<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 2, 1996
WASHINGTON MUTUAL, INC.
(Exact name of the Registrant as specified in its charter)
Washington 0-25188 91-1653725
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1201 Third Avenue, Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 461-2000
N/A
(Former name or former address, if changed since last report)
Total number of pages: _____
Index to exhibits occurs on page __3__
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Included as Exhibit 99.1 are a complete set of Washington Mutual,
Inc.'s audited financial statements and management's discussion and analysis of
financial position and results of operations for the year ended December 31,
1995 as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASHINGTON MUTUAL, INC.
Date: October 23, 1996 /s/ Ruthanne M. King
----------------------
Ruthanne M. King
Vice-President & Assistant Controller
<PAGE> 3
INDEX OF EXHIBITS
Exhibit Page
99.1 - Audited financial statements and management discussion and
analysis as of December 31, 1995 restated to give
consideration to Washington Mutual, Inc.'s merger transaction
with Western Bank
<PAGE> 1
Preparer: [ ]
Reviewer: [ ]
Blank Word Workpaper * : 1/2
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
of the Company at and for the years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands, except for per 1995 1994 1993 1992 1991
share amounts)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 1,578,960 $ 1,258,550 $ 1,081,309 $ 813,893 $ 777,812
Interest Expense 960,724 651,871 520,750 456,876 520,021
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 618,236 606,679 560,559 357,017 257,791
Provision for loan losses 11,150 20,400 35,225 14,887 22,407
Other income 117,874 118,502 152,575 97,748 101,317
Other expense 417,655 415,300 394,874 253,024 204,130
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary items and
cumulative effect of change
in tax accounting method 307,305 289,481 283,035 186,854 132,571
Income taxes 107,504 108,159 98,864 64,459 45,920
Extraordinary items, net of
federal income tax effect - - (8,953) (4,638) -
Cumulative effect of change in
tax accounting method - - 13,365 - -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 199,801 $ 181,322 $ 188,583 $ 117,757 $ 86,651
========================================================================================================================
Net income attributable to
common stock $ 181,217 $ 162,738 $ 175,025 $ 112,882 $ 81,776
========================================================================================================================
Net income per common share(1):
Primary $ 2.59 $ 2.45 $ 2.70 $ 1.95 $ 1.61
Fully diluted 2.51 2.38 2.57 1.85 1.52
Cash dividend declared per share (2):
Preferred stock (Series A, C, D and E
cumulative) $ 10.18 $ 10.18 $ 7.56 $ 3.75 $3.75
Common stock(1) 0.77 0.70 0.50 0.33 0.24
Common stock dividend payout ratio 25.74% 24.50% 15.98% 15.43% 13.06%
Return on average assets 0.97 1.03 1.31 1.24 1.05
Return on average stockholders'
equity 13.31 13.77 16.89 15.26 14.33
Return on average common
stockholders' equity 13.73 14.30 18.31 15.26 14.33
Assets $22,420,379 $19,175,991 $16,513,432 $10,531,744 $8,529,135
Available for sale securities 7,768,115 2,701,799 138,342 0 0
Held to maturity securities 172,786 2,646,194 4,070,733 2,809,057 2,342,998
Loans:
Residential 7,861,990 8,100,930 6,764,373 4,416,454 3,241,043
Residential construction 615,814 549,271 430,215 366,808 326,508
Commercial real estate 1,867,347 1,805,951 1,922,120 1,055,312 901,098
Manufactured housing, second
mortgage and other consumer 2,653,850 2,392,502 2,138,852 1,136,370 940,252
Commercial 179,568 129,048 131,468 118,717 112,312
Reserve for loan losses (143,319) (132,499) (119,315) (58,075) (55,900)
- ------------------------------------------------------------------------------------------------------------------------
Total loans 13,035,250 12,845,203 11,267,713 7,035,586 5,465,313
========================================================================================================================
Deposits 11,306,436 10,432,888 9,976,961 6,624,584 5,910,396
Annuities 855,503 799,178 713,383 571,428 433,767
Borrowings 8,332,275 6,413,711 4,337,262 2,164,268 1,355,669
Preferred stock 250,168 252,034 252,053 266,633 63,152
Stockholders' equity 1,660,084 1,364,258 1,252,888 1,045,289 694,134
Stockholders' equity ratio 7.40% 7.11% 7.59% 9.93% 8.14%
Leverage capital ratio 5.72 6.01 6.10 9.27 7.52
Book value per common share(1) $ 19.97 $ 16.98 $ 15.87 $ 13.89 $ 11.42
Number of common shares
outstanding(1) 71,804,527 67,837,553 65,958,489 59,637,406 54,383,960
Number of preferred shares
outstanding 6,122,500 6,200,000 6,200,000 5,494,150 1,300,000
</TABLE>
- -----------
(1) Net income per common share, cash dividends declared per common share, book
value per common share and number of common shares outstanding for 1992 and
1991 have been adjusted for the third quarter 1993 and first quarter 1992 50
percent stock dividends, each of which had the effect of a three-for-two
stock split.
(2) Dividends include only amounts paid to Washington Mutual, Inc. shareholders.
<PAGE> 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto, and with reference
to the discussion of the operations and other financial information presented
elsewhere in this report.
During the first half of 1993, Washington Mutual merged with Pioneer
and acquired Pacific First. As a result of the acquisition of 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, the Company acquired Enterprise through a
merger of Enterprise with and into WMB. Enterprise, a Bellevue, Washington-based
commercial bank specializes in lending to small- and mid-size businesses. In
October, Washington Mutual signed an agreement to merge WMB with Western, a
commercial bank with branch operations throughout Oregon. The Western
transaction was completed on January 31, 1996.
During 1994, there was an increase in short-term interest rates, which
had an adverse effect not only on the results of operations but also on the
market value of the Company's net financial assets. Although short-term interest
rates did not generally increase further in 1995 and actually declined somewhat
in the latter half of the year, the 1994 interest rate increase continued to
affect the Company's financial performance during much of 1995. Except for
available-for-sale securities, financial assets and liabilities were reported at
historical cost and accordingly the financial statements do not reflect changes
in market value. (See "Financial Statements and Supplementary Data--Note 27:
Fair Value of Financial Instruments.")
RESULTS OF OPERATIONS
Washington Mutual's net income of $199.8 million for 1995 exceeded
earnings of $181.3 million in 1994 and $188.6 million in 1993. Fully diluted
earnings per share were $2.51 in 1995, compared with $2.38 in 1994 and $2.57 in
1993. Washington Mutual's return on average assets ("ROA") for 1995 equaled 0.97
percent, down from 1.03 percent in 1994 and 1.31 percent in 1993. Its return on
average common stockholders' equity ("ROCE") of 13.73 percent for 1995 was also
down from the previous two years--14.30 percent in 1994 and 18.31 percent in
1993. During 1993, Washington Mutual operated in a highly favorable interest
rate environment. However, an increase of approximately 250 basis points in
short-term interest rates in 1994 led to a compression of the net interest
margin (net interest income divided by average interest-earning assets) and a
corresponding pressure on net interest income in 1994 and 1995. Certain
short-term interest rates were lowered 25 basis points in mid-1995 and again in
December, resulting in an improved operating environment for the Company. This
favorable change in interest rates helped the Company earn an ROA and ROCE of
1.02 percent and 14.17 percent for 4th quarter 1995.
Net Interest Income
Net interest income of $618.2 million for 1995 was up slightly from
$606.7 million in 1994, which in turn was 8 percent higher than the $ 560.6
million earned during 1993. Most of the growth in net interest income was due to
the increase in average interest-earning assets. Although average
interest-earning assets were up 18 percent during 1995, a decline in the net
interest margin limited the increase in net interest income.
The increase in market interest rates during 1994 had a negative
impact on the net interest margin throughout 1995. The net interest margin for
1995 of 3.14 percent declined from 3.65 percent in 1994 and 4.15 percent in
1993. During the last three months of 1995 the net interest margin rose to 3.19
percent, aided by a decrease in short-term interest rates beginning in mid-1995.
However, an increase in market interest rates during 1996 could place pressure
on
1
<PAGE> 3
the net interest margin and, unless offset by growth of interest-earning assets,
a corresponding pressure on net interest income. (See "Financial Statements and
Supplementary Data--Note 15: Interest Rate Risk Management.")
The low level of interest rates during 1993 resulted in a significant
portion of the Company's loans being refinanced and mortgage-backed securities
being prepaid, as borrowers sought to lower their interest rates. The result was
a decline in the yield on interest-earning assets to 8.00 percent in 1993 and
7.57 percent in 1994. The lower interest rate levels also resulted in a lower
cost of funds during 1993. The average rate paid on deposits and borrowings fell
to 3.98 percent in 1993. However, an increase in short-term rates during 1994
caused the cost of funds to increase to 4.06 percent. The full effect of this
rise in short-term rates was felt in 1995 (mitigated somewhat by a subsequent
lowering of short-term rates mid-year) pushing the cost of funds up to 5.05
percent for the year. The yield on earning assets during 1995 increased to only
8.02 percent because longer-term interest rates did not increase as much as
short-term rates. Also, the Company, because most of its earning assets were
fixed rate, was not in a position to take full advantage of the increase. The
net interest spread (the difference between the yield on interest-earning assets
and the cost of funds) declined to 2.97 percent for 1995 from 3.51 percent
earned during 1994 and 4.02 percent in 1993.
2
<PAGE> 4
Average consolidated statements of financial position and analysis of
net interest spread were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Interest
Average Income
(dollars in thousands) Balance(1) Rate or Expense
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments $ 6,634,030 7.30% $ 484,422
Loans(3) 13,042,573 8.39 1,094,538
- -----------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,676,603 8.02 1,578,960
Other assets 913,921 -- --
- -----------------------------------------------------------------------------------------------------------
$20,590,524 -- --
===========================================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,480,410 1.38 $ 20,363
Savings and money market accounts 3,560,764 4.02 143,255
Time deposits 5,915,419 5.66 334,885
- -----------------------------------------------------------------------------------------------------------
10,956,593 4.55 498,503
Borrowings:
Annuities 801,129 5.58 44,716
Federal funds purchased 299,495 5.16 15,460
Securities sold under agreements to repurchase 3,785,118 5.86 221,735
Advances from the FHLB 2,970,831 5.77 171,564
Other interest-bearing liabilities 194,879 4.49 8,746
- -----------------------------------------------------------------------------------------------------------
8,051,452 5.74 462,221
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 19,008,045 5.05 960,724
Other liabilities 81,639 -- --
- -----------------------------------------------------------------------------------------------------------
19,089,684 -- --
Stockholders' equity 1,500,840 -- --
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,590,524 -- --
===========================================================================================================
Net interest spread and income 2.97% $ 618,236
===========================================================================================================
Net interest margin 3.14%
</TABLE>
(1) Average balances were calculated on a monthly basis.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the daily average loan amounts
outstanding.
3
<PAGE> 5
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1993
- ----------------------------------------------------------------------------------------------------------
Interest Interest
Average Income Average Income
Balance(2) Rate or Expense Balance(2) Rate or Expense
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,656,366 6.63% $ 308,773 $ 3,672,777 7.04% $ 258,435
11,956,873 7.94 949,777 9,848,555 8.36 822,874
- ----------------------------------------------------------------------------------------------------------
16,613,239 7.57 1,258,550 13,521,332 8.00 1,081,309
951,995 -- -- 882,559 -- --
- ----------------------------------------------------------------------------------------------------------
$17,565,234 -- -- $14,403,891 -- --
==========================================================================================================
$ 1,460,393 1.34 19,629 $ 1,324,899 1.61 $ 21,292
3,243,281 3.16 102,352 2,865,964 3.30 94,701
5,315,137 4.68 248,891 5,112,073 4.67 238,750
- ----------------------------------------------------------------------------------------------------------
10,018,811 3.70 370,872 9,302,936 3.81 354,743
734,969 4.51 33,143 629,636 5.92 37,258
-- -- -- -- -- --
2,206,363 4.47 98,568 1,526,208 3.84 58,614
3,002,174 4.80 144,163 1,573,678 4.19 65,890
81,951 6.25 5,125 68,504 6.20 4,245
- ----------------------------------------------------------------------------------------------------------
6,025,457 4.66 280,999 3,798,026 4.37 166,007
- ----------------------------------------------------------------------------------------------------------
16,044,268 4.06 651,871 13,100,962 3.98 520,750
204,124 -- -- 186,412 -- --
- ----------------------------------------------------------------------------------------------------------
16,248,392 -- -- 13,287,374 -- --
1,316,842 -- -- 1,116,517 -- --
- ----------------------------------------------------------------------------------------------------------
$17,565,234 -- -- $14,403,891 -- --
==========================================================================================================
3.51% $ 606,679 4.02% $560,559
==========================================================================================================
3.65% 4.15%
</TABLE>
4
<PAGE> 6
An analysis of the change in net interest income was as follows:
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
- --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due To Total Increase (Decrease) Due To Total
(dollars in thousands) Volume(1) Rate Change Volume(2) Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Investments $133,015 $ 42,634 $175,649 $ 69,506 $(19,168) $ 50,338
Loans(3) 86,599 58,162 144,761 176,474 (49,571) 126,903
- --------------------------------------------------------------------------------------------------------------------------------
219,614 100,796 320,410 245,980 (68,739) 177,241
Interest expense
Deposits:
Checking accounts 234 500 734 2,056 (3,719) (1,663)
Savings and money
market accounts 10,048 30,855 40,903 12,005 (4,354) 7,651
Time deposits 28,100 57,894 85,994 9,662 479 10,141
- --------------------------------------------------------------------------------------------------------------------------------
38,382 89,249 127,631 23,723 (7,594) 16,129
Borrowings:
Annuities 2,988 8,585 11,573 6,252 (10,367) (4,115)
Federal funds purchased 15,460 -- 15,460 -- -- --
Securities sold under
agreements to repurchase 70,603 52,564 123,167 26,234 13,720 39,954
Advances from the FHLB (1,563) 28,964 27,401 59,901 18,372 78,273
Other 7,007 (3,386) 3,621 821 59 880
- --------------------------------------------------------------------------------------------------------------------------------
94,495 86,727 181,222 93,208 21,784 114,992
- --------------------------------------------------------------------------------------------------------------------------------
132,877 175,976 308,853 116,931 14,190 131,121
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 86,737 $(75,180) $ 11,557 $129,049 $(82,929) $ 46,120
================================================================================================================================
</TABLE>
(1) Average balances were calculated on a monthly basis.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the daily average loan amounts
outstanding.
Other Income
Other income was $117.9 million in 1995, down from $118.5 million in
1994 and $152.6 million in 1993. Other income in 1993 included $42.3 million in
gains on the sale of loans and other assets. The significant level of asset
gains during 1993 resulted from asset restructuring to accommodate the
acquisition of Pacific First. In addition, loans were sold during 1993 to take
advantage of record loan origination volume fueled by home loan refinancing and
a declining interest rate environment which enabled the Company to sell these
loans at a gain.
Depositor fees of $57.5 million in 1995 were far in excess of the
prior year's $28.5 million and $22.3 million in 1993. The increase in depositor
fees reflected substantial account and household 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 demand for the
Company's other products and services.
Loan servicing fees were $10.6 million in 1995, up from $9.2 million
in 1994. During 1995, the Company securitized $2,373.2 million in residential
loans, increasing the portfolio of loans serviced for others to $5,216.4 million
at December 31, 1995 from $4,015.4 million at the end of 1994. Loan servicing
fees were $13.4 million in 1993. The 1993 level was the result of an expanded
loan servicing portfolio stemming from the acquisition of Pacific First. The
decision to retain loans originated in the latter half of 1993 and into 1994,
coupled with the significant refinancing activity of 1993,
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<PAGE> 7
resulted in a shrinkage of the portfolio of loans serviced for others to
$4,015.4 million at December 31, 1994, from $4,794.8 million one year earlier.
The principal component of other service fees is 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. (See "Management's Discussion and Analysis of Financial Position and
Results of Operations - Nonbanking Subsidiary Operations.") Due to the drop in
nonbanking service fees, other service fees in 1995 totaled $8.0 million,
compared with $12.2 million in 1994 and $10.6 million in 1993.
The gain on sale of loans, inclusive of write-downs totaled $1.7
million in 1995, compared with $802,000 in 1994 and $15.5 million in 1993. Sales
activity in 1995 and 1994 was minimal as Washington Mutual retained or
securitized most of its loan production. However, during 1993, gains of $21.6
million were earned on a sales volume of $981.3 million, but prepayment activity
required a write-down of mortgage servicing rights of $6.1 million.
During 1995, the net loss of $2.4 million on the sale of other assets,
inclusive of write-downs was the result of $8.4 million in write-downs taken due
to credit quality deterioration on certain securities offset by $6.0 million in
gains generated through the disposition of primarily fixed-rate mortgage-backed
securities. Gains on the sale of other assets in 1994 were $4.7 million, down
from $26.8 million in 1993. The gains generated in 1995 and 1994 were from the
available-for-sale portfolio. Adjustments to Washington Mutual's balance sheet
to accommodate the acquisition of Pacific First were primarily responsible for
the large gains on the sale of other assets during 1993. During this
restructuring, Washington Mutual primarily sold mortgage-backed securities to
reduce the pre-acquisition size of its balance sheet.
Other Expense
Total other expense of $417.7 million in 1995 compared favorably with
$415.3 million in 1994 and $394.9 million in 1993. The increases generally
reflected the growth in total assets, particularly the increased number of
financial centers. One commonly accepted measure of a bank's operating
efficiency is the ratio of its operating expenses to revenues (net interest
income and other income). The Company has established a long-term operating
efficiency goal of 50 percent. Washington Mutual's operating efficiency ratios
were 56.7 percent for 1995 versus 57.3 percent for 1994 and 55.4 percent for
1993.
At year-end 1995, staffing for the organization of 4,924 full-time
equivalent employees was virtually unchanged from 4,887 at the end of 1994, but
down from 5,186 at the end of 1993. The decline in the number of full-time
equivalent employees during 1994 was the result of reducing staffing levels to
match lower lending volumes. These declines helped to alleviate the upward
pressure on salaries and employee benefits. The expense for salaries and
employee benefits totaled $190.2 million, $189.3 million and $176.4 million in
1995, 1994, and 1993.
The increase in occupancy and equipment expense to $73.0 million in
1995 from $67.6 million in 1994 and $60.1 million in 1993 was primarily due to
the growth in the number of financial centers, an expansion of head office
facilities and technology upgrades to accommodate the Company's reengineering
efforts.
Regulatory assessments totaled $21.5 million in 1995, compared with
$22.4 million in 1994 and $20.4 million in 1993. Although total deposits
outstanding increased in 1995, the expected increase in deposit premiums paid to
the FDIC was offset by a reduction in the premium rate. (See "Regulation and
Supervision -- FDIC Insurance.") The expense increase in 1994 was solely the
result of the increase in total deposits outstanding.
