANSACTION -- Conditions to the
Keystone Transaction."
The operations of ASB are significantly influenced by general economic
conditions, the related monetary, fiscal and regulatory policies of the federal
government and by the policies of the OTS, the FDIC, and the FHLB of San
Francisco. Deposit flows and the cost of funds are influenced by interest rates
on competing investments and general market interest rates. Similarly, loan
origination volume and the level of prepayments on receivables are affected by
market interest rates on loans, as well as additional factors that affect the
supply of and demand for housing and the availability of funds.
LENDING ACTIVITIES
Keystone Holdings, through ASB, originates receivables using three
primary distribution channels: residential loan centers, income-property loan
centers, and a state-wide network of independent residential mortgage brokers.
Both residential and income-property loan centers are staffed with commissioned
employees of ASB. In recent years, ASB has strengthened its relationships with
wholesale independent mortgage brokers by offering a competitive product line
that has allowed brokers to broaden their customer base. Loan production agents
are not involved in the appraisal or underwriting functions. The value of
property pledged as collateral for a mortgage loan is determined by an appraiser
who generally is an employee of ASB. In areas where ASB does not have appraisal
staff, appraisers approved by ASB's Board of Directors are used. All appraisers
used by ASB meet applicable regulatory requirements. Salaried underwriters or
loan officers of ASB must approve loans on residential properties (single and
multi-family) according to lending guidelines established by ASB's Board of
Directors. Loan production from the independent residential mortgage brokers is
subject to the same underwriting standards as loan production from ASB's loan
centers.
F-24
<PAGE> 171
Keystone Holdings' receivable portfolio consists principally of loans
secured by single-family real estate. The following table summarizes the
composition of Keystone Holdings' receivable portfolio on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- -----------------------------------------------------
1996 1995 1994
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
------------ ------------ ------------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate receivables:
Single-family
Adjustable.................... $10,769,464 83.13% $ 9,235,248 81.79% $ 9,539,309 74.32%
Fixed......................... 268,832 2.08 208,841 1.85 162,861 1.27
Multi-family
Adjustable.................... 1,422,469 10.98 1,342,563 11.89 2,529,120 19.70
Fixed......................... 55,772 0.43 56,462 0.50 66,414 0.52
Commercial, industrial and
land (1)...................... 352,246 2.72 359,537 3.18 441,980 3.44
Equity loans (1)(2)............. 44,332 0.34 46,122 0.41 49,643 0.39
Construction.................... -- -- -- -- -- --
-------------- ------ ------------- ------ ------------ -----
Total real estate receivables. 12,913,115 99.68 11,248,773 99.62 12,789,327 99.64
Other receivables:
Deposit certificates............ 21,121 0.16 21,582 0.19 24,472 0.19
Credit card..................... 2,809 0.02 3,003 0.03 2,897 0.02
Other........................... 17,398 0.14 18,156 0.16 19,071 0.15
------------- ------- ------------- ------- ------------ -------
Total other receivables....... 41,328 0.32 42,741 0.38 46,440 0.36
------------- ------- ------------- ------- ------------ -------
Total gross receivables..... $12,954,443 100.00% $11,291,514 100.00% $12,835,767 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1993 1992 1991
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
------------- ------------ ------------- ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate receivables:
Single-family
Adjustable.................... $6,796,988 67.65% $7,012,321 70.77% $5,905,566 67.83%
Fixed......................... 304,837 3.03 341,713 3.45 624,132 7.17
Multi-family
Adjustable.................... 2,171,648 21.61 1,707,545 17.23 1,252,144 14.38
Fixed......................... 82,834 0.82 95,841 0.97 84,868 0.97
Commercial, industrial and
land (1)...................... 426,908 4.25 456,230 4.60 519,869 5.97
Equity loans (1)(2)............. 58,302 0.58 71,743 0.72 89,736 1.03
Construction.................... 2,991 0.04 2,991 0.03 2,991 0.03
-------- ------ -------- ------- --------- -------
Total real estate receivables. 9,844,508 97.98 9,688,384 97.77 8,479,306 97.38
Other receivables:
Deposit certificates............ 31,024 0.31 39,693 0.40 53,699 0.62
Credit card..................... 151,871 1.51 158,476 1.60 149,428 1.72
Other........................... 20,129 0.20 22,561 0.23 24,076 0.28
------------ ------- ------------ ------- ------------ -------
Total other receivables....... 203,024 2.02 220,730 2.23 227,203 2.62
------------ ------- ------------ ------- ------------ -------
Total gross receivables..... $10,047,532 100.00% $ 9,909,114 100.00% $ 8,706,509 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
- ----------------
(1) Predominantly adjustable-rate receivables.
(2) All equity loans are secured by residential real estate.
Keystone Holdings' mortgage portfolio is almost exclusively within
California. The following table summarizes the real estate receivable portfolio
by certain geographic areas on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------ ------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ----------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
-------------- ----------- ----------- ----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County.................. $3,930,640 30.44% $ 3,494,217 31.06% $ 4,028,411 31.50%
San Francisco Bay Area.............. 4,156,423 32.19 3,537,474 31.45 3,680,469 28.78
Orange County....................... 1,438,278 11.14 1,285,570 11.43 1,256,836 9.83
Other California Counties........... 3,292,603 25.50 2,867,455 25.49 3,492,578 27.31
Other States........................ 95,171 0.73 64,057 0.57 331,033 2.58
------------- ------- ------------- ------ ------------ ------
Total Real Estate Receivables..... $12,913,115 100.00% $11,248,773 100.00% $12,789,327 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
F-25
<PAGE> 172
Single-Family Mortgages. A substantial portion of ASB's lending
activity consists of the origination and acquisition of loans secured by
single-family residences. Approximately 70% of the single-family mortgage loans
originated by ASB during the six months ended June 30, 1996 were secured by
owner-occupied properties and had loan-to-value ratios of less than 80% based on
appraisals at the time of origination. The remaining 30% consisted of owner and
non-owner occupied single-family originations, with the majority being
owned-occupied loans with loan-to-value ratios between 80 percent and 90
percent.
ASB offers an array of mortgage products with varying maturities and
repricing characteristics. Primary products include COFI ARMs that adjust
monthly with maturities up to a maximum of 40 years, mortgages that have a fixed
initial rate for up to five years and then reprice monthly until maturity, and
fixed-rate 15, 20 and 30 year mortgages. ASB's 30 and 40 year mortgages have
historically remained outstanding for substantially shorter periods than the
loan term due to borrower prepayments and refinancings. See Note 5,
"Receivables," in the Notes to the Consolidated Financial Statements of Keystone
Holdings for additional information regarding the contractual loan repayment
schedule of the receivable portfolio.
The June 30, 1996 gross receivable balance consisted of over 97% ARMs
and less than 3% fixed-rate receivables. The majority of the ARMs adjust monthly
to a predetermined margin over COFI.
The monthly payments on substantially all of ASB's ARMs adjust annually
with the adjustment limited to 7.5% per year (except at the end of each
five-year interval during the life of the loan, when the payment may be adjusted
by more than 7.5% to assure that the loan will amortize over the remaining term)
thereby protecting borrowers from unlimited payment increases. These protections
for borrowers can result in monthly payments that are greater or less than the
amount necessary to amortize the mortgage by its maturity at the interest rate
in effect for any particular month. In the event that a monthly payment is not
sufficient to pay the interest accruing on a mortgage, the shortage is added to
the principal balance. This is referred to as negative amortization. An increase
in interest rates tends to increase the outstanding loan principal arising from
negative amortization. The portion of outstanding loan principal resulting from
negative amortization was $22.0 million, $13.3 million and $2.9 million at June
30, 1996 and December 31, 1995 and 1994, respectively.
ASB requires title insurance on all liens on real property securing
loans and also requires that fire and casualty insurance be maintained on
properties in an amount at least equal to the total of ASB's loans plus all
prior liens on the property or the replacement cost of the property, whichever
is less.
Under federal regulations, a real estate loan may not exceed the
appraised value of the property at the time of origination. In addition, savings
associations are required by regulation to adopt written policies that establish
appropriate limits and standards for real estate loans and to consider certain
regulatory guidelines in establishing these policies. These guidelines specify
that savings associations should not originate any commercial, multi-family or
nonowner-occupied 1-to-4 family mortgage loan with an initial loan-to-value
ratio in excess of 85%. The guidelines further provide that savings associations
should not originate any owner-occupied 1-to-4 family mortgage loan with a
loan-to-value ratio that equals or exceeds 90% at origination, unless such loan
is protected by an appropriate credit enhancement in the form of either mortgage
insurance or readily marketable collateral. These real estate lending guidelines
recognize that it may be appropriate for a savings association to originate
mortgage loans with loan-to-value ratios exceeding these specified levels,
provided that the aggregate amount of all loans in excess of these limits does
not exceed a specified level of such association's total capital and such loans
are identified in the association's records and reported at least quarterly to
its board of directors. ASB's real estate lending policies and real estate loans
comply with these requirements.
Multi-Family and Commercial Mortgages. The risks associated with
multi-family and commercial lending are typically greater than those associated
with residential single-family mortgage lending. The former typically involve
larger loan balances concentrated with single borrowers or groups of related
borrowers. In addition, payments on loans secured by such properties are usually
dependent on the cash flows generated from the related real estate project and
therefore may be subject, to a greater extent, to adverse conditions in the real
estate market or in the economy. During the first six months of 1996 and 1995,
multi-family originations represented approximately 5.2% and 6.4%, respectively,
of total loan originations (by principal balance).
F-26
<PAGE> 173
The commercial loans originated by ASB during the first six months of
1996 and 1995 were restricted to loans secured by mobile home parks and
refinances of existing loans. Commercial originations represented approximately
0.3 percent and 0.2 percent of total loan originations (by principal balance)
during the six months ending June 30, 1996 and 1995, respectively.
The following table summarizes the balance of multi-family, commercial
and industrial receivables by collateral type on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- ------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------ -----------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
-------------- ------------ -------------- ------------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Multi-family.................... $1,478,241 80.76% $1,399,025 79.56% $2,595,534 85.45%
Office buildings (1)............ 131,517 7.18 137,441 7.82 206,135 6.79
Retail stores................... 73,145 3.99 75,446 4.29 95,293 3.14
Manufacturing/wholesale
warehouses.................... 36,359 1.99 39,396 2.24 44,018 1.45
Mobile home parks............... 104,861 5.73 101,712 5.78 86,799 2.86
Other (2)....................... 6,364 0.35 5,542 0.31 9,735 0.31
------------ ------- ------------ ------- ------------ -------
Total....................... $1,830,487 100.00% $1,758,562 100.00% $3,037,514 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- ----------------
(1) $0.6 million, $2.8 million and $46.8 million of these receivables were
covered by government credit support at June 30, 1996 and at December 31,
1995 and 1994, respectively.
(2) Includes land receivables of $190,000, $90,000 and $51,000 at June 30 1996,
December 31, 1995 and December 31, 1994, respectively.
Under applicable regulations, a savings association may invest in
commercial real estate loans up to 400.0% of its total risk-based capital. ASB
was in compliance with this limitation at June 30, 1996. The amount of
multi-family lending and single-family lending is not limited by federal
regulation.
Consumer Receivables. ASB has originated various types of consumer
loans generally consisting of unsecured lines of credit and loans that are
secured by personal property. These loans historically have been provided as a
service to existing customers and have not represented a significant portion of
ASB's business. In the first quarter of 1994, ASB sold the majority of its
credit card portfolio for a gain of approximately $25.0 million.
Receivables Held-for-Sale. ASB had designated $42.1 million of
receivables as held-for-sale at June 30, 1996. The held-for-sale portfolio at
June 30, 1996 primarily consisted of single-family fixed-rate receivables. The
buyers of receivables sold by ASB are primarily the Federal National Mortgage
Association (the "FNMA") and, to a lesser extent, the Federal Home Loan Mortgage
Corporation (the "FHLMC").
At the time of sale, Keystone Holdings retains the servicing for
substantially all of the loans it sells and, in turn, receives servicing fees.
Servicing activities include collecting and remitting loan payments, inspecting
the properties and ensuring that insurance and tax payments are made on behalf
of the borrowers. At June 30, 1996 and at December 31, 1995, Keystone Holdings
serviced $15.7 billion and $16.2 billion of receivables for investors,
respectively. Although most receivables are sold servicing retained, Keystone
Holdings has sold certain receivables servicing released.
ASB hedges certain of its mortgage commitments in an effort to manage
its exposure to movements in interest rates. Depending on the level of the
commitments hedged and actual movements in interest rates, ASB may incur gains
or losses upon disposition of these assets in the secondary market. The results
of these activities are included in "Other Income and Expense" in the
Consolidated Statements of Earnings. See "CONSOLIDATED FINANCIAL STATEMENTS OF
KEYSTONE HOLDINGS."
F-27
<PAGE> 174
Receivables Held-to-Maturity. Receivables not designated by management
as held-for-sale are classified as held-to-maturity with the intent of holding
these receivables to maturity. At June 30, 1996, ASB's held-to-maturity
receivables consisted primarily of single-family ARMs and, to a lesser extent,
multi-family, commercial and consumer loans.
Mortgage-Backed Securities. Total net mortgage-backed securities
decreased to $6.3 billion at June 30, 1996 from $7.0 billion at December 31,
1995. Substantially all mortgage-backed securities held by Keystone Holdings are
collateralized by mortgages originated and securitized by ASB for purposes of
diversifying credit risk, increasing liquidity and creating collateral for
borrowings.
Delinquent Receivables and Non-Performing Assets. When a borrower fails
to make a scheduled payment, the related receivable is classified as delinquent.
If the delinquency is not cured (through receipt of payments due or, in certain
instances, through formal modifications or restructurings), ASB sends a notice
of intent to foreclose on approximately the 35th day of delinquency, records a
notice of default and commences foreclosure proceedings on the 65th day of
delinquency.
The procedural steps necessary for foreclosure vary from state to
state, but generally if the loan is not reinstated within a certain period
specified by statute, the property securing the loan can be acquired by the
lender. In most cases, a lender is not permitted under California law to obtain
a deficiency judgment against the borrower if the property is insufficient to
cover the balance owed on the loan. While deficiency judgments are available in
several of the other states in which ASB has loans, it generally relies on the
underlying real property to satisfy foreclosed loans.
Interest is not recognized on receivables that are 90 days or more
contractually delinquent or where collection is less than probable ("nonaccrual
receivables"). Interest income is subsequently recognized on these receivables
only to the extent that payments are received.
Classification of Assets. Savings associations are required to review
and classify receivables and other assets according to risk on a regular basis.
An association generally classifies an asset, or a portion thereof, as
"substandard" if it has a well-defined weakness and is characterized by the
distinct possibility that the association will sustain some loss if the
deficiencies are not corrected. Assets classified as "doubtful" have the
weaknesses inherent in those classified substandard, with the added
characteristic that collection or liquidation in full on the basis of currently
existing facts is highly questionable and improbable. Those assets that are
classified as "loss" have been considered to be uncollectible. Any portion of an
asset that is classified as loss must have either a specific valuation allowance
equal to 100.0% of the balance classified as loss or be charged off. In
addition, an asset that does not currently warrant classification as substandard
but that demonstrates weaknesses or deficiencies deserving close attention is
required to be designated as "special mention." ASB monitors the level of assets
within each category and utilizes this information as one of the factors in
determining the appropriate level of credit allowances.
Allowance for Credit Losses. ASB establishes general loss allowances on
the outstanding portfolio and, where appropriate, specific loss allowances on
individual receivables. Specific loss allowances are provided when an impairment
of value which is deemed other than temporary is identified on an individual
receivable. Factors management considers when assessing the adequacy of the
allowance for credit losses include, but are not limited to, the nature and
value of the underlying collateral, the loan delinquency status, historical and
projected loss experience on foreclosed properties and the level and trend of
classified assets. As management utilizes information currently available to
make such an assessment, the allowance for credit losses is subjective and may
be adjusted in the future depending on changes in economic conditions or other
factors. Additionally, various regulatory agencies, as an integral part of their
regular examination process, review the allowance for estimated losses. These
agencies may require additions to the allowance based on their judgments of
information available to them at the time of their examination. See Note 6,
"Allowance for Credit Losses," in the Notes to the Consolidated Financial
Statements of Keystone Holdings for additional information on the allowance for
credit losses.
F-28
<PAGE> 175
INVESTING ACTIVITIES
OTS Applicable regulations require that ASB maintain a balance of
assets that are invested in certain eligible liquid investments. ASB maintains a
portfolio of investment securities in order to meet liquidity requirements and
to fulfill short-term cash needs. ASB's investment portfolio is managed to
emphasize liquidity, to preserve capital and to minimize credit risk. The
following tables summarize Keystone Holdings' investment securities classified
as available-for-sale on the dates indicated (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------
Gross
Unrealized
Amortized ---------------------- Fair
Cost Gain Loss Value
----------- ------- --------- --------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ............ $123,418 $ -- $ (1,613) $121,805
Corporate debt obligations -- $ -- -- --
-------- ------- -------- --------
Total ................ $123,418 $ -- $ (1,613) $121,805
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
------------------------------------------- -------------------------------------------
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- -------- ------ -------- --------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations ......................... $164,972 $ 407 $ -- $165,379 $ 90,021 $ -- $ (2,447) $ 87,574
Corporate debt obligations ............ -- -- -- -- 50,000 -- (1,625) 48,375
-------- -------- ------ -------- -------- ------ -------- --------
Total ............................... $164,972 $ 407 $ -- $165,379 $140,021 $ -- $ (4,072) $135,949
======== ======== ====== ======== ======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1993
--------------------------------------------
Gross
Amortized Unrealized Fair
Cost Gain Loss Value
--------- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations.................. $ -- $ -- $ -- $ --
Corporate debt obligations..... -- -- -- --
----- ----- ----- ---
Total........................ $ -- $ -- $ -- $ --
===== ===== ===== ====
</TABLE>
The following tables summarize Keystone Holdings' investment securities
classified as held-to-maturity on the dates indicated (in thousands):
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------
Gross
Unrealized
Amortized ---------------------- Fair
Cost Gain Loss Value
----------- ------- --------- --------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations.................. $ 6,008 $ 2 $ -- $ 6,010
Corporate debt obligations..... 100,087 -- (8) 100,079
-------- ----- ---- --------
Total...................... $106,095 $ 2 $(8) $106,089
======== ==== ==== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994
---------------------------------------- ------------------------------------------
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ------ ------ -------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agency
Obligations ...................... $ 19,693 $ -- $ -- $ 19,693 $ 23,847 $ -- $ -- $23,847
Corporate debt obligations ......... 97,035 -- (7) 97,028 63,167 1 (13) 63,155
-------- ------ ------- -------- -------- ------ ------ -------
Total ............................ $116,728 $ -- $ (7) $116,721 $ 87,014 $ 1 $ (13) $87,002
======== ====== ======= ======== ======== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
1993
----------------------------------------------
Gross
Amortized Unrealized Fair
Cost Gain Loss Value
--------- ----- ----- -------
<S> <C> <C> <C> <C>
U.S. government and agency
obligations.................. $18,790 $ -- $ -- $18,790
Corporate debt obligations..... 73,638 1 (12) 73,627
------- ---- ----- -------
Total........................ $92,428 $ 1 $ (12) $92,417
======= ==== ===== =======
</TABLE>
F-29
<PAGE> 176
Keystone Holdings limits its investment in commercial paper and in
debentures to investments rated at least A1/P1 and AAA, respectively.
Consequently, management considers the credit risk associated with these types
of investments to be minimal. Keystone Holdings minimizes the market risk
associated with these types of investments by limiting the maturities of
commercial paper and fixed-rate debentures to 90 days and five years,
respectively.
At June 30, 1996, Keystone Holdings had commercial paper totalling
$71.2 million issued by Ford Motor Company, representing 12.9% of Keystone
Holdings' stockholder's equity at that date. The market value of the Ford Motor
Company commercial paper approximated its carrying value on June 30, 1996.
See Note 3, "Investment Securities," in the Notes to the Consolidated
Financial Statements of Keystone Holdings for additional information.
FUNDING ACTIVITIES
Deposit accounts traditionally have been an important source of funds
for ASB's lending activities. In addition to deposits, ASB obtains funds from
loan repayments, sales of receivables and mortgage-backed securities, wholesale
borrowings, FHLB advances, reverse repurchase agreements and other borrowings.
Scheduled loan payments are a relatively stable source of funds, while loan
prepayments and deposit levels are significantly influenced by prevailing
interest rates and money market conditions.
Deposits. ASB's deposits are generated primarily from its sales force
located in the 158 retail branch offices throughout California. Deposits
declined slightly at June 30, 1996 from December 31, 1995. In order to attract
both short and long-term deposits from the general public, ASB offers a variety
of products including passbook accounts, NOW accounts, various money market and
savings accounts and certificates of deposit.
The following table summarizes the deposit account balances outstanding
on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- -----------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Demand and savings deposits:
Money market demand ............... $ 1,324,613 $ 1,425,243 $ 1,585,308 $ 1,945,614
Passbook .......................... 2,027,509 1,878,761 1,063,064 758,431
Money market savings .............. 375,724 415,886 564,298 693,242
Super passbook .................... 143,251 173,826 400,525 607,550
Other ............................. 108 237 383 10,297
------------ ------------ ------------ ------------
Total demand and savings deposits 3,871,205 3,893,953 3,613,578 4,015,134
------------ ------------ ------------ ------------
Time deposits:
Fixed Rate ........................ 8,873,365 9,126,012 9,217,044 9,353,918
Other ............................. 40 247 365 2,867
------------ ------------ ------------ ------------
Total time deposits ............. 8,873,405 9,126,259 9,217,409 9,356,785
------------ ------------ ------------ ------------
Unearned premium .................... -- -- 313 2,198
Deferred hedging costs .............. (15,644) (15,183) (15,811) (6,477)
------------ ------------ ------------ ------------
Total ......................... $ 12,728,966 $ 13,005,029 $ 12,815,489 $ 13,367,640
============ ============ ============ ============
</TABLE>
Time deposit accounts with balances of $100,000 or greater aggregated
$1.7 billion and $1.8 billion at June 30, 1996 and December 31, 1995,
respectively. At June 30, 1996, time deposit accounts with balances of $100,000
or greater mature as follows: $557.8 million within three months, $458.0 million
in three to six months, $551.0 million in six to twelve months, and $180.3
million thereafter. At December 31, 1995, time deposit accounts with balances of
$100,000 or greater matured as follows: $1.4 billion within three months, $177.2
million in three to six months, $102.0 million in six to twelve months, and
$98.9 million thereafter.
F-30
<PAGE> 177
The following table summarizes average deposit balances by category for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
------------------------------------------------------
1996 1995
Average Average
Balance(1) Rate Balance(1) Rate
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Money market demand accounts...... $894,591 0.81% $909,584 1.01%
Savings accounts.................... 2,940,489 3.36% 3,027,627 3.54%
Time deposit accounts............... 8,925,101 5.47% 9,374,031 5.41%
----------- ------ ----------- ------
Total deposits............. $12,760,181 4.65% $13,311,242 4.68%
=========== ====== =========== ======
</TABLE>
- -----------------
(1) Average balances calculated on a monthly basis.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1995 1994 1993
--------------------------- ---------------------------- --------------------------
Average Average Average
Balance(1) Rate Balance(1) Rate Balance(1) Rate
------------ ------- ------------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Money market demand accounts........ $909,383 0.91% $963,857 1.03% $983,330 1.29%
Savings accounts.................... 3,087,775 3.84% 2,864,716 2.26% 3,308,896 2.41%
Time deposit accounts............... 9,327,026 5.46% 9,242,465 4.41% 9,488,159 4.44%
----------- ------ ----------- ------ ----------- ------
Total deposits............. $13,324,184 4.78% $13,071,038 3.69% $13,780,385 3.73%
=========== ====== =========== ====== =========== ======
</TABLE>
- -----------------
(1) Average balances calculated on a monthly basis.
For additional information on deposits see Note 12, "Deposits," in the
Notes to the Consolidated Financial Statements of Keystone Holdings.
FHLB Advances and Other Borrowings. In addition to deposits, ASB
utilizes borrowings from the FHLB of San Francisco as a source of funds,
pledging as security its shares of FHLB of San Francisco stock and certain
receivables and mortgage-backed securities. At June 30, 1996, FHLB of San
Francisco advances are secured by ASB's investment in FHLB stock of $180.3
million and receivables and mortgage-backed securities with aggregate principal
balances of $1.8 billion and $91.4 million, respectively. The maximum amount of
credit that the FHLB of San Francisco will advance for purposes other than
meeting withdrawals varies from time to time in accordance with changes in
policy of the FHLB of San Francisco.
In order to meet cash flow requirements and fund receivables, ASB also
enters into reverse repurchase and dollar roll agreements, consisting of sales
of securities with a concurrent commitment to repurchase the same or similar
securities at a predetermined price at a future date. ASB generally borrows 97%
of the fair value of the collateral from broker-dealers and 100% of the fair
value of the collateral from the FHLB. In these transactions, ASB sells
securities to broker-dealers and the FHLB of San Francisco with a concurrent
commitment to repurchase securities from the broker-dealer and the FHLB of San
Francisco at a specified price on a specified future date, typically one to 90
days after the date of the initial purchase. However, ASB has entered into
transactions as long as five years based on the economic benefit derived from
these transactions. Reverse repurchase agreements are subject to certain risks,
including the risk that the broker-dealer will fail to perform its obligations.
ASB attempts to reduce such risks by, among other things, entering into such
agreements only with well-capitalized broker-dealers who are primary dealers in
government securities, reviewing on a regular basis the financial status of such
broker-dealers, limiting the maximum amount of agreements permitted to be
outstanding at any time with any single broker-dealer and requiring the return
of securities if the market value of the purchased securities rises above levels
specified in such agreements. Although ASB believes that these procedures reduce
the risks of reverse repurchase agreements, there is no assurance that it would
be able to obtain the purchased securities in the event that a broker-dealer
fails to perform its obligations under a reverse repurchase agreement.
F-31
<PAGE> 178
The following table summarizes information concerning Keystone
Holdings' borrowings outstanding on the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances............................... $2,013,439 $1,004,337 $ 391,366 $1,537,663
Reverse repurchase agreements............... 3,987,359 4,016,441 3,982,659 1,034,595
Federal funds purchased..................... -- -- 50,000 --
Payable to affiliates....................... 25,000 -- -- 10,000
Other borrowed money........................ 493,734 371,079 309,653 308,721
----------- ----------- ----------- ----------
Total................................... $6,519,532 $5,391,857 $4,733,678 $2,890,979
========== ========== ========== ==========
Total borrowings as a percentage of:
Deposits.................................. 51.22% 41.46% 36.94% 21.63%
Total assets.............................. 31.83% 27.36% 25.72% 16.79%
</TABLE>
See Note 13, "Federal Home Loan Bank Advances," Note 14, "Reverse Repurchase
Agreements," and Note 15, "Other Borrowed Money" in the Notes to the
Consolidated Financial Statements of Keystone Holdings for additional
information, including the contractual maturity of outstanding borrowings.
ASSET LIABILITY MANAGEMENT
Keystone Holdings controls the sensitivity of its net interest income
to fluctuations in interest rates by closely matching the maturities and
interest rates of its interest-earning assets and interest-bearing liabilities.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KEYSTONE HOLDINGS -- Asset/Liability Management."
TAXATION
For federal income tax purposes, Keystone Holdings reports its income
and expenses using the accrual method of accounting and uses the calendar year
as its tax year. Except for interest expense rules pertaining to certain tax
exempt income applicable to banks and the recently repealed bad debt reserve
deduction, the Keystone Entities are subject to federal income tax, under
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code") in generally the same manner as other corporations. As a result of the
1988 Acquisition, however, Keystone Holdings and certain subsidiaries, in
exchange for the ability to utilize certain net operating loss carryforwards
generated by the Failed Association, agreed to share certain federal income tax
benefits with the FRF. See "KEYSTONE HOLDINGS STRUCTURE -- The 1988 Acquisition
- -- Tax Related Agreements." Recently enacted legislation requires thrifts to
calculate tax bad debt deductions based on actual current loan losses. Such
legislation also requires ASB to recapture as ordinary income its post-1987 tax
bad debt reserves over a six-year period. Such post-1987 reserves have been
provided for in calculating the deferred tax asset set forth in the Consolidated
Financial Statements of Keystone Holdings attached as Appendix B. However, the
useable value of the net operating loss carryforward deductions involved in the
deferred tax asset calculations will be severely reduced due to the Keystone
Transaction.
PROPERTIES
ASB owns its principal office building in Stockton, California, 96 of
its 158 branch offices and 13 of its 51 other facilities. ASB leases 62 branches
and 38 other facilities for periods through 2061. ASB also leased its executive
offices in Irvine, California during 1994. Effective January 1995, ASB acquired
the Irvine Plaza Buildings in Irvine, California, which house ASB's executive
offices as well as various other departments.
F-32
<PAGE> 179
LEGAL PROCEEDINGS
Keystone Holdings and its subsidiaries are defendants in various legal
actions that arise out of the normal course of business. In the opinion of
management, the probable liability resulting from these suits, individually or
in the aggregate, is unlikely to have a material effect on Keystone Holdings.
As part of the administration and oversight of the agreements between
Keystone Holdings and the FRF, among others, related to the 1988 Acquisition
(the "FRF Agreements"), the FDIC has a variety of review and audit rights,
including the right to review and audit computations of payments in lieu of
taxes. Keystone Holdings and its affiliates have entered into settlement
agreements (the "Settlement Agreements") with the FDIC for all periods through
June 30, 1994, pursuant to which Keystone Holdings and certain of its affiliated
parties and the FDIC have mutually settled and released all claims in
consideration of certain nominal payments. Keystone Holdings has received no
notice of any issues involving more than nominal amounts arising after June 30,
1994. The FDIC Office of Inspector General has commenced an audit of certain
transactions and payments under the FRF Agreements occurring during the period
beginning July 1, 1994 and ending June 30, 1996. See "THE KEYSTONE TRANSACTION."
MANAGEMENT
The following table sets forth the names, ages and titles of the
directors and executive officers of Keystone Holdings as of October 1, 1996:
Name Age Title
---- --- -----
David Bonderman 53 Director and President
Bernard J. Carl 48 Director
James G. Coulter 36 Director
Ray L. Pinson 39 Senior Vice President, Secretary and Treasurer
The following table sets forth the names, ages and titles of the
directors and executive officers of ASB as of October 1, 1996:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Mario J. Antoci 62 Chairman of the Board and Chief Executive Officer
Robert T. Barnum 50 Director, President and Chief Operating Officer
David Bonderman 53 Director
Bernard J. Carl 48 Director
James G. Coulter 36 Director
J. Taylor Crandall 42 Director
Robert B. Henske 35 Director, Executive Vice President and Chief Financial Officer
John D. Broderick 54 Executive Vice President and Director of Retail Banking
Craig S. Davis 45 Executive Vice President and Director of Mortgage Origination
John R. Donohue 53 Executive Vice President and Director of Lending Portfolio Management
Jimmy D. Holland 48 Executive Vice President, General Counsel and Secretary
Mary P. Locatelli 46 Executive Vice President and Director of Audit and Compliance Officer
</TABLE>
Mario J. Antoci. Mario J. Antoci has more than 30 years of financial
services experience. He has served ASB as Chairman and Chief Executive Officer
since 1988. Prior to his employment with ASB, Mr. Antoci was President and Chief
Operating Officer of Home Savings of America, the nation's largest savings and
loan association, and its parent company, H.F. Ahmanson and Co., for four years.
He was a member of Home Savings' Board of Directors from 1982 to 1988. Mr.
Antoci will resign as Chairman and Chief Executive Officer of ASB effective as
of the closing of the Keystone Transaction. See "MANAGEMENT AND OPERATIONS
FOLLOWING THE KEYSTONE TRANSACTION -- Operations Following the Keystone
Transaction."
