As filed with the Securities and Exchange Commission on December 5, 1996
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
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,
including area code, of agent for service)
Copies to:
Fay L. Chapman Gregg A. Noel
David R. Wilson Skadden, Arps, Slate, Meagher & Flom LLP
Foster Pepper & Shefelman 300 South Grand Avenue
1111 Third Avenue Suite 3400
Suite 3400 Los Angeles, CA 90071
Seattle, WA 98101 (213) 687-5000
(206) 447-4400
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check in the
following box. /_ /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /_ /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /_ /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. /_ /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_ /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------- ---------------- ----------------------- ------------------------- -----------------
Proposed maximum Proposed maximum Amount of
Title of each class of Amount to be offering price per aggregate offering price registration fee
securities to be registered registered share(1)
- ------------------------------- ---------------- ----------------------- ------------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, no par value 15,085,305 $40.375 $609,069,190 $184,567
per share
- ------------------------------- ---------------- ----------------------- ------------------------- -----------------
Share Purchase Rights(2) 15,085,305 -- -- --
- ------------------------------- ---------------- ----------------------- ------------------------- -----------------
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) based on the National Market tier of the Nasdaq
Stock Market average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market on December 2, 1996.
(2) Rights initially will trade together with the Common Stock. The value
attributable to the Rights, if any, is reflected in the market price of
the Common Stock.
</TABLE>
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
------------------------------------------------------------------------------
PROSPECTUS SUBJECT TO COMPLETION
------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS DATED _______________, 1996
15,085,305 Shares
WASHINGTON MUTUAL, INC.
Common Stock
Of the 15,085,305 shares (the "Shares") of common stock, no par value
("Common Stock"), of Washington Mutual, Inc., a Washington corporation
("Washington Mutual" or the "Company"), offered hereby, 14,000,000 Shares are
offered by the Federal Deposit Insurance Corporation (the "FDIC"), for the
account of the FSLIC Resolution Fund, which is a government-controlled
instrumentality of the United States of America managed by the FDIC (the "FRF";
the FDIC in its capacity as manager of the FRF is referred to herein as the
"FDIC-Manager"), and 1,085,305 Shares are offered by certain other stockholders
of the Company identified herein (collectively with the FRF, the "Selling
Stockholders"). See "Selling Stockholders." The Shares were issued in connection
with a recent transaction pursuant to which Washington Mutual acquired Keystone
Holdings, Inc. ("Keystone Holdings") by merger, as a result of which the direct
and indirect subsidiaries of Keystone Holdings, including American Savings Bank,
F.A. ("ASB"), became subsidiaries of the Company. See "The Keystone
Transaction." The Company will not receive any proceeds from the sale of the
Shares hereunder.
The Company's Common Stock is traded on the National Market tier of The
Nasdaq Stock Market (the "Nasdaq Stock Market") under the symbol "WAMU." On
December 4, 1996, the last reported sale price of the Common Stock was $40 3/8
per share.
See "Risk Factors" beginning on page 11 of this Prospectus for a
discussion of certain factors that should be considered by prospective
purchasers of the Shares.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================= ================ ================== =========================
Price to Underwriting Proceeds to Selling
Public Discount(1) Stockholders(2)
- ------------------------------------------------------- ---------------- ------------------ -------------------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
- ------------------------------------------------------- ---------------- ------------------ =========================
Total................................................. $ $ $
======================================================= ================ ================== =========================
(1) The Company and the Selling Stockholders have severally agreed to indemnify
the several Underwriters (the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act). See "Underwriting."
(2) All expenses of the offering (including reimbursement of certain expenses
of the Selling Stockholders) are payable by the Company.
</TABLE>
The Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about
___________________, 1997.
Merrill Lynch & Co. Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is ______________________, 1997
<PAGE>
MAP OF THE STATES OF WASHINGTON, OREGON, CALIFORNIA, UTAH, IDAHO, MONTANA,
ARIZONA, COLORADO AND NEVADA AND A TABLE SETTING FORTH THE NUMBERS OF THE
COMPANY'S BRANCHES, LOAN PRODUCTION CENTERS, COMMERCIAL BANK OFFICES AND NUMBER
OF HOUSEHOLDS SERVED.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S
SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK
MARKETS' SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE IN ACCORDANCE
WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus or in documents incorporated herein by reference and is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus and the other documents
incorporated herein by reference. Unless otherwise indicated, all references
herein to Washington Mutual or the Company refer to the combined entity
including Keystone Holdings on a restated basis as if the respective companies
had been combined for all periods presented.
The Company
With a history dating back to 1889, Washington Mutual is a regional
financial services company committed to serving consumers and small to mid-sized
businesses throughout the Western United States. Through its subsidiaries, the
Company engages in the following activities:
Mortgage Lending and Consumer Banking Activities. Through its principal
subsidiaries, Washington Mutual Bank ("WMB"), ASB, and Washington Mutual Bank
fsb ("WMBfsb"), at September 30, 1996 the Company operated 412 financial centers
and 86 loan centers offering a full complement of mortgage lending and consumer
banking products and services. For the nine months ended September 30, 1996, WMB
was the leading originator of first-lien single-family residential loans in
Washington and Oregon, and ASB was the second largest in California.
Commercial Banking Activities. Through the commercial banking division of
WMB, at September 30, 1996 the Company operated 47 full-service business
branches offering a range of commercial banking products and services to small
to mid-sized businesses. WMB commenced its commercial banking activities through
the acquisition of Enterprise Bank of Bellevue, Washington ("Enterprise") in
1995 and Western Bank of Coos Bay, Oregon ("Western") in 1996.
Insurance Activities. Through WM Life Insurance Co. ("WM Life") and
Mortgage Securities Services Insurance Agency, Inc. ("MSS"), the Company
underwrites and sells annuities and sells a range of life insurance contracts
and selected property and casualty insurance policies.
Brokerage Activities. Through ASB Financial Services, Inc. ("ASB
Financial"), Murphey Favre, Inc. ("Murphey Favre") and Composite Research and
Management Co. ("Composite Research"), the Company offers full service
securities brokerage and acts as the investment advisor to and the distributor
of mutual funds. The Company operates in Washington, California, Oregon, Utah,
Idaho, Montana, Arizona, Colorado and Nevada. These operations constitute one of
the largest banking franchises in the Western United States and serve more than
1.3 million households. At September 30, 1996, the Company had consolidated
assets of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of
$2.4 billion.
In December 1996, Washington Mutual consummated the merger of Keystone
Holdings with and into the Company and certain other transactions in connection
therewith (the "Transaction") and thereby acquired ASB. Washington Mutual issued
47,883,333 shares of Common Stock in the Transaction. At September 30, 1996, ASB
had assets of $21.3 billion and deposits of $12.9 billion and operated 158
branches and 61 loan centers, substantially all of which were located in
California.
Washington Mutual intends to continue operating ASB under the name
"American Savings Bank" in ASB's markets and has retained a significant number
of ASB's management team to guide ASB's operations. Washington Mutual intends to
introduce its consumer banking products and approaches throughout ASB's branch
system and to expand ASB's loan origination capabilities.
The principal executive offices of Washington Mutual are located in the
Washington Mutual Tower, 1201 Third Avenue, Suite 1500, Seattle, Washington
98101, and its telephone number is (206) 461-2000.
Business Strategy"
In 1995, Washington Mutual introduced a revised strategic plan designed to
position the Company to achieve higher levels of profitability and growth.
Elements of this strategic plan include strengthening Washington Mutual's
consumer banking franchise throughout the West; expanding the commercial banking
franchise; managing Washington Mutual's sensitivity to movements in interest
rates; maintaining strong asset quality; and operating more efficiently.
Acquisitions have played an integral role in Washington Mutual's past
growth and business line expansion. Since 1988, Washington Mutual has acquired
numerous financial institutions and substantial assets, including two commercial
banks, which significantly expanded its geographic reach beyond the state of
Washington. The Company anticipates that acquisitions will continue to be an
important element of its strategic plan in the future. The acquisition of ASB
(the Company's largest acquisition to date) allowed Washington Mutual to expand
into California with a financially strong institution with similar business
strategies, strong management and complementary product capabilities. Washington
Mutual believes that the acquisition of ASB satisfies elements of the Company's
strategic plan, including:
Strengthens Consumer Banking Franchise throughout the Western United
States. The acquisition of ASB gives Washington Mutual immediate access to the
consumer banking market in California. ASB has a state-wide presence in
California, which at September 30, 1996, included 158 branches and 63 loan
centers, predominantly concentrated in the Los Angeles and San Francisco areas.
In addition, the acquisition of ASB added more than 575,000 new households to
Washington Mutual's customer base.
Decreases Washington Mutual's Sensitivity to Interest Rate Movements. ASB's
loan and investment portfolios consist primarily of adjustable-rate mortgages
("ARMs") and adjustable-rate mortgage-backed securities ("MBS"). These
portfolios complement Washington Mutual's pre-Transaction portfolios, which
contained a much higher percentage of fixed-rate mortgages. The addition of
ASB's loan and investment portfolios to Washington Mutual's portfolios
accelerated the Company's efforts to adjust its portfolios to reduce the
sensitivity of its results of operations to changes in prevailing interest
rates.
Background of the Transaction
History of Keystone Holdings. Keystone Holdings commenced operations in
December 1988 as an indirect holding company for ASB. ASB was formed by Keystone
Holdings Partners L.P. ("KHP") to effect the December 1988 acquisition (the
"1988 Acquisition") of certain assets and liabilities of the failed savings and
loan association subsidiary (the "Failed Association") of Financial Corporation
of America. In connection with the 1988 Acquisition, the Federal Savings and
Loan Insurance Corporation ("FSLIC") received warrants (the "Warrants") which
represented an interest in an intermediary holding company between Keystone
Holdings and ASB. In addition, the 1988 Acquisition had a "good bank/bad bank"
structure, with ASB, the "good bank," acquiring substantially all of the Failed
Association's performing loans and fixed assets and assuming substantially all
of its deposit liabilities. New West Federal Savings and Loan Association ("New
West"), the "bad bank," was formed to acquire the Failed Association's other
assets (including nonperforming loans) and liabilities with a view toward their
liquidation. New West was divested by Keystone Holdings prior to consummation of
the Transaction.
The Transaction. In the Transaction, the Company issued 47,883,333 shares
of Common Stock as follows: 25,883,333 shares were issued to KHP, the sole
shareholder of Keystone Holdings, which shares were subsequently distributed to
the general and limited partners of KHP (the "KHP Investors"); 14,000,000 shares
were issued to the FRF (in exchange for the Warrants); and 8,000,000 shares (the
"Litigation Escrow Shares") were issued to an escrow for the benefit of the KHP
Investors and the FRF (the "Litigation Escrow"). Shares will be released from
the Litigation Escrow to the extent that Washington Mutual receives net cash
proceeds from certain litigation that Keystone Holdings and certain of its
affiliates were pursuing against the United States, which litigation became an
asset of the Company in the Transaction. See "The Keystone Transaction--The
Litigation Escrow." The Transaction was treated as a pooling-of-interests for
accounting purposes.
Immediately after the Transaction, Robert M. Bass, one of the principal KHP
Investors, beneficially owned 9,478,300 shares of Common Stock, and has the
contingent right to receive up to 1,901,276 shares from the Litigation Escrow,
for an aggregate of 11,379,576 shares of Common Stock (approximately 10.2
percent of the Common Stock then outstanding). Mr. Bass is not selling any
shares of Common Stock in this offering. After the sale of all the Shares
offered hereby by the FDIC-Manager on behalf of the FRF, the FRF will no longer
beneficially own any shares of Common Stock, but will have the contingent right
to receive 2,808,000 shares from the Litigation Escrow. See "Selling
Stockholders." Holders of contingent rights to receive Litigation Escrow Shares
will have the power to direct the Escrow Agent to vote such Shares while they
are held in the Escrow. See "The Keystone Transaction--The Litigation Escrow."
As part of the Transaction, Washington Mutual, KHP and the FDIC-Manager
entered into a Registration Rights Agreement (the "Registration Rights
Agreement"), which provides that Washington Mutual will use its best efforts to
register for resale under the Securities Act shares of Common Stock issued in
the Transaction. Pursuant to the Registration Rights Agreement, Washington
Mutual agreed to file the registration statement of which this Prospectus is a
part (together with all exhibits and amendments thereto, the "Registration
Statement") and use its best efforts to cause it to be declared effective by the
Securities and Exchange Commission (the "Commission"). Pursuant to the
Registration Rights Agreement, Washington Mutual has also agreed to file with
the Commission and use its best efforts to cause to become effective as soon as
practicable after nine months from the closing of the Transaction, a shelf
registration statement (the "Initial Shelf Registration") for sale from time to
time of all shares of Common Stock issued in the Transaction that are not sold
hereunder, other than the Litigation Escrow Shares. Washington Mutual has agreed
to file with the Commission as soon as practicable after distribution of the
Litigation Escrow Shares, and use its best efforts to cause to become effective
as soon as practicable, an additional shelf registration statement for the sale
of such shares. During the three-year period following the effectiveness of the
Initial Shelf Registration, any persons who hold 15 percent or more of the
shares issued in the Transaction may require the Company, an aggregate of four
times, to facilitate an underwritten public offering of such shares of Common
Stock then owned by them; and each of the KHP Investors and the FRF (of their
transferees) are entitled to notice of any registrations by the Company of
Common Stock for sale under the Securities Act for its own account (with certain
exceptions) and to include their shares therein.
Recent Developments
Redemption of Keystone Entities Preferred Stock and Debt Securities. Upon
consummation of the Transaction, the Company redeemed $20.5 million of debt
securities and $80.0 million of nonconvertible preferred stock issued by New
American Capital, Inc. ("New Capital"), a subsidiary of Keystone Holdings.
Washington Mutual has also given the required notices to redeem $344.0 million
of additional debt securities issued by New Capital. By redeeming such equity
and debt, management believes it can significantly reduce its overall cost of
capital. See "Management's Discussion And Analysis Of Financial Position And
Results Of Operations--Liquidity."
Transaction Expenses and Addition to Reserve for Loan Losses. Washington
Mutual anticipates recording approximately $245 million in pretax
Transaction-related expenses, including an addition of $125.0 million to the
reserve for loan losses in the fourth quarter of 1996. The additional loan loss
reserve results because certain Washington Mutual credit administration and
asset management philosophies and procedures differed from those of ASB. The
balance of the expenses to be recorded will be related to severance and
management payments, payments related to a tax settlement between Reserve for
Loan Losses and the FRF, write-downs of software and equipment, premiums paid in
redemption of New Capital debt securities, professional fees and investment
banking fees. The Company anticipates that the after-tax charge, net of certain
deferred tax adjustments, will be approximately $210 million. See "The Keystone
Transaction--Transaction Expenses and Additions to Keystone Holdings."
Utah Federal Merger. On November 30, 1996, the Company consummated a merger
of Utah Federal Savings Bank, a federal savings bank ("Utah Federal"), with and
into WMBfsb (the "Utah Federal Merger"). The Company issued 347,190 shares of
Common Stock in the Utah Federal Merger. At September 30, 1996, Utah Federal
operated five branches and two loan production offices in Utah and had assets of
$122.2 million, deposits of $106.9 million and stockholders' equity of $11.9
million.
United Western Merger. On September 6, 1996, Washington Mutual entered into
an agreement to acquire United Western Financial Group, Inc. of Salt Lake City
("United Western") and its United Savings Bank, Uniwest Service Corporation and
Western Mortgage Loan Corporation subsidiaries for $80.3 million in cash (the
"United Western Merger"), subject to certain adjustments. United Western
operates eight branches in Utah, one branch in Idaho and seven loan production
offices. At September 30, 1996, United Western had assets of $414.9 million,
deposits of $294.4 million and stockholders' equity of $53.8 million. The United
Western Merger is subject to various conditions, including the approval of
shareholders of United Western and the receipt of all required regulatory
approvals. There can be no assurances when or if the United Western Merger will
be consummated, although the Company expects it to close in January 1997.
Recent Federal Legislation. On September 30, 1996, President Clinton signed
legislation intended in part to recapitalize the Savings Association Insurance
Fund ("SAIF") and to reduce the gap between SAIF premiums and the Bank Insurance
Fund ("BIF") premiums. The legislation provided for a special one-time
assessment on SAIF-insured deposits that were held as of March 31, 1995,
including certain deposits acquired after that date. The assessment was designed
to bring the SAIF's reserve ratio to the legally required level of $1.25 for
every $100 in insured deposits. Prior to this legislation, deposits of
Washington Mutual subsidiaries insured through the SAIF were subject to regular
FDIC assessments of 23 cents per $100 per year. Beginning in January 1997,
deposits of well-capitalized institutions insured through the SAIF probably will
be subject to regular FDIC assessments of 6.4 cents per $100 per year, while
deposits of well-capitalized institutions insured through the BIF probably will
be subject to regular FDIC assessments of 1.3 cents per $100 per year.
Washington Mutual's special assessment on deposits held by WMB, ASB and
WMBfsb resulted in a pretax charge of $124.2 million, which was recorded in the
quarter ended September 30, 1996. Based on current levels of deposits,
Washington Mutual estimates that the reduction in the regular assessment on its
SAIF deposits beginning in 1997 should result in annual savings of approximately
$31.2 million.
Redemption of Series D Preferred Stock. On November 30, 1996, the Company
mailed a notice of redemption to holders of its $6.00 Noncumulative Convertible
Perpetual Preferred Stock, Series D (the "Series D Preferred Stock"), for
redemption of the Series D Preferred Stock on December 31, 1996. The Series D
Preferred Stock is redeemable at $103.60 per share or convertible into 3.8709
common shares per share or an aggregate of approximately 5.4 million shares of
Common Stock. The Company anticipates that substantially all of the Series D
Preferred Stock will be converted into Common Stock.
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary supplemental financial data for
Washington Mutual. This table is derived from and should be read in conjunction
with the Supplemental Consolidated Financial Statements of Washington Mutual and
the Notes thereto, which are included elsewhere in this Prospectus. The
Transaction was accounted for as a pooling-of-interests. The financial
statements presented herein are designated as "supplemental" because generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The assets,
liabilities, and results of operations of Keystone Holdings have been recorded
on the books of Washington Mutual at their values as carried on the books of
Keystone Holdings, and no goodwill was created. Washington Mutual supplemental
financial information contained in this Prospectus has been restated as if the
respective companies had been combined for all periods presented. As such, the
information presented herein is not comparable to that reflected in the
Company's annual report on Form 10-K for the year ended December 31, 1995, or
the restated financial statements of the Company contained in Form 8-K dated
October 18, 1996, as amended. Because of the significant increase in Washington
Mutual's size as a result of the acquisition of Pacific First Bank, a Federal
Savings Bank ("Pacific First") (which was accounted for by the purchase method)
early in 1993, the financial results for the years ended and as of December 31,
1995, 1994, and 1993, are not generally comparable to prior periods or dates.
The information as of September 30, 1996 and for the nine-month periods ended
September 30, 1996 and 1995 is not necessarily indicative of the operating
results for the entire year.
<TABLE>
<CAPTION>
Nine Months Ended
SUPPLEMENTAL FINANCIAL DATA September 30, Year Ended December 31,
---------------------
- -------------------------------------------- --------------------- ----------------------------------------------------------------
(dollars in thousands, except for per 1996 1995 1995 1994 1993 1992 1991
share amounts)
- ------------------------------------------------------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639
Interest expense 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630
- ----------------------------------------- ------------------------ ---------------------------------------------------------------
Net interest income 883,383 720,628 992,650 960,055 986,682 868,480 762,009
Provision for loan losses 58,138 57,540 74,987 122,009 158,728 158,537 85,807
Other income 183,822 152,225 208,339 220,794 246,576 174,365 175,806
Other expense 684,542 525,024 700,514 695,517 687,519 561,688 516,348
- ----------------------------------------- ------------------------- ---------------------------------------------------------------
Income before income taxes, extraordinary
items, cumulative effect of change
in tax accounting method, and minority 324,525 290,289 425,488 363,323 387,011 322,620 335,660
interest
Income taxes 97,344 77,877 111,906 109,880 96,034 42,642 45,920
Provision (benefit) for payments in lieu 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221
of taxes
Extraordinary items, net of federal income - - - - (8,953) (4,638) --
tax effect(1)
Cumulative effect of change in tax
accounting method - - - - 13,365 60,045 --
Minority interest in income of
consolidated subsidiaries(2) (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095)
- ----------------------------------------- ------------------------- --------------------------------------------------------------
Net income $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424
========================================= ========================== ==============================================================
Net income attributable to common stock $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549
========================================= ========================== ==============================================================
Net income per common share (4)
Primary $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20
Fully diluted 1.66 1.69 2.42 2.06 2.36 2.71 2.10
Cash dividends declared per common share 0.66 0.57 0.77 0.70 0.50 0.33 0.28
(3)
Common stock dividend payout ratio(3) 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06%
Net interest margin 2.89 2.55 2.62 2.90 3.31 3.36 3.14
Efficiency ratio 64.14 60.15 58.33 58.90 55.75 53.86 55.06
Return on average assets 0.63 0.68 0.73 0.69 0.84 1.29 0.99
Return on average stockholders' equity 10.59 12.04 13.44 12.66 15.95 21.05 17.84
Return on average common stockholders' 10.69 12.24 13.73 12.95 16.78 21.05 17.84
equity
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL FINANCIAL DATA September 30, December 31,
- ------------------------------------------------ -------------- -----------------------------------------------------------------
(dollars in thousands, except for per share 1996 1995 1994 1993 1992 1991
amounts)
- ------------------------------------------------ -------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $43,711,945 $42,026,622 $37,481,296 $33,614,912 $27,678,923 $25,531,041
Available-for-sale securities 10,063,100 12,154,725 4,282,160 1,751,905 - -
Held-to-maturity securities 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573
Loans:
Residential 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201
Residential construction 668,976 615,814 549,271 430,215 366,808 342,623
Commercial real estate 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423
Manufactured housing, second mortgage and
other 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917
consumer
Commercial 295,263 179,568 129,048 131,468 118,717 112,312
Reserve for loan losses (234,341) (235,275) (244,989) (245,062) (179,612) (130,423)
=============================================== ============== ==================================================================
Total loans, including loans held for sale $28,496,757 $24,192,840 $25,472,092 $21,063,698 $16,666,525 $13,966,053
=============================================== ============== ==================================================================
Deposits $23,978,515 $24,462,960 $23,344,006 $23,516,317 $20,729,204 $19,950,479
Annuities 868,438 855,503 799,178 713,383 571,428 433,767
Borrowings 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292
Stockholders' equity(4) 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080
Stockholders' equity ratio 5.54% 6.05% 4.95% 5.25% 5.30% 4.46%
Nonperforming assets as a percentage of total 0.74 0.81 1.12 1.55 2.03 1.68
assets
Reserve for loan losses as a percentage of
nonperforming 108.33 110.04 87.22 72.74 54.58 45.60
loans
Reserve for loan losses as a percentage of
nonperforming 72.53 69.42 58.52 46.91 31.98 30.37
assets
Fully diluted book value per common share(4) $19.61 $20.70 $15.33 $14.84 $12.78 $11.32
Number of common shares at end of period(4) 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322
Weighted average common shares(4) 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
- ----------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pretax losses of $2.2 million and $3.1 million during 1993 and
1992, and penalties for prepayment of FHLB advances, resulting in pretax losses
of $10.8 million and $3.6 million during 1993 and 1992.
(2) Reflects earnings on preferred stock issued by New Capital, which was
redeemed by the Company in December of 1996.
(3) As computed on a fully diluted, including common stock equivalents. The
8,000,000 shares of common stock issued to the Litigation Escrow are reflected
in earnings per share using the treasury stock method. At the effective date of
the Transaction, there was no dilutive effect of the 8,000,000 Litigation Escrow
Shares. As a result, stockholders' equity, book value per share, common shares
and weighted average shares outstanding, and primary and fully diluted earnings
per share did not change. The reference price of the Common Stock for purposes
of the treasury stock method is $_____ per share. The Litigation Escrow Shares
generally will be dilutive to the extent that the market price of the Common
Stock exceeds the reference price.
(4) Dividends include only amounts paid to Washington Mutual, Inc.
shareholders without consideration of prior business combinations.
</TABLE>
<PAGE>
The following tables set forth other summary financial data for the
periods and as of the dates indicated for each of Washington Mutual and Keystone
Holdings prior to the Transaction on a noncombined basis without giving effect
to the Transaction. The Summary Financial Data for each company on a stand-alone
basis is intended for informational purposes only and is not indicative of the
future financial position or future results of operations of the combined
Company.
Washington Mutual (pre-Transaction):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year ended December
31,
- --------------------------------------------------------- ------------------------------- ----------------------------------------
(dollars in thousands) 1996 1995 1995 1994 1993
- --------------------------------------------------------- ------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $1,258,257 $1,163,101 $1,578,960 $1,258,550 $1,081,309
Interest expense 729,739 707,803 960,724 651,871 520,750
- --------------------------------------------------------- ------------------------------- ----------------------------------------
Net interest income 528,518 455,298 618,236 606,679 560,559
Provision for loan losses 8,738 8,450 11,150 20,400 35,225
Other income (expense), net (263,103) (225,254) (299,781) (296,798) (242,299)
Income taxes 95,615 76,883 107,504 108,159 98,864
- --------------------------------------------------------- ------------------------------ ----------------------------------------
Net income from continuing operations 161,062 144,711 199,801 181,322 184,171
Extraordinary items, net of federal income tax effect -- -- -- -- (8,953)
Cumulative effect in change of tax accounting method -- -- -- -- 13,365
- --------------------------------------------------------- ------------------------------ ----------------------------------------
Net income $ 161,062 $ 144,711 $ 199,801 $ 181,322 $ 188,583
========================================================= ============================== ========================================
Net income attributable to common stock $ 147,247 $ 130,773 $ 181,217 $ 162,738 $ 175,025
========================================================= ============================== ========================================
Net interest margin 3.30% 2.55% 3.14% 3.65% 4.15%
Efficiency ratio 58.84 57.56 56.74 57.27 55.37
Return on average assets 0.96 0.95 0.97 1.03 1.31
Return on average stockholders' equity 13.04 13.45 13.31 13.77 16.89
Return on average common stockholders' equity 13.39 13.90 13.73 14.30 18.31
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
----------------------------------------------------------- ---------------------------------------------------------------
(dollars in thousands) 1996 1995
----------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C>
Total assets $22,413,697 $22,420,379
Loans 14,652,743 13,035,250
Deposits 11,076,868 11,306,436
Borrowings 8,578,497 8,332,275
Nonperforming assets as a percentage of total assets 0.46% 0.41%
Reserve for loan losses as a percentage of nonperforming 186.64 209.91
loans
Reserve for loan losses as a percentage of nonperforming 139.89 153.07
assets
</TABLE>
Keystone Holdings (pre-Transaction):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year ended December 31,
--------------------------------------------------- ------------------------------ ------------------------------------------
(dollars in thousands) 1996 1995 1995 1994 1993
--------------------------------------------------- ----------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $1,080,328 $982,616 $1,337,126 $1,036,863 $1,117,269
Interest expense 725,463 717,286 962,712 683,487 691,146
--------------------------------------------------- --------------------------------------------------------------------------
Net interest income 354,865 265,330 374,414 353,376 426,123
Provision for loan losses 49,400 49,090 63,837 101,609 123,503
Other income (expense), net (237,617) (147,545) (192,394) (177,925) (198,644)
Income taxes 1,729 994 4,402 1,721 (2,830)
Provision (benefit) for payments in lieu of taxes 14,465 (1,410) 7,887 (824) 14,075
--------------------------------------------------- ----------------------------- ------------------------------------------
Net income from continuing operations 51,654 69,111 105,894 72,945 92,731
Minority interest in income of consolidated
subsidiaries(1) (24,812) (25,160) (21,092) (22,621) (10,474)
--------------------------------------------------- ----------------------------- ------------------------------------------
Net income $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257
=================================================== ============================= ==========================================
Net income attributable to common stock $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257
=================================================== ============================= ==========================================
Net interest margin 2.43% 1.93% 2.02% 2.12% 2.57%
Efficiency ratio 72.24 64.40 56.74 60.33 55.15
Return on average assets 0.18 0.30 0.44 0.29 0.48
Return on average stockholders' equity 3.98 7.35 15.15 9.04 15.30
Return on average common stockholders' equity 3.98 7.35 12.92 8.67 14.70
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $21,298,248 $19,703,656
Loans 13,844,014 11,175,031
Deposits 12,901,647 13,005,029
Borrowings 7,294,879 5,391,857
Nonperforming assets as a percentage of total assets 1.03% 1.24%
Reserve for loan losses as a percentage of nonperforming 64.75 78.07
loans
Reserve for loan losses as a percentage of nonperforming 40.74 46.08
assets
- ----------------
(1) Reflects earnings on preferred stock issued by New Capital.
</TABLE>
<PAGE>
RISK FACTORS
In addition to all the information in this Prospectus, and the
documents incorporated herein by reference, the following risk factors should be
considered carefully in evaluating an investment in the Shares offered hereby.
Expected Benefits of Combined Business May Not Be Achieved
The Company anticipates that substantial benefits will occur as a
result of the Transaction. Whether the anticipated benefits of the Transaction
are ultimately achieved, however, will depend on a number of factors, including
the ability of the Company to capitalize on its combined asset base and
strategic position and ability to achieve administrative cost savings at
projected levels within projected time frames. The ability of the Company to
operate efficiently, at least in the short term, will be enhanced by its ability
to retain key ASB personnel. There can be no assurance that the expected
benefits of the Transaction relative to the combined business will be achieved.
Economic Conditions and Real Estate Risk
Washington Mutual's lending operations are concentrated in Washington,
California and Oregon. The bulk of its assets are loans and securities secured
by residential real estate in those states. As a result, the financial condition
and results of operations of the Company will be subject to general economic
conditions and, in particular, the conditions in the single-family or
multi-family residential real estate markets prevailing in Washington,
California and Oregon. If economic conditions in any one of those states worsen
or if the market for residential real estate in particular declines, the Company
may suffer decreased net income or losses associated with higher default rates
and decreased collateral values on its existing portfolio, and may not be able
to originate the volume of single-family or multi-family residential mortgage
loans or achieve the level of deposits currently projected. Approximately
one-half of the Company's loan assets at September 30, 1996 were acquired in the
Transaction and are secured by properties in California. In the early 1990's,
the California economy sustained an economic recession that resulted in declines
in property values and increases in the levels of delinquencies, foreclosures
and losses for many of the state's financial institutions. While the California
economy generally began to show signs of recovery in 1994 continuing through
1996, certain real estate submarkets in which ASB operates remain weak. No
assurance can be given that levels of delinquencies, foreclosures and losses in
the Company's portfolio of loans and investments secured by properties in
California will continue to decline or that such levels will not increase.
Interest Rate Risk
Washington Mutual realizes its income principally from the differential
or spread between the interest earned on loans, investments and other
interest-earning assets and the interest paid on deposits and borrowings. Net
interest spreads are affected by the difference between the repricing
characteristics of interest-earning assets and deposits and borrowings and by
changes in market and contractual interest rates. Washington Mutual generally
will have better financial results in a steep yield curve environment. Loan
volumes and yields, as well as the volume of and rates on investments, deposits
and borrowings, are affected by market interest rates. Generally, Washington
Mutual will experience increased interest rate spreads during periods of
downward interest rate movement and decreased interest rate spreads during
periods of upward interest rate movement. This effect is ameliorated somewhat by
the large percentage of adjustable-rate assets in the Company's loan portfolio.
Nevertheless, the adjustments in the interest rates on the ARMs inherently lag
changes in the cost of funds for a few months. To the extent that interest rates
generally are increasing, the Company's actual interest rate spread, and thus
net income, will in most cases be negatively affected.
Competition
Washington Mutual faces significant competition both in attracting and
retaining deposits and in making loans in all of its market areas. Its most
direct competition for deposits has historically come from other thrift
institutions, credit unions, and commercial banks doing business in its primary
market areas of Washington, California and Oregon. As with all banking
organizations, however, Washington Mutual has experienced increasing competition
from nonbanking sources, including mutual funds, corporate and governmental debt
securities and other investment alternatives. Washington Mutual's competition
for loans comes principally from other thrift institutions, commercial banks,
mortgage banking companies, consumer finance companies, credit unions, insurance
companies and other institutional lenders. Many of these competitors are large,
have more significant financial resources, larger market share and greater name
recognition than the Company. The existence of such competitors may make it
difficult for Washington Mutual to achieve its financial goals. In addition to
the normal competitive factors described above, Washington Mutual management at
the holding company level has limited operating experience in California, which
has a much larger population with more large financial institution competitors
than the states in which the Company has historically operated. Accordingly,
there can be no assurance that the Company's consumer banking strategy will
prove successful in the California market.
Acquisition Strategy
The Company intends to continue its growth through the acquisition of
financial institutions. In this regard, Washington Mutual routinely reviews such
acquisition opportunities, but currently has no binding commitments to acquire
any specific business or other material assets, other than United Western.
Washington Mutual cannot predict whether it will be successful in consummating
additional acquisitions or what the consequences of any such acquisition would
be. Acquisitions entail numerous risks, including difficulties in the
integration of operations and systems, the diversion of management's attention
from other business concerns and the potential loss of key employees of any
acquired businesses.
Regulation
Each of the Company, as a savings and loan holding company, WMB, ASB
and WMBfsb is subject to significant regulation, which has materially affected
their businesses, as well as the businesses of other banking organizations, in
the past and is likely to do so in the future. Statutes and regulations
currently affecting the Company or its subsidiaries may be changed at any time,
and the interpretation of these statutes and regulations by examining
authorities is also subject to change. There can be no assurance that future
changes in the regulations or in their interpretations will not adversely affect
the business of Washington Mutual.
Governmental Immunity of the FRF and FDIC-Manager as Selling Stockholder
The doctrine of sovereign immunity, as limited by the Federal Tort
Claims Act, 28 U.S.C. ss.ss. 1346(b) and 2671 et seq., as amended (the "Federal
Tort Claims Act"), provides that claims may not be brought against the United
States of America or any agency or instrumentality thereof unless specifically
permitted by an act of Congress. The Federal Tort Claims Act bars claims for
fraud or misrepresentation, and courts have held, in cases involving the FDIC as
well as other federal agencies and instrumentalities, that the United States may
assert its sovereign immunity against claims brought under the federal
securities laws. Thus, any attempt to assert a claim against the FDIC-Manager or
the FRF alleging a violation of the federal securities laws (including the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), resulting from an alleged material misstatement in or material
omission from the Registration Statement or this Prospectus, or any other act or
omission in connection with the offering to which this Prospectus relates,
probably would be barred. In addition, Section 2(f)(1) of the Federal Deposit
Insurance Act specifically provides that directors, members, officers and
employees of the FDIC have no liability under the Securities Act with respect to
any claim arising out of or resulting from any alleged act or omission by such
person within the scope of such person's employment in connection with any
transaction involving the disposition of assets (or any interests in assets or
any obligations backed by any assets) by the FDIC. Moreover, the FDIC-Manager
has advised Washington Mutual that the FDIC and its directors, officers, agents,
and employees are exempt from liability for any violation or alleged violation
of the anti-fraud provisions of Section 10(b) of the Exchange Act by virtue of
Section 3(c) thereof. Accordingly, any attempt to assert such a claim against
the directors, members, officers or employees of the FDIC for a violation of the
Securities Act or the Exchange Act resulting from an alleged material
misstatement in or material omission from the Registration Statement or this
Prospectus or any other act or omission in connection with the offering of the
Shares hereunder probably would be barred.
Forward-Looking Statements May Not Prove Accurate
When used or incorporated by reference in this Prospectus, the words
"anticipate," "estimate," "expect," "project" and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act. Such statements are subject to certain risks,
uncertainties and assumptions, including those set forth under "Risk Factors"
and elsewhere in this Prospectus. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Several key factors that have a direct bearing on Washington
Mutual's ability to attain its goals are discussed above. These forward-looking
statements speak only as of the date of this Prospectus. The Company expressly
disclaims any obligation or undertaking to publicly release any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectation with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the Shares.
MARKET PRICES AND DIVIDENDS
Washington Mutual Common Stock is traded on the Nasdaq Stock Market
under the symbol "WAMU." The table below sets forth, for the calendar quarters
indicated, the reported high and low sales prices of the Common Stock as
reported on the Nasdaq Stock Market, and the dividends declared on such stock.
<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 December 2, 1996) 45.88 36.50 0.24
</TABLE>
On November 22, 1996, there were 15,925 shareholders of record of the
Common Stock.
Dividends may be paid on the Common Stock as and when declared by the
Washington Mutual Board of Directors out of funds legally available for the
payment of dividends. Each quarter, the Washington Mutual Board of Directors
considers the payment of dividends. The factors affecting this determination
include Washington Mutual's long-term interests, current and projected earnings,
adequacy of capitalization, expected asset and deposit growth as well as other
financial conditions, legal, regulatory and contractual restrictions, and tax
considerations. See "Description of Washington Mutual Capital Stock--Dividend
Policy."
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1996, restated following the Transaction as if
Washington Mutual and Keystone Holdings had been combined at the date presented.
<TABLE>
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------- -----------------------------------------
- ---------------------------------------------------------------------------------------- --------------------------- -------------
(dollars in thousands) Amount As Adjusted(1)
- ---------------------------------------------------------------------------------------- --------------------------- -------------
<S> <C> <C>
Long term debt $ 688,268 $ 667,768
Minority interest(2) 80,000 --
Stockholders' equity:
Capital surplus:
Preferred stock - no par value - 10,000,000 shares authorized;
6,122,400 shares outstanding; 4,722,500 shares outstanding as adjusted 250,158 110,168
Common stock - no par value - 350,000,000 shares authorized;
112,037,913 shares outstanding(3); 117,456,773 shares outstanding as adjusted 677,958 817,948
Valuation reserve for available-for-sale securities (19,570) (19,570)
Retained earnings 1,513,370 1,303,370
- ---------------------------------------------------------------------------------------- ------------- ------ ------ -------------
Total stockholders' equity 2,421,916 2,211,916
- ---------------------------------------------------------------------------------------- ------------- ------ ------ -------------
Total capitalization $3,190,184 $2,879,684
======================================================================================== ============= ====== ====== =============
Consolidated capital ratios:
Stockholders' equity 5.54% 5.09%
Tangible stockholders' equity 5.24 4.78
Tangible common stockholders' equity 4.97 4.51
Book value per fully diluted common share $19.61 $17.83
- -------------
(1) Adjusted to record (i) the approximately $210 million in anticipated
after-tax Transaction related expenses, (ii) the redemption of New Capital's
preferred stock and subordinated notes and (iii) the conversion of all shares of
the Company's Series D Preferred Stock into 5,418,860 shares of Common Stock.
See "Keystone Transaction--Transaction Expenses and Addition to Reserve for Loan
Losses" and "Management's Discussion And Analysis Of Financial Position And
Results Of Operations--Liquidity."
(2) Preferred stock issued by New Capital, which was redeemed by the
Company upon consummation of the Transaction.
(3) Includes the 8,000,000 Litigation Escrow Shares. Washington Mutual is
using the treasury stock method to determine the effect of the 8,000,000 shares
upon the Company's financial statements. At the effective date of the
Transaction, there was no dilutive effect of the 8,000,000 Litigation Escrow
Shares. As a result, stockholders' equity, book value per share and primary and
fully diluted earnings per share did not change. The reference price of the
Common Stock for purposes of the treasury stock method is $_____ per share. The
Litigation Escrow Shares generally will be dilutive to the extent that the
market price of the Common Stock exceeds the reference price.
</TABLE>
THE KEYSTONE TRANSACTION
The Transaction
On December __, 1996 (the "Effective Date"), Keystone Holdings merged
with and into Washington Mutual, with Washington Mutual as the surviving
corporation. The separate existence of Keystone Holdings ceased upon the
Effective Date and the direct and indirect subsidiaries of Keystone Holdings,
including ASB but excluding New West, became subsidiaries of Washington Mutual.
On the Effective Date, Washington Mutual also consummated the acquisition of
certain warrants to purchase shares of ASB's parent held by the FRF.
In the Transaction, Washington Mutual issued 47,883,333 shares of
Common Stock, as follows: 25,883,333 shares to KHP, 14,000,000 shares to the FRF
and 8,000,000 shares to the Litigation Escrow for the benefit of KHP and the
FRF. See "--The Litigation Escrow" below. The shares issued to KHP and the
contingent right to receive the portion of the Litigation Escrow Shares
attributable to KHP were distributed by KHP to the KHP Investors immediately
following consummation of the Transaction.
As an integral part of the Transaction, Washington Mutual, KHP and the
FDIC-Manager entered into the Registration Rights Agreement, pursuant to which
Washington Mutual is required to use its best efforts to register for resale to
the public under the Securities Act certain shares of Common Stock issued in the
Transaction. Pursuant to the Registration Rights Agreement, Washington Mutual
filed the Registration Statement for the sale of the Shares offered hereby.
Pursuant to the Registration Rights Agreement, Washington Mutual has
also agreed to file with the Commission and use its best efforts to cause to
become effective as soon as practicable after nine months from the closing of
the Transaction the Initial Shelf Registration for sale from time to time of all
shares of Common Stock issued in the Transaction that are not sold hereunder,
other than the Litigation Escrow Shares. Washington Mutual has agreed to file
with the Commission as soon as practicable after distribution of the Litigation
Escrow Shares, and use its best efforts to cause to become effective as soon as
practicable an additional shelf registration statement for the sale of such
shares. During the three-year period following the effectiveness of the Initial
Shelf Registration, any persons who hold 15 percent or more of the shares issued
in the Transaction may require the Company, an aggregate of four times, to
facilitate an underwritten public offering of such shares of Common Stock then
owned by them, and the KHP Investors and the FRF are entitled to notice of any
registrations by the Company of Common Stock for sale under the Securities Act
for its own account (with certain exceptions) and to include their shares
therein.
Transaction Expenses and Addition to Reserve for Loan Losses
Washington Mutual anticipates recording approximately $245 million in
pretax Transaction expenses and additions to loan loss reserves in the fourth
quarter of 1996. These charges include $125.0 million of additional loan loss
reserves because certain Washington Mutual credit administration and asset
management philosophies and procedures differed from those of ASB. The balance
of the expenses to be recorded were related to severance and management
payments, payments related to a tax settlement between ASB and the FRF,
write-downs of software and equipment, premiums paid in redemption of New
Capital debt securities, professional fees and investment banking fees. The tax
benefit from gross transaction-related expenses is expected to be approximately
$85 million. Additionally, the Company will make a $50 million adjustment to
Keystone Holdings' deferred tax asset, which will have diminished value to the
combined entity due to limitations provided in the Internal Revenue Code on the
use of acquired net operating loss carryforwards. The Company anticipates that
the after tax charge will be approximately $210 million.
The additional loan loss provision was provided principally because a
number of Washington Mutual credit administration and asset management
philosophies and procedures differed from those of ASB. Those differences
consisted principally of the following: (i) Washington Mutual is more proactive
in dealing with emerging credit problems and tends to prefer foreclosure actions
to induce borrowers to correct defaults, whereas ASB was not as proactive and
tended to prefer workouts in lieu of a more aggressive foreclosure stance; and
(ii) ASB considered the risk characteristics of its portfolio of loans secured
by apartment buildings of less than $1.0 million to be similar to 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
incidence of loan losses than the single-family residential portfolio.
Washington Mutual is conforming ASB's asset management practices,
administration, philosophies and procedures to its own. The plan of realization
of troubled loans differed between the companies and therefore resulted 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 value of residential real estate in certain
California markets, a decline in collateral values for some portions of the
California real estate market occurred in 1996.
The Litigation Escrow
KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs in a
lawsuit against the United States (the "Case"). In the Case, among other claims,
plaintiffs allege that as part of the 1988 Acquisition, they entered into a
contract with the FSLIC and the Federal Home Loan Bank Board entitling the
plaintiffs to certain economic benefits, and that the U.S. government breached
that contract, causing damage to the plaintiffs. A number of other savings
institutions have asserted similar types of claims against the U.S. government.
Pursuant to the Agreement for Merger among the Company, Keystone Holdings and
certain of its affiliates (the "Merger Agreement"), the Case became an asset of
Washington Mutual and the Company will receive any recovery in the Case (the
"Case Proceeds"). Due to its ownership of the Warrants, the FRF was entitled to
receive an economic benefit from any recovery from the Case. As consideration
for the possible future recovery of Case Proceeds, Washington Mutual issued the
Litigation Escrow Shares to The Bank of New York as escrow agent (the "Escrow
Agent") to be held for the benefit of KHP and the FRF. The shares issued to KHP
and the contingent right to receive the portion of the Litigation Escrow Shares
attributable to KHP were distributed by KHP to the KHP Investors immediately
following the Transaction.
The Litigation Escrow Shares are registered in the name of the Escrow
Agent, who will hold such shares together with any dividends, distributions or
any additional or substitute securities with respect to such shares, as well as
any interest or earnings on such dividends, distributions or additional or
substitute securities (collectively, the "Escrow Fund"). The Escrow Agent will
vote the Litigation Escrow Shares in accordance with instructions received from
each of the KHP Investors and the FDIC-Manager with respect to their respective
interests in the Litigation Escrow Shares (64.9 percent for KHP Investors and
35.1 percent for the FDIC-Manager). The Escrow Agent will hold the Escrow Fund
until the earlier of the date that is the sixth anniversary of the Effective
Date or until the entire Escrow Fund has been released from the Litigation
Escrow (the "Escrow Expiration Date"). In general, the Escrow Expiration Date
will be automatically extended to 10 years from the Effective Date if, prior to
the sixth anniversary of the Effective Date, there has been any judgment or
final settlement in the Case granted or entered in favor of Washington Mutual or
any of its subsidiaries. The Escrow Expiration Date may be extended further if
Case Proceeds are paid in installments. In the event that Washington Mutual
receives any Case Proceeds on or before the Escrow Expiration Date, the Escrow
Agent will make distributions of all or a portion of the Escrow Fund, 64.9
percent to the KHP Investors and 35.1 percent to the FRF. The number of
Litigation Escrow Shares to be distributed will be calculated based on a formula
in the Merger Agreement. The Escrow Agent may make more than one distribution
out of the Escrow Fund if Case Proceeds are received in two or more
installments. In general, if no Case Proceeds have been received, beginning on
the last day of the full calendar month immediately following the sixth
anniversary of the Effective Date and on the last day of every succeeding month,
the Escrow Agent will return to Washington Mutual for cancellation a number of
shares equal to 1.25 percent of the number of Litigation Escrow Shares, together
with any dividends and distributions received on such shares and any interest or
earnings on such dividends. At the Escrow Expiration Date, any remaining
Litigation Escrow Shares, together with any amounts in the Escrow Fund, will be
returned to Washington Mutual.
The ultimate outcome of the Case is uncertain, and there can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses. Generally,
Washington Mutual will not benefit financially from the Case unless Case
Proceeds exceed such an amount and, in negotiating the Transaction, Washington
Mutual ascribed no value to the possibility that the Case Proceeds would exceed
such amount. As a result, it is uncertain what, if any, effect recovery in the
Case will have on the financial position of Washington Mutual.
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected financial data for Washington
Mutual. This table is derived from and should be read in conjunction with the
Supplemental Consolidated Financial Statements of Washington Mutual and the
notes thereto, which are included elsewhere in this Prospectus. The Transaction
was accounted for as a pooling-of-interests. The financial statements presented
herein are designated as "supplemental" because generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. The assets, liabilities, and results of
operations of Keystone Holdings have been recorded on the books of Washington
Mutual at their values as carried on the books of Keystone Holdings, and no
goodwill was created. Washington Mutual supplemental financial information
contained in this Prospectus has been restated as if the respective companies
had been combined for all periods presented. As such, the information presented
herein is not comparable to that reflected in the Company's annual report on
Form 10-K for the year ended December 31, 1995, or the restated financial
statements of the Company contained in Form 8-K dated October 18, 1996, as
amended. Because of the significant increase in Washington Mutual's size as a
result of the acquisition of Pacific First (which was accounted for by the
purchase method) early in 1993, the financial results for the years ended and as
of December 31, 1995, 1994, and 1993, are not generally comparable to prior
periods or dates. The information as of September 30, 1996 and for the
nine-month periods ended September 30, 1996 and 1995 is not necessarily
indicative of the operating results for the entire year.