Other operating expenses increased to $102.6 million in 1995 from
$98.8 million (inclusive of a $5.0 million one-time expense of a legal
settlement, see "Nonbanking Subsidiary Operations") in 1994 and $98.1 million in
1993. Other operating expenses tend to rise with the increased size of the
Company.
Goodwill and other intangible assets have resulted from business
combinations accounted for as purchase transactions. Goodwill and other
intangible assets are amortized using the straight-line method over the period
that is
6
<PAGE> 8
expected to be benefited, which originally ranged from three to 10 years. The
acquisition of Pacific First in the second quarter of 1993 was the most
significant of such business combinations and resulted in the creation of $178.2
million in goodwill and other intangible assets to be amortized over 10 years.
The amortization of goodwill and other intangible assets was $28.3 million in
1995, compared with $29.1 million in 1994 and $24.7 million in 1993.
During 1995, REO operations, inclusive of write-downs generated $7.4
million of income, compared with net expense of $12,000 in 1994 and $6.3 million
in 1993. During 1995, net gains on the disposition of properties totaled $5.0
million. There were no gains or losses in 1994 and only $340,000 of net gains in
1993. During 1994 and 1993, write-downs of $100,000 and $7.3 million were taken
to increase the REO reserve for losses. (See "Financial Statements and
Supplementary Data -- Note 7: REO" for further discussion of REO operations.)
Extraordinary Items
In 1993, Washington Mutual redeemed for cash all $40.0 million in
principal of its 10.50 percent subordinated capital notes due March 15, 1999.
Also, during 1993, Washington Mutual prepaid advances from the FHLB totaling
$432.6 million.
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 February 1992, FASB issued SFAS No. 109, Accounting for Income
Taxes, that changed the accounting principle governing accounting for income
taxes. The statement requires the use of the liability method in accounting for
income taxes and eliminates on a prospective basis the former exception from the
provision of deferred income taxes on thrift bad debt reserves. Washington
Mutual implemented the change in first quarter 1993, as required by FASB. The
change resulted in a cumulative positive adjustment to earnings of $13.4
million, on an after-tax basis.
Nonbanking Subsidiary Operations
Nonbanking subsidiary operations generally constitute 5 percent of the
Company's total pretax operating income. Pretax operating income (net income
before amortization of goodwill and intangible assets and elimination of
intercompany transactions) was $17.2 million in 1995, compared with $14.2
million in 1994 and $18.1 million in 1993. The securities and insurance
operations typically account for more than 90 percent of nonbanking pretax
operating income.
WM Life improved its operating performance, posting pretax operating
income of $14.3 million in 1995, up from $12.5 million in 1994 and $9.9 million
in 1993. Contributing to the improvement in earnings were strong sales of
annuities. However, annuities outstanding at year-end 1995 were up only 7
percent to $855.5 million, from $799.2 million at the end of 1994 due to a high
level of surrenders of annuity contracts. Annuities outstanding at the end of
1994 were up 12 percent from $713.4 million at the end of 1993.
Lower than anticipated sales reduced pretax operating income for
Murphey Favre to $437,000 in 1995. The pretax net loss of $2.2 million in 1994
resulted primarily from the $5.0 million one-time expense of a legal settlement
related to the sale by Murphey Favre between 1987 and 1990 of bonds issued by
Homestead Savings of Millbrae, California. Murphey Favre earned $4.3 million on
a pretax basis during 1993.
7
<PAGE> 9
Composite Research's financial performance has remained steady during
the past three years, rising slightly to $3.0 million in 1995 from $2.9 million
in 1994 and $2.5 million in 1993.
The 1994 pretax operating income of Mutual Travel was $1.2 million,
compared with $1.3 million in 1993. In March 1995, as part of the Company's
decision to refocus on its core business, WMI sold Mutual Travel to a company
whose principal shareholders were Mutual Travel's management team. The sale
price is contingent upon the operating performance of Mutual Travel over the
next three years, and is expected to result in a minimum pretax gain of
approximately $4.0 million. The gain will be recognized when a substantial
portion of the applicable provisions of the sale agreement are met, which is
anticipated to be in early 1996.
Nonbanking subsidiary results of operations were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities:
Murphey Favre, Inc. $ 437 $(2,249) $ 4,334
Composite Research & Management Co. 2,967 2,854 2,539
- --------------------------------------------------------------------------------------------------------------
3,404 605 6,873
WM Life Insurance Co. 14,292 12,482 9,900
Mutual Travel, Inc. 229 1,178 1,266
WM Financial, Inc. and other (691) (23) 40
- --------------------------------------------------------------------------------------------------------------
Net income before amortization of goodwill and other
intangible assets, elimination of intercompany
transactions, and federal income taxes 17,234 14,242 18,079
Amortization of goodwill and other intangible assets 932 1,501 1,874
- --------------------------------------------------------------------------------------------------------------
Net income before elimination of intercompany transactions
and federal income taxes $16,302 $12,741 $16,205
==============================================================================================================
</TABLE>
8
<PAGE> 10
REVIEW OF FINANCIAL POSITION
Assets
Assets grew substantially in 1995, as they did in 1994. During 1995,
total assets grew $3,244.4 million to end the year at $22,420.4 million. At
December 31, 1994, total assets were $19,176.0 million, an increase of $2,725.2
million from December 31, 1993. Most of the growth over the past two years has
come from retaining originated loans (either as part of the loan portfolio or as
securitized mortgage-backed securities) and acquiring investment-grade
securities.
Investment Activities
The Company's investment portfolio increased 48 percent to $7,941.1
million at December 31, 1995 from $5,348.6 million a year earlier. Contributing
to the growth in 1995 was the securitization and retention of $2,373.2 million
of loans. Also in 1995, as in 1994, Washington Mutual leveraged its capital and
increased its investment portfolio. This increase was funded mostly through
borrowings. By leveraging the balance sheet through the use of these wholesale
activities, Washington Mutual generated additional net interest income.
As of December 31, 1995, the Company's investment portfolio included
$172.8 million held-to-maturity securities (with a fair value of $186.5
million), $7,768.1 million available-for-sale securities and $238,000 trading
account securities. During 1995, FASB issued a report entitled A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, Questions and Answers that allowed companies a one-time
reassessment and related reclassification from the held-to-maturity category to
the available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. Washington Mutual elected to take advantage of this
opportunity and reclassified $3,501.2 million of its held-to-maturity securities
into the available-for-sale category on December 1, 1995. Of the securities
transferred, approximately 80 percent were fixed-rate securities.
It is anticipated that these fixed-rate securities will be replaced
with adjustable-rate agency securities, adjustable- and fixed-rate private-issue
securities, collateralized mortgage obligations, and purchased loan pools as the
fixed-rate securities pay down or are sold as market conditions permit. This
portfolio restructuring strategy is intended to reduce the Company's interest
rate sensitivity while simultaneously protecting its yield. As the Company
substitutes adjustable-rate assets for fixed-rate securities, its sensitivity to
future changes in interest rates decreases. This is because, unlike fixed-rate
securities, adjustable-rate assets' interest rates change, within certain
periodic and lifetime cap restraints, with corresponding changes in market
rates. But, substituting adjustable-rate assets for fixed-rate securities can
have two disadvantages. First of all, adjustable-rate assets, when compared with
similar fixed-rate assets, carry additional credit risk in an increasing
interest rate environment. As these assets reprice upward, the underlying
borrower's creditworthiness may become impaired. Secondly, the holding of
adjustable-rate assets will decrease the overall portfolio yield in a stable or
declining interest rate environment. Accordingly, the Company plans to replace
some of its fixed-rate securities with private-issue securities, collateralized
mortgage obligations, and purchased loan pools to minimize the decline in
portfolio yield.
Historically, the yield on private-issue securities, collateralized
mortgage obligations, and purchased loan pools has exceeded agency securities
because they expose the Company to certain risks that are not inherent in agency
securities, such as credit risk and liquidity risk. These assets are not
guaranteed by the U.S. government or one of its agencies because the loan size,
underwriting or underlying collateral of these assets often does not meet set
industry standards. Consequently, there is a higher potential of loss of the
principal investment. For this reason, it is possible that the Company will not
receive an enhanced overall yield on the portfolio and in fact could incur a
loss. Additionally, the Company may not be able to sell such assets in certain
market conditions as the number of interested buyers may be limited at that
time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. An example of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated tranches, certain collateralized mortgage obligations that
have been resecuritized, and certain securities that contain a significant
number of jumbo, nonconforming loans.
9
<PAGE> 11
In an effort to reduce these risks, the Company now performs a credit
review on each individual security or loan pool prior to purchase. Such a review
includes consideration of the collateral characteristics, borrower payment
histories and information concerning loan delinquencies and losses of the
underlying collateral. After a security is purchased, similar information will
be monitored on a periodic basis. Furthermore, the Company has established
internal guidelines limiting the geographic concentration of the underlying
collateral.
As of December 31, 1995, the Company held $744.6 million of
private-issue securities. Of that amount, 14 percent were the highest investment
grade (AAA), 66 percent were rated investment grade (AA or A), 13 percent were
rated lowest investment grade (BBB) and 7 percent were rated below investment
grade (BB or below). During 1995, the Company realized $8.4 million of losses on
certain securities in the below investment grade portfolio due to credit quality
deterioration.
The available-for-sale portfolio is now much larger as a result of the
transfer on December 1, 1995. Therefore, the Company redesignated $1,567.0
million of interest rate exchange agreements and interest rate cap agreements
from short-term borrowings and deposits to the available-for-sale portfolio.
While this is not expected to fully offset the impact of further changes in
interest rates on the portfolio, it will help to reduce the impact of future
changes. As of December 31, 1994, a net unrealized loss (on an after-tax basis)
of $32.1 million associated with the available-for-sale securities was included
as a separate component of stockholders' equity. But as a result of interest
rate declines during 1995 and the reclassification of securities into the
available-for-sale portfolio, the valuation reserve for the available-for-sale
portfolio increased to a net unrealized gain (on an after-tax basis) of $78.4
million as of December 31, 1995.
Available-for-sale securities reported in the financial statements at
fair value consisted of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. government and agency obligations $ 153,846 $ 420,884 $138,342
Corporate debt obligations 437,985 135,060 --
Equity securities 365,204 265,010 --
- ---------------------------------------------------------------------------------------
957,035 820,954 138,342
Mortgage-backed securities:
U.S. government agency 6,068,903 1,471,070 --
Corporate 744,609 349,431 --
- ---------------------------------------------------------------------------------------
6,813,512 1,820,501
Derivative instruments:
Interest rate exchange agreements (11,847) 18,654 --
Interest rate cap agreements 9,415 41,690 --
- ---------------------------------------------------------------------------------------
(2,432) 60,344 --
- ---------------------------------------------------------------------------------------
$7,768,115 $2,701,799 $138,342
=======================================================================================
</TABLE>
10
<PAGE> 12
The stated maturities of the Company's available-for-sale securities
were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
Due after one After five No
Due within but within but within After stated
(dollars in thousands) one year five years 10 years 10 years maturity Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations $65,056 $ 19,955 $ 9,671 $ 59,164 $ -- $ 153,846
Corporate debt obligations 1,512 143,734 188,456 104,283 -- 437,985
Equity securities -- -- -- -- 365,204 365,204
- ------------------------------------------------------------------------------------------------------------------------------
66,568 163,689 198,127 163,447 365,204 957,035
Mortgage-backed securities:
U.S. government agency 5 13,849 9,446 6,045,603 -- 6,068,903
Corporate -- -- 19,257 725,352 -- 744,609
- ------------------------------------------------------------------------------------------------------------------------------
5 13,849 28,703 6,770,955 -- 6,813,512
Derivative instruments:
Interest rate exchange agreements -- (11,847) -- -- -- (11,847)
Interest rate cap agreements -- 9,415 -- -- -- 9,415
- ------------------------------------------------------------------------------------------------------------------------------
-- (2,432) -- -- -- (2,432)
- -----------------------------------------------------------------------------------------------------------------------------
$66,573 $175,106 $226,830 $6,934,402 $365,204 $7,768,115
==============================================================================================================================
Weighted average yield at
end of year 4.80% 8.23% 7.01% 7.01% 7.00% 7.02%
</TABLE>
The available-for-sale portfolio is maintained as a source of
investment income as well as potential liquidity should it be necessary for the
Company to raise cash or reduce its asset size. Because the available-for-sale
portfolio is required to be carried at fair value, its carrying value fluctuates
with changes in market factors, primarily interest rates. This portfolio is
substantially composed of mortgage-backed securities of which approximately 40
percent have adjustable rates and the remainder fixed rates. In an attempt to
modify the interest flows on these securities as well as protect against market
value changes, certain interest rate exchange agreements and interest rate cap
agreements have been designated to the available-for-sale portfolio. The effect
of such agreements in a rising interest rate environment is to shorten the
effective repricing period of the underlying assets. Specifically, as short-term
interest rates increase, the overall yield of the portfolio rises. However, the
yield is constrained by periodic and lifetime interest rate adjustment limits or
caps on the underlying adjustable-rate assets and also by the very nature of the
fixed-rate assets in the portfolio. The Company, therefore, seeks to shorten the
repricing period by entering into interest rate cap agreements that are intended
to provide an additional layer of interest rate protection against the effect of
the periodic and lifetime interest rate adjustment limits or caps and fixed-rate
securities in the portfolio. Through the use of specific interest rate cap
agreement provisions, management attempts to reduce the repricing ceiling of the
portfolio and to effectively shorten the repricing period. Thus, the Company has
a degree of interest rate protection when interest rates increase because the
interest rate cap agreements provide a mechanism for repricing the investment
portfolio generally on pace with current market rates. In a similar way,
interest rate exchange agreements are utilized to provide protection in an
increasing rate environment, but also result in sensitivity in a downward
market. There can be no assurance that interest rate exchange agreements and
interest rate cap agreements will provide the Company with protection in all
scenarios or to the full extent of the Company's exposure.
The following table presents the effect interest rate exchange
agreements and interest rate cap agreements have on the repricing period of
securities in the available-for-sale portfolio currently (as of December 31,
1995) or in an increasing interest rate environment (up 200 basis points):
11
<PAGE> 13
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $3,690 $ 392 $ 3,550 $7,632
Effect of derivative instruments 3,715 (174) (3,541) --
- --------------------------------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $7,405 $ 218 $ 9 $7,632
================================================================================================================================
</TABLE>
The following table presents the effect interest rate exchange
agreements and interest rate cap agreements have on the repricing period of
securities in the available-for-sale portfolio in a decreasing interest rate
environment (down 200 basis points):
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
After one
Reprice within but within After
(dollars in millions) one year two years two years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal amount of securities $3,690 $392 $ 3,550 $7,632
Effect of derivative instruments 1,165 -- (1,165) --
- --------------------------------------------------------------------------------------------------------------------------------
Principal amount of securities after effect
of derivative instruments $4,855 $392 $ 2,385 $7,632
================================================================================================================================
</TABLE>
The held-to-maturity portfolio by investment type consisted of the
following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. government and agency obligations $ 6,592 $ 32,720 $ 292,532
Corporate debt obligations 72,855 370,374 486,970
Municipal obligations 92,321 80,762 73,360
Equity securities -- -- 240,637
- --------------------------------------------------------------------------------------------------------------------------------
171,768 483,856 1,093,499
Mortgage-backed securities:
U.S. government agency 1,018 2,044,220 2,323,175
Corporate -- 118,118 654,059
- --------------------------------------------------------------------------------------------------------------------------------
1,018 2,162,338 2,977,234
- --------------------------------------------------------------------------------------------------------------------------------
$172,786 $2,646,194 $4,070,733
================================================================================================================================
</TABLE>
12
<PAGE> 14
The stated maturities of the Company's held-to-maturity securities
were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
After one After five
Due within but within but within After
(dollars in millions) one year five years 10 years 10 years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations $ -- $ -- $ 6,592 $ -- $ 6,592
Corporate debt obligations 2,034 31,123 22,536 17,162 72,855
Municipal obligations 1,090 1,658 36,202 53,371 92,321
- --------------------------------------------------------------------------------------------------------------------------------
3,124 32,781 65,330 70,533 171,768
Mortgage-backed securities:
U.S. government agency -- -- -- 1,018 1,018
- --------------------------------------------------------------------------------------------------------------------------------
-- -- -- 1,018 1,018
- --------------------------------------------------------------------------------------------------------------------------------
$3,124 $32,781 $65,330 $71,551 $172,786
================================================================================================================================
Weighted average yield at end of year 5.47% 8.61% 7.52% 7.03% 7.52%
</TABLE>
Due to the transfer of predominantly fixed-rate mortgage-backed
securities from the held-to-maturity portfolio to the available-for-sale
portfolio in 1995, the held-to-maturity portfolio now consists almost entirely
of long-term fixed-rate debt securities that the Company intends to hold until
maturity. This portfolio had a market value appreciation of 8 percent or $13.7
million on a pretax basis at year-end 1995, compared with a 8 percent or $202.6
million market value depreciation on a pretax basis at December 31, 1994. The
decline in value at December 31, 1994 was due to the significant increase in
interest rates during 1994.
During 1994, there were no transfers between the available-for-sale
and held-to-maturity portfolios, nor were there any sales from the
held-to-maturity portfolio.
13
<PAGE> 15
Loans
Loans grew modestly during 1995 to end the year at $13,025.6 million.
At December 31, 1994, total loans outstanding equaled $12,841.6 million. Over
half of the 1995 loan production was securitized and retained in the Company's
investment portfolio.
The total amount of loans originated in 1995 was $4,429.8 million
compared with $4,338.6 million in 1994. While a year-to-year comparison of total
lending volume doesn't show much change, the mix between fixed- and
adjustable-rate loan originations has substantially altered. With the easing of
interest rates during the second half of 1995, loan production switched
predominantly to fixed-rate lending compared with a preference towards
adjustable-rate loans during 1994.
Residential loan originations of $2,279.2 million in 1995 were up
slightly from the 1994 level of $2,064.4 million. For the year, originations of
loans to purchase homes were $1,437.4 million compared with $1,211.3 million
last year, and refinancing activity in 1995 accounted for $841.8 million of the
residential lending volume compared with $853.1 million in 1994. At year-end
1995, 1-4 family residential loans comprised 60 percent of total loans
outstanding. However, with the more favorable interest rate environment in the
latter half of 1995, residential loan originations during the fourth quarter
were up 116 percent from the same period a year ago.
Residential construction originations of $929.8 million for 1995 were
down from $1,034.2 million in 1994. Custom built homes for the final purchaser
were responsible for over 60 percent of these originations during both years.
