<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1653725
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1201 THIRD AVENUE SEATTLE, WASHINGTON 98101
------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(206) 461-2000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the last 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's classes of common stock as
of March 31, 1996:
COMMON STOCK - 72,120,915
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated financial statements of Washington Mutual, Inc. ("Washington
Mutual" or the "Company") begin on page 9.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
- - - Net income for first quarter 1996 was $59.5 million, up 32 percent from
earnings of $45.3 million during first quarter 1995. Fully diluted earnings per
share were 74 cents for first quarter 1996 compared with 58 cents in 1995.
During first quarter 1996, the Company's return on assets was 1.08 percent
compared with 0.94 percent a year earlier.
- - - The Company's net interest margin for the quarter ended March 31, 1996 was
3.26 percent compared with 3.15 percent for the same quarter in 1995.
- - - Lower market interest rates during the first three months of 1996 resulted in
loan production of $1,673.6 million for the quarter compared with $696.4 million
during the same period in 1995, an increase of 140 percent. Loan production
during the quarter just ended included $606.7 million of refinancing activity.
- - - During the quarter, the Company took steps to expand its position in Utah by
signing an agreement to acquire Utah Federal Savings Bank ("Utah FSB"). Utah FSB
is an Ogden-based savings bank operating five branches and three loan production
centers in Utah. At December 31, 1995, Utah FSB had assets of $122.6 million,
deposits of $110.0 million and stockholder's equity of $10.5 million. The merger
is scheduled to be completed during the third quarter of 1996 subject to the
receipt of regulatory and Utah FSB shareholder approval.
- - - On January 31, 1996, Washington Mutual completed the merger of Western Bank
("Western"), a commercial bank headquartered in Oregon, with and into Washington
Mutual Bank ("WMB"), a subsidiary of the Company. Western operated 42 branches
located predominately in western and central Oregon. At December 31, 1995,
Western had assets of $787.1 million, deposits of $709.7 million and
stockholders' equity of $68.6 million. The Company issued 5.87 million shares of
common stock (equal to approximately 8.2 percent of the shares of common stock
outstanding as of December 31, 1995) to complete the merger. Results from 1995
have been restated to reflect the merger with Western, which was accounted for
as a pooling of interests.
RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net interest income was $171.0 million for
the quarter, up 15 percent from $149.1 million a year earlier. The 1996 level
reflected the continuing effect of low interest rates on the Company's net
interest margin which increased to 3.26 percent from 3.15 percent in first
quarter 1995. (The net interest margin measures the Company's annualized net
interest income as a percentage of interest-earning assets.)
Lower market interest rates decreased the Company's combined yield on loans
and investments to 7.91 percent for the quarter ended March 31, 1996 from 7.94
percent for the quarter ended March 31, 1995. They also, however, decreased the
cost of funds by even more to 4.86 percent for first quarter 1996, from 5.00
percent for the same period a year ago. The net interest spread was 3.05 percent
in the first quarter, compared with 2.94 percent for the same period in 1995.
(The net interest spread is the difference between the Company's yield on assets
and its cost of funds.)
With the increase in interest rates during second quarter 1996, maintaining
the current levels for the net interest margin, net interest spread and net
interest income will be more difficult.
1
<PAGE> 3
OTHER INCOME. Other income was $36.7 million for the quarter ended March 31,
1996 compared with $28.9 million for the same period in 1995.
Service fees rose 14 percent to $24.6 million. A revised fee structure on
certain deposit services resulted in a 42 percent growth in deposit fees to
$16.6 million. Offsetting this growth was the loss of $3.6 million of fee income
as a result of the sale of the Company's travel agency subsidiary in March 1995.
Loan servicing fees were $3.9 million, up 62 percent from $2.4 million for
the same period a year ago. Loans serviced for others increased to $6,812.4
million at March 31, 1996 from $3,926.5 million one year earlier due to
substantial securitizations of loans throughout 1995 and the April 1995 addition
of the loan servicing portfolio of Olympus Bank, a Federal Savings Bank.
Other operating income declined from $4.7 million in first quarter 1995 to
$3.6 million for the same period this year. In 1995, this item included $1.0
million of interest income on a tax refund.
Gains on the sale of loans for first quarter 1996 were $2.7 million
compared with $199,000 for first quarter 1995. The higher level of gains in the
quarter just ended reflected the continued sale of fixed-rate loans as the
Company restructures its asset base with the objective of reducing the effect of
future interest rate movements.