<TABLE>
<CAPTION>
Nine Months Ended
SUPPLEMENTAL FINANCIAL DATA September 30, Year Ended December 31
- ------------------------------------ -------------------------------------- ------------------------------------------------------
(dollars in thousands, except for
per share amounts) 1996 1995 1995 1994 1993 1992 1991
- ------------------------------------ -------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639
Interest expense 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630
- ------------------------------------ -------------------------------------- ------------------------------------------------------
Net interest income 883,383 720,628 992,650 960,055 986,682 868,480 762,009
Provision for loan losses 58,138 57,540 74,987 122,009 158,728 158,537 85,807
Other income 183,822 152,225 208,339 220,794 246,576 174,365 175,806
Other expense 684,542 525,024 700,514 695,517 687,519 561,688 516,348
- ------------------------------------ --------------------------------------- -----------------------------------------------------
Income before income taxes,
extraordinary items, cumulative
effect of change in tax accounting
method, and minority 324,525 290,289 425,488 363,323 387,011 322,620 335,660
interest
Income taxes 97,344 77,877 111,906 109,880 96,034 42,642 45,920
Provision (benefit) for payments
in lieu of taxes 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221
Extraordinary item, net of federal
income tax effect (1) - - - - (8,953) (4,638) -
Cumulative effect of change in tax
accounting method - - - - 13,365 60,045 -
Minority interest in income of
consolidated subsidiaries(2) (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095)
==================================== ======================================= =====================================================
Net income $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424
==================================== ======================================= =====================================================
Net income attributable to
common stock $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549
==================================== ======================================= =====================================================
Net income per common share (4)
Primary $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20
Fully diluted 1.66 1.69 2.42 2.06 2.36 2.71 2.10
Cash dividends declared per common
share (3)(4) 0.66 0.57 0.77 0.70 0.50 0.33 0.28
Common stock dividend payout ratio(4) 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06%
Net interest margin 2.89 2.55 2.62 2.90 3.31 3.36 3.14
Efficiency ratio 64.14 60.15 58.33 58.90 55.75 53.86 55.06
Return on average assets 0.63 0.68 0.73 0.69 0.84 1.29 0.99
Return on average stockholders' equity 10.59 12.04 13.44 12.66 15.95 21.05 17.84
Return on average common stockholders' 10.69 12.24 13.73 12.95 16.78 21.05 17.84
equity
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL FINANCIAL DATA September 30, December 31,
- ------------------------------------------- -------------- ------------------------------------------------------------------
(dollars in thousands, except for per share 1996 1995 1994 1993 1992 1991
amounts)
- ------------------------------------------ -------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $43,711,945 $42,026,622 $37,481,296 $33,614,912 $27,678,923 $25,531,041
Available-for-sale securities 10,063,100 12,154,725 4,282,160 1,751,905 - -
Held-to-maturity securities 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573
Loans:
Residential 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201
Residential construction 668,976 615,814 549,271 430,215 366,808 342,623
Commercial real estate 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423
Manufactured housing, second mortgage
and other consumer 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917
Commercial 295,263 179,568 129,048 131,468 118,717 112,312
Reserve for loan losses (234,341) (235,275) (244,989) (245,062) (179,612) (130,423)
=========================================== ============== ==================================================================
Total loans, including loans held
for sale $28,496,757 $24,192,840 $25,472,092 $21,063,698 $16,666,525 $13,966,053
=========================================== ============== ==================================================================
Deposits $23,978,515 $24,462,960 $23,344,006 $23,516,317 $20,729,204 $19,950,479
Annuities 868,438 855,503 799,178 713,383 571,428 433,767
Borrowings 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292
Stockholders' equity(4) 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080
Stockholders' equity ratio 5.54% 6.05% 4.95% 5.25% 5.30% 4.46%
Nonperforming assets as a percentage
of total assets 0.74 0.81 1.12 1.55 2.03 1.68
Reserve for loan losses as a percentage of
nonperforming loans 108.33 110.04 87.22 72.74 54.58 45.60
Reserve for loan losses as a percentage of
nonperforming assets 72.53 69.42 58.52 46.91 31.98 30.37
Fully diluted book value per common share(4) $19.61 $20.70 $15.33 $14.84 $12.78 $11.32
Number of common shares at end of period
outstanding(4) 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322
Weighted average common shares(4) 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
- ----------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pretax losses of $2.2 million and $3.1 million during 1993 and
1992, and penalties for prepayment of FHLB advances, resulting in pretax losses
of $10.8 million and $3.6 million during 1993 and 1992.
(2) Reflects earnings on preferred stock issued by New Capital, which was
redeemed by the Company in December of 1996.
(3) As computed on a fully-diluted basis, including common stock
equivalents. The 8,000,000 shares of common stock issued to the Litigation
Escrow are reflected in earnings per share using the treasury stock method. At
the effective date of the Transaction, there was no dilutive effect of the
8,000,000 Litigation Escrow Shares. As a result, stockholders' equity, book
value per share, common shares and weighted average shares outstanding, and
primary and fully diluted earnings per share did not change. The reference price
of the Common Stock for purposes of the treasury stock method is $_____ per
share. The Litigation Escrow Shares generally will be dilutive to the extent
that the market price of the Common Stock exceeds the reference price.
(4) Dividends include only amounts paid to Washington Mutual, Inc.
shareholders without consideration of prior business combinations.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Supplemental Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus.
General
Washington Mutual is a regional financial services company committed to
serving consumers and small to mid-sized businesses throughout the Western
United States. The Company's banking subsidiaries accept deposits from the
general public, make residential and consumer loans, and engage in certain
commercial banking activities. Washington Mutual also underwrites and sells
annuities, sells other insurance products, offers full service securities
brokerage, and acts as the investment advisor to and the distributor of mutual
funds.
The Keystone Acquisition. In December 1996, Keystone Holdings merged
with and into Washington Mutual and all of its subsidiaries, including ASB,
became subsidiaries of the Company. ASB will remain as an operating subsidiary
of the Company. The Transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated as if the respective
companies had been combined for all periods presented. Accordingly, unless
otherwise noted, all references to Washington Mutual or the Company refer to the
combined entity including Keystone Holdings.
The Company anticipates that it will consolidate certain head office
functions and back office operations of ASB. The Company anticipates achieving
cost savings from such consolidations of between $30 and $50 million (pretax) in
1998 depending upon the amount of growth in ASB's residential lending and other
consumer banking activities and additional growth, if any, in the Company's
California operations.
Other Acquisition Activity. During the first half of 1993, Washington
Mutual merged with Pioneer Savings Bank ("Pioneer") and acquired a substantial
portion of the assets of Pacific First. As a result of acquiring Pacific First,
the Company became substantially larger, with significant operations in Oregon
as well as Washington. In 1994 and 1995, Washington Mutual continued to expand
its operations through business combinations with other financial institutions
with locations in Washington, Utah and Montana.
During 1995, Washington Mutual took steps to diversify its operations
into commercial banking. In August 1995, the Company acquired Enterprise and in
January 1996, acquired Western, a commercial bank with branch operations
throughout Oregon. Each of these transactions was accounted for as a
pooling-of-interests. See "Business--Business Combinations."
Recent Federal Legislation. On September 30, 1996, President Clinton
signed legislation intended in part to recapitalize the SAIF and to reduce the
gap between SAIF premiums and BIF premiums. The legislation provided for a
special one-time assessment on SAIF-insured deposits that were held as of March
31, 1995, including certain deposits acquired after that date. The assessment
was designed to bring the SAIF's reserve ratio to the legally required level of
$1.25 for every $100 in insured deposits. Prior to this legislation, deposits of
Washington Mutual subsidiaries insured through the SAIF were subject to regular
FDIC assessments of 23 cents per $100 per year. Beginning in January 1997,
deposits of well-capitalized institutions insured through the SAIF probably will
be subject to regular FDIC assessments of 6.4 cents per $100 per year, while
deposits of well-capitalized institutions insured through the BIF probably will
be subject to regular FDIC assessments of 1.3 cents per $100 per year.
Washington Mutual's special assessment on deposits held by WMB, ASB and
WMBfsb resulted in a pretax charge of $124.2 million, which was taken in the
quarter ended September 30, 1996. Based on current levels of deposits,
Washington Mutual estimates that the reduction in the regular assessment on its
SAIF deposits beginning in 1997 should result in annual savings of approximately
$31 million.
Results of Operations
Nine Months Ended September 30, 1996 Compared with Nine Months Ended
September 30, 1995. Net income for the nine months ended September 30, 1996 was
$202.2 million or $1.66 per fully diluted share compared with $201.6 million or
$1.69 per fully diluted share for the nine months ended September 30, 1995. Net
income was reduced by a pretax charge of $124.2 million representing the
Company's portion of the one-time assessment paid by savings institutions and
banks to recapitalize the SAIF. For the nine months ended September 30, 1996,
the Company's return on average assets ("ROA") and return on average common
stockholders' equity ("ROCE") were 0.63 percent and 10.69 percent, compared with
0.68 percent and 12.24 percent for the same period in 1995. Excluding the
one-time nonrecurring SAIF assessment, net income, net income per fully diluted
share, ROA and ROCE would have been $288.0 million, $2.39, 0.94 percent and 15.4
percent, respectively, for the nine months ended September 30, 1996.
Net Interest Income. The Company's net interest income of
$883.4 million for the nine months ended September 30, 1996 was up from $720.6
million for the same period a year earlier. The 1996 increase reflected the
effect of two primary factors. First, average interest earning assets of $40.7
billion for the nine months ended September 30, 1996 were up eight percent from
the same period in 1995. Second, the net interest margin (which measures the
Company's annualized net interest income as a percentage of average
interest-earning assets) rose to 2.89 percent for the nine months ended
September 30, 1996 from 2.55 percent for the same period in 1995.
To a certain extent, the Company's net interest margin is affected by
changes in the yield curve. Banks generally have better financial results in a
steep yield curve environment. At September 30, 1996, the difference between the
yield on a 3-month treasury bill and a 30-year bond was 187 basis points
compared with only 119 basis points a year earlier. This increased differential
helped increase the Company's net interest margin. Rising interest rates in the
first nine months of 1995 had a negative impact on the margin due to the lag in
repricing of the Company's ARMs, significantly its ARMs indexed to the cost of
Funds Index of the Eleventh District Federal Home Loan Bank (San Francisco)
("COFI"). In the first nine months of 1996 short-term interest rates, the main
contributor to COFI, declined slightly with the result that the repricing lag
provided a slight benefit to the margin.
The net interest spread rose to 2.76 percent for the nine months ended
September 30, 1996 from 2.42 percent for the same period in 1995. (The net
interest spread is the difference between the Company's yield on
interest-earning assets and its cost of funds.) Although long-term interest
rates were generally higher during 1996 when compared with 1995, the Company's
combined yield on loans and investments rose only six basis points to 7.66
percent for the nine months ended September 30, 1996 compared with 7.60 percent
for the same period in 1995. As part of a strategy initiated in late 1995 and
continued in 1996 to restructure the Company's asset base, the Company purchased
adjustable-rate assets while selling fixed-rate assets. See "--Interest Rate
Risk Management." The disposition of these higher yielding fixed-rate assets and
inclusion of more adjustable-rate assets partially offset the increased yields
resulting from higher market interest rates. The decrease in market short-term
interest rates during 1996 led to a decline in the Company's cost of funds to
4.90 percent for the nine months ended September 30, 1996, from 5.18 percent for
the same period in 1995. In addition to the favorable interest rate environment,
the Company's cost of funds was positively affected by a change in its deposit
mix. Maturing time deposit accounts were replaced, in part, with lower
interest-cost money market and checking accounts. An increase in market
short-term interest rates would make it difficult to maintain the current levels
for the net interest margin, net interest spread and net interest income.
Other Income. Other income increased by 21 percent to $183.8 million for
the nine months ended September 30, 1996 from $152.2 million for the same period
in 1995.
Other income consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -------------------------------------------------------------------------------------- -----------------------------------
- -------------------------------------------------------------------------------------- ------------------ ----------------
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Depositor fees $ 76,309 $ 55,361
Loan servicing fees 31,769 21,050
Other service fees 38,640 36,685
Other operating income 25,804 22,289
Gain (loss) on sale of loans, inclusive of write-downs 15,223 (2,117)
Gain (loss) on sale of other assets, inclusive of write-downs (3,923) 726
Loss on sale of covered assets - (37,399)
Effect of FDIC assistance payment - 55,630
- -------------------------------------------------------------------------------------- ------------------ ----------------
Total other income $183,822 $152,225
====================================================================================== ================== ================
</TABLE>
Depositor fees increased 38 percent to $76.3 million for the nine
months ended September 30, 1996 from $55.4 million during the same period in
1995. The increase was primarily the result of a revised fee structure on
nonsufficient funds and overdraft fees combined with an aggressive marketing
campaign that substantially increased the number of checking accounts. The
growth in depositor fees has been tempered somewhat by an increase in the amount
of transaction-related losses incurred by the Company resulting from the
increased number of checking accounts. Transaction-related losses (included with
other expenses) totaled $8.3 million for the nine months ended September 30,
1996, compared with $6.0 million for the same period in 1995. Management closely
monitors the amount of losses incurred to assure the profitability of its
deposit products.
Loan servicing fees were $31.8 million for the nine months ended
September 30, 1996, a 51 percent increase from $21.1 million during the same
period in 1995. The average balance of loans serviced for others for the nine
months ended September 30, 1996 increased 47 percent from the same period in
1995. Also contributing to the 1996 increase was $1.3 million of additional loan
servicing fees booked in September 1996 resulting from a change related to the
loan servicing system. Loans serviced for others totaled $23.9 billion at
September 30, 1996.
Loan servicing fees consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- ------------------------------------------------------------------------------- ------------------------------------------
- ------------------------------------------------------------------------------- ---------------------- -------------------
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Loan servicing income $ 54,851 $ 37,670
Amortization of mortgage servicing rights (23,082) (16,620)
- ------------------------------------------------------------------------------- ---------------------- -------------------
Loan servicing fees $ 31,769 $ 21,050
=============================================================================== ====================== ===================
</TABLE>
Other service fees, principally generated by the Company's nonbanking
subsidiaries, were $38.6 million for the nine months ended September 30, 1996
compared with $36.7 million for the same period in 1995.
Gains on the sale of loans were $15.2 million for the nine months ended
September 30, 1996 compared with a loss of $2.1 million for the same period in
1995. The gains in the 1996 period resulted from the sale of fixed-rate loans as
part of the Company's program of selling fixed-rate loan production with the
objective of reducing the effect of future movements in interest rates.
In addition, on January 1, 1996, WMB and WMBfsb adopted Statement of
Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights,
which was adopted by ASB on January 1, 1995. The statement eliminates the
distinction between servicing rights that are purchased and those that are
retained upon the sale or securitization of loans. The statement requires
mortgage servicers to record the servicing rights on loans as separate assets,
no matter what their origin. Banks that sell or securitize loans and retain the
servicing rights are required to allocate the total cost of the loans between
servicing rights and principal balance.
During the first nine months of 1996, the Company capitalized $26.5
million of mortgage servicing rights as a result of SFAS No. 122. Capitalizing
the mortgage servicing rights on loans originated for sale effectively reduces
the Company's cost basis in the loans and leads to higher gains on sale. As a
result, gains on the sale of loans were $13.9 million more for the nine months
ended September 30, 1996 than would have been recognized under prior accounting
policies.
Mortgage servicing rights, net of amortization and the valuation
allowance were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------- -----------------------------------
- --------------------------------------------------------------------------------------- -------------------- --------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------- -------------------- --------------
<S> <C> <C>
Balance, beginning of period $104,495 $ 70,911
Additions 57,602 50,614
Amortization (23,082) (16,620)
Valuation allowance (530) (700)
======================================================================================= ==================== ==============
Balance, end of period $138,485 $104,205
======================================================================================= ==================== ==============
</TABLE>
The Company records its valuation allowance for mortgage servicing
rights as an offset against gains on the sale of loans.
Losses on the sale of other assets were $3.9 million for the nine
months ended September 30, 1996 compared with gains of $726,000 for the same
period in 1995. The net loss in the first nine months of 1996 consisted
primarily of securities transaction losses of $7.9 million partially offset by
the recognition of a $4.1 million previously deferred gain on the March 1995
sale of Mutual Travel, Inc. ("Mutual Travel"), the Company's travel agency
subsidiary. The losses on the sale of securities during 1996 were incurred in
connection with the Company's strategy to reduce its exposure to movements in
interest rates. See "--Net Interest Income" and "--Interest Rate Risk
Management."
A sale of "covered assets" occurred during the nine months ended
September 30, 1995. "Covered assets" is a term used to refer to certain assets
as to which ASB was entitled to government assistance as part of the 1988
Acquisition. See "--For the Three Years Ended December 31, 1995--Other Income."
There was no comparable transaction in 1996.
Other Expense. Other expense for the nine months ended
September 30, 1996 totaled $684.5 million (inclusive of the one-time SAIF
recapitalization assessment of $124.2 million) compared with $525.0 million
during the same period in 1995. The efficiency ratio, one commonly accepted
measure of a bank's operating efficiency, is the ratio of its operating expenses
to revenues (net interest income and other income). The Company's efficiency
ratio, excluding the nonrecurring SAIF recapitalization assessment, was 52.5
percent for the nine months ended September 30, 1996 compared with 60.2 percent
for the same period in 1995. The effect of increases in other expense during the
first nine months of 1996 (exclusive of the SAIF recapitalization assessment)
was offset by substantial increases in net interest income and other income for
the same period.
Other expense consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------- ----------------------------------
- --------------------------------------------------------------------------------------- -------------------- -------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Salaries and employee benefits $250,106 $233,785
Occupancy and equipment 88,592 82,665
Regulatory assessments 36,533 41,124
SAIF recapitalization assessment 124,193 -
Data processing fees 28,766 24,527
Other operating expense 127,062 113,623
Amortization of goodwill and other intangible assets 20,881 21,337
Real estate owned operations, inclusive of write-downs 8,409 7,963
======================================================================================= ==================== =============
Total other expense $684,542 $525,024
======================================================================================= ==================== =============
</TABLE>
Salaries and employee benefits increased to $250.1 million for the nine
months ended September 30, 1996 from $233.8 million for the same period in 1995
due primarily to increases in staffing levels in commercial banking, financial
centers and loan administration. Full-time equivalent employees were 8,214 at
September 30, 1996, up from 7,854 at September 30, 1995. The increase in
full-time equivalent employees was moderated by the sale of the Company's item
processing operation and outsourcing in the information systems and property
management departments during 1996.
Occupancy and equipment expense increased to $88.6 million for the nine
months ended September 30, 1996 compared with $82.7 million for the same period
in 1995. This increase was primarily due to the growth in the number of
financial centers, an expansion of head office facilities and technology
upgrades.
Regulatory assessments (excluding the SAIF recapitalization assessment)
decreased to $36.5 million for the nine months ended September 30, 1996 compared
with $41.1 million for the same period in 1995, reflecting a reduction in the
assessment rate on the portion of the Company's deposits insured through the
BIF.
Other operating expense (including data processing fees) increased 12.8
percent to $155.8 million for the nine months ended September 30, 1996 compared
with $138.2 million for the same period in 1995. Increases in 1996 were due in
part to higher telecommunications expenses, professional fees associated with
process reengineering projects and acquisition-related charges.
Taxation. The provision for income taxes was $97.3 million for
the nine months ended September 30, 1996 compared to $77.9 million for the same
period in 1995, representing an effective tax rate of 30 percent compared to a
27 percent effective tax rate for the same period in the prior year. See "--For
The Three Years Ended December 31, 1995-Taxation" for a discussion of the
variance from normal corporate tax rates.
The provision for payments in lieu of tax was $14.5 million compared
with a benefit of $1.4 million for the same period in 1995. The change in
payment in lieu of taxes was primarily a result of deductions taken in 1995
which were not taken for the same period in 1996. See "Business-Tax Related
Agreements-Assistance Agreement."
In August 1996, Keystone Holdings amended prior year returns to reduce
tax bad debt deductions and to make other amendments. As a result, the net
operating loss carryforwards were reduced by approximately $756 million. In
September 1996, ASB amended prior year state returns to reduce tax bad debt
deductions. The result was to decrease state net operating loss carryforwards by
approximately $545 million. The decrease in the gross deferred tax asset as a
result of the amendments which reduced the federal and state net operating loss
carryforwards was offset by an equal decrease in the valuation allowance to the
deferred tax asset.
For the Three Years Ended December 31, 1995. Washington Mutual's 1995
net income of $289.9 million increased from $240.3 million in 1994 and $267.3
million in 1993. Fully diluted earnings per share were $2.42 in 1995, compared
with $2.06 in 1994 and $2.36 in 1993. Washington Mutual's ROA for 1995 equaled
0.73 percent, up from 0.69 percent in 1994 and down from 0.84 percent in 1993.
Its ROCE for 1995 was 13.73 percent up from 12.95 percent in 1994 and down from
16.78 percent in 1993. During 1993, Washington Mutual operated in a highly
favorable interest rate environment. However, an increase of approximately 250
basis points in short-term market interest rates in 1994 led to a compression of
the net interest margin and a corresponding pressure on net interest income in
1994 and 1995. Certain short-term interest rates decreased 25 basis points in
mid-1995 and again in December 1995, resulting in an improved operating
environment for the Company over 1994.
Net Interest Income. Net interest income of $992.7 million for
1995 was up from $960.1 million in 1994, which in turn was 3 percent lower than
the $986.7 million earned during 1993. The growth in net interest income in 1995
was due primarily to an increase in average interest-earning assets. Although
average interest-earning assets were up 14 percent during 1995, a decline in the
net interest margin limited the increase in net interest income. A significant
portion of the Company's ARMS are indexed to COFI. In both 1995 and 1994 net
interest margin was negatively affected by the lag between COFI and changes in
the repricing of the Company's interest-bearing liabilities.
The increase in market interest rates during 1994 had a negative effect
on the net interest margin during much of 1995. The net interest margin for 1995
of 2.62 percent declined from 2.90 percent in 1994 and 3.31 percent in 1993. See
"--Interest Rate Risk Management." and "Supplemental Consolidated Financial
Statements--Note 18: Interest Rate Risk Management."
The low level of market interest rates during 1993 resulted in a
significant portion of the Company's loans being refinanced and mortgage-backed
securities being prepaid, as borrowers sought to lower their interest rates. The
result was a decline in the yield on interest-earning assets to 6.93 percent in
1994 from 7.37 percent in 1993. In general, the costs of deposits and borrowings
were also lower in 1994 as compared with 1993. However, due to an increase in
the level and cost of certain borrowings, the Company's overall cost of funds of
4.11 percent during 1994 was virtually unchanged from 4.12 percent during 1993.
The full effect of the rise in short-term rates that began in late 1994 was felt
in 1995 (mitigated somewhat by a subsequent lowering of short-term rates
mid-year) increasing the cost of funds during 1995 to 5.17 percent. The yield on
interest-earning assets during 1995 increased to only 7.70 percent because
long-term interest rates did not increase as much as short-term rates. The
Company also was not in a position to take full advantage of the increase in
long-term interest rates because a sizable portion of its earning assets were
fixed rate. The net interest spread declined to 2.53 percent for 1995 from 2.82
percent in 1994 and 3.25 percent in 1993.
<PAGE>
The following table sets forth information regarding the Company's
consolidated average statements of financial condition, together with the total
dollar amounts of interest income and expense and the weighted average interest
rates for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
- ----------------------------------------- ------------------------------------------- ---------------------------------------
Interest Interest
Average Income Average Income
(dollars in thousands) Balance(1) Rate or Expense Balance(2) Rate or Expense
-
- ----------------------------------------- ------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments $11,260,051 7.06% $ 795,444 $ 8,790,748 5.64% $ 495,556
New West Note(3) 723,800 8.13 58,841 2,346,753 6.01 141,039
Loans(4) 25,877,673 7.97 2,061,801 21,987,836 7.54 1,658,818
- ----------------------------------------- ------------------------------------------- ---------------------------------------
Total interest-earning assets 37,861,524 7.70 2,916,086 33,125,337 6.93 2,295,413
Other assets 1,841,038 -- -- 1,744,338 -- --
========================================= =========================================== =======================================
Total assets $39,702,562 -- -- $34,869,675 -- --
========================================= =========================================== =======================================
Liabilities
Deposits:
Checking accounts $ 2,389,793 1.20 28,672 $ 2,424,250 1.22 29,530
Savings and money market accounts 6,648,539 3.94 261,958 6,107,997 2.74 167,091
Time deposits 15,242,445 5.54 844,188 14,557,602 4.51 656,045
- ----------------------------------------- ------------------------------------------- ---------------------------------------
24,280,777 4.67 1,134,818 23,089,849 3.69 852,666
Borrowings:
Annuities 801,129 5.58 44,716 734,969 4.51 33,143
Federal funds purchased 305,468 5.30 16,188 -- -- --
Securities sold under agreements
to repurchase 7,749,929 6.23 482,698 4,318,592 4.69 202,677
Advances from the FHLB 3,482,200 5.81 202,422 3,966,494 5.38 213,259
Other interest-bearing liabilities 558,320 7.63 42,594 396,586 8.48 33,613
- ----------------------------------------- ------------------------------------------- ---------------------------------------
12,897,046 6.11 788,618 9,416,641 5.13 482,692
- ----------------------------------------- ------------------------------------------- ---------------------------------------
Total interest-bearing liabilities 37,177,823 5.17 1,923,436 32,506,490 4.11 1,335,358
Other liabilities 367,702 -- -- 465,792 -- --
- ----------------------------------------- ------------------------------------------- ---------------------------------------
Total liabilities 37,545,525 -- -- 32,972,282 -- --
Stockholders' equity 2,157,037 -- -- 1,897,393 -- --
- ----------------------------------------- ------------------------------------------- ---------------------------------------
Total liabilities and
stockholders' equity $39,702,562 -- -- $34,869,675 -- --
========================================= =========================================== =======================================
Net interest spread and income 2.53% $ 992,650 2.82% $ 960,055
========================================= =========================================== =======================================
Net interest margin 2.62% 2.90%
- -------------
(1) Average balances were calculated on a monthly basis. Due to the
relative consistency of the Company's asset and liability balances during 1995,
the average balances calculated on a monthly basis approximate the average
balances calculated on a daily basis and were representative of the Company's
operations in 1995.
(2) Average balances were calculated on a daily basis.
(3) See "Supplemental Consolidated Financial Statements-- Note 8: Note
Receivable."
(4) Nonaccruing loans were included in the average loan amounts
outstanding.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1993
------------------------------------
Interest
Average Income
Balance(2) Rate or Expense
------------------------------------
<S> <C> <C> <C>
Assets
Investments $ 5,955,132 6.35% $ 378,084
New West Note(3) 3,894,221 6.19 241,014
Loans(4) 19,998,871 7.90 1,579,480
- ----------------------------------------- ------------------------------------
Total interest-earning assets 29,848,224 7.37 2,198,578
Other assets 1,732,053 -- --
========================================= ===================================
Total assets $31,580,277 -- --
========================================= ====================================
Liabilities
Deposits:
Checking accounts $ 2,308,229 1.47 34,019
Savings and money market accounts 6,174,860 2.82 174,437
Time deposits 14,600,232 4.52 659,722
- ----------------------------------------- ------------------------------------
23,083,321 3.76 868,178
Borrowings:
Annuities 629,636 5.92 37,258
Federal funds purchased -- -- --
Securities sold under agreements
to repurchase 2,176,260 3.62 78,853
Advances from the FHLB 3,148,089 6.18 194,631
Other interest-bearing liabilities 374,438 8.81 32,976
- ----------------------------------------- ------------------------------------
6,328,423 5.43 343,718
- ----------------------------------------- ------------------------------------
Total interest-bearing liabilities 29,411,744 4.12 1,211,896
Other liabilities 492,556 -- --
- ----------------------------------------- ------------------------------------
Total liabilities 29,904,300 -- --
Stockholders' equity 1,675,977 -- --
- ----------------------------------------- ------------------------------------
Total liabilities and
stockholders' equity $31,580,277 -- --
========================================= ====================================
Net interest spread and income 3.25% $ 986,682
========================================= ====================================
Net interest margin 3.31%
- -------------
(1) Average balances were calculated on a monthly basis. Due to the
relative consistency of the Company's asset and liability balances during 1995,
the average balances calculated on a monthly basis approximate the average
balances calculated on a daily basis and were representative of the Company's
operations in 1995.
(2) Average balances were calculated on a daily basis.
(3) See "Supplemental Consolidated Financial Statements-- Note 8: Note
Receivable."
(4) Nonaccruing loans were included in the average loan amounts
outstanding.
</TABLE>
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amounts of interest income and interest expense fluctuate
depending upon the changes in the respective interest rates and upon changes in
the respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume and (ii) changes in rate.
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
- ------------------------------------ ------------------------------------------ -----------------------------------------
Increase (decrease) Increase (decrease)
due to Total due to Total
(dollars in thousands) Volume(1) Rate Change Volume(2) Rate Change
- ------------------------------------ ------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Investments $139,201 $160,687 $299,888 $180,030 $(62,558) $117,472
Notes receivable (97,539) 15,341 (82,198) (95,773) (4,202) (99,975)
Loans(3) 293,459 109,524 402,983 157,085 (77,747) 79,338
- ------------------------------------ ------------------------------------------ -----------------------------------------
Total interest income 335,121 285,552 620,673 241,342 (144,507) 96,835
Interest Expense
Deposits:
Checking accounts (420) (438) (858) 1,710 (6,199) (4,489)
Savings and
money market accounts 14,787 80,080 94,867 (1,889) 5,457) (7,346)
Time deposits 30,863 157,280 188,143 (1,926) (1,751) (3,677)
- ------------------------------------ ------------------------------------------ -----------------------------------------
Total deposit expense 45,230 236,922 282,152 (2,105) (13,407) (15,512)
Borrowings:
Annuities 2,983 8,590 11,573 6,233 (10,348) (4,115)
Federal funds purchased 16,188 -- 16,188 -- -- --
Securities sold under
agreements
to repurchase 161,037 118,984 280,021 77,623 46,201 123,824
Advances from the FHLB (26,038) 15,201 (10,837) 50,598 (31,970) 18,628
Other 13,708 (4,727) 8,981 1,951 (1,314) 637
- ------------------------------------ ------------------------------------------ -----------------------------------------
Total borrowing expense 167,878 138,048 305,926 136,405 2,569 138,974
- ------------------------------------ ------------------------------------------ -----------------------------------------
Total interest expense 213,108 374,970 588,078 134,300 (10,838) 123,462
- ------------------------------------ ------------------------------------------ -----------------------------------------
Net interest income $122,013 $(89,418) $ 32,595 $107,042 $(133,669) $(26,627)
==================================== ========================================== =========================================
- --------
(1) Average balances in 1995 were calculated on a monthly basis. Due to the
relative consistency of the Company's asset and liability balances during
1995, the average balances calculated on a monthly basis approximate the
average balances calculated on a daily basis and were representative of the
Company's operations in 1995.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the average loan amounts outstanding.
</TABLE>
Other Income. Other income was $208.3 million in 1995, down
from $220.8 million in 1994 and $246.6 million in 1993. Other income has
declined in each of the years presented, primarily due to one-time gains that
were recorded in 1993 and to a lesser extent in 1994. Other income in 1993
included $52.1 million in gain on the sales of loans and other assets. The
significant level of gain on sales of assets during 1993 largely resulted from
asset restructurings to accommodate the acquisition of Pacific First. In
addition, loans were sold during 1993 to take advantage of loan origination
volume fueled by home loan refinancing and a declining interest rate environment
which enabled the Company to sell these loans at a gain.
<PAGE>
Other income consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------- -------------------- --------------------- ------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------- -------------------- --------------------- ------------------
<C> <C> <C> <C>
Depositor fees $ 79,017 $ 45,255 $ 39,872
Loan servicing fees 29,315 23,247 20,569
Other service fees 49,679 65,248 71,921
Other operating income 31,035 39,630 39,082
Gain on sale of loans, inclusive of write-downs 1,717 23,488 25,266
Gain (loss) on sale of other assets, inclusive of write-downs (655) 23,926 26,866
Loss on sale of covered assets (37,399) - -
Effect of FDIC assistance payment 55,630 - 23,000
=================================================================== ==================== ===================== ==================
Total other income $208,339 $220,794 $246,576
=================================================================== ==================== ===================== ==================
</TABLE>
Depositor fees of $79.0 million in 1995 increased substantially from
fees of $45.3 million in 1994 and $39.9 million in 1993. The increase in
depositor fees reflected substantial account growth coupled with a revised fee
structure for certain deposit services. The primary component of this growth was
noninterest-bearing checking accounts, considered the core accounts of consumer
banking. Checking accounts are an attractive means of providing low-cost
deposits, producing added fee income and generating opportunities to sell the
Company's other products and services.
Loan servicing fees were $29.3 million in 1995, up from $23.2 million
in 1994. The balance of mortgage servicing rights also increased during this
period to $104.5 million at December 31, 1995 from $70.9 million a year earlier.
This higher level of loan servicing fees recognized and capitalized servicing
rights reflected an increase in the amount of loans serviced for others and the
implementation of SFAS No. 122 in 1995 by ASB. The portfolio of loans serviced
for others increased to $21.4 billion at December 31, 1995 from $15.3 billion at
the end of 1994, as a result of the purchase of $4.2 billion loan servicing
rights and the securitization and sale of residential loans. During 1994, the
Company purchased the rights to service $3.9 billion of ARMs and sold servicing
rights relating to $1.9 billion of its fixed-rate servicing portfolio.
Loan servicing fees consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------- ------------------------- ------------------------ ------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------- ------------------------- ------------------------ ------------
<S> <C> <C> <C>
Loan servicing income $ 53,155 $ 43,665 $ 47,652
Amortization of mortgage servicing rights (23,840) (20,418) (27,083)
- ------------------------------------------------------------------- ------------------------- ------------------------ ------------
Loan servicing fees $ 29,315 $ 23,247 $ 20,569
=================================================================== ========================= ======================== ============
</TABLE>
Mortgage servicing rights, net of amortization and the valuation
allowance were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------ ------------- -------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Balance, beginning of year $ 70,911 $ 66,031
Additions 58,306 38,385
Sales -- (13,087)
Amortization (23,840) (20,418)
Valuation allowance (882) --
- ------------------------------------------------------------------------------------------------------ ------------- -------------
Balance, end of year $104,495 $ 70,911
====================================================================================================== ============= =============
</TABLE>
The principal components of other service fees consist of service fees
generated by the Company's nonbanking subsidiaries. Nonbanking service fees
totaled $24.8 million in 1995, down from $37.9 million in 1994 and $43.1 million
in 1993, primarily due to declining sales of securities products and the March
1995 sale of Mutual Travel. Due to the drop in nonbanking service fees, other
service fees in 1995 totaled $49.7 million, compared with $65.2 million in 1994
and $71.9 million in 1993.
The gain on sale of loans, inclusive of write-downs on mortgage
servicing rights, totaled $1.7 million in 1995, compared with $23.5 million in
1994 and $25.3 million in 1993. During 1994, a $25.0 million gain was realized
on the sale of the Company's credit card portfolio with a book value of $151.9
million. Except as noted above, sales activity in 1995 and 1994 was minimal as
Washington Mutual retained or securitized most of its loan production. During
1993, gains of $31.4 million were earned on a sales volume of $1.8 billion, but
prepayment activity required a write-down of mortgage servicing rights of $6.3
million.
During 1995, the net loss of $655,000 on the sale of other assets,
inclusive of write-downs, was primarily due to an $8.4 million write-down
recorded due to credit quality deterioration on certain mortgage-backed
securities partially offset by gains generated through the disposition of
fixed-rate mortgage-backed securities. Included in gains on the sale of other
assets in 1994 of $23.9 million was the recognition of a $20.4 million gain on
the sale of mortgage servicing rights related to the sale of $1.9 billion of
loans serviced for others. Adjustments to Washington Mutual's balance sheet to
accommodate the acquisition of Pacific First were responsible for approximately
half of the $49.9 million in gains on the sale of other assets during 1993.
During this restructuring, Washington Mutual primarily sold mortgage-backed
securities to reduce the preacquisition size of its balance sheet. The balance
of the 1993 gain included a $23.0 million gain resulting from a transaction
among ASB, New West and their affiliates and the FDIC and the Resolution Trust
Corporation (the "RTC"), which served to modify a number of the credit support
and other arrangements that had been put in place at the time of the 1988
Acquisition.
Other income for the year ended December 31, 1995 included $18.2
million, net, related to the sale of certain assets by ASB. These assets,
single-family residential loans, were acquired by ASB in the 1988 Acquisition
and were designated by relevant agreements as covered assets. The loss on the
sale of the covered assets was offset by a payment received during the same year
from the FRF representing compensation, under the terms of the 1988 Acquisition,
for the remaining value of such covered assets computed in accordance with the
1988 Acquisition.
Other Expense. Total other expense of $700.5 million in 1995
increased slightly compared with $695.5 million in 1994 and $687.5 million in
1993. Between 1993 and 1994, WMB's expenses increased by $20.7 million due to
increased operations and number of financial centers. Partially offsetting this
increase were efficiency measures taken at ASB which reduced its operating
expenses by $12.9 million. Washington Mutual's efficiency ratio was 58.3 percent
for 1995 versus 58.9 percent for 1994 and 55.7 percent for 1993. The increase in
the efficiency ratio from 1993 to 1994 was a result of a decrease in net
interest income.
Other expense consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------- ----------------- --------------------- ----------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------- ----------------- --------------------- ----------------
<S> <C> <C> <C>
Salaries and employee benefits $313,304 $315,424 $316,929
Occupancy and equipment 111,381 102,403 106,419
Regulatory assessments 54,909 54,887 52,444
Data processing fees 36,538 33,862 35,613
Other operating expense 145,394 146,463 132,178
Amortization of goodwill and other intangible assets 28,306 29,076 24,690
Real estate owned operations, inclusive of write-downs 10,682 13,402 19,246
========================================================================= ================= ===================== ================
Total other expense $700,514 $695,517 $687,519
========================================================================= ================= ===================== ================
</TABLE>
At year-end 1995, the Company had full-time equivalent employees of
7,903, virtually unchanged from 7,915 at the end of 1994, and from 7,889 at the
end of 1993.
The increase in occupancy and equipment expense to $111.4 million in
1995 from $102.4 million in 1994 and $106.4 million in 1993 was primarily due to
the growth in the number of financial centers, an expansion of head office
facilities and technology upgrades. The decrease between 1993 and 1994 resulted
from efficiency measures at ASB which more than offset general increases at the
rest of the Company.
Regulatory assessments totaled $54.9 million in both 1995 and 1994,
compared with $52.4 million in 1993. Although total deposits outstanding
increased in 1995, the increase in deposit balances was offset by a reduction in
the premium rate for BIF-insured deposits. The expense increase in 1994 was
primarily the result of the increase in total deposits outstanding.
Other operating expense (including data processing fees) increased to
$181.9 million in 1995 from $180.3 million (inclusive of a $5.0 million expense
for a legal settlement) in 1994 and $167.8 million in 1993. See "--Nonbanking
Subsidiary Operations." Other operating expenses tend to rise with the increased
size of the Company.
Goodwill and other intangible assets have resulted from business
combinations accounted for as purchase transactions. Goodwill and other
intangible assets are amortized using the straight-line method over the period
that is expected to be benefited. The acquisition of Pacific First in the second
quarter of 1993 was the most significant of such business combinations and
resulted in the creation of $178.2 million in goodwill and other intangible
assets to be amortized over 10 years. The amortization of goodwill and other
intangible assets was $28.3 million in 1995, compared with $29.1 million in 1994
and $24.7 million in 1993.
The reduction in expense from real estate owned ("REO") operations is
generally attributable to a decline in the provision for REO losses, which were
$10.5 million, $15.5 million and $26.9 million in 1995, 1994, and 1993,
respectively. See "--Asset Quality--Provision for Loan Losses and Reserve for
Loan Losses."
Extraordinary Items. In 1993, Washington Mutual redeemed for
cash all $40.0 million in principal of its 10.50 percent subordinated capital
notes due March 15, 1999 for an after-tax charge of $1.6 million. Also during
1993, Washington Mutual prepaid advances from the Federal Home Loan Bank
("FHLB") of Seattle totaling $432.6 million for an after-tax charge of $7.4
million.
Taxation. Income taxes include federal income taxes and applicable
state income taxes. See "Business--Taxation."
As a result of the Budget Act, which was signed into law on August 10,
1993, the corporate tax rate increased to 35 percent effective January 1, 1993.
Washington Mutual was also required under the Budget Act to report certain
securities and other assets at fair market value effective January 1, 1993. This
rule, however, has not had a material impact on the income tax provision of the
Company.
In connection with the 1988 Acquisition, the Internal Revenue Service
entered into a closing agreement (the "Closing Agreement") with respect to the
federal income tax consequences of the 1988 Acquisition and certain aspects of
the taxation of Keystone Holdings and certain of its affiliates. The Closing
Agreement contains provisions that are intended to ensure that losses generated
by New West would be available to offset income of ASB for federal income tax
purposes. In connection with the 1988 Acquisition, Keystone Holdings and certain
of its affiliates entered into a number of continuing agreements with the
predecessor to the FRF, which agreements were designed, in part, to provide that
over time 75 percent of most of the federal income tax savings and 19.5 percent
of most of the California tax savings (in each case computed in accordance with
specific provisions contained in the Assistance Agreement between Keystone
Holdings and the predecessors to the FRF (the "Assistance Agreement") in
connection with the 1988 Acquisition would be paid by Keystone Holdings to New
West for the benefit of the FRF. The provision for such payments is reflected in
the financial statements as "payments in lieu of taxes." See
"Business--Tax-Related Agreements--Assistance Agreement." Due to the above
arrangements, the Company's effective tax rate (including payments in lieu of
taxes) for the three years ended December 31, 1995 has ranged from approximately
28 percent to 30 percent compared to a normal corporate tax rate of 35 percent.
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109, Accounting for Income Taxes, that changed the accounting
principle governing accounting for income taxes. The statement requires the use
of the liability method in accounting for income taxes and eliminates on a
prospective basis the former exception from the provision of deferred income
taxes on thrift bad debt reserves. The change was implemented in 1992 for ASB
and during the first quarter of 1993 for Washington Mutual (without regard to
ASB). The change resulted in an after-tax cumulative positive adjustment to
earnings of $60.0 million in 1992 and $13.4 million in 1993.
Nonbanking Subsidiary Operations. For a description of the Company's
principal nonbanking subsidiaries, see "Business--Washington Mutual's Operating
Subsidiaries."
Nonbanking subsidiary results of operations were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year ended December 31,
----------------------- ----------------------------------
- ----------------------------------------------------------- ----------------------- ----------------------------------
(dollars in thousands) 1996 1995 1995 1994 1993
- ----------------------------------------------------------- ----------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
WM Life Insurance Co. $11,832 $10,912 $14,292 $12,482 $ 9,900
ASB Financial Services, Inc. 10,027 7,850 10,599 11,245 14,089
Composite Research & Management Co. 2,516 2,095 2,967 2,854 2,539
Mortgage Securities Services Insurance Agency, Inc. 1,438 441 1,100 -- --
Murphey Favre, Inc. 561 442 437 (2,249) 4,334
Mutual Travel, Inc. -- 229 229 1,178 1,266
Other 4,478 (654) (644) (23) 39
- ----------------------------------------------------------- ----------------------- ----------------------------------
Net income before amortization of goodwill and other
intangible assets, elimination of intercompany
transactions, and income taxes 30,852 21,315 28,980 25,487 32,167
Amortization of goodwill and other intangible assets 105 749 932 1,501 1,874
- ----------------------------------------------------------- ----------------------- ----------------------------------
Net income before elimination of intercompany
transactions and income taxes $30,747 $20,566 $28,048 $23,986 $30,293
=========================================================== ======================= ==================================
</TABLE>
Nine Months Ended September 30, 1996 Compared With Nine Months
Ended September 30, 1995. Operating income (net income before amortization of
goodwill and other intangible assets, elimination of intercompany transactions
and income taxes) for the nine months ended September 30, 1996 was $30.9 million
compared with $21.3 million for the same period in 1995.
WM Life improved its pretax operating income to $11.8 million for the
first nine months of 1996, from $10.9 million in the same period of 1995. Most
of the increase in WM Life pretax operating income was due to higher net
interest income resulting from growth in net interest-earning assets.
ASB Financial had pretax operating income of $10.0 million for the nine
months ended September 30, 1996, an increase of 27 percent compared with $7.9
million for the same period last year, primarily as a result of greater
securities sales.
Composite Research's pretax operating income improved slightly to $2.5
million during for the first nine months of 1996 from $2.1 million during the
same period in 1995. At September 30, 1996, Composite Research's assets under
management totaled $1.3 billion.
Pretax operating income for MSS for the nine months ended September 30,
1996 totaled $1.4 million compared with $441,000 for the same period in 1995.
MSS began operations in 1995.
Murphey Favre posted pretax operating income of $561,000 for the first nine
months of 1996 compared with $442,000 during the same period in 1995. During
1996, Murphey Favre recorded a $1.7 million charge resulting from a legal
settlement with residents of Montana related to the sale by Murphey Favre
between 1987 and 1990 of bonds issued by Homestead Savings of Millbrae,
California.
The results of operations during the first nine months of 1996 for other
nonbanking subsidiaries included the recognition of a previously deferred gain
of $4.1 million on the 1995 sale of Mutual Travel.
For the Three Years Ended December 31, 1995. Operating income was $29.0
million in 1995, compared with $25.5 million in 1994 and $32.2 million in 1993.
WM Life improved its operating performance, posting pretax operating income
of $14.3 million in 1995, up from $12.5 million in 1994 and $9.9 million in
1993. Contributing to the improvement in earnings were strong sales of
annuities. However, annuities outstanding at year-end 1995 were up only seven
percent to $855.5 million, from $799.2 million at the end of 1994 due to a high
level of surrenders of annuity contracts. Annuities outstanding at the end of
1994 were up 12 percent from $713.4 million at the end of 1993.
Higher sales commissions and salaries expense, related to higher securities
commission revenues resulted in a decrease in pretax operating income at ASB
Financial in 1995 from $11.2 million in 1994 to $10.6 million in 1995. 1994
pretax operating income was reduced from the 1993 levels of $14.1 million
primarily as a result of declining securities commission revenue.
Composite Research's financial performance has remained steady during
the past three years, with pretax operating income rising slightly to $3.0
million in 1995 from $2.9 million in 1994 and $2.5 million in 1993. Assets of
the Composite Group of mutual funds, managed by Composite Research, were $1.3
billion at December 31, 1995, $1.1 billion at year-end 1994 and $1.3 billion at
December 31, 1993. Although there has been a net outflow of investor funds, the
differences in asset balances are primarily due to fluctuations in market
valuation of the mutual fund assets.
In 1995, its first year of operations, pretax operating income for MSS
totaled $1.1 million.
Lower sales reduced pretax operating income for Murphey Favre to
$437,000 in 1995. The pretax net loss of $2.2 million in 1994 resulted primarily
from the $5.0 million expense of a legal settlement related to the sale by
Murphey Favre between 1987 and 1990 of bonds issued by Homestead Savings of
Millbrae, California. Murphey Favre earned $4.3 million on a pretax basis during
1993.
The 1994 pretax operating income of Mutual Travel was $1.2 million,
compared with $1.3 million in 1993. In March 1995, Washington Mutual sold Mutual
Travel to a company whose principal shareholders were Mutual Travel's management
team. The sales price resulted in a pretax gain of $4.1 million, which was
recognized in 1996.