The remainder were to builders for resale. At year-end 1995, total residential
construction loans outstanding for custom homes were $367.4 million and builder
loans totaled $248.4 million, or collectively 5 percent of total loans. Because
of its short-term nature and relatively high profit margins, residential
construction lending is very profitable. Residential construction loans also
contain a higher degree of risk than other residential loans. For this reason,
Washington Mutual has strict lending and monitoring policies to limit credit
exposure. At year-end 1995, less than 2 percent of residential construction
loans were nonperforming, and loan charge-offs were minimal during the year.
Consumer loan originations of $940.7 million for all of 1995 were
slightly below the prior year's level of $977.8 million. The majority of
consumer lending was for second mortgage and manufactured housing loans. Both of
these loan areas are natural extensions of shelter-based lending and have higher
yields and generally shorter terms than traditional first mortgages.
At year-end 1995, consumer loans accounted for 20 percent of total loans.
At December 31, 1995, commercial real estate lending constituted 14
percent of total loans, of which 50 percent were for multi-family housing.
Commercial business lending accounted for 1 percent of total loans at
year-end 1995, but is expected to gain in importance with the recent commercial
bank mergers.
14
<PAGE> 16
Loans originated consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential (1-4 family units):
Fixed-rate $1,557,106 $ 792,202 $3,012,935 $2,159,027 $1,241,085
Adjustable-rate 722,136 1,272,187 824,743 682,559 131,710
Residential construction 929,827 1,034,176 847,217 652,952 459,029
- -----------------------------------------------------------------------------------------------------------------------------------
3,209,069 3,098,565 4,684,895 3,494,538 1,831,824
Consumer:
Second mortgage and other
consumer 686,268 748,826 751,433 465,018 328,376
Manufactured housing 254,394 229,011 190,555 172,827 146,131
- -----------------------------------------------------------------------------------------------------------------------------------
940,662 977,837 941,988 637,845 474,507
Commercial real estate:
Apartment buildings 96,639 92,135 71,771 59,959 31,177
Other 71,870 71,508 135,214 63,003 52,851
- -----------------------------------------------------------------------------------------------------------------------------------
168,509 163,643 206,985 122,962 84,028
Commercial business 111,597 98,539 83,722 58,984 46,230
- -----------------------------------------------------------------------------------------------------------------------------------
$4,429,837 $4,338,584 $5,917,590 $4,314,329 $2,436,589
===================================================================================================================================
</TABLE>
Deposits
Total deposits increased to $11,306.4 million at December 31, 1995,
from $10,432.9 million at December 31, 1994. The majority of deposits are retail
in nature. Wholesale activities -- primarily time deposits from political
subdivisions and public agencies -- are an alternative to other borrowings and
their levels are determined by management's decisions as to the most economic
funding sources.
The following table sets forth information relating to deposit flows,
total deposits and the weighted average interest rate on deposit accounts for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease due to deposit outflow $(42,033) $(126,482) $ (834,066)
Increase due to acquired deposits 417,078 211,537 3,831,700
Increase due to interest credited 498,503 370,872 354,743
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in total deposits $ 873,548 $ 455,927 $3,352,377
===================================================================================================================================
Total deposits at end of year $11,306,436 $10,432,888 $9,976,961
Weighted average rate for the year 4.69% 3.97% 3.71%
</TABLE>
The Company utilizes interest rate exchange agreements and interest
rate cap agreements to reduce its exposure to rising interest rates. (See
"Financial Statements and Supplementary Data--Note 16: Interest Rate Risk
Management.")
Nondeposit Products
Through its nonbanking subsidiaries, Washington Mutual offers to its
customers alternative retail investment products. Annuities underwritten by WM
Life increased $56.3 million to $855.5 million. Assets of the Composite Group of
mutual funds, managed by Composite Research ended the year at $1,268.5 million,
up from $1,095.5 million at December 31, 1994. The improvement was due primarily
to an increase in market valuation.
15
<PAGE> 17
Borrowings
Washington Mutual's borrowings primarily take the form of securities
sold under agreements to repurchase and advances from the FHLB. These two
borrowing sources totaled $3,965.8 million and $3,711.4 million at year-end 1995
compared with $2,596.2 million and $3,737.6 million at December 31, 1994. The
exact mix at any given time is dependent upon the market pricing of the two
borrowing sources. The increase in the level of borrowing was used to fund the
Company's asset growth.
The Company utilizes interest rate exchange agreements and interest
rate cap agreements to reduce its exposure to rising interest rates. (See
"Financial Statements and Supplementary Data -- Note 15: Interest Rate Risk
Management.")
ASSET QUALITY
Classified Assets
Classified assets, which consist of nonaccrual loans, loans under
foreclosure, REO and performing loans (including substandard troubled debt
restructurings) and securities that exhibit credit quality weaknesses, were as
follows:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans and loans under foreclosure $ 69,707 $ 61,633
REO 25,064 19,122
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 94,771 80,755
Troubled debt restructurings (classified as substandard) 13,094 10,289
Other classified loans 97,946 156,384
Classified securities 37,645 12,865
- -----------------------------------------------------------------------------------------------------------------------------------
$243,456 $260,293
===================================================================================================================================
</TABLE>
Classified assets of $243.5 million were down 6 percent from year-end
1994 due to both the improved credit quality of certain commercial real estate
and residential construction loans and to loan repayments.
Nonperforming assets increased to $94.8 million at the end of the 1995
from $80.8 million at December 31, 1994. The majority of the increase stemmed
from a rise in the level of nonperforming residential real estate loans.
However, nonperforming assets as a percentage of total assets remained steady at
0.42 percent at year-end 1995, compared with year-end 1994.
Even though nonperforming commercial real estate assets declined to
$32.9 million at December 31, 1995, from $35.6 million a year ago, four large
loans (properties valued at $1.0 million or more) were placed on nonaccrual--a
California loan for $2.7 million and three Washington loans totaling $6.3
million. Also, during 1995, a REO property valued at $4.8 million was sold and
another loan with a basis of $1.8 million was returned to current status. At the
end of 1995, troubled assets in California totaled less than 12 percent of total
nonperforming assets.
Nonperforming assets and troubled debt restructurings consisted of the
following:
16
<PAGE> 18
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Nonaccruing Total As a Troubled
Loans & Non- Percentage Debt
Loans Under performing of Restruc-
(dollars in thousands) Foreclosure(1) REO Assets Total Assets turings(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential $38,449 $ 7,965 $46,414 0.21% $ --
Residential construction 9,550 695 10,245 0.05 --
Apartment buildings 3,934 -- 3,934 0.02 2,605
Other commercial real estate 7,889 21,048 28,937 0.13 15,629
Second mortgage and other consumer 7,138 445 7,583 0.03 --
Manufactured housing 1,923 1,286 3,209 0.01 --
Commercial business 824 -- 824 -- --
Reserve for REO losses -- (6,375) (6,375) (0.03) --
- -----------------------------------------------------------------------------------------------------------------------------------
$69,707 $25,064 $94,771 0.42% $18,234
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Nonaccruing Total As a Troubled
Loans & Non- Percentage Debt
Loans Under performing of Restruc-
(dollars in thousands) Foreclosure REO Assets Total Assets turings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential $27,954 $ 6,807 $34,761 0.18% --
Residential construction 4,640 1,691 6,331 0.03 --
Apartment buildings 9,106 729 9,835 0.05 1,680
Other commercial real estate 10,828 14,972 25,800 0.13 8,609
Second mortgage and other consumer 6,444 692 7,136 0.04 --
Manufactured housing 1,643 736 2,379 0.01 --
Commercial business 1,018 -- 1,018 0.01 --
Reserve for REO losses -- (6,505) (6,505) (0.03) --
- -----------------------------------------------------------------------------------------------------------------------------------
$61,633 $19,122 $80,755 0.42% $10,289
===================================================================================================================================
December 31, 1993 $77,928 $34,624 $112,552 0.68% $8,265
December 31, 1992 45,604 88,033 133,637 1.27 9,631
December 31, 1991 41,165 93,885 135,050 1.58 8,431
</TABLE>
(1) Includes $22.2 million of loans designated as impaired.
(2) Includes $8.8 million of loans designated as impaired.
(See "Management's Discussion and Analysis of Financial Position and Results of
Operations - Asset Quality - Impaired Loans.")
17
<PAGE> 19
Nonperforming commercial real estate and troubled debt restructurings
by geographic distribution and property type consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
As a
Nonaccruing Total Percentage Troubled
Loans & Non- Total of Total Debt
Loans Under performing Loans Loans Restruc-
(dollars in thousands) Foreclosure REO Assets & REO & REO turings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Washington $ 5,193 $16,059 $21,252 $1,033,063 2.06% $ 1,014
California 5,745 4,989 10,734 210,125 5.11 13,466
Other states 885 -- 885 645,207 0.14 3,754
- -----------------------------------------------------------------------------------------------------------------------------------
$11,823 $21,048 $32,871 $1,888,395 1.74% $18,234
===================================================================================================================================
Apartment buildings $ 3,934 $ -- $ 3,934 $ 938,533 0.42% $ 2,605
Office buildings 2,931 11,655 14,586 164,103 8.89 --
Shopping centers -- 1,357 1,357 114,158 1.19 --
Medical/dental buildings 586 4,364 4,950 50,349 9.83 --
Other 4,372 3,672 8,044 621,252 1.29 15,629
- -----------------------------------------------------------------------------------------------------------------------------------
$11,823 $21,048 $32,871 $1,888,395 1.74% $18,234
===================================================================================================================================
</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, their relatively small balances and historically low level of losses. All
residential construction, commercial real estate and commercial business loans,
regardless of 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. A troubled debt restructuring is a
restructuring in which the creditor grants a concession to the borrower that it
would not otherwise consider. At December 31, 1995, the Company had $18.2
million of restructured loans of which $8.8 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 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 of 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 December 31, 1995, loans totaling $99.7 million were impaired, of
which $67.0 million had allocated reserves of $10.9 million. The remaining $32.7
million were either nonperforming or previously written down, and have no
reserves allocated to them at this time. Of the $99.7 million of impaired loans,
$12.1 million were on nonaccrual status, $10.1 million were under foreclosure,
and $77.5 million (including $8.8 million of troubled debt restructurings) were
18
<PAGE> 20
performing but judged to be impaired. (See "Management's Discussion and Analysis
of Financial Position and Results of Operations - Asset Quality - Classified
Assets" and "Financial Statements and Supplementary Data -- 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:
With allocated reserves $6,511 $1,224 $5,287 $1,370
Without allocated reserves 7,616 793 6,823 --
- -----------------------------------------------------------------------------------------------------------------------------------
14,127 2,017 12,110 1,370
Loans under foreclosure:
With allocated reserves 2,214 -- 2,214 664
Without allocated reserves 8,193 320 7,873 --
- -----------------------------------------------------------------------------------------------------------------------------------
10,407 320 10,087 664
Troubled debt restructurings:
With allocated reserves 3,446 -- 3,446 --
Without allocated reserves 5,854 516 5,338 359
- -----------------------------------------------------------------------------------------------------------------------------------
9,300 516 8,784 359
Other impaired loans:
With allocated reserves 56,096 33 56,063 8,535
Without allocated reserves 19,246 6,600 12,646 --
- -----------------------------------------------------------------------------------------------------------------------------------
75,342 6,633 68,709 8,535
- -----------------------------------------------------------------------------------------------------------------------------------
$109,176 $9,486 $99,690 $10,928
===================================================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES
The provision for loan losses during 1995 was $11.2 million compared
with $20.4 million in 1994 and $35.2 million in 1993. The 1995 and 1994
provision reflected the Company's strong level of reserves and continued
improvement in asset quality. Given the significant decline in nonperforming
assets and continued growth of the reserve for loan losses during 1994,
management further reduced the provision for loan losses in 1995. The growth in
the provision during 1993 was determined necessary by management because of the
increase in the size of the loan portfolio and uncertainty about the economic
conditions in some lending markets as well as caution about the quality of the
loans acquired from Pacific First.
The Company's primary focus of residential, residential construction,
and consumer lending continued to demonstrate extremely high credit quality
during 1992, resulting in a low level of provision for loan losses. At year-end
1992, commercial credits, which consist primarily of high-yield bonds, declined
to $14.0 million from $22.2 million at the end of the previous year. This
decline was primarily the result of $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. The provision for 1991 also included amounts to
provide for the growing potential exposure to loss in the California commercial
real estate market.
In determining the adequacy of the reserve for loan losses and the
related level of provision, management reviews the amount and type of loan
charge-offs. Loan charge-offs, net of recoveries for 1995 totaled $5.7 million.
This was less than the level of net charge-offs of $8.1 million in 1994 and
$20.0 million in 1993. During 1993, net charge-offs of commercial real estate
loans accounted for $12.9 million of total net charge-offs. However, with the
improved performance of the commercial real estate portfolio, recoveries
exceeded charge-offs by $427,000 in 1995 and net
19
<PAGE> 21
charge-offs on commercial real estate loans totaled only $395,000 during 1994.
Of the $5.7 million of net charge-offs taken in 1995, $4.7 million was the
result of consumer loan activity in large part due to loans acquired from
Pacific First. Net charge-offs on consumer loans have grown to the current level
from $4.3 million in 1994 and $2.2 million in 1993.
Loan charge-offs, net of recoveries during 1992 totaled $18.0 million,
down from $23.0 million in 1991. In 1992, commercial credit net charge-offs
totaled only $424,000, but commercial real estate loan net charge-offs increased
to $14.4 million from $4.5 million in 1991. This increase was primarily the
result of charge-offs on California loans. During 1991, the majority of net
charge-offs resulted from $16.9 million on commercial credits. The exposure of
commercial credits has declined significantly in recent years.
20
<PAGE> 22
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 $132,499 $119,315 $ 58,075 $ 55,900 $ 55,946
Provision for loan losses 11,150 20,400 35,225 14,887 22,407
Reserves added through business
combinations 5,372 921 46,000 5,320 571
Reserves charged-off:
Residential (1,214) (1,604) (1,612) (1,138) (379)
Residential construction (125) (190) (297) (937) (139)
Commercial real estate (1,260) (2,353) (13,832) (15,011) (5,308)
Manufactured housing, second
mortgage and other consumer (5,378) (5,460) (2,993) (1,423) (1,610)
Commercial business (813) (2,065) (3,065) (1,321) (18,544)
- -----------------------------------------------------------------------------------------------------------------------------------
(8,790) (11,672) (21,799) (19,830) (25,980)
Reserves recovered:
Residential 171 17 45 17 36
Residential construction 47 -- -- -- 314
Commercial real estate 1,687 1,958 889 571 598
Manufactured housing, second
mortgage and other consumer 701 1,117 768 313 315
Commercial business 482 443 112 897 1,693
- -----------------------------------------------------------------------------------------------------------------------------------
3,088 3,535 1,814 1,798 2,956
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $143,319 $132,499 $119,315 $ 58,075 $ 55,900
===================================================================================================================================
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.07% 0.10% 0.22% 0.32% 0.48%
</TABLE>
As part of the process of determining the adequacy of the reserve for
loan losses, management reviews the loan portfolio for specific weaknesses. A
portion of the reserve is then allocated to reflect the loss exposure.
Residential real estate and consumer loans are not individually analyzed for
impairment and loss exposure because of the significant number of loans, their
relatively small balances and historically low level of losses. Residential
construction, commercial real estate and commercial business loans were
evaluated individually for impairment, which resulted in an allocation of $10.9
million of the reserve for loan loss at year-end 1995, compared with a high of
$28.6 million in 1992. Contributing to the decline was a reduction in the level
of allocated reserves related to commercial real estate in California. While the
quality of the California commercial real estate portfolio appears to have
improved over the past four years, reserves allocated to this portfolio still
comprised 60 percent of total allocated reserves at December 31, 1995. With the
reduction of commercial credits, reserves were last allocated to this portfolio
in 1993.
Unallocated reserves are established for loss exposure that may exist
in the remainder of the loan portfolio but has yet to be identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, and current and anticipated economic conditions. Further analysis of
the reserve for loan losses during 1996 will determine if the current level of
provision for loan loss will be sustainable throughout 1996 and beyond. The high
level of unallocated reserves established during 1993 was due to the Company's
acquisition of Pacific First. The acquisition brought a significant increase in
total loans outstanding, a change in the mix of loans in the portfolio, some
uncertainty as to the long-term credit quality of acquired loan portfolios as
well as caution over future economic conditions. During 1991, primarily because
of a growing concern over the declining commercial real estate market in
California, the Company increased its level of unallocated reserves. During
1992, the losses in the California loan portfolio were identified and reserves
were allocated appropriately. This allocation is primarily responsible for the
decline in unallocated reserves at year-end 1992 to $29.5 million from $38.2
million at the end of the prior year.
21
<PAGE> 23
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 $ 10,770 $ 15,594 $ 19,354 $21,746 $ 5,736
Residential construction 158 1,327 1,503 1,219 1,901
Commercial business/credits -- -- 1,718 5,597 10,064
- -----------------------------------------------------------------------------------------------------------------------------------
10,928 16,921 22,575 28,562 17,701
Unallocated reserves 132,391 115,578 96,740 29,513 38,199
- -----------------------------------------------------------------------------------------------------------------------------------
$143,319 $132,499 $119,315 $58,075 $55,900
===================================================================================================================================
Total reserve for loan losses as a percentage of:
Total loans 1.10% 1.03% 1.06% 0.83% 1.01%
Nonperforming loans 205.62 214.98 152.87 127.35 135.79
</TABLE>
INTEREST RATE RISK MANAGEMENT
Washington Mutual's banking subsidiaries traditionally have had a
mismatch between the maturities of their assets and liabilities because
customers generally prefer short-term deposits and long-term fixed-rate loans.
This mismatch is not a problem when interest rates are stable or declining.
However, with a rise in short-term interest rates, as was experienced throughout
most of 1994, the interest paid on deposits and other short-term borrowings
increases much more quickly than the interest earned on loans and investments.
The result for Washington Mutual was a reduction in its net interest spread and
the corresponding pressure on net interest income in both 1994 and 1995.
Washington Mutual engages in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes. The implementation of
strategies to reduce interest rate risk, however, generally has the negative
effect of lowering current period earnings. Management tries to balance these
two factors in administering its interest rate risk program. The Company
monitors its interest rate sensitivity and attempts to reduce the risk of a
significant decrease in net interest income caused by a change in interest
rates; nevertheless, rising interest rates or a flat yield curve adversely
affects the Company's operations.
As part of this program, management actively manages the actual asset
and liability maturities and at various times uses derivative instruments, such
as interest rate exchange agreements and interest rate cap agreements, to reduce
the negative effect that rising rates could have on net interest income.
Derivative instruments have received a lot of attention lately because of the
financial exposure they may cause if not used appropriately. Management, in
conjunction with the Company's Board of Directors, has established strict
policies and guidelines for their use. Moreover, Washington Mutual has used
these instruments for many years solely to mitigate interest rate risk. Under no
circumstances are these instruments used as techniques to generate earnings by
speculating on the movements of interest rates, nor does the Company act as a
dealer of these instruments. (See "Financial Statements and Supplementary
Data--Note 15: Interest Rate Risk Management.")