The Company offsets the write-down of mortgage servicing rights against its
gains on the sale of loans. No write-downs of mortgage servicing rights were
made during the first quarter in either 1996 or 1995. On January 1, 1996 the
Company adopted Statement of Accounting Standards ("SFAS") No. 122, Accounting
for Mortgage Servicing Rights. The statement eliminates the distinctions between
servicing rights that are purchased and those that are retained upon the sale or
securitization of loans. The statement requires mortgage servicers to record the
servicing rights on loans as separate assets, no matter how acquired. Banks that
sell or securitize loans and retain the servicing rights will be required to
allocate the total cost of the loans between servicing rights and principal
balance.
During first quarter 1996, the Company capitalized $6.7 million of mortgage
servicing rights as a result of SFAS No. 122. Gains on the sale of loans as a
result of capitalizing mortgage servicing rights under the provisions of this
statement were $867,000 more for the quarter just ended than would have been
recognized under prior accounting policies. At March 31, 1996, the Company's
balance sheet included mortgage servicing rights valued at $6.6 million as a
result of this statement.
Gains on sale of other assets were $1.8 million during first quarter 1996
compared with a loss of $176,000 for the same period in 1995. The net gain for
the quarter consisted of a $4.1 million gain on the sale of Mutual Travel,
securities transaction losses of $2.8 million and net gains of $490,000 on the
sale of other bank assets. In 1995, most of the first quarter loss of $176,000
resulted from the sale of bank property.
OTHER EXPENSE. Operating expenses were up 7 percent from $103.1 million in first
quarter 1995 to $110.0 million for the current quarter.
Salaries and employee benefits increased 10 percent to $50.8 million from
$46.2 million a year ago due primarily to increases in staffing levels in
financial centers, lending support, telephone banking services and commercial
banking . The staffing level of full-time equivalent employees was 4,909 at
March 31, 1996, up from 4,637 a year earlier. The increase in full-time
equivalent employees was moderated by the sale of the Company's item processing
operation which resulted in a decrease of 98 employees.
Occupancy and equipment expense increased 4 percent to $18.7 million
compared with $18.0 million a year earlier.
Regulatory assessments decreased 48 percent to $3.3 million due to a
reduction in the assessment rate on the Company's deposits insured by the Bank
Insurance Fund ("BIF"). (See Item 5, Other Information on page 7 for a
discussion of deposit assessments.)
Other operating expense increased 12 percent to $30.7 million from $27.3
million a year ago due in part to higher telecommunications expenses, other
professional fees associated with reengineering projects and acquisition-related
charges.
Amortization of goodwill and intangible assets for the quarter ended March
31, 1996 was $7.0 million down 5 percent from $7.3 million from the same period
in 1995.
2
<PAGE> 4
Real estate owned ("REO") operations, inclusive of write-downs resulted in
income of $490,000 for the current quarter. REO operations in first quarter 1995
had income of $2.1 million and included a recovery on one large commercial loan.
OPERATING EFFICIENCY RATIO. The Company's operating efficiency ratio - other
expense as a percentage of net interest income plus other income - was 53.0
percent for first quarter 1996 compared with 57.9 percent for the same period in
1995. The effect of increases in other expenses was offset by substantial
increases in net interest income and other income during the first quarter 1996.
NONBANKING SUBSIDIARY OPERATIONS. Pretax operating income (net income before
amortization of goodwill and intangible assets and elimination of intercompany
transactions) for first quarter 1996 was $9.8 million compared with $3.7 million
for the same period in 1995. The Company's insurance subsidiaries reported a 6
percent increase in pretax operating income to $4.1 million from $3.8 million a
year earlier. The securities subsidiaries had pretax operating income of $1.6
million compared with $249,000 in first quarter 1995. Operating income in 1995
was reduced by the effect of a one-time legal settlement of $455,000. The
results of operations during first quarter 1996 for other nonbanking
subsidiaries included the recognition of a deferred gain of $4.1 million on the
sale of Mutual Travel in 1995. Results of operations for nonbanking subsidiaries
were as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
- - -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities:
Murphey Favre, Inc. $ 742 $ (400)
Composite Research & Management Co. 829 649
- - -----------------------------------------------------------------------------------------------------------
Total securities 1,571 249
WM Life Insurance Co. 4,058 3,828
Mutual Travel - 229
Other 4,118 (612)
- - -----------------------------------------------------------------------------------------------------------
Net income before taxes, amortization of goodwill and other intangible
assets, and elimination of intercompany transactions 9,747 3,694
Amortization of goodwill and other intangible assets 103 381
- - -----------------------------------------------------------------------------------------------------------
Net income before elimination of intercompany transactions $9,644 $3,313
===========================================================================================================
</TABLE>
FINANCIAL POSITION
ASSETS. At March 31, 1996, the Company's assets were $22,344.8 million down
slightly from $22,420.4 million at year-end 1995.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at March 31,
1996 was carried at $7,608.4 million, a 4 percent decrease from the year-end
1995 balance of $7,940.9 million. During the quarter just ended, the Company
continued the restructuring of its investment portfolio by selling approximately
$880.0 million of fixed-rate securities and replacing them with approximately
$639.0 million of adjustable-rate securities and loans.