Review of Financial Position
Assets. At September 30, 1996, the Company's assets were $43.7 billion, up
four percent from $42.0 billion at December 31, 1995. During 1995, total assets
grew $4.5 billion to end the year at $42.0 billion. At December 31, 1994, total
assets were $37.5 billion, an increase of $3.9 billion from December 31, 1993.
Most of the growth during 1994, 1995 and 1996 has come from retaining originated
loans (either as part of the loan portfolio or as securitized mortgage-backed
securities).
Investment Activities. Washington Mutual's investment portfolio at
September 30, 1996 was carried at $13.1 billion, a 15 percent decrease from the
December 31, 1995 balance of $15.4 billion. During the first nine months of
1996, the Company continued the restructuring of its investment portfolio by
selling fixed-rate securities and replacing them with adjustable-rate
securities. This portfolio restructuring was intended to reduce Washington
Mutual's sensitivity to changes in market interest rates. As noted above,
however, the portfolio restructuring also contributed to a decline in the yield
on interest-earning investment securities. See "--Net Interest Income."
At September 30, 1996, the Company's investment portfolio included
$10.1 billion in available-for-sale securities, $3.0 billion in held-to-maturity
securities (with a fair value of $3.0 billion), and $2.2 million in trading
account securities. Mortgage-backed securities constituted $11.6 billion or 89
percent of the total investment portfolio.
The Company's investment portfolio increased 77 percent to $15.4
billion at December 31, 1995 from $8.7 billion a year earlier. In 1995, the
Company securitized and retained $6.6 billion of loans. Also in 1995, as in
1994, Washington Mutual leveraged its capital through purchases of investment
securities. These purchases were funded mostly through borrowings. By leveraging
the balance sheet through the use of these wholesale activities, Washington
Mutual generated additional net interest income.
At December 31, 1995, the Company's investment portfolio included $12.2
billion in available-for-sale securities, $3.2 billion in held-to-maturity
securities (with a fair value of $3.3 billion), and $238,000 in trading account
securities. During 1995, the FASB issued a report entitled A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, Questions and Answers that allowed companies a one-time
reassessment and related reclassification from the held-to-maturity category to
the available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. Pursuant to the FASB report, Washington Mutual
reclassified $4.9 billion of its held-to-maturity securities into the
available-for-sale category on December 1, 1995. Of the securities transferred,
over half were fixed-rate securities. During 1994, there were no transfers
between the available-for-sale and held-to-maturity portfolios, nor were there
any sales from the held-to-maturity portfolio. See "Business--Interest Rate Risk
Management."
Loans. Total loans outstanding (including loans held for sale) at September
30, 1996 were $28.5 billion, up from $24.2 billion at December 30, 1995 and
$25.2 billion at year-end 1994. Changes in the loan balances are primarily
driven by originations of new loans, prepayments of existing loans, scheduled
repayments of principal, and loan securitizations.
Loans originated by product line consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------------------------------- --------------------------------- -----------------------------------------------
(dollars in thousands) 1996 1995 1995 1994 1993
--------------------------------------------- --------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential (1-4 family units):
Fixed rate $2,772,973 $1,363,634 $2,365,603 $1,040,035 $3,972,550
Adjustable-rate 4,557,338 3,233,001 4,455,740 5,288,231 3,173,748
Residential construction 973,432 674,208 935,827 1,034,176 847,217
Apartment buildings 352,811 245,495 348,942 618,201 674,672
Other commercial real estate 183,416 115,701 166,987 136,749 164,435
--------------------------------------------- --------------------------------- ------------------------------------------------
Total real estate loans 8,839,970 5,632,039 8,273,099 8,117,392 8,832,622
Consumer:
Second mortgage and other consumer 689,425 539,318 722,871 776,176 768,666
Manufactured housing 251,678 207,047 274,115 277,358 210,819
--------------------------------------------- --------------------------------- ------------------------------------------------
Total consumer loans 941,103 746,365 996,986 1,053,534 979,485
Commercial business loans 258,634 119,784 167,830 128,539 103,722
--------------------------------------------- --------------------------------- ------------------------------------------------
Total loans originated $10,039,707 $6,498,188 $9,437,915 $9,299,465 $9,915,829
============================================= ================================= ================================================
Residential refinances to
total residential originations 40.83% 38.09% 42.14% 48.31% 76.68%
</TABLE>
In 1993 and early 1994, the Company's originations included
significant refinancing activity that was generated by low market interest
rates. Higher interest rates in 1994 curtailed refinancing activity for the year
and resulted in an increase in residential adjustable-rate originations compared
to residential fixed-rate originations. As a consequence of higher interest
rates, total lending volumes in 1994 were below those in 1993. Refinancings
increased again during the second half of 1995 as market interest rates
declined. The decline in apartment building originations from 1994 to 1995 was
due to a management decision at ASB to reduce lending volumes in that product
line.
Deposits. Total deposits decreased to $24.0 billion at September 30,
1996 from $24.5 billion at December 31, 1995. Time deposits at WMB were allowed
to run off because it chose not to be as aggressive in the repricing of time
deposits. Partially offsetting the $795.8 million decline in time deposits were
increases in the level of money market and checking accounts. Both of these
products have the benefit of lower interest costs. Total deposits increased to
$24.5 billion at December 31, 1995, from $23.3 billion at December 31, 1994.
While the vast majority of deposits are retail in nature, the Company
does engage in certain wholesale activities -- primarily accepting time deposits
from political subdivisions and public agencies. The Company considers wholesale
deposits to be an alternative borrowing source rather than a customer
relationship and, as such, their levels are determined by management's decisions
as to the most economic funding sources.
The following table sets forth information relating to deposit flows,
total deposits and the weighted average interest rate on deposit accounts for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------------------------- --------------------------------- ------------------------------------------------
(dollars in thousands) 1996 1995 1995 1994 1993
----------------------------------------- --------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
Decrease due to deposit outflow $ (1,283,490) $(592,633) $ (432,942) $(1,236,514) $(1,912,765)
Increase due to acquired deposits - 417,078 417,078 211,537 3,831,700
Increase due to interest credited 799,045 842,413 1,134,818 852,666 868,178
----------------------------------------- --------------------------------- ------------------------------------------------
Increase (decrease) in total deposits $ (484,445) $ 666,858 $ 1,118,954 $ (172,311) $ 2,787,113
========================================= ================================= ================================================
Total deposits at end of period $23,978,515 $24,010,864 $24,462,960 $23,344,006 $23,516,317
Weighted average rate for the period 4.43% 4.67% 4.69% 3.69% 3.76%
</TABLE>
Borrowings. Washington Mutual's borrowings primarily take the form of
federal funds purchased, securities sold under agreements to repurchase and
advances from the FHLB of Seattle and San Francisco. These borrowing sources
totaled $1.0 billion, $8.6 billion and $5.5 billion, respectively, at September
30, 1996 compared with $433.4 million, $8.0 billion and $4.7 billion,
respectively, at year-end 1995. At December 31, 1994, the Company had $6.6
billion of securities sold under agreements to repurchase, $4.1 billion of
advances from the FHLB of Seattle and San Francisco and no federal funds
purchased. See "Business--Borrowings."
Asset Quality
Provision for Loan Losses and Reserve for Loan Losses.
Nine Months Ended September 30, 1996 Compared With Nine Months
Ended September 30, 1995. The provision for loan losses is based upon
management's estimate of the amount necessary to maintain adequate reserves for
losses inherent in the Company's loan portfolio. The estimate of inherent losses
is developed by considering a number of factors including matters pertinent to
the underlying quality of the loan portfolio and management's policies,
practices and intentions with respect to credit administration and asset
management. The provision for loan losses for the nine months ended September
30, 1996 was $58.1 million which was substantially unchanged from $57.5 million
for the same period in 1995, primarily reflecting the fact that the dollar
amounts of nonperforming loans were substantially the same in both periods. The
balance of the reserve for loan losses was $234.3 million at September 30, 1996,
virtually unchanged from $235.3 million at December 31, 1995. Reserves charged
off, net of recoveries, totaled $59.1 million for the nine months ended
September 30, 1996 compared with $69.3 million for the same period in 1995.
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------- -----------------------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------- ---------------- -------------------
<S> <C> <C>
Balance, beginning of period $235,275 $244,989
Provision for loan losses 58,138 57,540
Reserves added through business combinations - 5,372
Reserves charged-off:
Residential (40,387) (42,670)
Residential construction (14) (112)
Commercial real estate (17,636) (26,163)
Manufactured housing, second mortgage and other consumer (6,583) (5,906)
Commercial business (296) (283)
- --------------------------------------------------------------------------------------------- ---------------- -----------------
(64,916)) (75,134)
Reserves recovered:
Residential 3,323 1,763
Residential construction - 47
Commercial real estate 1,886 3,093
Manufactured housing, second mortgage and other consumer 580 715
Commercial business 55 255
- ---------------------------------------------------------------------------------------------- ---------------- ----------------
5,844 5,873
- ---------------------------------------------------------------------- ------------------------ --------------- ----------------
Balance, end of period $234,341 $238,640
====================================================================== ======================== ============== ================
Ratio of net charge-offs during the period to average loans
outstanding during the period 0.22% 0.27%
Reserve for loan losses as a percentage of:
Nonperforming loans 108.33 119.89
Nonperforming assets 72.53 71.68
</TABLE>
As part of the process of determining the adequacy of the reserve for
loan losses, management reviews its loan portfolio for specific weaknesses. A
portion of the reserve is then allocated to reflect the identified loss
exposure. The September 30, 1996 analysis of residential construction,
commercial real estate and commercial business loans resulted in an allocation
of $23.5 million of the reserve. At December 31, 1995, the Company had allocated
reserves of $16.6 million. The remaining reserve of $210.8 million at September
30, 1996 was unallocated and available for potential losses from any of the
Company's loans.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
(dollars in thousands) September 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated reserves:
Commercial real estate $ 21,682 $16,488
Residential construction 193 158
Commercial business 1,672 --
- ------------------------------------------------------------------------------------------------------------------
23,547 16,646
Unallocated reserves 210,794 218,629
- ------------------------------------------------------------------------------------------------------------------
Total loan loss reserves $234,341 $235,275
==================================================================================================================
</TABLE>
A reserve for REO losses is maintained for any subsequent decline in
the value of foreclosed property. The reserve for REO losses was $6.6 million at
September 30, 1996, compared with $10.1 million at December 31, 1995. The level
is based upon a routine review of the REO portfolio and the strength of national
and local economies.
The Company recorded an additional $125.0 million provision for loan
losses at the Effective Date. An additional loan loss provision was provided
principally because a number of Washington Mutual credit administration and
asset management philosophies and procedures differed from those of ASB. Those
differences consisted principally of the following: (i) Washington Mutual is
more proactive in dealing with emerging credit problems and tends to prefer
foreclosure actions to induce borrowers to correct defaults, whereas ASB was not
as proactive and tended to prefer workouts in lieu of a more aggressive
foreclosure stance; and (ii) ASB considered the risk characteristics of its
portfolio of loans secured by apartment buildings of less than $1.0 million to
be similar to 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 incidence of loan losses than the single-family residential
portfolio. Washington Mutual is conforming ASB's asset management practices,
administration, philosophies and procedures to its own. The plan of realization
of troubled loans differed between the companies and therefore resulted in
different levels of loss reserves. The additional loan loss provision was to a
lesser degree being provided because Washington Mutual believes that while there
has been an increase in the value of residential real estate in certain
California markets, a decline in collateral values for some portions of the
California real estate market occurred in 1996. Management of the Company has
individually reviewed ASB's large performing and nonperforming loans and
performed a review of its other loan portfolios and is developing appropriate
strategies for such credits. As a result, Washington Mutual expects that
approximately one third of the additional $125.0 million provision will be
allocated to loans in the commercial real estate loan portfolio. The remainder
is attributed to ASB's apartment building loans with balances under $1.0 million
and to various residential loan portfolios, for which specific reserve
allocations will not be recorded.
For the Five Years Ended December 31, 1995. The provision for
loan losses during 1995 was $75.0 million compared with $122.0 million in 1994
and $158.7 million in 1993. The 1995 provision reflected a decline in the level
of nonperforming assets, particularly California residential and apartment
building real estate loans. The 1994 provision reflected a significant decline
in the levels of certain nonperforming assets, but was increased from levels
otherwise indicated by $12.5 million related to losses resulting from the
Northridge, California earthquake in January 1994
The provision for loan losses of $158.7 million during 1993 was
virtually unchanged from 1992's level of $158.5 million, but up significantly
from $85.8 million during 1991. During 1991, California's general economic
indicators, including employment, consumer confidence and the value of
residential real estate, began to deteriorate. These trends continued through
1992 and 1993. In response to these trends, the Company increased its reserve
for loan losses through the provision for loan losses during those years and
tightened underwriting standards at ASB. Management believes that the stricter
underwriting standards initiated at ASB in the latter part of 1991 and 1992 have
helped to alleviate the level of loan delinquencies, despite the recessionary
conditions that existed in California. The delinquency experience of loans
originated by ASB subsequent to 1992 has been significantly less than that of
those originated prior to 1992. Management believes that the high rate of
delinquencies in prior years' originations can be attributed to a limited
documentation program offered by ASB during 1989 and 1990 as well as the general
decline in the value of residential real estate that resulted in the
deterioration of many borrowers' equity. The loan loss provision in 1992 and
1993 was also affected by the increase in the size of the loan portfolio, and in
1993, caution about the quality of the loans acquired from Pacific First.
Integral to determining the level of the provision for loan losses in
any given year is an analysis of actual loss experience and plans for problem
loan administration and resolution. Loan chargeoffs, net of recoveries for 1995,
totaled $90.1 million. This was less than the level of net chargeoffs of $123.0
million in 1994, $139.3 million in 1993, and $114.7 million in 1992. The
downward trend in residential delinquencies over the past two years resulted in
reduced charge-offs and declines in the overall provision for loan losses during
1995. Charge-offs on loans secured by commercial real estate were relatively
higher in 1995 than in prior years. Although charge-offs have increased,
commercial real estate delinquencies as a percentage of the total commercial
real estate loan portfolio have declined significantly, contributing to the
lower overall provision for loan losses. At year-end 1992, commercial credits,
which consisted primarily of high-yield bonds, declined to $14.0 million from
$22.2 million at the end of the previous year. This decline was mostly due to
$6.6 million in sales during the year. However, by the end of 1992,
nonperforming assets in this portfolio had increased to $8.5 million from
$360,000 one year earlier. This increase in nonperforming credits was
anticipated by management and was considered in the 1991 analysis of the reserve
for loan losses. During 1991, a major portion of net charge-offs were the result
of losses on commercial credits. The Company's exposure to commercial credits
has declined significantly in recent years.
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------ ------------- ------------ ------------- -------------- --------------
(dollars in thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------ ------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $244,989 $245,062 $179,612 $130,423 $ 94,523
Provision for loan losses 74,987 122,009 158,728 158,537 85,807
Reserves added through business combinations 5,372 921 46,000 5,321 573
Reserves charged-off:
Residential (57,147) (89,637) (93,799) (77,815) (14,074)
Residential construction (125) (190) (297) (937) (139)
Commercial real estate (33,149) (26,835) (26,967) (19,377) (7,624)
Manufactured housing, second
mortgage and other consumer (6,888) (10,544) (16,964) (17,017) (13,055)
Commercial business/credits (813) (2,065) (3,065) (1,321) (18,544)
- ------------------------------------------------------------ ------------- ------------ ------------- -------------- --------------
(98,122) (129,271) (141,092) (116,467) (53,436)
Reserves recovered:
Residential 2,393 2,522 45 17 36
Residential construction 47 - - - 314
Commercial real estate 4,426 2,186 889 571 598
Manufactured housing, second
mortgage and other consumer 701 1,117 768 313 315
Commercial business/credits 482 443 112 897 1,693
- ------------------------------------------------------------ ------------- ------------ ------------- -------------- --------------
8,049 6,268 1,814 1,798 2,956
============================================================ ============= ============= ============= ============= =============
Balance, end of year $235,275 $244,989 $245,062 $179,612 $130,423
============================================================ ============= ============ ============= ============== =============
Net charge-offs as a percentage of average loans 0.35% 0.56% 0.70% 0.69% 0.34%
</TABLE>
As part of the process of determining the adequacy of the reserve for
loan losses, management reviews the loan portfolio for specific weaknesses. A
portion of the reserve is then allocated to reflect the identified loss
exposure. Residential real estate and consumer loans are not individually
analyzed for impairment and loss exposure because of the significant number of
loans and their relatively small individual balances. Residential construction,
commercial real estate and commercial business loans with balances over $1.0
million were evaluated individually for impairment, which resulted in an
allocation of $16.6 million of the reserve for loan losses at year-end 1995,
compared with an allocation of $21.4 million a year earlier. Contributing to the
decline was a reduction in the level of allocated reserves related to commercial
real estate in California.
Unallocated reserves are established for loss exposure that may exist
in the remainder of the loan portfolio but has yet to be identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, and current and anticipated economic conditions.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------- --------------- ---------------- ----------------- --------------- -------------
(dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------- --------------- ---------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Allocated reserves:
Commercial real estate $ 16,488 $ 20,025 $ 22,833 $ 22,496 $ 5,736
Residential construction 158 1,327 1,503 1,219 1,901
Commercial business/credits - - 1,718 5,597 10,064
- -------------------------------------------------- --------------- ---------------- ----------------- --------------- -------------
16,646 21,352 26,054 29,312 17,701
Unallocated reserves 218,629 223,637 219,008 150,300 112,722
- -------------------------------------------------- --------------- ---------------- ----------------- --------------- -------------
Total loan loss reserves $235,275 $244,989 $245,062 $179,612 $130,423
================================================== =============== ================ ================= =============== =============
Total Reserve for loan losses as a percentage of:
Nonperforming loans 110.04% 87.22% 72.74% 54.58% 45.60%
Nonperforming assets 69.42 58.52 46.91 31.98 30.37
</TABLE>
Classified Assets. The following table sets forth the Company's
classified assets, which consist of nonaccrual loans, loans under foreclosure,
REO and performing loans (including substandard troubled debt restructurings)
and securities that exhibit credit quality weaknesses. When and if loans sold on
a recourse basis are nonperforming, they are included in nonaccrual loans. See
"Supplemental Consolidated Financial Statements--Note 1: Summary of Significant
Accounting Policies."
<TABLE>
<CAPTION>
September 30, December 31,
- ------------------------------------------------------- -------------------------- ------------------- ------------------
(dollars in thousands) 1996 1995 1994
- ------------------------------------------------------- -------------------------- ------------------- ------------------
<S> <C> <C> <C>
Nonaccrual loans and loans under foreclosure $216,325 $213,802 $280,899
REO 106,748 125,101 137,767
- ------------------------------------------------------- -------------------------- ------------------- ------------------
Total nonperforming assets 323,073 338,903 418,666
Troubled debt restructurings (classified as 87,239 85,483 54,583
substandard)
Other classified assets 133,257 129,264 169,004
======================================================= ========================== =================== ==================
Total classified assets $543,569 $553,650 $642,253
======================================================= ========================== =================== ==================
</TABLE>
Nonperforming assets decreased to 0.74 percent of total assets at
September 30, 1996 or $323.1 million compared with $338.9 million or 0.81
percent of total assets at December 31, 1995. Nonperforming assets decreased 19
percent to $338.9 million at the end of the 1995 from $418.7 million at the end
of 1994. At September 30, 1996, nonperforming assets in California accounted for
71 percent of total nonperforming assets, down from 75 percent and 83 percent at
the end of 1995 and 1994. The decline in residential nonperforming loans from
1993 through 1995 is largely a result of a tightening of underwriting standards
at ASB beginning in mid-1991. Declining market rents and occupancy rates in
certain areas of Los Angeles that were negatively affected by the economic
environment during the three years ended December 31, 1995, as well as the Los
Angeles riots in 1992 and the Northridge earthquake in January 1994, contributed
to higher charge-offs in the apartment loan portfolio in 1994 and 1995, thereby
reducing the level of nonperforming apartment loans. See "--Provision for Loan
Losses and Reserve for Loan Losses."
Nonperforming assets and troubled debt restructurings consisted of the
following:
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
- ---------------------------------------------- ------------------ --------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992 1991
- ---------------------------------------------- ------------------ --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure
Real estate loans:
Residential $163,521 $158,040 $172,136 $233,618 $ 253,888 $ 232,460
Residential construction 7,512 9,550 4,640 8,527 5,856 14,583
Apartment buildings 12,558 23,300 70,944 53,474 37,059 5,734
Other commercial real estate 17,780 12,663 23,549 20,516 14,883 22,501
- ------------------------------------------------ ------------------ ------------------------------------------------------------
Total real estate loans 201,371 203,553 271,269 316,135 311,686 275,278
Second mortgage and other consumer loans 8,972 7,502 6,969 14,783 7,218 8,192
Manufactured housing loans 5,033 1,923 1,643 2,207 1,571 1,680
Commercial business loans/commercial credits 949 824 1,018 3,785 8,580 867
- ------------------------------------------------ ------------------ ------------------------------------------------------------
Total nonperforming loans 216,325 213,802 280,899 336,910 329,055 286,017
REO, net of REO reserves 106,748 125,101 137,767 185,492 232,568 143,385
================================================ ================== ============================================================
Total nonperforming assets $323,073 $338,903 $418,666 $522,402 $561,623 $429,402
================================================ ================== ============================================================
Troubled debt restructurings $ 95,053 $ 90,623 $ 54,583 $ 68,670 $104,538 $ 9,131
Nonperforming assets as a
percentage of total assets 0.74% 0.81% 1.12% 1.55% 2.03% 1.68%
</TABLE>
Nonperforming assets by geographic concentration were as follows:
<TABLE>
<CAPTION>
September 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Other
(dollars in thousands) California Washington Oregon Utah States Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $122,110 $29,889 $ 3,933 $ 680 $ 6,909 $163,521
Residential construction -- 5,410 1,778 324 -- 7,512
Apartment buildings 12,558 -- -- -- -- 12,558
Other commercial real estate 10,265 4,382 499 -- 2,634 17,780
- ---------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 144,933 39,681 6,210 1,004 9,543 201,371
Second mortgage and other consumer loans 1,679 3,522 1,689 29 2,053 8,972
Manufactured housing loans -- 2,135 1,111 115 1,672 5,033
Commercial business loans -- 16 750 -- 183 949
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 146,612 45,354 9,760 1,148 13,451 216,325
REO 88,833 22,652 779 -- 1,120 113,384
REO reserves -- (6,636)
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $235,445 $68,008 $10,539 $1,148 $14,571 $323,073
=================================================================================================================================
Nonperforming assets by state as a percentage of
total nonperforming assets 71% 21% 3% -- 5% 100%
</TABLE>
Impaired Loans. 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 collectively evaluated for impairment include
residential real estate and consumer loans because of the significant number of
loans and their relatively small balances. All residential construction,
commercial real estate and commercial business loans over $1.0 million are
individually evaluated for impairment. Factors involved in determining
impairment include, but are not limited to, the financial condition of the
borrower, value of the underlying collateral, and current economic conditions.
SFAS No. 114 also applies to all loans that are restructured in a troubled debt
restructuring, subsequent to the adoption of SFAS No. 114, as defined by SFAS
No. 15. A troubled debt restructuring is a restructuring in which the creditor
grants a concession to the borrower that it would not otherwise consider. At
September 30, 1996, the Company had $90.6 million of restructured loans of which
$72.8 million, though performing, were considered to be impaired. Troubled debt
restructurings which were not considered to be impaired were restructured prior
to 1995 and have been performing according to the terms of the restructure.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires that impairment of loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. Washington Mutual bases the measurement of loan impairment on the
fair value of the loan's underlying collateral. The amount by which the recorded
investment in the loan exceeds the value of the impaired loan's collateral is
included in the Company's allocated reserve for loan losses. Any portion of an
impaired loan classified as loss under regulatory guidelines is charged off.
At September 30, 1996, loans totaling $195.3 million were impaired of which
$122.8 million had allocated reserves of $21.6 million. The remaining $72.5
million were either nonperforming or previously written down and had no reserves
allocated to them. Of the $195.3 million of impaired loans, $36.2 million were
on nonaccrual status or under foreclosure. The average balance of impaired loans
during 1996 was $188.1 million and the Company recognized $14.9 million of
related interest income. Interest income is normally recognized on an accrual
basis; however, if the impaired loan is nonperforming, interest income is then
recorded on the receipt of cash.
Impaired loans and the related allocated reserve for loan losses were as
follows:
<TABLE>
<CAPTION>
September 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Loan Amount Net Loan Allocated
(dollars in thousands) Amount Charged-off Amount Reserves
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves $ 26,853 $3,782 $ 23,071 $ 4,553
Without allocated reserves 13,100 -- 13,100 --
- --------------------------------------------------------------------------------------------------------------------------------
39,953 3,782 36,171 4,553
Troubled debt restructurings:
With allocated reserves 23,607 -- 23,607 3,605
Without allocated reserves 50,197 971 49,226 --
- --------------------------------------------------------------------------------------------------------------------------------
73,804 971 72,833 3,605
Other impaired loans:
With allocated reserves 76,392 290 76,102 13,454
Without allocated reserves 15,016 4,844 10,172 --
- --------------------------------------------------------------------------------------------------------------------------------
91,408 5,134 86,274 13,454
- --------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $205,165 $9,887 $195,278 $21,612
================================================================================================================================
</TABLE>
At December 31, 1995, loans totaling $169.1 million were impaired, of
which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4
million were either nonperforming or previously written down, and had no
reserves allocated to them. Of the $169.1 million of impaired loans, $26.8
million were on nonaccrual status or under foreclosure, and $142.3 million
(including $57.1 million of troubled debt restructurings) were performing but
judged to be impaired. See "--Asset Quality--Classified Assets" and
"Supplemental Consolidated Financial Statements--Note 6: Loans."
Impaired loans and the related allocated reserve for loan losses were
as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Loan Amount Net Loan Allocated
(dollars in thousands) Amount Charged-off Amount Reserves
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves $ 9,853 $1,224 $ 8,629 $ 2,192
Without allocated reserves 19,226 1,113 18,113 --
- ---------------------------------------------------------------------------------------------------------------------------------
29,079 2,337 26,742 2,192
Troubled debt restructurings:
With allocated reserves 16,917 -- 16,917 3,115
Without allocated reserves 40,733 516 40,217 --
- ---------------------------------------------------------------------------------------------------------------------------------
57,650 516 57,134 3,115
Other impaired loans:
With allocated reserves 66,161 33 66,128 11,339
Without allocated reserves 25,665 6,600 19,065 --
- ---------------------------------------------------------------------------------------------------------------------------------
91,826 6,633 85,193 11,339
- ---------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $178,555 $9,486 $169,069 $16,646
=================================================================================================================================
</TABLE>
Interest Rate Risk Management
Washington Mutual engages in a comprehensive asset and liability
management program that attempts to reduce the risk of significant decreases in
net interest income caused by interest rate changes. One of the Company's
strategies to reduce the effect of future movements in interest rates is to
increase the percentage of adjustable-rate assets in its portfolio. During the
first nine months of 1996, the Company securitized and then sold the majority of
the fixed-rate loans it originated, while retaining nearly all of its
adjustable-rate loan production. The Company retained the servicing rights to
the loans that were sold. In addition, as part of the restructuring strategy
initiated in late 1995, the Company purchased adjustable-rate assets and sold
fixed-rate mortgage-backed securities.
A conventional measure of interest rate sensitivity for thrift institutions
is the one-year gap, which is calculated by dividing the difference between
assets maturing or repricing within one year and total liabilities maturing or
repricing within one year by total assets. The Company's assets and liabilities
that mature or reprice within one year were as follows:
<TABLE>
<CAPTION>
(dollars in millions) September 30, 1996 December 31, 1995
- ----------------------------------------------------------------------------- ---------------------------- -----------------------
<S> <C> <C>
Interest-sensitive assets $29,885 $27,733
Derivative instruments designated against assets 1,750 1,825
Interest-sensitive liabilities (33,858) (31,471)
Derivative instruments designated against liabilities 1,799 832
- ----------------------------------------------------------------------------- ---------------------------- -----------------------
Net liability sensitivity $ (424) $(1,081)
============================================================================= ============================ =======================
One-year gap (0.97)% (2.57)%
</TABLE>
The implementation of strategies to reduce interest rate risk, however,
generally has the negative effect of lowering current period earnings. The
Company monitors its interest rate sensitivity and attempts to reduce the risk
of a significant decrease in net interest income caused by a change in interest
rates; nevertheless, rising interest rates or a flat yield curve adversely
affect the Company's operations.
As part of the asset and liability management program, the Company actively
manages the asset and liability maturities and at various times uses derivative
instruments, such as interest rate exchange agreements and interest rate cap
agreements, to reduce the negative effect that rising rates could have on net
interest income. Derivative instruments, if not used appropriately, can subject
a company to unintended financial exposure. Management, in conjunction with the
Company's Board of Directors, has established strict policies and guidelines for
the use of derivative instruments. Moreover, Washington Mutual has used these
instruments for many years to mitigate interest rate risk. Under no
circumstances are these instruments used as techniques to generate earnings by
speculating on the movements of interest rates, nor does the Company act as a
dealer of these instruments. See "Supplemental Consolidated Financial
Statements--Note 18: Interest Rate Risk Management."
At the end of 1995, Washington Mutual's one-year gap was a negative 2.57
percent, compared to a positive 7.76 percent at the end of 1994. While the
one-year gap at December 31, 1995 on a consolidated basis is fairly neutral, the
level of interest sensitivity is not the same throughout the organization. WMB's
one-year gap was a negative 13.3 percent at the end of 1995 due in large part to
the preference of its customers for fixed-rate loan products. Management can
compensate for this preference by selling fixed-rate loans, purchasing
adjustable-rate assets, and strategically using hedging instruments, all of
which were done during 1995. Since the vast majority of interest-earning assets
at ASB are COFI ARM products, however, its one-year gap at the end of 1995 was a
positive 9.6 percent.
At September 30, 1996, interest-sensitive assets of $29.9 billion and
interest-sensitive liabilities of $33.9 billion were scheduled to mature or
reprice within one year. At September 30, 1996, the Company's one-year gap was a
negative 1.0 percent. The Company's interest rate sensitivity has decreased with
the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of ARMs
originated by ASB. It still, however, suffers from some short-term volatility of
net income because of the impact of COFI lag. Management hopes to reduce this
short-term volatility in part by increasing production of non-COFI
adjustable-rate products and short-term fixed-rate products such as consumer
loans. At September 30, 1996, the Company had entered into interest rate
exchange agreements and interest rate cap agreements with notional values of
$14.8 billion. Without these instruments, the Company's one-year gap at
September 30, 1996, would have been a negative 9.0 percent as opposed to a
negative 1.0 percent. See "Supplemental Consolidated Financial Statements--Note
18: Interest Rate Risk Management" for a discussion of the use of derivative
instruments.
Interest sensitivity analysis by maturity or repricing period for
Washington Mutual at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
After one After two After five
0-3 4-12 but within but within but within After
(dollars in millions) months months two years five years 10 years 10 years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Cash, cash equivalents, and trading
account securities(1) $ 1,061 $ -- $ -- $ -- $ -- $ -- $ 1,061
Available-for-sale securities(2) 5,284 2,457 396 1,260 1,248 1,263 11,908
Held-to-maturity securities 3,025 3 1 32 66 71 3,198
Loans(3):
Real estate loans 11,733 2,817 1,410 2,592 1,513 1,368 21,433
Manufactured housing, second mortgage and other
consumer 593 638 499 744 336 81 2,891
Commercial business 94 28 13 24 16 5 180
- ----------------------------------------------------------------------------------------------------------------------------------
12,420 3,483 1,922 3,360 1,865 1,454 24,504
- ----------------------------------------------------------------------------------------------------------------------------------
21,790 5,943 2,319 4,652 3,179 2,788 40,671
Derivative instruments affecting interest
rate sensitivity:
Interest rate exchange agreements:
Designated against available-for-sale securities 775 (75) (200) (500) -- -- --
Interest rate cap agreements:
Designated against available-for-sale securities 1,975 (850) (875) (250) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
2,750 (925) (1,075) (750) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive assets 24,540 5,018 1,244 3,902 3,179 2,788 40,671
Interest-sensitive liabilities:
Deposits(4) 9,799 9,895 3,017 1,495 90 159 24,455
Borrowings and other liabilities 10,870 907 1,165 1,473 151 14 14,580
- ----------------------------------------------------------------------------------------------------------------------------------
20,669 10,802 4,182 2,968 241 173 39,035
Derivative Instruments affecting rate
sensitivity:
Interest rate exchange agreements:
Designated against deposits and
short-term borrowings (663) (159) 485 337 -- -- --
Interest rate cap agreements:
Designated against deposits
and short-term borrowings (10) -- 10 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
(673) (159) 495 337 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 19,996 10,643 4,677 3,306 240 173 39,035
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) sensitivity $ 4,544 $(5,625) $(3,433) $ 597 $2,938 $2,615 $ 1,635
==================================================================================================================================
Cumulative net (liability) asset sensitivity $4,544 $(1,081)
Cumulative net (liability) asset sensitivity as a
percentage of total assets 10.81% (2.57)%
- ----------------------
(1) Includes accrued interest on interest-earning assets.
(2) Excludes mark-to-market adjustment.
(3) Excludes deferred loan fees, reserve for loan losses and premium and
discount on purchased loans.
(4) Excludes premium on purchased deposits. Deposits without stated
maturity are included in the category "Due within 0-3 months."
</TABLE>
While the one-year gap helps provide some information about a financial
institution's interest sensitivity, it does not predict the trend of future
earnings. For this reason, Washington Mutual uses financial modeling to forecast
earnings under different interest rate projections. Although this modeling is
very helpful in managing interest rate risk, it does require significant
assumptions for the projection of loan prepayment rates, loan origination
volumes and liability funding sources that may prove to be inaccurate.
Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No.
115. This statement requires investment and equity securities to be segregated
into three categories: trading, held-to-maturity and available-for-sale.
The available-for-sale portfolio is maintained as a source of investment
income as well as potential liquidity should it be necessary for the Company to
raise cash or reduce its asset size. Because the available-for-sale portfolio is
required to be carried at fair value, its carrying value fluctuates with changes
in market factors, primarily interest rates. This portfolio is substantially
composed of mortgage-backed securities of which approximately 70 percent have
adjustable rates and the remainder have fixed rates. In an attempt to modify the
interest flows on these securities as well as protect against market value
changes, certain interest rate exchange agreements and interest rate cap
agreements have been designated to the available-for-sale portfolio. The effect
of such agreements in a rising interest rate environment is to shorten the
effective repricing period of the underlying assets. Specifically, as short-term
interest rates increase, the overall yield of the portfolio rises. However, the
yield is constrained by periodic and lifetime interest rate adjustment limits or
caps on the underlying adjustable-rate assets and also by the very nature of the
fixed-rate assets in the portfolio. The Company, therefore, seeks to shorten the
repricing period by entering into interest rate cap agreements that are intended
to provide an additional layer of interest rate protection against the effect of
the periodic and lifetime interest rate adjustment limits or caps and fixed-rate
securities in the portfolio. Through the use of specific interest rate cap
agreement provisions, management attempts to reduce the repricing ceiling of the
portfolio and to effectively shorten the repricing period. Thus, the Company has
a degree of interest rate protection when interest rates increase because the
interest rate cap agreements provide a mechanism for repricing the investment
portfolio generally on pace with current market rates. In a similar way,
interest rate exchange agreements are utilized to provide protection in an
increasing rate environment, but also result in sensitivity in a downward
market. There can be no assurance that interest rate exchange agreements and
interest rate cap agreements will provide the Company with protection in all
scenarios or to the full extent of the Company's exposure.
The following table presents the effect interest rate exchange agreements
and interest rate cap agreements would have had on the repricing period of
securities in the available-for-sale portfolio at December 31, 1995 in an
increasing interest rate environment (up 200 basis points) for the period the
derivatives are oustanding:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $ 7,741 $396 $ 3,771 $11,908
Effect of derivative instruments 3,715 -- (3,715) --
- ---------------------------------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $11,456 $396 $ 56 $11,908
=================================================================================================================================
</TABLE>
The following table presents the effect interest rate exchange agreements
and interest rate cap agreements would have had on the repricing period of
securities in the available-for-sale portfolio in a decreasing interest rate
environment (down 200 basis points) for the period the derivatives are
outstanding:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $7,741 $396 $ 3,771 $11,908
Effect of derivative instruments 1,165 -- (1,165) --
- ---------------------------------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $8,906 $396 $ 2,606 $11,908
=================================================================================================================================
</TABLE>
Liquidity
Liquidity management focuses on the need to meet both short-term
funding requirements and long-term growth objectives. The long-term growth
objectives of the Company are to attract and retain stable consumer deposit
relationships and to maintain stable sources of wholesale funds. Because the low
interest rate environment of recent years inhibited consumer deposits,
Washington Mutual has supported its growth through business combinations with
other financial institutions and by increasing its use of wholesale borrowings.
Should the Company not be able to increase deposits either internally or through
acquisitions, its ability to grow would be dependent upon, and to a certain
extent limited by, its borrowing capacity.
Washington Mutual monitors its ability to meet short-term cash
requirements using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing capacity is sufficient to satisfy unanticipated cash needs. The
volatile dependency ratio measures the degree to which the Company depends on
wholesale funds maturing within one year weighted by the dependability of the
source. At September 30, 1996, the Company had substantial liquidity compared
with its established guidelines.
The Company also computes ratios promulgated by the FDIC to monitor the
liquidity position of WMB. The regulatory liquidity ratio measures WMB's ability
to use liquid assets to meet unusual cash demands. The regulatory dependency
ratio measures WMB's reliance upon potentially volatile liabilities to fund
long-term assets. WMB manages both ratios to remain within the acceptable ranges
and, at September 30, 1996, met the established FDIC guidelines.
Washington Mutual's major sources of funds are the collection of loan
principal and interest payments, attracting deposits, and borrowing from the
FHLB of Seattle and San Francisco and elsewhere. In addition, Washington Mutual
is able to generate funds through the sale of loans and investment securities
available for sale. The Company uses these funds primarily to originate loans
and maintain its investment portfolio. See "Supplemental Consolidated Financial
Statements--Consolidated Statements of Cash Flows."
At September 30, 1996, the Company's banking subsidiaries were able to
borrow an additional $10.8 billion through the use of collateralized borrowings
using unpledged mortgage-backed securities and other wholesale sources. The
ability of the Company's banking subsidiaries to make dividends to the Company
is influenced by legal, regulatory and economic restrictions.
OTS regulations require that ASB and WMBfsb maintain for each calendar
month an average daily balance of liquid assets at least equal to 5.00 percent
of the prior month's average daily balance of net withdrawable deposits plus
borrowings due within one year. At September 30, 1996, ASB's liquid assets
consisted of currency, cash in banks, short-term investments in federal funds
and bankers acceptances. Also included were mortgage-backed securities with
maturities of five years or less. ASB's liquidity ratio was 6.23 percent, 5.29
percent and 5.04 percent at September 30, 1996, December 31, 1995 and December
31, 1994, respectively.
In November 1996, Washington Mutual received a commitment for two Revolving
Credit Facilities: a $100.0 million 364-day facility and a $100.0 million 4-year
facility. Chase Manhattan Bank will act as Administrative Agent for the
Facilities. Proceeds of the Facilities are available for potential funding needs
at the closing of the merger with Keystone Holdings, including redemption of the
New Capital securities and for general corporate purposes.
Capital Requirements
At September 30, 1996, Washington Mutual's banking subsidiaries
exceeded all current regulatory capital requirements and were classified as well
capitalized institutions, the highest regulatory standard. In order to be
categorized as a well capitalized institution, the FDIC and the Office of Thrift
Supervision (the "OTS") require banks they regulate 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.
Regulatory capital ratios of WMB, WMBfsb and ASB were the following:
<TABLE>
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
WMB WMBfsb ASB
- ------------------------------------------------------- ----------------------- --------------------------- ---------------------
<S> <C> <C> <C>
FDIC capital ratios:
Leverage 5.63% --% --%
Tier 1 risk-based 10.19 -- --
Total risk-based 10.99 -- --
OTS capital ratios:
Tangible -- 6.75 5.21
Leverage -- 6.75 5.22
Risk-based -- 11.42 10.46
</TABLE>
WM Life is subject to risk-based capital requirements developed by the
National Association of Insurance Commissions. This measure uses four major
categories of risk to calculate an appropriate level of capital to support an
insurance company's overall business operations. The four risk categories are
asset risk, insurance risk, interest rate risk and business risk. At December
31, 1995, WM Life's capital was 672 percent of its required regulatory
risk-based level.
The Company's securities subsidiaries are also subject to capital
requirements. At December 31, 1995, all of Washington Mutual's securities
subsidiaries were in compliance with their applicable capital requirements.
BUSINESS
The Company
With a history dating back to 1889, Washington Mutual is a regional
financial services company committed to serving consumers and small to mid-sized
businesses throughout the Western United States. Through its subsidiaries, the
Company engages in the following activities:
Mortgage Lending and Consumer Banking Activities. Through its principal
subsidiaries, Washington Mutual Bank, American Savings Bank, F.A., and
Washington Mutual Bank fsb, at September 30, 1996, the Company operated 412
financial centers and 86 loan centers offering a full complement of mortgage
lending and consumer banking products and services. For the nine months ended
September 30, 1996, WMB was the leading originator of first-lien single-family
residential loans in Washington and Oregon, and ASB was the second largest in
California.
Commercial Banking Activities. Through the commercial banking division of
WMB, at September 30, 1996, the Company operates 47 full-service business
branches offering a range of commercial banking products and services to small
to mid-sized businesses. WMB commenced its commercial banking activities through
the acquisition of Enterprise in 1995 and Western in 1996.
Insurance Activities. Through WM Life Insurance Co. and Mortgage Securities
Services Insurance Agency, Inc., the Company underwrites and sells annuities and
sells a range of life insurance contracts, and selected property and casualty
insurance policies.
Brokerage Activities. Through ASB Financial Services, Inc., Murphey Favre,
Inc. and Composite Research and Management Co., the Company offers full service
securities brokerage and acts as the investment advisor to and the distributor
of mutual funds.
The Company operates in Washington, California, Oregon, Utah, Idaho,
Montana, Arizona, Colorado and Nevada. These operations constitute one of the
largest banking franchises in the Western United States and serve more than 1.3
million households. At September 30, 1996, the Company had consolidated assets
of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of $2.4
billion.
In December 1996, Washington Mutual consummated the merger of Keystone
Holdings with and into the Company and certain other transactions in connection
therewith and thereby acquired ASB. Washington Mutual issued 47,883,333 shares
of Common Stock in the Transaction. At September 30, 1996, ASB had assets of
$21.3 billion and deposits of $12.9 billion and operated 158 branches and 61
loan centers, substantially all of which were located in California.
Washington Mutual intends to continue operating ASB under the name
"American Savings Bank" in ASB's markets and has retained a significant number
of ASB's management team to guide ASB's operations. Washington Mutual intends to
introduce its consumer banking products and approaches throughout ASB's branch
system and to expand ASB's loan origination capabilities.
The Reorganization
Washington Mutual was formed in August 1994 by its predecessor, Washington
Mutual Savings Bank ("WMSB"), a former Washington state-chartered savings bank,
for the purpose of serving as a holding company in the reorganization of WMSB
into a holding company structure (the "Reorganization"). The Reorganization was
completed in November 1994 through the merger of WMSB into WMB, with WMB as the
surviving entity. As a result of the Reorganization, Washington Mutual became
the parent company of the companies of which WMSB was, prior to the
Reorganization, the parent company.
As a result of the Reorganization, all common and preferred shareholders of
WMSB became shareholders of Washington Mutual on a one-for-one basis with
substantially the same relative rights, privileges and preferences. Except as
noted otherwise, references in this Prospectus to "Washington Mutual" or the
"Company" refer to both (i) Washington Mutual, Inc. and its consolidated
subsidiaries after the consummation of the Reorganization; and (ii) WMSB and its
consolidated subsidiaries prior to the consummation of the Reorganization.
Business Strategy
In 1995, Washington Mutual revised its strategic plan to position the
Company for higher levels of future profitability and growth. The main elements
of this strategic plan are:
Strengthen the Company's consumer banking franchise throughout the West.
The Company focuses on increasing the number of households served within its
market areas and the scope of its customer relationships. Washington Mutual
primarily attracts new customers by offering competitive consumer-oriented
deposit products, including "Free Checking" and money market accounts. The
Company actively markets to its customers residential mortgages and a variety of
higher margin consumer loan products, including manufactured housing loans, home
equity loans and lines of credit, automobile and boat loans, student loans, and
unsecured consumer loans; as well as investment products, including mutual funds
and annuities. To further its penetration within its principal markets,
Washington Mutual delivers its products through several alternative distribution
channels that allow it to target sub-markets within its franchise area. These
alternative delivery channels complement the Company's freestanding financial
center network and include in-store financial centers, loan centers, interactive
banking kiosks, and telephone banking operations. The Company plans to
strengthen its franchise through the continued introduction of its consumer
products to all of its market areas; targeted de novo branch openings; and
selected in-market acquisitions.
Expand the commercial banking franchise. The Company is developing and
growing a commercial banking presence in Washington, Oregon, and Idaho. The
commercial banking division of WMB, which operates primarily as "Western Bank,"
focuses on serving the needs of small to mid-sized businesses and offers a full
range of commercial banking products, including business checking accounts and
secured and unsecured loans. The lending activities of the commercial banking
division generally provide higher margins than the Company's residential
mortgage lending activities. The Company plans to expand its commercial banking
activities within its existing market areas and eventually to other parts of the
Company's franchise.
Decrease sensitivity to interest rate movements. The Company intends to
decrease the sensitivity of its net interest income to movements in market
interest rates. Through purchases and sales of loans and mortgage-backed
securities and the retention of internally originated ARMs, the Company has
decreased the percentage of fixed-rate assets and increased the percentage of
adjustable-rate assets in its loan and investment portfolios in order to more
closely match its liability base. The acquisition of ASB with its portfolio of
adjustable-rate loans has furthered this strategy.
Maintain asset quality. Management is committed to maintaining a
conservative credit culture even as it pursues growth and diversification
opportunities in new markets and product areas. The Company has targeted a one
percent nonperforming assets to total assets ratio of one percent or less as a
credit quality policy objective.
Operate more efficiently. The Company has a long-term target of reducing
its ratio of operating expenses to revenues to 50 percent or lower. To that end,
the Company has undergone an extensive process reengineering review and
introduced a number of initiatives to manage expense levels and improve
productivity, including the consolidation and outsourcing of certain back office
functions and the development of new banking systems and software applications.
The Company historically has used acquisitions of other financial
institutions to further its strategic plan. Since 1988, the Company has
completed 16 acquisitions, two of which were commercial banks, which have
expanded the Company's geographic service area beyond the state of Washington.
The Company anticipates that acquisitions will continue to be an important
element of its strategic plan in the future.
<PAGE>
Washington Mutual's Operating Subsidiaries
Washington Mutual Bank. WMB's principal business is providing a broad
range of financial services, primarily to consumers. These services include
accepting deposits from the general public and making residential mortgage
loans, consumer loans and limited types of commercial real estate loans,
primarily loans secured by multi-family properties. Beginning in the latter half
of 1995, WMB, through its mergers with Enterprise and Western, diversified its
traditional activities into commercial banking.
At September 30, 1996, WMB had assets of $20.4 billion, deposits of
$11.0 billion and operated 228 financial centers, of which 156 were in
Washington and 72 were in Oregon; 21 loan centers, of which 14 were in
Washington and seven were in Oregon; and 47 full-service business branches, of
which one was in Washington and 46 were in Oregon. WMB operates under Title 32
(Mutual Savings Banks) of the Revised Code of Washington. Its deposits are
insured by the FDIC through the BIF and the SAIF.