Robert T. Barnum. Robert T. Barnum has served ASB as President and
Chief Operating Officer since 1992. He joined ASB in 1989 as a Director,
Executive Vice President and Chief Financial Officer. Previously, Mr. Barnum was
Chief Financial Officer for First Nationwide Corp. of San Francisco, California
and Executive
F-33
<PAGE> 180
Vice President and Chief Financial Officer for the Krupp Companies, a
Boston-based builder-syndicator and savings and loan holding company. Currently,
he serves as a director for National Re Holdings Corp., a reinsurance holding
company in Stanford, Connecticut and Harborside Healthcare Corp. of Boston,
Massachusetts. See "MANAGEMENT AND OPERATIONS FOLLOWING THE KEYSTONE TRANSACTION
- -- Operations Following the Keystone Transaction."
David Bonderman. David Bonderman has been a Director of each of
Keystone Holdings and ASB since 1989. Mr. Bonderman is a Principal of Texas
Pacific Group, an investment entity. From 1983 until 1992, Mr. Bonderman was
Chief Operating Officer of Keystone, Inc. (formerly Robert M. Bass Group, Inc.),
a company owned by Robert M. Bass and principally engaged in investment
activities. KH Group Management, Inc., a corporation of which Mr. Bonderman is
the sole director and president, is the managing general partner of Keystone
Partners. He is a director of National Re Holdings Corp., a reinsurance holding
company, Bell & Howell Company, Inc., an information handling, storage and
retrieval company, Carr Realty Co., a real estate investment trust, and is
Chairman of the Board of Continental Airlines, Inc.
John D. Broderick. John D. Broderick joined ASB as Executive Vice
President and Director of Retail Banking in January 1996. In this capacity, he
oversees the strategic direction and operation of ASB's branch network and
retail operations. Previously, Mr. Broderick was Chairman and Chief Executive
Officer of San Francisco, California-based ITT Residential Capital Corporation.
He also has served as an Executive Vice President of First New Hampshire Bank
and Crocker National Bank.
Bernard J. Carl. Bernard J. Carl has been a director of each of
Keystone Holdings and ASB since 1988. Mr. Carl is the Managing General Partner
of Castine Partners, an investment partnership associated with Keystone, Inc. In
this capacity, Mr. Carl had lead responsibility for the 1988 acquisition of ASB,
negotiation of the Settlement Agreements, and the 1993 acquisition of the Brazos
Partners, L.P. portfolio. Before joining Castine, Mr. Carl was in charge of
product development for the mortgage, real estate and financial institutions
group at Salomon Brothers Inc; a partner in the law firm of Williams & Connolly;
an appointee to the President's Commission on Housing; chief policy official of
the U.S. Department of Housing and Urban Development (HUD); and law clerk to
U.S. Supreme Court Justice Thurgood Marshall.
James G. Coulter. James G. Coulter has been a Director of each of
Keystone Holdings and ASB since 1992. Mr. Coulter is a Managing Partner of Texas
Pacific Group. From 1986 until 1992, Mr. Coulter was a Vice President of
Keystone, Inc. From 1986 to 1988, Mr. Coulter was also associated with SPO
Partners. Prior to joining Keystone, Inc., Mr. Coulter was an analyst for Lehman
Brothers Kuhn Loeb, Inc. Mr. Coulter is a director of America West Airlines,
Inc., Virgin Cinemas Ltd., Allied Waste Industries, Inc., Beringer Wine Estates
and Paradyne, Inc.
J. Taylor Crandall. J. Taylor Crandall has been a Director of ASB since
December 1988. He has been Chief Financial Officer and Vice President of
Keystone, Inc. and President of Acadia MGP, Inc., a general partner of Acadia
Partners, L.P., an investment partnership. In addition, since August 1989, Mr.
Crandall has been a Vice President of National Re Holdings Corp., and he served
as Treasurer of that company until June 1990 and has been one of its directors
since November 1989. From July 1976 to October 1986, Mr. Crandall was employed
by The First National Bank of Boston, where he was Vice President-Corporate
Lending at the time of his departure. Mr. Crandall is also a director of Bell &
Howell Company, Inc. and Specialty Foods Acquisition Corporation.
Craig S. Davis. Craig S. Davis has served ASB as Executive Vice
President and Director of Mortgage Origination since 1993. In this capacity, he
directs the strategic operation of ASB's residential and wholesale lending
operations. Mr. Davis joined ASB in 1989 to establish ASB Financial Services,
Inc., a subsidiary offering investments and insurance products, and served as
President of that subsidiary until his appointment to head Mortgage Origination.
Prior to joining ASB, Mr. Davis helped co-found and direct Home Savings of
America's broker-dealer operations, Griffin Financial Services.
John R. Donohue. John R. Donohue has served ASB as Executive Vice
President and Director of Lending Portfolio Management since 1993. In this
capacity, he oversees ASB's credit and lending operations. Mr. Donohue
F-34
<PAGE> 181
came to ASB after 16 years at Oakland-based World Savings, where he most
recently served as Group Senior Vice President, Loan Underwriting and Human
Resources.
Robert B. Henske. Robert B. Henske joined ASB as Executive Vice
President and Chief Financial Officer in January 1996. In this capacity, he
oversees all aspects of ASB's financial operations. Previously, Mr. Henske was
Vice President of Boston, Massachusetts-based Bain & Company. He also has served
as Vice President of First Manhattan Consulting Group.
Jimmy D. Holland. Jimmy D. Holland has served ASB as Executive Vice
President and General Counsel since 1991 and as Corporate Secretary since July
1992. From 1990 to 1991, Mr. Holland was General Counsel of American Real Estate
Group, Inc. and New West. Mr. Holland also specialized in finance and corporate
matters in private practice during six years as a director of Kelly, Hart &
Hallman, P.C., a Fort Worth, Texas law firm. During this period, he participated
in the representation of Keystone Holdings in the 1988 Acquisition.
Mary Locatelli. Mary Locatelli has served ASB as Executive Vice
President and Director of Audit and ASB's Compliance Officer since 1992. Ms.
Locatelli joined ASB in 1990 as First Vice President, Audit and Compliance
Officer. Previously, she was a Partner at Ernst & Young.
Ray L. Pinson. Ray L. Pinson has been Senior Vice President, Secretary
and Treasurer of Keystone Holdings since 1993. Since July 1990, Mr. Pinson has
been an analyst with Bass Enterprises Production Co. under contract to act as a
full-time consultant to ASB's holding companies, including Keystone Holdings.
From September 1988 until July 1990, Mr. Pinson was employed as a consultant to
Ferguson and Company, a consulting firm active in the savings association
industry. Mr. Pinson is a certified public accountant.
KEYSTONE HOLDINGS COMMON STOCK; DIVIDENDS
The authorized capital stock of Keystone Holdings consists of 100,000
shares of Keystone Holdings Common Stock. As of the date of this Proxy
Statement, there were 1,048.4483 shares of Keystone Holdings Common Stock issued
and outstanding. All of the issued and outstanding shares of Keystone Holdings
Common Stock are held by Keystone Holdings Partners L.P. There is no established
trading market for Keystone Holdings Common Stock and the shares of Keystone
Holdings Common Stock do not trade.
At June 30, 1996, ASB was a "well capitalized" institution as defined
by the OTS and was a "Tier 1" institution for purposes of OTS dividend
regulations. Under OTS regulations, ASB may make capital distributions during a
calendar year up to the greater of: (i) 100% of net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" at the beginning of the calendar year, or (ii) 75% of net income over the
most recent four-quarter period. ASB's available dividend capacity under these
regulations was $134.7 million at June 30, 1996 and $126.3 million at December
31, 1995.
It is the intent of the management of Keystone Holdings to operate ASB
as a "well-capitalized" institution. Therefore, ASB's dividend policy
incorporates OTS dividend requirements, planned balance sheet growth, and
certain earnings contingencies, such as an anticipated one-time SAIF assessment.
Keystone Holdings' dividends have been dependent on dividend payments
made by its subsidiary, New Holdings, whose dividends have been dependent on
dividend payments made by New Capital. The amount of dividends paid are in
accordance with the provisions of certain debt covenants, called restricted
payments, applicable to New Capital and the timing of the dividend payments is
determined by the timing of certain cash flows arising from certain tax sharing
payments that are made in accordance with an intercompany tax sharing agreement.
Keystone Holdings paid dividends of $76.3 million, $29.0 million, $32.5 million,
and $5.6 million in 1992, 1993, 1994, and 1995, respectively. The 1995 dividend
was lower than prior years due to the increase in capital at ASB in anticipation
of a one-time SAIF assessment and the timing of the 1995 tax sharing payments.
Keystone Holdings has declared dividends totalling $60.0 million in 1996 and
does not intend to declare further dividends in 1996.
F-35
<PAGE> 182
KEYSTONE HOLDINGS
GENERAL
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. NACH Inc. owns all of the outstanding common stock of
ASB. NACH Inc. is owned by New Capital whose common stock is owned by New
Holdings, a subsidiary of Keystone Holdings. The Keystone Group is comprised of
Keystone Holdings and its direct and indirect subsidiaries. The holding company
structure of the Keystone Group and related companies is shown on the following
diagram.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
-------------------------------------
Keystone Holdings
-------------------------------------
- --------------------- -------------------------------------
New West New Holdings
- --------------------- -------------------------------------
-------------------------------------
New Capital
-------------------------------------
------------------------------------- -----------------
NACH, Inc. Warrants FRF
------------------------------------- ------------ -----------------
-------------------------------------
ASB
-------------------------------------
</TABLE>
Substantially all of Keystone Holdings consolidated assets consist of
the consolidated assets of ASB, and at June 30, 1996, 97.8% of Keystone
Holdings' consolidated liabilities consisted of ASB's consolidated liabilities.
Substantially all of Keystone Holdings' remaining consolidated liabilities
consisted of indebtedness issued by New Capital. Thus, substantially all of the
earnings of Keystone Holdings consist of its equity in the earnings of ASB, less
the interest costs on an aggregate of $364.5 million principal amount of debt of
New Capital. Keystone Holdings' equity in the earnings of ASB is further reduced
by the minority interest represented by the warrants held by the FRF (see
"KEYSTONE HOLDINGS STRUCTURE -- The Warrants"), as well as by $80.0 million in
outstanding preferred stock issued by New Capital. Keystone Holdings reported
earnings before taxes of $102.2 million and $34.8 million for the six months
ended June 30, 1996 and 1995, respectively. Net earnings were $53.6 million and
$25.5 million for the same periods. American reported consolidated net earnings
of $93.6 million and $62.5 million for the six months ended June 30, 1996 and
1995, respectively.
F-36
<PAGE> 183
The following schedule reconciles the differences between ASB's consolidated net
earnings and Keystone Holdings' consolidated net earnings for the first six
months of 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993
(in millions of dollars):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
-------------------------- -------------------------------------
1996 1995 1995 1994 1993
------------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
ASB's consolidated net earnings.................. $93.6 $62.5 $148.5 $109.2 $114.6
Minority interest attributable to the Warrants... (13.9) (14.3) (14.6) (21.8) (9.6)
Intermediate holdings companies' separate
income and expenses:
Gain on sale of asset management rights..... -- -- -- -- 23.0
Interest expense............................ (15.0) (16.2) (32.6) (26.7) (26.1)
Amortization of the Warrant value........... (3.1) (3.2) (6.2) (6.8) (8.0)
Loss on early extinguishment of debt........ -- (2.1) (2.1) -- --
General and administrative expenses......... (0.2) (0.3) (0.7) (0.9) (8.6)
------- ------- ------- ------- -------
61.4 26.4 92.3 53.0 85.3
Minority interest attributable to intermediate
holding company preferred...................... (7.0) (0.5) (6.5) (0.8) (0.8)
Separate net loss of Keystone Holdings........... (0.8) (0.4) (1.0) (1.9) (2.2)
------- ------- ------- ------- -------
Keystone Holdings consolidated net earnings...... $53.6 $25.5 $84.8 $50.3 $82.3
===== ===== ===== ===== =====
</TABLE>
THE 1988 ACQUISITION
General
ASB was formed to effect the 1988 Acquisition of certain assets and
liabilities of the Failed Association. The 1988 Acquisition had a "good bank/bad
bank" structure, with ASB, the "good bank," acquiring substantially all of the
Failed Association's performing loans, fixed assets and deposit liabilities.
ASB's sister association, New West, the "bad bank," was formed to acquire the
Failed Association's other assets (including non-performing loans) and
liabilities, with a view towards their liquidation. As a result of the 1988
Acquisition, ASB received a note (the "New West Note") from New West with an
initial outstanding principal amount of $7.8 billion (representing the
difference between the amount of deposits and other liabilities assumed and the
value of the assets acquired by ASB at the time of the 1988 Acquisition). The
then outstanding balance on the New West Note was prepaid in full on October 24,
1995. In the 1988 Acquisition, the Failed Association's assets and liabilities
acquired or assumed by ASB were marked to market.
At the time of the 1988 Acquisition, the FSLIC, with the approval of
the Federal Home Loan Bank Board (the "FHLBB"), entered into the FRF Agreements
with Keystone Holdings and its affiliates. Among other things, these
arrangements provided Keystone Holdings and its affiliates with protection
against certain credit risks associated with the assets acquired from the Failed
Association and provided for the availability and allocation of tax benefits
arising from the assets and operations of New West and loss carryovers inherited
from the Failed Association. As a result of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), certain assets and liabilities
of the FSLIC, including those arising from the 1988 Acquisition, have been
assigned to and assumed by the FRF, a special fund managed by the FDIC.
In April 1993, Keystone Holdings and certain of its affiliates entered
into the Settlement Agreement with the FDIC to settle certain existing disputes
between the parties relating to their respective rights and obligations under
the various agreements entered into in connection with the Acquisition. In June
1993, Keystone Holdings and its affiliates entered into a transaction (the
"Restructuring") with the FDIC and the Resolution Trust Corporation (the "RTC"),
which served to modify a number of the credit support and other arrangements
that had been put in place at the time of the 1988 Acquisition. The terms of the
1988 Acquisition arrangements described below are those in effect after the 1993
settlement agreement and the Restructuring unless otherwise indicated.
F-37
<PAGE> 184
Prior to consummation of the Keystone Transaction, it is anticipated
that these arrangements will be renegotiated, with a view to the simplification
and elimination of their most complex aspects. It is not anticipated that any
material assistance from the United States government will continue after
consummation of the Keystone Transaction. However, the obligation to share
certain tax benefits with the FRF will continue. See "THE KEYSTONE TRANSACTION."
In connection with the 1988 Acquisition, Keystone Holdings and its
subsidiaries entered into a variety of agreements relating to credit loss
protection and other matters. Many of the provisions of these agreements have
been modified or eliminated as a result of events following the 1988
Acquisition, including the Restructuring. The following are the principal
remaining agreements.
Credit Loss Protection and Other FRF Assistance
ASB receives direct FRF assistance on certain of ASB's assets. The
assets receiving this assistance consist of (i) certain identified loans and REO
properties that have become more than 61 days delinquent since the 1988
Acquisition, (ii) any loans which ASB is required to repurchase or to provide a
substitute loan for as a result of one or more participation interests therein
sold by the Failed Association and (iii) any loan or REO acquired by ASB in the
1988 Acquisition that is or becomes affected by certain environmental
conditions. The direct assistance provided by the FRF with respect to these
assets consists of the payment by the FDIC to ASB of (i) monthly yield
maintenance that provides an annual rate of 175 basis points over COFI, (ii)
capital loss protection upon sale or other disposition (generally, the
difference between the net proceeds from disposition and the then current
carrying value of the assets), and (iii) reimbursement of all out-of-pocket
costs and expenses relating to the holding, operation and resolution of the
assets (collectively, the "Direct FRF Assistance").
The FRF has agreed to indemnify, among others, Keystone Holdings, ASB,
New Capital and New West against all liabilities, subject to certain exceptions,
relating to the Failed Association existing prior to the effective date of the
1988 Acquisition and legal challenges relating to the 1988 Acquisition. Pursuant
to these provisions, the FDIC assumed defense of a statutory notice of
deficiency resulting from an audit by the Internal Revenue Service of Financial
Corporation of America's consolidated tax returns for the years 1982, 1983 and
1984. See Note 23, "Commitments and Contingencies," in the Notes to the
Consolidated Financial Statements of Keystone Holdings. In addition, with
respect to loans or REO that qualify for Direct FRF Assistance. Keystone
Holdings and its subsidiaries will also receive indemnification from the FDIC
with respect to liabilities incurred in connection with third-party claims
relating to the ownership or management by ASB thereof (other than claims
resulting from ASB's gross negligence or willful misconduct). These
indemnifications are expected to terminate at the end of 1998, except that
certain environmental indemnities will continue for longer periods.
Tax-Related Agreements
In connection with the 1988 Acquisition, the Internal Revenue Service
entered into a closing agreement (the "Closing Agreement") with respect to the
federal income tax consequences of the 1988 Acquisition and certain aspects of
the taxation of the affiliated group of which Keystone Holdings is the common
parent (the "Keystone Group"). The Closing Agreement contains provisions that
were intended to ensure that losses expected to be generated by New West would
be available to offset income of ASB for federal income tax purposes. To
accomplish this, the Closing Agreement provides, among other things, that: (a)
the 1988 Acquisition was a tax-free reorganization, (b) the tax attributes of
the Failed Association, including NOLs and tax loan loss reserves, carried over
to ASB, (c) as long as ASB qualifies as a domestic building and loan association
and New West is its nominee, any assistance received or accrued from the FRF
would be excluded from gross income, and (d) as long as certain conditions (the
"nominee conditions") existed, New West would be a nominee for ASB with the
result that all of New West's income, deductions, gains and losses would be
treated as ASB's income, deductions, gains and losses. In connection with the
Restructuring, the Keystone Group received a closing agreement from the Internal
Revenue Service to the effect that the Closing Agreement remains in effect.
The California Franchise Tax Board issued an opinion letter with
provisions substantially similar to the Closing Agreement; thus, New West's
losses similarly should be available to offset ASB's income for California
franchise tax purposes. No additional rulings or opinion letters were sought
from the California Franchise Tax
F-38
<PAGE> 185
Board in connection with the Restructuring; however, management believes that
the Keystone Group may continue to rely on its earlier opinion letters. In 1993,
California enacted legislation reducing the NOL carryover period to 10 years
from 15 years for losses incurred prior to 1994 related to assets acquired in a
tax-free reorganization such as that used in the 1988 Acquisition.
Even if New West's losses offset ASB's income for federal income and
California franchise tax purposes, the Keystone Group may still have alternative
minimum tax liability. Federal legislation enacted in 1993 retroactively
disallowed certain losses and bad debt deductions relating to assets acquired in
a federally assisted transaction. This legislation reduced Keystone Holdings'
federal net operating loss carryover by approximately $455 million. The federal
loss carryovers available to Keystone Holdings as of December 31, 1995, based on
tax returns as filed total approximately $3.9 billion; such net operating loss
carryovers are principally attributable to New West. The deductibility of these
loss carryovers will be significantly limited under Section 382 of the Code for
periods after the closing of the Keystone Transaction.
On October 24, 1995, when the New West Note was prepaid in full, New
West and ASB ceased to meet the nominee conditions. Accordingly, the tax
benefits generated by any future losses of New West may not offset ASB's taxable
income, although the benefit of utilizing existing significant tax loss
carryovers will continue.
The FRF Agreements are designed, in part, to provide that over time,
75% of most of the federal tax savings and 19.5% of most of the California tax
savings (in each case computed in accordance with specific provisions contained
in the FRF Agreements) attributable to the Keystone Group's utilization of any
current losses or tax loss carryovers of New West are paid by Keystone Holdings
to New West for the benefit of the FRF. The provision for such payments is
reflected in Keystone Holdings' financial statements as "Payments in Lieu of
Taxes." These payments have historically been funded primarily through an
intercompany tax sharing agreement between Keystone Holdings and its
subsidiaries. In connection with the negotiation of the Merger Agreement,
Keystone Holdings, certain of its subsidiaries and the FDIC entered into a tax
settlement agreement dated July 21, 1996 which clarifies the treatment under
these agreements of certain items relating to bad debts. See "MANAGEMENT AND
OPERATIONS OF WASHINGTON MUTUAL FOLLOWING THE KEYSTONE TRANSACTION -- Operations
After The Keystone Transaction."
THE WARRANTS
In connection with the 1988 Acquisition, the FSLIC received the
Warrants entitling the holder thereof to purchase, for a nominal price, shares
of Class B Common Stock of NACH Inc. that represent (after certain dividend
preferences) an interest of approximately 30% in NACH Inc. The FRF became the
holder of the Warrants as a result of the enactment of FIRREA. The Warrants will
be exchanged for shares of Common Stock in connection with the consummation of
the Keystone Transaction. See "THE KEYSTONE TRANSACTION."
REGULATION AND SUPERVISION
Keystone Holdings and ASB are subject to extensive supervision and
regulation by various federal regulators, including the OTS and the FDIC.
Keystone Holdings and ASB are regulated in the same manner as Washington Mutual
and its wholly-owned federally chartered savings bank, Washington Mutual Bank
fsb, respectively. For a discussion of such regulation and supervision, see
Washington Mutual's Annual Report on Form 10-K for the year ended December 31,
1995, which is incorporated herein by reference. See "PROXY STATEMENT/PROSPECTUS
- -- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "PROXY
STATEMENT/PROSPECTUS -- AVAILABLE INFORMATION."
F-39
<PAGE> 186
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KEYSTONE HOLDINGS
The following discussion of the financial condition and results of
operations of Keystone Holdings should be read in conjunction with the
Consolidated Financial Statements of Keystone Holdings, Inc. and Subsidiaries
and the Condensed Consolidated Financial Statements of Keystone Holdings, Inc.
and Subsidiaries, including the notes thereto, appearing elsewhere in this Proxy
Statement.
Keystone Holdings is an indirect holding company for ASB. At June 30,
1996, substantially all of Keystone Holdings' consolidated assets consist of the
consolidated assets of ASB; 97.8 percent of Keystone Holdings' consolidated
liabilities consisted of ASB's consolidated liabilities. Substantially all of
Keystone Holdings' remaining consolidated liabilities consisted of indebtedness
issued by New Capital. Thus, substantially all of the earnings of Keystone
Holdings consist of its equity in the earnings of ASB, less the interest costs
on the principal amount of New Capital debt. Keystone Holdings' equity in the
earnings of ASB is further reduced by the minority interest represented by the
Warrants held by the FRF, as well as by $80.0 million of outstanding preferred
stock issued by New Capital. Keystone Holdings reported earnings before taxes of
$102.2 million and $34.8 million for the six months ended June 30, 1996 and
1995, respectively. Net earnings were $53.6 million and $25.5 million for the
same periods. ASB reported consolidated net earnings of $93.6 million and $62.5
million for the six months ended June 30, 1996 and 1995, respectively. See
"KEYSTONE HOLDINGS STRUCTURE -- General."
On September 30, 1996, President Clinton signed legislation intended to
recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce the
gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums, among
other things. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amount to 1.3
cents per $100 per year.
Keystone Holdings' special assessment will result in an estimated
pretax charge of about $88.1 million. Even though the one-time charge, to be
taken in the quarter ended September 30, 1996, will have a severe negative
impact on the results of operations for that quarter, management believes the
legislation to be in the best interests of Keystone Holdings. Based on current
levels of deposits, Keystone Holdings estimates that the reduction in the
regular assessment on its SAIF deposits beginning in 1997 should result in
annual pretax savings of approximately $21.2 million. Neither the one-time
charge, nor the annual savings thereafter should have a material impact on
Keystone Holdings' financial position, capital level or liquidity.
F-40
<PAGE> 187
SUMMARY FINANCIAL INFORMATION FOR KEYSTONE HOLDINGS
For the Six-Month
<TABLE>
<CAPTION>
Period Ended June 30, For the Year Ended December 31,
-------------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income .............. $ 706,720 $ 636,301 $ 1,337,126 $ 1,036,863 $ 1,117,269 $ 1,357,076 $ 1,629,827
Total interest expense ............. 469,096 470,602 962,712 683,487 691,146 845,613 1,125,609
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income ................ 237,624 165,699 374,414 353,376 426,123 511,463 504,218
Provision for credit losses ........ 35,180 34,533 63,837 101,609 123,503 143,650 63,400
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision
for credit losses ................ 202,444 131,166 310,577 251,767 302,620 367,813 440,818
Other income ....................... 42,120 48,224 90,465 102,292 94,001 76,617 75,724
General and administrative expenses (134,870) (136,130) (264,827) (266,827) (279,694) (298,599) (312,218)
Net expense of foreclosed properties (7,496) (8,467) (18,032) (13,390) (12,951) (10,065) (1,235)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings before taxes .............. 102,198 34,793 118,183 73,842 103,976 135,766 203,089
Federal and state income taxes and
payments in lieu of taxes ........ 27,685 (5,439) 12,289 897 11,245 31,983 85,221
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings from operations ........... 74,513 40,232 105,894 72,945 92,731 103,783 117,868
Cumulative effect of change in
accounting principle ............. -- -- -- -- -- 60,045 --
Minority interest in earnings of
consolidated subsidiaries ........ 20,896 14,708 21,092 22,621 10,474 883 874
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings ....................... $ 53,617 $ 25,524 $ 84,802 $ 50,324 $ 82,257 $ 162,945 $ 116,994
=========== =========== =========== =========== =========== =========== ===========
Common dividends declared .......... $ 60,000 $ 5,500 $ 5,587 $ 22,500 $ 18,000 $ 97,300 $ 49,000
</TABLE>
FINANCIAL CONDITION
At June 30, 1996, December 31, 1995 and December 31, 1994, Keystone
Holdings' total consolidated assets were $20.5 billion, $19.7 billion and $18.4
billion, respectively. Consolidated stockholder's equity was $550.4 million at
June 30, 1996, representing a $118.2 million or 17.7 percent decrease from the
balance at December 31, 1995. The decrease from December 31, 1995 to June 30,
1996 was largely attributable to the change in unrealized holding gains (losses)
on available-for-sale securities of $111.8 million, which have been recorded at
fair value in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). Total dividends declared on common stock during the six months ended June
30, 1996 were $60.0 million. Stockholder's equity at December 31, 1995 increased
$134.4 million or 25.2 percent from the balance at December 31, 1994. The
increase from December 31, 1994 to December 31, 1995 was primarily due to a
change in unrealized holding gains (losses) on available-for-sale securities of
$139.5 million, which were recorded at fair value in accordance with SFAS 115.
See "KEYSTONE HOLDINGS STRUCTURE -- General."
The components of the $118.2 million decrease in stockholder's equity
for the six months ended June 30, 1996 are shown in the following table:
<TABLE>
<CAPTION>
Amount
---------------------------
(dollars in millions)
<S> <C>
Net earnings................................................ $ 53.6
Common stock dividends...................................... (60.0)
Unrealized loss on available-for-sale securities............ (111.8)
-----
Decrease in stockholder's equity.......................... $ (118.2)
======
</TABLE>
Total net receivables and mortgage-backed securities increased to $19.2
billion at June 30, 1996 from $18.1 billion at December 31, 1995 and $15.7
billion at December 31, 1994. The balance of foreclosed properties, net declined
to $84.0 million at June 30, 1996 from $100.0 million at December 31, 1995 and
$118.6 million at December 31, 1994.
F-41
<PAGE> 188
Total deposits were $12.7 billion, $13.0 billion and $12.8 billion at
June 30, 1996, December 31, 1995 and December 31, 1994, respectively. In
addition to deposits, Keystone Holdings utilizes several other funding sources,
including reverse repurchase agreements, brokered deposits and FHLB advances.
At June 30, 1996, December 31, 1995 and December 31, 1994, the
outstanding balance of receivables sold or securitized with recourse ("recourse
obligations") was $4.6 billion, $4.8 billion and $1.2 billion, respectively.
Keystone Holdings has provided for probable and estimated losses on these
receivables through charges to earnings.
ORIGINATIONS
The following table presents real estate receivables originated and
acquired for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period Ended June 30,
-----------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Percentage of Percentage of
Amount Total Amount Total
----------- ------------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Single-Family:
Monthly ARMs ................. $1,303,018 45.66% $1,644,639 77.90%
Other ARMs ................... 26,043 0.91 146,241 6.93
Fixed ........................ 634,233 22.23 151,758 7.19
Fixed five year-one month ARMs 729,386 25.56 23,659 1.12
---------- ------ ---------- ------
2,692,680 94.36 1,966,297 93.14
Multi-family:
Monthly ARMs ................. 137,082 4.80 128,784 6.10
Fixed ........................ 6,498 0.23 5,603 0.27
Fixed five year-one month ARMs 5,323 0.19 710 0.03
---------- ------ ---------- ------
148,903 5.22 135,097 6.40
Equity loans .................... 4,445 0.16 4,565 0.22
Commercial ...................... 7,558 0.26 5,049 0.24
---------- ------ ---------- ------
Total receivables originated
and acquired ............. $2,853,586 100.00% $2,111,008 100.00%
========== ====== ========== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1995 1994 1993
------------------------ -------------------------- -----------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family:
Monthly ARMs ..................... $2,606,592 54.66% $3,801,693 79.03% $2,223,679 57.37%
Other ARMs ....................... 185,940 3.90 176,902 3.68 56,457 1.46
Fixed ............................ 782,032 16.40 231,332 4.81 925,852 23.89
Fixed five year-one month ARMs ... 906,545 19.00 9,739 0.20 39,360 1.02
---------- ------ ---------- ------ ---------- ------
4,481,109 93.96 4,219,666 87.72 3,245,348 83.74
Multi-Family:
Monthly ARMs ..................... 245,698 5.15 516,800 10.74 565,587 14.59
Fixed ............................ 6,103 0.13 7,561 0.16 975 0.03
Fixed five year-one month ARMs ... 6,306 0.13 9,787 0.20 46,113 1.19
---------- ------ ---------- ------ ---------- ------
258,107 5.41 534,148 11.10 612,675 15.81
Equity loans ........................ 9,515 0.20 7,291 0.15 2,158 0.05
Commercial .......................... 20,388 0.43 49,314 1.03 15,549 0.40
---------- ------ ---------- ------ ---------- ------
Total receivables originated and
acquired ..................... $4,769,119 100.00% $4,810,419 100.00% $3,875,730 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Interest rates offered on fixed-rate receivables declined during the
six months ended June 30, 1996 compared to the same period in 1995. As a result,
the origination volume of fixed-rate products increased while the volume of
adjustable-rate products decreased during the first six months of 1996 when
compared to the same period in 1995. In addition, the origination volume of
fixed-rate products increased while the volume of adjustable-
F-42
<PAGE> 189
rate products stabilized during 1995 when compared to 1994 due to the
significant increase in short-term interest rates in the later part of 1994 and
early 1995. Originations of single-family loans where the loan rate is fixed for
five years and then converts to a monthly adjustable-rate loan increased during
1995 and the first half of 1996 when compared to 1994 and 1993 as pricing for
this product became more competitive. However, in 1996 the pricing for this
product has been changed to make it less attractive to customers.
The percentage of multi-family receivables originated to total
receivables originated and acquired declined to 5.2 percent from 6.4 percent for
the six months ended June 30, 1996 and 1995, respectively, and declined to 5.4
percent for the year ended December 31, 1995 from 11.1 percent and 15.8 percent
for the years ended December 31, 1994 and 1993, respectively. Keystone Holdings'
primary focus continues to be single-family lending, representing 94.4 percent
of total 1996 originations.
The following table summarizes Keystone Holdings' refinancing volume as
a percentage of its total originated receivables (divided between refinancings
of loans originated by ASB and refinancings of loans originated by other lending
institutions) for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
------------------ ------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Refinance volume/originated receivables:
ASB .................................. 8.72% 3.42% 5.81% 7.97% 20.34%
Other lending institutions ........... 38.57 31.57 37.53 38.55 46.30
----- ----- ----- ----- -----
Total .............................. 47.29% 34.99% 43.34% 46.52% 66.64%
===== ===== ===== ===== =====
</TABLE>
Low interest rates during 1993 generated an unusually large increase in
refinancing volume. As a result of higher interest rates during the latter part
of 1994 and in 1995, the volume of refinancing declined. Management does not
expect that the extremely high levels of refinancings experienced during 1993
will occur in the future.