At March 31, 1995, the Company's investment portfolio included $7,426.9
million available-for-sale securities and $181.5 million held-to-maturity
securities. Mortgage-backed securities comprised $6,548.7 million or 86 percent
of the total investment portfolio at quarter end.
LOAN ORIGINATIONS. For first quarter 1996, total lending was $1,673.6 million
compared with $696.4 million a year earlier. Lower market interest rates helped
generate increases in lending volumes in all loan categories. Residential loan
originations increased more than fourfold to $1,048.1 million during the quarter
just ended compared with $252.9 million a year earlier. Originations of
residential loans to
3
<PAGE> 5
purchase homes were $441.4 million compared with $203.7 million a year ago,
while home loan refinancings were $606.7 million compared with $39.4 million in
first quarter 1995. The Company remained the leading residential first-mortgage
lender in Washington and Oregon. Originations of residential construction loans
during the quarter were $249.7 million, an increase of 52 percent from first
quarter 1995's total of $164.6 million. Consumer loan originations, primarily
home equity and manufactured home loans, increased to $237.5 million for the
first three months of 1996 from $207.5 million a year ago. Commercial real
estate lending, primarily for apartment buildings, increased to $101.4 million
for the quarter just ended from $42.5 million for first quarter 1995. Commercial
business lending increased to $36.9 million for the first quarter 1996 compared
with $28.9 million a year ago.
DEPOSITS. Total deposits decreased to $11,275.5 million at March 31, 1996 from
$11,306.4 million at December 31, 1995. Retail deposits were down $33.0 million
to $10,599.5 million. Wholesale activities - predominantly time deposits greater
than $100,000 - increased $2.1 million. The Company considers wholesale deposits
to be an alternative borrowing source rather than a customer relationship and,
as such, their levels are determined by management's decisions as to the most
economic funding sources.
BORROWINGS. Washington Mutual's borrowings primarily take the form of securities
sold under agreements to repurchase and advances from the Federal Home Loan Bank
of Seattle. These two borrowing sources totaled $4,690.0 million and $2,740.9
million at March 31, 1996 compared with $3,965.8 million and $3,711.4 million at
year-end 1995. The exact mix at any given time is dependent upon the market
pricing of the two borrowing sources.
INTEREST RATE RISK MANAGEMENT. Washington Mutual engages in a comprehensive
asset and liability management program that attempts to reduce the risk of
significant decreases in net interest income caused by interest rate changes.
One of the Company's strategies to reduce the effect of future movements in
interest rates is to increase the percentage of adjustable-rate assets in its
portfolio. A conventional measure of interest rate sensitivity for thrift
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total liabilities
maturing or repricing within one year by total assets. At the end of 1995, the
Company reported a one-year gap of a negative 14.4 percent. But, due to the
merger with Western, the one-year gap at December 31, 1995 has been restated to
a negative 13.3 percent.
The Company's assets and liabilities that mature or reprice within one year
were as follows:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in millions) 1996 1995
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Interest-sensitive assets $ 10,662 $ 9,885
Interest-sensitive liabilities 15,316 14,679
Derivative instruments (1,550) (1,825)
- - -------------------------------------------------------------------------------------
Net liability sensitivity $ (3,104) $ (2,969)
=====================================================================================
Net liability sensitivity as a percentage of total assets (13.9)% (13.3)%
</TABLE>
During first quarter 1996, the Company continued it's efforts to replace
fixed-rate mortgages and mortgage-backed securities with adjustable-rate
instruments. In addition to acquiring $775.3 million of primarily
adjustable-rate assets from Western, the Company sold approximately $880.0
million of fixed-rate mortgage-backed securities and purchased approximately
$639.0 million of adjustable-rate assets. Liabilities that mature or reprice
within one year increased $637.0 million to $15,316.0 million at March 31, 1996
as liabilities with an original maturity term greater than one year fell to
within one year.