American Savings Bank, F.A. ASB's principal business is accepting
deposits from the general public and making residential mortgage loans and loans
secured by multi-family properties. At September 30, 1996, ASB had assets of
$21.3 billion, deposits of $12.9 billion and operated 158 branches in California
and 63 loan offices in California and Arizona. In November 1996, ASB opened two
loan offices in Colorado and one in Nevada. ASB's deposits are insured by the
FDIC through the SAIF.
Washington Mutual Bank fsb. WMBfsb's principal business includes
accepting deposits from the general public and making residential loans,
consumer loans and limited types of commercial real estate loans, primarily
loans secured by multi-family properties. At September 30, 1996, WMBfsb had
assets of $889.7 million, deposits of $323.4 million, and operated 26 financial
centers, of which 17 were in Utah, seven were in Idaho, two were in Montana and
one was in Oregon, and operated one loan center in Idaho and one in Utah. On
November 30, 1996, WMBfsb acquired Utah Federal, which at September 30, 1996,
operated five branches and two loan production offices in Utah and had assets of
$122.2 million, deposits of $106.9 million and stockholders' equity of $11.9
million. WMBfsb's deposits are insured by the FDIC through the SAIF.
WM Life Insurance Company. WM Life, an Arizona-domiciled life insurance
company, is licensed under state law to issue annuities in seven states. In
addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is currently
licensed under state law to issue annuities in 28 states. WM Life currently
issues fixed and variable flexible premium deferred annuities, single premium
fixed deferred annuities and single premium immediate annuities. Empire
currently issues fixed flexible premium deferred annuities and single premium
immediate annuities. Both companies conduct business through licensed
independent agents. The majority of such agents are employees of affiliates of
the Company and operate in WMB's financial centers. Annuities presently are
issued primarily in Washington and Oregon. At September 30, 1996, WM Life had
assets of $1.1 billion.
Mortgage Securities Services Insurance Agency, Inc. Mortgage Services
is a registered insurance broker that offers a wide array of products, including
life and property and casualty insurance and annuities, in California.
ASB Financial Services, Inc. ASB Financial is a registered
broker-dealer that distributes a broad array of mutual funds in California. ASB
Financial representatives are available for consultation regularly or by
appointment in many of ASB's branches.
Composite Research & Management Co. Composite Research is a registered
investment advisor. Composite Research is the investment advisor of eight mutual
funds. At September 30, 1996, Composite Research had a total of $1.3 billion in
funds under management in the eight mutual funds.
Murphey Favre, Inc. Murphey Favre is a registered broker-dealer that
offers a broad range of securities brokerage services, including distribution of
mutual funds in Washington, Oregon, Idaho, Utah and Montana. Murphey Favre has
seven free-standing offices, and Murphey Favre representatives are available for
consultation regularly or by appointment in many of WMB's financial centers.
Lending Activities
General. The Company's lending activities are carried on through its
banking subsidiaries, WMB, ASB and WMBfsb. At September 30, 1996, the Company's
total loan portfolio (carried at historical cost) of $28.7 billion (exclusive of
reserve for loan losses) included $21.0 billion in mortgage loans secured by
first liens on 1 to 4 family residential properties; $669.0 million in
residential construction loans; $3.7 billion in mortgage loans secured by
commercial real estate such as apartment buildings, office buildings,
warehouses, shopping centers and medical office buildings; $3.1 billion in
consumer loans; and $295.3 million in commercial business loans. For a
discussion of the fair value of the loan portfolio, see "Supplemental
Consolidated Financial Statements--Note 30: Fair Value of Financial
Instruments."
Washington state law gives state-chartered savings banks such as WMB
broad lending powers, subject to certain statutory restrictions on total
investment in different types of loans. WMB may make loans secured by
residential and commercial real estate, secured and unsecured consumer loans,
and secured and unsecured commercial loans. ASB and WMBfsb have somewhat
narrower lending authority, but can make loans secured by residential and
commercial real estate, certain secured and unsecured consumer loans, and a
limited amount of secured and unsecured commercial loans.
In originating loans, the Company must compete directly with other savings
banks, savings and loan associations, commercial banks, credit unions, mortgage
companies and life insurance companies (primarily in the commercial real estate
area) and indirectly with government-sponsored entities ("GSEs") such as the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Government National Mortgage Association ("GNMA").
In addition, the Company's lending activities are heavily influenced by economic
trends affecting the availability of funds and by general interest rate levels
as well as by competitive factors such as the lower cost structure of less
regulated originators and the influence of government-sponsored entities in
establishing rates. The condition of the construction industry and the demand
for housing also directly affect residential lending volumes.
In addition to interest earned on loans, the Company receives fees for
originating loans and for providing loan commitments. The Company also charges
fees for loan modifications, late payments, changes of property ownership and
other miscellaneous services. Fees received in connection with loan originations
are deferred and amortized into interest income over the life of the loan. The
Company also receives fees for servicing loans for others.
For the periods indicated, the Company's loans consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------- ----------------------------- --------------------------- -------------------
% of % of % of
(dollars in thousands) Amount Total Amount Total Amount Total
- ----------------------------------------- ----------------------------- --------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential:
Fixed rate loans $16,678,649 58.1% $13,611,786 55.7% $14,341,202 55.8%
Adjustable rate loans 4,298,543 15.0% 3,691,519 15.1% 3,425,013 13.3%
Residential construction loans 668,976 2.3% 615,814 2.5% 549,271 2.1%
Apartment buildings 2,473,925 8.6% 2,310,344 9.5% 3,497,582 13.6%
Other commercial real estate 1,258,760 4.4% 1,177,230 4.8% 1,201,638 4.7%
loans
- ----------------------------------------- ----------- ------ ----------- ----- ------------ -------
Total real estate loans 25,378,853 88.3% 21,406,693 87.6% 23,014,706 89.5%
Second mortgage and other consumer loans 2,078,073 7.3% 1,974,673 8.1% 1,841,613 7.2%
Manufactured housing loans 978,909 3.4% 867,181 3.6% 731,714 2.8%
Commercial business loans 295,263 1.0% 179,568 0.7% 129,048 .5%
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $28,731,098 100.0% $24,428,115 100.0% $25,717,081 100.0%
===================================================================================================================================
</TABLE>
Residential loans comprised 64.9, 69.7 and 69.1 percent of total loans
at December 31, 1993, 1992 and 1991, respectively. Residential construction
loans comprised 2.0, 2.2 and 2.4 percent of total loans at December 31, 1993,
1992 and 1991, respectively. Commercial real estate loans comprised 21.2, 19.0
and 18.3 percent of total loans at December 31, 1993, 1992 and 1991,
respectively. Manufactured housing, second mortgage and other consumer loans,
and commercial business loans comprised 11.3 and 8.5, 9.4 and 0.6, and 0.7 and
0.8 percent of total loans at December 31, 1993, 1992 and 1991, respectively.
At September 30, 1996, loans, exclusive of reserve for loan losses, by
geographic concentration were as follows:
<TABLE>
<CAPTION>
Other
(dollars in thousands) California Washington Oregon Utah States Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $12,214,647 $6,245,015 $1,695,022 $230,860 $ 591,648 $20,977,192
Residential construction -- 355,498 247,639 44,582 21,257 668,976
Apartment buildings 1,551,243 556,446 249,233 57,098 59,905 2,473,925
Other commercial real estate 358,789 406,153 357,548 30,847 105,423 1,258,760
- ---------------------------------------------------------------------------------------------------------------------------------
14,124,679 7,563,112 2,549,442 363,387 778,233 25,378,853
Second mortgage and other consumer 89,994 1,131,229 529,647 23,693 303,510 2,078,073
Manufactured housing 106,569 443,534 219,935 31,663 177,208 978,909
Commercial business -- 108,065 185,944 104 1,150 295,263
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans $14,321,242 $9,245,940 $3,484,968 $418,847 $1,260,101 $28,731,098
- ---------------------------------------------------------------------------------------------------------------------------------
Loans as a percentage of total loans 50% 32% 12% 1% 5% 100%
</TABLE>
Residential Loans.
General. Primarily as a result of recent business
combinations, the size of the Company's residential loan portfolio has increased
dramatically. The bulk of the Company's residential loan portfolio is focused in
California, Washington and Oregon.
All of the Company's residential mortgage lending is subject to
nondiscriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market. All
loans are subject to underwriting review and approval by various levels of
Company personnel, depending on the size of the loan.
The Company requires title insurance on all first liens on real
property securing loans and also requires that fire and casualty insurance be
maintained on properties in an amount at least equal to the total of the
Company's loan amount plus all prior liens on the property or the replacement
cost of the property, whichever is less.
Mortgage insurance currently is required on all residential real estate
loans originated at a loan-to-value ratio of above 90 percent. Any exceptions
must be reported to the board of directors of the subsidiary bank issuing the
credit. At September 30, 1996, six percent of the Company's residential real
estate loan portfolio had loan-to-value ratios of 90 percent or above at
origination and were without mortgage insurance.
Under federal regulations, a real estate loan may not exceed 100
percent of the appraised value of the property at the time of origination. In
addition, savings associations are required by regulation to adopt written
policies that establish appropriate limits and standards for real estate loans
and to consider certain regulatory guidelines in establishing these policies.
These guidelines specify that savings associations should not originate any
commercial, multi-family or nonowner-occupied 1 to 4 family mortgage loan with
an initial loan-to-value ratio in excess of 85 percent. The guidelines further
provide that savings associations should not originate any owner-occupied 1 to 4
family mortgage loan with a loan-to-value ratio that equals or exceeds 90
percent at origination, unless such loan is protected by an appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral. These real estate lending guidelines recognize that it may be
appropriate for a savings association to originate mortgage loans with
loan-to-value ratios exceeding these specified levels, provided that the
aggregate amount of all loans in excess of these limits does not exceed a
specified level of such association's total capital and such loans are
identified in the association's records and reported at least quarterly to its
board of directors.
WMB and WMBfsb Residential Lending. WMB makes available to
borrowers in Washington and Oregon a full range of residential loans, including
FHA-insured and VA-guaranteed loans, conventional fixed-rate loans for terms of
five, 15 or 30 years, and ARMs. WMBfsb makes the same loan products available to
customers in Utah, Montana and Idaho.
ARMs are advantageous to the Company because adjustable-rate loans
better match its natural liability base. However, WMB's and WMBfsb's ability to
originate ARMs in lieu of fixed-rate loans has varied in response to changes in
market interest rates. Between 1992 and 1993, ARMs constituted less than 25
percent of WMB's residential loan originations, reflecting continuing lower
market interest rates. When interest rates rose in 1994, ARMs totaled 62 percent
of WMB's residential loan originations. However, interest rates declined in
mid-1995 and, as a result, ARMs totaled 32 percent of WMB's and 28 percent of
WMBfsb's residential loan originations during 1995. For the nine months ended
September 30, 1996, ARMs accounted for 35 percent of WMB's and 33 percent of
WMBfsb's residential loan originations.
Under WMB's and WMBfsb's current ARM programs, the borrower may choose
among loans that have the initial interest rate fixed for one, three or five
years before the adjustments begin. Currently, such ARMs are indexed to the
one-year Constant Maturity Treasury Index and have annual caps of two percent.
Under most options, the borrower may elect, between the sixth and the sixtieth
months, to convert to a fixed-rate loan payable over the remainder of the
original term. There is no conversion fee, and the fixed interest rate is
indexed to the then-current required net yield for loans sold to FNMA.
The majority of WMB and WMBfsb's loan originations satisfy all requirements
to make them salable in the secondary market. In both 1995 and the first nine
months of 1996, WMB securitized and sold approximately 47 percent of its newly
originated fixed-rate loans. The remainder were retained in WMB's portfolio. Of
its newly originated adjustable-rate loans, 53 percent were securitized with
recourse (see "--Loan Securitization") and 47 percent of the total were retained
in WMB's portfolio.
WMB and WMBfsb originate loans through all of their branches as well as
through home loan centers and loan representatives located in real estate
brokers' offices. In addition, a small portion of their originations comes
through loan brokers. WMB was the leading originator of first lien residential
mortgage loans in both Washington and Oregon for the nine months ended September
30, 1996.
ASB Residential Lending. ASB offers an array of mortgage products to
customers in California, Arizona, Nevada and Colorado. The primary products are
COFI ARMs that adjust monthly with maturities up to a maximum of 40 years;
mortgages that have a fixed initial rate for up to five years and then reprice
monthly at a set margin over COFI until maturity ("Flex-5 Loans") and fixed-rate
15, 20 and 30 year mortgages. For the nine months ended September 30, 1996,
substantially all of ASB's 1996 ARM residential loan originations were indexed
to COFI.
As interest rates increased in the latter part of 1994 and the first half
of 1995, the rates on COFI ARMs rose and the difference between those rates and
the rates on fixed rate loans narrowed. As a result, the origination volume of
fixed-rate loans at ASB increased while the origination volume on
adjustable-rate loans stabilized. The same conditions also made the Flex-5 loans
more popular. Nevertheless, because ASB sells virtually all of its fixed-rate
product on the secondary market, its portfolio is comprised almost entirely of
ARMs. At September 30, 1996, ASB's gross loan balance consisted of 97 percent
ARMs and 3 percent fixed-rate loans. The majority of the ARMs adjust monthly to
a predetermined margin over COFI.
The monthly payments on substantially all of ASB's ARMs adjust annually
with the adjustment limited to 7.5 percent per year (except at the end of each
five-year interval during the life of the loan, when the payment may be adjusted
by more than 7.5 percent to assure that the loan will amortize over the
remaining term). These protections for borrowers can result in monthly payments
that are greater or less than the amount necessary to amortize a loan by its
maturity at the interest rate in effect in any particular month. In the event
that a monthly payment is not sufficient to pay the interest accruing on the
loan, the shortage is added to the principal balance and is repaid through
future monthly payments. This is referred to as negative amortization. The
portion of outstanding loan principal arising from negative amortization was
$26.5 million at September 30, 1996.
The majority of ASB's fixed-rate loan originations are salable in the
secondary market either through FNMA or, in the case of loans with balances
larger than the FNMA/FHLMC limit for conforming loans ("Jumbo loans"), to
private investors. For the nine months ended September 30, 1996, all of such
originations (12 percent of total originations) have been sold. The remainder of
ASB's originations, approximately 88 percent of the total for the nine months
ended September 30, 1996, are intended for ASB's portfolio. These loans are
almost entirely COFI ARMs.
One of the primary market segments in which ASB originates loans for its
portfolio is that group of borrowers who are creditworthy, but for one reason or
another are unable to provide some of the documentation required to meet agency
secondary market rules. These loans are referred to as low documentation (or
alternative documentation) loans. Approximately 47 percent of ASB's 1996
portfolio originations consist of low documentation loans. The documentation
which is omitted generally relates to the credit or employment history of the
borrower and not to the value of the collateral. All low documentation loans are
fully supported by appraisals and title insurance. In addition, the maximum
loan-to-value ratio on low documentation loans is 80 percent and the required
ratio drops as the amount of the loan increases. The average loan-to-value ratio
on all low documentation loans originated in the nine months ended September,
30, 1996 is 68 percent. Low documentation loans are generally priced at a
premium to FNMA or FHLMC conforming loans.
The delinquency experience on low documentation loans originated by ASB
in 1994, 1995 and 1996 is comparable to the experience on ASB's COFI ARM
portfolio as a whole. The delinquency experience on ASB's portfolio as a whole
has historically been higher than the delinquency experience at WMB and WMBfsb.
ASB does not originate residential mortgage loans in its branches. All
direct originations (54.3 percent of total residential originations for the nine
months ended September 30, 1996) are through its 63 loan centers. In addition,
ASB indirectly originates loans through independent mortgage brokers throughout
the state of California. Indirect originations accounted for 45.7 percent of
total residential loan originations for the nine months ended September 30,
1996.
ASB's wholesale mortgage broker distribution channel was established in
1991 to serve geographic regions not covered by residential loan centers.
Initially the participating brokers were primarily in northern California but in
1993 the program was expanded to the rest of the state. Participation grew
through 1994 and 1995 and it has become a significant element of ASB's overall
lending strategy, including in its more recently opened loan production offices
in Arizona, Colorado and Nevada. To monitor credit quality, ASB conducts
extensive due diligence and reviews the stability and credit experience of each
broker prior to accepting any loan packages. Loan production from the wholesale
channel is subjected to the same underwriting standards as loan production from
the residential loan centers. All underwriting decisions are made by ASB
personnel.
ASB was the second largest originator of first lien residential
mortgage loans in California for the nine months ended September 30, 1996.
Residential Construction Loans. WMB and WMBfsb provide financing for
two different categories of residential construction loans. A custom
construction loan is made to the intended occupant of a house to finance its
construction. Speculative construction loans are made to borrowers who are in
the business of building homes for resale. Speculative construction loans are
made either on a house-by-house basis or, in certain circumstances, through a
collateralized, limited line of credit. Speculative construction lending
involves somewhat more risk than custom construction loans and involves
different underwriting considerations. All construction loans require approval
by various levels of Company personnel, depending on the size of the loan.
Construction loans for nonconforming residential properties (properties other
than single-family detached houses) are subject to more stringent approval
requirements than loans for conforming properties.
Residential construction loans are an integral part of WMB's overall
lending program. Construction loans are of short duration, generally 12 to 18
months, and have adjustable rates so they are an important element in the
Company's interest rate sensitivity management. Speculative construction loans
are generally priced at a higher spread then permanent residential loans.
In addition, the residential construction loan program provides a
source of permanent loans. Most custom construction loans have provisions for
conversion to permanent loan status upon completion of construction. Speculative
construction loan builders are a good source of referrals when their buyers need
financing. WMB has a program under which it waives certain closing fees for
borrowers who are buying homes for which WMB provided construction financing.
At September 30, 1996, 57 percent of the residential construction
portfolio was custom construction loans and 43 percent was speculative
construction loans. The demand for residential construction loans is sensitive
to the same factors as the market for residential loans generally. Lower market
interest rates help to improve the market for houses generally and this in turn
stimulates new construction. As a result, originations of residential
construction loans in the first nine months of 1996 totaled $973.4 million, an
increase of 44 percent from $674.2 million for the first nine months of 1995
ASB has never originated any residential construction loans.
Commercial Real Estate Loans.
General. Commercial real estate lending generally entails
greater risks than residential mortgage lending. Commercial real estate loans
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties usually depends on the successful
operation of the related real estate project and thus may be subject, to a
greater extent, to adverse conditions in the real estate market or in the
economy generally. In recent years, commercial real estate values in many areas
of the country have substantially declined, particularly in California, as a
result of excess supply and weak economies.
In all commercial real estate lending, the Company considers the
location, marketability and overall attractiveness of the project. Washington
Mutual's current underwriting guidelines for commercial real estate loans
require an economic analysis of each property with regard to the annual revenue
and expenses, debt service coverage and fair value to determine the maximum loan
amount. Commercial real estate loans require approval at various levels of
Company personnel, depending on the size of the loan.
WMB and WMBfsb Commercial Real Estate Lending. The Boards of
Directors of both WMB and WMBfsb have adopted lending policies that generally
limit future commercial real estate loan originations to Washington, Oregon,
Idaho, Utah, Montana and contiguous states. WMB's existing commercial real
estate loan portfolio is principally concentrated in Washington, Oregon and
California. WMBfsb's commercial real estate loan portfolio is concentrated in
Utah and Montana.
During the past few years, WMB focused its commercial real estate
lending on small to mid-sized apartment lending (loans of $2.5 million or less).
The focus on apartment lending has been altered by the Company's diversification
into commercial banking. Both the Enterprise and Western commercial real estate
portfolios consisted of predominately nonresidential commercial real estate.
However, the relatively small size of both Enterprise and Western before they
were merged with WMB placed constraints on the size and to some extent the type
of loans they could make. For example, the individual loan size limitations made
meaningful participation in office building and urban retail loans impossible.
With the added flexibility provided by WMB's size, the size and also the types
of commercial real estate loans that WMB will be able to make will change; this
will generally increase the risk characteristics of the commercial loan
portfolio.
ASB Commercial Real Estate Lending. ASB's commercial real
estate portfolio is concentrated in California. Due to ASB's past desire to
remain a "traditional thrift lender," management historically did not emphasize
commercial loan originations other than for apartment properties. No commercial
loans, other than apartment loans, have been originated by ASB since 1994, at
which time such commercial loans represented approximately 1 percent of total
loan originations by principal balance. Because of credit weaknesses in the
small to mid-sized apartment house market in California, in 1994, ASB tightened
its underwriting of apartment property loans. Due to tightened underwriting
standards, apartment loan originations have declined as a percentage of the
total from 10.9 percent in 1994 to 5.3 percent in 1995 and 4.7 percent for the
first nine months of 1996. From time to time, ASB originates mobile-home loans
and refinances its existing commercial loans.
Under OTS regulations, a savings association may invest in commercial
real estate loans up to 400 percent of its total risk-based capital. ASB was in
compliance with this limitation at September 30, 1996. The amount of apartment
lending and residential lending is not limited by federal regulation.
Commercial Real Estate Portfolio Management. In order to
monitor its commercial real estate loan portfolio, the Company periodically (i)
inspects real estate collateral based on the loan risk classification, the loan
size and the location of the collateral; (ii) analyzes the economic condition of
markets in which the Company has a geographic concentration; and (iii) reviews
operating statements and rent rolls, updated financial and tax statements of
borrowers, evidence of insurance coverage and evidence that real estate taxes
have been paid. These procedures are designed to analyze the economic viability
of the property and to determine whether or not the debt service coverage and
loan-to-value ratios remain consistent with the Company's underwriting policies.
It is the intention of management to perform a continual review of the
commercial real estate loan portfolio in light of the condition of the real
estate market. Based upon the above procedures, the Company classifies loans
that fall below underwriting standards into various risk or watch categories.
Loan Securitization. The Company from time to time, depending on its
asset and liability management strategy, converts a portion of its loan
portfolio into either FHLMC participation certificates, GNMA mortgage-backed
securities or FNMA conventional mortgage-backed securities, (collectively "GSE
MBS"). This securitization of its loans provides the Company with increased
liquidity both because the mortgage securities are more readily marketable than
the underlying loans and because they can be used as collateral for borrowing.
WMB has historically securitized its fixed-rate loan production with the
intent to sell those MBS in the secondary market and also from time to time
securitizes other loans and retains the resulting MBS as investment securities.
ASB generally securitizes substantially all of its fixed-rate production for
potential sale in the secondary market. Loans securitized through GSEs for sale
in the secondary market are sold without recourse and become obligations of the
applicable GSE. Generally, the servicing of the loans is retained by the Company
with the servicing fee income fixed by the relevant GSE.
In 1995 and 1996, the Company securitized loans with FHLMC and FNMA under
programs in which the owner of the MBS has recourse against the originator of
the loans rather than the GSE. These MBS are generally salable in the secondary
market and can be used as collateral for borrowings and to meet regulatory
liquidity requirements. Generally, however, MBS created under this program are
retained by the originator, and the Company has retained the majority of MBS
created under these programs. In 1995, ASB created a real estate mortgage
investment conduit (a "REMIC") by means of which it securitized a pool of loans
consisting of $1.2 billion in apartment loans and $200.0 million of its Flex-5
Loans. To date, ASB has not sold any portion of this REMIC and the entire amount
is still owned by ASB with full recourse. The Company has, however, sold
securitized loans with recourse. At September 30, 1996, the Company's total
recourse obligation with respect to securitized loans was $6.8 billion, of which
$989.1 million represented the retained recourse obligation from securitized
loans which had been sold.
When MBS composed of loans originated by the Company's banking
subsidiaries are owned by such banking subsidiaries, they are serviced in the
same manner as any other loan in the loan portfolio. In addition, when loans
sold with recourse become nonperforming, the loans and the associated collateral
properties are included in the Company's total nonperforming assets.
Manufactured Housing, Second Mortgage and Other Consumer Loans. WMB and
WMBfsb offer consumer loan programs in Washington, Oregon, Utah, Idaho and
Montana that include: (i) manufactured housing loans; (ii) second mortgage loans
for a variety of purposes, including purchase, renovation, or remodeling of
property, and for uses unrelated to the security; (iii) loans for the purchase
of automobiles, pleasure boats and recreational vehicles; (iv) student loans;
and (v) loans for general household purposes, including loans made under
Washington Mutual's secured line of credit programs. Consumer loans, in addition
to being an important part of the Company's orientation toward consumer
financial services, promote greater net interest income stability because of
their somewhat shorter maturities and faster prepayment characteristics. The
size of the consumer loan portfolio has grown in recent years. It is
management's intention to introduce these products into ASB's service area.
Lending in this area may involve special risks, including decreases in the value
of collateral and transaction costs associated with foreclosure and
repossession.
Consumer loans generally are secured loans and are made based on an
evaluation of the collateral and the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. Secured consumer loan
amounts typically do not exceed 80 percent of the value of the collateral, less
the outstanding balance of any first-mortgage loan. Manufactured housing loans
do not exceed 90 percent of the value of the collateral plus taxes and other
costs. Additional limitations may be based on the customer's income, credit
history and other factors showing creditworthiness, and lines of credit are
subject to periodic review, revision and, when deemed appropriate by the
Company, cancellation as a result of changes in the borrower's financial
circumstances.
As a result of the acquisition of Pacific First, the amount of loans in
the Company's portfolio that were for the purchase of recreational vehicles,
pleasure boats and automobiles increased. While Washington Mutual is authorized
to make these loans, they have not been a significant part of the Company's
consumer loan business in recent years. At September 30, 1996, the Company's
portfolio included $74.5 million of recreational vehicle loans, $42.2 million of
boat loans and $70.2 million of automobile loans. The other acquisitions
completed from 1993 through 1996 did not have a material effect on the Company's
consumer loan portfolio.
ASB has originated various types of consumer loans that are generally
unsecured lines of credit and loans that are secured by personal property. These
loans have historically been provided as a service to ASB's existing customers
and have not represented a significant portion of its business. In the first
quarter of 1994, ASB discontinued its credit card operations and sold its entire
credit card portfolio for a gain of $25.0 million
Commercial Business Loans. The Company's commercial business loans are
mainly loans to small to mid-sized businesses and to individuals, secured by a
variety of business and personal assets, real estate and equipment or are in
some cases unsecured. They are originated through WMB's commercial banking
division which, at September 30, 1996, accounted for $1.1 billion of WMB's
assets.
The commercial banking division offers a full range of commercial
banking products and services through 47 free standing, full service commercial
banking branches, supplemented by ten business banking centers located near or
in WMB financial centers.
Asset Quality
General. Washington Mutual reviews its assets for weakness on a regular
basis. Reserves are maintained for assets classified as substandard or doubtful.
Any portion of an asset classified as loss is immediately written off.
Washington Mutual's comprehensive process for identifying impaired assets,
classifying assets and asset review is performed on a quarterly basis. The
objective of the review process is to identify any trends and determine the
levels of loss exposure to evaluate the need for an adjustment to the reserve
accounts.
The principal measures of asset problems are the levels of nonaccrual
loans, loans under foreclosure and REO (nonperforming assets or "NPAs"), levels
of impaired loans, the size of the provision for loan losses, loan charge-offs
and the size of the write-downs in the value of REO. See "Management's
Discussion and Analysis of Financial Position and Results of Operations--Asset
Quality--Classified Assets."
Management ceases to accrue interest income on any loan that becomes 90
days or more delinquent and reserves all interest accrued up to that time. In
addition, when circumstances indicate concern as to the future collectibility of
the principal of a commercial real estate loan, management stops accruing
interest on the loan, whether or not it has reached the 90-day delinquency
point. Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans on which interest is not being accrued are referred to
as loans on nonaccrual status.
Nonperforming loans include loans on which payment is 90 days or more
delinquent and loans that are under foreclosure (a category that includes
properties for which decrees of foreclosure have been granted but that are held
under sheriffs' certificates pending expiration of the borrowers' redemption
rights).
REO. Real estate that served as security for a defaulted loan and
becomes REO is recorded on the Company's books at the lower of the outstanding
loan balance (net of any reserves charged off) or fair value, the determination
of which takes into account the effect of sales and financing concessions that
may be required to market the property. If management's estimate of fair value
at the time a property becomes REO is less than the loan balance, the loan is
written down at that time by a charge to the reserve for loan losses.
The REO reserve provides for losses that may result from unforeseen
market changes in the REO portfolio and declines in fair values of properties
subsequent to their initial transfer to REO.
REO properties are analyzed periodically to determine the adequacy of
the REO reserve. Any adjustment in the reserve that results from such
evaluations is charged to the results of REO operations in the period in which
it is identified. Personal property that has been repossessed is recorded at the
lower of the outstanding loan balance (net of any charge-offs) or fair value at
the time the property was repossessed. See "Management's Discussion and Analysis
of Financial Position and Results of Operations--Asset Quality" for further
discussion.
Provision for Loan Losses and Reserve for Loan Losses. Loan loss
reserves are based upon management's continuing analysis of pertinent factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, historical loan loss experience,
industry-wide loss experience, current and anticipated economic conditions and
detailed analysis of individual loans and credits for which full collectibility
may not be assured, as well as management's policies, practices and intentions
with respect to credit administration and asset management.
As part of the process of determining the adequacy of the reserve for
loan losses, management reviews the Company's loan portfolio for specific
weaknesses. Residential construction, commercial real estate and commercial
business loans that are above the thresholds described above or are delinquent
are evaluated individually for impairment. This detailed analysis includes
techniques to estimate the fair value of loan collateral and the existence of
potential alternative sources of repayment. When available information confirms
that specific loans or portions thereof are uncollectible, those amounts are
charged-off against the reserve for loan losses. The existence of some or all of
the following criteria will generally confirm that a loss or impairment has
incurred: the loan is significantly delinquent and the borrower has not
evidenced the ability or intent to bring the loan current; the Company has no
recourse to the borrower, or if it does, the borrower has insufficient assets to
pay the debt; or the fair value of the loan collateral is significantly below
the current loan balance, and there is little or no near-term prospect for
improvement.
Unallocated reserves are established for loss exposure that may exist
in the remainder of the loan portfolio but has not yet been identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, and current and anticipated economic conditions.
The Company will record an additional $125.0 million in provision for
loan losses in December 1996 after the Transaction. This additional provision
for loan losses will be taken principally because a number of credit
administration and asset management philosophies and procedures of WMB differed
from those of ASB, and it is the intention of the Company to conform ASB's
administration, philosophies and procedures to those of WMB. The additional
provision for loan losses will to a lesser degree be provided because the
Company believes that while there has been an increase in the value of
residential real estate in certain California markets, a further decline in
collateral values in other portions of the California real estate market has
occurred.
It is possible that the provision for loan losses may, in the future,
change as a percentage of total loans. The reserve for loan losses is maintained
at a level sufficient to provide for estimated loan losses based on evaluating
known and inherent risks in the loan portfolio. See "Management's Discussion and
Analysis of Financial Position and Results of Operations--Provision for Loan
Losses and Reserve for Loan Losses."
Investing Activities
General. Washington Mutual has authority under state law to make any
investment, but may be subject to certain restrictions imposed by the Home
Owners' Loan Act ("HOLA"). Under Washington state law, WMB has authority to make
any investment deemed prudent by its board of directors, and may invest in
commercial paper, corporate bonds, mutual fund shares, debt and equity
securities issued by creditworthy entities and interests in real estate located
inside or outside of Washington state. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), however, prohibits a state bank (such as
WMB) from making or retaining equity investments that are not permissible for a
national bank, subject to certain exceptions.
ASB and WMBfsb have authority to make investments specified by HOLA and
applicable regulations, including the purchase of governmental obligations,
investment-grade commercial paper, and investment-grade corporate debt
securities. Under the laws of the states of Arizona and Washington,
respectively, WM Life and Empire have broad authority to make investments in
debt and equity securities subject to applicable reserve requirements and
risk-based capital requirements.
Effective January 1, 1994, Washington Mutual adopted, as required, SFAS
No. 115. This statement required investment and equity securities to be
segregated into three categories: "trading" securities, "held-to-maturity"
securities and "available-for-sale" securities. As a result of SFAS No. 115, at
September 30, 1996, a net unrealized loss (on an after-tax basis) of $19.6
million associated with the available-for-sale securities was included as a
separate component of stockholder's equity. At September 30, 1996, the Company's
investment portfolio included $3.0 billion of held-to-maturity securities (with
a fair value of $3.0 billion), $10.1 billion of available-for-sale securities
and $2.2 million of trading account securities. At September 30, 1996, MBS
accounted for $11.6 billion or 89 percent of the total investment portfolio.
The Company's investment portfolio by investment type at carrying value
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
- --------------------------------------------------- ------------------- ------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993
- --------------------------------------------------- ------------------- ------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations $ 210,865 $ 345,510 $ 565,025 $ 459,664
Corporate debt obligations 538,163 607,926 617,548 550,608
Municipal obligations 105,730 92,508 80,762 73,360
Equity securities 617,484 525,153 387,997 347,167
- --------------------------------------------------- ------------- ------------ ---------- -----------
1,472,242 1,571,097 1,651,332 1,430,799
Mortgage-backed securities:
U.S. government agency 10,714,973 12,561,748 6,113,146 4,984,828
Private issue 859,300 1,222,270 913,941 1,014,843
- --------------------------------------------------- ------------- ------------- ---------- -----------
11,574,273 13,784,018 7,027,087 5,999,671
Derivative instruments
Interest rate exchange agreements 507 (11,847) 18,654 --
Interest rate cap agreements 4,525 9,415 41,690 --
- --------------------------------------------------- ------------ -------------- ---------- ----------
5,032 (2,432) 60,344 --
- --------------------------------------------------- ------------ -------------- ----------- -----------
Total investment portfolio $13,051,547 $15,352,683 $8,738,763 $7,430,470
=================================================== ============ ============== =========== ===========
</TABLE>
For a discussion of the stated maturities of the Company's investment
portfolio at December 31, 1995, see Notes 4 and 5 to the Supplemental
Consolidated Financial Statements.
The risk of loss upon default of the borrower is generally greater for
corporate debt securities than for real estate loans. In addition, investments
by the Company in debt or equity securities of an issuer are generally much
larger than investments in any particular real estate loan, resulting in a
greater impact on the Company in the event of default or decline in market
value. The Company regularly analyzes these securities for impairment of value
and makes adjustments in their carrying value or yield as appropriate.
Historically, the yield on private-issue MBS, collateralized mortgage
obligations, and purchased loan pools has exceeded the yield on GSE MBS because
they expose the Company to certain risks that are not inherent in GSE MBS, such
as credit risk and liquidity risk. These assets are not guaranteed by the U.S.
government or one of its agencies because the loan size, underwriting or
underlying collateral of these assets often does not meet set industry
standards. Consequently, there is a higher potential of loss of the principal
investment. Additionally, the Company may not be able to sell such assets in
certain market conditions as the number of interested buyers may be limited at
that time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. An example of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated tranches, certain collateralized mortgage obligations that
have been resecuritized, and certain securities that contain a significant
number of Jumbo loans.
In an effort to reduce these risks, beginning in 1995, the Company has
performed credit reviews on each individual security or loan pool prior to
purchase. Such a review includes consideration of the collateral
characteristics, borrower payment histories and information concerning loan
delinquencies and losses of the underlying collateral. After a security is
purchased, similar information is monitored on a periodic basis. Furthermore,
the Company has established internal guidelines limiting the geographic
concentration of the underlying collateral.
At September 30, 1996, the Company held $859.3 million of private-issue
MBS. Of that amount, 33 percent were the highest investment grade (AAA), 55
percent were rated investment grade (AA or A), 8 percent were rated lowest
investment grade (BBB) and 4 percent were rated below investment grade (BB or
below). The Company's policy is not to purchase securities that are below
investment grade. The below investment grade securities in the Company's
portfolio at September 30, 1996 were the result of downgrades by the rating
agencies. During 1995, the Company realized $8.4 million of losses on certain
securities in the below investment grade portfolio due to credit quality
deterioration.
Sources of Funds
Deposits. At September 30, 1996, WMB accepted deposits at 275 financial
centers in Washington and Oregon, ASB accepted deposits at 158 branches in
California, and WMBfsb accepted deposits at 26 financial centers in Utah, Idaho,
Montana and Oregon. The Company's banking subsidiaries compete with other
financial institutions in attracting savings deposits. Competition from
commercial banks has been particularly strong due to their extensive branch
systems. In addition, there is strong competition for customer dollars from
credit unions, mutual funds and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.
In recent years, deposit growth has resulted almost exclusively from
business combinations. At September 30, 1996, the Company's deposits totaled
$24.0 billion. During 1993, the acquisition of Pacific First and the merger with
Pioneer added $3.8 billion and $659.5 million in deposits, respectively.
Additional business combinations during 1994 and 1995 added $211.5 million and
$417.1 million in deposits, respectively. The merger with ASB added $12.9
billion in deposits. ASB itself had grown deposits through acquisition, with
$4.0 billion in acquired deposits over its less than eight year life. Without
the addition of the acquired deposits, the Company's deposits would have
decreased from December 31, 1993 to September 30, 1996.
The Company offers traditional passbook and statement savings accounts
as well as checking accounts. In addition, the Company offers money market
deposit accounts ("MMDAs") with higher minimum balances that offer higher
yields. The Company's deposits consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
- --------------------------------------- ------------------ --------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- --------------------------------------- ------------------ --------------------------------------------------------
<S> <C> <C> <C>
Checking accounts:
Interest bearing $ 2,037,577 $ 2,111,124 $ 2,342,407
Noninterest bearing 797,717 665,205 499,282
- ---------------------------------------- ------------ ---------- -----------
2,835,294 2,776,329 2,841,689
Savings accounts 1,719,506 1,905,659 2,224,784
MMDAs 5,106,381 4,667,884 3.502,981
Time deposit accounts
Due within one year 12,244,657 12,696,186 10,496,491
After one but within two years 999,017 1,410,809 2,780,944
After two but within three years 592,354 409,580 765,219
After three but within four years 378,757 243,541 293,167
After four but within five years 79,280 258,415 293,522
After five years 23,269 94,557 145,209
- ---------------------------------------- ----------- ---------- ---------
14,317,334 15,113,088 14,774,552
======================================== =========== ========== ==========
Total deposits $23,978,515 $24,462,960 $23,344,006
======================================== =========== =========== ===========
</TABLE>
WMB's and WMBfsb's Deposits. WMB and WMBfsb offer a broad range of deposit
products and at September 30, 1996 had a total of $11.1 billion in deposits,
$5.3 billion of which were time deposits, $4.2 billion of which were MMDAs and
savings accounts; and $1.6 billion of which were checking accounts. The most
popular time deposit is a product called Investor's Choice, which is a time
deposit with maturities available from one to 120 months in any one of three
deposit size categories. Interest rates on Investor's Choice time deposits
generally increase with increased maturity and amount. Less than 50 percent of
deposits at September 30, 1996 were time deposits and of those, only $1.1
billion or 22 percent of total time deposits had original maturities longer than
one year.
Since 1995, WMB and WMBfsb have has been heavily promoting a "Free
Checking" account. This account has helped to reduce the overall cost of funds
by increasing the percentage of deposits that are noninterest-bearing. At
September 30, 1996, $702.0 million or 45 percent of WMB's and WMBfsb's total
checking accounts did not bear interest.
WMB and WMBfsb have also actively promoted MMDAs because, while a somewhat
volatile source of deposits, they have the advantage of being variable-rate
liabilities. At September 30, 1996, WMB and WMBfsb had an aggregate of $3.3
billion in MMDAs and only $973.0 million in regular savings accounts.
Wholesale deposits, primarily time deposits, are sold to political
subdivisions and public agencies. The Company considers wholesale deposits to be
a borrowing source rather than a customer relationship.
ASB's Deposits. Like WMB and WMBfsb, ASB's deposit liabilities are
primarily short term. Of ASB's total deposits of $12.9 billion at September 30,
1996, only $940.0 million was in time deposits with original maturities of
longer than one year.
Like WMB, ASB has also promoted a checking account, in its case "Mileage
Checking." Mileage Checking is, unlike Free Checking, an interest-bearing
checking account product. At September 30, 1996, ASB had total interest-bearing
checking deposits of $1.2 billion. Management of the Company hopes to reduce
ASB's cost of funds in the future by introducing Free Checking in ASB's markets.
Management also hopes to interest more of ASB's depositors in MMDAs, which
currently account for only 6 percent of ASB's deposits.
Borrowings and Annuities. The Company uses borrowings, in addition to
deposit acquisitions, as an integral part of funding its growth. In addition to
the borrowings discussed below, at September 30, 1996, the Company was in a
position to obtain an additional $10.8 billion, primarily through the use of
collateralized borrowings and deposits of public funds using unpledged
mortgage-backed securities and other wholesale borrowing sources. See
"Management's Discussion And Analysis Of Financial Position And Results Of
Operation--Liquidity."
Borrowings include the sale of securities subject to repurchase agreements,
the purchase of federal funds, the issuance of mortgage-backed bonds or notes,
capital notes and other types of debt securities, and funds obtained as advances
from the FHLB of Seattle and the FHLB of San Francisco. The Company also has
access to the Federal Reserve Bank's discount window. Under Washington state
law, WMB may borrow up to 30 percent of total assets, but sales of securities
subject to agreements to repurchase are not deemed borrowings under such law,
and borrowings from federal, state or municipal governments, agencies or
instrumentalities thereof also are not subject to the 30 percent limit.
<TABLE>
<CAPTION>
The following table shows the Company's borrowings:
September 30, December 31,
- --------------------------------------------------------- ----------------------- -------------------------------------------
(dollars in thousands) 1996 1995 1994
- --------------------------------------------------------- ----------------------- -------------------------------------------
<S> <C> <C> <C>
Annuities $ 868,438 $ 855,503 $ 799,178
Federal funds purchased 1,030,500 433,420 -
Securities sold under agreements to repurchase 8,615,157 7,984,756 6,637,346
Advances from the Federal Home Loan Bank 5,539,551 4,715,739 4,128,977
New Capital borrowings 364,500 364,500 300,500
Other 323,768 225,717 80,566
----------------------- ----------------------- -------------
=========================================================
Total borrowings $16,741,914 $14,579,635 $11,946,567
========================================================= ======================= ======================== ==============
</TABLE>
The Company actively engages in repurchase agreements with authorized
broker-dealers and major customers selling U.S. government and corporate
securities and mortgage-backed securities under agreements to repurchase them or
similar securities at a future date. At September 30, 1996, the Company had $8.6
billion of such borrowings.
WMB, WMBfsb and WM Life are members of the FHLB of Seattle and ASB is a
member of the FHLB of San Francisco. As members, each company maintains a credit
line that is a percentage of its total regulatory assets, subject to
collateralization requirements. At year-end 1995, WMB, ASB, WMBfsb, and WM Life
had credit lines of 17 percent, 14 percent, 19 percent and 45 percent,
respectively, of total regulatory assets. At September 30, 1996, advances under
these credit lines totaled $5.5 billion and were secured in aggregate by grants
of security interests in all FHLB stock owned, deposits with the FHLB, and
certain mortgage loans and deeds of trust and securities of the U.S. government
and agencies thereof.
In August 1995, the Company filed a shelf registration statement with
the Commission for the offering, on a delayed or continuous basis, of up to
$250.0 million of debt securities, of which $100.0 million remains available.
In November 1996, Washington Mutual received two commitments for
Revolving Credit Facilities: a $100.0 million 364-day facility and a $100.0
million 4-year facility. Chase Manhattan Bank has agreed to act as
Administrative Agent for the Facilities. Proceeds of the Facilities are
available to be used as capital at a subsidiary level or for potential funding
needs at the closing of the merger with Keystone Holdings, redemption of any
securities of Keystone Holdings, and for general corporate purposes.
WM Life and Empire issue fixed annuity contracts through licensed
agents who are employees of subsidiaries of the Company and operate in WMB
financial centers. Currently, annuities are issued primarily in Washington and
Oregon. At September 30, 1996, the policy value of such contracts was $806.6
million. WM Life also issues variable annuity contracts. At September 30, 1996,
the policy value of such contracts was $61.8 million. All annuity contracts
impose a contractual surrender charge in the event of a customer's withdrawal of
funds within a certain number of years (in the case of most of WM Life's fixed
annuity contracts, five years) from the date the annuity contract was issued.
In December 1996, the Company redeemed $20.5 million of debt securities
of New Capital, and intends to redeem the remaining $344 million of New Capital
debt securities in early 1997.
Asset and Liability Management
The long-run profitability of the Company depends not only on the
success of the services it offers to its customers and the quality of its loans
and investments, but also the extent to which its earnings are unaffected by
changes in interest rates. The Company's asset and liability management strategy
attempts to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings.
WMB and WMBfsb, as is true of many financial institutions, has had a
mismatch between the maturity of its assets and liabilities. Its customers
generally prefer short-term deposits (see "Deposits") and many of them also
prefer long-term fixed-rate loans. This mismatch is not a problem when interest
rates are stable or declining. However, with a rise in short-term interest
rates, as was experienced throughout most of 1994, the interest paid on deposits
and other short-term borrowings increases much more quickly than the interest
earned on loans and investments. The result for WMB was a reduction in its net
interest spread and corresponding pressure on net interest income in both 1994
and 1995. One means of reducing the effect of interest rate volatility on net
interest income is to shorten asset durations. In recent years, WMB and WMBfsb
has attempted to do this by emphasizing ARMs and short-term consumer loan
programs. At September 30, 1996, the portion of WMB's and WMBfsb's residential
loans and MBS that were adjustable-rate was approximately 53 percent. ASB does
not suffer from the same asset liability mismatch as WMB because the majority of
its assets are COFI ARMs which reprice monthly. In times of rising interest
rates, however, the Company is negatively affected by an inherent timing
difference between the repricing of its ARM assets and its liabilities. The
effect of this timing difference, or "lag," will be favorable during a period of
declining interest rates and unfavorable in a rising interest rate environment.
Although the effect of this lag generally balances out over the life of a loan,
it can produce short-term volatility in the Company's net interest income during
periods of interest rate movement.
The lifetime interest rate caps which the Company offers to its ARM
borrowers introduce another element of interest rate risk to the Company. In
periods of high interest rates, it is possible for the index to exceed the rate
on the lifetime interest rate caps offered to customers. When determined
appropriate by management, the Company hedges this risk by purchasing COFI- and
LIBOR-based interest rate cap and floor agreements.
Over half of the $4.9 billion of securities reclassified from Washington
Mutual's held-to-maturity category to its available-for sale category in 1995
were fixed-rate mortgage-backed securities. The reclassification will give the
Company the flexibility to dispose of a portion of such securities over time and
replace them with adjustable-rate assets as part of its interest rate risk
management program. During the first nine months of 1996, the Company
securitized and then sold a substantial portion of the fixed-rate loans it
originated, while retaining nearly all of its adjustable-rate loan production.
The Company retained the servicing rights to the loans that were sold. In
addition, as part of the restructuring strategy initiated in late 1995, the
Company purchased adjustable-rate assets and sold fixed-rate mortgage-backed
assets.
In the future, it is anticipated that a portion of the remaining
fixed-rate securities may be replaced with adjustable-rate GSE MBS,
adjustable-rate private-issue MBS, collateralized mortgage obligations, and
purchased loan pools as well as new originations of ARMs, as the fixed-rate
securities pay down or are sold as market conditions permit. During periods of
moderate to high market interest rates, originations of ARMs have been well
received by customers. During periods of low market interest rates, however,
customers have preferred fixed-rate mortgage loans. This portfolio restructuring
strategy is intended to reduce the Company's interest rate sensitivity while
simultaneously protecting its yield. As the Company substitutes adjustable-rate
assets for fixed-rate assets, its sensitivity to future changes in interest
rates decreases, because, unlike fixed-rate securities, interest rates on
adjustable-rate assets change, within certain periodic and lifetime cap
restraints, with corresponding changes in market rates. However, substituting
adjustable-rate assets for fixed-rate assets can have two disadvantages. First,
adjustable-rate assets, when compared with similar fixed-rate assets, carry
additional credit risk in an increasing interest rate environment. As these
assets reprice upward, the borrower's creditworthiness may become impaired.