Keystone Holdings' receivables are originated through three primary
distribution channels: residential loan centers, income-property loan centers,
and a state-wide network of independent residential mortgage brokers. Both
residential and income-property loan centers are staffed with commissioned
employees of ASB. The following table displays the percentage distribution
between the channels as a percentage of total originations for the periods
indicated:
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
------------------- --------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential loan centers................................ 50.8% 51.7% 52.8% 56.8% 78.3%
Income-property loan centers............................ 5.6 6.7 5.9 12.3 16.3
Mortgage brokers........................................ 43.6 41.6 41.3 30.9 5.4
----- ----- ----- ----- -----
Total................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The mortgage broker channel is an important element of Keystone
Holdings' California residential lending strategy. Keystone Holdings has
strengthened its relationships with wholesale brokers by offering a competitive
product line that allows brokers to broaden their customer base. As a result,
originations through the wholesale channel increased significantly beginning in
1994. Loan production from the wholesale channel is subjected to the same
underwriting standards as loan production from loan centers.
CREDIT QUALITY
Provision for Losses and Allowance for Credit Losses. The provision for
losses is based upon Keystone Holdings management's estimate of the amount
necessary to maintain the allowance for credit losses at an adequate level.
Keystone Holdings determines the level of its allowance for credit losses by
assessing numerous factors, including the nature and value of the underlying
collateral, the loan's delinquency status, historical and projected loss
experience and the level and trends of non-performing assets (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
KEYSTONE HOLDINGS -- Credit Quality -- Non-Performing Assets"), receivable
modifications and classified assets.
F-43
<PAGE> 190
The following table summarizes an allocation of the allowance for
credit losses by product type and the percentage of receivables and recourse
obligations in each category to total receivables and recourse obligations on
the dates indicated:
<TABLE>
<CAPTION>
June 30,
1996 1995 1994
------------------------ ------------------------ ------------------------
Allowance % Allowance % Allowance %
----------- ----------- ------------ ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family......... $ 43,883 62.93% $46,079 58.82% $ 54,768 69.65%
Multi-family and
commercial.......... 26,231 17.50 27,358 18.85 39,829 21.65
Recourse obligations.. 18,862 19.26 17,441 21.97 16,701 8.24
Consumer.............. 1,045 0.31 1,078 0.36 1,192 0.46
-------- ------ -------- ------ --------- ------
Total............... $ 90,021 100.00% $91,956 100.00% $112,490 100.00%
======== ====== ======= ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1992 1991
------------------------ ------------------------ -----------------------
Allowance % Allowance % Allowance %
------------ ----------- ----------- ------------ ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family......... $ 73,087 60.13% $ 81,528 66.93% $49,989 66.93%
Multi-family and
commercial.......... 30,570 23.49 22,796 20.16 13,977 20.16
Recourse obligations.. 12,075 14.44 7,110 11.30 4,360 11.30
Consumer.............. 10,015 1.94 10,103 1.61 6,195 1.61
------- ------ ------ ------ ----- ------
Total............... $125,747 100.00% $121,537 100.00% $74,521 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
The following table summarizes an allocation of the provision for
losses by product type for the periods indicated:
<TABLE>
<CAPTION>
Six-Month Period Ended June 30, Year Ended December 31,
------------------------------------------------- -------------------------------------------------
1996 1995 1995 1994
------------------------ ------------------------ ------------------------ ------------------------
Percentage Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total Amount of Total
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family......... $19,759 56.17% $25,670 74.34% $34,413 53.91% $ 48,074 47.31%
Multi-family and
commercial.......... 10,594 30.11 9,905 28.68 16,889 26.46 28,939 28.48
Consumer.............. 943 2.68 798 2.31 1,418 2.22 2,361 2.32
Earthquake (1)........ -- -- -- -- -- -- 12,500 12.31
Recourse obligations.. 3,884 11.04 (1,840) (5.33) 11,117 17.41 9,735 9.58
-------- ------ -------- ------- ------- ------ --------- -------
Total............. $35,180 100.00% $34,533 100.00% $63,837 100.00% $101,609 100.00%
======= ====== ======= ====== ======= ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1993 1992 1991 (2)
------------------------ ------------------------ ----------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Single-family......... $81,635 66.10% $119,669 83.30%
Multi-family and
commercial.......... 20,909 16.93 6,423 4.47
Consumer.............. 13,883 11.24 15,176 10.56
Earthquake (1)........ -- -- -- --
Recourse obligations.. 7,076 5.73 2,382 1.67
-------- ------- --------- -------
Total............. $123,503 100.00% $143,650 100.00% $63,400 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
- ----------------
(1) The provision for losses for the year ended December 31, 1994 included
$12.5 million related to losses resulting from the Northridge,
California earthquake in January 1994.
(2) Detail not available for periods prior to 1992.
F-44
<PAGE> 191
The following summarizes the activity in the allowance for credit
losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Beginning Balance................... $91,956 $112,490
Provision for Credit Losses......... 35,180 34,533
Charge-Offs:
Single-Family..................... (26,420) (28,587)
Multi-Family...................... (10,364) (10,594)
Commercial........................ (2,276) (2,580)
Other............................. (926) (829)
-------- --------
(39,986) (42,590)
Earthquake.......................... (166) (2,157)
-------- --------
Total Charge-Offs................ (40,152) (44,747)
Recoveries:
Single-Family..................... 1,951 1,258
Multi-Family...................... 888 998
Commercial........................ 198 --
--------- -----------
Total Recoveries................. 3,037 2,256
-------- ---------
Ending Balance.................... $90,021 $104,532
======= ========
Net Charge-offs/Average
Receivables and Recourse
Obligations....................... 0.22% 0.30%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- --------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Beginning Balance................... $112,490 $125,747 $121,537 $ 74,521 $38,577
Provision for Credit Losses......... 63,837 101,609 123,503 143,650 63,400
Charge-Offs:
Single-Family..................... (55,933) (88,033) (92,187) (76,674) (13,695)
Multi-Family...................... (22,784) (17,374) (10,127) (3,144) (1,333)
Commercial........................ (5,362) (1,963) (3,008) (1,222) (983)
Other............................. (1,510) (5,084) (13,971) (15,594) (11,445)
--------- ---------- --------- -------- -------
(85,589) (112,454) (119,293) (96,634) (27,456)
Earthquake.......................... (3,743) (5,145) -- -- --
--------- --------- ---------- ---------- ----------
Total Charge-Offs................ (89,332) (117,599) (119,293) (96,634) (27,456)
Recoveries:
Single-Family..................... 2,222 2,505 -- -- --
Multi-Family...................... 1,563 220 -- -- --
Commercial........................ 1,176 8 -- -- --
-------- ----------- ----------- ----------- ----------
Total Recoveries................. 4,961 2,733 -- -- --
-------- --------- ----------- ----------- ----------
Ending Balance.................... $91,956 $112,490 $125,747 $121,537 $74,521
======= ======== ======== ======== =======
Net Charge-Offs/Average
Receivables and Recourse
Obligations....................... 0.52% 0.92% 1.02% 0.93% 0.29%
</TABLE>
The total provision for losses increased to $35.2 million during the
first six months of 1996 from $34.5 million for the same period in 1995. The
increase is primarily due to a $0.7 million increase in the provision for
multi-family and commercial loans and a $5.7 million increase in the provision
for recourse obligations, which were partially offset by a $5.9 million decrease
in the provision for single-family loans, during the six months ended June 30,
1996 as compared to the same period in 1995. The negative $1.8 million provision
for recourse obligations during the six months ended June 30, 1995 resulted from
a change in the methodology used to accrue for losses that management believes
resulted in a better estimate of probable losses under the recourse obligations.
F-45
<PAGE> 192
Single-family charge-offs declined to $26.4 million from $28.6 million
for the six months ended June 30, 1996 and 1995, respectively. Multi-family and
commercial charge-offs decreased slightly to $12.6 million from $13.2 million
for the six months ended June 30, 1996 and 1995, respectively. The decline in
charge-offs reflects an overall decline in delinquencies. Total receivable and
recourse obligation delinquencies declined to 1.36 percent of the total gross
receivable and recourse obligation portfolios at June 30, 1996 from 1.68 percent
at June 30, 1995.
The provision for losses declined to $63.8 million from $101.6 million
and $123.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The decrease in the provision reflects a continuing decline in
receivable and recourse obligation delinquencies. Declines in single-family
delinquencies resulted in reduced single-family charge-offs and declines in the
overall allowance for credit losses related to the single-family portfolio.
Single-family charge-offs declined to $55.9 million from $88.0 million and $92.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Multi-family and commercial charge-offs increased to $28.1 million from $19.3
million and $13.1 million for the years ending December 31, 1995, 1994 and 1993,
respectively. Although charge-offs increased in the multi-family and commercial
portfolio, total multi-family and commercial delinquencies as a percentage of
the total multi-family and commercial portfolio declined to 0.24 percent at
December 31, 1995 from 0.74 percent at December 31, 1994. In addition, the 1994
provision for losses included $12.5 million related to losses resulting from the
Northridge, California earthquake in January 1994.
During 1991, California's general economic indicators, including
employment, consumer confidence and real estate prices, began to deteriorate.
These trends continued through 1992 and 1993. In response to these trends,
Keystone Holdings increased its allowance for credit losses through the
provision for credit losses, and tightened underwriting standards. Keystone
Holdings provided $123.5 million for credit losses during the year ended
December 31, 1993, compared with $143.7 million provided in 1992 and $63.4
million provided during 1991. The decrease from 1992 to 1993 reflects an
improvement in delinquencies. Management believes that the stricter underwriting
standards initiated in the latter part of 1991 and 1992 contributed to the
overall decline in delinquencies during 1993, despite the recessionary
conditions that existed in California. The delinquency experience of Keystone
Holdings' 1993 and 1992 originations has been significantly less than those
originated prior to 1992. Management believes that the high rate of
delinquencies in prior years' originations can be attributed to a limited
documentation program offered by Keystone Holdings during 1989 and 1990 as well
as the general decline in housing prices that resulted in the deterioration of
many borrowers' equity.
Impaired Loans. In May 1993, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114
addresses the accounting by creditors for impairment of a loan by specifying how
allowances for credit losses related to impaired loans, as defined, should be
determined. In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting for Creditors for Impairment of a Loan--Income
Recognition Disclosures" ("SFAS 118") as an amendment to SFAS 114. SFAS 118
eliminates the income recognition provisions included in SFAS 114 thereby
permitting the use of existing methods for recognizing interest income on
impaired loans. Keystone Holdings adopted the provisions of SFAS 114 and SFAS
118 effective January 1, 1995.
SFAS 114 does not apply to large groups of smaller balance homogenous
loans that are collectively evaluated for impairment. Management collectively
reviews all single-family loans, all consumer loans, and multi-family and
commercial loans with outstanding principal balances under $1.0 million for
impairment.
Management considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Keystone Holdings will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Keystone Holdings' impaired loans disclosed under the
requirements of SFAS 114 include nonaccrual loans (excluding those collectively
reviewed for impairment), debt restructurings, and multi-family and commercial
loans less than 90 days delinquent in which management believes that the
borrower may be experiencing financial difficulty based on indicators such as
low debt coverage ratios or high loan-to-value ratios. Keystone Holdings bases
the measurement of loan impairment on the fair value of the loan's underlying
collateral in accordance with SFAS 114. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
included in the allowance for credit losses through a charge to the provision
for credit
F-46
<PAGE> 193
losses. At the time of in-substance foreclosure or troubled debt restructuring,
the shortfall, if any, between the recorded investment of a loan and the measure
of impairment is charged-off.
The recorded investment in loans considered to be impaired under SFAS
114 was $86.8 million and $69.4 million at June 30, 1996 and December 31, 1995,
respectively. Included in the amount at June 30, 1996 is $37.9 million of
impaired loans for which the related allowance for credit losses is $7.4 million
and $48.9 million of impaired loans that do not have an allowance for credit
losses. Included in the impaired loans amount at December 31, 1995 is $24.7
million of impaired loans for which the related allowance for credit losses is
$5.7 million and $44.7 million of impaired loans that do not have an allowance
for credit losses. The average recorded investment in impaired loans at June 30,
1996 and December 31, 1995 was $77.7 million and $69.0 million for the six
months ended June 30, 1996 and for the year ended December 31, 1995,
respectively. Interest income of $2.1 million, $1.1 million and $4.7 million was
recognized on impaired loans during the period of impairment for the six months
ended June 30, 1996, 1995 and for the year ended December 31, 1995,
respectively.
The aggregate investment in troubled debt restructurings ("TDRs")
modified prior to January 1, 1995 that were not impaired based on the terms
specified by the TDR agreements with borrowers was $5.7 million at June 30, 1996
and $10.6 million, $22.6 million, $36.4 million, $7.9 million and $0.7 million
at December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The foregone
interest on these restructured receivables did not have a significant impact on
Keystone Holdings' earnings for the six months ended June 30, 1996 or 1995 or
the years ended December 31, 1995, 1994, 1993, 1992 or 1991. Interest income on
TDRs was $0.2 million and $0.4 million for the six months ended June 30, 1996
and 1995, respectively, and $0.8 million and $1.8 million for the years ended
December 31, 1995 and 1994, respectively. At June 30, 1996 and December 31,
1995, Keystone Holdings had no commitments to lend additional funds to borrowers
whose loans were classified as TDRs.
Interest income is accrued and credited to income as it is earned.
Accrued interest on nonaccrual receivables (i.e., receivables that are 90 days
or more contractually delinquent) is not recognized as income. Interest income
is subsequently recognized on nonaccrual receivables only to the extent that
payments are received. Payments received on nonaccrual receivables are recorded
as a reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. Nonaccrual
loans at June 30, 1996 and at December 31, 1995, 1994, 1993, 1992 and 1991 had
interest due but not recognized of approximately $6.9 million, $7.1 million,
$8.8 million, $12.7 million, $16.6 million and $14.7 million, respectively.
Non-Performing Assets. Non-performing assets consisted of the following
at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual receivables (1).................. $135,968 $144,095 $219,266 $259,002 $283,452 $245,453
Foreclosed properties (2)................... 84,036 100,037 118,645 150,868 144,535 49,500
-------- -------- -------- -------- -------- --------
Total non-performing assets............... $220,004 $244,132 $337,911 $409,870 $427,987 $294,953
======== ======== ======== ======== ======== ========
Percentage of total assets.................. 1.07% 1.24% 1.84% 2.38% 2.48% 1.73%
</TABLE>
- ------------------
(1) Nonaccrual receivables include recourse obligations
(2) Net of allowance for losses on foreclosed properties.
Nonaccrual receivables declined to $136.0 million at June 30, 1996 from
$144.1 at December 31, 1995 and $219.3 million at December 31, 1994. Net
foreclosed properties decreased to $84.0 million at June 30, 1996 from $100.0
million at December 31, 1995 and $118.6 million at December 31, 1994. Total
non-performing assets declined to $220.0 million at June 30, 1996 from $244.1
million and $337.9 million at December 31, 1995 and 1994, respectively.
F-47
<PAGE> 194
The following table presents certain portfolio information by selected
regions in California and all other states as of June 30, 1996:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------------------------------------------------
Non-Performing Assets
------------------------------------------------------------------------
Gross Receivables Nonaccrual
and Recourse Receivables and Foreclosed
Obligations Recourse Obligations Properties, Net Total
---------------------- --------------------- ---------------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Los Angeles County......... $5,355,751 30.52% $66,829 49.15% $35,088 41.75% $101,917 46.32%
San Francisco Bay area..... 5,415,568 30.86 20,923 15.39 14,496 17.25 35,419 16.10
Orange County.............. 1,877,261 10.70 15,626 11.49 7,201 8.57 22,827 10.38
Other California counties.. 4,775,948 27.21 31,873 23.44 27,176 32.34 59,049 26.84
Other states............... 104,291 0.59 717 0.53 75 0.09 792 0.36
Non-mortgage receivables... 20,206 0.12 -- -- -- -- -- --
----------- ------- -------- ------- -------- -------- --------- -------
Total.................... $17,549,025 100.00% $135,968 100.00% $84,036 100.00% $220,004 100.00%
=========== ====== ======== ====== ======= ====== ======== ======
</TABLE>
Foreclosed Properties. The following table summarizes activity in the
foreclosed property portfolio for the periods indicated:
<TABLE>
<CAPTION>
Six-Months Ended Year Ended
June 30, December 31,
------------------------------ -------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance.................... $100,037 $118,645 $118,645 $150,868 $144,535
Acquisition cost..................... 87,479 103,676 185,250 230,605 228,654
Allowances........................... (3,237) (5,066) (10,523) (15,391) (19,589)
Sales................................ (100,243) (97,091) (193,335) (247,437) (202,732)
-------- ------- -------- -------- ---------
Ending net balance................... $84,036 $120,164 $100,037 $118,645 $150,868
======= ======== ======== ======== ========
</TABLE>
Foreclosed properties are recorded at fair value, less estimated costs
to sell, as determined by independent appraisals. The following table summarizes
the number of properties in the foreclosed property portfolio for the periods
indicated:
<TABLE>
<CAPTION>
Six-Months Year Ended
Ended June 30, December 31,
------------------------------ -------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Beginning amount 581 628 628 772 556
Foreclosures . 523 527 972 1,124 1,084
Sales ........ (511) (480) (1,019) (1,268) (868)
------ ------ ------ ------ ------
Ending amount .. 593 675 581 628 772
====== ====== ====== ====== ======
</TABLE>
Typically, foreclosed properties are sold by Keystone Holdings within
six to eight months subsequent to foreclosure. The timely disposal of foreclosed
properties continues to be a priority of management.
DEPOSITS AND OTHER BORROWINGS
Total deposits were $12.7 billion, $13.0 billion and $12.8 billion at
June 30, 1996, December 31, 1995 and December 31, 1994, respectively. Management
anticipates maintaining its current deposit market share among the institutions
that are members of the FHLB of San Francisco.
On February 8, 1996, ASB completed the private placement of $100.0
million of Subordinated Notes (the "Notes"). The Notes bear an interest rate of
6.625 percent per annum. Interest on the Notes is payable semi-annually in
arrears on each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are
redeemable in whole, or in part, at the option of ASB at any time prior to that
date. The redemption price is equal to the greater of (i) 100 percent of the
F-48
<PAGE> 195
principal amount and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest discounted to the date of
redemption on a semiannual basis at a yield comparable to that on a treasury
security with a term equal to the then remaining term of the Notes, plus 15
basis points, plus in each case accrued interest to the date of redemption.
The payment of the principal and interest on the Notes is subordinated
to the prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against ASB
having the same priority as savings account holders of ASB or any higher
priority, (b) all indebtedness of ASB, other than the Notes, which is given in
connection with the acquisition of any businesses, properties or assets of any
kind and (c) obligations of ASB as lessee under capitalized leases. At June 30,
1996, Senior Indebtedness totaled approximately $18.8 billion, including $12.7
billion in deposits.
The proceeds of the Notes were used to pay general corporate expenses,
to repay certain borrowings and to fund loan originations. The Notes qualify to
be included in regulatory capital.
The Notes do not restrict ASB from paying dividends or from incurring,
assuming or becoming liable for any type of debt or other obligation. In
addition, the Notes do not require ASB to maintain any financial ratios or
certain levels of regulatory capital or liquidity.
Keystone Holdings utilizes several other funding sources including
reverse repurchase agreements, brokered deposits and FHLB advances. FHLB
advances increased to $2.0 billion at June 30, 1996 from $1.0 billion and $391.4
million at December 31, 1995 and 1994, respectively. New Capital, a wholly-owned
subsidiary of Keystone Holdings, has issued debt securities with outstanding
principal balances totalling $364.5 million at June 30, 1996. New Capital's
$175.0 million Series C Floating Rate Notes due April 12, 2000 ("Series C
Notes") bear interest at the three-month London Interbank Offering Rate
("LIBOR") plus 1.375%, while its $20.5 million floating rate subordinated notes
due in 1998 ("Subordinated Notes") bear interest at three-month LIBOR plus
2.875%. The Series C Notes and Subordinated Notes reprice and require interest
payments quarterly. New Capital's $169.0 million Series B Notes due 1999
("Series B Notes") bear interest at a fixed rate of 9.60 percent until maturity.
Interest payments on the Series B Notes are made semi-annually.
In June 1996, ASB was approved to participate in the FHLB's Guaranteed
Spread Program (the "GSP Program"). Under the GSP Program, ASB was approved for
a credit amount of up to $0.9 billion after paying a fee to the FHLB of San
Francisco and pledging certain qualifying mortgages as collateral. Interest on
advances is determined using LIBOR minus a fixed spread. Included in FHLB
advances at June 30, 1996 are $0.9 billion related to the GSP Program.
RESULTS OF OPERATIONS
Net Earnings. Keystone Holdings reported earnings before taxes of
$102.2 million and $34.8 million for the six months ended June 30, 1996 and
1995, respectively. Net earnings were $53.6 million and $25.5 million for the
same periods.
Keystone Holdings reported earnings before taxes of $118.2 million,
$73.8 million and $104.0 million for the years ended December 31, 1995, 1994 and
1993, respectively. Net earnings were $84.8 million, $50.3 million and $82.3
million for the same periods.
Net Interest Income. Net interest income increased to $237.6 million
for the six months ended June 30, 1996 from $165.7 million for the same period
in 1995. The increase in net interest income resulted from an increase of 66
basis points in the interest rate spread to 2.40 percent from 1.74 percent for
the six month periods ended June 30, 1996 and 1995, respectively. In addition,
net interest income for the six months ended June 30, 1996 was positively
affected by COFI lag when compared to the same period in 1995. A majority of
ASB's interest-earning assets reprice at a spread above COFI. There is an
inherent timing difference between the repricing of assets and liabilities that
could impact the interest rate spread if there are significant fluctuations in
the interest rate environment. This timing difference, or lag, is a result of
delays in the publication of COFI and the repricing
F-49
<PAGE> 196
terms of related assets. The impact of this timing difference will be favorable
during a period of declining interest rates and unfavorable in a rising interest
rate environment. Although the impact of this lag tends to balance out over the
life of a loan, it can produce short-term volatility in an institution's net
interest income during periods of interest rate movement. The COFI lag resulted
in a favorable impact to net interest income of approximately $11.6 million for
the six months ended June 30, 1996 compared with an unfavorable impact to net
interest income of $38.5 million for the six months ended June 30, 1995.
Net interest income increased to $374.4 million for the year ended
December 31, 1995 from $353.4 million for the year ended December 31, 1994. The
interest rate spread was 1.95 percent and 2.04 percent for the years ended
December 31, 1995 and 1994, respectively. COFI lag resulted in an unfavorable
impact to net interest income of approximately $38.8 million and $23.8 million
in 1995 and 1994, respectively.
Keystone Holdings' net interest income decreased to $353.4 million for
the year ended December 31, 1994 compared to $426.1 million for the year ended
December 31, 1993. The decrease in net interest income resulted from a decrease
of 43 basis points in the interest rate spread to 2.04 percent from 2.47 percent
for the years ended December 31, 1994 and 1993, respectively. In addition, net
interest income in 1994 when compared to 1993 was negatively impacted by COFI
lag. The COFI lag resulted in an unfavorable impact to net interest income of
$23.8 million in 1994 contrasted with a favorable impact to net interest income
of $32.7 million in 1993.
F-50
<PAGE> 197
The following tables summarize average yields earned and rates paid for
the periods indicated and the resulting volume and rate variances:
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
-----------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------------------------------
1996 1995
--------------------------------------------------- ---------
Average Average
Balance(1) Interest Yield/Rate Balance(1)
------------ -------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)............................. $ 11,890,990 $445,479 7.49% $13,109,784
Mortgage-backed securities................. 6,500,155 242,465 7.46 3,332,138
Consumer loans............................. 41,718 2,918 13.99 44,923
New West Note.............................. -- -- -- 1,348,383
Investment securities...................... 355,209 11,319 6.37 446,118
FHLB stock................................. 175,227 4,539 5.18 145,979
------------ -------- ----- -----------
Total interest-earning assets............ $ 18,963,299 $706,720 7.45% $18,427,325
============ ======== ===== ===========
Interest-bearing liabilities:
Deposits................................... $ 12,800,352 $298,357 4.66% $13,287,497
FHLB advances.............................. 739,654 21,252 5.75 410,700
Other borrowings........................... 5,053,253 149,487 5.92 4,492,032
------------ -------- ----- -----------
Total interest-bearing liabilities....... $ 18,593,259 $469,096 5.05% $18,190,229
============ ======== ===== ===========
Excess of average interest-earning assets
over average interest-bearing liabilities.. $ 370,040 $ 237,096
Net interest income.......................... $237,624
Interest rate spread......................... 2.40%
Net interest margin.......................... 2.51%
Change in net interest income................
<CAPTION>
Rate Volume Analysis
------------------------------------------
Six Months Ended
------------------------------------------
June 30, 1996 Versus 1995
Favorable (Unfavorable) Change
1995 Due to Changes in:
----------------------- ------------------------------------------
Interest Yield/Rate Volume Rate Total
-------- ---------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2)............................. $460,003 7.02% $ (74,358) $ 59,834 $ (14,524)
Mortgage-backed securities................. 112,497 6.75 104,147 25,821 129,968
Consumer loans............................. 3,091 13.76 (274) 101 (173)
New West Note.............................. 43,699 6.48 -- (43,699) (43,699)
Investment securities...................... 13,813 6.19 (3,279) 785 (2,494)
FHLB stock................................. 3,198 4.38 63 1,278 1,341
-------- ----- --------- -------- ---------
Total interest-earning assets............ $636,301 6.91% $ 26,299 $ 44,120 $ 70,419
======== ===== ========= ======== =========
Interest-bearing liabilities:
Deposits................................... $308,414 4.64% $ 12,642 $ (2,585) $ 10,057
FHLB advances.............................. 13,120 6.39 (11,007) 2,875 (8,132)
Other borrowings........................... 149,068 6.64 (34,666) 34,247 (419)
-------- ----- --------- -------- ---------
Total interest-bearing liabilities....... $470,602 5.17% $ (33,031) $ 34,537 $ 1,506
======== ===== ========= ======== =========
Excess of average interest-earning assets
over average interest-bearing liabilities
Net interest income.......................... $165,699
Interest rate spread......................... 1.74%
Net interest margin.......................... 1.80%
Change in net interest income................ $ (6,732) $ 78,657 $ 71,925
</TABLE>
- -------------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
F-51
<PAGE> 198
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
-----------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------------
1995 1994
----------------------------------------------- -----------------------------
Average Yield/ Average
Balance(1) Interest Rate Balance(1) Interest
--------- ---------- ------ ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2) ...................... $14,084,471 $ 961,002 6.82% $10,671,463 $ 697,086
Mortgage-backed securities .......... 2,842,714 272,320 9.58 2,988,864 167,073
Consumer loans ...................... 44,773 6,261 13.98 79,603 11,955
New West Note ....................... 890,800 58,841 6.61 2,513,753 141,039
Investment securities ............... 487,341 31,006 6.36 298,726 13,603
FHLB stock .......................... 152,209 7,696 5.06 118,558 6,107
----------- ---------- ----- ----------- ----------
Total interest-earning assets ..... $18,502,308 $1,337,126 7.23% $16,670,967 $1,036,863
=========== ========== ===== =========== ==========
Interest-bearing liabilities:
Deposits ............................ $13,249,964 $ 636,315 4.80% $13,053,566 $ 481,794
FHLB advances ....................... 492,611 30,858 6.26 1,044,018 69,096
Other borrowings .................... 4,483,800 295,539 6.59 2,260,826 132,597
----------- ---------- ----- ----------- ----------
Total interest-bearing liabilities $18,226,375 $ 962,712 5.28% $16,358,410 $ 683,487
=========== ========== ===== =========== ==========
Excess of average interest-earning
assets over average interest-bearing
liabilities ......................... $ 275,933 $ 312,557
Net interest income ................... $ 374,414 $ 353,376
Interest rate spread................... 1.95%
Net interest margin.................... 2.02%
Change in net interest income .........
Rate Volume Analysis
-------------------------------------------
Year Ended December 31,
1995 Versus 1994
Favorable (Unfavorable) Change
1994 Due to Changes in:
------- ------------------------------------------
Yield/
Rate Volume Rate Total
----- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2) ...................... 6.53% $ 231,661 $ 32,255 $ 263,916
Mortgage-backed securities .......... 5.59 (8,543) 113,790 105,247
Consumer loans ...................... 15.02 (4,920) (774) (5,694)
New West Note ....................... 5.61 (103,725) 21,527 (82,198)
Investment securities ............... 4.55 10,683 6,720 17,403
FHLB stock .......................... 5.15 1,703 (114) 1,589
---------- --------- --------- ---------
Total interest-earning assets ..... 6.22% $ 126,859 $ 173,404 $ 300,263
========== ========= ========= =========
Interest-bearing liabilities:
Deposits ............................ 3.69% $ (7,353) $(147,168) $(154,521)
FHLB advances ....................... 6.62 34,721 3,517 38,238
Other borrowings .................... 5.86 (144,716) (18,226) (162,942)
---------- --------- --------- ---------
Total interest-bearing liabilities 4.18% $(117,348) $(161,877) $(279,225)
========== ========= ========= =========
Excess of average interest-earning
assets over average interest-bearing
liabilities .........................
Net interest income ...................
Interest rate spread................... 2.04%
Net interest margin.................... 2.12%
Change in net interest income ......... $ 9,511 $ 11,527 $ 21,038
</TABLE>
- ----------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
F-52
<PAGE> 199
<TABLE>
<CAPTION>
Average Yields Earned and Rates Paid
-------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------
1994 1993
--------------------------------------------- --------------------------------
Average Yield/ Average
Balance(1) Interest Rate Balance(1) Interest
--------- -------------- ----------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2) ...................... $ 10,671,463 $ 697,086 6.53% $10,101,371 $ 725,687
Mortgage-backed securities .......... 2,988,864 167,073 5.59 1,860,407 106,764
Consumer loans ...................... 79,603 11,955 15.02 208,614 30,919
New West Note ....................... 2,513,753 141,039 5.61 4,061,221 241,014
Investment securities ............... 298,726 13,603 4.55 273,148 9,315
FHLB stock .......................... 118,558 6,107 5.15 103,136 3,570
------------ ----------- ----- ----------- ----------
Total interest-earning assets ..... $ 16,670,967 $ 1,036,863 6.22% $16,607,897 $1,117,269
============ =========== ===== =========== ==========
Interest-bearing liabilities:
Deposits ............................ $ 13,053,566 $ 481,794 3.69% $13,718,142 $ 513,435
FHLB advances ....................... 1,044,018 69,096 6.62 1,578,904 128,741
Other borrowings .................... 2,260,826 132,597 5.86 935,282 48,970
------------ ----------- ----- ----------- ----------
Total interest-bearing liabilities $ 16,358,410 $ 683,487 4.18% $16,232,328 $ 691,146
============ =========== ===== =========== ==========
Excess of average interest-earning
assets over average interest-bearing
liabilities ......................... $ 312,557 $ 375,569
Net interest income ................... $ 353,376 $ 426,123
Interest rate spread................... 2.04%
Net interest margin.................... 2.12%
Change in net interest income .........
<CAPTION>
Rate Volume Analysis
--------------------------------------
Year Ended December 31,
1994 Versus 1993
Favorable (Unfavorable) Change
1993 Due to Changes in:
----- --------------------------------------
Yield/
Rate Volume Rate Total
------ ------ ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Receivables(2) ...................... 7.18% $ 39,531 $(68,132) $(28,601)
Mortgage-backed securities .......... 5.74 63,148 (2,839) 60,309
Consumer loans ...................... 14.82 (19,370) 406 (18,964)
New West Note ....................... 5.93 (87,451) (12,524) (99,975)
Investment securities ............... 3.41 936 3,352 4,288
FHLB stock .......................... 3.46 595 1,942 2,537
----- -------- -------- --------
Total interest-earning assets ..... 6.73% $ (2,611) $(77,795) $(80,406)
===== ======== ======== ========
Interest-bearing liabilities:
Deposits ............................ 3.74% $ 24,605 $ 7,036 $ 31,641
FHLB advances ....................... 8.15 38,335 21,310 59,645
Other borrowings .................... 5.24 (77,091) (6,536) (83,627)
----- -------- -------- --------
Total interest-bearing liabilities 4.26% $(14,151) $ 21,810 $ 7,659
===== ======== ======== ========
Excess of average interest-earning
assets over average interest-bearing
liabilities .........................
Net interest income ...................