4
<PAGE> 6
ASSET QUALITY
Classified assets, which consist of nonaccrual loans, loans under
foreclosure, real estate owned ("REO") and performing loans (including
substandard troubled debt restructurings) and securities that exhibit credit
quality weaknesses, were as follows:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in thousands) 1996 1995
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans and loans under foreclosure $ 71,263 $ 69,707
REO 23,690 25,064
- - -------------------------------------------------------------------------------------
Total nonperforming assets 94,953 94,771
Troubled debt restructurings (classified as substandard) 14,615 13,094
Other classified assets 94,689 97,946
Classified securities 26,428 37,645
- - -------------------------------------------------------------------------------------
$230,685 $243,456
=====================================================================================
</TABLE>
Nonperforming assets increased slightly from $94.8 million at December 31,
1995 to $95.0 million at March 31, 1996, but as a percentage of total assets
remained steady at 0.42 percent for both periods.
The level of nonperforming commercial real estate loans declined to $27.6
million at March 31, 1996 compared with $32.9 million three months earlier.
During the period, a medical office building in California at $4.4 million was
sold. Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
(dollars in thousands) 1996 1995
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets (loans and REO) by collateral type:
Residential real estate $ 49,876 $ 46,414
Residential construction 10,348 10,245
Apartment buildings 2,378 3,934
Other commercial real estate 25,210 28,937
Consumer and manufactured housing 11,432 10,792
Commercial business 853 824
Reserve for REO losses (5,144) (6,375)
- - ------------------------------------------------------------------------------------
Total $ 94,953 $ 94,771
====================================================================================
Nonperforming assets as a percentage of total loans 0.70% 0.73%
Nonperforming assets as a percentage of total assets 0.42 0.42
</TABLE>
On January 1, 1995, Washington Mutual adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. It is applicable to all loans except: large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment; loans measured at fair value or at the lower of cost or fair value;
leases; and debt securities (as defined by SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities). It applies to all loans that are
restructured in a troubled debt restructuring as defined by SFAS 15. A troubled
debt restructuring is a restructuring in which the creditor grants a concession
to the borrower that it would not otherwise consider. At March 31, 1996, the
Company had $18.9 million of restructured loans of which $14.6 million, though
performing, were classified substandard.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. At March 31, 1996, loans totaling $88.5 million were impaired of
which $72.0 million had allocated reserves of $10.2 million. The remaining $16.5
million were previously written down and have no reserves allocated to them. Of
the $88.5 million of impaired loans, $5.5 million were on nonaccrual status and
$7.8 million were under foreclosure. The average balance of impaired loans
during the quarter was $87.8 million and the Company recognized $1.8 million of
related interest income. Interest income is normally recognized on an accrual
basis, however, if the impaired loan is nonperforming, then interest income is
recorded on the receipt of cash.
5
<PAGE> 7
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN AND REO LOSSES. The quarterly
provision for loan losses was $2.9 million for first quarter 1996 compared with
$2.8 million for first quarter 1995 and reflected the Company's high level of
reserves and continued strength in asset quality. The reserve for loan losses
decreased slightly to $143.0 million at March 31, 1996 from $143.3 million at
December 31, 1995. Reserves charged off, net of recoveries, totaled $3.2 million
for the first three months of 1996 compared with $1.1 million for the same
period in 1995. At March 31, 1996, the reserve for loan losses represented 1.05
percent of outstanding loans and 200.65 percent of nonperforming loans, compared
with 1.10 percent and 151.23 percent three months earlier.
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews its loan portfolio for specific weaknesses. A portion
of the reserve is then allocated to reflect the loss exposure. The March 31,
1996 analysis of residential construction and commercial real estate resulted in
an allocation for impaired loans of $10.2 million of the reserve for loan loss
exposure. At December 31, 1995, the Company had allocated reserves of $10.9
million. The remaining reserve of $132.8 million at March 31, 1996 was
unallocated and available for potential losses from any of the Company's loans.
A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $5.1 million at
March 31, 1996, down from $6.4 million at December 31, 1995. The level is based
upon a routine review of the REO portfolio and the state of national and local
economies.