Second, the holding of adjustable-rate assets will decrease the overall
portfolio yield in a stable or declining interest rate environment. Accordingly,
the Company plans to replace some of its fixed-rate MBS with private-issue MBS,
collateralized mortgage obligations, and purchased loan pools to minimize the
decline in portfolio yield.
Another way to reduce the effect of the volatility of interest rates is
to lengthen liability durations, which is difficult because of depositors'
preferences for liquidity. This was apparent from the fact that at September 30,
1996, the Company's MMDAs accounted for $4.0 billion or 17 percent of total
deposits and time deposits with maturities less than one year totaled $12.2
billion or 51 percent of total deposits.
At September 30, 1996, interest-sensitive assets of $29.9 billion and
interest-sensitive liabilities of $33.9 billion were scheduled to mature or
reprice within one year. At September 30, 1996, the Company's one-year gap was a
negative 1.0 percent. The Company's interest rate sensitivity has decreased with
the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of ARMs
originated by ASB. It still, however, suffers from some short-term volatility of
net income because of the impact of COFI lag. Management hopes to reduce this
short-term volatility in part by increasing production of non-COFI
adjustable-rate products and short-term fixed-rate products such as consumer
loans. In addition to managing the terms of its actual assets and liabiilties,
the Company uses derivative instruments, such as interest rate exchange
agreements and interest rate cap agreements, to mitigate interest rate risk. At
September 30, 1996, the Company had entered into interest rate exchange
agreements and interest rate cap agreements with notional values of $14.8
billion. Without these instruments, the Company's one-year gap at September 30,
1996, would have been a negative 9.0 percent as opposed to a negative 1.0
percent. See "Supplemental Consolidated Financial Statements--Note 18: Interest
Rate Risk Management" for a discussion of the use of derivative instruments.
Business Combinations
Most of the Company's growth since 1988 has occurred as a result of
banking business combinations. These institutions were generally combined with
the Company's federally chartered banking subsidiaries, primarily for regulatory
reasons.
<TABLE>
<CAPTION>
The following table summarizes Washington Mutual's business
combinations since April 1988:
Acquisition Name Date Acquired Loans Deposits Assets Number of Branches
- ------------------------------------------------- ------------------- ----------- ------------- ------------- --------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Columbia Federal Savings Bank and Shoreline
Savings Bank April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1) June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings Association(2) June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings Bank(2) Sept. 14, 1990 -- 44.3 -- 3
Vancouver Federal Savings Bank July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2) Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association Jan. 1, 1992 16.8 20.5 23.5 1
World Savings and Loan Association(2) March 6, 1992 -- 37.8 -- 2
Great Northwest Bank April 1, 1992 603.2 586.4 710.4 17
Pioneer Federal Savings Bank March 1, 1993 624.5 659.5 926.5 17
Pacific First April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2) April 15, 1994 -- 42.2 -- 3
Summit Savings Bank Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings Bank April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank(3) Nov. 30, 1996 87.5 106.9 122.2 5
American Savings Bank(3) Dec. __, 1996 13,844.0 12,902.0 21,317.4 158
United Western Financial Group(3) Jan. __, 1997 217.9 294.4 414.9 9
- --------------
(1) This was an acquisition of selected assets and liabilities.
(2) The acquisition was of branches and deposits only. The only assets
acquired were branch facilities or loans collateralized by acquired savings
deposits.
(3) Information given at September 30, 1996.
</TABLE>
See "Supplemental Consolidated Financial Statements --Note 2: Business
Combinations" for a discussion of the accounting treatment of certain of the
acquisitions.
Employees
The number of full-time equivalent employees at the Company increased
from 7,915 at December 31, 1995 to 8,214 at September 30, 1996. The Company
believes that it has been successful in attracting quality employees and
believes its employee relations are excellent.
Taxation
General. For federal income tax purposes, the Company reports its
income and expenses using the accrual method of tax accounting and uses the
calendar year as its tax year. Except for the interest expenses rules pertaining
to certain tax exempt income applicable to banks and the recently repealed bad
debt reserve deduction, the Company is subject to federal income tax, under
existing provisions of the Code, in generally the same manner as other
corporations.
Tax Bad Debt Reserve Recapture. The recently enacted "Small Business Job
Protection Act of 1966" (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 an additional
approximately $4.2 million (based upon current federal income tax rates) in
federal income taxes each year of the six-year period due to the Job Protection
Act. As required by the Merger Agreement, Keystone Holdings filed amended
federal income tax returns with the IRS for 1992 and 1993 in order to reduce the
tax bad debt reserve recapture amount that ASB would otherwise incur due to the
Job Protection Act. The Company believes that because ASB will be able to offset
the majority of its bad debt reserve recapture amounts with ASB's net operating
loss carryforward deductions, the foregoing recapture provisions will not have a
material effect on ASB.
The Job Protection Act also repeals the reserve method of accounting
for tax bad debt deductions and, thus, requires thrifts to calculate the tax bad
debt deduction based on actual current loan losses.
Net Operating Loss Carryforward Deductions. Due to Section 382 of the Code,
most of the value of the net operating loss carryforward deductions described in
the Consolidated Financial Statements of Keystone Holdings will be eliminated
due to the Transaction. Accordingly, the future tax savings attributable to such
net operating loss carryforward deductions (other than amounts used to offset
bad debt reserve deduction recapture described above for ASB) will be greatly
reduced. Further, the actual savings due to such reduced net operating loss
carryforward deductions will be even further reduced due to a provision in the
FRF Agreements generally requiring that approximately 75% of the federal tax
savings resulting from such net operating loss carryforwards be paid to the FRF.
State Income Taxation. The state of Washington does not currently have
a corporate income tax. A business and occupation tax based on percentage of
gross receipts is assessed on businesses. Currently, interest received on loans
secured by first mortgages or deeds of trust on residential properties is not
subject to such tax. However, it is possible that legislation will be introduced
that would repeal or limit this exemption.
The states of California, Oregon, Utah, Idaho, Montana, Colorado and
Nevada have corporate income taxes, which are imposed on companies doing
business in those states. The Company's substantial operations in California and
Oregon will result in substantial corporate income tax expenses in such states.
As the Company's operations in the remaining states increase, the corporate
income taxes will have an increasing effect on Company's results of operations
or financial condition.
If and to the extent the Company carries on activities in other states,
the Company may in certain circumstances be subject to tax in such states.
Tax-Related Agreements
Closing Agreements. In connection with the 1988 Acquisition, the
Internal Revenue Service entered into the Closing Agreement with respect to the
federal income tax consequences of the 1988 Acquisition and certain aspects of
the taxation of Keystone Holdings and certain of its affiliates. The Closing
Agreement contains provisions that are intended to ensure that losses generated
by New West would be available to offset income of ASB for federal income tax
purposes. To accomplish this, the Closing Agreement provides, among other
things, that: (a) the 1988 Acquisition was a tax-free reorganization, (b) the
tax attributes of the Failed Association, including net operating losses and tax
bad debt reserves, carried over to ASB, (c) as long as ASB qualified as a
domestic building and loan association and New West was its nominee, any
assistance received or accrued from the FRF would be excluded from gross income,
and (d) as long as certain conditions (the "nominee conditions") existed, New
West would be a nominee for ASB with the result that all of New West's income,
deductions, gains and losses would be treated as ASB's income, deductions, gains
and losses.
The California Franchise Tax Board issued an opinion letter with
provisions substantially similar to the Closing Agreement; thus, New West's
losses similarly should be available to offset ASB's income for California
franchise tax purposes. In 1993, California enacted legislation reducing the net
operating loss carryforward period to 10 years from 15 years for losses incurred
prior to 1994 related to assets acquired in a tax-free reorganization such as
that used in the 1988 Acquisition. No adverse effect is expected from this
legislative change.
Federal legislation enacted in 1993 retroactively disallowed certain
losses and bad debt deductions relating to assets acquired in a federally
assisted transaction. This legislation reduced Keystone Holdings' federal net
operating loss carryforward by approximately $445 million. The federal net
operating loss carryforwards available to Keystone Holdings at December 31, 1995
total approximately $3.2 billion. See "Taxation--Net Operating Loss Carryfoward
Deductions."
On October 24, 1995, New West and ASB ceased to meet the nominee
conditions. Accordingly, the tax benefits generated by any future losses of New
West may not offset ASB's taxable income.
Assistance Agreement. The Assistance Agreement between Keystone
Holdings and it subsidiaries is designed, in part, to provide that over time, 75
percent of most of the federal tax savings and 19.5 percent of most of the state
tax savings (in each case computed in accordance with specific provisions
contained in the Assistance Agreement) attributable to the utilization of any
current losses or tax loss carryforwards of New West are paid ultimately to the
FRF. The provision for such payments is reflected in the financial statements as
"Payments in Lieu of Taxes."
Tax Settlement Agreement. The Tax Settlement Agreement, which was a
condition to closing the Transaction, resolved certain disputes that arose
between Keystone Holdings and certain of its affiliates and the FDIC-Manager
regarding interpretations of provisions in the 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
required Keystone Holdings to pay $10.5 million to the FRF upon the closing of
the Transaction, in addition to any other undisputed amounts owed.
Tax Sharing Agreement. Under the Tax Sharing Agreement entered into by
Keystone Holdings and its subsidiaries, ASB and its parent are required to pay
to Keystone Holdings an amount equal to the federal income tax liability that
such corporations would have had if they had filed a separate consolidated
federal income tax return, except that such separate federal income tax
liability is to be calculated excluding certain significant deductions
(including NOL carryforwards attributable to New West) and with certain other
adjustments and including as an add-back, for years ending before 1995 the
agreed upon amortization of the excess of tax basis over value of the assets
(the "mark adjustment") acquired by ASB in the 1988 Acquisition. A similar
concept applies in determining the amount of the tax sharing payment related to
the California franchise tax that ASB must pay to Keystone Holdings. See Note
21, "Payments in Lieu of Taxes," in the Notes to the Supplemental Consolidated
Financial Statements and Supplementary Data.
Environmental Regulation
The Company's business and properties are subject to federal and state
laws and regulations governing environmental matters, including the regulation
of hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up such substances without regard to whether such persons
actually caused the contamination. Such laws may affect the Company both as an
owner of properties used in or held for its business, and as a secured lender of
property that is found to contain hazardous substances or wastes. With respect
to a property owned by the Company, the Company has been notified that it may be
liable for certain investigatory and other costs related to groundwater
contamination allegedly caused by dry cleaners purported to have formerly
operated at the property, prior to the Company's ownership. The Company believes
it has meritorious defenses in this matter and plans to vigorously defend
against any liability therefor. There can be no assurance, however, that the
Company will not incur liability for this matter or that any such liability will
not be material.
Further, although CERCLA exempts holders of security interests, the
exemption may not be available if a secured party engages in the management of
its borrower or the collateral property in a manner deemed beyond the protection
of the secured party's interest. While the United States Environmental
Protection Agency and a number of courts have provided some guidance to lenders
to assure themselves of activities they may undertake and remain within CERCLA's
secured party exemption, other courts have narrowly construed the exemption
against lenders, particularly in foreclosure proceedings. As a result, CERCLA
and similar state statues may affect the Company's decision whether to foreclose
on property that is found to be contaminated. It is the Company's general policy
to obtain an environmental assessment prior to foreclosure of commercial
property. The existence of hazardous substances or wastes on such property may
cause the Company to elect not to foreclose on the property, thereby limiting,
and in some instances precluding, the Company from realizing on such loans.
<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders consist of the FRF and certain KHP Investors
all of whom received shares of Common Stock in the Transaction. The following
table sets forth the number of Shares beneficially owned and being offered by
each Selling Stockholder specified. Except as set forth below, none of the
Selling Stockholders has held any position or office or otherwise had a material
relationship with the Company within the past three years other than as a result
of the ownership of the shares of Common Stock. The Selling Stockholders
collectively own approximately ____ percent of all shares of Common Stock
outstanding, based on ____ shares of Common Stock outstanding on ________, 1996.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Number of Shares Owned After the
Selling Stockholders Offering(1) Offered Offering(1)
- -------------------------------------- --------------------- ----------------------- -----------------------
<S> <C> <C> <C>
FSLIC Resolution Fund 14,000,000 14,000,000 0
Andrew E. Furer 841,395 841,395 0
William E. Oberndorf 328,465 100,000 228,465
Barry R. Jackson Revocable Trust 157,802 50,000 107,802
William P. Hallman, Jr. 78,777 38,777 40,000
KHI Associates, L.P. 349,726 36,223 313,503
26 Savings Associates, L.P. 156,142 18,910 137,232
- --------------------------------- ---------- ---------- -------
TOTAL 15,912,307 15,085,305 827,002
- --------------------------------- ---------- ---------- -------
(1) Does not include each Selling Stockholder's contingent right to receive its
pro rata interest in the 8,000,000 Litigation Escrow Shares. Upon
consummation of this offering, none of the Selling Stockholders will own in
excess of 1% of the Company's outstanding Common Stock.
</TABLE>
Such Shares were acquired by the FRF pursuant to the Warrant Exchange
Agreement as part of the Transaction. See "Summary--Background of the
Transaction." The FRF held the Warrants since 1989, when all assets and
liabilities of the FSLIC, including the Warrants that the FSLIC received as part
of the 1988 Acquisition, were transferred to the FRF, the statutory successor to
the FSLIC, pursuant to federal legislation. As part of the 1988 Acquisition, the
FSLIC (or its statutory successor, the FRF) has, pursuant to contractual
agreements entered into that time, as such agreements have been amended from to
time, provided a variety of forms of financial assistance to ASB and certain of
its affiliates. See "Summary--Background of the Transaction" and
"Business--Tax-related Agreements." As government-controlled entities of the
United States of America, the FRF and the FDIC-Manager benefit from certain
governmental immunities from actions under the federal securities laws. See
"Risk Factors--Governmental Immunity of the FRF and FDIC-Manager as Selling
Stockholder." At the time of completion of the offering to which this Prospectus
relates, the FRF will not hold, in any capacity, any other securities of the
Company, other than the FRF's contingent right to receive a portion of the
Litigation Escrow Shares. See "The Keystone Transaction--The Litigation Escrow."
In addition, Mr. William Longbrake, the Company's Senior Executive Vice
President and Chief Financial Officer, served as Chief Financial Officer and
Deputy to the Chairman for Financial Policy at the FDIC from February 1995
through September 1996.
Mr. Furer is a limited partner of KHP and received the Shares held by
him and being offered hereunder upon the distribution of such shares by KHP upon
consummation of the Transaction. See "The Keystone Transaction -- The
Transaction." For different periods during the three-year period prior to the
date of the offering to which this Prospectus relates, Mr. Furer was a director
of Keystone Holdings, New American, New Capital, NACH, ASB, American Real Estate
Group, ("AREG"), and New West and was Chairman of the Audit Committee of the
board of directors of each of ASB, New West, and AREG. Mr. Furer resigned as
director and as a member of the Audit Committee of AREG on February 15, 1994;
resigned as director and as a member of the Audit Committee of New West on April
22, 1994; and resigned all other directorships referred to above (and as a
member of the Audit Committee of ASB) on July 18, 1996. Mr. Furer is, and for
the three-year period prior to the date of the offering to which this Prospectus
relates, Mr. Furer has been, a Managing Partner of Castine Partners, which
assisted in the organization and execution of the 1988 Acquisition and monitored
this investment on behalf of KHP. At the time of completion of the offering to
which this Prospectus relates, Mr. Furer will not hold, in any capacity, any
other securities of the Company, other than his contingent right to receive a
portion of the Litigation Escrow Shares. See "The Keystone Transaction -- The
Litigation Escrow."
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK
Washington Mutual is authorized by its Restated Articles of Incorporation
(the "Articles") to issue up to 350,000,000 shares of no par value Common Stock
and up to 10,000,000 shares of Preferred Stock, no par value. At November 22,
1996, there were issued and outstanding 72,358,795 shares of Common Stock,
2,752,500 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C (the
"Series C Preferred"); 1,395,065 shares of $6.00 Noncumulative Convertible
Perpetual Preferred Stock, Series D (the "Series D Preferred"); and 1,970,000
shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E (the "Series E
Preferred"). Collectively, the Series C Preferred, Series D Preferred and Series
E Preferred are referred to as the "Preferred Stock."
Common Stock
Each holder of Common Stock is entitled to one vote for each share held
by such holder on all matters voted upon by holders of Common Stock.
Shareholders are not permitted to cumulate their votes for the election of
directors.
In the unlikely event of liquidation, dissolution or winding up of
Washington Mutual, holders of Common Stock will be entitled to share ratably in
any remaining assets of Washington Mutual, in cash or in kind, after payment or
provision for payment of all liabilities and the liquidation preference of any
outstanding Preferred Stock.
Holders of Common Stock are not entitled to preemptive rights with
respect to any additional shares that may be issued.
The authorized but unissued and unreserved shares of Common Stock will
be available for general corporate purposes, including but not limited to
possible issuance in exchange for capital notes, as stock dividends or stock
splits, upon conversion of preferred stock in future mergers or acquisitions,
under a cash dividend reinvestment plan, for employee benefit plans, or in a
future underwritten or other public offering. Except as required to approve the
transactions in which the additional authorized shares of Common Stock would be
issued, no shareholder approval will be required for the issuance of these
shares.
Preferred Stock
Each series of Preferred Stock is prior to Common Stock as to dividends
and payments upon liquidation, dissolution or winding up, but does not confer
general voting rights.
The Series C Preferred has a liquidation preference of $25.00 per share
plus dividends accrued and unpaid for the then-current dividend period, and is
not convertible into any other Washington Mutual securities. Dividends on the
Series C Preferred, if and when declared by the Washington Mutual Board of
Directors, or a duly authorized committee thereof, are noncumulative, are
payable quarterly and are set at an annual rate of $2.28 per share. On or after
December 31, 1997, Washington Mutual may at its option redeem the Series C
Preferred. On November 30, 1996, the Company mailed a notice of redemption to
holders of the Series D Preferred notifying them that the Series D Preferred
will be redeemed on December 31, 1996. Management anticipates that substantially
all of the Series D Preferred will be converted into approximately 5.4 million
shares of Common Stock.
The Series D Preferred 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 Common Stock. Dividends on the Series D
Preferred, if and when declared by the Washington Mutual Board of Directors, or
a duly authorized committee thereof, are noncumulative, are payable quarterly
and are set at an annual rate of $6.00 per share. On or after December 31, 1996
Washington Mutual may at its option redeem the Series D Preferred. On November
30, 1996, the Company mailed a notice of redemption to holders of the Series D
Preferred Stock notifying them that the Series D Preferred Stock will be
redeemed on December 31, 1996. The Company anticipates that substantially all of
the Series D Preferred Stock will be converted into approximately 5.4 million
shares of Common Stock.
The Series E Preferred has a liquidation preference of $25.00 per share
plus dividends accrued and unpaid for the then-current dividend period, and is
not convertible into any other Washington Mutual securities. Dividends on the
Series E Preferred, if and when declared by the Washington Mutual Board of
Directors, or a duly authorized committee thereof, are noncumulative, are
payable quarterly and are set at an annual rate of $1.90 per share. On or after
September 15, 1998, Washington Mutual may at its option redeem the Series E
Preferred.
Dividend Policy
Dividends may be paid on the Common Stock as and when declared by the
Washington Mutual Board of Directors out of funds legally available for the
payment of dividends. Each quarter, the Washington Mutual Board of Directors
considers the payment of dividends. The factors affecting this determination
include Washington Mutual's long-term interests, current and projected earnings,
adequacy of capitalization, 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
WMB, and ASB, and WMBfsb and other subsidiary operations to pay dividends to
Washington Mutual.
The three series of outstanding Preferred Stock rank prior to the
Common Stock and to all other classes and series of equity securities of
Washington Mutual, other than any classes or series of equity securities of
Washington Mutual ranking on a parity with the Preferred Stock.
The rights of holders of Preferred Stock to receive dividends is
noncumulative. Accordingly, if the Washington Mutual Board of Directors fails to
declare a dividend on any dividend payment date, the holders of Preferred Stock
will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date and Washington Mutual will have no
obligation to pay the dividend accrued for such period, whether or not dividends
are declared payable on any future dividend payment dates.
Full dividends on Preferred Stock must be declared and paid or set
apart for payment for the most recent dividend period ended before (i) any
dividend (other than in Common Stock) on stock junior to the Preferred Stock
("Junior Stock") may be declared or paid or set aside for payment or other
distribution made upon the Common Stock or on any other Junior Stock or (ii)
Junior Stock is redeemed (or any moneys are paid to or made available for a
sinking fund for the redemption of any share of any such stock) or any Junior
Stock or stock on a parity with Preferred Stock is purchased or otherwise
acquired by Washington Mutual for any consideration except by conversion into or
exchange for Junior Stock.
The Washington Mutual Board of Directors may issue Preferred Stock that
is entitled to such dividend rights as the Washington Mutual Board of Directors
may determine, including priority over Common Stock in the payment of dividends.
Certain Anti-Takeover Provisions in Washington Mutual's Articles and Bylaws
The Articles and bylaws of Washington Mutual currently contain
provisions that may assist the Washington Mutual Board in resisting, or enabling
the Washington Mutual Board to resist, a takeover attempt it does not consider
beneficial to Washington Mutual. These provisions are designed to inhibit
hostile takeovers and encourage potential acquirers to negotiate with the
Washington Mutual Board. The possible effect of these provisions may be to
delay, defer, or prevent a change in control of Washington Mutual.
Authority to Issue Preferred Stock. The Washington Mutual Board is
authorized to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
shareholders. Washington Mutual has no present plans to issue any additional
shares of preferred stock.
No Cumulative Voting. The Articles do not provide for cumulative
voting. As a result, to be ensured of representation on the Washington Mutual
Board, a shareholder must control the votes of a majority of the shares present
and voting at a shareholders' meeting at which a quorum is present. In addition,
the Articles provide that a transaction is not void or voidable solely by virtue
of the interested status of a director in such a transaction, if the
relationship is known or disclosed and a sufficient number of disinterested
directors, at a meeting at which a quorum is present, approve the transaction.
Classified Board of Directors. Article IV of the Articles provides that
the 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 Common Stock, to force an immediate change in the composition
of the majority of the Washington Mutual Board.
Approval of Mergers, Consolidations, Sale of Substantially All Assets
and Dissolution. Article IX of Washington Mutual's Articles provides that if,
pursuant to the Washington Business Corporation Act, Washington Mutual's
shareholders are required to approve a merger and if two-thirds of the
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.
In addition, Article XI of the Articles prohibits, except under
specified circumstances, Washington Mutual (or any subsidiary of Washington
Mutual) from engaging in certain significant business transactions with a "Major
Stockholder" (defined as a person who, without the prior approval of the
Washington Mutual Board, acquires beneficial ownership of five percent or more
of the votes held by the holders of the outstanding shares of Washington
Mutual's voting stock). Prohibited transactions include, among others, any
merger with, disposition of assets to, acquisition by Washington Mutual of the
assets of, issuance of securities of Washington Mutual to, or acquisition by
Washington Mutual of securities of a Major Stockholder, or any reclassification
of the voting stock of Washington Mutual or of any subsidiary beneficially owned
by a Major Stockholder, or any partial or complete liquidation, spin off, slit
off or split up of Washington Mutual or any subsidiary. The above prohibitions
do not apply, in general, if the specific transaction is approved by a
supermajority vote of either the Washington Mutual Board or the holders of
voting stock owned other than by any Major Stockholder. The Articles also
provide that during the time a Major Stockholder exists, Washington Mutual may
voluntarily dissolve only upon the unanimous consent of its stockholders or an
affirmative vote of at least two-thirds of its directors and the holders of at
least two-thirds of both the shares entitled to vote on such a dissolution and
of each class of shares entitled to vote on such a dissolution as a class, if
any. Amendments to this Article XI require the affirmative vote of 95% of
Washington Mutual shareholders holding voting stock beneficially owned by
stockholders other than any Major Stockholder.
Shareholder Rights Plan. In October 1990, WMSB's board of directors
adopted a shareholder rights plan and declared a dividend of one right for each
outstanding share of common stock of WMSB to stockholders of record on October
31, 1990. The Company has assumed the shareholder rights plan. The rights have
certain antitakeover effects and are intended to discourage coercive or unfair
takeover tactics and to encourage any potential acquirer to negotiate a price
fair to all stockholders. The rights may cause substantial dilution to an
acquiring party that attempts to acquire the Company on terms not approved by
the Board, but they will not interfere with any friendly merger or other
business combination. The plan was not adopted in response to any specific
effort to acquire control of the Company.
The rights are not exercisable until the tenth day after a party
acquires beneficial ownership of 20 percent or more of outstanding Common Stock
or commences or publicly announces for the first time a tender offer to do so.
Each right entitles the holder to purchase one share of Common Stock for an
exercise price that is currently $26.67 per share. In the event, among certain
other specified events, that an acquiring party thereafter gains control of 30
percent or more of the Common Stock, any rights held by that party will be void
and, for the next 60 days, all other holders of rights can receive that number
of shares of Common Stock having a market value of two times the exercise price
of the right. The rights, which expire on October 16, 2000, may be redeemed by
the Company for $0.0044 per right prior to being exercisable. Until a right is
exercised, the holder of that right will have no rights as a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement
(the "Purchase Agreement") among the Company, the Selling Stockholders and the
underwriters (the "Underwriters"), the Selling Stockholders have agreed to sell
to each of the Underwriters, and each of the Underwriters, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and Friedman, Billings, Ramsey &
Co., Inc. are acting as representatives (the "Representatives"), has severally
agreed to purchase from the Selling Stockholders the number of Shares set forth
opposite its name below.
Underwriters Number of Shares
Merrill Lynch Pierce Fenner & Smith
Incorporated
Friedman, Billings, Ramsey & Co., Inc. ----------------
Total 15,085,035
================
The Representatives have advised the Company that the Underwriters
propose initially to offer the Shares to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $___ per share. The Underwriters may
allow, and such dealers may re-allow, a discount not in excess of $___ per share
on sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Company has agreed that it will not, with certain exceptions,
offer, sell or otherwise dispose of any shares of Common Stock for a period of
60 days from the date of this Prospectus without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. This prohibition will not
affect shares of Common Stock issued by the Company pursuant to acquisitions,
employee or director benefit plans, any dividend reimbursement plan, an
acquisition, or the conversion or exercise of securities convertible into or
exercisable for Common Stock.
Merrill Lynch, Pierce, Fenner & Smith Incorporated renders various
financial advisory services to the Company from time to time.
ERISA MATTERS
Washington Mutual and certain of its subsidiaries and affiliates,
including WMB, Murphey Favre, Composite Research and WM Life, may be considered
"parties in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or "disqualified persons" within the
meaning of Section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code"), with respect to many employee benefit plans and individual retirement
accounts ("IRAs"), including without limitation by reason of providing trust
custodial services, annuity products, investment advice or brokerage services to
such plans and IRAs. Prohibited transactions within the meaning of ERISA or the
Code may occur if, for example, the Shares are acquired by an employee benefit
plan or IRA or an entity (such as an insurance company general account) deemed
to be investing assets of an employee benefit plan, unless such Shares are
acquired pursuant to an exemption from the prohibited transaction rules. Any
such plan or entity proposing to invest in the Shares should consult with its
legal counsel.
EXPERTS
The Supplemental Consolidated Financial Statements of the Company, as
of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995, included in this Prospectus and Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein. Insofar as the report of Deloitte & Touche LLP
relates to the amounts included for Keystone Holdings Inc. and subsidiaries for
1995, 1994, and 1993 it is based solely on the report of other auditors. The
consolidated financial statements of Keystone Holdings Inc. and subsidiaries for
1995, 1994 and 1993, incorporated herein by reference from the Proxy Statement
dated November 12, 1996 have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report also incorporated herein by reference. The
consolidated financial statements of the Company incorporated in this Prospectus
by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, as amended by Form 8-K dated October 18, 1996, Form 8-K/A
dated October 23, 1996, and Form 8-K/A dated October 25, 1996 also have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated herein by reference. Such financial statements
of the Company and Keystone Holdings, Inc. are included herein or incorporated
by reference in reliance upon the respective reports of such firms given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby has
been passed upon by Foster Pepper & Shefelman, counsel to Washington Mutual.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California. As of December 2, 1996, individual members of Foster Pepper &
Shefelman owned an aggregate of 43,953 shares of Common Stock, 160 shares of
Series C Preferred and 100 shares of Series D Preferred.
AVAILABLE INFORMATION
Washington Mutual is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. The reports, proxy statements and other
information filed by Washington Mutual with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center (13th Floor), New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at
prescribed rates. The Commission also maintains a Web site that contains copies
of reports, proxy and information statements and other information regarding
registrants that file electronically, including the Company, with the Commission
at http://www.sec.gov. In addition, material filed by Washington Mutual can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. This
Prospectus does not contain all of the information set forth in the Registration
Statement, which Registration Statement the Company has filed with the
Commission. In accordance with the rules and regulations of the Commission, this
Prospectus does not contain certain information contained in the Registration
Statement to which reference is hereby made for further information. Statements
in this Prospectus regarding the contents of any contract or other document are
not necessarily complete; with respect to each such contract or document,
reference is made to the copy of such document filed with the Commission for a
more complete description of the matter involved, and each statement shall be
deemed to be qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Washington Mutual
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1995; 2.
Quarterly Reports on Form 10-Q, as amended, for each of the quarterly periods
ended March 31, 1996, June 30, 1996 and September 30, 1996; 3. Current Report on
Form 8-K dated March 15, 1996; 4. Item 2 of Current Report on Form 8-K dated
July 22, 1996; 5. Current Report on Form 8-K dated October 18, 1996, as amended
by Form 8-K/A dated October 23, 1996, as amended by Form 8-K/A dated October 25,
1996; and 6. Appendix B, pages B-1 through B-54, of the Company's definitive
proxy statement dated November 12, 1996.
All documents and reports filed by Washington Mutual pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of offering of the Shares shall be
deemed to be incorporated by reference in this Prospectus and to be part hereof
from the date of filing of such documents or reports. Any statement contained in
a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference that are not
presented herein or delivered herewith. These documents (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference)
are available upon request to each person to whom a copy of this Prospectus is
delivered, without charge, upon request to the Company at Investor Relations,
Washington Mutual, Inc., Washington Mutual Tower, 1201 Third Avenue, 12th Floor,
Seattle, Washington 98101 (telephone number (206) 461-3187).
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Unaudited Supplemental Consolidated Financial Statements as of September 30, 1996 and 1995 Page
<S> <C>
Supplemental Consolidated Statements of Income for the nine months ended September 30, 1996
and 1995..................................................................................... F-2
Supplemental Consolidated Statements of Financial Position as of September 30, 1996 and
December 31, 1995............................................................................ F-4
Supplemental Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 1996........................................................................... F-5
Supplemental Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995.................................................................. F-6
Notes to Supplemental Consolidated Financial Statements.......................................... F-8
Supplemental Consolidated Financial Statements as of December 31, 1995, 1994 and 1993
Independent Auditors' Report..................................................................... F-10
Supplemental Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993................................................................................ F-11
Supplemental Consolidated Statements of Financial Position as of December 31, 1995 and 1994...... F-13
Supplemental Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993............................................................. F-14
Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993............................................................................... F-15
Notes to Supplemental Consolidated Financial Statements.......................................... F-17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Nine Months
Ended September 30,
(dollars in thousands, except for per share amounts) 1996 1995
- -----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Interest Income
Loans $ 1,557,650 $ 1,525,432
Available-for-sale securities
607,748 252,896
Held-to-maturity securities
171,164 308,308
Notes receivable
- 56,650
Cash equivalents
2,023 2,431
- -----------------------------------------------------------------------------------------------------------
Total interest income
2,338,585 2,145,717
Interest Expense
Deposits
799,045 842,413
Borrowings
656,157 582,676
- -----------------------------------------------------------------------------------------------------------
Total interest expense
1,455,202 1,425,089
- -----------------------------------------------------------------------------------------------------------
Net interest income
883,383 720,628
Provision for loan losses
58,138 57,540
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 663,088
825,245
Other Income
Depositor fees 76,309
55,361
Loan servicing fees 31,769 21,050
Other service fees 38,640 36,685
Other operating income 25,804 22,289
Gain on sale of loans, inclusive of write-downs 15,223 (2,117)
Gain (loss) on sale of other assets, inclusive of write-downs (3,923) 726
Loss on sale of covered assets (37,399)
-
Federal Deposit Insurance Corporation ("FDIC") assistance
on covered assets 55,630
-
- -----------------------------------------------------------------------------------------------------------
Total other income 183,822 152,225
Other Expense
Salaries and employee benefits 250,106 233,785
Occupancy and equipment 88,592 82,665
Regulatory assessments 36,533 41,124
SAIF recapitalization assessment 124,193
-
Data processing fees 28,766 24,527
Other operating expense 127,062 113,623
Amortization of goodwill and other intangible assets 20,881 21,337
Real estate owned ("REO") operations, inclusive of
write-downs 8,409 7,963
- -----------------------------------------------------------------------------------------------------------
Total other expense 684,542 525,024
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 324,525 290,289
Income taxes 97,344 77,877
Provision (benefit) for payments in lieu of taxes 14,465 (1,410)
- -----------------------------------------------------------------------------------------------------------
Income before minority interest 212,716 213,822
Minority interest in earnings of consolidated subsidiaries (10,504) (12,244)
===========================================================================================================
Net Income $ 202,212 $ 201,578
===========================================================================================================
Net Income Attributable to Common Stock $188,397 $ 187,640
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME CONTINUED
Nine Months
Ended September 30,
- ------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Per share amounts -- primary
Net Income
$1.68 $1.72
===========================================================================================================
Per share amounts -- fully diluted
Net Income $1.66 $1.69
===========================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 657,640 $ 983,833
Trading account securities 2,151 238
Available-for-sale securities, amortized cost $10,092,075 and $11,919,009 10,063,100 12,154,725
Held-to-maturity securities, fair value $3,030,168 and $3,262,850 2,986,296 3,197,720
Loans, net of allowance for loan losses 28,336,065 24,109,136
Loans held for sale 160,692 83,704
REO 106,748 125,101
Premises and equipment 463,513 452,743
Goodwill and other intangible assets 140,300 161,127
Other assets 795,440 758,295
=============================================================================================================
Total assets $43,711,945 $42,026,622
=============================================================================================================
Liabilities
Deposits:
Checking accounts $ 2,835,294 $ 2,776,329
Savings and money market accounts 6,825,887 6,573,543
Time deposit accounts 14,317,334 15,113,088
- -------------------------------------------------------------------------------------------------------------
Total deposits 23,978,515 24,462,960
Annuities 868,438 855,503
Federal funds purchased 1,030,500 433,420
Securities sold under agreements to repurchase 8,615,157 7,984,756
Advances from the Federal Home Loan Bank ("FHLB") 5,539,551 4,715,739
Other borrowings 688,268 590,217
Other liabilities 489,600 362,323
- -------------------------------------------------------------------------------------------------------------
Total liabilities 41,210,029 39,404,918
Minority interest 80,000 80,000
Stockholders' Equity
Preferred stock, no par value: 10,000,000 shares authorized - 6,122,400
and 6,122,500 shares issued and outstanding - -
Common stock, no par value: 350,000,000 shares authorized -
120,037,913 and 119,687,860 shares issued; 112,037,913 and
111,687,860 shares outstanding - -
Capital surplus 928,116
920,406
Valuation reserve for available-for-sale securities (19,570) 188,715
Retained earnings 1,513,370 1,432,583
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,421,916 2,541,704
=============================================================================================================
Total liabilities, minority interest and stockholders' equity $43,711,945 $42,026,622
=============================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Valuation
Number of Shares Surplus Reserve
--------------------- Offset Against for Total
Preferred Common Capital Note Retained AFS Stockholders'
(in thousands) Stock Stock Surplus Receivable Earnings Securities Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 6,123 111,688 $920,406 - $1,432,583 $188,715 $2,541,704
Net income - - - - 202,212 - 202,212
Cash dividends on preferred stock - - - (13,814) - (13,814)
Cash dividends on common stock - - - - (107,611) - (107,611)
Common stock issued through stock
options and employee stock plans - 350 7,711 - - - 7,711
Adjustment in valuation reserve for
available-for-sale securities - - - - - (208,285) (208,285)
Conversion of preferred stock to
common stock (1) - (1) - - - (1)
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 6,122 112,038 $928,116 $ - $1,513,370 $ (19,570) $2,421,916
==========================================================================================================================
Balance at December 31, 1994 6,200 107,720 $890,344 (167,000) $1,192,741 $(61,249) $1,854,836
Net income - - - - 201,578 - 201,578
Cash dividends on preferred stock - - - - (13,938) - (13,938)
Cash dividends on common stock - - - - (43,874) - (43,874)
Common stock issued through stock
options and employee stock plans - 388 6,038 - - - 6,038
Adjustment in valuation reserve for
available-for-sale securities - - - - - 101,803 101,803
Immaterial Business Combination
accounted for as a pooling-of-interests - 3,429 23,562 - 26,645 9 50,216
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 6,200 111,537 $919,944 $(167,000) $1,363,152 $ 40,563 $2,156,659
==========================================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended September 30,
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 202,212 $ 201,578
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 58,138 57,540
(Gain) loss on sale of loans (15,223) 2,117
Loss (gain) on sale of other assets 3,923 (726)
Loss on sale of covered assets - 37,399
Effect of FDIC assistance on covered assets - (55,630)
REO operations, inclusive of write-downs 8,409 7,963
Depreciation and amortization 63,448 44,752
FHLB stock dividend (22,187) (18,867)
(Increase) in trading account securities (722) (1,330)
Origination of loans, held for sale (1,534,225) (452,177)
Proceeds on sale of loans, held for sale 1,631,365 812,774
(Increase) in interest receivable (17,501) (49,898)
(Increase) decrease in interest payable (1,953) 39,064
Increase in income taxes payable 8,430 27,887
Decrease (increase) in other assets 69,020 (57,186)
Increase in payable to FSLIC Resolution Fund ("FRF") 31,117 -
Increase in other liabilities 150,508 15,182
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 634,759 610,442
Cash Flows From Investing Activities
Purchases of available-for-sale securities (1,569,122) (1,341,521)
Principal payments and maturities of available-for-sale securities 1,101,438 421,038
Sales of available-for-sale securities 3,082,344 815,023
Purchases of held-to-maturity securities (3,963,691) (529,535)
Principal payments and maturities of held-to-maturity securities 4,172,020 628,088
Sales of loans 61,335 19,391
Principal payments on loans 3,012,042 1,981,642
Origination and purchases of loans (8,462,376) (5,753,939)
New West Note, payments received - 1,176,763
Sales of REO 115,376 109,422
Other REO operations (16,023) (2,247)
Proceeds from sales of premises and equipment 1,648 2,868
Purchase of premises and equipment (49,157) (87,738)
Purchased mortgage servicing rights (13,704) (38,433)
Cash acquired through acquisitions - 69,348
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (2,527,870) (2,529,830)
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
Nine Months
Ended September 30,
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash Flows From Financing Activities
(Decrease) increase in deposits $ (482,475) $ 954,257
Increase in annuities 12,935 51,120
Increase (decrease) in federal funds purchased 597,080 (50,000)
Increase in securities sold under short-term agreements to repurchase (751,998) 1,414,334
Proceeds from securities sold under long-term agreements to repurchase 2,497,407 1,666,557
Repurchase of securities sold under long-term agreements to repurchase (1,115,008) (355,151)
Proceeds from FHLB advances 8,160,050 1,445,084
Repayments of FHLB advances (7,335,114) (3,200,553)
Proceeds from other borrowings 99,172 322,867
Repayments of other borrowings (192) (111,129)
Issuance of common stock through stock options and employee stock plans
7,711 6,037
Increase in payable to affiliate (1,225) -
Cash dividends paid (121,425) (57,812)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,566,918 2,085,611
- ---------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (326,193) 166,223
Cash and cash equivalents at beginning of period 983,833 477,509
===============================================================================================================
Cash and cash equivalents at end of period $ 657,640 $ 643,732
===============================================================================================================
Noncash Investing Activities
Loans exchanged for mortgage-backed securities $884,314 $582,659
Real estate acquired through foreclosure 172,229 210,818
Loans originated to facilitate the sale of foreclosed properties 55,472 52,202
Cash Paid During The Period For
Interest on deposits 778,274 548,950
Interest on borrowings 677,353 354,905
Income taxes 87,200 55,680
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Adjustments
The information included in the consolidated statements of financial
position as of September 30, 1996 and December 31, 1995, the supplemental
consolidated statements of income and cash flows for the nine months ended
September 30, 1996 and 1995, and the supplemental consolidated statement of
stockholders' equity for the nine months ended September 30, 1996 of Washington
Mutual, Inc. ("Washington Mutual" or the "Company") reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for the period presented.
2. Earnings per Common Share
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Data Used to Compute Per Share Amounts
Net income $202,212 $201,578
Preferred stock dividends:
Noncumulative Perpetual, Series C (4,707) (4,788)
Noncumulative Perpetual, Series E (2,808) (2,850)
Noncumulative Convertible Perpetual, Series D (6,300) (6,300)
============================================================================================================
Net income available to primary common stock $188,397 $187,640
============================================================================================================
Net income $202,212 $201,578
Preferred stock dividends:
Noncumulative Perpetual, Series C (4,707) (4,788)
Noncumulative Perpetual, Series E (2,808) (2,850)
============================================================================================================
Net income available to fully diluted common stock $194,697 $193,940
============================================================================================================
Average common shares outstanding (1):
Primary 111,908,946 109,376,709
Noncumulative Convertible Perpetual Preferred Stock, Series D 5,418,860 5,419,247
============================================================================================================
Fully diluted 117,327,806 114,795,956
============================================================================================================
</TABLE>
(1) As part of the business combination with Keystone Holdings, Inc., 8,000,000
shares of common stock, with an assigned value of $___ per share were issued to
an escrow for the benefit of the general and limited partners of Keystone
Holdings, Inc. and the FRF. The Company will use the treasury stock method to
determine the effect of the shares upon the Company's financial statements. As
of the merger date, there is no potential dilutive effect of the 8,000,000
shares of common stock. The shares in the escrow will be dilutive in the future
to the extent that the market price of the common stock exceeds $___ per share.
3. Income Taxes
In August 1996, Keystone Holdings, Inc. amended prior-year federal tax
returns to reduce tax bad debt deductions and to make other amendments. As a
result, the net operating loss carryforwards for federal tax purposes were
reduced by approximately $756 million. In September 1996, ASB amended prior-year
state tax returns to reduce tax bad debt deductions. The result was to decrease
state net operating loss carryovers by approximately $545 million. The decrease
in the gross deferred tax asset as a result of the amendments which reduced the
federal and state net operating loss carryforwards was offset by an equal
decrease in the valuation allowance for the deferred tax asset. As of September
30, 1996, the Company had the following federal and state income tax net
operating loss carryforwards due to expire under current law during the years
indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) Federal State
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ - $ 140
2000 1,666 754,460
2001 140 599,241
2002 278 557,803
2003 1,602,736 -
2004 784,195 -
2005 700,619 -
2007 12,780 -
2008 37,460 -
===========================================================================================================
$3,139,874 $1,911,644
===========================================================================================================
</TABLE>
4. Common Shares Outstanding
On December ___, 1996, the shareholders of Washington Mutual, Inc. approved
an amendment to the Company's Restated Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 shares to
350,000,000 shares. The supplemental consolidated financial statements reflect
the amendment.
<PAGE>
The accompanying financial statements give effect to the consummation of the
merger of Washington Mutual, Inc. and Keystone Holdings, Inc. that must take
place prior to the commencement of the proposed offering of securities. The
following report is in the form that will be furnished by Deloitte & Touche LLP
upon the consummation of the merger described in Note 2 to the supplemental
consolidated financial statements assuming that from December 3, 1996 to the
date of such merger no other material events have occurred that would affect the
accompanying financial statements or require disclosure therein.
INDEPENDENT AUDITORS' REPORT
"To the Board of Directors and Shareholders of
Washington Mutual, Inc.:
We have audited the accompanying supplemental consolidated statements of
financial position of Washington Mutual, Inc. and subsidiaries ("the Company")
as of December 31, 1995 and 1994, and the related supplemental consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. The supplemental consolidated financial
statements give retroactive effect to the merger of Keystone Holdings, Inc.,
with and into Washington Mutual, Inc. on December , 1996, which has been
accounted for as a pooling-of-interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These supplemental financial statements do
not extend through the date of consummation; however, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued. We did not audit the consolidated balance sheet of Keystone Holdings,
Inc. and subsidiaries as of December 31, 1995 and 1994, or the related
consolidated statements of earnings, stockholder's equity, and cash flows for
the years ended December 31, 1995, 1994 and 1993, which statements reflect total
assets constituting 47% and 49%, respectively, of consolidated total assets as
of December 31, 1995 and 1994, and total net income constituting 31%, 25% and
30% for the years ended December 31, 1995, 1994 and 1993, respectively. Those
statements were audited by other auditors whose report, dated, January 26, 1996,
except as to Note 27 to the consolidated financial statements, which is as of
February 8, 1996, has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Keystone Holdings, Inc. and subsidiaries for
1995, 1994, and 1993, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Washington
Mutual, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, on January 1, 1994 and
December 31, 1993.