Another strategy management has used to reduce the Company's
sensitivity to rising interest rates is to securitize and then sell its
fixed-rate loan production. Toward the end of 1995, the Company sold $1,255.3
million of predominately fixed-rate mortgage-backed securities. Essentially,
these securities were replaced with the purchase of adjustable-rate securities.
Depending on market conditions at the time, management may pursue this strategy
more vigorously in 1996.
At the end of 1995, Washington Mutual's one-year gap was a negative
13.3 percent, relatively unchanged from a negative 13.7 percent at the end of
1994. The one-year gap is a conventional measure of interest sensitivity for
thrift institutions.
22
<PAGE> 24
Interest sensitivity analysis by maturity or repricing period was as
follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
After one After two After five
4-12 but within but within but within After
(dollars in millions) 0-3 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) $ 564 $ -- $ -- $ -- $ -- $ -- $ 564
Available-for-sale securities(2)(5) 1,233 2,457 392 1,053 1,234 1,263 7,632
Held-to-maturity securities 1 2 1 32 66 71 173
Loans(3):
Real estate loans 1,531 2,571 1,149 2,133 1,417 1,316 10,117
Manufactured housing, second mortgage
and other consumer 425 634 495 736 332 80 2,702
Commercial credits 204 60 29 54 34 12 393
- -----------------------------------------------------------------------------------------------------------------------------------
2,160 3,265 1,673 2,923 1,783 1,408 13,212
- -----------------------------------------------------------------------------------------------------------------------------------
3,958 5,724 2,066 4,008 3,083 2,742 21,581
Interest-sensitive liabilities:
Deposits(4) 2,569 4,993 2,261 1,231 87 158 11,299
Borrowings and other liabilities 6,147 784 1,150 950 150 7 9,188
- -----------------------------------------------------------------------------------------------------------------------------------
8,716 5,777 3,411 2,181 237 165 20,487
Derivative instruments affecting
interest rate sensitivity:
Interest rate exchange agreements:
Designated against available-for-
sale securities(5) (775) 75 200 500 -- -- --
Interest rate cap agreements:
Designated against available-for-
sale securities(5) (1,975) 850 875 250 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(2,750) 925 1,075 750 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net (liability) asset sensitivity $(2,008) $ (978) $(2,420) $1,077 $2,846 $2,577 $ 1,094
===================================================================================================================================
Net (liability) asset sensitivity as a
percentage of total assets (8.96)% (4.36)% (10.79)% 4.80% 12.69% 11.50% 4.88%
</TABLE>
(1) Includes accrued interest on interest-earning assets.
(2) Excludes mark-to-market adjustment.
(3) Excludes deferred loan fees, reserve for loan losses and premium and
discount on purchased loans.
(4) Excludes premium on purchased deposits. Deposits without stated maturity are
included in the category "Due within one year."
(5) See "Investment Activities" regarding the effect of derivative instruments
on the repricing period of available-for-sale securities against which the
derivative instruments are designated.
23
<PAGE> 25
While the one-year gap helps provide some information about a
financial institution's interest sensitivity, it does not predict the trend of
future earnings. For this reason, Washington Mutual uses financial modeling to
forecast earnings under different interest rate projections. Although this
modeling is very helpful in managing interest rate risk, it does require
significant assumptions for the projection of loan prepayment rates, loan
origination volumes and liability funding sources that may prove to be
inaccurate.
LIQUIDITY
Liquidity management focuses on the need to meet both short-term
funding requirements and long-term growth objectives. The long-term growth
objectives of the Company are to attract and retain stable consumer deposit
relationships and to maintain stable sources of wholesale funds. Because the low
interest rate environment of recent years inhibited consumer deposits,
Washington Mutual has supported its growth through business combinations with
other financial institutions and by increasing its use of wholesale borrowings.
Should the Company not be able to increase deposits either internally or through
acquisitions, its ability to grow would be dependent upon, and to a certain
extent limited by, its borrowing capacity.
Washington Mutual actively manages its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing capacity is sufficient to satisfy unanticipated cash needs. The
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At December 31,
1995, the Company had excess liquidity compared to its established guidelines.
To meet its immediate needs for funds as well as long-term lending
demands, Washington Mutual maintains various sources of liquid assets and
borrowing capabilities. At December 31, 1995, the Company was able to borrow an
additional $5,424.1 million through the use of collateralized borrowings using
unpledged mortgage-backed securities and other wholesale sources.
During 1995, the Company increased its balance of cash and cash
equivalents by $336.0 million. Washington Mutual's major sources of funds are
generated from the collection of loan principal and interest payments,
attracting deposits, and the use of borrowing instruments, such as securities
sold under agreements to repurchase and FHLB advances. 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 "Consolidated
Statements of Cash Flows.")
CAPITAL REQUIREMENTS
Washington Mutual's banking subsidiaries exceeded all current
regulatory capital requirements to be classified as well-capitalized
institutions, the highest regulatory standard. In order to be categorized as a
well-capitalized institution, the FDIC requires banks it regulates to maintain a
leverage ratio, defined as Tier 1 capital divided by total regulatory assets, of
at least 5.00 percent; total capital of at least 10.00 percent of risk-weighted
assets; and Tier 1 (or core) capital of at least 6.00 percent of risk-weighted
assets. At December 31, 1995, WMB's consolidated ratio of leverage capital to
assets was 5.72 percent, the ratio of total capital to risk-weighted assets was
11.58 percent, and the ratio of core capital to risk-weighted assets was 10.70
percent.
Washington Mutual's federal savings bank subsidiary is required by the
OTS to maintain certain capital levels. In order to be classified as a
well-capitalized institution, the OTS requires banks it regulates to maintain a
leverage ratio of at least 5.00 percent; total capital of at least 10.00 percent
of risk-weighted assets; and core capital of at least 6.00
24
<PAGE> 26
percent of risk-weighted assets. At December 31, 1995, the federal banking
subsidiary was in compliance with all well-capitalized requirements.
WM Life is subject to risk-based capital requirements developed by the
NAIC. This measure uses four major categories of risk to calculate an
appropriate level of capital to support an insurance company's overall business
operations. The four risk categories are asset risk, insurance risk, interest
rate risk and business risk. At December 31, 1995, WM Life's capital was 672
percent of its required regulatory risk-based level.
(See "Financial Statements and Supplementary Data--Note 22: Regulatory
Capital Requirements.")
25
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Washington Mutual, Inc.:
We have audited the accompanying restated consolidated statements of financial
position of Washington Mutual, Inc. and subsidiaries (the Company) as of
December 31, 1995 and 1994, and the related restated consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these restated financial statements based on our audits. The restated
consolidated financial statements give retroactive effect to the merger of
Washington Mutual, Inc. and Western Bank, which has been accounted for as a
pooling of interests as described in Note 2 to the restated consolidated
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the restated consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Washington
Mutual, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, on January 1, 1994.
Deloitte & Touche LLP
Seattle, Washington
October 15, 1996
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
As restated - See note 2
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 1,094,538 $ 949,777 $ 822,874
Available-for-sale securities 294,286 151,561 1,371
Held-to-maturity securities 185,388 156,043 253,945
Cash equivalents 4,748 1,169 3,119
- --------------------------------------------------------------------------------------------------------------
Total interest income 1,578,960 1,258,550 1,081,309
INTEREST EXPENSE
Deposits 498,503 370,872 354,743
Borrowings 462,221 280,999 166,007
- --------------------------------------------------------------------------------------------------------------
Total interest expense 960,724 651,871 520,750
- --------------------------------------------------------------------------------------------------------------
Net interest income 618,236 606,679 560,559
Provision for loan losses 11,150 20,400 35,225
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 607,086 586,279 525,334
OTHER INCOME
Depositor fees 57,491 28,474 22,317
Loan servicing fees 10,619 9,209 13,381
Other service fees 32,789 50,098 53,683
Other operating income 17,649 25,186 20,918
Gain on sale of loans, inclusive of write-downs 1,683 802 15,490
Gain on sale of other assets, inclusive of write-downs (2,357) 4,733 26,786
- --------------------------------------------------------------------------------------------------------------
Total other income 117,874 118,502 152,575
OTHER EXPENSE
Salaries and employee benefits 190,183 189,281 176,384
Occupancy and equipment 72,990 67,602 60,106
Regulatory assessment fees 21,542 22,404 20,425
Data processing expense 9,419 8,085 8,859
Other operating expense 102,565 98,840 98,115
Amortization of goodwill and other intangible assets 28,306 29,076 24,690
Real estate owned ("REO") operations, inclusive of
write-downs (7,350) 12 6,295
- --------------------------------------------------------------------------------------------------------------
Total other expense 417,655 415,300 394,874
- --------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary items and
cumulative effect of change in tax accounting
method 307,305 289,481 283,035
Income Taxes 107,504 108,159 98,864
- --------------------------------------------------------------------------------------------------------------
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
==============================================================================================================
Net Income Attributable to Common Stock $ 181,217 $ 162,738 $ 175,025
==============================================================================================================
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>
See Notes to Restated Consolidated Financial Statements
<PAGE> 29
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
As restated - See note 2
December 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 598,272 $ 262,256
Trading account securities 238 572
Available-for-sale securities, amortized cost $7,642,766 and $2,752,630 7,768,115 2,701,799
Held-to-maturity securities, fair value $186,521 and $2,443,557 172,786 2,646,194
Loans 13,025,567 12,841,639
Loans held for sale 9,683 3,564
REO 25,064 19,122
Premises and equipment 219,056 198,576
Goodwill and other intangible assets 161,127 190,998
Other assets 440,471 311,271
- -------------------------------------------------------------------------------------------------------------
Total assets $22,420,379 $ 19,175,991
=============================================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,351,086 $ 1,256,381
Savings and money market accounts 3,968,521 3,619,364
Time certificates 5,986,829 5,557,143
- -------------------------------------------------------------------------------------------------------------
Total deposits 11,306,436 10,432,888
Annuities 855,503 799,178
Federal funds purchased 430,000 --
Securities sold under agreements to repurchase 3,965,820 2,596,209
Advances from the Federal Home Loan Bank ("FHLB") 3,711,402 3,737,611
Other borrowings 225,053 79,891
Other liabilities 266,081 165,956
- -------------------------------------------------------------------------------------------------------------
Total liabilities 20,760,295 17,811,733
Contingencies (Note 25)
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -- 6,122,500 -- --
and 6,200,000 shares issued and outstanding
Common stock, no par value: 100,000,000 shares authorized -- 71,804,527 -- --
and 67,837,553 shares issued and outstanding
Capital surplus 722,986 692,924
Valuation reserve for available-for-sale securities 78,348 (32,088)
Retained earnings 858,750 703,422
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,660,084 1,364,258
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,420,379 $ 19,175,991
=============================================================================================================
</TABLE>
See Notes to Restated Consolidated Financial Statements
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
As restated - See note 2
<TABLE>
<CAPTION>
Number of Shares Total
----------------------- Valuation Reserve for
Preferred Common Capital Retained AFS Stockholders'
(in thousands) Stock Stock Surplus Earnings Securities Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 5,494 58,896 $594,316 $450,973 $ $1,045,289
Net income -- -- -- 188,583 -- 188,583
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 -- -- -- (30,936) -- (30,936)
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
Conversion of preferred stock to
common stock (1,294) 5,152 -- (445) -- (445)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 6,200 65,574 665,529 587,088 -- 1,252,617
Establishment of valuation reserve
for available-for-sale securities -- -- -- -- 13,836 13,836
Net income -- -- -- 181,322 -- 181,322
Miscellaneous stock transactions -- 383 7,762 (7,774) -- (12)
Cash dividends declared on preferred
stock -- -- -- (18,584) -- (18,584)
Cash dividends declared on common
stock -- -- -- (45,335) -- (45,335)
Adjustment in valuation reserve for
available-for-sale securities -- -- -- -- (45,924) (45,924)
Common stock issued through stock
options and employee stock plans -- 426 10,038 -- -- 10,038
Immaterial pooling -- 1,454 9,595 6,705 -- 16,300
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 6,200 67,837 692,924 703,422 (32,088) 1,364,258
Net income -- -- -- 199,801 -- 199,801
Miscellaneous stock transactions -- (1) (13) -- -- (13)
Cash dividends declared on preferred
stock -- -- -- (18,584) -- (18,584)
Cash dividends declared on common
stock -- -- -- (52,410) -- (52,410)
Adjustment in valuation reserve for
available-for-sale securities -- -- -- -- 110,436 110,436
Common stock issued through stock
options and employee stock plans -- 539 8,379 -- -- 8,379
Immaterial pooling -- 3,429 23,562 26,645 -- 50,207
Repurchase of preferred stock (78) -- (1,866) (124) -- (1,990)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 6,122 71,804 $722,986 $858,750 $ 78,348 $1,660,084
====================================================================================================================================
</TABLE>
See Notes to Restated Consolidated Financial Statements
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
As restated - See note 2
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 199,801 $ 181,322 $ 188,583
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 11,150 20,400 35,225
Cumulative effect of change in tax accounting method -- -- (13,365)
(Gain) on sale of loans (1,683) (802) (15,490)
Loss (gain) on sale of other assets 2,357 (4,733) (26,786)
REO operations, inclusive of write-downs (7,350) 12 6,295
Extraordinary loss -- -- 13,028
Depreciation and amortization 27,312 36,978 38,238
FHLB stock dividend (15,967) (16,753) (22,943)
Decrease in trading account securities 742 691 1,574
Origination of loans, held for sale (39,442) (39,835) (67,527)
Proceeds on sale of loans, held for sale 33,322 40,386 81,657
(Increase) in interest receivable (24,841) (14,249) (32,096)
Increase (decrease) in interest payable 10,475 11,761 (24,815)
Increase in income taxes payable 37,376 40,500 13,190
(Increase) decrease in other assets (46,437) 19,714 357
(Decrease) in other liabilities (8,389) (57,745) (21,267)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 178,426 217,647 153,858
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (1,662,380) (1,113,344) --
Principal payments and maturities of available-for-sale securities 370,745 357,348 --
Sales of available-for-sale securities 1,219,979 335,132 --
Purchases of held-to-maturity securities (88,249) (783,930) (1,815,544)
Principal payments and maturities of held-to-maturity securities 180,624 219,817 1,259,730
Sales of held-to-maturity securities -- -- 838,358
Sales of loans 84,197 54,754 919,768
Principal payments on loans 2,319,047 2,476,028 3,673,747
Origination and purchases of loans (4,622,696) (4,174,737) (5,849,538)
Sales of REO 22,867 34,233 52,822
Other REO operations 1,774 (1,236) (8,573)
Expenditures for premises and equipment (37,708) (38,408) (42,242)
Cash acquired through acquisitions 68,358 40,679 387,688
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (2,143,442) (2,593,664) (583,784)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 461,654 259,160 (478,942)
Increase in annuities 56,325 85,795 141,955
Increase in federal funds purchased 430,000 -- --
(Decrease) increase in securities sold under short-term agreements to
repurchase (44,765) 394,547 530,393
Proceeds of securities sold under long-term agreements to
repurchase 2,275,000 288,682 914,156
Repayment of securities sold under long-term agreements to
repurchase (933,000) (260,713) (332,188)
Net increase (decrease) in FHLB advances 3,616,601 5,703,996 3,946,509
Payments for FHLB advances (3,642,575) (4,045,800) (4,241,356)
Call of subordinated capital notes -- -- (41,600)
Proceeds of other borrowings 147,867 -- --
Payments of other borrowings (1,470) (3,488) (5,536)
Issuance of preferred stock -- -- 48,182
Issuance of common stock through stock options and employee
stock plans 8,379 10,038 15,526
Other capital transactions, net (1,990) -- (445)
Cash dividends paid (70,994) (63,919) (44,495)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,301,032 2,368,298 452,159
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 336,016 (7,719) 22,233
Cash and cash equivalents at beginning of year 262,256 269,975 247,742
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 598,272 $ 262,256 $ 269,975
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities $ 2,373,213 $ 174,572 $ 816,859
Implementation of new accounting standard -
reclass to available-for-sale portfolio -- 2,127,890 --
Transfer of securities to the available-for-sale portfolio 3,501,268 -- --
Real estate acquired through foreclosure 23,190 15,773 32,870
CASH PAID DURING THE YEAR FOR
Interest on deposits 496,608 369,712 378,430
Interest on borrowings 451,490 269,414 167,301
Federal Income Taxes 71,836 90,172 65,930
</TABLE>
See Notes to Restated Consolidated Financial Statements
<PAGE> 32
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements (as restated) include the
accounts of Washington Mutual, Inc. ("WMI" and together with its subsidiaries
"Washington Mutual" or the "Company"). WMI was formed in August 1994 by the
Company's predecessor, Washington Mutual Savings Bank ("WMSB"), a Washington
state-chartered savings bank, in connection with the reorganization of WMSB into
a holding company structure. The reorganization was completed in November 1994
through the merger of WMSB into WMB, the Company's Washington state-chartered
savings bank subsidiary, with WMB as the surviving entity. WMB continued as a
wholly owned subsidiary of WMI. The par value of preferred and common stock and
capital surplus of the Company have been restated to reflect the new par value
of the holding company, effective November 1994.
Certain reclassifications have been made to the 1994 and 1993
financial statements to conform to the 1995 presentation. All significant
intercompany transactions and balances have been eliminated. Results of
operations of companies acquired and accounted for as purchases are included
from the dates of acquisition. When Washington Mutual acquires a company through
a material pooling-of-interests, current and prior period financial statements
are restated to include the accounts of acquired companies.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the financial statements.
LINES OF BUSINESS
WMI is a Washington corporation that provides a broad range of
financial services to individuals and small businesses in Washington, Oregon,
Utah, Montana and Idaho through its subsidiary operations. The principal assets
of WMI are its principal subsidiaries, including its bank subsidiaries, WMB and
Washington Mutual Bank fsb ("WMBfsb"), and its insurance subsidiary, WM Life
Insurance Co. ("WM Life"). Financial services of the Company include the
traditional savings bank activities of accepting deposits from the general
public and making residential loans, consumer loans and limited types of
commercial real estate loans, primarily multi-family. Washington Mutual, through
other subsidiaries, also issues and markets annuity contracts and is the
investment advisor to and distributor of mutual funds.
On August 31, 1995, Washington Mutual diversified its business mix by
merging WMB with Enterprise Bank ("Enterprise"), a Seattle-area commercial bank
that focuses on small- to mid-size commercial business clients. The merger was
treated as a pooling-of-interests. Due to the immaterial nature of the
transaction, prior period information has not been restated as if the companies
had been combined.
On January 31, 1996, WMB merged with Western Bank ("Western") of Coos
Bay, Oregon. With 42 offices in 35 communities, Western is Oregon's largest
community-based commercial bank. The merger was treated as a
pooling-of-interests and, accordingly, the Company's historical financial
statements have been restated for all periods prior to the acquisition to
include the accounts and results of operations of Western.