LIQUIDITY AND CAPITAL REQUIREMENTS
LIQUIDITY. Washington Mutual monitors its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing capacity is sufficient to satisfy unanticipated cash needs. The
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At March 31, 1996,
the Company had substantial liquidity compared with its established guidelines.
The Federal Deposit Insurance Corporation ("FDIC") uses two ratios to
monitor WMB's liquidity position. The liquidity ratio measures WMB's ability to
use liquid assets to meet unusual cash demands. The dependency ratio measures
WMB's reliance upon potentially volatile liabilities to fund long-term assets.
WMB manages both ratios to remain within the acceptable ranges and, at March 31,
1996, met the established FDIC guidelines.
To meet its immediate needs for funds as well as long-term lending demands,
Washington Mutual maintains various sources of liquid assets and borrowing
capabilities. At March 31, 1996, the Company was able to borrow an additional
$6,592.4 million through the use of collateralized borrowings using unpledged
mortgage-backed securities and other wholesale sources.
Because the low interest rate environment of recent years and competition
from non-regulated activities (such as mutual funds) has inhibited consumer
deposits, Washington Mutual has supported its growth through business
combinations with other financial institutions and by increasing its use of
wholesale borrowings. Should the Company not be able to increase deposits either
internally or through acquisitions, its ability to grow would be dependent upon,
and to a certain extent limited by, its borrowing capacity.
CAPITAL REQUIREMENTS. At March 31, 1996, Washington Mutual's banking
subsidiaries exceeded all current regulatory capital requirements and were
classified as well capitalized institutions, the highest regulatory standard. In
order to be categorized as a well capitalized institution, the FDIC requires
banks it regulates to maintain a leverage ratio, defined as Tier 1 capital
divided by total regulatory assets, of at least 5.00 percent; total capital of
at least 10.00 percent of risk-weighted assets; and Tier 1 (or core) capital of
at least 6.00 percent of risk-weighted assets. At March 31, 1996, WMB's
(consolidated with its subsidiaries) ratio of leverage capital to assets was
5.60 percent, its ratio of total capital to risk-weighted assets was 11.21
percent, and the ratio of core capital (Tier I) to risk-weighted assets was
10.41 percent.
Washington Mutual's federal savings bank subsidiary is required by the
Office of Thrift Supervision ("OTS") to maintain certain capital levels. In
order to be classified as a well capitalized institution, the
6
<PAGE> 8
OTS requires banks it regulates to maintain a leverage ratio of at least 5.00
percent, total capital of a least 10.00 percent of risk-weighted assets, and
core capital of at least 6.00 percent of risk-weighted assets. At March 31,
1996, the subsidiary was in compliance with all well capitalized requirements.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
between 0 percent and 0.27 percent per annum of total adjusted deposits for all
deposits insured through the BIF, effective as of January 1996. The assessment
rate schedule applicable to deposits insured through the Savings Association
Insurance Fund ("SAIF") is between 0.23 percent and 0.31 percent per annum of
total adjusted SAIF deposits. The assessment rates are calculated to keep the
respective insurance funds capitalized at 1.25 percent of estimated insured
deposits. Since the BIF has reached the required reserve ratio, under the new
assessment rate schedule, most institutions are being assessed the statutory
annual minimum of $2,000 for their BIF deposits. In contrast, because the SAIF
is still undercapitalized, the assessment rate for SAIF deposits is expected to
continue at between 0.23 percent and 0.31 percent per annum. The resulting
premium differential will have adverse consequences on those institutions with
SAIF deposits, including a competitive disadvantage with respect to pricing of
loans and deposits and with respect to the ability to control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, estimated at 0.78 percent of SAIF deposits. Such
a proposal would lead to elimination of the ongoing differential. The budget
bill signed by the President in April 1996 did not include such a one-time
assessment, however, and it is not known when or if such a proposal will be
adopted. Such an assessment on Washington Mutual's SAIF deposits at March 31,
1995 would result in a charge to earnings of approximately $50.5 million or
$32.4 million on an after-tax basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
7
<PAGE> 9
11. Statement re computation of per share earnings
(b) During the quarter, the Company filed Current Report on Form 8-K dated
March 15, 1996.
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 14, 1996.
Washington Mutual, Inc.