Interest rate spread................... 2.47%
Net interest margin.................... 2.57%
Change in net interest income ......... $(16,762) $(55,985) $(72,747)
</TABLE>
- ----------------
(1) Average balances are calculated on a daily basis.
(2) Nonaccruing loans are included in the daily average receivables
outstanding.
F-53
<PAGE> 200
Other Income and Expense. Other income and expense consisted of the
following items for the periods indicated:
<TABLE>
<CAPTION>
Six Month Ended
June 30, Year Ended December 31,
------------------------ ----------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gain (loss) on sale of receivables, net $ 2,965 $ 777 $ 34 $ (2,295) $ 9,776
Gain on disposition of credit card
receivables, net ..................... -- -- -- 24,981 --
Gain on sale of mortgage servicing
rights ............................... -- -- -- 20,396 --
Savings, commission and receivable fee
income ............................... 29,549 21,763 50,227 44,913 49,622
Gain (loss) on asset sales, net ........ (324) 890 2,534 207 23,994
Net expense of foreclosed properties ... (7,496) (8,467) (18,032) (13,390) (12,951)
Net servicing income ................... 9,391 8,275 18,696 14,038 7,229
Loss on sale of covered assets ......... -- (667) (37,399) -- --
Effect of FDIC assistance on covered
assets ............................... -- 16,741 55,630 -- --
Other, net ............................. 539 445 743 52 3,380
-------- -------- -------- -------- --------
Total ................................ $ 34,624 $ 39,757 $ 72,433 $ 88,902 $ 81,050
======== ======== ======== ======== ========
</TABLE>
Other income and expense for the six months ended June 30, 1996 was
$34.6 million compared to $39.8 million for the same period in 1995. Included in
the previous period's amount is a $16.7 million gain of FDIC assistance. This
assistance related to the sale of certain single-family loans serviced by other
institutions that had an outstanding principal balance of $200.5 million at the
time of sale. These loans (covered assets) were acquired by ASB in the 1988
Acquisition and, as a part of the terms of the 1988 Acquisition, the FRF was
contractually obligated to ASB to make up any deficiencies in the timely payment
of principal and interest on these covered assets. As a result of a
restructuring of certain FRF Agreements, direct payments by the FRF to ASB with
respect to such deficiencies were to be terminated by a mark-to-market process
to be conducted when the New West Note became fully repaid (or, if sooner, when
a covered asset subject to the assistance was sold) pursuant to an agreed upon
mark-to-market methodology. Thus, included in the $16.7 million assistance was
compensation from the FRF relating to the value implicit in the remaining
duration (at the time of the mark) of the original FRF guarantee. The decrease
in FDIC assistance was partially offset by an increase in savings fee,
commission, receivable fee and net servicing income assistance during the six
month period ended June 30, 1996 compared to the same period in 1995.
Other income and expense decreased to $72.4 million from $88.9 million
for the years ended December 31, 1995 and 1994, respectively, due to a $25.0
million decrease in gains on the sale of the credit card portfolio, a $20.4
million decline in gains on the sale of mortgage servicing rights, and a $37.4
million increase in loss on sale of covered assets, which were partially offset
by a $55.6 million increase in FDIC assistance.
Other income and expense increased to $88.9 million from $81.1 million
for the years ended December 31, 1994 and 1993, respectively. The decrease was
due to a $25.0 million gain on the 1994 sale of the credit card portfolio and a
$20.4 million gain on the sale of mortgage servicing rights related to the sale
of $1.9 billion of Keystone Holdings' servicing portfolio, which were partially
offset by $23.8 million and $12.1 million declines in gains on asset sales and
sales of receivables, respectively.
F-54
<PAGE> 201
As shown in the previous table, net gain (loss) on other asset sales
consisted of the following for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities $(402) $580 $1,127 $ 33 $ 1,433
Asset management rights .. -- -- -- -- 23,000
Other .................... 78 310 1,407 174 (439)
----- ---- ------ ---- --------
Total .................. $(324) $890 $2,534 $207 $ 23,994
===== ==== ====== ==== ========
</TABLE>
In 1993, Keystone Holdings recognized a $23.0 million gain on the sale
of certain rights related to the management of New West assets.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an
amendment to Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities" ("SFAS 65"). In September 1995, Keystone
Holdings adopted early application of SFAS 122. SFAS 122 requires an institution
that purchases or originates mortgage loans and subsequently sells or securities
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Institutions are
required to assess impairment of the capitalized mortgage servicing portfolio
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
Capitalized mortgage servicing rights should be stratified based upon one or
more of the predominant risk characteristics of the underlying loans such as
loan type, size, note rate, date of origination, term and/or geographic
location.
Keystone Holdings elected to retroactively implement SFAS 122 as of
January 1, 1995. Keystone Holdings capitalized $4.4 million and $7.8 million in
originated loan servicing rights during the first six months of 1996 and the
year ended December 31, 1995, respectively, that resulted from the origination
and sale of receivables with servicing retained. At June 30, 1996 and December
31, 1995, Keystone Holdings established an impairment valuation allowance of
$0.4 million and $0.9 million, respectively, based upon an evaluation performed
on the entire servicing rights portfolio.
In order to determine the fair value of the servicing rights,
management uses market prices under comparable servicing sale contracts, when
available, or alternatively, uses a valuation model that calculates the present
value of future cash flows. Assumptions used in the valuation model include
market discount rates and anticipated prepayment speeds. The prepayment speeds
are determined from market sources for fixed-rate mortgages with similar coupons
and prepayment reports for comparable ARM loans. In addition, management uses
market comparables for estimates of the cost of servicing per loan, float value,
an inflation rate, ancillary income per loan and default rates.
Keystone Holdings amortizes the servicing rights in proportion to and
over the period of estimated future net servicing income.
For the purpose of measuring impairment, management stratified the
capitalized mortgage servicing rights using the following risk characteristics:
fixed-rate loans by coupon (less than 8%, 8%-10%, 10%-12% and greater than 12%);
and adjustable-rate loans by index (COFI, Treasury, LIBOR, etc.). Impairment is
measured utilizing fair value.
F-55
<PAGE> 202
Purchased loan servicing, originated loan servicing and excess
servicing fees, net of amortization and the valuation allowance were as follows
for the periods indicated:
<TABLE>
<CAPTION>
Purchased Loan Originated Loan Excess Total Mortgage
Servicing, Net Servicing, Net Servicing, Net Servicing Rights
-------------- --------------- -------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 66,884 $ 6,509 $ 17,508 $ 90,901
Additions ................ 5,170 4,356 685 10,211
Amortization ............. (8,053) (615) (2,026) (10,694)
Valuation allowance ...... -- (392) -- (392)
-------- ------- -------- --------
Balance at June 30, 1996 ... $ 64,001 $ 9,858 $ 16,167 $ 90,026
======== ======= ======== ========
</TABLE>
Net servicing income consisted of the following for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- -------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Servicing Income ................. $ 20,085 $ 16,193 $ 37,521 $ 29,270 $ 30,032
Amortization of mortgage servicing
rights ......................... (10,694) (7,918) (18,825) (15,232) (22,803)
-------- -------- -------- -------- --------
Net servicing income ............. $ 9,391 $ 8,275 $ 18,696 $ 14,038 $ 7,229
======== ======== ======== ======== ========
</TABLE>
Net servicing income increased to $18.7 million from $14.0 million and
$7.2 million for the years ended December 31, 1995 and 1994 and 1993,
respectively. The increase from 1994 to 1995 is due to the average outstanding
balance of the loans serviced by ASB for other institutions increasing to $16.2
billion for the year ended December 31, 1995 from $11.4 billion for the year
ended December 31, 1994. The increase in net servicing income from $7.2 million
in 1993 to $14.0 million in 1994 was largely due to a decrease in amortization
of mortgage servicing rights attributable to a gradual decline in prepayments of
mortgage receivables in 1994 compared to 1993.
Miscellaneous other income and expense consisted of the following items
for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------------ -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Credit card fees ........ $ 255 $ 135 $ 532 $ 1,095 $ 4,574
Loss on sales of branches (217) (98) (832) (1,410) (955)
Provision on other assets -- -- -- -- (1,000)
Other ................... 501 408 1,043 367 761
----- ----- ------- ------- -------
Total ................. $ 539 $ 445 $ 743 $ 52 $ 3,380
===== ===== ======= ======= =======
</TABLE>
Credit card fees decreased in 1995 and 1994 as compared to 1993 due to
the sale of a majority of the credit card portfolio in the first quarter of
1994.
General and Administrative Expenses. General and administrative
expenses were $134.9 million for the six-month period ended June 30, 1996
compared to $136.1 million for the same period in 1995. General and
administrative expenses as a percentage of total average assets on an annualized
basis were 1.36% and 1.42% for the six months ending June 30, 1996 and 1995,
respectively. Total general and administrative expenses declined to $264.8
million for the year ended December 31, 1995 compared to $266.8 million for the
year ended December 31, 1994 and $279.7 million for the year ended December 31,
1993. General and administrative expenses as a percentage of total average
assets were 1.37%, 1.54% and 1.62% for the years ended December 31, 1995, 1994
and 1993, respectively. These trends reflect management's continuing focus on
decreasing general and administrative expenses through the automation of
processes and the streamlining of operations where appropriate.
F-56
<PAGE> 203
Provision for Federal and State Income Taxes. The provision for federal
and state taxes on income was $3.5 million and $1.0 million for the six-month
periods ended June 30, 1996 and 1995, respectively. The provision consisted of
alternative minimum tax for these periods.
The provision for federal and state taxes on income was $4.4 million
for the year ended December 31, 1995 compared to a provision of $1.7 million for
the year ended December 31, 1994 and a benefit of $2.8 million for the year
ended December 31, 1993. These provisions reflect effective tax rates of 3.7%,
2.3% and (2.7%) for the years ended December 31, 1995, 1994 and 1993,
respectively. The effective tax rates for 1995 and 1994 reflect the utilization
of current tax losses of ASB's nominee and the increase in the tax loan loss
base year reserve amounts coupled with changes in the deferred tax asset
valuation allowance. The 1993 effective tax rate reflects the utilization of
current tax losses of ASB's nominee, the benefit on the deferred tax asset of
the tax rate change in the 1993 Revenue Reconciliation Act, a reduction in the
deferred tax asset for provisions in the same legislation that significantly
reduced, retroactively to March 4, 1991, losses attributable to ASB's nominee,
New West, and changes to the deferred tax asset valuation allowance.
Provision (Benefit) for Payments in Lieu of Taxes. Keystone Holdings
recorded a provision for payments in lieu of taxes of $24.2 million for the six
months ended June 30, 1996 compared to a benefit for payments in lieu of taxes
of $6.5 million for the six months ended June 30, 1995. The provision for
payments in lieu of taxes for the six months ended June 30, 1996 as compared to
the benefit for the six months ended June 30, 1995 is the result of an increase
in earnings before taxes and a decrease in allowable tax bad debt deductions in
excess of book credit loss provisions. Keystone Holdings' earnings before taxes
for the six months ended June 30, 1996 were $102.2 million compared to $34.8
million for the same period in 1995. See Note 18, "Payments in Lieu of Taxes,"
in the Notes to the Consolidated Financial Statements.
The provision for payments in lieu of taxes was $7.9 million for the
year ended December 31, 1995 compared with a benefit for payments in lieu of
taxes of $0.8 million and a provision of $14.1 million for the years ended
December 31, 1994 and 1993, respectively. The increase in the provision for
payments in lieu of taxes in 1995 over 1994 and the decrease in 1994 over 1993
were largely attributable to increased or decreased earnings before taxes.
Earnings before taxes for the years ended December 31, 1995, 1994 and 1993 were
$118.2 million, 73.8 million and $104.0 million, respectively.
Accounting for Income Taxes. In February 1992, the FASB issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the anticipated future tax
consequences attributable to carryovers and differences between the amount
recorded in the financial statements for existing assets and liabilities and
their respective tax bases. Effective January 1, 1992, Keystone Holdings adopted
SFAS 109.
At January 1, 1992, Keystone Holdings recognized a deferred tax asset
relating to NOL carryforwards of $4.3 billion and net deductible temporary
differences of $370.0 million. The deferred tax asset was reduced by a valuation
allowance to arrive at the net amount that is more likely than not to be
realized from such carryforwards and temporary differences.
In adopting SFAS 109, Keystone Holdings recorded the cumulative effect
of a change in accounting principle of $60.0 million which was presented
separately in its Consolidated Statement of Earnings for the year ended December
31, 1992. Prior years' financial statements were not restated. Under the
provisions of SFAS 109, Keystone Holdings recorded a deferred tax benefit of
$2.8 million and $22.0 million for 1993 and 1992, respectively. The Consolidated
Balance Sheets include deferred tax assets of $112.6 million at June 30, 1996
and December 31, 1995 and 1994.
Keystone Holdings had earnings before taxes of $102.2 million and $34.8
million for the six months ended June 30, 1996 and 1995, respectively, and
$118.2 million, $73.8 million, and $104.0 million for the years ended December
31, 1995, 1994 and 1993, respectively. However, for the latter three periods,
Keystone Holdings had taxable losses due to the operations of New West, a
non-consolidated subsidiary of New Holdings that was a nominee of ASB for tax
purposes. For the six months ended June 30, 1996, NOL carryovers from the 1988
F-57
<PAGE> 204
Acquisition were used to eliminate Keystone Holdings' taxable income. As of
December 31, 1995, Keystone Holdings had NOL carryovers available to offset
future taxable income of $3.9 billion. Virtually all of these carryovers are
attributable to the operations of New West with the balance representing
carryovers available to Keystone Holdings from the Acquisition. Since all of the
loss carryovers belong to Keystone Holdings for tax purposes, they are
considered in the computation of the deferred tax asset. The net deferred tax
asset has been reduced to the extent Keystone Holdings will share these loss
carryover benefits with the FRF.
In order to fully realize the net deferred tax asset at December 31,
1995, Keystone Holdings will need to begin to generate future taxable income of
approximately $672.1 million prior to the expiration of its NOLs, which expire
in 2004. Based on its history of prior operating earnings and expectations for
the future, management believes it is more likely than not that Keystone
Holdings will realize the recorded benefit of $112.6 million through use of net
operating loss carryovers existing at December 31, 1995.
CAPITAL REGULATIONS AND REQUIREMENTS
Statutes and OTS regulations applicable to savings associations,
including ASB, require the maintenance of tangible capital, as defined, in an
amount not less than 1.5% of adjusted total assets; core capital, as defined, in
an amount not less than 3.0% of adjusted total assets; and risk-based capital,
as defined, in an amount not less than 8.0% of adjusted risk-weighted assets.
The following table presents ASB's actual regulatory capital compared
to the minimum required regulatory capital at June 30, 1996:
<TABLE>
<CAPTION>
Capital Assets % of Assets
------- ------ -----------
(dollars in thousands)
<S> <C> <C> <C>
TANGIBLE CAPITAL REQUIREMENT:
GAAP capital/assets ...................................... $ 1,180,436 $ 20,367,147
Add: Unrealized loss on available-for-sale securities .... 1,411 1,411
Reclass ACH settlement from deposits to other assets -- 22,141
Reclass deferred debt issue costs to other assets ... -- 1,249
Less:Deferred income taxes(1) ............................ (78,596) (78,596)
Core deposit intangible ............................. (2,025) (2,025)
Investment in nonincludable subsidiary .............. (2,401) (970)
----------- ------------
Actual tangible capital/assets ........................... 1,098,825 $ 20,310,357 5.41%
============
Required tangible capital ................................ (304,655) 1.50
----------- -----
Excess tangible capital .................................. $ 794,170 3.91%
=========== =====
CORE CAPITAL REQUIREMENT:
Tangible capital/assets .................................. $ 1,098,825 $ 20,310,357
Add:Core deposit intangible .............................. 2,025 2,025
----------- ------------
Actual core capital/assets ............................... 1,100,850 $ 20,312,382 5.42%
============
Required core capital(2) ................................. (609,371) 3.00
----------- -----
Excess core capital ...................................... $ 491,479 2.42%
=========== =====
RISK-BASED CAPITAL REQUIREMENT:
Core capital ............................................. $ 1,100,850
On-balance sheet risk-weighted assets .................. -- $ 11,826,300
Off-balance sheet risk-weighted assets ................. -- 61,272
----------- ------------
Core capital/risk-weighted assets ........................ 1,100,850 $ 11,887,572
Add: Allowable general credit loss reserve ............... 76,334 --
Qualifying subordinated notes, net .................. 99,825 --
Reclass deferred debt issue costs to other assets ... -- 1,249
----------- ------------
Actual risk-based capital/assets ......................... 1,277,009 $ 11,888,821 10.74%
============
Required risk-based capital .............................. (951,106) 8.00
----------- -----
Excess risk-based capital ................................ $ 325,903 2.74%
=========== =====
</TABLE>
- --------------------
F-58
<PAGE> 205
(1) $34.0 million of total deferred income tax qualifies for inclusion in
regulatory capital at June 30, 1996. This balance represents the
estimated amount of the deferred tax asset that can be realized in the
twelve-month period following the reporting period based upon ASB's
projected earnings for the same period.
(2) Under the prompt corrective action standards of the Federal Deposit
Insurance Corporation Improvement Act, an institution is subject to
regulatory sanctions if its core capital is less than 4.00%.
ASSET/LIABILITY MANAGEMENT
Keystone Holdings controls the sensitivity of its net interest income
to fluctuations in interest rates by closely matching the maturities and
interest rates of its interest-earning assets and interest-bearing liabilities.
The movement of interest rates on assets or liabilities, whether at
maturity or through interest rate adjustment provisions, is referred to as
"repricing." In order to match the interest rates of its assets and liabilities,
Keystone Holdings originates ARMs which reprice monthly at a spread over COFI.
COFI reflects the weighted average cost of funds for savings associations in the
FHLB's Eleventh District. Additionally, a majority of the mortgage-backed
securities portfolio represent adjustable rate assets indexed to COFI. Keystone
Holdings' primary asset/liability management objective is to maximize the
long-term spread between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Keystone Holdings has focused on
managing its cost of funds to provide rate and repricing characteristics similar
to COFI.
The lifetime interest rate caps which Keystone Holdings offers to its
COFI ARM borrowers introduce an element of interest rate risk to Keystone
Holdings. In periods of high interest rates, it is possible for Keystone
Holdings' cost of funds to exceed the rate on the lifetime interest rate caps
offered to customers. When determined appropriate by management, Keystone
Holdings hedges this risk by purchasing COFI- and LIBOR-based interest rate caps
and collars.
Other various financial instruments utilized by Keystone Holdings'
management to reduce or eliminate interest rate risk include options, swaps and
forward sales. See Note 21, "Interest Rate Risk Management," in the Notes to the
Consolidated Financial Statements for additional information.
Maturity and Interest Rate Sensitivity Analysis. 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 June
30, 1996, Keystone Holdings' one-year gap was a positive 2.20 percent compared
with a positive 4.82 percent at the end of 1995. Keystone Holdings slightly
positive one-year gap is a reflection of its ability to originate and maintain
adjustable-rate receivables. By holding in its portfolio primarily
adjustable-rate receivables and MBS, Keystone Holdings is able to help control
its sensitivity to movements in interest rates. The following maturity and
interest rate sensitivity analysis summarizes the asset and liability balances
of Keystone Holdings at June 30, 1996, on the basis of rate adjustments due to
occur within selected time intervals. The repricing periods and amounts in the
table assume the contractual amortization and estimated prepayments of
receivables and MBS.
F-59
<PAGE> 206
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------------------------------------------
Repricing Periods(1)
-----------------------------------------------------------------
Weighted
Average 0-3 4-12 1-5 5-10 Over 10
Balance(2) Yield Months Months Years Years Years
---------- -------- ------ ------ ----- ----- ------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments ............... $ 408 5.93% $ 286 $ -- $ 122 $ -- $ --
Receivables ............... 12,954 7.49 11,188 294 1,277 97 98
MBS ....................... 6,355 7.35 6,306 4 15 11 19
------- ---- -------- ------- ------- ---- ----
Total interest-earning
assets ................ 19,717 7.41 17,780 298 1,414 108 117
------- ---- -------- ------- ------- ---- ----
Interest-bearing liabilities:
Deposits .................. 12,729 4.69 6,467 5,296 966 -- --
Borrowings ................ 6,495 5.87 5,741 118 523 100 13
------- ---- -------- ------- ------- ---- ----
Total interest-bearing
liabilities ........... 19,224 5.06 12,208 5,414 1,489 100 13
------- ---- -------- ------- ------- ---- ----
Maturity gap ................ $ 493 $ 5,572 ($5,116) ($ 75) $ 8 $104
======= ==== ======== ======= ======= ==== ====
Cumulative maturity gap ..... $ 5,572 $ 456 $ 381 $389 $493
======== ======= ======= ==== ====
Gap as a percentage of
total assets .............. 2.38% 27.18% 2.20% 1.84% 1.88% 2.38%
</TABLE>
- ----------------
(1) The impact of hedging is reflected in the individual asset or liability
lines.
(2) Balances in this table are presented gross of discounts, premiums and
allowances for credit losses.
(3) Investments and borrowings are assumed to reprice at the earlier of their
interest rate reset date or their contractual maturity.
(4) Deposits are assumed to reprice at the earlier of their interest rate reset
date or their contractual maturity, except for deposits with no stated
maturity, which are assumed to reprice in month O.
Consistent with Keystone Holdings' strategy to maintain the majority of
its portfolio in monthly adjustable rate receivables and MBS, the repricing
table indicates that at June 30, 1996 Keystone Holdings' assets are scheduled to
reprice sooner than its liabilities. Given this strategy, Keystone Holdings'
earnings would be expected to decline with falling interest rates and to
increase with rising interest rates. However, Keystone Holdings' earnings are
also affected by the lag inherent in COFI, the index on which the majority of
Keystone Holdings' adjustable rate receivables and MBS interest rates are based.
This lag results from the two month delay in reporting COFI because of the time
required to gather the data needed to compute the index. Consequently, the
current COFI used to price adjustable rate receivables and MBS actually reflects
the cost of funds at a two month prior level. As a result, the COFI lag causes
adjustable rate receivables and MBS to initially reprice more slowly than
liabilities when the interest rate environment changes, enhancing earnings when
rates fall and lessening income when rates rise. In addition to the COFI
reporting lag, other characteristics of adjustable rate receivables and MBS
impact earnings. These characteristics include introductory (or "teaser") rates,
the interest rate adjustment frequencies, interest rate caps or limits on
interest rate changes, and interest rate floors.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Keystone Holdings has declared dividends on its common stock
of $60.0 million and $5.5 million for the six months ended June 30, 1996 and
1995, respectively, and $5.6 million and $32.5 million for the years ended
December 31, 1995 and 1994, respectively. In 1993, Keystone Holdings retired a
note for $21.0 million which had been given to its shareholder in payment of a
dividend in 1992. In addition Keystone Holdings paid an $8.0 million cash
dividend in 1993. At the end of 1993 a $10.0 million dividend had been declared
but unpaid.
New Capital is subject to the restrictions and limitations provided for
in the note purchase agreements related to the Series B Notes and the
Subordinated Notes and the Indenture covering the Series C Notes. See Note 20,
"Stockholder's Equity," in the Notes to the Consolidated Financial Statements of
Keystone Holdings for additional information on the restrictions under debt
covenants. Based on the most restrictive of New Capital's debt
F-60
<PAGE> 207
covenants, at June 30, 1996, New Capital would have been permitted to make up to
$28.6 million in dividend or other restricted payments.
Federal regulations require that ASB maintain for each calendar month
an average daily balance of liquid assets at least equal to 5.0% of the prior
month's average daily balance of net withdrawable deposits plus borrowings due
within one year. At June 30, 1996, ASB's liquid assets consisted of currency,
cash in banks, short-term investments in federal funds and bankers acceptances.
Also included were mortgage-backed securities with maturities of five years or
less. ASB's liquidity ratio was 6.76%, 5.29% and 5.04% at June 30, 1996,
December 31, 1995 and December 31, 1994, respectively.
At December 31, 1995, approximately 88 percent of time certificates are
scheduled to mature within one year. In the event that a higher than anticipated
number of these certificates do not renew, liquidity will be maintained
utilizing other funding sources such as FHLB advances, reverse repurchase
agreements and brokered deposits.
Keystone Holdings' cash and cash equivalents decreased to $144.1
million at June 30, 1996 from $385.6 million at December 31, 1995. The decrease
is primarily due to receivable originations of $2.3 billion and purchases of
held-to-maturity securities of $1.7 billion during the six months ended June 30,
1996. The decrease in cash and cash equivalents was partially offset by a net
increase in FHLB advances of $1.0 billion, and principal payments of
held-to-maturity securities and receivables of $1.8 billion and $507.7 million,
respectively, during the six months ended June 30, 1996.
Cash and cash equivalents increased to $385.6 million at December 31,
1995 from $215.3 million at December 31, 1994. The increase primarily results
from payments received on the New West Note of $1.7 billion during the year
ended December 31, 1995. In addition, proceeds from the sale of receivables
increased $1.1 billion, principal payments on receivables increased $744.4
million and net FHLB advances increased $613.0 million during the year ended
December 31, 1995. The increase in cash and cash equivalents was partially
offset by receivable originations of $3.9 billion during the year ended December
31, 1995.
Capital Resources. ASB's major sources of funds are generated from the
collection of loan principal and interest payments, deposits, FHLB advances,
repurchase agreements and other borrowings. In addition, ASB receives funds
through the sale of receivables, mortgage-backed securities and other assets.
ASB uses these funds primarily to originate receivables and pay dividends.
F-61
<PAGE> 208
CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE HOLDINGS
AS OF DECEMBER 31, 1995, 1994 AND 1993
F-62
<PAGE> 209
Independent Auditors' Report
The Board of Directors
Keystone Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Keystone
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Holdings,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 26, 1996, except as to Note 27
to the consolidated financial statements,
which is as of February 8, 1996
F-63
<PAGE> 210
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1995 and 1994
(Dollars in Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994
------------------ -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 385,561 $ 215,253
Investment Securities (fair value of $116,721 and $87,002) 116,728 87,014
Receivable from Affiliates 1,357 1,282
Receivables, net 11,101,010 12,638,520
Mortgage-Backed Securities, net (fair value of $2,959,608 and $1,698,338) 2,890,765 1,706,122
Assets Available-for-Sale:
Investment Securities 165,379 135,949
Mortgage-Backed Securities, net 4,061,282 1,321,425
Assets Held-for-Sale:
Receivables (fair value of $75,614 and $5,070) 74,021 5,070
New West Note - 1,515,040
Federal Home Loan Bank Stock 159,949 122,987
Interest Receivable 111,284 77,223
Premises and Equipment, net 233,687 194,112
Foreclosed Properties, net 100,037 118,645
Mortgage Servicing Rights, net 90,901 61,039
Deferred Tax Asset, net 112,596 112,596
Other Assets 99,099 90,126
----------- -----------
TOTAL ASSETS $19,703,656 $18,402,403
=========== ===========
LIABILITIES:
Deposits $13,005,029 $12,815,489
Federal Home Loan Bank Advances 1,004,337 391,366
Reverse Repurchase Agreements 4,016,441 3,982,659
Other Borrowed Money 371,079 359,653
Interest Payable 63,114 42,562
Remittances Due Banks 54,525 77,183
Remittances Due on Loans Serviced for Others 136,312 80,131
Accounts Payable and Accrued Expenses 91,199 82,782
----------- -----------
TOTAL LIABILITIES 18,742,036 17,831,825
----------- -----------
MINORITY INTEREST 293,061 203,454
LESS OFFSET-NEW WEST NOTE -- (167,000)
----------- -----------
NET MINORITY INTEREST 293,061 36,454
STOCKHOLDER'S EQUITY:
Common Stock (par value $1.00 per share); Shares Authorized 100,000;
Shares Issued and Outstanding 1,048 1 1
Additional Paid-in Capital 30,419 105,419
Unrealized Gain (Loss) on Available-for-Sale Securities 110,367 (29,161)
Retained Earnings - Substantially Restricted 527,772 457,865
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 668,559 534,124
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY $19,703,656 $18,402,403
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-64
<PAGE> 211
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings for the Years Ended
December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Receivables $ 967,263 $ 709,041 $ 756,606
Mortgage-Backed Securities 272,320 167,073 106,764
New West Note 58,841 141,039 241,014
Investment Securities 38,702 19,710 12,885
----------- ----------- -----------
Total Interest Income 1,337,126 1,036,863 1,117,269
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 636,315 481,794 513,435
FHLB Advances 30,858 69,096 128,741
Reverse Repurchase Agreements 261,217 103,828 20,239
Other Borrowings 34,322 28,769 28,731
----------- ----------- -----------
Total Interest Expense 962,712 683,487 691,146
----------- ----------- -----------
NET INTEREST INCOME 374,414 353,376 426,123
Provision for Credit Losses 63,837 101,609 123,503
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 310,577 251,767 302,620
OTHER INCOME AND EXPENSE:
Gain From Disposition of Credit Card Receivables, net -- 24,981 --
Gain (Loss) on Sale of Receivables, net 34 (2,295) 9,776
Gain on Sale of Servicing Rights -- 20,396 --
Savings Fee Income 21,526 16,781 17,555
Commissions Income 16,890 15,150 18,238
Receivable Fee Income 11,811 12,982 13,829
Gain on Asset Sales, net 2,534 207 23,994
Net Expense of Foreclosed Properties (18,032) (13,390) (12,951)
Net Servicing Income 18,696 14,038 7,229
Loss on Sale of Covered Assets (37,399) -- --
Effect of FDIC Assistance on Covered Assets 55,630 -- --
Other Income and Expense 743 52 3,380
----------- ----------- -----------
Total Other Income and Expense 72,433 88,902 81,050
----------- ----------- -----------
EARNINGS BEFORE GENERAL AND ADMINISTRATIVE
EXPENSES AND TAXES 383,010 340,669 383,670
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and Fringe Benefits 146,292 151,797 160,837
Occupancy 38,391 34,801 46,313
Regulatory Premiums and Assessments 33,367 32,483 32,019
Data Processing 27,119 25,777 26,754
Advertising and Promotion 12,424 11,628 11,677
Deferred Origination Expenses (34,718) (38,931) (35,067)
Reimbursements from Affiliates (573) (1,144) (17,407)
Other Operating Expenses 42,525 50,416 54,568
----------- ----------- -----------
Total General and Administrative Expenses 264,827 266,827 279,694
----------- ----------- -----------
EARNINGS BEFORE TAXES 118,183 73,842 103,976
Provision (Benefit) for Federal and State Income Taxes 4,402 1,721 (2,830)
Provision (Benefit) for Payments in Lieu of Taxes 7,887 (824) 14,075
----------- ----------- -----------
EARNINGS FROM OPERATIONS 105,894 72,945 92,731
Minority Interest in Earnings of Consolidated Subsidiaries (21,092) (22,621) (10,474)
----------- ----------- -----------
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-65
<PAGE> 212
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Retained
Additional Available- Earnings - Total
Common Paid-in for-Sale Substantially Stockholder's
Stock Capital Securities Restricted Equity
------ ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $1 $ 105,419 $ -- $ 392,018 $ 497,438
Net Earnings - -- -- 82,257 82,257
Dividends on Common Stock - -- -- (18,000) (18,000)
Other Capital Distributions - -- -- (13,117) (13,117)
Unrealized Gain on Available-
for-Sale Securities - -- 29,657 -- 29,657
-- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1993 1 105,419 29,657 443,158 578,235
Net Earnings - -- -- 50,324 50,324
Dividends on Common Stock - -- -- (22,500) (22,500)
Other Capital Distributions - -- -- (13,117) (13,117)
Unrealized Loss on Available-
for-Sale Securities - -- (58,818) -- (58,818)
-- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 $1 $ 105,419 (29,161) 457,865 534,124
Net Earnings - -- -- 84,802 84,802
Dividends on Common Stock - -- -- (5,587) (5,587)
Other Capital Distributions - -- -- (9,308) (9,308)
Other Capital Reductions - (75,000) -- -- (75,000)
Unrealized Gain on Available-
for-Sale Securities - -- 139,528 -- 139,528
-- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 $1 $ 30,419 $ 110,367 $ 527,772 $ 668,559
== ========= ========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-66
<PAGE> 213
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
Adjustments to Reconcile Net Earnings to Net Cash Provided
By Operating Activities:
Provisions for Credit Losses 63,837 101,609 123,503
Depreciation and Amortization 27,049 21,961 53,197
Net Gain from Disposition of Credit Card Receivables -- (24,981) --
Net Gain on Sale of Servicing Rights -- (20,396) --
Net Loss (Gain) on Asset Sales (2,568) 2,088 (33,770)
Loss on Sale of Covered Assets 37,399 -- --
Effect of FDIC Assistance on Covered Assets (55,630) -- --
Federal Home Loan Bank Stock Dividend (7,188) (5,355) (2,772)
Interest Payable, Net Change 20,552 10,398 20,074
Remittances Due, Net Change 33,523 (78,759) 33,550
Originated Receivables, Held-for-Sale (782,583) (223,220) (920,151)
Proceeds from Sale of Real Estate Receivables, Held-for-Sale 1,093,754 724,324 818,966
Purchase of Investment Securities, Held-for-Trading (128,510) (66,211) --
Proceeds from Sales of Investment Securities, Held-for-Trading 128,609 66,324 --
Decrease (Increase) in Interest Receivable (34,061) (14,551) 3,543
Increase (Decrease) in Federal and State Taxes 1,307 (295) (2,830)
Increase (Decrease) in Payable to FSLIC Resolution Fund 8,210 (15,133) (41,396)
Other, Net (2,601) (12,652) 57,250
----------- ----------- -----------
Total Adjustments 401,099 465,151 109,164
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 485,901 515,475 191,421
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (619,918) (355,975) (334,306)
Principal Payments and Maturities of Available-for-Sale Securities 446,303 188,405 142,116
Proceeds from Sales of Available-for-Sale Securities 453,874 164,587 262,132
Purchases of Held-to-Maturity Securities (609,221) (1,147,607) (271,216)
Principal Payments and Maturities of Held-to-Maturity Securities 704,581 889,979 514,708
Originated Real Estate Receivables (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables 744,400 840,432 1,014,252
Consumer Receivables Originated or Collected, Net Change 3,698 16,023 3,735
Federal Home Loan Bank Stock Purchases (29,774) (11,102) (14,068)
New West Note, Payments Received 1,682,040 1,569,018 1,569,018
Proceeds from Sale of Premises and Equipment 4,871 2,211 8,130
Purchase of Premises and Equipment (65,169) (19,988) (17,610)
Foreclosed Properties, Net Sales Proceeds 125,889 168,141 151,513
Cash Proceeds from Disposition of Credit Card Receivables -- 166,315 --
Purchased Mortgage Servicing Rights (38,270) (37,605) --
Other, Net (7,224) 38,818 (3,948)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,143,304) (2,019,993) 68,878
----------- ----------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-67
<PAGE> 214
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
for the Years Ended December 31, 1995, 1994 and 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, Net 189,540 (552,151) (618,033)
Proceeds from Federal Home Loan Bank Advances 1,093,732 2,505,794 3,170,361
Payments for Federal Home Loan Bank Advances (480,761) (3,652,271) (3,219,518)
Proceeds from Long-Term Reverse Repurchase Agreements 597,557 1,103,000 --
Payments for Long-Term Reverse Repurchase Agreements (475,127) -- --
Short-Term Reverse Repurchase Agreements, Net Change (88,648) 1,845,064 534,842
Federal Funds Purchased, Net Change (50,000) 50,000 --
Proceeds from Issuance of Series C Notes 175,000 -- --
Proceeds from Issuance of Subordinated Notes -- -- 19,988
Repayment of Series A Notes (111,000) -- --
Retirement of Subordinated Debentures -- -- (20,000)
Decrease in Payable to Affiliate -- -- (21,000)
Common Stock Dividends Paid (5,587) (32,500) (8,000)
Other Capital Distributions (9,308) (13,117) (13,117)
Other, Net (7,687) 4,704 (36,833)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 827,711 1,258,523 (211,310)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 170,308 (245,995) 48,989
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215,253 461,248 412,259
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 385,561 $ 215,253 $ 461,248
=========== =========== ===========
</TABLE>
DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest Paid on Deposits $ 628,618 $ 481,834 $ 513,196
Interest Paid on Borrowings 310,510 188,619 155,009
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities 4,214,911 8,697 1,557,485
Foreclosed Properties Acquired in Settlement of Loans 231,838 318,726 316,369
Loans Originated to Facilitate the Sale of Foreclosed Properties 65,693 92,415 47,832
Non-Cash Financing Activities:
Deposits Exchanged in Branch Swaps -- -- 152,382
Additional Paid-in Capital Transferred to Minority Interest
Upon Sale of Preferred Stock to Unrelated Party 75,000 -- --
Dividends Declared and Payable in Different Years:
Common Stock Dividends -- (10,000) 10,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-68
<PAGE> 215
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Keystone Holdings, Inc. ("Keystone Holdings") commenced operations in December
1988 as an indirect holding company for American Savings Bank, F.A. ("ASB") and
for American Real Estate Group, Inc. ("AREG"). ASB is a Federally chartered
savings bank. AREG formerly managed certain real estate related assets of New
West Federal Savings and Loan ("New West") and is now inactive as a result of a
restructuring transaction in 1993. N.A. Capital Holdings, Inc. ("NACH Inc.")