The mergers with Enterprise and Western provide the Company with
access to the higher growth business segment of commercial banking.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments, such as interest rate
exchange agreements and interest rate cap agreements to reduce its exposure to
interest rate risk. Interest rate exchange agreements and interest rate cap
agreements are used only if they have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. Such
effect is measured through ongoing correlation tests.
Interest rate exchange agreements and interest rate cap agreements are
designated either against the available-for-sale portfolio or against short-term
borrowings and deposits. Agreements designated against available-for-sale
securities are included at their fair value in the available-for-sale portfolio.
Any mark-to-market adjustments are reported as a separate component of
stockholders' equity, net of tax. The fair value of interest rate exchange
agreements and interest rate cap agreements designated against short-term
borrowings and deposits are not reported on the balance sheet.
<PAGE> 33
The interest differential paid or received on interest rate exchange
agreements is recorded as an adjustment to interest income or interest expense
and classified with the interest income or interest expense of the related asset
or liability. The purchase premium of interest rate cap agreements is
capitalized and amortized on a straight-line basis and included as a component
of interest income or interest expense over the original term of the interest
rate cap agreement. No purchase premium is paid at the time an interest rate
exchange agreement is entered into.
From time to time, the Company terminates interest rate exchange
agreements and interest rate cap agreements prior to maturity. Such
circumstances arise if, in the judgment of management, such instruments no
longer cost effectively meet policy objectives. Often such instruments are
within one year of maturity. Gains and losses from terminated interest rate
exchange agreements and interest rate cap agreements are recognized, consistent
with the gain or loss on the asset or liability designated against the
agreement. When the asset or liability is not sold or paid off, the gains or
losses are deferred and amortized on a straight-line basis as additional
interest income or interest expense over the original terms of the agreements or
the remaining life of the designated asset or liability, whichever is less. When
the asset or liability is sold or paid off, the gains or losses are recognized
in the current period as an adjustment to the gain or loss recognized on the
corresponding asset or liability.
From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between available-for-sale
securities and short term deposits and borrowings. Such redesignations are
treated as a sale out of the one portfolio and as a purchase by the other
portfolio and recorded at the fair value at the time of transfer.
The Company may also buy put or call options on mortgage instruments.
The purpose and criteria for the purchase of options are to manage the interest
rate risk inherent in secondary marketing activities. The cost of such options
are capitalized and amortized on a straight-line basis as a reduction of other
income over the original terms of the options. All such options are carried at
fair value with the corresponding gain or loss recognized in other income.
Additionally, the Company may write covered call options on its
available-for-sale portfolio to enhance fee income. If the option is exercised,
the option fee is an adjustment to the gain or loss on the sale of the security.
If the option is not exercised, it is recognized as fee income. Covered call
options are carried at cost.
In the event that any of the derivative instruments fail to meet the
above established criteria, they would be marked to market with the
corresponding gain or loss recognized in income.
INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This statement requires investment and equity
securities to be segregated into the following three categories: trading,
held-to-maturity and available-for-sale.
Trading Securities
Trading securities are purchased and held principally for the purpose
of reselling them within a short period of time. Their unrealized gains and
losses are included in earnings.
Held-To-Maturity Securities
Investments classified as held-to-maturity are accounted for at
amortized cost, but an institution must have both the positive intent and the
ability to hold those securities to maturity. There are very limited
circumstances under which securities in the held-to-maturity category can be
sold without jeopardizing the cost basis of accounting for the remainder of the
securities in this category. Recognition is provided for unrealized losses in
the debt portfolio if any market valuation differences are deemed to be other
than temporary.
Available-For-Sale Securities
Securities not classified as either trading or held-to-maturity are
considered to be available-for-sale. Gains and losses realized on the sale of
these securities are based on the specific identification method. Unrealized
gains and losses for available-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
<PAGE> 34
risk. Because of this added risk, private-issue securities have
historically paid a greater rate of interest than agency securities, enhancing
the overall yield of the portfolio. Such securities are not guaranteed by the
U.S. government or one of its agencies because the loan size, underwriting or
underlying collateral of these securities often does not meet set industry
standards. Consequently, there is the possibility of loss of the principal
investment. For this reason, it is possible that the Company will not receive an
enhanced overall yield on the portfolio and, in fact, could incur a loss.
Additionally, the Company may not be able to sell such securities in certain
market conditions as the number of interested buyers may be limited at that
time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. Examples of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated traunches, certain collateralized mortgage obligations that
have been "resecuritized," and certain securities that contain a significant
number of jumbo, nonconforming loans. In an effort to reduce the aforementioned
risks, the Company now performs a credit review on each individual security
prior to purchase. Such a review includes consideration of the collateral
characteristics, borrower payment histories and information concerning loan
delinquencies and losses of the underlying collateral. After a security is
purchased, similar information will be monitored on a periodic basis.
Furthermore, the Company has established internal guidelines limiting the
geographic concentration of the underlying collateral.
LOANS
Loans held for investment are stated at the principal amount
outstanding, net of deferred loan fees and any discounts or premiums on
purchased loans. The deferred fees, discounts and premiums are amortized using
the interest method over the estimated life of the loan. The Company sells
residential fixed-rate loans in the secondary market. At the date of
origination, the loans so designated and meeting secondary market guidelines are
identified as held-for-sale and carried at the lower of net cost or fair value
on an aggregate basis.
Management ceases to accrue interest income on any loan that becomes
90 days or more delinquent and reserves all interest accrued up to that time.
Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans on which interest is not being accrued are referred to
as loans on nonaccrual status.
On January 1, 1995, Washington Mutual adopted SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. It is applicable to all loans except
large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. Loans 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. All residential construction, commercial real
estate and commercial business loans, 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 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 of 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.
In May 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 122, Accounting for Mortgage Servicing Rights. The statement eliminates
the distinctions between servicing rights that are purchased and those that are
retained upon the sale or securitization of loans. The statement requires
mortgage servicers to recognize the servicing rights on loans as separate
assets, no matter how acquired. Banks who sell loans and retain the servicing
rights will be required to allocate the total cost of the loans between
servicing rights and loans based on their relative fair values if their values
can be estimated. Effective January 1, 1996, the Company adopted SFAS No. 122.
The adoption did not have a material impact on the results of operations or
financial condition of the Company.
RESERVE FOR LOAN LOSSES
<PAGE> 35
The reserve for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluating known and inherent risks
in the loan portfolio. The reserve is based on management's continuing analysis
of the pertinent factors underlying the quality of the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated economic conditions, and
detailed analysis of individual loans and credits for which full collectibility
may not be assured. The detailed analysis includes techniques to estimate the
fair value of loan collateral and the existence of potential alternative sources
of repayment. The appropriate reserve level is estimated based upon factors and
trends identified by management at the time financial statements are prepared.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged-off against the reserve for
loan losses. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not evidenced the ability or intent to bring the
loan current; the Company has no recourse to the borrower, or if it does, the
borrower has insufficient assets to pay the debt; the fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.
Commercial real estate loans are considered by the Company to have
somewhat greater risk of uncollectibility than residential real estate loans due
to the dependency on income production or future development of the real estate.
The ultimate recovery of all loans is susceptible to future market
factors beyond the Company's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
REO
REO includes properties acquired through foreclosure that are
transferred to REO at the lower of cost or fair value, which represents the new
recorded basis of the property. Subsequently, properties are evaluated and any
additional declines in value are provided for in the REO reserve for losses. The
amount the Company will ultimately recover from REO may differ substantially
from the amount used in arriving at the net carrying value of these assets
because of future market factors beyond the Company's control or because of
changes in the Company's strategy for sale or development of the property.
Commercial REO that is managed and operated by the Company is
depreciated using the straight-line method over the property's estimated useful
life.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives on the straight-line method. Leasehold improvements are amortized
over the shorter of their useful lives or lease terms.
ANNUITY AND INSURANCE ACCOUNTING
WM Life is an Arizona-domiciled life insurance company. WM Life is
authorized under state law to issue annuities in seven states. In addition, WM
Life owns Empire Life Insurance Co. ("Empire"), which is currently licensed
under state law to issue annuities in 28 states. WM Life currently issues fixed
and variable flexible premium deferred annuities, single premium fixed deferred
annuities and single premium immediate annuities. Empire currently issues fixed
flexible premium deferred annuities and single premium immediate annuities. Both
companies conduct business through licensed independent agents. The majority of
such agents are employees of affiliates of the Company and operate in the
Company's financial centers. Currently, annuities are primarily issued in
Washington and Oregon.
The Company defers certain costs, such as commissions and the expenses
of underwriting and issuing policies, that are involved in acquiring new annuity
and life insurance business. These costs, which are included in other assets in
the accompanying Consolidated Statements of Financial Position, are amortized
over the lives of the policies in relation to the estimated gross profit.
Annuities equal the policy value as defined in the policy contract as of the
balance sheet date.
FEDERAL INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Under this method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the change in the deferred tax
liability from the beginning to the end of the year. The
<PAGE> 36
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.
<PAGE> 37
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>
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 1993
- -------------------------------------------------------------------------------------
<S> <C>
Pioneer:
Net interest income $6,615
Income before extraordinary items and cumulative effect of change in tax
accounting method 1,836
- -------------------------------------------------------------------------------------
Net income $1,836
=====================================================================================
Net income attributable to common stock $1,836
=====================================================================================
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1993
- --------------------------------------------------------------------------------
<S> <C>
Washington Mutual and Pioneer combined:
Net interest income $ 529,431
Income before extraordinary items and cumulative effect of
change in tax accounting method 175,264
Extraordinary items, net of federal income tax effect (8,953)
Cumulative effect of change in tax accounting method $ 13,365
- --------------------------------------------------------------------------------
Net income $ 179,676
================================================================================
Net income attributable to common stock $ 166,118
================================================================================
Per share amounts--primary
Income before extraordinary items and cumulative effect of
change in tax accounting method $ 2.74
Extraordinary items, net of federal income tax effect (0.15)
Cumulative effect of change in tax accounting method $ 0.23
- --------------------------------------------------------------------------------
Net income $ 2.82
================================================================================
Per share amounts--fully diluted
Income before extraordinary items and cumulative effect of
change in tax accounting method $ 2.60
Extraordinary items, net of federal income tax effect (0.14)
Cumulative effect of change in tax accounting method $ 0.21
- --------------------------------------------------------------------------------
Net income $ 2.67
================================================================================
</TABLE>
On April 9, 1993, the Company acquired Pacific First from RT Holdings,
Inc. ("RTH"), a subsidiary of Royal Trustco Limited of Toronto, Canada. In April
1993, Pacific First operated 129 branches and 14 home loan centers in Washington
and Oregon. At March 31, 1993, Pacific First had assets of $5,847.5 million and
deposits of $3,825.7 million.
As part of the acquisition of Pacific First, the Company negotiated
several provisions designed to reduce the effect of any Pacific First asset
quality problems on the resulting combined loan portfolio. As a result of the
provisions, RTH purchased $656.2 million book value in assets from Pacific First
prior to the sale to the Company.
As part of the purchase agreement, the Company received
indemnification from RTH for a variety of problems Pacific First had that could
result in future losses to the Company. These indemnification provisions were
secured by both specific funds held in escrow and by a guarantee from RTH's
parent company. The largest individual component is a $10.0 million general
indemnity escrow that can be drawn upon to pay a variety of claims, including
any exposure arising from transactions or acts prior to the purchase date.
The acquisition of Pacific First was treated as a purchase for
accounting purposes. Accordingly, under generally accepted accounting
principles, the assets and liabilities of Pacific First have been recorded on
the books of the Company at their respective fair market values at the time of
the consummation of the acquisition of Pacific First. Goodwill, the excess of
the purchase price over the net fair value of the assets and liabilities,
including identified intangible assets, was recorded at $178.2 million.
Amortization of goodwill over a 10-year period will result in a charge to
earnings of approximately $17.8 million per year.
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:
<PAGE> 39
<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 Bank ("Western") of Coos
Bay, Oregon. With 42 offices in 35 communities, Western is 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
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 principals, 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 pro forma information represents the results of
operations of the Company and Western for 1995, 1994 and 1993 on an individual
as well as combined basis. The pro forma results do not necessarily indicate the
actual results that would have been obtained, nor are they necessarily
indicative of the future operations of the combined companies. The unaudited pro
forma results of operations were as follows:
<PAGE> 40
<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 190,624 172,304 175,264
of change in tax accounting method
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 $ 2.59 $ 2.45 $ 2.63
of change in tax accounting method
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>
<PAGE> 41
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and demand deposits $303,697 $260,780
Cash Equivalents:
Overnight Investments 293,000 --
Time Deposits 1,575 1,476
- --------------------------------------------------------------------------------
294,575 1,476
- --------------------------------------------------------------------------------
$598,272 $262,256
================================================================================
</TABLE>
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, overnight investments and time
deposits. Generally, time deposits are short term.
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. Included in cash and demand deposits
were required deposits at the Federal Reserve of $53.6 million and $44.3 million
at December 31, 1995 and 1994.
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
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amortized Unrealized Unrealized Fair Value Yield
Cost Gains Losses (1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations
Due within one year $ 65,120 $ -- $ (64) $ 65,056 4.72 %
Due after one but within five years 19,865 119 (29) 19,955 5.78
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
- ----------------------------------------------------------------------------------------------------------------------------------
154,553 281 (988) 153,846 5.90
Corporate debt obligations:
Due within one year 1,502 10 -- 1,512 8.27
Due 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 254,440 -- -- 254,440 6.91
Other stock 5 3 -- 8 --
- ----------------------------------------------------------------------------------------------------------------------------------
364,977 2,538 (2,311) 365,204 7.00
- ----------------------------------------------------------------------------------------------------------------------------------
936,272 25,184 (4,421) 957,035 7.14
Mortgage-backed securities
U.S. government agency:
Due within one year 5 -- -- 5 9.23
Due after one but within five years 13,979 -- (130) 13,849 5.47
After five but within 10 years 9,479 24 (57) 9,446 6.44
After 10 years 5,923,040 141,777 (19,214) 6,045,603 6.91
- ----------------------------------------------------------------------------------------------------------------------------------
5,946,503 141,801 (19,401) 6,068,903 6.91
Corporate:
Due after five but within 10 years 18,614 901 (258) 19,257 7.14
After 10 years 730,279 7,482 (12,409) 725,352 7.74
- ----------------------------------------------------------------------------------------------------------------------------------
748,893 8,383 (12,667) 744,609 7.72
- ----------------------------------------------------------------------------------------------------------------------------------
6,695,396 150,184 (32,068) 6,813,512 7.00
Derivative instruments:
Interest rate exchange agreements (848) 2,225 (13,224) (11,847) --
Interest rate cap agreements 11,946 -- (2,531) 9,415 --
- ----------------------------------------------------------------------------------------------------------------------------------
11,098 2,225 (15,755) (2,432) --
- ----------------------------------------------------------------------------------------------------------------------------------
$ 7,642,766 $ 177,593 $ (52,244) $ 7,768,115 7.02 %
==================================================================================================================================
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amortized Unrealized Unrealized Fair Value Yield
Cost Gains Losses (1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations
Due within one year $ 66,937 $ -- $ (887) $ 66,050 4.17 %
Due after one but within five years 292,869 7 (15,281) 277,595 5.52
After five but within 10 years 9,469 -- (254) 9,215 6.08
After 10 years 70,340 -- (2,316) 68,024 5.97
- --------------------------------------------------------------------------------------------------------------------------------
439,615 7 (18,738) 420,884 5.39
Corporate debt obligations:
Due after one but within five years 83,255 231 (2,232) 81,254 6.71
After five but within 10 years 50,609 296 (2,980) 47,925 7.50
After 10 years 6,502 23 (644) 5,881 7.65
- --------------------------------------------------------------------------------------------------------------------------------
140,366 550 (5,856) 135,060 7.03
Equity Securities
Preferred stock 35,457 -- (1,790) 33,667 9.95
FHLB stock 230,311 -- -- 230,311 6.00
Other stock 1,032 -- -- 1,032 --
- --------------------------------------------------------------------------------------------------------------------------------
266,800 -- (1,790) 265,010 6.48
- --------------------------------------------------------------------------------------------------------------------------------
846,781 557 (26,384) 820,954 6.01
Mortgage-backed securities
U.S. government agency:
Due after one but within five years 52,036 -- (4,191) 47,845 5.18
After five but within 10 years 6,152 9 (2) 6,159 7.78
After 10 years 1,475,882 1,272 (60,088) 1,417,066 6.51
- --------------------------------------------------------------------------------------------------------------------------------
1,534,070 1,281 (64,281) 1,471,070 6.47
Corporate:
Due after five but within 10 years 9,716 -- (280) 9,436 5.46
After 10 years 355,657 511 (16,173) 339,995 6.14
- --------------------------------------------------------------------------------------------------------------------------------
365,373 511 (16,453) 349,431 6.12
- --------------------------------------------------------------------------------------------------------------------------------
1,899,443 1,792 (80,734) 1,820,501 6.40
Derivative instruments:
Interest rate exchange agreements (2,360) 21,014 -- 18,654 --
Interest rate cap agreements 8,766 32,924 -- 41,690 --
- --------------------------------------------------------------------------------------------------------------------------------
6,406 53,938 -- 60,344 --
- --------------------------------------------------------------------------------------------------------------------------------
$ 2,752,630 $ 56,287 $ (107,118) $2,701,799 6.14 %
================================================================================================================================
</TABLE>
(1) Weighted average yield at end of year.
<PAGE> 43
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1995 and 1994 were $332.0 million and $73.4 million. The
Company realized $2.6 million in gains and $2.1 million in losses on these sales
during 1995. Similarly, the Company realized $770,000 in gains and $100,000 in
losses on sales during 1994. Proceeds from sales of mortgage-backed securities
in the available-for-sale portfolio during 1995 and 1994 were $888.0 million and
$261.7 million. The Company realized $12.3 million in gains and $16.0 million in
losses on these sales during 1995 and $3.6 million in gains and $469,000 in
losses on these sales during 1994.
Available-for-sale mortgage-backed securities with a book value of
$4,545.0 million and $1,644.0 million and a market value of $4,642.0 million and
$1,573.4 million at December 31, 1995 and 1994, were pledged to secure public
deposits, securities sold under agreements to repurchase, other borrowings,
interest rate exchange agreements and access to the Federal Reserve discount
window.