/s/ Kerry K. Killinger
-----------------------------------------------
Kerry K. Killinger
Chairman, President and Chief Executive Officer
/s/ Douglas G. Wisdorf
-----------------------------------------------
Douglas G. Wisdorf
Senior Vice President and Controller
9
<PAGE> 11
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended March 31,
- - -----------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1996 1995
- - -----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income
Loans $ 278,900 $ 266,887
Available-for-sale securities 132,269 52,918
Held-to-maturity securities 3,314 47,398
Cash equivalents 914 244
- - -----------------------------------------------------------------------------------------
Total interest income 415,397 367,447
Interest expense
Deposits 122,920 114,327
Borrowings 121,505 104,047
- - -----------------------------------------------------------------------------------------
Total interest expense 244,425 218,374
- - -----------------------------------------------------------------------------------------
Net interest income 170,972 149,073
Provision for loan losses 2,912 2,800
- - -----------------------------------------------------------------------------------------
Net interest income after provision for loan losses 168,060 146,273
Other income
Service fees 24,640 21,657
Loan servicing fees 3,870 2,389
Other operating income 3,620 4,786
Gain on sale of loans, inclusive of write-downs 2,747 199
Gain (loss) on sale of other assets, inclusive of write-downs 1,821 (176)
- - -----------------------------------------------------------------------------------------
Total other income 36,698 28,855
Other expense
Salaries and employee benefits 50,770 46,242
Occupancy and equipment 18,728 17,972
Regulatory assessments 3,308 6,319
Other operating expense 30,721 27,342
Amortization of goodwill and other intangible assets 6,968 7,317
Real estate owned ("REO") operations, inclusive of write-downs (490) (2,111)
- - -----------------------------------------------------------------------------------------
Total other expense 110,005 103,081
- - -----------------------------------------------------------------------------------------
Income before income taxes 94,753 72,047
Income taxes 35,224 26,797
- - -----------------------------------------------------------------------------------------
Net income $ 59,529 $ 45,250
=========================================================================================
Net income attributable to common stock $ 54,924 $ 40,604
=========================================================================================
Net income per common share:
Primary $ 0.76 $ 0.60
Fully Diluted 0.74 0.58
Dividends declared per common share 0.22 0.19
</TABLE>
See Notes to Consolidated Financial Statements
10
<PAGE> 12
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, Dec. 31,
(dollars in thousands) 1996 1995
- - -------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 290,031 $ 598,272
Trading account securities 2,447 238
Available-for-sale securities 7,426,919 7,768,115
Held-to-maturity securities 181,472 172,786
Loans 13,562,058 13,035,250
Real estate owned 23,690 25,064
Bank premises and equipment 218,267 219,056
Goodwill and other intangible assets 154,212 161,127
Other assets 485,673 440,471
- - -------------------------------------------------------------------------------------------
Total assets $22,344,769 $22,420,379
===========================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,429,763 $ 1,336,340
Savings and money market accounts 4,185,842 3,983,267
Time certificates 5,659,903 5,986,829
- - -------------------------------------------------------------------------------------------
Total deposits 11,275,508 11,306,436
Annuities 859,939 855,503
Federal funds purchased 674,000 430,000
Securities sold under agreements to repurchase 4,690,011 3,965,820
Advances from the Federal Home Loan Bank of Seattle 2,740,907 3,711,402
Other borrowings 223,755 224,250
Other liabilities 230,770 266,884
- - -------------------------------------------------------------------------------------------
Total liabilities 20,694,890 20,760,295
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -
6,122,500 and 6,122,500 shares issued and outstanding -- --
Common stock, no par value: 100,000,000 shares authorized -
72,007,309 and 71,804,527 shares issues and outstanding -- --
Capital surplus 726,948 722,986
Valuation reserve for available-for-sale securities 24,382 78,348
Retained earnings 898,549 858,750
- - -------------------------------------------------------------------------------------------
Total stockholders' equity 1,649,879 1,660,084
- - -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,344,769 $22,420,379
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Shares Total
-------------------- Valuation Stock-
Preferred Common Capital Retained Reserve for holders'
(in thousands) Stock Stock Surplus Earnings Securities Equity
- - -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 6,123 71,805 $722,986 $858,750 $ 78,348 $1,660,084
Net income - - - 59,529 - 59,529
Cash dividends on preferred stock - - - (4,605) - (4,605)
Cash dividends on common stock - - - (15,125) - (15,125)
Common stock issued through stock
options and employee stock plans - 202 3,962 - - 3,962
Adjustment in valuation reserve
for available-for-sale securities - - - - (53,966) (53,966)
- - -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 6,123 72,007 $726,948 $898,549 $ 24,382 $1,649,879
===========================================================================================================