[Deloitte & Touche LLP]
December , 1996
Seattle, Washington
Deloitte & Touche LLP
December 3, 1996
Seattle, Washington
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $2,061,801 $1,658,818 $1,579,480
Note receivable 58,841 141,039 241,014
Held-to-maturity securities 409,063 235,709 54,377
Available-for-sale securities 381,633 258,678 320,588
Cash equivalents 4,748 1,169 3,119
- ------------------------------------------------------------------------------------------------------------
Total interest income 2,916,086 2,295,413 2,198,578
Interest expense
Deposits 1,134,818 852,666 868,178
Borrowings 788,618 482,692 343,718
- ------------------------------------------------------------------------------------------------------------
Total interest expense 1,923,436 1,335,358 1,211,896
- ------------------------------------------------------------------------------------------------------------
Net interest income 992,650 960,055 986,682
Provision for loan losses 74,987 122,009 158,728
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 917,663 838,046 827,954
Other Income
Depositor fees 79,017 45,255 39,872
Loan servicing fees 29,315 23,247 20,569
Other service fees 49,679 65,248 71,921
Other operating income 31,035 39,630 39,082
Gain on sale of loans, inclusive of write-downs 1,717 23,488 25,266
Gain (loss) on sale of other assets, inclusive of write-downs (655) 23,926 49,866
Loss on sale of covered assets (37,399) - -
Federal Deposit Insurance Corporation ("FDIC") assistance on
covered assets 55,630 - -
- ------------------------------------------------------------------------------------------------------------
Total other income 208,339 220,794 246,576
Other Expense
Salaries and employee benefits 313,304 315,424 316,929
Occupancy and equipment 111,381 102,403 106,419
Regulatory assessments 54,909 54,887 52,444
Data processing fees 36,538 33,862 35,613
Other operating expense 145,394 146,463 132,178
Amortization of goodwill and other intangible assets 28,306 29,076 24,690
Real estate owned ("REO") operations, inclusive of write-downs 10,682 13,402 19,246
- ------------------------------------------------------------------------------------------------------------
Total other expense 700,514 695,517 687,519
- ------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary items,
cumulative effect of change in tax accounting method
and minority interest 425,488 363,323 387,011
Income taxes 111,906 109,880 96,034
Provision (benefit) for payments in lieu of taxes 7,887 (824) 14,075
- ------------------------------------------------------------------------------------------------------------
Income before extraordinary items, cumulative effect of
change in tax accounting method and minority interest 305,695 254,267 276,902
Extraordinary items, net of federal income tax effect - - (8,953)
Cumulative effect of change in tax accounting method - - 13,365
Minority interest in income of consolidated subsidiaries (15,793) (13,992) (13,991)
============================================================================================================
Net Income $ 289,902 $ 240,275 $ 267,323
============================================================================================================
Net Income Attributable to Common Stock $ 271,318 $ 221,691 $ 253,764
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME CONTINUED
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share amounts -- primary
Income before extraordinary items and cumulative
effect of change in tax accounting method $2.47 $2.09 $ 2.38
Extraordinary items, net of federal income tax effect - - (0.09)
Cumulative effect of change in tax accounting method - - 0.13
============================================================================================================
Net income $2.47 $2.09 $ 2.42
============================================================================================================
Per share amounts -- fully diluted
Income before extraordinary items and cumulative
effect of change in tax accounting method $2.42 $2.06 $ 2.32
Extraordinary items, net of federal income tax effect - - (0.08)
Cumulative effect of change in tax accounting method - - 0.12
============================================================================================================
Net income $2.42 $2.06 $ 2.36
============================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 983,833 $ 477,509
Trading account securities 238 572
Available-for-sale securities, amortized cost $11,919,009 and $4,362,152 12,154,725 4,282,160
Held-to-maturity securities, fair value $3,262,850 and $4,228,897 3,197,720 4,456,031
Loans, net of the allowance for loan losses 24,109,136 25,463,458
Loans held for sale 83,704 8,634
Note receivable - 1,515,040
REO 125,101 137,767
Premises and equipment 452,743 392,688
Goodwill and other intangible assets 161,127 190,998
Other assets 758,295 556,439
- -----------------------------------------------------------------------------------------------------------
Total assets $42,026,622 $37,481,296
============================================================================================================
Liabilities
Deposits:
Checking accounts $ 2,776,329 $ 2,841,689
Savings and money market accounts 6,573,543 5,727,765
Time deposit accounts 15,113,088 14,774,552
- ------------------------------------------------------------------------------------------------------------
Total deposits 24,462,960 23,344,006
Annuities 855,503 799,178
Federal funds purchased 433,420 -
Securities sold under agreements to repurchase 7,984,756 6,637,346
Advances from the Federal Home Loan Bank ("FHLB") 4,715,739 4,128,977
Other borrowings 590,217 381,066
Other liabilities 362,323 255,887
- ------------------------------------------------------------------------------------------------------------
Total liabilities 39,404,918 35,546,460
Minority interest 80,000 80,000
Contingencies (Note 28) - -
Stockholders' Equity
Preferred stock, no par value: 10,000,000 shares authorized - 6,122,500
and 6,200,000 shares issued and outstanding - -
Common stock, no par value: 350,000,000 shares authorized -
119,687,860 and 115,720,886 shares issued; 111,687,860 and
107,720,886 shares outstanding - -
Capital surplus 920,406 890,344
Capital surplus offset against note receivable - (167,000)
Valuation reserve for available-for-sale securities 188,715 (61,249)
Retained earnings 1,432,583 1,192,741
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,541,704 1,854,836
============================================================================================================
Total liabilities, minority interest and stockholders' equity $42,026,622 $37,481,296
============================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Captial
Number of Surplus Valuation
Number of Shares offset Reserve
(in thousands) ------------------ against for Total
Preferred Common Capital Note Retained AFS Stockholders'
Stock Stock Surplus Receivable Earnings Securities Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 5,494 98,779 $791,736 $(167,000) $ 843,099 $ - $1,467,835
Net income - - - - 267,323 - 267,323
Miscellaneous stock transactions - 375 7,523 - (7,546) - (23)
Cash dividends declared on preferred
stock - - - - (13,559) - (13,559)
Cash dividends declared on common
stock - - - - (48,936) - (48,936)
Preferred stock issued 2,000 - 48,182 - - - 48,182
Common stock issued through stock
options and employee stock plans - 1,151 15,508 - 18 - 15,526
Establishment of valuation reserve for
available-for-sale securities -
Keystone Holdings, Inc. - - - - - 29,657 29,657
Conversion of preferred stock to
common stock (1,294) 5,152 - (445) - (445)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 6,200 105,457 862,949 (167,000) 1,039,954 29,657 1,765,560
Establishment of valuation reserve for
available-for-sale securities -
Washington Mutual, Inc. - - - - - 13,836 13,836
Net income - - - - 240,275 - 240,275
Miscellaneous stock transactions - 384 7,762 - (7,774) - (12)
Cash dividends declared on preferred
stock - - - - (18,584) - (18,584)
Cash dividends declared on common
stock - - - - (67,835) - (67,835)
Adjustments in valuation reserve for
available-for-sale securities - - - - - (104,742) (104,742)
Common stock issued through stock
options and employee stock plans - 426 10,038 - - - 10,038
Immaterial business combination
accounted for as a - 1,454 9,595 - 6,705 - 16,300
pooling-of-interests
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 6,200 107,721 890,344 (167,000) 1,192,741 (61,249) 1,854,836
Net income - - - - 289,902 - 289,902
Miscellaneous stock transactions - (1) (13) - - - (13)
Cash dividends declared on preferred
stock - - - - (18,584) - (18,584)
Cash dividends declared on common
stock - - - - (57,997) - (57,997)
Adjustments in valuation reserve for
available-for-sale securities - - - - - 249,964 249,964
Common stock issued through stock
options and employee stock plans - 539 8,379 - - - 8,379
Capital surplus previously offset
against
note receivable - - - 167,000 - - 167,000
Immaterial business combination
accounted for as a - 3,429 23,562 - 26,645 - 50,207
pooling-of-interests
Repurchase of preferred stock (77) - (1,866) - (124) - (1,990)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 6,123 111,688 $920,406 $ $1,432,583 $188,715 $2,541,704
========================================================================================================================
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 289,902 $ 240,275 $ 267,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 74,987 122,009 158,728
Cumulative effect of change in tax accounting method - - (13,365)
(Gain) on sale of loans (1,717) (23,488) (25,266)
Loss (gain) on sale of other assets 655 (23,926) (49,866)
Loss on sale of covered assets 37,399 - -
Effect of FDIC assistance on covered assets (55,630) - -
REO operations, inclusive of write-downs 10,682 13,402 19,246
Extraordinary loss - - 13,028
Depreciation and amortization 54,361 58,939 91,435
FHLB stock dividend (23,155) (22,108) (25,715)
Decrease in trading account securities 749 691 1,574
Origination of loans, held for sale (822,025) (263,055) (987,678)
Proceeds on sale of loans, held for sale 1,127,076 764,710 900,623
(Increase) in interest receivable (58,902) (28,800) (28,553)
Increase (decrease) in interest payable 31,027 22,159 (4,741)
Increase in income taxes payable 38,683 40,205 10,360
(Increase) decrease in other assets (88,951) 10,757 31,114
(Decrease) in other liabilities (22,217) (65,641) (78,523)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 591,614 846,129 279,724
Cash Flows From Investing Activities
Purchases of available-for-sale securities (2,312,072) (1,480,421) (348,374)
Principal payments and maturities of available-for-sale 817,048 545,753 142,116
securities
Sales of available-for-sale securities 1,673,853 499,719 262,132
Purchases of held-to-maturity securities (697,470) (1,931,537) (2,086,760)
Principal payments and maturities of held-to-maturity securities 885,205 1,109,796 1,774,438
Sales of held-to-maturity securities - - 838,358
Proceeds from sales of loans 84,197 54,754 919,768
Principal payments on loans 3,067,145 3,332,483 4,691,734
Origination and purchases of loans (8,562,080) (8,666,382) (8,805,116)
New West Note, payments received 1,682,040 1,569,018 1,569,018
Sales of REO 148,756 202,374 204,335
Other REO operations 1,774 (1,236) (8,573)
Proceeds from sale of premises and equipment 4,871 2,211 8,130
Purchase of premises and equipment (102,877) (58,396) (59,852)
Purchase of mortgage servicing rights (38,270) (37,605) -
Cash proceeds from disposition of credit card receivables - 166,315 -
Cash acquired through acquisitions 68,358 40,679 387,688
- ------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (3,279,522) (4,652,475) (510,958)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Increase (decrease) in deposits $ 707,375 $ (380,297) $(1,048,485)
Increase in annuities 56,325 85,795 141,955
Increase in federal funds purchased 433,420 - -
(Decrease) increase in securities sold under short-term
agreements to repurchase (186,833) 2,289,611 1,065,235
Proceeds from securities sold under long-term
agreements to repurchase 2,872,557 1,391,682 914,156
Repurchase of securities sold under long-term agreements
to repurchase (1,408,127) (260,713) (332,188)
Proceeds from FHLB advances 4,710,333 8,209,790 7,116,870
Repayments of FHLB advances (4,123,336) (7,698,071) (7,460,874)
Call of subordinated capital notes - - (41,600)
Proceeds of other borrowings 147,867 - -
Repayments of other borrowings (1,470) (3,488) (5,536)
Issuance of Keystone Holdings, Inc. Series C Notes 175,000 - -
Repayment of Keystone Holdings, Inc. Series A Notes (111,000) - -
Proceeds from issuance of subordinate notes - - 19,988
Retirement of subordinate debentures - - (20,000)
Decrease in payable to affiliate - - (21,000)
Other capital transactions, net (1,298) 14,742 26,430
Cash dividends paid (76,581) (96,419) (52,495)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,194,232 3,552,632 302,456
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 506,324 (253,714) 71,222
Cash and cash equivalents at beginning of year 477,509 731,223 660,001
=============================================================================================================
Cash and cash equivalents at end of year $ 983,833 $ 477,509 $ 731,223
=============================================================================================================
Noncash Investing Activities
Loans exchanged for mortgage-backed securities $6,588,124 $ 183,269 $2,374,344
Implementation of new accounting standard -
reclass to available-for-sale portfolio - 2,127,890 1,615,482
Transfer of securities to the available-for-sale portfolio 4,924,168 - -
Real estate acquired through foreclosure 255,028 334,499 349,239
Loans originated to facilitate the sale of foreclosed properties 65,693 92,415 47,832
Cash Paid During The Year For
Interest on deposits 1,125,226 851,546 891,626
Interest on borrowings 762,000 458,033 322,310
Federal income taxes 73,130 92,172 65,930
Deposits exchanged in branch swaps - - 152,382
Dividends declared and payable in different years
Common stock dividends - (10,000) 10,000
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Supplemental Consolidated Financial Statements are
the same as the restated financial statements that will be issued after the
postmerger operating results are published. On December ___, 1996, Keystone
Holdings, Inc. ("Keystone Holdings") merged with and into Washington Mutual,
Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the
"Company"). The supplemental financial statements reflect the accounting for the
merger as a pooling-of-interests and are presented as if the companies were
merged as of the earliest period shown.
WMI was formed in August 1994 by the Company's predecessor, Washington
Mutual Savings Bank ("WMSB"), a Washington state-chartered savings bank, in
connection with the reorganization of WMSB into a holding company structure. The
reorganization was completed in November 1994 through the merger of WMSB into
Washington Mutual Bank ("WMB"), the Company's Washington state-chartered savings
bank subsidiary, with WMB as the surviving entity. WMB continued as a wholly
owned subsidiary of WMI. The par values of preferred and common stock and
capital surplus of the Company have been restated to reflect the new par value
of the holding company, effective November 1994.
Certain reclassifications have been made to the 1994 and 1993
financial statements to conform to the 1995 presentation. All significant
intercompany transactions and balances have been eliminated. Results of
operations of companies acquired and accounted for as purchases are included
from the dates of acquisition. When Washington Mutual acquires a company through
a material pooling-of-interests, current and prior-period financial statements
are restated to include the accounts of merged companies. Previously reported
balances of the merged companies have been reclassified to conform to WMI's
presentation and restated to give effect to the combinations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the financial statements.
LINES OF BUSINESS
Washington Mutual provides a broad range of financial services to
individuals and small businesses in Washington, California, Oregon, Utah, Idaho,
Montana, Arizona, Colorado and Nevada through its subsidiary operations.
Financial services of the Company include accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family, which are offered
principally through WMB, American Savings Bank, F.A. ("ASB") and Washington
Mutual Bank fsb ("WMBfsb"). Washington Mutual, through other subsidiaries, also
issues and markets annuity contracts and is the investment advisor to and
distributor of mutual funds.
Washington Mutual diversified its business mix by merging WMB with
Enterprise Bank ("Enterprise"), a Seattle-area commercial bank and Western Bank
("Western") of Coos Bay, Oregon, Oregon's largest community-based commercial
bank. The mergers with Enterprise and Western provide the Company with access to
the higher-growth business segment of commercial banking .
<PAGE>
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments, such as interest rate
exchange agreements and interest rate cap agreements, forward sales of financial
instruments, financial futures and options to reduce its exposure to interest
rate risk. Interest rate exchange agreements and interest rate cap agreements
are used only if they have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. Such
effect is measured either through ongoing correlation or effectiveness tests.
Interest rate exchange agreements and interest rate cap agreements are
designated either against the available-for-sale portfolio or against borrowings
and deposits. Agreements designated against available-for-sale securities are
included at their fair value in the available-for-sale portfolio and any
mark-to-market adjustments are reported as a separate component of stockholders'
equity, net of tax. The fair value of interest rate exchange agreements and
interest rate cap agreements designated against loans, short-term borrowings,
and deposits are not reported on the balance sheet.
The interest differential paid or received on interest rate exchange
agreements is recorded as an adjustment to interest income or interest expense
and classified with the interest income or interest expense of the related asset
or liability. The purchase premium of interest rate cap agreements is
capitalized and amortized and included as a component of interest income or
interest expense over the original term of the interest rate cap agreement. No
purchase premium is paid at the time an interest rate exchange agreement is
entered into.
From time to time, the Company terminates interest rate exchange
agreements and interest rate cap agreements prior to maturity. Such
circumstances arise if, in the judgment of management, such instruments no
longer cost-effectively meet policy objectives. Often such instruments are
within one year of maturity. Gains and losses from terminated interest rate
exchange agreements and interest rate cap agreements are recognized, consistent
with the gain or loss on the asset or liability designated against the
agreement. When the asset or liability is not sold or paid off, the gains or
losses are deferred and amortized on a straight-line basis as additional
interest income or interest expense over the original terms of the agreements or
the remaining life of the designated asset or liability, whichever is less. When
the asset or liability is sold or paid off, the gains or losses are recognized
in the current period as an adjustment to the gain or loss recognized on the
corresponding asset or liability.
From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between available-for-sale
securities and short-term deposits and borrowings. Such redesignations are
treated as a sale out of the one portfolio and as a purchase by the other
portfolio and recorded at the fair value at the time of transfer.
The Company may also buy put or call options on mortgage instruments.
The purpose and criteria for the purchase of options are to manage the interest
rate risk inherent in secondary marketing activities. The costs of such options
are capitalized and amortized on a straight-line basis as a reduction of other
income over the original terms of the options. All such options are carried at
fair value with the corresponding gain or loss recognized in other income.
The Company may write covered call options on its available-for-sale
portfolio to enhance fee income. If the option is exercised, the option fee is
an adjustment to the gain or loss on the sale of the security. If the option is
not exercised, it is recognized as fee income. Covered call options are carried
at cost.
Additionally, the Company uses forward sales of financial instruments
to lock in prices on similar types and coupons of financial instruments and
thereby limit market risk until these financial instruments are sold.
In the event that any of the derivative instruments fail to meet the
above established criteria, they would be marked to market with the
corresponding gain or loss recognized in income.
INVESTMENT SECURITIES
Effective December 31, 1993, Keystone Holdings adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Washington Mutual adopted SFAS No.
115 on January 1, 1994. Following the provisions of the Statement, management
has segregated investment and equity securities into the following three
categories: trading, held-to-maturity and available-for-sale, and utilizes the
accounting conventions for each category described below. The effect on
stockholders' equity at December 31, 1993 of the Keystone Holdings adoption was
a $29.7 million increase. The effect on stockholders' equity at January 1, 1994
of the Washington Mutual adoption was a $13.8 million increase.
Trading Securities
Trading securities are purchased and held principally for the purpose
of reselling them within a short period of time. Their unrealized gains and
losses are included in earnings.
Held-To-Maturity Securities
Investments classified as held-to-maturity are accounted for at
amortized cost, but an institution must have both the positive intent and the
ability to hold those securities to maturity. There are limited circumstances
under which securities in the held-to-maturity category can be sold without
jeopardizing the cost basis of accounting for the remainder of the securities in
this category. Recognition is provided for unrealized losses in the debt
portfolio if any market valuation differences are deemed to be other than
temporary.
Available-For-Sale Securities
Securities not classified as either trading or held-to-maturity are
considered to be available-for-sale. Gains and losses realized on the sale of
these securities are based on the specific identification method. Unrealized
gains and losses for available-for-sale securities are excluded from earnings
and reported (net of tax) as a net amount in a separate component of
stockholders' equity until realized.
The available-for-sale portfolio contains adjustable- and fixed-rate
private-issue (nonagency) mortgage-backed securities ("private-issue
securities") and collateralized mortgage obligations that expose the Company to
certain risks that are not inherent in agency securities, primarily credit risk
and liquidity risk. Because of this added risk, private-issue securities have
historically paid a greater rate of interest than agency securities, enhancing
the overall yield of the portfolio. Such securities are not guaranteed by the
U.S. government or one of its agencies because the loan size, underwriting or
underlying collateral of these securities often does not meet set industry
standards. Consequently, there is the possibility of loss of the principal
investment. For this reason, it is possible that the Company will not receive an
enhanced overall yield on the portfolio and, in fact, could incur a loss.
Additionally, the Company may not be able to sell such securities in certain
market conditions as the number of interested buyers may be limited at that
time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. Examples of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated tranches, certain collateralized mortgage obligations that
have been "resecuritized," and certain securities that contain a significant
number of jumbo, nonconforming loans. In an effort to reduce the aforementioned
risks, the Company now performs a credit review on each individual security
prior to purchase. Such a review includes consideration of the collateral
characteristics, borrower payment histories and information concerning loan
delinquencies and losses of the underlying collateral. After a security is
purchased, similar information will be monitored on a periodic basis.
Furthermore, the Company has established internal guidelines limiting the
geographic concentration of the underlying collateral.
LOANS
Loans held for investment are stated at the principal amount
outstanding, net of deferred loan fees and any discounts or premiums on
purchased loans. The deferred fees, discounts and premiums are amortized using
the interest method over the estimated life of the loan. The Company sells
residential fixed-rate loans in the secondary market. At the date of
origination, the loans so designated and meeting secondary market guidelines are
identified as held-for-sale and carried at the lower of net cost or fair value
on an aggregate basis, net of their related hedge gains and losses.
Management ceases to accrue interest income on any loan that becomes
90 days or more delinquent and reserves all interest accrued up to that time.
Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans for which interest in not being accrued are referred to
as loans on nonaccrual status.
On January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. This standard is applicable to all loans
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. Loans that are collectively evaluated for impairment
by Washington Mutual include residential real estate and consumer loans because
of the significant number of loans, their relatively small balances and
historically low level of losses. Residential construction, commercial real
estate and commercial business loans that become delinquent, regardless of the
loan amount, are individually evaluated for impairment. Factors involved in
determining impairment include, but are not limited to, the financial condition
of the borrower, value of the underlying collateral, and current economic
conditions. SFAS No. 114 also applies to all loans that are restructured in a
troubled debt restructuring subsequent to the adoption of SFAS No. 114, as
defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. A troubled debt restructuring is a restructuring in which the
creditor grants a concession to the borrower that it would not otherwise
consider.
A loan is impaired when it is probable that a creditor will be unable
to collect all amounts due according to the terms of the loan agreement. SFAS
No. 114 requires that the valuation of impaired loans be based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The Company
bases the measurement of loan impairment on the fair value of the loan's
underlying collateral. The amount by which the recorded investment in the loan
exceeds the value of the impaired loan's collateral is included in the Company's
allocated reserve for loan losses. Any portion of an impaired loan classified as
loss under regulatory guidelines is charged off. The adoption of SFAS No. 114
had no material impact on the results of operations or financial condition of
the Company.
The Company holds certain loans that have been securitized into
mortgage-backed securities with full recourse.
<PAGE>
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluating known and inherent risks
in the loan portfolio. The reserve is based on management's continuing analysis
of the pertinent factors underlying the quality of the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated economic conditions, and
detailed analysis of individual loans and credits for which full collectibility
may not be assured. The detailed analysis includes techniques to estimate the
fair value of loan collateral and the existence of potential alternative sources
of repayment. The appropriate reserve level is estimated based upon factors and
trends identified by management at the time financial statements are prepared.
The reserve includes amounts relating to loans which have been securitized with
recourse, and not sold.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged off against the reserve for
loan losses. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not evidenced the ability or intent to bring the
loan current; the Company has no recourse to the borrower, or if it does, the
borrower has insufficient assets to pay the debt; the fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.
Commercial real estate loans are considered by the Company to have
somewhat greater risk of uncollectibility than residential real estate loans due
to the dependency on income production or future development of the real estate.
The ultimate recovery of all loans is susceptible to future market
factors beyond the Company's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
NOTE RECEIVABLE
Keystone Holdings, through New American Holdings, Inc. ("New
Holdings"), a wholly owned subsidiary of Keystone Holdings, owns the common
stock of New West Federal Savings and Loan Association ("New West"). On December
28, 1988, (the "1988 Acquisition"), substantially all assets and liabilities of
the failed savings and loan subsidiary (the "Failed Association") of Financial
Corporation of America ("FCA"), were transferred to ASB (the "Acquisition") and
New West. As part of the acquisition, ASB received a note ("Note Receivable")
from New West representing the difference between the amount of the deposits and
other liabilities assumed and the value of the assets acquired by ASB at the
time of the Acquisition.
As of the 1988 Acquisition, Keystone Holdings and other related
entities also entered into an assistance agreement (the "Assistance Agreement")
with the Federal Savings and Loan Insurance Corporation (the "FSLIC"). Under the
terms of the Assistance Agreement, the FSLIC Resolution Fund (the "FRF") is
required to indemnify ASB for specified losses that may be incurred on, or in
connection with, certain of the acquired assets, and the FRF received warrants
entitling the holder thereof to purchase, for a nominal price, 3,000 shares of
N.A. Capital Holdings ("N.A. Holdings") Class B Common Stock.
Although the Company holds the ownership interest in New West, the
Company does not have a financial interest in New West because of certain
contractual provisions and indemnifications, described above. Any loss incurred
by New West during its liquidation is the financial responsibility of the FRF.
In addition, substantially all decisions made by New West's management must be
approved by the FDIC prior to execution. New West has not recorded any earnings
or losses since its inception. New West was considered a nominee corporation of
ASB for state and federal tax purposes until October 24, 1995.
The balance of the Note Receivable reported in the Company's financial
statements prior to December 31, 1995 has been reduced by the $167.0 million
value ascribed to the warrants. Consensus No. 88-19 of the Emerging Issues Task
Force of the Financial Accounting Standards Board ("FASB") requires that capital
arising from instruments issued to the FSLIC be offset against amounts
receivable from the FSLIC, which in this case included the Note Receivable as
its repayment was supported by FRF assistance to New West.
REO
REO includes properties acquired through foreclosure that are
transferred to REO at the lower of cost or fair value, less estimated selling
costs, which represents the new recorded basis of the property. Subsequently,
properties are evaluated and any additional declines in value are provided for
in the REO reserve for losses. The amount the Company will ultimately recover
from REO may differ substantially from the amount used in arriving at the net
carrying value of these assets because of future market factors beyond the
Company's control or because of changes in the Company's strategy for sale or
development of the property.
Commercial REO that is managed and operated by the Company is
depreciated using the straight-line method over the property's estimated useful
life.
MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. The statement eliminates the distinction between servicing
rights that are purchased and those that are retained upon the sale or
securitization of loans. The statement requires mortgage servicers to recognize
the servicing rights on loans as separate assets, no matter how acquired. Banks
that sell loans and retain the servicing rights are required to allocate the
total cost of the loans between servicing rights and loans based on their
relative fair values if their values can be estimated. In September 1995,
Keystone Holdings elected early adoption of SFAS No. 122, as permitted by the
Statement, and implemented it as of January 1, 1995. Effective January 1, 1996,
Washington Mutual adopted SFAS No. 122. The adoption of SFAS No. 122 did not
have a material impact on the results of operations or financial condition of
the Company.
Purchased servicing represents the cost of acquiring the right to
service mortgage loans. Originated servicing rights are recorded when mortgage
loans are originated and subsequently sold or securitized with the servicing
rights retained. The total cost of the mortgage loans is allocated to the
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. The cost relating to purchased and
originated servicing is capitalized and amortized in proportion to, and over the
period of, estimated future net servicing income.
The Company assesses impairment of the capitalized mortgage servicing
portfolio based on the fair value of those rights on a stratum-by-stratum basis
with any impairment recognized through a valuation allowance for each impaired
stratum. For purposes of measuring impairment, the rights are stratified based
on the following predominant risk characteristics of the underlying loans:
fixed-rate loans by coupon (less than 8%, 8%-10%, 10%-12% and greater than 12%);
and adjustable rate loans by index (Weighted Average Cost of Funds Index for the
Eleventh District Savings Institutions ("COFI"), Treasury, London Interbank
Offering Rate ("LIBOR"), etc.) The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights for a stratum exceed their
fair value.
In order to determine the fair value of the servicing rights, the
Company uses the market prices under comparable servicing sales contracts, when
available, or alternatively, it uses a valuation model that calculates the
present value of future cash flows. Assumptions used in the valuation model
include market discount rates and anticipated prepayment speeds. The prepayment
speeds are determined from market sources for fixed-rate mortgages with similar
coupons and prepayment reports for comparable adjustable-rate mortgages
("ARMs"). In addition, the Company uses market comparables for estimates of the
cost of servicing per loan, an inflation rate, ancillary income per loan and
default rates. Amounts capitalized are recorded at cost, net of accumulated
amortization and valuation allowance.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives on the straight-line method. Leasehold improvements are amortized
over the shorter of their useful lives or lease terms.
ANNUITY AND INSURANCE ACCOUNTING
WM Life Insurance, Inc. ("WM Life") is an Arizona-domiciled life
insurance company. WM Life is authorized under state law to issue annuities in
seven states. In addition, WM Life owns Empire Life Insurance Co. ("Empire"),
which is currently licensed under state law to issue annuities in 28 states. WM
Life currently issues fixed and variable flexible premium deferred annuities,
single premium fixed deferred annuities and single premium immediate annuities.
Empire currently issues fixed flexible premium deferred annuities and single
premium immediate annuities. Both companies conduct business through licensed
independent agents. The majority of such agents are employees of affiliates of
the Company and operate in the Company's financial centers. Currently, annuities
are primarily issued in Washington and Oregon.
The Company defers certain costs, such as commissions and the expenses
of underwriting and issuing policies, that are involved in acquiring new annuity
and life insurance business. These costs, which are included in other assets in
the accompanying Consolidated Statements of Financial Position, are amortized
over the lives of the policies in relation to the estimated gross profit.
Annuities equal the policy value as defined in the policy contract as of the
balance sheet date.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to
repurchase the same ("reverse repurchase agreements") or similar ("dollar
repurchase agreements") securities. Reverse repurchase agreements and dollar
rolls are accounted for as financing arrangements, with the obligation to
repurchase securities sold reflected as a liability in the Consolidated
Statement of Financial Position. The dollar amount of securities underlying the
agreements remain in the respective asset accounts.
TRUST ASSETS
Assets held by the Company in fiduciary or agency capacity for
customers are not included in the Consolidated Financial Statements as such
items are not assets of the Company. Assets totaling $67.3 million and $60.9
million as of December 31, 1995 and 1994 were held by the Company in fiduciary
or agency capacity.
<PAGE>
FEDERAL AND STATE INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Under this method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the change in the deferred tax
liability from the beginning to the end of the year. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company reports income and expenses using the accrual method of
accounting and files a consolidated tax return that includes all of its
subsidiaries excluding Keystone Holdings and its subsidiaries. Keystone Holdings
and its subsidiaries filed a separate consolidated tax return for periods prior
to December ___, 1996.
Subsequent to the consummation of the merger with Keystone Holdings,
the Company will file a consolidated tax return that includes all of its
subsidiaries. For California franchise tax purposes, ASB joins in the filing of
a combined return with its subsidiaries and with ASB Real Estate Group, Inc.
("AREG"). AREG formerly managed certain real estate related assets of New West
and is now inactive as a result of a restructuring transaction in 1993.
The tax sharing agreement entered into by Keystone Holdings and its
subsidiaries (the "Tax Sharing Agreement") requires the subsidiaries to compute
their tax sharing payments as if they were filing a separate return. Such
agreement further requires N.A. Holdings to compute its tax sharing payment as
if it were filing a separate consolidated return with its subsidiaries
(including ASB), with certain adjustments. The principal adjustments are (a) the
income, expenses, gains and losses of New West, a nominee of ASB for income and
franchise tax purposes through October 23, 1995, are excluded; (b) loan fees are
recognized on a straight-line basis over seven years, adjusted for sales of such
loans, rather than as received; and (c) for the years ending on or before
December 31, 1994, the mark-to-market adjustments attributable to the real
estate loan portfolio acquired from the Failed Association is accreted into
income ratably over seven years, adjusted for sales of the acquired loans.
<PAGE>
NOTE 2: BUSINESS COMBINATIONS
On March 1, 1993, the Company merged with Pioneer Savings Bank
("Pioneer") of Lynnwood, Washington. Pioneer operated 17 branches and one
mortgage lending center. At February 28, 1993, Pioneer had assets of $926.5
million, deposits of $659.5 million and stockholders' equity of $114.4 million.
The Company issued 8,779,581 shares of common stock (after adjustment for the
third quarter 1993 50 percent stock dividend) to complete the merger with
Pioneer. The financial information presented in this document reflects the
pooling-of-interests method of accounting for the merger of Pioneer into the
Company. Accordingly, under generally accepted accounting principles, the assets
and liabilities of Pioneer were recorded on the books of the resulting
institution at their values as reported on the books of Pioneer immediately
prior to the consummation of the merger with Pioneer. No goodwill was created in
the merger with Pioneer. This presentation required the restatement of prior
periods as if the companies had been combined.
The following pro forma information represents the results of
operations of the Company and Pioneer for 1993, on an individual as well as
combined basis. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies. The unaudited pro forma results
of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Washington Mutual:
Net interest income $522,816
Income before extraordinary items and cumulative effect of change in tax
accounting method 173,428
Extraordinary items, net of federal income tax effect (8,953)
Cumulative effect of change in tax accounting method 13,365
===========================================================================================================
Net income $177,840
===========================================================================================================
Net income attributable to common stock $164,282
===========================================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative effect of change in tax
accounting method $ 2.78
Extraordinary items, net of federal income tax effect (0.15)
Cumulative effect of change in tax accounting method 0.23
===========================================================================================================
Net income $ 2.86
===========================================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect of change in tax
accounting method $ 2.63
Extraordinary items, net of federal income tax effect (0.14)
Cumulative effect of change in tax accounting method 0.21
===========================================================================================================
Net income $ 2.70
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Pioneer:
Net interest income $6,615
Income before extraordinary items and cumulative effect of change in tax
accounting method 1,836
===========================================================================================================
Net income $1,836
===========================================================================================================
Net income attributable to common stock $1,836
===========================================================================================================
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -----------------------------------------------------------------------------------------------------------
Washington Mutual and Pioneer combined:
Net interest income $529,431
Income before extraordinary items and cumulative effect of
change in tax accounting method 175,264
Extraordinary items, net of federal income tax effect (8,953)
Cumulative effect of change in tax accounting method 13,365
===========================================================================================================
Net income $179,676
===========================================================================================================
Net income attributable to common stock $166,118
===========================================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative effect of
change in tax accounting method $ 2.74
Extraordinary items, net of federal income tax effect (0.15)
Cumulative effect of change in tax accounting method 0.23
===========================================================================================================
Net income $ 2.82
===========================================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect of
change in tax accounting method $ 2.60
Extraordinary items, net of federal income tax effect (0.14)
Cumulative effect of change in tax accounting method 0.21
===========================================================================================================
Net income $ 2.67
===========================================================================================================
</TABLE>
On April 9, 1993, the Company acquired Pacific First Bank ("Pacific
First") from RT Holdings, Inc. ("RTH"), a subsidiary of Royal Trustco Limited of
Toronto, Canada. In April 1993, Pacific First operated 129 branches and 14 home
loan centers in Washington and Oregon. At March 31, 1993, Pacific First had
assets of $5.8 billion and deposits of $3.8 billion.
As part of the acquisition of Pacific First, the Company negotiated
several provisions designed to reduce the effect of any Pacific First asset
quality problems on the resulting combined loan portfolio. As a result of the
provisions, RTH purchased $656.2 million book value in assets from Pacific First
prior to the sale to the Company.
As part of the purchase agreement, the Company received
indemnification from RTH for a variety of problems Pacific First had that could
result in future losses to the Company. These indemnification provisions were
secured by both specific funds held in escrow and by a guarantee from RTH's
parent company. The largest individual component is a $10.0 million general
indemnity escrow that can be drawn upon to pay a variety of claims, including
any exposure arising from transactions or acts prior to the purchase date.
The acquisition of Pacific First was treated as a purchase for
accounting purposes. Accordingly, under generally accepted accounting
principles, the assets and liabilities of Pacific First have been recorded on
the books of the Company at their respective fair market values at the time of
the consummation of the acquisition of Pacific First. Goodwill, the excess of
the purchase price over the net fair value of the assets and liabilities,
including identified intangible assets, was recorded at $178.2 million.
Amortization of goodwill over a 10-year period will result in a charge to
earnings of approximately $17.8 million per year.
The accompanying financial statements include the operations of the
two institutions from April 1, 1993 to December 31, 1993. The following pro
forma information presents the results of operations for 1993 as though the
acquisition had occurred on January 1, 1993. The pro forma results do not
necessarily indicate the actual results that would have been obtained, nor are
they necessarily indicative of the future operations of the combined companies.
The unaudited pro forma results of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Net interest income $571,220
Income before extraordinary items and cumulative effect of change
in tax accounting method 198,327
Extraordinary items, net of federal income tax effect (8,953)
Cumulative effect of change in tax accounting method 13,365
===========================================================================================================
Net income $202,739
===========================================================================================================
Net income attributable to common stock $189,181
===========================================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative effect of change in
tax accounting method $ 3.13
Extraordinary items, net of federal income tax effect (0.15)
Cumulative effect of change in tax accounting method 0.23
===========================================================================================================
Net income $ 3.21
===========================================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect of change in tax
accounting method $ 2.95
Extraordinary items, net of federal income tax effect (0.14)
Cumulative effect of change in tax accounting method 0.21
===========================================================================================================
Net income $ 3.02
===========================================================================================================
</TABLE>
On April 28, 1995, Washington Mutual merged with Olympus Capital
Corporation of Salt Lake City, Utah ("Olympus"), the holding company of Olympus
Bank, a Federal Savings Bank ("Olympus Bank"). At the merger date, Olympus (on a
consolidated basis) had assets of $391.4 million, deposits of $278.6 million and
stockholders' equity of $37.2 million. Olympus Bank operated 11 branches in Utah
and Montana. Under the terms of the transaction, Olympus Bank merged into
WMBfsb. The merger was treated as a pooling-of-interests. Due to the immaterial
nature of the transaction, prior-period information has not been restated as if
the companies had been combined.
On August 31, 1995, Washington Mutual acquired Enterprise through a
merger of Enterprise with and into WMB. Enterprise, a Washington-based
commercial bank specializing in lending to small- and mid-size businesses, had
assets of $153.8 million, deposits of $138.5 million and stockholders' equity of
$14.0 million on August 31, 1995. The merger was treated as a
pooling-of-interests. Due to the immaterial nature of the transaction,
prior-period information has not been restated as if the companies had been
combined.
On January 31, 1996, WMB merged with Western of Coos Bay, Oregon. At
the time of the merger, Western had 42 offices in 35 communities and was
Oregon's largest community-based commercial bank. At January 31, 1996 Western
had assets of $776.3 million, deposits of $696.4 million and stockholders'
equity of $69.5 million. The Company issued 5,866,199 shares of common stock to
complete the merger with Western. The merger was treated as a
pooling-of-interests. The supplemental financial information presented in this
document reflects the pooling-of-interests method of accounting for the merger
of Western into the Company. Accordingly, under generally accepted accounting
principles, the assets and liabilities of Western were recorded on the books of
the resulting institution at their values as reported on the books of Western
immediately prior to the consummation of the merger with Western. No goodwill
was created in the merger with Western. This presentation required the
restatement of prior periods as if the companies had been combined for all years
presented.
The following supplemental information represents the results of
operations of the Company and Western for 1995, 1994 and 1993 on an individual
as well as combined basis. This information does not necessarily indicate the
actual results that would have been obtained, nor are they necessarily
indicative of the future operations of the combined companies. The supplemental
results of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual:
Total revenue $1,625,451 $1,315,651 $1,177,313
Income before extraordinary items and cumulative effect
of change in tax accounting method 190,624 172,304 175,264
Extraordinary items, net of federal income tax effect - - (8,953)
Cumulative effect of change in tax accounting method - - 13,365
============================================================================================================
Net income $ 190,624 $ 172,304 $ 179,676
============================================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative
effect of change in tax accounting method $2.68 $2.54 $ 2.74
Extraordinary items, net of federal income tax effect (0.15)
- -
Cumulative effect of change in tax accounting method - - 0.23
- -----------------------------------------------------------------------------------------------------------
Net income $2.68 $2.54 $ 2.82
============================================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.59 $2.46 $ 2.60
Extraordinary items, net of federal income tax effect - - (0.14)
Cumulative effect of change in tax accounting method - - 0.21
- -----------------------------------------------------------------------------------------------------------
Net income $2.59 $2.46 $ 2.67
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western:
Total revenue $71,383 $61,401 $56,571
============================================================================================================
Net Income $ 9,177 $ 9,018 $ 8,907
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual and Western:
Total revenue $1,696,834 $1,377,052 $1,233,884
Income before extraordinary items and cumulative effect
of change in tax accounting method 199,801 181,322 184,171
Extraordinary items, net of federal income tax effect - - (8,953)
Cumulative effect of change in tax accounting method - - 13,365
============================================================================================================
Net income $ 199,801 $ 181,322 $ 188,583
============================================================================================================
Per share amounts -- primary
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.59 $2.45 $ 2.63
Extraordinary items, net of federal income tax effect - - (0.14)
Cumulative effect of change in tax accounting method - - 0.21
============================================================================================================
Net income $2.59 $2.45 $ 2.70
============================================================================================================
Per share amounts -- fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.51 $2.38 $ 2.51
Extraordinary items, net of federal income tax effect - - (0.13)
Cumulative effect of change in tax accounting method - - 0.19
============================================================================================================
Net income $2.51 $2.38 $ 2.57
============================================================================================================
</TABLE>
On November 30, 1996, WMI merged with Utah Federal Savings Bank (Utah
FSB") by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB,
which was an Ogden-based institution, had assets of $121.9 million, deposits of
$105.9 million and stockholders' equity of $12.2 million. The merger will be
accounted for as a pooling-of-interests. Due to the immaterial nature of the
transaction, the Company will not restate prior-period information as if the
companies had been combined.
On December ____, 1996, WMI merged with Keystone Holdings. Keystone
Holdings is an indirect holding company whose principal operating subsidiary,
through a multi-tiered holding company structure, is ASB, a California-based
federally chartered savings bank. N.A. Holdings owns all of the outstanding
common stock of ASB. N.A. Holdings is owned by New American Capital, Inc. ("New
Capital") whose common stock is owned by New American Holdings, Inc. ("New
Holdings"), a direct subsidiary of Keystone Holdings.
At December ____, 1996, Keystone Holdings had assets of approximately $____
billion, deposits of approximately $___ billion and stockholder's equity of
approximately $____ million. The Company issued 47,883,333 shares of common
stock to complete the merger with Keystone Holdings. The merger was treated as a
pooling-of-interests. The financial information presented in this document
reflects the pooling-of-interests method of accounting for the merger of
Keystone Holdings into the Company. Accordingly, under generally accepted
accounting principles, the assets and liabilities of Keystone Holdings were
recorded on the books of the resulting institution at the amounts as reported on
the books of Keystone Holdings immediately prior to the consummation of the
merger with Keystone Holdings. No goodwill was created in the merger with
Keystone Holdings. This presentation required the restatement of prior periods
as if the companies had been combined for all years presented. Certain amounts
in Keystone Holdings' financial statements have been restated to conform to
WMI's presentation.
The following pro forma information represents the results of
operations of the Company and Keystone Holdings for 1995, 1994 and 1993 on an
individual as well as combined basis. The pro forma results do not necessarily
indicate the actual results that would have been obtained, nor are they
necessarily indicative of the future operations of the combined companies. The
pro forma results of Keystone Holdings have been adjusted to (i) eliminate
earnings attributable to the warrant holders and (ii) reflect the preferred
stock dividends to related parties as minority interest. The pro forma results
of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual:
Total revenue $1,696,834 $1,377,052 $1,233,884
Income before extraordinary items and cumulative effect
of change in tax accounting method 199,801 181,322 184,171
Extraordinary items, net of federal income tax effect - - (8,953)
Cumulative effect of change in tax accounting method - - 13,365
- ------------------------------------------------------------------------------------------------------------
Net income $ 199,801 $ 181,322 $ 188,583
============================================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative
effect of change in tax accounting method $2.59 $2.45 $ 2.63
Extraordinary items, net of federal income tax effect - - (0.14)
Cumulative effect of change in tax accounting method - - 0.21
- ------------------------------------------------------------------------------------------------------------
Net income $2.59 $2.45 $ 2.70
============================================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.51 $2.38 $ 2.51
Extraordinary items, net of federal income tax effect - - (0.13)
Cumulative effect of change in tax accounting method - - 0.19
- -----------------------------------------------------------------------------------------------------------
Net income $2.51 $2.38 $ 2.57
============================================================================================================
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Keystone Holdings:
Total revenue $1,427,591 $1,139,155 $1,211,270
- -----------------------------------------------------------------------------------------------------------
Net Income $ 90,101 $ 58,953 $ 78,740
============================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Mutual and Keystone Holdings:
Total revenue $3,124,425 $2,516,207 $2,445,154
Income before extraordinary items and cumulative effect
of change in tax accounting method 289,902 240,275 262,911
Extraordinary items, net of federal income tax effect - - (8,953)
Cumulative effect of change in tax accounting method - - 13,365
- ------------------------------------------------------------------------------------------------------------
Net income $ 289,902 $ 240,275 $ 267,323
============================================================================================================
Per share amounts -- primary
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.47 $2.09 $ 2.38
Extraordinary items, net of federal income tax effect - - (0.09)
Cumulative effect of change in tax accounting method - - 0.13
- ------------------------------------------------------------------------------------------------------------
Net income $2.47 $2.09 $ 2.42
============================================================================================================
Per share amounts -- fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method $2.42 $2.06 $ 2.32
Extraordinary items, net of federal income tax effect - - (0.08)
Cumulative effect of change in tax accounting method - - 0.12
- ------------------------------------------------------------------------------------------------------------
Net income $2.42 $2.06 $ 2.36
============================================================================================================
</TABLE>
NOTE 3: CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Cash and cash equivalents consisted of the following:
December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and demand deposits $689,258 $406,149
Cash equivalents:
Overnight investments 293,000 69,884
Time deposits 1,575 1,476
- -----------------------------------------------------------------------------------------------------------
294,575 71,360
- -----------------------------------------------------------------------------------------------------------
$983,833 $477,509
===========================================================================================================
</TABLE>
For the purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, overnight investments and time
deposits. Generally, time deposits are short term, with an original maturity of
three months or less.
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. Included in cash and demand deposits
were required deposits at the Federal Reserve of $107.9 million and $96.0
million at December 31, 1995 and 1994.
<PAGE>
NOTE 4: AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified by type and contractual
maturity date consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value Yield (1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year $ $ $ (64) $ 65,056 4.72%
65,120 -
After one but within five years 184,837 526 (29) 185,334 6.48
After five but within 10 years 9,755 41 (125) 9,671 7.23
After 10 years 59,813 121 (770) 59,164 7.02
- ------------------------------------------------------------------------------------------------------------
319,525 688 (988) 319,225 6.24
Corporate debt obligations:
Due within one year 1,502 10 - 1,512 8.27
After one but within five years 136,447 7,492 (205) 143,734 8.70
After five but within 10 years 181,038 8,237 (819) 188,456 7.02
After 10 years 97,755 6,626 (98) 104,283 7.50
- ------------------------------------------------------------------------------------------------------------
416,742 22,365 (1,122) 437,985 7.69
Equity securities:
Preferred stock 110,532 2,535 (2,311) 110,756 7.21
FHLB stock 414,389 - - 414,389 6.74
Other stock 5 3 - 8 -
- -----------------------------------------------------------------------------------------------------------
524,926 2,538 (2,311) 525,153 6.84
- ------------------------------------------------------------------------------------------------------------
1,261,193 25,591 (4,421) 1,282,363 6.98
Mortgage-backed securities:
U.S. government agency:
Due within one year 5 - - 5 9.23
After one but within five years 467,226 14,883 (497) 481,612 7.64
After five but within 10 years 236,497 14,338 (86) 250,749 7.84
After 10 years 8,713,086 226,286 (19,214) 8,920,158 6.93
- ------------------------------------------------------------------------------------------------------------
9,416,814 255,507 (19,797) 9,652,524 6.99
Corporate:
Due after five but within 10 years 18,614 901 (258) 19,257 7.14
After 10 years 1,211,290 8,739 (17,016) 1,203,013 7.37
- -----------------------------------------------------------------------------------------------------------
1,229,904 9,640 (17,274) 1,222,270 7.37
- ------------------------------------------------------------------------------------------------------------
10,646,718 265,147 (37,071) 10,874,794 7.03
Derivative instruments:
Interest rate exchange agreements (848) 2,225 (13,224) (11,847) -
Interest rate cap agreements 11,946 - (2,531) 9,415 -
- ------------------------------------------------------------------------------------------------------------
11,098 2,225 (15,755) (2,432) -
- ------------------------------------------------------------------------------------------------------------
$11,919,009 $292,963 $(57,247) $12,154,725 7.03%
============================================================================================================
(1) Weighted average yield at end of year
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value Yield (1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year $ 66,937 $ - $ (887) $ 4.17%
66,050
After one but within five years 382,890 7 (17,728) 365,169 5.55
After five but within 10 years 9,469 - (254) 9,215 6.08
After 10 years 70,340 - (2,316) 68,024 5.97
- ------------------------------------------------------------------------------------------------------------
529,636 7 (21,185) 508,458 5.44
Corporate debt obligations:
Due after one but within five years 133,255 231 (3,857) 129,629 6.33
After five but within 10 years 50,609 296 (2,980) 47,925 7.50
After 10 years 6,502 23 (644) 5,881 7.65
- ------------------------------------------------------------------------------------------------------------
190,366 550 (7,481) 183,435 6.68
Equity securities:
Preferred stock 35,457 - (1,790) 33,667 9.95
FHLB stock 353,298 - - 353,298 5.67
Other stock 1,032 - - 1,032 -
- ------------------------------------------------------------------------------------------------------------
389,787 - (1,790) 387,997 6.03
- ------------------------------------------------------------------------------------------------------------
1,109,789 557 (30,456) 1,079,890 5.86
Mortgage-backed securities
U.S. government agency:
Due after one but within five years 209,806 35 (7,440) 202,401 5.06
After five but within 10 years 56,929 9 (2,134) 54,804 5.61
After 10 years 2,608,957 1,272 (79,609) 2,530,620 6.30
- ------------------------------------------------------------------------------------------------------------
2,875,692 1,316 (89,183) 2,787,825 6.20
Corporate:
Due after five but within 10 years 9,716 - (280) 9,436 5.46
After 10 years 360,549 511 (16,395) 344,665 6.14
- ------------------------------------------------------------------------------------------------------------
370,265 511 (16,675) 354,101 6.12
- ------------------------------------------------------------------------------------------------------------
3,245,957 1,827 (105,858) 3,141,926 6.19
Derivative instruments:
Interest rate exchange agreements (2,360) 21,014 - 18,654 -
Interest rate cap agreements 8,766 32,924 - 41,690 -
- ------------------------------------------------------------------------------------------------------------
6,406 53,938 - 60,344 -
- ------------------------------------------------------------------------------------------------------------
$4,362,152 $56,322 $(136,314) $4,282,160 6.02%
============================================================================================================
(1) Weighted average yield at end of year
</TABLE>
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1995 and 1994 were $626.2 million and $161.8 million. The
Company realized $4.0 million in gains and $2.2 million in losses on these sales
during 1995. Similarly, the Company realized $2.5 million in gains and $740,000
in losses on sales during 1994. Proceeds from sales of mortgage-backed
securities in the available-for-sale portfolio during 1995 and 1994 were $1.0
billion and $337.9 million. The Company realized $13.5 million in gains and
$16.2 million in losses on these sales during 1995 and $2.8 million in gains and
$469,000 in losses on these sales during 1994.