There were no sales out of the held-to-maturity portfolio during 1995
and 1994. During 1995, FASB issued a report entitled A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities, Questions and Answers that allowed companies a one-time reassessment
and related reclassification from the held-to-maturity category to the
available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. On December 1, 1995, Washington Mutual elected to
take advantage of this opportunity and reclassified held to maturity securities
with a book value of $3,501.2 million and gross unrealized gains of $53.7
million and gross unrealized losses of $24.1 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 $138.8 million and unrealized losses on the derivative
instruments designated against this portfolio were $13.5 million, resulting in a
combined net unrealized gain included as a separate component of stockholders'
equity (on an after-tax basis) of $78.3 million. At December 31, 1994, net
unrealized losses on the available-for-sale portfolio were $104.7 million and
unrealized gains on the derivative instruments designated against this portfolio
were $53.9 million, resulting in a combined net unrealized loss included as a
separate component of stockholders' equity (on an after-tax basis) of $32.1
million.
On December 31, 1995, the Company held $744.6 million of private-issue
securities. Of that amount, 14 percent were of the highest investment grade
(AAA), 66 percent were rated investment grade (AA or A), 13 percent were rated
lowest investment grade (BBB) and 7 percent were rated below investment grade
(BB or below). During 1995, the Company realized $8.4 million in losses on
securities in the below investment grade portfolio.
As of December 31, 1995, the Company had mortgage-backed securities in
excess of 10% of stockholders' equity, with book value and market value of
$168.0 million from a single issuer, the Resolution Trust Corporation.
NOTE 5: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and contractual
maturity date consisted of the following:
<PAGE> 44
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amortized Unrealized Unrealized Fair Value Yield
Cost Gains Losses (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations
After five but within 10 years $ 6,592 $ 906 $ -- $ 7,498 8.09%
- -----------------------------------------------------------------------------------------------------------------------
6,592 906 -- 7,498 8.09
Corporate debt obligations:
Due within one year 2,034 -- (7) 2,027 4.73
Due after one but within five years 31,123 2,895 -- 34,018 8.67
After five but within 10 years 22,536 2,472 -- 25,008 8.38
After 10 years 17,162 2,310 (9) 19,463 8.91
- -----------------------------------------------------------------------------------------------------------------------
72,855 7,677 (16) 80,516 8.54
Municipal Obligations:
Due within one year 1,090 1 -- 1,091 6.85
Due 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 6.59
- -----------------------------------------------------------------------------------------------------------------------
171,768 13,664 (16) 185,416 7.50
Mortgage-backed securities
U.S. government agency:
After 10 years 1,018 87 -- 1,105 10.25
- -----------------------------------------------------------------------------------------------------------------------
1,018 87 -- 1,105 10.25
- -----------------------------------------------------------------------------------------------------------------------
$172,786 $ 13,751 $ (16) $186,521 7.52%
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amortized Unrealized Unrealized Fair Value Yield
Cost Gains Losses (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations
Due within one year $ 191 $ -- $ (2) $ 189 6.10 %
Due after one but within five years 23,972 1 (478) 23,495 6.81
After five but within 10 years 8,557 -- (61) 8,496 7.75
- -----------------------------------------------------------------------------------------------------------------------------
32,720 1 (541) 32,180 7.06
Corporate debt obligations:
Due within one year 6,202 14 (75) 6,141 5.39
Due after one but within five years 95,607 1,914 (3,644) 93,877 8.00
After five but within 10 years 172,708 727 (13,781) 159,654 7.24
After 10 years 95,857 493 (8,831) 87,519 7.80
- -----------------------------------------------------------------------------------------------------------------------------
370,374 3,148 (26,331) 347,191 7.55
Municipal Obligations:
Due within one year 806 3 -- 809 8.33
Due 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
- -----------------------------------------------------------------------------------------------------------------------------
483,856 5,838 (28,275) 461,419 7.38
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 2,031,920 38 (175,624) 1,856,334 7.15
- -----------------------------------------------------------------------------------------------------------------------------
2,044,220 38 (176,643) 1,867,615 7.14
Corporate:
Due within one year 15 -- -- 15 9.23
Due after one but within five years 51 2 (1) 52 10.44
Due after five but within 10 years 548 13 -- 561 11.06
After 10 years 117,504 252 (3,861) 113,895 7.04
- -----------------------------------------------------------------------------------------------------------------------------
118,118 267 (3,862) 114,523 7.06
- -----------------------------------------------------------------------------------------------------------------------------
2,162,338 305 (180,505) 1,982,138 7.14
- -----------------------------------------------------------------------------------------------------------------------------
$2,646,194 $6,143 $ (208,780) $2,443,557 7.18%
=============================================================================================================================
</TABLE>
(1) Weighted average yield at end of year.
<PAGE> 45
No held-to-maturity securities were pledged as collateral as of
December 31, 1995. Held-to-maturity mortgage-backed securities with a book value
of $1,995.6 million and a market value of $1,828.0 million at December 31, 1994
were pledged to secure public deposits, securities sold under agreements to
repurchase, other borrowings, interest rate exchange agreements and access to
the Federal Reserve discount window.
NOTE 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 $7,861,990 $8,100,930
Residential construction 615,814 549,271
Commercial real estate 1,867,347 1,805,951
- ------------------------------------------------------------------------------------------------
10,345,151 10,456,152
Second mortgage and other consumer 1,886,133 1,745,897
Manufactured housing 767,717 646,605
Commercial business 179,568 129,048
Reserve for loan losses (143,319) (132,499)
- ------------------------------------------------------------------------------------------------
$13,035,250 $12,845,203
================================================================================================
</TABLE>
Included in the table above are loans held-for-sale of $9.7 million
and $3.6 million at December 31, 1995 and 1994.
Nonaccrual loans totaled $44.8 million and $33.5 million at December
31, 1995 and 1994. If interest on these loans had been recognized, such income
would have been $3.7 million and $2.8 million for 1995 and 1994. Loans under
foreclosure were $24.9 million and $28.1 million at December 31, 1995 and 1994.
In addition, at December 31, 1995 and 1994, the Company had troubled debt
restructurings aggregating $18.2 million and $10.3 million. During 1995 and
1994, these troubled debt restructurings returned a net yield of 8.69 percent
and 8.53 percent, thereby contributing $1.6 million and $878,000 to interest
income. Had these loans not been restructured and interest accrued at their
original rates, the additional interest income would have been $82,000 and
$93,000 for 1995 and 1994.
At December 31, 1995, loans totaling $99.7 million were impaired of
which $67.0 million had allocated reserves of $10.9 million. The remaining $32.7
million were either nonperforming or previously written down, and had no
reserves allocated to them. Of the $99.7 million of impaired loans, $12.1
million were on nonaccrual status, $10.1 million were under foreclosure and
$77.5 million (including $8.8 million of troubled debt restructurings) were
performing but judged to be impaired. The average balance of impaired loans
during the year was $108.6 million and the Company recognized $7.7 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 delinquent
or under foreclosure in which case interest income is recorded on the
<PAGE> 46
cash basis. An immaterial amount of interest income was recorded on the cash
basis during 1995.
Loans and loans held-for-sale, exclusive of reserve for loan losses,
by geographic concentration were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Washington Oregon California Utah Other States Total
- ---------------------------------------------------------------------------------------------------------------------------------
Real estate:
<S> <C> <C> <C> <C> <C> <C>
Residential $5,668,638 $1,450,311 $296,816 $107,423 $338,802 $7,861,990
Residential construction 345,163 224,117 - 23,321 23,213 615,814
Apartment buildings 591,764 201,452 61,817 30,889 52,611 938,533
Other commercial real estate 425,240 264,235 143,319 37,595 58,425 928,814
- ---------------------------------------------------------------------------------------------------------------------------------
7,030,805 2,140,115 501,952 199,228 473,051 10,345
Second mortgage and other consumer 1,519,796 344,708 229 10,749 10,651 1,886
Manufactured housing 567,012 166,322 - 7,317 27,066 767
Commercial business 57,882 121,519 - - 167 179
- ---------------------------------------------------------------------------------------------------------------------------------
$9,175,495 $2,772,664 $502,181 $217,294 $510,935 $13,178
=================================================================================================================================
</TABLE>
Loans and loans held-for-sale, exclusive of reserve for loan losses,
deferred loan fees and premiums and discounts, by maturity or repricing date
were as follows:
<TABLE>
<CAPTION>
<S> <C>
(dollars in thousands) December 31, 1995
- -------------------------------------------------------------------------------
Adjustable rate loans:
Due within one year $3,751,568
After one but within five years 1,841,414
After five but within 10 years 90,925
After 10 years 21,853
- -------------------------------------------------------------------------------
5,705,760
Fixed rate loans:
Due within one year 386,049
After one but within five years 1,283,863
After five but within 10 years 1,626,446
After 10 years 4,209,852
- -------------------------------------------------------------------------------
7,506,210
- -------------------------------------------------------------------------------
$13,211,970
===============================================================================
</TABLE>
In addition to loans the Company serviced for its own portfolio, it
serviced loans of $5,216.4 million and $4,015.4 million at December 31, 1995 and
1994 for U.S. government agencies, institutions and private investors.
Unamortized deferred loan fees, which are netted in the loan balances
above, were $74.6 million and $94.4 million at December 31, 1995 and 1994.
At December 31, 1995, the Company had $591.2 million in fixed-rate
mortgage loan commitments, $369.2 million in adjustable-rate mortgage loan
commitments, $72.0 million in commercial business loan commitments and $576.5
million in undisbursed lines of credit.
It is the policy of Washington Mutual to not grant loans to employees
who hold the position of Senior Vice President or above.
<PAGE> 47
NOTE 7: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 132,499 $119,315 $58,075
Provision for loan losses 11,150 20,400 35,225
Reserves added through business combinations 5,372 921 46,000
Reserves charged off:
Residential (1,214) (1,604) (1,612)
Residential construction (125) (190) (297)
Commercial real estate (1,260) (2,353) (13,832)
Manufactured housing, second mortgage and other consumer (5,378) (5,460) (2,993)
Commercial business (813) (2,065) (3,065)
- --------------------------------------------------------------------------------------------------------------
(8,790) (11,672) (21,799)
Reserves recovered:
Residential 171 17 45
Residential construction 47 -- --
Commercial real estate 1,687 1,958 889
Manufactured housing, second mortgage and other consumer 701 1,117 768
Commercial business 482 443 112
- --------------------------------------------------------------------------------------------------------------
3,088 3,535 1,814
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 143,319 $132,499 $119,315
==============================================================================================================
</TABLE>
As part of the ongoing process to determine the adequacy of the
reserve for loan losses, the Company reviews the components of its loan
portfolio for specific risk of principal loss. Reserves are then allocated for
impaired loans. An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allocated reserves:
Commercial real estate $ 10,770 $ 15,594
Residential construction 158 1,327
- ------------------------------------------------------------------------------------------------------------
10,928 16,921
Unallocated reserves 132,391 115,578
- ------------------------------------------------------------------------------------------------------------
$143,319 $132,499
============================================================================================================
Total reserve for loan losses as a percentage of:
Total loans 1.10% 1.03%
Nonperforming loans 205.62 214.98
</TABLE>
NOTE 8: REO
REO consisted of the following:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through forclosure $30,421 $24,648
Other repossessed assets 1,018 979
Reserve for losses (6,375) (6,505)
- -----------------------------------------------------------------------------------------------------
$25,064 $19,122
=====================================================================================================
</TABLE>
<PAGE> 48
Changes in the REO reserve for losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $6,505 $5,475 $ 11,239
Provision for REO losses - 100 7,300
Reserves charged-off, net of recoveries (130) 930 (13,064)
- -----------------------------------------------------------------------------
Balance, end of year $6,375 $6,505 $ 5,475
=============================================================================
</TABLE>
REO operations, inclusive of write-downs were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $2,343 $ 88 $ 665
Gain on Sale of REO 5,007 - 340
Provision for REO losses - (100) (7,300)
- -----------------------------------------------------------------------------
$7,350 $ (12) $(6,295)
=============================================================================
</TABLE>
NOTE 9: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------
(dollar in thousands) 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
Furniture and Equipment $ 143,910 $ 141,311
Buildings 116,934 89,978
Leasehold Improvements 32,931 35,280
- --------------------------------------------------------------------
293,775 266,569
Accumulated Depreciation (112,594) (105,355)
- --------------------------------------------------------------------
181,181 161,214
Land 37,875 37,362
- --------------------------------------------------------------------
$ 219,056 $ 198,576
====================================================================
</TABLE>
Depreciation expense for 1995, 1994 and 1993 was $24.0 million, $20.9
million and $15.2 million.
The Company has noncancelable operating leases for financial centers,
office facilities and equipment. Rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $27.5 million for 1995 and $25.9
million in both 1994 and 1993.
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------
(dollars in thousands) Land & Furniture &
Buildings Equipment
- -----------------------------------------------------------------------
<S> <C> <C>
Commitments:
Due within one year $ 20,676 $3,882
After one but within two years 19,796 2,822
After two but within three years 18,453 1,630
After three but within four years 17,476 652
After four but within five years 16,671 -
After five years 61,896 -
- -----------------------------------------------------------------------
$154,968 $8,986
=======================================================================
</TABLE>
<PAGE> 49
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
hass not had a material impact on the results of operations or financial
condition of the Company.
NOTE 10: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Washington Mutual Bank, net of amortization of $98,654 and $71,366 $159,259 $186,547
Murphey Favre and Composite Research & Management Co., net of - -
amortization of $9,389 and $8,653 1,468 2,203
Mutual Travel, Inc., net of amortization of $3,136 - 1,799
Other, net of amortization of $85 and $36 400 449
- ----------------------------------------------------------------------------------------------
$161,127 $190,998
==============================================================================================
</TABLE>
Goodwill and other intangible assets result from business combinations
accounted for as a purchase of assets and an assumption of liabilities. Other
intangible assets primarily consist of core deposit intangibles and
covenants-not-to-compete resulting from acquisitions of thrift branch systems.
Goodwill and other intangible assets are amortized using the straight-line
method over the period that is expected to be benefited, which ranges from three
to 10 years. The average remaining amortization period at December 31, 1995 was
approximately six years. The Company periodically evaluates goodwill and other
intangible assets for impairment. The level of goodwill and other intangible
assets at December 31, 1995 was supported by the value attributed to the retail
operations of acquired financial institutions.
During 1993, the acquisition of Pacific First Bank ("Pacific First")
was accounted for as a purchase of assets and assumption of liabilities and
increased goodwill and other intangible assets by $178.2 million.
NOTE 11: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Checking Accounts:
Interest Bearing $ 794,014 $ 798,465
Noninterest Bearing 557,072 457,916
- --------------------------------------------------------------------------
1,351,086 1,256,381
Savings accounts 962,399 1,179,447
Money market accounts 3,006,122 2,439,917
Time deposit accounts
Due within one year 4,700,530 3,998,652
After one but within two years 605,791 765,881
After two but within three years 246,113 313,109
After three but within four years 178,983 197,277
After four but within five years 165,617 222,138
After five years 89,795 60,086
- --------------------------------------------------------------------------
5,986,829 5,557,143
- --------------------------------------------------------------------------
$11,306,436 $10,432,888
==========================================================================
</TABLE>
<PAGE> 50
Time certificates of deposit in amounts of $100,000 or more totaled
$1,321.7 million and $1,203.8 million at December 31, 1995 and 1994. At December
31, 1995, $484.9 million of these deposits mature within three months, $313.6
million mature in three months to six months, $269.3 million mature in six
months to one year, and $253.9 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 4.55% 3.76% 3.85%
</TABLE>
NOTE 12: FEDERAL FUNDS PURCHASED
The Company purchased federal funds from a variety of counterparties
during 1995. All federal funds purchased had maturities of thirty days or less,
with the majority having maturities of one day. As of December 31, 1995, the
balance of federal funds purchased was $430.0 million.
Financial data pertaining to the weighted average cost, the level of
federal funds purchased, and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.83% - -
Weighted daily average interest rate during the year 5.84 - -
Daily average balance of federal funds purchased $264,888 - -
Maximum amount of federal funds purchased at any month end 998,000
Interest expense during the year 15,460 - -
</TABLE>
NOTE 13: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consisted of the
following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
Reverse repurchase agreements $3,579,820 $2,077,209
Dollar repurchase agreements 386,000 519,000
- --------------------------------------------------------------------
$3,965,820 $2,596,209
====================================================================
</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> 51
Scheduled maturities or repricing of securities sold under agreements
to repurchase were as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase:
Due within 30 days $2,676,777 $1,707,251
After 30 but within 90 days 397,178 -
After 90 but within 180 days 392,361 394,123
After 180 but within one year - 244,360
After one year 499,504 250,475
- -------------------------------------------------------------------------------
$3,965,820 $2,596,209
===============================================================================
</TABLE>
Financial data pertaining to the weighted average cost, the level of
securities sold under agreements to repurchase and the related interest expense
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.68% 5.64% 3.49%
Weighted daily average interest rate during the year 5.91 4.47 3.84
Daily average of securities sold under agreements to
repurchase $3,754,921 $2,206,363 $1,526,208
Maximum securities sold under agreements to repurchase
at any month end 4,545,140 2,676,447 2,173,693
Interest expense during the year
221,735 98,568 58,614
</TABLE>
NOTE 14: ADVANCES FROM THE FHLB
As members of the FHLB, WMB, WM Life and WMBfsb maintain credit lines
that are percentages of their total regulatory assets, subject to
collateralization requirements. At December 31, 1995, the credit lines were 17
percent, 19 percent and 45 percent of regulatory assets for WMB, WM Life and
WMBfsb. Advances are collateralized in aggregate, as provided for in the
Advances, Security and Deposit Agreements with the FHLB, by all FHLB stock
owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and
securities of the U.S. government and agencies thereof.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ranges of Amount Ranges of
Interest Rates Interest Rates
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within one year $1,896,718 4.74%-8.35% $1,456,133 3.95%- 7.89%
After one but within two years 1,321,000 4.38 - 8.45 1,369,852 4.74 - 5.78
After two but within three years 457,000 5.71 - 8.50 774,478 4.38 - 5.60
After three but within four years 7,000 8.50 - 8.50 57,575 5.95 - 5.99
After four but within five years 5,137 6.25 - 6.89 60,403 6.19 - 6.28
After five years 24,547 2.80 - 8.65 19,170 4.50 - 8.65
- ------------------------------------------------------------------------------------------------------
$3,711,402 $3,737,611
======================================================================================================
</TABLE>
Financial data pertaining to the weighted average cost, the level of
FHLB advances and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.64% 5.66% 3.82%
Weighted daily average interest rate during the year 5.63% 4.80% 4.19%
Daily average of FHLB advances $3,046,722 $3,002,174 $1,573,678
Maximum FHLB advances at any month end 3,711,402 3,737,611 2,079,934
Interest expense during the year 171,564 144,163 65,890
</TABLE>
<PAGE> 52
NOTE 15: OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Range of Amount Range of
Interest Rates Interest Rates
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Notes due 2005 $147,845 7.46% - -%
Notes Payable due 1998 76,405 6.13 - 8.00 79,039 6.13 - 8.75
Other Borrowings 803 10% 852 10%
- ------------------------------------------------------------------------------------------------------
$225,053 $79,891
======================================================================================================
</TABLE>
In August 1995, the Company issued $150.0 million of senior notes
bearing an interest rate of 7.25%. The notes are due August 15, 2005 and may not
be redeemed prior to maturity. As part of the acquisition of Pacific First, the
Company assumed a $75.0 million note payable to the City of Tampa. The City of
Tampa issued capital improvement revenue bonds in 1988 and invested a portion of
the receipts with Pacific First. The note matures in 1998 and is subject to
periodic withdrawals.