Balance at December 31, 1994 6,200 67,837 $695,922 $700,424 $(32,088) $1,364,258
Net income - - - 45,250 - 45,250
Cash dividends on preferred stock - - - (4,646) - (4,646)
Cash dividends on common stock - - - (12,572) - (12,572)
Common stock issued through stock
options and employee stock plans - 177 2,872 - - 2,872
Adjustment in valuation reserve
for available-for-sale securities - - - - 25,182 25,182
- - -----------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 6,200 68,014 $698,794 $728,456 $ (6,906) $1,420,344
===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Quarter Ended March 31,
- - ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- - ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net income $ 59,529 $ 45,250
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,912 2,800
(Gain) on sale of loans (2,747) (199)
(Gain) loss on sale of other assets (1,821) 176
REO operations, exclusive of write-downs (490) (2,111)
Depreciation and amortization 10,698 4,557
FHLB stock dividend (4,744) (6,956)
(Increase) in trading account securities (2,204) (1,530)
(Increase) in interest receivable (2,702) (9,880)
Increase in interest payable 4,732 8,236
Increase in federal income taxes payable 28,782 27,218
Decrease (increase) in other assets 44,690 (8,501)
(Decrease) increase in other liabilities (28,414) 20,973
- - ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 108,221 80,033
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (515,775) (383,727)
Maturities and principal payments on available-for-sale securities 288,795 67,783
Sales of available-for-sale securities 850,271 --
Purchases of held-to-maturity securities (12,777) (29,481)
Maturities, calls and principal payments on held-to-maturity securities 4,658 28,133
Sales of loans 103,906 5,784
Principal payments on loans 758,575 477,431
Origination and purchases of loans (1,848,328) (736,443)
Sales of REO 8,711 3,342
Other REO operations 178 2,111
Expenditures for premises and equipment (6,194) (8,820)
- - ----------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (367,980) (573,887)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits (34,907) 176,404
Increase in annuities 4,436 19,316
Increase in federal funds purchased 244,000 --
Increase in securities sold under agreements to repurchase 724,191 438,060
Proceeds from FHLB advances 729,791 326,080
Payments for maturing and prepaid FHLB advances (1,700,000) (420,000)
(Repayments) of other borrowings (225) (74)
Common stock issued through stock options and employee stock plans 3,962 2,872
Cash dividends paid (19,730) (17,218)
- - ----------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (48,482) 525,440
- - ----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents (308,241) 31,586
Cash and cash equivalents at beginning of period 598,272 262,256
- - ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 290,031 $ 293,842
====================================================================================================
</TABLE>
13
<PAGE> 15
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended March 31,
- - -----------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- - --------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities and held for investment $461,315 $109,117
Real estate acquired through foreclosure 5,446 8,233
CASH PAID DURING THE PERIOD FOR
Interest on deposits 122,920 114,324
Interest on borrowings 121,505 104,047
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of March 31, 1996 and December 31, 1995 and the consolidated
statements of income, stockholders' equity and cash flows of Washington Mutual,
Inc. ("Washington Mutual" or the "Company") for the quarters ended March 31,
1996 and 1995 reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the period presented.
2. CONTINGENCIES
On November 14, 1995, the Federal Deposit Insurance Corporation ("FDIC")
adopted a new assessment rate schedule of between 0 percent and 0.27 percent per
annum of total adjusted deposits for all deposits insured through the Bank
Insurance Fund ("BIF"), effective as of January 1996. The assessment rate
schedule applicable to deposits insured through the Savings Association
Insurance Fund ("SAIF") is between 0.23 percent and 0.31 percent per annum of
total adjusted SAIF deposits. The assessment rates are calculated to keep the
respective insurance funds capitalized at 1.25 percent of estimated insured
deposits. Since the BIF has reached the required reserve ratio, under the new
assessment rate schedule, most institutions are being assessed the statutory
annual minimum of $2,000 for their BIF deposits. In contrast, because the SAIF
is still undercapitalized, the assessment rate for SAIF deposits is expected to
continue at between 0.23 percent and 0.31 percent per annum. The resulting
premium differential will have adverse consequences on those institutions with
SAIF deposits, including a competitive disadvantage with respect to pricing of
loans and deposits and with respect to the ability to control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, estimated at 0.78 percent of SAIF deposits. Such
a proposal would lead to elimination of the ongoing differential. The budget
bill signed by the President in April 1996 did not include such a one-time
assessment, however, and it is not known when or if such a proposal will be
adopted. Such an assessment on Washington Mutual's SAIF deposits at March 31,
1995 would result in a charge to earnings of approximately $50.5 million or
$32.4 million on an after-tax basis.
3. MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights. The statement eliminates the distinctions between
servicing rights that are purchased and those that are retained upon the sale or
securitization of loans. The statement requires mortgage servicers to recognize
the servicing rights on loans as separate assets, no matter how acquired. Banks
who sell loans and retain the servicing rights will be required to allocate the
total cost of the loans between servicing rights and loans based on their
relative fair values if their values can be estimated. Effective January 1,
1996, the Company adopted SFAS No. 122.
During first quarter 1996, the Company capitalized $6.7 million of mortgage
servicing rights as a result of this statement. Gains on the sale of loans as a
result of capitalizing mortgage servicing rights under the provisions of SFAS
No. 122 were $867,000 more for the quarter just ended than would have been
recognized under prior accounting policies. At March 31, 1996, the Company's
balance sheet included $6.6 million of mortgage rights as a result of this
statement.
15
<PAGE> 17
Washington Mutual, Inc.
List of Exhibits
<TABLE>
<CAPTION>
Exhibit Page
- - --------------------------------------------------------------------------------
<S> <C> <C>
11 Statement re computation of per share earnings.................
27 Financial Data Schedule .......................................
</TABLE>
16
<PAGE> 1
EXHIBIT 11
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Quarter Ended March 31,
- - ----------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- - ----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
DATA USED TO COMPUTE PER SHARE AMOUNTS
Net income $59,529 $45,250
Preferred stock dividends:
Noncumulative Perpetual, Series C (1,569) (1,596)
Noncumulative Perpetual, Series E (936) (950)
Noncumulative Convertible Perpetual, Series D (2,100) (2,100)
- - ----------------------------------------------------------------------------------------------
Net income available to primary common stock $54,924 $40,604
==============================================================================================
Net income $59,529 $45,250
Preferred stock dividends
Noncumulative Perpetual, Series C (1,569) (1,596)
Noncumulative Perpetual, Series E (936) (950)
- - ----------------------------------------------------------------------------------------------
Net income available to fully diluted common stock $57,024 $42,704
==============================================================================================
Average common shares outstanding:
Primary 71,914,397 67,893,874
Noncumulative Convertible Perpetual Preferred Stock, Series D 5,419,247 5,419,247
- - ----------------------------------------------------------------------------------------------
Fully diluted 77,333,644 73,313,121
==============================================================================================
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 288,437
<INT-BEARING-DEPOSITS> 1,594
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 2,447
<INVESTMENTS-HELD-FOR-SALE> 7,426,919
<INVESTMENTS-CARRYING> 181,472
<INVESTMENTS-MARKET> 192,553
<LOANS> 13,705,047
<ALLOWANCE> 142,989
<TOTAL-ASSETS> 22,344,769
<DEPOSITS> 11,275,508
<SHORT-TERM> 6,272,261
<LIABILITIES-OTHER> 230,770
<LONG-TERM> 2,916,351
0
250,168
<COMMON> 476,780
<OTHER-SE> 922,931
<TOTAL-LIABILITIES-AND-EQUITY> 22,344,769
<INTEREST-LOAN> 278,900
<INTEREST-INVEST> 135,583
<INTEREST-OTHER> 914
<INTEREST-TOTAL> 415,397
<INTEREST-DEPOSIT> 122,920
<INTEREST-EXPENSE> 244,425
<INTEREST-INCOME-NET> 170,972
<LOAN-LOSSES> 2,912
<SECURITIES-GAINS> (2,824)
<EXPENSE-OTHER> 110,005
<INCOME-PRETAX> 94,753
<INCOME-PRE-EXTRAORDINARY> 59,529
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,529
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 7.91
<LOANS-NON> 71,263
<LOANS-PAST> 71,263
<LOANS-TROUBLED> 18,904
<LOANS-PROBLEM> 94,689
<ALLOWANCE-OPEN> 143,320
<CHARGE-OFFS> 3,504
<RECOVERIES> 261
<ALLOWANCE-CLOSE> 142,989
<ALLOWANCE-DOMESTIC> 142,989
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 132,750
</TABLE>