owns all of the outstanding common stock of ASB and AREG. NACH Inc. is owned by
New American Capital, Inc. ("New Capital") whose common stock is owned by New
American Holdings, Inc. ("New Holdings"), a subsidiary of Keystone Holdings.
Keystone Holdings and its direct and indirect subsidiaries are collectively
referred to as the "Keystone Group."
Keystone Holdings, through New Holdings owns the common stock of New West.
Although Keystone Holdings holds the ownership interest in New West, Keystone
Holdings does not have a financial interest in New West because of certain
contractual provisions and indemnifications, described here and in Note 8. Any
loss incurred by New West during its liquidation is the financial responsibility
of the FSLIC Resolution Fund. Keystone Holdings does not record any equity in
the earnings or losses of New West and substantially all decisions made by New
West's management must be approved by the FDIC prior to execution. Therefore,
the accounts of New West are not included in Keystone Holdings' consolidated
financial statements. New West was considered a nominee corporation of ASB for
state and federal tax purposes until October 24, 1995. (See Notes 17 and 18).
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). In preparing the Consolidated
Financial Statements, management is required to make estimates and assumptions
that affect the reported balances of certain assets and liabilities as of the
balance sheet date and revenues and expenses for the period then ended. In those
cases where amounts reported in the Consolidated Financial Statements are
significantly influenced by such estimates and assumptions, actual results could
differ from those reported. Certain amounts in the prior years Consolidated
Financial Statements have been reclassified to conform with the current year
presentation.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Keystone Holdings
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash, federal funds sold and repurchase
agreements with original maturities of 90 days or less.
Investment and Mortgage-Backed Securities
Investments in debt and equity securities that management has both the intent
and ability to hold until maturity are carried at cost, adjusted for
amortization of premium and accretion of discount, ("amortized cost") using the
interest method over the term of the security.
Securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities. In addition, mortgage loans
that are held-for-sale and were subsequently securitized in conjunction with
mortgage banking activities are classified as trading securities. Trading
securities are carried at fair value, with unrealized holding gains and losses
included in earnings. Keystone Holdings had no securities classified as trading
securities at December 31, 1995 and 1994.
Securities not classified as either held-to-maturity or as trading securities
are classified as available-for-sale and carried at fair value, with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of stockholder's equity until realized. Securities are classified into
one of the three categories at
F-69
<PAGE> 216
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
acquisition. Any transfer between categories of investments are accounted for at
fair value. Keystone Holdings recognized unrealized holding gains of $139.5
million for the year ended December 31, 1995 and unrealized holding losses of
$58.8 million for the year ended December 31, 1994 on its available-for-sale
portfolio.
Any declines in the recorded value of investment and mortgage-backed securities
that are determined to be other than temporary are charged to current earnings.
Dividend and interest income, including amortization of premium and accretion of
discount, for all three categories of securities are included in earnings when
earned using the interest method. The cost of investments and mortgage-backed
securities sold is determined by the specific identification method.
Receivables
Receivables, other than those that are identified as held-for-sale, are recorded
in the balance sheets at amortized cost. Receivables held-for-sale are those
originated or purchased with the intent to be sold in the foreseeable future.
These receivables, net of their related hedge gains and losses, are recorded at
the lower of amortized cost or fair value.
Interest income is accrued and credited to earnings as it is earned. Accrued
interest on receivables that are 90 days or more contractually delinquent is not
recognized as income ("nonaccrual receivables"). Interest income is subsequently
recognized on nonaccrual receivables only to the extent that payments are
received. Payments received on nonaccrual receivables are recorded as a
reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. Keystone
Holdings ceases amortization of deferred net fees or costs and accretion of
discounts on nonaccrual receivables. Nonaccrual receivables are returned to
accrual status at the time the delinquent receivable balance is paid current.
Restructured receivables have been permanently modified by Keystone Holdings and
include partial forgiveness of principal, interest and an extension of the
receivable's maturity. Keystone Holdings accounts for these receivables in
accordance with Statement of Financial Accounting Standards No. 15 ("SFAS 15"),
"Accounting by Debtors and Creditors for Troubled Debt Restructurings" and
Statement of Financial Accounting Standards No. 114 ("SFAS 114"), "Accounting by
Creditors for Impairment of a Loan", as amended by Statement of Financial
Accounting Standards No. 118 ("SFAS 118"), "Accounting for Creditors for
Impairment of a Loan - Income Recognition Disclosures."
Certain direct loan origination fees and costs are deferred and amortized as an
adjustment to yield over the estimated life of the related loans using the
interest method. Fees and direct costs associated with commitments expected to
be exercised are treated in the same manner. Indirect loan origination costs are
expensed as incurred.
Keystone Holdings holds certain receivables that have been securitized into
mortgage-backed securities with full recourse. The allowance for credit losses
on mortgage-backed securities represents management's estimate of the credit
losses Keystone Holdings will incur.
Allowance for Credit Losses
The allowance for credit losses is maintained at an amount management believes
adequate to absorb probable losses on the existing portfolio. Management
continuously assesses the adequacy of the allowance and periodically makes
adjustments through charges to earnings in order to maintain the allowance at an
appropriate level. Factors considered when making such an assessment include,
but are not limited to, the nature and value of the underlying collateral, the
loan delinquency status, historical and projected loss experience on sales of
foreclosed properties and the levels and trends of non-performing assets, loan
modifications and classified assets.
As management utilizes information currently available to make such an
assessment, the allowance for credit losses is subjective and may be adjusted in
the future depending on changes in economic conditions or other factors.
Additionally, various regulatory agencies, as an integral part of their regular
examination process, review Keystone Holdings' allowance for credit losses on a
periodic basis. These agencies may require Keystone Holdings to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
F-70
<PAGE> 217
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Premises and Equipment
Premises and equipment are recorded at cost and depreciated over their estimated
useful lives using the straight-line method. Estimated lives are generally 31.5
years for buildings, three to five years for furniture and equipment, three to
five years for computer hardware and three years for computer software.
Leasehold improvements are depreciated using the straight-line method over the
remaining lease terms or the lives of the improvements, whichever is less. Costs
related to maintenance and repairs are expensed as incurred, whereas costs that
increase either the estimated useful life or value of the property are
capitalized.
Foreclosed Properties
Real estate acquired in settlement of loans or through deed-in-lieu of
foreclosure is recorded at fair value less estimated selling costs, as supported
by independent appraisals. Once acquired, the recorded value of the property is
periodically reviewed and may subsequently be adjusted downward with a charge to
earnings, as appropriate.
Purchased and Originated Servicing
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
("SFAS 122"), "Accounting for Mortgage Servicing Rights," an amendment to
Statement of Financial Accounting Standards No. 65 ("SFAS 65"), "Accounting for
Certain Mortgage Banking Activities." In September 1995, Keystone Holdings
adopted early application of SFAS 122 and elected to implement SFAS 122 as of
January 1, 1995 which resulted in the recognition of $5.9 million in originated
mortgage servicing rights. As SFAS 122 prohibits retroactive application in
prior years, Keystone Holdings' financial statement reporting for 1994 and prior
is in accordance with the original SFAS 65.
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. Originated servicing rights are recorded when mortgage loans are
originated and subsequently sold or securitized with the servicing rights
retained. The total cost of the mortgage loans is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. The cost relating to purchased and originated
servicing is capitalized and amortized in proportion to, and over the period of,
estimated future net servicing income.
Keystone Holdings assesses impairment of the capitalized mortgage servicing
portfolio based on the fair value of those rights on a stratum-by-stratum basis
with any impairment recognized through a valuation allowance for each impaired
stratum. For the purpose of measuring impairment, Keystone Holdings stratified
the capitalized mortgage servicing rights using the following risk
characteristics: fixed-rate loans by coupon (less than 8%, 8%-10%, 10%- 12% and
greater than 12%); and adjustable-rate loans by index (Weighted Average Cost of
Funds Index for the Eleventh District Savings Institutions ("COFI"), Treasury,
London Interbank Offering Rate ("LIBOR"), etc.).
Impairment is measured utilizing fair value.
In order to determine the fair value of the servicing rights, Keystone Holdings
uses market prices under comparable servicing sales contracts, when available,
or alternatively, it uses a valuation model that calculates the present value of
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed-rate mortgages with similar coupons and
prepayment reports for comparable ARMs. In addition, Keystone Holdings uses
market comparables for estimates of the cost of servicing per loan, an inflation
rate, ancillary income per loan and default rates. Amounts capitalized are
recorded at cost, net of accumulated amortization and valuation allowance.
Capitalized Excess Servicing
To the extent that servicing fees on a mortgage loan exceed a "normal" servicing
fee, the gain or loss on sale is adjusted to provide for the recognition of the
excess servicing fee over the estimated lives of the loans. The amount of the
adjustment approximates the amount that investors were willing to pay for the
excess servicing fees at the time of the loan sale. The adjustment results in an
asset that is realized through receipt of the excess service fee over the lives
of the loans.
F-71
<PAGE> 218
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Keystone Holdings uses a valuation model to calculate the present value of
future excess servicing. Prepayment speeds are determined from market
projections for fixed-rate mortgages with similar coupons and vintage. Discount
rates are maintained at the market rate that existed at the time the excess
servicing was originally calculated.
Intangible Amortization
The assumption of deposits through acquisition has resulted in the recognition
of an intangible asset ("core deposit intangible"). The core deposit intangible
is included in "Other Assets" in the Consolidated Balance Sheets and is
amortized over the estimated life of the core deposits. The balance of Keystone
Holdings' core deposit intangible was $3.3 million and $7.1 million at December
31, 1995 and 1994, respectively.
Debt Issuance Costs
Expenses incurred in connection with the issuance of certain outstanding debt of
Keystone Holdings are deferred and amortized, using the interest method. The
amortization of deferred issuance costs is included as an adjustment of the debt
service cost over the term of the related debt. The unamortized balance of these
debt issuance costs is included in "Other Assets" in the Consolidated Financial
Statements.
Organization Costs
Expenses incurred in connection with the organization of Keystone Holdings were
deferred and amortized over five years using the straight-line method. These
organization costs were fully amortized as of December 31, 1993.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
recorded 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 in earnings in the
period that includes the enactment date.
Keystone Holdings and its subsidiaries file a consolidated federal income tax
return. For California franchise tax purposes, ASB joins in the filing of a
combined return with its subsidiaries and with AREG.
The Tax Sharing Agreement entered into by Keystone Holdings and its subsidiaries
(the "Tax Sharing Agreement") requires the subsidiaries to compute their tax
sharing payments as if they were filing a separate return. Such agreement
further requires NACH Inc. to compute its tax sharing payment as if it were
filing a separate consolidated return with its subsidiaries (including ASB),
with certain significant adjustments. The principal adjustments are (a) the
income, expenses, gains and losses of New West, a nominee of ASB for income and
franchise tax purposes through October 23, 1995, are excluded, (b) loan fees are
recognized on a straight-line basis over seven years, adjusted for sales of such
loans, rather than as received, and (c) for the years ending on or before
December 31, 1994, the market-to-market adjustment attributable to the real
estate loan portfolio acquired from the failed ASB Savings and Loan Association
is accreted into income ratably over seven years, adjusted for sales of the
acquired loans.
Securities and Loans Sold Under Agreements to Repurchase
Keystone Holdings enters into sales of securities and loans under agreements to
repurchase the same or similar securities or loans ("reverse repurchase
agreements" and "dollar roll agreements"). Reverse repurchase and dollar roll
agreements are accounted for as financing arrangements, with the obligation to
repurchase securities or loans sold reflected as a liability in the Consolidated
Balance Sheets. The dollar amount of securities and loans underlying the
agreements remains in the respective asset accounts.
F-72
<PAGE> 219
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest Rate Risk Management Instruments
Interest rate risk management instruments include interest rate exchange
agreements ("swaps"), interest rate protection agreements ("caps"), forward
sales of financial instruments, and financial futures and options contracts.
Premiums, discounts and fees associated with caps and swaps are accreted into
income or amortized to expense using the interest method. A gain or loss upon
the termination of a hedge is amortized over the remaining life of the hedged
asset or liability. Any gains and losses from forward sales and financial
futures which meet deferral accounting criteria are either deferred and
amortized using the interest method over the lives of the related positions or
recognized in current earnings if the related assets are sold. Net unamortized
gains or losses are included in the recorded value of the related asset or
liability being hedged.
NOTE 2: CASH AND CASH EQUIVALENTS
The following table summarizes the outstanding balance of cash and cash
equivalents at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash $385,561 $145,369
Federal Funds Sold -- 69,884
-------- --------
Total $385,561 $215,253
======== ========
</TABLE>
The cash balances noted above include restricted cash of $9.2 million and $4.8
million at December 31, 1995 and 1994, respectively. The restrictions primarily
relate to remittances received on certain receivables serviced for others.
Keystone Holdings did not have any repurchase agreements outstanding at any
month end in 1995. The maximum balance of repurchase agreements outstanding at
any month end during 1994 was $125.0 million. The average balances outstanding
during 1995 and 1994 were $0.5 million and $13.9 million, respectively. The
weighted average interest rates for 1995 and 1994 were 5.95 percent and 3.37
percent. All of the securities underlying the repurchase agreements remain under
Keystone Holdings' custody and control.
F-73
<PAGE> 220
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3: INVESTMENT SECURITIES
The following tables summarize the amortized cost, fair value and gross
unrealized holding gains and losses on investment securities, all of which
management has the ability and intent to hold until maturity, at December 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Weighted
Amortized Gross Unrealized Fair Average
-----------------
Cost Gains Losses Value Yield
--------- ----- ------ ----- --------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year..................... $ 19,693 $-- $ -- $ 19,693 5.24%
Corporate debt obligations:
Due within one year..................... 96,935 -- (2) 96,933 5.72
Due after one but within five years..... 50 -- (2) 48 5.50
After five but within 10 years.......... 50 -- (3) 47 5.50
-------- --- ---- -------- ----
97,035 -- (7) 97,028 5.72
-------- --- ---- -------- ----
Total................................. $116,728 $-- $ (7) $116,721 5.64%
======== === ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------------------
Weighted
Amortized Gross Unrealized Fair Average
----------------------
Cost Gains Losses Value Yield
--------- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year..................... $23,847 $ -- $ -- $23,847 4.94%
Corporate debt obligations:
Due within one year..................... 63,067 1 (7) 63,061 5.67
Due after one but within five years..... -- -- -- -- --
After five but within 10 years.......... 100 -- (6) 94 5.50
------- ---- -------- ------- ----
63,167 1 (13) 63,155 5.67
------- ---- -------- ------- ----
Total................................. $87,014 $ 1 $ (13) $87,002 5.47%
======= ==== ======== ======= ====
</TABLE>
The following tables summarize the amortized cost, fair value and gross
unrealized holding gains and losses on investment securities, all of which
management has determined to be available-for-sale, at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Weighted
Amortized Gross Unrealized Fair Average
------------------
Cost Gains Losses Value Yield
--------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after one but within five years..... $164,972 $407 $ -- $165,379 6.56%
-------- ---- ----- -------- ----
Total................................. $164,972 $407 $ -- $165,379 6.56%
======== ==== ===== ======== ====
</TABLE>
F-74
<PAGE> 221
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------
Weighted
Amortized Gross Unrealized Fair Average
-----------------
Cost Gains Losses Value Yield
--------- ----- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after one but within five years . $ 90,021 $ -- $(2,447) $ 87,574 5.66%
Corporate debt obligations:
Due after one but within five years . 50,000 -- (1,625) 48,375 5.70
-------- ----- ------- -------- ----
Total ............................. $140,021 $ -- $(4,072) $135,949 5.68%
======== ===== ======= ======== ====
</TABLE>
No investment securities were classified as trading securities at December 31,
1995 and 1994. At December 31, 1995 and 1994, investment securities of $21.9
million and $15.8 million, respectively, were pledged as collateral to secure
certain borrowings.
The following table presents certain information on sales of Keystone Holdings'
investment securities portfolio for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Proceeds From Sales $294,123 $88,328 $39,992
Gross Realized Gains 1,431 183 41
Gross Realized Losses 14 64 --
</TABLE>
The proceeds from sales of securities in 1995 and 1994, identified above, were
the result of sales of debentures. The proceeds from sales of securities in 1993
were the result of the sale of a U.S. Treasury security and a corporate
security. All of these securities were classified as available-for-sale or
held-for-trading.
F-75
<PAGE> 222
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4: MORTGAGE-BACKED SECURITIES
The following table presents held-to-maturity and available-for-sale
mortgage-backed securities at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------- ----------
Amortized Gross Unrealized Fair Amortized
-----------------------
Cost Gains Losses Value Cost
---------- ----- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
HLMC ............... $ -- $ -- $ -- $ -- $ 591,960
FNMA (1) ........... 2,908,206 51,402 -- 2,959,608 689,142
Private Label ...... -- -- -- -- 333,691
Resolution Trust
Corporation ...... -- -- -- -- 108,030
---------- ----------
2,908,206 $ 51,402 $ -- 2,959,608 1,722,823
==========
Allowance for Credit
Losses ........... (17,441) -- (16,701)
----------- ---------- -------
TOTAL ............ $ 2,890,765 $2,959,608 $ 1,706,122
=========== ========== ===========
AVAILABLE-FOR-SALE:
FHLMC .............. $ 598,307 $ 16,900 $ (364) $ 614,843 $ 150,020
FNMA (2) ........... 2,872,005 97,699 (926) 2,968,778 1,191,602
Resolution Trust
Corporation ...... 125,301 18 (1,387) 123,932 4,892
Private Labels ..... 355,709 1,240 (3,220) 353,729 --
---------- ----------- ---------- ----------
TOTAL ............ $ 3,951,322 $ 115,857 $ (5,897) $4,061,282 $1,346,514
=========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------
Gross Unrealized Fair
--------------------
Gains Losses Value
----- ------ -----
<S> <C> <C> <C>
HELD-TO-MATURITY:
FHLMC .............. $ -- $ (6,932) $ 585,028
FNMA (1) ........... 602 (5,572) 684,172
Private Label ...... -- (10,007) 323,684
Resolution Trust
Corporation ...... -- (2,576) 105,454
-------- ----------- ----------
$ 602 $ (25,087) 1,698,338
======== =========== ==========
Allowance for Credit
Losses ........... --
----------
TOTAL ............ $1,698,338
==========
AVAILABLE-FOR-SALE:
FHLMC .............. $ 31 $ (4,376) $ 145,675
FNMA (2) ........... 19,020 (39,542) 1,171,080
Resolution Trust
Corporation ...... -- (222) 4,670
Private Labels ..... -- -- --
-------- ----------- ----------
TOTAL ............ $ 19,051 $ (44,140) $1,321,425
======== =========== ==========
</TABLE>
- ------------------
(1) Included $2.9 billion of recourse obligations in 1995. There were no
recourse obligations in 1994.
(2) Included $1.8 billion and $1.0 billion of recourse obligations in 1995 and
1994, respectively. The $1.4 billion FNMA REMIC executed in December 1995
is included in the $1.8 billion. Approximately $1.2 billion of the REMIC is
collateralized by multi-family loans, and represent Keystone Holdings only
multi-family recourse amounts.
At December 31, 1995 and 1994, respectively, mortgage-backed securities of $4.2
billion and $1.9 billion were pledged as collateral to secure certain reverse
repurchase agreements.
At December 31, 1995 and 1994, Keystone Holdings did not have any
mortgage-backed securities classified as trading securities.
The following table presents certain information on sales of Keystone Holdings'
available-for-sale portfolio for the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Proceeds From Sales $159,751 $76,259 $222,140
Gross Realized Gains 1,184 252 1,359
Gross Realized Losses 18 -- 2
</TABLE>
In November 1995, the FASB issued its Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities", that permitted enterprises to reassess the appropriateness of the
classifications of all securities held upon initial adoption of the Special
Report, provided that such reassessment and any resulting reclassification was
completed no later than December 31, 1995. As a result, Keystone Holdings
reclassified $1.4 billion of mortgage-backed securities from its
held-to-maturity portfolio to the available-for-sale portfolio during November
1995. The unrealized gain on these securities at the time of the
reclassification was $24.8 million. There were no subsequent sales of these
reclassified securities in 1995.
F-76
<PAGE> 223
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5: RECEIVABLES
The following table summarizes receivables at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
REAL ESTATE RECEIVABLES:
Single-Family
Adjustable ........................................... $ 9,235,248 $ 9,539,309
Fixed ................................................ 208,841 162,861
Multi-Family
Adjustable ........................................... 1,342,563 2,529,120
Fixed ................................................ 56,462 66,414
Commercial, Industrial and Land ........................ 359,537 441,980
Equity(1) .............................................. 46,122 49,643
------------ ------------
TOTAL REAL ESTATE RECEIVABLES .......................... 11,248,773 12,789,327
OTHER RECEIVABLES:
Deposit Certificates ................................... 21,582 24,472
Credit Card ............................................ 3,003 2,897
Other .................................................. 18,156 19,071
------------ ------------
TOTAL OTHER RECEIVABLES .............................. 42,741 46,440
------------ ------------
TOTAL GROSS RECEIVABLES .............................. 11,291,514 12,835,767
Unearned Discount, net ................................. (41,492) (69,532)
Unamortized Deferred Fees, net ......................... (476) (26,856)
Allowance for Credit Losses ............................ (74,515) (95,789)
------------ ------------
RECEIVABLES OWNED, NET ............................... $ 11,175,031 $ 12,643,590
============ ============
Weighted Average Yield on Receivables for the Year Ended 7.60% 6.64%
============ ============
</TABLE>
- ---------------
(1) All equity loans are secured by residential real estate.
Total net receivables serviced was $27.4 billion, $24.0 billion and $18.7
billion at December 31, 1995, 1994 and 1993, respectively.
Collateralized borrowings issued by Keystone Holdings, including FHLB advances,
are secured by receivables of $2.4 billion, mortgage-backed securities of $3.0
billion and FHLB stock of $159.9 million at December 31, 1995.
Included in the above table are receivables held-for-sale of $74.0 million and
$5.1 million at December 31, 1995 and 1994, respectively.
Keystone Holdings primarily lends to customers located throughout California.
The following table summarizes the
F-77
<PAGE> 224
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company's real estate receivable portfolio by certain geographic areas at
December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
San
Los Francisco Other Other
Angeles Orange Bay Area California States Total
---------- ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Single-Family $2,759,775 $1,145,718 $3,178,947 $2,323,659 $35,990 $ 9,444,089
Multi-Family 559,749 110,935 299,488 402,995 25,858 1,399,025
Commercial, Industrial and
Land 136,076 28,448 55,578 137,231 2,204 359,537
Equity 38,617 469 3,461 3,570 5 46,122
---------- ---------- ---------- ---------- ------- -----------
TOTAL $3,494,217 $1,285,570 $3,537,474 $2,867,455 $64,057 $11,248,773
========== ========== ========== ========== ======= ===========
PERCENT 31.06% 11.43% 31.45% 25.49% 0.57% 100.00%
====== ===== ===== ===== ==== ======
</TABLE>
No other geographic areas within California or other states constituted more
than ten percent of total receivables at December 31, 1995.
The following table presents the contractual maturity of gross real estate
receivables at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1999- 2001- 2006 &
1996 1997 1998 2000 2005 After Total
------- ------- ------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY
Adjustable $ 167 $ -- $ 68 $ -- $ 1,463 $ 9,233,550 $ 9,235,248
Fixed 1,638 1,101 271 951 19,068 185,812 208,841
MULTI-FAMILY
Adjustable 4,067 1,267 3,073 13,735 74,963 1,245,458 1,342,563
Fixed 1,480 15,334 10,106 2,641 9,690 17,211 56,462
COMMERCIAL, INDUSTRIAL,
LAND
Adjustable 2,716 32,713 12,742 10,350 110,760 104,154 273,435
Fixed 12,236 19,322 10,424 1,245 38,613 4,262 86,102
EQUITY
Adjustable -- -- -- -- 14 43,985 43,999
Fixed 3 27 1,788 55 71 179 2,123
------- ------- ------- -------- ----------- -----------
TOTAL $22,307 $69,764 $38,472 $28,977 $254,642 $10,834,611 $11,248,773
======= ======= ======= ======= ======== =========== ===========
</TABLE>
Based upon historical experience, a substantial amount of receivables will be
paid prior to contractual maturity. As a result, this table is not to be
regarded as a forecast of future cash collections.
The following table summarizes the aggregate outstanding balance of nonaccrual
receivables and loans sold or securitized with recourse ("recourse obligations")
at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
NONACCRUAL RECEIVABLES AND RECOURSE OBLIGATIONS(1)(2)
Single-Family $118,480 $143,360
Multi-Family and Commercial 23,979 74,423
Equity 1,636 1,483
-------- --------
TOTAL $144,095 $219,266
======== ========
Percentage of Total Receivables and Recourse Obligations 0.90% 1.56%
</TABLE>
- --------
(1) At December 31, 1995 and 1994, nonaccrual receivables include nonaccrual
restructured receivables of $6.5 million and $3.9 million, respectively.
(2) At December 31, 1994, nonaccrual receivables serviced by others were
entitled to certain FDIC assistance and, therefore, were excluded from the
amounts shown above.
F-78
<PAGE> 225
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Keystone Holdings did not have any receivables or recourse obligations more than
90 days past due and still accruing interest at December 31, 1995 and 1994,
except for consumer credit card loans which are placed on nonaccrual status when
such loans become 120 days past due.
In May 1993, the FASB issued SFAS 114. SFAS 114 addresses the accounting by
creditors for impairment of certain loans by specifying how allowances for
credit losses related to impaired loans should be determined. A loan is defined
as being impaired when, based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement
(including both principal and interest payments) will not be received. SFAS 114
applies to all loans that are restructured in a troubled debt restructuring
involving a modification of terms.
In October 1994, the FASB issued SFAS 118 as an amendment to SFAS 114. SFAS 118
eliminates the income recognition provisions included in SFAS 114 thereby
permitting creditors to use existing methods of recognizing interest income on
impaired loans. Keystone Holdings adopted the provisions of SFAS 114 as amended
by SFAS 118, effective January 1, 1995.
SFAS 114 does not apply to large groups of smaller balance homogenous loans that
are collectively evaluated for impairment. Keystone Holdings collectively
reviews all single family loans, all consumer loans and multi-family and
commercial loans with outstanding principal balances under $1.0 million for
impairment. Keystone Holdings considers a loan to be impaired when, based upon
current information and events, it believes it is probable that Keystone
Holdings will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Keystone Holdings' impaired loans disclosed under
the requirements of SFAS 114 include nonaccrual loans (excluding those
collectively reviewed for impairment), debt restructurings, and multifamily and
commercial loans less than 90 days delinquent in which management believes that
the borrower may be experiencing financial difficulty based on indicators such
as low debt coverage ratios or high loan-to-value ratios ("other impaired
loans"). Keystone Holdings bases the measurement of loan impairment on the fair
value of the loan's underlying collateral. If the recorded investment of a loan
exceeds the measure of impairment, Keystone Holdings recognizes the impairment
by creating a valuation allowance (or adjusting an existing valuation allowance
on the loan) with a corresponding charge to the provision for credit losses. At
the time of in-substance foreclosure or troubled debt restructuring, including
foreclosure, the shortfall, if any, between the recorded investment of a loan
and the measure of impairment is charged off.