Financial data pertaining to the weighted average cost, the level of
other borrowings and the related interest expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate at end of year 6.88% 6.13% 6.21%
Weighted daily average interest rate during the year 6.67 6.25 6.20
Daily average of other borrowings $131,169 $81,951 $68,504
Maximum other borrowings at any month end 226,017 82,925 89,548
Interest expense during the year 8,746 5,125 4,245
</TABLE>
NOTE 16: INTEREST RATE RISK MANAGEMENT
From time to time, the following strategies may be used by the Company
to reduce its exposure to interest rate risk: the origination and purchase of
adjustable-rate mortgage loans and the purchase of adjustable-rate
mortgage-backed securities; the sale of fixed-rate residential mortgage loan
production or fixed-rate mortgage-backed securities; and the use of derivative
instruments, such as interest rate exchange agreements and interest rate cap
agreements.
As of December 31, 1995, interest-sensitive assets of $9,682.1 million
and interest-sensitive liabilities of $14,492.2 million were scheduled to mature
or reprice within one year. At December 31, 1995, the Company had entered into
interest rate exchange agreements and interest rate cap agreements with notional
values of $1,165.0 million and $2,550.0 million. Without these instruments the
Company's one-year gap at December 31, 1995 would have been a negative 21.46
percent as opposed to a negative 13.32 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
<PAGE> 53
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 Fair
(dollars in thousands) Amount Receipt Rate(1) Payment Rate Value Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale securities:
Due within one year $ 465,000 5.13% 5.92% $ 1,528 $ 1,528
After one but within two years 200,000 6.83 5.88 (4,144) (4,144)
After two but within three years 300,000 6.05 5.92 (5,244) (5,244)
After three years 200,000 6.88 5.88 (3,987) (3,987)
- --------------------------------------------------------------------------------------------------------------------------
$1,165,000 5.96% 5.89% $(11,847) $(11,847)
==========================================================================================================================
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
Notional Short-Term Long-Term Carrying Fair
(dollars in thousands) Amount Receipt Rate(1) Payment Rate Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due within one year $150,000 6.38% 4.33% $ 4,700 $ 4,700
After one but within two years 350,000 5.69 4.54 13,954 13,954
Designated against short term
borrowings and deposits:
Due within one year 69,000 5.79 7.46 -- (209)
After one but within two years 190,000 5.80 6.75 -- 2,319
- ----------------------------------------------------------------------------------------------------------------------
$759,000 5.86% 5.32% $18,654 $20,764
======================================================================================================================
</TABLE>
(1) The terms of each agreement have specific London Interbank Offering
Rate reset and index requirements, which result in different
short-term receipt rates for each agreement. The receipt rate
represents the weighted average rate as of the last reset date for
each agreement.
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying Fair
(dollars in thousands) Amount Rate Receipt Rate Value Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available for sale securities:
Due within one year(1) $1,425,000 5.34% 5.90% $4,484 $4,484
After one but within two years(2) 875,000 5.85 5.83 3,799 3,799
After two but within three years(3) 250,000 6.05 5.90 1,132 1,132
- ---------------------------------------------------------------------------------------------------------------------
$2,550,000 5.59% 5.87% $9,415 $9,415
=====================================================================================================================
</TABLE>
(1) Includes $425.0 million notional amount with a weighted average cap
ceiling of 8.06%
(2) Includes $600.0 million notional amount with a weighted average cap
ceiling of 7.75%
(3) Includes $250.0 million notional amount with a weighted average cap
ceiling of 7.65%
<PAGE> 55
<TABLE>
<CAPTION>
December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
Notional Strike Short-Term Carrying Fair
(dollars in thousands) Amount Rate Receipt Rate Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Designated against available for sale securities:
Due after one but within two years $ 600,000 5.13% 5.76% $24,936 $24,936
After two years 275,000 4.80 5.70 16,754 16,754
Designated against short term borrowings
and deposits:
Due after one but within two years(1) 825,000 5.50 5.89 -- 20,421
- ----------------------------------------------------------------------------------------------------------------------
$1,700,000 5.25% 5.81% $41,690 $62,111
======================================================================================================================
</TABLE>
(1) Includes $425.0 million notional amount with a weighted average cap
ceiling of 8.06%.
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1995
- ------------------------------------------------------------------------------
Interest Rate Interest Rate
Exchange Cap
(dollars in thousands) Agreements Agreements
- ------------------------------------------------------------------------------
<S> <C> <C>
Notional balance, beginning of year $759,000 $1,700,000
Purchases 700,000 850,000
Terminations and maturities (294,000) --
- ------------------------------------------------------------------------------
Notional balance, end of year $1,165,000 $2,550,000
==============================================================================
</TABLE>
The unamortized balance of prepaid fees and deferred gains and losses
from terminated interest rate exchange agreements and interest rate cap
agreements are scheduled to be amortized into interest expense as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------
Gain on Gain on Short- Loss on Short- Net
Available-For- Term Borrowings Term Borrowings Gain
(dollars in thousands) Sale Securities and Deposits and Deposits (Loss)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $1,152 $367 $(3,030) $(1,511)
1997 -- -- (392) (392)
1998 -- -- (81) (81)
- -----------------------------------------------------------------------------------------------------------------
Unamortized deferred gain (loss) $1,152 $367 $(3,503) $(1,984)
=================================================================================================================
</TABLE>
<PAGE> 56
Financial data pertaining to the weighted average net effective
(benefit) cost, the level of interest rate exchange agreements and the related
cost (benefit) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average net effective (benefit) cost at end of year (0.07)% (0.54)% 2.92%
Weighted average net effective (benefit) cost during the year (0.51) 1.73 4.25
Monthly average notional amount of interest rate exchange $1,113,500 $ 890,250 $670,767
agreements
Maximum notional amount of interest rate exchange
agreements at any month end 1,382,000 1,125,000 855,000
Net cost included with interest expense on deposits 3,887 15,289 24,268
during the year
Net cost included with interest expense on borrowings 902 1,426 4,210
during the year
Net (benefit) included with interest income on available
for 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 $2,083,333 $1,064,583 $462,500
agreements
Maximum notional amount of interest rate cap agreements
at any month end 2,550,000 1,700,000 675,000
Net cost (benefit) included with interest expense on deposits 4,380 (301) --
during the year
Net (benefit) cost included with interest income on available for sale
securities during the year (5,340) 1,365 --
</TABLE>
NOTE 17: GAIN (LOSS) ON SALE OF OTHER ASSETS, INCLUSIVE OF WRITE-DOWNS
Gain (loss) on sale of other assets, inclusive of write-downs
consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Trading account securities $ 408 $ 165 $ 46
Available for sale securities (3,342) 3,841 1,578
Held to maturity securities - - 26,706
Premises and equipment (626) 140 1,397
Other 1,203 587 (3,641)
- -----------------------------------------------------------------------
$(2,357) $4,733 $26,786
=======================================================================
</TABLE>
<PAGE> 57
NOTE 18: INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense $ 87,913 $ 92,731 $77,390
Deferred income tax expense 19,591 15,428 17,399
- ---------------------------------------------------------------------------
$107,504 $108,159 $94,789
===========================================================================
</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.
The significant components of the Company's deferred tax liabilities
and assets were as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Purchase accounting adjustments $ 22,996 $ 37,331
FHLB stock dividends 42,100 35,783
Deferred loan fees 32,958 19,163
Deferred gains 50,947 11,655
Other 51,593 32,194
- ------------------------------------------------------------------------
200,594 136,126
Deferred tax assets:
Book reserves 44,076 44,655
Purchase accounting adjustments 12,318 16,167
Deferred losses -- 12,166
Other 19,411 18,436
- ------------------------------------------------------------------------
75,805 91,424
- ------------------------------------------------------------------------
$124,789 $ 44,702
========================================================================
</TABLE>
In April 1994, revenue procedures were issued allowing the Company to
change its method of accounting for loan fees, effective for 1993. The change
allowed the Company to defer the recognition of loan fees for income tax
purposes.
Under SFAS No. 115, the tax effect of net unrealized gains and losses
on available-for-sale securities at December 31, 1995 and 1994 were included in
the deferred tax liabilities and assets. The tax effect was made directly to
stockholders' equity and was not included in the provision for income taxes.
<PAGE> 58
The change in the net deferred tax liability was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax liability, beginning of year $ 44,702
Tax effect of valuation adjustment on available for sale securities 57,044
Deferred income tax expense 19,591
Other adjustments 3,452
- ----------------------------------------------------------------------------------------------------------
Deferred tax liability, end of year $124,789
==========================================================================================================
</TABLE>
Reconciliations between income taxes computed at statutory rates and
income taxes included in the Consolidated Statements of Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at statutory rates $107,556 $101,318 $100,028
Tax effect of: -- -- --
Amortization of goodwill and other intangible assets 6,631 6,688 6,281
Dividends received deduction (987) (506) (441)
Tax exempt income (1,973) (1,680) (1,924)
Other (3,723) 2,339 (5,080)
- ---------------------------------------------------------------------------------------------------------
Income taxes before extraordinary items 107,504 108,159 98,864
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 $107,504 $108,159 $ 94,789
=========================================================================================================
</TABLE>
NOTE 19: 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 20: 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:
<PAGE> 59
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------
(dollars in thousands) 1995(1) 1994(1) 1993(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
First quarter $0.19 $0.16 $0.10
Second quarter 0.19 0.17 0.11
Third quarter 0.19 0.18 0.14
Fourth quarter 0.20 0.19 0.15
</TABLE>
(1) cash dividends per common share represent historical dividends per share
paid by Washington Mutual prior to business combinations.
Not only is the dividend policy of Washington Mutual influenced by
legal, regulatory and economic restrictions, but it is also predicated on the
ability of its subsidiaries to declare and pay dividends to Washington Mutual.
These subsidiaries are in turn subject to legal and regulatory restrictions on
their ability to pay dividends.
Retained earnings of the Company at December 31, 1995 included a
pre-1988 thrift bad debt reserve for tax purposes of $220.6 million for which no
federal income taxes had been provided. In the future, if this thrift bad debt
reserve is used for any purpose other than to absorb bad debt losses, if any of
the banking subsidiaries do not meet the 60 percent qualified assets test or if
legislation is enacted requiring recapture of all thrift bad debt reserves, the
Company will incur a federal income tax liability at the then prevailing
corporate tax rate.
On October 16, 1990, the Company's Board of Directors adopted a
shareholder rights plan and declared a dividend of one right for each
outstanding share of common stock to shareholders of record on October 31, 1990.
The rights have certain anti-takeover effects. They are intended to discourage
coercive or unfair takeover tactics and to encourage any potential acquirer to
negotiate a price fair to all shareholders. The rights may cause substantial
dilution to an acquiring party that attempts to acquire the Company on terms not
approved by the Board of Directors, but they will not interfere with any
friendly merger or other business combination. The plan was not adopted in
response to any specific effort to acquire control of the Company.
PREFERRED STOCK
In August 1989, the Company issued 1,300,000 shares of Noncumulative
Convertible Perpetual Preferred Stock, Series A, at $50 per share for net
proceeds of $63.2 million. In January 1993, the Company issued a notice of
redemption to all holders of its Preferred Stock, Series A. Virtually all
holders of the Preferred Stock, Series A, converted their shares into common
stock prior to the redemption date of February 12, 1993.
In December 1992, the Company issued 2,800,000 shares of Noncumulative
Perpetual Preferred Stock, Series C, at $25 per share for net proceeds of $67.4
million. The stock has a liquidation preference of $25 per share plus dividends
accrued and unpaid for the then current dividend period. Dividends, if and when
declared by Washington Mutual's Board of Directors, are at an annual rate of
$2.28 per share. Dividends have been declared and paid in all quarters since
issuance. The Company may redeem the stock on or after December 31, 1997, at the
redemption price of $25 per share plus unpaid dividends, whether or not
declared, for the then current dividend period up to the date fixed for
redemption. In November 1995, the Company purchased and retired 47,500 shares of
its stock.
Also in December 1992, the Company issued 1,400,000 shares of
Noncumulative Convertible Perpetual Preferred Stock, Series D, at $100 per share
for net proceeds of $136.4 million. The stock has a liquidation preference of
$100 per share plus dividends accrued and unpaid for the then current dividend
period. The stock is convertible at a rate of 3.870891 shares of common stock
per share of preferred stock (after adjustment for the third quarter 1993 50
percent stock dividend discussed below). Dividends, if and when declared by
Washington Mutual's Board of Directors, are at an annual rate of $6.00 per
share. Dividends have been declared and paid in all quarters since issuance. The
Company may redeem the stock on or after December 31, 1996 at an initial
redemption price of $103.60 per share. The redemption price declines to $100 per
share by the year 2003.
In September 1993, the Company issued 2,000,000 shares of
Noncumulative Perpetual Preferred Stock, Series E, at $25 per share for net
proceeds of $48.2 million. The stock has a liquidation preference of $25 per
share plus dividends accrued and unpaid for the then current dividend period.
Dividends, if and when declared by Washington Mutual's Board of Directors, are
at an annual rate of $1.90 per share. Dividends have been declared and paid in
all quarters since issuance. The Company may redeem the stock on or after
September 15, 1998, at the redemption price of $25 per share plus unpaid
dividends, whether or not declared, for the then current dividend period up to
the date fixed for redemption. In November 1995, the Company purchased and
retired 30,000 shares of its stock.
The Preferred Stocks, Series C, Series D and Series E, are senior to
common stock as to dividends and liquidation, but they do not confer general
voting rights.
<PAGE> 60
NOTE 21: 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 $ 199,801 $ 181,322 $ 188,583
Preferred stock dividends:
Noncumulative Perpetual, Series C (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E (3,800) (3,800) (538)
Noncumulative Convertible Perpetual, Series D (8,400) (8,400) (7,392)
- -----------------------------------------------------------------------------------------------------------------
Net income attributable to primary common stock $ 181,217 $ 162,738 $ 175,025
=================================================================================================================
Net income 199,801 181,322 188,583
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 $ 189,617 $ 171,138 $ 182,417
=================================================================================================================
Average number of common shares outstanding:
Primary 70,061,144 66,361,794 64,808,073
Noncumulative Convertible Perpetual, Series A -- -- 643,121
Noncumulative Convertible Perpetual, Series D 5,419,247 5,419,247 5,419,247
- -----------------------------------------------------------------------------------------------------------------
Fully diluted 75,480,391 71,781,041 70,870,441
=================================================================================================================
</TABLE>
NOTE 22: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to any regulatory capital requirements. However,
each of its subsidiary depository and insurance institutions is subject to
various capital requirements. WMB is subject to the Federal Deposit Insurance
Corporation ("FDIC") capital requirements while WMBfsb is subject to the Office
of Thrift Supervision ("OTS") capital requirements.
The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC requires most banks it
regulates to maintain a minimum leverage ratio, defined as core ("Tier 1")
capital divided by total regulatory assets, of at least 4.00 percent to 5.00
percent. It also requires total capital of at least 8.00 percent of
risk-weighted assets and Tier 1 capital of at least 4.00 percent of
risk-weighted assets. The OTS requires savings associations, such as WMBfsb, to
meet each of three separate capital adequacy standards: a core capital leverage
requirement, a tangible capital requirement and a risk-based capital
requirement. OTS regulations require savings associations to maintain core
capital of at least 3.00 percent of assets and tangible capital (excluding all
goodwill) of at least 1.50 percent of assets. Most savings institutions are
required to maintain a minimum leverage capital ratio of at least 4.00 percent.
OTS regulations incorporate a risk-based capital requirement that is designed to
be no less stringent than the capital standard applicable to national banks and
is modeled in many respects on, but not identical to, the risk-based capital
requirements adopted by the FDIC. These regulations require a core risk-based
capital ratio of at least 4.00 percent and a total risk-based capital ratio of
at least 8.00 percent.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. For WMB and WMBfsb, FDICIA establishes
five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-based
capital measure, a leverage ratio capital measure and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations which implement this statutory framework. Under these regulations,
in order to be well capitalized a bank must have a ratio of total
<PAGE> 61
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, both WMB and WMBfsb were well capitalized.
The OTS has adopted final regulations adding an interest rate risk
component to the risk-based capital requirements for savings associations (such
as WMBfsb), although implementation of the regulation has been delayed.
Management believes that the effect of including such an interest rate risk
component in the calculation of risk-adjusted capital will not cause WMBfsb to
cease to be well capitalized. In August 1995, the FDIC revised its capital
standards to state explicitly that it will consider the risk of declines in the
economic value of capital due to changes in interest rates. The FDIC stated that
in the future, after gaining more experience with the risk measurement process,
it will issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk. The ultimate effect of such risk-based capital
requirements cannot be determined until final regulations are adopted.
WM Life is subject to risk-based capital requirements developed by the
National Association of Insurance Commissioners ("NAIC"). This measure uses four
major categories of risk to calculate an appropriate level of capital to support
an insurance company's overall business operations. The four risk categories are
asset risk, insurance risk, interest rate risk and business risk. At December
31, 1995, WM Life's capital was 672 percent of its required regulatory
risk-based level.
<PAGE> 62
Capital ratios for WMB (on a consolidated basis) and WMBfsb (on a
consolidated basis) were as follows:
<TABLE>
<CAPTION>
December 31, 1995
- -------------------------------------------------------------------------
WMB WMBfsb
- -------------------------------------------------------------------------
<S> <C> <C>
Tangible capital ratio n.a.% 6.76%
Leverage capital ratio 5.72 6.76
Total risk based capital ratio 11.58 12.64
Tier 1 or core risk based capital ratio 10.70 11.39
</TABLE>
Reconciliation of WMB's and WMBfsb's consolidated stockholders' equity
to regulatory capital was as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31, 1995
- --------------------------------------------------------------------------------------------
WMB WMBfsb
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Stockholders' equity $1,418,271 $ 46,117
Reporting differences:
Goodwill and other intangible assets (160,781) (401)
Valuation reserve for available for sale securities (65,683) (202)
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
============================================================================================
</TABLE>
NOTE 23: 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.