Available-for-sale mortgage-backed securities with a book value of
$5.6 billion and a market value of $5.8 billion at December 31, 1995 were
pledged to secure public deposits, securities sold under agreements to
repurchase, other borrowings, interest rate exchange agreements and access to
the Federal Reserve discount window.
There were no sales out of the held-to-maturity portfolio during 1995
and 1994. During 1995, FASB issued a report entitled A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities, Questions and Answers that allowed companies a one-time reassessment
and related reclassification from the held-to-maturity category to the
available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. During the fourth quarter of 1995, the Company
elected to take advantage of this opportunity and reclassified held-to-maturity
securities with a book value of $4.9 billion and gross unrealized gains of $82.6
million and gross unrealized losses of $28.2 million. No transfers between the
held-to-maturity and available-for-sale categories were made during 1994.
At December 31, 1995, net unrealized gains on the available-for-sale
portfolio were $249.2 million and unrealized losses on the derivative
instruments designated against this portfolio were $13.5 million, resulting in a
combined net unrealized gain included as a separate component of stockholders'
equity (on an after-tax basis) of $188.7 million. At December 31, 1994, net
unrealized losses on the available-for-sale portfolio were $133.9 million and
unrealized gains on the derivative instruments designated against this portfolio
were $53.9 million, resulting in a combined net unrealized loss included as a
separate component of stockholders' equity (on an after-tax basis) of $61.2
million.
On December 31, 1995, the Company held $1.2 billion of private-issue
mortgage-backed securities. Of that amount, 33 percent were of the highest
investment grade (AAA), 55 percent were rated investment grade (AA or A), 8
percent were rated lowest investment grade (BBB) and 4 percent were rated below
investment grade (BB or below). During 1995, the Company realized $8.4 million
in losses on securities in the below investment grade portfolio.
As of December 31, 1995, the Company had mortgage-backed securities
with book value of $293.3 million and a market value of $291.9 million from a
single issuer, the Resolution Trust Corporation.
<PAGE>
NOTE 5: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and contractual
maturity date consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value Yield(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year $ 19,693 $ $ - $ 19,693 5.24%
-
After five but within 10 years 6,592 906 - 7,498 8.09
- ------------------------------------------------------------------------------------------------------------
26,285 906 - 27,191 6.03
Corporate debt obligations:
Due within one year 98,969 (9) 98,960 5.70
-
After one but within five years 31,173 2,895 (2) 34,066 8.66
After five but within 10 years 22,586 2,472 (3) 25,055 8.37
After 10 years 17,162 2,310 (9) 19,463 8.91
- ------------------------------------------------------------------------------------------------------------
169,890 7,677 (23) 177,544 7.00
Municipal obligations:
Due within one year 1,090 1 - 1,091 6.85
After one but within five years 1,658 89 - 1,747 7.44
After five but within 10 years 36,202 2,083 - 38,285 6.88
After 10 years 53,371 2,908 - 56,279 6.37
--------------------------------------------------------------
- ----------------------------------------------
92,321 5,081 - 97,402 6.60
- ------------------------------------------------------------------------------------------------------------
288,496 13,664 (23) 302,137 6.78
Mortgage-backed securities
U.S. government agency:
After 10 years 2,909,224 54,833 (3,344) 2,960,713 7.44
- ------------------------------------------------------------------------------------------------------------
$3,197,720 $68,497 $(3,367) $3,262,850 7.38%
============================================================================================================
(1) Weighted average yield at end of year.
(1) Weighted average yield at end of year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized
(dollars in thousands) Cost Gains Losses Fair Value Yield(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year $ 24,038 $ - $ $ 4.95%
(2) 24,036
After one but within five years 23,972 1 (478) 23,495 6.82
After five but within 10 years 8,557 - (61) 8,496 7.75
- ------------------------------------------------------------------------------------------------------------
56,567 1 (541) 56,027 6.16
Corporate debt obligations:
Due within one year 69,269 15 (82) 69,202 5.65
After one but within five years 95,607 1,914 (3,644) 93,877 8.00
After five but within 10 years 172,808 727 (13,787) 159,748 7.24
After 10 years 95,857 493 (8,831) 87,519 7.80
- ------------------------------------------------------------------------------------------------------------
433,541 3,149 (26,344) 410,346 7.27
Municipal obligations:
Due within one year 806 3 - 809 8.33
After one but within five years 1,662 7 (14) 1,655 7.15
After five but within 10 years 26,968 812 (636) 27,144 6.51
After 10 years 51,326 1,867 (753) 52,440 6.88
- ------------------------------------------------------------------------------------------------------------
80,762 2,689 (1,403) 82,048 6.78
- ------------------------------------------------------------------------------------------------------------
570,870 5,839 (28,288) 548,421 7.08
Mortgage-backed securities:
U.S. government agency:
Due within one year 4 - - 4 6.72
After five but within 10 years 12,296 - (1,019) 11,277 6.13
After 10 years 3,313,021 640 (188,128) 3,125,533 6.68
- ------------------------------------------------------------------------------------------------------------
3,325,321 640 (189,147) 3,136,814 6.68
Corporate:
Due within one year 15 - - 15 9.23
After one but within five years 51 2 (1) 52 10.44
After five but within 10 years 548 13 - 561 11.06
After 10 years 559,226 252 (16,444) 543,034 6.44
- -----------------------------------------------------------------------------------------------------------
559,840 267 (16,445) 543,662 6.44
- ------------------------------------------------------------------------------------------------------------
3,885,161 907 (205,592) 3,680,476 6.65
- ------------------------------------------------------------------------------------------------------------
$4,456,031 $6,746 $(233,880) $4,228,897 6.71%
============================================================================================================
(1) Weighted average yield at end of year.
</TABLE>
Held-to-maturity mortgage-backed securities with a book value of $1.9
billion and a market value of $1.9 billion at December 31, 1995 were pledged to
secure public deposits, securities sold under agreements to repurchase, other
borrowings, interest rate exchange agreements and access to the Federal Reserve
discount window.
<PAGE>
NOTE 6: LOANS
Loans and loans held for sale consisted of the following:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate:
Residential $17,303,305 $17,766,215
Residential construction 615,814 549,271
Commercial real estate 3,487,574 4,699,220
- -----------------------------------------------------------------------------------------------------------
21,406,693 23,014,706
Second mortgage and other consumer 1,974,673 1,841,613
Manufactured housing 867,181 731,714
Commercial business 179,568 129,048
Reserve for loan losses (235,275) (244,989)
- -----------------------------------------------------------------------------------------------------------
$24,192,840 $25,472,092
===========================================================================================================
</TABLE>
Included in the table above are loans held-for-sale of $83.7 million
and $8.6 million at December 31, 1995 and 1994.
Nonaccrual loans totaled $213.8 million and $280.9 million at December
31, 1995 and 1994. If interest on these loans had been recognized, such income
would have been $10.8 million and $11.6 million for 1995 and 1994. At December
31, 1995 and 1994, the Company had troubled debt restructurings aggregating
$90.6 million and $54.6 million. During 1995 and 1994, these troubled debt
restructurings returned a net yield of 8.13 percent and 8.87 percent, thereby
contributing $5.9 million and $5.5 million to interest income. Had these loans
not been restructured and interest accrued at their original rates, the
additional interest income would not have been material.
At December 31, 1995, loans totaling $169.1 million were impaired, of
which $91.7 million had allocated reserves of $16.6 million. The remaining $77.4
million were previously written down and had no reserves allocated to them. Of
the $169.1 million of impaired loans, $26.8 million were on nonaccrual status
and $142.3 million (including $57.1 million of troubled debt restructurings)
were performing but judged to be impaired. The average balance of impaired loans
during the year was $177.6 million, and the Company recognized $12.4 million of
related interest income. Interest income on impaired loans is normally
recognized on the accrual basis, unless the loan is more than 90 days past due,
in which case interest income is recorded on the cash basis. An immaterial
amount of interest income was recorded on the cash basis during 1995.
<PAGE>
Loans, exclusive of reserve for loan losses, and loans held for sale
by geographic concentration were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) California Washington Oregon Other Total
States
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Residential $9,701,368 $5,669,411 $1,450,311 $482,215 $17,303,305
Residential construction - 345,163 224,117 46,534 615,814
Apartment buildings 1,296,649 591,764 201,452 109,358 2,199,223
Other commercial real estate 500,652 425,240 264,235 98,224 1,288,351
- ------------------------------------------------------------------------------------------------------------
11,498,669 7,031,578 2,140,115 736,331 21,406,693
Second mortgage and other consumer 88,764 1,519,796 344,708 21,405 1,974,673
Manufactured housing 99,464 567,012 166,322 34,383 867,181
Commercial business - 57,882 121,519 167 179,568
- ------------------------------------------------------------------------------------------------------------
$11,686,897 $9,176,268 $2,772,664 $792,286 $24,428,115
============================================================================================================
</TABLE>
California loans include $3.7 billion of loans in the Los Angeles
area, $3.7 billion of loans in the San Francisco Bay area, $1.5 billion of loans
in Orange County and $2.9 billion of loans in other California areas.
Loans, exclusive of reserve for loan losses, deferred loan fees and
premiums and discounts, by maturity or repricing date were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) December 31, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Adjustable-rate loans:
Due within one year $14,151,629
After one but within five years 2,385,004
After five but within 10 years 101,957
After 10 years 29,840
- -----------------------------------------------------------------------------------------------------------
16,668,430
Fixed-rate loans:
Due within one year 401,380
After one but within five years 1,347,147
After five but within 10 years 1,690,024
After 10 years 4,396,502
- -----------------------------------------------------------------------------------------------------------
7,835,053
- -----------------------------------------------------------------------------------------------------------
$24,503,483
===========================================================================================================
</TABLE>
In addition to loans the Company serviced for its own portfolio, it
serviced loans of $21.4 billion and $15.3 billion at December 31, 1995 and 1994
for U.S. government agencies, institutions and private investors.
Loans of $5.2 billion at December 31, 1995 were pledged to secure advances
from the FHLB.
Unamortized deferred loan fees were $75.1 million and $121.3 million at
December 31, 1995 and 1994.
At December 31, 1995, the Company had $663.4 million in fixed-rate
mortgage loan commitments, $638.2 million in adjustable-rate mortgage loan
commitments, $72.0 million in commercial business loan commitments and $576.5
million in undisbursed lines of credit.
NOTE 7: RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Changes in the reserve for loan losses were as follows:
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $244,989 $245,062 $179,612
Provision for loan losses 74,987 122,009 158,728
Reserves added through business combinations 5,372 921 46,000
Reserves charged off:
Residential (57,147) (89,637) (93,799)
Residential construction (125) (190) (297)
Commercial real estate (33,149) (26,835) (26,967)
Manufactured housing, second mortgage and other consumer (6,888) (10,544) (16,964)
Commercial business (813) (2,065) (3,065)
- ------------------------------------------------------------------------------------------------------------
(98,122) (129,271) (141,092)
Reserves recovered:
Residential 2,393 2,522 45
Residential construction 47 - -
Commercial real estate 4,426 2,186 889
Manufactured housing, second mortgage and other consumer 701 1,117 768
Commercial business 482 443 112
- ------------------------------------------------------------------------------------------------------------
8,049 6,268 1,814
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $235,275 $244,989 $245,062
============================================================================================================
</TABLE>
The Company holds certain loans that have been securitized into
mortgage-backed securities with full recourse. The Company includes those loans
securitized with recourse in determining the adequacy of the reserve for loan
losses.
As part of the ongoing process to determine the adequacy of the
reserve for loan losses, the Company reviews the components of its loan
portfolio for specific risk of principal loss. Reserves are then allocated for
impaired loans.
The Company intends to provide an additional $125.0 million in loan
loss provision at the Effective Date. This additional loan loss provision is
being provided principally because a number of Washington Mutual (prior to the
business combination with Keystone Holdings) credit administration and asset
management philosophies and procedures differ from those of ASB. These
differences consist principally of the following: (i) Washington Mutual is more
proactive than ASB in dealing with emerging credit problems and tends to prefer
judicial foreclosure actions to induce borrowers to correct defaults, whereas
ASB tends to prefer workouts in lieu of a more aggressive foreclosure stance;
and (ii) ASB has considered the risk characteristics of its portfolio of
multi-family loans of less than $1 million to be similar to its single-family
residential portfolio. Washington Mutual, on the other hand, considers the risk
characteristics of that portfolio to be more closely aligned with its commercial
property portfolio, which tends to have more loss exposure than the
single-family residential portfolio. Washington Mutual intends to conform ASB's
asset management practices, administration, philosophies and procedures to its
own, or in some instances to revise ASB's current asset management strategies to
conform to strategies being developed by Washington Mutual. The plan of
realization of troubled loans differed between the companies and therefore
results in different levels of loss reserves. The additional loan loss provision
is to a lesser degree being provided because Washington Mutual believes that,
while there has been an increase in the price of houses in California markets, a
decline in collateral values for some portions of the California real estate
market has occurred in 1996.
<TABLE>
<CAPTION>
An analysis of the reserve for loan losses is as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated reserves:
Commercial real estate $ 16,488 $ 20,025
Residential construction 158 1,327
Commercial business - -
- ------------------------------------------------------------------------------------------------------------
16,646 21,352
Unallocated reserves 218,629 223,637
- ------------------------------------------------------------------------------------------------------------
$235,275 $244,989
============================================================================================================
Total reserve for loan losses as a percentage of:
Total loans and recourse obligations 0.79% 0.91%
Nonperforming loans 110.04 87.22
</TABLE>
NOTE 8: NOTE RECEIVABLE
In October 1995, Keystone Holdings agreed with the FDIC to allow
prepayment of the remaining balance of the Note Receivable. Prior to October
1995, the FDIC had always caused New West to prepay the Note Receivable to the
maximum extent permitted by its terms. If the maximum prepayments under its
terms were to have continued, the balance of the Note Receivable would have been
reduced to approximately $113.0 million in November 1995 and fully repaid in
February 1996. ASB received the remaining principal balance of $505.3 million,
plus interest, on October 24, 1995. ASB utilized the proceeds received to pay
down certain short-term borrowings and to originate new loans.
The following is a summary of the Note Receivable activity for the
years indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Capital Net of
(dollars in thousands) Note Receivable Surplus Offset Capital Surplus
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1992 $ 4,767,144 $ 167,000 $ 4,600,144
Receivable transferred to New West 52,932 52,932
Optional prepayments (1,569,018) (1,569,018)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 3,251,058 167,000 3,084,058
Optional prepayments (1,569,018) (1,569,018)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 1,682,040 167,000 1,515,040
Optional prepayments (1,682,040) (167,000) (1,515,040)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ - $ - $ -
============================================================================================================
</TABLE>
<PAGE>
NOTE 9: REO
REO consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure $134,195 $144,923
Other repossessed assets 1,018 979
Reserve for losses (10,112) (8,135)
- ------------------------------------------------------------------------------------------------------------
$125,101 $137,767
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Changes in the REO reserve for losses were as follows:
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 8,135 $ 13,330 $ 16,025
Provision for REO losses 10,523 15,491 26,889
Reserves charged-off, net of recoveries (8,546) (20,686) (29,584)
- ------------------------------------------------------------------------------------------------------------
$10,112 $ 8,135 $ 13,330
============================================================================================================
</TABLE>
REO operations, inclusive of write-downs were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations $ (3,457) $ (2,977) $ 665
Gain on sale of REO 3,298 5,066 6,978
Provision for REO losses (10,523) (15,491) (26,889)
- ------------------------------------------------------------------------------------------------------------
$(10,682) $(13,402) $(19,246)
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollar in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $ 243,527 $ 235,771
Buildings 363,894 289,434
Leasehold improvements 54,683 54,490
Construction in progress 8,080 9,047
- ------------------------------------------------------------------------------------------------------------
670,184 588,742
Accumulated depreciation (296,779) (268,755)
- ------------------------------------------------------------------------------------------------------------
373,405 319,987
Land 79,338 72,701
- ------------------------------------------------------------------------------------------------------------
$ 452,743 $ 392,688
============================================================================================================
</TABLE>
Depreciation expense for 1995, 1994, and 1993 was $41.3 million, $38.4
million, and $38.9 million, respectively.
The Company has noncancelable operating leases for financial centers,
office facilities and equipment. Rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $40.4 million, $44.5 million and
$44.2 million in 1995, 1994, and 1993, respectively.
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Land & Furniture &
(dollars in thousands) Buildings Equipment
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments:
Due within one year $ 30,200 $3,882
After one but within two years 28,803 2,822
After two but within three years 26,268 1,630
After three but within four years 24,177 652
After four but within five years 22,344 -
After five years 87,315 -
- -----------------------------------------------------------------------------------------------------------
$219,107 $8,986
============================================================================================================
</TABLE>
In March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
statement establishes accounting standards for the impairment of long-lived
assets that either will be held and used in operations or that will be disposed
of. Effective January 1, 1996, the Company adopted SFAS No. 121. The adoption is
not anticipated to have a material impact on the results of operations or
financial condition of the Company.
In January 1995, a wholly owned service corporation subsidiary of ASB
purchased from a related limited partnership the Irvine Plaza building
structures and adjoining land currently utilized for ASB's executive offices and
various departments. The total cash purchase price paid for the property was
$45.2 million.
NOTE 11: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Washington Mutual Bank, net of amortization of $98,654 and $71,366 $159,259 $186,547
Murphey Favre and Composite Research & Management Co., net of
amortization of $9,389 and $8,653 1,468 2,203
Mutual Travel, Inc., net of amortization of $3,136 - 1,799
Other, net of amortization of $85 and $36 400 449
- ------------------------------------------------------------------------------------------------------------
$161,127 $190,998
============================================================================================================
</TABLE>
Goodwill and other intangible assets result from business combinations
accounted for as a purchase of assets and an assumption of liabilities. Other
intangible assets primarily consist of core deposit intangibles and covenants
not-to-compete resulting from acquisitions of thrift branch systems. Goodwill
and other intangible assets are amortized using the straight-line method over
the period that is expected to be benefited, which ranges from three to 10
years. The average remaining amortization period at December 31, 1995 was
approximately six years. The Company periodically evaluates goodwill and other
intangible assets for impairment. The level of goodwill and other intangible
assets at December 31, 1995 was supported by the value attributed to the retail
operations of acquired financial institutions.
During 1993, the acquisition of Pacific First was accounted for as a
purchase of assets and assumption of liabilities and increased goodwill and
other intangible assets by $178.2 million.
NOTE 12: MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are included in other assets and consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 70,911 $ 66,031 $ 77,945
Additions 58,306 38,385 21,446
Sales - (13,087) -
Amortization (23,840) (20,418) (27,083)
Write-downs - - (6,277)
Impairment valuation allowance (882) - -
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $104,495 $ 70,911 $ 66,031
============================================================================================================
</TABLE>
In 1995, with the adoption of SFAS No. 122, the Company recorded a
valuation allowance for impairment of mortgage servicing rights of $882,000. No
write-downs were recorded in 1994. In 1993, prior to the adoption of SFAS No.
122, the Company recorded a specific write-down of $6.3 million on mortgage
servicing rights.
NOTE 13: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Checking accounts:
Interest bearing $ 2,111,124 $ 2,342,407
Noninterest bearing 665,205 499,282
- ------------------------------------------------------------------------------------------------------------
2,776,329 2,841,689
Savings accounts 1,905,659 2,224,784
Money market accounts 4,667,884 3,502,981
Time deposit accounts:
Due within one year 12,696,186 10,496,491
After one but within two years 1,410,809 2,780,944
After two but within three years 409,580 765,219
After three but within four years 243,541 293,167
After four but within five years 258,415 293,522
After five years 94,557 145,209
- ------------------------------------------------------------------------------------------------------------
15,113,088 14,774,552
- ------------------------------------------------------------------------------------------------------------
$24,462,960 $23,344,006
============================================================================================================
</TABLE>
Time certificates of deposit in amounts of $100,000 or more totaled
$3.1 billion and $2.8 billion at December 31, 1995 and 1994. At December 31,
1995, $1.9 billion of these deposits mature within three months, $490.8 million
mature in three to six months, $371.3 million mature in six months to one year,
and $352.8 million mature after one year.
Financial data pertaining to the weighted average cost of deposits
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted daily average interest rate during the year 4.69% 3.69% 3.76%
</TABLE>
NOTE 14: FEDERAL FUNDS PURCHASED
The Company purchased federal funds from a variety of counterparties
during 1995. All federal funds purchased had maturities of thirty days or less,
with the majority having maturities of one day. As of December 31, 1995, the
balance of federal funds purchased was $433.4 million.
Financial data pertaining to the weighted average cost, the level of
federal funds purchased, and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.83% - % - %
Weighted daily average interest rate during the year 5.98 - -
Daily average balance of federal funds purchased $270,861 $ - $ -
Maximum amount of federal funds purchased at any month end 998,000 - -
Interest expense during the year 16,188 - -
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
</TABLE>
Securities sold under agreements to repurchase consisted of the
following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reverse repurchase agreements $7,592,841 $6,109,868
Dollar repurchase agreements 391,915 527,478
- ------------------------------------------------------------------------------------------------------------
$7,984,756 $6,637,346
============================================================================================================
</TABLE>
The Company sold, under agreements to repurchase, specific securities
of the U.S. government and its agencies and other approved investments to
broker-dealers and customers. The securities underlying the agreements with
broker-dealers were delivered to the dealer who arranged the transaction or were
held by a safekeeping agent for the Company's account. Securities delivered to
broker-dealers may be loaned out in the ordinary course of operations. The
securities underlying the agreements with customers were held in a segregated
account by a safekeeping agent for the Company.
<PAGE>
Scheduled maturities or repricing of securities sold under agreements
to repurchase were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase:
Due within 30 days $5,225,817 $4,853,237
After 30 but within 90 days 1,764,074 787,151
After 90 but within 180 days 406,361 502,123
After 180 but within one year - 244,360
After one year 504,504 250,475
- ------------------------------------------------------------------------------------------------------------
$7,984,756 $6,637,346
============================================================================================================
</TABLE>
Financial data pertaining to the weighted average cost, the level of
securities sold under agreements to repurchase and the related interest expense
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.92% 5.94% 3.41%
Weighted daily average interest rate during the year 6.14% 4.69% 3.62%
Daily average of securities sold under agreements to repurchase $7,859,948 $4,318,592 $2,176,260
Maximum securities sold under agreements to repurchase
at any month end 8,647,814 6,637,346 3,208,288
Interest expense during the year 482,698 202,677 78,853
</TABLE>
NOTE 16: ADVANCES FROM THE FHLB
As members of the FHLB, WMB, WM Life, WMBfsb and ASB maintain credit
lines that are percentages of their total regulatory assets, subject to
collateralization requirements. As members of the FHLB of Seattle, WMB's, WM
Life's and WMBfsb's advances are collateralized in aggregate, as provided for in
the Advances, Security and Deposit Agreements with the FHLB, by all FHLB stock
owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and
securities of the U.S. government and agencies thereof. As a member of the FHLB
of San Francisco, ASB's advances are collateralized by all FHLB stock owned and
certain mortgages and deeds of trust.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------
Ranges of Ranges of
(dollars in thousands) Amount Interest Rates Amount Interest Rates
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within one year $2,545,594 4.74%-8.54% $1,466,133 3.95%-8.30%
After one but within two years 1,331,000 4.38-8.45 1,394,852 4.74-8.54
After two but within three years 545,642 5.59-8.50 789,478 4.38-7.44
After three but within four years 57,000 8.50-8.63 146,944 5.49-6.15
After four but within five years 55,137 6.25-9.34 110,403 6.19-8.53
After five years 181,366 2.80-8.65 221,167 4.50-9.34
============================================================================================================
$4,715,739 $4,128,977
============================================================================================================
</TABLE>
Financial data pertaining to the weighted average cost, the level of
FHLB advances and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.76% 5.72% 5.36%
Weighted daily average interest rate during the year 5.72% 5.38% 6.18%
Daily average of FHLB advances $3,539,006 $3,966,494 $3,148,089
Maximum FHLB advances at any month end 4,715,739 4,560,891 3,617,596
Interest expense during the year 202,422 213,259 194,631
</TABLE>
NOTE 17: OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------
Range of Range of
(dollars in thousands) Amount Interest Rates Amount Interest Rates
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series C Floating Rate Notes, due 2000 $175,000 7.31% $ - -%
Series B 9.60% Notes, due 1999 169,000 9.60 169,000 9.60
Senior notes, due 2005 147,845 7.46 - -
Series A Floating Notes, due 1997 - 111,000 7.88
Notes payable, due 1998 76,405 6.13-8.00 79,039 6.13-8.75
Subordinated notes, due 1998 20,500 8.81 20,500 8.50
Other 1,467 - 1,527 -
- ------------------------------------------------------------------------------------------------------------
$590,217 $381,066
============================================================================================================
</TABLE>
On March 23, 1995, New Capital completed the private placement of
$175.0 million of its Series C Floating Rate Notes due April 12, 2000 (the
"Series C Notes"). The net proceeds from the issuance of the Series C Notes were
used to redeem the $111.0 million Series A Notes and to fund a $60.0 million
capital contribution from N.A. Holdings to ASB. Interest on the Series C Notes
accrues at a rate equal to three-month LIBOR plus 1.375 percent, reset on a
quarterly basis, and interest payments are made quarterly.
The indenture related to the Series C Notes contains certain covenants
that, among other things, require the maintenance of regulatory capital at ASB
and limit the following: (i) funded indebtedness, (ii) subsidiary funded
indebtedness, (iii) upstream payments, (iv) subsidiary dividends, (v) liens,
(vi) certain mergers and consolidations, (vii) issuance of subsidiary capital
stock, (viii) transactions with affiliates and (ix) lines of business. New
Capital is in compliance with all such covenants and restrictions.
On January 14, 1992, New Capital completed the private placement of
$111.0 million of its Series A Floating Rate Notes due 1997 ("Series A Notes")
and $169.0 million of its Series B 9.60 percent Notes due 1999 ("Series B
Notes"). Interest on the Series A Notes accrued at three-month LIBOR plus 2.25
percent and repriced quarterly. A note purchase agreement (the "Note Purchase
Agreement") was executed by New Capital in connection with the private placement
of the Series A and Series B Notes.
On October 12, 1993, in accordance with a subordinated note purchase
agreement (the "Subordinated Note Agreement"), New Capital issued $20.5 million
of subordinated notes. The subordinated notes accrue interest at a rate equal to
three-month LIBOR plus 2.875 percent. Interest is paid quarterly and the
subordinated notes mature on October 12, 1998.
The Note Purchase Agreement and the Subordinated Note Agreement
contain certain limitations regarding the payment of cash dividends on common or
preferred stock, the reacquisition or issuance of common or preferred stock,
additional borrowings and payments thereon and certain other transactions. Under
the terms of the Note Purchase Agreement and the Subordinated Note Agreement,
New Capital cannot pay dividends on its preferred stock or common stock unless
its consolidated net worth exceeds $375.0 million. As long as New Capital's
consolidated net worth exceeds $375.0 million, it can make restricted payments
if the cumulative restricted payments do not exceed the sum of (i) $30.0
million, (ii) the proceeds from certain capital contributions, and (iii) 50% of
the cumulative adjusted net earnings (as defined in the agreements) of New
Capital. The percentage limitation applied to cumulative adjusted net earnings
is increased to 65% percent as long as New Capital's consolidated net worth
after the proposed restricted payments exceeds $475.0 million. As of December
31, 1995, New Capital's consolidated net worth was $653.4 million and the 65%
percent limitation was in effect. Under the terms of the Series C Note
Indenture, New Capital may pay dividends and make other capital distributions
("Upstream Payments") to the extent that it has the capacity to incur an
additional dollar of funded indebtedness (as defined in the Series C Indenture)
after the proposed Upstream Payment. Based on the most restrictive of New
Capital's debt covenants, as of December 31, 1995, New Capital would have been
permitted to make up to $55.8 million in dividend or other restricted payments.
New Capital is in compliance with all such limitations.
A redemption notice was provided to holders of the Series A Notes as
required by the Note Purchase Agreement and the redemption was completed on
April 12, 1995. As of March 30, 1995, New Capital irrevocably placed sufficient
funds in trust with its paying agent to satisfy the required principal and
interest necessary to redeem the Series A Notes on their redemption date. As a
result, New Capital recorded the payment of those funds as an in-substance
defeasance of the Series A Notes. The early retirement of the Series A Notes
required New Capital to write off certain related unamortized debt issuance
costs and to mark certain interest rate cap agreements to market as of March 30,
1995, resulting in a pre-tax loss on early retirement of debt of approximately
$2.1 million.
In August 1995, the Company issued $150.0 million of senior notes
bearing an interest rate of 7.25 percent. The notes are due August 15, 2005 and
may not be redeemed prior to maturity.
As part of the acquisition of Pacific First, the Company assumed a
$75.0 million note payable bearing an interest rate of 8.0 percent to the City
of Tampa. The City of Tampa issued capital improvement revenue bonds in 1988 and
invested a portion of the receipts with Pacific First. The note matures in 1998
and is subject to periodic withdrawals.
NOTE 18: INTEREST RATE RISK MANAGEMENT
From time to time, the following strategies may be used by the Company
to reduce its exposure to interest rate risk: the origination and purchase of
adjustable-rate mortgage loans and the purchase of adjustable-rate
mortgage-backed securities; the sale of fixed-rate residential mortgage loan
production or fixed-rate mortgage-backed securities; and the use of derivative
instruments, such as interest rate exchange agreements and interest rate cap
agreements.
As of December 31, 1995, interest-sensitive assets of $27.7 billion
and interest-sensitive liabilities of $31.5 billion were scheduled to mature or
reprice within one year. At December 31, 1995, the Company had entered into
interest rate exchange agreements and interest rate cap agreements with notional
values of $2.7 billion and $9.8 billion. Without these instruments the Company's
one-year gap at December 31, 1995 would have been a negative 8.90 percent as
opposed to a negative 2.57 percent.
Interest rate exchange agreements and interest rate cap agreements
expose the Company to credit risk in the event of nonperformance by
counterparties to such agreements. This risk consists primarily of the
termination value of agreements where the Company is in a favorable position.
The Company controls the credit risk associated with its interest rate exchange
agreements and interest rate cap agreements through counterparty credit review,
counterparty exposure limits and monitoring procedures.
The Company's use of derivative instruments reduces the negative
effect that changing interest rates may have on net interest income. The Company
uses such instruments to reduce the volatility of net interest income over an
interest rate cycle. None of the Company's derivative instruments are what are
termed leveraged derivative instruments. These types of instruments are riskier
than the derivatives used by the Company in that they have significant embedded
options that enhance the performance in certain circumstances but dramatically
reduce the performance in other circumstances.
From time to time, the Company terminates interest rate exchange
agreements and interest rate cap agreements prior to maturity. Such
circumstances arise if, in the judgment of management, such instruments no
longer cost-effectively meet policy objectives. Often such instruments are
within one year of maturity. During 1995, the Company terminated an interest
rate exchange agreement with a notional value of $75.0 million and recorded a
deferred gain of $845,000. There were no other terminations of interest rate
exchange agreements or interest rate cap agreements in 1995. During 1994, the
Company terminated interest rate exchange agreements with a notional value of
$370.0 million for deferred gains of $1.4 million and deferred losses of $4.8
million. In 1993, interest rate exchange agreements with a notional value of
$90.0 million were terminated and deferred losses of $3.4 million were recorded.
During 1994, the Company terminated interest rate cap agreements with a notional
value of $375.0 million and deferred gains of $860,000 were recorded. No
interest rate cap agreements were terminated in 1993.
Scheduled maturities of interest rate exchange agreements were as
follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Notional Short-Term Long-Term Carrying
(dollars in thousands) Amount ReceiptRate(1) Payment Rate Value Fair Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-
sale securities:
Due within one year $ 465,000 5.13% 5.92% $ 1,528 $1,528
After one but within two years 200,000 6.83 5.88 (4,144) (4,144)
After two but within three years 300,000 6.05 5.92 (5,244) (5,244)
After three years 200,000 6.88 5.88 (3,987) (3,987)
Designated against deposits and borrowings:
Due within one year 495,000 6.95 6.08 - 2,385
After one but within two years 484,500 5.96 6.62 - (8,461)
After two but within three years 276,000 6.04 6.75 - (8,746)
After three years 261,000 7.10 8.27 - (7,793)
- ------------------------------------------------------------------------------------------------------------
$2,681,500 6.26% 6.38% $(11,847) $(34,462)
============================================================================================================
(1) The terms of each agreement have specific London Interbank Offering Rate
reset and index requirements, which result in different short-term receipt
rates for each agreement. The receipt rate represents the weighted average
rate as of the last reset date for each agreement.
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------------
Notional Short-Term Long-Term Carrying Fair Value
(dollars in thousands) Amount Receipt Rate(1) Payment Rate Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-
sale securities:
Due within one year $ 150,000 6.38% 4.33% $ 4,700 $ 4,700
After one but within two years 350,000 5.69 4.54 13,954 13,954
Designated against deposits and borrowings:
Due within one year 355,000 4.62 6.66 - (3,367)
After one but within two years 685,000 6.52 6.16 - 8,748
After two but within three years 500,500 5.75 6.76 - 14,772
After three years 602,000 6.33 7.70 - 1,908
============================================================================================================
$2,642,500 5.96% 6.37% $18,654 $40,715
============================================================================================================
(1) The terms of each agreement have specific London Interbank Offering Rate
reset and index requirements, which result in different short-term receipt
rates for each agreement. The receipt rate represents the weighted average
rate as of the last reset date for each agreement.
</TABLE>
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying
(dollars in thousands) Amount Rate Receipt Rate(1) Value Fair Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-
sale securities:
Due within one year (2) $1,425,000 5.34% 5.90% $ 4,484 $ 4,484
After one but within two years (3) 875,000 5.85 5.83 3,799 3,799
After two but within three years 250,000 6.05 5.90 1,132 1,132
(4)
Designated against deposits and borrowings:
Due within one year (5) 5,193,000 7.43 5.63 151 (1,775)
After one but within two years (6) 386,000 9.18 5.60 1,241 2
After two but within three years 286,000 8.81 5.49 1,177 42
(7)
After three years (8) 1,359,000 8.05 5.27 15,122 1,101
- ------------------------------------------------------------------------------------------------------------
$9,774,000 7.14% 5.64% $27,106 $ 8,785
============================================================================================================
(1) The terms of each agreement have specific London Interbank Offering
Rate or Cost of Funds Index for the Eleventh District Savings Institutions reset
and index requirements, which result in different short-term receipt rates for
each agreement. The receipt rate represents the weighted average rate as of the
last reset date for each agreement.
(2) Includes $425.0 million notional amount with a weighted average cap
ceiling of 8.06%
(3) Includes $600.0 million notional amount with a weighted average cap
ceiling of 7.75%
(4) Includes $250.0 million notional amount with a weighted average cap
ceiling of 7.65%
(5) Includes $30.0 million notional amount with a weighted average cap
ceiling of 9.50% and $5.0 billion notional amount with a weighted average floor
of 4.85%
(6) Includes $45.0 million notional amount with a weighted average cap
ceiling of 9.50%
(7) Includes $40.0 million notional amount with a weighted average cap
ceiling of 9.50%
(8) Includes $1.1 billion notional amount with a weighted average cap
ceiling of 9.50%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
- ------------------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying Fair
(dollars in thousands) Amount Rate Receipt Rate(1) Value Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-
sale securities:
Due after one but within two years $ 600,000 5.13% 5.76% $24,936 $24,936
After two years 275,000 4.80 5.70 16,754 16,754
Designated against deposits and borrowings:
Due after one but within two years 1,018,000 6.14 5.90 937 21,366
(2)
After two but within three years (3) 441,000 9.21 5.91 2,234 3,677
After three years (4) 1,250,000 8.21 4.53 13,641 15,759
- ------------------------------------------------------------------------------------------------------------
$3,584,000 6.97% 5.38% $58,502 $82,492
============================================================================================================
(1) The terms of each agreement have specific London Interbank Offering
Rate or Cost of Funds Index for the Eleventh District Savings Institutions reset
and index requirements, which result in different short-term receipt rates for
each agreement. The receipt rate represents the weighted average rate as of the
last reset date for each agreement.
(2) Includes $455.0 million notional amount with a weighted average cap
ceiling of 8.15%
(3) Includes $45.0 million notional amount with a weighted average cap
ceiling of 9.50%
(4) Includes $968.5 million notional amount with a weighted average cap
ceiling of 9.50%
</TABLE>
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
<TABLE>
<CAPTION>
Interest Rate Interest Rate
(dollars in thousands) Exchange Agreements Cap Agreements
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notional balance, beginning of year $2,642,500 $3,584,000
Purchases 705,000 6,190,000
Terminations and maturities (666,000) -
- ------------------------------------------------------------------------------------------------------------
Notional balance, end of year $2,681,500 $9,774,000
============================================================================================================
</TABLE>
The unamortized balance of prepaid fees and deferred gains and losses
from terminated interest rate exchange agreements and interest rate cap
agreements are scheduled to be amortized into interest expense as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Gain on Gain on Short- Loss on Short- Net
Available-For- Term Borrowings Term Borrowings Gain
(dollars in thousands) Sale Securities and Deposits and Deposits (Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $1,152 $367 $(3,030) $(1,511)
1997 - - (392) (392)
1998 - - (81) (81)
- ------------------------------------------------------------------------------------------------------------
Unamortized deferred gain (loss) $1,152 $367 $(3,503) $(1,984)
============================================================================================================
</TABLE>
<PAGE>
Financial data pertaining to the weighted average net effective
(benefit) cost, the level of interest rate exchange agreements and the related
cost (benefit) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average net effective cost at end of year 0.12% 0.42% 0.88%
Weighted average net effective cost during the year - 1.44 2.26
Monthly average notional amount of interest rate exchange
agreements $2,749,167 $2,803,750 $1,992,517
Maximum notional amount of interest rate exchange
agreements at any month end 2,901,500 3,058,500 2,593,500
Net cost included with interest expense on deposits during
the year 3,540 13,286 19,250
Net cost included with interest expense on borrowings during
the year 6,842 28,426 25,827
Net (benefit) included with interest income on available-for-
sale securities during the year (10,495) (1,316) -
</TABLE>
Financial data pertaining to the level of interest rate cap agreements
and related net cost (benefit) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Monthly average notional amount of interest rate cap agreements $6,363,000 $2,557,625 $1,761,625
Maximum notional amount of interest rate cap
agreements at any month end 9,774,000 3,584,000 2,129,500
Net cost included with interest expense on deposits during the year 7,875 2,257 3,078
Net cost included with interest expense on borrowings during
the year 415 565 472
Net (benefit) cost included with interest income on available-
for-sale securities during the year (5,340) 1,365 -
</TABLE>
NOTE 19: GAIN (LOSS) ON SALE OF OTHER ASSETS, INCLUSIVE OF WRITE-DOWNS
Gain (loss) on sale of other assets, inclusive of write-downs
consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trading account securities $ 529 $ 45 $ 1,123
Available-for-sale securities (929) 4,111 2,675
Held-to-maturity securities - - 26,706
Premises and equipment (1,458) (1,270) 442
Other 1,203 21,040 18,920
- ------------------------------------------------------------------------------------------------------------
$ (655) $23,926 $49,866
============================================================================================================
</TABLE>
<PAGE>
NOTE 20: INCOME TAXES
The provision for income taxes from continuing operations consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $ 92,315 $ 94,452 $ 77,390
Deferred income tax expense 19,591 15,428 14,569
- ------------------------------------------------------------------------------------------------------------
$111,906 $109,880 $91,959
============================================================================================================
</TABLE>
In determining taxable income, savings banks are allowed bad debt
deductions based on a percentage of taxable income or on actual experience. Each
year, savings banks may select whichever method results in the most tax savings.
The Company primarily used the percentage method in 1995 and 1994 and the
experience method in 1993. Effective with the adoption of SFAS No. 109, this bad
debt deduction is no longer treated as a permanent difference. Effective for
years ending after December 31, 1995, the reserve method of accounting for tax
basis bad debts is no longer available to the Company (see Note 32, "Subsequent
Events").
The significant components of the Company's deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,632,230 $1,690,939
Book loan loss reserves 106,828 124,075
Purchase accounting adjustments 41,343 56,486
Deferred losses - 12,166
Other 59,468 52,377
- ------------------------------------------------------------------------------------------------------------
1,839,869 1,936,043
Valuation allowance (1,150,206) (1,157,320)
- ------------------------------------------------------------------------------------------------------------
Deferred tax asset, net of valuation allowance 689,663 778,723
Deferred tax liabilities:
Tax bad debt reserves 467,125 538,297
FHLB stock dividends 60,636 50,810
Deferred loan fees 32,958 19,163
Deferred gains 50,947 11,655
Purchase accounting adjustments 26,644 41,831
Other 63,546 49,073
- ------------------------------------------------------------------------------------------------------------
701,856 710,829
- ------------------------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (12,193) $ 67,894
============================================================================================================
</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: (1) projected future taxable income; (2) reversing taxable temporary
differences; and (3) tax planning strategies.
The decline in the valuation allowance of $7.1 million during the year
ended December 31, 1995 was due primarily to a greater-than-anticipated
utilization of the beginning balance of the deferred tax asset.
The enactment in 1993 of certain federal tax legislation had the
effect of retroactively disallowing certain losses and bad debt deductions
arising from assets of New West. As a result, the Company reduced its gross
deferred tax asset and related valuation allowance by $155.0 million.
Also during 1993, California enacted legislation reducing the net
operating loss carryforward period from 15 years to 10 years for losses incurred
prior to 1994 relating to assets acquired in a tax-free reorganization under
Internal Revenue Code Section 368(a)(1)(G). This change had a negligible impact
on the valuation allowance.
As of December 31, 1995, Keystone Holdings' net deferred tax asset was
$112.6 million. In order to fully realize the net deferred tax asset, Keystone
Holdings will need to generate future taxable income of approximately $672.1
million prior to the expiration of its tax net operating losses, which begin to
expire in 1999. Based on Keystone Holdings' history of prior operating earnings
and expectations for the future, management believes it is more likely than not
that Keystone Holdings, on a continuing company basis, will realize the recorded
benefit of $112.6 million as of December 31, 1996 through use of existing net
operating loss carryovers existing at December 31, 1995. However, in August 1996
Keystone Holdings amended certain prior-year state and federal tax returns. (See
Note 32 "Subsequent Events" for further discussion.)
As of December 31, 1995, prior to the amendments mentioned above, the
Company had the following federal and state income tax net operating loss
carryforwards due to expire under current law during the years indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) Federal State
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000 $ - $ 140
2001 - 754,460
2002 599,241
2003 - 1,102,387
2004 1,641,595 -
2005 784,196 -
2006 701,008 -
2007 105,825 -
2008 625,887 -
2009 37,460 -
- -----------------------------------------------------------------------------------------------------------
$3,895,971 $2,456,228
===========================================================================================================
</TABLE>
In April 1994, revenue procedures were issued allowing the Company to
change its method of accounting for loan fees, effective for 1993. The change
allowed most members of the Company's consolidated filing group to defer the
recognition of loan fees for income tax purposes.
Under SFAS No. 115, where actual benefits or liabilities are expected
to be realized, the net realizable tax effects of unrealized gains and losses on
available-for-sale securities at December 31, 1995 and 1994 were included in the
deferred tax liabilities and assets. The tax effect was made directly to
stockholders' equity and was not included in the provision for income taxes.
<PAGE>
The change in the net deferred tax asset (liability) was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax asset, beginning of year $ 67,894
Tax effect of valuation adjustment on available-for-sale securities (55,155)
Deferred income tax expense (19,591)
Other adjustments (5,341)
- ------------------------------------------------------------------------------------------------------------
Deferred tax liability, end of year $(12,193)
============================================================================================================
</TABLE>
Reconciliations between income taxes computed at statutory rates and
income taxes included in the Supplemental Consolidated Statements of Income were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at statutory rates $148,920 $127,163 $ 136,420
Tax effect of:
Utilization of current tax losses of New West (nominee to ASB) (17,482) (55,100) (90,136)
Amortization of goodwill and other intangible assets 6,631 6,688 6,281
Change in tax laws and rates 121,034
State franchise tax, net of federal tax benefit 3,899 (2,890) 39,286
Increase in base year reserve amount (16,318) (11,605)
Valuation allowance change from prior year (7,114) 48,241 (107,658)
Dividends received deduction (987) (506) (441)
Tax exempt income (1,973) (1,680) (1,924)
Other (3,670) (431) (6,828)
- ------------------------------------------------------------------------------------------------------------
Income taxes before extraordinary items 111,906 109,880 96,034
Tax effect of:
Call of subordinated capital notes - - (709)
Penalty for prepayment of FHLB advances - - (3,366)
- ------------------------------------------------------------------------------------------------------------
Income taxes included in the Consolidated Statements of Income $111,906 $109,880 $ 91,959
============================================================================================================
</TABLE>
NOTE 21: PAYMENTS IN LIEU OF TAXES
The Assistance Agreement generally provides that 75.0 percent of most
of the federal tax savings and approximately 19.5 percent of most of the
California tax savings (as computed in accordance with the Assistance Agreement)
attributable to ASB's utilization of any current tax losses or tax loss
carryovers of New West are to be paid by the Company for the benefit of the FRF.
The Assistance Agreement sets forth certain special adjustments to federal
taxable income to arrive at "FSLIC taxable income." The principal adjustments
effectively permit ASB to (i) recognize loan fees ratably over seven years
adjusted for loan dispositions, (ii) treat the income and expenses of N.A.
Holdings and New Capital as income and expenses of ASB, and (iii) for years
ending on or before December 31, 1994, to recognize approximately 36.0 percent
of the amortization of the mark-to-market adjustment attributable to the
acquired loan portfolio.
<PAGE>
The provision (benefit) for payments in lieu of taxes consisted of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) for payments in lieu of taxes:
Federal $3,450 $(137) $ 327
State 4,437 (687) 13,748
- -------------------------------------------------------------------------------------------------------------
Total provision (benefit) for payments in lieu of taxes $7,887 $(824) $14,075
=============================================================================================================
</TABLE>
NOTE 22: EXTRAORDINARY ITEMS
Extraordinary items consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Call of subordinated capital notes $ - $ - $ (2,266)
Penalty for prepayment of FHLB advances - - (10,762)
- ------------------------------------------------------------------------------------------------------------
- - (13,028)
Federal income tax benefits - - 4,075
- ------------------------------------------------------------------------------------------------------------
- - $ (8,953)
============================================================================================================
</TABLE>
On September 15, 1993, the Company redeemed for cash all $40.0 million
in principal of its 10.50 percent subordinated capital notes due March 15, 1999.
The Company prepaid $432.6 million in advances from the FHLB during 1993.