Impaired loans and the related specific loan loss allowance at December 31, 1995
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Recorded Allowance Net
Investment for Losses Investment
---------- ---------- ----------
<S> <C> <C> <C>
Nonaccrual Loans:
With specific allowances $ 1,128 $ 158 $ 970
Without specific allowances 3,417 -- 3,417
------- ------- -------
4,545 158 4,387
------- ------- -------
Restructured Loans:
With specific allowances 13,471 2,756 10,715
Without specific allowances 34,879 -- 34,879
------- ------- -------
48,350 2,756 45,594
------- ------- -------
Other Impaired Loans:
With specific allowances 10,065 2,804 7,261
Without specific allowances 6,419 -- 6,419
------- ------- -------
16,484 2,804 13,680
------- ------- -------
TOTAL IMPAIRED LOANS $69,379 $ 5,718 $63,661
======= ======= =======
</TABLE>
F-79
<PAGE> 226
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The average net recorded investment in impaired loans for the year ended
December 31, 1995 was $69.0 million. Interest income of $4.7 million was
recognized on impaired loans during the period of impairment.
Interest income is accrued and credited to earnings as it is earned. Accrued
interest on nonaccrual receivables (i.e., receivables that are 90 days or more
contractually delinquent) is not recognized as income. Interest income is
subsequently recognized on nonaccrual receivables only to the extent that
payments are received. Payments received on nonaccrual receivables are recorded
as a reduction of principal or as interest income depending on management's
assessment of the ultimate collectibility of the loan principal. At December 31,
1995 nonaccrual loans had interest due but not recognized of approximately $7.1
million.
The aggregate investment in troubled debt restructurings ("TDRs") modified prior
to January 1, 1995 that are not impaired based on the terms specified by the TDR
agreements with borrowers was $10.6 million at December 31, 1995. The foregone
interest on these restructured receivables did not have a significant impact on
Keystone Holdings' earnings for the year ended December 31, 1995. Interest
income on TDRs for the year ended December 31, 1995 was $0.8 million. At
December 31, 1995, Keystone Holdings had no commitments to lend additional funds
to borrowers whose loans were classified as TDRs.
The following table reconciles total nonaccrual loans to total impaired loans at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995
----
<S> <C>
Total Nonaccrual Loans $144,095
Homogenous Nonaccrual Loans (139,550)
Accruing Restructured Loans 48,350
Other Impaired Loans 16,484
--------
Total Impaired Loans $ 69,379
</TABLE>
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
The following summarizes the activity in the allowance for credit losses related
to loan receivables and mortgage-backed securities ("MBS") for the year ended
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
January 1, ........................ $ 112,490 $ 125,747 $ 121,537
Provision for Credit Losses ....... 63,837 101,609 123,503
Charge-Offs:
Single-Family ................... (55,933) (88,033) (92,187)
Multi-Family .................... (22,784) (17,374) (10,127)
Commercial ...................... (5,362) (1,963) (3,008)
Consumer ........................ (1,510) (5,084) (13,971)
--------- --------- ---------
(85,589) (112,454) (119,293)
Earthquake ...................... (3,743) (5,145) --
--------- --------- ---------
Total Charge-offs ............. (89,332) (117,599) (119,293)
Recoveries:
Single-Family ................... 2,222 2,505 --
Multi-Family .................... 1,563 220 --
Commercial ...................... 1,176 8 --
--------- --------- ---------
Total Recoveries .............. 4,961 2,733 --
--------- --------- ---------
December 31, ...................... $ 91,956 $ 112,490 $ 125,747
========= ========= =========
Net Charge-Offs/Average Receivables
and Recourse Obligations ........ 0.52% 0.92% 1.02%
</TABLE>
F-80
<PAGE> 227
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7: INTEREST RECEIVABLE
Interest receivable is comprised of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Receivables $ 60,779 $58,972
Mortgage-Backed Securities 48,380 16,971
Investment Securities 2,125 1,280
-------- -------
TOTAL $111,284 $77,223
======== =======
</TABLE>
NOTE 8: NEW WEST NOTE
On December 28, 1988 (the "Effective Date"), substantially all assets and
liabilities of the failed savings and loan subsidiary (the "Failed Association")
of Financial Corporation of America ("FCA"), were transferred to ASB (the
"Acquisition") and New West. As part of the transaction, ASB received a
promissory note from New West for the balance of the net assets transferred to
New West ("New West Note").
As of the Effective Date, Keystone Holdings and other related entities also
entered into an assistance agreement (the "Assistance Agreement") with the
Federal Savings and Loan Insurance Corporation (the "FSLIC"). Under the terms of
the Assistance Agreement, the FRF is required to indemnify ASB for specified
losses that may be incurred on, or in connection with, certain of the acquired
assets.
The FDIC has always caused New West to prepay the New West Note to the maximum
extent permitted by its terms. If the maximum prepayments under its terms were
to have continued, the balance of the New West Note would have been reduced to
approximately $113.0 million in November 1995 and fully repaid in February 1996.
However, in October 1995, Keystone Holdings agreed with the FDIC to allow
prepayment of the remaining balance of the New West Note. ASB received the
remaining principal balance of $505.3 million, plus interest on October 24,
1995. ASB utilized the proceeds received to pay down certain short-term
borrowings and to originate new receivables.
The following is a summary of the New West Note activity for the years indicated
(dollars in thousands):
<TABLE>
<CAPTION>
New West Warrant Net of
Note Offset Warrant
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 ........ $ 4,767,144 $ 167,000 $ 4,600,144
Receivables Transferred to New West 52,932 -- 52,932
Optional Prepayments .............. (1,569,018) -- (1,569,018)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1993 ........ 3,251,058 167,000 3,084,058
Optional Prepayments .............. (1,569,018) -- (1,569,018)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1994 ........ 1,682,040 167,000 1,515,040
Optional Prepayments .............. (1,682,040) (167,000) (1,515,040)
----------- --------- -----------
BALANCE AT DECEMBER 31, 1995 ........ $ -- $ -- $ --
=========== ========= ===========
</TABLE>
The balance of the New West Note reported in Keystone Holdings' financial
statements prior to December 31, 1995 has been reduced by the $167.0 million
value ascribed to the Warrants. Consensus No. 88-19 of the Emerging Issues Task
Force of the Financial Accounting Standards Board requires that capital arising
from instruments issued to the FSLIC be offset against amounts receivable from
the FSLIC which in this case included the New West Note, as its repayment was
supported by FRF assistance to New West.
F-81
<PAGE> 228
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Buildings and Leasehold Improvements $ 268,712 $ 218,666
Furniture and Equipment 99,617 94,460
Land 41,463 35,339
Construction in Progress 8,080 9,047
Accumulated Depreciation and Amortization (184,185) (163,400)
--------- ---------
TOTAL $ 233,687 $ 194,112
========= =========
</TABLE>
In January 1995, a wholly-owned service corporation of ASB purchased from a
related limited partnership the Irvine Plaza building structures and adjoining
land currently utilized for ASB's executive offices and various departments.
The total cash purchase price paid for the property was $45.2 million.
NOTE 10: FORECLOSED PROPERTIES
The following summarizes the outstanding balance of foreclosed properties at
December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Single-Family $ 69,448 $ 91,824
Multi-Family 29,404 28,423
Commercial and Industrial 4,922 28
--------- ---------
103,774 120,275
Allowance for Market Losses
Subsequent to Foreclosure (3,737) (1,630)
--------- ---------
TOTAL $ 100,037 $ 118,645
========= =========
</TABLE>
A summary of the activity in the allowance for market losses subsequent to
foreclosure for the years shown follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, $ 1,630 $ 7,855 $ 4,786
Provision for Market Losses 10,523 15,391 19,589
Write-downs (8,416) (21,616) (16,520)
-------- -------- --------
BALANCE AT DECEMBER 31, $ 3,737 $ 1,630 $ 7,855
======== ======== ========
</TABLE>
NOTE 11: MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued SFAS 122, an amendment to SFAS 65. In September
1995, Keystone Holdings adopted early application of SFAS 122. SFAS 122 requires
a company that purchases or originates mortgage loans and subsequently sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Companies are required to assess impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights
should be stratified based upon
F-82
<PAGE> 229
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
one or more of the predominant risk characteristics of the underlying loans such
as loan type, size, note rate, date of origination, term and/or geographic
location.
Keystone Holdings elected to implement SFAS 122 effective January 1, 1995. As a
result, throughout 1995 Keystone Holdings capitalized $7.8 million in originated
loan servicing rights that resulted from the origination and sale of receivables
with servicing retained. At December 31, 1995, Keystone Holdings established an
impairment valuation allowance of $0.9 million based upon an evaluation
performed on the entire servicing rights portfolio. Keystone Holdings' financial
statement reporting for 1994 and prior was in accordance with the original SFAS
65.
The following table summarizes the activity in purchased loan servicing,
originated loan servicing and excess servicing fees, net of amortization and the
valuation allowance for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Purchased Loan Originated Loan Excess Total Mortgage
Servicing, Net Servicing, Net Servicing, Net Servicing Rights
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 9,205 $ -- $ 59,345 $ 68,550
Present Value Gain on 1993 Sales -- -- 5,448 5,448
Amortization (3,046) -- (19,757) (22,803)
-------- ------- -------- --------
BALANCE AT DECEMBER 31, 1993 6,159 -- 45,036 51,195
Sale of Servicing -- -- (13,087) (13,087)
Purchased Servicing 37,605 -- -- 37,605
Present Value Gain on 1994 Loan Sales -- -- 558 558
Amortization (2,448) -- (12,784) (15,232)
-------- ------- -------- --------
BALANCE AT DECEMBER 31, 1994 41,316 -- 19,723 61,039
Purchased/Originated Servicing 38,270 7,757 -- 46,027
Present Value Gain on 1995 Loan Sales -- -- 3,542 3,542
Amortization (12,702) (366) (5,757) (18,825)
Impairment Valuation Allowance -- (882) -- (882)
-------- ------- -------- --------
BALANCE AT DECEMBER 31, 1995 $ 66,884 $ 6,509 $ 17,508 $ 90,901
======== ======= ======== ========
</TABLE>
NOTE 12: DEPOSITS
Deposits and related weighted average interest rates consisted of the following
at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
DEMAND AND SAVINGS DEPOSITS
Money Market Demand $ 1,425,243 1.50% $ 1,585,308 1.84 %
Passbook 1,878,761 3.90 1,063,064 2.77
Money Market Savings 415,886 2.51 564,298 2.58
Super Passbook 173,826 3.02 400,525 2.77
Other 237 -- 383 --
------------ -----------
TOTAL DEMAND AND SAVINGS DEPOSITS 3,893,953 2.83 3,613,578 2.33
------------ -----------
TIME CERTIFICATES
Fixed 9,126,012 5.64 9,217,044 4.83
Other 247 2.79 365 2.94
------------ -----------
TOTAL TIME CERTIFICATES 9,126,259 5.64 9,217,409 4.83
------------ -----------
Unearned Premium -- 313
Deferred Hedging Costs (15,183) (15,811)
------------ -----------
TOTAL $ 13,005,029 4.81% $12,815,489 4.13 %
============ ===========
</TABLE>
F-83
<PAGE> 230
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the maturity characteristics of time certificates
within each interest rate range at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Maturing in
-----------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
---------- -------- -------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
0%-3.9% $ 55,130 $ 1,079 $ -- $ -- $ 1,068 $ -- $ 57,277
4.0%-4.9% 1,202,412 62,729 427 93 5 -- 1,265,666
5.0%-5.9% 4,952,907 356,129 97,417 18,239 27,983 4,081 5,456,756
6.0%-6.9% 1,235,642 345,122 58,663 43,053 52,327 214 1,735,021
7.0% or more 549,565 39,959 6,960 3,173 11,415 467 611,539
---------- -------- -------- ------- ------- ------ ----------
TOTAL $7,995,656 $805,018 $163,467 $64,558 $92,798 $4,762 $9,126,259
========== ======== ======== ======= ======= ====== ==========
</TABLE>
Fixed time certificates with balances of $100,000 or greater are $1.76 billion
at December 31, 1995.
At December 31, 1995 and 1994, respectively, receivables with total unpaid
principal balances of $344,000 and $383,000 were pledged as collateral for
certain public agency deposits.
The following summarizes interest expense on deposits by type of account for the
years ended December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Savings Deposits $598,403 $447,506 $468,000
Demand Deposits 24,112 29,502 40,486
Wholesale Deposits 6,000 1,365 2,447
Other 7,800 3,421 2,502
-------- -------- --------
TOTAL $636,315 $481,794 $513,435
======== ======== ========
</TABLE>
NOTE 13: FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1995, FHLB advances are secured by Keystone Holdings' investment
in FHLB capital stock of $159.9 million and receivables and mortgage-backed
securities with aggregate principal balances of $893.1 million and $96.1
million, respectively. At December 31, 1994, FHLB stock of $123.0 million and
receivables with aggregate principal balances of $391.4 million secured FHLB
advances.
As a member of the FHLB of San Francisco, ASB must maintain FHLB capital stock
equal to the greater of: (a) 1.0 percent of its net residential mortgages, (b)
5.0 percent of outstanding FHLB advances and letters of credit from the FHLB or
(c) 0.3 percent of unconsolidated assets. At December 31, 1995 and 1994, ASB was
in compliance with this requirement.
The following summarizes the FHLB advances outstanding and their related
weighted average interest rates at December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------- -------- -------
<S> <C> <C> <C> <C>
Fixed $ 824,337 6.27% $211,366 6.31%
Adjustable 180,000 5.81 180,000 6.17
---------- --------
TOTAL $1,004,337 6.19% $391,366 6.25%
========== ========
</TABLE>
F-84
<PAGE> 231
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FHLB advances outstanding at December 31, 1995 will mature as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Maturing in
------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
-------- ------- ------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed $648,876 $10,000 $58,642 $50,000 $50,000 $ 6,819 $ 824,337
Adjustable -- -- 30,000 -- -- 150,000 180,000
-------- ------- ------- ------- ------- -------- ----------
TOTAL $648,876 $10,000 $88,642 $50,000 $50,000 $156,819 $1,004,337
======== ======= ======= ======= ======= ======== ==========
</TABLE>
The following table presents certain information on FHLB advances for the years
ending December 31, (dollar in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $1,004,337 $1,562,919 $1,638,561
Average Balance Outstanding 492,284 1,044,018 1,578,904
Weighted Average Rate 6.64% 6.62% 8.15%
</TABLE>
NOTE 14: REVERSE REPURCHASE AGREEMENTS
Keystone Holdings enters into reverse repurchase agreements with major brokerage
firms that are primary dealers in government securities. Mortgage-backed
securities underlying certain of the agreements are delivered to the dealers
that arrange the transactions. The dealers may loan these securities to other
parties in the normal course of their operations. The following table presents
information regarding reverse repurchase agreements at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
Repurchase Recorded(1) Fair Maturity
Underlying Collateral Liability Value Value Date
- --------------------- ------------------------ ------------------------ ------------------------ ------------------
1995 1994 1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC Securities $ 113,171 $ 531,034 $ 113,774 $ 573,558 $ 119,162 $ 553,600 2/1/96 3/20/95
FNMA Securities 2,695,270 1,490,688 2,711,622 1,563,680 2,730,927 1,513,599 1/26/96 3/20/95
Pledged Receivables(2) 1,208,000 1,960,937 1,226,853 2,106,704 1,230,630 2,084,559 5/22/97 6/15/99
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $4,016,441 $3,982,659 $4,052,249 $4,243,942 $4,080,719 $4,151,758
========== ========== ========== ========== ========== ==========
</TABLE>
- ------------------
(1) Recorded value includes accrued interest at December 31.
(2) In July 1994, ASB pledged certain single-family adjustable rate loans as
collateral for reverse repurchase agreements with the Federal Home Loan
Bank.
F-85
<PAGE> 232
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reverse repurchase agreements outstanding with individual brokers in excess of
ten percent of Keystone Holdings' stockholder's equity at December 31, 1995 are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted Collateral
Average Recorded Recorded Market
Purchasing Party Maturity Value(1) Value(1) Value
- ---------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
DLJ 29 days $ 172,220 $ 176,433 $ 179,059
CS First Boston 33 days 366,168 376,221 325,228
Federal Home Loan Bank 508 days 1,226,853 1,206,500 1,230,630
FNMA 12 days 334,118 342,511 343,666
Goldman Sachs 32 days 672,917 674,362 677,774
Nomura Securities 25 days 330,640 341,574 344,715
Prudential Securities 17 days 266,880 270,036 273,920
Paine Webber 37 days 122,191 126,497 126,355
Salomon Brothers 32 days 325,496 333,555 335,158
UBS Securities 16 days 120,993 125,681 125,052
Smith Barney 32 days 113,774 118,275 119,162
</TABLE>
- ---------------
(1) Recorded value includes accrued interest at December 31, 1995.
The following table presents certain information on reverse repurchase
agreements for the years shown (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $4,258,600 $3,982,659 $1,101,457
Average Balance Outstanding 4,109,917 2,025,036 628,885
Weighted Average Rate 6.09% 4.68% 3.17%
</TABLE>
NOTE 15: OTHER BORROWED MONEY
Other borrowed money consisted of the following at December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Series A Floating Rate Notes due 1997 $ -- $111,000
Series B 9.60% Notes due 1999 169,000 169,000
Series C Floating Rate Notes due 2000 175,000 --
Federal Funds Purchased -- 50,000
Subordinated Notes Due 1998 20,500 20,500
Dollar Roll Agreements 5,915 8,478
Capitalized Leases 560 562
Mortgage Notes Payable Secured by Premises 104 113
-------- --------
TOTAL $371,079 $359,653
======== ========
Weighted average interest rate at end of period 8.41% 7.83%
======== ========
</TABLE>
F-86
<PAGE> 233
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other borrowed money matures as follows (dollars in thousands):
Year Ending December 31, Amount
1996 $ 5,927
1997 13
1998 105,013
1999 84,514
2000 175,015
Thereafter 597
--------
TOTAL $371,079
========
The following table presents certain information on other borrowed money for the
years ending December 31, (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Maximum Month-End Outstanding Balance $380,277 $367,795 $309,050
Average Balance Outstanding 368,477 319,500 301,461
Weighted Average Rate 8.54% 8.06% 8.47%
</TABLE>
On January 14, 1992, New Capital completed its private placement of Series A
Floating Rate Notes due 1997 ("Series A Notes") of $111.0 million and Series B
9.60 percent Notes due 1999 ("Series B Notes") of $169.0 million. Interest on
the Series A Notes accrued at three-month LIBOR plus 2.25 percent and repriced
quarterly. The Series B Notes accrue interest at 9.60 percent over their entire
term. A note purchase agreement (the "Note Purchase Agreement") was executed by
New Capital in connection with the private placement of the Series A and Series
B Notes.
On October 12, 1993, in accordance with a subordinated note purchase agreement
(the "Subordinated Note Agreement"), New Capital issued $20.5 million of
subordinated notes at a discounted price of 97.5 percent of the principal
amount. The subordinated notes accrue interest at a rate equal to three-month
LIBOR plus 2.875 percent. The rate on the subordinated notes wa 8.81 percent at
December 31, 1995. Interest is paid quarterly and the subordinated notes mature
on October 12, 1998.
The Note Purchase Agreement and the Subordinated Note Agreement contain certain
limitations regarding the payment of cash dividends on common or preferred
stock, the reacquisition or issuance of common or preferred stock, additional
borrowings and payments thereon and certain other transactions. New Capital is
in compliance with all such limitations.
On March 23, 1995, New Capital completed the private placement of $175.0 million
of its Series C Floating Rate Notes due April 12, 2000 (the "Series C Notes").
The net proceeds from the issuance of the Series C Notes were used to redeem the
$111.0 million Series A Notes and to fund a $60.0 million capital contribution
from NACH Inc. to ASB. Interest on the Series C Notes accrues at a rate equal to
three-month LIBOR plus 1.375%, reset on a quarterly basis. Interest payments are
made quarterly on January 12, April 12, July 12 and October 12 of each year.
The indenture related to the Series C Notes contains certain covenants that,
among other things, require the maintenance of regulatory capital at ASB and
limit the following: (i) funded indebtedness, (ii) subsidiary funded
indebtedness, (iii) upstream payments, (iv) subsidiary dividends, (v) liens,
(vi) mergers and consolidations, (vii) issuance of subsidiary capital stock,
(viii) transactions with affiliates and (ix) lines of business. New Capital is
in compliance with all such covenants and restrictions.
F-87
<PAGE> 234
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A redemption notice was provided to holders of the Series A Notes as required by
the Note Purchase Agreement and the redemption was completed on April 12, 1995.
As of March 30, 1995, New Capital irrevocably placed sufficient funds in trust
with its paying agent to satisfy the required principal and interest necessary
to redeem the Series A Notes on their redemption date. As a result, New Capital
recorded the payment of those funds as an in-substance defeasance of the Series
A Notes. The early retirement of the Series A Notes required Keystone Holdings
to write off certain related unamortized debt issuance costs and to mark certain
interest rate cap agreements to market as of March 30, 1995, resulting in a
pre-tax loss on early retirement of debt approximating $2.1 million. The loss
has been included in general and administrative expenses in the accompanying
Consolidated Statements of Earnings.
NOTE 16: EMPLOYEE BENEFIT AND COMPENSATION PLANS
Pension Plan
Effective January 1, 1989, ASB established a defined benefit pension plan (the
"Plan") covering substantially all of its employees. The benefits are based on
each employee's years of service after January 1, 1989, up to a maximum of 30
years and each employee's compensation during the last five years of
participation. All service since the date of hire with either ASB or the Failed
Association is counted for vesting purposes. ASB's funding policy is to ensure
that the Plan meets the minimum funding requirement set forth in the Employee
Retirement Income Security Act of 1974 ("ERISA"). Plan assets include cash
equivalents and mutual funds.
Effective December 31, 1993, the Plan was amended to freeze benefit accruals for
all participants. This event resulted in a curtailment under Statement of
Financial Accounting Standards No. 88 ("SFAS 88"), "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." ASB realized a nominal gain as a result of the
curtailment.
The Plan was terminated effective June 30, 1995. At the termination date, all
participants' accrued benefits became fully vested. The net assets of the Plan
were allocated as prescribed by the ERISA and the Pension Benefit Guaranty
Corporation (the "PBGC") and their related regulations. All participants
received full benefits. The termination resulted in a settlement under SFAS 88.
ASB recognized a gain of $1.7 million as a result of the settlement. The
majority of the projected benefit obligation was settled in 1995. At December
31, 1995, the Plan had $1.8 million in remaining assets. Ultimate distribution
of these assets is pending IRS approval.
The following table sets forth the Plan's funded status and amounts recorded in
Keystone Holdings' Consolidated Balance Sheet at December 31, 1994 (dollars in
thousands):
<TABLE>
<CAPTION>
1994
----
<S> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION
Vested Accumulated Benefits $ 5,307
Non-Vested Accumulated Benefits 1,316
-------
TOTAL ACCUMULATED BENEFITS $ 6,623
=======
Projected Benefit Obligation for Service Rendered to Date $ 6,623
Plan Assets at Fair Value 8,035
-------
Projected Benefit Obligation (Less than) in Excess of Plan Assets (1,412)
Unrecognized Net Gain 3,317
-------
PENSION LIABILITY $ 1,905
=======
</TABLE>
F-88
<PAGE> 235
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Assumptions used in determining the actuarial present value of the projected
benefit obligation at December 31, 1994 follows:
<TABLE>
1994
----
<S> <C>
Rate of Return on Plan Assets 8.50%
Discount Rate 8.50%
Rate of Increase in Future Compensation 5.00%
</TABLE>
Net pension (income) cost includes the following components for the years shown
below (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service Cost (benefits earned during the period) $ -- $ -- $ 3,162
Interest Cost on Projected Benefit Obligation 594 688 803
Actual Return on Plan Assets (896) 152 (840)
Net Amortization and Deferral 78 (896) 233
----- ----- -------
NET PERIODIC PENSION (INCOME) COST $(224) $ (56) $ 3,358
===== ===== =======
</TABLE>
Savings Plan
ASB has established a savings plan for its employees that allows participants to
make contributions by salary deduction equal to 14.0 percent or less of their
salaries, pursuant to Section 401(k) of the Internal Revenue Code. All regular
employees of ASB, other than collective bargaining and temporary employees are
immediately eligible to participate in the Plan. ASB matches an employee's
contributions up to a maximum 4.0 percent of the employee's salary. Employee
contributions vest immediately; ASB's partial matching contributions vest over
five years. ASB's contributions to the savings plan in 1995, 1994 and 1993 were
$4.2 million, $4.4 million and $3.1 million, respectively.
Supplemental Executive Retirement Plan
ASB implemented a Supplemental Executive Retirement Plan ("SERP") in 1990. The
SERP is a non-qualified, noncontributory, defined benefit plan where benefits
are paid to certain officers using a target percentage which is based upon the
number of years of service with ASB. This percentage is applied to the
participant's average annual earnings for the highest three out of the final ten
years of employment. These benefits are reduced to the extent a participant
receives benefits from the defined benefit pension plan. The expense for the
SERP was $1.6 million, $1.9 million and $1.2 million in 1995, 1994 and 1993,
respectively.
Phantom Share Plan
In 1990, ASB implemented the Phantom Share Plan (the "PSP") for the benefit of
certain of its officers. The PSP provides a long-term financial performance
incentive to its participants. Participants in the PSP are granted phantom
shares (units of value), the value of which is determined similar to that of
actual equity securities. The PSP calls for the immediate exercisability and
cashing out in the event of a change of control of Keystone Holdings or any of
its subsidiaries. In the case of an initial public offering, the phantom shares
are converted into stock options. ASB did not record any costs for the PSP in
1995 and 1994.
Executive Short-Term Incentive Plan
ASB has established a Short-Term Incentive Plan ("STI") for the benefit of
certain of its executives. The STI provides a short-term incentive to its
participants based upon the achievement of both overall company and individual
performance goals. The expense for the STI was $3.2 million, $2.2 million and
$3.0 million in 1995, 1994 and 1993, respectively.
F-89
<PAGE> 236
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17: FEDERAL AND STATE INCOME TAXES
The Tax Sharing Agreement between Keystone Holdings and its subsidiaries is
generally patterned after provisions in the Internal Revenue Code and requires
Keystone Holdings' subsidiaries to make quarterly payments of their estimated
tax liabilities and tax sharing dividends based on analyzing income, as
adjusted. The excess of the amounts paid to Keystone Holdings under the Tax
Sharing Agreement over the sum of (a) the current portion of the provision for
income taxes and (b) the provision for payments in lieu of taxes (see Note 18,
"Payments in Lieu of Taxes") is recorded as a tax sharing dividend.
Keystone Holdings' taxable income (loss) and earnings before taxes for the years
ended December 31, follows (dollars in millions):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Taxable Income (Loss) $ 128.5 $ (31.0) $ (944.6)
Earnings Before Taxes 118.2 73.8 104.0
</TABLE>
Pursuant to the terms of the closing agreement entered into with the Internal
Revenue Service in connection with the Acquisition, New West was treated as a
nominee of ASB until the balance of the New West Note fell below $250.0 million
(the "Unwind Date," which occurred on October 24, 1995). Accordingly, beginning
on the Unwind Date, New West was treated as a separate entity for federal income
and California franchise tax purposes and is no longer a nominee of ASB. Tax
benefits that may be generated by any future losses of New West will not reduce
the taxes of ASB; however, there is no effect on the benefits of utilizing the
existing significant tax loss carryovers.
Current and deferred income taxes are allocated among the members of the
Keystone Group as if each company were filing a separate tax return. In ASB's
case, this computation considers the losses generated by ASB's nominee, New
West, prior to the Unwind Date.
As of December 31, 1995, Keystone Holdings' net deferred tax asset was $112.6
million. In order to fully realize the net deferred tax asset, Keystone Holdings
will need to generate future taxable income of approximately $672.1 million
prior to the expiration of its tax net operating losses, which begin to expire
in 2004. Based on Keystone Holdings' history of prior operating earnings and
expectations for the future, management believes it is more likely than not that
Keystone Holdings will realize the recorded benefit of $112.6 million through
use of net operating loss carryovers existing at December 31, 1995.
In determining the possible future realization of deferred tax assets
attributable to net operating loss carryovers, GAAP requires that future taxable
income from the following sources be taken into account: (a) the reversal of
taxable temporary differences, (b) future operations exclusive of reversing
temporary differences and (c) tax-planning strategies that, if necessary, would
be implemented to accelerate taxable income into years in which net operating
losses might otherwise expire. Keystone Holdings' management has taken these
sources of future taxable income into account in determining the amount of the
net deferred tax asset.
F-90
<PAGE> 237
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income taxes (benefit) attributable to income from continuing operations for the
years shown are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
CURRENT
Federal $ 3,471 $ 766 $ --
State 931 955 --
-------- -------- ---------
CURRENT INCOME TAXES 4,402 1,721 --
DEFERRED
Federal 784 (42,840) (55,492)
State 6,330 (5,401) 39,286
-------- -------- ---------
7,114 (48,241) (16,206)
Change in Net Deferred Tax Asset Before Valuation
Allowance due to Change in Tax Laws and Rate -- -- 121,034
Change in Valuation Allowance (7,114) 48,241 (107,658)
-------- -------- ---------
DEFERRED INCOME TAXES (BENEFIT) -- -- (2,830)
-------- -------- ---------
TOTAL INCOME TAXES (BENEFIT) $ 4,402 $ 1,721 $ (2,830)
======== ======== =========
</TABLE>
Keystone Holdings' effective tax rate differs from the statutory federal tax
rate as set forth below for the years shown (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- -------------------- -------------------
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
STATUTORY FEDERAL INCOME TAX
PROVISION AND RATE $ 41,364 35.0% $ 25,845 35.0% $ 36,392 35.0%
INCREASE (DECREASE) DUE TO:
Utilization of Current Tax
Losses of Nominee, New West (17,482) (14.8) (55,100) (74.6) (90,136) (86.7)
Change in Net Deferred Tax Asset
Before Valuation Allowance due
to Change in Tax Laws and Rate -- -- -- -- 121,034 116.4
State Franchise Tax net of Federal Tax Benefit 3,899 3.3 (2,890) (3.9) 39,286 37.8
Increase in Base Year Reserve Amount (16,318) (13.8) (11,605) (15.7) -- --
Change in Valuation Allowance (7,114) (6.0) 48,241 65.3 (107,658) (103.5)
Other, net 53 -- (2,770) (3.8) (1,748) (1.7)
-------- ----- -------- ----- --------- -----
EFFECTIVE INCOME TAX PROVISION AND RATE $ 4,402 3.7% $ 1,721 2.3% $ (2,830) (2.7)%
======== ===== ======== ===== ========= =====
</TABLE>
F-91
<PAGE> 238
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions
of deferred income taxes at December 31, are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
COMPONENTS OF THE DEFERRED TAX ASSET
Purchase Accounting $ 29,025 $ 40,319
Net Operating Loss Carryforwards 1,632,230 1,690,939
Provision for Losses on Loans and Real Estate 44,764 67,829
Other 40,057 33,941
----------- -----------
Total 1,746,076 1,833,028
VALUATION ALLOWANCE (1,150,206) (1,157,320)
----------- -----------
DEFERRED TAX ASSET, NET OF VALUATION ALLOWANCE 595,870 675,708
----------- -----------
COMPONENTS OF DEFERRED TAX LIABILITY
Tax Bad Debt Reserve (449,137) (526,706)
Purchase Accounting (3,648) (4,500)
Other (30,489) (31,906)
----------- -----------
DEFERRED TAX LIABILITY (483,274) (563,112)
----------- -----------
DEFERRED TAX ASSET, NET $ 112,596 $ 112,596
=========== ===========
</TABLE>
The valuation allowances of $1.2 billion at December 31, 1995 and 1994, include
$130.6 million and $270.2 million, respectively, related to payments in lieu of
taxes that will arise from the realization of the net deferred tax asset. These
valuation allowances represent the excess of the gross deferred tax asset over
the sum of the taxes and the payments in lieu of taxes related to projected
future taxable income, reversing taxable temporary differences and tax planning
strategies. The decline in the valuation allowance of $7.1 million during the
year ended December 31, 1995 was primarily attributable to a greater than
anticipated utilization of the beginning balance of the deferred tax asset. The
increase in the valuation allowance of $48.2 million during the year ended
December 31, 1994 reflects management's estimate of the benefit Keystone would
ultimately receive from the utilization of losses from the operations of ASB's
nominee, New West. While the Revenue Reconciliation Act of 1993 increased the
federal tax rate, it also significantly reduced, retroactively to March 4, 1991,
losses and deductions attributable to ASB's nominee, New West. This resulted in
a reduction in the deferred tax asset with a corresponding change in the related
valuation allowance for the year ended December 31, 1993.