<PAGE> 63
Stock options and SARs granted, exercised or terminated were as
follows:
<TABLE>
<CAPTION>
Stock Options(1) SARs(1)
- -----------------------------------------------------------------------------------------------------------
Average Price Number Average Price Number
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1993 $ 7.86 1,456,859 $5.86 6,750
Granted in 1993 22.25 202,500 -
Exercised in 1993 6.04 (519,019) -
- -----------------------------------------------------------------------------------------------------------
Outstanding December 31, 1993 11.24 1,140,340 5.86 6,750
Granted in 1994 22.27 191,631 -
Exercised in 1994 7.96 (106,399) -
- -----------------------------------------------------------------------------------------------------------
Outstanding December 31, 1994 13.25 1,225,572 5.86 6,750
Granted in 1995 17.47 416,618 -
Exercised in 1995 7.92 (290,981) -
Terminated in 1995 22.07 (49,848) -
- -----------------------------------------------------------------------------------------------------------
Outstanding December 31, 1995 $15.46 1,301,361 $5.86 6,750
===========================================================================================================
</TABLE>
(1) Average price and number of stock options and SARs granted, exercised
and terminated in 1993 have been adjusted for the third quarter 1993
50 percent stock dividend, which had the effect of a three-for-two
stock split.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-based Compensation. The statement requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) application of the fair value recognition provisions in the
statement. SFAS No. 123 does not rescind or interpret the existing accounting
rules for employee stock-based arrangements. Companies may continue following
those rules to recognize and measure compensation as outlined in Accounting
Principles Board Opinion 25 ("APB 25"), but they will now be required to
disclose the pro forma amounts of net income and earnings per share that would
have been reported had the company elected to follow the fair value recognition
provisions of SFAS No. 123. Effective January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, but has determined that it will
continue to measure its employee stock-based compensation arrangements under the
provisions of APB 25. The adoption of the disclosure requirements of SFAS No.
123 will have no material impact on the results of operations or financial
condition of the Company.
NOTE 24: EMPLOYEE BENEFITS PROGRAMS
The Company maintains a noncontributory cash balance defined benefit
pension plan ("Plan") for substantially all eligible employees. Benefits earned
for each year of service are based primarily on the level of compensation in
that year plus a stipulated rate of return on the benefit balance. It is the
Company's policy to fund the Plan on a current basis to the extent deductible
under federal income tax regulations. The net periodic pension cost for the Plan
was $2.2 million, $1.3 million and $575,000 for 1995, 1994 and 1993. The
weighted average discount rate was 7.25 percent, 8.00 percent and 7.25 percent
for 1995, 1994 and 1993. The long-term rate of return on assets was 8.00 percent
for 1995, 8.00 percent for 1994 and 9.00 percent for 1993. The assumed rate of
increase in future compensation levels was 6.00 percent for all years presented.
The Plan's assets consist primarily of listed common stocks, U. S. government
obligations, corporate debt obligations and annuity contracts.
<PAGE> 64
The Plan's funded status and amounts recognized in the Company's
financial statements were as follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit obligations:
Vested benefits $ (46,628) $ (34,885)
Nonvested benefits (2,367) (4,690)
- ---------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (48,995) (39,575)
Effect of future compensation increases (1,598) (1,429)
- ---------------------------------------------------------------------------------------------------------
Projected benefit obligation (50,593) (41,004)
Plan assets at fair value 61,722 53,037
- ---------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 11,129 12,033
Unrecognized (gain) loss due to past experience different from assumptions (2,103) 1,710
- ---------------------------------------------------------------------------------------------------------
Unrecognized net asset at transition being recognized over 18.6 years (3,300) (3,682)
- ---------------------------------------------------------------------------------------------------------
Prepaid pension asset 7,819 10,061
=========================================================================================================
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 3,240 $ 2,952 $ 1,643
Interest cost on projected benefit obligation 3,336 2,695 1,904
Actual (gain) loss on Plan assets (11,935) 463 (5,637)
Amortization and deferral, net 7,601 (4,779) 2,665
- -----------------------------------------------------------------------------------------
$ 2,242 $ 1,331 $ 575
=========================================================================================
</TABLE>
During 1994, the defined benefit pension plan acquired in the
acquisition of Pacific First was merged into the Company's defined benefit
pension plan. The fair value of plan assets exceeded the projected benefit
obligation and the accrued pension cost was reduced by $10.8 million.
In addition, the Company currently provides eligible retired employees
with access to medical coverage on the same basis as active employees and
provides certain other health care insurance benefits to a limited number of
retired employees. Postretirement benefits, such as retiree health benefits, are
accrued during the years an employee provides services. The net periodic expense
was $697,000, $689,000 and $621,000 for 1995, 1994 and 1993.
The funded status of these benefits were as follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation $(5,484) $(4,488)
Unrecognized transition obligation 2,503 2,650
Unrecognized (gain) (36) (189)
- ---------------------------------------------------------------------------------
Prepaid postretirement liability $(3,017) $(2,027)
=================================================================================
</TABLE>
Net periodic postretirement expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $206 $220 $154
Interest cost 344 322 320
Amortization of transition obligation 147 147 147
- -------------------------------------------------------------------------------
$697 $689 $621
===============================================================================
</TABLE>
The weighted average discount rate was 7.25 percent, 8.00 percent and
7.25 percent for 1995, 1994 and 1993. The medical trend rate starts at 13.00
percent for 1993 and declines steadily to 6.00 percent by the year 2000. The
effect of a 1.00 percent increase in the trend rates is not significant.
The Company also maintains a savings plan for substantially all
eligible employees that allows participants to make contributions by salary
deduction equal to 15.00 percent or less of their salary pursuant to section
401(k) of the Internal Revenue Code. Western maintained a substantially similar
plan. Employees' contributions vest immediately. The Company's partial matching
contributions vest over five years. The Company's contributions to the savings
plan in 1995, 1994 and 1993 were $5.8 million, $8.0 million and $4.5 million.
<PAGE> 65
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 25: CONTINGENCIES
The Company has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management and legal counsel, none of these matters is likely to have a
materially adverse effect on the Company's financial position.
At periodic intervals, the FDIC and OTS regulators examine the
Company's financial statements as part of their legally prescribed oversight.
Based on these examinations, the regulators can direct that the Company's
financial statements be adjusted in accordance with their findings. A future
examination by the FDIC or the OTS could include a review of certain
transactions or other amounts reported in the Company's 1995 financial
statements. The regulators have not proposed significant adjustments to the
Company's financial statements in prior years and management is not aware of any
basis for any such adjustments for 1995. But, in view of the uncertain
regulatory environment in which the Company operates, the extent, if any, to
which a forthcoming examination may ultimately result in regulatory adjustments
to the 1995 financial statements cannot presently be determined.
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations on a quarterly basis have been restated to
give effect to the business combination with Western Bank. Results of operations
on a quarterly basis were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, First Quarter Second Quarter Third Quarter
except for per share amounts) Washington Western Restated Washington Western Restated Washington Western Restated
Mutual Mutual Mutual
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $353,378 $14,069 $367,447 $375,224 $14,792 $390,016 $390,114 $15,524 $405,638
Interest expense 213,906 4,468 218,374 235,828 4,757 240,585 243,729 5,115 248,844
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 139,472 9,601 149,073 139,396 10,035 149,431 146,385 10,409 156,794
Provision for loan losses 2,500 300 2,800 2,500 350 2,850 2,500 300 2,800
Other income 26,585 2,270 28,855 26,828 2,726 29,554 25,620 2,660 28,280
Other expense 95,171 7,910 103,081 98,135 8,197 106,332 94,466 8,064 102,530
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 68,386 3,661 72,047 65,589 4,214 69,803 75,039 4,705 79,744
Income taxes 25,381 1,416 26,797 20,398 1,632 22,030 26,233 1,823 28,056
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 43,005 2,245 45,250 45,191 2,582 47,773 48,806 2,882 51,688
==================================================================================================================================
Net income attributable to
common stock $ 38,359 $ 2,245 $ 40,604 $ 40,545 $2,582 $43,127 $44,160 $ 2,882 $ 47,042
==================================================================================================================================
Net income per common share
Primary $ 0.62 $ 0.60 $ 0.64 $ 0.62 $ 0.68 $ 0.66
Fully diluted 0.60 0.58 0.62 0.60 0.66 0.64
<CAPTION>
Year Ended December 31, 1995
- ---------------------------------------------------------------
(dollars in thousands, Fourth Quarter
except for per share amounts) Washington Western Restated
Mutual
- ---------------------------------------------------------------
<S> <C> <C> <C>
Interest income $399,997 $15,862 $415,859
Interest expense 247,620 5,301 252,921
- ---------------------------------------------------------------
Net interest income 152,377 10,561 162,938
Provision for loan losses 2,500 200 2,700
Other income 27,705 3,480 31,185
Other expense 94,543 11,169 105,712
- ---------------------------------------------------------------
Income before income taxes 83,039 2,672 85,711
Income taxes 29,417 1,204 30,621
- ---------------------------------------------------------------
Net income 53,622 1,468 55,090
===============================================================
Net income attributable to
common stock $ 48,976 $ 1,468 $ 50,444
===============================================================
Net income per common share
Primary $ 0.74 $ 0.71
Fully diluted 0.72 0.69
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
- -------------------------------------------------------------------------------------------------------
(dollars in thousands, First Quarter Second Quarter
except for per share amounts) Washington Western Restated Washington Western Restated
Mutual Mutual
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $276,166 $11,415 $287,581 $287,784 $12,488 $300,272
Interest expense 132,629 3,482 136,111 146,041 3,791 149,832
- -------------------------------------------------------------------------------------------------------
Net interest income 143,537 7,933 151,470 141,743 8,697 150,440
Provision for loan losses 5,000 0 5,000 5,000 50 5,050
Other income 28,348 2,434 30,782 27,747 2,489 30,236
Other expense 100,583 6,974 107,557 96,890 7,532 104,422
- -------------------------------------------------------------------------------------------------------
Income before income taxes 66,302 3,393 69,695 67,600 3,604 71,204
Income taxes 24,607 1,316 25,923 25,531 1,399 26,930
- -------------------------------------------------------------------------------------------------------
Net income 41,695 2,077 43,772 42,069 2,205 44,274
=======================================================================================================
Net income attributable to
common stock $ 37,049 $2,077 $ 39,126 $37,423 $2,205 $ 39,628
=======================================================================================================
Net income per common share
Primary $ 0.62 $ 0.59 $ 0.62 $ 0.60
Fully diluted 0.60 0.58 0.60 0.58
<CAPTION>
Year Ended December 31, 1994
- -----------------------------------------------------------------------------------------------------
(dollars in thousands, Third Quarter Fourth Quarter
except for per share amounts) Washington Western Restated Washington Western Restated
Mutual Mutual
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $308,427 $13,118 $321,545 $335,436 $13,716 $349,152
Interest expense 164,887 3,869 168,756 193,031 4,141 197,172
- -----------------------------------------------------------------------------------------------------
Net interest income 143,540 9,249 152,789 142,405 9,575 151,980
Provision for loan losses 5,000 200 5,200 5,000 150 5,150
Other income 25,782 2,607 28,389 25,961 3,134 29,095
Other expense 93,722 7,742 101,464 93,117 8,740 101,857
- -----------------------------------------------------------------------------------------------------
Income before income taxes 70,600 3,914 74,514 70,249 3,819 74,068
Income taxes 26,517 1,518 28,035 25,792 1,479 27,271
- -----------------------------------------------------------------------------------------------------
Net income 44,083 2,396 46,479 44,457 2,340 46,797
=====================================================================================================
Net income attributable to
common stock $39,437 $2,396 $ 41,833 $39,811 $2,340 $42,151
=====================================================================================================
Net income per common share
Primary $ 0.65 $ 0.63 $0.65 $0.63
Fully diluted 0.63 0.61 0.63 0.61
</TABLE>
<PAGE> 66
NOTE 27: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
The fair value of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 598,272 $ 598,272 $ 262,256 $ 262,256
Trading account securities 238 238 572 572
Available for sale securities 7,768,115 7,768,115 2,701,799 2,701,799
Held to maturity securities 172,786 186,521 2,646,194 2,443,557
Loans, exclusive of reserve for
loan losses 13,178,569 13,271,625 12,977,702 12,522,219
- ---------------------------------------------------------------------------------------------------------------------
21,717,980 21,824,771 18,588,523 17,930,403
Financial liabilities:
Deposits 11,306,436 11,336,233 10,432,888 10,424,731
Annuities 855,503 855,503 799,178 799,178
Federal funds purchased 430,000 430,073 - -
Securities sold under agreements 3,965,820 3,965,462 2,596,209 2,595,360
to repurchase
Advances from the FHLB 3,711,402 3,713,968 3,737,611 3,671,503
Other borrowings 225,053 235,657 79,891 79,842
- ---------------------------------------------------------------------------------------------------------------------
20,494,214 20,536,896 17,645,777 17,570,614
Derivative instruments(1):
Interest rate exchange agreements:
Designated against available for
sale securities (11,847) (11,847) 18,654 18,654
- ---------------------------------------------------------------------------------------------------------------------
Designated against short term 2,110
borrowings and deposits - - -
Interest rate cap agreements:
Designated against available for
sale securities 9,415 9,415 41,690 41,690
Designated against short term 20,421
borrowings and deposits - - -
- ---------------------------------------------------------------------------------------------------------------------
(2,432) (2,432) 60,344 82,875
Off balance sheet loan commitments - 4,476 - (8,057)
- ---------------------------------------------------------------------------------------------------------------------
Net financial instruments $ 1,221,334 $ 1,289,919 $ 1,003,090 $ 434,607
=====================================================================================================================
</TABLE>
(1) See "Note 16: Interest Rate Risk Management."
<PAGE> 67
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument as of December 31, 1995 and 1994:
Cash and cash equivalents--The carrying amount represented fair value.
Trading account securities--Fair values were based on quoted market
prices.
Available-for-sale securities--Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Held-to-maturity securities--Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Loans--Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
Deposits--The fair value of checking accounts, savings accounts and
money market accounts was the amount payable on demand at the reporting date.
For time deposit accounts, the fair value was determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on
similar products.
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.
<PAGE> 68
Derivative instruments--The fair value for interest rate exchange
agreements was determined using the discounted cash flow method. The market
prices for similar instruments were used to value interest rate cap agreements.
Off balance sheet loan commitments--Loan commitments are commitments
the Company made to borrowers at locked-in rates. The fair value of loan
commitments was estimated based on current levels of interest rates versus the
committed interest rates. The balance shown represents the differential between
committed value and fair value.
<PAGE> 69
NOTE 28: FINANCIAL INFORMATION - WMI
WMI was formed August 17, 1994. The following WMI (parent company
only) financial information should be read in conjunction with the other notes
to the consolidated financial statements.
RESTATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Period of August 17, 1994
(dollars in thousands) December 31, 1995 (inception) to December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Available for sale securities $ 8,033 $ 1,641
Cash equivalents 471 44
- -------------------------------------------------------------------------------------------------------------------
Total interest income 8,504 1,685
Interest Expense
Borrowings 9,072 884
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 9,072 884
- -------------------------------------------------------------------------------------------------------------------
Net interest income (568) 801
Other Income
Equity in net earnings of subsidiaries(1) 203,529 13,103
Other operating income 8 --
Gain (loss) on sale of other assets, inclusive of write-downs (171) --
- -------------------------------------------------------------------------------------------------------------------
Total other income 203,366 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 196,792 13,676
Income taxes (865) 201
- -------------------------------------------------------------------------------------------------------------------
Net Income(1) $197,657 $13,475
===================================================================================================================
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 70
RESTATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 90,096 $ 5,903
Available for sale securities 99,932 104,987
Loans 147,867 --
Investment in subsidiaries(1) 1,570,336 1,344,399
Other assets 929 654
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,909,160 $1,455,943
=================================================================================================================
LIABILITIES
Securities sold under agreements to repurchase $ 82,481 $ 84,329
Other borrowings 147,845 --
Other liabilities 5,647 (14)
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 235,973 84,315
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized --
6,122,500 and 6,200,000 shares issued and outstanding -- --
Common stock, no par value: 100,000,000 shares authorized --
67,835,939 and 107,719,272 shares issued and outstanding -- --
Capital surplus(1) 832,129 801,077
Valuation reserve for available for sale securities 2,390 (2,511)
Valuation reserve for available for sale securities--subsidiaries 75,958 (29,577)
Retained earnings(1) 762,710 602,639
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,673,187 1,371,628
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,909,160 $1,455,943
=================================================================================================================
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 71
RESTATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Period of August 17, 1994
(dollars in thousands) December 31, 1995 (inception) to December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(1) $ 197,657 $ 13,475
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in interest receivable 80 (693)
Increase in interest payable 3,167 884
(Decrease) in income taxes payable (865) (1,151)
Equity in undistributed earnings of subsidiaries(1) (203,529) (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) --
Tax sharing dividends received -- --
Dividends received from subsidiaries 130,934 --
Acquisition of wholly owned subsidiary(1) -- (82,877)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (4,339) (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 (70,994) --
Contribution from wholly owned subsidiaries(1) -- 111,252
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 81,392 196,575
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 84,193 5,903
Cash and cash equivalents at beginning of year 5,903 --
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 90,096 $ 5,903
================================================================================================================
</TABLE>
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 72
NOTE 29: SUBSEQUENT EVENTS
On February 29, 1996, Washington Mutual signed an agreement to merge
with Utah Federal Savings Bank ("Utah FSB"). Utah FSB, an Ogden-based
institution, had assets of $122.9 million, deposits of $108.7 million and
stockholder's equity of $11.4 million on June 30, 1996. The transaction, which
is scheduled to be completed in the fourth quarter of 1996, has received
regulatory approval and still requires approval by shareholders of two-thirds of
Utah FSB's common stock.
On July 21, 1996, Washington Mutual signed an agreement to
acquire, through merger, Keystone Holdings, Inc. ("Keystone"), the holding
company of American Savings Bank. At June 30, 1996, Keystone, on a consolidated
basis, had assets of $20,480.7 million, deposits of $12,729.0 million, and
stockholders' equity of $550.4 million. The transaction, which is scheduled to
be completed in the fourth quarter of 1996, is subject to the approval of
banking regulators and a majority of shareholders of Washington Mutual's common
stock.
On September 6, 1996, Washington Mutual signed an agreement to acquire
United Western Financial Group ("United Western") of Salt Lake City and it's
United Savings Bank and Western Mortgage Loan subsidiaries for $80.3 million in
cash. At June 30, 1996, United Western had assets of $403.9 million, deposits of
$291.9 million, and stockholders' equity $52.2 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.
The June 30, 1996 balances related to Utah FSB, Keystone, and United
Western are unaudited.
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 the year ending
December 31, 1996. 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 $26.3 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, 1998. 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.
On September 30, 1996, President Clinton signed legislation intended
to recapitalize the Savings Association Insurance Fund ("SAIF") and to reduce
the gap between SAIF premiums and the Bank Insurance Fund ("BIF") premiums,
among other things. The legislation provides for a special one-time assessment
on SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amounting to
1.3 cents per $100 per year.
Washington Mutual's special assessment will result in an estimated
pretax charge of about $35.7 million, which will be 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 $10 million.