NOTE 23: STOCKHOLDERS' EQUITY
COMMON STOCK
In the third quarter of 1993, Washington Mutual's Board of Directors
declared a 50 percent stock dividend on its shares of common stock. The stock
dividend had the effect of a three-for-two stock split. Cash dividends declared,
as adjusted for the above mentioned stock dividend, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (1)
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter $0.19 $0.16 $0.10
Second quarter 0.19 0.17 0.11
Third quarter 0.19 0.18 0.14
Fourth quarter 0.20 0.19 0.15
(1) Dividends per share includes only those amounts paid to Washington Mutual
shareholders, prior to business combinations.
</TABLE>
Prior to the business combination with Washington Mutual, Keystone
Holdings paid total common cash dividends of $5.6 million, $22.5 million and
$18.0 million in 1995, 1994 and 1993.
Not only is the dividend policy of Washington Mutual influenced by
legal, regulatory and economic restrictions, but it is also predicated on the
ability of its subsidiaries to declare and pay dividends to Washington Mutual.
These subsidiaries are in turn subject to legal and regulatory restrictions on
their ability to pay dividends.
Retained earnings of the Company at December 31, 1995 included a
pre-1988 thrift bad debt reserve for tax purposes of $448.1 million for which no
federal income taxes had been provided. In the future, if this thrift bad debt
reserve is used for any purpose other than to absorb bad debt losses, if any of
the banking subsidiaries do not meet the 60 percent qualified assets test or if
legislation is enacted requiring recapture of all thrift bad debt reserves, the
Company will incur a federal income tax liability at the then prevailing
corporate tax rate.
On October 16, 1990, the Company's Board of Directors adopted a
shareholder rights plan and declared a dividend of one right for each
outstanding share of common stock to shareholders of record on October 31, 1990.
The rights have certain anti-takeover effects. They are intended to discourage
coercive or unfair takeover tactics and to encourage any potential acquirer to
negotiate a price fair to all shareholders. The rights may cause substantial
dilution to an acquiring party that attempts to acquire the Company on terms not
approved by the Board of Directors, but they will not interfere with any
friendly merger or other business combination.
The plan was not adopted in response to any specific effort to acquire control
of the Company.
PREFERRED STOCK
In August 1989, the Company issued 1,300,000 shares of Noncumulative
Convertible Perpetual Preferred Stock, Series A, at $50 per share for net
proceeds of $63.2 million. In January 1993, the Company issued a notice of
redemption to all holders of its Preferred Stock, Series A. Virtually all
holders of the Preferred Stock, Series A, converted their shares into common
stock prior to the redemption date of February 12, 1993.
In December 1992, the Company issued 2,800,000 shares of Noncumulative
Perpetual Preferred Stock, Series C, at $25 per share for net proceeds of $67.4
million. The stock has a liquidation preference of $25 per share plus dividends
accrued and unpaid for the then current dividend period. Dividends, if and when
declared by Washington Mutual's Board of Directors, are at an annual rate of
$2.28 per share. Dividends have been declared and paid in all quarters since
issuance. The Company may redeem the stock on or after December 31, 1997 at the
redemption price of $25 per share plus unpaid dividends, whether or not
declared, for the then current dividend period up to the date fixed for
redemption. In November 1995, the Company purchased and retired 47,500 shares of
its stock.
Also in December 1992, the Company issued 1,400,000 shares of
Noncumulative Convertible Perpetual Preferred Stock, Series D, at $100 per share
for net proceeds of $136.4 million. The stock has a liquidation preference of
$100 per share plus dividends accrued and unpaid for the then current dividend
period. The stock is convertible at a rate of 3.870891 shares of common stock
per share of preferred stock (after adjustment for the third quarter 1993 50
percent stock dividend discussed below). Dividends, if and when declared by
Washington Mutual's Board of Directors, are at an annual rate of $6.00 per
share. Dividends have been declared and paid in all quarters since issuance. The
Company may redeem the stock on or after December 31, 1996 at an initial
redemption price of $103.60 per share. The redemption price declines to $100 per
share by the year 2003.
In September 1993, the Company issued 2,000,000 shares of
Noncumulative Perpetual Preferred Stock, Series E, at $25 per share for net
proceeds of $48.2 million. The stock has a liquidation preference of $25 per
share plus dividends accrued and unpaid for the then current dividend period.
Dividends, if and when declared by Washington Mutual's Board of Directors, are
at an annual rate of $1.90 per share. Dividends have been declared and paid in
all quarters since issuance. The Company may redeem the stock on or after
September 15, 1998, at the redemption price of $25 per share plus unpaid
dividends, whether or not declared, for the then current dividend period up to
the date fixed for redemption. In November 1995, the Company purchased and
retired 30,000 shares of its stock.
In December 1988, New Capital issued $80 million of Cumulative
Redeemable Preferred Stock. The Preferred Stock is presented as a minority
interest in the Company's Supplemental Consolidated Financial Statements.
The Preferred Stocks, Series C, Series D and Series E, are senior to
common stock as to dividends and liquidation, but they do not confer general
voting rights.
NOTE 24: EARNINGS PER COMMON SHARE
Primary earnings per common share have been calculated by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of shares outstanding for the period. Fully diluted earnings per common
share assume conversion of the outstanding convertible preferred stock.
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $289,902 $240,275 $267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E (3,800) (3,800) (538)
Noncumulative Convertible Perpetual, Series D (8,400) (8,400) (7,393)
- ------------------------------------------------------------------------------------------------------------
Net income attributable to primary common stock $271,318 $221,691 $253,764
============================================================================================================
Net income $289,902 $240,275 $267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E (3,800) (3,800) (538)
- ------------------------------------------------------------------------------------------------------------
Net income attributable to fully diluted common stock $279,718 $230,091 $261,157
============================================================================================================
Average number of common shares outstanding (1):
Primary 109,944,477 106,245,127 104,691,406
Noncumulative Convertible Perpetual, Series A - - 643,121
Noncumulative Convertible Perpetual, Series D 5,419,247 5,419,247 5,419,247
- ------------------------------------------------------------------------------------------------------------
Fully diluted 115,363,724 111,664,374 110,753,774
============================================================================================================
(1) As part of the business combination with Keystone Holdings, 8,000,000
shares of common stock, with a assigned value of $___ per share were issued to
an escrow for the benefit of the general and limited partners of Keystone
Holdings and the FRF. The Company will use the treasury stock method to
determine the effect of the shares upon the Company's financial statements. As
of the merger date, there is no potential dilutive effect of the 8,000,000
shares of common stock. The shares in the escrow will be dilutive in the future
to the extent that the market price of the common stock exceeds $___ per share.
</TABLE>
NOTE 25: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to any regulatory capital requirements. However,
each of its subsidiary depository and insurance institutions is subject to
various capital requirements. WMB is subject to the FDIC capital requirements
while ASB and WMBfsb are subject to the Office of Thrift Supervision ("OTS")
capital requirements.
The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC requires most banks it
regulates to maintain a minimum leverage ratio, defined as core ("Tier 1")
capital divided by total regulatory assets, of at least 4.00 percent to 5.00
percent. It also requires total capital of at least 8.00 percent of
risk-weighted assets and Tier 1 capital of at least 4.00 percent of
risk-weighted assets. The OTS requires savings associations, such as ASB and
WMBfsb, to meet each of three separate capital adequacy standards: a core
capital leverage requirement, a tangible capital requirement and a risk-based
capital requirement. OTS regulations require savings associations to maintain
core capital of at least 3.00 percent of assets and tangible capital (excluding
all goodwill) of at least 1.50 percent of assets. Most savings institutions are
required to maintain a minimum leverage capital ratio of at least 4.00 percent.
OTS regulations incorporate a risk-based capital requirement that is designed to
be no less stringent than the capital standard applicable to national banks and
is modeled in many respects on, but not identical to, the risk-based capital
requirements adopted by the FDIC. These regulations require a core risk-based
capital ratio of at least 4.00 percent and a total risk-based capital ratio of
at least 8.00 percent.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. For WMB, ASB and WMBfsb, FDICIA
establishes five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-based
capital measure, a leverage ratio capital measure and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations which implement this statutory framework. Under these regulations,
in order to be well capitalized a bank must have a ratio of total capital to
risk-weighted assets of not less than 10.00 percent, a ratio of Tier 1 capital
to risk-weighted assets of not less than 6.00 percent, and a leverage ratio of
Tier 1 capital to total average assets of not less than 5.00 percent and must
not be subject to any federal supervisory order or directive to meet a specific
capital level. In order to be adequately capitalized, an institution must have a
total risk-based capital ratio of not less than 8.00 percent, a Tier 1
risk-based capital ratio of not less than 4.00 percent, and a leverage ratio of
not less than 4.00 percent. Any institution which is neither well capitalized
nor adequately capitalized will be considered undercapitalized. Undercapitalized
institutions are subject to certain regulatory controls and restrictions which
become more extensive as an institution becomes more severely undercapitalized.
At December 31, 1995, WMB, ASB and WMBfsb were well capitalized.
The OTS has adopted final regulations adding an interest rate risk
component to the risk-based capital requirements for savings associations (such
as ASB and WMBfsb), although implementation of the regulation has been delayed.
Management believes the effect of including such an interest rate risk component
in the calculation of risk-adjusted capital will not cause ASB or WMBfsb to
cease to be well capitalized. In August 1995, the FDIC revised its capital
standards to state explicitly that it will consider the risk of declines in the
economic value of capital due to changes in interest rates. The FDIC stated that
in the future, after gaining more experience with the risk measurement process,
it will issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk. The ultimate effect of such risk-based capital
requirements cannot be determined until final regulations are adopted.
WM Life is subject to risk-based capital requirements developed by the
National Association of Insurance Commissioners ("NAIC"). This measure uses four
major categories of risk to calculate an appropriate level of capital to support
an insurance company's overall business operations. The four risk categories are
asset risk, insurance risk, interest rate risk and business risk. At December
31, 1995, WM Life's capital was 672 percent of its required regulatory
risk-based level.
<PAGE>
Capital ratios for WMB (on a consolidated basis), WMBfsb (on a
consolidated basis) and ASB (on a consolidated basis) were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
WMB WMBfsb ASB
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible capital ratio n.a.% 6.76% 5.39%
Leverage capital ratio 5.72 6.76 5.41
Total risk-based capital ratio 11.58 12.64 10.12
Tier 1 or core risk-based capital ratio 10.70 11.39 9.39
</TABLE>
Reconciliations of WMB, WMBfsb and ASB's consolidated stockholders'
equity to regulatory capital were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) WMB WMBfsb ASB
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity $1,418,271 $46,117 $1,238,950
Reporting differences:
Goodwill and other intangible assets (160,781) (401) (3,329)
Valuation reserve for available-for-sale (65,683) (202) (110,367)
securities
Deferred tax asset - - (78,596)
Investment in securities-related subsidiaries (6,579) -
-
Purchased mortgage servicing rights (542) (818) -
Other nonqualifying assets (542) - -
- -----------------------------------------------------------------------------------------------------------
Total regulatory capital $1,184,144 $44,696 $1,046,658
===========================================================================================================
</TABLE>
NOTE 26: STOCK OPTION PLAN
On March 8, 1984, the Company's stockholders approved the adoption of
the 1983 incentive stock option plan, providing for the award of incentive stock
options or nonqualified stock options and stock appreciation rights ("SARs") to
certain officers of the Company at the discretion of the Board of Directors. On
April 19, 1994, the Company's stockholders' approved the adoption of the 1994
stock option plan in which the right to purchase common stock of the Company may
be granted to employees, directors, consultants and advisers of the Company. The
1994 plan is similar in some respects to the 1983 plan, which terminated
according to its terms in 1993. Consistent with the Company's practice under the
1983 plan, it is anticipated that the majority of options available under the
plan will be granted to the most senior management of the Company. The 1994 plan
does not affect any options granted under the 1983 plan.
Under the 1994 stock option plan, on the date of the grant, the
exercise price of the option must at least equal the market value per share of
the Company's common stock. The 1994 plan provides for the granting of options
for a maximum of 4,000,000 common shares.
A SAR represents the right to receive in cash an amount equal to the
difference between the market value of one share of the Company's common stock
on the date of exercise of the SAR and the market value of such a share on the
date of the grant. The market value is the closing stock price on the date of
the grant. The increased value of SARs during 1995 and 1993, which had been
recorded as compensation expense, was $81,000 and $15,000. During 1994, due to
the decline in the price of the Company's common stock, a credit of $49,000 was
recorded against compensation expense.
Stock options and SARs are exercisable on a phased-in schedule. At December
31, 1995, stock options of 900,528 and 6,750 SARs were fully exercisable.
Stock options and SARs granted, exercised or terminated were as
follows:
<TABLE>
<CAPTION>
Stock Options (1) SARs (1)
- ------------------------------------------------------------------------------------------------------------
Average Price Number Average Price Number
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1993 $ 7.86 1,456,859 $5.86 6,750
Granted in 1993 22.25 202,500
- -
Exercised in 1993 6.04 (519,019)
- -
- ------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1993 11.24 1,140,340 5.86 6,750
Granted in 1994 22.27 191,631 - -
Exercised in 1994 7.96 (106,399) - -
- ------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1994 13.25 1,225,572 5.86 6,750
Granted in 1995 17.47 416,618
- -
Exercised in 1995 7.92 (290,981)
- -
Terminated in 1995 22.07 (49,848)
- -
- ------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1995 $15.46 1,301,361 $5.86 6,750
============================================================================================================
(1) Average price and number of stock options and SARs granted, exercised and
terminated in 1993 have been adjusted for the third quarter 1993 50 percent
stock dividend, which had the effect of a three-for-two stock split.
</TABLE>
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-based Compensation. The statement requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) application of the fair value recognition provisions in the
statement. SFAS No. 123 does not rescind or interpret the existing accounting
rules for employee stock-based arrangements. Companies may continue following
those rules to recognize and measure compensation as outlined in Accounting
Principles Board Opinion 25 ("APB 25"), but they will now be required to
disclose the pro forma amounts of net income and earnings per share that would
have been reported had the company elected to follow the fair value recognition
provisions of SFAS No. 123. Effective January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, but has determined that it will
continue to measure its employee stock-based compensation arrangements under the
provisions of APB 25. The adoption of the disclosure requirements of SFAS No.
123 will have no material impact on the results of operations or financial
condition of the Company.
NOTE 27: EMPLOYEE BENEFITS PROGRAMS
Washington Mutual maintains a noncontributory cash balance defined
benefit pension plan for substantially all eligible employees. American provided
a substantially similar plan which was terminated effective June 30, 1995.
Benefits earned for each year of service are based primarily on the level of
compensation in that year plus a stipulated rate of return on the benefit
balance. It is the Company's policy to fund the Plan on a current basis to the
extent deductible under federal income tax regulations. The combined net
periodic pension cost for the Plans was $2.0 million, $1.3 million and $3.9
million for 1995, 1994 and 1993. The weighted average discount rate was 7.25
percent, 8.00 percent and 7.25 percent for 1995, 1994 and 1993. The long-term
rate of return on assets was 8.00 percent for 1995, 8.00 percent for 1994 and
9.00 percent for 1993. The assumed rate of increase in future compensation
levels was 6.00 percent for all years presented. The Plan's assets consist
primarily of listed common stocks, U. S. government obligations, corporate debt
obligations and annuity contracts.
At the termination date of American's plan, all participants' accrued
benefits became fully vested. The net assets of the plan were allocated as
prescribed by the Employee Retirement Income Security Act of 1974 and the
Pension Benefit Guaranty Corporation and their related regulations. All
participants received full benefits. The termination resulted in a settlement
under SFAS 88. American recognized a gain of $1.7 million as a result of the
settlement. The majority of the projected benefit obligation was settled in
1995. At December 31, 1995, the terminated plan had $1.8 million in remaining
assets. Ultimate distribution of these assets is pending IRS approval.
The plan's funded status and amounts recognized in the Company's
financial statements were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
Keystone
Washington Mutual Holdings
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefit obligations:
Vested benefits $(46,628) $(34,885) $(5,307)
Nonvested benefits (2,367) (4,690) (1,316)
- ------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (48,995) (39,575) (6,623)
Effect of future compensation increases (1,598) (1,429) -
- ------------------------------------------------------------------------------------------------------------
Projected benefit obligation (50,593) (41,004) (6,623)
Plan assets at fair value 61,722 53,037 8,035
Plan assets in excess of projected benefit obligation 11,129 12,033 1,412
- ------------------------------------------------------------------------------------------------------------
Unrecognized (gain) loss due to past experience different
from assumptions (2,103) 1,710 -
Unrecognized prior service cost 2,093 - -
Unrecognized net asset at transition being recognized over 18.6 years (3,300) (3,682) (3,317)
- ------------------------------------------------------------------------------------------------------------
Prepaid pension asset $ 7,819 $ 10,061 $(1,905)
============================================================================================================
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
Washington Mutual Keystone Holdings
Year Ended December 31, Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the period $ 3,240 $ 2,952 $ 1,643 $ - $ - $3,162
Interest cost on projected benefit obligation 3,336 2,695 1,904 594 688 803
Actual (gain) loss on plan assets (11,935) 463 (5,637) (896) 152 (840)
Amortization and deferral, net 7,601 (4,779) 2,665 78 (896) 233
- -----------------------------------------------------------------------------------------------------------
$ 2,242 $ 1,331 $ 575 $ (224) $ (56) $3,358
===========================================================================================================
</TABLE>
During 1994, the defined benefit pension plan acquired in the
acquisition of Pacific First was merged into the Company's defined benefit
pension plan. The fair value of plan assets exceeded the projected benefit
obligation, and the accrued pension cost was reduced by $10.8 million.
In addition, the Company currently provides eligible retired employees
with access to medical coverage on the same basis as active employees and
provides certain other health care insurance benefits to a limited number of
retired employees. Postretirement benefits, such as retiree health benefits, are
accrued during the years an employee provides services.
<PAGE>
The funded status of these benefits were as follows:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation $(5,484) $(4,488)
Unrecognized transition obligation 2,503 2,650
Unrecognized (gain) (36) (189)
- -----------------------------------------------------------------------------------------------------------
Prepaid postretirement liability $(3,017) $(2,027)
===========================================================================================================
</TABLE>
Net periodic postretirement expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $206 $220 $154
Interest cost 344 322 320
Amortization of transition obligation 147 147 147
- ------------------------------------------------------------------------------------------------------------
$697 $689 $621
============================================================================================================
</TABLE>
The weighted average discount rate was 7.25 percent, 8.00 percent and
7.25 percent for 1995, 1994 and 1993. The medical trend rate starts at 13.00
percent for 1993 and declines steadily to 6.00 percent by the year 2000. The
effect of a 1.00 percent increase in the trend rates is not significant.
Washington Mutual maintains a savings plan for substantially all
eligible employees that allows participants to make contributions by salary
deduction equal to 15.00 percent or less of their salary pursuant to Section
401(k) of the Internal Revenue Code. ASB maintained a substantially similar
plan. Employees' contributions vest immediately. The Company's partial matching
contributions vest over five years.
ASB implemented a Supplemental Executive Retirement Plan ("SERP") in
1990. The SERP is a non qualified, noncontributory, defined benefit plan where
benefits are paid to certain officers using a target percentage which is based
upon the number of years of service with ASB. This percentage is applied to the
participant's average annual earnings for the highest three out of the final ten
years of employment. These benefits are reduced to the extent a participant
receives benefits from the defined benefit pension plan.
In 1990, ASB implemented the Phantom Share Plan (the "PSP") for the
benefit of certain of its officers. The PSP provides a long-term financial
performance incentive to its participants. Participants in the PSP are granted
phantom shares (units of value), the values of which are determined similar to
that of actual equity securities. The PSP calls for immediate exercisability and
cashing out in the event of a change in control of Keystone Holdings or any of
its subsidiaries. In July 1996, Keystone Holdings entered into an agreement to
merge with Washington Mutual. As a result of the business combination, the
phantom shares will become immediately exercisable, and ASB will incur an
expense of approximately $12.0 million in 1996, upon consummation of the merger.
ASB established a Short-Term Incentive Plan ("STI") for the benefit of
certain of its executives. The STI provides a short-term incentive to its
participants based upon the achievement of both overall company and individual
goals.
<PAGE>
Total employee benefit plan expense was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic pension expense $ 2,018 $ 1,275 $ 3,933
Net periodic postretirement expense 697 689 621
Company's contributions to savings plan 10,027 12,374 7,641
SERP expense 1,590 1,900 1,237
STI expense 3,247 2,219 3,141
- -----------------------------------------------------------------------------------------------------------
$17,579 $18,457 $16,573
===========================================================================================================
</TABLE>
In November 1992, the FASB issued SFAS No. 112, Employers' Accounting
for Postemployment Benefits. This statement establishes standards of financial
accounting and reporting for the estimated cost of benefits provided by an
employer to former or inactive employees after employment but before retirement.
Effective January 1, 1994, the Company adopted SFAS No. 112. There were no costs
accrued under this pronouncement.
NOTE 28: CONTINGENCIES
The Company has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a material adverse effect on
the Company's financial position.
As part of the administration and oversight of the Assistance Agreement and
other agreements among ASB and certain of its affiliates and the FDIC, the FDIC
has a variety of review and audit rights, including the right to review and
audit computations of payments in lieu of taxes. ASB and certain of its
affiliates have entered into settlement agreements with the FDIC for all periods
through June 30, 1994, pursuant to which Keystone Holdings and certain of its
affiliates and the FDIC have mutually settled and released all claims in
consideration of certain nominal payments. The Office of Inspector General has
commenced an audit of certain transactions and payments under the Assistance
Agreement and other agreements occurring during the period beginning July 1,
1994 and ending June 30, 1996. Keystone Holdings has received no notice of any
issues involving more than nominal amounts arising after June 30, 1994.
<PAGE>
NOTE 29: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations on a quarterly basis have been restated to
give effect to the business combination with Keystone Holdings. Results of
operations on a quarterly basis were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, Washington Keystone Washington Keystone
except for per share amounts) Mutual Holdings Restated Mutual Holdings Restated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $367,447 $305,735 $673,182 $390,016 $330,727 $720,743
Interest expense 218,374 228,270 446,644 240,585 242,493 483,078
- ------------------------------------------------------------------------------------------------------------
Net interest income 149,073 77,465 226,538 149,431 88,234 237,665
Provision for loan losses 2,800 18,869 21,669 2,850 15,664 18,514
Other income 28,855 29,188 58,043 29,554 18,315 47,869
Other expense 103,081 71,496 174,577 106,332 73,101 179,433
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 72,047 16,288 88,335 69,803 17,784 87,587
Income taxes 26,797 (6,081) 20,716 22,030 642 22,672
Minority interest in earnings of
consolidated subsidiary - 3,948 3,948 - 3,948 3,948
- ------------------------------------------------------------------------------------------------------------
Net income $ 45,250 $ 18,421 $ 63,671 $ 47,773 $ 13,194 $ 60,967
============================================================================================================
Net income attributable to
common stock $ 40,604 $ 18,421 $ 59,025 $ 43,127 $ 13,194 $ 56,321
============================================================================================================
Net income per common share:
Primary $0.60 $0.55 $0.62 $0.51
Fully diluted 0.58 0.54 0.60 0.51
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- ------------------------------------------------------------------------------------------------------------
Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, Washington Keystone Washington Keystone
except for per share amounts) Mutual Holdings Restated Mutual Holdings Restated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $405,638 $346,343 $751,981 $415,859 $354,321 $770,180
Interest expense 248,844 246,712 495,556 252,921 245,237 498,158
- ------------------------------------------------------------------------------------------------------------
Net interest income 156,794 99,631 256,425 162,938 109,084 272,022
Provision for loan losses 2,800 14,557 17,357 2,700 14,747 17,447
Other income 28,280 18,033 46,313 31,185 24,929 56,114
Other expense 102,530 68,484 171,014 105,712 69,778 175,490
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 79,744 34,623 114,367 85,711 49,488 135,199
Income taxes 28,056 5,023 33,079 30,621 12,705 43,326
Minority interest in earnings of
consolidated subsidiary - 3,948 3,948 - 3,949 3,949
- ------------------------------------------------------------------------------------------------------------
Net income $ 51,688 $ 25,652 $ 77,340 $ 55,090 $ 32,834 $ 87,924
============================================================================================================
Net income attributable to
common stock $ 47,042 $ 25,652 $ 72,694 $ 50,444 $ 32,834 $ 83,278
============================================================================================================
Net income per common share:
Primary $0.66 $0.66 $0.71 $0.75
Fully diluted 0.64 0.64 0.69 0.73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
- ------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, Washington Keystone Washington Keystone
except for per share amounts) Mutual Holdings Restated Mutual Holdings Restated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $287,581 $253,452 $541,033 $300,272 $248,798 $549,070
Interest expense 136,111 155,147 291,258 149,832 157,856 307,688
- ------------------------------------------------------------------------------------------------------------
Net interest income 151,470 98,305 249,775 150,440 90,942 241,382
Provision for loan losses 5,000 32,973 37,973 5,050 25,218 30,268
Other income 30,782 34,481 65,263 30,236 16,500 46,736
Other expense 107,557 74,647 182,204 104,422 68,627 173,049
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 69,695 25,166 94,861 71,204 13,597 84,801
Income taxes 25,923 1,467 27,390 26,930 921 27,851
Minority interest in earnings of
consolidated subsidiary - 3,498 3,498 - 3,498 3,498
- ------------------------------------------------------------------------------------------------------------
Net income $ 43,772 $ 20,201 $ 63,973 $ 44,274 $ 9,178 $ 53,452
============================================================================================================
Net income attributable to
common stock $ 39,126 $ 20,201 $ 59,327 $ 39,628 $ 9,178 $ 48,806
============================================================================================================
Net income per common share:
Primary $0.59 $0.56 $0.60 $0.46
Fully diluted 0.58 0.55 0.58 0.46
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
- ------------------------------------------------------------------------------------------------------------
Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, Washington Keystone Washington Keystone
except for per share amounts) Mutual Holdings Restated Mutual Holdings Restated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $321,545 $257,746 $579,291 $349,152 $276,867 $626,019
Interest expense 168,756 173,468 342,224 197,172 197,016 394,188
- ------------------------------------------------------------------------------------------------------------
Net interest income 152,789 84,278 237,067 151,980 79,851 231,831
Provision for loan losses 5,200 21,047 26,247 5,150 22,371 27,521
Other income 28,389 15,788 44,177 29,095 35,523 64,618
Other expense 101,464 69,387 170,851 101,857 67,556 169,413
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 74,514 9,632 84,146 74,068 25,447 99,515
Income taxes 28,035 (1,249) 26,786 27,271 (242) 27,029
Minority interest in earnings of
consolidated subsidiary - 3,498 3,498 - 3,498 3,498
- ------------------------------------------------------------------------------------------------------------
Net income $ 46,479 $ 7,383 $ 53,862 $ 46,797 $ 22,191 $ 68,988
============================================================================================================
Net income attributable to
common stock $ 41,833 $ 7,383 $ 49,216 $ 42,151 $ 22,191 $ 64,342
============================================================================================================
Net income per common share:
Primary $ 0.63 $ 0.47 $ 0.63 $ 0.60
Fully diluted 0.61 0.46 0.61 0.59
</TABLE>
<PAGE>
NOTE 30: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
The fair value of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 983,833 $ 983,833 $ 477,509 $ 477,509
Trading account securities 238 238 572 572
Available-for-sale securities 12,154,725 12,154,725 4,282,160 4,282,160
Held-to-maturity securities 3,197,720 3,262,850 4,456,031 4,228,897
Mortgage servicing rights 104,495 110,173 70,911 71,915
Loans, exclusive of reserve for loan losses 24,428,115 24,788,750 25,717,081 24,777,595
Note receivable - - 1,515,040 1,667,405
- ------------------------------------------------------------------------------------------------------------
40,869,126 41,300,569 36,519,304 35,506,053
Financial liabilities:
Deposits 24,462,960 24,624673 23,344,006 23,284,547
Annuities 855,503 855,503 799,178 799,178
Federal funds purchased 433,420 433,493 - -
Securities sold under agreements to repurchase 7,984,756 7,985,202 6,637,346 6,636,487
Advances from the FHLB 4,715,739 4,732,366 4,128,977 4,060,902
Other borrowings 590,217 612,240 381,066 378,780
- ------------------------------------------------------------------------------------------------------------
39,042,595 39,243,477 35,290,573 35,159,894
Derivative instruments (1):
Interest rate exchange agreements:
Designated against available for sale (11,847) (11,847) 18,654 18,654
securities
Designated against short term borrowings and
deposits - (22,615) - 22,061
Interest rate cap agreements: - - - -
Designated against available for sale securities 9,415 9,415 41,690 41,690
Designated against short term borrowings and
deposits 17,691 (630) 16,812 40,802
- ------------------------------------------------------------------------------------------------------------
15,259 (25,677) 77,156 123,207
Off-balance-sheet loan commitments - 3,595 - (8,078)
- ------------------------------------------------------------------------------------------------------------
Net financial instruments $ 1,841,790 $ 2,034,787 $ 1,305,887 $ 461,288
============================================================================================================
(1) See Note 18: Interest Rate Risk Management.
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument as of December 31, 1995 and 1994:
Cash and cash equivalents--The carrying amount represented fair value.
Note Receivable--In January 1995, the FDIC offered to pay down the
remaining principal balance of the Note Receivable at-par. Therefore, the fair
value of the Note Receivable at December 31, 1994 represented the at-par offer
by the FDIC, as it was the best indication of the current fair value. Keystone
Holdings agreed with the FDIC in October 1995 to allow prepayment of the
remaining balance of the Note Receivable. On October 24, 1995, ASB received the
remaining principal balance of the Note Receivable of $505.3 million, plus
interest.
Trading account securities--Fair values were based on quoted market
prices.
Available-for-sale securities--Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Held-to-maturity securities--Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Mortgage servicing rights--The fair value of mortgage servicing rights
is estimated using projected cash flows, adjusted for the effects of anticipated
prepayments, using a market discount rate.
Loans--Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
Deposits--The fair value of checking accounts, savings accounts and
money market accounts was the amount payable on demand at the reporting date.
For time deposit accounts, the fair value was determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on
similar products. Core deposit intangibles are not included.
Annuities--The carrying amount represented fair value.
Federal funds purchased--These were valued using the discounted cash
flow method. The discount rate was equal to the rate currently offered on
similar borrowings.
Securities sold under agreements to repurchase--These were valued
using the discounted cash flow method. The discount rate was equal to the rate
currently offered on similar borrowings.
Advances from the FHLB--These were valued using the discounted cash
flow method. The discount rate was equal to the rate currently offered on
similar borrowings.
Other borrowings--These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Derivative instruments--The fair value for interest rate exchange
agreements was determined using dealer quotations, when available, or the
discounted cash flow method. The market prices for similar instruments were used
to value interest rate cap agreements.
Off-balance-sheet loan commitments--Loan commitments are commitments
the Company made to borrowers at locked-in rates. The fair value of loan
commitments was estimated based on current levels of interest rates versus the
committed interest rates. The balance shown represents the differential between
committed value and fair value.
<PAGE>
NOTE 31: FINANCIAL INFORMATION - WMI
WMI was formed August 17, 1994. The following WMI (parent company
only) financial information should be read in conjunction with the other notes
to the consolidated financial statements.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December Period of August 17, 1994
(dollars in thousands) 31, 1995 (inception) to December 31, 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Available-for-sale securities $ 8,033 $ 1,641
Cash equivalents 471 44
- -----------------------------------------------------------------------------------------------------------
Total interest income 8,504 1,685
Interest Expense
Borrowings 9,072 884
- -----------------------------------------------------------------------------------------------------------
Total interest expense 9,072 884
- -----------------------------------------------------------------------------------------------------------
Net interest (expense) income (568) 801
Other Income
Equity in net earnings of subsidiaries (1) 293,630 13,103
Other operating income 8 -
(Loss) on sale of other assets, inclusive of
write-downs (171) -
- -----------------------------------------------------------------------------------------------------------
Total other income 293,467 13,103
Other Expense
Salaries and employee benefits 2,716 -
Occupancy and equipment 1 -
Other operating expense 3,289 228
- -----------------------------------------------------------------------------------------------------------
Total other expense 6,006 228
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 286,893 13,676
Income taxes (865) 201
- -----------------------------------------------------------------------------------------------------------
Net income (1) $287,758 $13,475
===========================================================================================================
(1) Contains intercompany transactions eliminated upon consolidation.
</TABLE>
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 90,096 $ 5,903
Available-for-sale securities 99,932 104,987
Loans 147,867 -
Investment in subsidiaries (1) 2,451,956 1,834,977
Other assets 929 654
- -----------------------------------------------------------------------------------------------------------
Total assets $2,790,780 $1,946,521
===========================================================================================================
Liabilities
Securities sold under agreements to repurchase $ 82,481 $ 84,329
Other borrowings 147,845 -
Other liabilities 5,647 (14)
- -----------------------------------------------------------------------------------------------------------
Total liabilities 235,973 84,315
Stockholders' Equity
Preferred stock, no par value: 10,000,000 shares authorized --
6,122,500 and 6,200,000 shares issued and outstanding - -
Common stock, no par value: 350,000,000 shares authorized --
111,687,860 and 107,720,886 shares issued and outstanding - -
Capital surplus (1) 1,029,549 998,497
Valuation reserve for available-for-sale securities 2,390 (2,511)
Valuation reserve for available-for-sale securities--subsidiaries 186,325 (58,738)
Retained earnings (1) 1,336,543 924,958
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,554,807 1,862,206
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,790,780 $1,946,521
===========================================================================================================
(1) Contains intercompany transactions eliminated upon consolidation.
</TABLE>
<PAGE>
STATEMENS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December Period of August 17, 1994
(dollars in thousands) 31, 1995 (inception) to December 31, 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income(1) $ 287,758 $ 13,475
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Decrease (increase) in interest receivable 80 (693)
Increase in interest payable 3,167 884
(Decrease) in income taxes payable (865) (1,151)
Equity in undistributed earnings of subsidiaries (1) (293,630) (13,103)
Decrease in other assets 9,910 39
Increase in other liabilities 720 252
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 7,140 (297)
Cash Flows From Investing Activities
Purchases of available-for-sale securities - (111,984)
Principal repayments of available-for-sale
securities 12,594 4,486
Originations and purchases of loans (147,867) -
Dividends received from subsidiaries 136,521 -
Acquisition of wholly owned subsidiary (1) - (82,877)
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,248 (190,375)
Cash Flows From Financing Activities
(Decrease) increase in securities sold under
agreements to repurchase (1,848) 84,329
Proceeds of other borrowings 147,845 -
Issuance of common stock through stock options
and employee stock plans 8,379 994
Repurchase of preferred stock (1,990) -
Cash dividends paid (76,581) -
Contribution from wholly owned subsidiaries (1) - 111,252
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 75,805 196,575
- ------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 84,193 5,903
Cash and cash equivalents at beginning of year 5,903 -
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 90,096 $ 5,903
============================================================================================================
(1) Contains intercompany transactions eliminated upon consolidation.
</TABLE>
<PAGE>
NOTE 32: SUBSEQUENT EVENTS
SUBSEQUENT BUSINESS COMBINATIONS
On July 21, 1996, Washington Mutual signed an agreement to acquire,
through merger, Keystone Holdings, the indirect holding company of American
Savings Bank F.A. At September 30, 1996, Keystone Holdings, on a consolidated
basis, had assets of $21.3 billion, deposits of $12.9 billion, and stockholder's
equity of $520.0 million. The transaction was completed December ___, 1996.
On September 9, 1996, Washington Mutual signed an agreement to acquire
United Western Financial Group, Inc. ("United Western") of Salt Lake City and
its United Savings Bank and Western Mortgage Loan subsidiaries for $80.3 million
in cash. At September 30, 1996, United Western had assets of $414.9 million,
deposits of $294.4 million, and stockholders' equity of $53.8 million. The
transaction, which is scheduled to be completed in the first quarter of 1997, is
subject to the approval of banking regulators and a majority of shareholders of
United Western's common stock.
On November 30, 1996, WMI merged with Utah Federal Savings Bank (Utah
FSB") by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB,
which was an Ogden-based institution, had assets of $121.9 million, deposits of
$105.9 million and stockholders' equity of $12.2 million. The merger will be
accounted for as a pooling-of-interests. Due to the immaterial nature of the
transaction, the Company will not restate prior-period information as if the
companies had been combined.
The balances stated above related to Keystone Holdings, United Western
and Utah FSB are unaudited.
FEDERAL AND STATE TAXATION MATTERS
In August 1996, the President signed the Small Business Job Protection
Act of 1996 (the "Act"). Under the Act, the reserve method of accounting for tax
basis bad debts is no longer available, effective for years ending after
December 31, 1995. As a result, the Company will be required to use the specific
charge-off method of accounting for tax basis bad debts for 1996 and later
years. In addition, the Company will also be required to recapture its post-1987
additions to its bad debt reserves, whether such additions were made pursuant to
the percentage of taxable income method or the experience method. As of December
31, 1995, these additions were $151.3 million which, pursuant to the Act, will
be included in taxable income ratably over a six-taxable-year period beginning
with the year ending December 31, 1997. The recapture of the post-1987 additions
to tax basis bad debt reserves will not result in a charge to earnings as these
amounts are included in the deferred tax liability at December 31, 1995.
In August 1996, Keystone Holdings amended prior-year federal tax
returns to reduce tax bad debt deductions and to make other amendments. As a
result, net operating loss carryforwards for federal tax purposes were reduced
by approximately $756 million. In September 1996, ASB amended prior-year state
tax returns to reduce tax bad debt deductions. The result was to decrease state
net operating loss carryovers by approximately $545 million. The decrease in the
gross deferred tax asset as a result of the amendments which reduced the federal
and state net operating loss carryforwards was offset by an equal decrease in
the valuation allowance for the deferred tax asset.
SAIF RECAPITALIZATION ASSESSMENT
On September 30, 1996, President Clinton signed legislation intended,
among other things, to recapitalize the Savings Association Insurance Fund
("SAIF") and to reduce the gap between SAIF premiums and the Bank Insurance Fund
("BIF") premiums. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amounting to
1.3 cents per $100 per year.
The Company's special assessment resulted in a pretax charge of $124.2
million, which was taken in the quarter ended September 30, 1996. Based on the
current level of deposits, the Company estimates that the reduction in the
regular assessment on its SAIF deposits beginning in 1997 should result in
annual savings of approximately $31.2 million.
SUBSEQUENT FINANCING MATTERS
On February 8, 1996, ASB completed the private placement of $100.0
million of Subordinated Notes (the "Notes") maturing February 15, 2006. The
Notes bear interest at a rate of 6.625% per annum. Interest on the Notes is
payable semi-annually in arrears on each February 15 and August 15, beginning on
August 15, 1996.
In November 1996, Washington Mutual received commitments for $200
million of Revolving Credit Facilities with two tranches: a $100 million 364-day
facility and a $100 million 4-year facility. Chase Manhattan Bank will act as
Administrative Agent for the Facilities. Proceeds of the Facilities are
available for potential funding needs at the closing of the merger with Keystone
Holdings, including redemption of any securities of Keystone Holdings, and for
general corporate purposes.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
On December ___, 1996, the shareholders of Washington Mutual approved
an amendment to the Company's Restated Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 shares to
350,000,000 shares.
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by the Company, the Selling Stockholders or the Underwriters. This Prospectus
does not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction where, or to any person to whom, it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has not been any change in the facts set forth in this Prospectus or
in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page
===============================================================================
15,085,305 Shares
Washington Mutual, Inc.
Common Stock
===============================================================================
PROSPECTUS
===============================================================================
Merrill Lynch & Co.
Friedman, Billings, Ramsey & Co., Inc.
_______, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission Registration Fee .................$ 190,852
Attorneys' Fees and Expenses .........................................____*____
Accountants' Fees and Expenses .......................................____*____
Blue Sky Filing Fees and Expenses ....................................____*____
Printing Fees and Expenses ...........................................____*____
Miscellaneous Expenses................................................____*____
Total.............................................. .............$___*____
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 23B.08.320 of the Washington Business Corporation Act (the
"Corporation Act") provides that the personal liability of directors to a
corporation imposed by Section 23B.08.310 of the Corporation Act may be
eliminated by the articles of incorporation of the corporation, except in the
case of acts or omissions involving certain types of conduct. At Article XIII of
its Restated Articles of Incorporation, the Registrant has elected to eliminate
the liability of directors to the Registrant to the extent permitted by law.
Thus, a director of the Registrant is not personally liable to the Registrant or
its shareholders for monetary damages for conduct as a director, except for
liability of the director (i) for acts or omissions that involve intentional
misconduct by the director or a knowing violation of law by the director, (ii)
for conduct violating Section 23B.08.310 of the Corporation Act, or (iii) for
any transaction from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled. If
Washington law is amended to authorize corporate action that further eliminates
or limits the liability of directors, then the liability of Washington Mutual
directors will be eliminated or limited to the fullest extent permitted by
Washington law, as so amended.
Section 23B.08.560 of the Corporation Act provides that if authorized
by (i) the articles of incorporation, (ii) a bylaw adopted or ratified by the
shareholders, or (iii) a resolution adopted or ratified, before or after the
event, by the shareholders, a corporation will have the power to indemnify
directors made party to a proceeding, or to obligate itself to advance or
reimburse expenses incurred in a proceeding, without regard to the limitations
on indemnification contained in Sections 23B.08.510 through 23B.08.550 of the
Corporation Act.
Pursuant to Article X of Washington Mutual's Restated Articles of
Incorporation and Article VIII of Washington Mutual's Bylaws, Washington Mutual
must, subject to certain exceptions, indemnify and defend its directors against
any expense, liability or loss arising from or in connection with any actual or
threatened action, suit or proceeding relating to service for or at the request
of Washington Mutual, including without limitation, liability under the
Securities Act. Washington Mutual is not permitted to indemnify a director from
or on account of acts or omissions of such director which are finally adjudged
to be intentional misconduct, or from or on account of conduct in violation of
RCW 23B.08.310, or a knowing violation of the law from or on account of any
transaction with respect to which it is finally adjudged that such director
received a benefit in money, property or services to which he or she was not
entitled. If Washington law is amended to authorize further indemnification of
directors, then Washington Mutual directors shall be indemnified to the fullest
extent permitted by Washington law, as so amended. Also, pursuant to Article X
of Washington Mutual's Restated Articles of Incorporation and Article VIII of
Washington Mutual's Bylaws, Washington Mutual may, by action of the Board of
Directors of Washington Mutual, provide indemnification and pay expenses to
officers, employees and agents of Washington Mutual or another corporation,
partnership, joint venture, trust or other enterprise with the same scope and
effect as above described in relation to directors. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling Washington Mutual pursuant to the provisions
described above, Washington Mutual has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS
The exhibits identified in parentheses below, on file with the
Commission, are incorporated herein by reference as exhibits hereto.
Exhibit
1.1* Form of Purchase Agreement
3.1* Restated Articles of Incorporation of the Registrant dated December
____, 1996
3.2** Bylaws of the Registrant
4.1* Rights Agreement, dated October 16, 1990, as amended by Amendment No. 1
to Rights Agreement, dated October 31, 1994, and as supplemented by
Supplement to Rights Agreement, dated November 29, 1994
5.1* Opinion of Foster Pepper & Shefelman
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Foster Pepper & Shefelman (contained in its opinion filed
as Exhibit 5.1)
24.1 Power of Attorney (included on Signatures pages)
27 Financial Data Schedule
- ------------------------
*To be filed by amendment. **Incorporated by reference to Washington
Mutual, Inc. Current Report on Form 8-K dated November 29, 1994 (File No.
0-25188).
ITEM 17. UNDERTAKINGS
(b) The undersigned registrant hereby undertakes that, for the
purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrants pursuant to the provisions
referred to in Item 15 or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on the 29 day of
November, 1996.
WASHINGTON MUTUAL, INC.
By: /s/ Kerry K. Killinger
Kerry K. Killinger
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints and
hereby authorizes Kerry K. Killinger and Marc R. Kittner, and each of them, with
the full power of substitution, as attorney-in-fact to sign in such person's
behalf, individually and in each capacity stated below, and to file any
amendments, including post-effective amendments to this Registration Statement
(and to any Registration Statement filed pursuant to Rule 462 under the
Securities Act).
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 29 day of November, 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
Deputy Chief Financial Officer
and Controller
(Principal Accounting Officer)
/S/ DOUGLAS P. BEIGHLE /S/ WILLIAM P. GERBERDING
Douglas P. Beighle William P. Gerberding
Director Director
/S/ HERBERT M. BRIDGE /S/ DR. SAMUEL B. MCKINNEY
Herbert M. Bridge Dr. Samuel B. McKinney
Director Director
/S/ ROGER H. EIGSTI /S/ MICHAEL K. MURPHEY
Roger H. Eigsti Michael K. Murphey
Director Director
/S/ JOHN W. ELLIS /S/ LOUIS H. PEPPER
John W. Ellis Louis H. Pepper
Director Director
/S/ DANIEL J. EVANS /S/ WILLIAM G. REED, JR.
Daniel J. Evans William G. Reed, Jr.
Director Director
/S/ ANNE V. FARRELL /S/ JAMES H. STEVER
Anne V. Farrell James H. Stever
Director Director
<PAGE>
===============================================================================
EXHIBITS INDEX
===============================================================================
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Registration
Statement of Washington Mutual, Inc. on Form S-3 and related
prospectus of our report dated February 14, 1996, appearing on Form
10-K and our report dated October 15, 1996, appearing on Form 8-K
dated October 18, 1996, as amended by Form 8-K/A dated October 23,
1996, as amended by Form 8K/A dated October 25, 1996.
We also consent to the reference to us under the heading "Experts"
in such Registration Statement and Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
December 4, 1996
Independent Auditors' Consent
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, on 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, incorporated by reference and to the reference
to our firm under the heading "Experts" in the registration
statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
December 4, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 655,815 689,258
<INT-BEARING-DEPOSITS> 1,825 1,575
<FED-FUNDS-SOLD> 0 293,000
<TRADING-ASSETS> 2,151 238
<INVESTMENTS-HELD-FOR-SALE> 10,063,100 12,154,725
<INVESTMENTS-CARRYING> 2,986,296 3,197,720
<INVESTMENTS-MARKET> 3,030,168 3,262,850
<LOANS> 28,731,098 24,428,115
<ALLOWANCE> 234,341 235,275
<TOTAL-ASSETS> 43,711,945 42,026,622
<DEPOSITS> 23,978,515 24,462,960
<SHORT-TERM> 9,770,997 10,459,266
<LIABILITIES-OTHER> 489,600 362,323
<LONG-TERM> 6,970,917 4,120,369
0 0
250,158 250,168
<COMMON> 677,958 670,238
<OTHER-SE> 1,493,800 1,621,298
<TOTAL-LIABILITIES-AND-EQUITY> 43,711,945 42,026,622
<INTEREST-LOAN> 1,557,650 2,061,801
<INTEREST-INVEST> 778,912 790,696
<INTEREST-OTHER> 2,023 63,589
<INTEREST-TOTAL> 2,338,585 2,916,086
<INTEREST-DEPOSIT> 799,045 1,134,818
<INTEREST-EXPENSE> 1,455,202 1,923,436
<INTEREST-INCOME-NET> 883,383 992,650
<LOAN-LOSSES> 58,138 74,987
<SECURITIES-GAINS> (7,893) (400)
<EXPENSE-OTHER> 684,542 700,514
<INCOME-PRETAX> 324,525 425,488
<INCOME-PRE-EXTRAORDINARY> 212,716 305,695
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 202,212 289,902
<EPS-PRIMARY> 1.68 2.47
<EPS-DILUTED> 1.66 2.42
<YIELD-ACTUAL> 7.66 7.70
<LOANS-NON> 215,982 212,714
<LOANS-PAST> 343 1,088
<LOANS-TROUBLED> 87,239 90,623
<LOANS-PROBLEM> 133,257 129,264
<ALLOWANCE-OPEN> 235,275 244,989
<CHARGE-OFFS> 64,916 98,122
<RECOVERIES> 5,844 8,049
<ALLOWANCE-CLOSE> 234,341 235,275
<ALLOWANCE-DOMESTIC> 23,547 16,646
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 210,794 218,629
</TABLE>