The enactment in 1993 of certain federal tax legislation had the effect of
retroactively disallowing certain losses and bad debt deductions arising from
assets of New West. As a result, Keystone Holdings reduced its gross deferred
tax asset and the related valuation allowance by $155.0 million.
Also during 1993, California enacted legislation reducing the net operating loss
carryforward period from 15 years to ten years for losses incurred prior to 1994
relating to assets acquired in a tax-free reorganization under Internal Revenue
Code Section 368(a)(1)(G). This change had a negligible impact on the valuation
allowance.
At December 31, 1995, Keystone Holdings has the following federal income tax net
operating loss carryforwards which expire under current law during the years
indicated (dollars in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2004 $1,641,595
2005 784,196
2006 701,008
2007 105,825
2008 625,887
2009 37,460
----------
TOTAL $3,895,971
==========
</TABLE>
F-92
<PAGE> 239
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Keystone Holdings also has alternative minimum tax credit carryovers of
approximately $4.2 million as of December 31, 1995 which are available to reduce
future regular federal income taxes.
Savings institutions are permitted a special bad debt deduction computed under
the percentage of taxable income method or the experience method, whichever is
more beneficial. The percentage of taxable income method is approximately 8.0
percent of taxable income, subject to certain limitations. Under the experience
method, a savings institution's bad debt deduction is computed based on actual
loan loss experience. Due to the significant tax net operating losses generated
by ASB's tax nominee, New West, prior to the Unwind Date, coupled with the
actual loan loss experience of New West deemed attributable to ASB for tax
purposes under the agreements executed in connection with the Acquisition, bad
debt deductions of ASB are computed using the experience method.
A deferred tax liability is not required to be recognized for the amount of the
tax bad debt reserve arising in years beginning before 1988 (the "base year
reserve amount") unless it becomes apparent that it will reverse in the
foreseeable future. At December 31, 1995 the base year reserve amount was
approximately $225.6 million. The Consolidated Financial Statements do not
include a tax liability of $24.4 million related to the base year reserve amount
as these reserves are not expected to reverse until indefinite future periods or
may never reverse. Circumstances that would require an accrual of all or a
portion of this unrecorded tax liability include the failure to meet the tax
definition of a savings institution or a reduction in qualifying loan levels.
The 1988, 1989 and 1990 tax returns of Keystone Holdings have been examined by
the Internal Revenue Service.
NOTE 18: PAYMENTS IN LIEU OF TAXES
The Assistance Agreement generally provides that 75.0 percent of most of the
federal tax savings and approximately 19.5 percent of most of the California tax
savings (as computed in accordance with the Assistance Agreement) attributable
to ASB's utilization of any current tax losses or tax loss carryovers of New
West are to be paid by Keystone Holdings for the benefit of the FRF. The
Assistance Agreement sets forth certain special adjustments to federal taxable
income to arrive at "FSLIC taxable income." The principal adjustments
effectively permit ASB (a) to recognize loan fees ratably over seven years
adjusted for loan dispositions, (b) to treat the income and expenses of NACH
Inc. and New Capital as income and expenses of ASB, and (c) for years ending on
or before December 31, 1994, to recognize approximately 36.0 percent of the
amortization of the market-to-market adjustment attributable to the acquired
loan portfolio.
At December 31, the provision (benefit) for payments in lieu of taxes consisted
of the following (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- -------
<S> <C> <C> <C>
PROVISION (BENEFIT) FOR PAYMENTS IN LIEU OF TAXES
State $3,450 $(137) $ 327
Federal 4,437 (687) 13,748
------ ----- -------
TOTAL $7,887 $(824) $14,075
====== ===== =======
</TABLE>
NOTE 19: MINORITY INTEREST
New Capital's $80.0 million cumulative redeemable preferred stock ("Preferred
Stock") was issued to three investment partnerships, two of whom share
substantially common ownership with KHP (the holder of Keystone Holdings' common
stock). The two investment partnerships received $75.0 million of the $80.0
million of Preferred Stock issued. Due to substantially common ownership, the
$75.0 million of Preferred Stock was previously presented in Keystone Holdings'
Consolidated Financial Statements as "Additional Paid-In Capital". The
F-93
<PAGE> 240
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
remaining $5.0 million of Preferred Stock, owned by an unrelated investment
partnership, has been presented as a minority interest.
Effective August 1, 1995, the three investment partnerships sold all of the
Preferred Stock to an unrelated party. Due to that sale, all of the Preferred
Stock is presented as a minority interest in Keystone Holdings' Consolidated
Financial Statements as of December 31, 1995.
"Other Capital Distributions" in the Consolidated Statement of Stockholder's
Equity represents dividends on the Preferred Stock paid (prior to August 1,
1995) to the two investment partnerships that share substantially common
ownership with Keystone Holdings Partners, L.P. "Other Capital Reductions" in
the Consolidated Statement of Stockholder's Equity represents the $75.0 million
reduction in Keystone Holdings' consolidated stockholder's equity due to the
sale of the Preferred Stock by the investment partnerships.
On the Effective Date, the FSLIC received the Warrants entitling the holder
thereof to purchase, for a nominal price, 3,000 shares of NACH Inc. Class B
Common Stock, subject to certain adjustments, at any time after the earlier of
December 28, 1998 or a decision by NACH Inc. to file a registration statement
under the Securities Act of 1933 in respect of a secondary public offering of
its securities. The Warrants expire by their terms on December 28, 1999, but may
be extended to December 28, 2003 in certain circumstances. Holders of the
Warrants will also have certain rights upon liquidation of NACH Inc., or any of
its subsidiaries. The Warrants were valued as of the Effective Date by an
Independent Financial Advisor, based on certain assumptions, and have been
recorded at their ascribed value of $167.0 million on the books of NACH Inc..
Prior to the repayment of the New West Note in October 1995, the $167.0 million
value ascribed to the Warrants was offset against the balance of the New West
Note pursuant to guidance provided by Consensus No. 88-19 of the Emerging Issues
Task Force of the Financial Accounting Standards Board. Subsequent to the
repayment of the New West Note, the $167.0 million Warrant value is included in
the balance of Minority Interest on the Consolidated Balance Sheets of Keystone
Holdings.
The holder of the Warrants issued by NACH Inc. is entitled to receive 30 percent
of common dividends from NACH Inc. after satisfaction of the exclusive right of
the common stock to receive the first $500.0 million in common dividends. Tax
sharing dividends are not subject to the $500.0 million preference. In addition,
the common stock is entitled to receive a 1.4 percent preferential return.
In June 1993, the cumulative net earnings of NACH Inc. net of tax sharing
dividends and the 1.4 percent preferential return amount exceeded $500.0
million. Keystone Holdings records only 70.0 percent of such amounts earned in
excess of the $500.0 million preference as equity in earnings of subsidiaries.
The amount of earnings attributable to the Warrant holder are shown in the
Consolidated Financial Statements as minority interest in earnings of
consolidated subsidiaries.
NOTE 20: STOCKHOLDER'S EQUITY
Dividend Restrictions and Capital Levels
ASB's primary regulator is the Office of Thrift Supervision ("OTS"). OTS
regulations impose limitations upon all "capital distributions" by savings
associations, including cash dividends, payments to repurchase or otherwise
acquire an institution's shares, payments to shareholders of another institution
in a cash-out merger and other distributions charged against capital of savings
associations. All dividends paid by ASB have complied with these limitations.
Savings institutions are categorized into one of three tiers by the OTS based
upon each institution's compliance with capital requirements and level of OTS
supervisory concern. Tier 1 savings institutions have capital, both before and
after a proposed distribution, greater than or equal to the fully phased-in
capital requirement applicable on December 31, 1995, and have not been notified
of being in need of more than normal supervision. These institutions may make
capital distributions, after thirty days prior notice to the OTS Director,
during a calendar year
F-94
<PAGE> 241
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
up to the higher of 100.0 percent of net earnings to date during such year plus
an amount equal to 50.0 percent of capital in excess of the fully phased-in
capital requirement as of the beginning of the year or 75.0 percent of its net
earnings for the most recent four quarters. ASB is a Tier 1 institution. Tier 2
savings institutions have capital, both before and after a proposed
distribution, greater than or equal to the minimum capital required or would
otherwise be a Tier 1 institution except for notification of supervisory
concerns. These institutions may make capital distributions, after notice to the
OTS Director, during a calendar year between 75.0 percent and 25.0 percent of
net earnings to date depending upon how close the institution is to meeting its
fully phased-in capital requirement. Tier 1 and Tier 2 institutions can make
additional distributions after OTS approval. Tier 3 institutions do not meet
their capital requirements and cannot make capital distributions without prior
OTS approval.
OTS regulations also prohibit savings institutions from making any capital
distribution or paying any management fees to any person controlling the
institution if after the distribution or payment the institution's capital would
be less than any of the following requirements: (a) a risk-based capital ratio
of 8.0 percent, (b) a core capital to risk-adjusted assets ratio of 4.0
percent, (c) a core capital to adjusted total assets ratio of 4.0 percent, and
(d) any specific capital level for any capital measure in any written agency
capital directive to which the institution is subject. ASB's capital has
exceeded these standards throughout the periods covered by the Consolidated
Financial Statements.
In addition, pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), ASB is required to meet certain minimum
regulatory tangible, core and risk-based capital requirements. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") further
expanded the capital requirements promulgated by FIRREA. At December 31, 1995
and 1994, ASB met all current and fully-phased in capital requirements.
New Capital is subject to the restrictions and limitations provided for in the
Note Purchase Agreement, the Subordinated Note Agreement and the Series C Note
Indenture. See Note 15, "Other Borrowed Money." Under the terms of the Note
Purchase Agreement and the Subordinated Note Agreement, New Capital cannot pay
dividends on its preferred stock or common stock unless its consolidated net
worth exceeds $375.0 million. As long as New Capital's consolidated net worth
exceeds $375.0 million, it can make restricted payments if the cumulative
restricted payments do not exceed the sum of (i) $30.0 million, (ii) the
proceeds from certain capital contributions and (iii) 50.0 percent of the
cumulative adjusted net earnings (as defined in the agreements) of New Capital.
The percentage limitation applied to cumulative adjusted net earnings is
increased to 65.0 percent as long as New Capital's consolidated net worth after
the proposed restricted payments exceeds $475.0 million. As of December 31,
1995, New Capital's consolidated net worth was $653.4 million and the 65.0
percent limitation was in effect. Under the terms of the Series C Note
Indenture, New Capital may pay dividends and make other capital distributions
("Upstream Payments") to the extent that it has the capacity to incur an
additional dollar of funded indebtedness (as defined in the Series C Indenture)
after the proposed Upstream Payment. Based on the most restrictive of New
Capital's debt covenants, as of December 31, 1995, New Capital would have been
permitted to make up to $55.8 million in dividend or other restricted payments.
NOTE 21: INTEREST RATE RISK MANAGEMENT
General
Keystone Holdings enters into interest rate risk management transactions that
involve, to varying degrees, elements of credit and interest-rate risk. Exposure
to credit risk generally arises from the nonperformance of counterparties or
their inability to meet contractual terms. Keystone Holdings' policy is to enter
into interest-rate risk management agreements only with large commercial banks,
the FHLB and primary dealers. The collateral supporting the financial
instruments are typically liquid assets such as mortgage-backed securities and
loans. Keystone Holdings further manages its credit risk through the
underwriting of investments and the establishment of credit approvals, credit
limits and the ongoing monitoring of the counterparties. Interest rate and
market risks arising from these transactions are managed through the use of
established transaction size limitations, a specific approval process for each
transaction and ongoing monitoring of risk positions. Keystone Holdings does not
enter into speculative positions.
F-95
<PAGE> 242
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest Rate Exchange Agreements
Keystone Holdings utilizes swaps to limit interest-rate risk or modify terms of
certain interest-sensitive assets and liabilities. At December 31, 1995 and
1994, Keystone Holdings held $1.5 billion and $1.9 billion, respectively, in
swap positions. The following is a summary of the open swap positions, which are
generally based on one, three and six-month LIBOR (dollars in millions):
<TABLE>
<CAPTION>
Term to Maturity
Notional Fair Weighted Average Rate In Years
--------------------- ---------------------
Amount Value Commences Receive Pay Original Remaining
-------- ----- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995
Floating Payment $100 $13.3 1990 8.95% 6.01% 10.0 4.3
Floating Payment 225 3.6 1991 8.05 6.04 5.0 0.6
Fixed Payment 135 (4.6) 1992 5.90 6.87 5.0 1.3
Fixed Payment 782 (33.9) 1993 5.99 7.34 4.6 2.1
Fixed Payment 255 (0.7) 1994 6.05 5.84 2.4 0.5
Fixed Payment 20 (0.2) 1995 5.93 6.54 1.9 1.5
</TABLE>
<TABLE>
<CAPTION>
Notional Fair Weighted Average Rate In Years
--------------------- ---------------------
Amount Value Commences Receive Pay Original Remaining
-------- ----- --------- ------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994
Floating Payment $100 $ 4.0 1990 9.03% 5.79% 10.1 5.4
Floating Payment 225 0.4 1991 8.05 5.68 5.0 1.6
Floating Payment 250 (2.9) 1993 4.00 6.15 1.5 0.3
Fixed Payment 168 4.0 1992 6.00 6.84 4.9 2.2
Fixed Payment 946 8.9 1993 5.77 7.52 4.5 3.0
Fixed Payment 195 5.6 1994 5.71 5.90 2.6 1.6
</TABLE>
Interest Rate Protection Agreements
Interest rate protection agreements entitle the purchaser, in exchange for the
payment of a premium, to receive variable interest payments if the index exceeds
an agreed upon interest rate ("cap rate"). Keystone Holdings' cap positions are
indexed based upon one or three-month LIBOR or one-month COFI. Shown below are
the interest rate protection agreements held by Keystone Holdings at the dates
indicated (dollars in millions):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Notional Amount $ 7,224 $ 1,885
Unamortized Premium $ 18 $ 17
Estimated Market Value $ (0.6) $ 21
Weighted Average Maturity 1.9 yrs 4.6 yrs
Weighted Average Original Term 2.2 yrs 5.9 yrs
Weighted Average Cap Rate 7.69% 8.46%
One-Month LIBOR at December 31, 5.69% 5.94%
Three-Month LIBOR at December 31, 5.63% 6.44%
One-Month COFI at December 31, 5.12% 4.19%
</TABLE>
For the years ended December 31, 1995 and 1994, the index did not exceed the cap
rates and Keystone Holdings did not receive any payments under these agreements.
To further manage interest rate risk, Keystone Holdings entered into interest
rate collar agreements (caps and floors) during 1995 which are effective January
1996. The collars have a notional amount of $5.0 billion, a three-month LIBOR
index and a weighted average maturity of one year.
F-96
<PAGE> 243
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Forward Sales
Keystone Holdings uses forward sales of financial instruments to lock in prices
on similar types and coupons of financial instruments and thereby limit market
risk until these financial instruments are sold. See Note 23, "Commitments and
Contingencies - Loan Commitments."
The following table summarizes the open positions at the dates indicated
(dollars in millions):
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
MORTGAGE POOL SECURITIES
Notional Amount $ 97 $ 7
Deferred Loss $ (1) $ --
Weighted Average Maturity 25 days 33 days
Weighted Average Coupon 6.61% 8.40%
</TABLE>
Financial Futures and Options
Financial futures and options contracts may be used to limit risk from declining
interest rates or to protect against rising interest rates; however, during 1995
and 1994 Keystone Holdings did not purchase any futures or option contracts.
NOTE 22: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of the Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-97
<PAGE> 244
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of Keystone Holdings' financial instruments at
December 31, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
--------- ----- -------- ------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash, Cash Equivalents and Other Investments $ 827,617 $ 827,610 $ 561,215 $ 561,203
New West Note -- -- 1,515,040 1,667,405
Mortgage-Backed Securities 6,952,047 7,020,890 3,027,547 3,019,763
Receivables from Affiliates 1,357 1,357 1,282 1,282
Receivables, Net of Allowance for Credit Losses 11,175,031 11,517,125 12,643,590 12,255,376
Excess Servicing Fees Receivable 17,508 22,963 19,723 20,727
FINANCIAL LIABILITIES:
Deposits 13,005,029 13,136,945 12,815,489 12,764,187
Federal Home Loan Bank Advances 1,004,337 1,018,398 391,366 389,399
Reverse Repurchase Agreements 4,016,441 4,017,245 3,982,659 3,982,649
Other Borrowings 371,079 382,498 359,653 357,416
OFF-BALANCE SHEET NET UNREALIZED GAINS (LOSSES):
Interest Rate Protection and Exchange Agreements -- (22,965) -- 40,341
Outstanding Loan Commitments Written -- 50 -- (14)
Commitments to Sell or Purchase Mortgage Loans -- (931) -- (7)
</TABLE>
Cash, Cash Equivalents and Other Investments
The fair values of cash and cash equivalents, federal funds sold, and investment
in FHLB stock approximate the recorded values reported in the balance sheets.
The fair values of investment securities and repurchase agreements are based on
quoted market prices.
New West Note
In January 1995, the Federal Deposit Insurance Corporation ("FDIC") offered to
pay down the remaining principal balance of the New West Note at par. Therefore,
the fair value of the New West Note at December 31, 1994 represented the at par
offer by the FDIC as it was the best indication of the current fair value.
Keystone Holdings agreed with the FDIC in October 1995 to allow prepayment of
the remaining balance of the New West Note. On October 24, 1995, ASB received
the remaining principal balance of the New West Note of $505.3 million, plus
interest. See Note 8, "New West Note".
Mortgage-backed Securities
The fair value of mortgage-backed securities is based on quoted market prices,
yield spreads or dealer quotations from secondary market sources, adjusted for
excess mortgage servicing rights for mortgage-backed securities issued before
January 1, 1995 and originated mortgage servicing rights for mortgage-backed
securities issued on or after January 1, 1995 on wholesale loans that were
obtained from secondary market sources.
Loans Receivable
For purposes of calculating the fair value of loans receivable, loans were
segregated by type, such as residential mortgages, income property loans,
consumer and other receivables. Each loan category was further segregated
between those with fixed interest rates and those with adjustable interest
rates. ARMs are grouped based upon index, repricing terms and other relevant
terms.
F-98
<PAGE> 245
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For all mortgage loans, fair value is estimated using discounted cash flow
analyses. Discount rates are based on secondary market quotations for similar
loan types adjusted for differences in credit and servicing characteristics. For
adjustable-rate mortgages in particular, a multiple scenario analysis is used to
measure the impact interest rate caps have on fair value.
Excess Servicing Fees Receivable
The fair value of excess servicing fees receivable is estimated using projected
cash flows, adjusted for the effects of anticipated prepayments, using a market
discount rate.
Deposits
The fair values of passbook accounts, demand deposits, and certain money market
deposits are assumed to be the recorded amounts at the reporting date. The fair
value of term accounts is based on projected contractual cash flows discounted
at rates currently offered for deposits of similar maturities. Core deposit
intangibles are not included.
Federal Home Loan Bank Advances and Other Borrowings
The fair values of fixed and adjustable rate FHLB advances are estimated by
discounting contractual cash flows using discount rates that reflect current
FHLB borrowing rates for similar advances.
Other borrowings include securities and loans sold under agreements to
repurchase, Series A, B and C Notes, subordinated notes and mortgages payable
secured by premises. The fair value of other borrowings is calculated based on a
discounted cash flow analysis. The cash flows are discounted using approximated
maturity matched rates for comparable instruments.
Off-Balance Sheet Financial Instruments
Off-balance sheet items include interest rate caps, collars, corridors and swaps
used for hedging purposes. Swap values are determined using dealer quotations,
when available, or a discounted cash flow calculation whereby existing positions
are discounted using rates that reflect current spreads on swaps with similar
terms. Fair value of caps, collars and corridors are calculated using a multiple
scenario analysis when dealer quotations are not available. The fair values
represent the estimated amounts that Keystone Holdings would receive or pay to
terminate the existing agreements at the reporting date. Other off-balance sheet
financial instruments include outstanding loan commitments written, recourse
obligations on receivables sold, and commitments to sell or purchase mortgage
loans. The fair values of these instruments are determined using current
estimated replacement costs.
NOTE 23: COMMITMENTS AND CONTINGENCIES
Lease Commitments
ASB conducts a major portion of its operations through leased facilities,
primarily branch offices. These leases are primarily operating leases and
contain options to renew at current market rates. Most leases contain escalation
clauses based upon operating costs or the consumer price index. Management
believes that in the normal course of business a majority of the leases will be
renewed or replaced by other leases. At December 31, 1995, minimum commitments
under noncancelable leases are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Contractual Maturity
---------------------------------------------------------------------------------
1996 1997 1998 1999 2000 Thereafter Total
------- ------ ------- ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE $ 9,524 $9,007 $ 7,815 $ 6,701 $ 5,673 $ 25,419 $64,139
======= ====== ======= ======= ======== =========== =======
</TABLE>
F-99
<PAGE> 246
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Also, see discussion relating to purchase of Irvine Plaza buildings and land at
Note 9 "Premises and Equipment." Total rent expense was $13.1 million, $18.8
million and $18.5 million for the years ending December 31, 1995, 1994 and 1993,
respectively.
Loan Commitments
At December 31, Keystone Holdings has the following commitments outstanding
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commitments to Originate Adjustable Receivables $258,079 $529,064
Commitments to Originate Fixed Receivables 102,046 1,306
Commitments to Sell Receivables 126,501 6,683
Commitments to Purchase Mortgage-Backed Securities -- 9,234
</TABLE>
In December 1992, ASB issued a $5.7 million irrevocable letter of credit
(expiring no later than December 17, 2002). This letter of credit serves to
ensure the timely payment of principal and interest on a loan made by the City
of Modesto, California. This loan is secured by a first trust deed on an
apartment complex in Modesto. At December 31, 1995, this letter of credit had
not been drawn upon. As part of the reimbursement agreement supporting the
letter of credit, ASB obtained a $5.7 million standby letter of credit from the
FHLB.
Litigation
Keystone Holdings is a defendant in various legal actions that arise out of the
normal course of business. In the opinion of management, the probable liability
resulting from these suits, individually or in the aggregate, is unlikely to
have a material effect on Keystone Holdings.
ASB has been named as a party in a variety of actions arising out of the
development of a 48-unit residential condominium project located in Long Beach,
California. The Failed Association had foreclosed on a loan secured by the
project in 1984 and completed construction. All 48 units in the project were
then sold, most with financing supplied by the Failed Association; one of these
loans was later refinanced by ASB. The loans issued by the Failed Association,
to the extent still outstanding, are now owned directly by the FDIC. The claims
in the actions include allegations of design and construction defects, as a
result of the alleged location of the project on a solid waste landfill, and
claims for relief under the Resource Conservation and Recovery Act and the
Comprehensive Environmental Response, Compensation and Liability Act. Although
the claimed damages are substantial, ASB has received indemnification from the
FDIC for claims other than those relating to the loan refinanced by ASB. ASB
settled that claim in 1995 by a release of the loan for a discounted payoff.
As part of the administration and oversight of the Assistance Agreement, the
FDIC has a variety of review and audit rights, including the right to review and
audit computations of payments in lieu of taxes. At the present time, Keystone
Holdings and its affiliated parties are completing a settlement with the FDIC
for all periods through June 30, 1994. Under the terms of a proposed settlement,
Keystone Holdings and its affiliated parties and the FDIC will mutually settle
and release all claims in consideration of certain nominal payments. Keystone
Holdings has received no notice of any issues arising after June 30, 1994.
Acquisition Structure
In the ordinary course of business, a variety of interpretive differences have
arisen between ASB and its affiliated entities on the one hand and the
government agencies responsible for administering the agreements entered into in
connection with the Acquisition (principally the FDIC) (the "Acquisition
Agreements") on the other. These differences (some of which involved amounts
material to ASB) have been addressed both through negotiation and through
arbitration without a material impact on ASB. Management expects that the
administration of the Acquisition Agreements will continue to raise issues as to
which ASB and its affiliates, may have views different from those of the FDIC.
The prepayment of the balance of the New West Note, which occurred on October
24,
F-100
<PAGE> 247
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1995, will implicate various provisions of the Acquisition Agreements that have
not previously been the subject of interpretation by the parties. Management
does not believe that any disputes that may continue to arise relating to the
Acquisition Agreements will have a material adverse effect on ASB.
NOTE 24: SIGNIFICANT EVENT
Restructuring
On June 30, 1993, ASB, AREG, certain of ASB's holding companies and New West
entered into a transaction (the "Restructuring") with the FDIC as manager of the
FRF and the RTC, pursuant to which New West transferred most of its real
estate-related assets (the "Transferred Assets") to a new partnership, Brazos
Partners, L.P. ("Brazos Partners"). Also, as a result of the Restructuring,
AREG's agreement to manage the real estate assets of New West was terminated and
ASB modified and restated its management agreement (the "Restated Management
Agreement") with New West to cover management of all assets and liabilities
retained by New West (respectively, the "Retained Assets" and "Retained
Liabilities").
Pursuant to the Restated Management Agreement, ASB is responsible for all
post-June 30, 1993 management functions associated with the remaining operations
of New West. The Restated Management Agreement provides identical
indemnifications and virtually the same management standards, exculpations,
covenants and level of FDIC oversight, as contained in ASB's prior management
agreement.
At the closing of the Restructuring, NACH Inc. received a non-recourse,
subordinated note (the "Investor Note") in the aggregate principal amount of
$20.0 million, along with $3.0 million in cash from certain entities that are
investors in Brazos Partners (the "Investor Entities"). These were delivered to
NACH Inc. in exchange for the transfer to the Investor Entities of certain
rights related to the existing management agreements distributed by ASB to NACH
Inc. immediately prior thereto. As a result of this transaction, NACH Inc.
recorded a gain of $23.0 million in 1993.
Payments on the Investor Note were made out of 18.1 percent of all
non-liquidating distributions to the Investor Entities and, after payment of
$72.4 million of senior indebtedness owed to the FDIC, out of 100.0 percent of
liquidating distributions. The note accrued interest at 12.0 percent per annum
and was secured by a second priority lien on the respective interests of the
Investor Entities in Brazos Partners. NACH Inc. had agreed that all payments of
principal and interest received with respect to the Investor Note would be
contributed by NACH Inc. to the capital of ASB. The Investor Note due to NACH
Inc. was completely repaid in 1994.
With respect to loans or real estate owned ("REO") that qualify for Modified FRF
Assistance and certain categories of loans serviced by others ("LSBOs") that
would have previously qualified to be "put" to New West, ASB and its holding
companies will also receive indemnification from the FDIC with respect to
liabilities incurred in connection with third-party claims relating to the
ownership or management by ASB thereof (other than claims resulting from ASB's
gross negligence or willful misconduct). These indemnification rights end upon
termination of the Assistance Agreement (expected to be December 28, 1998),
except that certain environmental indemnities will continue for longer periods.
After the Restructuring, certain assistance and indemnification payments by the
FDIC to ASB will accrue interest at 175 basis points above the COFI from the
date ASB records the amount until paid at the end of each quarter.
In connection with the Restructuring, the Keystone Group received a closing
agreement from the Internal Revenue Service concluding that the closing
agreement received in 1988 remains in effect. Therefore, losses generated by New
West may continue to offset income of ASB for federal income tax purposes, and
the Keystone Group will continue to benefit from a reduction of its federal
income tax. No additional rulings or opinion letters were sought from the
California Franchise Tax Board; however, management believes that the Keystone
Group may continue to rely on its earlier opinion letters so that New West's
losses will continue to offset income of ASB for California franchise tax
purposes.
F-101
<PAGE> 248
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Provisions of the 1988 Assistance Agreement that impose restrictions on the uses
of the tax sharing payments made to Keystone Holdings by its subsidiaries were
modified to allow those payments to be contributed as capital to ASB under
certain circumstances (including Keystone Holdings' passing a $300.0 million
minimum net worth test). Certain procedures were established, including, among
others, a procedure whereby funds would be advanced by New Capital to NACH Inc.
as a loan and NACH Inc. would then in turn contribute the proceeds of the loan
to ASB. By this procedure, the dividend preference contained in the Class A
Common Stock of NACH Inc. held by New Capital will not be affected. On June 30,
1993, $12.0 million was contributed from Keystone Holdings to New Holdings to
New Capital and lent to NACH Inc. NACH Inc. then contributed the $12.0 million
to ASB pursuant to this modification. Amounts contributed to ASB out of tax
sharing payments are required to be returned to Keystone Holdings as needed to
fund payments in lieu of taxes for the benefit of the FRF. As of December 31,
1994, the $12.0 million formerly contributed to ASB had been returned to
Keystone Holdings.
NOTE 25: RELATED PARTY TRANSACTIONS
Irvine Plaza
In January 1995, a wholly-owned service corporation of ASB purchased from a
related limited partnership the Irvine Plaza building structures and adjoining
land currently utilized for ASB's executive offices and various departments.
The total cash purchase price paid for the property was $45.2 million.
Consulting Payments
Keystone Holdings has consulting agreements with affiliates calling for annual
payments to be made to the affiliates in return for executive services rendered
to Keystone Holdings. During 1995, 1994 and 1993 payments of $0.8 million,$0.7
million and $1.5 million, respectively were made.
Advances to Affiliates
From time to time Keystone Holdings makes interest bearing advances to
affiliates. At December 31, 1995 and 1994 Keystone Holdings had advances to
affiliates of $1.4 million and $1.3 million, respectively.
NOTE 26: ACCOUNTING STANDARDS ISSUED
Statement of Financial Accounting Standards No. 121
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If an impairment analysis is necessary, the following should be
performed: (a) estimate the future cash flows expected to result from the use of
the asset and its eventual disposition (b) if the sum of the expected future
cash flows (undiscounted and without interest rate charges) is less than the
carrying amount of the asset, an impairment loss is recognized (c) the
measurement of an impairment loss should be based on the fair value of the
asset. This statement does not apply to financial instruments, core deposit
intangibles, mortgage and other servicing rights or deferred tax assets.
This statement is effective for fiscal years beginning after December 15, 1995.
The provisions of SFAS 121 will be implemented January 1, 1996. The impact on
Keystone Holdings is not expected to be material.
Statement of Position 94-6
In December 1994, the ASB Institute of Certified Public Accountants issued
Statement of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." SOP 94-6 supplements disclosure requirements for
F-102
<PAGE> 249
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
risks and uncertainties existing as of the date of the financial statements in
the following areas: (a) nature of operations, (b) use of estimates in the
preparation of financial statements, (c) certain significant estimates and (d)
current vulnerability due to certain concentrations.
SOP 94-6 is effective for financial statements issued for fiscal years ending
after December 15, 1995, and for financial statements for interim periods in
fiscal years subsequent to the year for which this SOP is to be the first
applied. SOP 94-6 did not have an impact on Keystone Holdings' operations or
financial position.
Statement of Financial Accounting Standards No. 123
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123
establishes a fair value based method of accounting for stock based compensation
plans. SFAS 123 encourages, but does not require, adopting the fair value based
method. SFAS 123 will not have an impact on Keystone Holdings' operations or
financial position.
NOTE 27: SUBSEQUENT EVENT
On February 8, 1996, ASB completed the private placement of $100.0 million of
Subordinated Notes (the "Notes"). The Notes bear interest at a rate of 6.625
percent per annum. Interest on the Notes is payable semi-annually in arrears on
each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are redeemable in
whole, or in part, at the option of ASB at all time prior to that date. The
redemption price is equal to the greater of (i) 100 percent of the principal
amount and (ii) the sum of the present values of the remaining scheduled
payments of principal and interest discounted to the date of redemption on a
semiannual basis at the Treasury Yield plus 15 basis points, plus in each case
accrued interest to the date of redemption.
The payment of the principal and interest on the Notes is subordinated to the
prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against ASB
having the same priority as savings account holders of ASB or any higher
priority, (b) all indebtedness of ASB, other than the Notes, which is given in
connection with the acquisition of any businesses, properties or assets of any
kind and (c) obligations of ASB as lessee under capitalized leases. At December
31, 1995, Senior Indebtedness of ASB totaled approximately $18.0 billion,
including $13.0 billion in deposits.
The proceeds of the private placement were used to pay general corporate
expenses, to repay certain borrowings and to fund loan originations. The Notes
qualify to be included in regulatory capital.
The Notes do not restrict ASB from paying dividends or from incurring, assuming
or becoming liable for any type of debt or other obligation. In addition, the
Notes do not require ASB to maintain any financial ratios or certain levels of
regulatory capital or liquidity.
F-103
<PAGE> 250
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 28: PARENT COMPANY FINANCIAL INFORMATION
Following are the Condensed Financial Statements of Keystone Holdings, Inc.
(parent company only) (dollars in thousands):
CONDENSED BALANCE SHEETS:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 59 $ 34
Held-to-maturity investment securities (fair
value $70,731 and $3,027) 70,731 3,027
Investment in subsidiaries 590,003 526,586
Receivable from affiliates 18,304 5,000
Other assets $ 1,296 $ 1,016
-------- ---------
TOTAL ASSETS $680,393 $ 535,663
======== =========
LIABILITIES:
Accounts payable and accrued expenses $ 11,834 $ 1,539
STOCKHOLDER'S EQUITY:
Common stock 1 1
Additional paid-in capital 30,419 105,419
Unrealized gain (loss) on available-for-sale securities 110,367 (29,161)
Retained earnings 527,772 457,865
-------- ---------
TOTAL STOCKHOLDER'S EQUITY 668,559 534,124
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $680,393 $ 535,663
======== =========
</TABLE>
CONDENSED STATEMENTS OF EARNINGS:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest income $ 640 $ 480 $ 1,782
Interest expense -- -- 299
-------- -------- --------
Net interest expense 640 480 1,483
Other expenses 1,606 2,398 3,072
-------- -------- --------
Loss before equity in earnings of subsidiary (966) (1,918) (1,589)
Provision for payments in lieu of taxes -- -- (428)
Equity in earnings of subsidiary 85,768 52,242 84,274
-------- -------- --------
NET EARNINGS $ 84,802 $ 50,324 $ 82,257
======== ======== ========
</TABLE>
F-104
<PAGE> 251
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 28: PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net earnings $ 84,802 $ 50,324 $ 82,257
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiary (85,768) (52,242) (84,274)
Increase (decrease) in FSLIC Resolution Fund
share of Keystone Group tax benefits
payable to New West 8,210 (15,133) (41,396)
(Increase) decrease in receivable from subsidiaries
for Keystone Group tax benefits
payable to New West (6,845) 5,731 (6,121)
Other, net 1,806 (203) 17
--------- --------- ---------
Total adjustments (82,597) (61,847) (131,774)
--------- --------- ---------
Net cash provided by (used in) operating activities 2,205 (11,523) (49,517)
--------- --------- ---------
Cash flows from investing activities:
Contributions to subsidiary (13,392) (20,677) (72,860)
Purchase of held-to-maturity securities (120,518) (150,462) (680,950)
Tax sharing dividends received 77,173 21,594 49,526
Common stock dividends received 7,500 39,500 34,000
Proceeds from maturities of held-to-maturity securities 52,814 155,118 749,598
Other, net (75) (1,111) (535)
--------- --------- ---------
Net cash provided by investing activities 3,502 43,962 78,779
--------- --------- ---------
Cash flows from financing activities:
Common stock dividends paid (5,587) (32,500) (8,000)
---------
Decrease in notes payable to affiliates -- -- (21,000)
Other, net (95) 1 (409)
--------- --------- ---------
Net cash used in financing activities (5,682) (32,499) (29,409)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 25 (60) (147)
Cash and cash equivalents at beginning of year 34 94 241
--------- --------- ---------
Cash and cash equivalents at end of year $ 59 $ 34 $ 94
========= ========= =========
</TABLE>
F-105
<PAGE> 252
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION
Following is the condensed financial information for Keystone Holdings'
significant subsidiary, ASB (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 385,203 $ 215,049
Investment Securities (fair value of $38,311 and $76,676) 38,318 76,688
Receivables, net 11,101,010 12,638,520
Mortgage-Backed Securities, net (fair value of $2,959,608 and $1,698,338) 2,890,765 1,706,122
Assets Available-for-Sale:
Investment Securities 165,379 135,949
Mortgage-Backed Securities, net 4,061,282 1,321,425
Assets Held-for-Sale:
Receivables (fair value of $75,614 and $5,070) 74,021 5,070
New West Note -- 1,682,040
Federal Home Loan Bank Stock 159,949 122,987
Interest Receivable 110,977 77,191
Premises and Equipment, net 227,282 181,467
Foreclosed Properties, net 100,037 118,645
Mortgage Servicing Rights, net 90,901 61,039
Deferred Tax Asset, net 112,596 112,596
Other Assets 90,223 82,003
----------- ------------
TOTAL ASSETS $19,607,943 $ 18,536,791
=========== ============
LIABILITIES:
Deposits $13,005,029 $ 12,815,489
Federal Home Loan Bank Advances 1,004,337 391,366
Reverse Repurchase Agreements 4,016,441 3,982,659
Payable to Affiliate 16,001 2,867
Federal Funds Purchased -- 50,000
Other Borrowed Money 6,579 9,153
Interest Payable 52,212 32,677
Remittances Due Banks 54,525 77,183
Remittances Due on Loans Serviced for Others 136,312 80,131
Accounts Payable and Accrued Expenses 77,557 81,203
----------- ------------
TOTAL LIABILITIES 18,368,993 17,522,728
----------- ------------
STOCKHOLDERS' EQUITY:
Participating Preferred Stock Series A (par value $0.01 per share, liquidation
preference $0.10 per share); Shares Authorized 10,000;
Shares Issued 3,503 -- --
Common Stock (par value $1.00 per share); Shares Authorized 1,000,000;
Shares Issued and Outstanding 97,000 97 97
Additional Paid-in Capital 446,488 386,488
Unrealized Gain (Loss) on Available-for-Sale Securities 110,367 (29,161)
Retained Earnings - Substantially Restricted 681,998 656,639
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,238,950 1,014,063
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,607,943 $ 18,536,791
=========== ============
</TABLE>
F-106
<PAGE> 253
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Receivables $ 967,168 $ 708,369 $ 755,409
Mortgage-Backed Securities 272,320 167,073 106,764
New West Note 58,841 141,039 241,014
Investment Securities 37,846 18,745 10,346
----------- ----------- -----------
Total Interest Income 1,336,175 1,035,226 1,113,533
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 636,315 481,794 513,435
FHLB Advances 30,858 69,096 128,741
Reverse Repurchase Agreements 261,217 103,828 20,239
Other Borrowings 1,378 956 412
----------- ----------- -----------
Total Interest Expense 929,768 655,674 662,827
----------- ----------- -----------
NET INTEREST INCOME 406,407 379,552 450,706
Provision for Credit Losses 63,837 101,609 123,503
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 342,570 277,943 327,203
OTHER INCOME AND EXPENSE:
Gain From Disposition of Credit Card Receivables, net -- 24,981 --
Gain on Sale of Servicing Rights -- 20,396 --
Gain (Loss) on Sale of Receivables, net 34 (2,295) 9,776
Savings Fee Income 21,526 16,781 17,555
Commissions Income 16,890 15,150 17,590
Receivable Fee Income 11,811 12,982 13,829
Gain on Other Asset Sales, net 2,534 207 1,474
Net Expense of Foreclosed Properties (18,032) (13,390) (12,951)
Net Servicing Income 18,696 14,038 7,229
Loss on Sale of Covered Assets (37,399) -- --
Effect of FDIC Assistance on Covered Assets 55,630 -- --
Other Income and Expense 743 45 3,138
----------- ----------- -----------
Total Other Income and Expense 72,433 88,895 57,640
----------- ----------- -----------
EARNINGS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES AND TAXES 415,003 366,838 384,843
GENERAL AND ADMINISTRATIVE EXPENSES:
Salaries and Fringe Benefits 146,292 151,797 149,770
Occupancy 32,151 34,801 40,568
Regulatory Premiums and Assessments 33,367 32,483 32,019
Data Processing 27,119 25,777 26,693
Advertising and Promotion 12,424 11,628 11,677
Deferred Origination Expenses (34,718) (38,931) (35,067)
Reimbursements from Affiliates (573) (1,144) (6,601)
Other Operating Expenses 38,130 40,325 39,584
----------- ----------- -----------
Total General and Administrative Expenses 254,192 256,736 258,643
----------- ----------- -----------
EARNINGS BEFORE TAXES 160,811 110,102 126,200
Provision (Benefit) for Federal and State Income Taxes 4,402 1,722 (2,830)
Provision (Benefit) for Payments in Lieu of Taxes 7,887 (824) 14,397
----------- ----------- -----------
NET EARNINGS $ 148,522 $ 109,204 $ 114,633
=========== =========== ===========
</TABLE>
F-107
<PAGE> 254
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 148,522 $ 109,204 $ 114,633
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities:
Provision for Credit Losses 63,837 101,609 123,503
Depreciation and Amortization 16,447 12,502 38,951
Net Gain on Disposition of Credit Card Receivables -- (24,981) --
Net Gain on Sale of Servicing Rights -- (20,396) --
Net Loss (Gain) on Asset Sales (2,568) 2,088 (11,250)
Loss on Sale of Covered Assets 37,399 -- --
Effect of FDIC Assistance on Covered Assets (55,630) -- --
Federal Home Loan Bank Stock Dividend (7,188) (5,355) (2,772)
Interest Payable, Net Change 19,535 9,731 20,609
Remittances Due, Net Change 33,523 (78,759) 33,550
Increase (Decrease) in Accounts Payable and Accrued Expenses (3,646) 4,463 (13,644)
Originated Receivables, Held-for-Sale (782,583) (223,220) (920,151)
Proceeds from Sale of Receivables, Held-for-Sale 1,093,754 724,324 818,966
Purchase of Investment Securities, Held-for-Trading (128,510) (66,211) --
Proceeds from Sale of Investment Securities, Held-for-Trading 128,609 66,324 --
Decrease (Increase) in Interest Receivable (33,786) (14,569) 3,433
Other, Net (9,263) (39,009) 59,442
----------- ----------- -----------
Total Adjustments 369,930 448,541 150,637
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 518,452 557,745 265,270
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (619,918) (355,975) (334,306)
Principal Payments and Maturities of Available-for-Sale Securities 446,303 188,405 142,116
Proceeds from Sales of Available-for-Sale Securities 453,874 164,587 262,132
Purchases of Held-to-Maturity Securities (443,322) (824,013) (13,137)
Principal Payments and Maturities of Held-to-Maturity Securities 606,767 532,304 199,951
Originated Real Estate Receivables (3,939,384) (4,491,645) (2,955,578)
Principal Payments on Real Estate Receivables 744,400 840,432 1,014,252
Consumer Receivables Originated or Collected, Net Change 3,698 16,023 3,735
Federal Home Loan Bank Stock Purchases (29,774) (11,102) (14,068)
New West Note, Net Payments Received 1,682,040 1,569,018 1,569,018
Proceeds from Sale of Premises and Equipment 4,871 2,211 8,130
Purchase of Premises and Equipment (65,169) (19,988) (17,438)
Foreclosed Properties, Net Sales Proceeds 125,889 168,141 151,513
Purchased Mortgage Servicing Rights (38,270) (37,605) --
Cash Proceeds from Disposition of Credit Card Receivables -- 166,315 --
Other, Net (7,149) 21,369 (3,928)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,075,144) (2,071,523) 12,392
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, Net 189,540 (552,151) (618,033)
Proceeds from Federal Home Loan Bank Advances 1,093,732 2,505,794 3,170,361
Payments for Federal Home Loan Bank Advances (480,761) (3,652,271) (3,219,518)
Proceeds from Long-Term Reverse Repurchase Agreements 597,557 1,103,000 --
Payments for Long-Term Reverse Repurchase Agreements (475,127) -- --
Short-Term Reverse Repurchase Agreements, Net Change (88,648) 1,845,064 534,842
Federal Funds Purchased, Net Change (50,000) 50,000 --
Tax Sharing Dividends Paid (77,173) (22,050) (49,793)
Common Stock Dividends Paid (39,700) (29,500) (25,000)
Capital Contributions from Parent 60,000 19,167 14,642
Other, Net (2,574) 932 (31,754)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 726,846 1,267,985 (224,253)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 170,154 (245,793) 53,409
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215,049 460,842 407,433
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 385,203 $ 215,049 $ 460,842
=========== =========== ===========
</TABLE>
F-108
<PAGE> 255
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 29: SIGNIFICANT SUBSIDIARY FINANCIAL INFORMATION (CONTINUED)
DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- -----------
<S> <C> <C> <C>
Interest Paid on Deposits $ 628,618 $481,834 $ 513,196
Interest Paid on Borrowings 280,763 164,109 129,022
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities 4,214,911 8,697 1,557,485
Foreclosed Properties Acquired in Settlement of Loans 231,720 318,726 316,369
Loans Originated to Facilitate the Sale of Foreclosed Properties 65,693 92,415 47,832
Non-Cash Financing Activities:
Deposits Exchanged in Branch Swaps -- -- 152,382
Dividends Declared and Payable in Different Years:
Tax Sharing Dividends 9,206 2,916 (7,987)
</TABLE>
F-109
<PAGE> 256
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
KEYSTONE HOLDINGS AS OF JUNE 30, 1996
F-110
<PAGE> 257
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 144,062 $ 385,561
Investment Securities (fair value of $106,089 and $116,721) 106,095 116,728
Receivables, net 12,812,492 11,101,010
Mortgage-Backed Securities, net (fair value of $2,820,495 and $2,959,608) 2,770,432 2,890,765
Assets Available-for-Sale:
Investment Securities 121,805 165,379
Mortgage-Backed Securities, net 3,542,364 4,061,282
Assets Held-for-Sale:
Receivables (fair value of $42,433 and $75,614) 42,141 74,021
Federal Home Loan Bank Stock 180,270 159,949
Interest Receivable 115,745 111,284
Premises and Equipment, net 231,455 233,687
Foreclosed Properties, net 84,036 100,037
Mortgage Servicing Rights, net 90,026 90,901
Deferred Tax Asset, net 112,596 112,596
Receivable from Affiliate 2,582 1,357
Other Assets 124,605 99,099
------------ -----------
TOTAL ASSETS $ 20,480,706 $19,703,656
============ ===========
LIABILITIES:
Deposits $ 12,728,966 13,005,029
Federal Home Loan Bank Advances 2,013,439 1,004,337
Reverse Repurchase Agreements 3,987,359 4,016,441
Other Borrowings 493,734 371,079
Interest Payable 80,666 63,114
Remittances Due Banks 46,092 54,525
Remittances Due on Loans Serviced for Others 97,089 136,312
Dividend Payable 25,000 --
Accounts Payable and Accrued Expenses 150,984 91,199
------------ -----------
TOTAL LIABILITIES 19,623,329 18,742,036
------------ -----------
MINORITY INTEREST 306,979 293,061
STOCKHOLDER'S EQUITY:
Common Stock 1 1
Additional Paid-in Capital 30,419 30,419
Unrealized Gain (Loss) on Available-for-Sale Securities (1,411) 110,367
Retained Earnings - Substantially Restricted 521,389 527,772
------------ -----------
TOTAL STOCKHOLDER'S EQUITY 550,398 668,559
------------ -----------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDER'S EQUITY $ 20,480,706 $19,703,656
============ ===========
</TABLE>
F-111
<PAGE> 258
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Receivables $ 448,397 $ 463,094 $ 230,568 $ 235,908
Mortgage-Backed Securities 242,465 112,497 117,954 66,249
New West Note -- 43,699 -- 19,432
Investment Securities 15,858 17,011 8,986 8,976
--------- --------- --------- ---------
Total Interest Income 706,720 636,301 357,508 330,565
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 298,357 308,414 147,227 160,913
Federal Home Loan Bank Advances 21,252 13,120 11,636 6,304
Reverse Repurchase Agreements 130,393 132,055 67,150 66,940
Other Borrowings 19,094 17,013 9,792 8,588
--------- --------- --------- ---------
Total Interest Expense 469,096 470,602 235,805 242,745
--------- --------- --------- ---------
NET INTEREST INCOME 237,624 165,699 121,703 87,820
Provision for Credit Losses 35,180 34,533 17,203 15,600
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 202,444 131,166 104,500 72,220
--------- --------- --------- ---------
OTHER INCOME AND EXPENSE:
Gain (Loss) on Sale of Receivables, net 2,965 777 1,332 (10,742)
Savings Fee Income 11,627 9,018 5,879 4,629
Commission Income 10,241 7,703 5,163 4,324
Receivable Fee Income 7,681 5,042 4,309 2,849
Gain (Loss) on Other Asset Sales, net (324) 890 45 734
Net Expense of Foreclosed Properties (7,496) (8,467) (3,772) (4,936)
Net Servicing Income 9,391 8,275 4,698 4,149
Loss on Sale of Covered Assets -- (667) -- (453)
Effect of FDIC Assistance on Covered Assets -- 16,741 -- 14,226
Other, net 539 445 360 (420)
--------- --------- --------- ---------
Total Other Income and Expense 34,624 39,757 18,014 14,360
--------- --------- --------- ---------
EARNINGS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES AND TAXES 237,068 170,923 122,514 86,580
General and Administrative Expenses 134,870 136,130 67,592 68,165
--------- --------- --------- ---------
EARNINGS BEFORE TAXES 102,198 34,793 54,922 18,415
Provisions for Federal and State Income Taxes 3,469 1,037 1,803 684
Provision (Benefit) for Payments in Lieu of Taxes 24,216 (6,476) 11,411 (42)
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 74,513 40,232 41,708 17,773
Minority Interest in Earnings of Consolidated Subsidiaries (20,896) (14,708) (11,516) (5,488)
--------- --------- --------- ---------
NET EARNINGS $ 53,617 $ 25,524 $ 30,192 $ 12,285
========= ========= ========= =========
</TABLE>
F-112
<PAGE> 259
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on Retained
Additional Available- Earnings - Total
Common Paid-in for-Sale Substantially Stockholder's
Stock Capital Securities Restricted Equity
------ ---------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $1 $30,419 $ 110,367 $ 527,772 $ 668,559
Net Earnings - -- -- 53,617 53,617
Dividends on Common Stock - -- -- (60,000) (60,000)
Unrealized Loss on
Available-for-Sale Securities - -- (111,778) -- (111,778)
-- ------- --------- --------- ---------
Balance at June 30, 1996 $1 $30,419 $ (1,411) $ 521,389 $ 550,398
== ======= ========= ========= =========
</TABLE>
F-113
<PAGE> 260
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 53,617 $ 25,524
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities
Provision for Losses 35,180 34,533
Depreciation and Amortization 19,439 13,141
Net Gain on Asset Sales (2,641) (1,667)
Loss on Sale of Covered Assets -- 667
Effect of FDIC Assistance on Covered Assets -- (16,741)
Federal Home Loan Bank Stock Dividend (4,394) (3,249)
Interest Payable, Net Change 17,552 31,725
Remittances Due, Net Change (47,656) 25,587
Originated Receivables, Held-for-Sale (538,310) (152,312)
Proceeds from Sale of Receivables, Held-for-Sale 561,428 284,200
Purchase of Mortgage-Backed Securities, Held-for-Trading (5,326) --
Proceeds from Sales of Mortgage-Backed Securities, Held-for-Trading 5,331 --
Purchase of Investment Securities, Held-for-Trading -- (29,827)
Proceeds from Sales of Investment Securities, Held-for-Trading -- 29,888
Increase in Interest Receivable (4,461) (27,780)
Increase (Decrease) in Federal and State Taxes (1,301) 108
Increase (Decrease) in Payable to FSLIC Resolution Fund 24,090 (6,267)
Other, Net 27,109 7,329
----------- -----------
Total Adjustments 86,040 189,335
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 139,657 214,859
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Available-for-Sale Securities (113,223) (290,604)
Principal Payments and Maturities of Available-for-Sale Securities 270,047 175,908
Proceeds from Sales of Available-for-Sale Securities 283,638 136,679
Purchases of Held-to-Maturity Securities (1,662,880) (322,595)
Principal Payments and Maturities of Held-to-Maturity Securities 1,800,566 357,261
Originated Real Estate Receivables (2,280,377) (1,944,071)
Principal Payments on Real Estate Receivables 507,667 270,835
Consumer Receivables Originated or Collected, Net Change 1,413 1,469
Federal Home Loan Bank Stock Purchases (15,927) (29,774)
New West Note, Payments Received -- 784,508
Proceeds from Sale of Premises and Equipment 1,178 1,990
Purchase of Premises and Equipment (10,623) (56,228)
Foreclosed Properties, Net Sales Proceeds 59,384 79,069
Purchased Mortgage Servicing Rights (5,170) (19,783)
Other, Net (2,080) 3,007
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,166,387) (852,329)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposit Activity, net (276,063) 487,811
Proceeds from Federal Home Loan Bank Advances 2,130,844 103,292
Payments for Federal Home Loan Bank Advances (1,121,742) (110,350)
Proceeds from Issuance of Series C Notes -- 175,000
Repayment of Series A Notes -- (111,000)
Proceeds from Issuance of Subordinated Notes 99,172 --
Proceeds from Long-Term Reverse Repurchase Agreements 574,081 394,885
Payments for Long-Term Reverse Repurchase Agreements (202,672) --
Short-Term Reverse Repurchase Agreements, Net Change (400,491) (198,621)
Federal Funds Purchased, Net Change 30,000 (50,000)
Common Stock Dividends Paid (35,000) (5,500)
Preferred Stock Dividends Paid (6,977) (6,938)
Other, Net (5,921) (6,385)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 785,231 672,194
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (241,499) 34,724
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 385,561 215,253
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 144,062 $ 249,977
=========== ===========
</TABLE>
F-114
<PAGE> 261
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
(Unaudited)
Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Interest Paid on Deposits $281,943 $282,895
Interest Paid on Borrowings 168,584 154,977
Non-Cash Investing Activities:
Loans Exchanged for Mortgage-Backed Securities -- 918
Foreclosed Properties Acquired in Settlement of Loans 107,334 137,682
Loans Originated to Facilitate the Sale of Foreclosed Properties 40,533 16,627
Dividends Declared and Payable in Different Periods:
Common Dividends 25,000 --
</TABLE>
F-115
<PAGE> 262
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
Keystone Holdings commenced operations in December 1988 as an indirect holding
company for ASB, a Federally chartered savings bank. NACH Inc. owns all of the
outstanding common stock of ASB. NACH Inc. is owned by New Capital whose common
stock is owned by New Capital a subsidiary of Keystone Holdings. Keystone
Holdings and its direct and indirect subsidiaries are collectively referred to
as the "Keystone Group."
Keystone Holdings, through New Holdings owns the common stock of New West.
Although Keystone Holdings holds the ownership interest in New West, Keystone
Holdings does not have a financial interest in New West because of certain
contractual provisions and indemnifications. Any loss incurred by New West
during its liquidation is the financial responsibility of the FSLIC Resolution
Fund. Keystone Holdings does not record any equity in the earnings or losses of
New West and substantially all decisions made by New West's management must be
approved by the FDIC prior to execution. Therefore, the accounts of New West
are not included in Keystone Holdings' consolidated financial statements. New
West was considered a nominee corporation of ASB for state and federal income
tax purposes until October 24, 1995.
The Condensed Consolidated Financial Statements included herein have been
prepared by Keystone Holdings and are unaudited. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been made.
Certain information and note disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although Keystone Holdings believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these Condensed Consolidated Financial Statements be read
in conjunction with the audited December 31, 1995 Consolidated Financial
Statements and the notes thereto. The Condensed Consolidated Financial
Statements have been prepared on a basis substantially consistent with that of
the audited consolidated financial statements referred to above. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported balances of certain assets and liabilities
as of the balance sheet dates and the revenues and expenses for the periods then
ended. In those cases where amounts reported in the Condensed Consolidated
Financial Statements are significantly influenced by such estimates and
assumptions, actual results could differ from those reported. Certain amounts in
the prior periods' financial statements have been reclassified to conform with
the current period presentation. The results for the periods covered hereby are
not necessarily indicative of the operating results for a full year.
The Condensed Consolidated Financial Statements include the accounts of Keystone
Holdings and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 2 -- SUBORDINATED NOTES
On February 8, 1996, ASB completed the private placement of $100.0 million of
Subordinated Notes (the "Notes"). The Notes bear an interest rate of 6.625
percent per annum. Interest on the Notes is payable semi-annually in arrears on
each February 15 and August 15, beginning on August 15, 1996.
The Notes mature on February 15, 2006. However, the Notes are redeemable in
whole, or in part, at the option of ASB at any time prior to that date. The
redemption price is equal to the greater of (i) 100 percent of the principal and
interest discounted to the date of redemption on a semi-annual basis at the
Treasury Yield plus 15 basis points, plus in each case accrued interest to the
date of redemption.
The payment of the principal and interest on the Notes is subordinated to the
prior payment in full of all Senior Indebtedness. Senior Indebtedness, in
general, includes the principal and interest on (a) all claims against ASB
having the same priority as savings account holders of ASB or any higher
priority, (b) all indebtedness of ASB, other than the Notes, which is given in
connection with the acquisition of any businesses, properties or assets of any
kind and (c) obligations of ASB as lessee under capitalized leases.
F-116
<PAGE> 263
KEYSTONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The proceeds of the private placement were used to pay general corporate
expenses, to repay certain borrowings and to fund loan originations. The Notes
qualify to be included in regulatory capital.
The Notes do not restrict ASB from paying dividends or from incurring, assuming
or becoming liable for any type of debt or other obligation. In addition, the
Notes do not require ASB to maintain any financial ratios or certain levels of
regulatory capital or liquidity.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." This statement specifies when financial
assets and liabilities are to be removed from an entity's financial statements,
specifies the accounting for servicing assets and liabilities, and the
accounting for assets that can be contractually prepaid in such a way that the
holder would not recover substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities it
has incurred, derecognizes assets only when control has been surrendered, and
derecognizes liabilities only when they have been extinguished. SFAS 125
requires that the selling entity continue to carry retained interests, including
servicing assets, in assets it has derecognized. Such retained interests are
based on their relative fair values at the date of transfer. Transfers not
meeting the criteria for sale recognition are accounted for as a secured
borrowing with pledge of collateral. Under SFAS 125, certain collateralized
borrowings may result in asset derecognition when the assets provided as
collateral may be derecognized based on whether the secured party takes control
over the collateral and whether the secured party is: (1) permitted to repledge
or sell the collateral; and (2) the debtor does not have the right to redeem the
collateral on short notice. Extinguishments of liabilities are recognized only
when the debtor pays the creditor and is relieved of its obligation for the
liability or when the debtor is legally released from being the primary obligor
under the liability, either judicially or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets, that are retained in a transfer of assets, in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and over the period of net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained interests
in securitizations, such as capitalized servicing fees receivable, that can
contractually be prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment, to require their
classification as available for sale or as trading securities. Interest-only
strips and retained interests are to be recorded at fair value. Changes in fair
value are included in stockholder's equity as unrealized holding gains or
losses, net of the related tax effect.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is
required to be applied prospectively. Keystone Holdings does not anticipate a
material impact on transactions covered by SFAS 125.
NOTE 4 -- SUBSEQUENT EVENT
On September 30, 1996, President Clinton signed legislation intended to
recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce the
gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums, among
other things. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amounting to
1.3 cents per $100 per year.
Keystone Holdings' special assessment will result in an estimated pre-tax charge
of $88.5 million in the quarter ended September 30, 1996.
F-117
<PAGE> 264
PROXY
UTAH FEDERAL SAVINGS BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John E. Clay and Ernest J. Miller, 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 October 28, 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
November 29, 1996, at 9:00 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 October 30, 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, and as amended September 10, 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 $107.04 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> 265
PART II
ITEM 21. EXHIBITS.
An index of exhibits appears below.
II-1
<PAGE> 266
<PAGE> 267
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-2
<PAGE> 268
<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)
10.17 Agreement for Merger, dated as of July 21, 1996, by and among
Washington Mutual, Inc., Keystone Holdings Partners, L.P., Keystone
Holdings, Inc., New American Holdings, Inc., New American Capital,
Inc., N.A. Capital Holdings, Inc., and American Savings Bank, F.A.
(Incorporated by reference to Registrant's Filing on Form 8-K dated
July 22, 1996)
10.18 Warrant Exchange Agreement, dated as of July 21, 1996, by and among
Washington Mutual, Inc., Keystone Holdings Partners, L.P., Keystone Holdings,
Inc., New American Holdings, Inc., New American Capital, Inc., N.A.
Capital Holdings, Inc., and American Savings Bank, F.A., together with
the Federal Deposit Insurance Corporation, as manager of the Federal Savings
and Loan Insurance Corporation Resolution Fund (Incorporated by reference
to Registrant's Filing on Form 8-K dated July 22, 1996)
10.19 Registration Rights Agreement dated as of July 21, 1996, by and among
Washington Mutual, Inc., Keystone Holdings Partners, L.P., and the Federal
Deposit Insurance Corporation, as manager of the Federal Savings and
Loan Insurance Corporation Resolution Fund (Incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the Quarterly Period
Ended June 30, 1996)
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
13.3** Quarterly Report of Washington Mutual on Form 10-Q for the Quarterly Period
Ended June 30, 1996
21.0** List of Subsidiaries of the Registrant
23.1** Consent of Foster Pepper & Shefelman (contained in opinion filed as Exhibit
5.1)
23.2 Consent of Deloitte & Touche LLP (contained on page II-4)
23.3 Consent of Jones, Jensen & Company (contained on page II-5)
23.4** Consent of Columbia Financial Advisors, Inc.
23.5 Consent of KPMG Peat Marwick LLP (contained on page II-6)
24.1** Power of Attorney
</TABLE>
- ---------------
* Incorporated by reference to the Registrant's filing on Form 8-K dated
November 29, 1994 (File No. 0-75188).
** Previously filed.
II-3
<PAGE> 269
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 October
18, 1996, appearing on Form 8-K of Washington Mutual, Inc. dated October 18,
1996, and to the reference to us under the heading "Independent Auditors" in
this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 28, 1996
II-4
<PAGE> 270
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
October 25, 1996
Sincerely,
/s/ Jones, Jensen & Company
Jones, Jensen & Company
II-5
<PAGE> 271
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Keystone Holdings, Inc.
We consent to the use of our report dated January 26, 1996, except as
to Note 27 to the consolidated financial statements, which is as of February 8,
1996, with respect to the consolidated financial statements of Keystone
Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and for each
of the years in the three-year period ended December 31, 1995, which report
appears in the Post-Effective Amendment No. 2 on Form S-4 (No. 333-05365) of
Washington Mutual, Inc. and to the reference to our firm under the heading
"Independent Auditors" in the Registration Statement.
Los Angeles, California /s/ KPMG Peat Marwick LLP
October 28, 1996
II-6
<PAGE> 272
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 28th day of October, 1996.
WASHINGTON MUTUAL, INC.
By: /s/ Kerry K. Killinger
-------------------------------------
Kerry K. Killinger
President and Chief Executive Officer
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 28th day of October, 1996.
/s/ Kerry K. Killinger /s/ William A. Longbrake
- ------------------------------------ ------------------------------------
Kerry K. Killinger William A. Longbrake
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> 273
/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
*By: /s/ Kerry C. Killinger
--------------------------------
Attorney-in-fact
<PAGE> 274
FORM S-4 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
23.2 Consent of Deloitte & Touche LLP (contained on page II-4)
23.3 Consent of Jones, Jensen & Company (contained on page II-5)
23.5 Consent of KPMG Peat Marwick LLP. (contained on page II-6)
</TABLE>
